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ABS-CBN CORPORATION QUARTERLY REPORT PART I - FINANCIAL INFORMATION 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2. Financial Statements 2.1 Consolidated Statements of Financial Position 2.2 Consolidated Statements of Income 2.3 Consolidated Statements of Comprehensive Income 2.4 Consolidated Statements of Changes in Equity 2.5 Consolidated Statements of Cash Flows 2.6 Notes to Financial Statements 2.6.1 Business Segment and Geographical Segment Results (Note 5) 2.6.2 Rollforward of Property and Equipment (Note 10) PART II - OTHER FINANCIAL INFORMATION EXHIBIT 1 – Aging of Accounts Receivables SIGNATURES PART I – FINANCIAL INFORMATION 1. MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2014 The following is a discussion and analysis of ABS-CBN Corporation and Subsidiaries’ (“ABS-CBN” or the “Company”) financial performance for the six-month period ended June 30, 2014 and 2013. The table below summarizes the results of operations for the first half of 2014 and 2013. 1H 2014 (Amounts in million Pesos) Consolidated Revenues Advertising Revenues Consumer Sales Sale of Services Sale of Goods Others Costs and Expenses Production Costs Cost of Sales and Services General and Administrative Expenses (GAEX) Financial Costs - net Equity in Net Earnings of Associates and Joint Ventures Other Income - net Net Income EBITDA P16,378 8,819 7,559 7,232 212 115 15,092 5,600 4,698 4,794 420 (3) (217) P995 P3,430 1H 2013 P17,178 10,213 6,965 6,690 191 84 15,145 5,826 4,397 4,922 489 − (238) P1,291 P4,130 Variance Amount (P800) (1,394) 594 542 21 31 (53) (226) 301 (128) (69) (3) 20 (P296) (P700) % -4.7 -13.6 8.5 8.1 11.0 36.9 -0.3 -3.9 6.8 -2.6 -14.1 100.0 -8.8 -22.9 -16.9 Consolidated Revenues For the six-month period ended June 30, 2014, ABS-CBN generated consolidated revenues of P16.378 billion from advertising and consumer sales, P800 million or 4.7% lower year-on-year. Removing the impact of election-related revenues, consolidated revenues grew by 3.0%. Advertising revenues decreased by P1.394 billion or 13.6% year-on-year. Excluding impact of election-related advertisements in previous year, advertising revenues is down by merely 1.2%. On the other hand, consumer sales is up by 8.5% resulting from strong performance of movies released both locally and internationally. Comparative revenue mix is as follows: Advertising revenues Consumer sales 2013 57% 43% 2013* 55% 45% 1H 2013 59% 41% 1H 2014 54% 46% *Excluding election related revenues Consolidated Costs and Expenses Direct costs and expenses amounted to P15.092 billion, or a 0.3% decrease year-on-year. Production costs declined by P226 million or 3.9% to P5.600 billion. Personnel expenses and talent fees which comprised 56% of total production costs is down by 2.3% year-on-year. Other significant components of production costs are facilities-related and set requirement expenses which drop by 12% and 22%, respectively. Cost of sales and services increased by P301 million or 6.8% to P4.698 billion. Parallel to increase in number of subscribers coupled with foreign exchange losses, Sky Cable’s programming and bandwidth costs increased compared to prior year. And with the increasing number of movies shown overseas, Global’s corresponding theatrical costs increased as well. GAEX declined by 2.6% or P128 million. Ninety percent (90%) of GAEX is cash which declined by 2% due to continuous effort of the Company to manage its costs. Net Income and EBITDA The Company generated almost P1 billion net income for the first half of the year. Net income decreased by 22.9% compared to P1.291 billion in previous year. EBITDA reached P3.430 billion or 16.9% decline year-onyear. Without the election-related revenues and expenses, net income and EBITDA both posted an increase of 43.6% and 4.7%, respectively. 2nd Quarter Results (Amounts in million Pesos) Consolidated Revenues Advertising Revenues Consumer Sales Sale of Services Sale of Goods Others Costs and Expenses Production Costs Cost of Sales and Services GAEX Financial Costs - net Equity in Net Earnings of Associates and Joint Ventures Other Income - net Net Income EBITDA vs 1Q 2014 Amount % vs 2Q 2013 Amount % 1Q 2014 2Q 2014 2Q 2013 P8,191 P8,187 P9,253 (P4) − (P1,066) -11.5 4,110 4,081 3,877 130 74 7,412 2,789 2,296 2,327 247 4,709 3,478 3,355 82 41 7,680 2,811 2,402 2,467 174 5,790 3,463 3,297 116 50 7,934 3,053 2,246 2,635 357 599 (603) (522) (48) (33) 268 22 106 140 (73) 14.6 -14.8 -13.5 -36.9 -44.6 3.6 0.8 4.6 6.0 -29.6 (1,081) 15 58 (34) (9) (254) (242) 156 (168) (183) -18.7 0.4 1.8 -29.3 -18.0 -3.2 -7.9 6.9 -6.4 -51.3 3 (113) P538 P1,764 (6) (105) P457 P1,666 − (137) P788 P2,230 (9) 8 (P81) (P98) -300.0 -7.1 -15.1 -5.6 (6) 32 (P331) (P564) 100.0 -23.4 -42.0 -25.3 During the quarter, advertising revenues grew by almost P600 million or 14.6% compared to previous quarter owing to 7% increase in terms of volume and impact of rate increase implemented last February 2014. Excluding impact of election-related revenue in 2013, consolidated revenues is down by only 1.3% compared with second quarter of 2013. On the other hand, consumer sales decreased by P603 million or 14.8% due to lower number of movies released during the quarter. Mainstream - Star Cinema Mainstream - Skylight Distribution Total 1Q 2014 4 − 1 5 2Q 2014 2 1 − 3 1H 2014 6 1 1 8 1H 2013 6 1 1 8 Total costs and expenses grew by P268 million or 3.6% compared to previous quarter. Production costs during the quarter remain flat compared with first quarter with a minimal increase of 0.8% which is a net effect of 13% increase in noncash expenses and decline of 1% in cash expenses. Decrease in cost of sales and services related to theatrical and events is offset by increase in programming and bandwidth costs of 6% and 26%, respectively, coupled with 407% growth in inventory costs from licensing business. GAEX grew by 6% due to increase in personnel and facilities-related expenses. Compared with second quarter of 2013, total costs and expenses declined by P254 million or 3.2%. Excluding impact of election-related costs and expenses, this quarter has a minimal increase of only 0.3%. Blockbuster movies released both locally and internationally boosted the net income for the first quarter of 2014. Excluding election-related income, net income during the quarter increased by 47.9% compared with second quarter of 2013. Business Segments For management purposes, the Company presents its operations into the following reportable businesses: TV and Studio, Pay TV Networks and New Businesses. This segmentation is the basis upon which the Company measures its business operations. TV and Studio TV and studio segment is comprised of broadcast, global operations, film and music production, cable channels, and publishing. This consists of local and global content creation and distribution through television and radio broadcasting. Broadcast segment covers content creation and distribution mainly through free TV and radio with Channel 2 and DZMM as its flagship platforms. The content created is predominantly in Filipino and is aimed at the mass Filipino audience. The Company’s leading position in the Philippine television broadcasting industry is largely due to the popularity of its entertainment programs, including teleseryes, drama anthologies, situation comedies, variety, reality and game shows. On the other hand, news and public affairs programs have developed a reputation for the quality of news coverage that includes national, local and international events. Global segment, through ABS-CBN International, North America (NA), pioneered the international content distribution through Direct to Home (DTH), cable, internet protocol TV, mobile and online through The Filipino Channel (TFC). It is available in all territories where there is a significant market of overseas Filipinos such as the Unites States, Middle East, Europe, Australia, Canada and Asia Pacific. Other activities include international film distribution, sponsorship and events, remittance and retail. Films and Music segment of the Company is composed of movie production, film distribution, audio recording and distribution and video/audio post production. Films are generally produced through its subsidiary ABS-CBN Film Productions (AFPI) or more popularly known as Star Cinema. Other movies are co-produced with other local or international producers or are simply distributed by AFPI. Music needs are managed by Star Recording, Inc. and Star Songs, Inc. to complement the recording needs of the Company’s multi-talented artists and handle music publishing and composing requirements, respectively. Narrowcast and Sports segment caters to the needs of specific or targeted audiences or markets not normally addressed by the Broadcast business. Included in this line of business are cable programming and channel offerings such as Filipino movie channel, music channel, animé, upscale male sports content and upscale female lifestyle content. It also covers print, sports, and other niched programming via its UHF (Ultra High Frequency) channel. Narrowcast and Sports includes the following subsidiaries: Creative Programs, Inc. and ABS-CBN Publishing, Inc. As part of the Company’s goal to elevate boxing as a sport in the country, it entered into a joint venture agreement with ALA Promotions, Inc., a world class boxing organization and promotional company. Pay TV Networks Pay TV networks include cable television services of Sky Cable and its subsidiaries in Metro Manila and in certain provincial areas in the Philippines. It offers both postpaid and prepaid packages as well as a la carte programming, broadband, internet phone, among others. Consumers are given various options that can be tailor fitted to suit their specific requirements including the ability to have a real tripleplay service in the market that combines cable TV, broadband and internet phone. Catch up feature on missed programming via iWantv were provided as an option to the customers for a total pay TV entertainment package. With Sky Cable’s acquisition of Destiny Cable, Sky Cable accounts for nearly half of the total local pay TV market. New Businesses New businesses and initiatives pertain to wireless telecommunications business, digital terrestrial TV, theme parks and home shopping. ABS-CBNMobile Wireless Telecommunications business was established on May 28, 2013 through ABS-CBNmobile’s network sharing agreement with Globe Telecom. This partnership enables ABS-CBN to deliver ABS-CBN content in addition to traditional telecommunication services on mobile devices. Through the networksharing agreement, Globe will provide capacity and coverage on its existing cellular mobile telephony network to ABS-CBN Convergence on a nationwide basis. The parties may also share assets such as servers, towers, and switches. On November 16, 2013, ABS-CBN Mobile’s pre-paid service was launched. Digital Terrestrial TV The Company continues to invest in Digital Terrestrial TV equipment to improve clarity of signal in certain areas of Mega Manila and Central Luzon. The company believes that the transition from analogue to digital will result in an increase in its audience share. The Company will be ready to launch as soon as the implementing rules and regulations is released. Theme Parks The Company has also invested in a theme park more popularly known as Kidzania Manila. KidZania provides children and their parents a safe, unique, and very realistic educational environment that allows kids between the ages of four to twelve to do what comes naturally to them: role-playing by mimicking traditionally adult activities. As in the real world, children perform "jobs" and are either paid for their work (as a fireman, doctor, police officer, journalist, shopkeeper, etc.) or pay to shop or to be entertained. The indoor theme park is a city built to scale for children, complete with buildings, paved streets, vehicles, a functioning economy, and recognizable destinations in the form of "establishments" sponsored and branded by leading multi-national and local brands. Home Shopping A CJ O Shopping Corporation is a joint venture between ABS-CBN and CJ O Shopping Corporation of Korea to provide TV home shopping in the Philippines. The TV home shopping channel was launched in October 2013. The following table presents revenue and income information regarding the Company’s business segments for the years 2014 and 2013: Net Income EBITDA 1H 2014 1H 2013 % 1H 2014 1H 2013 P1,706 P1,646 3.6 P3,537 P3,658 13.1% 12.1% 27.2% 26.8% 3,823 3,410 12.1 122 147 -17.0 879 830 3.2% 4.3% 23.0% 24.3% 198 275 -28.0 (833) (502) 65.9 (986) (358) (569) (64) 789.1 − − − − − P16,451 P17,271 -4.7 P995 P1,291 -22.9 P3,430 P4,130 Margins 6.0% 7.5% 20.8% 23.9% *Gross of revenue deductions amounted to P73 million and P93 million in June 30, 2014 and 2013, respectively. (Amounts in million Pesos) TV and Studio Margins Pay TV Networks Margins New Businesses Intersegment Eliminations 1H 2014 P12,999 Revenues* 1H 2013 P13,650 % -4.8 % -3.3 5.9 175.4 − -16.9 A. TV and Studio TV and Studio segment results for the first half are as follows: (Amounts in Revenues* million Pesos) Broadcast Global Films and Music Narrowcast and Sports Others** 1H 2014 1H 2013 % P8,675 P9,576 -9.4 2,872 2,596 10.6 876 760 15.3 780 828 -5.8 (204) (110) 85.5 P12,999 P13,650 -4.8 *Gross of revenue deductions. **This includes intercompany eliminations within segment. Direct Costs 1H 2014 P5,298 1,713 413 625 (552) P7,497 1H 2013 P5,509 1,595 357 683 (416) P7,728 Gross Profit Rate (%) % -3.8 7.4 15.7 -8.5 32.7 -3.0 1H 2014 38.9 40.4 52.9 19.9 1H 2013 42.5 38.6 53.0 17.5 Variance -3.5 1.8 -0.2 2.4 42.3 43.4 -1.1 Broadcast Revenues from the broadcast business declined by P901 million or 9.4% year-on-year. Excluding the impact of election-related revenues, recurring revenues grew by 4.6%. Growth is fuelled by ABS-CBN’s strength in content creation and programming which led to ratings leadership. ABS-CBN’s Channel 2 led in national audience share and ratings. Channel 2’s total day audience share was at 44% while the primetime audience share was at 49% based on Kantar National TV Audience Measurement. Moreover, first half top 10 programs in the Philippines were from ABS-CBN: Rank 1 2 3 4 5 6 7 8 9 10 Channel ABS-CBN ABS-CBN ABS-CBN ABS-CBN ABS-CBN ABS-CBN ABS-CBN ABS-CBN ABS-CBN ABS-CBN Program The Voice Kids - Sunday The Voice Kids - Saturday Honesto Mars Ravelo’s Dyesebel Ikaw Lamang Wansapanataym MMK Ang Tahanan Mo Got to Believe TV Patrol Weekday Bet on Your Baby Rating (%) 36.4 Weekend 34.2 Weekend 31.7 Weekday 30.7 Weekday 29.3 Weekday 29.0 Weekend 28.5 Weekend 28.3 Weekday 27.2 Weekday 24.9 Weekend *Source : Kantar Media TV Audience Measurement - Total Homes, January - June 2014 (excluding Holyweek) Direct costs and expenses associated with broadcast operations decreased by 6.9% or P576 million due to continuous implementation of cost management initiatives by the Company. Global As of June 30, 2014, ABS-CBN Global has over 2.8 million viewers in over 40 countries across 4 continents worldwide. Forty three percent (43%) of Global viewers are in North America while 40% are in the Middle East. Global’s primary revenue drivers are as follows: (Amounts in million Pesos) Subscription Theatrical and Events Advertising Revenue Remittance Others Contribution 63% 11% 10% 9% 7% 100% Revenues 1H 2014 1H 2013 P1,796 P1,663 330 214 298 206 247 195 201 318 P2,872 P2,596 % 8.0 54.2 44.7 26.7 -36.8 10.6% Total revenue of Global grew by 10.6% year-on-year. Excluding impact of foreign exchange, it grew by 2.6%. Subscription revenues grew by P133 million or 8.0% year-on-year. Total viewership increased by 1% driven by growth in Canada and Australia of 17.4% and 6.0%, respectively, with a slight decline in other regions. Revenue from theatrical and events grew by P116 million coming from the success of international screening of the Girl Boy Bakla Tomboy, Bride for Rent, Starting Over Again, Pagpag and Maybe This Time. Total gross revenues from theatrical grew by 52.9% year-on-year driven by shorter window between local and international releases of the movies. ASAP in Dubai and OK Go Canada event fuelled the 44.7% growth in advertising revenues. Remittance revenue went up by 26.7% driven by increase in volume of 11.2%. Cost of sales and services of Global operations increased by 7%. The higher cost is attributable to theatrical costs related to movies shown overseas and costs of mounted events which grew by 58% and 6%, respectively. In addition, transaction costs also grew by 13%, parallel to the increase in remittance volume. Contribution margin improved by 1% from 16% in first half of 2013. Films and Music Total revenue of Films and Music grew by more than P100 million year-on-year. ABS-CBN Film Productions, Inc. (a.k.a “Star Cinema”) released 8 films during the first half of the year. Three of them topped P300 million box office receipts – Girl Boy Bakla Tomboy (P421 million), Bride for Rent (P323 million) and Starting Over Again (P390 million) – and another three generated more than P100 million gross receipts – Pagpag (P177 million), Da Possessed (P119 million) and Maybe This Time (P133 million). Considering both local and foreign movies, Starting Over Again was the 2nd top grosser movie next to The Amazing Spider Man (P447 million). My Illegal Wife was the first Skylight movie that posted more than P80 million gross receipts. As of June 30, 2014, Star Cinema captured 88% of the total local market gross receipts (excluding receipts from Metro Manila Film Festival movies). The Company also mounted a successful concert - “DOS The Daniel Padilla Concert”- last April 2014. Cost of sales and services increased by 15.7% year-on-year. This is attributable to more quality-produced films of the Company. Narrowcast and Sports Total revenues of narrowcast and sports has a net decrease of 5.8%. Despite increase in subscription revenues of 11% which is attributable to 12% growth in Cinema One channel, circulation revenues declined by 24.2% year-on-year. Magazine issued during the period was reduced by 29% compared in the same period of last year. To still maintain sound gross profit margins, management controlled its direct costs which declined by 8.5%. Gross profit margin improved by 2.4% year-on-year. The Company continue to grow its classic cable channel Jeepney TV which offers well-loved and timeless programs of ABS-CBN as well as movies and other program fare that define and highlight the best of Filipino TV. B. Pay TV Networks The Pay TV business segment refers to the local subscription based cable television services of Sky Cable Corporation and its subsidiaries. It offers postpaid and prepaid packages as well as a la carte programming, broadband and internet phone among others. Below is a breakdown of the Pay TV Networks’ revenues: (Amounts in million Pesos) Cable Broadband Advertising Revenue and Others 1H 2014 P2,797 598 428 P3,823 Revenues 1H 2013 P2,606 427 377 P3,410 % 7.3 40.0 13.5 12.1 Total revenues grew by more than P400 million or 12.1% year-on year. Broadband revenues increased by 40% driven by 31% growth in subscriber base while cable revenues also grew by 7.3% driven as well by 3% growth in subscriber count. Direct cost and expenses increased by 14.8% or P463 million to P3.600 billion. The increase is caused by growth in programming and bandwidth costs of 16% and 44%, respectively. Increase in bandwidth costs is due to improvement made in the product to match market competition. Excluding foreign exchange losses, costs and expenses increased merely by 13%. Capital Expenditures Cash capital expenditures and program rights acquisitions amounted to P2.301 billion as of June 30, 2014. Program rights acquisitions amounted to P387 million. Investments in Pay TV facilities reached P1 billion. Statement of Financial Position Accounts As at June 30, 2014, total consolidated assets stood at P64.848 billion, 11.8% higher than total assets of P57.992 billion as of December 31, 2013. Cash and cash equivalents of P15.270 billion is 43.8% higher than the December 31, 2013 balance. The increase in cash is coming from the proceeds of the P7.0 billion loan. Consequently, total interest-bearing loans grew by 38.8% at P20.383 billion. Trade accounts receivables amounting to P8.199 billion is 13% higher than at the end of 2013. Shareholders’ equity stood at P26.239 billion as of December 31, 2013. Increase attributable to net income earned during the quarter was offset by effect of declaration of cash dividends for both common and preferred shareholders. The company’s net debt-to-equity ratio was at 0.19x as of June 30, 2014 and December 31, 2013. Key Performance Indicators Ratios Current ratio Debt-to-Equity ratio Net Debt-to-Equity ratio 1H 2014 2.24 0.78 19.48% 2013 1.76 0.57 15.67% EXHIBIT 1 – Aging of Accounts Receivable As of June 30, 2014 Amount in Thousands Neither Past Due nor Impaired Trade Receivables Airtime Subscription Others Nontrade Receivables Total 3,596,476 545,070 277,664 317,052 4,736,262 Past Due Accounts Less than 30 Days 30 Days and Over 896,063 208,832 129,153 24,580 1,258,628 447,511 374,784 1,062,978 247,193 2,132,466 Impaired Allowance 993,716 716,197 351,559 36,503 2,097,975 (556,954) (693,690) (150,113) (38,004) (1,438,761) Total 5,376,812 1,151,193 1,671,241 587,324 8,786,570 As of December 31, 2013 Amount in Thousands Trade Receivables Airtime Subscription Others Nontrade Receivables Due from related parties Total Neither Past Due nor Impaired Past Due Accounts Less than 30 Days 30 Days and Over 3,122,176 640,513 603,962 301,875 1,240,859 153,451 129,352 16,495 128,209 418,901 723,331 234,292 4,668,526 1,540,157 1,504,732 Impaired Allowance Total 638,856 576,485 173,702 92,980 1,482,023 (556,922) (550,286) (192,125) (27,327) (1,326,661) 4,573,178 1,239,063 1,438,220 618,316 7,868,778 ABS–CBN Corporation and Subsidiaries Unaudited Interim Condensed Consolidated Financial Statements June 30, 2014 and for the Six Months Ended June 30, 2014 and 2013 (With Comparative Audited Consolidated Statement of Financial Position as at December 31, 2013) ABS-CBN CORPORATION AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Thousands) June 30, 2014 (Unaudited) December 31, 2013 (Audited) P =15,270,120 9,364,870 648,349 933,409 2,858,494 29,075,242 =10,616,855 P 8,333,761 265,221 1,385,972 2,781,665 23,383,474 19,040,790 18,535,905 5,945,094 5,284,666 221,646 195,335 199,589 2,469,200 2,416,869 35,773,189 5,429,192 5,288,350 219,191 196,916 166,591 2,192,429 2,580,033 34,608,607 P =64,848,431 =57,992,081 P P =12,375,892 117,703 309,374 189,520 12,992,489 =11,332,006 P 1,345,471 448,861 193,216 13,319,554 20,264,927 221,405 13,334,579 276,344 4,409,823 138,271 252,062 330,274 25,616,762 38,609,251 4,191,082 299,798 245,195 402,772 18,749,770 32,069,324 ASSETS Current Assets Cash and cash equivalents (Note 6) Trade and other receivables (Notes 7 and 22) Inventories (Note 8) Program rights and other intangible assets (Note 12) Other current assets (Note 9) Total Current Assets Noncurrent Assets Property and equipment (Notes 10, 11, 18 and 29) Program rights and other intangible assets - net of current portion (Note 12) Goodwill (Note 16) Available-for-sale investments (Note 13) Investment properties (Notes 10, 11 and 18) Investments in associates and joint ventures (Note 14) Deferred tax assets - net (Note 27) Other noncurrent assets (Note 15) Total Noncurrent Assets LIABILITIES AND EQUITY Current Liabilities Trade and other payables (Notes 17, 22 and 28) Interest-bearing loans and borrowings (Notes 10, 11 and 18) Obligations for program rights (Note 19) Income tax payable Total Current Liabilities Noncurrent Liabilities Interest-bearing loans and borrowings - net of current portion (Notes 10, 11 and 18) Obligations for program rights - net of current portion (Note 19) Accrued pension obligation and other employee benefits (Note 28) Deferred tax liabilities (Note 27) Convertible note Other noncurrent liabilities (Note 20) Total Noncurrent Liabilities Total Liabilities June 30, 2014 (Unaudited) Equity Attributable to Equity Holders of the Parent Company Capital stock (Note 21): Common Preferred Additional paid-in capital (Note 21) Cumulative translation adjustments Unrealized gain on available-for-sale investments (Note 13) Share-based payment plan Retained earnings (Note 21) Philippine depository receipts convertible to common shares (Note 21) Noncontrolling Interests (Note 3) Total Equity See accompanying Notes to Interim Condensed Consolidated Financial Statements. December 31, 2013 (Audited) P =872,124 200,000 4,495,050 (360,289) 124,221 34,349 20,452,666 =872,124 P 200,000 4,495,050 (270,632) 121,766 34,349 19,817,957 (1,264,096) 24,554,025 (1,164,146) 24,106,468 1,685,155 26,239,180 1,816,289 25,922,757 P =64,848,431 =57,992,081 P ABS-CBN CORPORATION AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts in Thousands, Except Per Share Amounts) For the Quarter Ended June 30 For the Period Ended June 30 2014 2013 2014 2013 P =4,709,467 3,355,126 82,070 40,890 8,187,553 =5,789,832 P 3,296,864 116,111 49,541 9,252,348 P =8,819,197 7,231,883 212,057 115,089 16,378,226 =10,213,025 P 6,689,959 190,873 83,847 17,177,704 PRODUCTION COSTS (Notes 10, 12, 22, 23, 28 and 29) (2,811,097) (3,053,323) (5,599,607) (5,826,125) COST OF SERVICES (Notes 8, 10, 12, 15, 22, 24, 28 and 29) (2,356,068) (2,177,423) (4,616,116) (4,277,854) (45,912) (68,890) (82,275) (119,636) 2,974,476 3,952,712 6,080,228 6,954,089 (2,467,046) (2,634,837) (4,793,845) (4,921,117) (287,246) (198,746) (553,551) (400,827) INTEREST INCOME (Note 6) 49,632 27,785 77,936 48,265 FOREIGN EXCHANGE GAINS (LOSSES) - net 63,889 (185,298) 55,307 (136,535) 5,871 (13) 2,998 (27) OTHER INCOME - net (Notes 26 and 29) 104,396 136,904 216,766 237,503 INCOME BEFORE INCOME TAX 443,972 1,098,507 1,085,839 1,781,351 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 27) (12,914) 310,646 90,867 490,582 P =456,886 =787,861 P P =994,972 =1,290,769 P P =535,290 (78,404) P =456,886 P836,162 = (48,301) =787,861 P P =1,161,983 (167,011) P =994,972 =1,343,876 P (53,107) =1,290,769 P P =0.671 =1.088 P P =1.457 =1.772 P REVENUES Advertising (Note 22) Sale of services (Note 29) Sale of goods (Note 22) Others COST OF SALES (Notes 8, 10, 22, 24, 28 and 29) GROSS PROFIT GENERAL AND ADMINISTRATIVE EXPENSES (Notes 7, 8, 10, 11, 12, 22, 25, 28 and 29) FINANCE COSTS (Notes 18 and 26) EQUITY IN NET EARNINGS (LOSSES) OF ASSOCIATES AND JOINT VENTURES (Note 14) NET INCOME Attributable to Equity holders of the Parent Company (Note 32) Noncontrolling interests Basic/Diluted Earnings per Share Attributable to Equity Holders of the Parent Company (Note 32) See accompanying Notes to Interim Condensed Consolidated Financial Statements. ABS-CBN CORPORATION AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in Thousands) For the Quarter Ended June 30 2013 2014 NET INCOME OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) to be reclassified to profit and loss in subsequent periods: Unrealized fair value gain (loss) on available-for-sale investments (Note 13) Exchange differences on translation of foreign operations TOTAL COMPREHENSIVE INCOME Attributable to Equity holders of the Parent Company Noncontrolling interests For the Period Ended June 30 2013 2014 P =456,886 =787,861 P P =994,972 =1,290,769 P (14,421) 1,636 2,455 35,387 (164,690) (179,111) 276,594 278,230 (89,657) (87,202) 322,268 357,655 P =277,775 =1,066,091 P P =907,770 =1,648,424 P P =356,179 (78,404) P =277,775 =1,114,392 P (48,301) =1,066,091 P P =1,074,781 (167,011) P =907,770 =1,701,531 P (53,107) =1,648,424 P See accompanying Notes to Interim Condensed Consolidated Financial Statements. ABS-CBN CORPORATION AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (Unaudited) (Amounts in Thousands) Capital Stock (Note 21) Common Preferred Subscribed Common Subscription Stock Receivable Attributable to Equity Holders of the Parent Company Unrealized Gain on AvailableAdditional Cumulative for-Sale Share-based Retained Earnings (Note 21) Paid-in Translation Investments Payment (Note 13) Capital Adjustments Plan Appropriated Unappropriated Philippine Depository Receipts (PDRs) Convertible to Common Shares (Note 21) Total Noncontrolling Interests Total Equity P =– – – – – – – P =– P =– – – – – – – P =– P = 4,495,050 – – – – – – P = 4,495,050 (P = 270,632) – (89,657) (89,657) – – – (P = 360,289) P = 121,766 – 2,455 2,455 – – – P = 124,221 P = 34,349 – – – – – – P = 34,349 P = 16,200,000 – – – – – – P = 16,200,000 P = 3,617,957 1,161,983 – 1,161,983 – (527,274) – P = 4,252,666 (P = 1,164,146) – – – – – (99,950) (P = 1,264,096) P = 24,106,468 1,161,983 (87,202) 1,074,781 – (527,274) (99,950) P = 24,554,025 P = 1,816,289 P = 25,922,757 (167,011) 994,972 – (87,202) (167,011) 907,770 35,877 35,877 – (527,274) – (99,950) P = 1,685,155 P = 26,239,180 At December 31, 2012 =779,585 P =– P =– P Net income – – – Other comprehensive income – – – Total comprehensive income – – – Cash dividend declared – – – Reversal of appropriation of retained earnings – – – Appropriation of retained earnings – – – Issuance of common stock 57,837 – – Subscription of common stock – – 34,702 Issuance of preferred stock – 200,000 – Increase in noncontrolling interest – – – At June 30, 2013 (Unaudited) =837,422 P =200,000 P =34,702 P See accompanying Notes to Interim Condensed Consolidated Financial Statements. =– P – – – – =679,069 P – – – – (P =638,289) – 322,268 322,268 – =126,676 P – 35,387 35,387 – =28,952 P – – – – =8,300,000 P – – – – =11,047,893 P 1,343,876 – 1,343,876 (296,563) (P =1,164,146) – – – – =19,159,740 P 1,343,876 357,655 1,701,531 (296,563) =2,359,132 P (53,107) – (53,107) – =21,518,872 P 1,290,769 357,655 1,648,424 (296,563) – – – (1,125,000) – – (P =1,125,000) – – 2,436,377 1,465,298 – – =4,580,744 P – – – – – – (P =316,021) – – – – – – =162,063 P – – – – – – =28,952 P (8,300,000) 16,200,000 – – – – =16,200,000 P 8,300,000 (16,200,000 – – – – =4,195,206 P – – – – – – (P =1,164,146) – – 2,494,214 375,000 200,000 – =23,633,922 P – – – – – (67,521) =2,238,504 P – – 2,494,214 375,000 200,000 (67,521) =25,872,426 P At December 31, 2013 (Audited) Net income Other comprehensive income (loss) Total comprehensive income (loss) Additional investment Cash dividends declared Acquisitions of PDRs At June 30, 2014 (Unaudited) P = 872,124 – – – – – – P = 872,124 P = 200,000 – – – – – – P = 200,000 ABS-CBN CORPORATION AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in Thousands) Six Months Ended June 30 2013 2014 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization (Notes 10 and 11) Amortization of: Program rights and other intangibles (Note 12) Debt issue costs (Note 26) Deferred charges (Note 24) Interest expense (Note 26) Interest income (Note 6) Equity in net losses (earnings) of associates and joint ventures (Note 14) Gain on sale of property and equipment (Note 26) Net unrealized foreign exchange losses (gains) Income before working capital changes Provisions for: Pension expense and other employee benefits (Note 28) Doubtful accounts (Note 25) Inventory losses (Note 8) Increase in: Trade and other receivables Inventories Other current assets Increase (decrease) in: Trade and other payables Other noncurrent liabilities Obligations for program rights Contribution to pension plan Cash generated from operations Income taxes paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property and equipment (Note 10) Program rights and other intangible assets (Notes 12 and 33) Increase (decrease) in other noncurrent assets Interest received Investment in joint venture (Note 14) Proceeds from sale of property and equipment Net cash used in investing activities (Forward) P =1,085,839 =1,781,351 P 1,405,610 1,504,104 677,771 55,944 34,865 491,788 (77,936) 744,883 11,487 32,519 387,897 (48,265) (2,998) (1,870) 27,564 3,696,577 27 (153) (14,212) 4,399,638 454,108 193,120 20,963 523,410 212,109 3,983 (1,244,539) (399,449) (263,608) (1,484,552) (1,414) (88,578) 696,301 (143,647) (194,822) – 2,815,004 (552,399) 2,262,605 1,336,722 (200,562) 99,100 (540) 4,799,316 (656,009) 4,143,307 (1,914,428) (667,333) 301,109 69,158 (30,000) 8,868 (2,232,626) (1,175,438) (830,662) (250,349) 50,560 – 7,312 (2,198,577) -2- Six Months Ended June 30 2013 2014 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Long-term debt Bank loans Payments of: Long-term debt Dividends Interest Bank loans Obligations under finance lease Issuances of: Common shares (Note 21) Preferred shares (Note 21) Acquisition of Philippine depository receipts (Note 21) Proceeds from additional investment Decrease in noncontrolling interests Net cash provided by financing activities EFFECTS OF EXCHANGE RATE CHANGES AND TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS P =8,585,063 – =– P 850,000 (2,557,611) (497,862) (437,920) (400,000) (15,681) – (293,554) (351,472) (1,000,000) (22,871) – – (99,950) 35,877 – 4,611,916 2,869,215 200,000 – – (67,521) 2,183,797 11,370 14,212 4,653,265 4,142,739 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,616,855 6,394,938 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 6) P =15,270,120 =10,537,677 P NET INCREASE IN CASH AND CASH EQUIVALENTS See accompanying Notes to Interim Condensed Consolidated Financial Statements. ABS-CBN CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands Unless Otherwise Specified) 1. Corporate Information ABS-CBN Corporation (“ABS-CBN” or “Parent Company”) is incorporated in the Philippines on July 11, 1946. On July 27, 1994, the Philippine Securities and Exchange Commission (SEC) approved the extension of the corporate term of the Parent Company for another 50 years. The Parent Company’s core business is television and radio broadcasting. Its subsidiaries and associates are involved in the following related businesses: cable and direct-to-home (DTH) television distribution and telecommunications services overseas, movie production, audio recording and distribution, video/audio post production and film distribution. Other activities of the subsidiaries include merchandising, internet and mobile services and publishing. In 2013, Capital International Private Equity Fund VI, L.P. (CIPEF) subscribed to P =2.5 billion worth of new Philippine Depository Receipts (PDRs) issued by ABS-CBN Holdings Corporation (ABS-CBN Holdings) which in turn subscribed to the same number of newly issued common shares of the Parent Company. Lopez, Inc. also subscribed to 34,702,140 common shares and 987,130,246 preferred shares of the Parent Company in 2013. After the subscription, Lopez, Inc.’s economic interest in the Parent Company decreased to 56% while its voting rights increased from 57% to 79% as of December 31, 2013 (see Note 21). The common shares of ABS-CBN were listed beginning July 8, 1992 and have been traded in the Philippine Stock Exchange (PSE) since then. The registered office address of the Parent Company is ABS-CBN Broadcasting Centre, Sgt. Esguerra Ave. corner Mother Ignacia Street, Quezon City. 2. Summary of Significant Accounting and Financial Reporting Policies Basis of Preparation The accompanying interim condensed consolidated financial statements of ABS-CBN and all its subsidiaries (collectively referred to as “the Company”) have been prepared on a historical cost basis, except for available-for-sale (AFS) investments that have been measured at fair value. The interim condensed consolidated financial statements are presented in Philippine peso, which is the functional and presentation currency of the Parent Company. All values are rounded to the nearest thousand, except for number of shares, per share amounts and when otherwise indicated. Statement of Compliance The interim condensed consolidated financial statements of the Company were prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes statements named PFRS and Philippine Accounting Standards (PAS) and Philippine Interpretations issued by the Financial Reporting Standards Council (FRSC). The interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual consolidated financial statements and should be read in conjunction with the 2013 audited annual consolidated financial statements, comprising the consolidated statements of financial position as at December 31, 2013, 2012 and January 1, 2012, -2- and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011, issued and approved on February 25, 2014 (referred to as the “2013 audited annual consolidated financial statements”). Changes in Accounting Policies and Disclosures The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Company’s 2013 audited annual consolidated financial statements. Basis of Consolidation and Noncontrolling Interests The interim condensed consolidated financial statements include the financial statements of the Parent Company and its subsidiaries as of June 30, 2014 and December 31, 2013. The following is a list of the subsidiaries or companies, which ABS-CBN controls as of June 30, 2014 and December 31, 2013: Company TV and Studio Global: ABS-CBN Global Ltd. (ABS-CBN Global)(a) (j) ABS-CBN Europe Ltd. (ABS-CBN Europe)(b) (c) (j) ABS-CBN Europe Remittance Inc.(d) (j) ABS-CBN Japan, Inc. (ABS- CBN Japan)(d) (j) ABS-CBN Middle East FZ-LLC (ABS-CBN Middle East)(b) (j) ABS-CBN Middle East LLC(b) (j) E-Money Plus, Inc.(b) ABS-CBN Global Hungary Kft. (ABS-CBN Hungary)(j) (l) ABS-CBN International, Inc. (ABS-CBN International)(j) (n) ABS-CBN Australia Pty. Ltd. (ABS-CBN Australia)(j) (k) ABS-CBN Canada, ULC (ABS-CBN Canada)(j) (k) ABS-CBN Global Remittance Inc.(j) (k) Place of Incorporation Principal Activities Cayman Islands Holding company 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 California, USA Cable and satellite programming services Cable and satellite programming services Cable and satellite programming services Services - money remittance Telecommunications USD 100.0 100.0 Australian dollar (AUD) Canadian dollar (CAD) USD 100.0 100.0 100.0 100.0 100.0 100.0 USD 100.0 100.0 Services - money remittance Intermediate holding and financing company CAD 100.0 100.0 Euro (EUR) 100.0 100.0 Movie production Philippine peso 100.0 100.0 Philippine peso 100.0 100.0 Philippines Audio and video production and distribution Music publishing Philippine peso 100.0 100.0 Philippines Print publishing Philippine peso 100.0 100.0 Philippines Content development and Philippine peso programming services Content development and Philippine peso programming services 100.0 100.0 100.0 100.0 Victoria, Australia Canada California, USA California, USA ABS-CBN Global Netherlands B.V. (ABS-CBN Netherlands)(j) (n) Amsterdam, Netherlands Canada Films and Music: ABS-CBN Film Productions, Inc. Philippines (ABS-CBN Films) (v) Star Recording, Inc. (Star Recording) (v) Philippines Narrowcast and Sports: ABS-CBN Publishing, Inc. (ABS-CBN Publishing) Creative Programs, Inc. (CPI) Studio 23, Inc. (Studio 23) Effective Interest June 30, December 31, 2013 2014 United States dollar (USD) United Kingdom Cable and satellite Great Britain pound programming services (GBP) United Kingdom Services - money GBP remittance Japan Cable and satellite Japanese yen (JPY) programming services Dubai, UAE Cable and satellite United Arab programming services Emirates dirham (AED) Dubai, UAE Trading AED Philippines Services - money Philippine peso remittance Budapest, Hungary Holding company USD ABS-CBN Telecom North America, Inc.(j) (k) ABS-CBN Canada Remittance Inc.(j) (n) Star Songs, Inc. (Star Songs) (v) Functional Currency Philippines -3- Company Place of Incorporation Others: ABS-CBN Center for Communication Philippines Arts, Inc.(e) ABS-CBN Global Cargo Corporation(u) Philippines Effective Interest June 30, December 31, 2013 2014 Principal Activities Functional Currency Educational/training Philippine peso 100.0 100.0 Philippine peso 100.0 100.0 ABS-CBN Integrated and Strategic Property Holdings, Inc. ABS-CBN Interactive, Inc. (ABS-CBN Interactive) ABS-CBN Multimedia, Inc. (ABS-CBN Multimedia)(f) ABS-CBN Shared Service Center PTE. Ltd.(j) (m) Professional Services for Television & Radio, Inc. Rosetta Holdings Corporation (RHC)(q) Philippines Non-vessel operations common carrier Real estate Philippine peso 100.0 100.0 Philippines Services - interactive mediaPhilippine peso 100.0 100.0 Philippines Philippine peso 100.0 100.0 Singapore Digital electronic content distribution Services - support 100.0 100.0 Philippines Services - production Singapore dollar (SGD) Philippine peso 100.0 100.0 Philippines Holding company Philippine peso 100.0 100.0 Sarimanok News Network, Inc. Philippines 100.0 100.0 The Big Dipper Digital Content & Design, Inc. (Big Dipper) Philippines 100.0 100.0 TV Food Chefs, Inc. Philippines Content development and Philippine peso programming services Digital film archiving and Philippine peso central library, content licensing and transmission Services - restaurant and Philippine peso food 100.0 100.0 Philippines Philippines Philippines Holding company Cable television services Cable television services Philippine peso Philippine peso Philippine peso 75.0(x) 57.4 57.4 75.0(x) 57.4 57.4 Philippines Philippines Philippines Cable television services Cable television services Cable television services Philippine peso Philippine peso Philippine peso 57.4 57.4 57.4 57.4 57.4 57.4 Philippines Philippines Philippines Philippines Philippines Philippines Cable television services Cable television services Cable television services Cable television services Cable television services Cable television services Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso 57.4 57.4 57.4 57.4 57.4 57.4 57.4 57.4 57.4 57.4 57.4 57.4 Philippines Philippines Philippines Cable television services Cable television services Holding company Philippine peso Philippine peso Philippine peso 57.4 57.4 57.4 57.4 57.4 57.4 Philippines Cable television services Philippine peso 57.4 57.4 Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Cable television services Cable television services Holding company Cable television services Cable television services Cable television services Cable television services Cable television services Cable television services Cable television services Cable television services Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso Philippine peso 57.4 57.4 57.4 54.6 54.0 53.0 55.8 52.2 52.2 40.2 34.4 57.4 57.4 57.4 54.6 54.0 53.0 55.8 52.2 52.2 40.2 34.4 Philippines Holding company Philippine peso 100.0 100.0 Philippines Theme park Budapest, Hungary Theme park Philippine peso USD 73.0 73.0 73.0 73.0 Philippines Philippines Services - call center Holding company Philippine peso Philippine peso 100.0 100.0 100.0 100.0 Philippines Philippines Holding company Telecommunication Philippine peso Philippine peso 70.0 69.3 70.0 66.5 Pay TV Networks Sky Vision Corporation (Sky Vision) Sky Cable Corporation (Sky Cable) Bisaya Cable Television Network, Inc.(h) (i) Bright Moon Cable Networks, Inc.(h) Cavite Cable Corporation(h) Cepsil Consultancy and Management Corporation(h) Davao Cableworld Network, Inc.(h) (o) HM Cable Networks, Inc.(h) HM CATV, Inc.(h) Hotel Interactive Systems, Inc.(h) Isla Cable TV, Inc.(h) Moonsat Cable Television, Inc.(h) (o) Pilipino Cable Corporation (PCC)(h) Satellite Cable TV, Inc.(h) Sun Cable Holdings, Incorporated (SCHI)(h) Sun Cable Systems Davao, Inc.(h) (i) Sunvision Cable, Inc.(h) Tarlac Cable Television Network, Inc.(h) Telemondial Holdings, Inc.(h) (i) JMY Advantage Corporation(h) Cebu Cable Television, Inc.(h) (o) (p) Suburban Cable Network, Inc.(h) Pacific CATV, Inc. (Pacific)(h) (o) (w) First Ilocandia CATV, Inc.(h) (o) Mactan CATV Network, Inc.(h) (o) (p) Discovery Mactan Cable, Inc.(h) (t) Home-Lipa Cable, Inc.(h) (t) New Businesses ABS-CBN Theme Parks and Resorts Holdings, Inc. (ABS-CBN Theme Parks) Play Innovations, Inc.(g) Play Innovations Hungary Kft. (Play Innovations)(j) (g) iConnect Convergence, Inc. Sapientis Holdings Corporation (Sapientis) Columbus Technologies, Inc. (CTI)(r) ABS-CBN Convergence, Inc, (ABS-C)(r) (s) -4(a) With branches in the Philippines and Taiwan Through ABS-CBN Global (c) With branches in Italy and Spain (d) Subsidiary of ABS-CBN Europe (e) Nonstock ownership interest (f) Through ABS-CBN Interactive (g) Through ABS-CBN Theme Parks (h) Through Sky Cable (i) Subsidiary of SCHI (j) Considered as foreign subsidiary (k) Subsidiary of ABS-CBN International (l) With a branch in Luxembourg (m) With a regional operating headquarters in the Philippines (n) Through ABS-CBN Hungary (o) Subsidiary of PCC (p) Through Pacific (q) On September 13, 2013, the Parent Company, as the assignee, entered into a Deed of Assignment with the subscribers of RHC, as the assignor, whereby the assignor assign, transfer and convey in a manner absolute and irrevocable, and free and clear of all liens and encumbrances, unto the assignee all their rights, title to and interest in their subscription of 250,000 shares with a par value of = P 1.00 per share, or a total par value of = P 250 thousand in RHC on which the amount of = P 63 thousand has been paid. (r) Through Sapientis (s) Subsidiary of CTI. ABS-CBN’s effective interest increased in 2013 as a result of the conversion of CTI’s deposits for stock subscription into capital stock of ABS-C. The difference between the fair value of the consideration transferred and carrying value of net assets of ABS-C amounting to = P 6 million was offset against “Additional paid-in capital” account in the equity section. (t) A subsidiary of Sky Cable where Sky Cable effectively owns more than 50% interest (u) In liquidation (v) On April 21, 2014, the BOD approved the Plan of Merger of ABS-CBN Films, Star Recording and Star Songs, with ABS-CBN Films as surviving corporation. On April 30, 2014, ABS-CBN Films filed an application with the SEC for the merger. On June 24, 2014, the SEC approved the said application effective June 30, 2014. (w) PCC acquired additional interest in 2013. The difference between the fair value of the consideration transferred and carrying value of net assets of Pacific amounting to = P 25 million was offset against “Additional paid-in capital” account in the equity section. (x) ABS-CBN has an economic interest of 24.8% in Sky Vision. In 2012, Lopez, Inc. executed a proxy in favor of ABS-CBN assigning its voting rights in Sky Vision. As a result, ABS-CBN has a voting interest of 75.0% in Sky Vision. The proxy is coupled with interest and irrevocable for five years renewable upon its expiration. Sky Vision is the holding company of Sky Cable, where the Parent Company has an economic interest of 57.4%. (b) 3. Material Noncontrolling Interests Financial information of subsidiaries that have material noncontrolling interests is provided below. Proportion of Equity Interest Held By Noncontrolling Interests Company Place of Incorporation June 30, 2014 (Unaudited) December 31, 2013 (Audited) (Percentage) Sky Cable Corporation and Subsidiaries Philippines 42.6 42.6 -5- Accumulated Balances of Material Noncontrolling Interests Company Sky Cable Corporation and Subsidiaries June 30, 2014 (Unaudited) P =1,990,184 December 31, 2013 (Audited) =2,041,861 P Net Income Attributable to Noncontrolling Interests Company Sky Cable Corporation and Subsidiaries Six Months Ended June 30 (Unaudited) 2013 2014 =58,613 P P =48,106 The summarized financial information of Sky Cable is provided below. This information is based on amounts before intercompany eliminations and after fair value adjustments. Summarized Consolidated Statements of Financial Position Cash and cash equivalents Other current assets Goodwill Trademarks Customer relationships Other noncurrent assets Current liabilities Noncurrent liabilities June 30, 2014 (Unaudited) P =1,232,551 1,869,084 4,491,817 1,111,784 452,954 8,850,149 (5,551,150) (4,592,872) December 31, 2013 (Audited) =1,289,820 P 1,588,285 4,491,817 1,111,784 463,523 8,429,890 (4,915,003) (4,999,856) Summarized Consolidated Statements of Comprehensive Income Revenue Cost of services General and administrative expenses Finance costs Foreign exchange loss Interest income Other expenses - net Income before income tax Provision for income tax Net income Six Months Ended June 30 (Unaudited) 2013 2014 =3,409,103 P P =3,822,264 (2,134,134) (2,539,178) (1,003,446) (1,060,735) (122,430) (118,661) (13,583) (13,069) 12,793 3,879 43,872 58,716 192,175 153,216 58,382 43,511 =133,793 P P =109,705 -6- Six Months Ended June 30 (Unaudited) 2013 2014 Attributable to Equity holders of Parent Company Noncontrolling interest Net income Other comprehensive income Total comprehensive income Attributable to Equity holders of Parent Company Noncontrolling interest P =112,538 (2,833) P =109,705 =136,117 P (2,324) =133,793 P P =109,705 – P =109,705 =133,793 P 58,238 =192,031 P P =112,538 (2,833) P =109,705 =194,355 P (2,324) =192,031 P Summarized Consolidated Statements of Cash Flows Operating Investing Financing Six Months Ended June 30 (Unaudited) 2013 2014 (P =740,844) P =1,141,493 (765,750) (1,013,123) (217,630) (185,580) 4. Seasonality of Operations The Company’s operations are not general affected by any seasonality or cyclicality. 5. Segment Information The Executive Committee, the Company’s chief operating decision maker, monitors operating results of its business segments 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 operating profit and loss in the interim condensed consolidated financial statements. On a consolidated basis, the Company’s performance is evaluated based on consolidated net income for the year, earnings before interest, taxes and depreciation and amortization (EBITDA) and EBITDA margin. EBITDA margin pertains to EBITDA divided by gross revenues. EBITDA and EBITDA margin are non-PFRS measures. -7- The following table shows the reconciliation of the consolidated EBITDA to consolidated net income for six months ended June 30, 2014 and 2013: Consolidated EBITDA Depreciation and amortization Amortization of intangible assets* Finance costs** Interest income Provision for income tax Consolidated net income Six Months Ended June 30 (Unaudited) 2013 2014 =4,130,263 P P =3,430,054 (1,504,104) (1,405,610) (493,689) (468,809) (399,384) (547,732) 48,265 77,936 (490,582) (90,867) =1,290,769 P P =994,972 *Excluding amortization of movie in-process and filmed entertainment and story, video and publication and record master **Excluding bank service charges Business Segment Data The following tables present revenue and income information for the six months ended June 30, 2014 and 2013 and certain asset and liability information as of June 30, 2014 and December 31, 2013 regarding business segments: TV and Studio 2014 Revenue External sales Inter-segment sales Revenue deductions Total revenue 2013 Pay TV Networks 2014 2013 New Businesses 2014 2013 Eliminations 2014 2013 Consolidated 2014 2013 P = 12,444,125 1,586,582 (88,173) P = 13,942,534 =13,586,061 P 920,298 (110,870) =14,395,489 P P = 3,815,735 6,529 – P = 3,822,264 =3,409,103 P – – =3,409,103 P P = 191,233 33,709 (10,259) P = 214,683 =275,064 P – – =275,064 P P =– (1,626,820) 25,565 (P = 1,601,255) =– P (920,298) 18,346 (P =901,952) P = 16,451,093 – (72,867) P = 16,378,226 =17,270,228 P – (92,524) =17,177,704 P P = 2,057,326 (434,806) 21,964 73,291 =2,091,114 P (263,713) 3,209 35,728 P = 222,351 (118,661) (13,069) 3,879 =271,523 P (122,430) (13,583) 12,793 (P = 1,125,788) (84) 6,480 766 (P =486,630) (14,953) (20,697) 13 P = 132,494 – 39,932 – =156,965 P 269 (105,464) (269) P = 1,286,383 (553,551) 55,307 77,936 =2,032,972 P (400,827) (136,535) 48,265 2,998 416,570 (338,109) P = 1,799,234 (27) 501,677 (456,359) =1,911,629 P – 58,716 (43,511) P = 109,705 – 43,872 (58,382) =133,793 P – (4,310) 290,753 (P = 832,183) – (4,251) 24,159 (P =502,359) – (254,210) – (P = 81,784) – (303,795) – (P =252,294) 2,998 216,766 (90,867) P = 994,972 (27) 237,503 (490,582) =1,290,769 P Core Net Income P = 1,007,232 =1,303,029 P EBITDA P = 3,430,054 =4,130,263 P 21% 24% Results Operating results Finance costs Foreign exchange gains (losses) - net Interest income Equity in net earnings (losses) of associates and joint ventures Other income - net Income tax Net income EBITDA Margin Assets and Liabilities Operating assets Investments in associates and joint ventures Deferred tax assets – net Total assets P = 48,386,755 16,631,961 1,370,791 P = 66,389,507 =41,784,551 P 15,934,999 1,282,929 =59,002,479 P P = 16,984,936 – 770,886 P = 17,755,822 =16,373,444 P – 738,897 =17,112,341 P P = 1,706,412 – 338,284 P = 2,044,696 =1,774,615 P – 181,364 =1,955,979 P (P = 4,898,461) (16,432,372) (10,761) (P = 21,341,594) (P =4,299,549) (15,768,408) (10,761) (P =20,078,718) P = 62,179,642 199,589 2,469,200 P = 64,848,431 =55,633,061 P 166,591 2,192,429 =57,992,081 P Operating liabilities Interest-bearing loans and borrowings Deferred tax liabilities - net Obligations under finance lease Total liabilities P = 12,714,878 16,567,680 – 67,739 P = 29,350,297 =12,145,518 P 10,847,444 – 82,050 =23,075,012 P P = 5,693,068 3,737,371 – 9,840 P = 9,440,279 =5,155,948 P 3,739,347 – 11,209 =8,906,504 P P = 1,669,389 – 138,271 – P = 1,807,660 =1,219,951 P – 299,798 – =1,519,749 P (P = 1,988,985) – – – (P = 1,988,985) (P =1,431,941) – – – (P =1,431,941) P = 18,088,350 20,305,051 138,271 77,579 P = 38,609,251 =17,089,476 P 14,586,791 299,798 93,259 =32,069,324 P P = 809,155 742,687 1,723,924 =1,112,243 P 1,938,059 3,517,926 P = 988,937 – 612,169 =1,715,255 P – 1,089,035 P = 116,336 – 70,566 =900,172 P 42,777 122,778 P =– – (323,278) =– P – (584,729) P = 1,914,428 742,687 2,083,381 =3,727,670 P 1,980,836 4,145,010 73,771 22,959 154,390 177,501 20,903 23,136 – – 249,064 223,596 Other Segment Information Capital expenditures: Property and equipment Intangible assets Depreciation and amortization Noncash expenses other than depreciation and amortization Geographical Segment Data The following tables present revenue and expenditure for the six months ended June 30, 2014 and 2013 and certain asset information regarding geographical segments as of June 30, 2014 and December 31, 2013: Philippines 2014 2013 United States 2014 2013 Others 2014 2013 Eliminations 2014 2013 Consolidated 2014 2013 Revenue External sales Inter-segment sales Revenue deductions Total revenue P = 13,864,809 1,626,820 (98,432) P = 15,393,197 =14,866,591 P 920,298 (110,870) =15,676,019 P P = 1,870,021 – – P = 1,870,021 =1,217,843 P – – =1,217,843 P P = 716,263 – – P = 716,263 =1,185,794 P – – =1,185,794 P P =– (1,626,820) 25,565 (P = 1,601,255) =– P (920,298) 18,346 (P =901,952) P = 16,451,093 – (72,867) P = 16,378,226 =17,270,228 P – (92,524) =17,177,704 P Assets Operating assets Investments in associates and joint ventures Deferred tax assets - net Total assets P = 59,767,630 16,631,961 2,357,769 P = 78,757,360 =52,585,900 P 15,934,999 2,067,641 =70,588,540 P P = 2,449,112 – 122,192 P = 2,571,304 =2,656,700 P – 116,842 =2,773,542 P P = 4,861,361 – – P = 4,861,361 =4,690,010 P – 18,707 =4,708,717 P (P = 4,898,461) (16,432,372) (10,761) (P = 21,341,594) (P =4,299,549) (15,768,408) (10,761) (P =20,078,718) P = 62,179,642 199,589 2,469,200 P = 64,848,431 =55,633,061 P 166,591 2,192,429 =57,992,081 P Liabilities Operating liabilities Interest-bearing loans and borrowings Deferred tax liabilities - net Obligations under finance lease Total liabilities P = 18,689,329 20,267,408 138,271 77,579 P = 39,172,587 =17,014,915 P 14,547,657 299,798 93,259 =31,955,629 P P = 2,625,451 37,643 – – P = 2,663,094 =685,490 P 39,134 – – =724,624 P (P = 1,237,445) – – – (P = 1,237,445) =821,012 P – – – =821,012 P (P = 1,988,985) – – – (P = 1,988,985) (P =1,431,941) – – – (P =1,431,941) P = 18,088,350 20,305,051 138,271 77,579 P = 38,609,251 =17,089,476 P 14,586,791 299,798 93,259 =32,069,324 P P = 1,884,400 742,687 =3,616,665 P 1,980,836 P = 18,555 – =48,396 P – P = 11,473 – =62,609 P – P =– – =– P – P = 1,914,428 742,687 =3,727,670 P 1,980,836 Other Segment Information Capital expenditures: Property and equipment Intangible assets 6. Cash and Cash Equivalents June 30, 2014 (Unaudited) P =5,053,017 10,217,103 P =15,270,120 Cash on hand and in banks Cash equivalents December 31, 2013 (Audited) =6,159,544 P 4,457,311 =10,616,855 P Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are short-term placements, which are made for varying periods of up to three months depending on the immediate cash requirements of the Company, and earn interest at the respective short-term placement rates. Interest earned from cash and cash equivalents amounted to P =78 million and P =48 million for the six months ended June 30, 2014 and 2013, respectively. 7. Trade and Other Receivables Trade: Airtime Subscriptions Others Due from related parties (see Note 22) Advances to employees and talents (see Note 22) Others Less allowance for doubtful accounts June 30, 2014 (Unaudited) December 31, 2013 (Audited) P =5,933,767 1,844,883 1,821,354 578,300 296,843 328,484 10,803,631 1,438,761 P =9,364,870 =5,130,100 P 1,789,349 1,630,346 464,983 298,984 346,660 9,660,422 1,326,661 =8,333,761 P Movements in the allowance for doubtful accounts are as follows: Balance at January 1, 2013 Provisions Write-offs and others Balance at December 31, 2013 Provisions (see Note 25) Write-offs and others Balance at June 30, 2014 Trade Airtime Subscriptions =548,849 P =274,329 P 14,147 323,000 (6,075) (47,043) 556,921 550,286 5,415 149,636 (5,384) (6,232) =556,952 P =693,690 P Others =107,024 P 90,912 (5,810) 192,126 28,833 (70,844) =150,115 P Nontrade Total =51,184 P =981,386 P 4,035 432,094 (27,891) (86,819) 27,328 1,326,661 9,236 193,120 1,440 (81,020) =38,004 = P P1,438,761 The aging analysis of the unbilled airtime and subscription receivables follows: Less than 30 days 31 to 60 days June 30, 2014 (Unaudited) P =771,141 22,014 P =793,155 December 31, 2013 (Audited) =966,325 P 27,530 =993,855 P June 30, 2014 (Unaudited) December 31, 2013 (Audited) P =566,964 35,901 =156,907 P 62,189 37,984 7,500 P =648,349 38,384 7,741 =265,221 P 8. Inventories At net realizable value: Merchandise inventory Materials, supplies and spare parts At cost Merchandise inventory Office supplies Inventory losses amounted to P =21 million and P =4 million for the six months ended June 30, 2014 and 2013, respectively (see Note 25). The cost of inventories carried at net realizable value amounted to P =723 million and P =364 million as of June 30, 2014 and December 31, 2013, respectively. Inventory costs, recognized under “Cost of sales and services”, amounted to =89 million and P P =64 million for the six months ended June 30, 2014 and 2013, respectively (see Note 24). 9. Other Current Assets Creditable withholding and prepaid taxes Advances to suppliers Preproduction expenses Prepaid license fees Prepaid rent Prepaid insurance Other prepayments June 30, 2014 (Unaudited) P =1,473,462 429,725 398,598 166,525 100,871 43,168 246,145 P =2,858,494 December 31, 2013 (Audited) =1,570,697 P 539,701 375,475 74,526 45,512 20,173 155,581 =2,781,665 P Other prepayments mainly pertain to transponder services, membership dues and advertisement. 10. Property and Equipment June 30, 2014 (Unaudited - Six Months) Towers, Transmission, Television, Land Buildings Radio, Movie, and Land and and Auxiliary Other Construction Improvements Improvements Equipment Equipment in Progress Cost Balance at beginning of period Additions Disposals/retirements Reclassifications Translation adjustments Balance at end of period Accumulated Depreciation and Amortization Balance at beginning of period Depreciation and amortization (see Notes 23, 24 and 25) Disposals/retirements Reclassifications Translation adjustments Balance at end of period Net Book Value P =702,942 48,929 – 2,922 (1,335) 753,458 16,365 2,220 – – 136 18,721 P =734,737 P =10,942,592 30,552 (2,903) 101,273 (2,464) 11,069,050 P =16,985,422 1,003,876 (168,062) 29,947 (6,050) 17,845,133 P =9,946,047 273,333 (38,125) 98,802 (13,385) 10,266,672 5,494,287 9,276,082 6,736,327 234,561 (857) – (2,357) 5,725,634 P =5,343,416 828,271 (163,783) 30 4,605 9,945,205 P =7,899,928 339,992 (37,452) (30) (24,000) 7,014,837 P =3,251,835 P =1,481,963 557,738 – (232,944) 4,117 1,810,874 Total P =40,058,966 1,914,428 (209,090) – (19,117) 41,745,187 – – – – – – P =1,810,874 21,523,061 1,405,044 (202,092) – (21,616) 22,704,397 P =19,040,790 December 31, 2013 (Audited - One Year) Towers, Transmission, Television, Land Buildings Radio, Movie, and Land and and Auxiliary Other Construction Improvements Improvements Equipment Equipment in Progress Cost Balance at beginning of year Additions Transfer to investment properties (see Note 11) Disposals/retirements Reclassifications Translation adjustments Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization (see Notes 23, 24 and 25) Disposals/retirements Reclassifications Translation adjustments Balance at end of year Net Book Value =636,808 P 166,439 (135,927) – 29,699 5,923 702,942 9,569 6,790 – – 6 16,365 =686,577 P =10,713,747 P 32,044 =14,628,588 P 1,746,585 =9,775,900 P 566,852 – (2,937) 186,617 13,121 10,942,592 – (201,620) 785,084 26,785 16,985,422 – (194,698) (268,603) 66,596 9,946,047 4,996,969 7,426,980 6,646,787 489,041 (2,500) – 10,777 5,494,287 =5,448,305 P 1,595,556 (173,789) 403,784 23,551 9,276,082 =7,709,340 P 621,732 (192,649) (403,784) 64,241 6,736,327 =3,209,720 P =994,975 P 1,215,750 Total =36,750,018 P 3,727,670 – – (732,797) 4,035 1,481,963 (135,927) (399,255) – 116,460 40,058,966 – – – – – – =1,481,963 P 19,080,305 2,713,119 (368,938) – 98,575 21,523,061 =18,535,905 P Certain property and equipment of Sky Cable and PCC with a carrying value of P =492 million as of December 31, 2009 were pledged as collateral to secure the long-term debt of Sky Cable. On October 26, 2010, the loans were fully paid. As of June 30, 2014, the release of security interest on the pledged properties is still in process. Certain property and equipment with cost amounting to P =16,086 million and P =15,044 million as of June 30, 2014 and December 31, 2013, respectively, were fully depreciated but are still being used by the Company. Unamortized borrowing costs capitalized as part of property and equipment amounted to =728 million and P P =742 million as of June 30, 2014 and December 31, 2013, respectively. Property and equipment includes the following amounts where the Company is a lessee under a finance lease (see Note 29): June 30, 2014 (Unaudited) P =499,231 (405,924) P =93,307 Cost capitalized under finance lease Accumulated depreciation Net book value December 31, 2013 (Audited) =504,482 P (405,655) =98,827 P 11. Investment Properties Cost and related accumulated depreciation of investment properties are as follows: June 30, 2014 (Unaudited - Six Months) Land Building Total Cost: Balance at beginning of period Translation adjustments Balance at end of period Accumulated depreciation: Balance at beginning of period Depreciation (see Note 25) Translation adjustments Balance at end of period Net book value P =167,004 (602) 166,402 P =35,797 (522) 35,275 P =202,801 (1,124) 201,677 – – – – P =166,402 5,885 566 (109) 6,342 P =28,933 5,885 566 (109) 6,342 P =195,335 December 31, 2013 (Audited - One Year) Land Building Total Cost: Balance at beginning of year Transfer from property and equipment (see Note 10) Additions Translation adjustments Balance at end of year Accumulated depreciation: Balance at beginning of year Depreciation (see Note 25) Translation adjustments Balance at end of year Net book value =28,735 P =28,735 P =57,470 P 135,927 – 2,342 167,004 – 4,720 2,342 35,797 135,927 4,720 4,684 202,801 – – – – =167,004 P 4,397 1,080 408 5,885 =29,912 P 4,397 1,080 408 5,885 =196,916 P In May 2013, the Parent Company transferred land with a carrying value of P =136 million from property and equipment to investment properties as it intends to hold the land for capital appreciation (see Note 10). As of June 30, 2014 and December 31, 2013, management believes that the carrying value of investment properties amounting to P =140 million and P =141 million, respectively, approximates its fair value. Land and building with carrying value of P =55 million and P =56 million as of June 30, 2014 and December 31, 2013, respectively, pertain to a parcel of land purchased by ABS-CBN International, with a two-storey house constructed thereon, located in Redwood City, California, USA. The real property which was acquired in July 2008 at a purchase price of US$1.4 million (P =67 million) was intended to be held by ABS-CBN International as investment properties. To fund the acquisition, ABS-CBN International obtained a loan from Citibank, North America amounting to US$1 million (P =50 million) for which the property was pledged as collateral (see Note 18). As of June 30, 2014 and December 31, 2013, the fair market value of land and building, which is based on market price of similar properties within the area, amounted to =64 million and P P =65 million, respectively. The fair value of the investment properties is categorized under Level 3 of the fair value hierarchy as the market for the identical or similar properties is not active. Rental income derived from the investment properties amounted to P =1 million for the six months ended June 30, 2014 and 2013. Direct operating expenses, which consist mainly of depreciation, amounted to P =566 thousand and P =525 thousand for the six months ended June 30, 2014 and 2013, respectively. 12. Program Rights and Other Intangible Assets June 30, 2014 (Unaudited - Six Months) Balance at beginning of period Additions Amortization (see Notes 23, 24 and 25) Translation adjustments Balance at end of period Less current portion Noncurrent portion Balance at beginning of year Additions Amortization (see Notes 23, 24 and 25) Translation adjustments Balance at end of year Less current portion Noncurrent portion Movie In-Process Program and Filmed Rights Music Rights Entertainment P =3,016,561 P =138,758 P =494,726 462,262 – 278,422 (426,603) (2,968) (214,446) – – – 3,052,220 135,790 558,702 753,923 135,790 37,057 P =2,298,297 P =– P =521,645 Program Rights =2,634,785 P 1,383,218 (1,001,442) – 3,016,561 1,174,274 =1,842,287 P Story, Video and Publication and Record Master P =11,630 2,003 (1,297) – 12,336 6,639 P =5,697 Customer Licenses Relationships P = 1,005,715 P =502,522 – – (1,055) (28,569) (373) – 1,004,287 473,953 – – P = 1,004,287 P =473,953 Cable Channels CPI P =459,968 – – – 459,968 – P =459,968 Production and Distribution Business Middle East P =73,500 – (2,833) (1,204) 69,463 – P =69,463 Total P =6,815,164 742,687 (677,771) (1,577) 6,878,503 933,409 P =5,945,094 December 31, 2013 (Audited - One Year) Movie Story, In-Process Video and and Filmed Publication and Customer Music Rights Entertainment Record Master Trademarks Licenses Relationships =143,682 P =301,499 P =9,860 P =1,111,784 P =965,049 P =559,660 P 1,000 546,368 7,473 – 42,777 – (5,924) (353,141) (5,703) – (2,111) (57,138) – – – – – – 138,758 494,726 11,630 1,111,784 1,005,715 502,522 138,758 67,007 5,933 – – – =– P =427,719 P =5,697 P =1,111,784 P =1,005,715 P =502,522 P Cable Channels CPI =459,968 P – – – 459,968 – =459,968 P Production and Distribution Business Middle East =73,140 P – (5,352) 5,712 73,500 – =73,500 P Total =6,259,427 P 1,980,836 (1,430,811) 5,712 6,815,164 1,385,972 =5,429,192 P Trademarks P =1,111,784 – – – 1,111,784 – P =1,111,784 Costs and related accumulated amortization of other intangible assets with finite life (except cable channels) are as follows: Cost Accumulated amortization Net book value Licenses P =42,777 (3,539) P =39,238 June 30, 2014 (Unaudited) Production and Cable Distribution Customer Channels Business Relationships CPI Middle East P =612,940 P =574,960 P =212,358 (138,987) (114,992) (142,895) P =473,953 P =459,968 P =69,463 Total P =1,443,035 (400,413) P =1,042,622 Licenses =42,777 P (2,111) =40,666 P December 31, 2013 (Audited) Production and Cable Distribution Customer Channels Business Relationships CPI Middle East =612,940 P =574,960 P =212,358 P (110,418) (114,992) (138,858) =502,522 P =459,968 P =73,500 P Total =1,443,035 P (366,379) =1,076,656 P 13. Available-for-Sale Investments Balance at beginning of year Unrealized fair value gain (loss) on AFS investments Balance at end of year June 30, 2014 (Unaudited) P =219,191 2,455 P =221,646 December 31, 2013 (Audited) =224,101 P (4,910) =219,191 P AFS investments consist mainly of investments in quoted (P =131 million and P =128 million as of June 30, 2014 and December 31, 2013, respectively) and unquoted (P =91 million as of June 30, 2014 and December 31, 2013) ordinary shares. The unrealized fair value gain on AFS investments amounting to P =2 million and P =35 million for the six months ended June 30, 2014 and 2013, respectively, were recognized in other comprehensive income. 14. Investments in Associates and Joint Ventures The following are the associate and joint ventures of the Company with remaining carrying value as of June 30, 2014 and December 31, 2013: Entity Principal Activities June 30, 2014 (Unaudited) December 31, 2013 (Audited) Percentage of Ownership Associate Amcara Broadcasting Network, Incorporated (Amcara) Joint Ventures A CJ O Shopping Corporation (A CJ O) ALA Sports Promotions International, Inc. (ALA Sports) Services 49.0 49.0 Home shopping 50.0 50.0 Boxing promotions 44.0 44.0 Details and movement in the account are as follows: Acquisition costs: Balance at beginning of year Additions Balance at end of year Accumulated equity in net losses: Balance at beginning of year Equity in net earnings (losses) during the year Balance at end of year June 30, 2014 (Unaudited) December 31, 2013 (Audited) P =699,490 30,000 729,490 =561,528 P 137,962 699,490 (532,899) 2,998 (529,901) P =199,589 (520,502) (12,397) (532,899) =166,591 P Investments in: Joint ventures Associates P =158,669 40,920 P =199,589 =125,600 P 40,991 =166,591 P All the associates and joint ventures are incorporated in the Philippines. The associates and joint ventures have no contingent liabilities or capital commitments as of June 30, 2014 and December 31, 2013. Condensed financial information of the joint ventures follows: Current assets Noncurrent assets Current liabilities Net equity Revenue Costs and expenses Net income June 30, 2014 (Unaudited) P =446,326 19,435 (132,307) P =333,454 December 31, 2013 (Audited) =294,363 P 18,006 (72,223) =240,146 P Six Months Ended June 30 (Unaudited) 2013 2014 =– P P =208,258 – (202,366) =– P P =5,892 Below is the reconciliation of the summarized financial information of the joint venture to the carrying amount of the Parent Company’s investments therein: Net assets of A CJ O Interest of the Parent Company in the net assets of A CJ O Investment in ALA Sports Carrying amount of investments in joint ventures June 30, 2014 (Unaudited) P =199,150 50% 99,575 59,094 P =158,669 December 31, 2013 (Audited) =191,200 P 50% 95,600 30,000 =125,600 P a. Investments in Associates As of June 30, 2014 and December 31, 2013, the remaining carrying value of investments in associates pertains to Amcara. Investment in the other associate, Star Cinema Productions, Inc., has been reduced to zero due to accumulated equity in net losses. The net cumulative unrecognized net losses amounted to P =17 million as of June 30, 2014 and December 31, 2013. Condensed financial information of the associates follows: Current assets Noncurrent assets Current liabilities Net equity Revenue Costs and expenses Net loss June 30, 2014 (Unaudited) P =25,095 208,344 (149,929) P =83,510 December 31, 2013 (Audited) =24,652 P 208,887 (149,883) =83,656 P Six Months Ended June 30 (Unaudited) 2013 2014 =31,786 P P =17,156 (31,840) (17,301) (P =54) (P =145) Below is the reconciliation of the summarized financial information of the associates to the carrying amount of the Parent Company’s investment therein: Net assets of associates Interest of the Parent Company in the net assets of the associates Carrying amount of investments in associates June 30, 2014 (Unaudited) P =83,510 49% December 31, 2013 (Audited) =83,656 P 49% P =40,920 =40,991 P June 30, 2014 (Unaudited) P =1,980,477 187,690 140,286 108,416 P =2,416,869 December 31, 2013 (Audited) =2,046,069 P 168,271 186,775 178,918 =2,580,033 P 15. Other Noncurrent Assets Tax credits with TCCs - net Deposits and bonds Deferred charges Others Amortization of deferred charges amounted to P =35 million and P =33 million as of June 30, 2014 and 2013, respectively (see Note 24). 16. Goodwill Analysis of movement in goodwill follows: Balance at beginning of year Impairment loss (see Note 25) Translation adjustment Balance at end of year June 30, 2014 (Unaudited) P =5,288,350 – (3,684) P =5,284,666 December 31, 2013 (Audited) =5,291,873 P (20,061) 16,538 =5,288,350 P Goodwill arose from the following acquisitions and business combination: Sky Cable CTI and ABS-C ABS-CBN International Sapientis June 30, 2014 (Unaudited) P =4,491,817 567,836 215,812 9,201 P =5,284,666 December 31, 2013 (Audited) =4,491,817 P 567,836 219,496 9,201 =5,288,350 P June 30, 2014 (Unaudited) P =2,339,473 December 31, 2013 (Audited) =1,929,302 P 4,049,815 4,137,246 2,275,581 1,154,040 316,830 1,610,835 278,029 191,247 98,326 61,716 P =12,375,892 1,734,725 1,130,477 269,830 1,209,093 278,029 161,835 210,606 270,863 =11,332,006 P 17. Trade and Other Payables Trade Accrued expenses: Production costs and other expenses Salaries and other employee benefits (see Note 28) Taxes Interest Deferred revenue Installment payable Dividend payable Due to related parties (see Note 22) Others 18. Interest-bearing Loans and Borrowings Borrower Parent Company Sky Cable PCC ABS-CBN International June 30, 2014 (Unaudited) Current Noncurrent Portion Portion Total P =79,895 P =16,517,881 P =16,597,776 30,949 2,927,988 2,958,937 6,000 782,274 788,274 859 36,784 37,643 P =117,703 P =20,264,927 P =20,382,630 December 31, 2013 (Audited) Current Noncurrent Portion Portion Total =1,307,204 P =9,583,156 P =10,890,360 P 29,588 2,930,906 2,960,494 6,956 783,105 790,061 1,723 37,412 39,135 =1,345,471 P =13,334,579 P =14,680,050 P Parent Company The details of interest-bearing loans and borrowings of the Parent Company are as follows: Bank loans Term loans: Bonds payable Loan agreement Syndicated loans Obligations under finance lease (see Note 29) June 30, 2014 (Unaudited) Current Noncurrent Portion Portion P =– P =– Total P =– December 31, 2013 (Audited) Current Noncurrent Portion Portion Total =400,000 P =– P =400,000 P – 58,625 – 5,929,770 10,541,642 – 5,929,770 10,600,267 – – 75,077 808,173 – 9,525,060 – – 9,600,137 808,173 21,270 P =79,895 46,469 P =16,517,881 67,739 P =16,597,776 23,954 =1,307,204 P 58,096 =9,583,156 P 82,050 =10,890,360 P Bonds Payable. On January 23, 2014, the Philippine SEC approved the Parent Company’s offering of debt securities in the aggregate principal amount of up to P =10 billion to be issued in one or two tranches as approved by the BOD on November 29, 2013. The first tranche comprised of fixed rate bonds amounting to P =5 billion and an overallotment option of P =1 billion (collectively the Bonds). On February 10, 2014 ABS-CBN Corporation issued fixed rate bonds amounting to P =6 billion with Banco de Oro (BDO) Capital & Investment Corporation, Bank of the Philippine Islands (BPI) Capital and Hongkong and Shanghai Banking Corporation as joint-issue managers. The bond has a term of seven years with a fixed interest rate of 5.335% p.a.. Interest on the bonds shall be payable quarterly in arrears starting on May 10, 2014 for the first Interest Payment Date. On the same date, the Parent Company listed the P =6 billion worth of retail bonds in the Philippine Dealing and Exchange Corporation. The Bonds had been rated PRS Aaa by the Philippine Rating Services Corporation on December 27, 2013. As of June 30, 2014, the Parent Company is in compliance with the provisions of this facility. Unamortized debt issue cost, presented as a deduction from the Parent Company’s long-term debt, amounted to P =70 million as of June 30, 2014. Amortization of debt issue costs amounted to about P =3 million for the six months ended June 30, 2014 (see Note 26). Loan Agreement. On January 30, 2014, the BOD approved the refinancing of the Parent Company’s outstanding obligation under its existing P =1,650 billion loan with Security Bank Corporation (Security Bank) and Philippine National Bank. On February 28, 2014, ABS-CBN secured the loan with term of four years with fixed rate equivalent to 4.25% p.a.. The loan is intended to refinance existing indebtedness and fund working capital requirements. On March 7, 2014, ABS-CBN secured a P =1 billion loan with Philippine American Life and General Insurance Company to partially finance the Borrower’s capital expenditure requirements and general working capital purposes. The loan has a term of ten years and a fixed rate of 5.40% p.a.. As of June 30, 2014, the Parent Company is in compliance with the provisions of this facility. Details of unamortized debt issue cost, presented as a deduction from the Parent Company’s long-term debt, are as follows: June 30, 2014 (Unaudited) P =100,733 – P =100,733 Transaction costs Debt discount December 31, 2013 (Audited) =104,081 P =40,108 P 144,189 Amortization of debt issue costs are as follows (see Note 26): Debt discount (charged to interest expense) Transaction costs Six Months Ended June 30 (Unaudited) 2013 2014 =24,834 P P =40,108 8,675 6,892 =33,509 P P =47,000 Schedule of Maturities and Repayments. Repayments of long-term debt based on nominal values are scheduled as follows: Year 2014 2015 2016 2017 and onwards Loan Agreement P =83,000 83,000 83,000 10,452,000 P =10,701,000 Bonds Payable P =− − − 6,000,000 P =6,000,000 Amount P =83,000 83,000 83,000 16,452,000 P =16,701,000 Syndicated Loans. The P =854 million syndicated loan facility contains provisions regarding the maintenance of certain financial ratios and limiting, among others, the incurrence of additional debt, the payment of dividends, making investments, the issuing or selling of the Parent Company’s capital stock or some of its subsidiaries, the selling or exchange of assets, creation of liens and effecting mergers. The Company prepaid the loan on March 7, 2014. Sky Cable The details of interest-bearing loans and borrowings of the Sky Cable are as follows: Bank loans Obligations under finance lease (see Note 29) June 30, 2014 (Unaudited) Current Noncurrent Portion Portion Total P =28,000 2,921,097 P =2,949,097 December 31, 2013 (Audited) Current Noncurrent Portion Portion Total =26,781 P =2,922,504 P =2,949,285 P 2,949 P =30,949 2,807 =29,588 P 6,891 P =2,927,988 9,840 P =2,958,937 8,402 =2,930,906 P 11,209 =2,960,494 P The loan agreements provided for certain requirements and restrictions with respect to, among others, the use of the proceeds, maintenance of certain financial ratios, incurrence of additional debt, sale or lease of all or substantially all of Sky Cable’s assets, declaration of cash dividends or enter into merger or consolidation, except where Sky Cable is the surviving entity and it does not result to a change in control. As of June 30, 2014 and December 31, 2013, Sky Cable is in compliance with the provisions and all of the financial ratios required by its creditors in the agreement. Amortization of debt issue costs amounted to about P =2 million and P =1 million for the six months ended June 30, 2014 and 2013, respectively (see Note 26). The schedule of debt repayment based on nominal values is as follows: Year 2014 2015 2016 2017 2018 and onwards Amount P =30,000 30,000 30,000 960,000 1,920,000 P =2,970,000 PCC Omnibus Notes Facility and Security Agreement. This loan is supported by deed of pledge executed by Sky Cable and the Continuing Suretyship Agreement executed by Sky Vision. It is payable in quarterly installments commencing on July 16, 2013 with a maturity on April 1, 2019. The agreement provided for certain requirements and restrictions with respect to, among others, the use of the proceeds, maintenance of certain financial ratios, incurrence of additional debt, sale or lease of all or substantially all of PCC’s assets, declaration of cash dividends or enter into merger or consolidation, except where PCC is the surviving entity and it does not result to a change in control. As of June 30, 2014, PCC is in compliance with the provisions and all of the financial ratios required by its creditors in the agreement. Amortization of debt issue costs amounted to about P =473 thousand and P =394 thousand for the six months ended June 30, 2014 and 2013, respectively (see Note 26). The schedule of debt repayment of the loan is as follows: Year 2014 2015 2016 2017 2018 and onwards Amount P =4,000 8,000 8,000 8,000 764,000 P =792,000 ABS-CBN International The investment property acquired for which the loan was availed was pledged as collateral (see Note 11). The schedule of debt repayment is as follows: Year 2014 2015 2016 2017 2018–2028 Amount P =859 1,793 1,899 2,011 31,081 P =37,643 19. Obligations for Program Rights The amounts presented in the consolidated statements of financial position represent the face amounts of the obligations, net of unamortized discounts, which represent the difference between the face amounts and the fair values of the obligations upon initial recognition. Unamortized discounts amounted to P =42 million and P =49 million as of June 30, 2014 and December 31, 2013, respectively. The schedule of repayments is as follows: Year Within one year More than one year to five years Amount P309,374 = 263,152 =572,526 P 20. Other Noncurrent Liabilities June 30, 2014 (Unaudited) P =259,211 60,063 1,464 9,536 P =330,274 Customers’ deposits Deferred credits Asset retirement obligation Others December 31, 2013 (Audited) =241,961 P 62,730 1,464 96,617 =402,772 P 21. Equity Capital Stock Details of authorized and issued capital stock as of June 30, 2014 and December 31, 2013 are as follows: June 30, 2014 (Unaudited) December 31, 2013 (Audited) Number of Number of Shares Amount Shares Amount (Amounts in Thousands, Except Number of Shares) Common Shares - P =1.0 par value Authorized: Balance at beginning of year Reclassification to preferred shares Balance at end of year Issued: Balance at beginning of year Issuances Balance at end of year 1,300,000,000 − 1,300,000,000 P =1,300,000 − P =1,300,000 872,123,642 − 872,123,642 P =872,124 − P =872,124 1,500,000,000 (200,000,000) 1,300,000,000 =1,500,000 P (200,000) =1,300,000 P 779,584,602 92,539,040 872,123,642 =779,585 P 92,539 =872,124 P June 30, 2014 (Unaudited) December 31, 2013 (Audited) Number of Number of Shares Amount Shares Amount (Amounts in Thousands, Except Number of Shares) Preferred Shares - P = 0.2 par value Authorized: Balance at beginning of year Reclassification from common shares Balance at end of year 1,000,000,000 − 1,000,000,000 P =200,000 − P =200,000 − 1,000,000,000 1,000,000,000 =− P 200,000 =200,000 P Issued: Balance at beginning of year Issuances Balance at end of year 1,000,000,000 − 1,000,000,000 P =200,000 − P =200,000 − 1,000,000,000 1,000,000,000 =− P 200,000 =200,000 P Below are the Parent Company’s track record of the registration of securities: Date of SEC Order Rendered Effective or Permit to Sell March 31, 1992 June 16, 1993 August 18, 1994 July 25, 1995 July 2, 1996 January 7, 2014 January 7, 2014 Event Registered and Listed Shares (Original Shares) Initial Public Offering (Primary) Secondary * ESOP* 40% stock dividends 50% stock dividends 100% stock dividends 50% stock dividends Issuance Issuance Authorized Capital Stock Issued Shares Issue Price =200,000 P 200,000 200,000 200,000 200,000 500,000 1,500,000 1,500,000 1,500,000 1,500,000 111,327,200 12,428,378 18,510,517 1,403,500 49,502,074 86,620,368 259,861,104 259,861,104 57,836,900 34,702,140 P1.00 = 15.00 15.00 15.00 1.00 1.00 1.00 1.00 43.125 43.225 *Included in the 111,327,200 shares existing at the time of the IPO The Parent Company’s total number of common stockholders is 5,696 and 5,741 as of June 30, 2014 and December 31, 2013, respectively. The Parent Company’s total number of preferred shareholders is 191 as of June 30, 2014 and December 31, 2013. Retained Earnings Unappropriated retained earnings available for dividend distribution is adjusted to exclude the Parent Company’s accumulated equity in net earnings of subsidiaries and associates amounting to =838 million and P P =875 million for the six months ended June 30, 2014 and 2013, respectively. Further, the Parent Company’s loan agreement with its creditors limits the declaration of dividends up to 50% of the net income after tax for the immediately preceding financial year. This limitation has been in effect since 2004 resulting to an accumulation of unappropriated retained earnings (see Note 18). On January 30, 2014, the BOD approved the declaration and payment of 2% per annum cash dividend on the Parent Company’s preferred shares with a record date set for February 14, 2014 and payable on February 28, 2014. On March 27, 2014, the BOD also approved the declaration of cash dividend of P =0.60 per common share or an aggregate amount of P =523 million to all common stockholders of record as of April 16, 2014 payable on May 7, 2014. On April 23, 2013, the BOD approved the declaration of cash dividend of P =0.40 per share or an aggregate amount of P =297 million to all stockholders of record as of May 10, 2013 payable on June 6, 2013. On February 27, 2013, the BOD approved the reversal of appropriated retained earnings amounting to P =8,300 million to unappropriated retained earnings. On the same date, the Company’s BOD approved the appropriation of retained earnings of P =16,200 million, including the specific projects and timeline. The appropriated retained earnings is set aside for capital expenditures particularly for the purchase of Parent Company’s property and equipment needed for business operations and expansion over a period of five years. PDRs Convertible to Common Shares Details of PDRs convertible to common shares as of June 30, 2014 and December 31, 2013 are as follows: December 31, 2013 June 30, 2014 (Unaudited - Six Months) (Audited - One Year) Number of Shares Amount Number of Shares Amount (Amounts in Thousands, Except Number of Shares) Balance at beginning of year Acquisitions Balance at end of year 38,178,209 3,376,400 41,554,609 P =1,164,146 99,950 P =1,264,096 38,178,209 − 38,178,209 =1,164,146 P − =1,164,146 P On February 25, 2014, the BOD approved the buy-back of ABS-CBN common shares or PDR’s issued by ABS-CBN Holdings in the aggregate amount of P =500 million for a period of one year from February 25, 2014. 22. Related Party Transactions Parties are considered to be related if one party has the ability, directly or 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. Transactions with Related Parties In addition to the related party transactions discussed in Note 18, significant transactions of the Company with its associates and related parties follow: Nature Associate Blocktime fees paid by the Parent Company and Studio 23 to Amcara Entities under Common Control Expenses paid by ABS-C to Bayantel, a subsidiary of Lopez, Inc., and other related parties Expenses paid by Sky Cable to Bayantel and other related parties Expenses paid by the Parent Company and subsidiaries to Goldlink Securities and Investigative Services, Inc. (Goldlink), Bayantel and other related parties Airtime revenue from Bayantel and A CJ O Expenses and charges paid for by the Parent Company which are reimbursed by the concerned related parties Termination cost charges of Bayantel to ABS-CBN Global Others Donation to ABS-CBN Lingkod Kapamilya Foundation,Inc. (ABS-CBN Lingkod Kapamilya, formerly ABS-CBN Foundation, Inc.) Six Months Ended June 30 (Unaudited) 2013 2014 Blocktime fees P = 17,155 =15,702 P Rent and utilities 155,712 127,691 Bandwith cost and utilities expenses Service fees and utilities expenses 131,617 75,920 83,610 83,048 Airtime fees Rent and utilities 30,240 8,513 19,523 14,850 Termination cost 4,409 20,127 18,992* – Donations for Typhoon Yolanda victims *Net proceeds from sale of “Tulong Na, Tabang Na, Tayo Na” shirts. The related receivables from related parties, presented under “Trade and other receivables” account and payables to related parties, presented under “Trade and other payables” account in the consolidated statements of financial position, are as follows: Relationship* Terms Due from (see Note 7) Bayantel Affiliate Amcara Associate First Philippine Holdings Corporation (FPHC) Inaec Aviations Corporation Affiliate 30 days upon receipt of Unsecured, billings; noninterestno impairment bearing 30 days upon receipt of Unsecured, billings; noninterestno impairment bearing 30 days upon receipt of Unsecured, billings; noninterestno impairment bearing ABS-CBN Lingkod Kapamilya ALA Sports Lopez Holdings A CJ O Star Cinema Goldlink Rockwell Land Corporation (Rockwell Land) Others Affiliate 30 days upon receipt of billings; noninterestbearing Corporate social 30 days upon receipt of responsibility billings; noninterestsector of bearing ABS-CBN Joint Venture 30 days upon receipt of billings; noninterestbearing Affiliate 30 days upon receipt of billings; noninterestbearing Joint Venture 30 days upon receipt of billings; noninterestbearing Associate 30 days upon receipt of billings; noninterestbearing Affiliate 30 days upon receipt of billings; noninterestbearing Affiliate 30 days upon receipt of billings; noninterestbearing Affiliate 30 days upon receipt; noninterest-bearing Conditions P = 292,136 =177,868 P 144,827 146,031 34,336 27,753 Unsecured, no impairment 19,746 – Unsecured, no impairment 19,119 66,013 Unsecured, no impairment 18,750 – Unsecured, no impairment 11,696 11,468 Unsecured, no impairment 10,951 10,797 Unsecured, no impairment 7,923 7,923 Unsecured, no impairment 5,729 3,783 Unsecured, no impairment 2,388 2,545 Unsecured, no impairment 10,699 10,802 P = 578,300 =464,983 P P = 55,858 =55,858 P 26,148 7,415 Total Due to (see Note 17) Sky Cable Net, Inc. Affiliate Lopez, Inc. Ultimate parent (Forward) June 30, December 31, 2013 2014 (Unaudited) (Audited) 30 days upon receipt of Unsecured billings; noninterestbearing 30 days upon receipt of Unsecured billings; noninterestbearing ABS-CBN Lingkod Kapamilya Beyond Cable Holdings, Inc. Others Relationship* Terms Corporate social 30 days upon receipt of responsibility billings; noninterestsector of bearing ABS-CBN Affiliate 30 days upon receipt of billings; noninterestbearing Affiliates 30 days upon receipt of billings; noninterestbearing Conditions Unsecured June 30, December 31, 2013 2014 (Unaudited) (Audited) – 120,631 Unsecured – 16,690 Unsecured 16,320 10,012 P = 98,326 =210,606 P Total **Affiliate pertains to various entities under common control of Lopez, Inc., ultimate parent company. a. The Parent Company own the program rights being aired in UHF Channel 23 of Amcara. The Parent Company has an existing blocktime agreement with Amcara for its provincial operations. b. Sky Cable has entered into an agreement with Bayantel for the grant of Indefeasible Right of Use (IRU) in certain capacities in the network. Operation and maintenance fees paid by Sky Cable to Bayantel amounted to P =5 million as of December 31, 2013 (see Note 29). c. Advances to employees and talents amounted to P =297 million and P =299 million as of June 30, 2014 and December 31, 2013, respectively (see Note 7). d. Share-based payment amounted to nil and P =34 million as of June 30, 2014 and December 31, 2013, respectively. e. On April 21, 2014, BOD approved the arm’s length loan agreement entered by Parent Company and Play Innovations, Inc. On May 28, 2014, the Parent Company extended credit to Play Innovations, Inc. amounted to P =500 million. The loan has a term of one year with fixed rate equivalent to 6% p.a.. f. Other transactions with related parties include cash advances for working capital requirements. Terms and Conditions of Transactions with Related Parties The sales to and purchases from related parties are made at normal market prices. Outstanding balances as of year-end are generally unsecured, interest-free and settlement occurs in cash, and are collectible or payable on demand. For the six months ended June 30, 2014 and 2013, the Company has not made any provision for doubtful accounts relating to amounts owed by related parties. This assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates. Compensation of Key Management Personnel of the Company Compensation (see Notes 23, 24 and 25) Pension benefits (see Note 28) Vacation leaves and sick leaves (see Note 28) Termination benefits Six Months Ended June 30 (Unaudited) 2013 2014 =708,513 P P =811,183 33,120 54,032 14,906 25,148 101 15,978 =756,640 P P =906,341 23. Production Costs Six Months Ended June 30 (Unaudited) 2013 2014 Personnel expenses and talent fees (see Notes 22 and 28) Facilities-related expenses (see Notes 22 and 29) Depreciation and amortization (see Note 10) Travel and transportation Amortization of program rights (see Note 12) License and royalty Set requirements Catering and food expenses Stationery and office supplies Advertising and promotions Other program expenses (see Notes 12 and 22) P =3,125,961 817,872 452,437 320,227 278,926 210,846 148,512 84,013 23,268 15,338 122,207 P =5,599,607 =3,198,489 P 929,599 590,381 176,743 291,681 226,796 191,576 88,550 23,567 16,714 92,029 =5,826,125 P Other program expenses consist of production expenses including, but not limited to, prizes and other expenses related to the promotional activities of various programs during the year. 24. Cost of Sales and Services Cost of services consists of the following: Facilities-related expenses (see Notes 22 and 29) Programming costs Personnel expenses (see Notes 22 and 28) Depreciation and amortization (see Note 10) Advertising and promotions Amortization of program rights (see Note 12) Bandwidth costs Transaction costs Transportation and travel License fees and royalties Inventory costs (see Note 8) Freight and delivery Stationery and office supplies Amortization of deferred charges (see Note 15) Amortization of other intangible assets (see Note 12) Interconnection costs (see Note 22) Installation costs (Forward) Six Months Ended June 30 (Unaudited) 2013 2014 =1,291,204 P P =1,266,689 736,891 856,821 621,923 707,813 626,244 697,635 229,008 229,069 166,071 154,458 85,871 123,985 79,381 82,127 59,861 76,027 48,868 69,807 44,181 69,086 38,252 37,942 39,309 37,723 32,519 34,865 20,860 20,967 49,813 20,502 26,587 15,177 Taxes and licenses Set requirements Catering and food expenses Others (see Note 22) Six Months Ended June 30 (Unaudited) 2013 2014 7,181 11,076 10,397 10,951 12,312 10,365 51,121 83,031 =4,277,854 P P =4,616,116 Amortization of movie in-process and filmed entertainment are recorded as part of “Cost of services” under each applicable expense account. Cost of sales consists of the following: Personnel expenses (see Notes 22 and 28) Printing and reproduction Inventory costs (see Note 8) Handling and processing costs Advertising and promotions Freight and delivery Facilities related expenses (see Notes 22 and 29) Transportation and travel Depreciation and amortization (see Note 10) Others (see Notes 10 and 22) Six Months Ended June 30 (Unaudited) 2013 2014 =27,275 P P =22,628 36,161 21,827 19,474 19,993 6,618 5,564 3,873 2,955 5,208 2,299 6,414 433 804 191 144 20 13,665 6,365 =119,636 P P =82,275 25. General and Administrative Expenses Personnel expenses (see Notes 22 and 28) Contracted services Facilities related expenses (see Notes 22 and 29) Advertising and promotion Depreciation and amortization (see Notes 10 and 11) Taxes and licenses Provision for doubtful accounts (see Note 7) Transportation and travel Research and survey Entertainment, amusement and recreation Donations and contributions Inventory losses (see Note 8) Amortization of other intangible assets (see Note 12) Others (see Note 22) Six Months Ended June 30 (Unaudited) 2013 2014 =2,256,880 P P =2,395,955 507,459 577,323 309,139 358,788 306,908 261,649 287,335 255,518 219,149 223,393 212,109 193,120 135,378 153,821 112,412 115,852 33,976 43,443 17,581 25,950 3,983 20,963 15,077 14,458 503,731 153,612 =4,921,117 P P =4,793,845 Others consist mainly of stationery and office supplies and other expenses. 26. Other Income and Expenses Finance Costs Interest expense (see Note 18) Amortization of debt issue costs (see Note 18) Bank service charges Six Months Ended June 30 (Unaudited) 2013 2014 =387,897 P P =491,788 11,487 55,944 1,443 5,819 =400,827 P P =553,551 The following are the sources of the Company’s interest expense: Long-term debt (see Note 18) Bonds payable (see Note 18) Convertible note Obligations under finance lease (see Note 18) Bank loans (see Note 18) Six Months Ended June 30 (Unaudited) 2013 2014 =347,892 P P =354,078 – 124,483 8,528 9,182 7,755 3,535 23,722 510 =387,897 P P =491,788 Other Income (Charges) Leasing operations (see Note 29) Management fees Dividend income Gain on sale of property and equipment Others - net Six Months Ended June 30 (Unaudited) 2013 2014 =118,363 P P =96,284 53,931 5,282 3,487 3,880 153 1,870 61,569 109,450 =237,503 P P =216,766 Others mainly consist of income from workshops and trainings, service fees and miscellaneous income and expenses. 27. Income Tax and Registration with the Philippine Economic Zone Authority (PEZA) The provision for (benefit from) income tax follows: Current Deferred Six Months Ended June 30 (Unaudited) 2013 2014 =816,402 P P =548,704 (325,820) (457,837) =490,582 P P =90,867 The components of consolidated net deferred tax assets and liabilities of the Company are as follows: Deferred tax assets - net: Accrued pension obligation and other employee benefits NOLCO Allowance for doubtful accounts Excess of the purchase price over the fair value of net assets acquired Customers’ deposits Capitalized interest, duties and taxes (net of accumulated depreciation) Accrued expenses Unearned revenue Allowance for impairment loss on property and equipment MCIT Net unrealized foreign exchange gain Allowance for inventory obsolescence Gain on acquisition and exchange of debt (net of accretion) Others Deferred tax liabilities Excess of the fair value over the book value of net assets acquired June 30, 2014 (Unaudited) December 31, 2013 (Audited) P =1,272,014 486,399 319,179 =1,173,192 P 190,655 288,389 258,557 230,353 306,958 153,329 (218,393) 176,964 59,334 (222,666) 216,860 51,668 50,784 34,238 (11,597) 2,605 54,608 24,763 (19,515) 8,078 – (191,237) P =2,469,200 (84,536) 50,646 =2,192,429 P P =138,271 =299,798 P The details of the deductible temporary differences, NOLCO and MCIT of certain subsidiaries for which no deferred tax assets were recognized are as follows: Allowance for doubtful accounts NOLCO Allowance for decline in value of inventories Accretion of interest expense Allowance for impairment loss on property and equipment Unearned revenue MCIT Accrued pension obligation and others June 30, 2014 (Unaudited) P =1,106,649 404,774 155,724 49,575 December 31, 2013 (Audited) =1,052,820 P 386,752 144,315 165,249 22,790 12,800 9,926 152,503 P =1,914,741 104,736 4,077 9,167 153,421 =2,020,537 P MCIT of the subsidiaries amounting to P =44 million can be claimed as tax credit against future RCIT as follows: Year Paid 2011 2012 2013 2014 Expiry Dates December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 Amount =2,379 P 28,717 11,879 1,417 =44,392 P NOLCO of the subsidiaries amounting to P =1,991 million can be claimed as deductions from future taxable income as follows: Year Incurred 2011 2012 2013 2014 Expiry Dates December 31, 2014 December 31, 2015 December 31 ,2016 December 31 ,2017 Amount P176,227 = 204,312 631,690 978,358 =1,990,587 P As of June 30, 2014 and December 31, 2013, deferred tax liability on undistributed earnings of ABS-CBN Global, holding company of the Parent Company’s foreign subsidiaries, amounting to =1,323 million and P P =1,299 million, respectively, has not been recognized because the Parent Company has control over such earnings, which have been earmarked for expansion in the Company’s foreign operations and are not expected to reverse in the foreseeable future. The reconciliation of statutory tax rate to effective tax rates applied to income before income tax is as follows: Statutory tax rate Additions to (reduction in) income taxes resulting from the tax effects of: Interest income subjected to final tax Nondeductible interest expense Others (mainly income subject to different tax rates and change in unrecognized deferred tax assets) Effective tax rates Six Months Ended June 30 (Unaudited) 2013 2014 30% 30% (7) 2 (2) 1 (17) 8% (1) 28% Registration with the PEZA On February 13, 2014, the PEZA approved the application of Big Dipper for entitlement to Pioneer Status. Consequently, Big Dipper’s income tax holiday period shall be extended until October 31, 2015. Total income tax holiday incentives availed by Big Dipper amounted to P =142 million and P =226 million as of June 30, 2014 and December 31, 2013, respectively. 28. Pension and Other Employee Benefits This account consists of: Pension obligation Other employee benefits Current portion Noncurrent portion June 30, 2014 (Unaudited) P =3,508,622 1,547,223 P =5,055,845 December 31, 2013 (Audited) =3,371,676 P 1,498,364 =4,870,040 P P =646,022 4,409,823 P =5,055,845 =678,958 P 4,191,082 =4,870,040 P a. Pension Plan The Company’s pension plans are composed of funded (Parent Company and Sky Cable) and unfunded (other subsidiaries), noncontributory and actuarially computed pension plans, except for ABS-CBN International (contributory) covering substantially all of its employees. The benefits are based on years of service and compensation during the last year of employment. The Parent Company’s retirement plan is a noncontributory defined benefit plan covering all regular employees. Benefits are based on the employee’s years of service and final monthly salary. Actuarial valuation is performed every year-end. The following tables summarize the components of consolidated net pension expense recognized in the consolidated statements of income and accrued pension obligation recognized in the consolidated statements of financial position: Net Pension Expense Current service cost Net interest cost Net pension expense Six Months Ended June 30 (Unaudited) 2013 2014 =324,788 P P =154,729 139,195 132,633 =463,983 P P =287,362 Accrued Pension Obligation Present value of obligation Fair value of plan assets Accrued pension obligation June 30, 2014 (Unaudited) P =5,366,867 (1,858,245) P =3,508,622 December 31, 2013 (Audited) =4,952,976 P (1,581,300) =3,371,676 P The Parent Company and Sky Cable expect to contribute P =200 million and P =97 million, respectively, to the retirement fund in 2014. The major categories of plan assets as a percentage of the fair value of total plan assets are as follows: June 30, 2014 (Unaudited) December 31, 2013 (Audited) (Percentage) Investment in fixed/floating rate treasury note Investment in government securities and bonds Investment in stocks Others 14.3 5.9 76.2 3.6 100.0 16.9 6.2 72.9 4.0 100.0 The ranges of principal assumptions used as of January 1, 2014 and 2013 in determining pension benefit obligations for the Company’s plans are shown below: Discount rate Future salary rate increases June 30, 2014 (Unaudited) 4.6%–6.1% 4.0%–11.0% December 31, 2013 (Audited) 4.6%–6.1% 4.0%–11.0% ABS-CBN On March 11, 2010, the BOD approved the re-constitution of the retirement committee who will actively manage the pension fund. The retirement committee is composed of five members, four of whom are executive staff of the Parent Company and beneficiaries of the plan. The retirement committee of the beneficial trust fund uses an investment approach with the objective of maximizing the long-term expected return of plan assets. The plan’s investment portfolio seeks to achieve regular income, long-term capital growth and consistent performance over its own portfolio benchmark. In order to attain this objective, the Trustee’s mandate is to invest in a diversified portfolio of fixed income and equities. The investment portfolio consists of investment in equity and fixed income securities of 81% and 19% as of June 30, 2014 and 78% and 22% as of December 31, 2013. On July 27, 2010, the retirement committee of the retirement fund approved the following: a. Acquisition of ABS-CBN securities to fully fund the retirement fund deficiency; b. Allow the acquisition of Lopez Holdings shares and shares of other listed companies; c. Migrate to an investment management account arrangement in lieu of a “Trusteed” arrangement with BDO; and d. Appoint an investment officer of the retirement plan. The market value of ABS-CBN asset allocation as at June 30, 2014 and December 31, 2013 are as follows: Fixed Income: Short-term Medium and long-term: Government securities Corporate bonds Preferred shares Equities: Investment in shares of stock and other securities of related parties Common shares and unit investment trust fund (UITF) June 30, 2014 (Unaudited) December 31, 2013 (Audited) P =37,288 =29,279 P 206,870 81,014 5,195 202,755 78,353 5,450 1,161,829 935,900 242,294 P =1,734,490 206,584 =1,458,321 P Short-term Fixed Income. Short-term fixed income investment includes time deposit, special deposit account and special savings account with interest ranging from 0.5% to 2.3% and 2.0% to 4.0% as of June 30, 2014 and December 31, 2013, respectively. Medium and Long-term Fixed Income. Investments in medium and long-term fixed income include Philippine peso-denominated bonds, such as government securities, corporate bonds, notes and debt securities and equity investment in preferred shares. Government securities include treasury bills and fixed-term treasury notes bearing interest ranging from 2% to 11% and 2% to 9% as of June 30, 2014 and December 31, 2013, respectively. These securities are fully guaranteed by the government of the Republic of the Philippines. Investment in unsecured corporate bonds has a total cost of P =78 million and P =77 million with terms ranging from 5 to 15 years as of June 30, 2014 and December 31, 2013. Yield to maturity rate ranges from 4% to 8% and 7% to 8% as of June 30, 2014 and December 31, 2013, respectively. Total gain amounted to P =1 million as of June 30, 2014 and December 31, 2013. Investment in preferred stock refers to 50,000 shares with a total cost of P =5 million as of June 30, 2014 and December 31, 2013. Gain from investments amounted to P =129 thousand and =450 thousand of June 30, 2014 and December 31, 2013, respectively. The market value of P preferred stock is P =5 million as of June 30, 2014 and December 31, 2013. In 2013, option to redeem the 170,000 shares was exercised. Equities. These pertain to investments in shares of stock and other securities of related parties and other companies listed in the PSE. Investments in Shares of Stock and Other Securities of Related Parties. These pertain to investments in ABS-CBN PDRs and common shares and Lopez Holdings and Rockwell Land common shares. June 30, 2014 (Unaudited) ABS-CBN common shares ABS-CBN PDRs Lopez Holdings Rockwell Land Number of Shares 23,800 19,704,158 69,777,680 17,103,433 106,609,071 Cost P =704 765,281 230,137 34,476 P =1,030,598 Market Value P =881 755,654 373,311 31,983 P =1,161,829 Unrealized Gain (Loss) P =176 (9,627) 143,174 (2,493) P =131,230 December 31, 2013 (Audited) ABS-CBN common shares ABS-CBN PDRs Lopez Holdings Rockwell Land Number of Shares 23,800 19,704,158 69,777,680 17,103,433 106,609,071 Cost =704 P 765,281 230,137 34,476 =1,030,598 P Market Value =772 P 630,533 279,111 25,484 =935,900 P Unrealized Gain (Loss) =68 P (134,748) 48,974 (8,992) (P =94,698) Additional PDRs were acquired in 2011 and 2012 in open market at an average price of =29.92 each. This brings the average price of all PDRs acquired to about P P =39.08 each. In 2013, the retirement fund purchased additional 76,000 shares of PDRs at P =42.12, which increased total PDRs shares held in trust with BDO to 580,058 shares. As of June 30, 2014 and December 31, 2013, the value of each PDR is at P =32.00 and P =38.35, respectively. Total gain (loss) from investments in shares of stock and other securities of related parties amounted to P =131 million and (P =95) million as of June 30, 2014 and December 31, 2013, respectively. Investments in Common Shares and UITF. Common shares pertain to 11,084,743 shares and 6,610,649 shares listed in the PSE as of June 30, 2014 and December 31, 2014, respectively, with market value of P =232 million and P =198 million as of June 30, 2014 and December 31, 2013, respectively. UITF has a market value of P =10 million and P =9 million as of June 30, 2014 and December 31, 2013, respectively. Total gain from these investments amounted to =30 million and P P =12 million as of June 30, 2014 and December 31, 2013, respectively. Sky Cable Sky Cable’s retirement benefit fund is being maintained by trustee banks, BDO and Rizal Commercial Banking Corporation. In 2013, PCC contributed P =540 thousand to the retirement fund and no withdrawals were made during the year. The carrying value of Sky Cable asset allocation as of June 30, 2014 and December 31, 2013 are as follows: Short-term fixed income Investment in medium and long-term fixed income: Government securities Corporate bonds Investment in shares of stock of related parties: First Gen Corporation (First Gen) Common shares June 30, 2014 (Unaudited) P =24,599 December 31, 2013 (Audited) =20,258 P 58,197 29,128 66,869 23,128 7,200 4,631 P =123,755 7,270 5,454 =122,979 P Short-term Fixed Income. Short-term fixed income investment includes time deposit, special deposit account and special savings account with interest ranging from 2.0% and 2.3% to 6.7% as of June 30, 2014 and December 31, 2013, respectively. Medium and Long-term Fixed Income. Investment in medium and long-term fixed income include Philippine peso-denominated bonds, such as government securities, corporate bonds, notes and debt securities. Investment in Government Securities. Investment in government securities include treasury bills and fixed-term treasury notes bearing interest ranging from 1.6% to 11.1% and 3.3% to 11.1% as of June 30, 2014 and December 31, 2013, respectively. These securities are fully guaranteed by the government of the Republic of the Philippines. Total gain from investments in government securities amounted to P =4 million and P =6 million as of June 30, 2014 and December 31, 2013, respectively. Investment in Corporate Bonds. A total cost of P =24 million and P =14 million unsecured bonds with terms ranging from 5 to 10 years and 3 to 25 years as of June 30, 2014 and December 31, 2013, respectively. Yield to maturity rate ranges from 4.6% to 8.5% and 4.6% to 8.5% with a gain of P =628 thousand as of June 30, 2014 and December 31, 2013. Investments in Shares of Stock of Related Parties. These refer to investments in preferred shares of First Gen and FPHC, which are listed in the PSE. Total cost and market value of investments in shares of stock of First Gen amounted to =7 million as of June 30, 2014 and December 31, 2013. Total gain from investments in P preferred shares amounted to P =160 million and P =900 thousand as of June 30, 2014 and December 31, 2013, respectively. b. Other Employee Benefits Other employee benefits consists of accumulated employee sick and vacation leave entitlement. Net Benefit Expense Current service cost Interest cost Net benefit expense Six Months Ended June 30 (Unaudited) 2013 2014 =43,955 P P =133,070 15,472 33,676 =59,427 P P =166,746 Consolidated changes in the present value of the defined benefit obligation are as follows: Defined benefit obligation at beginning of year Current service cost Interest cost Actuarial loss Benefits paid Defined benefit obligation at end of year June 30, 2014 (Unaudited) P =1,498,364 133,070 33,676 – (117,887) P =1,547,223 December 31, 2013 (Audited) =1,238,328 P 370,456 67,352 (132,232) (45,540) =1,498,364 P The sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as of the end of the reporting period, assuming all other assumptions were held constant: December 31, 2013 (Audited) Increase (Decrease) in Defined Benefit Obligation Discount rate: Increase by 1% Decrease by 1% Future salary increases: Increase by 1% Decrease by 1% (P =615,231) 724,800 616,239 (530,890) Shown below is the maturity analysis of the undiscounted benefit payments: Year 2014 2015 to 2018 2019 to 2023 2024 and beyond December 31, 2013 =293,437 P 751,362 2,730,221 29,240,963 The average duration of the defined benefit obligation at the end of the period is 21 years. 29. Commitments Deal Memorandum with DirecTV ABS-CBN International’s share in the subscription revenue earned from subscribers that have migrated to DirectTV amounted to P =318 million and P =292 million for the six months ended June 30, 2014 and 2013, respectively. Operating Lease As Lessee. The Parent Company and subsidiaries lease office facilities, space and satellite equipment. Future minimum rental payable under non-cancelable operating leases are as follows: Within one year After one year but not more than five years June 30, 2014 (Unaudited) P =503,465 414,726 P =918,191 December 31, 2013 (Audited) =509,199 P 618,230 =1,127,429 P As Lessor. The Parent Company has entered into commercial property leases on its building, consisting of the Parent Company’s surplus office buildings. These non-cancelable leases have remaining non-cancelable lease terms of 3 to 5 years. All leases include a clause to enable upward revision of the rental charge on a predetermined rate. Future minimum rental receivable under non-cancelable operating leases are as follows: Within one year After one year but not more than five years June 30, 2014 (Unaudited) P =50,565 197,102 P =247,667 December 31, 2013 (Audited) =111,913 P 157,931 =269,844 P Obligations under Finance Lease Future minimum lease payments under finance leases and hire purchase contracts together with the present value of the net minimum lease payments are as follows: Within one year After one year but not more than five years Total minimum lease payments Less amounts representing finance charges Present value of minimum lease payments Less current portion (see Note 18) Noncurrent portion (see Note 18) June 30, 2014 (Unaudited) P =29,052 57,541 86,593 9,014 77,579 24,219 P =53,360 December 31, 2013 (Audited) =32,574 P 72,852 105,426 12,167 93,259 26,761 =66,498 P Sky Cable has entered into an agreement with Bayantel for the grant of IRU in certain capacities in the network. As of December 31, 2013, Sky Cable has fully paid Bayantel for the grant of IRU amounting to P =82 million (see Note 22). There are no future lease payments expected from this agreement. Purchase Commitments Sky Cable has commitments with various program suppliers for a period of 1 to 5 years. Channel license fees are based on fixed and variable rates. Estimated fees for the next four years are as follows: Year Within one year After one year but not more than five years Amount* =477,815 P 1,585,337 *Includes variable fees based on the number of active subscribers as of December 31, 2013. The estimated fees include channel license fees contracted by Sky Cable for its subsidiaries, amounting to P =106 million, for which Sky Cable will be reimbursed. Network Sharing Agreement On May 28, 2013, ABS-CBN announced its network sharing agreement with Globe Telecom, Inc. (Globe). This partnership enables ABS-CBN to deliver ABS-CBN content and offer traditional telecommunication services on mobile devices. Through the network-sharing agreement, Globe will provide capacity and coverage on its existing cellular mobile telephony network to ABS-C on a nationwide basis. The parties may also share assets such as servers, towers and switches. Construction Contracts Play Innovations, Inc., a subsidiary of ABS-CBN Theme Parks, entered into various construction contracts for the development of an educational theme park under the franchise license of KidZania brand in the Philippines. Total contract value committed for the significant construction contracts amounted to P =350 million as of December 31, 2013. Channel Distribution Agreement ABS-CBN Middle East entered into an agreement with Orbit Showtime Network (OSN) effective November 1, 2013, whereby ABS-CBN Middle East has awarded the rights of distribution of its content to OSN against a license fee at the predetermined rate per subscriber as per the agreement, subject to minimum license fee per month. 30. Financial Risk Management Objectives and Policies Capital Management The Company’s capital structure pertains to the mix of long-term sources of funds. When the Company expands, it needs capital, and that capital can come from debt or equity. The primary objective of the Company’s capital management is to ensure that it maintains healthy capital ratios and strong credit ratings while viably supporting its business to maximize shareholder value. The Company’s approach focuses on efficiently allocating internally generated cash for operational requirements and investments to grow the existing business as well as to deliver on its commitment of a regular dividend payout at a maximum of 50% of the previous year’s net income. Shortages if any and acquisitions or investments in new business are funded by the incurrence of additional debt largely capped by existing loan covenants on financial ratios. As evidenced by the quarterly financial certificates that the Company issued to its lenders, all financial ratios are within the required limits all throughout 2014 and 2013 as follows: 2014 Financial Ratios Loan Agreement Debt to equity Debt service coverage ratio 2013 Financial Ratios Loan Agreement Debt to equity Debt service coverage ratio SCA Facility, BDO Facility, Syndicated Loan Facility, Combined Facility Agreements Debt to earnings before income tax, depreciation and amortization Earnings before income tax to financing cost Required Less than or equal to 2.50 Greater than or equal to 1.10 Required 1st Quarter 2nd Quarter 1.51 15.73 1.47 14.80 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Less than or equal to 2.50 Greater than or equal to 1.10 1.31 8.08 1.17 11.64 1.14 7.32 1.24 6.46 Less than or equal to 2.25 1.61 1.86 1.93 2.17 Greater than or equal to 3.00 5.00 4.00 3.88 4.23 The following table shows the financial ratios that Sky Cable is required to maintain in accordance with the DRA: Financial ratios Total liabilities to equity Debt service coverage ratio Required Maintain at all times not exceeding 2:1 Maintain at least 1.5 times 2013 0.97 6.04 2014 1.29 8.25 31. Financial Assets and Liabilities The following tables set forth the carrying amounts and estimated fair values of consolidated financial assets and liabilities recognized as of June 30, 2014 and December 31, 2013. There are no material unrecognized financial assets and liabilities as of June 30, 2014 and December 31, 2013. June 30, 2014 (Unaudited) Financial Assets Loans and receivables: Deposits (included under “Other noncurrent assets” account in the consolidated statements of financial position) AFS investments - quoted Financial Liabilities Other financial liabilities at amortized cost: Interest-bearing loans and borrowings Obligations for program rights Convertible note Customers’ deposits (included as part of “Other noncurrent liabilities”) Carrying Amount Fair Value Level 1 Level 2 Level 3 P =140,663 130,811 P =271,474 P =128,110 130,811 P =258,921 P =– 130,811 P =130,811 P =– – P =– P =128,110 – P =128,110 P =20,382,630 530,779 252,062 P =20,033,969 572,526 300,771 P =– – – P =– 572,526 – P =20,033,969 – 300,771 259,211 P =21,424,682 309,555 P =21,216,821 – P =– – P =572,526 309,555 P =20,644,295 December 31, 2013 (Audited) Financial Assets Loans and receivables: Deposits (included under “Other noncurrent assets” account in the consolidated statements of financial position) AFS investments - quoted Financial Liabilities Other financial liabilities at amortized cost: Interest-bearing loans and borrowings Obligations for program rights Convertible note Customers’ deposits (included as part of “Other noncurrent liabilities”) Carrying Amount Fair Value Level 1 Level 2 Level 3 =121,934 P 128,359 =250,293 P =109,892 P 128,359 =238,251 P =– P 128,359 =128,359 P =– P – =– P =109,892 P – =109,892 P =14,680,050 P 725,205 245,195 =16,306,382 P 774,205 281,678 =– P – – =– P 774,205 – =16,306,382 P – 281,678 269,616 =15,920,066 P 290,445 =17,652,710 P – =– P – =774,205 P 290,445 =16,878,505 P Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value: Cash and Cash Equivalents, Trade and Other Receivables and Trade and Other Payables. Due to the short-term nature of transactions, the fair values of these instruments approximate the carrying amounts as of financial reporting date. Deposits. Fair value of these instruments is computed by discounting future cash flows using the risk-free interest rates for similar type of instruments adjusted for credit risk. AFS Investments. The fair values of publicly-traded instruments were determined by reference to market bid quotes as of financial reporting date. Investments in unquoted equity securities for which no reliable basis for fair value measurement is available are carried at cost, net of any impairment. Interest-bearing Loans and Borrowings. Fair value was computed based on the following: Term loans Other variable rate loans Fair Value Assumptions Estimated fair value is based on the discounted value of future cash flows using the applicable risk-free rates for similar types of loans adjusted for credit risk. The interest rates used to discount the future cash flows have ranged from 0.4% to 3.7%. The face value approximates fair value because of recent and frequent repricing (i.e., 3 months) based on market conditions. Obligations for Program Rights. Estimated fair value is based on the discounted value of future cash flows using the applicable risk-free rates for similar types of loans adjusted for credit risk. Convertible Note. Fair value was computed based on the discounted value of future cash flows using the PDST-R2 rate plus 1% credit spread. Customers’ Deposits. The fair values were calculated by discounting the expected future cash flows at prevailing PDST-F rate plus applicable credit spread ranging from 2.85% to 4.98% and 1.0% to 4.8% in as of June 30, 2014 and December 31, 2013, respectively. There were no transfers between levels in the fair value hierarchy as of June 30, 2014 and December 31, 2013. Offsetting of Financial Assets and Liabilities There is no offsetting of financial assets and liabilities as of June 30, 2014 and December 31, 2013. 32. EPS Computations Basic EPS amounts are calculated by dividing the net income for the period attributable to common shareholders by the weighted average number of common shares outstanding (net of PDRs) during the period. The following table presents information necessary to calculate EPS: Six Months Ended June 30 (Unaudited) 2013 2014 Net income attributable to equity holders of the Parent Company Dividends on preferred shares (a) Net income attributable to common equity holders of the Parent Company (b) Weighted average of shares outstanding: At beginning of year Issuances of common shares (see Note 21) Acquisitions of PDRs (see Note 21) At end of year Basic/diluted EPS (a/b) P =1,161,983 (3,333) =1,343,876 P (2,667) P =1,158,650 =1,341,209 P 797,137,500 – (2,059,417) 795,078,083 741,406,393 15,423,173 – 756,829,566 P =1.457 =1.772 P The Company has no dilutive potential common shares outstanding, therefore basic EPS is the same as diluted EPS. 33. Note to Consolidated Statements of Cash Flows Noncash investing activity pertains to acquisition of program rights amounted to P =75 million and =218 million as of June 30, 2014 and 2013, respectively. P 34. Contingent Liabilities and Other Matters a. The Parent Company has contingent liabilities with respect to claims and lawsuits filed by third parties. The events that transpired last February 4, 2006, which resulted in the death of 71 people and injury to about 200 others led the Parent Company to shoulder the burial expenses of the dead and medical expenses of the injured, which did not result in any direct or contingent financial obligation that is material to the Parent Company. The Parent Company has settled all of the funeral and medical expenses of the victims of the tragedy. Given the income flows and net asset base of the Parent Company, said expenses do not constitute a material financial obligation of the Parent Company, as the Parent Company remains in sound financial position to meet its obligations. As of June 30, 2014, the claims, including those in connection with the events of February 4, 2006, are still pending and remain contingent liabilities. While the funeral and medical expenses have all been shouldered by the Parent Company, there still exist claims for compensation for the deaths and injuries, the amount of which have not been declared and cannot be determined with certainty at this time. Management is nevertheless of the opinion that should there be any adverse judgment based on these claims, this will not materially affect the Parent Company’s financial position and performance. b. In relation to the consolidation of Sky Cable and Home Cable in 2004, a competitor television broadcasting company (complainant) filed a case before the NTC for unlawful merger and unlawful cross-ownership and common control and operations of telecommunications companies and cable companies with a prayer for cease and desist order. As of June 30, 2014, the case is still pending before the NTC. It is the opinion of Sky Vision’s legal counsels that the case filed by the complainant is without legal basis and would not have a material impact to the consolidated financial statements.