Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
1 8 0 3
S.E.C. Registration Numer
A B S - C B N B ROA DCA S T I NG
C O R P O R A T I ON
1 2 3 1 1 7 - A 0 4 2 7
Month Day FORM TYPE Month Day
Fiscal Year Annual Meeting
Document I.D.
Cashier
STAMPS
1
SECURITIES AND EXCHANGE COMMISSION
7. ABS-CBN Broadcasting Centre Complex, Sgt. Esguerra Ave cor Mo Ignacia St., QC 1100
Address of principal office
9. Not applicable
Former name, former address, and former fiscal year, if changed since last report.
10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA
Yes [ x ] No [ ]
If yes, state the name of such stock exchange and the classes of securities listed therein:
Philippine Stock Exchange Class A
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12. Check whether the issuer:
(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17
thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141
of The Corporation Code of the Philippines during the preceding twelve (12) months (or for
such shorter period that the registrant was required to file such reports);
Yes [ x ] No [ ]
(b) has been subject to such filing requirements for the past ninety (90) days.
Yes [ x ] No [ ]
13. State the aggregate market value of the voting stock held by non-affiliates of the registrant.
3
TABLE OF CONTENTS
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for Issuer’s Common Equity and Related Stockholder Matters
Item 6. Management’s Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
SIGNATURES
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PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Business
Business Development
ABS-CBN Broadcasting Corporation (“ABS-CBN” or the “Company”) traces its roots from Bolinao
Electronic Corporation (“BEC”) which was established in 1946 as an assembler of radio transmitting
equipment. In 1952, BEC changed its corporate name to Alto Broadcasting Corporation (“ABS”). On
September 24, 1956, the Chronicle Broadcasting Network (“CBN”) which is owned by the Lopez family
was organized. In 1957, ABS acquired CBN and on February 1, 1967, the corporate name was changed to
ABS-CBN Broadcasting Corporation.
With the imposition of martial law in September 1972, ABS-CBN’s operations ceased as the government
took over the Company’s studios and equipment. ABS-CBN resumed commercial operations in February
1986 during the height of the EDSA revolution.
Core Business
ABS-CBN is the largest integrated media and entertainment company in the Philippines. The Company
is principally involved in television and radio broadcasting, as well as the production of television
programming for domestic and international audiences and other related businesses.
The Company’s congressional franchise, Republic Act No. 7966, which allows the Company to operate
television and radio stations, was renewed on March 30, 1995 for 25 years. Its broadcasting operations
cover the production of television and radio programs that serve its target audience’s needs for news,
information and entertainment, and public service.
The Company’s Very High Frequency (“VHF”) television network, which consists of its flagship station
in Mega Manila, Channel 2, 23 other owned and operated television stations and ten affiliated stations, is
the leading television network in the Philippines. The Company also operates Studio 23, the leading Ultra
High Frequency (“UHF”) television network with 35 television stations. The two networks reach an
estimated 97% and 50% of all television owning households in the Philippines, respectively. The
Company's VHF network broadcasts a wide variety of entertainment and news programs nationwide to
the mass market, primarily in Filipino. The Company's UHF network has in the past broadcast mostly
English language programs imported from the United States, targeting more affluent viewers, but is now
broadening the target audience for Studio 23 to include the mass market demographic segment. The
Company is also one of the leading radio broadcasting companies, with 19 owned AM and FM radio
stations and ten affiliated radio stations throughout the Philippines. The Company’s anchor radio
stations in Manila, DZMM and DWRR, are the highest-rated stations in Mega Manila in the AM and FM
bands, respectively.
Its subsidiaries and associates are involved in the following related businesses: video/audio post
production, content development and production, film production and distribution, audio recording and
distribution, cable and satellite programming services, and telecommunication services overseas. Other
activities of the subsidiaries include merchandising and licensing, internet services, publishing, money
remittance, property management, and food and restaurant service.
Gross revenues in 2005 amounted to P17,047 million of which 61% or P10,334 million came from airtime
revenues; 25% or P4,248 million from sale of services; 9% or P1,619 from license fees; and 5% or P846
million from sale of goods. Sale of services refer to revenues derived from cable and satellite
5
programming services, film production and distribution, interactive media, content development and
programming services, post production, text messaging, etc.
License fees, on the other hand, represent revenues from the initial phase of the migration of existing US
DTH (direct to home) subscribers to DirecTV’s platform as well as take-up of new subscribers. In 21 July
2005, ABS-CBN and its subsidiary ABS-CBN International signed an affiliation agreement with DirecTV,
one of the leading DTH system providers in the US. Under the deal, DirecTV will have the exclusive right
to air The Filipino Channel (TFC) package on its DTH platform. In return, DirecTV will pay license fees to
ABS-CBN based on the number of subscribers, new and existing, who will avail of the service during the
migration period.
Meanwhile, sale of goods refer to revenues arising from the sale of consumer products such as
magazines, audio, video products, and phonecards.
The Company operates in three major geographical areas. In the Philippines, its home country, the
Company is involved in broadcasting, cable operation and other businesses. In the United States and
other locations (which includes Middle East, Europe, Japan, Australia, and Asia Pacific), the Company
operates its cable and satellite operations to bring television programming outside the Philippines. The
Company’s activities outside the Philippines represent approximately 21%, 20% and 19% of total
revenues in 2005, 2004 and 2003, respectively (see Note 4. Segment Information, in the notes to the
financial statements).
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ABS-CBN Multi-Media, Inc. Digital electronic content distribution 2004 75.0(g)
SkyGuide, Inc. Print Publishing 1998 50.0(h)
Culinary Publications, Inc. Print Publishing 1996 70.0(h)
ABS-CBN Integrated & Strategic Property Holdings, Real estate 2003
Inc. 100.0
Definition Records, Inc. Audio production & distribution 2001 100.0(j)
Discontinuing Operations
ABS-CBN Consumer Products, Inc. (b) Consumer products 1995 100.0
ABS-CBN Europe Societa Per Azioni (m) Services 2001 100.0
ABS-CBN Hong Kong, Ltd. (n) Services 2001 100.0
Cinemagica, Inc. (b) Services 1996 100.0
Shopping Network, Inc. (c) Consumer products 2001 100.0
Creative Creatures, Inc. (CCI) (d) Services 1995 100.0
Associates
AMCARA Broadcasting Network, Inc. (Amcara) Services 1994 49.0
Star Cinema Productions, Inc. (Star Cinema) Movie production 1993 45.0
Sky Vision Corporation. (Sky Vision) Cable operation 1990 10.2
Beyond Cable Holdings, Inc. Holding Company 2001 7.0
(a) indirectly-owned through ABS-CBN Global
(b) ceased commercial operations on December 31, 2002
(c)ceased commercial operations on December 31, 2001
(d)ceased commercial operations on October 31, 2003
(e)with a branch in the Philippines
(f)indirectly-owned through ABS-CBN International
(g)indirectly-owned through ABS-CBN Interactive, Inc.
(h)indirectly-owned through ABS-CBN Publishing, Inc.
(i)indirectly-owned through ABS-CBN Middle East FZ-LLC
(j)indirectly-owned through Star Recording, Inc. (50%) and ABS-CBN Interactive, Inc. (50%)
(k)with a branch in Italy
(l) merger approved in 2000
(m) liquidated in December 2003
(n) de-registered in 2003
Competition
There are currently 12 commercial television stations – those which derive the majority of their revenues
from the sale of advertising and airtime – in Mega Manila (which includes Metro Manila and parts of
Rizal, Laguna, Cavite and Bulacan), with seven on very high frequency (VHF) and five on ultra high
frequency (UHF).
The Company's television broadcasting networks compete for advertising revenues, the acquisition of
popular programming and for the services of recognized talent and qualified personnel. The Company's
television stations also compete with other advertising media, such as radio, newspapers, outdoor
advertising and cable television channels, as well as with home video exhibition, the Internet and home
computer usage. The Company principally competes with 12 commercial television stations in Mega
Manila, including the channels of its major competitor, GMA, which owns and operates Channel 7 and
provides programming for Channel 11 in Manila, and which is affiliated with 41 other stations outside of
Manila.
The major VHF broadcasting networks in the country and their corresponding Mega Manila channels are
as follows:
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ABS-CBN Broadcasting Corp. -- Channel 2
National Broadcasting Network -- Channel 4
Associated Broadcasting Corp. -- Channel 5
GMA Network, Inc. -- Channel 7
Radio Philippine Network -- Channel 9
Zoe Broadcasting Corp. -- Channel 11
Intercontinental Broadcasting Corp. -- Channel 13
Channels 4, 9 and 13 are owned by the Philippine government, although the privatization of Channels 9
and 13 is currently in process.
The principal UHF networks operating in the Philippines and their corresponding Mega Manila channels
are as follows:
ABS-CBN Broadcasting Corp. (Studio 23) -- Channel 23
Southern Broadcasting Network -- SBN 21
RJ Broadcasting -- RJTV 29
National Broadcasting Corp. (MTV Phils) -- Channel 41
Eagle Broadcasting -- Net 25
The Philippine television industry is dominated by ABS-CBN and GMA, which together accounted for
more than 70% of the total audience share in recent years. The following table shows the television
stations’ average ratings and share in Mega Manila for 2005 for the time block 6:00 a.m. to midnight.
Programming
The Company is a growing supplier of Filipino content for television and cable channels both in the
Philippines and, increasingly, throughout the world. The Company faces competition for distribution of
its programming from other producers of Filipino programming. The Company competes with other
programming providers for channel space and compensation for carriage from cable television operators
and other multi-channel distributors. For such program services, distributors select programming based
on various considerations, including the prices charged for the programming and the quality, quantity
and variety of programming.
The Company is the first media company in the Philippines which provided an international DTH and
cable channel service through The Filipino Channel (TFC). The channel is targeted specifically at overseas
8
Filipinos including Filipino immigrants and workers. In July 2005, ABS-CBN and its subsidiary ABS-CBN
International signed an affiliation agreement with DirecTV, one of the leading direct to home (DTH)
system providers in the US. Under the deal, DirecTV will have the exclusive right to air the TFC package
on its direct to home platform. In return, DirecTV will pay license fees to ABS-CBN and to ABS-CBN
International.
The Company's DTH satellite subscription service in the U.S. presently competes with other satellite
television and cable systems, national broadcast networks, and regional and local broadcast stations. In
2005, main competitor GMA-7 launched its own Filipino Channel in the US, Pinoy TV, which is also
available via DTH and cable platforms.
Magazine Publishing
Each of the Company's magazine publications competes for readership and advertising revenues with
other magazines of similar format and with other forms of print and non-print media. Competition for
advertising is based on circulation levels, reader demographics and advertising rates.
The production and distribution of feature films is a highly competitive business in the Philippines.
ABS-CBN Films competes for the services of recognized creative talents (both artists and production staff)
and for film rights to scripts, which are essential to the success of a movie. The Company likewise
competes with other feature film producers, including other Filipino studios, smaller independent
producers and major foreign studios such as Disney, Dreamworks, Fox, MGM, Sony, Universal and
Warner Bros. Success in the Philippine movie business depends on the quality of the film, its distribution
and marketing, and the public’s response to the movie which is difficult to predict. The number of films
released by the Company's competitors in any given period may create an oversupply of product in the
market, which may reduce the Company's share of gross box office admissions and make it more difficult
for its films to succeed. ABS-CBN Films also competes with other forms of entertainment and leisure time
activities such as DVDs, video cassettes and computer games.
In connection with the Company's Internet services and other new interactive products including SMS
and MMS, the Company faces competition from Internet service providers, and personal communication
and telecommunications companies. Some of these companies are looking to develop their own SMS-
related content and value-added services.
Post-Production Services
The post-production services business is also highly competitive. In addition to other post-production
services companies, including one owned by GMA, television and movie studios themselves can also
perform similar services in-house. These studios could devote substantially greater resources to the
development of post-production services that compete with those provided by the Company. The
Company also actively competes with certain industry participants that are niche players or specialized
businesses.
Sky Vision's cable operations directly compete for viewer attention and subscriptions with other
providers of entertainment, news and information, including other cable television systems, broadcast
television stations and DTH satellite companies. Cable television systems also face strong competition
9
from all media for advertising revenues. Important competitive factors include fees charged for basic and
premium services, the quantity, quality and variety of the programming offered, signal reception,
customer service, and the effectiveness of marketing efforts.
In the parent company financial statements, significant transactions of the Parent Company with its
subsidiaries, associates, and a related party follow:
2005 2004
Expenses and charges paid by the Company
which are reimbursed by the subsidiaries
and associates (see Notes 17 and 18) =298,266
P =358,011
P
Interest income on convertible note (see Note 7) 230,855 112,841
Airtime revenue from Sky Films, ABS-CBN Films,
Manila North Tollways Corp. (MNTC) and
Bayan Telecommunications Holdings, Inc.
(Bayantel), a subsidiary of Lopez (see Note 19) 114,203 66,523
Technical facilities order charges for the use of
the Company’s facilities (see Note 19) 104,306 163,304
Blocktime fees charged to Studio 23 for the use of the
Company’s equipment (see Note 19) 14,927 16,500
Management and other service fees (see Note 19) 62,395 72,390
Rental charges of the Company for the use
of office space (see Note 19) 37,081 37,328
Other transactions with subsidiaries and associates include cash advances for working capital
requirements.
Outstanding balances from the above transactions are reflected in the parent company balance sheets
under the following accounts:
2005 2004
Trade and other receivables (see Note 5) P358,041
= P190,957
=
Advances to subsidiaries and associates (see Note 7) 1,334,261 1,082,882
Trade and other payables (see Note 12) 1,197,956 470,277
In the consolidated financial statements, transactions of the Company with its associates and related
parties follow:
2005 2004
Associates
Interest on noncurrent receivable from Sky Vision =261,161
P =112,841
P
License fees charged by CPI to Central, (a) PCC
and Home Cable 112,334 137,443
Blocktime fees paid by Studio 23 to Amcara (b) 60,816 68,000
Management and other service fees 604 412
2005 2004
Affiliates
Expenses paid by Parent Company & subsidiaries to
Manila Electric Company (Meralco), Bayan
Telecommunications Holding, Inc. (Bayantel)
& other related parties =432,346
P =364,527
P
10
Termination cost charges of Bayantel, a subsidiary of
Lopez, to ABS-CBN Global 286,549 232,140
Airtime revenue from Manila North Tollways Corp.
(MNTC), Bayantel and Meralco, an associate of Lopez 61,273 30,162
Expenses and charges paid for by the
Parent Company which are reimbursed
by the concerned related parties 34,788 46,449
Rental charges of the Parent Company for the use of office
space – 133
The related receivables and payables from related parties are as follows:
2005 2004
Due from associates =150,929
P =161,741
P
Due from affiliates 95,769 102,139
Total =246,698
P =263,880
P
CPI entered into a channel carriage agreement (Agreement) with Central for the airing of the
cable channels (see Note 10) to the franchise areas of Central and its cable affiliates. The
Agreement with Central is for a period of five years effective January 1, 2001, renewable upon
mutual agreement. Under the terms of the Agreement, CPI receives license fees from Central and
its cable affiliates computed based on agreed rates and on the number of subscribers of Central
and its cable affiliates. As the owner of the said cable channels, CPI develops and produces its
own shows and acquires program rights from various foreign and local suppliers.
Studio 23 owns the program rights being aired in UHF Channel 23 of Amcara. On July 1, 2000, it
entered into a blocktime agreement with Amcara for its provincial operations.
Other transactions with associates include cash advances for working capital requirements.
As discussed in Note 15 of the FS, the Parent Company’s obligation under the Senior Credit
Agreement (SCA) is jointly and severally guaranteed by its principal subsidiaries.
11
Compensation of key management personnel of the Company
2005 2004
Compensation =358,321
P =281,553
P
Pension benefit 32,128 20,640
Vacation leaves and sick leaves 3,920 4,472
Termination benefits 70,181 –
=464,550
P =306,665
P
Republic Act No. 7966, approved on March 30, 1995, granted ABS-CBN the franchise to operate TV and
radio broadcasting stations in the Philippines through microwave, satellite or whatever means including
the use of new technologies in television and radio systems. The franchise is for a term of 25 years. ABS-
CBN is required to secure from the National Telecommunications Commission (“NTC”) appropriate
permits and licenses for its stations and any frequency in the TV or radio spectrum.
ABS-CBN Management recognizes two labor unions, one for the supervisory employees and another for
the rank and file employees. The collective bargaining agreement (CBA) for the supervisory union
expired last 31 July 2005 while the CBA for the non-supervisory union expired last 10 December 2005.
Negotiations with both Unions started last year which covered the economic and non-economic
provisions for CBA cycle 2005-2010. Negotiations on the non-economic provisions of the CBA were
successfully concluded last year and hopefully Management reaches an agreement with both Unions on
the economic provisions within the year.
Licenses from foreign and local film and programs aired through the networks
ABS-CBN and its subsidiaries have licenses from foreign and local program and feature film owners to
distribute the same through its networks. The licenses to distribute the foreign programs and foreign and
local feature films grant ABS-CBN and its subsidiaries the right to distribute said programs and films on
free TV, UHF, cable, and satellite TV in the Philippines and in territories wherein The Filipino Channel is
distributed. These licenses for TV rights have an average term of two (2) to three (3) years. Such
programs comprise approximately twenty five percent (25%) of the programming of ABS-CBN's Manila
VHF Channel 2 and approximately thirty (30%) percent of the content of its Manila UHF Channel 23.
ABS-CBN and its wholly-owned subsidiary, Sky Films, Inc., also have the license to distribute local and
foreign feature films in the Philippines for theatrical, TV, and video distribution, with limited ancillary
rights. The licenses for foreign films have an average term of ten (10) to fifteen (15) years.
The principal law governing the broadcasting industry is the 1936 Commonwealth Act. No. 146, as
amended, otherwise known as the Public Service Act. This act seeks to protect the public against
unreasonable charges and inefficient service by public utilities, including companies engaged in
television and radio broadcasting as well as to prevent excessive competition.
The 1987 Philippine Constitution provides that “ownership and management of mass media shall be
limited to citizens of the Philippines, or to corporations, cooperatives or associations wholly-owned and
managed by such citizens” (Section 11, Article XVI). As a result, the Company is highly regulated by the
Philippine Government. The Company’s Congressional Franchise, renewed in 1995 for a term of 25
years, allows the Company to engage in the television and radio broadcasting business.
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The government departments and agencies that administer the laws governing the broadcasting industry
and content are the National Telecommunications Commission (NTC), the Department of Transportation
and Communication (DOTC), the Movie and Television Review and Classification Board (MTRCB), the
Optical Media Board (OMB), and the Department of Labor and Employment.
The NTC is the government agency which regulates the broadcasting industry. Among its specific
functions is the granting of provisional authorities and certificates of public conveniences to own and
operate a broadcasting station within the Philippines. The NTC also regulates the bandwidth allocation
used by the different broadcasting companies through the grant of temporary permits and licenses to
operate television and radio stations.
The DOTC formulates general and specific policies on the broadcasting industry. Although the DOTC
exercises supervision and control over the NTC, it does not have the power to review the acts and
resolutions of the NTC. The MTRCB classifies television programs based on their content, including the
showing of indecent and excessively violent scenes on television. The OMB issues permits to television
stations or networks engaged in the exhibition and distribution of programs in video format.
In addition to the restrictions imposed by the government agencies, a broadcaster must also follow rules
and industry standards promulgated by the Kapisanan ng mga Brodkaster sa Pilipinas (KBP). The KBP is a
trade organization consisting of television and radio operators. It formulates policies and guidelines for
the operations of its members and enforces programming and advertising rules.
Whenever required, the Company applies for and secures proper permits, clearances or exemptions from
the Department of Environment and Natural Resources, Department of Health, Air Transportation Office,
and other regulatory agencies, for the installation and operation of proposed broadcast stations
nationwide.
For the past three years, there were no costs related to the effect of compliance with environmental laws.
Employees
The number of employees and talents of the Parent Company was 3,317 and 3,684 as of December 31,
2005 and 2004, respectively. The number of employees and talents of the Parent Company and its
subsidiaries (collectively referred to as the “Company”) was 5,509, 6,007 and 6,305 as of December 31,
2005, 2004 and 2003, respectively.
The Company recognizes two labor unions, one for the supervisory employees and another for the rank
and file employees. The collective bargaining agreement (CBA) for the supervisory union, which
represents approximately 4% of total Parent Company employees expired last 31 July 2005 while the CBA
for the non-supervisory union, which represents approximately 15% of total Parent Company employees
expired last 10 December 2005.
In July 2005, the Company implemented an employee reduction program or SSP (special separation
package) in order to cut employee costs and improve efficiencies. Around 400 regular employees availed
of the SSP. For the next 12 months, the Company considers its headcount to be adequate for its
requirements and does not have any plans to significantly increase or decrease its headcount.
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Risks Relating to the Company
The Company’s results of operations may be negatively affected by adverse economic conditions in the
Philippines since its operations depend largely on its ability to sell airtime for advertising. Historically,
the advertising industry, relative to other industries, has been particularly sensitive to the general
condition of the economy. Consequently, the Company’s business may be affected by the economic
condition of the country.
Item 2. Properties
The properties of the Company consist of production, broadcasting, transmission and office facilities,
majority of which are owned by the Company. Broadcast operations are principally conducted in the
44,000 square meter ABS-CBN complex located at Sgt. Esguerra Avenue, Quezon City. The complex also
houses the Company’s 650-foot transmitter tower and other broadcast facilities and equipment.
The Company also owns a modern 15-story building located beside the existing ABS-CBN complex. The
building houses the corporate offices of the Company and its subsidiaries engaged in related businesses.
Aside from the corporate offices, the building also has three television soundstages, three sound recoding
studios and other television production facilities. The building has a gross floor area of approximately
100,000 square meters and total office space of approximately 58,000 square meters. The ground floor is
leased to various businesses including banks, retail stores, coffee shops and restaurants. The Company
has received approval from the Philippine Economic Zone Authority to operate as an Information
Technology Zone, enabling potential lessees to take advantage of the incentives and benefits under the
Special Economic Zone Act of 1995.
The Company also owns television broadcast and production facilities and other real estate properties in
various parts of the Philippines, including local television and radio originating stations in Bacolod,
Cebu, Davao, Dagupan, Naga, Legaspi, Zamboanga, General Santos, Cagayan de Oro and Iloilo. Other
principal properties used in connection with the Company's operations include a training center and a
technical operations center. The Company also owns the production and transmission equipment and
facilities of its radio stations located both within and outside of Manila.
With the Company having made substantial investments in upgrading its production, broadcasting and
transmission equipment in recent years, the Company does not anticipate any major capital expenditures
in the near future.
On June 18, 2004, the Parent Company entered into a Senior Credit Agreement (SCA) with several foreign
and local banks (Original Lenders) for a dual currency US$120 million syndicated term loan facility for
the purpose of refinancing existing indebtedness incurred for the construction of the Eugenio Lopez, Jr.
Communications Center, additional investment in the cable TV business and funding capital
expenditures and working capital requirements. The Parent Company’s obligation under the SCA is
secured and covered by a Mortgage Trust Indenture (MTI) which consists of substantially all of the
Parent Company’s real property and moveable assets used in connection with its business and insurance
proceeds related thereto. Further, the Parent Company’s obligation under the SCA is jointly and
severally guaranteed by its principal subsidiaries.
The SCA contains provision 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 the Parent Company’s capital stock or some of its subsidiaries, the selling or exchange of assets,
creation of liens and effecting mergers.
14
Local and Regional Properties
ABS-CBN also owns real estate properties in various parts of the country. Originating stations have the
capacity to produce and broadcast their own programs and to air advertising locally. Relay stations can
only re-transmit broadcasts from originating stations. Affiliate stations are not owned by the Company.
Rather, they are typically independently owned by local Filipino business people and are contracted to
re-broadcast the Company’s originating signals during specified time blocks for negotiated fixed fees.
The following table sets forth the location and use of ABS-CBN’s television and radio stations as of
December 31, 2005:
VHF TV STATIONS
CH STATION Location
STATION TYPE (Transmitter Site)
UHF TV STATIONS
NO. STATION CH STATION STATION LOCATION
TYPE (Transmitter Site)
15
6 Batangas 36 Relay Station Mt. Banoy, Batangas*
7 Baguio** 32 Relay Station Mt. Sto. Tomas (Baguio)*
8 Ilocos Norte 23 Relay Station San Nicolas, Laoag*
9 Bacolod 22 Relay Station Bacolod City*
10 Iloilo** 38 Relay Station La Paz, Iloilo City*
11 Zamboanga 23 Relay Station Zamboanga City*
12 Gen. Santos 36 Relay Station General Santos City*
13 Tacloban*** 24 Relay Station Mt. Naga-Naga, Tacloban
14 Cagayan De Oro 23 Relay Station Cagayan de Oro City*
15 Dumaguete 24 Relay Station Mt. Palimpinon, Valencia, Negros Oriental*
16 Zambales 23 Relay Station Mt. Bucao, Botolan, Zambales*
17 Isabela (not operating) 23 Relay Station Santiago City*
18 Bohol*** 40 Relay Station Jagna, Bohol
19 Cotabato 24 Relay Station Marbel, S. Cotabato
20 Rizal*** 40 Relay Station Antipolo, Rizal
21 Legaspi*** 23 Relay Station Legaspi City
22 Olongapo 24 Relay Station Olongapo City*
23 Iligan (closed) 26 Relay Station Iligan City*
24 Butuan*** 22 Relay Station Butuan City
25 Cotabato*** 23 Relay Station N. Cotabato
26 Pagadian*** 24 Relay Station Pagadian City
27 Palawan 23 Relay Station P. Princesa, Palawan
28 Surigao*** 23 Relay Station Surigao City
29 Roxas City 21 Relay**** Roxas City
30 Quezon 22 Relay Station Baler, Aurora
31 Camarines Norte 23 Relay**** Daet, Camarines Norte
32 Kalibo 23 Relay**** Aklan
33 Dipolog 42 Relay**** Dipolog City
34 Lucena City 24 Relay**** Lucena City, Lucena
35 Lipa City 38 Relay Station Lipa City, Batangas
36 Tarlac** (closed as of Oct. 28, 34 Relay Station Tarlac City
2005)
37 San Fernando, Pampanga** 46 Sales Center San Fernando, Pampanga
38 Cabanatuan** (closed as of 30 Relay Station Cabanatuan, Nueva Ecija
Oct. 28, 2005)
* co-located with VHF TV Stations ; **owned by ABS-CBN;*** with pending application with the NTC,****with commercial insertion capability
FM STATIONS
FREQ. CALL STATION LOCATION
STATION MHz SIGN TYPE
AM STATIONS
FREQ. KHz CALL STATION LOCATION
STATION SIGN TYPE
16
Item 3. Legal Proceedings
For the past five years, the Company is not a party in any legal proceedings which involves a claim for
damages in an amount, exclusive of interest and cost, exceeding ten per cent (10%) of the current assets of
the Company.
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year
covered by this report.
Item 5. Market for Issuer’s Common Equity and Related Stockholder Matters
The Company’s common shares have been listed on the Philippine Stock Exchange (PSE) since 1992. Its
Philippine Deposit Receipts (PDRs) were listed in 1999. Common shares may be exchanged for Philippine
Deposit Receipts, and vice-versa. The Company is the only broadcasting network listed on the PSE. The
common shares (ABS) closed at Php10.75 while the Philippine Deposit Receipts (ABSP) closed at
Php10.75 on February 10, 2006.
Dividends
The declaration and payment of dividends are subject to certain conditions under the Company’s existing
Senior Credit Agreement (SCA) with creditor banks. Under the SCA, the Company may declare and pay
dividends provided: (a) all payments (including pre-payments) due on said loan and premiums on
insurance of assets are current and updated; (b) all financial covenants set forth therein are satisfied; (c)
certain financial ratios are met and such payment will not result in the violation of the required financial
ratios under the SCA; (d) no event of default as provided in the SCA shall exist or occur as a result of
such payment; and (e) the total amount of the cash dividends does not exceed fifty percent (50%) of the
Company’s net income after taxes for the fiscal year preceding the declaration.
ABS ABSP
2005 High Low High Low
First Quarter 18.75 15.25 18.75 14.75
Second Quarter 16.00 10.50 16.00 10.50
Third Quarter 14.75 10.25 14.75 10.25
Fourth Quarter 16.00 12.75 16.25 12.50
17
2004 High Low High Low
First Quarter 27.00 18.00 26.50 17.00
Second Quarter 25.50 19.00 26.00 18.75
Third Quarter 22.75 20.00 22.50 19.75
Fourth Quarter 24.00 18.00 24.25 17.75
The number of shareholders of record as of December 31, 2005 was 7,973. Common shares outstanding as
of December 31, 2005 were 779,583,312.
As of December 31, 2005, the Top 20 stockholders of ABS-CBN own an aggregate of 752,536,723 or 96.53%
of outstanding common shares.
Record / Number of
Rank Stockholder Citizenship Beneficial Shares Held Percent
1 Lopez, Inc. Filipino Record 446,231,607 57.24%
2 PCD Nominee Corporation Filipino Record 298,769,369 38.32%
3 Ching Tiong Keng Filipino Record 1,111,500 0.14%
4 ABS-CBN Foundation, Inc. Filipino Record 780,995 0.10%
5 Carlos Salinas, Sr. Filipino Record 736,200 0.09%
6 Eugenio L. Lopez III Filipino Record 578,190 0.07%
7 Letitia T. Dee Filipino Record 439,590 0.06%
8 Pua Yok Bing Filipino Record 407,100 0.05%
9 FG Holdings Filipino Record 386,270 0.05%
10 Meralco Foundation, Inc. Filipino Record 352,600 0.05%
11 Charlotte C. Cheng Filipino Record 340,000 0.04%
12 Cynthia D. Ching Filipino Record 337,500 0.04%
13 Phil. Communication Satellite Corp Filipino Record 325,500 0.04%
14 Century Securities Corp. Filipino Record 320,000 0.04%
15 Carmela Tiangco Filipino Record 301,395 0.04%
16 Cualoping Securities Corp. Filipino Record 281,200 0.04%
17 Federico M. Garcia Filipino Record 226,207 0.03%
18 James Ang Filipino Record 211,500 0.03%
19 La Suerte Cigar & Cigarette Factory Filipino Record 205,000 0.03%
20 Carlos C. Salinas Filipino Record 195,000 0.03%
Sub-total Top 20 Stockholders 752,536,723 96.53%
Others 27,046,589 3.47%
TOTAL STOCKHOLDERS 779,583,312 100.00%
The Company had an employee stock option plan (ESOP) which covered 1,403,500 shares at 95% of offer
price during the initial public offering. Collections were made in 48 semi-monthly installments without
interest through payroll deductions. Shares offered under the Plan have been fully paid and issued since
1995.
18
On March 29, 2000, the Board of Directors approved another ESOP covering 6,080,306 shares. In 2002, all
the shares acquired by the Company covering this ESOP, were exercised by the employees. As of
December 31, 2003 and 2002, there are no more outstanding ESOP.
The Management Discussion and Analysis of Financial Condition and the Results of Operation are
attached hereto as Annex A.
The principal accountants and external auditors of the Company is the accounting firm of Sycip, Gorres,
Velayo & Company (SGV & Co.). The accounting firm of SGV & Co. has been the Company’s
Independent Public Accountants for the last five (5) years. There was no event in the past five (5) years
where SGV & Co. and the Company had any disagreement with regard to any matter relating to
accounting principles or practices, financial statement disclosure or auditing scope or procedure.
SGV & Co. is being recommended for re-election at the scheduled Annual Stockholders’ Meeting.
Representatives of SGV & Co. for the current year and for the most recently completed fiscal year are
expected to be present at the Annual Stockholders’ Meeting. They will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond to appropriate questions.
Pursuant to Memorandum Circular No. 8, Series of 2003 (Rotation of External Auditors), the company
has not engaged with Maria Vivian C. Ruiz, partner of SGV & Co., for more than five years. Ms. Ruiz has
been engaged by the Company since 2002 for the examination of the Company’s financial statements.
The aggregate fees billed for each of the last two (2) fiscal years for professional services rendered by the
external auditor are as follows:
2005 2004
Audit Fees 6,815,000 4,730,253
Tax Fees 0 1,295,140
All Other Fees* 3,000,000 290,333
*related to IFRS conversion
The audit committee’s approval policies and procedures for the above services from Sycip, Gorres,
Velayo & Co., the external auditors are discussed in Section 7 of the Company’s Manual of Corporate
Governance filed with the Commission on September 2, 2002.
The Statement of Management’s Responsibility for Financial Statements prepared in accordance with
SRC Rule 68, as amended is attached hereto as Annex B.
The Audited Financial Statements as of 31 December 2005 prepared in accordance with SRC Rule 68, as
amended and Rule 68.1 is attached hereto as Annex B.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There are no changes in and disagreements with accountants on accounting and financial disclosure
during the two most recent fiscal years or subsequent interim period.
19
PART III - CONTROL AND COMPENSATION INFORMATION
Board of Directors
The following are expected to be nominated as members of the Board of Directors for the ensuing year:
Except for Ms. Maria Rosario Santos-Concio, all of the above nominees are incumbent directors. The
aforementioned nominees were formally nominated by a shareholder of the Company, Lopez Inc.,
through its Chairman, Mr. Oscar M. Lopez. The nominees will serve as directors of the Company for one
year from date of election.
The Company has adopted the SRC Rule 38 (Requirements on Nomination and Election of Independent
Directors) and compliance therewith has been made.
The following directors have held their current positions in their respective companies for more than 5
years unless otherwise indicated.
20
Harvard University in 1969. Mr. Almeda-Lopez is also the Vice-Chairman of First Philippine Holdings
Corporation. He also serves as the Chairman of ACRIS Corporation and ADTEL, Inc. while he serves as a
Director of various companies in the telecommunications, manufacturing, and service industries, namely
First Philippine Industrial Corporation, First Gen Renewables, Inc., First Electro Dynamics Corporation,
Philippine Electric Corporation, Bayan Telecommunications, Inc., and Sky Vision Corporation.
He was a recipient of the Management Association of the Philippines Management Man of the Year
Award for the year 2000 and was also one of the finalists for the Asia Business Leaders Award for the
year 2004 given by CNBC and TNT International. On civics, Mr. Lopez is a member of the international
board of Conservation International, and Chairman of both First Philippine Conservation, Inc. and the
Ophthalmological Foundation of the Philippines. He is also a member of the Conference Board. He
studied at Harvard College and graduated cum laude with a Bachelor of Arts Degree. He obtained his
Masters degree in Public Administration at the Littauer School of Public Administration also at Harvard
University.
21
held the position of Vice President at First Philippine Holdings Corporation since 1994. He oversees the
development, financing and implementation of its energy-related projects. Over the past ten years, Mr.
Lopez has been involved in the financing and development of the Sta. Rita 1000 MW project as well as the
500 MW San Lorenzo Project. Mr. Lopez also sits as director of the Board of Manila North Tollways
Corporation, Bauang Private Power Corporation, First Gen Renewables, Inc., First Philippine Industrial
Corporation, ABS-CBN Bayan Foundation, Inc. and President of First Philippine Conservation, Inc. Mr.
Lopez is also a trustee of the Asian Institute of Management and Hands On Manila Foundation. He
graduated Cum Laude with a Bachelor of Arts degree in Economics and International Relations, from the
University of Pennsylvania, USA.
He is currently a director of Pilipinas Shell and Pacific Activated Carbon Corporation, an independent
director of Bayan Telecommunications, Inc. and an advisory director of Unilever Phils. He is also the co-
chair of the Presidential Task Force to Develop Service Industries representing the private sector. He is
the Chairman of English Speaking Union and a member of the boards of the Institute of Corporate
Directors, the Foundation for Global Concerns, and the IT Foundation.
In 1998, he received the Most Outstanding Alumnus Award from the University of the Philippines and
the Distinguished Alumnus Award from the Ohio State University. He was also named the Most
Outstanding Professional In 1997. He was awarded the Presidential Order of Merit and the Order of
Sikatuna, rank of Datu, for service to the country.
22
Fr. Carmelo A. Caluag II, S.J., Filipino, age 47
Board Member, Independent Director
Fr. Caluag has been an independent director since 2005. Fr. Caluag was Vice-President for University
Development and Alumni Relations of the Ateneo de Manila University from 2000 to 2005. He also
served as Trustee of the Ateneo de Manila University from 1998 to 2005, as well as trustee in Xavier
School, Ateneo de Naga, Ateneo de Zamboanga, and various social and civic organizations. He also
served as principal of the Ateneo de Manila High School, 1995-1998, headmaster of the Ateneo de Manila
Grade School, 1998-1999, and the first director of the Basic Education Units of the Ateneo de Manila, 1998-
2000. In 1986, he helped organize the Namfrel Marines and consequently founded Simbahang Lingkod ng
Bayan, a church-based socio-political organization. He has also done consultancies for various schools,
companies, and organizations and remains active in various socio-civic groups, especially in the field of
education particularly teacher formation and youth leadership formation. Fr. Caluag obtained his
undergraduate degree from the Ateneo de Manila University in 1980, having studied there also for his
elementary and secondary education. He earned his masters in school administration from Fordham
University, New York in 1994 and is an M.A. Candidate in Theology at the Loyola School of Theology. He
is finishing a Doctoral Program in Leadership Studies at the Gonzaga University, Spokane, Washington.
He was ordained a priest on April 17, 1993 and is in the process of applying for incardination in the
Diocese of Imus.
Ms. Santos-Concio began her career with the Company as a Television Production Consultant in 1987,
which she joined after working as a line producer for BanCom, Audiovision, Vanguard Films, Regal
Films and Vision Exponents. She also worked as a Film Production Manager for the Experimental
Cinema of the Philippines. She has held her current position since December 1998. Ms. Santos-Concio was
hailed as Best Actress in the 1978 Asian Film Festival for her work in Itim, and is the recipient of many
cinema and broadcast industry-related awards over the years. Ms. Santos-Concio graduated Cum Laude
from St. Paul’s College in Manila with a Communications Arts degree.
The Company’s Independent Directors, Mr. Cesar B. Bautista, and Fr. Carmelo A. Caluag II, S.J. have at
least one (1) share of the stock of the Company in their respective names, are both college graduates and
possess integrity, probity and assiduousness. They are persons who, apart from their fees as directors of
the Company, are independent of management and free from any business or other relationship which
could, or could reasonably be perceived to, materially interfere with their exercise of independent
judgment in carrying out their responsibilities as directors of the Company. Specifically, Mr. Bautista and
Fr. Caluag: (i) are not directors or officers or substantial stockholders of the Company or its related
companies or any of its substantial shareholders (other than as independent directors of any of the
foregoing); (ii) are not relatives of any director, officer or substantial shareholder of the Company, or any
of its related companies or any of its substantial shareholders; (iii) are not acting as nominees or
representatives of a substantial shareholder of the Company, or any of its related companies or any of its
substantial shareholders; (iv) have not been employed in any executive capacity by the Company, or any
23
of its related companies or by any of its substantial shareholders within the last five (5) years; (v) are not
retained as professional advisers by the Company, any of its related companies or any of its substantial
shareholders within the last five (5) years, either personally or through their firms; (vi) have not engaged
and do not engage in any transaction with the Company or with any of its related companies or with any
of its substantial shareholders, whether by themselves or with other persons or through a firm of which
they are partners or companies of which they are directors or substantial shareholders, other than
transactions which are conducted at arms length and are immaterial; and (vii) do not own more than two
percent of the shares of the Company and/or its related companies or any of its substantial shareholders.
Mr. Bautista and Fr. Caluag do not possess any of the disqualifications enumerated under Section II (5) of
the Code of Corporate Governance and Section II (D) of SEC Memorandum Circular No. 16, Series of
2002.
Ms. Ressa graduated from Princeton University. She was awarded a Fulbright Fellowship to the
Philippines in 1986, where she attended graduate school at the University of the Philippines. Among the
awards she has received are the Overseas Press Club Award for Best Documentary, the National
Headliner Award for Investigative Journalism, an Emmy nomination for Outstanding Investigative
Journalism, the Asian Television Awards, the SAIS-Novartis International Journalism Award, and the
TOYM. Ms. Ressa taught broadcasting principles at the University of the Philippines, and at Princeton
University, she designed and taught a course on Politics and the Press in Southeast Asia.
24
He was tapped by then general manager, Mr. Federico M. Garcia, in 1986 to help re-launch the Company
and has been instrumental in developing all types of shows for the network. Mr. Manahan graduated
from the University of California at Berkeley in 1969 with an Art History Degree and had been a freelance
television director working with all networks and producers for 15 years. His artistic eye and vision for
the phenomenal has given rise to the biggest and brightest stars in the entertainment industry. He is also
the network’s most respected director having been in the forefront of the Company’s top-rating shows
and TV specials.
25
Randolph T. Estrellado, Filipino, age 41
Vice-President and Chief Financial Officer
Mr. Estrellado has been with the Lopez Group of Companies since 1996, starting as Assistant Vice-
President for Treasury of International Communications Corporation, and later as Assistant Vice-
President for Finance of its holding company, Benpres Holdings Corporation. He joined the Company as
Assistant Vice-President for Finance in 1998 and was promoted to his current position in 2000. Mr.
Estrellado obtained his Masters Degree in Business Administration from Harvard Business School in
1991. He obtained his degree of Bachelor of Science in Business Management, Honors Program, from
Ateneo de Manila, graduating cum laude in 1986.
Other members of the Company’s senior management team as of 31 January 2006 are as follows:
Evelyn D. Raymundo Vice President
Joaquin Enrico C. Santos Vice President
Johnny C. Sy Vice President & Chief Information Officer
Rolando P. Valdueza Vice President
Mercedes L. Vargas Vice President
Joanna G. Santos Vice President
Carmencita A. Guerrero Vice President
Olivia M. Lamasan Vice President
Ma. Lourdes Lilia K. Espinosa Vice President
Roldeo Theodore T. Endrinal Vice President
Laurenti M. Dyogi Vice President
Roberto G. Labayen Vice President
Ma. Yolanda R. Alberto Vice President
Raul Pedro G. Bulaong Vice President
Luchi Cruz-Valdez Vice President
Rosario Sofia S. Villa Vice President
Peter S. Musngi Vice President
Alden Alfonso M. Castañeda Vice President
Vivian Y. Tin Vice President
Mario Carlo P. Nepomuceno Vice President
Philip Lamberto L. Berba Vice President
Andrefanio D. Santos Vice President & Chief Legal Counsel
Alfredo P. Bernardo Vice President
Vice President & Managing Director, Studio 23, Inc. &
Leonardo P. Katigbak SkyFilms, Inc.
Ernesto L. Lopez President, ABS-CBN Publishing, Inc.
Thelma Sioson San Juan General Manager, ABS-CBN Publishing, Inc.
Luis Paolo M. Pineda Managing Director, ABS-CBN Interactive, Inc.
Zenon D. Carlos Managing Director, ABS-CBN Telecoms
Wilhelm O. Ick Managing Director, ABS-CBN Australia
Edgardo B. Garcia Managing Director, ABS-CBN Middle East
Rafael A. Jison Managing Director, ABS-CBN Europe
Candido Q. Santico, Jr. Managing Director, E-Moneyplus, Inc.
Olivia Finina G. de Jesus Managing Director, Creative Programs Inc.
Arnedo C. Lucas Managing Director, Roadrunner Network, Inc.
Eric John Hawthorne Assistant Managing Director, Roadrunner Network, Inc.
Annabelle M. Regalado Managing Director, Star Recording, Inc. & Star Songs, Inc.
Myrna D. Segismundo Managing Director, TV Food Chefs, Inc.
Regina Paz L. Lopez Managing Director, ABS-CBN Foundation, Inc.
Reno R. Rayel Executive Director, ABS-CBN Bayan Foundation, Inc.
26
Family Relationships
Mr. Oscar M. Lopez is the brother of Mr. Manuel M. Lopez and Mrs. Presentacion L. Psinakis. He is the
uncle of Mr. Eugenio L. Lopez III and Mr. Manuel L. Lopez Jr., and the father of Federico R. Lopez.
Significant Employees
The company considers its entire work force as significant employees. Everyone is expected to work
together as a team to achieve the company’s goals and objectives.
For the past five years, the Company is not aware of any bankruptcy proceedings filed by or against any
business of which a director, person nominated to become a director, executive officer, or control person
of the Company is a party or of which any of their property is subject.
For the past five years, the Company is not aware of any conviction by final judgment in a criminal
proceeding, domestic or foreign, or being subject to a pending criminal proceeding, domestic or foreign,
of any of its director, person nominated to become a director, executive officer, or control person.
For the past five years, the Company is not aware of any order, judgment, or decree not subsequently
reversed, superseded, or vacated, by any court of competent jurisdiction, domestic or foreign,
permanently or temporarily enjoining, barring, suspending, or otherwise limiting the involvement of a
director, person nominated to become a director, executive officer, or control person of the Company in
any type of business, securities, commodities, or banking activities.
For the past five years, the Company is not aware of any findings by a domestic or foreign court of
competent jurisdiction (in a civil action), the Commission or comparable foreign body, or a domestic or
foreign exchange or electronic marketplace or self regulatory organization, that any of its director, person
nominated to become a director, executive officer, or control person has violated a securities or
commodities law.
Information as to the aggregate compensation paid or accrued during the last two fiscal years and to be
paid in the ensuing fiscal year to the Company’s chief and five other most highly compensated executive
officers follow:
27
Roldeo Theodore T. Endrinal
Joaquin Enrico C. Santos
Ma. Lourdes N. Santos
The directors each receive per diems amounting to P5,000.00 for their attendance to board meetings.
There are no other arrangements for compensation either by way of payments for committee
participation or consulting contracts.
There are currently no existing employment contracts with executive officers. There are no arrangements
for compensation or payment to be received from the Company in the event of a resignation, retirement
or termination of the executive officer’s employment or a change in control of the Company. There are no
outstanding warrants or stock options held by the Company’s executives.
Security Ownership of Certain Records and Beneficial Owners as of February 10, 2006:
Title Name and Address of Name of Citizenship No. of Shares Per cent
Of class Record Owner Beneficial Owner Held Owned
and Relationship
with Record
Owner
Common Lopez, Inc. Lopez, Inc.
5/F Benpres Bldg, (Oscar M. Lopez, Filipino 446,231,607 57.2%
Exchange Road cor Chairman, is
Meralco Ave., Pasig City authorized to vote
on behalf of Lopez,
Inc.)
Common PCD Nominee Corporation ABS-CBN
G/F Makati Stock Exchange Bldg., Holdings Corp.
Ayala Ave., (Oscar M. Lopez, Filipino 298,967,299 38.3%
Makati City Chairman, is
(PCD Nominee Corporation is not authorized to vote
related to the Company) on behalf of ABS-
CBN Holdings
Corp)
Lopez, Inc. is the holding company of the Lopez family. It is owned by the respective holding companies
of the families of Eugenio Lopez, Jr., Oscar M. Lopez, Presentacion L. Psinakis and Manuel M. Lopez. It
has issued convertible notes covering the shares in the Company registered and beneficially owned by it
in favor of Benpres Holdings Corporation.
The Board of Directors of Lopez, Inc. has the power to decide how Lopez Inc.’s shares in ABS-CBN
Broadcasting Corp. are to be voted.
ABS-CBN Holdings Corp. is a participant of PCD. The 268,014,800 shares beneficially owned by ABS-
CBN Holdings Corp. form part of the 298,967,299 shares registered in the name of PCD. ABS-CBN
Holdings Corp. is owned 50% by Lopez, Inc. and 50% by Oscar M. Lopez, Manuel M. Lopez,
28
Presentacion L. Psinakis, and Eugenio Lopez III. The shares in the Company registered and beneficially
owned by it are covered by Philippine Deposit Receipts (PDR) which gives the holder thereof the right to
delivery or sale of the underlying share. The PDRs are listed with the Philippine Stock Exchange.
The Board of Directors of ABS-CBN Holdings Corporation has the power to decide how ABS-CBN
Holdings Corporation’s shares in ABS-CBN Broadcasting Corp. are to be voted.
As of February 10, 2006, the Company’s directors and senior officers owned an aggregate of 1,286,527
shares of the Company, equivalent to 0.1650% of the Company’s total issued and outstanding capital
stock.
No. of Co.
Title of Nature of Citizenship Percent
Stockholder Name Position Shares
Class Beneficial Held
Held
Ownership
Common Eugenio L. Lopez III Chairman and CEO * Direct Filipino 578,190 0.0742%
Common Augusto Almeda-Lopez Vice-Chairman Direct Filipino 191,009 0.0245%
Common Luis F. Alejandro President & COO** Direct Filipino 1 0.0000%
Common Oscar M. Lopez Director Direct Filipino 61,620 0.0079%
Common Presentacion L. Psinakis Director Direct Filipino 3 0.0000%
Common Federico R. Lopez Director Direct Filipino 1 0.0000%
Common Manuel L. Lopez, Jr. Director Direct Filipino 1 0.0000%
Common Peter D. Garrucho, Jr. Director Direct Filipino 150 0.0000%
Common Emily A. Abrera Director Direct Filipino 1 0.0000%
Common Cesar B. Bautista Independent Director Direct Filipino 4,320 0.0006%
Common Carmelo A. Caluag II, S.J. Independent Director Direct Filipino 1 0.0000%
29
Common Mercedes L. Vargas Vice President Direct Filipino 10,000 0.0013%
Common Arnedo C. Lucas Managing Director, Direct Filipino 8,100 0.0010%
Roadrunner Network,
Inc
Common Eric John Hawthorne Assistant Managing Direct Filipino 5,172 0.0007%
Director,
Roadrunner Network,
Inc
Common Carmencita A. Guerrero Vice President Direct Filipino 4,000 0.0005%
Common Raul Pedro G. Bulaong Vice President Direct Filipino 15 0.0000%
Changes in Control
There have not been any arrangements that have resulted in a change in control of the Company during
the period covered by this report. The Company is not aware of the existence of any voting trust
arrangement among the shareholders.
There had been no material transactions during the past two years, nor is any material transaction
presently proposed, to which the Company was or is to be a party in which any director, executive officer
of the Company, or security holder of more than 10% of the Company’s voting securities, any relative or
spouse of any such director or executive officer or owner of more than 10% of the Company’s voting
securities had or is to have direct or indirect material interest.
Furthermore, there had been no material transactions during the past two years, nor is any material
transaction presently proposed, between the Company and parties that fall outside the definition of
“related parties” under SFAS/IAS No. 24, but with whom the registrants or its related parties have a
relationship (e.g., former senior management of the Company or other parties who have some other
former or current relationship with the Company) that enables the parties to negotiate terms of material
transactions that may not be availed from other, more clearly independent parties on an arm's length
basis.
Parent Company
Lopez, Inc. is the registered owner of 57.24% of the voting stock of the Company as of February 10, 2006.
Lopez, Inc. is the holding company of the Lopez family. It is owned by the respective holding companies
of the families of Eugenio Lopez, Jr., Oscar M. Lopez, Presentacion L. Psinakis and Manuel M. Lopez. It
has issued convertible notes covering the shares in the Company registered and beneficially owned by it
in favor of Benpres Holdings Corporation.
No director has resigned or declined to stand for re-election to the Board of Directors since the date of the
last annual meeting of security holders of the Company because of a disagreement with the Company on
matters relating to the Company’s operations, policies and practices.
30
PART IV – CORPORATE GOVERNANCE
The evaluation system established by the company to measure or determine the level of compliance of
the Board of Directors and top-level management can be found in Section 2 (Duties and Responsibilities
of the Board), Section 3 (Nominations and Qualifications of the Board), and Section 13 (Monitoring and
Assessment) of its Manual of Corporate Governance (the Manual) filed with the Commission on
September 2, 2002.
The company’s efforts to fully comply with the adopted leading practices on good corporate governance
are as follows: (1) it has formed its Audit Committee and has elected its compliance officer, Mr. Alfredo P.
Bernardo, whose duties and responsibilities ensure continuous improvement towards full compliance
and; (2) it has also created policies regarding Penalties for Non-Compliance with the Manual. The scope
of these efforts can be found in Section 1 (Compliance Officer), Section 5 (Audit Committee), and Section
14 (Penalties for Non-Compliance with the Manual) of the Company’s Manual.
Based on the certification of compliance with the Company’s Manual filed with the Commission on
February 23, 2005, there have been no deviations from the Company’s Manual in the past year.
Furthermore, the Company’s Manual calls for the continuous assessment and evaluation of the
Company’s corporate governance policies and procedures. Hence, the Company does not see a need for
any further improvement in its corporate governance.
For the past six months, the Company has filed the following SEC Form 17-C reports and financial
statements:
Item 9: Other Events – 2005 Audited Financial Statements March 31, 2006
& Management Discussion and Analysis of Financial
Condition and Results of Operations for 2005
Item 9: Other Events – BOD approval of 2005 Audited Financial March 29, 2006
Statements and Election of Mr. Eugenio L. Lopez III as
President and Chief Operating Officer
Item 9: Other Events – Notice of Annual Stockholders’ Meeting January 26, 2006
31
Financial Statements Date Filed
32
ANNEX A
Revenues
ABS-CBN Broadcasting Corp.’s (ABS-CBN) total revenues, consisting of gross airtime revenues, sale of
services, license fees and sale of goods grew by 8% to P17,047 million in 2005, driven primarily by license
fees from DirecTV and continued growth of ABS-CBN Global revenues.
Consolidated
Amounts in million pesos 2005 2004 Variance
Amount %
Airtime revenues 10,334 11,086 (753) (7)
Sale of services 4,248 3,930 318 8
License fees 1,619 0 1,619 na
Sale of goods 846 755 91 12
Gross revenues 17,047 15,771 1,276 8
Consolidated gross airtime revenues dropped by 7% year on year (YoY) to P10,334 million from P11,086
million in 2004. In particular, parent airtime revenues which is composed of advertising revenues from
TV-VHF (Channel 2), AM and FM radio, and the regional network, declined by 8% to P9,362 million as
Channel 2 ratings in Mega Manila averaged a lower 14% in 2005 compared to 16% in 2004. The decline
was partly offset by other platforms namely the UHF and cable channels which posted a 2% growth in
airtime revenues.
Consolidated
Amounts in million pesos 2005 2004 Variance
Amount %
Parent airtime revenues 9,362 10,134 (772) (8)
Other platforms 971 952 19 2
Gross airtime revenues 10,334 11,086 (753) (7)
License fees amounting to P1,619 million were booked in 2005. These represent revenues from the initial
phase of the migration of existing US DTH (direct to home) subscribers to DirecTV’s platform as well as
take-up of new subscribers. In 21 July 2005, ABS-CBN and its subsidiary ABS-CBN International signed
an affiliation agreement with DirecTV, one of the leading DTH system providers in the US. Under the
deal, DirecTV will have the exclusive right to air The Filipino Channel (TFC) package on its DTH
platform. In return, DirecTV will pay license fees to ABS-CBN based on the number of subscribers, new
and existing, who will avail of the service during the migration period.
Sale of services, which refer to revenues derived from cable and satellite programming services, film
production and distribution, interactive media, content development and programming services, post
production, text messaging, etc., posted an 8% growth YoY to P4,248 million.
ABS-CBN Global, which accounted for 74% of sale of services, posted a 12% growth to P3,131 million.
Revenue growth was propelled by a 30% YoY increase in subscriber base, translating to 2.0 million
viewers worldwide by end-2005.
34
Amounts in million pesos 2005 2004 Variance
Amount %
ABS-CBN Global 3,131 2,785 346 12
Others 1,117 1,145 (28) (2)
Total sale of services 4,248 3,930 318 8
Other subsidiaries’ sale of services declined by 2% due to ABS-CBN Films which registered a 15% drop in
revenues. ABS-CBN Films released only five movies in 2005 namely Dreamboy, Can This Be Love?, Nasaan
Ka Man, D’ Anothers, and Dubai as against seven films in 2004. This lower output also affected the
corresponding video sales of Star Records.
Sale of goods, which refer to revenues arising from the sale of consumer products such as magazines,
audio, video, telecom products, etc., grew 12% to P846 million.
ABS-CBN Global’s sale of goods, which accounted for 59% of total, rose by 21% YoY to P501 million
given higher merchandise sales of audio, video products, and phonecards to Filipinos abroad.
Expenses
Total expenses in 2005 rose by 12% to P16,563 million from P14,735 million a year ago on the back of
higher cash operating expenses. These expenses, however, include non-recurring charges related to the
migration of DTH subscribers in the US, as well as expenses related to the employee reduction program
or SSP (special separation package). Without these non-recurring items, total expenses went up by only
3% YoY to P15,143 million.
Consolidated
Amounts in million pesos 2005 2004 Variance
Amount %
Production cost 5,691 5,468 223 4
General and administrative 5,791 4,106 1,685 41
Cost of sales and services 2,374 2,384 (11) 0
Agency commission, incentives, & co-prod share 2,085 2,197 (112) (5)
Other expenses 623 580 43 7
Total expenses 16,563 14,735 1,828 12
Operating expenses consisting of production cost, cost of sales and services, general and administrative
expenses, and agency commission rose by 13% to P15,940 million on account of higher cash and non-cash
operating expenses. Cash operating expenses went up by 13% while non-cash operating expenses
primarily depreciation and amortization grew by 11%. If we strip out the non-recurring expenses
mentioned earlier, total opex would have been up by only 3% to P14,520 million.
Total production cost went up by 4% to P5,691 million. Excluding non-cash charges such as depreciation
and film rights amortization, cash production cost rose by only 3% to P4,300 million. In 2005, ABS-CBN
initiated major efforts to control production cost in light of declining revenues. For instance, the
35
Company reduced local production and replaced certain timeslots with foreign soap operas and cartoons.
Some star-driven shows were also replaced with less expensive concept-driven programs starring new
and lesser known talents.
Consolidated
Amounts in million pesos 2005 2004 Variance
Amount %
Personnel expenses and talent fees 2,513 2,524 (11) 0
Facilities related expenses 840 716 124 17
Other program expenses 946 920 27 3
Sub-total -cash production cost 4,300 4,161 139 3
Non-cash production cost 1,391 1,308 83 6
Total production cost 5,691 5,468 223 4
Consolidated general and administrative expenses (GAEX) increased 41% YoY to P5,791 million, fueled
primarily by the SSP that was implemented beginning July 2005. Excluding depreciation, amortization
charges and provision for doubtful accounts, consolidated cash GAEX rose by 46% to P4,779 million.
Consolidated
Amounts in million pesos 2005 2004 Variance
Amount %
Personnel expenses 2,449 1,680 769 46
Facilities related expenses 496 408 88 22
Contracted services 404 338 66 20
Taxes and licenses 151 169 (17) (10)
Entertainment, amusement and recreation 119 128 (10) (8)
Advertising and promotions 503 95 408 427
Other expenses 656 465 191 41
Sub-total -cash GAEX 4,779 3,284 1,495 46
Non-cash GAEX 1,012 822 190 23
Total GAEX 5,791 4,106 1,685 41
Parent cash GAEX went up by 61% YoY to P2,916 million, inclusive of non-recurring charges of P508
million representing marketing expenses to encourage migration to DirecTV as well as P576 million in
SSP-related expenses. Around 400 employees or approximately 20% of ABS-CBN parent headcount
availed of the SSP. Stripping-out these non-recurring charges, parent cash GAEX would have been flat
compared to last year. Cash GAEX of the subsidiaries, on the other hand, increased by 28% driven
primarily by ABS-CBN Global and the full year impact of its Australian operations.
Cost of sales and services, which is the cost related to sale of services and sale of goods, was almost flat at
P2,374 million. This compares to an 8% increase in sale of services and 12% increase in sale of goods.
Non-cash operating expenses, composed primarily of depreciation and amortization, increased by 11% to
P2,407 million mainly as a result of higher amortization costs. Film rights amortization was relatively
36
lower, down by 7% to P827 million on the back of lower expiring titles. Total amortization costs,
however, increased by 14% to P1,172 million due to accelerated amortization of deferred subsidies on the
decoder boxes of existing DTH subscribers migrating to DirecTV’s platform. Excluding the one-time
charge, total amortization charges declined by 11% YoY while total non-cash opex was flat.
Depreciation expense, on the other hand, rose by 8% to P1,235 million due to the impact of new
accounting standards specifically the componentization of fixed assets to major components.
Operating Income
As operating expenses rose higher compared to revenues, operating income decreased by 31% to P1,107
million from P1,616 million in 2004. Consequently, operating margin was lower at 6% as against 10% in
2004.
Net Income
Other expenses increased by 7% to P623 million, largely driven by higher equity in net losses of
associates. Equity in net losses went up to P194 million from P47 million due to higher losses of Beyond
Cable (BCI). BCI took an impairment loss on its redundant assets which stemmed from the merger of
SkyCable and HomeCable. On the other hand, net finance costs, declined by 12% to P670 million as the
Company’s average outstanding debt was lower during the year. Meanwhile, other income, which refers
mostly to rental income increased by 7% YoY to P240 million.
With expense growth of 12% outpacing revenue growth of 8%, income before income tax fell by 53% to
P484 million from P1,036 million. After deducting taxes and minority interest, net income reached P288
million, 62% lower compared to last year. On the other hand, Earnings before interest, taxes, depreciation,
and amortization (EBITDA) was down by 10% to P3,589 million with EBITDA margin lower at 21% from
25% the previous year.
ABS-CBN ended 2005 with consolidated assets of P24,796 million, up by 5% from end-2004 levels.
Consolidated trade and other receivables increased by 29% to P4,668 million. In particular, net trade
receivables increased by 24% to P3,773 million, translating to consolidated trade days sales outstanding
(DSO) of 81-days as against 70-days in 2004.
Driving the increase in DSO is the accrual of license fees related to the migration of DTH subscribers
which are payable 60 days from installation in the new platform. Excluding the impact of license fees,
consolidated trade DSO would have been 79-days. Other current assets increased by 39% to P826 million
due primarily to production expenses of yet to be aired episodes of the Company’s programs. In 2005, the
Company began the canning or advanced taping of some shows particularly soap operas such as Gulong
ng Palad, Sa Piling Mo, and Panday 2 in order to cut location rentals as well as to maximize efficiencies
from production planning.
Meanwhile, current portion of interest-bearing loans and borrowings increased by 32% or P426 million as
a result of reclassification from long-term to short-term in line with their maturity schedule.
Consequently, non-current interest-bearing loans and borrowings dropped by roughly the same amount.
Given an improvement in cash position, net debt to equity ratio declined to 34% from 41% in 2004.
Consolidated capital expenditure and program rights acquisition amounted to P1,229 million, almost flat
compared to 2004.
37
Causes for any material changes in the Balance Sheet (increase or decrease of 5% or more in the
financial statements & other material movements / changes)
• Cash and cash equivalents increased by 36% to Php1,752 million from end-2004 due to minimal
investments and lower capital expenditure.
• Trade and other receivables increased by 29% to P4,668 million. In particular, net trade receivables
increased by 24% to P3,773 million due to accrual of license fees related to the migration of DTH
subscribers which are payable 60 days from installation in the new platform.
• Other current assets increased by 39% YoY to P826 million due primarily to production expenses of yet
to be aired episodes of the Company’s programs. In 2005, the Company began the canning or advanced
taping of some shows in order to cut location rentals and maximize efficiencies from production
planning.
• Investments in associates decreased by 81% to P44 million from end-2004 given higher equity in net
losses of associates.
• Long-term receivables from related parties increased by 7% due to interest income from the receivables
from Beyond Cable.
• Deferred tax assets went up to P294 million from P41 million due to increase in temporary tax
differences.
• Other non-current assets reached P2,073 million, down 21% YoY due to the write-off of deferred
charges pertaining to the DTH subscribers which have migrated to DirecTV as of December 31, 2005.
• Trade and other payables went up by 34% to P4,687 million from end-2004 due to an increase in
payables to suppliers.
• Income tax payable increased to P28 million from end-2004 due to higher tax rate.
• Current portion of interest-bearing loans and borrowings increased by 32% or P426 million as a result
of reclassification from long-term to short-term. On the other hand, non-current interest-bearing loans
and borrowings declined by 15% due to reclassification from long-term to short-term as well as some
payments made on the long-term debt.
• The 42% increase in obligations for program rights-non current is due to extended credit terms given
by program suppliers.
38
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR 2004
REVENUES
ABS-CBN Broadcasting Corp.’s (ABS-CBN) total revenues, consisting of gross airtime, other broadcast
related revenues and net sales and services, increased 7% to P15,560 million in 2004, driven primarily by
robust revenue growth in net sales and services.
Consolidated gross airtime and other broadcasting related revenues reached P11,310 million in 2004, up
slightly by 2% from the previous year.
Consolidated
Gross Revenues Variance
Amounts in million pesos 2004 2003 Php %
Airtime revenues 11,086 10,858 228 2%
Other broadcasting related 224 206 18 8%
Total 11,310 11,064 246 2%
Parent airtime revenues, which consists of advertising revenues from TV-VHF (Channel 2), AM and FM
radio, and the regional network, increased by 2% to Php10,134 million in 2004. Airtime revenues from
Channel 2, which make up 93% of parent airtime revenues, grew by a similarly subdued 2% as
commercial loading remained at 50% with the drop in Mega Manila ratings to 38% from 41% last year.
Airtime revenues from subsidiaries recorded a 6% year-on-year (YoY) growth to Php952 million with all
platforms registering growth in 2004. Studio 23’s airtime revenues increased by 4% to Php612 million
during the year as its commercial loading improved to 10% from 9% in 2003. Other platforms consisting
of airtime revenues of ABS-CBN Global, ABS-CBN News Channel and cable channels of Creative
Programs Inc. likewise recorded revenue growth of 10% driven primarily by volume growth.
Consolidated
Airtime Revenues Variance
Amounts in million pesos 2004 2003 Php %
Parent* 10,134 9,960 174 2%
Studio 23 612 588 24 4%
Other Platforms 340 310 30 10%
Total Airtime 11,086 10,858 228 2%
*Net of eliminated airtime revenues from intercompany transactions
Other broadcasting related revenues, consisting mainly of SMS or text-based revenue, amounted to
Php224 million, 8% higher than last year. The growth in SMS revenues arose from the popularity of ring
tone downloads connected with cable music channel Myx as well as from program promos such voting
for a favorite contestant in Star Circle Quest or a desired ending in the soap opera Sana’y Wala Nang Wakas.
Deductions as a ratio to airtime revenues and other broadcast related revenues remained at 18% in 2004,
the same level as in 2003. Thus, consolidated net airtime and other broadcasting related revenues
increased by a similar 2% to Php9,265 million.
39
Net Sales and Services
In contrast, net sales and services, which include subscription fees, sale of inventories, and non-broadcast
related revenues, grew double digit by 21% to Php4,310 million in 2004.
ABS-CBN Global continued to be the biggest contributor to net sales and services with its net revenues
accounting for 71% of total net sales and services. ABS-CBN Global’s net sales and services increased by
a vigorous 29% to Php3,048 million from the year ago. Bulk of ABS-CBN Global’s revenues came from
subscription revenues of its cable and direct-to-home service with an estimated viewership base of 1.6
million worldwide by end 2004, up 22% from a year ago. To reach even more viewers, ABS-CBN Global
launched its own DTH service in Australia last June 2004 where ABS-CBN’s channels were previously
distributed by a third party DTH provider.
ABS-CBN Films, contributing 9% to total net sales and services, registered a 33% growth YoY to Php390
million as, under the trade name Star Cinema, it produced several blockbuster movies in 2004. Top gross
earning movies in 2004 include romance-drama films Milan and All My Life, and suspense-horror film
Feng Shui. Aside from box office receipts, ABS-CBN Films also generated revenues from its share of
video sales of its movies.
The healthy growth of net sales and services lifted consolidated net revenues by 7% to Php13,575 million
from Php12,641 million in 2003.
EXPENSES
Meanwhile, consolidated cost and operating expenses reached Php12,049 million, increasing by 16% from
last year due primarily to cash operating expenses.
Cash operating expenses, consisting of production cost, general and administrative expenses and cost of
sales and services, increased by 19% to Php9,766 million driven largely by the growth in production cost
and cost of sales and services.
Production cost, still the biggest cost item accounting for 35% of total operating expenses, reached
Php4,161 million, increasing by 19% from the prior year. The rise in production cost was primarily
because of the growth in personnel expenses and talent fees due to an increase in station produced shows
in place of canned programs. Specifically, local programs replaced the Spanish telenovelas and animation
programs being aired in the afternoon timeslot. Growth of production cost was also a result of the higher
40
cost involved in producing fantasy type soap operas such as Marina and Krystala due to the special effects
required for this genre.
Similarly, general and administrative expenses (gaex) grew double digit driven by higher personnel
expenses and ABS-CBN Global’s entry into new territories. The increase in personnel cost was due to
higher headcount, salary increases, separation costs, and pay out of incentives for prior year’s
performance. In addition, ABS-CBN Global’s start-up operations in Europe and Australia contributed to
the growth of taxes and licenses and advertising and promotions.
Cost of sales and services, the cost related to the net sales and services of subsidiaries, reached Php2,209
million in 2004, growing at the same pace as net sales and services. Cost of sales as a percentage to net
sales was maintained at 51% as the improvement in ABS-CBN Global’s cost margin offset the increase in
cost margins of the other subsidiaries.
Non-cash operating expenses, consisting of depreciation and amortization, increased 6% YoY to Php2,283
million. The increase in non-cash operating expenses was due to an increase in amortization as
depreciation expense decreased by 9% to Php1,146 million. Amortization grew by 28% to Php1,137
million as ABS-CBN adopted a more aggressive amortization policy particularly given the reduced
number of movie nights in the program grid. Beginning 2004, the company opted to amortize the entire
cost of film or program package once the primary film or program is aired. Typically, films or programs
are sold as a package where strong titles are bundled with weaker titles.
41
INCOME FROM OPERATIONS
Consequently, income from operations stood at Php1,526 million in 2004, down by 32% from 2003 as
operating expenses growth overtook total revenue growth. As a result of lower operating income in 2004,
operating income margin was down to 11% from 18% in the previous year.
OTHER EXPENSES
Other expenses, net of other income, fell to Php483 million from Php584 million last year due to lower
losses from equity in investee companies and higher miscellaneous income. Losses from equity in net
earnings of investees were lower at Php47 million from Php115 million due to an improvement in Sky
Vision Corporation’s (Sky Vision) net income of which the company currently owns 10%.
Miscellaneous income, meanwhile, was up 60% to Php214 million primarily from higher space rental
income which accounted for 36% of total miscellaneous income. These improvements in losses from
equity in investees and in miscellaneous income offset the increase in net interest expense which grew 8%
YoY to Php650 million due to higher debt level.
Net income, therefore, amounted to Php758 million, 25% lower than the Php1,008 million in 2003.
Resulting net income margin stood at 6% from 8% the previous year.
EBITDA, or earnings before interest, taxes, depreciation and amortization, correspondingly declined by
10% to Php3,976 million in 2004 with EBITDA margin at 29% from 35% the prior year.
ABS-CBN ended the year with consolidated assets of Php23,652 million, 6% higher compared to the
previous year. The increase can largely be attributed to an additional investment of US$30 million in Sky
Vision in the form of a convertible note (classified as noncurrent receivable from Sky Vision in the balance
sheet). This convertible note carries a 13% per cent interest per annum and will mature on June 30, 2006.
Consolidated net trade receivables increased by 3% to Php3,414 million, translating to an average DSO of
91 days, an improvement from the 93 days DSO level in 2003. Parent net trade receivables, on the other
hand, decreased by 9% to Php1,865 million, which translated to an average DSO of 86 days, also an
improvement from the reported DSO level of 90 days in 2003.
Long-term debt amounted to Php5,969 million while short term debt stood at Php467 million. In June
2004, the company signed a US$120 million senior credit agreement with several local and foreign banks,
proceeds of which were used to pay down all existing loans of the company and used for additional
investment in Beyond Cable. The foreign exchange exposure of the principal amount is fully hedged
hence the company will not be exposed to foreign exchange risk other than on the interest. Factoring in
ABS-CBN’s cash position of Php1,292 million, net debt to equity stood at 39%. In 2004, capital
expenditure and program rights acquisition in 2004 amounted to Php1,240 million, slightly higher than
last year’s Php1,201 million.
42
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR 2003
In 2003, ABS-CBN Broadcasting Corporation (ABS-CBN), reaped the benefits of an improved economic
environment, coupled with a stronger and leaner organization focused on its core operations. As a result,
ABS-CBN delivered double-digit revenue, earnings, and cash flow growth, despite a more competitive
business environment.
Furthermore, ABS-CBN’s efforts to focus on complementary businesses also bore fruit as this improved
performance can be seen not only in the principal business of broadcasting, but in the remaining allied
businesses of cable and satellite programming, motion picture production, and other content generation
and distribution businesses.
Consolidated gross airtime and other broadcasting related revenues increased by 12% to Php11,064
million in 2003 from Php9,914 million in 2002 with growth primarily coming from airtime revenues.
Consolidated airtime revenues increased by 14%, or Php1,339 million, to Php10,858 million on the back of
the strong growth in advertising minutes, as the recovery in advertising spending in the second half of
2002 was sustained in 2003 amidst an improved economic outlook and stable consumer spending.
Parent airtime revenues, which consists of advertising revenues from TV-VHF (Channel 2), AM and FM
radio, and the regional network, increased by 14% to Php9,960 million from Php8,752 million in 2002.
Airtime revenues from Channel 2 alone, which accounts for 93% of parent airtime revenues, grew by 15%
as its commercial loading improved to 50% from 42% the previous year.
Airtime revenues from subsidiaries increased by 17% to Php898 million with all platforms registering
growth in 2003. Studio 23’s airtime revenues, which accounts for 5% of consolidated airtime revenues,
increased by 15% to Php588 million in 2003 as its commercial loading also improved to 9% from 6%.
Consolidated
Airtime Revenues Variance
Amounts in Php mln 2003 2002 Php %
Parent* 9,960 8,752 1,208 14%
Studio 23 588 511 77 15%
Other Platforms 310 256 53 21%
Total Airtime 10,858 9,519 1,339 14%
*Net of eliminated airtime revenues from intercompany transactions
Other broadcasting related revenues, on the other hand, decreased by 48% to Php206 million in 2003 from
Php395 million in 2002, due to a drop in SMS related revenues. In the first quarter of 2003, the Philippine
Amusement and Gaming Corp. (PAGCOR) raised concerns that television audience interaction via SMS
43
represented a form of gambling. As a result of this, the Company temporarily limited further
development and promotion of new SMS or text based products and services. However, by the second
half of 2003, SMS revenues had picked up as new mobile services such as downloadable logos, picture
messages, wallpapers and ring tones were launched in order to harvest the ancillary business from the
various programs of the Company.
Deductions from airtime revenues increased by 8% to Php1,981 million from Php1,830 million in 2002.
Deductions as a ratio to gross airtime revenues stood at 18% in 2003, lower than 2002 due to a slower
increase in marketing expenses compared to gross airtime revenues.
As a result, consolidated net airtime and other broadcasting related revenues increased by 12% to
Php9,084 million from Php8,084 million in 2002.
Net sales and services, which include subscription fees, sale of inventories, and non-broadcast related
revenues, increased by 26% to Php3,557 million in 2003 from Php2,825 million in 2002.
ABS-CBN Global’s net sales and services, which accounted for 67% of total net sales and services,
increased by 24% to Php2,371 million in 2003 from Php1,918 million in 2002. Bulk of ABS-CBN Global’s
revenues came from subscription revenues of its cable and direct-to-home service with an estimated
viewership base of 1.3 million by end 2003, up 24% from a year ago. Of its total viewers, around 53% are
located in North America. Furthermore, ABS-CBN Europe launched its services in December 2003.
Aside from a healthy growth in subscribers, revenues also benefited from a 15% increase in DTH fees to
US$23 as a fourth TV channel was included in the channel line up of DTH subscribers. The growth in
subscribers and the increase in DTH fees were partially offset, however, by lower installation revenues as
the Company reduced its prices to increase subscriber penetration rates so as to saturate the market prior
to the entry of competition.
ABS-CBN Film Productions, a 100% owned subsidiary, was established in the second quarter of 2003 to
handle the Company’s movie production and distribution business. This contributed Php337 million or
9% to total net sales and services. Under the trade name Star Cinema, it released several blockbuster films
in 2003 including Tanging Ina (No Ordinary Mom), which achieved an unprecedented first in Philippine
box office history with gross ticket sales of over Php178 million.
Creative Programs, Inc. (CPI) developer and producer of cable television channels, reported a 7% increase
in net sales and services to Php241 million from Php225 million in the previous year. CPI benefited from
the subscriber growth of ABS-CBN Global as Cinema One, the movie channel of CPI, is included in the
channel line up of ABS-CBN Global.
Wider circulation of ABS-CBN Publishing’s magazines as well as increased sales from Star Records also
contributed to the growth in total net sales and services.
44
Other Subsidiaries 329 344 (15) -4%
Total Net Sales and Services 3,632 2,825 807 29%
With strong growth of airtime revenues and net sales and services, consolidated net revenues increased
by 16% to Php12,641 million from Php10,909 million in 2002.
Compared to net revenues, consolidated cost and operating expenses increased by a lower rate of 12% to
Php10,386 million from Php9,273 million in 2002.
Cash operating expenses, consisting of production cost, cost of sales and services, and general and
administrative expenses, increased by 17% to Php8,364 million driven primarily by the growth in cost of
sales and services of subsidiaries.
Production cost, the biggest cost item accounting for 34% of total operating expenses, increased by 14% to
Php3,501 million from Php3,083 million in 2002. The increase in production cost was mainly due to a 17%
increase in personnel expenses and talent fees as the Company further aired more station produced
programs in response to increased competition in free to air TV. For example, movie nights were reduced
from thrice a week to twice a week in 2003 as the weekend programming was reformatted to air more
station produced programs in lieu of Filipino movies. In addition, more special programs and events
were produced and aired in 2003 as ABS-CBN celebrated its 50th year in television.
Cost of sales and services increased by 23% to Php1,817 million from Php1,481 million in 2002.
Nonetheless, the growth in cost of sales and services was lower than the increase in net sales and services,
reflecting the improved cost efficiencies of the Company’s major subsidiaries.
ABS-CBN Global’s cost of sales, which accounted for 68% of total cost of sales, grew by 30% to Php1,234
million, slightly higher than the growth of its net sales and services. As mentioned earlier, as part of ABS-
CBN Global’s strategy to increase subscriber penetration rates, it reduced margins on the installation and
sale of set-top boxes to its customers.
45
General and administrative expenses (GAEX) increased by 16% to Php2,923 million from Php2,524
million in 2002. The increase in GAEX was partly due to start up expenses for ABS-CBN Europe (TFC3).
Personnel expenses, which accounts for 47% of total GAEX, increased by 24% to Php1,375 million from
Php1,108 million as the Company paid out performance based incentives to its employees in line with
improved operating results.
Amortization of program rights increased by 16% to Php885 million in 2003 from Php765 million in 2002.
Parent company program rights amortization, which accounted for 58% of total amortization, increased
by 21% to Php510 million as the Company aired newer and relatively more expensive cartoons and
foreign programming, particularly Chinese and Korean dramas dubbed into Filipino such as the highly
successful Taiwanese soap opera Meteor Garden.
Income from operations increased by 38% to Php2,254 million in 2003 from Php1,636 million in 2002.
With net revenues growing faster at 16% compared to operating expenses growing at 12%, operating
margins improved to 18% in 2003 from 15% a year ago.
Other expenses, net of other income, decreased by 25% to Php584 million from Php780 million due to
lower interest expense and lower losses from equity in investee companies.
Interest charges, net of interest income, decreased by 8% to Php655 million from Php710 million the
previous year due to lower interest rates in 2003 compared to 2002. The decline in losses from equity in
investee companies was due to an improvement in Sky Vision’s financial results of which the Company
owns 10.2%.
Net income before discontinuing operations amounted to Php1,010 million, which was 135% higher than
the Php438 million in 2002. In 2003, losses from discontinued operations amounting to Php2 million was
due to the sale of assets from the winding down of the various subsidiaries that were discontinued in the
previous year.
Net income after discontinuing operations surged by more than 500% to Php1,008 million from Php156
million in 2002.
Assets
ABS-CBN ended 2003 with total consolidated assets of Php22,203 million, an increase of 2% or Php465
million from 2002. Cash and cash equivalents amounted to Php1,580 million due to the improvement in
operations and management of working capital.
Total receivables–net increased by 11% to Php3,788 million which translated to an average days sales
outstanding (DSO) of 90 days, an improvement from the 99 days DSO level in 2002. Similarly,
46
consolidated trade receivables increased by 6% to Php3,555 million resulting in a reduction of average
trade DSO to 86 days from 94 days in 2002. Parent trade receivables, which grew by 4% to Php2,155
million, had an average DSO of 76 days, improving by 13 days from the reported DSO level of 89-days in
the prior year.
To account for the maturities within the next 12 months, current portion of long-term debt increased to
Php2,116 million from Php484 million. Consequently, the movement from long-term debt to current
portion resulted to a reduction in long-term debt to Php3,454 million from Php5,393 million. Net interest
bearing debt in 2003 was down to Php4,210 million translating to a net debt-to-equity of 32% from 46% in
2002.
Free cash flow, defined as cash from operating activities less cash used in investing activities, increased
by 39% or Php583 million to Php2,065 million. The increase in free cash flow was driven by the
Company’s continuing efforts to drive revenue growth, to optimize operating efficiencies, and to closely
manage capital spending.
Capital expenditure and program rights acquisition in 2003 amounted to Php1,558 million, Php105
million lower than 2002 spending of Php1,663 million. For 2004, the Company’s capital expenditure is
estimated to be at the same level as in 2003.
47
ABS-CBN BROADCASTING CORPORATION
AND SUBSIDIARIES
and
1 8 0 3
SEC Registration Number
A B S - C B N B R O A D C A S T I N G C O R P O R A T I O N
A N D S U B S I D I A R I E S
M o t h e r I g n a c i a S t r e e t c o r n e r S g t .
E s g u e r r a A v e n u e , Q u e z o n C i t y
1 2 3 1 A A C F S 0 4 2 7
Month Day (Form Type) Month Day
(Fiscal Year) (Annual Meeting)
7,973
Total No. of Stockholders Domestic Foreign
Document ID Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
ABS-CBN BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
December 31
2004
(As restated -
2005 Note 2)
ASSETS
Current Assets
Cash and cash equivalents (Notes 5 and 26) P
=1,751,730 =1,291,557
P
Trade and other receivables (Notes 3, 6, 8, 14, 24 and 26) 4,667,630 3,631,219
Derivative assets (Notes 2 and 26) 193,305 –
Program rights - current (Notes 3, 10, 18 and 19) 799,040 782,960
Other current assets - net (Note 7) 826,395 593,854
Total Current Assets 8,238,100 6,299,590
Noncurrent Assets
Investments in associates (Note 8) 44,233 237,884
Long-term receivables from related parties (Notes 3, 8 and 26) 2,341,683 2,190,913
Property and equipment at cost - net (Notes 3, 9, 15 and 24) 10,287,599 10,650,285
Noncurrent program rights and other intangible assets
(Notes 3, 10, 18 and 19) 1,516,558 1,547,486
Deferred tax assets (Notes 3 and 22) 294,147 41,491
Other noncurrent assets - net (Notes 3, 11 and 12) 2,073,246 2,619,326
Total Noncurrent Assets 16,557,466 17,287,385
P
=24,795,566 =23,586,975
P
(Forward)
-2-
December 31
2004
(As restated -
2005 Note 2)
Stockholders’ Equity
Capital stock (Note 16) P
=779,583 =779,583
P
Capital paid in excess of par value 706,047 706,047
Cumulative translation adjustments 153,194 138,334
Retained earnings (Notes 2 and 16) 11,777,060 11,536,377
Philippine depositary receipts convertible
to common shares (Note 16) (200,000) (200,000)
Total Stockholders’ Equity attributable
to Equity holders of Parent Company 13,215,884 12,960,341
Minority Interest 61,015 42,248
Total Stockholders’ Equity 13,276,899 13,002,589
P
=24,795,566 =23,586,975
P
1. Corporate Information
The Parent Company is 57% owned by Lopez, Inc. (Lopez) (see Notes 14 and 16).
The registered office address of the Parent Company is Mother Ignacia Street corner Sgt. Esguerra
Avenue, Quezon City.
The accompanying financial statements were approved and authorized for issue by the Board of
Directors (BOD) on March 29, 2006.
Basis of Preparation
The consolidated financial statements have been prepared in compliance with the accounting
principles generally accepted in the Philippines as set forth in Philippine Financial Reporting
Standards (PFRSs). These are the first consolidated financial statements prepared in compliance
with PFRSs.
The Parent Company and its subsidiaries (collectively referred to as “the Company”) prepared its
consolidated financial statements until December 31, 2004 in compliance with Statements of
Financial Accounting Standards and Statements of Financial Accounting Standards/International
Accounting Standards.
The consolidated financial statements have been prepared on a historical cost basis, except for
derivative financial instruments and available-for-sale investments that are measured at fair value.
The consolidated financial statements are presented in Philippine Pesos, which is the Company’s
functional and presentation currency and all values are rounded to the nearest thousand (P=000)
except when otherwise indicated.
The transition to PFRSs resulted in certain changes to the Company’s previous accounting policies
(referred to in the following tables and explanations as “previous GAAP”). The comparative
figures for the 2004 consolidated financial statements were restated to reflect the changes in
policies except those relating to financial instruments. The Company availed of the exemption
under PFRS 1 and applied PAS 32 and PAS 39, the standards on financial instruments, from
January 1, 2005. The cumulative effect of adopting these standards are credited to January 1, 2005
retained earnings.
The accounting policies adopted are consistent with those of the previous financial year except for
the adoption of the following new/revised standards effective for financial years beginning on or
after January 1, 2005:
An explanation of the effects of the adoption of PFRSs is set forth in the following tables and
notes.
Reconciliation of assets, liabilities and stockholders’ equity at January 1, 2004, the date of
transition to PFRS, and December 31, 2004, the end of the latest period presented using previous
GAAP follows:
Effect of
transition to
Notes Previous GAAP PFRS PFRS
Attributable to:
Equity Holders of the Parent Company P
=757,947 (P
=7,192) P
=750,755
Minority Interest 10,419 – 10,419
EARNINGS PER SHARE (EPS)
Basic EPS P
=0.985 =0.976
P
Under previous GAAP, pension benefits were actuarially determined using the entry age
normal method and past service cost and experience adjustments, amortized over the expected
average remaining working lives of the covered employees. Under PFRS, pension benefits are
determined using the projected unit credit method. Actuarial gains and losses that exceed a
10% “corridor” are amortized over the expected average remaining working lives of
participating employees and vested past service cost, recognized immediately. In addition, the
Company recognized other long-term employee benefits which were not recognized in prior
years. The Company also availed of the voluntary exemption under PFRS 1. Accordingly, all
actuarial gains or losses were recognized up to January 1, 2004. The change reduced retained
earnings at January 1, 2004 by =P296.36 million; increased deferred tax asset included in
“Other noncurrent assets - net” account by =P133.27 million; increased trade and other
payables by =P429.60 million and increased personnel expenses included under the account
“General and administrative expenses” by P =35.90 million and benefit from deferred income
tax by P
=9.68 million at December 31, 2004. Additional disclosures were also made providing
information about the trends in the assets and liabilities in the defined benefit plan and the
assumptions underlying the components of the defined benefit cost.
-5-
PFRS 3 resulted in the cessation of the amortization of goodwill and a requirement for an
annual test for goodwill impairment. Any resulting negative goodwill after performing
reassessment will be credited to income. Moreover, pooling of interests in accounting for
business combination will no longer be permitted. The adoption of PFRS 3 has resulted in the
Company ceasing annual goodwill amortization and commencing testing for impairment at the
cash-generating unit level annually (unless an event occurs during the year which requires the
goodwill to be tested more frequently) from January 1, 2004. As a result, the Company
recognized an impairment loss in its goodwill (included under “Other Noncurrent Assets”) on
the January 1, 2004 amounting to = P88.76 million. The change decreased retained earnings as
of January 1, 2004 by =P69.85 million and increase net income by =P18.91 million as of
December 31, 2004 due to reversal of goodwill amortization in 2004.
Under previous GAAP, intangible assets were considered to have a finite useful life with a
rebuttable presumption that life would not exceed ten years from the date when the asset was
available for use. Under PFRS, some of the intangible assets are regarded to have an
indefinite useful life when, based on an analysis of all the relevant factors, there is no
foreseeable limit to the period over which the asset is expected to generate net cash inflows for
the Company. Accordingly, cable channels of Creative Programs, Inc (CPI) is considered to
have an indefinite life and the useful life of the production and distribution business in the
Middle East operations is changed from 10 to 25 years. Due to the change in the estimated
useful life of the cable channels of CPI (from finite to indefinite), the carrying value of the
cable channels as of January 1, 2005 is no longer amortized. Instead, it was tested for
impairment. As of December 31, 2005, there was no impairment identified. On the other
hand, the change in estimated useful life of the production and distribution business in the
Middle East operations resulted to an adjustment in the consolidated financial statements
prospectively and resulted a decrease in amortization expense by = P15.02 million in 2005.
Adoption of the above standards involved changes in accounting policies and the Company
has accordingly restated its comparative consolidated financial statements retroactively in
accordance with the transitional rules detailed in these standards. Required disclosures are
included in the consolidated financial statements, as applicable. Reconciliation of the effects
of these new standards, as it applies to the Company, on the Company’s stockholders’ equity
as of December 31, 2004 and January 1, 2004 and net income for the year ended
December 31, 2004 is presented below:
Increase (Decrease)
Stockholders’ Equity Net Income
December 31, January 1, December 31,
2004 2004 2004
As previously reported =
P13,353,447 =P13,086,351 =
P757,947
Effect of changes in accounting policies:
PAS 19 (322,625) (296,357) (26,268)
PAS 36 (69,848) (88,759) 18,911
Restatement of investment
in associates (633) (798) 165
(393,106) (385,914) (7,192)
As restated =
P12,960,341 =
P12,700,437 =
P750,755
-6-
PAS 32 covers the disclosure and presentation of all financial instruments. The standard
requires more comprehensive disclosures about a company’s financial instruments, whether
recognized or unrecognized in the financial statements. New disclosure requirements include
terms and conditions of financial instruments used, types of risks associated with both
recognized and unrecognized financial instruments (market risk, price risk, credit risk,
liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized
financial assets and financial liabilities, and financial risk management policies and
objectives. The standard also requires financial instruments to be classified as liabilities or
equity in accordance with their substance and not their legal form. New disclosure
requirements were included as a result of the adoption of the new standard.
PAS 39 establishes the accounting and reporting standards for recognizing and measuring a
company’s financial assets and financial liabilities. The standard requires a financial asset or
financial liability to be recognized initially at fair value. Subsequent to initial recognition, a
company should continue to measure financial assets at their fair values, except for loans and
receivables and held-to-maturity investments, which are to be measured at cost or amortized
cost using the effective interest rate method. Financial liabilities are subsequently measured at
cost or amortized cost, except for liabilities classified as “at fair value through profit and loss”
and derivatives which are measured at fair value. PAS 39 requires the use of discounted cash
flow techniques in determining impairment loss when objective evidence at impairment exists
for financial assets that accounted for at fair value through profit or loss.
PAS 39 also covers the accounting and reporting standards for derivative instruments. The
standard has expanded the definition of a derivative instrument to include derivatives
(derivative-like provisions) embedded in non-derivative contracts. Under the standard, every
derivative instrument is recorded in the balance sheet as either an asset or a liability measured
at its fair value. Derivatives that are not designated and do not qualify as hedges are adjusted
to fair value through income. If the derivative is designated and qualifies as a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are either offset
against the change in fair value of the hedged assets, liabilities or firm commitments through
earnings, or recognized in equity until the hedged item is recognized in earnings. A company
must formally document, designate and assess the hedge effectiveness of derivative
transactions that receive hedge accounting treatment.
-7-
Adoption of this Standard has increased (decreased) the following accounts at January 1,
2005:
Increase
Notes (decrease)
Other noncurrent assets a (P
=255,261)
Interest-bearing loans and borrowings -
net of current portion a (249,949)
Derivative assets b 125,575
Cumulative translation adjustments (CTA) b 117,070
Trade and other receivables c (59,589)
Obligations for program rights d (17,170)
Deferred tax assets 14,545
Program rights and other intangibles b (22,838)
Trade and other payables d (458)
Retained earnings (47,061)
b. The Company recognized the fair value of its derivatives (freestanding and embedded) as
of January 1, 2005. The fair value of freestanding derivatives which qualified for hedge
accounting under previous GAAP was reported in CTA. Embedded derivatives were
bifurcated from program rights and license agreements.
c. The Company tested its trade and other receivable for impairment on January 1, 2005
resulting to additional impairment losses.
The Company made use of exemption provided by PFRS 1. As allowed by the Securities and
Exchange Commission (SEC), the effect of adopting PAS 39 did not result in a restatement of
prior period’s financial statements. The cumulative effect of adopting this standard was
credited to the January 1, 2005 retained earnings.
Amendments to PAS 19, Employee Benefits – Actuarial Gains and Losses, Group Plans and
Disclosures — The revised disclosures from the amendments will be included in the
Company’s consolidated financial statements when the amendments are adopted in 2006.
PFRS 6, Exploration for and Evaluation of Mineral Resources — This standard will take
effect in 2006 but does not apply to the activities of the Company.
Basis of Consolidation
The consolidated financial statements comprise the financial statements of ABS-CBN
Broadcasting Corporation and its subsidiaries as at December 31 each year (see Note 14). The
financial statements of the subsidiaries are prepared for the same reporting year as the parent
company, using consistent accounting policies.
All intra-company balances, transactions, income and expenses and profits and losses resulting
from intra-company transactions that are recognized in assets, are eliminated in full.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the
Company obtains control, and continue to be consolidated until the date that such control ceases.
Inventories
Inventories included under “Other current assets - net” account in the balance sheets are valued at
the lower of cost or net realizable value. Cost is determined on the weighted average method. Net
realizable value of inventories that are for sale is the selling price in the ordinary course of
business, less the cost of marketing and distribution. Net realizable value of inventories not held
for sale is the current replacement cost. Unrealizable inventories are written off.
The carrying values of property and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of
the asset) is included in the consolidated statements of income in the year the asset is
derecognized.
The asset’s residual values, useful lives and methods are reviewed, and adjusted if appropriate, at
each financial year end.
When each major inspection is performed, its cost is recognized in the carrying amount of the
property and equipment as a replacement if the recognition criteria are satisfied.
Construction in progress represents equipment under installation and building under construction
and is stated at cost which includes cost of construction and other direct costs. Construction in
progress is not depreciated until such time that the relevant assets are completed and put into
operational use.
The net present value of legal obligations associated with the retirement of an item of property and
equipment that resulted from the acquisition, construction or development and the normal
operations of property and equipment is recognized in the period in which it is incurred and a
reasonable estimate of the obligation can be made.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is fair value as at the date of acquisition.
Following initial recognition, intangible assets are carried at cost less any accumulated
amortization and any accumulated impairment losses. The useful lives of intangible assets are
assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the
useful economic life and assessed for impairment whenever there is an indication that the
intangible asset may be impaired. The amortization period and the amortization method for an
intangible asset with a finite useful life is reviewed at least at each financial year-end. Changes in
the expected useful life or the expected pattern of consumption of future economic benefits
embodied in the asset is accounted for by changing the amortization period or method, as
- 10 -
Intangible assets with indefinite useful lives are tested for impairment annually either individually
or at the cash-generating unit level. Such intangibles are not amortized. The useful life of an
intangible asset with an indefinite life is reviewed annually to determine whether indefinite life
assessment continues to be supportable. If not, the change in the useful life assessment from finite
to indefinite is made on a prospective basis.
A summary of the policies applied to the Company’s acquired intangible assets is as follows:
In prior years, cable channels of CPI and production and distribution business of the Middle East
were considered to have a finite useful life with a rebuttable presumption that life would not
exceed ten years from the date when the asset was available for use.
The cable channels acquired by CPI has no definite life (see Note 10). Based on the Company’s
analysis of all the relevant factors, there is no foreseeable limit to the period over which this
business is expected to generate net cash inflows for the Company. The change in the useful life
assessment from finite to indefinite is accounted for prospectively.
- 11 -
The production and distribution business acquired for the Middle East operations has a definite
life of 25 years based on the terms of the Company’s sponsorship agreement with Arab Digital
Distribution (ADD) (see Note 10). Based on the Company’s analysis of all the relevant factors, it
is determined that the estimated useful life of such business should be 25 years. The change in the
useful life from 10 years to 25 years is accounted for prospectively.
Investment in an Associate
The Company’s investment in an associate is accounted for under the equity method of
accounting. An associate is an entity in which the Company has significant influence and which is
neither a subsidiary nor a joint venture.
Under the equity method, the investment in an associate is carried in the balance sheets at cost plus
post-acquisition changes in the Company’s share of net assets of the associate. Goodwill relating
to an associate is included in the carrying amount of the investment and is not amortized. After
application of the equity method, the Company determines whether it is necessary to recognize
any additional impairment loss with respect to the Company’s net investment in the associate.
The consolidated statements of income reflect the share of the results of operations of the
associate. Where there has been a change recognized directly in the equity of the associate, the
Company recognizes its share of any changes and discloses this, when applicable, in the
consolidated statements of changes in equity. The reporting dates of the associate and the
Company are identical and the associates’ accounting policies conform to those used by the
Company for like transactions and events in similar circumstances.
Goodwill
Goodwill acquired in a business combination is initially measured at cost being the excess of the
cost of the business combination over the Company’s interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is
measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment,
annually or more frequently if events or changes in circumstances indicate that the carrying value
may be impaired.
The functional currency of ABS-CBN International and ABS-CBN Middle East FZ-LLC is the
United States Dollar while the functional currency of ABS-CBN Europe, Ltd is the Great Britain
Pound. As at the reporting date, the balance sheets of these subsidiaries are translated into the
presentation currency of the Company (the Philippine Peso) at the rate of exchange ruling at the
balance sheet date and, their statements of income are translated at the weighted average exchange
rates for the year. The exchange differences arising on the translation are taken directly to a
separate component of equity. On disposal of a foreign entity, the deferred cumulative amount
recognized in equity relating to that particular foreign operation is recognized in the consolidated
statements of income.
Tax Credits
Tax credits from government airtime sales availed under Presidential Decree No. 1362 are
recognized in the books upon actual airing of government commercials and advertisements. This
is included under “Other noncurrent assets - net” account in the consolidated balance sheets.
Deferred Charges
Gain or loss on sale of decoders which has no stand alone value without the subscription revenues
are aggregated and recognized ratably over the longer of subscription contract term or the
estimated customer service life. These are presented as part of “Other noncurrent assets - net”
account in the consolidated balance sheets. As explained in Note 24, the Parent Company and
ABS-CBN International entered into an agreement with DirecTV, Inc. (DirecTV) whereby direct-
to-home (DTH) subscribers of ABS-CBN International are expected to migrate to DirecTV in
2006. ABS-CBN International will continue to service its subscribers until February 28, 2006.
Accordingly, the deferred charges related to the DTH subscribers of ABS-CBN International are
written off as of December 31, 2005, since management is of the opinion that the corresponding
future benefits from these assets, if any, are not material.
Impairment of Assets
The Company assesses at each reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is required,
the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is the higher of an asset’s or cash- generating unit’s fair value less costs to sell and its
value in use and is determined for an individual asset, unless the asset does not generate cash
inflows that are largely independent of those from other assets or groups of assets. Where the
carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and
is written down to its recoverable amount. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Impairment losses are
recognized in the consolidated statements of income in those expense categories consistent with
the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously
recognized impairment losses may no longer exist or may have decreased. If such indication
exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed
only if there has been a change in the estimates used to determine the asset’s recoverable amount
since the last impairment loss was recognized. If that is the case the carrying amount of the asset
is increased to its recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation, had no impairment loss been recognized for
the asset in prior years. Such reversal is recognized in profit or loss unless the asset is carried at
- 13 -
revalued amount, in which case the reversal is treated as a revaluation increase. After such a
reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised
carrying amount, less any residual value, on a systematic basis over its remaining useful life.
The Company recognizes a financial asset or a financial liability in the balance sheets when it
becomes a party to the contractual provisions of the instrument.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity net of any
related income tax benefits. Financial instruments are offset when there is a legally enforceable
right to offset and intention to settle either on a net basis or to realize the asset and settle the
liability simultaneously.
Financial assets and financial liabilities are further classified into the following categories:
financial asset or financial liability at fair value through profit or loss, loans and receivables, held-
to-maturity, available-for-sale financial assets and other financial liabilities. The Company
determines the classification at initial recognition and re-evaluates this designation at every
reporting date, where appropriate.
A financial asset or financial liability is classified in this category if acquired principally for
the purpose of selling or repurchasing in the near term or upon initial recognition, it is
designated by management at fair value through profit or loss. Derivatives are also
categorized as held at fair value through profit or loss, except those derivatives designated and
considered as effective hedging instruments. Assets or liabilities classified under this category
are carried at fair value in the balance sheet. Changes in the fair value of such assets and
liabilities are accounted for immediately in the consolidated statements of income.
The Company’s derivative instruments (including embedded derivatives) that are not
accounted for as accounting hedges are classified under this category.
b. Held-to-Maturity Investments
Quoted nonderivative financial assets with fixed or determinable payments and fixed maturity
are classified as held- to-maturity when the Company has the positive intention and ability to
hold to maturity. Investments intended to be held for an undefined period are not included in
this classification. Other long-term investments that are intended to be held-to-maturity, such
as bonds, are subsequently measured at amortized cost. This cost is computed as the amount
initially recognized minus principal repayments, plus or minus the cumulative amortization
using the effective interest method of any difference between the initially recognized amount
and the maturity amount. This calculation includes all fees and points paid or received
- 14 -
between parties to the contract that are an integral part of the effective interest rate, transaction
costs and all other premiums and discounts. For investments carried at amortized cost, gains
and losses are recognized in income when the investments are derecognized or impaired, as
well as through the amortization process.
Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. Such assets are carried at amortized cost using the
effective interest method. Gains and losses are recognized in income when the loans and
receivables are derecognized or impaired, as well as through the amortization process.
This category includes the Company’s trade, intercompany and other receivables.
Available-for-sale financial assets are those non-derivative financial assets that are designated
as available-for-sale or are not classified in any of the three preceding categories. After initial
recognition, available-for sale financial assets are measured at fair value with gains or losses
being recognized as a separate component of equity until the investment is derecognized or
until the investment is determined to be impaired at which time the cumulative gain or loss
previously reported in equity is included in the consolidated statements of income.
The fair value of financial instruments that are actively traded in organized financial markets
is determined by reference to quoted market bid prices at the close of business on the balance
sheet date. For financial instruments where there is no active market, fair value is determined
using valuation techniques. Such techniques include using recent arm’s length market
transactions; reference to the current market value of another instrument, which is
substantially the same; discounted cash flow analysis and option pricing models.
Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge
accounting are taken directly to net profit or loss for the year.
- 15 -
fair value hedges when hedging the exposure to changes in the fair value of a recognized asset
or liability;
cash flow hedges when hedging exposure to variability in cash flows that is either attributable
to a particular risk associated with a recognized asset or liability or a forecast transaction; or
A hedge of the foreign currency risk of a firm commitment is accounted for as a cash flow hedge.
At the inception of a hedge relationship, the Company formally designates and documents the
hedge relationship to which the Company wishes to apply hedge accounting and the risk
management objective and strategy for undertaking the hedge. The documentation includes
identification of the hedging instrument, the hedged item or transaction, the nature of the risk
being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting
the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged
risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value
or cash flows and are assessed on an ongoing basis to determine that they actually have been
highly effective throughout the financial reporting periods for which they were designated.
Hedges which meet the strict criteria for hedge accounting are accounted for as follows:
Fair Value Hedges. Fair value hedges are hedges of the Company’s exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified
portion of such an asset, liability or firm commitment, that is attributable to a particular risk and
could affect profit or loss. For fair value hedges, the carrying amount of the hedged item is
adjusted for gains and losses attributable to the risk being hedged, the derivative is remeasured at
fair value and gains and losses from both are taken to profit or loss.
The Company has no derivatives that are designated or accounted for fair value hedges in 2005.
Cash Flow Hedges. Cash flow hedges are hedge of the exposure to variability in cash flows that is
attributable to a particular risk associated with a recognized asset or liability or a highly probable
forecast transaction and could affect profit or loss. The effective portion of the gain or loss on the
hedging instrument is recognized directly in equity, while the ineffective portion is recognized in
profit or loss.
Amounts taken to equity are transferred to the income statement when the hedged transaction
affects profit or loss, such as when hedged financial income or financial expense is recognized or
when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial
asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the
non-financial asset or liability.
If the forecast transaction is no longer expected to occur, amounts previously recognized in equity
are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts
previously recognized in equity remain in equity until the forecast transaction occurs. If the
related transaction is not expected to occur, the amount is taken to profit or loss.
- 16 -
In October 2005, the Company designated its outstanding interest rates and cross currency swaps
of cash flow hedges.
The Company also enters into interest rates swaps to manage its interest rate exposures on
underlying floating-rate loans. Swap costs accruing on foreign currency swaps and interest rate
swaps that are currently due to or from the swap counterparties are charged to current operations.
Mark-to-market values of the foreign currency swaps are not included in the determination of net
income but are disclosed in the relevant note to these financial statements.
Hedges of a Net Investment. Hedges of a net investment in a foreign operation, including a hedge
of a monetary item that is accounted for as part of the net investment, are accounted for in a way
similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective
portion of the hedge are recognized directly in equity while any gains or losses relating to the
ineffective portion are recognized in profit or loss. On disposal of the foreign operation, the
cumulative value of any such gains or losses recognized directly in equity is transferred to profit or
loss.
A financial asset (or, where applicable a part of a financial asset or part of a group of similar
financial assets) is derecognized where:
the rights to receive cash flows from the asset have expired;
the Company retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third party under a ‘pass-through’
arrangement; or
the Company has transferred its rights to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset, but has transferred control of the
asset.
Where the Company has transferred its rights to receive cash flows from an asset and has neither
transferred nor retained substantially all the risks and rewards of the asset nor transferred control
of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the
asset.
- 17 -
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in profit or loss.
Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans
and receivables carried at amortized cost has been incurred, the amount of the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective interest rate (i.e. the effective interest rate computed at initial
recognition). The carrying amount of the asset shall be reduced either directly or through use of
an allowance account. The amount of the loss shall be recognized in profit or loss.
The Company first assesses whether objective evidence of impairment exists individually for
financial assets that are individually significant, and individually or collectively for financial
assets that are not individually significant. If it is determined that no objective evidence of
impairment exists for an individually assessed financial asset, whether significant or not, the asset
is included in a group of financial assets with similar credit risk characteristics and that group of
financial assets is collectively assessed for impairment. Assets that are individually assessed for
impairment and for which an impairment loss is or continues to be recognized are not included in
a collective assessment of impairment.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in the income statement, to the extent that the carrying value of the asset does not
exceed its amortized cost at the reversal date.
Assets Carried at Cost. If there is objective evidence that an impairment loss on an unquoted
equity instrument that is not carried at fair value because its fair value cannot be reliably
measured, or on a derivative asset that is linked to and must be settled by delivery of such an
unquoted equity instrument has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset.
Gains and losses are recognized in net profit or loss when the liabilities are derecognized as well
as through the amortization process.
Revenue
Revenue is recognized when it is probable that the economic benefits associated with the
transaction will flow to the Company and the amount of the revenue can be measured reliably.
Airtime revenue is recognized as income on the dates the advertisements are aired. The fair values
of barter transactions are included in airtime revenue and the related accounts. These transactions
represent advertising time exchanged for program materials, merchandise or service.
Sale of services include:
DTH subscribers and cable operators. Subscription fees are recognized under the accrual
basis in accordance with the terms of the agreements.
b. Telecommunications revenue are recognized when earned. These are stated net of the share of
the other telecommunications carriers, if any, under existing correspondence and
interconnection agreements. Interconnection fees and charges are based on agreed rates with
the other telecommunications carriers.
Income from prepaid phone cards are realized based on actual usage hours or expiration of the
unused value of the card, whichever comes earlier. Income from prepaid card sales for which
the related services have not been rendered as of balance sheet date, is presented as “Other
current liabilities” under “Trade payable and other payables” account in the consolidated
balance sheets.
License fees earned from DirecTV is recognized upon migration of the DTH subscribers of
ABS-CBN International to DirecTV. The additional license fees for each migrated subscriber that
will remain for 14 consecutive months from the date of activation, will be recognized on the 14th
month (see Note 24).
Sale of goods is recognized when delivery has taken place and transfer of risks and rewards has
been completed. These are stated net of sales discounts, returns and allowances.
Channel lease revenue (included under “Sale of services” account in the consolidated statements
of income) is recognized as income on a straight-line basis over the lease term.
- 19 -
Income related to the sale and installation of decoders of ABS-CBN Australia (included under
“Sale of goods” account in the consolidated statements of income) which has no stand alone value
without the subscription revenues are aggregated and recognized ratably over the longer of
subscription contract term or the estimated customer service life.
Rental income is recognized as income on a straight-line basis over the lease term. For income tax
purposes, rental income is taxable based on the provisions of the lease contracts.
Interest income is recognized on a time proportion basis that reflects the effective yield on the
asset.
Dividends are recognized when the shareholders’ right to receive payment is established.
Company as Lessee. Finance leases, which transfer to the Company substantially all the risks and
benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at
the fair value of the leased property or, if lower, at the present value of the minimum lease
payments. Lease payments are apportioned between the finance charges and reduction of the lease
liability so as to achieve a constant rate of interest on the remaining balance of the liability.
Finance charges are charged directly against income.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset
and the lease term, if there is no reasonable certainty that the Company will obtain ownership by
the end of the lease term. Operating lease payments are recognized as an expense in the
consolidated statements of income on a straight-line basis over the lease term.
Company as Lessor. Leases where the Company retains substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating
an operating lease are added to the carrying amount of the leased asset and recognized over the
lease term on the same bases as rental income.
For income tax purposes, rental expense is deductible based on the provisions of the lease
contracts.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as an interest expense.
- 20 -
Borrowing Costs
Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are
directly attributable to the acquisition, construction or production of a qualifying asset.
Capitalization of borrowing costs commences when the activities to prepare the asset are in
progress and expenditures and borrowing costs are being incurred. Borrowing costs are
capitalized until the assets are ready for their intended use. If the resulting carrying amount of the
asset exceeds its recoverable amount, an impairment loss is recorded. Borrowing costs include
interest charges and other costs incurred in connection with the borrowing of funds.
For income tax reporting purposes, interest is treated as a deductible expense during the period the
interest is incurred.
The past service cost is recognized as an expense on a straight-line basis over the average period
until the benefits become vested. If the benefits are already vested immediately following the
introduction of, or changes to, a pension plan, past service cost is recognized immediately.
The defined benefit liability is the aggregate of the present value of the defined benefit obligation
and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and
the fair value of plan assets out of which the obligations are to be settled directly. If such
aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of
cumulative unrecognized net actuarial losses and past service cost and the present value of any
economic benefits available in the form of refunds from the plan or reductions in the future
contributions to the plan.
Income Tax
Deferred income tax is provided, using the balance sheet liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, including
asset revaluations. Deferred income tax assets are recognized for all deductible temporary
differences, carryforward benefits of unused tax credits from excess minimum corporate income
tax (MCIT) and unused tax losses, to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences and carryforward benefits of unused
tax credits and unused tax losses can be utilized. Deferred income tax, however, is not recognized
when it arises from the initial recognition of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects neither the accounting profit nor
taxable profit or loss.
- 21 -
Deferred income tax liabilities are not provided on non-taxable temporary differences associated
with investments in domestic subsidiaries and associates. With respect to investments in other
subsidiaries and associates, deferred income tax liabilities are recognized except where the timing
of the reversal of the temporary difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred tax assets
are measured at each balance sheet date and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred tax to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply
to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws)
that have been enacted or substantively enacted at the balance sheet date.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set
off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable
entity and the same taxation authority.
EPS
Basic EPS amounts are calculated by dividing the net income attributed to equity holders of the
Parent Company for the period attributable to common shareholders by the weighted average
number of common shares outstanding during the period.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. They are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. A contingent asset is not recognized in the consolidated financial statements but disclosed
when an inflow of economic benefits is probable.
Subsequent Events
Post-year-end events that provide additional information about the Company’s position at the
balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post-
year-end events that are not adjusting events are disclosed in the notes when material.
The Company’s consolidated financial statements prepared under PFRSs require management to
make estimates and assumptions that affect amounts reported in the consolidated financial
statements and related notes. In preparing the Company’s consolidated financial statements, the
Company has made its best estimates and judgments of certain amounts, giving due consideration
to materiality.
- 22 -
The Company believes the following represent a summary of these significant estimates and
judgments and related impact and associated risks in its consolidated financial statements:
Estimated useful lives. The useful life of each of the Company’s property and equipment and
intangible assets with definite life is estimated based on the period over which the asset is
expected to be available for use. Estimation for property and equipment is based on a collective
assessment of industry practice, internal technical evaluation and experience with similar assets
while for intangible assets with definite life, estimated life is based on the life of agreement
covering such intangibles. The estimated useful life of each asset is reviewed periodically and
updated if expectations differ from previous estimates due to physical wear and tear, or other
limits on the use of the asset. It is possible, however, that future results of operations could be
materially affected by changes in the amounts and timing of recorded expenses brought about by
changes in the factors mentioned above. A reduction in the estimated useful life of any property
and equipment or intangible assets would increase the recorded expenses and decrease noncurrent
assets.
Property and equipment, net of accumulated depreciation and amortization as of December 31,
2005 and 2004 amounted to =P10.29 billion and =
P10.65 billion, respectively (see Note 9).
Asset impairment. Philippine GAAP requires that an impairment review be performed when
certain impairment indicators are present. In purchase accounting, estimation and judgment are
used in the allocation of the purchase price to the fair market values of the assets and liabilities
purchased. Likewise, determining the fair value of assets requires the estimation of cash flows
expected to be generated from the continued use and ultimate disposition of such assets.
While it is believed that the assumptions used in the estimation of fair values reflected in the
consolidated financial statements are appropriate and reasonable, significant changes in these
assumptions may materially affect the assessment of recoverable values and any resulting
impairment loss could have a material adverse impact on the results of operations.
Noncurrent assets that are subjected to impairment testing when impairment indicators are present
are as follows:
2005 2004
Program rights P
=914,831 =929,934
P
Cable channels - CPI 459,968 459,968
Long-term receivables from related parties 2,341,683 2,190,913
Property and equipment 10,287,599 10,650,285
Tax credits 1,767,484 1,809,118
No impairment loss for other long-lived assets was recognized in 2005 and 2004.
The carrying amount of goodwill at December 31, 2005 and 2004 amounted to = P22,565 included
under “Other noncurrent assets - net” account in the consolidated balance sheets (see Note 11).
Asset retirement obligation. Determining asset retirement obligation requires estimation of the
costs of dismantling installations and restoring leased properties to their original condition. While
it is believed that the assumptions used in the estimation of such costs are reasonable, significant
changes in these assumptions may materially affect the recorded expense or obligation in future
periods.
Deferred tax assets. The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient taxable profit will be
available to allow all or part of the deferred tax assets to be utilized. However, there is no
assurance that sufficient taxable profit will be generated to allow all or part of the deferred tax
assets to be utilized.
Unrecognized deferred tax assets as of December 31, 2005 and 2004 amounted to
=291.70 million and =
P P523.04 million, respectively (see Note 22).
Financial assets and liabilities. PFRSs require that certain financial assets and liabilities
(including derivative instruments) be carried at fair value, which requires the use of accounting
estimates and judgment. While significant components of fair value measurement are determined
using verifiable objective evidence (i.e. foreign exchange rates, interest rates, volatility rates), the
timing and amount of changes in fair value would differ using a different valuation methodology.
Any change in the fair values of financial assets and liabilities (including derivative instruments)
directly affect profit or loss and stockholders’ equity.
The fair value of financial assets and liabilities are set out in Note 26.
Allowance for doubtful accounts and decline in value of inventory. The Company maintains an
allowance for doubtful accounts and decline in value of inventory at a level considered adequate
to provide for potentially uncollectible receivables and decline in value of inventories. The level
of allowance is evaluated by management based on experience and other factors that may affect
the recoverability of these assets. If there is an objective evidence that an impairment loss on
trade and other receivables carried at amortized cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of
estimated future cash flows (excluding future credit losses that have not been incurred)
discounted at the financial asset’s original effective interest rate. The carrying amount of the
asset shall be reduced either directly or through use of an allowance account. The allowance is
established by charges to income in the form of provision for doubtful accounts and decline in
value of inventory. The amount and timing of recorded expenses for any period would therefore
differ based on the judgments or estimates made. An increase in provision for doubtful accounts
and decline in value of inventory would increase the Company’s recorded expenses and decrease
current assets.
- 24 -
Pension cost. The determination of the obligation and cost for pension and other pension benefits
is dependent on the selection of certain assumptions used by actuaries in calculating such
amounts. Those assumptions are described in Note 23 and include among others, discount rate,
expected return on plan assets and rate of compensation increase. In accordance with Philippine
GAAP, actual results that differ from the Company’s assumptions are accumulated and amortized
over future periods and therefore, generally affect the recognized expense and recorded obligation
in such future periods. While it is believed that the Company’s assumptions are reasonable and
appropriate, significant differences in actual experience or significant changes in assumptions
may materially affect the Company’s pension and other pension obligations.
Accrued pension and other long-term employee benefits amounted to =P511.21 million and
=710.86 million as of December 31, 2005 and 2004, respectively (see Note 13).
P
4. Segment Information
Business segments: for management purposes, the Company is organized into three business
activities - broadcasting, cable and satellite, and other businesses. This segmentation is the basis
upon which the Company reports its primary segment information. The broadcasting segment is
principally the television and radio broadcasting activities which generates revenue from sale of
national and regional advertising time. Cable and satellite business primarily develops and
produces programs for cable television, including delivery of television programming outside the
Philippines through its DTH satellite service, cable television channels and blocked time on
television stations. Other businesses include movie production, consumer products and services.
- 25 -
Geographical segments: although the Company is organized into three business activities, they
operate in three major geographical areas. In the Philippines, its home country, the Company is
involved in broadcasting, cable operations and other businesses. In the United States and other
locations (which includes Middle East, Europe and Australia), the Company operates its cable and
satellite operations to bring television programming outside the Philippines.
Inter-segment transactions: segment revenue, segment expenses and segment results include
transfers among business segments and among geographical segments. Such transfers are
accounted for at competitive market prices charged to unaffiliated customers for similar services.
Those transfers are eliminated in consolidation.
- 26 -
The following tables present revenue and income information and certain asset and liability information regarding business segments for the years ended December 31, 2005 and 2004:
Broadcasting Cable and satellite Other Businesses Eliminations Consolidated
2004 2004 2004 2004
(As restated - (As restated - (As restated - (As restated -
2005 see Note 2) 2005 see Note 2) 2005 see Note 2) 2005 2004 2005 see Note 2)
Revenues
External sales P
=11,612,208 =10,856,408
P P
=4,068,221 =3,895,790
P P
=1,366,647 =1,019,134
P P
=– =–
P P
=17,047,076 =15,771,332
P
Inter-segment sales 110,815 59,027 – 117,605 273,159 94,776 (383,974) (271,408) – –
Total revenue P
=11,723,023 =10,915,435
P P
=4,068,221 =4,013,395
P P
=1,639,806 =1,113,910
P (P
=383,974) (P
=271,408) P
=17,047,076 =15,771,332
P
Results
Segment result P
=356,979 =949,124
P P
=385,466 =231,633
P (P
=538,785) =89,459
P P
=903,586 P346,060
= P
=1,107,246 =1,616,276
P
Equity in net earnings (losses) of associates 94,352 267,962 – – – – (288,003) (315,287) (193,651) (47,325)
Other Income 469,311 498,525 746,489 17,231 23,056 46,801 (951,714) (335,414) 287,142 227,143
Finance Revenue 294,799 138,222 32,545 8,226 4,955 6,449 (36) – 332,263 152,897
Finance Cost (989,996) (911,843) (11,122) (67) (872) 1,180 – – (1,001,990) (910,730)
Foreign exchange gain (loss) (9,606) (2,347) (29,905) – (7,650) – – – (47,161) (2,347)
Income tax (11,995) (217,993) 62,465 (41,891) (239,834) (14,856) – – (189,364) (274,740)
Net income (loss) P
=203,844 =721,650
P P
=1,185,938 =215,132
P P
=(759,131) =129,033
P (P
=336,167) (P
=304,641) P
=294,485 =761,174
P
Assets and Liabilities
Segment assets P
=20,694,815 =20,027,343
P P
=1,642,458 =3,695,695
P P
=3,976,767 =1,124,338
P (P
=1,856,854) (P
=1,539,776) P
=24,457,186 =23,307,600
P
Investments in associates - at equity 2,487,992 2,606,705 – – – – (2,443,759) (2,368,821) 44,233 237,884
Consolidated total assets P
=23,182,807 =22,634,048
P P
=1,642,458 =3,695,695
P P
=3,976,767 =1,124,338
P (P
=4,300,613) (P
=3,908,597) P
=24,501,419 =23,545,484
P
Segment liabilities P
=3,920,127 =2,861,139
P P
=2,402,669 =1,842,427
P P
=814,048 =845,996
P (P
=1,893,961) (P
=1,617,844) P
=5,242,883 =3,931,718
P
Other Segment Information
Capital expenditures:
Property and equipment P
=651,185 =752,196
P P
=223,346 =147,517
P P
=14,718 =13,587
P P
=– =–
P P
=889,249 =913,300
P
Intangible assets 828,295 578,789 67,076 141,164 96,303 77,238 28,826 (14,346) 828,295 782,845
Depreciation and amortization of program rights 1,761,354 1,762,888 201,534 176,649 99,159 98,229 – (4,325) 2,062,047 2,033,441
Noncash expenses other than depreciation and
amortization of program rights 515,500 310,967 465,378 205,042 11,517 22,304 (292,391) – 700,004 538,313
The following tables present revenue and expenditure and certain asset information regarding geographical segments for the years ended December 31, 2005 and 2004:
Philippines United States Others Eliminations Consolidated
2004 2004 2004 2004 2004
(As restated - (As restated - (As restated - (As restated - (As restated -
2005 see Note 2) 2005 see Note 2) 2005 see Note 2) 2005 see Note 2) 2005 see Note 2)
Revenue
External sales P
=13,202,093 =12,654,058
P P
=2,919,411 =2,779,571
P P
=925,572 =337,703
P P
=– =–
P P
=17,047,076 =15,771,332
P
Inter-segment sales 383,975 271,408 – – – – (383,975) (271,408) – –
Total revenue P
=13,586,068 =12,925,466
P P
=2,919,411 =2,779,571
P P
=925,572 =337,703
P (P
=383,974) (P
=271,408) P
=17,047,076 =15,771,332
P
Other Segment Information
Segment assets P
=25,769,513 =22,000,305
P P
=1,863,083 =1,911,374
P P
=1,169,437 =3,541,769
P (P
=4,300,614) (P
=3,907,964) P
=24,501,419 =23,545,484
P
Capital expenditures:
Property and equipment 707,714 806,731 170,079 65,065 11,456 41,504 – – 889,249 913,300
Intangible assets 799,469 745,160 – 6,039 – 45,992 28,826 (14,346) 828,295 782,845
- 27 -
2005 2004
Cash on hand and in banks P
=1,284,690 =1,100,145
P
Short-term placements 467,040 191,412
P
=1,751,730 =1,291,557
P
Cash in banks earn interest at the respective bank deposit rates. Short-term placements 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.
2005 2004
Trade receivables (see Note 8) P
=3,920,578 =3,498,421
P
Receivable from DirecTV (see Note 24) 439,499 –
Due from related parties (see Note 14) 246,698 263,880
Advances to suppliers 97,002 46,875
Other receivables 563,260 297,385
5,267,037 4,106,561
Less allowance for doubtful accounts (see Note 3) 599,407 475,342
P
=4,667,630 =3,631,219
P
Trade receivables are noninterest-bearing and are generally on 60-90 days’ terms.
For terms and conditions relating to receivables from related parties, refer to Note 14.
2005 2004
Prepaid taxes P
=461,881 =294,523
P
Inventories at net realizable value (see Note 3) 141,523 130,523
Short-term investments 24,233 –
Prepaid expenses and others 198,758 168,808
P
=826,395 =593,854
P
Inventories consist mainly of materials and supplies of the Parent Company and records and other
consumer products held for sale by subsidiaries. The cost of inventories in the consolidated
financial statements amounted to =
P170,487 and = P173,209 in 2005 and 2004, respectively.
Short-term investments consist of time deposits with original maturity of more than three months
but less than one year.
- 28 -
8. Investments in Associates
2004
(As restated -
2005 see Note 2)
Acquisition costs P
=541,292 =541,292
P
Accumulated equity in net losses:
Balance at beginning of year,
as previously reported (302,775) (255,285)
Restatement of equity in net losses (633) (798)
Balance at beginning of year, as restated (303,408) (256,083)
Equity in net losses:
As previously reported – (47,490)
Equity in net losses during the year (193,651) –
Restatement of equity in net loss – 165
Balance at end of year, as restated (497,059) (303,408)
P
=44,233 =237,884
P
The carrying value of the investments exceeded the Company’s equity in net assets of the
associates by P
=194,202 as of December 31, 2004 in the consolidated financial statements.
Sky Vision
a. On July 18, 2001, the Parent Company, along with Lopez and Benpres Holdings Corporation
(BHC) (collectively, the Benpres Group), signed a Master Consolidation Agreement (MCA)
whereby they agreed with the Philippine Long Distance Telephone Company and Mediaquest
Holdings, Inc. (collectively, the PLDT Group) to consolidate their respective ownership or
otherwise their rights and interests in Sky Vision and Unilink Communications Corporation
(Unilink) under a holding company to be established for that purpose. Beyond Cable
Holdings, Inc. (Beyond) was incorporated on December 7, 2001 as the holding company. Sky
Vision owns Central CATV, Inc. (Central) and Pilipino Cable Corporation (PCC), which in
turn operate cable television systems in Metro Manila and key provincial areas under the
tradenames “Sky Cable” and “Sun Cable.” Unilink owns The Philippine Home Cable
Holdings, Inc. (Home), which operates cable television systems in Metro Manila and key
provincial areas under the tradename “Home Cable.”
Pursuant to the MCA, the Benpres Group and the PLDT Groups shall, respectively, own
66.5% and 33.5% of Beyond upon the transfer of their respective ownership and rights and
interests in Sky Vision and Unilink into Beyond. Although the original agreement envisions
the transfers to be completed within six months from signing date, or by January 18, 2002, the
Benpres Group and the PLDT Group agreed to extend this Closing date. On December 3,
2003, the Benpres and PLDT Groups, together with the PLDT Beneficial Trust Fund,
executed an Amendment Agreement to the MCA whereby additional closing conditions were
incorporated into the MCA and wherein the Closing Date was extended until such time the
parties shall have completed all conditions precedent under the MCA and the Amendment
Agreement, including the share transfers described above. The MCA also provides for the
Benpres Group to sell 33.0% of Beyond to a strategic and/or financial investor. The sale of
shares in Beyond is part of the Balance Sheet Management Plan of Benpres.
b. In November 2005, Sky Vision met with its creditors to request for an extension of the grace
period on its long-term debt for another five (5) years, with principal amortization to start in
2011. The creditors have already formed a steering committee to address the request of Sky
Vision. Negotiations are still on-going.
c. On June 30, 2004, Sky Vision and Central (“Issuer”) issued a convertible note (the “note”) to
the Parent Company amounting to US$30,000 equivalent to = P1,577,195 as of December 31,
2005. The Parent Company’s long-term receivable from Sky Vision, including accrued
interest receivable of P
=343,696 and =P112,841 as of December 31, 2005 and 2004,
respectively, is presented separately as “Long-term receivable from related parties” in the
consolidated balance sheets. The note is subject to interest of 13% compounded annually and
will mature on June 30, 2006. The principal and accrued interest as of maturity date shall be
mandatorily converted, based on the prevailing U.S. Dollar to Philippine Peso exchange rate
on Maturity Date, at a conversion price equivalent to a twenty percent (20%) discount of:
(a) the market value of the Shares, in the event of a public offering of the Issuer before
Maturity Date; (b) the valuation of the Shares by an independent third party appraiser that is a
recognized banking firm, securities underwriter or one of the big three international
accounting firms or their Philippine affiliate jointly appointed by the Benpres Group and
PLDT Group pursuant to the MCA dated July 18, 2001 as amended or supplemented.
Prior to the issuance of the convertible note, Sky Vision, Central and Home had trade and
advances payable to its shareholders in the Benpres Group and the PLDT Group, respectively.
Upon receipt of the proceeds of the note, Sky Vision, Central and Home prioritized the
servicing of its outstanding payables to third-party suppliers and creditors, as well as new
payables due to CPI. As a result, these companies did not service payables to its existing
shareholders outstanding as of June 30, 2004. Included in the amounts left unpaid were CPI's
receivable from Central of around = P420,792. Subject to approval of its creditors, the Parent
Company intends to include CPI's receivable in the above equity conversion in Sky Vision
under the same terms of the note.
Television,
Land and Radio, Movie
Land Building and and Auxiliary Other Construction
Improvements Improvements Equipment Equipment in Progress Total
At January 1, 2005
Cost P
=297,904 P
=9,585,198 P
=5,296,294 P
=2,969,740 P
=90,743 P
=18,239,879
Accumulated depreciation – (1,234,616) (4,069,106) (2,285,872) – (7,589,594)
Reclassifications (6,896) 6,318 (8,009) 8,587 – –
Net carrying amount P
=291,008 P
=8,356,900 P
=1,219,179 P
=692,455 P
=90,743 P
=10,650,285
At January 1, 2004
Cost =
P292,776 =
P9,400,560 =
P4,930,469 =
P2,606,479 =
P171,217 =
P17,401,501
Accumulated depreciation – (867,487) (3,698,497) (1,925,750) – (6,491,734)
Net carrying amount =
P292,776 =
P8,533,073 =
P1,231,972 =
P680,729 =
P171,217 =
P10,909,767
Property and equipment of the Parent Company with a carrying amount of = P9.5 billion and
=10 billion as of December 31, 2005 and 2004, respectively, was pledged as collateral to secure
P
the Parent Company’s long-term debt (see Note 15).
Property and equipment includes the following amounts where the Company is a lessee under a
finance lease (see Note 24):
2005 2004
Cost - capitalized finance lease P
=393,823 =254,860
P
Accumulated depreciation (216,327) (135,206)
Net book value P
=177,496 =119,654
P
- 32 -
Production and
Distribution
Program Cable Business -
Rights Channels - CPI Middle East Total
Balance at January 1, 2005 =
P1,712,894 =
P459,968 =
P157,584 =
P2,330,446
Additions 828,295 – – 828,295
Amortization and write-off
during the year
(see Notes 18, 19 and 20) (827,318) – (15,825) (843,143)
Balance at December 31, 2005 1,713,871 459,968 141,759 2,315,598
Less current portion 799,040 – – 799,040
Noncurrent portion =
P914,831 =
P459,968 =
P141,759 =
P1,516,558
Production and
Distribution
Cable Business -
Channels - CPI Middle East Total
At December 31, 2005
Cost =
P574,960 =
P212,358 =
P787,318
Accumulated amortization (114,992) (70,599) (185,591)
Net carrying amount =
P459,968 =
P141,759 =
P601,727
Production and
Distribution
Program Cable Business -
Rights Channels - CPI Middle East Total
Balance at January 1, 2004 =
P1,817,187 =
P488,716 =
P177,875 =
P2,483,778
Additions 782,845 – – 782,845
Amortization and write-off during
the year (Notes 18, 19 and 20) (887,138) (28,748) (20,291) (936,177)
Balance at December 31, 2004 1,712,894 459,968 157,584 2,330,446
Less current portion 782,960 – – 782,960
Noncurrent portion =
P929,934 =
P459,968 =
P157,584 =
P1,547,486
- 33 -
Production and
Distribution
Cable Business -
Channels - CPI Middle East Total
At January 1, 2004
Cost P
=574,960 =
P212,358 =
P787,318
Accumulated amortization (86,244) (34,483) (120,727)
Net carrying amount =
P488,716 =
P177,875 =
P666,591
December 31, 2004
Cost P
=574,960 =
P212,358 =
P787,318
Accumulated amortization (114,992) (54,774) (169,766)
Net carrying amount =
P459,968 =
P157,584 =
P617,552
In prior years, cable channels and production and distribution business were considered to have a
finite useful life with a rebuttable presumption that life would not exceed ten years from the date
when the asset was available for use.
The cable channels, namely, Lifestyle Channel, Cinema One and Myx Channel, were acquired by
CPI from Sky Vision in 2001. Based on the Company’s analysis of all the relevant factors, there
is no foreseeable limit to the period over which this business is expected to generate net cash
inflows for the Company. Due to the change in the estimated useful life of this business in the
current year resulting in indefinite lives, the cost as at January 1, 2005 is no longer amortized.
Production and distribution business for the Middle East operations represents payments arising
from the sponsorship agreement between ADD and ABS-CBN Middle East FZ-LLC. This
agreement grants the Company the right to operate in the Middle East with ADD as sponsor. The
estimated useful life was changed from 10 years to 25 years. The change in useful life was
accounted for prospectively, resulting to a decrease in amortization expense of =
P15 million in
2005.
2004
(As restated -
2005 see Note 2)
Tax credits:
With tax credit certificates (TCCs) P
=1,767,484 =1,809,118
P
Pending issuance of TCCs but supported by
telecast orders – 54,572
Available-for-sale investments (AFS) 30,931 34,104
Unamortized debt issue cost (see Note 15) – 291,160
Deferred charges and others (see Notes 3 and 12) 274,831 430,372
P
=2,073,246 =2,619,326
P
- 34 -
Tax credits represent claims on the government arising from airing of government commercials
and advertisements. Pursuant to Presidential Decree No. 1362, these will be collected in the form
of TCCs which the Parent Company can use in paying for import duties and taxes on its
broadcasting equipment. The Parent Company expects to utilize these tax credits within the next
10 years.
In view of the Deal Memorandum with DirecTV discussed in Note 24, the Company has written
off the deferred charges amounting to =
P335 million pertaining to the DTH subscribers as of
December 31, 2005.
AFS are investments in ordinary shares and therefore have no fixed maturity date or coupon rate.
AFS with a carrying value of =
P13.85 million and = P17.59 million as of December 31, 2005 and
2004 respectively was pledged as part of the collateral to secure the Parent Company’s long-term
debt (see Note 15).
Goodwill in investment in a subsidiary included under “Other noncurrent assets - net” account in
the consolidated balance sheets totaled =
P22.5 million as of December 31, 2005 and 2004.
For the impairment test of goodwill and cable channels, the difference between the enterprise
value of the subsidiary and the net book value or fair market value of its net assets was compared
against the amount of goodwill. The enterprise value of the subsidiaries was determined using
their cash flow projections which were based on financial budgets approved by the subsidiaries’
senior management covering a five-year period. The discount rate applied to the cash flow
projections is 21.1% while cash flows beyond the 5-year period are extrapolated using a 5%
perpetual growth rate that is based on projected long-term inflation rate of 3% and long-term real
growth of 2%.
Key Assumptions
Following are the key assumptions on which management has based its cash flow projections to
undertake impairment testing of goodwill and cable channels:
Gross revenues. On the average, gross revenues of the subsidiaries over the next five years were
projected to grow in line with the economy or with nominal Gross Domestic Product (GDP).
This assumes that the market share of the subsidiaries in their respective industries will be flat
on the assumption that the industries also grow at par with the economy. Historically,
advertising spending growth had a direct correlation with economic growth.
- 35 -
Operating expenses. Cash expenses of the subsidiaries particularly employee costs and general
and administrative expenses were projected to rise at an inflationary pace. On the other hand,
production costs or cost of sales were forecasted to increase in line with revenue growth.
Gross margins. Increased efficiencies over the next five years are expected to result to some
improvements in gross margins.
Discount rate. The discount rate or Weighted Average Cost of Capital (WACC) was based on
the cost of debt and cost of equity of the Parent Company. The cost of equity was computed
by adding the risk free rate (based on 5-year Forex Treasury Notes) and risk premium (based
on the difference between 10-year US Treasury bonds and 10-year Philippine Peso bonds)
multiplied to the equity beta of the Parent Company. On the other hand, the cost of debt, was
computed based on the pre-tax weighted interest cost of the Parent Company’s loan.
The consolidated financial statements include the financial statements of ABS CBN Broadcasting
Corporation and the subsidiaries listed in the following table:
Place of Ownership Interest
Company Incorporation Principal Activities 2005 2004
ABS-CBN Australia Pty. Ltd Victoria, Cable and satellite 100.0(a) 100.0(a)
Australia programming
services
ABS-CBN Center for Communication Arts, Inc. Philippines Educational/training 100.0(b) 100.0(b)
ABS-CBN Europe Ltd United Kingdom Cable and satellite 100.0(a) 100.0(a)
programming
services
ABS-CBN Film Productions, Inc. Philippines Movie production 100.0 100.0
(ABS-CBN Films)
ABS-CBN Global Ltd. (ABS-CBN Global) (c) Cayman Islands Holding company 100.0 100.0
ABS-CBN Interactive, Inc. Philippines Services - interactive 100.0 100.0
media
ABS-CBN International California, USA Cable and satellite 98.0(a) 98.0(a)
programming
services
- 36 -
(a)
indirectly-owned through ABS-CBN Global
(b)
non-stock ownership interest
(c)
with a branch in the Philippines
(d)
indirectly-owned through ABS-CBN Interactive, Inc.
(e)
not yet started commercial operations
(f)
owns 50% interest in Sky Guide, Inc. and 70% interest in Culinary Publications, Inc.
*
ABS-CBN Middle East FZ-LLC owns ABS-CBN Middle East LLC
ABS-CBN Broadcasting Corporation is the ultimate Philippine parent entity and the ultimate
parent company of the Company is Lopez, Inc.
The following table provides the total amount of transactions, which have been entered into with
related parties:
Transactions of the Company with its associates and related parties follow:
2005 2004
Associates
Interest on noncurrent receivable from Sky Vision P
=261,161 =112,841
P
License fees charged by CPI to Central, (a) PCC
and Home Cable 112,334 137,443
Blocktime fees paid by Studio 23 to Amcara (b) 60,816 68,000
Management and other service fees 604 412
- 37 -
2005 2004
Affiliates
Expenses paid by Parent Company & subsidiaries to
Manila Electric Company (Meralco), Bayan
Telecommunications Holding, Inc. (Bayantel)
& other related parties P
=432,346 =364,527
P
Termination cost charges of Bayantel, a subsidiary
of Lopez, to ABS-CBN Global 286,549 232,140
Airtime revenue from Manila North Tollways Corp.
(MNTC), Bayantel and Meralco, an associate
of Lopez 61,273 30,162
Expenses and charges paid for by the
Parent Company which are reimbursed
by the concerned related parties 34,788 46,449
Rental charges of the Parent Company for the use
of office space – 133
The related receivables and payables from related parties are as follows:
2005 2004
Due from associates P
=150,929 =161,741
P
Due from affiliates 95,769 102,139
Total P
=246,698 =263,880
P
Due to associates P
=40,715 P24,543
=
Due to affiliates 270,584 137,480
Total P
=311,299 =162,023
P
CPI entered into a cable lease agreement (Agreement) with Central for the airing of the cable
channels (see Note 10) to the franchise areas of Central and its cable affiliates. The
Agreement with Central is for a period of five years effective January 1, 2001, renewable upon
mutual agreement. Under the terms of the Agreement, CPI receives license fees from Central
and its cable affiliates computed based on agreed rates and on the number of subscribers of
Central and its cable affiliates. As the owner of the said cable channels, CPI develops and
produces its own shows and acquires program rights from various foreign and local suppliers.
Studio 23 owns the program rights being aired in UHF Channel 23 of Amcara. On July 1,
2000, it entered into a blocktime agreement with Amcara for its provincial operations.
Other transactions with associates include cash advances for working capital requirements.
- 38 -
As discussed in Note 15, the Parent Company’s obligation under the Senior Credit Agreement
(SCA) is jointly and severally guaranteed by its principal subsidiaries.
2005 2004
Compensation P
=358,321 =281,553
P
Pension benefit 32,128 20,640
Vacation leaves and sick leaves 3,920 4,472
Termination benefits 70,181 –
P
=464,550 =306,665
P
Effective
Interest
Rate % Maturity 2005 2004
Current:
Bank loans 11.17% 355,398 =
P355,398 =
P466,943
Long-term debt under Senior Credit
Agreement (SCA) 13.01% 1,373,603 1,322,500 806,633
Obligations under capital lease
(see Note 24) 88,246 66,356
P
=1,766,144 =
P1,339,932
Noncurrent:
Long-term debt under SCA (net of
transaction costs amounting to
=
P197,623 in 2005 12.87% 4,608,101 P
=4,307,941 =
P5,162,773
Obligations under capital lease
(see Note 24) 201,699 132,331
P
=4,509,640 =
P5,295,104
Bank Loans
This represents peso-denominated loans obtained from local banks which bear average annual
interest rates of 11.17% in 2005 and 11.017% in 2004.
- 39 -
The SCA contains provision 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 the Parent Company’s capital stock or some of its subsidiaries, the selling or
exchange of assets, creation of liens and effecting mergers. As of December 31, 2005, the Parent
Company is in compliance with the provisions of the SCA.
As indicated in the SCA, all existing loans of the Parent Company outside the SCA were settled
via proceeds of the term loan facility.
Details of the term loan under SCA using the effective interest rate method are as follows:
2005
Long-term debt under SCA
Current portion =
P1,322,500
Noncurrent portion 4,307,941
=5,630,441
P
Transaction costs related to the SCA amounting to = P324 million were deducted from the face
amount of the loan to get its net carrying value. This will be amortized over the life of the loan
using the effective interest rate method of amortizing transaction cost detailed as follows:
Repayments of the term loan based on the face value of the SCA are scheduled as follows:
2006 P
=1,373,603
2007 1,681,654
2008 1,827,275
2009 1,099,172
=5,981,704
P
To manage its exposures to foreign currency exchange and interest rate risks relating to the facility
drawdowns, the Parent Company entered into interest rate and cross currency swap contracts with
counterparty banks (see Notes 25 and 26).
a. Capital Stock
Number of
Shares Amount
(In Thousands)
Authorized:
Common shares - =
P1 par value 1,500,000,000 P
=1,500,000
Issued:
Common shares 779,583,312 P
=779,583
b. On April 24, 1998, BHC, then major stockholder of ABS-CBN, transferred all of its
investments in ABS-CBN to Lopez, BHC’s parent company, in exchange for convertible and
nonconvertible notes (Notes). The convertible notes can be exchanged by BHC for the
ABS-CBN shares transferred. The Notes shall terminate on any earlier date if the convertible
notes have been converted or when Lopez has satisfied its obligations with respect to all such
convertible notes that have been properly converted. After the transfer, Lopez had all the
voting rights associated with the shares.
c. On December 28, 1998, BHC sold a portion of the Notes to ABS-CBN for =
P800,000, the
equivalent market value of the underlying 40 million ABS-CBN shares.
On September 29, 1999, ABS-CBN Holdings Corporation (50% owned by Lopez) offered
132 million Philippine Depositary Receipts (PDRs) relating to 132 million ABS-CBN shares.
Each PDR grants the holder, upon payment of the exercise price and subject to certain other
conditions, the delivery of one ABS-CBN share or the sale of and delivery of the proceeds of
such sale of one ABS-CBN share. The ABS-CBN shares are still subject to ownership
restrictions on shares of corporations engaged in mass media and ABS-CBN may reject the
transfer of shares to persons other than Philippine nationals. The PDRs may be exercised at
any time from October 7, 1999 until the expiry date as defined in the terms of the offering.
Any cash dividends or other cash distributions in respect of the underlying ABS-CBN shares
shall be applied by ABS-CBN Holdings Corporation towards payment of operating expenses
- 41 -
and any amounts remaining shall be distributed pro-rata among outstanding PDR holders. The
PDRs were listed in the Philippine Stock Exchange on October 7, 1999.
The Notes held by ABS-CBN were amended to allow for conversion into shares or into PDRs.
ABS-CBN converted P =200,000 of the Notes into PDRs underlying 10 million ABS-CBN
shares and these are shown as “Philippine deposit receipts convertible to common shares” in
the Stockholders’ Equity section of the balance sheets. The remaining = P600,000 of the Notes
underlying 30 million ABS-CBN shares were converted into 30 million PDRs and these PDRs
were included in the PDR offering described above.
d. On June 3, 2004, the BOD approved the declaration of cash dividend of =P0.64 per share to all
stockholders of record as of July 26, 2004 payable on August 10, 2004.
e. Unappropriated retained earnings available for dividend distribution is adjusted to exclude the
Parent Company’s accumulated equity in net losses of subsidiaries and associates amounting
to =
P1,666,451 and =
P1,605,713 as of December 31, 2005 and 2004, respectively.
2005 2004
Agency commission P
=1,534,605 =1,759,939
P
Incentives and co-producers’ share 550,142 436,723
P
=2,084,747 =2,196,662
P
Industry rules allow ABS-CBN to sell up to 18 minutes of commercial spots per hour of television
programming. These spots are sold mainly through advertising agencies which act as the buying
agents of advertisers, and to a lesser extent, directly to advertisers. Substantially, all gross airtime
revenue, including airtime sold directly to advertisers, is subject to a standard 15% agency
commission.
Incentives include early payment and early placement discount as well as commissions paid to the
Company’s account executives.
The Company has co-produced shows which are programs produced by ABS-CBN together with
independent producers. Under this arrangement, ABS-CBN provides the technical facilities and
airtime, and handles the marketing of the shows. The co-producer shoulders all other costs of
production. The revenue earned on these shows is shared between ABS-CBN and the co-
producer.
- 42 -
2005 2004
Personnel expenses and talent fees (see Note 23) P
=2,513,203 =2,524,568
P
Facilities related expenses (see Notes 14 and 24) 840,284 716,189
Amortization of program rights (see Notes 10) 711,354 766,407
Depreciation (see Note 9) 679,547 541,110
Other program expenses (see Note 14) 946,396 919,874
P
=5,690,784 =5,468,148
P
Other program expenses consist of production expenses including, but not limited to, set
requirements, prizes, transportation, advertising and other expenses related to the promotional
activities of various projects during the year.
Other Income
2005 2004
Space rental (see Note 24) P
=89,283 =78,247
P
Management fees 40,314 59,592
Royalty income 11,450 17,576
Others 146,095 71,728
P
=287,142 =227,143
P
Finance Revenue
2005 2004
Interest income P
=297,435 =152,897
P
Mark-to-market gain (see Note 15) 34,828 –
P
=332,263 =152,897
P
Finance Cost
2005 2004
Interest expense P
=683,465 =802,850
P
Hedge cost 218,845 –
Amortization of debt issue costs (see Note 15) 87,046 107,880
Bank service charges 12,241 –
Mark-to-market loss 393 –
P
=1,001,990 =910,730
P
2004
(As restated -
2005 see Note 2)
Current P
=436,633 =320,929
P
Deferred (247,269) (46,189)
P
=189,364 =274,740
P
The details of the unrecognized deductible temporary differences, NOLCO, and MCIT of the
subsidiaries follow:
2005 2004
NOLCO P
=201,652 =285,884
P
Allowance for doubtful accounts 146,429 232,134
MCIT 908 2,355
Accrued retirement expense and others 5,253 2,669
P
=354,242 =523,042
P
Management believes that it is not probable that taxable income will be available against which
temporary differences, NOLCO and MCIT will be utilized.
The reconciliation of income from continuing operations before income tax computed at the
statutory tax rate to provision for income tax as shown in the consolidated statements of income is
as follows:
2005 2004
Statutory tax rate 32% 32%
Additions to (reduction in) income taxes resulting
from the tax effects of:
Equity in net losses of investees 33 1
Interest income subject to final tax (19) (1)
Unrecognized deferred tax assets (11) (1)
Change in tax rate 3 –
Nondeductible interest and others 1 (4)
Effective tax rates 39% 27%
The Company’s pension plan is composed of funded (Parent Company) and unfunded
(Subsidiaries), noncontributory and actuarially computed pension plan except for
ABS-CBN International (unfunded and contributory) covering substantially all of its employees.
The benefits are based on years of service and compensation during the last year of employment.
The Company has also agreed to provide certain additional long-term employee benefits to all of
its employees upon retirement. These benefits are unfunded.
In 2005, the Company implemented an Early Retirement Program. The employees availed this
program from July to December 2005. Total retrenchment cost amounted to =
P576.3 million, net
of recognized curtailment gain of =
P158.4 million.
The following table summarizes the components of consolidated net benefit expense (income)
recognized in the statements of income and amounts recognized in the balance sheets of plan
based on actuarial valuation dated December 31,2005:
- 46 -
Other Long-term
Pension Plan Employee Benefits
2005 2004 2005 2004
Current service cost P
=41,474 =
P46,105 P
=6,289 =
P8,191
Interest cost 51,482 46,664 – –
Expected return on plan assets (12,847) (12,658) – –
Net actuarial gain recognized
during the year (351) – – 23,757
Curtailment gain (158,418) – – –
Short-term normal cost – – 19,126 16,974
Net benefit expense/(income) (P
=78,660) =
P80,111 P
=25,415 =
P48,922
2005 2004
Actual return on Parent Company’s plan assets P
=19,364 =8,609
P
Benefit Liability
Other Long-term
Pension Plan Employee Benefits
2005 2004 2005 2004
Present value of obligation P
=343,887 =
P396,936 P
=393,659 =
P344,736
Fair value of plan assets (138,952) (126,105) – –
204,935 270,831 393,659 344,736
Unrecognized net actuarial losses 33,600 46,365 – –
Total expense – – 25,415 48,923
Benefits paid (187) – (146,396) –
Benefit liability P
=238,535 =
P317,196 P
=272,678 =
P393,659
Consolidated changes in the present value of the defined benefit obligation are as follows:
Other Long-term
Pension Plan Employee Benefits
2005 2004 2005 2004
Defined benefit obligation at
beginning of year P
=396,936 =
P398,667 P
=393,659 =
P344,736
Short term normal cost – – 19,126 16,973
Curtailment gains (146,005) – – –
Interest cost 51,482 46,664 – –
Current service cost 41,474 46,105 6,289 8,192
Benefits paid – (46,412) (146,396) (155)
Actuarial (gains) losses on
obligation – (48,088) – 23,913
Defined benefit obligation at
end of year P
=343,887 =
P396,936 P
=272,678 =
P393,659
- 47 -
Change in the fair value of plan assets of the Parent Company are as follows:
2005 2004
Fair value of plan assets at beginning of year P
=126,105 =126,582
P
Expected return on plan assets 12,847 12,658
Actual contributions – 35,000
Benefits paid – (46,412)
Actuarial losses – (1,723)
Fair value of plan assets at end of year P
=138,952 =126,105
P
The major categories of plan assets as a percentage of the fair value of total plan assets are as
follows:
2005 2004
Investment in FXTN/FRTN 45.35% 35.22%
Investment in bonds 21.93% 35.78%
Short-term equity investment 17.53% 13.76%
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date, applicable to the period over which the obligation is to be settled.
The principal assumptions used in determining pension and sick and vacation leave benefit
obligations for the Company’s plans are shown below:
2005 2004
Discount rate 13.54% 11.62%
Expected rate of return on plan assets 10% 10%
Future salary rate increase 6% 6%
24. Commitments
As provided in the Memorandum, all rights, title and interest in and to the content, discrete
programs or channels not granted to DirecTV are expressly reserved by the Parent Company. All
programming decisions with respect to the programs shall be in the Parent Company’s
commercially reasonable discretion, including the substitution or withdrawal of any scheduled
programs, provided that the Parent Company agrees that the programs will consist substantially
the same content and genre provided for in the Memorandum.
- 48 -
The Memorandum also provides for the following license fees to be paid by DirecTV to the Parent
Company:
a. A license fee for each existing DTH subscriber of ABS-CBN International or new subscribers
who becomes an activated subscriber during the migration period ( from June 2005 to
February 2006); and
b. An additional license fee for each activated subscriber who becomes an activated subscriber
during the migration period that remains a subscriber for 14 consecutive months.
The Memorandum also provides that subscription revenues, computed as the current and stand
alone retail price per month for a subscription to the TFC channel multiplied by the average
number of subscribers, shall be divided equally between DirecTV and ABS-CBN International.
Starting July 2005, existing DTH subscribers of ABS-CBN International have been migrating to
DirecTV. As of December 31, 2005, license fee amounting to = P1.629 billion have been
recognized in the consolidated financial statements. ABS-CBN International’s share in the
subscription revenues earned from subscribers that have migrated to DirecTV amounted to
=93.1 million in 2005.
P
On January 17, 2006, the Parent Company and DirecTV agreed to amend the Memorandum
entered in June 1, 2005 that include among others the extension of the migration period from
February 2006 to August 2006.
2005 2004
Within one year P
=291,921 =361,373
P
After one year but not more than five years 1,184,726 1,078,456
After five years 626,252 571,139
P
=2,102,899 =2,010,968
P
Future minimum rentals receivable under non-cancelable operating leases are as follows as of
December 31:
2005 2004
Within one year P
=117,854 =30,740
P
After one year but not more than five years 171,297 118,524
After five years 11,257 21,548
P
=300,408 =170,812
P
- 49 -
2005 2004
Within one year P
=118,984 =87,979
P
After one year but not more than five years 233,287 161,806
Total minimum lease payments 352,271 249,785
Less amounts representing finance charges 62,326 51,098
Present value of minimum lease payments 289,945 198,687
Less current portion 88,246 66,356
P
=201,699 =132,331
P
The Company’s principal financial instruments, other than derivatives, comprise bank loans,
finance leases and, and cash and short-term deposits. The main purpose of these financial
instruments is to raise finance for the Company’s operations. The Company has various other
financial assets and liabilities such as trade receivables and trade payables, which arise directly
from its operations.
The Company also enters into derivative transactions, including principally interest rate swaps,
cross currency swaps and currency forward contracts. The purpose is to manage the interest rate
and currency risks arising from the Company’s operations and its sources of finance.
It is, and has been throughout the year under review, the Company’s policy that no trading in
financial instruments shall be undertaken.
The main risks arising from the Company’s financial instruments are cash flow interest rate risk,
liquidity risk, foreign currency risk and credit risk. The BOD reviews and agrees policies for
managing each of these risks and they are summarized below. The Parent Company’s accounting
policies in relation to derivatives are set out in Note 2.
To manage this mix in a cost-efficient manner, the Company enters into interest rate swaps, in
which the company agrees to exchange, at specified intervals, the difference between fixed and
variable rate interest amounts calculated by reference to an agreed-upon notional principal
amount. These swaps are designated to hedge underlying debt obligations. At December 31,
2005, after taking into account the effect of interest rate swaps, approximately 45% of the
Company’s borrowings are at a fixed rate of interest.
- 50 -
The Company enters into cross currency swaps, to manage this risk and eliminate the variability of
cash flows due to changes in the fair value of the foreign-currency-denominated debt maturing
more than 1 year.
Other than the debt obligations, the Company has transactional currency exposures. Such
exposure arises when the transaction is denominated in currencies other than the functional
currency of the operating unit or the counterparty.
Credit Risk
The Company trades only with recognized, creditworthy third parties. Customers who wish to
trade on credit terms are subject to credit verification procedures. In addition, receivable balances
are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not
significant.
With respect to credit risk arising from the other financial assets of the Company, which comprise
cash and cash equivalents, available-for-sale financial assets and certain derivative instruments,
the Company’s exposure to credit risk arises from default of the counterparty, with a maximum
exposure equal to the carrying amount of these instruments.
Since the Company trades only with recognized third parties, there is no requirement for collateral.
Liquidity Risk
The Company’s objective is to maintain a balance between continuity of funding and flexibility
through the use of bank loans and finance leases.
The following table sets forth the carrying values and estimated fair values of consolidated
financial assets and liabilities recognized as of December 31, 2005. There are no material
unrecognized financial assets and liabilities as of December 31, 2005.
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
amount as of balance sheet date.
Available-for-sale investments: The fair values were determined by reference to market bid
quotes as of balance sheet date.
Interest-bearing loans and borrowings: Fair value was computed based on the following:
Forward foreign exchange contracts and bifurcated foreign currency forwards: The fair values
were determined using forward exchange market rates at the balance sheet date.
Within More
2005 Fixed Rate 1 Year 1-2 years 2-3 Years 3-4 years 4-5 Years than 5 Years Total
90,727 152,739 172,053 63,731 – – 479,250
Within More
2005 Floating Rate 1 Year 1-2 years 2-3 Years 3-4 years 4-5 Years than 5 Years Total
1,587,171 1,438,504 1,531,830 949,084 – – 5,506,589
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Within More
2004 Fixed Rate 1 Year 1-2 years 2-3 Years 3-4 years 4-5 Years than 5 Years Total
– 152,758 150,574 169,970 63,073 – 536,375
Within More
2004 Floating Rate 1 Year 1-2 years 2-3 Years 3-4 years 4-5 Years than 5 Years Total
1,107,672 1,039,414 1,283,787 1,369,673 849,761 – 5,650,307
Interest on financial instruments classified as floating rate is repriced at intervals of less than one
year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the
instrument. The other financial instruments of the Company that are not included in the above
tables are noninterest-bearing and are therefore not subject to interest rate risk.
Derivative Instruments
Cross Currency Swaps. In 2004, the Parent Company entered into long-term cross currency
swaps that hedge 100% of the Tranche A Principal against foreign exchange risk. The long-term
principal-only currency swaps have an aggregate notional amount of US$54.6 million as of
December 31, 2005 and a weighted average swap rate of =P56.01 to US$1. Under these
agreements, the Parent Company effectively swaps the principal amount of certain US dollar-
denominated loans under the SCA into Philippine peso-denominated loans with payments up to
June 2009.
The Company is also obligated to pay swap costs based on a fixed rate of 8.0% on a notional
amount of =P1.3 billion, 5.125% on a notional amount =
P203 million, 3-month PHIREF minus 2.9%
on a notional amount P=1.7 billion and 3-month PHIREF minus 3.1% on a notional amount on
=264 million.
P
Interest Rate Swaps. To manage the interest rate exposure from the floating rate loans, the
Company also entered into USD interest rate swaps and PHP interest rate swaps which effectively
swap certain floating rate loans into fixed-rate loans. These USD interest rate swaps and PHP
interest rate swaps have an aggregate outstanding notional amount of US$32 million and = P394
million as of December 31, 2005, respectively, with payments up to September 2006 and March
2008.
The terms of the USD and PHP interest rate swap agreements are as follows:
Hedge Accounting Implications of Swaps. The Parent Company’s principal-only currency swaps
and USD interest rate swap are designated as cash flow hedges on October 1, 2005, to manage the
Parent Company’s exposure to variability in cash flows attributable to foreign exchange and
interest rate risks of the underlying debt obligations. Since the critical terms of the swaps and the
outstanding debt obligations coincide, the hedges are expected to exactly offset changes in
expected cash flows due to fluctuations in foreign exchange and the prime rate over the term of the
debt obligations.
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From October 1, 2005 up to December 31, 2005, the effective net mark-to-market losses that have
been deferred in equity for these cash flow hedges amounted to P =52.6 million (P=34.19 million, net
of tax). Prior to designation as cash flow hedges, the principal-only currency swaps accounted for
mark-to-market losses in the consolidated statements of income of about = P32 million (net of
=316 million gain on the swap differentials), while the USD interest rate swap accounted for
P
mark-to-market gains in the consolidated statements of income of = P48 million.
The Parent Company did not designate its PHP interest rate swap as an accounting hedge because
the effectiveness tests show ineffective results. During the year, the mark-to-market gains
recorded immediately in the consolidated statements of income amounted to = P15 million.
As part of the transition adjustments as of January 1, 2005, the Company initially recognized an
aggregate amount of P =117 million (P
=76 million net of tax), representing the fair value for the
principal-only currency swaps (net of the impact of the foreign exchange restatement) and the
USD and PHP interest rate swaps. This amount is initially recorded as a credit adjustment in CTA
(‘initial CTA’) and will be amortized using the effective interest method over the remaining term
of the underlying related loans. For the year ended December 31, 2005, the amortization of the
initial CTA amounted to = P31 million and is recorded as a reduction in interest expense.
Embedded Derivatives. As of December 31, 2005, the Company has outstanding embedded
foreign currency derivatives which were bifurcated from various non-financial contracts. The
impact of these embedded derivatives is not significant.
As discussed in Note 8, the Parent Company has a receivables from Sky Vision that is convertible
into the latter’s common share, which are not quoted in an active market. The conversion option
embedded in the receivable is not separately accounted for as a financial asset at fair value through
profit and loss. The entire receivable from Sky Vision is reported at cost subject to impairment.
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 during the
period.
2005 2004
(a) Net income attributable to equity holders of
parent P
=287,744 =750,755
P
2005 2004
Noncash investing and financing activities:
Acquisition of property and equipment
under capital lease P
=166,077 P82,244
=
Acquisition of program rights on account 265,852 315,284
Acquisition of property and equipment
on account 81,466 21,100
Acquisition of property and equipment as
settlement of trade receivables 44,280 –
29. Reclassifications
The following accounts in December 31, 2004 consolidated financial statements have been
reclassified to conform to the 2005 presentation:
Nature Amount
Balance Sheet:
Production and distribution business under “Other noncurrent
assets” to Program rights and other intangible assets P
=617,552
Due from related parties to Trade and other receivables 262,435
CPI receivable from Sky Vision under “ Trade and other
receivables” to Long-term receivable from related parties 390,485
Advances to associates to Trade and other receivables 1,445
Program rights - current to Noncurrent program rights and other
intangible assets 125,595
Movie-in-progress under “Other current asset” account
to Program rights - current 35,572
Due to related parties to Trade and other payables 162,023
Obligations for program rights - net of current portion to
Obligations for program rights 124,094
Statement of Income:
Other expenses under “General and administrative expenses” to
Other expenses “Cost of Sales” account 15,432
Amortization, previously shown as a separate line item to:
Amortization of deferred charges under “General and
administrative expenses” 91,220
Amortization of Debt issue cost under “Finance Costs” 107,880
Depreciation previously shown as a separate line item, shown to:
Production costs 541,110
Cost of sales and services 39,614
General and administrative expenses 565,579
Gross-up of Agency commission, incentives and co-producers’
share to Sale of services 150,913
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a. In 1972, the Parent Company discontinued its operations when the government took
possession of its property and equipment. In the succeeding years, the property and
equipment were used without compensation to the Parent Company by Radio Philippines
Network, Inc. (RPN) from 1972 to 1979, and Maharlika Broadcasting System (MBS) from
1980 to 1986. A substantial portion of these property and equipment was also used from 1986
to 1992 without compensation to the Parent Company by People’s Television 4, another
government entity. In 1986, the Parent Company resumed commercial operations and was
granted temporary permits by the government to operate several television and radio stations.
The Parent Company, together with Chronicle Broadcasting System, filed a civil case on
January 14, 1988 against Ferdinand E. Marcos and his family, RPN, MBS, et. al, before the
Sandiganbayan to press collection of the unpaid rentals for the use of its facilities from
September 1972 to February 1986 totaling = P305,400 plus legal interest compounded quarterly
and exemplary damages of = P100,000.
The BOD resolved on June 27, 1991 to declare as scrip dividends, in favor of all stockholders
of record as of that date, whatever amount that may be recovered from the foregoing pending
claims and the rentals subsequently settled in 1995. The scrip dividends were declared on
March 29, 2000. In 2003, additional scrip dividends of =P13,290 were recognized for the said
stockholders.
On April 28, 1995, the Parent Company and the government entered into a compromise
settlement of rental claims from 1986 to 1992. The compromise agreement includes payment
to the Parent Company of P =29,914 (net of the government’s counterclaim against the Parent
Company of = P67,586) by way of tax credits or other forms of noncash settlement as full and
final settlement of the rentals from 1986 to 1992. The TCCs were issued in 1998.
b. The 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 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 Company. As of March 29, 2006, the 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 Company, said expenses do not constitute a material financial
obligation of the Company, as the Company remains in sound financial position to meet its
obligations.
Management, after consultations with outside legal counsels, is of the opinion that the
eventual liability from these claims cannot be presently determine, if any, and an adverse
judgment in any one cases will not materially affect its financial position and results of
operations.