2GO GROUP, INC. AND SUBSIDIARIES

Transcription

1 2GO GROUP, INC. AND SUBSIDIARIES CERTIFIED CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY SCHEDULES FOR THE SECURITIES AND EXCHANGE COMMISSION DECEMBER 31, 2012

2 2GO GROUP, INC. Formerly ATS Consolidated (ATSC), Inc. CERTIFIED CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY SCHEDULES FOR THE SECURITIES AND EXCHANGE COMMISSION TABLE OF CONTENTS EXHIBIT I Statement of Management s Responsibility for Consolidated Financial Statements Independent Auditors Report on the Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2012 and 2011 Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 Consolidated Statements of Changes in Equity for the years ended December 31, 2012, 2011 and 2010 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 Notes to Consolidated Financial Statements EXHIBIT II SUPPLEMENTARY SCHEDULES Report of Independent Auditors on Supplementary Schedules Schedule I List of Philippine Financial Reporting Standards (PFRS) effective as at December 31, 2012 and List of New and Amended Accounting Standards and Interpretations and Improvements to PFRS that became effective as at January 1, 2012 Schedule II Financial Soundness Indicators Schedule III Retained Earnings Available for Dividend Declaration Schedule IV Supplementary Schedules Required by Paragraph 6D, Part II Under SRC Rule 28, As Amended (2011) Schedule V Map of the Conglomerate or Group of Companies of the Registrant Showing the relationships between and among the company and its ultimate parent company, middle parent, subsidiaries or cosubsidiaries, and associates EXHIBIT III LAND, BUILDINGS AND WAREHOUSES EXHIBIT IV SUBSIDIARIES OF THE REGISTRANT 2GO Group, Inc. has consolidated subsidiaries that are wholly-owned namely: Name 2GO Express, Inc. (Incorporated on July 20, 1978) Supercat Fast Ferry Corporation (Incorporated on June 20, 2001) NN-ATS Logistics Management & Holdings, Inc. (Incorporated on November 22, 2011) Special Container and Value Added Services, Inc. (Incorporated on March 08, 2011) Jurisdiction Philippines Philippines Philippines Philippines EXHIBIT V Company Undertaking to make available the SEC Form 17-Q for the Quarter Ended March 31, 2013 to its Stockholders during its Annual Meeting on 10 June 2012

3 2GO GROUP, INC. AND SUBSIDIARIES Exhibit I 2012 Audited Consolidated Financial Statements

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5 2GO Group, Inc. [formerly ATS Consolidated (ATSC), Inc.] and Subsidiaries Consolidated Financial Statements As at December 31, 2012 and 2011 and Years Ended December 31, 2012, 2011 and 2010 and Independent Auditors Report SyCip Gorres Velayo & Co.

6 COVER SHEET SEC Registration Number 2 G O G R O U P, I N C. [ f o r m e r l y A T S C o n s o l i d a t e d ( A T S C ), I n c.] A N D S U B S I D I A R I E S (Company s Full Name) 1 2 t h F l o o r, T i m e s P l a z a B u i l d i n g U n i t e d N a t i o n s A v e n u e c o r n e r T a f t A v e n u e, E r m i t a, M a n i l a (Business Address: No. Street City/Town/Province) Jeremias E. Cruzabra (02) (Contact Person) (Company Telephone Number) A A C F S Month Day (Form Type) Month Day (Fiscal Year) (Annual Meeting) (Secondary License Type, If Applicable) CFD Articles 1, 2 and 3 Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings 1,965 Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document ID Cashier S T A M P S Remarks: Please use BLACK ink for scanning purposes.

7 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Phone: (632) Fax: (632) BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No FR-3 (Group A), November 15, 2012, valid until November 16, 2015 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors 2GO Group, Inc. 12th Floor, Times Plaza Building United Nations Avenue corner Taft Avenue Ermita, Manila We have audited the accompanying consolidated financial statements of 2GO Group, Inc. [formerly ATS Consolidated (ATSC), Inc.] and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012 and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited

8 - 2 - Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of 2GO Group, Inc. and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012, in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Josephine H. Estomo Partner CPA Certificate No SEC Accreditation No AR-3 (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No BIR Accreditation No , April 11, 2012, valid until April 10, 2015 PTR No , January 2, 2013, Makati City April 12, 2013

9 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) December ASSETS Current Assets Cash and cash equivalents (Note 6) P=787,834 P=906,263 Trade and other receivables (Notes 7 and 23) 2,806,797 2,898,193 Inventories (Note 8) 370, ,441 Other current assets (Note 9) 924, ,229 4,889,666 5,208,126 Assets held for sale (Note 10) 359, ,617 Total Current Assets 5,248,865 5,900,743 Noncurrent Assets Property and equipment (Notes 14 and 21) 4,575,654 4,651,107 Available-for-sale investments (Note 11) 8,735 9,377 Investments in associates (Note 12) 119,852 99,777 Investment property (Note 15) 9,763 9,763 Software development costs (Note 16) 10,814 13,826 Deferred income tax assets - net (Note 29) 793, ,101 Goodwill (Note 5) 250, ,450 Other noncurrent assets (Note 17) 197, ,940 Total Noncurrent Assets 5,966,468 6,231,341 TOTAL ASSETS P=11,215,333 P=12,132,084 LIABILITIES AND EQUITY Current Liabilities Loans payable (Note 18) P=1,384,130 P=1,215,440 Trade and other payables (Notes 19 and 23) 3,528,012 3,432,208 Income tax payable 7,235 5,501 Redeemable preferred shares (Notes 22 and 24) 6,882 25,938 Current portions of: Long-term debts (Note 20) 993, ,716 Obligations under finance lease (Notes 14 and 21) 77,724 30,174 Total Current Liabilities 5,997,302 5,494,977 Noncurrent Liabilities Long-term debts - net of current portion (Note 20) 2,185,297 3,178,027 Obligations under finance lease - net of current portion (Notes 14 and 21) 44,857 91,936 Accrued retirement benefits (Note 28) 58,900 52,182 Deferred income tax liabilities - net (Note 29) Other noncurrent liabilities 9,030 8,409 Total Noncurrent Liabilities 2,298,423 3,330,823 Total Liabilities 8,295,725 8,825,800

10 - 2 - December Equity Attributable to the equity holders of the Parent Company: Share capital (Note 24) 2,484,653 2,484,653 Additional paid-in capital 910, ,901 Acquisitions of non-controlling interests (Note 24) 5,940 5,940 Excess of cost over net assets of investments (Note 24) (10,906) (10,906) Unrealized gain on available-for-sale investments (Note 11) Share in cumulative translation adjustments of associate (Note 12) 5,294 5,294 Deficit (Note 24) (446,241) (49,698) Treasury shares (Note 24) (58,715) (58,715) 2,891,322 3,287,748 Non-controlling interests 28,286 18,536 Total Equity 2,919,608 3,306,284 TOTAL LIABILITIES AND EQUITY P=11,215,333 P=12,132,084 See accompanying Notes to Consolidated Financial Statements.

11 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except Loss Per Share Amount) Years Ended December CONTINUING OPERATIONS REVENUES Freight (Note 23) P=6,329,111 P=5,678,386 P=5,326,108 Passage 2,439,483 2,383,978 2,179,066 Sale of goods 2,128,009 3,028,658 2,565,741 Service fees (Note 23) 1,840,776 1,251,132 1,063,616 Food and beverage 375, , ,596 Others 611, , ,765 13,724,626 12,970,813 11,610,892 COSTS AND EXPENSES (Note 25) Operating 9,522,663 8,192,290 7,093,436 Terminal 1,072,581 1,495,409 1,473,979 Cost of goods sold (Note 8) 1,932,836 2,601,539 2,206,641 Overhead 1,113,036 1,033,605 1,476,029 13,641,116 13,322,843 12,250,085 OTHER INCOME (CHARGES) Impairment loss on assets held for sale and property and equipment (Notes 10 and 14) (223,644) (778,830) Equity in net earnings (loss) of associates (Note 12) 34,985 (14,525) 40,207 Interest and financing charges (Note 26) (400,739) (407,548) (228,781) Others - net (Note 26) 147, ,868 70,706 (218,570) (345,849) (896,698) LOSS BEFORE INTEGRATION COSTS (135,060) (697,879) (1,535,891) INTEGRATION COSTS (Note 27) (123,025) LOSS BEFORE INCOME TAX FROM CONTINUING OPERATIONS (135,060) (820,904) (1,535,891) PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 29) 251,154 (195,300) (421,467) LOSS FROM CONTINUING OPERATIONS (386,214) (625,604) (1,114,424) NET INCOME FROM DISCONTINUED OPERATIONS (Note 30) 359,049 NET LOSS (P=386,214) (P=625,604) (P=755,375) (Forward)

12 - 2 - Years Ended December ATTRIBUTABLE TO: Equity holders of the Parent Company: Net loss from continuing operations (P=396,543) (P=634,267) (P=1,114,113) Net income from discontinued operations 305,433 (396,543) (634,267) (808,680) Non-controlling interests: Net income (loss) from continuing operations 10,329 8,663 (311) Net income from discontinued operations 53,616 10,329 8,663 53,305 (P=386,214) (P=625,604) (P=755,375) LOSS PER COMMON SHARE (Note 32) Basic/diluted, for loss attributable to equity holders of the Parent Company (P=0.16) (P=0.26) (P=0.33) Basic/diluted, for loss from continuing operations attributable to equity holders of the Parent Company (P=0.16) (P=0.26) (P=0.46) Basic/diluted, for loss from discontinued operations attributable to equity holders of the Parent Company P= P= (P=0.13) See accompanying Notes to Consolidated Financial Statements.

13 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) Years Ended December NET LOSS (P=386,214) (P=625,604) (P=755,375) OTHER COMPREHENSIVE INCOME (LOSS) Net fair value changes of AFS investments (Note 11) ,286 Realized loss (gain) on sale of AFS investments (Note 11) (17,662) 138 (17,325) 12,286 Changes in cumulative translation adjustment (Note 12) (647) (2,217) 138 (17,972) 10,069 TOTAL COMPREHENSIVE LOSS FOR THE YEAR (P=386,076) (P=643,576) (P=745,306) ATTRIBUTABLE TO: Equity holders of the Parent Company Total comprehensive loss from continuing operations (P=396,426) (P=649,883) (P=1,104,582) Total comprehensive income from discontinued operations 305,433 (396,426) (649,883) (799,149) Non-controlling interest Total comprehensive income (loss) from continuing operations 10,350 6, Total comprehensive income from discontinued operations 53,616 10,350 6,307 53,843 (P=386,076) (P=643,576) (P=745,306) See accompanying Notes to Consolidated Financial Statements.

14 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (Amounts in Thousands) Share Capital (Note 24) Additional Paid-in Capital Acquisition of Noncontrolling Interests (Note 24) Attributable to Equity Holders of the Parent Company Excess of Share in Cost Unrealized Cumulative Over Net Gain Translation Assets on Availablefor-sale Adjustment of of an Investments Investments Associate (Note 24) (Note 11) (Note 12) Retained Earnings (Deficit) (Note 24) Treasury Shares (Note 24) Total Noncontrolling Interests Total Equity BALANCES AT DECEMBER 31, 2009 P=2,484,653 P=910,901 P=5,940 (P=11,700) P=18,312 (P=1,513) P=1,760,853 (P=58,715) P=5,108,731 P=50,841 P=5,159,572 Net income for the year (808,680) (808,680) 53,305 (755,375) Other comprehensive income 7,925 1,606 9, ,069 Total comprehensive loss for the year 7,925 1,606 (808,680) (799,149) 53,843 (745,306) Cash dividends at P=0.15 per share (Note 23) (367,604) (367,604) (367,604) Dividend distribution to non-controlling interests (Note 24) (46,670) (46,670) Non-controlling interest of acquired subsidiaries (Note 6) 10,877 10,877 Excess of net asset over cost of investments (Note 24) 2,834 2,834 2,834 Discontinued operations (Note 30) (10,989) 5,848 (5,141) (52,452) (57,593) BALANCES AT DECEMBER 31, ,484, ,901 5,940 (8,866) 15,248 5, ,569 (58,715) 3,939,671 16,439 3,956,110 Net Income (loss) for the year (634,267) (634,267) 8,663 (625,604) Other comprehensive loss (14,969) (647) (15,616) (2,356) (17,972) Total comprehensive loss for the year (14,969) (647) (634,267) (649,883) 6,307 (643,576) Dividend distribution to non-controlling interests (Note 24) (4,210) (4,210) Excess of net asset over cost of investments (Note 24) (2,040) (2,040) (2,040) BALANCES AT DECEMBER 31, ,484, ,901 5,940 (10,906) 279 5,294 (49,698) (58,715) 3,287,748 18,536 3,306,284 Net Income (loss) for the year (396,543) (396,543) 10,329 (386,214) Other comprehensive income Total comprehensive loss for the year 117 (396,543) (396,426) 10,350 (386,076) Dividend distribution to non-controlling interests (600) (600) BALANCES AT DECEMBER 31, 2012 P=2,484,653 P=910,901 P=5,940 (P=10,906) P=396 P=5,294 (P=446,241) (P=58,715) P=2,891,322 P=28,286 P=2,919,608 See accompanying Notes to Consolidated Financial Statements.

15 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Loss from continuing operations before income tax (P=135,060) (P=820,904) (P=1,535,891) Income from discontinued operations before income tax (Note 30) 386,282 Loss before income tax (135,060) (820,904) (1,149,609) Adjustments for: Depreciation and amortization of property and equipment (Note 14) 924,504 1,046,188 1,281,753 Amortization of development costs (Note 16) 10,761 37,683 67,120 Interest and financing charges (Note 26) 400, , ,121 Interest income (Note 26) (59,698) (61,108) (18,850) Unrealized foreign exchange gain (4,343) (10,320) Dividend income (912) (281) (1,313) Equity in net loss (earnings) of associates (Note 12) (34,985) 14,525 (40,207) Provisions for impairment loss on: Assets held for sale (Note 10) 223,644 Property and equipment (Note 14) 778,830 Goodwill (Note 5) 6,013 Loss (gain) on disposals of: Assets held for sale (Notes 10 and 26) 201,715 Property and equipment (Notes 14 and 26) (98,978) (11,447) 28,263 Asset swap (5,896) AFS investments (Note 26) (17,662) (57,895) Investments in subsidiaries (Notes 5 and 30) (300,904) Income from reversal of liabilities (Note 26) 182,984 (127,020) Gain on insurance claims (Note 26) (2,086) (34,568) (18,528) Retirement expense - net (Note 28) 8,709 86,390 21,780 Operating cash flows before working capital changes 1,393, , ,358 Decrease (increase) in: Trade and other receivables 93,482 (755,797) (554,512) Inventories (15,305) 156,718 (54,040) Other current assets 155, ,969 (315,132) Increase (decrease) in: Trade and other payables (105,458) (676,725) 772,937 Other noncurrent liabilities 621 Provision for cargo losses and damages 22,978 19,098 Net cash from (used in) operations 1,545,094 (370,749) 685,611 Income taxes paid, including creditable withholding taxes (163,162) (152,918) (85,337) Net cash flows from (used in) operating activities 1,381,932 (523,667) 600,274 (Forward)

16 - 2 - Years Ended December CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property and equipment (Note 14) (P=846,366) (P=397,992) (P=3,666,121) Software development costs (Note 16) (7,929) (6,333) (4,399) Proceeds from sale of: Available-for-sale investments (Note 11) 1,200 20,378 64,907 Assets held for sale (Note 10) 151,950 Property and equipment (Note 14) 160, , ,900 Investment in a subsidiary (Note 30) 399,908 Interest received 59,698 61,108 19,047 Dividends received (Notes 12 and 26) 15, ,313 Receipts of (payments for) various deposits 33,091 (3,246) (2,153) Disposal cost of investment in subsidiary (Note 30) (32,041) Cash from acquired subsidiaries (Note 24) 40,485 Cash attributable to discontinued operations (Note 30) (189,845) Proceeds from insurance claims 50, ,711 Net cash flows from (used in) investing activities (431,749) 285,738 (3,391,196) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Availments of loans payable (Note 18) 1,121, , ,750 Long-term debts (Note 20) 4,000,000 1,975,000 Payments of: Loans payable (Note 18) (952,653) (1,707,900) Long-term debts (Note 20) (800,000) (2,000,000) Obligations under finance lease (37,830) (100,633) (6,866) Interest and financing charges (Notes 18, 20 and 21) (378,034) (363,282) (230,335) Debt transaction costs (Note 20) (48,915) Redemption of preferred shares (Note 22) (20,481) Dividends paid (Note 24) (2,040) (365,976) (46,670) Dividends paid to non-controlling interests (600) (4,210) Net cash flows from (used in) financing activities (1,070,295) 339,524 2,499,879 EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,683 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (118,429) 101,595 (291,043) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 906, ,668 1,095,711 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 6) P=787,834 P=906,263 P=804,668 See accompanying Notes to Consolidated Financial Statements.

17 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Number of Shares, Earnings per Common Share, Exchange Rate Data and When Otherwise Indicated) 1. Corporate Information and Approval of Consolidated Financial Statements Corporate Information 2GO Group, Inc. [2GO or the Company, formerly ATS Consolidated (ATSC), Inc.] was incorporated in the Philippines on May 26, Its corporate life was renewed on May 12, 1995 and will expire on May 25, The Company s shares of stocks are listed in the Philippine Stock Exchange (PSE). The Company and its subsidiaries (collectively referred to as the Group ) are primarily engaged in the business of operating vessels, motorboats and other kinds of watercrafts; aircrafts and trucks; and acting as agent for domestic and foreign shipping companies for purposes of transportation of cargoes and passengers by air, land and sea within the waters and territorial jurisdiction of the Philippines. The Company s registered office address is 12 th Floor, Times Plaza Building, United Nations Avenue corner Taft Avenue, Ermita, Manila. As of December 31, 2012 and 2011, the Company is 88.3% and 98.1%-owned subsidiary of Negros Navigation Co., Inc (NN or the Parent Company), respectively. Its ultimate parent is Negros Holdings & Management Corporation (NHMC). NN and NHMC are both incorporated and domiciled in the Philippines. On December 1, 2010, the Board of Directors (BOD) of Aboitiz Equity Ventures, Inc. (AEV) and Aboitiz & Company, Inc. (ACO) approved the sale of their shareholdings in the Parent Company to NN in accordance with the securities and purchase agreements executed among AEV, ACO and NN. On December 28, 2010, the sale was finalized at P= per share. AEV sold its entire shareholdings in the Company comprising of 1,889,489,607 common shares for P=3.6 billion. ACO, on the other hand, sold its entire shareholdings in the Company comprising of 390,322,384 common shares for P=734.0 million. This resulted to 93.2% NN ownership of the outstanding common shares of the Company, along with all the Company s non-controlling shares that may be tendered to NN subsequent to December 31, On February 22, 2011, in relation to the tender offer issued by NN for the outstanding common shares held by public shareholders of the Company, NN acquired 120,330,004 common shares from the Company s non-controlling shareholders equivalent to 4.9% additional ownership interest in the Company for a total purchase price of P=226.4 million. As a result, NN s ownership interest in the Company increased to 98.10%. On December 21, 2012, NN sold 240,000,000 common shares of the Company at a price of P=1.65 per share to the public shareholders. The sale of shares resulted to a reduction in the ownership of NN in the Company from 98.1% to 88.3%. Pursuant to the securities and purchase agreements, the Company and its subsidiaries applied for the change in corporate names, which was approved by the Philippine Securities and Exchange Commission (SEC) on various dates in On December 29, 2011, the BOD approved the change in corporate branding of the Group to 2GO Logistics Group or variants thereto, resulting to another revision in the corporate names of the Company and its subsidiaries upon approval by the Philippine SEC. In February and March 2012, the Philippine SEC approved the application of the Company and its subsidiaries to change their Articles of Incorporation and By-laws, which include, among others, the change in their corporate names to 2GO Group, Inc. (formerly ATSC),

18 2GO Express, Inc. [formerly ATS Express, Inc. (ATSEI)], and 2GO Logistics, Inc. [formerly ATS Distribution, Inc. (ATSDI)]. On August 24, 2011, the Philippine SEC also approved the amendment to the Company s secondary purpose to include rendering technical services requirement to customers for refrigerated marine container vans and related equipment or accessories. This amendment was previously approved by the BOD on April 28, 2011 and ratified by the stockholders on June 22, Status of Operations and Management Action Plans As of December 31, 2011, NN and its subsidiaries (collectively referred to as NN Group ) has reported a consolidated deficit amounting to P=1,607.2 million due to the consolidated net losses incurred in 2011 and 2010 amounting to P=1,391.5 million and P=107.1 million, respectively. The consolidated net loss in 2010 (pre-integration year) included the net operating income of NN but was reduced by the transaction costs incurred in acquiring 2GO and subsidiaries. The 2011 performance was significantly affected by the integration activities that are primarily geared towards achieving economies of scale and realizing the synergies in both the shipping and supply chain operations of NN and 2GO. NN Group incurred additional costs and expenses in view of these integration activities, which include, among others, the consolidation of facilities and the right-sizing of the manpower complement. As a result, NN did not meet the minimum debt service coverage ratio (DSCR) and minimum current ratio and 2GO breached the maximum debt to equity ratio required under the Group s long-term loan agreements with the creditor bank as of December 31, 2011 (see Note 21). This, however, did not affect the status of the loan because the creditor bank issued a waiver on the breach of the loan covenants in its letters to NN and 2GO dated December 28, In 2012 (2 nd phase of the integration), NN Group incurred consolidated net loss amounting to P=94.8 million (after noncontrolling interest), which is 93.2% lower compared to the consolidated net loss reported in This net loss increased the deficit to P=1,705.0 million as of December 31, Despite the improvement in operations, and higher consolidated net cash inflow from operating activities of P=1,478.9 million in 2012 and P=1,092.2 million in 2011, 2GO remained in breach of the maximum debt to equity ratio, including the minimum DSCR and minimum current ratio. This, however, again did not affect the status of the loan because the creditor bank has issued a waiver on the breach of the loan covenants in its letters to 2GO dated December 28, During the year, NN s shareholders agreed to infuse $41.7 million (of which $28.3 million has been remitted in 2012) as additional capital to NN primarily to support working capital requirements and to pay off certain maturing obligations of Group. Having hurdled most of the major integration targets for 2011 and 2012, management is confident that in the ensuing years, it will fully realize the benefits of the integration. NN Group is implementing certain strategies and action plans to achieve positive results on the financial performance, financial condition and cash flows for Among others, these are: a. Continued fleet and route rationalization for the Shipping business and implementation of more aggressive sales and marketing strategies for the Supply Chain business. b. Comprehensive review and implementation of cost saving initiatives, including that of the One Port Project and the maximization of the takeover of the ship management. c. Implementation of a more robust management reporting systems to closely monitor the financial results and operating performance of the business units and ensure that they are all working to attain the revenue and collection targets and the savings from cost containment measures.

19 d. Restructuring of the long-term debt with counter party bank and ensure that NN Group s available cash will be used mainly to cover its operating activities so that all targeted results will be achieved. Approval of Consolidated Financial Statements The consolidated financial statements of the Group as at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 were authorized for issue by the BOD on April 12, Summary of Significant Accounting and Financial Reporting Policies Basis of Preparation The consolidated financial statements are prepared on a historical cost basis, except for quoted available-for-sale (AFS) investments which are measured at fair value. The consolidated financial statements are presented in Philippine peso (Peso), and all values are rounded to the nearest thousands, except when otherwise indicated. Statement of Compliance The consolidated financial statements are prepared in accordance with Philippine Financial Reporting Standards (PFRS). Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year except for the following amended PFRSs which were adopted effective beginning January 1, PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets (Amendments), require additional disclosures about financial assets that have been transferred but not derecognized to enhance the understanding of the relationship between those assets that have not been derecognized and their associated liabilities. In addition, the amendments require disclosures about continuing involvement in derecognized assets to enable users of financial statements to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognized assets. The amendments affect disclosures only and have no impact on the Group s financial position or performance. Philippine Accounting Standards (PAS) 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (Amendment), clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a sale basis. The presumption is rebutted if the investment property is depreciable and it is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time ( use basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset.

20 The Group does not have investment properties carried at fair value. Furthermore, its investment property is classified as ordinary assets for income tax purposes. As the jurisdiction in which the Group operates does not have a different tax charge for sale or use basis of assets classified as ordinary assets for income tax purposes, the amendment has no impact on the consolidated financial statements of the Group. New Accounting Standards, Amendments and Interpretations Effective Subsequent to 2012 The Group will adopt the standards, amendments and interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRSs and Philippine Interpretations to have significant impact on its consolidated financial statements. The relevant disclosures will be included in the notes to the consolidated financial statements when these become effective. Effective in 2013 PFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities, these amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32, Financial Instruments: Presentation and Disclosure. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the consolidated balance sheet; c) The net amounts presented in the consolidated balance sheet; d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and e) The net amount after deducting the amounts in (d) from the amounts in (c) above. The amendments to PFRS 7 are to be retrospectively applied for annual periods beginning on or after January 1, The amendment will affect disclosures only and will have no impact on the Group s financial position or performance. PFRS 10, Consolidated Financial Statements, replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standards Interpretation Committee (SIC-12), Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. The Company assessed whether or not it has control over its subsidiaries in accordance with the new definition of control and the related guidance set out in PFRS 10 and has determined that it has control on all its current subsidiaries and that all

21 its controlled entities will still be included in the 2013 consolidated financial statements. The adoption of the standard will not affect the Group s financial position and performance of the Group. PAS 27, Separate Financial Statements (as revised in 2011), as a consequence of the new PFRS 10 and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities and associates in separate financial statements. The amendment will have no impact on the Group s financial position and performance. PFRS 11, Joint Arrangements, replaces PAS 31, Interests in Joint Ventures, and SIC-13, Jointly-controlled Entities - Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The application of this new standard will impact the consolidated financial statements of the Group. Upon adoption of PFRS 11, the Group s investment in KLN Logistics Holdings Philippines, Inc., a joint venture, will be accounted for under the equity method. Currently, proportionate consolidation is applied for this joint venture. The change in the accounting for this joint venture will decrease total consolidated assets by P=46.1 million as of December 31, 2012 (P=42.3 million as of December 31, 2011) and total consolidated liabilities by P=46.1 million as of December 31, 2012 (P=42.3 million as of December 31, 2011). Consolidated revenues will also decrease by P=216.5 million for the year ended December 31, 2012 (P=175.1 million for the year ended December 31, 2011) while consolidated income before income tax will decrease by P=2.4 million for the year ended December 31, 2012 (P=3.4 million for the year ended December 31, 2011). PAS 28, Investments in Associates and Joint Ventures (as revised in 2011), as a consequence of the new PFRS 11 and PFRS 12, PAS 28, Investment in Associates, has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment will have no impact on the Group s financial position and performance. PFRS 12, Disclosure of Interests in Other Entities, includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The new standard will affect disclosures only and will have no impact on the Group s financial position or performance. PFRS 13, Fair Value Measurement, establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. The adoption of this new standard will not have significant impact on the Group s assets and liabilities carried at fair value. Amendments to PAS 19, Employee Benefits, range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and

22 disaggregation of plan assets by nature and risk. Once effective, the Group has to apply the amendments retroactively to the earliest period presented. The Group reviewed its existing employee benefits and determined that the amended standard will have significant impact on its accounting for retirement benefits. The Group obtained the services of an external actuary to compute the impact to the consolidated financial statements upon adoption of the standard. December 31, 2012 January 1, 2012 Increase (decrease) in: Consolidated Balance Sheets: Retirement benefits asset (P=11,708) (P=6,350) Accrued retirement benefits 62, ,524 Deferred income tax assets 18,697 30,757 Deferred income tax liabilities (3,512) (1,905) Other comprehensive income, net of deferred income tax effect 3,842 (5,967) Deficit 55,663 70,245 Consolidated Statement of Income: Retirement benefits cost (20,831) Provision for income tax - deferred (6,249) Net income for the year 14,582 Consolidated statement of comprehensive income, net of deferred income tax effect 9,809 Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine ( production stripping costs ) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset. This interpretation will have no impact on the Group s financial position or performance. Amendments to PAS 1, Financial Statement Presentation - Presentation of Items of Other Comprehensive Income, change the grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment will affect presentation only and will therefore have no impact on the Group s financial position or performance. Annual Improvements to PFRSs ( cycle) The Annual Improvements to PFRSs ( cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted. PAS 1, Presentation of Financial Statements - Clarification of the Requirements for Comparative Information, clarifies the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an

23 accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments will affect disclosures only and will have no impact on the Group s financial position or performance. PAS 16, Property, Plant and Equipment - Classification of Servicing Equipment, clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment will not have any significant impact on the Group s financial position or performance. PAS 32, Financial Instruments: Presentation - Tax Effect of Distribution to Holders of Equity Instruments, clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that the adoption of this amendment will not have any impact on its financial position or performance. PAS 34, Interim Financial Reporting - Interim Financial Reporting and Segment Information for Total Assets and Liabilities, clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity s previous annual financial statements for that reportable segment. The amendment will affect interim financial reporting disclosures only and will have no impact on the Group s financial position or performance. Effective in 2014 PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities, clarifies the meaning of currently has a legally enforceable right to set-off and also the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, The Group expects that the adoption of this amendment will not have a significant impact on its financial position or performance. Effective in 2015 PFRS 9, Financial Instruments - Classification and Measurement, as issued, reflects the first phase on the replacement of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss.

24 For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The Group has made an initial high-level evaluation of the impact of the adoption of this standard. The Group decided not to early adopt PFRS 9 for its 2012 reporting ahead of its effectivity date on January 1, 2015 and therefore the consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 do not reflect the impact of the said standard. Based on this evaluation, loans and receivables and other financial liabilities, both carried at amortized cost, will not be significantly affected. Upon adoption, these financial instruments shall continue to be carried at amortized cost, thus, the standard will have no impact to the Group s financial position and performance. Further, the Group s investments in equity securities classified as available-for-sale investments would be affected by the adoption of this standard. These investments shall be carried at fair value either through other comprehensive income or through profit or loss upon adoption of this standard. If carried at fair value through profit or loss, the P=0.4 million unrealized gain as of December 31, 2012 will be transferred to retained earnings. If carried at fair value through other comprehensive income, the unrealized gain will stay within equity. The Group shall conduct another impact assessment at the end of the 2013 reporting period using the consolidated financial statements as of and for the year ended December 31, Given the proposed amendments on PFRS 9, the Group at present, does not plan to early adopt in 2013 financial reporting. It plans to reassess its current position once the phases of PFRS 9 on impairment and hedge accounting become effective. The Group s decision whether to early adopt PFRS 9 for its 2013 financial reporting will be disclosed in the consolidated financial statements as of and for the three-month period ending March 31, Effectivity to be determined Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The adoption of this Philippine Interpretation may significantly affect the determination of the revenue from real estate sales and the corresponding costs, and the related contracts receivables, deferred income tax assets and retained earnings accounts. The adoption of this Philippine Interpretation will be accounted for retrospectively, and will result to restatement of prior period financial statements. The Group expects that this amendment will not have any impact on its financial position or performance.

25 Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company and the following wholly-owned and majority-owned subsidiaries, all incorporated in the Philippines, as at December 31 of each year. Percentage of Ownership Subsidiaries Nature of Business Direct Indirect Direct Indirect Direct Indirect 2GO Express, Inc. (2GO Express) 1 and Subsidiaries: Transportation/ Logistics GO Logistics, Inc.(2GO Logistics) 1 Logistics and distribution Scanasia Overseas, Inc. (SOI) Distribution Hapag-Lloyd Philippines, Inc.(HLP) Transportation/ Logistics WRR Trucking Corporation (WTC) 2 Transportation Supercat Fast Ferry Corp. (SFFC) Transporting passenger Special Container and Value Added Services, Inc. 3 Transportation/ Logistics NN-ATS Logistics Management & Holdings Co., Inc. (NALMHCI) 4 Holding Company J&A Services Corporation (JASC) 5 Vessel support services Red Dot Corporation (RDC) 5 Manpower services North Harbor Tugs Corporation (NHTC) 5 Tug assistance Super Terminal Inc. (STI) 5 and 6 Passenger terminal operator Sungold Forwarding Corporation (SFC) 5 Transportation/ logistics Supersail Services Inc. (SSI) 5 Manpower provider W G & A Supercommerce, Inc. (WSI) 7 Vessels hotel management Incorporated in November In various dates in 2011, the Philippine SEC approved the amendments in 2GO Express and 2GO Logistics Articles of Incorporation 2 Acquired in August 2011 by 2GO Express from NN 3 Incorporated in March Acquired by NALMHCI on December 1, 2011 from NN 6 NALMHCI has control over STI since it has the power to cast the majority of votes at the BOD s meeting and the power to govern the financial and reporting policies of STI Closed operations on February 2006 The financial statements of the subsidiaries are prepared for the same reporting year as the Company using consistent accounting policies. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies of the entities so as to obtain benefits from its activities and generally accompanying an interest of more than one-half of the voting rights of the entities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date of acquisition, being the date on which control is transferred to the Group and continue to be consolidated until the date that such control ceases. Non-controlling interest represents a portion of the profit or loss and net assets of subsidiaries not held by the Group, directly or indirectly, and are presented separately in profit or loss and within the equity section of the consolidated balance sheet and consolidated statement of changes in equity, separately from parent s equity. However, the Group must recognize in the consolidated balance sheet a financial liability (rather than equity) when it has an obligation to pay cash in the future (e.g., acquisition of non-controlling interest is required in the contract or regulation) to purchase the non-controlling s shares, even if the payment of that cash is conditional on the option being exercised by the holder. The Group will reclassify the liability to equity if a put option expires unexercised.

26 Non-controlling interest shares in losses, even if the losses exceed the non-controlling equity interest in the subsidiary. Changes in the controlling ownership interest, i.e., acquisition of noncontrolling interest or partial disposal of interest over a subsidiary that do not result in a loss of control, are accounted for as equity transactions. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognized in assets, liabilities and equity, are eliminated in full. A change in the ownership interest in a subsidiary, without a loss of control is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interest Derecognizes the related other comprehensive income like cumulative translation differences, recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the parent s share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred. When the Group acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.

27 Goodwill acquired in a business combination is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the fair values of net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Where goodwill forms part of a cash-generating unit (CGU) or a group of CGUs and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained. When subsidiaries are sold, the difference between the selling price and the net assets plus any other comprehensive income, and fair value of retained interest is recognized in profit or loss. Where there are business combinations in which all the combining entities within the Group are ultimately controlled by the same ultimate parties before and after the business combination and that the control is not transitory ( business combinations under common control ), the Group accounts for such business combinations under the purchase method of accounting, if the transaction was deemed to have substance from the perspective of the reporting entity. In determining whether the business combination has substance, factors such as the underlying purpose of the business combination and the involvement of parties other than the combining entities such as the non-controlling interest, shall be considered. In cases where the business combination has no substance, the Group accounts for the transaction similar to a pooling of interests. The assets and liabilities of the acquired entities and that of the Company are reflected at their carrying values. Comparatives shall be restated to include balances and transactions as if the entities had been acquired at the beginning of the earliest period presented and as if the companies had always been combined. Investments in Associates The following are the associates of the Group as at December 31, 2012 and 2011: Percentage of Ownership Nature of Business Direct Indirect Container MCCP Philippines (MCCP) transportation 33 Hansa-Meyer ATS Projects, Inc. (HATS) Project logistics and consultancy 47 The Group s investments in associates are accounted for under the equity method. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investments in associates are carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group s share of the net assets of the associates. The Group s share in the associates post-acquisition profits or losses is recognized in the consolidated statement of income, and its share of post-acquisition movements in the associates equity reserves is recognized directly in other comprehensive income. When the Group s share of losses in the associates equals or exceeds its interest in the associates, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associates. Profits and losses resulting from transactions between the Group and the associates are eliminated to the extent of the interest in the associate and joint venture.

28 Where necessary, adjustments are made to the financial statements of the associates to bring the accounting policies used in line with those used by the Group. For additional acquisitions resulting to a significant influence over an associate whose original investments were previously held at fair value through other comprehensive income, the changes in fair value previously recognized are reversed through equity reserves to bring the asset back to its original cost. Upon loss of significant influence over the associate, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate and joint venture upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognized either in profit or loss or other comprehensive income in the consolidated statement of comprehensive income. The financial statements of the associate are prepared for the same reporting period as the Parent Company and the associates accounting policies conform to those used by the Group for like transactions and events in similar circumstances. After the application of the equity method, the Group determines whether it is necessary to recognize an additional impairment loss on the Group s investments in associates. The Group determines at the end of each reporting period whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in profit or loss. Interest in a Joint Venture The Group has an interest in a joint venture which is a jointly controlled entity, whereby the joint venture partners have a contractual arrangement that establishes joint control over the economic activities of the entity. The Group recognizes its interest in the joint venture using the proportionate consolidation method. The Group combines its proportionate share of each of the assets, liabilities, income and expenses of the joint venture with similar items, on a line-by-line basis, in its consolidated financial statements. The financial statements of the joint venture are prepared for the same reporting period as the Parent Company. Adjustments are made where necessary to bring the accounting policies in line with those of the Group. Adjustments are made in the Group s consolidated financial statements to eliminate the Group s share of intragroup balances, income and expenses and unrealized gains and losses on transactions between the Group and its jointly controlled entity. Losses on transactions are recognized immediately if the loss provides evidence of a reduction in the net realizable value of current assets or an impairment loss. The joint venture is proportionately consolidated until the date on which the Group ceases to have joint control over the joint venture. Upon loss of joint control and provided the former jointly controlled entity does not become a subsidiary or associate, the Group measures and recognizes its remaining investment at its fair value. Any difference between the carrying amount of the former jointly controlled entity upon loss of joint control and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss. When the remaining investment constitutes significant influence, it is accounted for as investment in an associate.

29 Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, with original maturities of three months or less, and are subject to an insignificant risk of change in value. Financial Instruments Initial recognition Financial assets and financial liabilities are recognized in the consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way purchases) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). If part of consideration given or received is for something other than the financial instrument, the fair value of the financial instrument is estimated using a valuation technique. The initial measurement of financial instruments, except for those financial assets and liabilities at fair value through profit or loss (FVPL), includes transaction costs. Classification of financial instruments On initial recognition, the Group classifies its financial assets in the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments and AFS financial assets. The Group also classifies its financial liabilities into FVPL and other financial liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, reevaluates such designation at the end of each reporting period. 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. Determination of fair value The fair value for financial instruments traded in active markets at the end of reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If the financial instruments are not listed in an active market, the fair value is determined using appropriate valuation techniques which include recent arm s length market transactions, net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. The fair value of the Group s financial instruments are presented in Note 36. Fair value measurement hierarchy The Group categorizes its financial asset and financial liability based on the lowest level input that is significant to the fair value measurement. The fair value hierarchy has the following levels: (a) Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities accessible by the Group; (b) Level 2 - inputs that are

30 observable in the marketplace other than those classified as Level 1; and (c) Level 3 - inputs that are unobservable in the marketplace and significant to the valuation. Subsequent measurement The subsequent measurement of financial assets and financial liabilities depends on their classification as follows: a. Financial assets and financial liabilities at FVPL Financial assets or financial liabilities classified in this category are financial assets or financial liabilities that are held for trading or financial assets and financial liabilities that are designated by management as at FVPL on initial recognition when any of the following criteria are met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or the assets and liabilities are part of a group of financial assets and financial liabilities, respectively, or both financial assets and financial liabilities, which are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Financial assets are classified as held for trading if these are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets and financial liabilities at FVPL are recorded in the consolidated balance sheet at fair value. Changes in fair value are recorded in profit or loss. Interest earned is recorded as interest income, while dividend income is recorded in other income according to the terms of the contract, or when the right of the payment has been established. Interest incurred is recorded as interest expense. As at December 31, 2012 and 2011, the Group has not designated any financial asset or financial liability at FVPL. Embedded derivatives An embedded derivative is separated from the host financial or nonfinancial contract and accounted for as derivative if all the following conditions are met: the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristic of the host contract; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid or combined instrument is not recognized at FVPL.

31 The Group assesses whether embedded derivatives are required to be separated from host contract when the Group first becomes a party to the contract. Reassessment only occurs if there is change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Embedded derivatives that are bifurcated from the host contracts are accounted for as financial asset at FVPL. Changes in the fair values are included in profit or loss. As at December 31, 2012 and 2011, the Group has no embedded derivative. b. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, they are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. Loans and receivables are carried at amortized cost using the effective interest rate method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. Loans and receivables are included in current assets if maturity is within 12 months from the end of reporting period. As at December 31, 2012 and 2011, financial assets included under this classification are the Group s cash in banks, cash equivalents, trade and other receivables, and refundable deposits (presented as part of Other noncurrent assets in the consolidated balance sheet). c. HTM investments HTM investments are quoted non-derivative financial assets which carry fixed or determinable payments and fixed maturities and which the Group has the positive intention and ability to hold to maturity. After initial measurement, HTM investments are measured at amortized cost using the effective interest rate method. This method uses an effective interest rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. Gains and losses are recognized in profit or loss when the investments are derecognized or impaired, as well as through the amortization process. As at December 31, 2012 and 2011, the Group has no HTM investments. d. AFS investments AFS investments are those non-derivative financial assets which are designated as such or do not qualify to be classified as financial assets designated at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are measured at fair value with unrealized gains or losses recognized in the consolidated statement of comprehensive income and consolidated statement of changes in equity in the Unrealized gain on AFS investments until the AFS investments is derecognized, at which time the cumulative gain or loss recorded in equity is recognized in profit or loss. Assets under this category are classified as current assets if expected to be realized within 12 months from the end of reporting period and as noncurrent assets if maturity date is more than a year from the end of reporting period.

32 As at December 31, 2012 and 2011, financial assets included as part of the Group s AFS investments are investment in quoted and unquoted shares of stock and club shares. e. Other financial liabilities This classification pertains to financial liabilities that are not designated as at FVPL upon the inception of the liability. Included in this category are liabilities arising from operations or borrowings. The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest rate method of amortization (or accretion) for any related premium (discount) and any directly attributable transaction costs. As at December 31, 2012 and 2011, financial liabilities included under this classification are the Group s loans payable, trade and other payables, long-term debt, obligations under finance lease, redeemable preferred shares, and other noncurrent liabilities. Classification of Financial Instruments between Debt and Equity Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest relating to a financial instrument or a component that is a financial liability is reported as expenses. A financial instrument is classified as debt if it provides for a contractual obligation to: deliver cash or another financial asset to another entity; or exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. Redeemable preferred shares (RPS) The component of the RPS that exhibits characteristics of a liability is recognized as a liability in the consolidated balance sheet, net of transaction costs. The corresponding dividends on those shares are charged as interest expense in profit or loss. On issuance of the RPS, the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond; and this amount is carried as a long term liability on the amortized cost basis until extinguished on conversion or redemption.

33 Day 1 Difference Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit and loss) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 profit or loss amount. Offsetting of Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated balance sheet. Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through agreement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. In such case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Financial liability A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired.

34 When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such 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. Impairment of Financial Assets The Group assesses at the end of each reporting period whether a financial asset or group of financial assets is impaired. Loans and receivables For loans and receivables carried at amortized cost, the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines 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 there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the financial asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent period, the amount of the impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or decreased by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in profit or loss, 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. AFS investments For AFS investments, the Group assesses at the end of each reporting period whether there is objective evidence that an investment or group of investment is impaired. In the case of equity investments classified as AFS investments, objective evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. The Group treats significant generally as 20% or more and prolonged as greater than 12 months for quoted equity securities. Where there is evidence of impairment, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss) is removed from equity and recognized in profit or loss. Impairment losses on equity investments are not reversed through profit or loss. Increases in fair value after impairment are recognized in other comprehensive income.

35 In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of Interest income in profit or loss. If, in subsequent period, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through profit or loss. Inventories Inventories are valued at the lower of cost or net realizable value (NRV). Cost comprises all cost of purchase and other costs incurred in bringing the inventories to their present location or condition. Cost is determined using weighted average method for trading goods, moving average method for materials, parts and supplies, flight equipment expendable parts and supplies, and the first-in, first-out method for truck and trailer expendable parts, fuel, lubricants and spare parts. NRV of the trading goods is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. NRV of materials and supplies is the current replacement cost. An allowance for inventory obsolescence is provided for damaged goods based on analysis and physical inspection. Asset Held for Sale and Discontinued Operation Assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within 12 months from the date of classification. Property and equipment once classified as held for sale are not depreciated or amortized. If there are changes to a plan of sale, and the criteria for the asset or disposal group to be classified as held for sale are no longer met, the Group ceases to classify the asset or disposal group as held for sale and it shall be measured at the lower of: (a) its carrying amount before the asset was classified as held for sale adjusted for any depreciation, amortization or revaluations that would have been recognized had the asset not been classified as held for sale, and (b) its recoverable amount at the date of the subsequent decision not to sell. The Group includes any required adjustment to the carrying amount of a noncurrent asset or disposal group that ceases to be classified as held for sale in profit or loss from continuing operations in the period in which the criteria for the asset or disposal group to be classified as held for sale are no longer met. The Group presents that adjustment in the same caption in profit or loss used to present a gain or loss recognized, if any. In the consolidated statement of income of the reporting period, and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from normal income and expenses down to the level of profit after taxes, even when the Group retains a non-controlling interest in the asset after the sale. The resulting profit or loss (after taxes) is reported separately in profit or loss.

36 Property and Equipment Property and equipment, other than land, are carried at cost, less accumulated depreciation, amortization and impairment losses, if any. The initial cost of property and equipment consists of its purchase price and costs directly attributable to bringing the asset to its working condition for its intended use. When significant parts of property and equipment are required to be replaced in intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciation, respectively. Land is carried at cost less accumulated impairment losses. Subsequent expenditures relating to an item of property and equipment that have already been recognized are added to the carrying amount of the asset when the expenditure have resulted in an increase in future economic benefits, in excess of the originally assessed standard of performance of the existing asset, that will flow to the Group. Expenditures for repairs and maintenance are charged to the operations during the year in which they are incurred. Drydocking costs, consisting mainly of engine overhaul, replacement of steel plate of the vessels hull and related expenditures, are capitalized as a separate component of Vessels in operations. When significant drydocking costs are incurred prior to the end of the amortization period, the remaining unamortized balance of the previous drydocking cost is charged against profit or loss. Vessels under refurbishment, if any, include the acquisition cost of the vessels, the cost of ongoing refurbishments and other direct costs. Construction in progress represents structures under construction and is stated at cost. This includes cost of construction and other direct costs. Borrowing costs that are directly attributable to the refurbishment of vessels and construction of property and equipment are capitalized during the refurbishment and construction period. Vessels under refurbishment and construction in progress are not depreciated until such time the relevant assets are complete and available for use. Refurbishments of existing vessels are capitalized as part of vessel improvements and depreciated at the time the vessels are put back into operation. Vessel on lay-over, if any, represents vessel for which drydocking has not been done pending availability of the necessary spare parts. Such vessels, included under the Property and equipment account in the consolidated balance sheet are stated at cost less accumulated depreciation and any impairment in value. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the property and equipment as follows: Number of Years Vessels in operation, excluding drydocking costs and vessel equipment and improvements Drydocking costs 2 1 / 2-5 Vessel equipment and improvements 3-5 Containers and reefer vans 5-10 Handling equipment 5-7 Furniture and other equipment 3-5 Land improvements 5-10 Buildings and warehouses 5-20 Transportation equipment 5-10 Leasehold improvements are amortized over their estimated useful lives of 5-20 years or the term of the lease, whichever is shorter. Flight equipment is depreciated based on the estimated number of flying hours.

37 Depreciation or amortization commences when an asset is in its location or condition capable of being operated in the manner intended by management. Depreciation or amortization ceases at the earlier of the date that the item is classified as held for sale in accordance with PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, and the date the asset is derecognized. The asset s residual values, useful lives and depreciation and amortization methods are reviewed at each reporting period, and adjusted prospectively if appropriate. Fully depreciated assets are retained in the accounts until these are no longer in use. When property and equipment are sold or retired, their cost and accumulated depreciation and amortization and any allowance for impairment in value are eliminated from the accounts and any gain or loss resulting from their disposal is included in profit or loss. Investment Property Investment property, consisting of a parcel of land of 2GO Express, is measured at cost less any impairment in value. Subsequent costs are included in the asset s carrying amount only when it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the item can be measured reliably. Derecognition of an investment property will be triggered by a change in use or by sale or disposal. Gain or loss arising on disposal is calculated as the difference between any disposal proceeds and the carrying amount of the related asset, and is recognized in the consolidated statement of income. Transfers are made to investment property when, and only when, there is change in use, evidenced by cessation of owner-occupation, commencement of an operating lease to another party or completion of construction or development, transfers are made from investment property when, and only when, there is a change in used, evidenced by commencement of owner-occupation or commencement of development with a view to sale. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of the acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is reflected in profit or loss in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Software development costs Software development costs are initially recognized at cost. Following initial recognition, the software development costs are carried at cost less accumulated amortization and any accumulated impairment in value. The software development costs is amortized on a straight-line basis over its estimated useful economic life of three to five years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization commences when the software development costs is available for use. The amortization period and the amortization method for the software development costs are reviewed at each reporting period. Changes in the estimated useful life is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense is recognized in profit or loss in the expense category consistent with the function of the software development costs.

38 Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized. Impairment of Nonfinancial Assets The Group assesses at the end of each reporting period whether there is an indication that nonfinancial asset may be impaired. If any such indication exists, or when annual impairment testing for nonfinancial asset is required, the Group makes an estimate of the asset s recoverable amount. An asset s estimated recoverable amount is the higher of an asset s or CGU s fair value less costs to sell and its value in use (VIU) 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 or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing VIU, 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. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses of continuing operations are recognized in profit or loss in those expense categories consistent with the function of the impaired asset. A previously recognized impairment loss is reversed only if there has been a change in the assumptions 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 or amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation or amortization expense 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 Group s nonfinancial assets consist of creditable withholding taxes (CWTs), input value added tax (VAT), prepaid expenses, other current assets, assets held for sale, property and equipment, investment property, investments in associates, software development costs, deferred input VAT and retirement benefit asset. Goodwill Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGU) to which the goodwill relates. Where the recoverable amount of CGU (or group of CGUs) is less than their carrying amount, an impairment loss is recognized immediately in profit or loss of the CGU (or the group of CGUs) to which goodwill has been allocated. Impairment losses relating to goodwill cannot be reversed in future periods.

39 Provisions and Contingencies Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable. Equity Share capital is measured at par value for all shares issued. When the Parent Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. Additional paid-in capital (APIC) is the difference between the proceeds and the par value when the shares are sold at a premium. Contributions received from shareholders are recorded at the fair value of the items received with the credit going to share capital and any excess to APIC. Deficit represents the cumulative balance of net income or loss, net of any dividend declaration and other capital adjustments. Treasury shares are own equity instruments that are reacquired. Treasury shares are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of the Group s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized as APIC. Voting rights related to treasury shares are nullified for the Group and no dividends are allocated to them. Other comprehensive income comprises items of income and expenses that are not recognized in profit or loss for the year. Other comprehensive income of the Group includes net changes in fair value of AFS investments and share in other comprehensive income of an associate. Revenue Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT or duties. The Group assesses its revenue arrangement against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements. The specific recognition criteria for each type of revenue are as follows: Freight and passage revenues are recognized when the related services are rendered. Customer payments for services which have not yet been rendered are classified as unearned revenue under Trade and other payables in the consolidated balance sheet. Service fees are recognized when the related services have been rendered. Service fees are also recognized when cargos are received by either shippers or consignee for export and import transactions. These amounts are presented, net of certain costs which are reimbursed by customers. Revenue from sale of goods is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is upon delivery of the goods and acceptance of the buyer and the amount of revenue can be measured reliably.

40 Revenue from sale of food and beverage is recognized upon delivery and acceptance by customers. Vessel lease revenues from short-term leasing arrangements are recognized in accordance with the terms of the lease agreements. Manning and crewing services revenue is recognized upon embarkation of qualified ship crew based on agreed rates and when the corresponding training courses have been conducted. Management fee is recognized when the related services are rendered. Commissions are recognized as revenue in accordance with the terms of the agreement with the principal and when the related services have been rendered. Rental income arising from operating leases is recognized on a straight-line basis over the lease term. Interest income is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Dividend income is recognized when the shareholders right to receive the payment is established. Costs and Expenses Costs and expenses are recognized in profit or loss when decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if any of the following applies: a. there is a change in contractual terms, other than a renewal or extension of the arrangement; b. a renewal option is exercised and extension granted, unless the term of the renewal or extension was initially included in the lease term; c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or d. there is a substantial change to the asset. When a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances give rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b). The Group as a lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized directly in profit or loss.

41 Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in profit or loss on a straight-line basis over the lease term. The Group as a lessor Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as rental income. Contingent rents are recognized as revenue in the period in which they are earned. Borrowing Costs 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 necessary to prepare the asset for intended use are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the asset is available for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, as well as exchange differences arising from foreign currency borrowings used to finance these projects, to the extent that they are regarded as an adjustment to interest costs. All other borrowing costs are expensed as incurred. Retirement Benefits The Group has defined retirement benefit plans, which require contributions to be made to separately administered funds. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans. 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 asset or liability comprises the present value of the defined benefit obligation, less past service costs and actuarial gains and losses not yet recognized and less the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Group, nor can they be paid directly to the Group. Fair value is based on market price information and in the case of quoted securities it is the published bid price. The value of any defined benefit asset recognized is restricted to the sum of any past service costs and actuarial gains and losses not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. Taxes Current income tax Current income tax assets and liabilities for the current periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used

42 to compute the amount are those that are enacted at the end of each reporting period, in the countries where the Group operates and generates taxable income. Current income tax relating to items recognized directly in equity is recognized in equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred income tax Deferred income tax is provided, using the liability method, on all temporary differences at the financial reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from excess of minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient future taxable profits will be available against which the deductible temporary differences, carryforward benefits of unused tax credits from excess of MCIT over RCIT and unused NOLCO can be utilized. Deferred income tax liabilities are recognized for all taxable temporary differences. 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 or loss nor taxable profit or loss. Deferred income tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries, associates and interest in joint ventures. With respect to investments in other subsidiaries, associates and interests in joint ventures, deferred income tax liabilities are recognized except when 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 reporting date and reduced to the extent that it is no longer probable that sufficient future taxable income will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that sufficient future taxable profits will allow the deferred income tax asset to be recovered. It is probable that sufficient future taxable profits will be available against which a deductible temporary difference can be utilized when there are sufficient taxable temporary difference relating to the same taxation authority and the same taxable entity which are expected to reverse in the same period as the expected reversal of the deductible temporary difference. In such circumstances, the deferred income tax asset is recognized in the period in which the deductible temporary difference arises. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rate and tax laws that have been enacted or substantively enacted at the end of the reporting period. Deferred income tax relating to items recognized in other comprehensive income or directly in equity is recognized in the consolidated statement of comprehensive income and consolidated statement of changes in equity and not in profit or loss. Deferred income tax assets and liabilities are offset, if there is a legally enforceable right to offset current income tax assets against current income tax liabilities and they relate to income taxes

43 levied by the same tax authority and the Group intends to settle its current income tax assets and liabilities on a net basis. VAT Revenue, expenses, assets and liabilities are recognized, net of the amount of VAT, except where the VAT incurred as a purchase of assets or service is not recoverable from the tax authority, in which case VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable. The net amount of VAT recoverable from, or payable to, the tax authority is included as part of Other current assets or Trade and other payables in the consolidated balance sheet. Creditable withholding taxes Creditable withholding taxes (CWT), included in Other current assets account in the consolidated balance sheet, are amounts withheld from income subject to expanded withholding taxes (EWT). CWTs can be utilized as payment for income taxes provided that these are properly supported by certificates of creditable tax withheld at source subject to the rule on Philippine income taxation. CWTs which are expected to be utilized as payment for income taxes within 12 months are classified as current assets. Foreign Currency-denominated Transactions and Translations The Group s consolidated financial statements are presented in Philippine Peso, which is the Company s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the end of the reporting period. All differences are taken to the profit or loss except for the exchange differences arising from translation of the balance sheets of subsidiaries and associates which are considered foreign entities into the presentation currency of the Company (Peso) at the closing exchange rate at the end of the reporting period and their statements of income translated using the weighted average exchange rate for the year. These are recognized in other comprehensive income until the disposal of the net investment, at which time they are recognized in profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions and are not retranslated. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Earnings Per Common Share Basic earnings per common share are determined by dividing net income by the weighted average number of common shares outstanding, after retroactive adjustment for any stock dividends and stock splits declared during the year. Diluted earnings per common share amounts are calculated by dividing the net income for the year attributable to the ordinary equity holders of the parent by the weighted average number of common shares outstanding during the year plus the weighted average number of ordinary shares that would be issued for any outstanding common share equivalents. The Group has no potential dilutive common shares. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from retained earnings when approved by the respective shareholders of the Company and subsidiaries. Dividends for the

44 year that are approved after the balance sheet date are dealt with as an event after the balance sheet date. Segment Reporting The Group s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 4. Events After the Reporting Period Post year events that provide evidence of conditions that existed at balance sheet date are reflected in the consolidated financial statements. Subsequent events that are indicative of conditions that arose after balance sheet date are disclosed in the notes to consolidated financial statements when material. 3. Significant Judgments, Accounting Estimates and Assumptions The preparation of the consolidated financial statements in compliance with PFRS requires management to make judgments, accounting estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The judgments, estimates and assumptions are based on management s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from these estimates and assumptions used. Judgments In the process of applying the Group s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements: Determination of functional currency Based on the economic substance of the underlying circumstances relevant to the Group, the functional currency is determined to be the Peso. It is the currency that mainly influences the sale of services and the cost of rendering the services.

45 Determination if significant influence or control exists in an investee company Determining whether the Group has significant influence only in an investee requires significant judgment. Generally, a shareholding of 20.0% to 50.0% of the voting rights of an investee is presumed to give the Group a significant influence. Control is presumed to exist when the parent company owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Management has determined that despite only having 50% ownership in STI, it has control by virtue of its power to cast the majority votes at meetings of STI s BOD and control of the entity is by that BOD. Classification of financial instruments The Group classifies a financial instrument, or its component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual agreement and the definitions of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated balance sheet. The Group s classification of financial instruments is presented in Note 35. Classification of leases - the Group as lessee The Group has entered into commercial property leases on its distribution warehouses, sales outlets, trucking facilities and administrative office locations. Based on an evaluation of the terms and conditions of the arrangements, management assessed that there is no transfer of ownership of the properties by the end of the lease term and the lease term is not a major part of the economic life of the properties. Thus, the Group does not acquire all the significant risks and rewards of ownership of these properties and so account for it as an operating leases. The Group has also entered into a finance lease agreement covering certain property and equipment. The Group has determined that it bears substantially all the risks and benefits incidental to ownership of said properties based on the terms of the contracts (such as existence of bargain purchase option, present value of minimum lease payments amount to at least substantially all of the fair value of the leased asset). As at December 31, 2012 and 2011, the carrying amount of the property and equipment under finance lease amounted to P=182.6 million and P=143.0 million, respectively (see Note 21). Classification of leases - the Group as lessor The Group has entered into short-term leases or chartering arrangements, which provide no transfer of ownership to the lessee. The Group has determined that, based on an evaluation of the terms and conditions of the arrangements, it retains all the significant risks and rewards of ownership of these equipment and so accounts for it as an operating leases. Classification and valuation of assets held for sale In 2011, management assessed that five of the Group s existing vessels met the criteria as assets held for the following reasons: (1) the related assets are available for immediate sale; (2) preliminary negotiations with willing buyers were executed; and (3) the sale is expected to be completed within 12 months from the end of reporting period.

46 The Group classified five of its existing vessels as assets held for sale as at December 31, 2011 with total carrying value of P=692.6 million. In 2012, the Group sold two of these vessels (see Note 10) and reclassified one vessel to property and equipment as this vessel will be put back to operations (see Note 9). As of December 31, 2012, the carrying value of the vessel amounted to P=15.8 million was measured based on its carrying amount before the asset was classified as held for sale, adjusted for any depreciation that would have been recognized had the asset not been reclassified as held for sale. As of December 31, 2012, management assessed that the two of the undisposed vessels would remain as assets held for sale since the delay in the disposal within one year was caused by events beyond the control of the Group and management remains committed to its plan to sell the vessels. As of December 31, 2012, the carrying value of these two vessels under assets held for sale amounted to P=359.2 million. Classification of redeemable preferred shares (RPS) The Group has RPS which is redeemable at any time, in whole or in part, within a period not exceeding 10 years from the date of issuance. If not redeemed, the RPS may be converted to a bond over prevailing treasury bill rate to be issued by the Company. The Company classified this RPS amounting to P=6.9 million and P=25.9 million as liability as of December 31, 2012 and 2011, respectively (see Note 22). Evaluation of legal contingencies The Group is a party to certain lawsuits or claims arising from the ordinary course of business. The Group s management and legal counsel believe that the eventual liabilities under these lawsuits or claims, if any, will not have material effect on the consolidated financial statements. Accordingly, no provision for probable losses arising from legal contingencies was recognized in 2012 and 2011 (see Note 31). Evaluation of events after the reporting period Management exercises judgment in determining whether an event, favorable or unfavorable occurring between the end of the reporting period and the date when the financial statements are authorized for issue, is an adjusting event or non-adjusting event. Adjusting events provide evidence of conditions that existed at the end of the reporting period whereas non-adjusting events are events that are indicative of conditions that arose after the reporting period. Non-adjusting events that would require additional disclosure in the consolidated financial statements are disclosed in Note 22. Estimates and Assumptions The following are the key assumptions concerning the future and other key sources of estimation uncertainty, at the end of reporting period that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. Determination of fair value of financial instruments Where the fair value of financial assets and liabilities recorded in the consolidated balance sheet cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to the models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing the fair values. The judgments include considerations of inputs such as liquidity risk and credit risk. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The carrying values and corresponding fair values of financial assets and financial liabilities and the manner in which fair values were determined are described in Note 36. Estimation of allowance for doubtful receivables

47 The Group maintains an allowance for impairment losses on trade and other receivables at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by the Group on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Group s relationship with debtors, their payment behavior and other known market factors. The Group reviews the age and status of the receivables, and identifies accounts that are to be provided with allowance on a continuous basis. The amount and timing of recorded expenses for any period would differ if the Group made different judgment or utilized different estimates. An increase in the Group s allowance for impairment losses would increase the Group s recorded expenses and decrease current assets. The main considerations for impairment assessment include whether any payments are overdue or if there are any known difficulties in the cash flows of the counterparties. The Group assesses impairment in two levels: individually assessed allowances and collectively assessed allowances. The Group determines allowance for each significant receivable on an individual basis. Among the items that the Group considers in assessing impairment is the inability to collect from the counterparty based on the contractual terms of the receivables. Receivables included in the specific assessment are the accounts that have been endorsed to the legal department, non-moving account receivables, accounts of defaulted agents and accounts from closed stations. For collective assessment, allowances are assessed for receivables that are not individually significant and for individually significant receivables where there is no objective evidence of individual impairment. Impairment losses are estimated by taking into consideration the age of the receivables, past collection experience and other factors that may affect collectibility. As at December 31, 2012 and 2011, trade and other receivables amounted to P=2,806.8 million and P=2,898.2 million, respectively, net of allowance for doubtful receivables of P=322.8 million and P=309.1 million, respectively (see Note 7). Determination of net realizable value of inventories The Group provides an allowance for inventories whenever the value of inventories becomes lower than its cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The allowance account is reviewed on an annual basis. Inventory items identified to be obsolete and unusable are written off and charged as expense for the period. As at December 31, 2012 and 2011, the carrying values of inventories amounted to P=370.1 million and P=407.4 million, net of allowance for inventory obsolescence amounting to P=62.7 million and P=70.7 million, respectively (see Note 8). Estimation of useful lives of property and equipment The useful life of each of the Group s item of property and equipment is estimated based on the period over which the asset is expected to be available for use until it is derecognized. Such estimation is based on a collective assessment of similar businesses, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future 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 item of property and equipment would increase the recorded depreciation expenses and decrease the carrying value of property and equipment. There were no changes in the estimated useful lives of property and equipment in 2012, 2011 and 2010.

48 As at December 31, 2012 and 2011, property and equipment amounted to P=4,575.7 million and P= 4,651.1 million, net of accumulated depreciation, amortization and impairment loss of P=6,358.3 million and P=5,527.9 million, respectively (see Note 14). Estimation of residual value of property and equipment The residual value of the Group s property and equipment is estimated based on the amount that would be obtained from disposal of the asset, after deducting estimated costs of disposal, if the assets are already of the age and in the condition expected at the end of its useful life. Such estimation is based on the prevailing price of scrap steel. The estimated residual value of each asset is reviewed periodically and updated if expectations differ from previous estimates due to changes in the prevailing price of scrap steel. There is no change in the estimated residual value of property and equipment in 2012 and Estimation of useful life of software development costs The estimated useful life used as a basis for amortizing software development costs was determined on the basis of management s assessment of the period within which the benefits of these costs are expected to be realized by the Group. As at December 31, 2012 and 2011, the carrying value of software development costs amounted to P=10.8 million and P=13.8 million, respectively (see Note 16). Impairment assessment of AFS investments The Group considers AFS financial assets as impaired when there has been a significant or prolonged decline in the fair value of such investments below their cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgment. The Group treats significant generally as 20% or more and prolonged as greater than 12 months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and future cash flows and discount factors for unquoted equities in determining the amount to be impaired. At December 31, 2012 and 2011, the carrying value of AFS investments amounted to P=8.7 million and P=9.4 million, respectively (see Note 11). No impairment loss was recognized in 2012, 2011 and Estimation of probable losses on prepaid taxes The Group makes an estimate of the provision for probable losses on its creditable withholding tax (CWT) and input VAT. Management s assessment is based on historical experience and other developments that indicate that the carrying value may no longer be recoverable. The aggregate carrying values of CWT, input VAT and deferred input VAT amounting to P=937.6 million and P= 1,013.6 million as of December 31, 2012 and 2011, respectively, are fully recoverable (see Notes 9 and 17). Assessment of impairment of nonfinancial assets and estimation of recoverable amount The Group assesses at the end of each reporting period whether there is any indication that the nonfinancial assets listed below may be impaired. If such indication exists, the entity shall estimate the recoverable amount of the asset, which is the higher of an asset s fair value less costs to sell and its value-in-use. In determining fair value less costs to sell, an appropriate valuation model is used, which can be based on quoted prices or other available fair value indicators. In estimating the value-in-use, the Group is required to make an estimate of the expected future cash flows from the CGU and also to choose an appropriate discount rate in order to calculate the present value of those cash flows.

49 Determining the recoverable amounts of the nonfinancial assets listed below, which involves the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the use of estimates and assumptions that can materially affect the consolidated financial statements. Future events could indicate that these nonfinancial assets are impaired. Any resulting impairment loss could have a material adverse impact on the financial condition and results of operations of the Group. The preparation of estimated future cash flows involves significant judgment and estimations. While the Group believes that its assumptions are appropriate and reasonable, significant changes in these assumptions may materially affect its assessment of recoverable values and may lead to future additional impairment changes under PFRS. Assets that are subject to impairment testing when impairment indicators are present (such as obsolescence, physical damage, significant changes to the manner in which the asset is used, worse than expected economic performance, a drop in revenues or other external indicators) are as follows: Property and equipment - net (Note 14) P=4,575,654 P=4,651,107 Investment property (Note 15) 9,763 9,763 Investments in associates (Note 12) 119,852 99,777 Software development costs (Note 16) 10,814 13,826 The Group recognized impairment loss on assets held for sale amounting to P=223.6 million in 2011 and on property and equipment amounting to P=778.8 million in 2010 (see Notes 10 and 14). The significant assumptions used in the estimation of the value in use are disclosed in Note 14. In 2012, no impairment loss was recognized on assets held for sale. As of December 31, 2012 and 2011, no impairment loss was recognized on the investment property as its carrying value is higher than its fair value, which was determined based on the valuation performed by a qualified and independent appraiser. The valuation undertaken considered the sale of similar property and related market data. As of December 31, 2012 and 2011, no impairment loss was recognized on other nonfinancial assets. Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the CGUs to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The significant assumptions used in the estimation of the recoverable amount of goodwill are described in Note 5. As at December 31, 2012 and 2011, the carrying amount of goodwill amounted to P=250.5 million (see Note 5). Estimation of retirement benefits costs and obligation The determination of the obligation and cost for pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions were described in Note 28 and include among others, discount rate, expected return on plan assets and rate of compensation increase. In accordance with PFRS, actual results that differ from the Group s assumptions are accumulated and amortized over future periods and

50 therefore, generally affect the recognized expense and recorded obligation in such future periods. While it is believed that the Group s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group s pension and other retirement obligations. The discount rate and the expected rate of return on plan assets are determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled. As at December 31, 2012 and 2011, the Group s pension asset amounted to P=5.1 million and P=7.1 million while the Group s accrued retirement benefits amounted to P=58.9 million and P=52.2 million, respectively (see Notes 17 and 28). Recognition of deferred income tax assets The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient future taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Management expects future operation will generate sufficient taxable profit that will allow all or part of the deferred income tax assets to be utilized. As at December 31, 2012 and 2011, the Group has recognized deferred income tax assets on its temporary differences, carryforward benefits of NOLCO and excess MCIT amounting to P=801.9 million and P=976.6 million, respectively (see Note 29). Tax effect of the temporary differences and carryforward benefits of unused NOLCO and MCIT for which no deferred income tax assets were recognized amounted to P=366.5 million and P=62.3 million as at December 31, 2012 and 2011, respectively (see Note 29). 4. Operating Segment Information Operating segments are components of the Group: (a) that engage in business activities from which they may earn revenue and incur expenses (including revenues and expenses relating to transactions with other components of the Group); (b) whose operating results are regularly reviewed by the Group s BOD to make decisions about resources to be allocated to the segment and assess its performance; and (c) for which discrete financial information is available. The Group s Chief Operation Decision Maker is the Parent Company s BOD. For purposes of management reporting, the Group is organized into business units based on their products and services. The Group has the following segments: The shipping segment renders passage transportation and cargo freight services. The supply chain segment provides logistics services and supply chain management. The manpower services segment renders manning and personnel, particularly crew management services. The segment results for the years ended December 31, 2012 and 2011 pertain to the shipping and supply chain segment. Segment results of the manpower services segment were included until the date of disposal in 2010 and presented as discontinued operation in the 2010 segment information. The Company s BOD regularly reviews the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements.

51 The Group has only one geographical segment as all its assets are located in the Philippines. The Group operates and devices principally all its revenue from domestic operations. Thus, geographical business information is not required. Transfer prices between operating segments are on an arm s length basis in a manner similar to transactions with third parties. Segment revenue includes transfer of goods and services between operating segments. Such transfers are eliminated in the consolidation. Further, there were no revenue transactions with a single customer that accounts for 10% or more of total revenue. Further, the measurement of the segments is the same as those described in the summary of significant accounting and financial reporting policies, except for the Company and its subsidiaries retirement benefits where the related actuarial gains or losses are recognized in the Company s consolidated financial statements over the expected working lives of the participating employees, and the land property of 2GO Express, which is carried at cost in the Company s consolidated financial statements but was measured to fair value in the NN s consolidated financial statements at the date of the business combination of the Company and NN. Segment revenue, expenses, results, assets, liabilities and other information about the business segments follows: Financial information about business segments follow: 2012 Shipping Supply chain Eliminations/ adjustments Consolidated balances Revenues P=11,047,880 P=4,375,645 (P=1,698,899) P=13,724,626 Fuel, oil and lubricants 3,880,249 14,266 48,580 3,943,095 Terminal expenses 1,416,751 (344,170) 1,072,581 Cost of goods sold 171,272 1,761,564 1,932,836 Overhead 1,058, ,783 (345,736) 1,113,036 Depreciation and amortization Operating expenses 1,050,260 15,742 (299,131) 766,871 Terminal expenses 131,365 (57,894) 73,471 Overhead 71,286 36,437 (12,800) 94,923 Interest and financing charges 559,241 45,255 (203,757) 400,739 Share in equity earnings of associates 53,702 6,357 (25,074) 34,985 Provision for (benefit from) income tax 196,023 63,964 (8,833) 251,154 Segment profit (loss) (303,215) 155,692 (238,691) (386,214) Segment assets 18,302,346 2,488,425 (9,575,438) 11,215,333 Segment liabilities 9,412,651 1,847,244 (2,964,170) 8,295,725 Other information: Reversal of vessel impairment 211,660 (211,660) Capital expenditures 884,200 50,387 (41,252) 893,335 Investments in associates 126,383 32,775 (39,306) 119,852

52 2011 Shipping Supply chain Eliminations/ adjustments Consolidated balances Revenues P=10,911,133 P=5,182,198 (P=3,122,518) P=12,970,813 Fuel, oil and lubricants 4,204,063 18,255 (682,530) 3,539,788 Terminal expenses 2,192,360 (696,951) 1,495,409 Cost of goods sold 2,601,539 2,601,539 Overhead 1,295, ,798 (712,020) 1,033,605 Depreciation and amortization Operating expenses 1,090,687 21,336 (250,942) 861,081 Terminal expenses 156,534 (67,627) 88,907 Overhead 101,535 36,409 (3,524) 134,420 Interest and financing charges 560,535 51,356 (204,343) 407,548 Share in equity earnings (losses) of associates (2,073) 9,292 (21,744) (14,525) Provision for (benefit from) income tax (288,944) 31,550 62,094 (195,300) Segment profit (loss) (1,155,858) 2, ,631 (625,604) Segment asset 18,671,045 2,386,537 (8,925,498) 12,132,084 Segment liabilities 10,721,855 1,900,190 (3,796,245) 8,825,800 Other information: Provision of vessel impairment 435,304 (211,660) 223,644 Capital expenditures 1,370,626 32,680 (835,916) 567,390 Investments in associates 33,929 41,328 24,520 99, Shipping Supply Chain Manpower services (discontinued operations) Eliminations/ adjustments Consolidated balances Revenues P=7,267,362 P=4,770,589 P=1,826,129 (P=2,253,188) P=11,610,892 Fuel, oil and lubricants 2,896,922 3,041 (6,175) 2,893,788 Terminal expenses 1,443,499 30,480 1,473,979 Cost of goods sold 2,255,457 (145,279) 96,463 2,206,641 Overhead 1,100, ,272 (577,775) 524,602 1,476,029 Depreciation and amortization Operating 1,019,241 21,935 14,126 1,055,302 Terminal 118, ,549 Overhead 367,619 36,546 (18,910) (210,233) 175,022 Interest and financing charges 244,249 69,830 (85,298) 228,781 Share in equity earnings of associates 7, ,799 40,207 Provision for (benefit from) income tax (461,644) 40,177 (24,110) 24,110 (421,467) Segment profit (loss) 943,199 (195,680) (236,712) 510,807 Segment asset 10,928,263 2,541,777 1,123,735 (2,018,408) 12,575,367 Segment liabilities 7,931,782 1,954,593 (985,385) (281,733) 8,619,257 Other information: Reversal of impairment 778, ,830 Capital expenditures 3,594,789 57,471 14,282 28,789 3,695,331 Investments in associates 16,500 32,037 66, , Business Combinations Acquisition of SOI On June 3, 2008, 2GO Express acquired 100% ownership in SOI in line with the Group s business strategy to provide total supply chain solutions to clients and to further improve the effectiveness and efficiency of its delivery services. Goodwill resulting from this acquisition amounted to P=250.5 million.

53 Impairment testing of goodwill The amount of goodwill acquired from the acquisition of SOI has been attributed to a cashgenerating unit. The recoverable amount of goodwill has been determined based on a VIU calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The discount rate applied to cash flow projections is 10.2% and 15.2% in 2012 and Cash flows beyond the five-year period are extrapolated using a zero percent growth rate. Key assumptions used in value in use calculations The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill. a. Budgeted EBITDA has been based on past experience adjusted for the following: Revenue growth rate. Management expects a 23% increase in revenue in 2013 and 2014, respectively, and a 13% constant growth in subsequent years. The expected growth is based on management s strategic plan to expand its supply chain operations. Variable expenses. Management expects variable expenses to increase by 23% in 2013 and 2014 and 13% in subsequent years. Fixed operating expenses. Management expects an increase in fixed operating expenses of 15% in 2012 and 9% to 10% increase in subsequent years. Foreign exchange rates. The assumption used to determine foreign exchange rate is a fluctuating Philippine peso exchange rate of P=43.0 to a dollar starting 2013 until the fifth year. Materials price inflation. The assumption used to determine the value assigned to the materials price inflation is 5.00%, which then increased by 0.20% on the second year, another increase of 0.40% on the third year and remains steady until the fifth year. The starting point of 2012 is consistent with external information sources. b. Budgeted capital expenditure is based on management s plan to expand the Group s supply chain segment. c. Sensitivity to changes in assumptions Other than as disclosed above, management believes that any reasonably possible change in any of the above key assumptions would not cause the carrying value of any cash generating unit to exceed its recoverable amount. As at December 31, 2012 and 2011, the Group has not recognized any impairment in goodwill on SOI. Mergers of Zoom in Packages (ZIP), Reefer Van Specialist, Inc. (RVSI) and the Company On July 7, 2010, the SEC approved the merger of ZIP and the Company, with the latter as the surviving entity, effective July 7, ZIP was a wholly owned subsidiary of the Parent Company. Consequently, by operation of law, the separate corporate existence of ZIP ceased as provided under the Corporation Code. Thus, upon the implementation of the merger, all outstanding shares of capital stocks of ZIP were cancelled. On August 16, 2010, the SEC approved the merger of RVSI and the Company, with the latter as the surviving entity, effective September 1, RVSI is a wholly owned subsidiary of the 2GO. Consequently, by operation of law, the separate corporate existence of RVSI ceased as provided under the Corporation Code. Thus, upon the implementation of the merger, all outstanding shares of capital stocks of RVSI were cancelled. Goodwill arising from the acquisition of RVSI amounting to P=6.0 million was fully impaired in 2010.

54 The mergers of ZIP and RVSI with the Company are part of the integration of the 2GO business to further improve the effectiveness and efficiency of the delivery of the Group s services to their customers. 6. Cash and Cash Equivalents Cash on hand P=42,193 P=21,391 Cash in banks 663, ,151 Cash equivalents 82, ,721 P=787,834 P=906,263 Cash in banks earns interest at the respective bank deposit rates. Cash equivalents are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term investment rates. Total interest income earned by the Group from cash in banks and cash equivalents amounted to P=5.5 million, P=6.7 million and P=5.2 million in 2012, 2011 and 2010, respectively (see Note 26). 7. Trade and Other Receivables Trade (Note 24): Freight P=1,549,008 P=1,228,008 Passage 77,909 87,988 Service fees 109, ,161 Distribution 287, ,329 Others 434, ,009 Nontrade 323, ,045 Due from related parties (Note 24) 58, ,730 Insurance and other claims 248, ,817 Advances to officers and employees 41,207 18,171 3,129,631 3,207,258 Less allowance for doubtful receivables 322, ,065 P=2,806,797 P=2,898,193 a. Trade receivables are non-interest bearing and are normally on 30 days term. b. Nontrade receivables also include advances to supplier, passage bonds and receivable from trustee fund. These receivables are non-interest bearing and payable on demand. c. Insurance and other claims receivables pertain to the Group s claims for reimbursement of losses against insurance coverage for hull and machinery, cargo, and personal accidents. d. Freight and passage receivables of the NN Group totaling to P=1,488.2 million and P=1,281.7 million as of December 31, 2012 and 2011, respectively, were assigned to secure the long-term debts (see Note 20). e. Trade and other receivables that are individually determined to be impaired at the end of reporting period relate to debtors with significant financial difficulties and who have defaulted

55 on payments and whose accounts are under dispute and legal proceedings. These receivables are not secured by any collateral or credit enhancements The following tables set out the rollforward of the allowance for doubtful receivables as of December 31: 2012 Insurance Trade Freight Service fees Distribution Others Nontrade and other claims Total Beginning P=204,571 P=35,014 P=14,634 P=947 P=6,648 P=47,251 P=309,065 Provisions (Note 25) 18, ,124 22,311 Accounts written off / reclassifications (243) (8,299) (8,542) Ending P=204,571 P=34,771 P=24,505 P=947 P=6,665 P=51,375 P=322,834 Insurance Trade Freight Service fees Distribution Others Nontrade and other claims Total Beginning P=209,567 P=14,723 P=14,634 P=947 P=6,550 P=36,650 P=283,071 Provisions (Note 25) 27, ,362 38,594 Reversals (Note 26) (4,013) (4,013) Accounts written off/ reclassifications (983) (6,923) 80 (761) (8,587) Ending P=204,571 P=35,014 P=14,634 P=947 P=6,648 P=47,251 P=309,065 The following table sets out the analysis of collective and individual impairment of trade and other receivables: Collectively impaired Individually impaired Total Collectively impaired Individually impaired Total Trade P=20,663 P=244,131 P=264,794 P=76,687 P=178,479 P=255,166 Nontrade 6,665 6,665 6,648 6,648 Insurance and other claims 51,375 51,375 47,251 47,251 P=20,663 P=302,171 P=322,834 P=76,687 P=232,378 P=309, Inventories At NRV: Trading goods P=146,809 P=169,013 Materials, parts and supplies 99, ,306 At cost - Fuel, oil and lubricants 123, ,122 P=370,081 P=407,441 The allowance for inventory obsolescence as at December 31, 2012 and 2011 amounted to P=62.7 million and P=70.7 million, respectively. The cost of inventories recognized as Cost of goods sold in the consolidated statements of income pertains to the trading goods sold by the supply chain segment and food and beverages sold by the shipping segment totaling to P=1,932.8 million, P=2,601.5 million and P=2,206.6 million in 2012, 2011 and 2010, respectively (see Note 25).

56 9. Other Current Assets CWT P=832,415 P=748,264 Input VAT 9, ,594 Prepaid expenses 69, ,736 AFS investments (Note 11) 420 Others 13,728 13,215 P=924,954 P=996,229 Outstanding CWT pertains mainly to the amounts withheld from income derived from freight, sale of goods and service fees for logistics and other services. The CWTs can be applied against any income tax liability of a company in the group to which the CWTs relate. 10. Assets Held for Sale In December 2011, in line with the Group s integration and vessels route rationalization, the Group s BOD approved the sale of five of the Group s vessels within the next 12 months. Accordingly, the net carrying values of these vessels amounting to P=692.6 million were reclassified from property and equipment to assets held for sale in the 2011 consolidated balance sheet. In 2011, the Group recognized impairment loss amounting to P=223.6 million, representing the excess of carrying value over the fair value less cost to sell of the vessels. The recoverable values of the assets held for sale as at December 31, 2011 are based from quotations obtained from prospective buyers, net of estimated costs to sell. On June 2, 2012, the Group sold two of the five vessels held for sale and the related spare parts, fuel and lubricants inventories on board, for a total cash proceeds amounting to P=152.0 million which resulted to loss amounting to P=201.7 million (included in Others - net in the consolidated statement of income, see Note 26). In December 2012, the Group reclassified one vessel from assets held for sale to property and equipment as management decided to use the vessel in consideration of the change in the Group s operational requirements which would increase the vessel s utilization. Consequently, the Group assessed that the vessel will be recovered through continuing use rather than through sale. The Group recorded depreciation of P=16.8 million as if the Group had not classified the vessel as assets held for sale. As of December 31, 2012, the recoverable values of the remaining two vessels classified as assets held for sale amounting to P=359.2 million approximate the assets fair values less cost to sell.

57 11. AFS Investments Quoted equity investments - listed shares of stocks P=624 P=486 Unquoted equity investments - at cost 8,111 9,311 8,735 9,797 Classified as part of Other current assets (Note 9) 420 P=8,735 P=9,377 a. Listed shares of stocks are carried at market value. Unrealized gains or losses on AFS investments are recognized in the consolidated statement of comprehensive income and included in the Equity section of the consolidated balance sheets. b. Unquoted shares of stocks pertain to fixed number of shares that are subject to mandatory redemption every year. c. In 2010, AFS investments amounting to P=19.9 million were reclassified to Other current assets as management intends to sell the securities within 12 months. In 2011, the Group recognized realized gain on sale of these AFS investments amounting to P=17.7 million (see Note 26). d. The following table shows the movement of Unrealized gain on AFS investments account: At beginning of year P=622 P=17,947 Net change in unrealized gains (losses): Net fair value changes of AFS investments Realized gain on sale of AFS investments (17,662) At end of year Attributable to non-controlling interest P=396 P= Investments in Associates The Group has the power to participate in the financial and operating policy decision of the following investees which does constitute control or joint control over those policies. Hence, the following are considered as investments in associates which are accounted for under the equity method MCCP P=87,077 P=58,449 HATS 32,775 41,328 P=119,852 P=99,777

58 MCCP and HATS are both incorporated in the Philippines Acquisition - at beginning of year P=20,649 P=20,649 Accumulated equity in net earnings: Balances at beginning of year 73,834 88,359 Equity in net earnings (loss) during the year 34,985 (14,525) Dividends received (14,910) Balances at end of year 93,909 73,834 Share in cumulative translation adjustment of associates 5,294 5,294 P=119,852 P=99,777 Changes in cumulative translation adjustment P= (P=647) Summarized financial information of the associates are as follows as at and for the year ended December 31: 2012 HATS MCCP Total Current assets P=127,379 P=291,999 P=419,378 Noncurrent assets 6, , ,176 Current liabilities 77, , ,276 Noncurrent liabilities 2, , ,999 Revenue 314,489 1,197,558 1,512,047 Net income 13,493 86, , HATS MCCP Total Current assets P=176,204 P=271,225 P=447,429 Noncurrent assets 6, , ,718 Current liabilities 112, , ,802 Noncurrent liabilities 513, ,507 Revenue 77, ,520 1,027,284 Net income (loss) 18,584 (63,264) (44,680) 2010 HATS MCCP Total Current assets P=126,082 P=579,521 P=705,603 Noncurrent assets 9,981 9,981 Current liabilities 83, , ,941 Noncurrent liabilities Revenue 67,047 1,050,188 1,117,235 Net income 15,192 98, ,013

59 13. Interests in Joint Ventures On March 18, 2009, 2GO Express and KLN Investments formed KLN Holdings, a jointly controlled entity. In accordance with the Agreement, 2GO Express and KLN Investments (the venturers) will hold ownership interests of 78.4% and 21.6%, respectively, in KLN Holdings. However, the venturers exercise joint control over the financial and operating policies of KLN Holdings unanimously. As at December 31, 2012 and 2011, 2GO Express investment in KLN Holdings amounted to P=7.5 million. On March 30, 2009, KLN Holdings and KLN Investments formed another jointly controlled entity, Kerry-ATS Logistics, Inc. (KALI, formerly Kerry-Aboitiz Logistics, Inc.), to engage in the business of international freight and cargo forwarding. In accordance with the Agreement, KLN Holdings and KLN Investments will hold 62.5% and 37.5% interest in KALI, respectively. However, the Agreement also requires unanimous consent over decisions concerning financial and operating policies of KALI. On August 1, 2009, 2GO Express sold all of its investments in KLN Investments to Kerry Freight. As at December 31, 2012 and 2011, KLN Holdings investment in KALI amounted to P=9.6 million. As a result of the above, 2GO Express indirectly holds a 49% interest in KALI. To account for this, KALI is proportionately consolidated by KLN Holdings using the latter s 62.5% share. The consolidated balances of KLN Holdings are then proportionately consolidated by 2GO Express using the latter s 78.4% share. The Group s proportionate share of the assets and liabilities of KALI and KLN Holdings as at December 31, 2012 and 2011 and the income and expenses in the jointly controlled entities for the years ended December 31, 2012, 2011 and 2010, which are proportionately consolidated in the consolidated financial statements, are as follows: Amounts consolidated in the consolidated balance sheets: Assets Cash and cash equivalents P=4,100 P=12,741 Trade and other receivables 58,656 45,532 Other current assets 2,233 2,203 Property and equipment 2,811 1,489 Deferred income tax assets - net 1, Total Assets P=69,152 P=62,735 Liabilities and Equity Loans payable P=4,900 P= Trade and other payables 39,388 41,284 Retirement benefit liability 1,812 1,023 46,100 42,307 Share capital 7,526 7,526 Retained earnings 15,526 12,902 23,052 20,428 Total Liabilities and Equity P=69,152 P=62,735

60 Amounts consolidated in the consolidated statements of income: Service fees P=219,105 P=183,053 P=132,941 Cost and Expenses Operating 192, , ,554 Overhead 22,467 24,954 22,806 Other income (charges) (569) , , ,681 Income before income tax 5,077 11,328 6,260 Provision for income tax 2,453 3,394 3,394 Net income P=2,624 P=7,934 P=2,866

61 14. Property and Equipment Cost Vessels in Operation (Notes 20 and 21) Containers and Reefer Vans (Note 21) Terminal and Handling Equipment Flight Equipment Furniture and Other Equipment 2012 Land Improvements Buildings and Warehouses Transportation Equipment Leasehold Improvements Vessels Under Refurbishment and Construction in Progress Beginning P=5,481,092 P=1,502,549 P=1,271,824 P=25,221 P=741,461 P=428,483 P=254,651 P=110,369 P=363,333 P= P=10,178,983 Additions 721,452 36,410 12, , ,765 25,356 5,929 39, ,335 Disposals (103,559) (9,516) (147) (18,047) (13,629) (17,969) (9,059) (35,784) (3,174) (210,884) Retirements/reclassifications 61,722 1,419 (2,335) 11,222 (9,246) (14) 9,722 72,490 Ending 6,160,707 1,529,443 1,285,823 4, , , ,111 99, ,074 49,042 10,933,924 Accumulated Depreciation and Amortization Beginning 1,780,764 1,313,763 1,159,319 7, , , ,540 60, ,744 5,510,534 Depreciation and amortization (Note 25) 732,773 20,145 40, ,886 8,926 16,507 30,850 25, ,504 Disposals (87,479) (8,723) (147) (706) (12,600) (5,853) (5,395) (22,332) (1,505) (144,740) Retirements/Reclassifications 73, (1) (2,329) 810 1,244 (6,250) (7) 67,972 Ending 2,499,697 1,326,051 1,199,860 4, , , ,896 62, ,704 6,358,270 Impairment Loss Beginning 17,342 17,342 Disposal (17,342) (17,342) Ending Net Book Value P=3,661,010 P=203,392 P=85,963 P=218 P=91,407 P=305,895 P=71,215 P=37,142 P=70,370 P=49,042 P=4,575,654 Total

62 Cost Vessels in Operation (Notes 20 and 21) Containers and Reefer Vans (Note 21) Terminal and Handling Equipment Flight Equipment Furniture and Other Equipment 2011 Land Improvements Buildings and Warehouses Transportation Equipment Leasehold Improvements Vessels Under Refurbishment and Construction in Progress Beginning P=8,724,668 P=1,564,773 P=1,278,953 P=62,813 P=630,746 P=421,089 P=258,472 P=245,141 P=361,445 P=2,873 P=13,550,973 Additions 478,673 10,399 18, ,750 7,582 12,721 18,908 1,490 (14,534) 567,390 Disposals (1,052,577) (85,436) (27,029) (37,790) (41,044) (1,046) (51,599) (2,606) (1,299,127) Retirements/reclassifications (204,414) 12,813 1, ,009 (188) (15,496) (102,081) 3,004 11,661 (174,995) Reclassification to assets held for sale (Note 10) (2,465,258) (2,465,258) Ending 5,481,092 1,502,549 1,271,824 25, , , , , ,333 10,178,983 Accumulated Depreciation and Amortization Beginning 2,789,680 1,395,445 1,141,554 28, ,421 89, , , ,376 6,542,444 Depreciation and amortization (Note 25) 836,894 17,629 44, ,092 11,936 15,018 32,710 31,957 1,046,188 Disposals (582,250) (84,692) (18,013) (21,475) (20,846) (672) (49,010) (2,582) (779,540) Retirements/Reclassifications (122,987) (14,619) (8,828) 30 68,929 (450) (80,053) (7) (157,985) Reclassification to assets held for sale (Note 10) (1,140,573) (1,140,573) Ending 1,780,764 1,313,763 1,159,319 7, , , ,540 60, ,744 5,510,534 Impairment Loss Beginning 778,830 33, ,436 Disposal (370,406) (16,264) (386,670) Reclassification to assets held for sale (Note 10) (408,424) (408,424) Ending 17,342 17,342 Net Book Value P=3,700,328 P=188,786 P=112,505 P=319 P=103,865 P=326,766 P=77,111 P=49,838 P=91,589 P= P=4,651,107 Total

63 Noncash additions - property and equipment under finance lease Vessels in operations, containers and reefer vans, include units acquired under finance lease arrangements (see Note 21). In 2012 and 2011, noncash additions include costs of those leased assets amounting to P=31.9 million and P=169.4 million, respectively. The related depreciation of the leased containers amounting to P=10.0 million in 2012, P=16.3 million in 2011 and P=5.4 million in 2010 were computed on the basis of the Group s depreciation policy for owned assets. Capitalization of drydocking costs Vessels in operation also include capitalized drydocking costs incurred from four vessels drydocked in 2012 amounting to P=507.1 million. No drydrocking cost for capitalization was incurred in The related depreciable life of drydocking costs ranges from two to five years. Disposal and retirement of property and equipment In 2012 and 2011, the Group sold certain property and equipment for net cash proceeds of P=160.8 million and P=58.2 million resulting to a net gain of P=99.0 million and P=6.8 million, respectively (see Note 26). In 2011, the Company sold passenger/cargo vessels for net cash proceeds of P=103.7 million, resulting to a gain from sale amounting to P=4.6 million (see Note 26). In 2010, the Company s disposal of three vessels resulted to a net loss of P=28.3 million (see Note 26). Impairment of property and equipment In 2010, based on internal reporting indications on the economic performance of certain vessels and their ultimate disposal proceeds, the Company recorded impairment loss on vessels in operations amounting to P=778.8 million with corresponding deferred income tax effect of P=233.6 million. The estimated recoverable amounts were based on fair value less cost to sell on the basis of a third party offer to buy, as well as the value in use. Significant assumptions used in estimating value in use includes discount rate of 10.64%, passage and cargo volume of 3% to 5%, freight rate increase of 12%, and fuel price increase of 5% each year. Depreciation and amortization Depreciation and amortization were recognized and presented in the following accounts in the consolidated statements of income (see Note 25): Operating expenses P=766,871 P=861,081 P=1,055,302 Terminal expenses 73,471 88, ,549 Overhead expenses 84,162 96, ,902 P=924,504 P=1,046,725 P=1,281,753

64 Property and equipment as collateral As of December 31, 2012 and 2011, the Group s vessels in operations and assets held for sale with total carrying value of P=4,020.0 million and P=3,367.8 million are mortgaged to secure certain obligations (see Note 20). As of December 31, 2012 and 2011, containers held as collateral for finance lease amounted to P=71.6 million and P=91.9 million, respectively (see Note 21). Fair value of vessels in operation The Group s vessels in operation are appraised for the purpose of determining their market values. Based on the latest appraisal with various dates from March 2012 to November 2012 made by independent appraisers, the related vessels in operation have an aggregate market value of P=4,715.0 million against net book value of P=3,661.0 million. 15. Investment Property The Group s investment property amounting to P=9.8 million pertains to a parcel of land not currently being used in operations. As of December 31, 2012 and 2011, the fair value of the investment property amounted to P=66.9 million. This was determined based on valuation performed by a qualified and independent appraiser on December 20, The valuation undertaken considered the sale of similar properties and related market data. 16. Software Development Costs Software development costs amounted to P=10.8 million and P=13.8 million, net of accumulated amortization of P=573.0 million and P=561.1 million as at December 31, 2012 and 2011, respectively. The Group recognized additions to software amounting to P=7.9 million in 2012 and P=6.3 million in 2011 and amortization of software costs included under Overhead expenses in the consolidated statements of income amounting to P=10.8 million in 2012, P=37.7 million in 2011 and P=67.1 million in 2010 (see Note 25). 17. Other Noncurrent Assets Deferred input VAT P=95,702 P=134,708 Refundable deposits 91,076 77,105 Pension asset (Note 28) 5,091 7,082 Others 5,569 14,045 P=197,438 P=232,940 a. Deferred input VAT relates mainly to the acquisition of vessels and related component parts. b. Noncurrent refundable deposits consist of amounts reasonable beyond one year arising from rental deposits which can be applied as rental payments at the end of the lease term or can be paid out in cash upon termination of the lease.

65 18. Loans Payable As at December 31, 2012 and 2011, the peso-loans amounting to P=1,384.1 million and P=1,215.4 million, respectively, pertain to unsecured short-term notes payable obtained by the Group from local banks with annual interest rates ranging from 5.0% to 8.5% in 2012 and 5.0% to 7.0% in On March 15, 2011, the Group paid the principal amounting to P=2.0 billion plus interest of the outstanding short-term notes as of December 31, 2010 (see Note 20). Loans payable outstanding as of December 31, 2012 will mature on various dates in Total interest expense incurred by the Group for the loans amounted to P=89.1 million, P=85.0 million and P=89.8 million in 2012, 2011 and 2010, respectively (see Note 26). 19. Trade and Other Payables Trade (Note 23) P=1,704,920 P=1,307,798 Accrued expenses (Note 23) 902,112 1,226,541 Nontrade (Note 23) 701, ,880 Provision for cargo losses and damages (Note 25) 9,203 37,522 Due to related parties (Note 23) 124, ,971 Dividends payable (Note 24) 2,040 Unearned revenue - net of deferred discounts 85,055 80,456 P=3,528,012 P=3,432,208 a. Trade and other payables are non-interest bearing and are normally on days term except for advances to related parties which are classified under nontrade payables and are payable on demand. b. Details of accrued expenses are as follows: Freight and handling P=194,764 P=187,533 Fuel and lube 182, ,404 Insurance 99, ,436 Repairs and maintenance 73, ,508 Outside services 67,344 85,262 Rent 66, ,136 Salaries and wages 46,686 61,109 Pick-up and delivery 34,450 63,635 Coloading 25,560 44,633 Taxes and licenses 20,440 19,336 Interest 20,186 26,467 Communication, light and water 18,988 29,053 Professional fees 9,282 6,998 Advertising and promotions 4,198 10,057 Pilotage and berthing 2,577 12,747 Steward supplies 1,098 5,165 Others 34, ,062 P=902,112 P=1,226,541 c. Nontrade payables consist of customers deposits, and payables due to government agencies.

66 d. Provision for cargo losses and damages refers to the cost of claims for breakages, cargo losses, cargo short weight or passenger claims which are not covered by insurance. In 2012, 2011 and 2010, provisions recognized amounted to P=23.0 million and P=41.0 million andp=17.7 million while actual claims during the year amounted to P=51.3 million, P=21.9 million and P=15.9 million, respectively. 20. Long-term Debt Omnibus Loan and Security Agreement (OLSA) Banco de Oro Unibank, Inc. (BDO) P=3,200,000 P=4,000,000 Unamortized debt arrangement fees (21,384) (36,257) 3,178,616 3,963,743 Current portion (993,319) (785,716) P=2,185,297 P=3,178,027 Omnibus Loan and Security Agreement On February 24, 2011, the Company, NN, SFFC, and HLP entered into an Omnibus Loan and Security Agreement (OLSA) with BDO, which consists of term loans of P=4.0 billion and omnibus line of P=400.0 million. In March 2011, the Company availed the P=4.0 billion term loans, which was used for the refinancing of its short-term loans payable (see Note 18) and the early redemption of its long-term debt on March 15, 2011 in accordance with the provision of the OLSA. The omnibus line, on the other hand, amounting to P= million shall be used by the Company and HLP for working capital requirements and to secure their obligations with BDO. The P=4.0 billion term loans consist of Series A and Series B Term Loans amounting to P=2.0 billion each. The interest on each of the Series A and Series B Term Loans is a combination of fixed and floating rates. Fifty percent (50%) of the principal amount of each of the Series A Term Loan and Series B Term Loan, respectively, have a fixed interest rate, and the remaining fifty percent (50%) have a quarterly floating annual interest rate, provided, such floating interest rate shall have a minimum of 5.0% per annum. The principal of the loans is subject to 16 quarterly amortizations which commenced at the end of the third quarter from the drawdown date until March In 2012, the Company paid the principal of the loan amounting to P=800.0 million. Suretyship agreement, mortgage trust indenture and assignment of receivables In accordance with the OLSA dated February 24, 2011, the Company and NN executed a Continuing Suretyship in favor of BDO. As a result, upon the happening of an event of default, the creditor shall have the right to set-off or apply to payment of the credit facility any and all moneys of the sureties which may be in possession or control of the creditor bank. Further, the creditor bank shall likewise have the full power against all the sureties properties upon which the creditor bank has a lien. The Continuing Suretyship also applies with respect to the Facility Agreement entered by NN and the creditor bank on January 26, The Company, NN and SFFC also executed a Mortgage Trust Indenture (MTI) under the OLSA whereby the Group creates and constitutes a first ranking mortgage on the collaterals for the benefit of BDO. The Group shall at all times maintain the required collateral value, which is equivalent to 200% of the obligations.

67 Further, as required by the OLSA, the Company, NN and SFFC shall assigned customer receivables sufficient to cover the availed credit facility in excess of P=3.66 billion. Notwithstanding such assignment, the Company, NN and SFFC shall have the right to collect the assigned customer receivables and appropriate the proceeds therefrom for their benefit, provided that the assignors shall replace the collected receivables in accordance with the required terms and condition and there is no happening of an event of default under the OLSA. The customer receivables shall refer to all outstanding receivables of the assignors as of the date of the execution of the OLSA, and the future customer receivables of the assignors, which shall be valued at 50% of their face value expressed in Philippine Peso. As of December 31, 2012 and 2011, the Company, NN and SFFC collateralized their vessels under MTI with carrying value amounting to P=4,276.7 million and P=4,826.7 million and certain outstanding customers receivables amounting to P=1,405.1 million and P=1,305.5 million, respectively (see Notes 7 and 14). Loan covenants The OLSA is subject to certain covenants such as but not limited to: Maintenance of the following required financial ratios of the Company: minimum quarterly current ratio of 1:1; maximum quarterly debt-to-equity ratio of 2.5:1 for the first year and 2:1 for the succeeding years; and, minimum yearly debt service coverage ratio (DSCR) of 1.2:1 for first and second years and 1.5:1 for the succeeding years, provided, however, that the consolidated yearly DSCR of the Company and NN shall not fall below 1.5:1 for the first and second years, and 1.75:1 for the succeeding years; Prohibition on any change in control in the Company or its business or majority ownership of its capital stock (except with respect to the majority investors in the case of NN) or a change in the Chief Executive Officer; Prohibition to declare or pay any dividends to its common and preferred stockholder or make any other capital or asset distribution to its stockholders, unless the financial ratios above are fully satisfied; Prohibition to sell, lease, transfer or otherwise dispose of its properties and assets, divest any of its existing investments therein, or acquire all or substantially all of the properties or assets of any other third party, except those in the ordinary course of business. As of December 31, 2011, the Company breached the maximum debt-to-equity ratio required under OLSA. This constitutes an event of default on the long-term debt in accordance with the loan facilities. The Company obtained a letter from BDO dated December 28, 2011, which states that the Company shall not be declared in default by BDO should there be a breach in maximum debt to equity ratio of 2.5 and that the Company is given 12 months from December 31, 2012 to remedy the default. In view of this, the noncurrent portion of the loans remains as noncurrent liability in the consolidated balance sheet as of December 31, As of December 31, 2012, 2GO breached the minimum current ratio, maximum debt-toequity ratio and minimum DSCR, which likewise constitute events of default. Due to the cross-default provisions in accordance with the NN/BDO Facility Agreement, this resulted in an event of default also on the long-term debt of the Company. The Company obtained a letter from BDO dated December 28, 2012, which states that the Company shall not be declared in default by BDO should there be breach in minimum current ratio of 1.0, maximum debt to equity ratio of 2.0 and maximum DSCR of 1.2 and that the Company is given 12 months from December 31, 2012 to remedy the default. In view of this, the noncurrent portion of the loans remained as noncurrent liability in the

68 consolidated balance sheet as of December 31, Borrowing costs and debt transaction costs Interests from long-term borrowings of the Company recognized as expense amounted to P=263.7 million, P=266.2 million and P=108.3 million in 2012, 2011 and 2010, respectively (see Note 26). In 2011, the Company incurred debt transaction costs amounting to P=48.9 million. Amortization of these debt transaction costs included under interest and financing charges amounted to P=14.9 million, P=33.6 million and P=4.5 million in 2012, 2011 and 2010, respectively (see Note 26). 21. Obligations under Finance Lease The Group has various finance lease arrangements with third parties for the lease of vessels, containers and reefer vans denominated in US dollars. The lease agreements provide for the transfer of ownership to the Group at the end of the lease term, which among other considerations met the criteria for a finance lease. Therefore, the leased assets were capitalized. The future minimum lease payments under finance lease, together with the present value of minimum lease payments as at December 31 are as follows: Minimum lease payments due within one year P=81,904 P=36,407 Beyond one year but not later than five years 50,390 95,374 More than five years 2,492 Total minimum lease obligation 132, ,273 Less amount representing interest 9,713 12,163 Present value of minimum lease payment 122, ,110 Less current portion 77,724 30,174 P=44,857 P=91,936 The outstanding balance of the US dollar-denominated finance lease obligation of P=76.3 million (US$1.9 million) and P=108.1 million (US$2.5 million) as at December 31, 2012 and 2011, respectively, have been restated at the rate prevailing as of those dates of P= to US$1 and P=48.84 to US$1, respectively. The net carrying values of property and equipment held by the Group under finance lease are summarized as follows (see Note 14) Cost P=237,738 P=169,398 Less accumulated depreciation 55,133 26,385 Net book value P=182,605 P=143,013 The interest expense recognized related to these losses amounted to P=6.4 million in 2012, P=7.3 million in 2011 and P=7.3 million in 2010 (see Note 26).

69 22. Redeemable Preferred Shares (RPS) On January 7, 2003, the Company issued 374,520,487 RPS in the form of stock dividends out of capital in excess of par value at the rate of one share for every four common shares held by the shareholders. The RPS has the following features: non-voting; preference on dividends at the same rate as common share; redeemable at any time, in whole or in part, as may be determined by the BOD within a period not exceeding 10 years from the date of issuance at a price of not lower than P=6 per share as may be determined by the BOD. The shares must be redeemed in the amount of at least P=250,000 per calendar year; if not redeemed in accordance with the foregoing, the RPS may be converted to a bond bearing interest at 4% over prevailing treasury bill rate to be issued by the Parent Company; and preference over assets in the event of liquidation. On June 15, 2006, the SEC approved 2GO s application for the amendment of its Articles of Incorporation to add a convertibility feature to the RPS so as to allow holders of RPS, at their option, to convert every RPS into two (2) common shares of 2GO. During the Conversion Period from September 1 to October 13, 2006, a total of 70,343,670 preferred shares or 93.91% were converted to common shares. As at December 31, 2011, 4,560,417 outstanding RPS with remaining carrying value of P= 25.9 million are shown under Current liabilities section of the consolidated balance sheets, which are carried at amortized cost, accretion of interest amounting to P=1.4 million, and P=3.1 million and P=2.7 million in 2012, 2011 and 2010, respectively. On October 25, 2012, the BOD of the Company approved the redemption of all remaining outstanding RPS held by each eligible stockholder of such shares at a price of P=6.00 per share. As of December 31, 2012, unredeemed RPS amounted to P=6.9 million. On March 27, 2013, the BOD approved the retirement of the 4,564,330 RPS due to the mandatory redemption by the Company of the RPS. On the same date, the BOD also approved the amendment of the Articles of Incorporation of the Company to decrease its authorized capital stock as a result of the retirement of the RPS. 23. Related Party Disclosures In the normal course of business, the Group has transacted with the following related party: Relationship Ultimate parent Parent Company Significant stockholder Subsidiaries Subsidiaries Name Negros Holdings & Management Corporation (NHMC) KGLI-NM Holdings, Inc. (KGLI-NM) China-ASEAN Marine B.V. (CAMBV) Negrense Marine Integrated Services, Inc. (NMISI) Brisk Nautilus Dock Integrated Services, Inc. (BNDISI) 2GO Group, Inc. (2GO) 2GO Express, Inc. (Express) 2GO Logistics, Inc. (Logistics) (Forward)

70 Relationship Subsidiary Associates Name ScanAsia Overseas, Inc. (SOI) Hapag-Lloyd Philippines, Inc. (HLP) Reefer Van Specialist, Inc. (RVSI) WRR Trucking Corporation (WTC) The Supercat Fast Ferry Corporation (SFFC) Special Container and Value Added Services, Inc. (SCVASI) NN-ATS Logistics Management and Holdings, Inc. (NALMHCI) Super Terminal, Inc. (STI) J&A Services Corporation (J&A) Red Dot Corporation (RDC) North Harbor Tugs Corporation (NHTC) Sungold Forwarding Corporation (SFC) Supersail Corporation (SSI) W G & A Supercommerce, Inc. (WSI) Sea Merchants Inc.(SMI) Bluemarine Inc. (BMI) Astir Engineering Works, Inc. (AEWI) MCC Transport Philippines, Inc. (MCCP) Hansa-Meyer ATS Projects, Inc. (HATS) Vestina Securities Services, Inc. (VSSI) Attina Securities Services, Inc. (ASSI) United South Dockhandlers, Inc. (USDI) The following are the revenue and income (costs and expenses) included in the consolidated statements of income with related parties which are not eliminated are as follows: Parent Company Nature Interest income P=40,099 P=49,857 Vessel leasing (804,193) (57,452) Co-loading revenue 200,732 Co-loading expense (201,356) Associate Freight income 17,214 22,984 Shared cost 5,309 Freight expense (157) Rent 332 Outside services (143,555) (54,826) Repairs and maintenance (72,573) (12,384) Professional and management fee (53,354) Entities Under Common Control Crewing cost (11,437) (12,560) Arrastre and stevedoring (9,971) Steward supplies (7,409) (1,998) Food and subsistence (5,456) (954) Rent income (2,378) Hustling and shifting (1,150) Transportation and delivery (93) Key Management Short-term employee benefits 86,050 Personnel Post-employment benefits 2,924 The consolidated balance sheets include the following amounts with respect to the balances with related parties: Parent Company Financial Statement Account Terms and Conditions Trade receivables 30 to 60 days; noninterest-bearing P= P=21,960 Due from related parties On demand; noninterest-bearing 9 708,222 Nontrade receivables On demand; noninterest-bearing 23,621 32,859 (Forward)

71 Parent Company Associate Entities Under Common Control Financial Statement Account Terms and Conditions Trade payables 30 to 60 days; noninterest-bearing (P=80,287) (P=7,463) Accrued expenses 30 to 60 days; noninterest-bearing (48,866) (1,635) Due to related parties On demand; noninterest-bearing (121,941) (3,725) Trade receivables 30 to 60 days; noninterest-bearing 7,200 3,727 Due from related parties On demand; noninterest-bearing 32,811 23,275 Trade payables 30 to 60 days; noninterest-bearing (1,019) Due to related parties On demand; noninterest-bearing (11,243) Due from related parties On demand; noninterest-bearing 25,963 Nontrade receivables On demand; noninterest-bearing 91,710 Trade and other payables 30 to 60 days; noninterest-bearing (62,827) (7,426) Accrued expenses 30 to 60 days; noninterest-bearing (32,415) Due to related parties On demand; noninterest-bearing (2,946) (374,003) The outstanding related party balances are unsecured and settlement occurs in cash, unless otherwise indicated. The Group has not recorded any impairment of receivables relating to amounts owed by related parties. This assessment is undertaken each financial year through examining the financial position of the related parties and the market in which these related parties operate. Other terms and conditions related to the above related party balances and transactions are as follows: Transactions with NN Transactions with NN in 2011 include joint services and co-loading arrangements whereby the Company and NN share vessel space for the shipment of customer cargoes. Each of the parties, whoever is the actual vessel-operating carrier, charged the other party for the shared space on a per container basis Effective December 1, 2011, the Company entered into vessel lease arrangement (see Note 25) with NN involving six of NN s vessels at a fixed daily rate for a period of one year. In 2011, the Company has granted NN an interest-bearing loan amounting to P=657.5 million, which was fully paid by NN in Transactions with associates and other related parties under common control Negrense charges agency fee to the Company based on an agreed rate for its manpower services and for its management of the Company s food and beverage business effective August Negrense also provides housekeeping and manpower pooling services to the Company and SFFC. Brisk provides container repairs, cargo handling and trucking services to the Company. Transactions with other associates and related companies consist of shipping services, charter hire, management services, ship management services, purchases of steward supplies, availment of stevedoring, arrastre, trucking, and repair services and rental.

72 Transactions and balances with related parties eliminated during consolidation The following are the transactions and balances among related parties which are eliminated in the consolidated financial statements: Nature GO 2GO Express Freight P=80,717 P=98,166 Interest 22,921 33,852 2GO 2GO Express Professional and 71,082 management fee Shared cost 4,377 2GO Logistics Shared cost 7,430 KALI Freight 6,882 Shared cost 295 SFFC Interest 26,584 34,800 NALMHCI Shared cost 205 2GO Express 2GO Commission 55,181 42,190 Freight 30,534 33,476 Professional and management fee 7,596 Shared cost 12,000 KALI/J&A/STI/SSI 2GO Freight 430 Purchase/sale of water 21,153 7,986 Passage terminal 7,081 Outside services 109,988 93,380 December 31 Terms and Conditions Amounts owed to: Amounts owed by: 2GO 2GO Express 7% interest-bearing P=527,000 P=553,146 SFFC 9% interest-bearing 393, ,138 2GO Express/2GO Logistics/ On demand; Noninterest bearing SOI/Others 196,371 1,438 2GO Express/2GO Logistics/ days; Noninterest bearing SOI/Others 101,181 13,516 2GO Express 2GO On demand; Noninterest bearing 3,761 SCVASI days; Noninterest bearing 17,115 2GO Logistics 2GO On demand, Noninterest bearing 1,508 SOI RDC 30 days; Noninterest bearing 37 KALI 2GO days; Noninterest bearing 1,022 SFFC 2GO/2GO Express 30 days; Noninterest bearing 9,488 NALMHCI 2GO/2GO Express/2GO 30 days; Noninterest bearing 127,011 Logistics J&A NALMHCI/RDC/SFC On demand, Noninterest bearing 1,787 2GO/NHTC 30 days; Noninterest bearing 5,042 2,722 RDC NALMHCI On demand, Noninterest bearing 102 2GO Logistics/SOI/NALMHCI 30 days; Noninterest bearing 3,304 5,705 SSI J&A On demand; Noninterest bearing 626 2GO/2GO Express/2GO 30 days; Noninterest bearing 48,402 Logistics 19,467 STI 2GO 30 days; Noninterest bearing 3, NHTC 2GO/J&A 30 days; Noninterest bearing 9,757 1,243 SFC 2GO/2GO Express/ 30 days; Noninterest bearing 2,983 10,963 2GO Logistics/ NALMHCI SCVASI 2GO On demand; Noninterest bearing 624 The Company s transactions with 2GO Express Group include shipping and forwarding services, commission and trucking services. The Company provided management services to SFFC, 2GO Express, 2GO Logistics, HLP, KALI and SOI at fees based on agreed rates.

73 2GO Express provides management services to the Parent Company s loose cargo business at fees based on an agreed rate. AJBTC provided ship management services to the Company in 2010, and was terminated on October 15, GO Express and 2GO Logistics placed temporary cash advances to Company totaling to P=10.0 million as at December 31, SFFC obtained long-term cash advances from the Company for working capital requirements. As at December 31, 2011, the Company has provided guarantees on the bank loans of 2GO Express and 2GO Logistics amounting to P=183.3 million and P=38.4 million, respectively. 24. Equity a. Share capital Details of share capital considered as equity as of December 31 follows: Amount Number of shares Authorized common shares 4,070,343,670 P=4,070,344 Issued and outstanding common shares of P=1.00 per value each 2,446,136,400 2,484,653 Movements in authorized capital stocks follow: Date Common shares Number of shares Preferred shares (Note 22) Activity Total Authorized capital stocks as of incorporation date 5,000 5,000 May 26, 1949 December 10, 1971 Increase in authorized capital stocks 5,000 5,000 October 21, 1975 Increase in authorized capital stocks 4,990,000 4,990,000 September 3, 1982 Increase in authorized capital stocks 5,000,000 5,000,000 August 18, 1989 Increase in authorized capital stocks 10,000,000 10,000,000 December 29, 1993 Increase in authorized capital stocks 20,000,000 20,000,000 September 8, 1994 Increase in authorized capital stocks 60,000,000 60,000,000 November 21, 1994 Increase in authorized capital stocks 900,000, ,000,000 October 26, 1998 Increase in authorized capital stocks 1,000,000,000 1,000,000,000 Reclassification of common shares to preferred shares (375,000,000) 375,000,000 December 6, 2002 November 18, 2003 Redemption of preferred shares (224,712,374) (224,712,374) September 6, 2004 Increase in authorized capital stocks 750,000, ,000,000 November 22, 2004 Redemption of preferred shares (74,904,026) (74,904,026) October 24, 2005 Increase in authorized capital stocks 1,624,524,400 1,624,524,400 October 24, 2005 August 7, 2008 Reclassification of preferred shares to common shares 475,600 (475,600) Reclassification of preferred shares to common shares 70,343,670 (70,343,670) 4,070,343,670 4,564,330 4,074,908,000 Movements in issued and outstanding capital stocks follow: Issue price Common shares Number of shares Preferred shares (Note 22) Date Activity Total Issued capital stocks as of May 26, 1949 incorporation date P=1, ,002 1,002 December 10, 1971 to October 26, 1998 Increase in issued capital stocks 1, ,496,597,636 1,496,597,636 December 6, 2002 (Forward) Reclassification of common shares to preferred shares ,000, ,520, ,520,535

74 Issue price Common shares Number of shares Preferred shares (Note 22) Date Activity Total Issuance of preferred shares February 10, 2003 before redemption P=1.00 (48) (48) November 18, 2003 Redemption of preferred shares 6.67 (224,712,374) (224,712,374) Issuance of common shares by September 6, 2004 way of stock dividends ,246, ,246,555 November 22, 2004 Redemption of preferred shares 6.67 (74,904,026) (74,904,026) December 31, 2004 October 24, 2005 August 22 to October 13, 2006 December 6-31, 2012 Issuance of common shares prior to reorganization 1.00 (756) (756) Issuance of common shares through share swap transactions ,121, ,121,123 Conversion of redeemable preferred shares to common shares ,687,340 (70,343,670) 70,343,670 Redemption of redeemable preference share 6.00 (3,413,467) (3,413,467) 2,484,652,900 1,146,950 2,489,213,317 December 31, 2001 Treasury shares* 1.50 (38,516,500) (38,516,500) 2,446,136,400 1,146,950 2,450,696,817 * The carrying value of treasury shares is inclusive of P=0.9 million transaction cost. Issued and outstanding common shares are held by 1,965 and 1,976 equity holders as of December 31, 2012 and 2011, respectively. b. Deficit Deficit is net of undistributed earnings amounting to P=274.3 million in 2012 and P=508.1 million in 2011 representing accumulated equity in net earnings of subsidiaries and associates, which are not available for dividend declaration until received in the form of dividends from such subsidiaries and associates. Deficit is further restricted to the extent of the cost of the shares held in treasury and deferred income tax asset recognized as of December 31, 2012 and On December 1, 2010, the Company s BOD approved the declaration of a cash dividend amounting to fifteen centavos (P=0.15) for every common and preferred share outstanding as of December 15, 2010 or a total dividend declaration of P=367.6 million. The dividends were fully paid on January 12, c. Excess of cost over net asset value of investments - net The pooling of interest method was applied to account for the following acquisitions since these involves entities under common control: On August 30, 2007, the Company acquired SFFC from its affiliate, Accuria, Inc. for a total consideration of P=13.7 million. The excess of cost over SFFC s net assets during the time of acquisition, amounting to P=11.7 million is recorded in equity as Excess of cost over net asset value of investments. On December 1, 2011, NALHMCI acquired from NN, six of its subsidiaries for a total consideration of P=29.4 million. These subsidiaries are JASC, RDC, NHTC, STI, SGF and SSI. The excess of the combined net assets of NN s subsidiaries at the time of acquisition over the total cost of the investment amounted to P=0.8 million and is presented under equity as Excess of cost over net assets value of investments.

75 25. Operating Costs and Expenses Operating Expenses Fuel, oil and lubricants P=3,882,806 P=3,493,228 P=2,856,480 Outside services (Note 34b) 2,076,740 1,666,090 1,134,751 Vessel leasing (Notes 34e and 23) 830,166 57,452 92,808 Depreciation and amortization (Note 14) 766, ,081 1,055,302 Personnel costs (Note 27) 532, , ,344 Rent (Note 34f) 330, , ,964 Repairs and maintenance 231, , ,898 Insurance 157, , ,384 Material and supplies used 118,717 46,186 58,301 Food and subsistence 87, , ,331 Communication, light and water 93,658 85,227 70,813 Sales concessions 64,137 40,039 46,957 Commissions 31,386 34,600 33,819 Provision for cargo losses and damages (Note 19) 22,978 41,023 17,721 Others 294, , ,563 9,522,663 8,192,290 7,093,436 Terminal Expenses Transportation and delivery 167, , ,981 Outside services (Note 34b) 369, , ,072 Personnel costs (Note 27) 120, , ,765 Repairs and maintenance 118, ,418 90,081 Depreciation and amortization (Note 14) 73,471 88, ,549 Fuel, oil and lubricants 60,289 46,560 37,308 Rent (Note 34f) 51,015 98,291 62,868 Others 111,978 95,276 86,355 1,072,581 1,495,409 1,473,979 Overhead Expenses Personnel costs (Note 27) 445, , ,525 Advertising 115,786 72,946 81,266 Outside services 106,101 33, ,963 Depreciation and amortization (Notes 14 and 16) 94, , ,022 Communication, light and water 90,991 56,573 79,663 Taxes and licenses 43,825 22,755 36,509 Rent (Note 34f) 40,320 23,563 36,479 Computer charges 24,521 18,352 24,493 Provision for doubtful accounts on receivables (Note 7) 22,311 38,594 20,850 Repairs and maintenance 18,899 11,381 18,780 Entertainment, amusement and recreation 17,141 8,818 15,197 Office supplies 13,204 7,566 11,495 Transportation and travel 13,760 11,802 22,151 Others 65,828 93, ,636 1,113,036 1,033,605 1,476,029 Traveling goods 1,761,564 2,601,539 2,206,641 Food and beverage 171,272 Cost of Goods Sold (Note 8) 1,932,836 2,601,539 2,206,641 P=13,641,116 P=13,322,843 P=12,250,085

76 In accordance with the vessel leasing agreement as discussed in Note 24, NN, as the owner of the vessels, is accountable for its vessels drydocking costs, depreciation and amortization, repair and maintenance, personnel, and insurance costs. Included in the vessel costs are the costs incurred by 2GO relating to fuel and lubricants, pilotage, port charges and other variable costs on the leased NN s vessels. 26. Other Income (Charges) Interest and Financing Charges Interest expense on: Loans payable (Note 18) P=89,136 P=85,004 P=89,843 Long-term debt (Note 20) 263, , ,334 Amortization of: Debt transaction cost (Note 20) 14,872 33,550 4,481 Obligation under finance lease (Note 21) 6,407 7,306 7,281 RPS 1,425 3,055 2,706 Others 25,177 12,421 16,136 P=400,739 P=407,548 P=228,781 Others - net Gain (loss) on disposal of: AFS investments (Note 11) P= P=17,662 P=57,895 Assets held for sale (Note 10) (201,715) Property and equipment (Note 14) 98,978 11,447 (28,263) Income from reversal of liabilities 182, ,070 Condonation of debt 34,364 Gain on insurance claims (Note 14) 2,086 34,568 18,528 Reversal of impairment on receivables (Note 7) 4,013 12,527 Recovery of inventory obsolescence 343 1,400 Interest income (Notes 6 and 23) 59,698 61,108 5,210 Foreign exchange gains (losses) - net 494 5,337 (12,923) Dividend income ,313 Others 3,404 36,982 (17,945) P=147,184 P=299,868 P=70,706

77 27. Personnel Costs Included in cost of sales: Crewing costs P=118,638 P=227,550 P=118,638 Salaries and wages 347, , ,713 Retirement costs (Note 28) 10,697 12,389 19,725 Other employee benefits 56,437 27,789 46, , , ,344 Included in terminal expenses: Salaries and wages 89, ,653 89,862 Retirement costs (Note 28) 15,353 21,392 15,236 Other employee benefits 14,892 9,709 46, , , ,765 Included in overhead expenses: Salaries and wages 331, , ,000 Retirement costs (Note 28) 27,479 86,669 28,582 Other employee benefits 86,074 84, , , , ,525 P=1,098,523 P=1,226,015 P=1,250,634 In 2011, redundancy and retirement benefit costs included as part of integration cost amounted to P=97.2 million. The remaining P=25.8 million pertains to the professional fees incurred relating to the integration of the Group. 28. Retirement Benefits The Group has funded defined benefit pension plans covering all regular and permanent employees. The benefits are based on employees projected salaries and number of years of service. The following tables summarize the funded (unfunded) status and amounts as included in the consolidated balance sheets and the components of retirement benefit costs recognized by the Group as included in the consolidated statements of income in 2012, 2011 and 2010, respectively. The funded status and amounts recognized in the consolidated balance sheets include the retirement benefits of 2GO Logistics, HLP and SGF as at December 31, 2012 and of the Company, 2GO Logistics and SOI as at December 31, Accrued retirement benefits (P=58,900) (P=52,182) Pension asset (Note 17) 5,091 7,082 (P=53,809) (P=45,100)

78 Retirement Plan Asset (Liability) - net Present value of defined benefit obligation P=221,770 P=224,121 Fair value of plan assets (94,196) (70,145) Unfunded obligation 127, ,976 Unrecognized net actuarial losses (73,765) (108,876) P=53,809 P=45,100 Movement in the present value of the defined benefit obligation is as follows: Beginning P=224,121 P=285,954 Interest cost 17,967 25,562 Current service cost 26,064 30,034 Transfers (4,396) Actuarial loss 7,458 28,689 Curtailment gain (28,440) (102,106) Benefits paid (25,400) (39,616) P=221,770 P=224,121 Movement in the fair value of plan assets is as follows: Fair value of plan assets at January 1 P=70,145 P=224,602 Actuarial gain (loss) on plan assets 25,734 (16,970) Actual contributions 44,717 22,735 Expected return 2,580 15,354 Transfers (4,623) Benefits paid (48,980) (170,953) P=94,196 P=70,145 The major categories of plan assets are as follows: Investments in: Shares of stocks P=20,039 P=38,860 Cash and cash equivalents 10,538 30,602 Common trust fund 8,893 Government securities and other debt securities 53,872 Others P=94,196 P=70,145

79 The principal assumptions as of January 1 of each year used in determining pension benefit obligations for the Group s plans are shown below: Discount rate 7.52% 8.29% to 10.53% 9.00% to 10.55% Expected rate of return on assets 4.87% 7.00% 7.00% to 10.00% Future salary increases 7.70% 6.00% to 8.00% 6.00% to 8.00% As of December 31, 2012, the discount rate, expected rate of return on assets and future salary increases are 6.04% to 5.67%, and 7.83%, respectively. As of December 31, 2012 and 2011, the Group has no transactions with its retirement fund such as loans, investments, gratuities, or surety. The fund also does not have investments in debt or equity securities of the companies in the Group. Retirement Benefit Costs Current service cost P=26,064 P=30,034 P=40,963 Interest cost on benefit obligation 17,967 25,562 41,954 Expected return on plan assets (2,580) (15,354) (22,530) Net actuarial loss recognized 8,952 4,391 8,700 Curtailment loss (gain) (Note 27) 3,111 75,817 (4,766) Separation cost 16,995 Past service cost - nonvested benefits 15 Total net benefit expense 53, ,450 81,316 Net benefit expense attributable to discontinued operations (Note 30) (17,773) P=53,529 P=120,450 P=63,543 Actual return on plan assets P=20,003 (P=1,616) P=91,458 Amounts for the current and prior periods are as follows: (In Millions) Defined benefit obligation P=221.8 P=224.1 P=285.0 P=412.2 P=242.5 Fair value of plan assets (94.2) (70.1) (223.7) (224.3) (194.2) Deficit Experience adjustments on plan liabilities (24.0) (29.6) (9.7) 18.3 (69.8) Experience adjustments on plan assets 26.0 (17.0) 68.9 (30.1) (0.5) The Group expects to contribute approximately P=44.7 million to the defined benefit pension plan in 2013.

80 29. Income Tax a. The components of provisions for (benefit from) income tax are as follows: Current: RCIT P=66,461 P=42,221 P=49,624 MCIT 14,293 11,687 1,606 80,754 53,908 51,230 Deferred 170,400 (249,208) (472,697) P=251,154 (P=195,300) (P=421,467) b. The components of the Group s recognized net deferred income tax assets and liabilities are as follows: Net Deferred Income Tax Assets Net Deferred Net Deferred Income Income Tax Liabilities Tax Assets Net Deferred Income Tax Liabilities Deferred income tax assets on: NOLCO P=645,828 P= P=732,308 P= MCIT 13, Allowances for: Writedown of property and equipment 91,045 Impairment of receivables 84, , Inventory obsolescence 19,608 21,210 Investment in stock Accrued retirement costs and others 16, , Others 20, , ,856 1, ,453 1,172 Deferred income tax liabilities: Pension asset (1,322) (688) (1,437) Others (7,094) (29) (10,664) (4) (7,094) (1,351) (11,352) (1,441) P=793,762 (P=339) P=964,101 (P=269) b. Details of the Group s NOLCO and MCIT which can be carried forward and claimed as tax credit against regular taxable income and regular income tax due, respectively, are as follows: NOLCO Incurred in Available Until Amount Applied Expired Balances as of December 31, 2012 Tax Effect P=851,550 P= P= P=851,550 P=255, ,364,384 (28,690) 1,335, , ,168,924 1,168, , ,382 (1,382) P=3,386,240 (P=30,072) P= P=3,356,168 P=1,006,850

81 MCIT Incurred in Available Until Amount Applied Expired Balances as of December 31, P=14,293 P= P= P=14, ,092 3, ,645 1, ,073 (624) (22,449) P=42,103 (P=624) (P=22,449) P=19,030 c. The following are the Group s NOLCO and MCIT for which no deferred income tax assets have been recognized because management believes that it is not probable that sufficient future taxable income will be available against which the deferred tax assets can be utilized: NOLCO P=1,203,408 P=88,440 MCIT 5,454 35,795 d. Reconciliation between the income tax expense computed at statutory income tax rates of 30% in the provision for income tax expense as shown in profit or loss is as follows: Benefit from income tax at statutory tax rate (P=40,518) (P=246,271) (P=460,767) Income tax effects of: Changes in unrecognized deferred income tax assets 46,571 Income tax holiday (ITH) incentive on registered activities (Note 33) (36,123) 7,093 (32,318) Gain on sale of investment already subjected to final tax (5,299) (22,807) Equity in net (earnings) loss of associates (10,495) 4,358 (12,062) Interest income already subjected to a lower final tax (1,449) (1,944) (1,360) Dividend income (903) (84) (398) NOLCO derecognized 334,877 73,775 MCIT derecognized ,093 Others 5, (24,623) P=251,154 (P=195,300) (P=421,467)

82 30. Discontinued Operations On December 28, 2010, the Company and AEV closed the sale of the Company s 62.5% equity in each of Aboitiz Jebsen Bulk Transport Corporation (AJBTC), Aboitiz Jebsen Manpower Solutions, Inc. (AJMSI) and Jebsen Maritime, Inc. (JMI) to AEV for a total price of P=355.9 million. On the same day, the Company and ACO closed the sale of the Company s 50% equity in Jebsen Management (JMBVI) Limited to ACO for P=44.0 million. AEV and ACO paid the full price amounting to P=399.9 million on January 12, The Group recognized net gain of P=300.9 million, net of transaction costs of P=32.0 million, in the consolidated statements of income from this sale. The gain is included as part of 2010 net income from discontinued operations. The results of operation of AJBTC, AJMSI, JMI and JMBVI presented under discontinued operations in the consolidated statements of income are as follows: 2010 Revenue P=1,766,979 Cost and expenses (1,743,029) Gross profit 23,950 Other income 61,428 Gain from sale of discontinued operations 300,904 Income before income tax from discontinued operations 386,282 Provision for income tax: Current 24,112 Deferred 3,121 27,233 Net income from discontinued operations P=359,049 The net cash flows from the Abojeb Group are as follows: 2010 Operating P=29,086 Investing (29,977) Financing 19,878 Net cash inflow P=18,987 Earnings per share: Basic and diluted earnings from discontinued operation (P=0.1468) 31. Provisions and Contingencies a. There are certain legal cases filed against the Group in the normal course of business. Management and its legal counsel believe that the Group has substantial legal and factual bases for its position and are of the opinion that losses arising from these cases, if any, will not have a material adverse impact on the consolidated financial statements. b. The Company has pending insurance claims (presented as part of Insurance and other claims) amounting to P=196,871 million and P=57,566 million as at December 31, 2012 and 2011, respectively, which management believes is virtually certain of collection.

83 32. Earnings Per Common Share Basic and diluted earnings per common share were computed as follows: Net loss attributable to equity holders of the parent (a) (P=396,543) (P=634,267) (P=808,680) Weighted average number of common shares outstanding for the year (b) 2,446,136,400 2,446,136,400 2,446,136,400 Loss per common share (a/b) (P=0.16) (P=0.26) (P=0.33) There are no potentially dilutive common shares as at December 31, 2012, 2011 and Registration with the Board of Investments (BOI) a. With the effectivity of the merger of the Company and ZIP, the Parent Company assumed ZIP s outstanding BOI registration as an expanding operator of logistics service facility on a non-pioneer status under Certificate of Registration No The ITH incentive for a period of three years, which expired in July 2011, provided that for purpose of availment, a base figure of P=924.1 million will be used in the computation of the ITH for the said expansion. b. On January 27, 2011, BOI approved the Company s application for registration of the modernization of two (2) second-hand RORO vessels, SuperFerry 20 and SuperFerry 21. The Company was granted ITH incentive for a period of three years from March 2011 or actual start of operations. The ITH incentive shall be limited only to the sales/revenues generated by the registered project. c. SFFC is registered with BOI as a New Operator of Domestic Shipping (Passenger Vessel) on a Non-Pioneer status. The Company is entitled to four years ITH from date of registration until February Agreements and Commitments a. The Company has a Memorandum of Agreement (Agreement) with Asian Terminals, Inc. (ATI) for the use of ATI s facilities and services at the South Harbor for the embarkation and disembarkation of the Company s domestic passengers, as well as loading, unloading and storage of cargoes. The Agreement shall be for a period of five years, which shall commence from the first scheduled service of the Company at the South Harbor. The Agreement is renewable for another five years under such terms as may be agreed by the parties in writing. If the total term of the Agreement is less than ten years, then the Company shall pay the penalty equivalent to the unamortized reimbursement of capital expenditures and other related costs incurred by ATI in the development of South Harbor. The Agreement became effective on January 14, b. Under the terms and conditions of the Agreement, the Company shall avail of the terminal services of ATI, which include, among others, stevedoring, arrastre, storage, warehousing and passenger terminal. Domestic tariff for such services (at various rates per type of service as enumerated in the Agreement) shall be subject to an escalation of 5% every year. Total service fees charged to operations amounted to P=

84 182.4 million, P=197.5 million and P=196.3 million in 2012, 2011 and 2010, respectively (see Note 25). c. On December 31, 2012, the Company and MNHPI entered into an agreement to engage the services of MNHPI to handle all the freight, passenger terminal and allied port services requirements of the former and in particular, to consolidate all its operations at Manila North Harbor. The agreement is effective upon signing and shall remain in effect for 10 years, renewable for another 5 years upon such terms and conditions as the parties may agree. d. AJBTC, JMI and AJMSI (Agents) have outstanding agreements with foreign shipping principals, wherein the Agents render manning and crew management services consisting primarily of the employment of crew for the principals vessels. As such, the principals have authorized the Agents to act on their behalf with respect to all matters relating to the manning of the vessels. Total service fees revenues recognized in the consolidated statements of income from these agreements amounted to P=437.4 million in e. JMBVI and Subsidiaries have outstanding Charter Party Agreements with vessels owners for the use of the vessels or for sublease to third parties within the specified periods of one (1) to three (3) years under the terms and conditions covered in the agreements. In consideration thereof, JMBVI recognized charter hire expense amounting to P=1,001.1 million in 2011 and P=529.4 million in f. The Group has entered into various operating lease agreements for its office spaces. The future minimum rentals payable under the noncancellable operating leases are as follows: Within one year P=223,689 P=172,682 After one year but not more than five years 184, ,857 More than five years 1,366 P=407,897 P=494,905 g. The Company entered into several vessel leasing agreements for a period ranging from three to 15 months. Vessel lease rates are based on an agreed daily rate of $3,125 to $9, Financial Risk Management Objectives and Policies Risk Management Structure The Group s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Groups financial performance. It is, and has been throughout the year under review, the Group s policy that no trading in financial instruments shall be undertaken. Credit Risk Management Objectives and Procedures The Group s principal financial instruments comprise of cash and cash equivalents, loans payable, long-term debt, obligations under finance lease, restructured debts and redeemable preferred shares. The main purpose of these financial instruments is to raise financing for the Groups operations. The Group has other various financial assets and liabilities such as trade and other receivables and trade and other payables, which arise directly from operations.

85 The main risks arising from the Group s financial instruments are credit risk involving possible exposure to counter-party default, primarily, on its short-term investments and trade and other receivables; liquidity risk in terms of the proper matching of the type of financing required for specific investments and maturing obligations; foreign exchange risk in terms of foreign exchange fluctuations that may significantly affect its foreign currency denominated placements and borrowings; and interest rate risk resulting from movements in interest rates that may have an impact on interest bearing financial instruments. Credit risk To manage credit risk, the Group has policies in place to ensure that all customers that wish to trade on credit terms are subject to credit verification procedures and approval of the Credit Committee. In addition, receivable balances are monitored on an ongoing basis to reduce the Group s exposure to bad debts. The Group has policies that limit the amount of credit exposure to any particular customer. The Group does not have any significant credit risk exposure to any single counterparty. The Group s exposures to credit risks are primarily attributable to cash and collection of trade and other receivables with a maximum exposure equal to the carrying amount of these financial instruments. As of December 31, 2012 and 2011, the Group did not hold collateral from any counterparty. The credit quality per class of financial assets that are neither past due nor impaired is as follows: As at December 31, 2012 Neither past due nor impaired Past due or High Medium Low impaired Total Loans and receivables Cash in banks P=663,369 P= P= P= P=663,369 Cash equivalents 82,272 82,272 Trade and other receivables: Freight 17,536 28, ,500 1,321,550 1,549,008 Passage 25,352 52,557 77,909 Services fees 35,609 1,569 5,931 66, ,170 Distribution 184, , ,371 Others 147,953 21,944 1, , ,127 Nontrade receivables 39,885 15, , ,807 Due from related parties 58,786 58,786 Insurance and other claims 113,678 4, , ,246 Advances to officers and employees 38,515 1, ,207 AFS investments 8, ,735 Total P=1,415,715 P=73,792 P=189,094 P=2,205,406 P=3,884,007 As at December 31, 2011 Neither past due nor impaired Past due or High Medium Low impaired Total Loans and receivables Cash in banks P=754,151 P= P= P= P=754,151 Cash equivalents 130, ,721 Trade and other receivables: Freight 372, ,230 1,228,008 Passage 87,988 87,988 Services fees 45,144 18,250 2,751 65, ,161 Distribution 238, , ,329 Others 186,396 84, ,009 (Forward)

86 Neither past due nor impaired Past due or High Medium Low impaired Total Nontrade receivables P=178,045 P= P= P= P=178,045 Due from related parties 92, , ,730 Insurance and other claims 35,468 69, ,817 Advances to officers and employees 17, ,171 AFS investments 9,377 9,377 Total P=2,149,223 P=18,250 P=2,751 P=1,931,283 P=4,101,507 High quality receivables pertain to receivables from related parties and customers with good favorable credit standing. Medium quality receivables pertain to receivables from customers that slide beyond the credit terms but pay a week after being past due are classified under medium quality. Low quality receivables are accounts from new customers and forwarders. For new customers, the Group has no basis yet as far payment habit is concerned. With regards to the forwarders, most of them are either under legal or suspended. In addition, their payment habits extend beyond the approved credit terms because their funds are not sufficient to conduct their operations. The Group evaluated its cash in bank and cash equivalents as high quality financial assets since these are placed in financial institutions of high credit standing. It also evaluated its advances to officers and employees as high grade since these are deductible from their salaries. The aging per class of financial assets that were past due but not impaired is as follows: As at December 31, 2012 Neither past Past due but not impaired Impaired due nor impaired Less than 30 days 31 to 60 days 61 to 90 days Over 90 days financial assets Total Loans and receivables: Cash in banks P=663,369 P= P= P= P= P= P=663,369 Cash equivalents 82,272 82,272 Trade and other receivables: Freight 227, , , , , ,571 1,549,008 Passage 25,352 26, ,338 15,301 77,909 Service fees 43,109 17,898 2,635 1,927 8,830 34, ,170 Distribution 184,582 69,625 7, , ,371 Others 171, ,027 38,496 28,814 50, ,127 Nontrade receivables 54,944 3,949 4,640 4, ,428 6, ,807 Due from related parties 58,786 58,786 Insurance and other claims 117,953 1,084 77,834 51, ,246 Advances to officers and employees 40, ,207 AFS investments 8,735 8,735 Total P=1,678,601 P=634,483 P=250,526 P=181,143 P=816,420 P=322,834 P=3,884,007

87 As at December 31, 2011 Neither past Past due but not impaired Impaired due nor impaired Less than 30 days 31 to 60 days 61 to 90 days Over 90 days financial assets Total Loans and receivables: Cash in banks P=754,151 P= P= P= P= P= P=754,151 Cash equivalents 130, ,721 Trade and other receivables: Freight 372, ,777 33,426 26, , ,375 1,228,008 Passage 87,988 87,988 Service fees 66,145 25,682 8,630 6,251 3,102 21, ,161 Distribution 238, ,471 4,562 5,151 6,663 16, ,329 Others 186,396 25,742 20,860 25,190 12, ,009 Nontrade receivables 178, ,045 Due from related parties 92,437 2,242 2,484 99, ,263 5, ,730 Insurance and other claims 35,468 22,753 46, ,817 Advances to officers and employees 17, ,171 AFS investments 9,797 9,797 Total P=2,170,644 P=319,914 P=70,007 P=185,387 P=1,046,910 P=309,065 P=4,101,927 Liquidity risk The Group manages its liquidity profile to be able to finance its capital expenditures and service its maturing debt by maintaining sufficient cash during the peak season of the passage business. The Group regularly evaluates its projected and actual cash flow generated from operations. The Group s existing credit facilities with various banks are covered by the Continuing Suretyship for the accounts of the Group. The liability of the Surety is primary and solidary and is not contingent upon the pursuit by the bank of whatever remedies it may have against the debtor or collaterals/liens it may possess. If any of the secured obligations is not paid or performed on due date (at stated maturity or by acceleration), the Surety shall, without need for any notice, demand or any other account or deed, immediately be liable therefore and the Surety shall pay and perform the same. The following table summarizes the maturity profile of the Group s financial assets and financial liabilities based on contractual repayment obligations and the Group s cash to be generated from operations and the Group s financial assets as at December 31: Less than 1 year 1 to 5 years More than 5 years Total Less than 1 year 1 to 5 years More than 5 years Total Financial assets Cash and cash equivalents P=745,641 P= P= P=745,641 P=884,872 P= P= P=884,872 Trade and other receivables 2,806,797 2,806,797 2,898,193 2,898,193 AFS investments 8,735 8,735 9,797 9,797 Total undiscounted financial assets 3,561,173 3,561,173 3,792,862 3,792,862 Financial liabilities Loans payable 1,384,130 1,384,130 1,220,454 1,220,454 Trade and other payables* 3,090,967 3,090,967 2,971,510 2,971,510 (Forward)

88 Less than 1 year 1 to 5 years More than 5 years Total Less than 1 year 1 to 5 years More than 5 years Total Redeemable preferred shares P=6,882 P=` P= P=6,882 P=27,363 P= P= P=27,363 Long-term debts 1,239,671 2,429,377 3,669,048 1,185,628 3,639,897 4,825,525 Obligation under finance lease 81,904 50, ,294 36,407 95,374 2, ,273 Other noncurrent liabilities 9,030 9,030 8,409 8,409 Total undiscounted financial liabilities 5,803,554 2,488,797 8,292,351 5,441,362 3,743,680 2,492 9,187,534 Total net undiscounted financial liabilities (P=2,242,381) (P=2,488,797) P= (P=4,731,178) (P=1,648,500) (P=3,743,680) (P=2,492) (P=5,394,672) *Excludes nonfinancial liabilities amounting to P=437.0 million and P=460.7 million as of December 31, 2012 and 2011, respectively. Trade and other payables and maturing other liabilities are expected to be settled using cash to be generated from operations, drawing from existing and new credit lines and additional capital contribution of the shareholders. Foreign exchange risk Foreign currency risk arises when the Group enters into transactions denominated in currencies other than their functional currency. Management closely monitors the fluctuations in exchange rates so as to anticipate the impact of foreign currency risks associated with the financial instruments. To mitigate the risk of incurring foreign exchange losses, the Group maintains cash in banks in foreign currency to match its financial liabilities. The Group s significant foreign currency-denominated financial assets and financial liabilities as of December 31 are as follows: AUD 1 DKK 2 EUR 3 NZD 4 USD 5 Equivalent Total Peso Financial Asset Cash in banks $2 Kr 19 $ $251 P=15,315 Trade receivables , ,986 Financial Liabilities Trade and other payables ,434 Obligations under finance lease , ,966 Net foreign currency denominated assets (liabilities) ($279) (Kr596) ( 48) ($456) $268 (P=3,980) 1 $1 = P= $1 = P= Kr1 = P= = P= $1 = P= AUD 1 DKK 2 EUR 3 NZD 4 USD 5 Equivalent Total Peso Financial Asset Cash in bank $2 Kr1 2 $1 $434 P=19,270 Trade receivables , ,274 Financial Liabilities Trade payables 372 1, ,158 Obligations under finance lease , , ,825 Net foreign currency denominated assets (liabilities) ($370) (Kr1,756) ( 311) ($82) ($280) (P=62,551) 1 $1 = P= = P= Kr1 = P= $1 = P= $1 = P=

89 The Group has recognized foreign exchange revaluation gains amounting to P=0.5 million in 2012 and P=5.3 million in 2011 and foreign exchange loss in 2010 amounting to P=12.9 million. The following table demonstrates the sensitivity to a reasonably possible change in the foreign currency exchange rates, with all other variables held constant, of the Group s profit before tax as at December 31, 2012 and Appreciation/ (Depreciation) of Foreign Effect on Income Before Tax Currency Australian Dollar (AUD) +5% (P=600) (P=823) -5% Euro (EUR) +5% (218) (886) -5% New Zealand Dollar (NZD) +5% (131) (140) -5% US Dollar (USD) +5% (767) (613) -5% Danish Kroner (DKK) +5% 392 (672) -5% (392) 672 There is no other impact on the Group s equity other than those already affecting profit or loss. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of the Group s financial instruments will fluctuate because of changes in market interest rates. Borrowings issued at fixed rates exposes the Group to fair value interest rate risk. The Group s borrowings are subject to fixed interest rates ranging from 2.3% to 9.7% for 10 years in 2012 and 2.5% to 10.3% for 10 years in The Group s P=4.0 billion loans under the OLSA includes P=2.0 billion loans which bear variable interest rates and exposes the Group to cash flow interest rate risk. The sensitivity of the consolidated statement of income is the effect of the assumed changes in interest rates on the consolidated income before income tax for one year, based on the floating rate non-trading financial liabilities held at December 31, 2012 with other variables held constant: Changes in Effect on income before tax interest rates For more than one year +80 basis points (P=10,523) (P=15,710) -80 basis points 10,523 15,710

90 Equity price risk Equity price risk is the risk that the fair value of traded equity instruments decreases as the result of the changes in the levels of equity indices and the value of the individual stocks. As at December 31, 2012 and 2011, the Group s exposure to equity price risk is minimal. The effect on equity (as a result of a change in fair value of equity instruments held as AFS investments as of December 31, 2012 and 2011) due to reasonably possible change in equity indices, with all other variables held constant, follows: The impact on the Group s equity excludes the impact of transactions affecting the consolidated statements of comprehensive income. Increase (decrease) Effect on equity in PSE index AFS investments 34% P=212 P=156 (34%) (212) (156) The impact on the Group s equity excludes the impact of transactions affecting the consolidated statements of comprehensive income. Capital Risk Management Objectives and Procedures The Group s capital management objectives are to ensure the Group s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for others stakeholders and produce adequate and continuous opportunities to its employees; and to provide an adequate return to shareholders by pricing products/services commensurately with the level of risk. The Group sets the amount of capital in proportion to risk. It manages the capital structure and makes adjustments in the light of changes in economic conditions and the risk characteristics of the underlying assets, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. The Group considers its total equities as its capital. The Group monitors capital on the basis of the carrying amount of equity as presented on the face of the balance sheet. The capital ratios are as follows: Assets financed by: Creditors 73% 73% Stockholders 27% 27%

91 36. Fair Value of Financial Instruments The table below presents a comparison by category of the carrying amounts and fair values of the Group s financial instruments as at December 31, 2012 and Financial instruments with carrying amounts reasonably approximating their fair values are no longer included in the comparison Carrying Amount Fair Value Carrying Amount Fair Value Financial Liabilities Other financial liabilities: Long-term debts P=3,178,616 P=3,475,112 P=3,963,743 P=3,590,354 Obligations under finance lease 122,581 94, , ,427 P=3,301,197 P=3,569,395 P=4,085,853 P=3,707,781 The following methods and assumptions are used to estimate the fair value of each cash flow of financial instruments: Cash and cash equivalents, trade and other receivable, trade and other payables, refundable deposits and redeemable preferred shares The carrying amounts of these financial instruments approximate their respective fair values due to their relatively short-term maturities. Loans payable Loans payable that reprice every three (3) months, the carrying value approximates the fair value on current market rate. For fixed rate loans, the carrying value approximates fair value due to its short term maturities, ranging from three months to twelve months. AFS investments The fair values of AFS investments are based on quoted market prices, except for unquoted equity shares which are carried at cost since fair values are not readily determinable. Long-term debts Discount rates of 2.6% and 4.7% were used in calculating the fair value of the long term debt as of December 31, 2012 and 2011, respectively. Obligations under finance lease The fair values of obligation under finance lease are based on the discounted net present value of cash flows using discount rates of 1.45% to 4.82% as at December 31, 2012 and 1.75% to 5.27% as at December 31, Fair Value Hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities

92 Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. Only the Group s AFS investments, which are classified under Level 1, are measured at fair value. During the reporting period ended December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.

93 2GO GROUP, INC. AND SUBSIDIARIES Exhibit II Supplementary Schedules

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