TABLE OF CONTENTS 3 Financial Highlights 4 Message of the Chairman 6 Financial Review 8 A Kapamilya Nation 16 Management’s Responsibility for Financial Statements 17 Report of Independent Auditors 18 Financial Statements Balance Sheets Statements of Income Statements of Changes in Stockholders’ Equity Statements of Cash Flows Notes to Financial Statements 68 Board of Directors 70 Management Committee 72 Awards and Recognition 73 List of Officers 77 Corporate Addresses 79 Banks and Other Financial Institutions AR 2006.indd 1 4/24/07 8:10:44 AM FINANCIAL HIGHLIGHTS AR 2006.indd 2-3 4/24/07 8:10:49 AM AR 2006.indd 4-5 4/24/07 8:11:09 AM Operating expenses, which consist of production cost, general and administrative Non-cash operating expenses, composed primarily of depreciation and expenses, cost of sales and services, and agency commission declined by 2% amortization, went down by 14% to P2,075 million in 2006 from P2,407 million to P15,724 million in 2006. Cash operating expenses were flat while non-cash in the same period last year. Bulk of the decline can be attributed to lower operating expenses declined by 14% YoY. If we strip-out the non-recurring charges, amortization costs which dropped by 23% to P904 million as the Company already Management Discussion and Analysis of Financial Condition and Results of total opex went up by 5% to P15,257 million. completed the amortization of deferred subsidies on the decoder boxes of existing Operations for 2006 US DTH subscribers in 2005. Amortization of program rights, on the other hand, Production cost was almost flat YoY at P5,714 million. Excluding non-cash charges increased by 7% to P887 million as the Company accelerated the amortization of ABS-CBN Broadcasting Corporation’s (ABS-CBN) net income in 2006 more than such as depreciation and amortization of program rights, cash production cost movies based on their commercial viability. doubled to P741 million from P252 million in 2005. Despite an industry wide ABS-CBN Global 3,749 3,131 618 20 increased slightly to P4,344 million. Talent fees, which account for 42% of total slowdown in ad spending particularly in 2H06, airtime revenues grew by 3% to production cost, declined by 4% to P2,412 million as a result of a more efficient Other subsidiaries 1,328 1,117 211 19 P10,663 million in 2006. In addition, revenues were boosted by license fees from production planning which led to lesser number of taping days. Other program Total sale of services 5,077 4,248 829 20 the migration of DTH (direct-to-home) subscribers in North America to DIRECTV’s expenses, on the other hand, went up by 16% to P1,098 million due to expenses platform. Expense growth, on the other hand, remained controlled due to more related to the Pacquiao fights coupled with increased marketing activities in the prudent production cost spending coupled with lower employee cost. provinces to enhance the Company’s leadership nationwide. Other subsidiaries’ sale of services, on the other hand, went up by 19% to P1,328 Revenues million due primarily to a 26% increase in ABS-CBN Films’ revenues. Depreciation 1,235 (64) (5) 1,170 Amortization 904 1,172 (268) (23) Gross revenues, which consist of gross airtime revenues, sale of services, license ABS-CBN Films released nine movies in 2006 compared to five movies the prior Non-cash expenses 2,407 (332) (14) fees, and sale of goods rose by 2% year on year (YoY) to P17,386 million for 2006. year. Out of the nine movies released, ticket sales of four movies namely Don’t 2,075 Give up on Us, Close to You, Sukob, and You are the One surpassed the P100 million blockbuster mark. In particular, the horror movie, Sukob, grossed more than P200 Personnel expenses and 2,412 2,513 (101) (4) Depreciation expense, on the other hand, decreased by 5% to P1,170 million given million at the box office, making it the highest grossing local movie in Philippine controlled capital spending. talent fees history. Facilities related expenses 833 840 (7) (1) Operating Income Other program expenses 1,098 946 152 16 Meanwhile, sale of goods which refers to revenues arising from the sale of Airtime revenues 10,663 10,334 329 3 Sub-total - cash production cost 4,344 4,300 1 consumer products such as magazines, audio, video products and phonecards, 44 With revenues growing faster than operating expenses, operating income improved Sale of services 5,077 4,248 829 20 Non-cash production cost 1,370 1,391 (1) dropped by 37% to P529 million in 2006. (20) by 58% from P1,051 million to P1,661 million as of December. Consequently, License fees 1,117 1,619 (502) (31) Total production cost 5,714 5,691 24 0 operating margin went up to 10% as against 6% in the same period last year. Sale of goods 529 846 (317) (37) ABS-CBN Global’s sale of goods, which contributed 46% of total, dropped by 51% Gross revenues 2 17,386 17,047 339 to P244 million after it stopped selling prepaid phonecards in the United States Net Income to concentrate on its core business of content distribution. Sale of goods of other Consolidated general and administrative expenses (GAEX) dropped by 12% YoY to subsidiaries, on the other hand, declined by 17% due mainly to lower sales of audio P5,135 million from P5,847 million the previous year. Excluding non-cash charges Other expenses declined by 60% to P252 million in 2006 from P623 million in Consolidated gross airtime revenues improved by 3% to P10,663 million. Parent products by Star Records as there were fewer hit music records in 2006. such as depreciation and amortization, consolidated cash GAEX likewise declined 2005. Net finance costs decreased by 10% to P648 million on the back of lower airtime revenues, which consist of revenues from Channel 2, AM and FM radio, and by 7% to P4,630 million. However, without the non-recurring charges, total outstanding debt as of December. Other income, on the other hand, increased by the regional network, likewise went up by 3% to P9,602 million. This can be primarily recurring GAEX is up by 5% or in line with inflation rate. 56% to P449 million from P287 million due to gate receipts from the Pacquiao- attributed to higher revenue contribution from non-traditional advertisements Larios boxing bout organized by the Company in July. Meanwhile, equity losses or creative buys such as product intrusions and product placements. Airtime reached P52 million as against P194 million the prior year, reflecting the continued revenues of other platforms, on the other hand, grew by 9% YoY to P1,060 million improvement in Skycable’s operations. on the back of higher airtime revenues of ABS-CBN Global. As a result of the improvement in operating income and lower other expenses, the ABS-CBN Global 244 501 (258) (51) Company reported a net income of P742 million in 2006, 187% higher YoY. Net of Personnel expenses 2,505 (427) Other subsidiaries 285 344 (59) (17) 2,078 (17) minority interest, net income attributable to equity holders reached P741 million Advertising and promotions 520 503 16 3 Total sale of goods 529 846 (317) (37) in 2006, up 194% YoY from P252 million in 2005. Similarly, earnings before interest, Facilities related expenses 537 496 41 8 taxes, depreciation, and amortization (EBITDA) went up by 19% to P4,188 million, Contracted services 448 404 43 11 translating to an EBITDA margin of 24%. Parent airtime revenues 9,602 9,362 240 3 Taxes and licenses 151 151 0 0 Other platforms 1,060 971 89 9 Expenses Entertainment, amusement 139 119 20 17 Balance Sheet Accounts Gross airtime revenues 10,663 10,334 329 3 and recreation Total expenses went down by 4% to P15,976 million in 2006. However, excluding Other expenses 757 816 (58) (7) Total consolidated assets reached P23,902 million, 4% lower versus end-2005. non-recurring charges of P467 million in 2006 related to DIRECTV marketing Sub-total -cash GAEX 4,630 4,995 (365) (7) Cash and cash equivalents declined by 5% to P1,662 million. Consolidated trade expenses as well as P1,420 million DIRECTV marketing expenses and Special Non-cash GAEX 505 852 (347) (41) and other receivables dropped by 6% to P4,382 million with trade receivables License fees, which represent revenues from the migration of existing US DTH Separation Program (SSP) expenses booked in 2005, total recurring expenses went Total GAEX 5,135 5,847 (712) (12) accounting for 81% of total. Trade receivables increased by 3% to P4,010 million, subscribers to DIRECTV’s platform as well as take up of new subscribers, declined up by 2% to P15,508 million. translating to trade days sales outstanding (DSO) of 84 days or flat versus 2005. by 31% to P1,117 million in 2006 from P1,619 million in 2005 as the migration Less: non-recurring expense 467 1,420 (952) (67) Total recurring GAEX 4,667 4,427 240 5 period for both new and existing US DTH subscribers to DIRECTV’s platform ended Other current assets increased by 28% to P1,011 million due mainly to production last August. expenses of yet to be aired episodes of the Company’s programs particularly soap Cost of sales and services went up by 2% to P2,417 million in 2006. This compares operas as well as upcoming movies of ABS-CBN Films. Since 2005, the Company Sale of services, which refers to revenues derived from cable and satellite against a 10% growth in combined sale of services and sale of goods hence begun the canning or advanced taping of some shows in order to cut location programming services, film production and distribution, interactive media, content reflecting margin improvement of the subsidiaries.