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L O R E N Z O S H I P P I N G

C O R P O R A T I O N

2 0 T H F L O O R , T I M E S P L A Z A B L D G . ,

U N I T E D N A T I O N S A V E N U E ,

E R M I T A , M A N I L A

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Dept. Requiring this Doc.

Remarks = please use black ink for scanning purposes

ROMUALDO L. BEA 527-5555

Contact Person Company Telephone Number

COVER SHEET

S.E.C. Registration Number

(Company's Full Name)

(Business Address: No. Street City / Town / Province)

Fiscal Year Annual Meeting

Month Day Year FORM TYPE

Secondary License Type, If Applicable

Amended Articles Number/Section

Month Day Year

Foreign

To be accomplished by SEC Personnel concerned

Total Amount of Borrowings

Total no. of Stockholders Domestic

S T A M P S

File Number LCU

Document I.D. Cashier

(Form Type)

(Quarter Ending)

QUARTERLY INTERIM FINANCIAL STATEMENTS (SEC FORM 17-Q)

20TH FLOOR, TIMES PLAZA BUILDING

UNITED NATIONS AVENUE, ERMITA, MANILA

(632) 567-21-71 TO 80

June 30, 2017

(Registrant's Address)

Telephone Numbers

SEC Number

FILE Number

LORENZO SHIPPING CORPORATION

48909

(Registrant's Full Name)

1. For the quarterly period ended: 30 June 2017

2. Commission Identification Number: 48909

3. BIR Tax Identification Number: 000-628-958

4. Exact name of registrant as specified in its charter:

Lorenzo Shipping Corporation

5. Province, country or other jurisdiction of incorporation or organization:

Manila, Philippines

6. Industry classification code: (SEC Use Only)

7. Address of registrant's principal office: Postal code: 1006

20th Floor, Times Plaza Building, United Nations Avenue, Ermita, Manila

8. Registrant's telephone number including area code:

(632) 567-2171 to 80

9. Former name, former address and former fiscal year, if changed since last report:

Pier 6/10 North Harbor,

Tondo, Manila

10. Securities registered pursuant to SRC Rule 68.1

11. Are any or all of the securities listed on the Philippine Stock Exchange?

Yes [x] No [ ]

Common Stock 554,642,251

Preferred Stock

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-Q

QUARTERLY REPORT TO SECTION 17 OF THE

SECURITIES REGULATION CODE AND SRC RULE 17 (2) (b) THEREUNDER

Number of Shares

Title of Each Class Issued and outstanding

Exhibit 1

Financial Statements

Unaudited Audited

June 30 December

2017 2016

CURRENT ASSETS

Cash 22,776,820 104,831,011

Trade and other receivables - net 933,469,090 903,302,989

Inventories - at costs 21,046,481 21,095,855

Prepayments and other current assets 288,113,580 260,889,416

TOTAL CURRENT ASSETS 1,265,405,971 1,290,119,271

NON-CURRENT ASSETS

Property and equipment, net 1,568,017,049 1,652,654,409

Deferred income tax asset 36,773,618 36,773,618

Miscellaneous deposits and others 36,755,860 36,352,497

TOTAL NON-CURRENT ASSETS 1,641,546,527 1,725,780,524

TOTAL ASSETS 2,906,952,498 3,015,899,795

CURRENT LIABILTIES

Accounts Payable and Accrued Expenses 868,331,517 920,407,197

Short-term borrowings 649,420,400 519,420,400

Current portion of obligations under finance lease 19,941,894 32,664,533

Current portion of Long-Term Debts 68,747,936 161,558,373

TOTAL CURRENT LIABILITIES 1,606,441,747 1,634,050,503

NON-CURRENT LIABILITIES

Long-Term Debts, Net of current portion 568,689,611 568,689,611

Obligations under finance lease - net of current portion 61,919,542 61,919,542

Pension obligation 86,217,551 89,108,703

TOTAL NON-CURRENT LIABILTIES 716,826,703 719,717,856

TOTAL LIABILITIES 2,323,268,450 2,353,768,358

EQUITY

Common Shares 555,652,251 555,652,251

Additional paid-in capital 459,791,492 459,791,492

Treasury Shares (3,125,850) (3,125,850)

Actuarial Gain (Loss) on Pension Liability (26,166,812) (26,166,812)

Retained Earnings (Deficit) (402,467,034) (324,019,644)

TOTAL EQUITY 583,684,047 662,131,437

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 2,906,952,498 3,015,899,795

STOCKHOLDERS' EQUITY

LORENZO SHIPPING CORPORATION

Balance Sheets

June 30, 2017 and December 31, 2016

(Currency Expressed in Philippine Peso)

ASSETS

LIABILITIES

2017 2016 2017 2016

REVENUES

Freight 605,084,791 541,019,656 1,147,570,172 1,106,944,037

DIRECT COSTS

Cost of services 532,315,138 509,844,535 1,040,829,492 1,006,843,020

Terminal expenses 62,123,351 68,743,021 109,564,360 111,621,701

Total 594,438,490 578,587,556 1,150,393,851 1,118,464,721

GROSS PROFIT 10,646,302 (37,567,900) (2,823,679) (11,520,684)

GENERAL AND ADMINISTRATIVE EXPENSES (41,977,218) (40,295,564) (85,522,967) (81,732,154)

FINANCE COSTS, net (15,290,658) (1,199,293) (26,486,198) (28,038,958)

OTHER INCOME (CHARGES), net 32,553,732 (84,704,847) 36,385,454 (108,990,540)

INCOME BEFORE INCOME TAX (14,067,842) (163,767,603) (78,447,389) (230,282,336)

PROVISION FOR INCOME TAX 584,859

(14,067,842) (163,767,603) (78,447,389) (230,867,195)

* Depreciation expense increase by P13.9M due to revision of Vessel EUL

EARNING (LOSS) PER SHARE

Basic/Diluted (0.03) (0.30) (0.14) (0.42)

LORENZO SHIPPING CORPORATION

Unaudited Statements of Income (Loss)

June 30, 2017 and June 30, 2016

(Currency Expressed in Philippine Peso)

2nd Quarter For six months ending

2017 2016 2017 2016

Apr - Jun Apr - Jun Jan- Jun Jan- Jun

NET INCOME (LOSS) (14,067,842) (163,767,603) (78,447,389) (230,867,195)

OTHER COMPREHENSIVE INCOME - -

TOTAL COMPREHENSIVE INCOME (LOSS) (14,067,842) (163,767,603) (78,447,389) (230,867,195)

(Currency Expressed in Philippine Peso)

LORENZO SHIPPING CORPORATION

Unaudited Statements of Comprehensive Income (Loss)

June 30, 2017 and June 30, 2016

Actuarial Losses Unappropriated

Additional Treasury on Defined Retained Earnings

Capital Stock Paid-in Capital Shares Benefit Plan (Deficit) Total

Balances at December 31, 2016 555,652,251 459,791,492 (3,125,850) (26,166,812) (324,019,644) 662,131,437

Net income for the period - - (78,447,389) (78,447,389)

Cash Dividends Declared - - - - -

Balances at June 30, 2017 555,652,251 459,791,492 (3,125,850) (26,166,812) (402,467,034) 583,684,047

Balances at December 31, 2015 555,652,251 459,791,492 (3,125,850) (17,011,807) 41,281,855 1,036,587,941

Net income for the period - - (230,867,195) (230,867,195)

Cash Dividends Declared - - - -

Balances at June 30, 2016 555,652,251 459,791,492 (3,125,850) (17,011,807) (189,585,340) 805,720,746

(Currency Expressed in Philippine Peso)

Unaudited Statements of Changes in Equity

June 30, 2017 and June 30, 2016

2017 2016

CASH FLOWS FROM OPERATING ACTIVITIES

Income before provision for income tax (78,447,389) (230,282,336)

Adjustments:

Provision for:

Doubtful accounts 5,737,851 6,012,589

Inventory losses

Depreciation /Amortization 141,374,874 136,799,118

Interest Income (97,335) (123,704)

Interest Expense 25,365,081 27,681,979

Pension Costs

Loss (Gain) on:

Disposal of property and equipment (3,519,405) 62,121,076

Foreign currency translation 294,948 (27,848)

90,708,625 2,180,874

Increase in current assets

Receivables (35,903,952) 169,975,517

Prepayments (27,174,790) (53,275,298)

Decrease in accounts payable and - -

accrued expenses (55,261,825) (208,502,671)

Cash generated from operations (27,631,942) (89,621,578)

Income tax paid through tax credits (584,859)

Net cash flow provided by operating activities (27,631,942) (90,206,437)

CASH FLOWS FROM INVESTING ACTIVITIES

(Increase) Decrease in:

Other assets (403,363) 1,654,833

Additions to property and equipment (59,880,964) (65,764,880)

Proceeds from disposal of property and equipment 6,662,854 22,444,704

Interest received 97,335 123,704

Net cash flow used in investing activities (53,524,138) (41,541,639)

CASH FLOWS FROM FINANCING ACTIVITIES

Increase in:

Obligations under finance lease (12,722,639) (17,447,716)

Payments of short-term borrowings - (40,550,400)

Proceeds from short-term borrowings 130,000,000 126,830,400

Proceeds from long-term borrowings - -

Payments of long-term borrowings (92,810,436) (95,761,825)

Interest paid (25,365,081) (27,681,979)

Payment for acquisition of treasury shares - -

Cash Dividends paid (0) -

Net cash flows used in financing activities (898,157) (54,611,520)

NET INCREASE (DECREASE) IN CASH ON HAND AND

IN BANKS DURING THE PERIOD (82,054,237) (186,359,596)

CASH ON HAND AND IN BANKS

Beginning 104,831,056 212,576,368

Ending 22,776,819 26,216,772

LORENZO SHIPPING CORPORATION

Unaudited Statements of Cash Flows

For the Period Ending June 30, 2017 and June 30,2016

(Currency Expressed in Philippine Peso)

Operating income before working capital changes

Exhibit 2

Management's Discussion

LORENZO SHIPPING CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. Corporate Information

Lorenzo Shipping Corporation (the Company) was incorporated in the Philippines and registered

with the Securities and Exchange Commission (SEC) on October 17, 1972 primarily to engage in

domestic inter-island cargo shipping activities.

Since 2006, the Company is majority-owned by National Marine Corporation (NMC), a domestic

shipping company (see Note 23). A. Magsaysay, Inc. (AMI) is the ultimate parent company of

NMC.

The Company’s common shares of stock are traded in the Philippine Stock Exchange (PSE)

(see Note 21).

The Company is a holder of several Certificates of Convenience and special permits issued by the

Maritime Industry Authority to service certain domestic ports of call.

The Company’s registered and principal business address is 20th Floor Times Plaza Building,

United Nations Avenue, Ermita, Manila.

The financial statements of the Company as of December 31, 2016 and 2015 and for each of the

three years in the period ended December 31, 2016 were approved and authorized for issue by the

Board of Directors on March 27, 2017.

2. Basis of Preparation, Statements of Compliance and Changes in Accounting Policies and

Disclosures

Basis of Preparation

The accompanying financial statements have been prepared under the historical cost basis, presented

in Philippine peso, which is the Company’s functional and presentation currency, and rounded to

the nearest peso, except when otherwise indicated.

Statement of Compliance

The financial statements of the Company have been prepared in accordance with Philippine Financial

Reporting Standards (PFRSs).

Changes in Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year except for

the following new and amended PFRSs, Philippine Accounting Standards (PAS), Philippine

Interpretations based on International Financial Reporting Interpretations Committee (IFRIC)

interpretations and improvements to PFRSs which were effective beginning January 1, 2016. The

adoption did not have any significant impact on the Company’s financial statements.

Amendments to PFRS 10, PFRS 12 and PAS 28, Investment Entities: Applying the

Consolidation Exception

Amendments to PFRS 11, Accounting for Acquisitions of Interests in Joint Operations

PFRS 14, Regulatory Deferral Accounts

Amendments to PAS 1, Disclosure Initiative

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Amendments to PAS 16 and PAS 38, Clarification of Acceptable Methods of Depreciation

and Amortization

Amendments to PAS 16 and PAS 41, Agriculture: Bearer Plants

Amendments to PAS 27, Equity Method in Separate Financial Statements

Annual Improvements to PFRSs 2012 - 2014 Cycle

• Amendment to PFRS 5, Changes in Methods of Disposal

• Amendment to PFRS 7, Servicing Contracts

• Amendment to PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim

Financial Statements

• Amendment to PAS 19, Discount Rate: Regional Market Issue

• Amendment to PAS 34, Disclosure of Information ‘Elsewhere in the Interim Financial

Report’

Future Changes in Accounting Policies The following are the new standards, amendments and improvements to PFRS that were issued but

are not yet effective as at December 31, 2016. Unless otherwise indicated, the Company does not

expect the future adoption of the said new standards, amendments and improvements to have a

significant impact on the financial statements. The Company intends to adopt the applicable

standards, interpretations, amendments and improvements when these become effective.

Effective beginning on or after January 1, 2017

Amendment to PFRS 12, Clarification of the Scope of the Standard (Part of Annual

Improvements to PFRSs 2014 - 2016 Cycle)

These amendments clarify that the disclosure requirements in PFRS 12, other than those relating

to summarized financial information, apply to an entity’s interest in a subsidiary, a joint venture

or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or

included in a disposal group that is classified) as held for sale.

Amendments to PAS 7, Statement of Cash Flows, Disclosure Initiative

The amendments to PAS 7 require an entity to provide disclosures that enable users of financial

statements to evaluate changes in liabilities arising from financing activities, including both

changes arising from cash flows and non-cash changes (such as foreign exchange gains or

losses). On initial application of the amendments, entities are not required to provide

comparative information for preceding periods. Early application of the amendments is

permitted.

Application of amendments will result in additional disclosures in the 2017 financial statements

of the Company.

Amendments to PAS 12, Income Taxes, Recognition of Deferred Tax Assets for Unrealized

Losses

The amendments clarify that an entity needs to consider whether tax law restricts the sources of

taxable profits against which it may make deductions on the reversal of that deductible

temporary difference. Furthermore, the amendments provide guidance on how an entity should

determine future taxable profits and explain the circumstances in which taxable profit may

include the recovery of some assets for more than their carrying amount.

- 3 -

Entities are required to apply the amendments retrospectively. However, on initial application

of the amendments, the change in the opening equity of the earliest comparative period may be

recognized in opening retained earnings (or in another component of equity, as appropriate),

without allocating the change between opening retained earnings and other components of

equity. Entities applying this relief must disclose that fact. Early application of the amendments

is permitted.

The Company is currently assessing the impact of adopting the amendments to the standard.

Effective beginning on or after January 1, 2018

Amendments to PFRS 2, Share-based Payment, Classification and Measurement of Share-

based Payment Transactions

The amendments to PFRS 2 address three main areas: the effects of vesting conditions on the

measurement of a cash-settled share-based payment transaction; the classification of a share-

based payment transaction with net settlement features for withholding tax obligations; and the

accounting where a modification to the terms and conditions of a share-based payment

transaction changes its classification from cash settled to equity settled.

On adoption, entities are required to apply the amendments without restating prior periods, but

retrospective application is permitted if elected for all three amendments and if other criteria are

met. Early application of the amendments is permitted.

The above amendments have no effect on the Company’s financial position and performance.

Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, with

PFRS 4

The amendments address concerns arising from implementing PFRS 9, the new financial

instruments standard before implementing the forthcoming insurance contracts standard. They

allow entities to choose between the overlay approach and the deferral approach to deal with the

transitional challenges. The overlay approach gives all entities that issue insurance contracts

the option to recognize in other comprehensive income, rather than profit or loss, the volatility

that could arise when PFRS 9 is applied before the new insurance contracts standard is issued.

On the other hand, the deferral approach gives entities whose activities are predominantly

connected with insurance an optional temporary exemption from applying PFRS 9 until the

earlier of application of the forthcoming insurance contracts standard or January 1, 2021.

The overlay approach and the deferral approach will only be available to an entity if it has not

previously applied PFRS 9.

The amendments are not applicable to the Company since none of the entities within the

Companies have activities that are predominantly connected with insurance or issue insurance

contracts.

PFRS 15, Revenue from Contracts with Customers

PFRS 15 establishes a new five-step model that will apply to revenue arising from contracts

with customers. Under PFRS 15, revenue is recognized at an amount that reflects the

consideration to which an entity expects to be entitled in exchange for transferring goods or

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services to a customer. The principles in PFRS 15 provide a more structured approach to

measuring and recognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue

recognition requirements under PFRSs. Either a full or modified retrospective application is

required for annual periods beginning on or after January 1, 2018. The Company is currently

assessing the impact of PFRS 15 and plans to adopt the new standard on the required effective

date. The Company is currently assessing the impact of adopting this standard.

PFRS 9, Financial Instruments

PFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, Financial

Instruments: Recognition and Measurement, and all previous versions of PFRS 9.

The standard introduces new requirements for classification and measurement, impairment, and

hedge accounting. PFRS 9 is effective for annual periods beginning on or after

January 1, 2018, with early application permitted. Retrospective application is required, but

providing comparative information is not compulsory. For hedge accounting, the requirements

are generally applied prospectively, with some limited exceptions.

The adoption of PFRS 9 will have an effect on the classification and measurement of the

Company’s financial assets and impairment methodology for financial assets, but will have no

impact on the classification and measurement of the Company’s financial liabilities.

The adoption will also have an effect on the Company’s application of hedge accounting and on

the amount of its credit losses. The Company is currently assessing the impact of adopting this

standard.

Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of

Annual Improvements to PFRSs 2014 - 2016 Cycle)

The amendments clarify that an entity that is a venture capital organization, or other qualifying

entity, may elect, at initial recognition on an investment-by-investment basis, to measure its

investments in associates and joint ventures at fair value through profit or loss. They also clarify

that if an entity that is not itself an investment entity has an interest in an associate or joint

venture that is an investment entity, the entity may, when applying the equity method, elect to

retain the fair value measurement applied by that investment entity associate or joint venture to

the investment entity associate’s or joint venture’s interests in subsidiaries.

This election is made separately for each investment entity associate or joint venture, at the later

of the date on which (a) the investment entity associate or joint venture is initially recognized;

(b) the associate or joint venture becomes an investment entity; and (c) the investment entity

associate or joint venture first becomes a parent. The amendments should be applied

retrospectively, with earlier application permitted.

Amendments to PAS 40, Investment Property, Transfers of Investment Property

The amendments clarify when an entity should transfer property, including property under

construction or development into, or out of investment property. The amendments state that a

change in use occurs when the property meets, or ceases to meet, the definition of investment

property and there is evidence of the change in use. A mere change in management’s intentions

for the use of a property does not provide evidence of a change in use. The amendments should

be applied prospectively to changes in use that occur on or after the beginning of the annual

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reporting period in which the entity first applies the amendments. Retrospective application is

only permitted if this is possible without the use of hindsight.

Philippine Interpretation IFRIC-22, Foreign Currency Transactions and Advance

Consideration

This interpretation clarifies that in determining the spot exchange rate to use on initial

recognition of the related asset, expense or income (or part of it) on the derecognition of a non-

monetary asset or non-monetary liability relating to advance consideration, the date of the

transaction is the date on which an entity initially recognizes the nonmonetary asset or non-

monetary liability arising from the advance consideration. If there are multiple payments or

receipts in advance, then the entity must determine a date of the transactions for each payment

or receipt of advance consideration. The interpretation may be applied on a fully retrospective

basis. Entities may apply the interpretation prospectively to all assets, expenses and income in

its scope that are initially recognized on or after the beginning of the reporting period in which

the entity first applies the interpretation or the beginning of a prior reporting period presented

as comparative information in the financial statements of the reporting period in which the entity

first applies the interpretation.

Effective beginning on or after January 1, 2019

PFRS 16, Leases

Under the new standard, lessees will no longer classify their leases as either operating or finance

leases in accordance with PAS 17, Leases. Rather, lessees will apply the single-asset model.

Under this model, lessees will recognize the assets and related liabilities for most leases on their

balance sheets, and subsequently, will depreciate the lease assets and recognize interest on the

lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the

underlying asset is of low value are exempted from these requirements.

The accounting by lessors is substantially unchanged as the new standard carries forward the

principles of lessor accounting under PAS 17. Lessors, however, will be required to disclose

more information in their financial statements, particularly on the risk exposure to residual

value.

Entities may early adopt PFRS 16 but only if they have also adopted PFRS 15.

When adopting PFRS 16, an entity is permitted to use either a full retrospective or a modified

retrospective approach, with options to use certain transition reliefs.

The Company is currently assessing the impact of adopting PFRS 16.

Deferred effectivity

Amendments to PFRS 10 and PAS 28, Sale or Contribution of Assets between an Investor and

its Associate or Joint Venture

These amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss

of control of a subsidiary that is sold or contributed to an associate or joint venture.

The amendments clarify that a full gain or loss is recognized when a transfer to an associate or

joint venture involves a business as defined in PFRS 3, Business Combinations. Any gain or

- 6 -

loss resulting from the sale or contribution of assets that does not constitute a business, however,

is recognized only to the extent of unrelated investors’ interests in the associate or joint venture.

On January 13, 2016, the Financial Reporting Standards Council postponed the original

effective date of January 1, 2016 of the said amendments until the International Accounting

Standards Board has completed its broader review of the research project on equity accounting

that may result in the simplification of accounting for such transactions and of other aspects of

accounting for associates and joint ventures.

3. Summary of Significant Accounting Policies

Presentation of Financial Statements

The Company has elected to present all items of recognized income and expenses in two statements:

a statement displaying components of income or loss (statements of income) and a second statement

beginning with income or loss and displaying components of OCI (statements of comprehensive

income).

Current versus Non-current Classification

The Company presents assets and liabilities in the statement of financial position based on

current/non-current classification. An asset as current when it is:

Expected to be realized or intended to be sold or consumed in normal operating cycle;

Held primarily for the purpose of trading;

Expected to be realized within twelve months after the reporting period; or

Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for

at least twelve months after the reporting period

All other assets are classified as non-current.

A liability is current when:

It is expected to be settled in normal operating cycle;

It is held primarily for the purpose of trading;

It is due to be settled within twelve months after the reporting period; or

There is no unconditional right to defer the settlement of the liability for at least twelve months

after the reporting period

The Company classifies all other liabilities as non-current.

Deferred tax assets and liabilities are classified as non-current assets and liabilities.

Cash

Cash includes cash on hand and in banks, which are carried at face value.

Financial Instruments

Date of recognition

The Company recognizes a financial asset or financial liability in the statement of financial position

when it becomes a party to contractual provisions of the instrument.

- 7 -

All regular way purchases and sales of financial assets are recognized on the trade date, which is the

date the Company commits to purchase or sell the asset. Regular way purchases or sales are

purchases or sales of financial assets that require delivery of assets within the period generally

established by regulation or convention in the marketplace.

Initial recognition of financial instruments

All financial instruments, including investment securities and loans and receivables, are initially

measured at fair value. Except for financial assets at fair value through profit or loss (FVPL),

the initial measurement of financial assets includes transaction costs. The Company classifies its

financial instruments in the following categories: financial assets at FVPL, held-to-maturity (HTM)

investments, available-for-sale (AFS) investments, loans and receivables, financial liabilities at

FVPL, and other financial liabilities. The classification depends on the purpose for which the

financial instruments were acquired and whether they are quoted in an active market. Management

determines the classification of its financial instruments at initial recognition and, where allowed

and appropriate, re-evaluates such designation at every reporting period.

As of December 31, 2016 and 2015, the Company does not have outstanding financial assets at

FVPL, HTM investments, AFS investments, and financial liabilities at FVPL.

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an

orderly transaction between market participants at the measurement date. The fair value

measurement is based on the presumption that the transaction to sell the asset or transfer the liability

takes place either:

In the principal market for the asset or liability, or

In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Company.

The fair value of an asset or a liability is measured using the assumptions that market participants

would use when pricing the asset or liability, assuming that market participants act in their economic

best interest.

A fair value measurement of a non-financial asset takes into account market participants’ ability to

generate economic benefits by using the asset in its highest and best use or by selling it to another

market participant that would use the asset in its highest and best use.

The Company uses valuation techniques that are appropriate in the circumstances and for which

sufficient data are available to measure fair value, maximizing the use of relevant observable inputs

and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are

categorized within the fair value hierarchy, described as follows, based on the lowest level input that

is significant to the fair value measurement as a whole:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 - Valuation techniques for which the lowest level input that is significant to the fair

value measurement is directly or indirectly observable

Level 3 - Valuation techniques for which the lowest level input that is significant to the fair

value measurement is unobservable

- 8 -

For assets and liabilities that are recognized in the financial statements on a recurring basis, the

Company determines whether transfers have occurred between levels in the hierarchy by

re-assessing categorization (based on the lowest level input that is significant to the fair value

measurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Company has determined classes of assets and

liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of

the fair value hierarchy as explained above.

Day 1 difference

Where the transaction price in a non-active market is different from the fair value based on other

observable current market transactions in the same instrument or based on a valuation technique

whose variables include only data from observable market, the Company recognizes the difference

between the transaction price and fair value (a Day 1 difference) in the statement of income 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

the statement of income when the inputs become observable or when the instrument is derecognized.

For each transaction, the Company determines the appropriate method of recognizing the “Day 1”

difference amount..

Loans and receivables

Loans and receivables are nonderivative financial assets with fixed or determinable payments that

are not quoted in an active market. After initial measurement, such financial assets are carried at

amortized cost using the effective interest method less accumulated allowance for impairment, if

any. Amortized cost is calculated taking into account any discount or premium on acquisition and

includes fees that are an integral part of the effective interest rate and transaction costs.

The Company’s cash, trade and other receivables, loan receivables and security deposits included

under other noncurrent assets are classified under this category (see Note 25).

Other financial liabilities

Issued financial liabilities or their components, which are not designated at FVPL, are classified as

other financial liabilities, where the substance of the contractual arrangement results in the Company

having an obligation either to deliver cash or another financial asset to the holder, or to 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. The components of issued financial liabilities 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. After initial

measurement, other financial liabilities are subsequently measured at amortized cost using the

effective interest method. Amortized cost is calculated by taking into account any discount or

premium on the issue and fees that are an integral part of the effective interest rate. Any effects of

restatement of foreign currency-denominated liabilities are recognized in the statement of income.

The Company’s interest-bearing borrowings, accounts payable and accrued expenses, obligations

under finance lease and other obligations that meet the above definition (other than liabilities

covered by other accounting standards, such as income tax payable) are classified under this

category (see Note 25).

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Derecognition of Financial Assets and Liabilities

Financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar

financial assets) is derecognized where:

the rights to receive cash flows from the asset have expired;

the Company retains the right to receive cash flows from the asset, but has assumed an

obligation to pay them in full without material delay to a third party under a ‘pass-through’

arrangement; or

the Company has transferred its rights to receive cash flows from the asset and either (a) has

transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor

retained substantially all the risks and rewards of the asset, but has transferred control of the

asset.

Where the Company has transferred its rights to receive cash flows from an asset and has neither

transferred nor retained substantially all the risks and rewards of the asset nor transferred control of

the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset.

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 Company could be required to repay.

Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged, cancelled

or has expired.

Where an existing financial liability is replaced by another from the same lender on substantially

different terms, or the terms of an existing liability are substantially modified, such an exchange or

modification is treated as a derecognition of the original liability and the recognition of a new

liability, and the difference in the respective carrying amounts is recognized in the statement of

income.

Impairment of Financial Assets

The Company assesses at each statement of financial position date whether a financial asset or group

of financial assets is impaired.

Assets carried at amortized cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortized

cost has been incurred, the amount of the loss is measured as the difference between the asset’s

carrying amount and the present value of estimated future cash flows (excluding future credit losses

that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e.,

the effective interest rate computed at initial recognition). The carrying amount of the asset shall

be reduced either directly or through the use of an allowance account. The amount of the loss shall

be recognized in the statement of income.

The Company first assesses whether objective evidence of impairment exists individually for

financial assets that are individually significant, and individually or collectively for financial assets

that are not individually significant. If it is determined that no objective evidence of impairment

exists for an individually assessed financial asset, whether significant or not, the asset is included in

a group of financial assets with similar credit risk characteristics and that group of financial assets

is collectively assessed for impairment.

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Assets that are individually assessed for impairment and for which an impairment loss is or

continues to be recognized are not included in the collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be

related objectively to an event occurring after the impairment was recognized, the previously

recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is

recognized in the statement of income, to the extent that the carrying value of the asset does not

exceed its amortized cost at the reversal date.

In relation to trade receivables, a provision for impairment loss is made when there is objective

evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that

the Company will not able to collect all the amounts due under the original terms of the invoice.

The carrying amount of the receivables is reduced through the use of an allowance account.

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.

Offsetting Financial Instruments

Financial assets and financial liabilities are offset and the net amount reported in the statement of

financial position if there is a currently enforceable legal right to set off the recognized amounts and

there is intention to settle on a net basis, or to realize the asset and settle the liability

simultaneously. The Company assesses that it has a currently enforceable right of offset if the right

is not contingent on a future event, and is legally enforceable in the normal course of business, event

of default, and event of insolvency or bankruptcy of the Company and all of the counterparties.

Inventories

Inventories are valued at the lower of cost and net realizable value (NRV). Costs incurred in

bringing each product to its present location and condition are accounted for as follows:

Materials and spare parts - purchase cost using first-in, first-out method

Fuel, diesel and lubricants - purchase cost using first-in, first-out method

Net realizable value is the estimated replacement cost.

An allowance for losses and obsolescence is determined based on a regular review and management

evaluation of movement and condition of spare parts and supplies.

Property and Equipment

Property and equipment, except for land, are stated at cost, excluding the costs of day-to-day

servicing, less accumulated depreciation and any accumulated impairment in value. Such cost

includes the cost of replacing part of the property and equipment when that cost is incurred, if the

recognition criteria are met.

The initial cost of property and equipment consists of its purchase price, including import duties,

taxes and any directly attributable costs of bringing the asset to the location and condition necessary

for it to be capable of operating in the manner intended by the Company. Expenditures incurred

after the property and equipment have been put into operation, such as repairs and maintenance and

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overhaul costs, are normally charged in the statement of income in the period in which the costs are

incurred. Land is stated at cost less any accumulated impairment in value.

Each part of an item of property and equipment with a cost that is significant in relation to the total

cost of the item shall be depreciated separately.

Depreciation is computed on a straight-line basis less its residual value over the estimated useful

life (EUL) as follows:

Category Number of Years

Land improvements 3

Vessels, excluding drydocking costs and vessel tools and equipment 35*

Drydocking costs 3

Container vans and improvements 5-10

Buildings, warehouses, terminal premises and equipment

and leasehold improvements 3-10

Office furniture and equipment 5

Transportation equipment 5

Vessel tools and equipment 5 *From the time the ship was built

The property and equipment’s residual value, useful lives and depreciation method are reviewed

and adjusted, if appropriate, at each statement of financial position date.

Major overhaul costs incurred during drydocking of vessels are capitalized and depreciated over a

3-year period or the next drydocking, whichever comes first. When significant drydocking costs

are incurred prior to the expiry of the 3-year depreciation period, the remaining costs of the previous

drydocking are written off in the period of the subsequent drydocking. Drydocking costs are

recorded as part of “Vessels” under property and equipment.

Leasehold improvements are depreciated over their estimated useful lives or the term of the lease,

whichever is shorter.

Fully depreciated property and equipment are retained in the accounts until these are no longer in

use. An item of property and equipment is derecognized upon disposal or when no future economic

benefits are expected from the continued use of the item. Any gain or loss arising on derecognition

of the property and equipment (calculated as the difference between the net disposal proceeds and

the carrying amount of the item) is included in the statement of income in the year the asset is

derecognized.

The carrying amounts of property and equipment are reviewed for impairment when events or

changes in circumstances indicate that the carrying amount may not be recoverable.

Investment in an Associate

An associate is an entity over which the Company has significant influence. Significant influence is

the power to participate in the financial and operating policy decisions of the investee, but is not

control or joint control over those policies. The Company applies significant judgment in assessing

whether it holds significant influence over an investee and considers the following: (a)

representation on the board of directors or equivalent governing body of the investee; (b)

participation in policy-making process, including participation in decisions about dividends or other

distributions; (c) material transactions between the investor and the investee; or (d) interchange of

managerial personnel.

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The Company’s investment in its associate is accounted for using the equity method. Under the

equity method, the investment in an associate is initially recognized at cost. The carrying amount of

the investment is adjusted to recognize changes in the Company’s share of net assets of the associate

since the acquisition date. Goodwill relating to the associate is included in the carrying amount of

the investment and is not tested for impairment separately.

The statement of income reflects the Company’s share of the results of operations of the associate.

Any change in OCI of the investee is presented as part of the Company’s OCI. In addition, when

there has been a change recognized directly in the equity of the associate, the Company recognizes

its share of any changes, when applicable, in the statement of changes in equity. Unrealized gains

and losses resulting from transactions between the Company and the associate are eliminated to the

extent of the interest in the associate.

The financial statements of the associate are prepared for the same reporting period as the Company.

When necessary, adjustments are made to bring the accounting policies in line with those of the

Company.

After application of the equity method, the Company determines whether it is necessary to recognize

an impairment loss on its investment in its associate. At each reporting date, the Company

determines whether there is objective evidence that the investment in the associate is impaired. If

there is such evidence, the Company calculates the amount of impairment as the difference between

the recoverable amount of the associate and its carrying value, and then recognizes the loss as

‘Equity in net income (loss) of an associate’ in the statement of income.

Upon loss of significant influence over the associate, the Company measures and recognizes any

retained investment at its fair value. Any difference between the carrying amount of the associate

upon loss of significant influence and the fair value of the retained investment and proceeds from

disposal is recognized in profit or loss.

Impairment of Non-financial Assets

The Company assesses at each statement of financial position date whether there is an indication

that a non-financial asset may be impaired. If any such indication exists, or when annual impairment

testing for a non-financial asset is required, the Company makes an estimate of the non-financial

asset’s recoverable amount. A non-financial asset’s recoverable amount is the higher of a non-

financial asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is

determined for an individual non-financial asset, unless the non-financial asset does not generate

cash inflows that are largely independent of those from other non-financial assets or groups of non-

financial assets. Where the carrying amount of a non-financial asset exceeds its recoverable amount,

the non-financial asset is considered impaired and is written down to its recoverable amount. In

assessing value in use, the estimated future cash flows are discounted to their present value using a

pre-tax discount rate that reflects current market assessments of the time value of money and the

risks specific to the non-financial 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 the statement of income in those expense categories

consistent with the function of the impaired non-financial asset.

An assessment is made at each statement of financial position date as to whether there is any

indication that previously recognized impairment losses may no longer exist or may have decreased.

If such indication exists, the recoverable amount is estimated. A previously recognized impairment

loss is reversed only if there has been a change in the estimates used to determine the non-financial

asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the

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carrying amount of the non-financial asset is increased to its recoverable amount. That increased

amount cannot exceed the carrying amount that would have been determined, net of depreciation,

had no impairment loss been recognized for the non-financial asset in prior years. Such reversal is

recognized in the statement of income. After such a reversal, the depreciation charge is adjusted in

future periods to allocate the non-financial asset’s revised carrying amount, less any residual value,

on a systematic basis over its remaining useful life.

Revenue Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the

Company and the revenue can be reliably measured, regardless of when payment is being made.

Revenue is measured at the fair value of the consideration received or receivable, taking into account

contractually defined terms of payment and excluding taxes or duty. The Company assesses its

revenue arrangements against specific criteria in order to determine if it is acting as principal or

agent. The following specific recognition criteria must also be met before revenue is recognized:

Freight revenues

Revenues derived from freight services are recognized on the basis of cargo loaded during the year

taking into account all direct costs related to the cargo as well as capacity costs incurred.

Interest income

Interest income is recognized as the interest accrues using the effective interest method.

Rental income

Revenue is recognized on a straight-line basis over the lease term.

Income from insurance claims

Income from insurance claims is recognized when the amount can be measured and the flow of the

economic benefit to the Company is virtually certain.

Cost and Expenses

Costs and expenses are decreases in economic benefits during the accounting period in the form of

outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other

than those relating to distributions to equity participants. Costs and expenses are generally

recognized when the services are used or the expense arises while interest expenses are accrued in

the appropriate period.

Direct costs

Direct costs include cost of services and terminal expenses, and include material, supplies and

facilities costs, depreciation of vessels and terminal, personnel expenses, vessel insurance and other

freight and terminal related costs. This is recognized when the cost is incurred or the expense arises.

General and administrative expenses

General and administrative expenses are incurred in the direction and general administration of day-

to-day operations of the Company. General and administrative expenses are generally recognized

when the services are used or the expenses arise.

Provisions

Provisions are recognized only when the Company has a present obligation (legal or constructive)

as a result of a past event, it is probable that an outflow of resources embodying economic benefits

will be required to settle the obligation and a reliable estimate can be made of the amount of the

obligation. Where the Company expects a provision to be reimbursed, for example under an

insurance contract, the reimbursement is recognized as a separate asset but only when the

- 14 -

reimbursement is virtually certain. The expense relating to any provision is presented in the

statement of income and expenses, net of any reimbursements. If the effect of the time value of

money is material, provisions are determined by discounting the expected future cash flows at a pre-

tax rate that reflects current market assessments of the time value of money and, where appropriate,

the risks specific to the liability. Where discounting is used, the increase in the provision due to the

passage of time is recognized as interest expense.

Deferred Financing Costs

Deferred financing costs represent costs incurred to obtain project financing. Deferred financing

costs are amortized, using the effective interest method, over the term of the related long-term

borrowing.

Taxes

Current tax

Current tax assets and liabilities for the current and prior periods are measured at the amount

expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to

compute the amount are those that are enacted or substantively enacted by the end of reporting

period.

Deferred tax

Deferred tax is provided using the liability method on temporary differences at the statement of

financial position date between the tax bases of assets and liabilities and their carrying amounts for

financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or

liability in a transaction that is not a business combination and, at the time of the transaction,

affects neither the accounting income nor taxable income or loss; and

in respect of taxable temporary differences associated with investments in foreign subsidiaries

and interests in joint ventures, where the timing of the reversal of the temporary differences can

be controlled and it is probable that the temporary differences will not reverse in the foreseeable

future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits

of unused tax credits and unused tax losses, to the extent that it is probable that taxable income will

be available against which the deductible temporary differences, and the carryforward benefits of

unused tax credits and unused tax losses can be utilized except:

where the deferred tax asset relating to the deductible temporary difference arises from the initial

recognition of an asset or liability in a transaction that is not a business combination and, at the

time of the transaction, affects neither the accounting income nor taxable income or loss; and

in respect of deductible temporary differences associated with investments in foreign

subsidiaries and interests in joint ventures, deferred tax assets are recognized only to the extent

that it is probable that the temporary differences will reverse in the foreseeable future and

taxable income will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at the end of each reporting date and reduced

to the extent that it is no longer probable that sufficient taxable income will be available to allow all

or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at

each statement of financial position date and are recognized to the extent that it has become probable

that future taxable income will allow the deferred tax asset to be recovered.

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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year

when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been

enacted or substantively enacted by the end of reporting period.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to offset

current tax assets against current tax liabilities and the deferred taxes relate to the same taxable

entity and the same taxation authority.

Deferred tax relating to items recognized directly in equity is recognized in equity and not in the

statement of income.

Value-added taxes (VAT)

Revenues, expenses and assets are recognized net of the amount of VAT, except:

where the VAT incurred on a purchase of assets or services is not recoverable from the taxation

authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or

as part of the expense item as applicable.

receivables and payables that are stated with the amount of VAT included.

The net amount of VAT recoverable from, or payable to, the taxation authority is included as part

of receivables or payables in the statement of financial position.

Creditable withholding taxes (CWTs)

CWTs are amounts withheld from income subject to expanded withholding taxes. 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 rules on Philippine income taxation.

Capital Stock

Capital stock is determined using the par value shares that have been issued. When the Company

issues more than one class of stock, a separate account is maintained for each class of stock and

number of shares issued. The Company’s capital stock pertains to common stock. Direct costs

incurred related to the issuance of new common stock such as accounting and legal fees, printing

costs and taxes are shown in equity as deduction, net of tax, from proceeds.

When the shares are sold at a premium, the difference between the proceeds and the par value is

credited to the “Additional paid-in capital” account. When the shares are issued for a consideration

other than cash, the proceeds are measured by the fair value of the consideration received. In case

the shares are issued to extinguish or settle the liability of the Company, the shares shall be measured

either at fair value of the share issued or fair value of the liability settled, whichever is more reliably

determinable.

Treasury Stock

Treasury stock consists of the Company’s own equity instruments which are reacquired, recognized

at cost and deducted from equity. No gain or loss is recognized in the statement of income on the

purchase, sale, issue or cancellation of the Company’s own equity instruments.

Retained Earnings

The amount included in retained earnings includes profit or loss attributable to the Company’s

equity holders and reduced by dividends on common stock. Retained earnings may also include

effect of changes in accounting policies as may be required by the standards’ transitional provisions.

- 16 -

Pension Cost

The retirement benefit obligation or asset is the aggregate of the present value of the defined benefit

obligation at the end of the reporting period reduced by the fair value of plan assets

(if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset

ceiling is the present value of any economic benefits available in the form of refunds from the plan

or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the

projected unit credit method.

Defined benefit costs comprise the following:

Service cost

Net interest on the net defined benefit liability or asset

Remeasurements of net defined benefit liability or asset

Service costs which include current service costs, past service costs and gains or losses on

non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized

when plan amendment or curtailment occurs. These amounts are calculated periodically by

independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net

defined benefit liability or asset that arises from the passage of time which is determined by applying

the discount rate based on government bonds to the net defined benefit liability or asset. Net interest

on the net defined benefit liability or asset is recognized as expense or income in profit or loss.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the

effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized

immediately in other comprehensive income in the period in which they arise. Remeasurements are

not reclassified to profit or loss in subsequent periods.

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 Company, nor can they be paid directly

to the Company. Fair value of plan assets is based on market price information. When no market

price is available, the fair value of plan assets is estimated by discounting expected future cash flows

using a discount rate that reflects both the risk associated with the plan assets and the maturity or

expected disposal date of those assets (or, if they have no maturity, the expected period until the

settlement of the related obligations). If the fair value of the plan assets is higher than the present

value of the defined benefit obligation, the measurement of the resulting defined benefit asset is

limited to the present value of economic benefits available in the form of refunds from the plan or

reductions in future contributions to the plan.

Earnings Per Share (EPS)

Basic EPS is calculated by dividing net income for the year attributable to common shareholders by

the number of shares issued and outstanding at the end of the year after giving retroactive effect to

regular stock dividends declared and stock rights exercised during the year, if any. Diluted EPS is

computed by dividing net income by the weighted average number of common shares outstanding

during the period, after giving retroactive effect for any stock dividends, stock splits or reverse stock

splits during the period, and adjusted for the effect of dilutive convertible preferred shares. If the

required dividends to be declared on convertible preferred shares divided by the number of

equivalent common shares, assuming such shares are converted would decrease the basic EPS, then

such convertible preferred shares would be deemed dilutive. Where the effect of the assumed

conversion of the preferred shares and the exercise of all outstanding options have anti-dilutive

effect, basic and diluted EPS are stated at the same amount.

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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 one 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 or 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.

Where a reassessment is made, lease accounting shall commence or cease from the date when the

change in circumstances gave rise to the reassessment for scenario a, c or d and at the date of renewal

or extension period for scenario b.

Operating lease commitments - the Company as lessee

Leases of office premises and container yards where the lessor retains substantially all the risks and

rewards of ownership are classified as operating leases. Payments made under operating leases (net

of any incentives received from the lessor) are charged to the statement of income on a straight-line

basis over the period of lease.

Operating lease commitments - the Company as lessor

Lease of land where the Company retains substantially all the risks and rewards of ownership are

classified as operating leases. Receipts under operating leases (net of any incentives granted to the

lessee) are charged to the statement of income on a straight-line basis over the period of lease.

Finance lease commitments - the Company as lessee

Leases of container vans, where the Company has substantially obtained the risks and rewards of

ownership, are classified as finance leases. Finance leases are capitalized at the lease’s inception at

the lower of the fair value of the leased property and the present value of the minimum lease

payments. Each lease payment is allocated between the liability and finance charges so as to achieve

a constant rate on the finance balance outstanding. The corresponding rental obligations, net of

finance charges, are included in “Obligations under finance lease” account in the statement of

financial position. The interest element of the finance cost is charged to the statement of income

over the lease period so as to produce a constant periodic rate of interest on the remaining balance

of the liability for each period. Property and equipment acquired under finance leases is depreciated

over the shorter of the asset’s useful life and the lease term, if there is no reasonable certainty that

the Company will obtain ownership by the end of the lease term, otherwise it is depreciated over the

useful life of the property and equipment.

Foreign Currency Transactions

The financial statements are presented in Philippine peso, which is the Company’s functional and

presentation currency. Transactions in foreign currencies are initially recorded in Philippine peso

based on the exchange rates prevailing at the dates of the transactions. At year-end, monetary assets

and liabilities denominated in foreign currencies are restated at closing rate and any exchange

differentials are credited to or charged against the statement of income.

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Contingencies

Contingent liabilities are not recognized in the financial statements. These are disclosed unless the

possibility of an outflow of resources embodying economic benefits is remote. Contingent assets

are not recognized in the financial statements but are disclosed when an inflow of economic benefits

is probable.

Segment Reporting

The Company and its branches and agencies are operating as one reportable segment engaged in

domestic inter-island cargo shipping activities within the Philippines. Therefore, neither business

nor geographical segment information is presented.

Events After the Reporting Period

Post year-end events that provide additional information about the Company’s financial position at

the statement of financial position date (adjusting events) are reflected in the financial statements.

Post year-end events that are not adjusting events are disclosed in the notes to financial statements

when material.

4. Significant Accounting Judgments and Estimates

The preparation of the accompanying financial statements requires management to make judgments

and estimates that affect the amounts reported in the financial statements and the accompanying

notes. The judgments and estimates used in the accompanying financial statements are based upon

management’s evaluation of relevant facts and circumstances as of date of the financial statements.

Actual results could differ from such estimates.

Judgments

In the process of applying the Company’s accounting policies, management has made judgments,

apart from those involving estimation, which have the most significant effect on the amounts

recognized in the financial statements.

Assessing of control or significant influence of investee

The Company applies significant judgment in assessing whether it holds significant influence over

an investee and considers the following: (a) representation on the board of directors or equivalent

governing body of the investee; (b) participation in policy-making process, including participation

in decisions about dividends or other distributions; (c) material transactions between the investor

and the investee; or (d) interchange of managerial personnel. On the other hand, joint control is

presumed to exist when the investors contractually agreed sharing of control of an arrangement,

which exists only when decisions about the relevant activities require the unanimous consent of the

parties sharing control. Management has determined that it has significant influence over OTSI by

virtue of the power to participate in the financial and operating policy decisions of the investee.

Finance lease commitments - the Company as lessee

The Company has entered into leases of dry van containers. Based on the evaluation of the terms

and conditions of the lease agreements, the ownership of lease assets will be transferred to the

Company due to a bargain purchase option. The Company has determined that these leases are

finance leases since the significant risks and rewards of ownership related to these properties are

transferred to the Company from the date of the lease agreement.

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Estimations

The key assumptions concerning the future and other key sources of estimation uncertainty at the

statement of financial position date that have a significant risk causing material adjustments to the

carrying amounts of the assets and liabilities within the next financial years are discussed below:

Impairment losses on trade receivables

The Company determines the allowance for doubtful accounts based on impairment assessments of

individual customer balances. Individual balances for which there is no objective evidence of

impairment are assessed collectively by applying a loss rate determined based on historical losses.

The individual impairment assessment is an inherently uncertain process involving various

assumptions and factors about the financial condition of the customer, estimates of amounts still

collectible and, for the collective assessment, the loss rate used. These assumptions could be

significantly different from actual credit losses.

Trade receivables amounted to P=869.8 million and P=847 million as of June 30, 2017 and December

31, 2016, respectively (see Note 6). The Company recognized provision for impairment losses

amounting to P=5.7 million and P=41.2 million in June 30, 2017 and December 31,2016, respectively.

Allowance for doubtful accounts amounted to P=103.9 million and P=97.1 million as of June 30, 2017

and December 31, 2016, respectively (see Note 6).

EUL of property and equipment

The EUL used as a basis for depreciating the Company’s vessels and other property and equipment

were determined on the basis of management’s assessment of the period within which the benefits

of these assets are expected to be realized taking into account actual historical information on the

use of such assets as well as industry standards and averages applicable to the Company’s assets.

The Company reviews annually the EUL of property and equipment.

A reduction in EUL of property and equipment would increase the recorded depreciation expense

and decrease noncurrent assets.

The net book value of property and equipment amounted to P=1,568 million and P=1,652.7 million as

of June 30, 2017 and December 31, 2016, respectively (see Note 9).

Impairment of property and equipment and other non-financial assets

Internal and external sources of information are reviewed at each statement of financial position

date to identify indications that the property and equipment may be impaired or an impairment loss

previously recognized no longer exists or may be decreased. If any such indication exists, the

recoverable amount of the asset is estimated. An impairment loss is recognized whenever the

carrying amount of an asset exceeds its recoverable amount.

The Company assesses the impairment of assets whenever events or changes in circumstances

indicate that the carrying amount of an asset may not be recoverable. The factors that the Company

considers important which could trigger an impairment review include the following:

significant underperformance relative to expected historical or projected future operating

results;

significant changes in the manner of use of the assets or the strategy for the overall business;

and

significant negative industry or economic trends.

- 20 -

The Company has not identified any events or changes in circumstances that would indicate

impairment of property and equipment and other non-financial assets.

The carrying value of property and equipment amounted to P=1,568 million and P=1,652.7 million as

of June 30, 2017 and December 31, 2016, respectively (see Note 9). The carrying value of other

non-financial assets amounted to P=348.4 million and P=321.9 million as of December 31, 2016 and

2015, respectively (see Notes 7, 8 and 10).

Realizability of deferred tax assets

The Company reviews the carrying amounts of deferred tax assets at each statement of financial

position date and reduces it to the extent that it is no longer probable that sufficient taxable income

will be available to allow all or part of the deferred tax assets to be utilized. Management believes

that it can generate sufficient taxable income to allow all or part of its deferred tax assets to be

utilized.

Deferred tax assets were not recognized for temporary differences amounting to P=349.2 million and

P=85.4 million million as of December 31, 2016 and 2015, respectively (see Note 20).

Retirement benefit obligation

The determination of retirement benefit obligation is dependent on the selection of certain

assumptions used by actuaries in calculating such amounts. Those assumptions are described in

Note 16, and include among others, discount rates and salary increase rates. In accordance with

PFRS, actual results that differ from the Company’s assumptions are accumulated and amortized

over future periods and therefore, generally affect the recognized expense and recorded obligation

in such future periods. While the Company believes that the assumptions are reasonable and

appropriate, significant differences in the actual experience or significant changes in the

assumptions may materially affect the pension and other retirement obligation.

The carrying amount of the Company’s retirement benefit obligation was P=89.1 million and

P=93.4 million as of December 31, 2016 and 2015, respectively (see Note 16).

Contingencies

In the ordinary course of business, the Company is a defendant in various litigations and claims.

The Company has an ongoing case with the Court of Tax Appeals. The estimate of the probable

costs for the resolution of these claims and cases has been developed in consultation with internal

and external legal counsels handling the Company’s defense in these matters and is based upon an

analysis of potential results. Although there can be no assurances, management and its legal

counsels believe that the ultimate resolution of these legal proceedings would not likely have a

material, adverse effect on the results of its operations, financial position or liquidity of the

Company. It is possible, however, that the future results of operations could be materially affected

by changes in estimates or effectiveness of the strategies relating to these litigations and claims

(see Note 27).

5. Cash

June 30,2017 Dec. 31,2016

Cash on hand P=450,000 P=410,000

Cash in banks 22,326,820 104,421,056

P=22,776,820 P=104,831,011

Cash in banks earn interest at the respective bank deposit rates.

- 21 -

Interest income gross of final tax amounted to P=263,255, P=423,055 and P=347,151 in 2016, 2015 and

2014, respectively (see Note 18).

6. Trade and Other Receivables

June 30,2017 Dec. 31,2016

Trade:

Third parties P=802,134,766 P=770,266,693

Related parties (Note 23) 170,479,422 173,784,223

972,614,188 944,050,916

Less allowance for doubtful accounts 102,814,155 97,076,304

869,800,033 846,974,612

Non-trade related parties (Note 23) 45,989,079 34,863,575

Others: 19,406,042 21,985,756

Less allowance for doubtful accounts 1,726,065 1,726,065

17,679,977 20,259,691

P=933,469,090 P=902,097,878

Trade receivables are noninterest-bearing and are generally on a 30-day term.

Rollforward of allowance for doubtful accounts follows:

June 30, 2017

Trade Others Total

Balances at beginning of year P=97,076,304 P=1,726,065 P=98,802,369

Provisions (Note 15) 5,737,851 −

Write-off − −

P=102,814,155 P=1,726,065 P=105,610,720

December 31, 2016

Trade Others Total

Balances at beginning of year P=55,882,312 P=10,965,599 P=66,847,911

Provisions (Note 15) 41,193,992 − 41,193,992

Write-off − (9,239,534) (9,239,534)

P=97,076,304 P=1,726,065 P=98,802,369

- 22 -

7. Inventories

June 30,2017 Dec. 31,2016

Fuel, diesel and lubricants (at cost) P=20,186,124 P=20,186,124

Materials and spare parts (at NRV) 860,357 909,731

P=21,046,481 P=21,095,855

Fuel and supplies inventories recorded under “Cost of services”, “Terminal expenses”, and “General

and administrative expenses” amounted to P=338.18 million, P=32.9 million and P=4.0 million,

respectively, in 2016, P=390.8 million, P=39.1 million and P=2.0 million, respectively, in 2015 and

P=569.7 million, P=45.2 million and P=2.0 million, respectively, in 2014 (see Notes 13, 14 and 15).

8. Prepayments and Other Current Assets

June 30,2017 Dec. 31,2016

CWT P=241,365,702 P=231,336,017

Input VAT 35,246,088 26,058,503

Prepaid expenses 11,008,412 3,494,897

Loan receivable - current portion (Note 10) 493,378 1,205,111

P=288,113,580 P=262,094,528

CWTs represent the amount withheld by the Company’s customers in relation to its sale of services.

These are recognized upon collection of the related sales and are utilized as tax credits against

income tax due as allowed by the Philippine taxation laws and regulations.

Prepaid expenses include prepaid insurance, prepaid software maintenance and prepaid rent.

- 23 -

9. Property and Equipment

June 30, 2017

Land

Land

Improvements

Vessels and

Drydocking

Costs

Container

Vans and

Improvements

Buildings,

Warehouses,

Terminal

Premises and

Equipment

and Leasehold

Improvements

Office

Furniture and

Equipment

Transportation

Equipment

Vessel

Tools and

Equipment Total

Cost:

Balances at beginning of year P=96,163,103 P=15,272,566 P=2,015,782,610 P=742,332,641 P=346,916,464 P=71,393,644 P=33,898,432 P=264,322,733 P=3,586,082,193

Additions – – 43,232,881 – 239,400 156,737 16,157,337 59,786,356

Disposals/write-off – – – – (30,751,709) (1,180,727) (31,932,436)

Balances at end of year 96,163,103 15,272,566 2,059,015,491 742,332,641 316,404,154 71,550,381 33,898,432 280,480,070 3,613,936,113

Accumulated depreciation:

Balances at beginning of year – 15,272,566 740,618,770 575,165,826 314,313,204 66,960,105 29,325,211 191,772,102 1933,427,784

Depreciation for the year (Note 13, 14 and 15) – – 105,826,286 17,573,883 3,874,879 1,380,540 864,162 11,855,122 141,374,874

Disposals/write-off – – (27,702,868) (1,180,727) (28,883,595)

Balances at end of year – 15,272,566 846,445,056 592,739,710 290,485,216 68,340,645 29,008,646 203,627,223 2,045,919,064

Net book values P=96,163,103 P=– P=1,212,570,435 P=149,592,931 P=25,918,937 P=3,209,736 P=3,709,058 P=76,852,846 P=1,568,017,049

- 24 -

2016

Land

Land

Improvements

Vessels and

Drydocking

Costs

Container

Vans and

Improvements

Buildings,

Warehouses,

Terminal

Premises and

Equipment

and Leasehold

Improvements

Office

Furniture and

Equipment

Transportation

Equipment

Vessel

Tools and

Equipment Total

Cost:

Balances at beginning of year P=96,163,103 P=15,272,566 P=2,170,713,739 P=751,496,087 P=336,590,084 P=70,616,424 P=35,450,144 P=232,156,539 P=3,708,458,686

Additions – – 133,302,278 – 51,503,682 1,198,479 2,654,464 65,042,518 253,701,421

Disposals/write-off – – (288,233,407) (9,163,446) (41,177,302) (421,259) (4,206,176) (32,876,324) (376,077,914)

Balances at end of year 96,163,103 15,272,566 2,015,782,610 742,332,641 346,916,464 71,393,644 33,898,432 264,322,733 3,586,082,193

Accumulated depreciation:

Balances at beginning of year – 15,272,566 742,419,436 539,442,551 312,536,111 64,264,618 30,743,528 198,360,078 1,903,038,888

Depreciation for the year (Note 13, 14 and 15) – – 201,736,576 43,970,109 3,631,435 2,952,991 2,582,799 22,968,041 277,841,951

Disposals/write-off – – (203,537,242) (8,246,834) (1,854,342) (257,504) (4,001,116) (29,556,017) (247,453,055)

Balances at end of year – 15,272,566 740,618,770 575,165,826 314,313,204 66,960,105 29,325,211 191,772,102 1,933,427,784

Net book values P=96,163,103 P=– P=1,275,163,840 P=167,166,815 P=32,603,260 P=4,433,539 P=4,573,221 P=72,550,631 P=1,652,654,409

- 25 -

a. Sale of vessel

On May 6, 2016, the Company entered into a Memorandum of Agreement with a third party for

the sale of one of the Company’s vessels and related vessel equipment for a consideration of

P=20.4 million, which has a net book value P=84.1 million at the time of the sale. Loss recognized

on the sale amounted to P=63.7 million (see Note 19).

On June 30, 2015, the Company entered into a Memorandum of Agreement with a third party

for the sale of one of the Company’s vessels and related vessel equipment for a consideration

of P=25.0 million, which has a net book value amounting to P=82.1 million at the time of the sale.

Loss recognized on the sale amounted to P=57.1 million (see Note 19).

On March 14, 2014, the Company entered into a Memorandum of Agreement with a third party

for the sale of one of the Company’s vessels for a consideration of P=29.5 million, which has a

net book value amounting to P=68.3 million at the time of the sale. Loss recognized on the sale

amounted to P=38.8 million (see Note 19).

b. Purchase of vessel

On January 5, 2015, the Company entered into a Memorandum of Agreement with a third party

for the purchase of vessel named “Lorcon Iloilo” (formerly “MV Rio Para”) for a total purchase

price of $3.6 million or P=161.3 million.

On February 14, 2014, the Company entered into a Memorandum of Agreement with a third

party for the purchase of vessel named “Lorcon Bacolod” (formerly “MV Greetsiel”) with a

purchase price of $2.6 million or P=114.1 million.

c. Purchase of container yard

On January 6, 2015, the Company purchased two parcels of land from third parties amounting

to P=31.5 million and P=47.6 million to be used as a container yard.

d. Purchase of equipment

On September 2016, the Company acquired equipment for a total purchase price of

P=26.7 million. It was disposed during the same year under a sale and leaseback arrangement

with a third party for a total consideration of P=26.1 million. At the time of the sale, the assets’

book value amounts to P=25.8 million. Gain recognized on the sale amounted to P=0.3 million

(see Note 19).

e. In 2016, some parts of a vessel with a net book value of P=12.8 million were damaged and

subsequently derecognized which resulted to a loss on disposal of P=12.8 million (see Note 19).

f. To ensure the maintenance of the vessels in accordance with international standards, the

Company has availed of the services of a related party to oversee the regular upgrading and

maintenance of the vessels (see Note 23).

g. The balance of property and equipment as of December 31, 2016 and 2015 includes fully-

depreciated assets still in use amounting to P=861.0 million and P=776.8 million, respectively.

h. Certain vessels with carrying values of P=983.3 million and P=1,122.1 million as of

- 26 -

December 31, 2016 and 2015, respectively, are used as chattel mortgage securities for long-

term borrowings (see Note 12).

i. Property and equipment include the following amounts where the Company is a lessee under a

finance lease (see Note 24):

2016 2015

Cost P=219,984,732 P=219,633,901

Less accumulated depreciation 117,091,830 88,144,887

Net book value P=102,892,902 P=131,489,014

10. Other Noncurrent Assets

June 30,2017 Dec. 31,2016

Deferred input VAT P=27,771,233 P=27,771,233

Deposits - net (Note 24) 7,887,136 6,713,951

Investment in and advances to an associate 914,156 1,148,157

Loan receivable - net of current portion − −

Others 183,335 719,157

P=36,755,860 P=36,352,498

Deferred input VAT relates primarily to the major capital expenditures and dry docking of vessels.

Deposits consist of amounts paid for rental deposits which can be applied as rental payment at the

end of the lease term.

On November 2012, the Company entered into a Memorandum of Agreement with an agency

(the debtor) for a five year term loan amounting to P=6.0 million. The loan receivable is due on

October 2017, subject to 9% per annum and shall be equally amortized for 60 months. The loan is

secured by a chattel mortgage on a land-based equipment.

On April 20, 2011, the Company and its related party NMC Container Lines Inc. (NMCCLI)

incorporated OTSI, in the Philippines owning 50% each, primarily to engage in the business of

operating and maintaining cargo handling services including the operation, ownership, acquisition,

and/or lease of the proper and necessary transport and cargo handling equipment.

Rollforward of allowance for impairment losses in deposits follows:

2016 2015

Balances at beginning of year P=1,593,091 P=1,593,091

Provisions (Note 15) 1,585,900 −

Write-off (65,400) −

Reversal (450,000) −

P=2,663,591 P=1,593,091

- 27 -

Selected financial information of the associate as of December 31, 2016 and 2015 and for the years

then ended follows:

2016 2015

Current assets P=10,919,750 P=17,107,794

Non-current assets 223,858 237,918

Current liabilities (9,425,448) (15,826,100)

Non-current liabilities (653,551) (444,850)

Equity P=1,064,609 P=1,074,762

2016 2015 2014

Revenue P=19,474,269 P=18,175,345 P=13,445,045

Cost and expenses (19,483,048) (16,187,289) (13,180,630)

Finance costs − (694) –

Income (loss) before income tax (8,779) 1,987,362 264,415

Income tax expense (173,213) (479,571) –

Net income (loss) (P=181,992) P=1,507,791 P=264,415

Total comprehensive income (loss) (181,992) P=1,507,791 P=264,415

Equity in net income (loss) (Note 19) (90,996) P=753,896 P=132,208

2016 2015 2014

Acquisition cost P=250,000 P=250,000 P=250,000

Accumulated equity in net income (loss):

Balance at beginning of the year 287,382 (250,000) (250,000)

Equity in net income (loss) (Note 19) (90,996) 489,153 –

Balance at end of year 196,386 239,153 (250,000)

Share in remeasurement of the net

defined benefit plan of an associate 85,920 48,228 –

Carrying value of investment 532,305 537,381 –

Advances 615,852 701,772 750,000

P=1,148,157 P=1,239,153 P=750,000

- 28 -

11. Accounts Payable and Accrued Expenses

June 30,2017 Dec. 31,2016

Trade:

Third parties P=301,374,163 P=89,565,833

Related parties (Note 23) 445,300,782

Output VAT 109,376,295 76,625,691

Accrued expenses: 427,719,968 270,415,858

Dividends payable (Note 21) 10,216,513 10,216,513

Other taxes payable 11,434,214 8,924,229

Customer deposits 3,245,130 4,164,935

Customer claims 1,352,637 1,352,637

Others 3,612,597 13,840,719

P=868,331,517 P=920,407,197

Outside services include cargo and port expenses incurred in relation to the Company’s normal

shipping operations.

12. Borrowings

Short-term borrowings consist of:

June 30,2017 Dec. 31,2016

Bank of the Philippine Islands (BPI) P=165,690,000 P=165,690,000

Philippine National Bank (PNB) 194,750,000 194,750,000

Banco de Oro (BDO) 93,980,400 93,980,400

Rizal Commercial Banking Corporation (RCBC) 95,000,000 65,000,000

Metropolitan Bank and Trust Company (MBTC) 100,000,000 −

P=649,420,400 P=519,420,400

Short-term borrowings from local banks bear annual interest at 2.65% to 3.25% and 2.75% to 3.54%

in 2016 and 2015, respectively. Short-term borrowings are not secured.

- 29 -

Long-term borrowings consist of:

June 2017 Dec 2016

Balance of loan obtained from China Banking Corporation (CBC) of

P=200.0 million, maturing on October 22, 2024 and payable quarterly in

36 equal quarterly installments starting January 22, 2016. Annual

interest rate is equal to PDST-F plus 1.25% inclusive of Gross Receipts

Tax rate (GRT) and BSP overnight borrowing rate plus spread of

0.125% inclusive of GRT whichever is higher, subject to quarterly

repricing. Interest rates range from 3.125% to 4.125% in 2016 and at

4.125% in 2015. P=166,666,667 P=177,777,778

Balance of loan obtained from CBC of P=200.0 million, availed of last

September 9, 2015 and will mature on September 9, 2025. The loan is

payable quarterly in 36 equal quarterly installments starting

December 9, 2016. . Annual interest rate is equal to 90-day PDST-R2

inclusive of GRT and BSP overnight borrowing rate minus 0.05%

inclusive of GRT whichever is higher, subject to quarterly repricing.

Interest rate range from 2.95% to 3.95% in 2016 and at 3.95% in 2015. 183,333,333 194,444,444

Balance of loan obtained and refinanced from BDO of P=450.0 million,

maturing on July 7, 2021. Annual interest rate is equal to the PDST-F

plus 1.25% spread plus 1.00% GRT or BSP overnight borrowing rate

plus 0.25% and 1.00% GRT whichever is higher, subject to quarterly

repricing.Interest rates range from 3.4211% to 4.4737% in 2016, 4.29%

to 4.47% in 2015 and 3.50% to 3.79% in 2014. 121,428,571 135,714,286

Balance of loan obtained from MBTC of P=238.0 million, P=50.0 million

was availed last April 20, 2012 and will mature on April 20, 2019,

P=138.0 million was availed last May 15, 2012 and will mature on

May 15, 2019. The loan is payable in quarterly installments of

P=2.0 million for the first drawdown and P=7.5 million for the second

drawdown with one year grace period. Interest is paid and repriced

quarterly. Annual interest rate is equal to PDST-F plus minimum of

1.25% spread inclusive of GRT, or the BSP Overnight lending rate plus

GRT, whichever is higher at the time of the repricing. Interest rates

range from 2.621% to 3.9367% in 2016, 3.50% to 4.135% in 2015 and

at 3.00% in 2014. 76,160,000 95,200,000

Balance of loan obtained from BDO of P=132.0 million, availed of last

December 10, 2015 and will mature on December 8, 2020. The loan is

payable quarterly in 20 equal installments starting March 9, 2016.

Annual interest rate is equal to 3-month PDST R-2 plus applicable

spread and tax, or the BSP Overnight lending rate plus GRT, whichever

is higher at the time of the repricing. Interest rates range from 3.00% to

4.00% in 2016 and no interest has been paid by the Company on the

loan in 2015. 92,400,000 105,600,000

Balance of loan obtained from BDO of P=225.0 million, maturing on

March 16, 2017 and payable quarterly in 16 equal quarterly installments

starting June 16, 2013. Annual interest rate is equal to PDST-F plus

applicable spread and tax. Interest rates range from 3.00% to 4.0468% in

2016, at 4.00% in 2015 and range from 3.50% to 3.75% in 2014. - 14,062,500

(Forward)

- 30 -

June 2017 Dec 2016

On July 28, 2014, the Company and MBTC amended the loan

agreement to extend the maturity dates of the loans. As a result of the

amendment, balance amounting to P=36.0 million will become due on

June 2, 2017; P=24.0 million will become due on July 29, 2017 [original

interest and payment terms still apply]. The loan is payable in quarterly

installments of P=5.0 million. Interest is paid monthly and repriced

quarterly. Annual interest rate is equal to PDST-F plus 0.20% and 1.25%

spread inclusive of GRT, or the BSP overnight lending rate plus GRT,

whichever is higher at the time of the repricing.Interest rates range from

3.125% to 4.125% in 2016, at 4.125% in 2015 and range from 3.00% to

3.63% in 2014. - 10,000,000

639,988,571 732,799,008

Less deferred financing costs (2,551,024) (2,551,024)

637,437,547 730,247,984

Less current portion (68,747,936) (161,558,373)

P=568,689,611 P=568,689,611

The long-term borrowings are secured by chattel mortgages on certain vessels with carrying values

of P=983.3 million and P=1,122.1 million as of December 31, 2016 and 2015, respectively

(see Note 9).

Deferred financing costs were incurred in connection with the financing arrangement. These costs

are amortized using the effective interest method over the term of the related loans.

Rollforward analysis of deferred financing costs follows:

2016 2015

Cost:

Balances at beginning of year P=7,018,046 P=5,358,046

Addition − 1,660,000

7,018,046 7,018,046

Accumulated amortization:

Balances at beginning of year P=3,395,605 P=2,505,162

Amortization for the year 1,071,420 890,443

4,467,025 3,395,605

Balances at end of year P=2,551,021 P=3,622,441

13. Cost of Services

June 30, 2017 June 30, 2016

Outside services P=645,522,1014 P=627,785,916

Materials, supplies and facilities

(Note 7) 205,134,248 175,647,840

Depreciation (Note 9) 117,681,408 110,034517

Personnel (Note 17) 40,318,810 63,137,752

Voyage 30,691,120 28,884,487

Others 1,481,892 1,352,509

P=1,040,829,492 P=1,006,843,020

(Forward)

- 31 -

Outside services recorded under cost of services include trucking, arrastre, co-loading, craneage and

stevedoring charges amounting to P=432.9 million, P=146.5 million, P=275.7 million, P=111.8 million and

P=56.9 million, respectively, in 2016, P=464.8 million, P=149.9 million, P=132.7 million,

P=87.0 million and P=59.2 million, respectively, in 2015 and P=366.0 million, P=168.1 million,

P=58.7 million, P=50.1 million and P=69.9 million, respectively, in 2014.

14. Terminal Expenses

June 30, 2017 June 30, 2016

Depreciation (Note 9) P=21,238,551 P=23,774,102

Rental (Note 24) 37,392,009 31,535,654

Outside services 16,348,616 17,923,894

Materials, supplies and facilities

(Note 7) 20,776,147 13,782,350

Personnel (Note 17) 10,773,306 12,667,428

Others 3,035,730 11,938,272

P=109,564,360 P=111,621,701

Outside services recorded under terminal expenses include lift-on/lift-off (LOLO) charges and

expenses for security and temporary services amounting to P=23.7 million, P=7.1 million and

P=3.7 million, respectively, in 2016, P=17.1 million, P=6.0 million and P=3.1 million , respectively, in

2015 and P=21.4 million , P=7.0 million and P=1.9 million, respectively, in 2014.

Others consist of costs of office supplies, consultancy fees and container van insurance amounting

to P=2.8 million, P=0.3 million and P=1.1 million, respectively, in 2016, P=2.8 million, P=2.0 million and

P=1.2 million, respectively, in 2015 and P=2.9 million, nil and P=1.2 million, respectively, in 2014.

15. General and Administrative Expenses

June 30, 2017 June 30, 2016

Personnel (Note 17) P=28,363,892 P=35,380,745

Outside services 33,706,147 20,750,207

Impairment losses on:

Trade and other receivables (Note 6) 5,737,851 6,012,589

Inventories (Note 7) − −

Deposit (Note 10)

Communication, light and water 2,741,289 3,926,462

Rental (Note 24) 4,382,934 3,887,612

Depreciation (Note 9) 2,454,914 2,990,499

Taxes and licenses 2,224,687 1,776,399

Transportation and travel 1,054,722 1,472,420

Supplies (Note 7) 905,981 944,508

Repairs and maintenance 423,028 736,005

Employees’ training and staff meeting 159,653 477,142

Entertainment, amusement and recreation 455,442 264,938

Advertising 29,511 61,676

Membership fees 12,500 44,900

Others 2,870,416 3,0006,052

P=85,522,967 P=81,732,154

- 32 -

Outside services recorded under general and administrative expenses include legal fees, service fees

and expenses for temporary services amounting to P=1.5 million, P=22.6 million and P=14.8 million,

respectively, in 2016, P=10.9 million, P=10.8 million and P=8.7 million, respectively, in 2015 and

P=4.1 million, P=0.4 million and P=7.2 million, respectively, in 2014.

16. Pension Cost

Under the existing regulatory framework, Republic Act 7641, Retirement Pay Law, requires a

provision for retirement pay to qualified private sector employees in the absence of any retirement

plan in the entity, provided however that the employee’s retirement benefits under any collective

bargaining and other agreements shall not be less than those provided under the law. The law does

not require minimum funding of the plan.

The Company maintains a funded, tax qualified, non-contributory retirement plan covering all its

eligible employees. Under the provisions of the plan, the normal retirement age is 60 for both shore-

based and sea-based employees, with completion of at least 5 years of service for sea-based

employees. Shore-based employees at age 50 with at least 10 years of credited services can avail of

an early retirement. The retirement plan is intended to provide lump-sum benefit payments to

employees equal to 150% and 115% of plan salary for every year of credited service for shore-based

and sea-based employees, respectively.

The Company’s retirement benefit fund (“Fund”) is in form of a trust being maintained and managed

by BPI Asset Management.

The following tables summarize the components of net benefit expense recognized in the statements

of income and the funded status and amounts recognized in the statements of financial position for

the Plan.

2016 2015 2014

Pension costs to be recognized in the

statements of income:

Current service cost P=7,556,219 P=11,936,200 P=10,602,100

Net interest cost 4,186,625 5,541,947 4,518,981

P=11,742,844 P=17,478,147 P=15,121,081

- 33 -

2016 2015 2014

Re-measurement effects to be recognized

in

other comprehensive income:

Actuarial loss (gain) on

defined

benefit

obligation P=13,007,929 (P=26,687,878) P=7,872,180

Return on assets excluding amount

included

in net interest cost 70,649 656,180 749,396

P=13,078,578 (P=26,031,698) P=8,621,576

Movements in the retirement benefit obligation are as follows:

2016 2015

Balances at beginning of year P=93,352,755 P=123,459,870

Net benefit costs in statements of income:

Current service cost 7,556,219 11,936,200

Net interest cost 4,186,625 5,541,947

11,742,844 17,478,147

Net benefit costs in statements of comprehensive

income:

Actuarial loss (gain) due to:

Experience adjustments 8,423,519 (2,502,600)

Changes in financial assumptions 4,584,410 (12,243,870)

Changes in demographic assumptions – (11,941,408)

Actual return excluding amount included in net

interest cost 70,649 656,180

13,078,578 (26,031,698)

Actual contributions (2,500,000) (4,000,000)

Benefits paid (26,565,474) (17,553,564)

P=89,108,703 P=93,352,755

Retirement benefit obligation

2016 2015

Fair value of plan assets P=22,021,031 P=19,266,140

Present value of obligation (111,129,734) (112,618,895)

Pension liability (P=89,108,703) (P=93,352,755)

Changes in the present value of the defined benefit obligation are as follows:

2016 2015

Balances at beginning of year P=112,618,895 P=138,674,700

Net benefit costs in statements of income:

Current service costs 7,556,219 11,936,200

Interest cost 4,512,165 6,249,437

12,068,384 18,185,637

Re-measurements in other comprehensive income

- 34 -

Actuarial loss due to:

Changes in financial assumptions 4,584,410 (12,243,870)

Changes in demographic assumptions – (11,941,408)

Experience adjustments 8,423,519 (2,502,600)

13,007,929 (26,687,878)

Benefits paid for voluntary separation (26,565,474) (17,553,564)

Balances at end of year P=111,129,734 P=112,618,895

Changes in the fair value of plan assets are as follows:

2016 2015

Balances at beginning of year P=19,266,140 P=15,214,830

Interest income included in net interest cost 325,540 707,490

Actual return excluding amount included in net

interest cost (70,649) (656,180)

Actual contributions 2,500,000 4,000,000

Balances at end of year P=22,021,031 P=19,266,140

The fair value of plan assets by each class as at the end of the reporting period are as follows:

2016 2015

Cash and fixed-income investments P=22,054,848 P=19,295,969

Less other liabilities 33,817 29,829

Fair value of plan assets P=22,021,031 P=19,266,140

All equity instruments held have quoted prices in active market. The remaining plan assets do not

have quoted market prices in active market. The plan assets have diverse investments and do not

have any concentration risk.

The principal assumptions used as of December 31, 2016 and 2015 in determining pension benefit

obligations for the Company’s Plan are shown below:

2016 2015

Discount rate 4.82% 5.10%

Salary increase rate:

Land-based 6.00% 4.00%

Sea-based 6.00% 4.00%

The sensitivity analysis below has been determined based on reasonably possible changes of each

significant assumption on the defined benefit obligation as of December 31, 2016, assuming all other

assumptions were held constant:

Increase

(decrease)

in basis points

Effect on defined

benefit obligation

Discount rates 1.00% P=5,286,028

-1.00% (5,867,088)

Future salary increases 1.00% (P=6,621,740)

-1.00% 6,085,919

- 35 -

The Company’s defined benefit pension plan is funded by the Company.

The Company expects to contribute P=32.2 million to the defined benefit plan in 2017.

The average duration of the defined benefit obligation is 7.90 years and 7.26 years as of

December 31, 2016 and 2015, respectively.

17. Personnel Cost

June 30, 2017 Jun 30, 2016

Salaries and wages P=57,438,318 P=87,309,612

Other employee benefits 79,456,007 18,001,891

Pension costs (Note 16) 5,420,809 5,871,423

P=142,315,134 P=111,182,925

18. Finance Costs and Other Charges - net

June 30, 2017 June 30,2016

Interest expense on: P=25,365,081 27,681,979

Borrowings (Note 12):

Long-term borrowings

Short-term borrowings

Obligations under finance lease

(Note 24)

Foreign exchange losses - net 294,957 (27,830)

Banks and other financing charges 923,495 508,512

Interest income from: (97,335) (123,703)

Banks (Note 5)

Accretion of deposit

P=26,486,198 P=28,038,958

19. Other Charges – net6

June 30, 2017 June 30, 2016

Income from insurance claims

Rental income and others P=32,866,041 P=16,996,938

Equity in net income (loss) of an

associate (Note 10)

Taxes and licenses (63,866,420)

Loss/Gain on disposal of property and

equipment - net (Note 9) 3,519,413 (62,121,058)

P=36,385,454 (P=108,990,540)

Income from insurance claims refers to shipping, container LOLO and other claims, which are part

of the normal operating cycle of the Company, collected during the year

In 2016, the Company paid deficiency taxes for 2013 and 2014 tax assessments amounting to

P=31.9 million and P=32.0 million, respectively.

- 36 -

In 2015, the Company paid deficiency taxes for 2009 and 2011 tax assessments amounting to

P=40.0 million and P=16.2 million, respectively.

20. Income Taxes

The Company’s current provision for income tax represents minimum corporate income tax (MCIT)

in 2016 and 2015 and regular corporate income tax (RCIT) in 2014.

The reconciliation of income tax computed at the statutory income tax rate to provision for (benefit

from) income tax as shown in the statements of income is as follows:

2016 2015 2014

Income tax at statutory income tax rate

of 30% (P=108,614,027) (P=66,621,549) P=15,683,149

Additions to (reductions in) income tax

resulting from:

Unrecognized deferred tax assets 80,773,930 27,857,191 –

Loss (income) subject to income tax

holiday (Note 28) 14,673,760 27,800,181 (7,988,206)

Nondeductible expenses 16,170,728 19,875,351 905,282

Amortization of deferred financing

costs 260,691 128,443 –

Equity in net loss (income) of an

associate 27,299 (146,746) –

Interest expense limitation 26,062 41,882 85,011

Interest income subjected to final tax (63,744) (101,696) (206,437)

P=3,254,699 P=8,833,057 P=8,478,799

The components of the net deferred tax asset are as follows:

2016 2015

Deferred taxes recognized in the statement of

income:

Deferred tax assets:

Retirement benefit obligation P=18,003,408 P=16,159,336

Allowance for impairment losses on trade

and other receivables 9,862,175 12,788,655

Unrealized foreign exchange loss (996,030) –

26,869,553 28,947,991

Deferred tax liabilities:

Deferred financing costs (498,000) (498,000)

Depreciation (812,282) (812,282)

Deferred tax asset related to retirement benefit

obligation recognized directly in equity 11,214,348 7,290,775

P=36,773,619 P=34,928,484

Movement in NOLCO and MCIT follows:

Year Incurred Availment Period Amount Applied/Expired Balance

NOLCO

2016 2017-2019 P=225,344,378 P=– P=225,344,378

- 37 -

2015 2016-2018 65,346,911 – 65,346,911

P=290,691,289 P=− P=290,691,289

MCIT

2016 2017-2019 P=1,176,260 P=– P=1,176,260

2015 2016-2018 4,216,065 – 4,216,065

2013 2014-2016 2,654,175 2,654,175 −

P=8,046,500 P=2,654,175 P=5,392,325

No deferred income tax assets were recognized on the following deductible temporary differences

because management believes that it is not probable that sufficient taxable income will be available

to allow all or part of the deferred tax asset to be utilized:

2016 2015

NOLCO P=290,691,288 P=65,346,911

Allowance for impairment losses on:

Trade and other receivables 41,643,553 9,131,628

Deposit 1,286,231 −

Inventories 336,233 336,233

MCIT 5,392,325 6,870,240

Unrealized foreign exchange loss 9,445,945 3,320,100

Rent levelization 420,243 363,053

P=349,215,818 P=85,368,165

- 38 -

21. Equity

Capital Stock

On July 22, 1996, the Company listed its common stock with the PSE, wherein it offered

300,751,880 shares to the public at the issue price of P=5.96 per share.

On September 4, 2006, the SEC approved the increase in the Company’s authorized capital stock

from P=700.0 million divided into 400.0 million common shares, and 300.0 million preferred shares,

both with a par value of P=1.0 per share, to P=1.0 billion divided into 895,058,756 common shares and

104,941,244 preferred shares, both with a par value of P=1.00 per share. In separate meetings, the

BOD and the shareholders resolved that the increase of the authorized capital stock shall be funded

by the declaration of stock dividends equivalent to 75,187,967 common shares with a par value of

P=1.00 per share. On October 3, 2006, the PSE approved the application of the Company to list

additional shares relating to the issuance of stock dividends.

On December 29, 2006, certain shareholders owning 96,125,243 preferred shares opted to convert

their shares into 1 common share per 1 preferred share, plus stock dividends equivalent to 86.96%

common share for every preferred share (equivalent to 83,587,161 shares). The Company filed

Form 10.1 with SEC for the exemption from registration requirements of the converted 96,125,243

preferred shares into 179,712,404 common shares.

On September 21, 2007, the SEC approved the amendment of Article VII of the Company’s Articles

of Incorporation through the retirement of 8,816,001 preferred shares and conversion of 96,125,243

preferred shares into common shares resulting in the reduction of the Company’s authorized capital

stock to 991,183,999 with par value of P=1.00 per share.

On November 28, 2007, the PSE has approved the Company’s application to list additional

96,125,243 common shares to cover the underlying common shares for the conversion of a total of

96,125,243 preferred shares at a conversion rate of one (1) common share for every one (1)

convertible preferred share. In addition, the PSE has approved the application of the Company to

list additional 83,587,161 common shares, with a par value of P=1.00 per share, to cover the 86.96%

stock dividend declaration to the stockholders who opted to convert their preferred shares to

common shares in 2007.

The Company has 942 shareholders as of December 31, 2016 and 2015 and 937 shareholders as of

December 31, 2014.

Retained Earnings

On April 30, 2015, the BOD has declared and issued in favor of common shareholders of record as

of May 25, 2015 cash dividends amounting to two centavos (P=0.020) per share, or an aggregate

amount of P=11.1 million.

On June 27, 2013, the BOD has declared and issued in favor of common shareholders of record as

of July 12, 2013 cash dividends amounting to three centavos (P=0.025) per share, or an aggregate

amount of P=13.9 million.

Treasury Shares

On March 11, 2011, the BOD approved the acquisition of 1,010,000 shares of stock of the Company.

On June 23, 2011, the Company acquired 1,010,000 shares of its own outstanding shares for a total

consideration of P=3.1 million.

- 39 -

22. Earnings (Loss) Per Share

Following are the bases for the computation of earnings (loss) per share as of June 30 2017 & June

30, 2016:

2017 June 2016

Net income (loss) available to common

shareholders (P=78,447,389) (P=230,867,195)

Weighted average number of

outstanding common shares 554,642,251 554,642,251

Basic and diluted earnings (loss)

per share (P=0.14) (P=0.42)

For the years ended December 31, 2016, 2015 and 2014, there were no shares of stock that have a

potentially dilutive effect on the basic EPS of the Company.

23. Related Party Transactions

Parties are considered to be related if one party has the ability to control, directly or indirectly, the

other party or exercise significant influence over the other party in making financial and operating

decisions. Parties are also considered to be related if they are subject to common control or common

significant influence. Related parties may be individuals or corporate entities.

- 40 -

The following are the more significant related party transactions and balances as of and for te years ended December 31, 2016, 2015 and 2014 not separately shown elsewhere

in the financial statements.

Related Parties Year Freight Revenue Purchases

Management

Fees

(Note 13)

Reimbursable

Expenses

Insurance,

Rental,

Guarantee

Fee, and

Other Services

Amounts Owed by Related Parties (Note 6)

Amounts

Owed to

Related Parties

(Note 11) Terms Conditions Trade Non Trade Others

Parent:

NMC 2016 P=− P=− P=− P=− P=13,086,619 P=− P=3,166,530 P=165,877 P=– Brokerage Fee -

Payable within the

following month

Unsecured;

No Impairment 2015 – – – – 4,976,767 – 165,877 190,032 3,614,365

2014 – – – – 10,268,368 – 165,877 190,032 3,349,654

Affiliates:

One Stop Logistics

Solutions, Inc. (OLSI)

2016 16,233,540 − − – 988,878 47,057,276 14,384,206 3,248,369 1,472,184 Trucking - Payable

within the month

Unsecured;

No Impairment 2015 18,376,836 – – – 50,762 65,022,644 17,368,509 – 3,183,211

2014 25,130,779 – – – – 56,917,517 15,991,166 – 3,127,372

One Stop Warehousing

Solutions, Inc. (OWSI)

2016 − − − 178,098 62,338,384 1,470,046 754,000 48,449,958 Various Unsecured;

No Impairment 2015 – – – 186,988 23,868,034 – 12,951,384 – 7,092,872

2014 – – – 94,079 21,552,535 – 6,981,240 – 2,253,044

NMC Container Lines, Inc.

(NMCCLI)

2016 171,365,419 − − 1,148,212 327,930,376 81,377,361 15,832,173 2,164,090 198,826,766 Co-loading/

Reimbursables -

Payable within the

following month

Unsecured;

No Impairment 2015 125,859,985 – – 811,596 150,079,046 50,378,427 21,185,234 – 33,632,766

2014 169,559,097 – – 1,239,513 52,117,843 102,953,342 18,124,862 – 22,587,281

All Asian Countertrade 2016 18,177,939 10,928,571 − – – 24,271,432 − – 1,019,605 Freight - Collectible

in 30 days after

receipt of Bill

Unsecured;

No Impairment 2015 26,222,955 3,535,714 – – – 26,455,891 18,974,319 – 5,498,365

2014 69,418,121 – – – – 43,338,823 16,729,347 – –

Magsaysay

Shipmanagement, Inc.

(MSI)

2016 − − − 3,882 34,603,411 – 724,314 3,151,500 39,522,599 Revolving Fund

Replenishment -

Payable 5 days after

receipt

Unsecured;

No Impairment 2015 – – 8,234,453 – 26,811,650 – 725,814 3,654,328 39,401,470

2014 – – 21,391,308 – 1,377,114 – 725,814 3,844,498 2,498,462

Magsaysay Marine Services,

Inc. (MMSI)

2016 − − − – 6,648,990 – 19,000 14,484,069 Container Repair -

Payable within the

following month

Unsecured;

No Impairment 2015 – – – – 11,275,386 – 332,472 510,743 9,753,139

2014 – – – – 23,063,640 – 332,472 510,743 4,037,776

Oceanic Container Lines,

Inc.

2016 − − − – 4,021,911 – – – – Co-loading - Payable

in 30 days

Unsecured;

No Impairment 2015 – – – – 7,759,873 – – – 191,518

2014 72,116 – – – 5,176,484 225,435 – – 471,429

Asiaport Equipment and

Logistics Corp. (AELC)

2016 − − − – 16,684,797 – – 816,125 2,830,400 Lift on/lift off -

Payable in 30 days

Unsecured;

No Impairment 2015 – – – – 13,246,455 – – – 3,776,872

2014 – – – – 20,711,679 – – – 9,284,003

(Forward)

- 41 -

Related Parties Year Freight Revenue Purchases

Management

Fees

(Note 13)

Reimbursable

Expenses

Insurance,

Rental,

Guarantee

Fee, and

Other Services

Amounts Owed by Related Parties (Note 6)

Amounts

Owed to

Related Parties

(Note 11) Terms Conditions Trade Non Trade Others

OYG Transport Inc. 2016 P=– P=– P=– P=– P=– P=– P=– P=– P=– Trucking - Payable in

15 days

Unsecured;

No Impairment 2015 – – – – – – – – –

2014 – – – – 1,149,531 – – – –

Magsaysay Houlder

Insurance Brokers, Inc.

(MHIBI)

2016 − − – 10,203,473 – – – 113,683 Insurance - Payable in

30 days

Unsecured;

No Impairment 2015 – – – – 11,599,485 – – – 36,857

2014 – – – – 12,403,075 – – – 263,298

Roadlink Solution Inc.

(RLSI)

2016 − − − 1,823,651 48,722,599 435,937 – – 15,617,856 Various Unsecured;

No Impairment 2015 – – – 8,898,331 54,116,338 – 3,876,016 – 16,603,528

2014 – – – 18,042,930 63,498,157 – 3,876,016 – 6,012,569

Marine Fuels Philippines,

Inc. (MFPI)

2016 − 286,820,702 − – – – – – 116,619,149 Fuel - Payable in 30

days

Unsecured;

No Impairment 2015 – 271,070,411 – – – – – – 52,495,696

2014 – 207,529,689 – – – – – – 70,069,667

NMC Ship Agency and

Brokearge Inc

2016 − − − – 1,950,640 – – – 3,844,913 Shipping Agent -

Payable in 30 days

Unsecured;

No Impairment 2015 – – – – 520,234 – – 128,570 1,276,015

2014 – – – – 7,270,338 – – 128,570 208,002

Other shareholders:

Dumaguete Coconut Mills,

Inc. (DCM)

2016 7,820,057 − − – 1,262,762 – – – 357,694 Rental - first 5 days of

the month

Unsecured;

No Impairment 2015 14,034,230 – – – 1,004,484 5,309,883 – – 104,619

2014 8,223,843 – – – 1,210,411 4,075,930 – – –

Tao Commodity Trader, Inc.

(TAO)

2016 − 11,426,339 − – – – – – 967,500 Fuel - Payable in 30

days

Unsecured;

No Impairment 2015 – 3,663,782 – – – – – – 4,955

2014 – 19,267,680 – – – – – – 3,044,479

Pioneer Insurance and Surety

Corp. (Pioneer)

2016 − − − – 40,680,789 – – – 1,174,406 Insurance - Quarterly

payment, payable 1st

day of the quarter

Unsecured;

No Impairment 2015 – – – – 47,525,487 – – – 1,174,406

2014 – – – – 23,635,160 – – 4,302,819 –

E.F. Ruste Shipping Agency 2016 − − – – – – – – – Various Unsecured;

No Impairment 2015 – – – – – – – – –

2014 – – – – – – – 11,000,000 –

Others 2016 38,051,138 − – – 2,048,612 19,172,171 2,352 – – Various Unsecured;

No Impairment 2015 – – – – 6,120,144 – – 580,924 –

2014 – – – – 5,736,743 5,551 – 580,924 –

Total 2016 P=251,648,093 P=309,175,612 P=– P=3,153,843 P=571,172,241 P=173,784,223 P=34,863,575 P=9,564,961 P=445,300,782

2015 184,494,006 278,269,907 8,234,453 9,896,915 358,954,145 147,166,845 75,579,625 5,064,597 177,840,654

2014 272,403,956 226,797,369 21,391,308 19,376,522 249,171,078 207,516,598 62,926,794 20,557,586 127,207,036

Magsaysay Group of Companies

NMCCLI and MFPI are subsidiaries of NMC. NMCCLI has a co-loading agreement with the

Company while MFPI supplies fuel to the Company.

MHIBI, a subsidiary of NMC’s parent, handles the marine cargo insurance requirements of the

Company.

MSI is a subsidiary of NMC’s parent. The Company entered into a shipmanagement agreement

with MSI whereby the Company appointed MSI as the manager of its vessels. The agreement

is renewable annually.

AELC is an associate of NMC. In 2008, the Company entered into an equipment and logistics

services contract with AELC.

OLSI, a wholly-owned subsidiary of NMC, is engaged in warehousing, project and rolling cargo

handling and other cargo related services.

MMSI, a subsidiary of NMC’s parent, is primarily engaged in ship repair including corrosion

control, container van repairs and other similar services.

RLSI and OWSI are wholly-owned subsidiaries of NMC. Other Shareholders

TAO and DCM are substantially owned by Mr. Julio Sy, or his immediate family. The

Company has a lease agreement with DCM, while TAO is one of the Company’s suppliers of

fuel for its vessels.

Pioneer is the Company’s provider of protection and indemnity and hull and machinery

insurance for its vessels.

Other related parties mentioned are businesses owned by various shareholders or directors of

the Company and has transactions with the Company in the regular course of business. Retirement Fund

The Company’s retirement fund is managed by BPI Asset Management (see Note 16). Compensation of Key Management Personnel

2016 2015

Short-term employee benefits P=7,920,789 P=14,613,983

Post-employment benefits 1,101,326 1,850,419

P=9,022,115 P=16,464,402

24. Leases Finance Leases

The Company entered into separate lease purchase agreements with Cronos Containers Limited,

SeaCube Containers LLC, Textainer Equipment Management Limited and Container Applications

International (CAI) for the lease purchase of dry van containers. In August 4, 2015, a Notice of

Assignment was given to the Company that with effect from October 1, 2015 wherein Cronos

Containers Limited assigned to its affiliate, Seaco Global Limited all its right, title, interest and

benefit in and to all of the Company’s existing lease documentation. Lease charges for each

container shall commence on the first calendar day of the month following the month in which the

container was delivered to the Company and shall continue for a period of 3-8 years and shall be

payable in 36 monthly installments in accordance with the terms and conditions of the lease purchase

agreement.

The lease purchase agreement includes the following terms and conditions:

a. the Company shall pay the lessor for any event of loss as defined in the agreement equivalent

to the stipulated loss value; and

b. provided the Company is not in default, the Company has the option to purchase the containers

at the purchase price of US$1 per container at the end of the lease term.

The future minimum lease payments for the obligations under finance lease are as follows:

2016 2015

Within one year P=42,820,930 P=40,609,561

After one year but not more than five years 89,080,511 121,405,471

After five years − 3,790,126

Total minimum lease obligations 131,901,441 165,805,158

Less interest portion 37,317,366 42,768,013

Present value of minimum lease obligations 94,584,075 123,037,145

Less current portion 32,664,533 33,162,450

Noncurrent portion P=61,919,542 P=89,874,695

Operating Leases

As of December 31, 2015, the Company’s leases pertain to the lease of container yards,

warehouses/offices, equipment, and container vans under various lease agreements for a period

ranging from 1 to 10 years until 2019. The minimum annual rental commitments on these leases

are presented below:

2016 2015

Less than one year P=28,114,115 P=27,621,757

More than one year but not more than five years 36,054,004 37,604,502

P=64,168,119 P=65,226,259

Deposits on the above agreements amounting to P=6.7 million in 2016 and 2015, respectively, is

presented as part of “Other noncurrent assets” account in the statements of financial position (see

Note 10).

For the years ended December 31, 2016, 2015 and 2014, the Company’s operating leases were

charged to rental under “Cost of services” in the statements of income amounting to P=31.6 million,

P=35.7 million and P=24.1 million, under “Terminal expenses” in the statements of income amounting

to P=44.4 million, P=42.2 million and P=35.1 million, and under “General and administrative expenses”

in the statements of income amounting to P=9.3 million, P=7.2 million and P=11.3 million, respectively

(see Notes 13, 14 and 15).

25. Financial Instruments

Financial Risk Management Objectives and Policies

Risk management is carried out by the Management Committee (ManCom) under policies approved

by the Executive Committee (ExCom) and the BOD. Audit Committee identifies, evaluates, and

hedges financial risks in close cooperation with the Company’s ManCom. ExCom and BOD

approve written principles provided by ManCom for overall risk management, as well as written

policies, covering specific ones such as internal control policies, freight policies, purchasing policies

and operational policies among others.

The Company’s principal financial instruments consist of borrowings and obligations under finance

leases. The main purpose of these financial instruments is to raise funds for the Company’s

operations. The Company has various financial instruments such as cash and cash equivalents, trade

and other receivables, deposits, loan receivable and others included under other noncurrent assets,

and accounts payable and accrued expenses which arise directly from its operations.

The Company’s activities expose it to a variety of financial risks. The Company’s overall risk

management program focuses on the unpredictability of financial markets and seeks to minimize

potential adverse effects on the Company’s financial performance. Consistent with prior year, the

Company’s policies for managing each of these risks are summarized below:

Fluctuations in freight rate and cargo volumes

In the cargo liner shipping industry, there are constant fluctuations in cargo volumes arising from

competition and changes in the market environment. Negative trends in cargo volumes and freight

rates have an impact on the Company’s results of operations.

Fuel price fluctuations

Purchases of fuel to operate vessels are vital to the Company’s operations. The market price of fuel

is directly influenced by the price of crude oil in the world market. Any increase in the price of

crude oil and the related increase in the price of fuel will have a negative impact on the Company’s

earnings. The risk involving fuel price fluctuations are borne mostly by the customers as the

Company is allowed to increase freight rates under General Rate Increase and Automatic Fuel Rate

Adjustment.

Interest rate risk

The Company depends on funds procured from external sources to meet substantial capital

expenditure requirements. The Company reviews its exposure to interest rate risk through quarterly

monitoring of actual figures against projections. Management believes that cash generated from

operations is sufficient to pay its obligations under the loan agreements as they fall due.

The following tables set out the carrying amount as of December 31 by maturity, of the Company’s

financial instruments that are exposed to interest rate risk:

Floating Rate Within 1 Year 1-2 Years 2-5 Years Over 5 Years Total

Long-term borrowings 2016 P=161,558,373 P=137,495,873 P=283,744,762 P=150,000,000 P=732,799,008

2015 197,079,206 161,558,373 355,367,619 215,873,013 929,878,211

Fixed Rate Within 1 Year 1-2 Years 2-5 Years Over 5 Years Total

Short-term borrowings 2016 P=519,420,400 P=− P=− P=− P=519,420,400

2015 455,099,222 – – – 455,099,222

Obligations under finance

lease 2016 32,664,533 29,424,823 32,494,719 − 94,584,075

2015 33,162,450 30,916,994 56,155,796 2,801,905 123,037,145

Interest on financial instruments classified as floating rate is repriced at intervals of less than one

year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the

instrument. The other financial instruments of the Company that are not included in the above tables

are noninterest-bearing and are therefore not subject to interest rate risk.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates,

with all other variables held constant, of the Company’s income before tax (through the impact on

floating rate borrowings):

Year

Increase/Decrease

in Basis Points

Effect on Income

Before Tax

Interest-bearing loans and borrowings 2016 +28 (P=4,726,823)

-28 4,713,773

2015 +24 (P=3,030,862)

-24 3,030,862

The sensitivity of the Company’s statement of income is the effect of assumed changes in interest

rates based on the bank’s projection of 90-day interest rates using a combination of technical

analysis and trending techniques.

There is no other impact on the Company’s equity other than those already affecting the statement

of income.

Foreign currency risk

The Company’s foreign currency risk results primarily from the foreign exchange rate movements

of the Philippine peso against foreign currencies. The Company resolved to mitigate this risk by

taking advantage of market trends. Such trends are used to determine the proper timing of foreign

currency transactions in order to realize a foreign currency gain.

The following table demonstrates the sensitivity to a reasonable change in the Philippine peso

exchange rate in relation to foreign currencies based on the bank’s projection of foreign currency

fluctuations, with all variables held constant, of the Company’s income before tax:

Effect on Income Before Tax

2016 2015 2014

US Dollar

Strengthened (2016:14%, 2015: 9%, 2014: 3%) (P=3,945,568) (P=4,973,364) (P=2,853,789)

Weakened (2016:14%, 2015: 9%, 2014: 18%) 3,945,568 4,973,364 4,280,684

Japanese Yen

Strengthened (2016:14%, 2015: 9%, 2014: 3%) (568) (1,159) (81,175)

Weakened (2016:14%, 2015: 9%, 2014: 18%) 568 1,159 487,051

(Forward)

Effect on Income Before Tax

2016 2015 2014

Euro

Strengthened (2016:9%, 2015: 14%, 2014: 1%) 56,942 1,297,002 192,893

Weakened (2016:9%, 2015: 14%, 2014: 14%) (56,942) (1,297,002) (2,700,495)

Singaporean Dollar

Strengthened (2016:7%) (122,594) − −

Weakened (2016:7%) 122,594 − −

There is no other impact on the Company’s equity other than those already affecting the statement

of income.

The Company’s foreign currency denominated monetary assets and liabilities as of December 31

consist of:

2016

US Dollar

Japanese

Yen Euro

Singaporean

Dollar

Current assets $106,154 ¥− €517 $−

Current liabilities (844,683) (9,667) (12,745) (51,075)

Noncurrent liabilities (1,245,365) − − −

Net foreign currency

denominated assets

(liabilities) (1,983,894) (9,667) (12,228) (51,075)

Exchange rate used 49.72 0.42 51.74 34.29

Peso equivalent (P=98,639,210) (P=4,060) (P=632,677) (P=1,751,362)

2015

US Dollar

Japanese

Yen Euro

Current assets $200,282 ¥− €318,158

Current liabilities (932,526) (32,862) (139,107)

Noncurrent liabilities (1,909,790) − −

Net foreign currency denominated assets

(liabilities) (2,642,034) (32,862) 179,051

Exchange rate used 47.06 0.39 51.74

Peso equivalent (P=124,334,120) (P=12,816) P=9,264,099

The Company had a net unrealized foreign exchange loss of P=6.1 million, P=4.4 million and

P=3.4 million in 2016, 2015 and 2014, respectively.

Credit risk

Credit risk is defined as the risk of loss arising from the default of an individual, counterparty or

issuer not being able to or unwilling to honor its contractual obligations. The Company’s exposure

to this risk is primarily due to its transactions with its trading customers.

The Company counters this risk by trading only with recognized, creditworthy third parties. It

employs standard process in granting credit lines to customers. It performs thorough evaluation of

its customers’ operations and financial standing to ensure that its customers are able to meet its

contractual obligation.

The Company monitors receivable balances and ensures that customers are able to settle their

obligation within the agreed terms. Its Credit and Collection Department is responsible for the

collection of these receivables and ensures that customers are able to settle their obligation.

Concentration of risk arise when a number of counterparties are engaged in similar business

activities, or activities in the same geographic region, or have similar economic feature that would

cause their ability to meet contractual obligations to be similarly affected by changes in economic,

political or other conditions, such as fluctuations in currencies or interest rates. The Company has

no significant concentration of credit risk.

The Company’s exposure to credit risk arises from default of the counterparty, with a maximum

exposure equal to the carrying amount of its financial assets.

The following table shows the Company’s maximum exposure to credit risk:

2016 2015

Cash and cash equivalents* P=104,421,056 P=212,111,368

Trade and other receivables:

Trade 846,974,612 876,487,685

Non-trade 34,863,575 154,279,320

Advances 5,898,343 5,773,343

Insurance claims 1,922,053 2,576,754

Receivables from officers and employees 1,155,907 1,699,998

Other receivables 7,141,244 9,769,756

Loan receivable 1,205,111 2,532,214

Other noncurrent assets 8,581,265 8,687,039

P=1,012,163,166 P=1,273,917,477 *Excluding cash on hand

Credit quality per class of financial assets are as follows:

2016

Neither Past Due nor Impaired

Past Due but

Not Impaired Impaired Total High Grade

Standard

Grade

Sub-standard

Grade

Cash and cash equivalents* P=104,421,056 P=− P=− P=− P=− P=104,421,056

Trade and other receivables:

Trade 381,200,296 187,138,495 80,836,885 197,798,936 97,076,304 944,050,916

Non-trade 3,345,903 285,076 1,166,131 30,066,465 − 34,863,575

Advances 275,000 274,225 2,349,118 3,000,000 − 5,898,343

Insurance claims − 1,922,053 − − 1,726,065 3,648,118

Receivables from officers and employees 1,155,907 − − − − 1,155,907

Other receivables 7,141,244 − − − 7,141,244

Loan receivable 1,205,111 − − − − 1,205,111

Other noncurrent assets − 8,581,265 − − 2,663,591 11,244,856

P=491,603,273 P=205,342,358 P=84,352,134 P=230,865,401 P=101,465,960 P=1,113,629,126

2015

Neither Past Due nor Impaired

Past Due but

Not Impaired Impaired Total High Grade

Standard

Grade

Sub-standard

Grade

Cash and cash equivalents* P=212,111,368 P=– P=– P=– P=– P=212,111,368

Trade and other receivables: Trade 358,849,751 67,748,265 2,956,469 446,933,200 55,882,312 932,369,997

Non-trade 16,768,758 5,832,395 2,572,054 129,106,113 – 154,279,320

Advances 3,150,000 – 2,623,343 – – 5,773,343 Insurance claims – 2,576,754 – – 1,726,066 4,302,820

Receivables from officers

and employees 1,699,998 – – – – 1,699,998 Other receivables – 9,769,756 – – – 9,769,756

Loan receivable 2,532,214 – – – – 2,532,214

Other noncurrent assets – 8,687,039 – – 1,593,092 10,280,131

P=595,112,089 P=94,614,209 P=8,151,866 P=576,039,313 P=59,201,470 P=1,333,118,947

*Excluding cash on hand

High Grade. This pertains to counterparty who is not expected by the Company to default in settling

its obligation, thus, credit risk exposure is minimal. This normally includes large prime financial

institutions, companies, government agencies and individual buyers. Credit quality was determined

based on the credit standing of the counterparty.

Standard Grade. This pertains to accounts of debtors who have historically paid their accounts on

time and who have the financial capacity to pay.

Sub-standard Grade. This pertains to accounts of debtors where the Company incurred delays in

collection.

A financial asset is past due when a counterparty has failed to make payment when contractually

due. Impaired financial assets are those accounts identified by the Company that need to be provided

with allowance. The level of this allowance is evaluated by management on the basis of factors that

affect the collectability of the accounts such as, but not limited to, the length of the Company’s

relationship with the customer, customer payment behavior and known market factors.

Aging analyses per class of financial assets are as follows:

2016

Neither Past

Due nor

Impaired

Past Due but Not Impaired

Impaired Total

Less than

30 Days 31-60 Days 61-90 Days

More than

91 Days

Cash and cash equivalents* P=104,421,056 P=− P=− P=− P=− P=− P=104,421,056

Trade and other receivables:

Trade 381,200,296 123,152,507 63,985,988 34,842,558 243,793,263 97,076,304 944,050,916

Non-trade 3,345,903 80,472 204,605 131,472 31,101,123 − 34,863,575

Advances 275,000 − − − 5,623,343 − 5,898,343

Insurance claims − − − − 1,922,052 1,726,066 3,648,118

Receivables from officers

and employees 1,155,907 − − − − − 1,155,907

Other receivables 7,141,244 − − − − − 7,141,244

Loan receivable 1,205,111 − − − − − 1,205,111

Other noncurrent assets 8,581,265 − − − − 2,663,591 11,244,856

P=507,325,782 P=123,232,979 P=64,190,593 P=34,974,030 P=282,439,781 P=101,465,961 P=1,113,629,126

*Excluding cash on hand

2015

Neither Past

Due nor

Impaired

Past Due but Not Impaired

Impaired Total

Less than

30 Days 31-60 Days 61-90 Days

More than

91 Days

Cash and cash equivalents* P=212,111,368 P=– P=– P=– P=– P=– P=212,111,368

Trade and other receivables:

Trade 448,072,230 7,487,843 60,260,423 2,956,468 357,710,721 55,882,312 932,369,997

Non-trade 9,232,216 7,536,542 5,832,395 2,572,054 129,106,113 – 154,279,320

Advances 5,773,343 – – – – – 5,773,343

Insurance claims – – – – 2,576,754 1,726,066 4,302,820

Receivables from officers

and employees 1,699,998 – – – – – 1,699,998

Other receivables 9,769,756 – – – – – 9,769,756

Loan receivable 2,532,214 – – – – – 2,532,214

Other noncurrent assets 8,687,039 – – – – 1,593,092 10,280,131

P=697,878,164 P=15,024,385 P=66,092,818 P=5,528,522 P=489,393,588 P=59,201,470 P=1,333,118,947

*Excluding cash on hand

Liquidity risk

Liquidity risk is the risk that the Company will not be able to settle or meet its financial obligations

when they fall due. To mitigate exposure to such risk, the Company regularly monitors its cash

position and loan due dates to ensure sufficient fund for working capital and to meet obligations as

they fall due.

The tables below summarize the maturity profile of the Company’s financial liabilities as of

December 31, 2016 and 2015, based on contractual undiscounted cash flows. The table also

analyses the maturity profile of the Company’s financial assets in order to provide a complete view

of the Company’s contractual commitments. The analysis into relevant maturity grouping is based

on the remaining period at the end of the reporting period to the contractual maturity dates.

2016

Less than

6 Months

6 Months

to 1 Year Over 1 Year Total

Financial liabilities:

Short-term borrowings P=519,420,400 P=− P=− P=519,420,400

Long-term borrowings 92,810,436 68,747,936 571,240,635 732,799,007

Obligations under finance lease 16,462,632 16,201,901 61,919,542 94,584,075

Future interest payable on borrowings and

finance leases 12,769,217 11,205,854 50,614,446 74,589,517

Accounts payable and accrued expenses* 834,857,277 − − 834,857,277

P=1,476,319,962 P=96,155,691 P=683,774,623 P=2,256,250,276

Financial assets:

Cash and cash equivalents P=104,421,056 P=− P=− P=104,421,056

Trade and other receivables:

Trade 618,036,227 85,822,081 143,116,304 846,974,612

Non-trade 3,571,920 743,968 30,547,687 34,863,575

Advances 275,000 − 5,623,343 5,898,343

Insurance claims − − 1,922,053 1,922,053

Receivables from officers and

employees 1,155,907 − − 1,155,907

Other receivables 7,141,244 − − 7,141,244

Loan receivable 1,205,111 − − 1,205,111

Other noncurrent assets 8,581,265 − − 8,581,265

P=744,387,730 P=86,566,049 P=181,209,387 P=1,012,163,166

*Excluding statutory liabilities

2015

Less than

6 Months

6 Months

to 1 Year Over 1 Year Total

Financial liabilities:

Short-term borrowings P=455,099,222 P=– P=– P=455,099,222

Long-term borrowings 95,761,825 101,317,381 732,799,005 929,878,211

Obligations under finance lease 16,763,686 16,398,764 89,874,695 123,037,145

Future interest payable on borrowings and

finance leases 21,213,972 19,380,229 109,910,442 150,504,643

Accounts payable and accrued expenses* 692,559,314 – – 692,559,314

P=1,281,398,019 P=137,096,374 P=932,584,142 P=2,351,078,535

Financial assets:

Cash and cash equivalents P=212,111,368 P=– P=– P=212,111,368

Trade and other receivables:

Trade 518,776,965 53,709,584 304,001,136 876,487,685

Non-trade 33,353,071 25,952,417 94,973,832 154,279,320

Advances 5,773,343 – – 5,773,343

Insurance claims – – 2,576,754 2,576,754

Receivables from officers and

employees 1,699,998 – – 1,699,998

Other receivables 9,769,756 – – 9,769,756

Loan receivable 647,990 679,113 1,205,111 2,532,214

Other noncurrent assets 8,687,039 – – 8,687,039

P=790,819,530 P=80,341,114 P=402,756,833 P=1,273,917,477

*Excluding statutory liabilities

Classification and Fair Values of Financial Instruments

Set out below is a comparison by category of carrying amounts and fair values of the Company’s

financial instruments that are carried in the financial statements.

Carrying Amount Fair Value

2016 2015 2016 2015

Loans and receivables:

Loan receivable P=1,205,111 P=2,532,214 P=1,257,748 P=2,767,045

Other noncurrent assets 8,585,070 8,687,039 8,581,265 10,625,652

P=9,790,181 P=11,219,253 P=9,839,013 P=13,392,697

Other financial liabilities:

Obligations under finance lease P=94,584,075 P=123,037,145 P=131,901,441 P=165,454,328

Long-term borrowings 730,247,987 926,255,770 730,247,987 926,255,770

P=824,832,062 P=1,049,292,915 P=862,149,428 P=1,091,710,098

The following methods and assumptions are used to estimate the fair value of each class of financial

instruments:

Cash and cash equivalents, trade and other receivables, accounts payable and accrued expenses

and short-term borrowings

The carrying values of cash and cash equivalents, trade and other receivables, accounts payable and

accrued expenses and short-term borrowings approximate their fair values due to the relatively short-

term maturity of these financial instruments.

Loans receivable

The fair value of loans receivable is based on the discounted net present value of cash flows using

the applicable rates for similar types of loan receivables.

Long-term borrowings and obligations under finance lease

The fair values of long-term borrowings with variable interest rates approximate their carrying

amounts due to quarterly repricing of interest.

The fair values of obligations under finance lease are based on the discounted net present value of

cash flows using effective discount rates of 1.37% to 7.44% as of December 31, 2016 and 2015.

Fair value hierarchy

The Company 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

Level 2: Those involving inputs other than quoted prices included in Level 1 that are observable

for the asset or liability, either directly (as prices) or indirectly (derived from prices)

Level 3: Those inputs for the asset or liability that are not based on observable market data

(unobservable inputs)

As of December 31, 2016 and 2015, the Company held the following financial instruments that are

carried at amortized cost but for which fair values are required to be disclosed:

December 31, 2016

Total Level 1 Level 2 Level 3

Disclosed at fair value:

Other noncurrent assets P=8,585,070 P=− P=− P=8,585,070

Long-term borrowings 730,247,987 − − 730,247,987

Obligations under finance

lease 94,584,075 − − 94,584,075

Loan receivable 1,205,111 − − 1,205,111

December 31, 2015

Total Level 1 Level 2 Level 3

Disclosed at fair value:

Other noncurrent assets P=8,687,039 P=− P=− P=8,687,039

Long-term borrowings 926,255,770 − − 926,255,770

Obligations under finance

lease 123,037,145 − − 123,037,145

Loan receivable 2,532,214 − − 2,532,214

There were no transfers between Level 1 and Level 2 fair value measurement, and there were no

transfers into and out of Level 3 fair value measurement.

26. Capital Management

The primary objective of the Company’s capital management is to ensure that it maintains a strong

credit rating and healthy capital ratios to support its business and maximize shareholder value.

The Company monitors capital using debt-to-equity ratio. It is the policy of the Company to

maintain a debt-to-equity ratio of not more than 2.5 as required by certain lenders. Capital includes

equity attributable to common shareholders, share premium and accumulated earnings. Debt

includes all liabilities, current and long-term interest bearing loans and borrowings and pension

obligation.

2016 2015

Short-term borrowings and other current liabilities P=1,439,827,597 P=1,246,998,275

Long-term borrowings 730,247,987 926,255,770

Obligations under finance lease 94,584,075 123,037,145

Retirement benefit obligation 89,108,703 93,352,755

Total debt 2,353,768,362 2,389,643,945

Common stock 555,652,251 555,652,251

Additional paid-in capital 459,791,492 459,791,492

Actuarial losses on defined benefit plan (26,166,812) (17,011,807)

Treasury shares (3,125,850) (3,125,850)

Retained earnings (Deficit) (324,019,600) 41,281,855

Total equity 662,131,481 1,036,587,941

Total debt and equity P=3,015,899,843 P=3,426,231,886

The Company manages its capital structure and makes adjustments to it, in light of changes in

economic conditions. To maintain or adjust the capital structure, the Company may declare

dividends, reacquire outstanding shares, or issue new shares.

On October 28, 2010, PSE issued a memorandum regarding the rule for the minimum public

ownership for all listed companies. Based on the memorandum, listed companies shall, at all times,

maintain a minimum percentage of listed securities held by the public of ten percent (10%) of the

listed companies’ issued and outstanding shares, exclusive of any treasury shares or as such

percentage that may be prescribed by the PSE. The Company has complied with the minimum

public ownership.

The Company has externally imposed financial covenants for various loans from lenders which

contain provisions on maintenance of financial ratios. The requirements have been complied with

by the Company as of December 31, 2016. At the end of December 31, 2016, noncurrent portion of

long term borrowings amounted to P=571.2 million, of which P=243.5 million pertains to the principal

amount of the loans payable in default at the end of the reporting period. During the period, the

default was remedied before the financial statements were authorized for issue. No changes were made in the objectives, policies or processes during the years ended December 31, 2016 and 2015.

27. Contingencies The Company is involved in legal proceedings and assessment for national taxes. In the opinion of

management and the Company’s legal counsel, the ultimate liability for these lawsuits and claims

would not be material in relation to the financial position and operating results of the Company. It

is possible, however, that the future results of operations could be materially affected by changes in

estimates or in the effectiveness of the strategies relating to these litigation and claims (see Note 4).

28. Registration with Board of Investments (BOI) The Company is registered with the BOI as a new operator of domestic shipping cargo vessel of MV

Lorcon Manila on a preferred pioneer status and MV Lorcon Dumaguete, MV Lorcon General

Santos and MV Lorcon Bacolod on a non-pioneer status, under the provisions of Executive Order

(EO) No. 226, otherwise known as the Omnibus Investment Code of 1987.

Under the Company’s registration, it is entitled to certain tax and nontax incentives which include,

among others, income tax holiday (ITH).

Below are the details of the Company’s ITH entitlement:

Vessel BOI Approval Date Commencement Date* ITH Period

MV Lorcon General Santos July 2012 July 2012 4 years

MV Lorcon Bacolod July 2014 July 2014 4 years *or actual start of commercial operations, whichever comes first.

The ITH incentives shall be limited only to the revenues generated from the new activity. Under the terms of the Company’s registration, it is subject to certain requirements, principally that

of following a specified sales volume and sales revenue schedule and securing prior permission

from the BOI before performing certain acts. Under the Company’s application with the BOI, it can avail of a bonus year in each of the following

cases but the aggregate ITH availment (basic and bonus years) shall not exceed

eight (8) years: a. The ratio of the total imported and domestic capital equipment to the number of workers for the

project does not exceed US$10,000 to one (1) worker;

b. The net foreign exchange savings or earnings amount to at least US$500,000 annually during

the first three (3) years of operation; and

c. The indigenous raw materials used in the manufacture of the registered product must at least be

fifty (50%) of the total cost of raw materials for the preceding years prior to the extension unless

the BOI prescribes a higher percentage.

29. Note to Statements of Cash Flows

The Company purchased container vans under finance lease agreement for a total consideration

amounting to nil and P=15.6 million in 2016 and 2015, respectively. In 2015, the Company purchased

vessel improvements amounting to P=2.3 million which were paid in 2014.

30. Supplementary Information Required Under Revenue Regulations (RR) 15-2010

On November 25, 2010, the BIR issued RR 15-2010 which amends certain provisions of

RR 21-2002 prescribing the manner of compliance with any documentary and/or procedural

requirements in connection with the preparation and submission of financial statements

accompanying the tax returns. It requires the disclosures of taxes, duties and licenses paid or accrued

during the taxable year.

In compliance with the requirements set forth by RR 15-2010 hereunder are the information on

taxes, duties and licenses paid or accrued during the taxable year.

VAT

The National Internal Revenue Code of 1997 provides for the imposition of VAT on sales of goods

and services. Accordingly, the Company’s sales are subject to output VAT while its importations

and purchases from other VAT-registered individuals or corporations are subject to input VAT.

R.A. No. 9337 increased the VAT rate from 10.0% to 12.0%, effective February 1, 2006.

The Company is a VAT-registered company with output VAT declaration for the year ended

December 31, 2016 as follows:

Net sales/

receipts Output VAT

Taxable sales P=2,415,424,130 P=289,850,896

Zero-rated sales 3,742,186 −

P=2,419,166,316 P=289,850,896

The Company’s sales that are subjected to VAT are reported under “Freight Revenue” and “Other

Income”.

The Company’s sales of services are based on actual collections received, hence may not be the

same as amounts accrued in the statement of income.

The amount of input VAT claimed are broken down for the year ended December 31, 2016 is as

follows:

Balance at January 1 P=58,804,707

Current year’s purchases:

Capital goods subject to amortization 24,656,515

Services lodged under direct costs 212,938,817

From importation 8,898,381

Claims for tax credit/refund and other adjustments 305,298,420

Input tax application against output VAT 251,468,684

Balance at December 31 P=53,829,736

Importations

The landed cost of the Company’s importations amounted to P=148,901,000 for the year.

Documentary Stamp Taxes

The documentary stamp taxes paid/accrued during the year on the bill of lading amounted to

P=763,220.

Other Taxes and License:

This includes all other taxes, local and national, including real property taxes, licenses and permit

fees lodged under the “Taxes and licenses” account in “Cost of services”, Terminal expenses” and

“General and administrative expenses” in the statement of income.

Details of other taxes and licenses for the year ended December 31, 2016 follows:

License and permits fees P=5,124,245

Real property tax 404,733

Others 10,069,565

P=15,598,543

Withholding Taxes

Details of withholding taxes for the year ended December 31, 2016 follows:

Expanded withholding taxes P=40,344,530

Tax on compensation and benefits 20,710,711

Final withholding taxes 1,237,124

P=62,292,365

2008 Tax Assessment

The Company has a pending case with the Court of Tax Appeals (CTA) for the deficiency taxes for

the year 2008 amounting to P=2.01 billion, inclusive of penalties, interest and surcharges. On October

17, 2014, the Respondent in the said case (BIR) filed a Motion to Dismiss (MTD), which motion

has been denied by the CTA as per Resolution dated March 5, 2015.

LORENZO SHIPPING CORPORATION

Management Discussion and Analysis or Plan of Operation

For the Six Months Ending June 30, 2017 and 2016

RESULTS OF OPERATION

Lorenzo Shipping Corporation’s (LSC or the “Company”) total revenues for the six months ended

June 30, 2017 amounted to P1.147 billion, P41 million or 4% higher than the P1.107 billion revenue

reported in the same period in 2016, primarily due to 18% increase in volume this period from

recaptured lost accounts and acquired new accounts. Current freight rates were lower in comparison

to 2016 average rates brought about by higher industry TEU supply and the number of vessels

servicing domestic freight.

The Company ended both periods with negative gross profit, P2.8 million in 2017, this is an

improvement from 2016 of negative P11.5 million. Direct costs slightly increased this year

amounting to P1.150 billion, P32 million or 3% higher than the P1.118 billion posted last year.

Additional costs on CY rental caused by new Port Authority Regulations on dock storage space, and

materials/supplies used for the repairs and maintenance of containers and machinery and equipment

put pressure on the gross profit.

General and administrative increased by 5% from P82 million in prior year to P86 million this year,

attributable to higher costs incurred from allocations from parent company.

Net finance costs amounted to P26 million as of June 30, 2017, which is 6% or P1.6 million lower

than the P28 million reported in the same period in 2016 due to lower debt servicing in 2017.

In 2017, the Company posted a net other income of P36 million attributable to recognized gain on

insurance proceeds from a damaged vessel in 2015. While in 2016, net other charges amounted to

P109 million. The charges arose from “one-off” transactions – loss on sale of retired vessel, M/V

Lorcon Cagayan de Oro and settlement of certain tax assessments for prior years.

Factoring all of above, LSC’s operating results, though still on a negative, improved from a net loss of

P231 million in June 30, 2016 to a net loss of P78 million in 2017. This is equivalent to a loss per

share of P0.14 and P0.42 in 2017 and 2016, respectively.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) amounted to P84 million

in 2017 and P62 million in 2016.

FINANCIAL CONDITION

Total assets as at June 30, 2017 amounted to P2.907 billion, which is P109 million or 4% lower than

the P3.016 billion as at December 31, 2016. Current assets slightly decreased by 2% from P1.290

billion to P1.265 billion in 2016 and 2017, respectively brought about by the reduction in cash level

this year to P23 million from P105 million in December to pay-off trade obligations, including capital

expenditure requirements and loan principal repayments this year. While prepayments and other

current assets grew by 10% due to accumulated excess creditable withholding taxes and deferred

input VAT.

Total noncurrent assets decreased by 5% to P1.642 billion this year from P1.726 billion last year due

to reduction in property and equipment owing to depreciation and amortization.

The negative operating results during the period resulted in a Deficit of P402 million in June 2017

compared to December 31, 2016 deficit of P324 million. The Company is adequately capitalized at

P1.013 billion, thus despite the Deficit this year still shows a Stockholders’ Equity of P584 million.

Current ratio as at June 30, 2017 stood at 0.79 versus 0.88 as at December 31, 2016 while debt to

equity ratio was posted at 3.98 and 3.86 in 2017 and 2016, respectively on the account of negative

operating results during both periods. The creditor bank of the Company requiring maintenance of

certain financial ratios provided a waiver on the breach of debt covenants for the period ending

December 31, 2016.

Top Five Performance Indicators

LSC’s financial performance is determined by the following key results:

1. Current ratio – this represents the ratio between current assets and current liabilities which

measures liquidity and efficiency of LSC’s ability to pay off its short term liabilities with its

current assets.

2. Debt-to-equity ratio – measures financial leverage of LSC, how much debt is used to finance

assets relative to the amount of value represented in shareholders’ equity.

3. Net revenues - mainly composed of freight services recognized based on cargo loaded during the

year, taking into account all direct costs related to the cargo as well as capacity costs incurred

during the year.

4. Net income before tax – a quick indicator of the financial health of LSC.

5. Accounts receivable (A/R) turnover – measures how efficiently LSC uses its assets as well as how

effective is in extending credit as well as collecting its receivables.

The table below represents the key performance indicators of LSC over the last three (3) years:

Performance Indicators 2nd Quarter Full Year

2017 2016 2016 2015

Current ratio 0.79 0.99 0.79 1.04

Debt-to-equity ratio 3.98 2.67 3.55 2.30

Net revenues P1.148 billion P1.107 billion P2.253 billion P2.283 billion

Net income (loss) before tax (P78 million) (P230 million) (P362 million) (P222 million)

A/R turnover 1.51 1.47 2.50 2.54

i. LSC is not aware of any event that will trigger direct or contingent financial obligations that

is material to LSC, including any default or acceleration of an obligation.

ii. LSC is not aware of any material off-balance sheet transactions, arrangements, obligations

(including contingent obligations) and other relationships of LSC with unconsolidated entities

or other persons created during the reporting period.

iii. LSC is not aware of any material commitments for capital expenditures.

iv. LSC is not aware of any known trends, events, or uncertainties that have had or that are

reasonably expected to have a material favourable or unfavourable impact on net sales or

revenues or income from continuing operations.

v. LSC is not aware of any significant elements of income or loss that did not arise from the

registrant’s continuing operations.

vi. LSC is not aware of any seasonal aspects that had a material effect on the financial condition

or results of operations.

Plan of Operations

LSC is in the midst of executing a major turnaround project in order to address bottom line concerns.

Major initiatives being undertaken by the Company include:

1. Constant review of vessel and service combination to ensure the right asset for any particular

route given the changing market conditions. Flexible and situational pricing scheme is being

adopted without excessively distorting market levels. Efforts to renegotiate the terms of contract

of selected big volume accounts are also underway.

2. Significant reduction of operating costs such as trucking, terminal, lift-on lift-off, and container

van rental using a focused and flexible organization structure and appropriate technology.

Emphasis is likewise on substantially reducing container van repositioning costs through

intensified marketing and sales efforts on all northbound legs. Fuel and lube oil consumption

management thru constant engine performance analysis is being undertaken along with adjusting

vessels’ speed as necessary.

3. Implementing profit leakage management programs, focusing on claims reduction and improved

billing and collection cycle through people, process, and technology intervention also has

increased focus at this time.

4. Sale of excess assets wherever possible continues.

Exh tbit 2.1

Financial lndicators

Accounts Receivable Aging

2017 2016

Liquidity Ratios

Current ratio 0.79 0.99

Accounts receivable turnover 1.51 1.47

Acid test ratio 0.60 0.74

Funds from operations ₱58,646,686 (₱94,095,906)

Solvency Ratios

Times interest earned 3.30 2.24

Earnings (Loss) before interest and taxes (EBIT)(₱53,082,308) -₱74,716,365

Earnings (Loss) before interest, taxes,

depreciation and amortization

(EBITDA)

₱83,716,810 ₱62,082,753

Debt to equity ratio 3.98 2.67

Debt ratio 0.80 0.73

Equity ratio 0.20 0.27

Profitability Ratios

Return on revenue or Net profit ratio -6.8% -20.9%

Operating profit margin -4.6% -6.7%

Return on total assets (ROA) vs. EBIT -1.8% -2.5%

Return on assets (ROA) -2.7% -7.8%

Return on owners' equity -13% -29%

Exhibit 2.1

LORENZO SHIPPING CORPORATION

Financial Indicators

For the Period Ending June 30, 2017 and 2016

Financial Ratios

LORENZO SHIPPING CORPORATION

Accounts Receivables Aging

June 30, 2017

Port Total Current 1-30days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days 181 - 210days 211 - 365days 366 days - 2Years

MANILA 570,479,500 166,143,007 101,080,491 45,092,399 28,476,563 18,763,014 19,499,335 16,641,180 12,071,414 14,062,572 148,649,524

BRANCHES 23,625,543 5,848,816 3,327,673 273,825 206,485 (356,961) 159,641 299,311 (21,004) 1,240,711 12,647,046

AGENCIES 60,114,403 11,317,550 4,932,462 4,452,085 3,987,287 2,260,875 534,943 185,110 876,620 4,016,980 27,550,490

TOTAL 654,219,446 183,309,373 109,340,625 49,818,309 32,670,335 20,666,928 20,193,920 17,125,601 12,927,030 19,320,263 188,847,060