PNA SMALL COMPANY, INC.NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013( Amounts in Philippine Pesos)

1. GENERAL INFORMATION

PNA Small Company , Inc. (the company ) was incorporated on August 22,1987. The Company is presently engaged in the manufacture and sale of musical instruments and accessories.

The Company’s registered office which is also its principal place of business is located at 19 Andromeda Road, Nexus Village, Makati City.

The financial statements of the Company for the year ended December 31, 2014 ( including the comparatives for the year ended December 31, 2013 ) were authorized for issue by the Company’s Board of Directors on February 1, 2015.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of theses financial statements are summarized below. These policies have been consistently applied to all years presented , unless otherwise stated.

2.1 Basis of Preparation of Financial Statements

(a) Statement of Compliance with Philippine Financial Reporting Standards for Small and Medium –sized Entities

The financial statements of the Company have been prepared in accordance with Philippine Financial Reporting Standard for Small and Medium-sized Entities ( PFRS for SMEs). The financial statements have been prepared using the measurement bases specified by PFRS for SMEs for each type of assets, liabilities, income and expense. The measurement bases are more fully described in the accounting policies in the succeeding pages.

The preparation of financial statements in accordance with PFRS for SMEs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. Areas involving a higher and estimations are significant to the financial statements are disclosed in Note 3.

(b) Presentation of Statement of Income and Statement of Changes in Equity

The company opted to present a separate statement of income and separate statement of changes in equity even when the changes to equity during the years presented arise only from profit or loss and payment of dividends.

(c) Functional and Presentation Currency

These financial statements are presented in Philippine pesos, the Company’s functional and presentation currency, and all values represent absolute amounts except when otherwise indicatedItems included in the financial statements of the Company are measured using its functional currency. Functional currency is the currency of the primary economic environment in which the Company operates.

2.2 Cash and Cash Equivalents

Cash and cash equivalents include cash on hand , demand deposits and other short-term highly-liquid investments held to meet short-term cash commitments rather than for investments or other purposes.

2.3 Trade and Other Receivables

Trade receivables are recognized initially at the transaction price. These are subsequently measured at amortized cost using the effective interest method, less accumulated allowance for impairment. An allowance for impairment of trade and other receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. The related impairment loss is recognized immediately in profit or loss.

2.4 Inventories

Inventories are stated at the lower of cost and estimated selling price less costs to complete and sell. Cost of inventories includes all costs of purchase, costs of conversion and other costs incurred to bring the inventories to their present location and condition. Cost is calculated using the first-in, first-out method.

At each reporting date, inventories are assessed for impairment , the carrying amount is not fully recoverable due to damage, obsolescence or declining selling prices.

2.5 Investment in an Associates

An associate is an entity which the Company has significant influence but no control. As there are no published price quotation available for the Company’s investment in an associate, the Company has elected to account for the investment at cot less any accumulated impairment losses. Dividend income from investment in an associate is recognized when the Company’s right to receive payment has been established. It is included in Other Income in the statement of income.

2.6 Investment Property

Investment property consists of land held for capital appreciation and not for sale in the ordinary course of business, used in the production or supply of goods or services or for administrative purposes.

Investment property is accounted for under the fair value model and is recognized initially at cost, which includes acquisition price plus directly attributable costs incurred such as legal fees, transfer taxes and other transaction costs. Subsequently, investment property is started at fair value as determined by independent appraisers on an annual basis. The carrying amounts recognized in the statement of financial position reflect the prevailing market conditions at the end of each reporting period.

Any gain or loss resulting from either a change in the fair value or sale or retirement of an investment property is immediately recognized in profit or loss under the caption Other Income.Investment property is derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expected from its disposal.

2.7 Property, Plant and Equipment

Items of property , plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. The cost of an asset comprises its purchase price and directly attributable costs of bringing the assets to working

condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized, expenditures for repairs and maintenance are charged to expense during the period in which they are incurred.

Except for land, which is not depreciated, depreciation on property, plant and equipment is calculated using the straight line method over their estimated useful lives. The useful lives of the depreciable assets are as follows:

Buildings 20 yearsFixtures and equipment 3-5 years

If there is an indication that there has been a significant change in the useful life or residual value of an asset, the depreciation of that asset is revised prospectively to reflect the new expectations.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the item and are recognized as part of Other Income in profit or loss.

2.8 Intangible Assets

Intangible assets are acquired computer software licenses that are stated at cost less accumulated amortization and any accumulated impairment losses. These are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. It is amortized over its estimated useful life of five years using the straight-line method. Any change in the useful life of the assets is recognized prospectively.

When an intangible asset is disposed of, the gain or loss on disposal is determined as the difference between the proceeds and the carrying amount of the asset and is recognized in profit or loss.

2.9 Trade and Other Payables

Trade and other payables are recognized initially at the transactions price and subsequently measured at amortized cost using the effective interest method.

Trade and other payables are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration.

2.10 Interest –bearing Loan

Interest –bearing loan is recognized initially at the transactions price( the present value of cash payable to the bank, including transaction cost ). Borrowings are subsequently measured at amortized cost. Interest expense is recognized on the basis of the effective interest method and is recognized as an expense in profit or loss under the caption Finance Costs.

Interest-bearing loans are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

2.11 Provisions and Contingencies

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events ; it is probable that a transfer of economic benefits will be required to settle the obligations; and the amount can be reliably estimated.

Provisions are measured at the present value of the amount expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expenses.

2.12 Revenue and Expense Recognition

Revenue comprises revenue from sale of goods measured by reference to the fair value of consideration received or receivables by the Company for goods sold, excluding value-added tax ( VAT ), rebates and trade discounts.

Revenue is recognized to the extent that the revenue can be reliably measured; it is probable that the economic benefits will flow to the Company; and the costs incurred or to be incurred can be measured reliably. In addition, the following specific recognition criteria must also be met before revenue is recognized:

(a) Sale of goods- Revenue is recognized when the risks and rewards of ownership of the goods have passed to the buyer, generally when the customer has acknowledged delivery of goods.

(b) Interest income- Recognized as the interest accrues taking into account the effective yield on the asset.

(c) Dividends- Revenue is recognized when the Company’s right to receive payment is established.

2.13 Foreign Currency Transactions

The accounting records of the Company are maintained in Philippine pesos. Foreign currency transactions during the year are translated into the functional currency at exchange rates which appropriate those prevailing on transaction dates

Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at year –end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.

2.14 Borrowing Costs

All borrowing costs are recognized in profit or loss in the period in which they are incurred.

2.15 Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership of the leased asset to the Company. All other leases are classified as operating leases.

Rights to assets held under finance leases are recognized as assets of the Company at the fair value of the leased property ( or, if lower , the present value of minimum lease payments ) at the inceptions of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized and presented as part of Finance Costs in profit or loss. Assets held under finance leases are included in property, plant and

equipment, and depreciated and assessed for impairment losses in the same way as owned assets.

Rentals payable or paid under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease.

2.16 Impairment of Assets

At each reporting date, property, plant and equipment , intangible assets, and investments in an associate are reviewed to determine whether there is any indication that those assets have suffered an impairment loss. If there is an indication of possible impairment, the recoverable amount of any affected asset ( group of related assets ) is estimated and compared with its carrying amount . If estimated recoverable amount is lower, the carrying amount is reduced to its estimated recoverable amount, and an impairment loss is recognized immediately in profit or loss.

Similarly, at each reporting date, inventories are assessed for impairment by comparing the carrying amount of each item of inventory ( or group of similar items ) with its selling price less costs to complete and sell. If an item of inventory ( group of similar items ) is impaired, its carrying amount is reduced to selling price less costs to complete and sell, and an impairment loss is recognized immediately in profit or loss.

If an impairment loss subsequently reverses, the carrying amount of the asset ( or group of related assets ) is increased to the revised estimate of its recoverable amount ( estimated selling price less costs to complete and sell , in the case of inventories), but not in excess of the amount that would have been determined had no impairment loss been recognized for the asset ( group of related assets ) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

2.17 Employee Benefit

The Company provides post-employment benefits to employees through a defined benefit plan, as well as various defined contribution plans.

( a ) Defined Benefit Plan

A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Company, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Company’s defined benefit post-employment plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee.

The liability recognized in the statement of financial position for defined benefit plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annuallyby independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using a derived discount rate based on the interest rates of a zero coupon government bonds as published by the Philippine Dealing and Exchange Corporation that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related post-employment liability.

Actuarial gains and losses are charged or credited to profit or loss in the year in which they arise.

Past-service costs are recognized immediately in profit or loss.

( b ) Defined Contribution Plan

A defined contribution plan is a post-employment plan under which the Company pays fixed contributions to an independent entity. The Company has no legal orconstructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognized if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short –term nature.

( c ) Termination Benefits

Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whatever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either (i) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or (ii) providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value.

2.18 Income Tax

Tax expense represents the sum of the current tax and deferred tax. The current tax is based on taxable profit for the year and measured using the tax rates and laws that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and their corresponding tax bases ( Known as temporary differences). Deferred tax liabilities, with certain exceptions, are recognized for all temporary differences that are expected to increase taxable profit in the future. Deferred tax assets are recognized for all temporary differences that are to reduce taxable profit in the future, and the carry forward of unused tax losses or unused tax credits. Deferred tax assets are measured at the highest amount that, on the basis of current or estimated future taxable profit, is more likely than not to be recovered.The net carrying amount of deferred tax assets is reviewed at the end of each reporting and is adjusted to reflect the current assessment of future taxable profits. Any adjustments are recognized in profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the taxable profit (tax loss) in the periods in which the Company expects the deferred tax asset to be realized or the deferred tax liability to be settled, on the basis of tax rates that have been enacted or substantively enacted by the end of the reporting period.

The Company establishes liabilities for probable and estimable assessments by Bureau of Internal Revenue (BIR) resulting from any known tax exposures. Estimates represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes available.

2.19 Equity

Capital stock represents the nominal value of shares that have been issued.

Retained Earnings represents all current and prior period results of operations as reported in the profit or loss section of the statement of comprehensive income, reduce by the amounts of dividends declared.

2.20 Related Party Transactions

Related party transactions are transfers of resources, services or obligations between the Company and its related parties, regardless whether a price is charged.

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Company; (b) associates; and, (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company and close members of the family of any such individual.

2.21 Events after the End of the Reporting Period

Any posts-year-end event that provides additional information about the Company’s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.

3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES

The Company’s financial statements prepared in accordance with PFRS for SMEs requires management to make judgments and estimates that affect the amounts reported in the financial statements and related notes. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may ultimately differ from these estimates.

3.1 Critical Management Judgments in Applying Accounting Policies

In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statement:

(a) Distinction between Investment Properties and Owner-managed Properties

The Company determines whether a property qualifies as an investment property. In making its judgment, the Company considers whether the property generates cash flows largely independent of the other assets held by the Company. Owner-occupied properties generate cash flows that are attributable not only to the property but also to other assets used in the production or supply process.

(b) Distinction between Operating and Finance Leases

The Company has entered into various lease agreements. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or a finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities.

(c) Recognition of Provisions and Contingencies

Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provisions and contingencies are discussed in Note 2.11 and relevant disclosures are presented in Note 23.

3.2 Key Sources of Estimation Uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(a) Impairment of Trade and Other Receivables

Adequate amount of allowance for impairment is provided for specific and groups of accounts, where objective evidence of impairment exists. The Company evaluates the amount of allowance for impairment based on available facts and circumstances affecting the collectability of the accounts, including, but not limited to, the length of the Company’s relationship with the customers, the customers’ current credit status, average age of accounts, collection experience and historical loss experience.

There were no impairment losses required to be recognized on the Company’s trade and other receivables in 2013 and 2012. The carrying value of trade and other receivables are shown in Note 5.

(b) Determining Net Realizable Value of Inventories

In determining the net realizable value of inventories, management takes into account the most reliable evidence available at the time the estimates are made. The Company’s core business is continuously subject to rapid technology changes which may cause inventory obsolescence. Moreover, future realization of the carrying amounts of inventories as presented in Note 6 is affected by price changes in different market segments of musical instrument components. Both aspects are considered key sources of estimation uncertainty and may cause significant adjustments to the Company’s inventories within the next financial year.

(c) Fair Value Measurement for Investment Property

The fair value of investment property, as disclosed in Note 8, is based on a valuation made by independent appraisers who hold a recognized and relevant valuation licenses and have recent experience in valuing parcels of land in the same location as the Company’s investment property.

Management believes that the valuation of its investment property in both years is reasonable based on a thorough evaluation of the assumptions used by the appraisers.

(d) Useful Lives of Property, Plant & Equipment

The Company estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on

the use of the assets. The carrying amounts of property, plant and equipment are analyzed in Note 9. Based on management’s assessment as at December 31, 2013, there is no change in estimated useful lives of property, plant and equipment during the year. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above.

(e) Determining Realizable Amount of Deferred Tax Assets

The Company reviews its deferred tax assets at the end of each reporting period and as deemed necessary, recognizes a valuation allowance against deferred tax assets so that the net amount equals the highest amount that is more likely than not to be recovered on the basis of current or future taxable profit. The carrying value of deferred tax assets, which management assessed to be recoverable is disclosed in Note 21.

(f) Impairment of Non-financial Assets

The Company’s policy on estimating the impairment of non-financial assets is discussed in Note 2.16. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations.

(g) Estimating Provision for Warranty Obligation

All goods sold by the Company are warranted to be free of manufacturing defects for a period of one year. Goods are repaired or replaced at the Company’s option. When revenue is recognized, a provision is made for the estimated cost of the warranty obligation. Management believes that as of December 31, 2013 and 2012, it was able to adequately provide for its warranty obligation as disclosed in Note 13.

(h) Valuation of Post-employment Benefit ObligationIn determining the post-employment obligation (see Note 14), management makes an estimate of salary increases, determine the appropriate discount rate to use in the present value calculation, and the number of employees expected to leave before they receive the benefits. Management believes that the assumptions used by its independent actuary and the estimated post-employment obligation using those assumptions are reasonable.

4. CASH AND CASH EQUIVALENTS

The details of cash and cash equivalents are as follows:

Cash in banks generally earn interest at rates based on daily bank deposit rates. Short-term placements are made for varying periods of between 15 to 30 days and earn effective interest ranging from 2.4% to 3.6% in 2013 and 3.0% to 4.5% in 2012.

5. TRADE AND OTHER RECIEVABLES

This account consists of the following:

All of the Company’s trade and other receivables have been reviewed for indicators of impairment. Based on management’s evaluation, no impairment losses on trade and other receivables need to be recognized in 2013 and 2012.

6. INVENTORIES

Inventories as of December 31, 2013 and 2012 were all stated at cost, which is lower than their net realizable values. The details of inventories are shown below.

The cost of inventories recognized as expense in 2013 and 2012 are shown in Note 17. There were no expenses recognized related to impairment of inventories in both years.

7. INVESTMENT IN AN ASSOCIATE

The Company owns 35% of the voting shares of RMI, an associate whose shares are publicly traded. As of December 31, 2013 and 2012, the cost of investment amounts to P____________. Dividends received from the Company’s investment in an associate, which are included as part of Finance Income in the statements of income, amounted to P_______________ in 2013 and 2012, respectively (see Note 19)

8. INVESTMENT PROPERTY

Presented below is a reconciliation between the carrying amount of investment property at the beginning and end of the year.

The investment property consists of parcels of land currently intended for capital appreciation and, as such, are classified as investment property.

These items of investment property are valued annually at fair value based on a valuation by an independent, professionally qualified appraiser.

9. PROPERTY, PLANT & EQUIPMENT

The details of this account are shown in the reconciliation presented below.

10. INTANGIBLE ASSETS

This account includes mainly of acquired computer software licenses. The gross carrying amount and accumulated amortization and reconciliation of the net carrying amount of intangible assets at the beginning and end of year are shown below.

The amortization for the intangible assets is presented as part of Administrative Expenses in the statements of income (see Note 18).

The Company’s intangible assets are expected to be amortized over their remaining useful life of four years.

11. TRADE AND OTHER PAYABLES

This account consists of:

12. INTEREST-BEARING LOAN

The interest-bearing loan will mature in 2015 and is prepayable without penalty. This loan bears a fixed interest of 11% per annum of the principal amount and is secured by a lien over land and building owned by the Company with a carrying amount of P______________ and P__________ at December 31, 2013 and 2012, respectively.

13. PROVISION FOR WARRANTY OBLIGATIONS

A reconciliation of the carrying amount of the provision for warranty obligations at the beginning and end of 2013 is presented below.

The obligation is classified as a current liability because the warranty is limited to 12 months.

The Company has an unfunded defined benefit plan coverage all regular full-time employees. Actuarial valuations are made annually to update the retirement benefit cost and the amount of obligation.

Presented below is a reconciliation of the balance plan amounting to P______ and P___________ in 2013 and 2012, respectively, representing the current service cost and actuarial losses in those years were all recognized in profit or loss.

The principal actuarial assumptions used were as follows:

Assumptions regarding future mortality are based on published statistics and mortality tables. The average remaining working lives of an individual retiring at the age of 65 is 18 males and 20 females.

15. FINANCE LEASE OBLIGATIONS

The Company holds a piece of specialized equipment under a five-year finance lease arrangement. The obligation related to leased assets is classified in the statements of financial position as follows:

The future minimum lease payments required under finance leases are as follows.

16. EQUITY

16.1 Capital Stock

The Company is authorized to issue 10 million shares of common stock at P1 par value. In June 2013, the Company issued 180,000 shares of stock to existing stockholders resulting in increase in the total balance of issued and outstanding shares of stock to P6,510,000 as of December 31, 2013 from P6,330,000 as of December 31, 2012

As of December 31, 2013 and 2012, the Company has 10 stockholders owning 100 or more shares each of the Company’s capital stock.

16.2 Retained Earnings – Restriction on Payment of Dividends

Under the terms of the Company’s loan agreements with a local bank, dividends cannot be paid to the extent that these would reduce the balance of retained earnings below the sum of the outstanding balance of the bank loan (see Note 12).

16.3 Dividend Declarations

The Company declared and paid cash dividends amounting to P250,000 in 2013 and 2012 to stockholders of record on November 15, 2013 and November 21, 2012, respectively.

The details of cost of sales are shown below.

18. OTHER OPERATING EXPENSES

Presented below are details of other expenses.

These expenses are presented in the statements of income as follows:

19. FINANCE INCOME AND OTHER INCOME

Finance income includes the following:

Other income consists of:

20. FINANCE COSTS

Finance costs include the following:

21. INCOME TAX

The components of tax expense for each year as reported in profit or loss are presented below.

A reconciliation of tax on pretax profit computed at the applicable statutory rates to tax expense reported in profit or loss is as follows:

Differences between amounts recognized in the statement of income and amounts reported to BIR are significant.

The Company has not recognized a valuation allowance against the deferred tax assets because, on the basis of past years and future expectations, management considers it probable that taxable profits will be available against which the future income tax deductions can be utilized.

The net deferred tax assets relate to the following as of December 31:

The Company is subject to the minimum corporate income tax (MCIT) which is computed at 2% of gross income, as defined under the tax regulations or the RCIT, whichever is higher. No MCIT was reported in 2013 and 2012 as the RCIT was higher than MCIT in both years.

The Company claims itemized deductions for tax purposes.

22. RELATED PARTY TRANSACTIONS

22.1 Sale of Goods

The Company sells musical instruments to its associate. Sales made to its associate amounted to P925,785 in 2013 and P________ in 2012, of which P_____________ and P_______ are outstanding and are included as part of Trade receivables under Trade and Other Receivables account as of December 31, 2013 and 2012, respectively (see Note 5).

Goods are sold based on the price lists in force and terms that would be available to third parties.22.2 Financial Guarantee Contracts

The payments under the finance lease (see Note 15) are personally guaranteed by the principal shareholder of the Company. No charge has been requested for this guarantee.

22.3 Key Management Personnel Compensation

The total remuneration (including salaries and benefits) of directors and other members of key management amounted to P_____ and P____ in 2013 and 2012, respectively.

23. COMMITMENTS AND CONTINGENCIES

23.1 Operating Leases

The Company leases several sales offices under non-cancellable operating leases agreements. These leases have averaged period of three years, with fixed rentals over the same period. Minimum lease payments under these operating leases recognized as expense amounted to P275,000 and P____ in 2012 and 2012, respectively (see Note 18)

.

23.2 Contingent Liabilities

During 2013, a customer initiated proceedings against the Company for a fire caused by a faulty musical instrument. The customer asserts that total losses related to this amounted to P___ and has initiated litigation claiming the amount.

The Company’s legal counsel does not consider that the claim has merit, and the Company intends to contest it. No provision has been recognized in the financial statements as the Company’s management does not consider it probable that a loss will arise.

24. EVENTS AFTER THE END OF THE REPORTING PERIOD

On January 10, 2014, the directors voted to declare a cash dividend of P0.10 per share or a total of P____ payable on April 15, 2014 to stockholders on record on March 31, 2014.