Consolidated IS RFM 17 May08 · SGVMC308120 19 May 2008 Philippine Stock Exchange, Inc. PSE Center, Exchange Road Ortigas Center, Pasig City Attention: Atty. Pete M. Malabanan

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19 May 2008 Philippine Stock Exchange, Inc. PSE Center, Exchange Road Ortigas Center, Pasig City Attention: Atty. Pete M. Malabanan Head, Disclosure Department ---------------------------------------------------- Sir:

Please find attached the Consolidated Preliminary Information Statement and Management Report of RFM Corporation in preparation for its Annual Stockholders’ Meeting on 25 June 2008.

Thank you.

Very truly yours,

ROWEL S. BARBA VP & Head Corporate Legal/HRD

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R F M C O R P O R A T I O N

(Company’s Full Name)

R F M C o r p o r a t e C e n t e r , P i o n e e r C o r n e r

S h e r i d a n S t r e e t s , M a n d a l u y o n g C i t y

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

ATTY. ROWEL S. BARBA 631-8101

(Contact Person)

(Company Telephone Number)

NA

(Secondary License Type, If Applicable)

CFD NA

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

1 2 9 9 8

SEC Registration Number

1 2 3 1 PRELIMINARY INFORMATION STATEMENT 0 6 2 5

Month Day (Form Type) Month Day (Calendar Year) (Annual Meeting)


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Document ID Cashier

S T A M P S Remarks: Please use BLACK ink for scanning purposes.


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WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED

NOT TO SEND US A PROXY A. GENERAL INFORMATION Item 1. Date, Time and Place of Meeting of Security Holders (a) Date of Meeting: 25 June 2008

Time of Meeting: 11:00 a.m. Place of Meeting: Auditorium, RFM Corporate Center

Corner Pioneer and Sheridan Streets Mandaluyong City

Mailing Address: RFM Corporate Center Corner Pioneer and Sheridan Streets Mandaluyong City, Philippines 1550 (b) Approximate Date of Sending Information

Statement to Security Holders: 03 June 2008 Item 2. Dissenters' Right of Appraisal

The appraisal right may be exercised by any stockholder who shall have voted against (1) an amendment to the Articles of Incorporation that changes or restricts the rights of any stockholder or class of shares, or authorizes preferences in any respect superior to the outstanding shares of any class, or extends or shortens the corporate existence; (2) a sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets; or (3) a merger and consolidation; by making a written demand on the Corporation for payment of the fair value of his share(s). The written demand together with the share certificate/s of the withdrawing stockholder must be received by the Corporation within thirty (30) calendar days from the date on which the vote was taken. Failure to make the written demand and/or to surrender the share certificate/s within such period shall be deemed a waiver of the appraisal right.

If within a period of sixty (60) days from the date the corporate action was approved by the

stockholders, the withdrawing stockholder and the Corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the Corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the Corporation within thirty (30) days after such award is made.

No payment shall be made to any withdrawing stockholder unless the Corporation has unrestricted

retained earnings in its books to cover such payment. Upon payment by the Corporation of the agreed or awarded price, the stockholders shall forthwith

transfer his shares to the Corporation.

The appraisal right is also available to a dissenting stockholder in case the Corporation decides to invest its funds in another corporation or business or for any purpose other than the primary purpose as provided in Section 42 of the Corporation Code. Item 3. Interest of Certain Persons In or Opposition to Matters to be Acted Upon Each of the incumbent Directors, Nominees for Directors or Officers of the Corporation since the beginning of the last fiscal year or any associate of said persons do not have any substantial interest, direct or indirect, by security holdings, or otherwise, in any matter to be acted upon other than election to the office. There is no Director who has informed the Corporation, either verbally or in writing, of his intention to oppose any action to be taken by the Corporation at the meeting. B. CONTROL AND COMPENSATION INFORMATION


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Item 4. Voting Securities and Principal Holders Thereof

Stockholders of record of the Corporation as of 30 May 2008 shall be entitled to vote during the meeting. The outstanding capital stock of the Corporation as of 30 April 2008 is 3,160,403,866 common shares with a par value of Php1.00 per share, all of which are entitled to vote. For the purpose of voting the shares in the meeting, one common share is entitled to one vote.

Manner of Voting

Article 11 of the By-laws of the Corporation provides that the stockholders may vote in person or by proxy. In accordance with Section 24 of the Corporation Code of the Philippines, each stockholder may vote in any one of the following manner: 1. He may vote such number of shares for as many persons as there are Directors to be elected; 2. He may cumulate said shares and give one candidate as many votes as the number of Directors to be

elected multiplied by his shares; 3. He may distribute them on the same principle to as many candidates as he may see fit. In any of these

instances, the total number of votes cast by the stockholder should not exceed the number of shares owned by him as shown in the books of the Corporation multiplied by the total number of Directors to be elected.

Security Ownership of Certain Record and Beneficial Owners and Management (1) Security Ownership of Certain Record and Beneficial Owners

Security Ownership of Certain Record and Beneficial Owners as of 30 April 2008 of more than 5% of the Corporation's Voting Securities

(1)Title of (2)Name and address (3)Name of beneficial (4)Citizenship (5)No. of (6) % Class of record owner and owner and relationship Shares relationship with issuer/ with record owner ________________________________________________________________________________________________ Common Horizons Realty, Inc. Horizons Realty, Inc. Filipino 646,595,738 20.456773 11 Kawayan Road

N. Forbes Park, Makati City Stockholder Common PCD Nominee Corp. PCD Participants Filipino 573,725,026 18.151314 G/F MKSE Building Ayala Avenue, Makati Stockholder Common Triple Eight Holdings, Inc. Triple Eight Holdings, Inc. Filipino 552,670,472 17.485198 18 Gen. Capinpin St.

San Antonio, Pasig City Stockholder Common BJS Development Corp. BJS Development Corp. Filipino 311,210,184 9.845960

1869 P. Domingo St. Makati City Stockholder Common Renaissance Property Renaissance Property Filipino 201,982,966 6.390267 Management Corp. Management Corp. FEATI University Bldg. Carlos Palanca, Sta. Cruz Manila


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Based on the records of the Corporation, Mr. Jose Ma. A. Concepcion III is given the voting power over the security ownership of Triple Eight Holdings, Inc. and Horizons Realty, Inc., while Mr. Ernest Fritz Server or Mr. Joseph D. Server Jr. is given the voting power over the security ownership of BJS Development Corporation and Mr. Francisco A. Segovia is given the voting power over the security ownership of Renaissance Property Management Corp.

PCD Nominee Corporation is a wholly-owned subsidiary of Philippine Central Depository, Inc. and is the registered owner of the shares in the books of the Corporation's transfer agent, Securities Transfer Services, Inc. The beneficial owners of such shares are PCD's participants, who hold the shares on their behalf or in behalf of their clients. The Corporation is not aware that a participant holds more than 5% of outstanding common shares of the Corporation. PCD is a private corporation organized by the major institutions actively participating in the Philippine capital markets to implement an automated book-entry system of handling securities transactions in the Philippines.

(2) Security Ownership of Management

Security Ownership of Management as of 30 April 2008

(1) Title (2) Name of (3) Nature of (4) Citizenship (5) No. of Shares (6) % of Class beneficial beneficial

owner ownership __________________________________________________________________________________________ Common Jose S. Concepcion Jr. "r" Filipino 1,917,568 0.060674

Kawayan St., N. Forbes Park, Makati City

Common Jose Ma. A. Concepcion III "r" Filipino 14,833,886 0.469367 12 Talisay Rd., N Forbes Park, Makati City

Common John Marie A. Concepcion "r" Filipino 369,974 0.011707

9 Urdaneta Ave., Urdaneta Village, Makati City

Common Ernest Fritz Server "r" Filipino 564,834 0.017872 319 Chico Drive, Ayala

Alabang Village, Muntinlupa Common Francisco A. Segovia "r" Filipino 10 0.000000

521 Acacia Ave., Ayala Alabang Village, Muntinlupa

Common Felicisimo M. Nacino Jr. "r" Filipino 6,309,406 0.199639

Unit A354 Alexandra Condominiums Pasig City

Common Joseph D. Server Jr. "r" Filipino 135,376 0.004284

312 Cadena De Amor cor. Ilang-Ilang St., Ayala Alabang Village, Muntinglupa

Common Ma. Victoria Herminia C. Young “r “ Filipino 10 0.000000 No. 11 Kawayan Road North Forbes, Makati City Common Raissa H. Posadas "r" Filipino 2,000 0.000063

11 Nakpil St., San Lorenzo


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Village, Makati City Common Romeo L. Bernardo "r" Filipino 494 0.000016 16/F Belvedere Tower

San Miguel Avenue Ortigas Center, Pasig City

Common Lilia Bautista “r” Filipino 2,000 0.000063 33A Rita St., San Juan Metro Manila Common Lauro B. Ramos "r" Filipino 20,000 0.000633 Lot. 23, Blk. 23, Ponsettias St. La Colina Subd.

Antipolo Valley Homes Anitpolo, Rizal

Common Rowel S. Barba "r" Filipino __ __ 37 Clavecilla St., BF Executive Village Paranaque City

Common Norman P. Uy "r" Filipino 920,208 0.029117 18 Tacloban St., Alabang Hills Muntinglupa City Common Raymond B. Azcarate “r” Filipino 750 0.000024 16 D Washington Tower Condo.

Pacific Ave., Marina Asiaworld Paranaque City

Common Ramon M. Lopez “r” Filipino 348,282 0.011020 4 Crocus Drive Del-Nacia Village IV Sauyo, Quezon City Common Minerva C. Laforteza "r" Filipino 8,522 0.00027 9 Blk. 17 Lot 17 Burbank St., North Fairview Quezon City Common Imelda J. Madarang “r” Filipino ____ _____ 143 Don Rufino Avenue Tahanan Village, Paranaque City Common Gary R. Guarnes “r” Filipino 1,202,008 0.038033 38 Walnut St. Greenwoods Village Cainta, Rizal Common Philip V. Prieto “r” Filipino 122 0.000004 15 Melon St., Valle Verde 1 Pasig City Common Francis Gregory H. Banzon “r” Filipino 137,320 0.0043450 609 Batangas East, Ayala Alabang Muntinlupa City


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The total number of shares owned by the Directors and Executive Officers of the Corporation is 26,772,770 common shares. (3) Voting Trust Holders of 5% or More

To the extent known to the Corporation, there are no persons holding more than 5% or more of the Corporation’s stocks under a voting trust or similar agreement. (4) Changes in Control

No change in control of the Corporation has occurred since the beginning of its last fiscal year. Item 5. Directors and Executive Officers 1. Name and Information on the Directors and Executive Officers of the Corporation

(Please refer to pages 20 to 26 of the Management Report hereto attached for the names and

information on the Directors and Executive Officers of the Corporation.) The Nomination Committee of the Corporation pursuant to its Manual on Corporate Governance

adopted the following criteria for the selection of an independent director: Qualifications

1. Holder of at least one (1) share of stock of the Corporation; 2. He shall be at least a college graduate or have sufficient experience in business management to

substitute for such formal education; 3. He shall be at least twenty one (21) years old; 4. He shall have proven to possess integrity and probity; 5. He shall be diligent. Disqualifications

1. Any person finally convicted judicially of an offense involving moral turpitude or fraudulent

act or transgressions; 2. Any person finally found by the Securities and Exchange Commission (“Commission”) or a

court or other administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of, any provision of the Securities Regulation Code, the Corporation Code, or any other law administered by the Commission or Bangko Sentral ng Pilipinas (“BSP”) , or any rule, regulation or order of the Commission or BSP;

3. Any person judicially declared to be insolvent; 4. Any person finally found guilty by a foreign court or equivalent financial regulatory authority

of acts, violations or misconduct similar to any of the acts, violations or misconduct listed in the foregoing paragraphs; and

5. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of the Corporation Code, committed within five (5) years prior to the date of his election or appointment.

After the required pre-screening of the qualifications above-stated, the incumbent independent directors Mr. Romeo L. Bernardo and Ms. Lilia R. Bautista, are again nominated for the same positions. Mr. Bernardo was first nominated in 2002 by Triple Eight Holdings, Inc., Horizons Realty, Inc. and BJS Development Corporation and Renaissance Property Mgmt. Corp. and Ms. Lilia R. Bautista was first nominated in September 2005 by Mr. Jose S. Concepcion, Jr. Mr. Bernardo has no personal or business relationship with Triple Eight Holdings, Inc., Horizons Realty, Inc. and BJS Development Corporation. Likewise, Ms. Bautista has no business or personal relationship with Mr. Jose S. Concepcion, Jr. The nominations of Mr. Romeo L. Bernardo and Ms. Lilia R. Bautista were screened and short listed by the Nomination Committee pursuant to Article XVII of the existing By-Laws of the Corporation. The Nomination Committee consists of three members in the persons of Mr. Jose S. Concepcion Jr., Mr. Romeo L. Bernardo and Ms. Raissa H. Posadas and one non-voting member in the person of Atty. Rowel S. Barba, VP &


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Head, Corporate Legal & HR Divisions. Mr. Bernardo did not take part in the voting when his name was considered by the Nomination Committee. The members of the Nomination Committee have no business or personal relationship with the nominees. 2. Significant Employees

There are no persons other than the Executive Officers who are expected by the Corporation to make significant contribution to its business.

3. Family Relationships Jose S. Concepcion Jr. is the father of Jose Ma. A. Concepcion III, John Marie A. Concepcion and Ma. Victoria Herminia C. Young. Ernest Fritz Server and Joseph Server are brothers. 4. Involvement in Certain Legal Proceedings To the best knowledge and information of the Corporation, the nominees for Directors, its present Board of Directors and its Executive Officers are not, presently or during the last five years, involved or have been involved in any legal proceeding involving themselves and/or their properties before any court of law or administrative body in and out of the country that are material to their ability and/or integrity. Likewise, said persons have not been convicted by final judgment of any offense punishable by the laws of the Republic of the Philippines or the laws of any other country. 5. Certain Relationships and Related Transactions

In the ordinary and regular course of business, the Corporation and its subsidiaries entered into the

following transactions:

a. Purchase of goods and services. b. Cash advances for working capital purposes. c. Management services for RFM Insurance Brokerage, Inc. d. Distribution, sale and merchandising of RFM Group products. For a detailed discussion on related party transactions, please refer to pages 45 to 46 of the Notes to the

2007 Audited Financial Statement of the Corporation. Item 6. Compensation of Directors and Executive Officers

Name/Principal Other Annual Position Year Salary (In Pesos) Bonus Compensation Jose Ma. A. Concepcion III President/Chief Executive Officer Felicisimo M. Nacino, Jr. Executive Vice-President & COO John Marie A. Concepcion Director/CEO-URIC Francis Gregory H. Banzon SVP-Sales Director and General Manager, Beverage & Meat Div. Raymond B. Azcarate SVP, Corporate Finance & Controllership CEO/and four highest 2008 P29,690,034.00 2,474,166.00 0.00 Compensated executives 2007 P26,871,413.00 2,239,282.00 0.00 2006 17,232,696.00 1,442,304.00 0.00


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2005 16,638,463.00 1,386,537.00 0.00

All other officers as a 2008 P14,172,369.00 11,181,028.00 0.00 Group unnamed 2007 15,263,758.00 1,271,974.00 0.00 2006 10,031,539.00 835,961.00 0.00 2005 7,159,941.00 596,659.00 0.00

Compensation of Directors The Board of Directors and members of the Compensation, Nomination and Audit Committees are entitled to a per diem of Php5,000.00 for every meeting except that the per diem of the Chairman of the Compensation Committee is Php10,000.00. The Chairman of the Audit Committee is entitled to a remuneration of Php50,000.00 a month. Stock Purchase Plan On 6 April 2005, the Board of Directors of the Corporation approved the issuance of 9,348,101 of its treasury common shares to the following officers payable in cash: Name Position Number of Shares Jose Ma. A Concepcion III President/CEO 3,714,139 Felicisimo M. Nacino Jr. EVP/COO 1,498,463 Norman P. Uy SVP/Gen. Manager 1,588,114 Raymond B. Azcarate VP-Finance 518,698 Cristina D. Reyes VP-Legal 96,055 Ramon M. Lopez VP-Corplan/Marketing 829,918 Minerva C. Laforteza VP-Controller 146,004 Raul D. Villapana VP-HRD 544,313 Gary R. Guarnes AVP-Internal Audit 412,397 at the issue price of Php0.98 per share, the average price of the Corporation’s common shares over the last ten (10) trading days of the first quarter of 2005. On 5 May 2006, the Securities and Exchange Commission (“Commission”) confirmed that the aforementioned issuance is exempt from the registration requirements of the Securities Regulation Code. On 30 November 2005, in order to allow the Corporation to transfer the aforementioned stock purchase plan by way of block sale at the Philippine Stock Exchange, the Board of Directors defined the transfer price of said shares as the trading price of RFM common share on the date of sale. On the same date, the Corporation approved the additional issuance of up to 4,779,712 of its treasury common shares to the same set of officers under the same terms and condition and for the same transfer price as that of the 6 April 2005 stock grants. On 31 January 2006, in view of the fluctuations of the average market price of RFM common shares over the last trading days of the second, third and quarters of 2005 and the addition of two more officers of the Corporation who have been qualified to be included in the coverage of the stock purchase plan, the Board approved the increase of the shares to be issued on 30 November 2005 from 4,779,712 to 6,831,050 as follows: Name Position Number of Shares Jose Ma. A Concepcion III President/CEO 1,694,484 Felicisimo M. Nacino Jr. EVP/COO 1,525,037 Norman P. Uy SVP/Gen. Manager 677,794 Raymond B. Azcarate VP-Finance 762,517 Cristina D. Reyes VP-Legal 423,621 Ramon M. Lopez VP-Corplan/Marketing 406,676 Minerva C. Laforteza VP-Controller 321,953 Raul D. Villapana VP-HRD 288,062 Gary R. Guarnes AVP-Internal Audit 237,227


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Roberto L. Domingo Gen. Manager, Meat 259,101 Philip V. Prieto AVP-Purchasing 234,578 On 22 February 2006, the Commission again confirmed that the issuance of 6,831,050 common shares from its treasury shares as exempt from the registration requirements of the Securities Regulation Code. On 30 August 2006, the Board of Directors of the Corporation approved the issuance of 4,916,380 of its treasury common shares to the following officers payable in cash:

Name Position Number of Shares Jose Ma. A Concepcion III President/CEO 1,079,192 Felicisimo M. Nacino Jr. EVP/COO 971,273 Norman P. Uy SVP/GM-Flour & M & J 431,677 Francis Gregory H. Banzon SVP & Sales Director 217,391 Raymond B. Azcarate VP-Finance & Treasury 726,708 Ramon M. Lopez VP-Corplan & Exec. Asst. 344,721 Cristina D. Reyes VP-Legal 314,441 Minerva C. Laforteza VP-Controllership, BFG 205,047 Raul D. Villapana VP-HRD 183,462 Gary R. Guarnes AVP-Internal Audit 151,087 Roberto L. Domingo GM- Meat Division 107,919 Philip V. Prieto AVP-Purchasing, Meat Division 183,462 at the issue price of Php0.695 per share, the average price of the Corporation’s common shares over the last ten (10) trading days of the first and second quarters of 2006. On 27 October 2006, the Commission confirmed that the aforementioned issuance is exempt from the registration requirements of the Securities Regulation Code. Finally, on 31 January 2007, the Board of Directors of the Corporation approved the issuance of 4,351,603 of its treasury common shares to the following officers payable in cash: Name Position Number of Shares Jose Ma. A Concepcion III President/CEO 928,173 Felicisimo M. Nacino Jr. EVP/COO 835,355 Raymond B. Azcarate SVP-CFO 611,452 Norman P. Uy SVP/GM-Flour & M & J 371,269 Francis Gregory H. Banzon SVP & Sales Director 371,269 Cristina D. Reyes VP-Legal 232,043 Ramon M. Lopez VP-Corplan & Exec. Asst. 222,761 Minerva C. Laforteza VP-Controllership, BFG 183,257 Raul D. Villapana VP-HRD 182,498 Gary R. Guarnes AVP-Internal Audit 150,293 Roberto L. Domingo GM- Meat Division 94,634 Philip V. Prieto AVP-Purchasing, Meat 168,599 Division at the issue price of Php0.086 per share, the average market price of the Corporation’s common shares over the last ten (10) trading days ending 30 September 2006 and Php1.016 per share, the average market price of the Corporation’s common shares over the last ten (10) trading days ending 31 December 2006. On 19 April 2007, the Commission confirmed that the aforementioned issuance is exempt from the registration requirements of the Securities Regulation Code. The Board of Directors approved the stock purchase plan in order to motivate further and align more closely the interest of management with that of the stockholders. Employment Contracts


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The Executive Officers are entitled to the following pecuniary benefits, bonus scheme, major benefits and retirement plan, as follows: 1. Pecuniary Benefits

a) The Executive Officers have the option to purchase assigned vehicle after six (6) years at market value, or return the same to the Corporation for a replacement vehicle at such time.

b) All expenses related to registration, comprehensive insurance, repairs and maintenance will be borne by the Corporation.

c) Reimbursement of gasoline expenses up to a certain amount of liters per month. 2. Bonus Scheme

On the basis of performance and attainment of the business plan, in particular the specific objectives for the year, bonus will be in accordance with policy. 3. Major Benefits

a) Hospitalization Plan : A hospitalization plan will be provided for the executive and his immediate dependents in accordance with company policy.

b) Vacation Leave : 15 days per year; accumulated up to 30 days but not encashable.

c) Sick Leave : 15 days per year, accumulated up to 45 days but not encashable.

d) Executive Check-up : Once every four (4) years; SPEC 24 KSAT blood test every two (2) years.

4. Retirement Plan

Availment of retirement benefit is provided after the employee has rendered at least five (5) years of service with the Corporation at 25% of basic pay per year of service. Value increases by 5% per additional year of service up to a maximum of 125%. Item 7. Independent Public Accountants Sycip Gorres Velayo & Co. is the external auditor of the Corporation. The firm or such other reputable auditing firm will be recommended for election at the meeting. The representatives of the firms to be nominated are expected to be present during the meeting and will have the opportunity to make a statement if they so desire and will be available to respond to appropriate questions. During the last five fiscal years, there have been no disagreements between the Corporation and its auditors on matters related to accounting principles or practices, financial statement disclosures or auditing scope or procedure. Pursuant to SEC Memorandum Circular No. 8, Series of 2003, the Corporation has changed its engagement partner, the former being Ms. Teresita M. Baes who was engaged for the period January 2002 until December 2006, while the present engagement partner is Mr. Martin Guantes. Item 8. Compensation Plans No action will be taken with respect to any plan pursuant to which cash or non-cash compensation may be paid or distributed to the Corporations' officers and employees. Likewise, no action will be taken with regard to bonus, profit sharing, pension/retirement plan granting of extension of any option, warrant or right to purchase any securities. C. ISSUANCE AND EXCHANGE OF SECURITIES Items 9-14. Issuance and Exchange of Securities, Modification or Exchange of Securities, Financial and Other Information, Mergers, Consolidations, Acquisitions and Similar Matter, Acquisition or Disposition of Property and Restatement of Accounts No securities are to be issued in exchange for existing securities.


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D. OTHER MATTERS

Item 11. Authorization of Issuance of Securities Otherwise than for Exchange

Since no securities are to be issued in exchange for existing securities, no authorization has been issued to this effect Item 15. Action with Respect to Reports

Approval of the Management Report for the fiscal year 2007 and Minutes of the previous Annual Stockholders’ Meeting.

Summary of the Annual Stockholders' Meeting held on 28 June 2007 1. Approval of Previous Minutes

The minutes of the Annual Stockholders' Meeting held on 27 September 2006 was approved and ordered filed. 2. Presentation of the Presidents’ Annual Report and Audited Financial Statements

The 2006 Annual Report was noted and appended to the minutes while the 2006 Audited Financial Statements was likewise noted and approved.

3. Ratification of Acts of Management

The minutes of all meetings of the Board of Directors and the acts of the corporate officers for the period between the 2006 Annual Stockholders’ Meeting until the 2007 Annual Stockholders' Meeting were ratified, approved and confirmed. Further, all resolutions adopted by the Board of Directors at said meetings were ratified and adopted and all acts and proceedings of all Corporate Officers and Directors since the Annual Meeting were also ratified, approved and confirmed by the stockholders.

4. Election of Directors

The following directors were elected: Jose S. Concepcion Jr. Jose Ma. A. Concepcion III John Marie A. Concepcion Ma. Victoria Herminia C. Young Felicisimo M. Nacino Jr. Raissa Hechanova Posadas Francisco A. Segovia Ernest Fritz Server Joseph D. Server Jr. Romeo L. Bernardo as Independent Director

Lilia R. Bautista as Independent Director 5. Amendment of Articles of Incorporation

Article II (Primary & Secondary Purposes) and Article VII (Creation of up to 5,000,000,000 common shares with P1 par value) of the Articles of Incorporation 6. Adoption of new By-Laws 7. Appointment of External Auditor


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The appointment of Sycip Gorres Velayo & Co. as the Corporation's external auditor was extended.

Item 16. Matters Not Required to be Submitted Approval and ratification of all acts of Management and the Board of Directors for the fiscal year 2007 which are considered purely administrative, such as but not limited to:

1. Renewal of credit facilities, foreign exchange lines, domestic bills line and omnibus line with banks.

2. Authority to purchase, sell, negotiate, trade and transact foreign exchange with CC currency. 3. Application and Acceptance of short term credit lines and finance accommodation with banks. 4. Amendment of authorized signatories for bank, Long Term Commercial Paper and treasury-

related transactions. 5. Opening of peso/dollar CASA/ investment in short term Money Market and Temporary

Placement instruments with banks. 6. Others.

Item 17. Amendment of Charter, By-laws or Other Documents Amendment of Articles of Incorporation 1. Article VII of the Articles of Incorporation will be amended by decreasing the Authorized Capital Stock by P767,310,502 and P254,424,473 as a result of the retirement of 767,310,502 Treasury common shares and

254,424,473 redeemable preferred shares, respectively, and related amendment of Article VII of the Articles of Incorporation.

Reasons and General Effects of the Amendment

Retirement of the 767,310,502 treasury common shares and 254,424,473 redeemable preferred shares. Adoption of New By-Laws There will be no adoption of New By-Laws in 2008. Reasons and General Effects of the Adoption of New By-Laws N.A. Item 18. Voting Procedures Pursuant to the By-laws of the Corporation, in all regular and special stockholders’ meetings, the presence of shareholders who represent a majority of the outstanding capital stock entitled to vote shall constitute a quorum and all decisions made by the majority shall be final. However, the amendment of the Articles of Incorporation of the Corporation to be carried into effect requires the approval of two-thirds (2/3) of the outstanding common stock of the Corporation.

On the election of the member of the Board of Directors, the nominees receiving the highest number of

votes shall be declared elected under Section 24 of the Corporation Code of the Philippines and as provided for in Item 4 hereof. Likewise, the nominee for external auditor with the highest number of votes shall be declared elected as such. The method by which the votes of security holders will be counted is in accordance with the general provisions of the Corporation Code of the Philippines. The counting of votes will be done by the Corporate Secretary.

PART III


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SIGNATURE PAGE

After reasonable inquiry to the best of my knowledge and belief, I certify that the information set forth in this report is true, complete and correct. This report is signed in Mandaluyong City on 17 May 2008. RFM CORPORATION By:

ATTY.ROWEL S. BARBA Corporate Secretary


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MANAGEMENT REPORT OF RFM CORPORATION

I. CONSOLIDATED AUDITED FINANCIAL STATEMENTS The 2007 Audited Consolidated Financial Statements and the latest Interim Unaudited Financial Statement (Quarterly Report) for 2008 are incorporated herein by reference and are filed as part of this Management Report. II. INFORMATION CONCERNING DISAGREEMENT WITH ACCOUNT ANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE There is no event in the past five (5) years wherein the Company had any disagreement with regard to any matter relating to accounting principles or practices, financial statement disclosure or auditing scope or procedure.

The Company regularly adopts New Statement of Financial Accounting Standards (SFAS)/ International Accounting Standards (IAS) where applicable. III. MANAGEMENT DISCUSSION AND ANALYSIS (MD &A) OR PLAN OF OPERATION

First Quarter For CY 2008

Food and beverage company RFM Corporation achieved P67.3 million net profits for the first quarter of 2008, or a modest growth of 7.6% over P62.6 million during same period last year.

Sales volume growth coupled with calibrated price increases across the food and beverage categories to cover cost increases enabled the company to improve its gross margins.

The implementation of better plant efficiencies and cost management likewise served to temper the adverse consequence of rising costs of domestic raw materials, freight and handling, utilities, and wages.

Moreover, the ability to contain operating expenses like selling and marketing expenses aided in sustaining net income performance.

While the food and beverage revenues grew, the consolidated topline revenues of P1.6 billion in the first quarter was 6.4% lower than the P1.7 billion recorded over the same period last year, mainly due to a slowdown in the properties. Local and global market conditions affected the performance of the properties market.

The key financial performance indicators for RFM Corporation as of March 31, 2008 as compared to March 31, 2007, are as follows:

For the Quarter Ended March 31 Key Financial Performance Indicators (Amounts in Millions)* 2008 2007

Net Revenues P=1,582 P=1,691 Net Operating Margin 109 90 Net Income 67 63 EBITDA 173 160 Current Ratio 1.72 1.38

* Except current ratio


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1. Net Revenues

This is the barometer of the general demand for the Company’s products, reflecting their market acceptability vis-à-vis competition particularly in terms of quality, pricing, and image and perception, as well as availability of the products at the point of purchase market locations. This is of primary importance, and is regularly being monitored for appropriate action and/or improvement.

2. Net Operating Margin

This shows the financial profitability of the primary products of the Company, after deducting the expenses related to their manufacture, distribution, and sale, as well as the general administrative costs in running the business.

3. Net Income

This shows the over-all financial profitability of the Company, including the sale of primary and non-primary products and all other assets, after deducting all costs and expenses, interest expenses on debts and interest income on investments, as well as equity in net earnings or losses of associates.

4. Earnings Before Interest, Taxes, Depreciation an d Amortization (EBITDA)

This is a general yet reasonable representation of the cash generated by the Company from its

current business operations that can then be made available for payment of loan interests, loan principal amortization, and taxes; and any further amount in excess becomes the Company’s cash profit.

5. Current Ratio

This determines the Company’s ability to meet its currently maturing obligations using its current

resources. Analysis of Financial Condition and Balance Sheet Accounts

As of March 31, 2008, the Group’s total assets stood at P=9.9 billion from P10.1 billion in December 31, 2007.

The decrease in cash and cash equivalents by 27% was primarily due to the principal and interest payments that were made to continually settle the short-term loans, trade accounts, and accruals during the calendar quarter.

The 10% drop in total receivables was caused by the payments that were made by related parties to continually clear up its accounts and the collections of advances to officers and employees and other receivables during the calendar quarter.

The level of inventories increased by 1% due to the various purchases of materials and supplies to be used in the manufacturing process and the continual constructions of condominium and residential units for sale during the calendar quarter.

The increase in other current assets by 26% was due to the increase in various prepayments like insurance, taxes, and others made during the calendar quarter.

The property, plant, and equipment increased by 3%. This was brought by the constructions that were made in the principal office which were composed of the materials and labor cost incurred during the calendar quarter.

The other non-current assets account increased by 6%, which was attributable to the additional deferred charges recognized and miscellaneous deposits during the calendar quarter.

The 12% decrease in the amount of bank loans was due to the continual principal and interest payments to the creditor banks during the calendar quarter.


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The accounts payable and accrued liabilities decreased by 8%. Such drop was brought by the continual

payments of accruals made last year like janitorial and messengerial expenses and the settlement of trade payables during the calendar quarter.

The long-term debt, long-term obligations and other loans payable increased by 8%. Additional long-term loan availment was made to cater the financial needs in the long-term perspective during the calendar quarter.

The decrease in the amount of provisions by 13% was caused by the continuous payments made to settle the various expected claims arising from labor disputes in the ordinary course of business during the calendar quarter.

The level of net pension obligations decreased by 4%. This was due to the payments made to the employees who retired and resigned. Year ended December 31, 2007 vs. 2006 Management Report on Operations

RFM Corporation posted a stronger income performance of P 234.4 million in 2007, or a 15.7% growth over the P202.6 million income the previous year. RFM managed to achieve higher profitability as it focused on executing its value creation strategies and cost reduction measures during the year.

Key to reaching RFM’s income objectives were the introduction of higher value and innovative products that banked on RFM’s brands’ respective positioning in the market. Selecta Moo launched its richer chocolate drink product and basic fortified filled milk, while Sunkist launched its Hi-Juice beverages and iced tea drinks in more attractive and convenient plastic bottles. Fiesta pasta, with its new sizes and packaging, has made further inroads in the market making it a strong number 2 brand in the pasta category. Swift has also launched canned meaty corned beef and Rica Protina hotdogs that catered well to a broader segment of the market.

RFM also reported that Selecta ice cream, under a joint venture with Unilever, has expanded the whole ice cream category and in the process further enhanced its market leadership position in ice cream. Continuous product innovations with affordable pricing like the Selecta 3-in-1 ice cream, the Selecta Moo ice cream line, and various frozen novelties have brought life to a previously contracting ice cream market.

RFM’s strong performance was also attributed to its flour division which has exhibited healthy growth despite the serious wheat market situation due to better plant efficiencies and cost management.

The income growth was on back of a similar growth performance in Sales revenues. Consolidated sales for the whole RFM group amounted to P6.99 billion in 2007, a 13.8% growth compared to P6.14 billion in 2006 as the company focused on fewer but stronger products. Financial Position Analysis of Balance Sheet Accounts

The improved profitability contributed to a healthier balance sheet where total stockholder’s equity increased by 6% to P4.7 billion from P4.4 billion while total asset rose to P10.1 billion from P9.4 billion or a growth of 7%.

Increase in Cash and cash equivalent by 23% came mainly from proceeds from its sale of investments and long-term receivables as well as internally generated cash from operations.

Accounts receivable, consisting mainly of trade, rose 35% due to increased revenues generated by its manufacturing segment from P5.1 billion to P6.1 billion.


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Inventories are higher by 7% to P4.0 billion from P3.7 billion due to higher cost of imported wheat and other materials, as well as additional real properties obtained by its real estate subsidiary. Other Current Assets went up by 22% due to increase in deposits on purchases made to suppliers for future acquisitions of materials and supplies.

Installment contracts receivable declined by 7% due to its sale by Philtown, a real estate subsidiary, to further push development in its various projects.

Net property plant and equipment have decreased due mainly on depreciation charges during the year.

Net Investment properties have declined by 5% when Philtown sold certain parcels of land including the RFM Corporate Center building which is located thereon to Invest Asia Corporation, a related party.

Other non-current asset increased by 7% due mainly to imported machineries in transit.

Account payable and accrued expenses rose by 13% due to increased accruals particularly on wheat importation and billings from real; estate contractors.

Various payments have reduced the Group’s bank loans from P724 million to P675 million as well as its trust receipts and acceptances payable from P235 million to P208 million.

Various payments have also reduced the Group’s long term debt from P1.04 billion to P1.03 billion and long term obligation from P173 million to P57 million

Relative increase in retained earnings was largely on account of the favorable results of operation during the year. Year ended December 31, 2006 vs. 2005 Results of Operations

The results for year 2006 confirm the direction of RFM Corporation towards securing sustainable profitability. The Company attributed the positive trend to the continuing strong performance of its flour, baked goods, and ice cream businesses as well as to the cost-containment and margin-improvement contributions of its milk, juice, meat and other businesses.

The Group’s consolidated net sales of P6.1 billion in 2006 is 2% and 5% higher than 2005 and 2004, respectively. Improvement in sales performance was mainly brought by the non-food business segment, particularly the real estate business as the industry started to gain ground since 2003. Gross margin in 2006, however, declined to 23% from 25%, in 2005, and at the same level as 2004. Increased production costs coupled with the constraint in raising selling prices due to tighter competition negatively affected gross profit on its food business.

RFM is banking its growth strategy on manufacturing and selling affordable-quality food and beverage products for the mass market. The Company is developing new products that are priced within the reach of the broader income classes who put priority on getting value-for-money from their daily food purchases. In line with this thrust, RFM launched in year 2006 what it calls the “people’s milk,” Selecta Fortified Filled Milk. It has, since then, gained overwhelming market acceptance for its exceptionally good taste and reasonable price.

The Group’s consolidated operating income in year 2006, however, is lower at P239 million compared to P356 million in year 2005, but improved by 149% from P163 million registered in year 2004. Net income for year 2006 declined slightly to P203 million from P214 million in year 2005, but was much higher than in year 2004, when the Company reported a consolidated net loss of P422 million, which was a result of a write-down in investments on affiliate Swift Foods, Inc.

Property development subsidiary Philippine Townships, Inc. showed a modest net income growth in year 2006 to P26 million from P22 million in year 2005, mainly brought about by good sales from its residential condominium projects. This compares favorably against the P216 million net loss reported in year 2004.


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Financial Position Analysis of Balance Sheet Accounts

The sustained profitability helped maintain a healthy balance sheet where total stockholders’ equity increased by 6% to P4.5 billion from P4.2 billion while total assets rose to P9.4 billion from P8.9 billion or a growth of 6%.

Cash and cash equivalents are stable at P0.6 billion as cash generated from operations during the year was able to sustain the Company’s funding requirements.

Accounts receivables, consisting of trade and current portion of real estate’s installment contract receivables, increased by 37% mostly due to increased sales activities from the realty business from P719 million to P968 million.

Other current assets went up by 15% due to increase in deposit on purchases primarily from the flour business.

Total investment in 2006 amounting to P1.24 billion classified into available-for-sale investments and investment in associates at P961 million and P279 million respectively went up from P1.21 billion in 2005. This was due to the improvement in the fair market value of marketable securities.

Net property, plant and equipment have decreased due mainly on depreciation charges during the year.

Other non-current assets increased by 26% to P389 million in 2006 from P268 million in 2005 due mainly to higher deferred input VAT, from P36 million to P87 million.

Bank loans went up by 6% as the Company’s realty business obtained loans from various banks to finance on-going projects.

Accounts payable and accrued expenses rose by 35% due to increased accruals particularly on wheat importation and billings from real estate contractors.

Trust receipts and acceptances payable declined by 14% or equivalent to P0.5 million due to payments of outstanding balances.

Other current liabilities rose slightly to P831 million due mainly to the increase in customers’ deposits from P0.48 million to P0.52 million on the various condominium units.

Various payments have reduced the Company’s Long-term debt from P1.14 billion in 2005 to P1.04 billion in 2006; and Long-term obligations from P0.20 billion in 2005 and P0.17 billion in 2006.

Decrease of 20% or P19 million from net pension obligations is due to payment of pension obligations.

Other non-current liabilities went down by a total of P35.0 million or 26% from P49.7 million in 2005. These consist of clean-up/settlements of advances from related parties from P38.5 million to P12.7 million during the year and lower deferred income tax liabilities by P11.1 million.

Relative increase in retained earnings was largely on account of the favorable results of operation during the year. Year ended December 31, 2005 vs. 2004

Results of Operations

For 2005, the Corporation managed to sustain and even improve on the gains achieved the previous year when it registered a drastic turnaround into profitability. The Corporation’s operating income jumped to P357 million, improving by over 167% from P134 million in 2004, which represented the first year of the


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company’s recovery from 2003’s operating loss of P646 million. Net income for 2005 reached P168 million, a 180 degrees turnaround from the net loss of P427 million reported in 2004, which was a result of a write-down in investments on affiliate Swift Foods, Inc.

As the Corporation trimmed down expenses and revived fundamental efficiencies, it continued to

develop and renovate products that cater to a broader market base. After the move in 2004 to rationalize the marginal products, the Corporation strategically launched in 2005 few but promising products that helped strengthen the equity of the brands. In particular, the launch of Swift All Meat (SAM) brown hotdogs, Swift Juicy Corned Beef in foil packs, and a better Swift Carne Norte that are preferred by a broader market-base are just but examples of more exciting product innovations that perked-up their respective categories and brought in incremental sales revenues to the Corporation.

The Corporation continued to drive efficiencies and growth especially in the flour division, resulting in better returns to shareholders. Same value enhancement efforts were made on the other businesses, particularly in the branded categories like Selecta ready-to-drink milk, Sunkist ready-to-drink and powdered juice, Aqua Blue Mountain Spring Water, Swift canned and chilled meats, White King cake mixes and sauce mixes, Fiesta pasta products and spaghetti sauce, and Selecta Butterfresh margarine. The Corporation likewise supported all efforts to elevate the level of achievement of its Selecta ice cream joint venture with Unilever.

Property development subsidiary Philtown likewise showed a good turnaround to P18 million net income, from P216 million loss in 2004 mainly brought about by robust sales and income from its condominium projects.

Consolidated sales amounted to P6.05 billion in 2005, a modest growth compared to P5.85 billion in 2004 as the company focused on fewer but stronger products. Financial Position Analysis of Balance Sheet Accounts

Improved results of operations contributed to a healthier balance sheet where total stockholders’ equity increased by 5% to P4.2 billion from P3.95 billion while total assets rose to P9.3 billion from P9.1 billion or a growth of 2%.

Cash and cash equivalents went up by 16% equivalent to P82Mn mainly due to the cash generated from operations during the year.

Accounts receivables consisting of trade and current portion of real estate’s installment contract receivables, increased by 35% mostly due to brisk sales activities from the realty business increasing from P315 million to P670 million.

Other current assets went down by 6% due to decrease in deposit on purchases primarily from the flour business.

Total investment in 2005 amounting to P1.2 billion classified into available-for-sale and investment in shares of stocks as prescribed in the IFRS at P921million and P291million respectively went down from P1.3 billion. This was due to decline in value of SFI common shares. Bank loans went up by 35% as the Company’s realty business obtained loans from various banks to finance on-going projects.

Accounts payable and accrued expenses declined due to settlement of trade payables to suppliers and contractors.

Trust receipts and acceptances payable rose by 60% or equivalent to P102 million due to higher importation of raw materials for the manufacturing businesses.

Increase of 25% in other current liabilities was accounted for as availment/extensions of cash advances for working capital to subsidiaries and lower provisions from P22 million to P18 million due to the settlement of labor cases.


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Current portion of long-term debt went down by 43% due to lower scheduled amortization.

Long-term obligation grew by P45 million, a big part of which consist of labor case settlement payable until 2008 and reclassification of the non-current portion estimated liability for project development.

Decrease of 8% or P8 million from net pension obligations is due to payment of pension obligations.

Other non-current liabilities went down by a total of P54 million. These consist of clean-up/settlements of advances from related parties from P95 million to P37 million during the year and lower deferred income tax liabilities by P2 million.

Deferred income tax liabilities went up by Php 2 million in 2005, from Php 9 million in 2004 due to additional set-up of tax liabilities.

Relative increase in retained earnings was largely on account of the favorable results of operation during the year. Key Performance Indicators

For the full fiscal years 2007, 2006 & 2005 the Company’s and majority-owned subsidiaries’ top five (5) key performance indicators are as follows:

In Millions December 2007 December 2006 December 2005 Revenues 6,987. 6,139 6,045 Operating Margin 118 243 356 Net Income (Loss) 234 207 214 EBITDA 595 583 641 Current Ratio 1.63 1.54 1.65

(a) Revenue Growth

These indicate external performance of the Company and its subsidiaries in relation to the movement of consumer demand and the competitors’ action to the market behavior. These also express market acceptability and room for development and innovations. These are being monitored and compared as a basis for further study and development. (b) Operating Margin

This shows the result after operating expenses have been deducted. Operating expenses are examined, checked and traced for major expenses. These are being analyzed and compared to budget, and previous years, to ensure prudence and discipline in spending behind marketing and selling activities. (c) Net Income

This represents the outcome or results of operations. This measures the over-all performance of the team, the consequence of all the contributory factors affecting supply, demand, utilization and decisions. (d) EBITDA

This measures the Company’s ability to generate cash from operation by adding back non-cash expenses (i.e. depreciation and amortization expense) to earnings before interest and tax. (e) Current Ratio

This determines the company’s ability to meet its currently maturing obligations using its current resources. It indicates the possible tolerable shrinkage in current resources without threat to the claims of current creditors.


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Causes for Any Material Changes from Period to Peri od of FS, which shall include vertical and horizontal analyses of any material item

Please refer to the discussions under Results of Operations and Financial Position for the year ended December 31, 2007 vs. 2006, year ended December 31, 2006 vs. 2005 and year ended December 31, 2005 vs. 2004. The Company is not aware of the following: (i) Any events that will trigger direct or contingent financial obligation that is material to the

company, including any default or acceleration of an obligation. (ii) All material off-balance sheet transaction, arrangements, obligations (including contingent

obligations), and other relationships of the company with unconsolidated entities or other persons created during the reporting period.

Seasonal Aspects that has Material Effect on the FS

There is no material effect with the seasonal aspect of certain raw materials specifically wheat on the financial statements. Audit and Audit Related Fees

For the years 2007 and 2006, the Company engaged the professional services of SGV and Co. for an aggregate amount of P2.7M and P2.6M, respectively, excluding out of pocket expenses. The engagement is not limited to the examination and preparation of the company's financial statements in accordance with generally accepted auditing standards. It includes on a test basis review and evaluation of system, documentation and procedures to ascertain that adequate internal controls are in placed. Also, they provide updates on latest regulatory or compliance requirement with government agencies such as Securities and Exchange Commission and other government agencies.

The audit committee’s approval policies and procedure for external auditors are: 1. Statutory audit of company's annual F/S:

a. The Audit Committee ensures that the services of the external auditor conform with the provision of the company's manual of corporate governance specifically articles 2.3.4.1; 2.3.4.3 and 2.3.4.4

b. The Audit Committee makes an assessment of the quality of prior year audit work services, scope,

and deliverables and makes a determination of the reasonableness of the audit fee based on the proposed audit plan for the current year.

c. The Audit Committee approved the final audit plan and scope of audit presented by the external

auditor before the conduct of audit. The final audit plan was already the output after the conclusion of the series of pre-audit planning with Management.

d. The Audit Committee reports to the Board the approved audit plan.

2. For other services other than annual F/S audit:

a. The Audit Committee evaluates the necessity of the proposed services presented by Management taking into consideration the following:

i. The effectiveness of company's internal control and risk management arrangement, systems

and procedures, and management degree of compliance.

ii. The effect and impact of new tax and accounting regulations and standards.


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iii. Availability of in-house technical expertise.

iv. Cost benefit of the proposed undertaking.

b. The Audit Committee approves and ensures that other services provided by the external auditor shall not be in conflict with the functions of the external auditor for the annual audit of its financial statements.

IV. BRIEF DESCRIPTION OF THE GENERAL NATURE AND SC OPE OF THE BUSINESS General Scope of Business of RFM The RFM Group

RFM Corporation (the “Company”) is a major player in the food and beverage industry in the Philippines, specifically in the processing and manufacture of flour, flour-based products, milk and juice drinks, canned and processed meats, ice cream, and bottled mineral water.

The Company also operates non-food businesses, which include property development (Philippine Townships, Inc.), barging services (Rizal Lighterage Corporation) and insurance brokerage (RFM Insurance Brokers, Inc.). History and Business Development

RFM Corporation was incorporated on August 16, 1957 as Republic Flour Mills, Inc. to manufacture flour in the Philippines, a country which does not grow wheat, in order to contribute to the country’s greater self-reliance in basic food. From its original business of flour milling, the Company diversified into poultry and livestock production and areas of food manufacturing that includes flour-based products, margarine, milk & juices, canned and processed meat, ice cream, and bottled mineral water.

After RFM established itself in the flour milling business, the Company, in 1963, commissioned new plant facilities to produce cooking oil and margarine. This was then followed by the establishment of a feed mill in 1965 to manufacture poultry and hog feeds, of which key raw materials - bran and pollard - were by-products of the flour operations.

In the early 1971, RFM integrated forward into hog and poultry breeding. It entered into a licensing agreement with Peterson Industries and H & N Layers to breed day-old chicks. The Company, though, divested from the hog operation in 1994, and in the poultry business in 2003 by way of property dividends to its shareholders.

In 1973, the Company signed an exclusive licensing agreement with Swift and Company of Illinois (now Armour Swift & Echrich of the ConAgra Group). This move initiated the entry of RFM into the business of chilled and canned meat processing using the “Swift” brand name. A continuous meat processing plant, the first in the country, was constructed in 1975. The “Swift” brand name was eventually purchased by RFM in 1987, allowing the Company the rights to its exclusive use in the Philippines. Presently, the “Swift” brand name is being shared by RFM and Swift Foods, Inc. in their production and sale of processed meat and chicken products, respectively.

From the 1970s to 1980s, RFM concentrated primarily on growing its established core businesses. It also introduced grocery items, such as cake mixes, hotcake mixes, and ingredient mixes during this period.

As RFM began to enter the 1990s, it envisioned itself to become a truly diversified Food Company catering to the Filipino taste. This goal was and continues to be implemented through two approaches: strategic acquisition of Filipino companies with strong local brands, and partnerships with internationally-renowned food institutions.

This vision was first manifested in the purchase of Cosmos Bottling Corporation (Cosmos), a Filipino softdrinks company, in 1989, from the Wong Family. Then in 1990, RFM acquired the “Selecta” trademark from the Arce Family. RFM invested in new machinery under a new company, Selecta Dairy Products, Inc.


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(Selecta), to mass produce the locally famous ice cream flavors within international health standards. And in 1993, the Company ventured into the production of ready-to-drink ultra-heat treated (UHT) milk and juices in tetra-packaged format using the brand names Selecta Moo and Sunkist, respectively.

In 1994, Swift, Selecta, and Cosmos conducted an initial public offering of its shares of stock through the Philippine Stock Exchange.

A year later, in 1995, the Company incorporated RFM Properties and Holdings, Inc. to consolidate its real estate assets as well as to break into the land and housing development business. The company was later renamed Philippine Townships, Inc.

RFM continued to expand its businesses as it ventured into noodle manufacturing, tuna processing, bakeshop business with the acquisition of the Rolling Pin trademark, food franchising with the use of Little Ceasar’s Pizza brand of the USA, and thrift banking under Consumer Bank.

The Asian Financial Crisis of 1997, however, put a halt to the business expansion of RFM. The ensuing economic slowdown, more cutthroat market competition, and the dearth of capital financing weighed heavily on the financial operations of the Company. Furthermore, the US$83.7M bond, which it obtained in 1996, became due in 2001, and its payment forced RFM to sell many of its operating subsidiaries, including Consumer Bank which was sold to Philippine Bank of Communications, and Cosmos which was sold to San Miguel Corporation.

The remaining business, nevertheless, gives RFM the foundation to build on. Within the Parent Company, the original business of flour making continues; as well as branded food products such as Swift processed chilled and canned meats like hotdogs, vienna sausage, and corned beef, Sunkist Juices, Selecta Milk, Fiesta Pasta Noodles, White King Hot Cake, Butterfresh Margarine, among others.

Wholly-owned Philippine Townships, Inc., the property company, remains committed in liquidating its landholdings through the development of middle income housing enclaves. It also builds condominium projects in saleable areas in Fort Bonifacio, Rockwell, and Taft. The ice cream business remains profitable and is presently co-owned with Unilever Philippines, under a new corporate name, Unilever-RFM Ice Cream Inc. The Group and the Products Food Businesses RFM Corporation (Parent Company)

RFM Corporation (the parent company) operates two major business segments, the Flour Based Group, which accounts for the largest shares in sales and the Beverage & Meat Group that carries the flour-based mixes, pasta, canned and processed meat, milk and juices.

See table on sales. Unilever-RFM Ice Cream Corporation (formerly Selecta Wall’s Inc.)

Unilever-RFM Ice Cream Corporation is a joint venture enterprise owned 50%-50% by RFM Corporation and Unilever Philippines Inc. It is engaged in the business of manufacturing, marketing, distributing and selling, importing and exporting of ice cream and similar food products. Interbake Commissary Corporation

Interbake Commissary Corporation was established in 1998 to manufacture baked goods to complement RFM’s business in the food services category. It is the exclusive producer of hamburger buns to McDonald’s in the Greater Manila Area and certain parts of Luzon, and caters to wholesale markets. It also sells buns to KFC Philippines and WenPhil Corporation (Wendys Hamburger). The company is 100% owned by RFM Corporation. RFM Foods Philippines Corporation


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Established in 1991 as RFM-Indofood Philippines Corporation, then a joint venture company between

RFM Corporation and Indofood of the Salim Group of Indonesia, the company’s main product lines were instant noodles of various flavors and packaging. The Company, however, ceased operations in October 2000 due to operating losses. The company has been renamed RFM Foods Philippine Corporation, and remains dormant. FWBC Holdings, Inc.

FWBC Holdings, Inc. is 83.38% owned by RFM Corporation, and organized in 2001 to hold and manage Filipinas Water Bottling Corporation (FWBC). FWBC is involved in the processing and distribution of bottled mountain spring water. Non-Food Businesses Philippine Townships, Inc.

Philippine Townships, Inc. (Philtown), formerly known as RFM Properties & Holdings Inc., was organized in 1995 initially to develop and provide better value to the RFM Group’s underutilized land assets by converting these into middle income housing subdivisions. It has evolved and extended its construction development and selling into residential condominium projects in Pasig City, Makati City, and Fort Bonifacio Global City. Philtown is also involved in several real estate related activities under the following subsidiaries: RFM Realty Marketing Corporation, Philtown Property Management, Inc., First Tanauan Realty Corp. and McKinley Tower Inc. (in preoperating stage), First San Rafael Realty Corp., Philtown Utilities Corp., and One McKinley Place, Inc. Except for One McKinley Place, Inc. which is 50% owned, all are 100% owned by RFM Corporation. RFM Equities, Inc.

RFM Equities Inc. is a holding company that is 100% owned by RFM. It was organized in 1996 to hold and manage RFM Corporation’s holdings in two small financial services subsidiaries – Conglomerate Securities and Financing Corporation (CSFC) and RFM Insurance Brokers, Inc. (RIBI). CSFC provides consumer-financing services mainly to the managers and employees of the RFM Group. RIBI meanwhile services the insurance needs mainly of the RFM Group, affiliates and business partners. Rizal Lighterage Corporation

Rizal Lighterage Corporation (RLC) is a barging company that is 82.98% owned by RFM Corporation. It transports food commodities like wheat, soya bean and fishmeal via barges along the Pasig River. WS Holdings, Inc.

WS Holdings, Inc. is 60% owned by RFM Corporation and 40% owned by Unilever Philippines, Inc. It was incorporated and registered with the Securities and Exchange Commission in 1999 to invest in, purchase and own shares of stocks, bonds and other securities of obligations including real estate and personal property of any foreign or domestic corporation, or partnership, or association. Selecta Wall’s Land Corporation

Selecta Wall’s Land Corporation was incorporated in 1999 to acquire, own, use, develop and hold for investment all kinds of real estate. RFM Corporation owns 35% of this company. Cabuyao Meat Processing Corporation

Formerly Bringmenow, Inc., the company was renamed into Cabuyao Meat Processing Corporation (CMPC) in 2005. This is 100% owned by RFM Corporation, and its primary possession is the processing plant in Cabuyao, Laguna, which produces hotdogs, corned beef, hams, and other meat products under the Swift brand. Contribution to Sales


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The Group is primarily engaged in manufacturing, milling, and marketing of food and beverage

products, as well as property development, and management among others. The Group operates its business through the business units identified below. Information as to the relative contribution of the divisions and business to total sales are as follows: Business Unit

Products

Brands Contribution to

Sales

Flour Based Group

Flour & Bakery Products Republic Special, Cinderella, Hi-Pro Majestic, Pioneer, Señorita, Altar Bread

39.3%

Beverage & Meat Group

All–Purpose Flour-based mixes, Rice-based mixes, Sauce & Soup mixes, Pasta, Margarine Ready to Drink juice, Powdered juice, Ready to Drink milk, PET juice Processed Meat and Canned Meat

White King, Fiesta, Butterfresh Sunkist, Selecta Moo, Selecta Fortified Milk Swift Premium, Swift Mighty Meaty, Swift Sweet and Juicy, Swift All Meat (SAM), Rica Swift Juicy corned beef, Swift Carne Norte, Swift Vienna Sausage

28.3%

Real estate Industrial Lots, Residential Lots, Condominiums

12.8%

Others 19.6.% Domestic and Export Sales

The amounts of revenue, profitability, and identifiable assets attributable to domestic and export operations for 2007, 2006 and 2005 in Million Pesos are as follows: 2007 % 2006 % 2005 % Sales Domestic 6,696 95.82 5,925 96.51 5,939 98.25 Foreign (Export) 292 4.18 214 3.49 106 1.75 6,988 6,139 6,045 2007 2006 2005

Operating income(loss) Domestic 88 228 342 Foreign (Export) 30 10 14 118 238 356

Total Assets (All Domestic) 10,148 9,446 8,862 Distribution Methods of the Products or Services

The Corporation engages in different methods of distribution depending on the products/services to meet the needs of customers.

The Company’s food and beverage products are sold through wholesalers, distributors, supermarkets, wet markets, restaurants, and retail outlets. Real estate sales, on the other hand, are made through in-house property consultants and accredited outside real estate brokers. Status of any publicly-announced new product or services


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The Group does not have any publicly announced new product or service.

Competition

The Food and Beverage industry, to which RFM Corporation belongs to, is a highly saturated and competitive business. The marketplace is filled with many contending products produced by domestic and multinational companies. In addition, there are a number of imported products taking a slice of the market pie.

There are eleven flour millers in the country, and have grouped themselves into two trade associations -- Philippine Association of Flour Millers (PAFMIL) and Chamber of Philippine Flour Millers Inc (Champflour). RFM Corporation is a member PAFMIL. The Company believes that it accounts for about 8% to 9% of total industry volume sales. The larger manufacturers are General Milling Corporation, Universal Robina Corporation, Pilmico Foods Corporation, and San Miguel Corporation.

The presence of imported flour from China, which is increasing annually, is worsening the situation for the domestic manufacturers. In 2007, it is estimated that importation of Chinese flour more than doubled to 101,073 metric tons from 39,405 metric tons in 2006 and 14,500 metric tons in 2005. The Company is addressing this competition through the introduction of competitively priced flour with similar quality.

Like the flour market, the ready-to-drink (RTD) juice market is also a mature industry. The total juice market is estimated to be about 1.2 billion liters in volume, of which 79% is in powder or drink mix form, and only 21% is in ready-to-drink or liquid form. The RTD juice segment is about P3.1 billion in size, and is stable at 2.7% growth. Bulk of RTD juice market continues to be dominated by the low-priced and popular doy/foil packs, although its share of market, now at 71%, has declined, owing to the introduction of liquid juices in PET bottles, returnable glass bottles, and plastic cups. Juices in PET bottles, for example, now command a 12% share in value. On the other hand, juices in Tetra Pak cartons continue to decline and now only contribute 11% share in value.

The RTD Juice market continues to be lead by Zest-O Corporation with 45% value share, followed by Columbus Corporation with 15%. Both companies sell juice drinks in stand-up foil pouches. Sunkist, RFM Corporation’s juice brand, shares the third spot with Philippine Beverage Partners, Inc. with 8% value share. Sunkist juice drinks are mostly sold in Tetra Pak carton packages in 235ml Tetra Brik and 150ml Tetra Classic sizes; all come in orange, mango, apple and grape flavors. It also has a line of juice drinks in foil packs but volume sales continue to be small compared to competition.

In 2007, RFM also penetrated the fast-growing ready-to-drink tea in PET bottles. The RTD tea market is over 140 million liters in size and growing 35% annually. C2 Cool & Clean by Universal Robina Corporation continues to command leadership of the market with 79% market share. RFM launched Sunkist Lemon Iced Tea and Lemon Green Tea in 320ml and 500ml PET bottles. Entry market share was only over 1%. RFM also launched RTD juices in PET bottles in mid 2007 under the brand Sunkist Hi-Juice.

With RFM’s entry into the PET bottle category, the total Sunkist RTD business grew by 27% over the previous year.

RFM Corporation’s brand in the liquid milk business is Selecta Moo for flavored milk drinks and Selecta Fortified Filled Milk for the white milk line. Substantially all players in this category sell their liquid milk in asceptic tetra pack containers with some later introductions that come in doy packs. Majority import the basic raw material milk in powder form with several brands importing fresh milk sourced from Australia or New Zealand. RFM Corporation saw a resurgence of its Milk business via a +17% grown in total milk sales coming from solid growth on the base brand, Selecta Moo which was up +8% vs previous year, and the continued growth of Selecta Fortified Milk accounting for the balance growth.

The strong performance is attributed to maintaining a solid base of consumer through Selecta Moo and RFM Corporation’s ability to expand milk consumption among low income consumers via Selecta Fortified Milk which is at least priced 15% to 20% lower than most multinational and imported brands.


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The meat industry in which RFM Corporation competes in is divided into two sub-industries: chilled processed meat and canned meat. In the chilled processed meat market, RFM Corporation sells hotdogs, bacons, and hams. On the other hand, the Company sells corned beef, carne norte, and vienna sausages in the canned meat segment. The Company uses the brand name Swift for all its meat products.

In 2007 it is estimated that both the chilled processed and canned meat markets expanded by a good 5% as compared to 2006. This is 2 percentage points slower than the 7% growth experienced in 2006 versus the prior year. There is a trend towards lower priced processed and canned meats. In processed meat, lower priced brands such as CDO of Foodsphere, Inc. and Mekeni have seen strong market share increases. Market share for CDO is now 21% versus only 15% the previous year while Mekeni is at 4% versus 1.5% in 2006. Both brands have adopted a “low price, highly advertised” strategy which is potent in reducing market share for Purefoods to 60%, down from 65% in 2006. Market share for Swift is stable at 10% share in the premium hotdog segment and re-introduced its low priced brand, Rica Protina to compete in this price segment while improving presence in the wet market channel. This channel accounts for 75% of processed meat sales.

In canned meat, the key player is Pacific Meat Company, Inc. via its Argentina brand and Purefoods from San Miguel. Both brands compete head-to-head with over 40% market share each. RFM has around 5% share in canned meats via active participation in corned beef and Vienna sausages.

RFM focused its energies in rehabilitating the Cabuyao Meat Plant which has been shut down since the strike in 2001. Actual production of processed meat at this facility began in October as the plant was operated by a third party contractor, In Line Manufacturing. This has helped improve overall product quality for Swift which is key in lowering costs and improving overall product quality for the brand. This will allow RFM increased flexibility to regain market shares lost during the period when the plant was not in operation.

RFM Corporation believes it is the second largest seller of pasta in the Philippine market with a market share close to 20% using the brand name Fiesta; and third biggest in the hotcake mix segment with a market share of about 18%. For year 2007, the Company was able to grow the pasta 14% in sales value as compared to 2006. The flour mixes, on the other hand, declined by 3% in sales value. RFM Corporation competes with Royal, sold by Unilever Philippines, Inc., Del Monte by Del Monte Pacific Limited, Pillsbury by San Miguel Purefoods Company, Inc. and Maya by Liberty Flour Mills. Purchases of Raw Materials and Supplies

The principal materials are purchased at competitive prices from local and foreign suppliers.

The Company imports wheat primarily from the USA, anhydrous milk fat from New Zealand, skimmed milk powder from India, aseptic orange concentrate from Switzerland, while meat and meat casings are mostly imported from India and Spain. On the other hand, sugar, spices, yeast, and packaging materials like cotton bags, poly bags, tin cans, and corrugated cartons are purchased domestically. A sample of these suppliers and forms of payments are as follows: Columbia Grain International, Inc. for wheat (imported on Letter of Credit), Hind Agro Industries for meat (imported on DP-Drawn against Payment), La Perla Sugar Export Corporation for sugar (domestic purchase on a 30-day term), BSFIL Technologies, Bonpack Corporation and Oriental Tin Corporation for spices, cotton bags/polybags and cans, respectively (domestic purchase on a 30-day credit term). Customers

RFM Corporation sells to all socio-economic class segments of the market - A, B, C to D, E. The Company’s consumer products are sold to wholesalers, distributors, supermarkets, wet markets, restaurants, and other retail outlets that then sell the products to grocery stores, sari-sari stores, and the consumers directly.

RFM Corporation is not dependent on any single or few customers that might have any material adverse effect on its business, except for the processing and exclusive sale of hamburger buns by Interbake Commissary Corporation to Golden Arches and WenPhil Corporation. These hamburger buns account for about 56% of the sales of Interbake Commissary Corporation.


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Related Party Transactions

The Group, in the regular course of business, transact with related parties, which may consist but not limited

to the following:

• Purchase of goods and services. • Cash advances for working capital purposes. • The parent company provides management services to RFM Insurance Brokerage, Inc. • Distribution, sale and merchandising of RFM Group products.

Trademark, Royalty and Patents

Trademark is amortized using the straight-line metho d over 20 years, which is the expected minimum economic life of the trademark .

A Trademark License Agreement was entered into with Unilever-RFM Ice Cream, Inc. for the

exclusive right to use the Trademarks in its Ice Cream Products and to manufacture, market, and sell Selecta trademarked products. The agreement shall be co-terminus with the Joint Venture Agreement between RFM Corporation and Unilever-RFM Ice Cream, Inc. The license is free from royalty fee and any similar kind of payment.

RFM also entered into a Trademark License Agreement with Sunkist Growers, Inc. (Sunkist), which validity is extended for another five (5) years or from January 1, 2005 to December 31, 2009 whereby the latter granted RFM exclusive right to use certain of Sunkist’s trademark and trade dress in connection with the manufacture, marketing, distribution and sale of non-carbonated beverages. RFM agreed to pay a fixed amount of royalty every year. The Agreement will cease upon mutual consent of RFM and Sunkist.

Lastly, the use of the trademark “Swift” (originally assigned to RFM Corporation by Swift-Eckrich Inc. in Deed of Assignment dated 19 June 1988) is shared by the Corporation and Swift Foods Incorporated. Need for Any Government Approval of Principal Produ cts and Compliance with Environmental Laws

The Group complies with environmental laws and secures government approval for all its products. The Company has existing permits from various government agencies that include the Bureau of Food and Drug (BFAD) and the City Environment and Natural Resources Office. The Company also complies with the requirements of Laguna Lake Development Authority (LLDA) for environmental sanitation purposes.

The Company believes that it has complied with all applicable environmental laws and regulations, and incurred about P18,512 and P140,500 during the years 2007 and 2006, respectively, for payment of annual permits and fees.

The Group has no knowledge of recent or impending legislation, the implementation of which can result in a material adverse effect on the business or financial condition.

Research and Development Activities

The Company conducts research and development activities to improve existing products and to create new product lines, as well as to improve production processes, quality control measures, and packaging to meet the continuing and changing demands of the consumers at the least possible cost. The Company spent about P4.5 million and P3.0 million in the year 2007 and 2006, respectively, for research and development. Employees

As of December 31, 2007, the Company and its subsidiaries had 556 permanent and regular employees, of which 196 are executive and supervisory staff and 441 were non-supervisory staff. The Company does not anticipate any significant increase in the number of its employees in year 2008.


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About 27% of the total employees of the Company and its subsidiaries are members of various labor unions. The Company and its subsidiaries have collective bargaining agreements with these unions.

The Company believes that its relationship with its employees is generally good. The Company has not recently experienced any material interruption of operations due to labor disagreements. The labor strike at the meat plant in Cabuyao, Laguna, which began in 2003, was settled in February 2006, and the meat plant was re-opened for general rehabilitation immediately thereafter.

The employees of each division are covered by their respective retirement plans. The plans are trusted, noncontributory defined benefit pension plan covering substantially all permanent employees of the Company. The Company has no stock option plan.

The Company, in August 2006, retired 120 employees engaged in merchandising work in the supermarkets to minimize cost and adapt to the changing needs of the market place. Working Capital

The Company funds its working capital requirements through internally-generated funds and from bank borrowing. The working capital finances the purchase of raw materials, inventory, salaries, administrative expenses, tax payments, and sales receivables until such sales receivables are collected into cash. Major Business Risks

Like any other business, risks are always considered in the ability or inability to achieve the business objectives and execute strategy effectively. RFM Corporation and its subsidiaries perceives the following business risks: Financial Risk Management Objectives and Policies

The Group’s principal financial instruments include non-derivative instruments such as cash and cash equivalents, AFS investments, short-term and long-term debt and obligations, and advances from and payable to related parties. The main purpose of these financial instruments includes raising funds for the Group’s operations and managing identified financial risks. The Group has various other financial assets and financial liabilities such as trade receivables, trade and trust receipts payables, which arise directly from its operations. The main risk arising from the use of financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. Interest rate risk

The Company’s exposure to changes in interest rates relate primarily to the Company’s short-term and long-term debt obligations. Management is tasked to minimize interest rate risk through interest rate swaps and options, and having a mix of variable and fixed interest rates on its loans. Presently, the Company’s short-term and long-term bank loans are market-determined, with the long-term loan interest rates based on PSDT-F-1 plus a certain mark-up. The Company has not entered into interest rate swaps and options during 2007 and 2006. Foreign exchange risk

The Company’s exposure to foreign exchange risk results from its business transactions and financing agreements denominated in foreign currencies.

Management is tasked to minimize foreign exchange risk through the natural hedges arising from its export business and through external currency hedges. Presently, trade importations are immediately paid or converted into peso obligations as soon as these are negotiated with suppliers. The Group has not done any external currency hedges in 2007 Commodity price risk


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RFM Corporation is continually exposed to commodity price risk as its basic raw materials

such as flour, meat, and milk are commodities whose prices are driven by world supply and demand.

The Company’s management is tasked to minimize commodity risk through commodity hedging. This includes forward purchases primarily of wheat and freight services. The Company has done opportunistic hedges in the past that contributed positively to the financial performance for its Flour Division that is better than industry norm. The Company did not enter forward purchases and commodity hedging arrangements in years 2007 and 2006. Credit risk

Credit risk arises from the risk of counterparties defaulting. Management is tasked to minimize credit risk though strict implementation of credit, treasury and financial policies. The Group deals only with reputable counterparties, financial institutions and customers. To the extent possible, the Group obtains collateral to secure sales of its products to customers. Also, the Group transacts with financial institutions belonging to the top 25% of the industry, and/or those which provide the Group with long-term loans and/or short-term credit facilities.

The Group does not have significant concentrations of credit risk and does not enter into financial instruments to manage credit risk. With respect to credit risk arising from financial assets other than installment contracts and accounts receivable (such as cash and cash equivalents and available-for-sale investments), the Group's exposure to credit risk arises from default of the counterparties, with a maximum exposure equal to the carrying amount of these instruments. Liquidity risk

Liquidity risk arises from the possibility that the Company may encounter difficulties in raising fund to meet commitments from financial instruments.

Management is tasked to minimize liquidity risk though prudent financial planning and execution to meet the funding requirements of the various operating divisions within the Company; although long-term and short-term loans obtained from financial institutions, through strict implementation of credit and collection policies, particularly in containing trade receivables; and through capital raising, including equity, as may be necessary. Presently, the Company has existing long-term loans that fund capital expenditures. Working capital requirements, on the other hand, are adequately addressed through short-term credit facilities from financial institutions. Trade receivables are kept within manageable levels. Market risks

Market risks stems from new and/or existing re-launched products and/or new packaging at low prices being introduced in the market place by competitors. To address these competitive pressures, the Company continues to develop new products in innovative packaging formats to keep a hold on its consumers and increase market share. The strategy requires significant resources for market research, product development, and marketing and promotions. Attendant risks are inventory overstocks, spoilage, and warehousing cost if the new product launched in the market fails to take off. To manage these risks the Company has established a system where success indicators in the target market are closely being monitored and supported by effective supply chain management. Technological changes

RFM Corporation has been in the flour manufacturing for several decades, and its operating mills are older than many of its competitors which have more modern equipment and, thus, better rated operating yields. To meet these challenges, the Company continues to provide sufficient repairs and maintenance on its equipment and continually upgrades sections of its facilities to remain at par with the modern machineries. In addition, the Company spends in research in development, particularly in the areas of process engineering and wheat mixtures to produce higher flour yields. Labor Unrest


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Like other firms in the food and beverage industry, RFM also faces the risk of labor unrest, and strikes.

In August 2006, the Company retired all its 116 trade merchandisers to cut operating costs. Consequently, these former employees filed a notice of strike, though the operations of the Company were not disrupted. This matter remains under mediation, with the separation pay already accepted by 94 former trade merchandisers with only 22 people still resisting.

All cases filed by the merchandisers against the Corporation for illegal dismissal were dismissed by the Labor Arbiters. The cases are now on appeal with the National Labor Relations Commission. Item 2 – Properties

RFM Corporation owns a flour milling plant with a daily rated capacity of 1,000 metric tons per day, and is located in Barangay Buayang Bato, Pasig City. A milk and juice plant is located in Manggahan, Pasig City, and has a rated capacity of 20 million packs per month. The milk and juice plant currently has six (6) production lines, of which two (2) are owned and three (3) are under financing lease with a total capacity of about 48 million packs per month. The remaining one (1) production line is under operating lease with a fixed rental of P1.9 million a year. The milk and juice plant also acquired during the year a PET line with a total capacity of 4 million bottles per month. A meat processing facility, under 100%-owned Cabuyao Meat Processing Corporation, is situated in Cabuyao, Laguna and can produce hotdogs at a capacity of 900 MT per month. These properties with the exception of those under lease are covered by a mortgage trust indenture in favor the Company’s financial creditors.

Wholly owned food subsidiary Interbake Commissary Corporation owns a margarine plant with a capacity of 23MT per day located in Pioneer, Pasig City.

A significant amount of the real estate properties of the Company are in its 100% owned subsidiary, Philippine Townships, Inc. These are office and commercial properties located in Mandaluyong City and Pasig City, residential condominiums situated in Fort Bonifacio, Taguig City, residential subdivisions located at Manggahan, Pasig City, Calamba, Laguna, and Tanauan, Batangas; and an industrial estate located at Barrio Pagaspas, Tanauan, Batangas. A substantial portion of these properties are mortgaged as collateral.

In accordance with various loan agreements, the Company and its subsidiaries are restricted from performing certain corporate acts without the prior approval of the creditors, the more significant of which relate to entering into a corporate merger or consolidation, acting as guarantor or surety of obligation and acquiring treasury stocks. The Company and its subsidiaries are also required to maintain certain financial ratios. A. Company Owned:

Description LOCATION CONDITION

Pioneer Business Park Farelane, Pasig City in good condition (office/warehouse for lease) Manggahan Village Centre Manggahan, Pasig in good condition (for lease) Land -20,002 SQ.M SDD Warehouse

Manggahan, Pasig City Mortgaged Property

Flour Mills Plant/Building/Silos Buayang Bato, Pasig City Mortgaged Property/ in good condition Margarine Plant Fairlane, Pasig City With Capacity of 660 cases-per day Leader Warehouse Manggahan, Pasig City in good condition Incubation Warehouse Manggahan, Pasig City Mortgaged Property/ in good condition FG Warehouse – Inbound Manggahan, Pasig City Mortgaged Property/ in good condition QAD Laboratory Office Manggahan, Pasig City in good condition Flour Mills-Furniture & Office Equipment

Buayang Bato, Pasig City Mortgaged Property/ in good condition

Flour Mills - Machinery and Equipment

Buayang Bato, Pasig City Mortgaged Property/ in good condition

Pasta Machine Buayang Bato, Pasig City Will be replaced with new Pasta machine with a capacity of 3MT /hour

Milk & Juices Machines Manggahan, Pasig City in good working condition


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Filling Machines Manggahan, Pasig City in good working condition PET Line Manggahan Pasig City With capacity of 4 million bottles per month Land & Improvements Cabuyao Laguna In good working condition Bldg. & Improvements Cabuyao, Laguna Partly rehabilitated Machinery & Equipment Cabuyao, Laguna Partly rehabilitated

B. Leased Properties

Description LOCATION CONDITION AMT OF LEASE Expi ration Date

TERMS OF RENEWAL

RFM Bldg - Head Office Pioneer St., Mandaluyong

in good condition P300.00/sqm/mo. Jan. 1, 2009 2 years

M& J Plant (land & leader Whse (URICI)

Manggahan, Pasig City

Leased Property 402,865.00* Yearly Automatic Renewal

COLD STORAGE: Iglo Phils. Manggahan,

Pasig City Leased Property P65-75 per pallet Yearly Automatic

Renewal Jentec Cold Storage-storage

JENTEC, Laguna

Leased Property P0.08 per kg Yearly Automatic Renewal

Jentec Cold Storage- blast freezing

JENTEC, Laguna

Leased Property P2.50 per kg without blast

Yearly Automatic Renewal

Filling Machines WEDGE Manggahan, Pasig City

Leased Machine P0.20 per pack (net of vat)

Yearly Automatic Renewal

* Monthly rent fee will increase in April 2008 to P412,000 C. Real Properties as Inventories

Description LOCATION CONDITION Residential/Commercial Lots: Makiling Hills, Calamba 100% Completed/Developed

Woodlands, Calamba 65% with additional development works

Ridgemont South, Calamba 100% Completed/Developed Evergreen, Cabuyao 100% Completed/Developed Glenwood Park, Calamba 100% Completed/Developed Manggahan Village 1-3, Pasig Developed in selling stage Plantacion del Sol Pre-selling Mode Tagaytay Heights, Tagaytay Developed in selling stage

Condominiums: One McKinley Place Fort Bonifacio Makati 99% Completed/Developed Fairways Tower Fort Bonifacio Makati 96% Completed/Developed Metropolitan Tower Makati City Substructural Work in progress WHTaft Residences Taft Avenue, Manila Bored Piling Works in progress Asiana, QC Xavierville, Quezon City Pre-selling Mode

Industrial Estate: Philtown Technology Park Sto. Tomas, Batangas on going projects Light Industry & Science Park III Sto. Tomas, Batangas on going projects

Other Lots:: Manggahan Village Bldg 4 & 5 - Pasig soon to rise high to mid

condominium Plantacion del sol planned project mixed

residential/comm’l/ind’l Item 3 – Legal Proceedings


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Lawsuits and legal actions are in the ordinary course of the Company’s business. However, the Company or any of its subsidiaries is not currently involved in any material pending litigation or legal proceeding that could be expected to have a material adverse effect on the Company’s financial position or its result of operations. Item 4 – Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of this calendar year covered by this report.

V. DIRECTORS AND EXECUTIVE OFFICERS

(a) The following nominees for the Directors are also the incumbent directors of the Corporation:

(1) List of Directors, Including Independent Directors, and Executive Officers

Name of Director/ Executive Officer

Position

Age

Term as Director

Jose S. Concepcion Jr. Chairman of the Board 76 25 Ernest Fritz Server Vice Chairman 64 19 Jose Ma. A. Concepcion III Director/President & CEO 49 21 Joseph D. Server Director 67 28 Felicisimo M. Nacino Jr. Director/EVP & COO 56 12 John Marie A. Concepcion Director/CEO, URICI 46 20 Ma.Victoria Herminia C. Young Director/GM, ICC & White King Division 48 1 Francisco A. Segovia Director 54 21 Raissa H. Posadas Director 48 11 Romeo L. Bernardo Independent Director 53 5 Lilia R. Bautista Independent Director 72 2 Raymond B. Azcarate Treasurer SVP & CFO 44 NA Lauro B. Ramos Assistant Treasurer/GM, RLC 57 NA Rowel S. Barba Corporate Secretary/VP & Head, Corporate

Legal & HR Divisions 44 NA

Norman P. Uy SVP & GM, Flour Based Group 49 NA Gregory H. Banzon SVP & GM, Beverage & Meat Group &

Concurrent Sales Director 44 NA

Ramon M. Lopez VP & Exec. Assistant to the President 47 NA Imelda J. Madarang VP, Export Division 61 NA Minerva Laforteza VP, Beverage & Meat Group Accounting 43 NA Gary R. Guarnes AVP & Internal Audit Manager 50 NA Philip V. Prieto AVP, Corporate Purchasing 49 NA

As provided in the Company’s amended Articles of Incorporation, eleven (11) directors were elected to its Board of Directors during the last Annual Stockholders meeting. The officers, on the other hand, were elected during the Organizational Meeting following the Annual Stockholders’ meeting, each to hold office until the corresponding meeting of the Board of Directors in the next year or until a successor shall have been qualified and elected or appointed. The Company’s Board of Directors has committees for Audit, Compensation, Nomination, and Investment. There are two (2) independent directors, one of whom is the Chairman of the Audit Committee and the other heads the Compensation Committee. The following sets forth certain information as to the directors and executive officers of the Company as of December 31, 2007:


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Directors Jose S. Concepcion, Jr. 76 years old Filipino Born on 29 December 1931, has an Associate’s degree in Business Administration from De La Salle University and a Bachelor’s degree in Agriculture from Araneta University. He is the Chairman of the Board of RFM Corporation as well as the Chairman of the Board and Chief Executive Officer of Swift Foods, Inc. He also holds the Chairman position in the Asean-Business Advisory Council – Philippines, and East-Asia Business Council - Philippines. He is Founding Chairman of the National Citizens Movement for Free Elections, Special Resource Person of UCPB CIIF Finance Development, and Member of the Board of Trustees of CARITAS. He was previously the Secretary of the Department of Trade and Industry, Chairman of the Board of Investments, member of the Central Bank Monetary Board from 1986-1991, Co-Chairman of Bishops-Businessmen Conference from 1991-1998, and a delegate to the 1971 Constitutional Convention. He served as director of the Corporation from years 1970 to 1985 and was first elected on 3 April 3 1997 as Chairman of the Board. Ernest Fritz Server 64 years old Filipino Born on 08 July 1943, has a Bachelor of Arts degree in Economics from the Ateneo de Manila University and a Master’s degree in Business Administration from the Wharton School of the University of Pennsylvania. He is Chairman of Uniphil Computer Corporation, Unidata Corporation, Intercity Properties, Inc., and Millennium Mining and Management Corporation. He is a Director of Invest Asia Corporation, Philippine Townships, Inc., BJS Development Corporation and Worldwide Paper Mills, Inc., RFM Insurance Brokers, Inc. and RFM Equities, Inc. He is also President of BJS Development Corporation, Sta. Mesa Machinery Corporation, Inc., Trans-Pacific Properties, Inc., Geosands Resources Corporation, Eaglerock Mining Corporation and Philam Fund, Inc. He first became a director of the Corporation on 27 October 1988. Jose Ma. A. Concepcion III 49 years old Filipino Born on 23 June 1958, has a Bachelor's degree in Business Management from Dela Salle University. He is the President and Chief Executive Officer of the Corporation. He was appointed by the President of the Philippines as the Presidential Consultant for Entrepreneurship in the early part of 2005. He is the Chairman of Unilever RFM Ice Cream, Inc. and Integral Global Low-Temperature Philippines. He is the President and CEO of Philippine Townships, Inc., RFM Insurance Brokers Inc. and Rizal Lighterage Corporation. He is a director of Concepcion Industries Inc., one of the largest appliance manufacturers in the country. He was an awardee of the Ten Outstanding Young Men of the Philippines (TOYM) in 1995 and Time Global 100 List of Young Leaders for the New Millennium in 1994. He is associated with major business and industry and various socio-civic associations that includes the Philippine Center for Entrepreneurship. He first became a director of the Corporation on 30 October 1986 and was elected President and Chief Executive Officer in 1989. Joseph D. Server Jr. 67 years old Filipino Born on 08 October 1940, has a Bachelor of Arts degree in Economics from the Ateneo de Manila University and a Master’s degree in Business Administration from the Wharton School of the University of Pennsylvania in the United States. He is Chairman of the Board of BJS Development Corporation. He serves as Chairman of Rizal Lighterage Corporation and director of Swift Foods, Inc. He first became a director of the Corporation on 30 August 1979. Felicisimo M. Nacino, Jr.


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56 years old Filipino Born on 09 May, 1952, has a Bachelor of Arts degree in Economics and a Master’s degree in Business Administration, both from the University of the Philippines. He is the Executive Vice-President & Chief Operating Officer of the Corporation and serves as Director of RFM Corporation, Philippine Townships, Inc., RFM Insurance Brokers, Inc., Rizal Lighterage Corporation, Unilever RFM Ice Cream Inc., and other companies in the RFM Group. He first became a director of the Corporation on 30 March 1995. John Marie A. Concepcion 46 years old Filipino

Born on 13 January 1962, has a degree in Business Administration from Seattle University, Washington, U.S.A.. He is the Managing Director and Chief Executive Officer of Unilever RFM Ice Cream Inc. (formerly Selecta Walls, Inc.). He became a director of the Corporation on 29 October 1987. Ma. Victoria Herminia C. Young 48 years old Filipino Born on 4 August 1959, has a Bachelor of Science Degree in Management and Marketing from Assumption College in 1981. She is currently the General Manager of Interbake Commissary Corporation and White King Division, a division in the Branded Food Group of the Corporation. She is a Trustee and President of RFM Foundation, Inc., Trustee of Soul Mission Org., Ronald McDonald House of Charities and a Director of Interbake Commissary Commission. Francisco A. Segovia 54 years old Filipino Born on 17 January 1954, has a Bachelor of Science degree in Business Management from the Ateneo De Manila University. He is Vice-Chairman of Rizal Lighterage Corporation. He is President of Segovia & Corporation, Inc., Fritz International Philippines, Inc., Horseworld, Inc., Big A. Aviation Corporation, Intellicon, Inc., Regina Realty/Chilco Holdings, Araneta Institute of Agriculture, Republic Dynamics Corporation and Republic Consolidated Corporation. He is a director of Rizal Lighterage Corporation, RFM Insurance Brokers, Inc., RFM Equities, Inc., Philippine Townships, Inc., and Invest Asia Corporation. He first became a director of the Corporation on 30 October 1986. Raissa Hechanova Posadas 48 years old Filipino

Born on 16 April 1960, has a Master's degree in Business Administration from Imede (now IMD) Lausanne, Switzerland and a degree in Bachelor of Arts major in Applied Economics from De La Salle University. She joined the Corporation as director in April 1997, replacing her father, Mr. Rafael G. Hechanova, former Chairman of the Board of Directors of RFM Corporation. She first became a director of the Corporation on 3 April 1997. Romeo L. Bernardo 53 years old Filipino

Born 5 September 1954, has a Bachelor of Science degree in Business Economics (magna cum laude) from the University of the Philippines (Diliman) in 1974 and a Masters degree in Development Economics


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(Valedictorian) from Williams College (Williamstown, Massachusetts, U.S.A.) in 1977. He is the President of Lazaro Bernardo Tiu and Associates, Inc., Chairman of Ayala Life Peso, Dollar and Euro Funds, Board Member of Globe Telecom, Bank of the Philippine Islands, Philippine National Re-insurance Corporation, Ayala Life, Phinma, Philipine Institute of Development Studies, and US Nasdaq-quoted PSi Technologies Holdings, Inc. He is Vice Chairman and a Founding Fellow of the Foundation for Economic Freedom and was formerly the President of the Philippine Economic Society and the Federation of ASEAN Economic Societies. He was formerly Alternate Director of the Asian Development Bank (1997-1998), Undersecretary for International Finance, Privatization, and Treasury Operations of the Department of Finance (1990-1996). He first became independent director of RFM Corporation on 25 September 2002. He is married to Amina Rasul Bernardo with three children. Lilia R Bautista 72 years old Filipino

Born on 15 August 1935, Filipino, is an Independent Director of the Company since September 2006. She is also currently a director of Bank of the Philippine Islands, BPI Capital and Thunderbird Poro Point Development Ventures. Recently, she was appointed as a member of the Appellate Body of the World Trade Organization (WTO), with the rank of WTO Deputy Director General. She previously held several positions including Chairman, Securities and Exchange Commission, Ex-Officio Member, Anti-Money Laundering Council, Senior Undersecretary and Special Trade Negotiator, DTI, Ambassador Extraordinary and Plenipotentiary, Chief of Mission, Class I and Permanent Representative to the United Nations Office, World Trade Organization, World Health Organization, International Labor Organization and other International Organizations in Geneva, Switzerland, Acting Secretary , DTI, Chairman Ex- Officio–Board of Investments, National Development Company, Garments and Textile Export Board, Philippine International Trading Corp., Export Processing Zone Authority, Center for International Trade Expositions and Missions, Inc., Small and Medium Development Council, Export and Investment Development Council, Ex-Officio Member- Monetary Board and various government corporations and inter-agency bodies, Undersecretary/Deputy Minister, DTI, Concurrently Governor, Board of Investments and Executive Director and Vice Chairman of the Technology Transfer Board, Asst. Secretary/ Asst. Minister, DTI, Legal Officer, Chief Legal Officer, Asst. Director , BOI, Hearing Officer of the Juvenile and Domestic Relations Court of Manila, Legal Officer of the Office of the President, Legal Editor, Corporation Trust Co, New York, Legal Editor of Prentice Hall, New Jersey and Ambassador to Belgium. She was a consultant at the Philippine Judicial Academy and Development Academy of the Philippines. She holds an L.L.B., University of the Philippines, LLM, University of Michigan (Dewitt Fellow), M.B.A., University of the Philippines, and attended special courses in corporate finance and reorganization, New York University and Investment negotiation course, Georgetown University.

Executive Officers Management is comprised of owner-managers and professional managers. Mr. Jose A. Concepcion III is the President and Chief Executive officer of RFM Corporation, and is also a major shareholder. He joined the Company in 1980 as a route salesman, and occupied positions in sales and marketing before he became President and Chief Executive Officer in 1989.

Raymond B. Azcarate 44 years old Filipino

Born on 02 October 1963, has a Bachelor of Science degree in Business Administration (cum laude) from the University of the Philippines. He is presently the Treasurer and Senior Vice-President and Chief Finance Officer of the Corporation, and is the Assistant Treasurer of Philippine Townships, Inc., Rizal Lighterage Corporation. He was elected Treasurer of RFM Insurance Brokers, Inc. in 2005. He joined the Corporation in 1994. Lauro B. Ramos 57 years old Filipino


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Born on 3 February 1951, obtained his degree of Bachelor of Science in Business Administration and Accountancy from the University of the East. He passed the CPA Board Exam in 1972. He is the General Manager of Rizal Lighterage Corporation and Director of RFM Insurance Brokerage, Inc., Interbake Commissary Corporation, Rizal Lighterage Corporation and RFM Equities, Inc.

Norman P. Uy 49 years old Filipino

Born on 23 December 23 1958, he joined the Corporation in 1989 as Manager for General Services Division. He is currently the General Manager for the Flour Based Group, composed of the Flour operations, White King and Interbake Commissary Corporation. He is a graduate of AB Philosophy at the University of the Philippines. Ramon M. Lopez 47 years old Filipino

Born on 26 October 1960, has a Bachelor of Arts degree major in Economics from U.P School of Economics and a Masters Degree in Economics at Williams College, Massachusetts, U.S.A. He joined the Corporate Planning Department of RFM Corporation in 1994. He is a member of the Board of Directors of Phil. Chamber of Food Manufacturers. Gregory H. Banzon 44 years old Filipino

Born on March 12, 1964, has a Bachelor of Science Degree in Commerce majoring in

Marketing Management from De La Salle University where he was a member of the Student Council and graduated in 1985. He is concurrently the General Manager of the Beverage & Meat Group as well as Sales Director of the Sales Division. He joined RFM in April 2006 after a brief stint as an entrepreneur and 10 years with Johnson & Johnson (J&J) where he held the position of Managing Director of J&J Indonesia as well as ASEAN VP for Marketing from 2000 to 2005 and various positions of increasing responsibility in Marketing and Sales for J&J Philippines. Prior to J&J, Greg was with Bayer Philippines, Consumer Products Division as Marketing Manager. His first employment was with Citibank as part of the Management Trainee Program and subsequently held key positions with the Bank’s Treasury Division.

Rowel S. Barba 44 years old Filipino

Born on 13 May 1964, has a Bachelor of Arts degree major in Political Science and Bachelor of Laws degree, both from the University of the Philippines. Prior to joining the Corporation, he was the Corporate Secretary, Director, Member of the Management Committee and Chief Legal Counsel and Head of the Legal Division of Jaka Investments Corporation. While with Jaka, he also served as the Corporate Secretary and director in various subsidiaries and affiliates, and the Operating Unit Head of the Transport Division. He was the former Governor for Southern Luzon of the Integrated Bar of the Philippines and Legal Counsel of the Philippine Practical Shooting Association. He is currently the Vice President and Head of Corporate Legal & HR Divisions of the Corporation. He is also the Corporate Secretary of Philippine Townships, Inc., RFM Insurance Brokers, Inc. and Rizal Lighterage Corporation. He joined RFM Corporation in April 2007.

Imelda J. Madarang 61 years old


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Filipino

Born on October 9, 1946, has a Bachelor of Arts in Foreign Service degree from St. Theresa’s College, Q.C. and a Masters in Management degree from Asian Institute of Management. She was formerly the Vice President and General Manager of Swift Tuna Corporation. Before joining the Corporation, she served as Assistant Secretary for Regional Operations and various other post at the Department of Trade & Industry where she was concurrently the Director of Food Terminal Inc. and National Food Authority. She joined RFM Corporation in 1995. Minerva C. Laforteza 43 years old Filipino

Born on 9 March 1965, has a Bachelor of Science degree in Business Administration and Accountancy and a Masters degree in Business Administration from the University of the Philippines. She joined RFM Corporation in 1989 as Accounting Supervisor. She is currently the Vice-President of Beverage & Meat Group for Accounting.

Gary G. Guarnes 50 years old Filipino

Born on 16 October 1957, has a Bachelor of Science degree in Business Administration and Accounting at the National College of Business and Arts in 1978. He became a Certified Public Accountant in 1979. He joined Republic Consolidated Corporation (formerly an affiliate of RFM Corporation) in 1979 as an Accounting Bookkeeper.

Philip V. Prieto

49 years old Filipino

Born on 20 August 1958, has a Bachelors of Arts degree from the University of San Francisco.

He is the AVP – Corporate Purchasing. He joined the corporation in 1995 as the Purchasing Manager of Cosmos Bottling Corporation when this was still under the ownership of RFM Corporation.

VI. SECURITIES OF THE CORPORATION (1) Market Information

RFM shares are traded at the Philippine Stock Exchange (PSE). As of April 30, 2008, the total number of issued and outstanding shares of the Company is 3,160,403,866 common shares and 767,310,502 common shares held as treasury stock.

The following are the high and low prices per common share for each quarter within the last three calendar years and the first quarter of 2008:

2008 High Low First Quarter 0.69 0.45

2007 High Low First Quarter 0.81 0.51 Second Quarter 0.95 0.65 Third Quarter 0.98 0.68 Fourth Quarter 0.83 0.67

2006 High Low First Quarter 0.74 0.69 Second Quarter 0.82 0.69


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Third Quarter 0.90 0.77 Fourth Quarter 1.20 0.87

There are no unregistered securities or shares approved for exemption. All shares of the Company are listed in the Philippines Stock Exchange.

The price of RFM shares as of last trading date – April 29, 2008 was P0.46. (2) Holders

As of April 30, 2008, there are a total of 3,673 shareholders of RFM common stock. Filipinos owned 3,134,015,986 common shares or 99.1650% while the foreigners owned 26,387,880 common shares or 0.8349%, respectively.

Below are the top 20 stockholders of common shares as of April 30, 2008:

Name No. of shares held % to Total 1. Horizons Realty, Inc. 646,595,783 20.45 2. PCD Nominee Corporation 573,725,026 18.15 3. Triple Eight Holdings Inc. 552,670,472 17.48 4. BJS Development Corporation 311,210,184 9.84 5. Renaissance Property Management Corp. 201,982,966 6.39 6. FEATI University 112,011,350 3.54 7. Chilco Holdings, Inc. 72,748,950 2.30 8. Concepcion Industries, Inc. 71,384,424 2.26 9. FEBTC A/C No. 216-00145 70,739,468 2.24 10. Sahara Management & Development Corp. 57,539,818 1.82 11. Select Two Corporation 49,499,612 1.57 12. S&A Industrial Corporation 41,308,360 1.31 13. Republic Commodities Corp 33,115,616 1.05 14. PCD Nominee Corporation 25,394,328 0.80 15. Sole Luna, Inc. 23,926,208 0.76 16. Macric Incorporated 23,302,412 0.74 17. Young Concepts Inc 23,278,814 0.74 18. Lace Express Inc. 23,278,716 0.74 19. Monaco Express Corporation 23,278,552 0.74 20. Foresight Realty Development Corporation 19,215,194 0.61

There are no securities to be issued in connection with an acquisition, business combination or other

reorganization. (3) Dividends

(a) Dividend per Share

There has been no declaration of dividends since 2003.

(b) Dividends Restriction

The long-term loan agreements entered into by RFM Corporation with its creditors require the former to obtain the consent of the latter prior to the declaration and payment of any cash dividends, or to make any capital or asset distribution to its stockholders. Also, the Company may declare and pay cash dividends upon compliance with the required current ratio and debt-to-equity ratio, as stipulated in its long-term loan contracts.

(4) Recent sales of Unregistered or Exempt Securities including recent issuance of securities

constituting an exempt transaction.


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(a) Stock purchase plan

The Board of Directors of the Corporation during its regular meetings held on January 31,

2007 approved the sale of 4,351,603 treasury common shares to its officers.

April 20, 2007 Securities Sold 4,351,603 Treasury Common Shares Title and amount of sale Stock Purchase Plan

P5,831,148.02 Underwriters/persons securities were sold

There was no underwriter and securities were not sold publicly. Securities were sold to Company officers.

Consideration Cash at P1.34 per share, (prior to the 2 for 1 stock split on 11 September 2007 no commission, compensation or remuneration is paid in connection to the issuance of these securities.

Exemption from Registration Claimed

The distribution made is fewer than twenty (20) persons during the twelve-month period pursuant to Section 10.0 (K)

VII. LEADING PRACTICES ON CORPORATE GOVERNANCE (a) Evaluation System to Measure Compliance with Manual of Corporate Governance

The Corporation is committed to the continuous improvement of its corporate governance. Currently, there is no particular system presently being applied to measure the Corporation’s compliance with the provisions of its Manual on Good Corporate Governance except the Corporate Governance Score Card for Publicly Listed companies provided by the Securities and Exchange Commission.

(b) Measure being Undertaken to Fully Comply with the Adopted Leading Practices on Good

Corporate Governance

The following are some of the measures undertaken by the Corporation to ensure that full compliance with the leading practices on good governance are observed: 1. During the scheduled meetings of the Board of Directors, the attendance of each director is

monitored and recorded; 2. The Compliance Officer has been designated to monitor compliance with the provisions and

requirements of the Corporation’s Manual on Corporate Governance; 3. The Corporation has designated an audit committee, compensation committee, nomination

committee, and investment committee; 4. The Board has elected independent directors of at least two or 20% of the member of such Board,

whichever is lesser; 5. The nomination committee pre-screens and shortlists all candidates nominated to become directors

in accordance with the qualification and disqualification set up and established; 6. The directors and officers were given copies of the Manual of the Corporate Governance of the

Corporation for their information, guidance and compliance.

7. Attendance in corporate governance and risk management seminars & trainings. (c) Deviation from the Corporation’s Manual of Corporate Governance


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Per records, there is one (1) director who failed to meet the fifty percent (50%) attendance requirement in all board meetings, whether regular or special, during her incumbency in accordance with the Manual on Corporate Governance of the Corporation.

(d) Activities Undertaken to Comply with the Corporation’s Manual of Corporate Governance

a. Setting up of a Risk Management Process/ERM Plan and Risk Based Internal Audit Approach b. Establishment of a succession plan c. Implementation pf a compensation plan for officer’s and employees d. Implementation of the Corporation’s Code of Ethics e. Completion of the review and amendment of the Corporation’s policy on conflict of interest f. Implementation of the review and amendment of the Corporation’s policy on conflict of interest g. Implementation of the Disclosure Forms among the Corporation’s Directors, Officers and

Employees. (e) Plans to improve Corporate Governance of the Corporation

The Corporation will continue monitoring compliance with its Manual on Corporate Governance to

ensure full compliance thereto. The Company will improve its Corporate Governance Manual as needed and proper in its best judgment.

VIII. REGISTRANT'S MANAGEMENT REPORT The Corporation shall undertake to provide without charge, a copy of the registrant's Management Report on SEC Form 17-A upon written request to. Mr. Ramon M. Lopez VP/Exec. Asst. to the Pres. & CEO 8/F RFM Corporate Center Corner Pioneer and Sheridan Streets Mandaluyong City

RFM CORPORATION

By:

ATTY. ROWEL S. BARBA Corporate Secretary


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RFM CORPORATION AND SUBSIDIARIES Consolidated Financial Statements December 31, 2007 and 2006 and Years Ended December 31, 2007, 2006 and 2005 and Independent Auditors’ Report


*SGVMC308120*

INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors RFM Corporation RFM Corporate Centre Pioneer corner Sheridan Streets Mandaluyong City We have audited the accompanying financial statements of RFM Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2007 and 2006, and the consolidated statements of income, consolidated statements of recognized income and expense and consolidated statements of cash flows for each of the three years in the period ended December 31, 2007, and a summary of significant accounting policies and other explanatory notes. We did not audit the financial statements of WS Holdings, Inc. (WHI), a 60%-owned subsidiary, Unilever RFM Ice Cream, Inc. (URICI), a 50%-owned joint venture, and Selecta Wall’s Land Corporation (SWLC), a 35%-owned associate. The financial statements of WHI, URICI and SWLC were audited by other auditors whose reports have been furnished to us, and our opinion on the consolidated financial statements insofar as it relates to the amounts included for WHI, URICI and SWLC is based solely on their reports. The consolidated financial statements reflect total assets of URICI and WHI amounting to P=647 million and P=569 million as of December 31, 2007 and 2006, respectively, and total revenues amounting to P=1,337 million, P=1,131 million and P=991 million for each of the three years in the period ended December 31, 2007. The consolidated financial statements also reflect the investment in SWLC amounting to P=154 million as of December 31, 2007 and 2006, respectively, and equity in net earnings of SWLC amounting to P=11 million for each of the three years in the period ended December 31, 2007.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits and the reports of the other auditors. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or

BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

SGV & CO SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891-0307 Fax: (632) 819-0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

SGV & Co is a member practice of Ernst & Young Global


*SGVMC308120*

- 2 - error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained and the reports of the other auditors are sufficient and appropriate to provide a basis for our audit opinion. Opinion

In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of RFM Corporation and Subsidiaries as of December 31, 2007 and 2006, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2007 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO.

Martin C. Guantes Partner CPA Certificate No. 88494 SEC Accreditation No. 0325-A Tax Identification No. 152-884-272 PTR No. 0015216, January 3, 2008, Makati City April 24, 2008


*SGVMC308120*


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- 2 - December 31 2007 2006

Noncurrent Liabilities Long-term debt - net of current portion (Notes 12, 13 and 21) P=782,493 P=713,686 Loans from Filipinas Investments Ltd. (Notes 7 and 16) 169,570 – Net pension obligations (Note 28) 75,729 78,528 Long-term obligations - net of current portion (Note 19) 49,200 115,170 Advances from related parties (Note 27) – 12,689

Total Noncurrent Liabilities 1,076,992 920,073

Total Liabilities 5,409,729 4,973,069

Equity (Note 22)

Equity Attributable to Equity Holders of the Parent (Note 22)

Capital stock 3,927,714 3,927,714 Capital in excess of par value 1,013,097 1,019,860 Net unrealized gain on available-for-sale investments 110,178 76,709 Cumulative actuarial gains (losses) on defined benefit plans (1,030) 573 Retained earnings 677,542 445,343 Share-based compensation (Note 29) 3,442 2,937 5,730,943 5,473,136 Less cost of treasury stock (995,213) (1,006,397) 4,735,730 4,466,739 Minority interest 2,840 4,306

Total Equity 4,738,570 4,471,045

TOTAL LIABILITIES AND EQUITY P=10,148,299 P=9,444,114 See accompanying Notes to Consolidated Financial Statements.


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RFM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except Per Share Data) Years Ended December 31 2007 2006 2005

REVENUE (Note 27)

Manufacturing P=6,064,270 P=5,109,927 P=5,296,611 Real estate (Note 13) 892,668 943,676 719,405 Services and others 30,867 85,729 29,328 6,987,805 6,139,332 6,045,344

DIRECT COSTS AND EXPENSES (Note 23) Manufacturing (4,563,537) (3,849,341) (3,995,217) Real estate (855,909) (839,628) (486,865) Services and others (32,150) (37,595) (34,800) (5,451,596) (4,726,564) (4,516,882)

GROSS PROFIT 1,536,209 1,412,768 1,528,462

INTEREST AND FINANCING INCOME (Notes 5, 9 and 26) 88,932 162,211 144,929

OTHER INCOME (CHARGES) - Net (Notes 14, 26 and 27)

248,103

45,952

(1,042)

SELLING AND MARKETING EXPENSES (Note 24) (995,654) (879,052) (808,001)

GENERAL AND ADMINISTRATIVE EXPENSES (Note 25) (415,677) (295,138) (364,617)

INTEREST EXPENSE AND FINANCING CHARGES (Notes 15, 19, 21 and 26)

(147,554)

(231,169)

(242,640)

INCOME BEFORE INCOME TAX 314,359 215,572 257,091

PROVISION FOR INCOME TAX ( Notes 30 and 31) Current 102,850 62,468 95,396 Deferred (22,809) (49,453) (51,998) 80,041 13,015 43,398

NET INCOME P=234,318 P=202,557 P=213,693

Attributable to: Equity holders of the Parent P=232,199 P=205,111 P=228,487 Minority interests 2,119 (2,554) (14,794)

P=234,318 P=202,557 P=213,693

Basic / Diluted Earnings Per Share (Note 33) P=0.074 P=0.065 P=0.074 See accompanying Notes to Consolidated Financial Statements.


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RFM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE (Amounts in Thousands) Years Ended December 31 2007 2006 2005

Actuarial gains (losses) on defined benefit plans

(P=2,466)

P=3,662

P=433 Tax effect 863 762 136 Net actuarial gains (losses) on defined pension plan (1,603) 4,424 569

Unrealized gains on AFS investments 33,469 43,909 19,421 Impairment loss taken to the consolidated statement of

income (Note 10)

–

–

(14,232) Net unrealized gains on AFS investments 33,469 43,909 5,189

NET INCOME RECOGNIZED DIRECTLY IN EQUITY 31,866 48,333 5,758

NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

232,199

205,111

228,487

TOTAL RECOGNIZED INCOME FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

264,065

253,444

234,245

TOTAL RECOGNIZED INCOME (LOSS) FOR THE YEAR ATTRIBUTABLE TO MINORITY INTEREST

2,119

(2,554)

(14,794)

TOTAL RECOGNIZED INCOME P=266,184 P=250,890 P=219,451 See accompanying Notes to Consolidated Financial Statements.


*SGVMC308120*

RFM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years Ended December 31 2007 2006 2005

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=314,359 P=215,572 P=257,091Adjustments for: Gain on sale of investment property and property

equipment (Note 26)

(259,722)

(3,373)

(77) Interest expense and financing charges (Note 26) 147,554 231,169 242,640 Depreciation and amortization (Note 26) 133,172 136,904 146,403 Interest and financing income (Note 26) (88,932) (162,211) (144,929) Impairment loss on investment in an associate (Note

26) 29,681 5,000 –

Loss on sale of installment contracts receivables 58,512 – – Unrealized foreign exchange losses (gains) - net (23,012) (360) (1,779) Dividend income (Note 26) (9,269) (1,802) (1,539) Equity in net losses (earnings) of associates (Note 26) 7,366 (7,346) 5,618 Impairment of available-for-sale investments (Note 26) – – 14,232 Operating income before working capital changes 309,709 413,553 517,660 Decrease (increase) in: Accounts receivable and installment contracts receivables

(29,392)

(22,524)

(349,395)

Inventories (266,057) 37,928 97,575 Other current assets (42,644) (37,021) 52,769 Increase (decrease) in: Accounts payable and accrued liabilities 301,672 470,749 (166,719) Trust receipts and acceptances payable (26,557) (37,849) 102,819 Customers’ and tenants’ deposits 126,912 – – Net pension obligations (23,293) – – Provisions (796) (2,399) (3,876) Retirement benefits costs 18,028 – – Cash generated from operations 367,582 822,437 250,833 Interest paid (122,258) (141,123) (227,405) Income tax paid (112,384) (76,237) (66,409) Interest received 30,108 35,707 55,870 Net cash from operating activities 163,048 640,784 12,889

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investment property and property and equipment

131,564

4,345

4,246

Proceeds from sale of installment contracts receivables 161,695 – – Acquisition of investments and property and equipment (Notes 12 and 35c)

(145,263)

(131,308)

(68,521)

Increase in other noncurrent assets (22,843) (47,055) (77,807) Dividends received 9,269 70,700 22,238 Net cash from (used in) investing activities 134,422 (103,318) (119,844)

(Forward)


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- 2 - Years Ended December 31 2007 2006 2005

CASH FLOWS FROM FINANCING ACTIVITIES Availments of: Bank loans (Note 35a) P=1,701,949 P=523,068 P=291,387 Long-term debt 242,787 145,685 34,604 Repayments of: Bank loans (1,783,554) (405,451) (109,969) Long-term debt (348,386) (377,305) (258,877) Increase (decrease) in: Advances from related parties 23,718 (479,545) 258,119 Minority interest (3,585) (4,539) (3,320) Decrease in advances to related parties 45,458 27,407Net cash from (used in) financing activities (167,071) (552,629) 239,351

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

130,399

(15,163)

132,396

CASH AND CASH EQUIVALENTS AT

BEGINNING OF YEAR 555,334 570,497 438,101

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 5) P=685,733 P=555,334 P=570,497 See accompanying Notes to Consolidated Financial Statements.


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RFM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands Except for the Number of Shares or Where Otherwise Indicated) 1. Corporate Information

RFM Corporation (the Parent Company) is incorporated in the Philippines. The Parent Company is a public company under Section 17.2 of the Securities Regulation Code and its shares are listed in the Philippine Stock Exchange (PSE). The Parent Company is mainly involved in the manufacturing, processing and selling of wheat, flour and flour products, pasta, meat, milk, juices, margarine, and other food and beverage products. The major subsidiary, Philippine Townships, Inc., is engaged in real estate development and leasing of real estate properties (see Note 4). The Parent Company and its Subsidiaries are collectively referred to as the Group. The registered office address of the Parent Company is RFM Corporate Center, Pioneer corner Sheridan Streets, Mandaluyong City.

The consolidated financial statements as of and for the years ended December 31, 2007, 2006 and 2005 were reviewed and approved for issue by the Audit Committee as authorized by the Board of Directors (BOD) on April 24, 2008.

2. Basis of Preparation

The consolidated financial statements of the Parent Company and its subsidiaries (the Group) have been prepared using the historical cost basis, except for financial assets at fair value through profit and loss (FVPL) and available-for-sale (AFS) investments that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional currency. All values are rounded to the nearest thousand pesos (P=000), except for the number of shares or when otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Basis of Consolidation The consolidated financial statements comprise the financial statements of the Group prepared for the same reporting year as the Parent Company, using consistent accounting policies. The consolidated subsidiaries, which are all incorporated in the Philippines, are as follows:

Percentage of Ownership Cabuyao Meat Processing Corporation (CMPC) 100.00 Interbake Commissary Corporation (Interbake) 100.00 Philippine Townships, Inc. (Philtown) and Subsidiaries 100.00 RFM Realty Marketing Corporation* 100.00 Philtown Property Management, Inc.* 100.00 First Tanauan Realty Corporation (FTRC)* 100.00 McKinley Tower, Inc.* 100.00

(Forward)


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- 2 -

Percentage of Ownership First San Rafael Realty Corp.* 100.00 Metropolitan Tower Corp. * 100.00 Philtown Utilities Corporation 100.00 RFM Equities, Inc. and Subsidiaries (RFM Equities) 100.00 RFM Insurance Brokers, Inc. (RIBI) 100.00 Conglomerate Securities and Financing Corporation (CSFC) 88.68 RFM Foods Philippines Corporation (RFM Foods)* 100.00 Southstar Bottled Water Company, Inc.* 100.00 Swift Tuna Corporation (Swift Tuna)* 100.00 FWBC Holdings, Inc. and Subsidiary 83.38 Filipinas Water Bottling Company, Inc. (FWBC) 58.37 Rizal Lighterage Corporation (RLC) 82.98 RFM Canning and Marketing, Inc. (RFM Canning)* 70.00 WS Holdings, Inc. (WHI) 60.00

* Dormant. All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. However, intra-group losses that indicate impairment are recognized in the consolidated financial statements.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Group has the power to govern the financial and operating policies of the subsidiary so as to benefit from its activities. Consolidation of subsidiaries ceases when control is transferred out of the Group. Minority interests represent the portion of income and expense and net assets in CSFC, FWBC, RLC, RFM Canning and WHI not held by the Group and are presented separately in the consolidated statements of income and within equity in the consolidated balance sheets, separately from the equity attributable to equity holders of the Parent Company.

Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial period except as follows:

The Group has adopted the following new and amended standards and Philippine Interpretation based on International Financial Reporting Interpretation Committee (IFRIC) interpretations. Adoption of these new standard, amendments and interpretations did not have material effect on the consolidated financial statements as only additional disclosures, were required. • PFRS 7, Financial Instruments: Disclosures, requires disclosures that enable users of the financial

statements to evaluate the significance of the financial instruments and the nature and extent of the risks arising from those financial instruments. The Company adopted the amendment to the transitional provisions of PFRS 7, as provided by the Financial Reporting Standards Council of the Philippines, which gives transitory relief with respect to the


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presentation of comparative information for the new risk disclosures about the nature and extent of risks arising from the financial instruments. Accordingly, the Company did not present comparative information for the disclosures required by paragraphs 31 to 42 of PFRS, unless the disclosure was previously required under PAS 32, Financial Instruments: Disclosures and Presentation, and PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions. It is applicable to all entities that report under PFRS.

The adoption of PFRS 7 resulted in additional disclosures, which are included throughout the financial statements. These disclosures include presenting the different classes of loans and receivables, rollforward of allowance for doubtful accounts per class, credit quality of financial assets, aging of past due but not impaired financial assets and sensitivity analysis as to changes in interest rate and foreign exchange rate (see Note 34).

• Amendments to PAS 1, Presentation of Financial Statements: Capital Disclosures, require the

following additional disclosures: (a) an entity’s objectives, policies and processes for managing capital; (b) quantitative data about what the entity regards as capital; (c) whether the entity has complied with any externally imposed capital requirements; and (d) if it has not complied, the consequences of such noncompliance. The disclosures required by these amendments were included in the consolidated financial statements (see Note 36).

• Philippine Interpretation IFRIC 7, Applying the Restatement Approach under PAS 29, Financial

Reporting in Hyperinflationary Economies, provides guidance on how to apply PAS 29 when an economy first becomes hyperinflationary. This Interpretation has no impact on the consolidated financial statements.

• Philippine Interpretation IFRIC 8, Scope of PFRS 2, requires PFRS 2 to be applied to any arrangements

where equity instruments are issued for consideration which appears to be less than fair value. This Interpretation has no significant impact on the consolidated financial statements.

• Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, establishes that the date to

assess the existence of an embedded derivative is the date an entity first becomes a party to a contract, with assessment only if there is a change to the contract that significantly modifies the cash flows. As the Group currently has no such transactions, this Interpretation did not have an effect on the consolidated financial statements.

• Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment, prohibits the reversal

of impairment losses on goodwill and available-for-sale investments recognized in the interim financial reports even if impairment is no longer present at the annual balance sheet date. This Interpretation has no impact on the consolidated financial statements.

Summary of Significant Accounting Policies Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition and that are subject to an insignificant risk of change in value.


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- 4 - Financial Instruments Date of recognition The Group recognizes a financial asset or a financial liability in the balance sheet when it becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets that require delivery of assets within the time frame by regulation or convention in the marketplace are recognized on the settlement date. Initial recognition of financial instruments All financial assets and financial liabilities are recognized initially at fair value. Except for securities at fair value through profit and loss (FVPL), the initial measurement of financial assets includes any transactions costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, and AFS investments. The Group also classifies its financial liabilities into FVPL and other financial liabilities. The classification depends on the purpose for which the investments were acquired or whether they are quoted in an active market. The Group determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at each financial year end.

Financial instruments are classified as liability or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits. As of December 31, 2007 and 2006, the Group has no HTM investments and financial liabilities at FVPL.

Determination of fair value The fair value of financial instruments traded in active markets at the balance sheet date is based on the quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of current fair value as long as there has not been a significant change in economic circumstances since the time of transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation methodologies. Valuation methodologies include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

Day 1 profit or loss Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit or loss) in the consolidated statement of income unless it qualifies for the recognition as some other type of asset. In cases where use is


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- 5 - made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 profit amount.

Financial assets at FVPL

A financial asset is classified in this category if acquired principally for the purpose of selling or repurchasing in the near term or upon initial recognition, it is designated by management as at FVPL. Financial assets may be designated at initial recognition as at FVPL if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on them on a different basis; or (ii) the assets are part of a group of financial assets which are managed and the performance evaluated on a fair value basis in accordance with a documented risk management strategy; or (iii) the financial asset contains an embedded derivative that would need to be separately recorded. Derivatives, including separated embedded derivatives, are also categorized as held at FVPL, except those derivatives designated and considered as effective hedging instruments or a financial guarantee contract. Assets classified under this category are carried at fair value in the consolidated balance sheet. Changes in the fair value of such assets are accounted for immediately in the consolidated statement of income.

The Group’s financial assets at FVPL represent investments in bond funds of a local insurance company as of December 31, 2006.

Loans and receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. After initial measurement, loans and receivables are subsequently carried at cost or amortized cost using the effective interest method less any allowance for impairment. Gains and losses are recognized in the consolidated statement of income when the loans and receivables are derecognized or impaired, as well as through the amortization process. Loans and receivables are classified as current assets if maturity is within twelve months from the balance sheet date. Otherwise, these are classified as noncurrent assets. This category primarily includes the Group’s cash in bank and cash equivalents, trade accounts receivables, installment contracts receivables, advances to related parties, advances to officers and employees and other receivables as of December 31, 2007 and 2006 (see Note 34).

AFS investments AFS investments are nonderivatives that are either designated in this category or not classified in any of the other categories. AFS investments are carried at fair value in the consolidated balance sheet, with the unrealized gains or losses on changes in their fair value being recognized directly in equity. When the investment is disposed of, the cumulative gain or loss previously recorded in equity is recognized in the consolidated statement of income. Interest earned or paid on the investments is reported as interest income or expense using the effective interest method. Dividends earned on investments are recognized in the consolidated statement of income as “Dividends income” when the right of payment has been established.


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These financial assets are classified as noncurrent assets unless there is intention to dispose of such assets within twelve months of the balance sheet date. As of December 31, 2007, the Group’s AFS investments consist of investment in preferred shares and quoted common shares. Other financial liabilities This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings (e.g., payables, accruals).

The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. The Group’s other financial liabilities include accounts payable and accrued liabilities, trust receipts and acceptances payables, bank loans, long-term debt and other long-term liabilities and advances from related parties as of December 31, 2007 and 2006.

Impairment of Financial Assets

The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.

Loans and receivables If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of loss is measured as a 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 through the use of an allowance account. The amount of loss is recognized in the consolidated statement of income. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. Objective evidence includes observable data that comes to the attention of the Group about loss events such as but not limited to significant financial difficulty of the counterparty, a breach of contract, such as a default or delinquency in interest or principal payments, probability that the borrower will enter bankruptcy or other financial reorganization. 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 the group of financial assets with similar credit risk and characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

Loans and receivables, together with the related allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event


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occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated 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 receivables, a provision for impairment is made when there is objective evidence (such as the

probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced either directly or through the use of an allowance account. Impaired debts are derecognized when they are assessed as uncollectible.

AFS investments If an AFS investment is impaired, the cumulative loss that had been recognized directly in equity (resulting from decline in fair value) shall be removed from equity and recognized in the consolidated statement of income even though the investment has not been derecognized. The amount of the cumulative loss that is removed from equity and recognized in the consolidated statement of income shall be the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income.

In case of equity securities classified as AFS investments, objective evidence would include a significant or prolonged decline in the fair value of the financial assets below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Group treats “significant” generally as 20% or more of the original cost of investment, and “prolonged” as greater than 6 months. In addition, the Group evaluates other factors, including normal volatility in share price for unquoted equities.

Derecognition of Financial Assets and Financial 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 Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay

them in full without material delay to a third party under a “pass-through” arrangement; or • the Group has transferred its rights to receive cash flows from the asset, and either (a) has transferred

substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but have transferred control of the asset.

Where the Group 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 Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.


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Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. 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 consolidated statement of income.

Offsetting Financial Instruments

Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated balance sheet. Embedded Derivatives An embedded derivative is separated from the host financial or nonfinancial contract and accounted for as a derivative if all of the following conditions are met: • the economic characteristics and risks of the embedded derivative are not closely related to the economic

characteristic of the host contract; • a separate instrument with the same terms as the embedded derivative would meet the definition of a

derivative; and • the hybrid or combined instrument is not recognized at FVPL. The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes a party to the contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

An entity determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract.

Embedded derivatives that are bifurcated from the host contracts are accounted for as financial assets at FVPL. Changes in fair values are included in the consolidated statement of income. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.


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As of December 31, 2007 and 2006, the Group does not have contracts identified as having embedded derivatives characteristics. Investments in Associates Investments in associates are accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture of the Group. Following are the associates whose investments are accounted for under the equity method:

Associates Percentage of Ownership PSI Tech Realty, Inc. (PTRI) 60 RFM - Science Park of the Philippines, Inc. (RFM-SPPI)

40

Selecta Wall’s Land Corporation 35 Philstar Global Corporation 30

The investments in associates are carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share in the net assets of the associates. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized. After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the Group’s net investment in the associate. The consolidated statement of income reflects the Group’s share of the results of operations of the associates. Where there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes, and discloses this when applicable, in the details of the changes in equity.

PTRI is considered as an associate inspite of the Group’s 60% equity and more than half of the voting power because under the shareholders’ agreement between Philtown and PSI Technologies, Inc. (PSI), the power to govern the financial and operating policies of PTRI rests with PSI. Interests in Joint Ventures The interests in 50%-owned joint ventures, namely Unilever RFM Ice Cream, Inc. (URICI) and One McKinley Place (OMP), are accounted for using the proportionate consolidation method, which involves consolidating a proportionate share of the joint ventures’ assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis. Inventories Inventories, including goods in process, are valued at the lower of cost and net realizable value (NRV). Costs incurred in bringing the inventories to their present location and condition are accounted for as follows:

Finished goods and goods in process - Determined using the weighted average method

Raw materials - Determined using the weighted average method

Spare parts and supplies - Determined using the weighted average method

(Forward)


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Condominium and residential units for sale - Cost consists of acquisition cost and expenditures for the construction of the condominium and residential units, including capitalized borrowing costs

Land held for sale and development - Cost includes capitalized expenditures for the development and improvement of land and interest incurred while development is in progress

NRV, except for spare parts and supplies, is the selling price in the ordinary course of business, less the costs of completion, marketing and distribution. For spare parts and supplies, NRV is the current replacement cost. An allowance for inventory obsolescence is provided for slow-moving, obsolete, defective and damaged inventories based on physical inspection and management evaluation.

Property, Plant and Equipment Property, plant and equipment, except land, are stated at cost less accumulated depreciation and amortization, and any impairment in value. Land is stated at cost less any impairment in value. The initial cost of items of property, plant and equipment consists of its purchase price, including import duties and any directly attributable costs of bringing the asset to its working conditions and locations for its intended use. Expenditures incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to income in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of the item of property, plant and equipment. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets as follows:

Number of Years Land improvements 5-20 Silos, buildings and improvements 5-40 Machinery and equipment 5-15 Transportation and delivery equipment 5-15 Office furniture, fixtures and equipment 2-5

Leasehold improvements are amortized over the life of the assets or the lease term, whichever is shorter.

The residual values, estimated useful lives and depreciation and amortization method are reviewed periodically to ensure that the residual values of the assets, periods and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.


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Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation is credited or charged to current operations. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and any impairment in value are removed from the accounts and any resulting gain or loss is credited or charged to operations. Investment Properties

Investment properties consist of properties that are held to earn rentals and not occupied by the Group. Investment properties, except for land, are carried at cost less accumulated depreciation and amortization and any impairment in value. Land is stated at cost less any impairment in value. Cost includes directly attributable transaction costs. The carrying amount includes the cost of replacing part of an existing property at the time that cost is incurred and excludes the costs of day-to-day servicing of an investment property. Depreciation and amortization are computed using the straight-line method over the useful lives of the assets. Investment properties are derecognized when either they have been disposed of or when the investment properties are permanently withdrawn from use and no future economic benefit is expected from their disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statement of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale. Transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement or disclosure purposes. Impairment of Nonfinancial Assets An assessment is made at the balance sheet date to determine whether there is an indication of impairment on the carrying values of investments in associates, property, plant and equipment and investment properties and other noncurrent assets. If any such indication exists and where the carrying value exceeds the estimated recoverable amount, the asset or cash-generating unit is written down to its estimated recoverable amount. The estimated recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the consolidated statement of income.


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- 12 - Previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, but not, however, to an amount higher than the carrying amount that would have been determined (net of any depreciation and amortization) had there been no impairment loss recognized for the asset in prior years. A reversal of an impairment loss is recognized in the consolidated statement of income. Goodwill Goodwill acquired in a business combination is initially measured at cost, which is the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated: • represents the lowest level within the Group at which the goodwill is monitored for internal

management purposes; and • is not longer than a segment based on either the Group’s primary or secondary reporting format

determined in accordance with PAS 14, Segment Reporting.

Impairment is determined by assessing the recoverable amount of the cash-generating unit or group of cash-generating units, to which goodwill relates. Where the recoverable amount of the cash-generating unit or group of cash-generating units is less than the carrying amounts, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit or group of cash-generating units and part of the operations within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operations disposed of and the portion of the cash-generating unit retained.

Provisions and Contingencies Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable (i.e., more likely than not) 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 Group expects some or all of the provision to be reimbursed, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of income, net of reimbursement. If the effect of the time value of money is material, provisions are discounted using the current pre-tax rate that reflects, 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.


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Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed when an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the amount of revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

Sale of Goods Revenue is recognized net of applicable VAT, discounts, rebates and returns when the significant risks and rewards of ownership of the goods have passed to the buyer and there is actual delivery made and the same is accepted by the customer.

Sale of Real Estate Revenue from sale of real estate, which includes sale of subdivided land, condominium and residential units, are generally recognized upon receipt of sufficient downpayments. Revenue and cost from completed projects are accounted for using the full accrual method. The percentage of completion method is used to recognize revenue from sale of projects where the Group has material obligations to complete the project after the properties are sold. The percentage of completion is determined, after considering the relationship of actual cost incurred to total estimated costs to be incurred on project completion. Under this method, revenue is recognized as the related obligations are fulfilled. Cancellations during the year relating to prior years’ sales are deducted from current year’s revenue and costs. Any excess of collection over the recognized receivables are included in “Accounts payable and accrued liabilities” in the liabilities section of the consolidated balance sheet.

Rent Rent income is recognized on a straight-line basis over the terms of the lease.

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

Dividend income on investments in shares of stock, except for investments in associates, is recognized when the shareholders’ right to receive the payment is established, which is the date when the dividend declaration is approved by the investee’s BOD and stockholders. Pension Benefits Costs The Group has defined benefit pension plans covering all permanent, regular, full-time employees administered by trustee banks. The cost of providing benefits under the defined benefit plans is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognized outside the consolidated statement of income in the consolidated statement of recognized income and expense (SORIE). Any actuarial gains and losses and adjustments arising from the limits on asset ceiling tests are taken directly to the consolidated SORIE.


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- 14 - Retirement expense includes current service cost, interest cost, expected return on plan assets, amortization of unrecognized past service costs, recognition of actuarial gains or losses and effect of any curtailment or settlement. The past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately. Gains or losses on the curtailment or settlement of pension benefits are recognized when the curtailment or settlement occurs. The defined benefit liability is the aggregate of the present value of the defined benefit obligation reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

Share-Based Compensation Plan URICI operates an equity-settled, share-based compensation plan. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the consolidated statement of income, with a corresponding adjustment to equity. The proceeds received, net of any directly attributable transaction costs, are credited to capital stock (nominal value) and capital in excess of fair value when the options are exercised.

Leases Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statement of income on a straight-line basis over the lease term. Borrowing Costs

Borrowing costs generally are expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in


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progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds. Foreign Currency Transactions and Translations Transactions in foreign currencies are initially recorded in Philippine peso using the functional currency exchange rate at the date of the transaction. Exchange gains or losses arising from differences between exchange rates prevailing at the time of the transaction and exchange rates on settlement date are credited to or charged against income. Outstanding monetary assets and liabilities denominated in foreign currencies are restated using the closing exchange rate at balance sheet date. All differences are taken to the consolidated statement of income.

Income Taxes

Current Income Tax Current income 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 as basis to compute the amount are those that have been enacted or substantively enacted at the consolidated balance sheet date. Deferred Income Tax Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences, excess of minimum corporate income tax (MCIT) over regular corporate income tax and net operating loss carryover (NOLCO), to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences, excess MCIT and NOLCO can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profits will be available to allow all or part of the deferred income tax assets to be utilized. Deferred income 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 at the balance sheet date.

Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income.

Deferred income tax assets and liabilities are offset, if a legally enforceable right exists to offset current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.


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Earnings Per Share Basic earnings per share is computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year after giving retroactive effect to any stock split or stock dividends declared and stock rights exercised during the year, if any. The Group does not have dilutive potential common shares.

Segment Reporting The Group’s operating businesses are organized and managed separately according to the nature of the products provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 4.

Events After the Balance Sheet Date Post year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material. Future Changes in Accounting Policies The Group has not early adopted the following new and amended accounting standard amendments and Philippine Interpretations already issued but are not yet effective as of December 31, 2007: • PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1, 2009),

requires a management approach to reporting segment information. PFRS 8 will replace PAS 14, Segment Reporting, and is required to be adopted only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the Philippine Securities and Exchange Commission (SEC) for purposes of issuing any class of instruments in a public market. The Group is currently in the process of assessing the impact of this PFRS but is not yet in a position to state whether it could have a significant impact on the consolidated financial statements.

• Amendments to PAS 1, Presentation of Financial Statements (effective for annual periods beginning on

or after January 1, 2009), introduces new disclosures to aggregate information in the financial statements on the basis of shared characteristics. It requires the following presentations: (a) all changes in equity arising from transactions with owners are to be presented separately from nonowner changes in equity, (b) income and expense are to be presented in one statement (a statement of comprehensive income) or in two statements (a separate income statement and a statement of comprehensive income), separately from owner changes in equity, (c) components of other comprehensive income to be displayed in the statement of comprehensive income and, (d) total comprehensive income to be presented in the consolidated financial statements. Additional and/or revised disclosures required by this amendment will be included in the consolidated financial statements when this amendment is adopted.


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• Amendments to PAS 23, Borrowing Costs (effective for annual periods beginning on or after January 1,

2009), requires capitalization of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use of sale. In accordance with the transitional requirements in the Standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalized on qualifying assets with a commencement date after January 1, 2009. No changes will be made for borrowing costs incurred to this date that have been expensed.

• Philippine Interpretation IFRIC 11, Group and Treasury Share Transaction (effective for annual

periods beginning on or after March 1, 2007), requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when the subsidiary’s employees receive rights to the equity instruments of the parent. The Group is currently assessing the impact of this Interpretation but is not yet in a position to state whether it could have a significant impact on the consolidated financial statements.

• Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual periods

beginning on or after January 1, 2008), covers contractual arrangements arising from entities providing public services. The Group is not a party to any concession arrangement and, thus, expects that this Interpretation will not have any impact on the consolidated financial statements.

• Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, (effective for annual periods beginning on or after July 1, 2008). This interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and deferred over the period that the award credits are fulfilled. The Group expects that this Interpretation will have no impact on the consolidated financial statements as no such schemes currently exist.

• Philippine Interpretation IFRIC 14, PAS 19 - The Limit on a Defined Benefit Asset Minimum Funding

Requirements and their Interaction (effective for annual periods beginning on or after January 1, 2008), provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognized as an asset under PAS 19, Employee Benefits. The Group expects that this interpretation will have no impact on the financial statements of the Group as all defined benefit schemes are currently in deficit.

The revised disclosures in the consolidated financial statements provided by the above standard, amendments and interpretations, where applicable, will be included in the consolidated financial statements when these are adopted upon their effectivity.


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3. Management’s Use of Significant Accounting Judgments, Estimates and Assumptions

The preparation of the Group’s consolidated financial statements in compliance with PFRS requires management to make judgments, estimates and assumptions that affect the amounts reported and the disclosures made. In preparing the Group’s consolidated financial statements, management has made its best estimates of and judgments relating to certain amounts, giving due consideration to materiality. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the financial statements. Accordingly, actual results could differ from those estimates, and such estimates will be adjusted accordingly.

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.

The Group believes the following represent a summary of these significant estimates and judgments and related impact and associated risks in consolidated financial statements.

Judgments

Measurement of revenue Revenue from sale of goods is recognized when significant risks and rewards of ownership of the goods are transferred to the buyer, which is upon delivery of the goods to the customer. Selecting an appropriate revenue recognition method for a particular real estate sale transaction requires certain judgments based on, among others:

• buyer’s commitment on the sale which may be ascertained through the significance of the buyer’s initial

investment; and • stage of completion of the project.

Classification of financial instruments The Group classifies a financial instrument, or its component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated balance sheet. Classification of financial instruments is reviewed at each balance sheet date. Impairment of AFS investments

The Group determines that AFS equity investments are impaired when there has been a significant or prolonged decline in the fair value below their cost. This determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group treats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than six months for the quoted equity securities. Impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. As of December 31, 2007 and 2006, AFS investments in equity securities amounted to P=989.41 million and P=960.84 million, net of allowance for impairment losses of P=555.66 million in both years (see Note 10).


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- 19 - Provisions The estimate of the probable costs for the resolution of possible third party claims has been developed in consultation with outside consultant/legal counsel handling the Group’s defense on these matters and is based upon an analysis of potential results. When management and outside consultant/legal counsel believe that the eventual liabilities under these and any other claims, if any, will not have a material effect on the Group’s financial statements, no provision for probable losses is recognized in the Group’s financial statements. The amount of provision is being reassessed at least on an annual basis to consider new relevant information. Provisions amounted to P=14.93 million and P=15.73 million as of December 31, 2007 and 2006, respectively (see Note 20).

Determination of the classification of leases The Group has entered into various lease agreements as a lessee. The Group accounts for lease arrangements

where the significant risks and rewards are transferred to the Group as finance leases (see Note 19a). Otherwise, the leases are accounted for as operating leases.

Estimates Determination of fair value of financial instruments Financial assets and liabilities, on initial recognition, are accounted for at fair value. The fair values of financial assets and financial liabilities, on initial recognition are normally the transaction price. In the case of those financial assets that have no active markets, fair values are determined using an appropriate valuation technique.

The carrying amounts and the fair values of financial assets and financial liabilities as of December 31, 2007 and 2006 are disclosed in Note 35. Estimation of allowance for doubtful accounts The Group maintains allowance for doubtful accounts based on the results of the individual and collective assessment under PAS 39. Under the individual assessment, the Group is required to obtain the present value of estimated cash flows using the receivable’s original effective interest rate. Impairment loss is determined as the difference between the receivables’ carrying balance and the computed present value. If no future cash flows is expected, impairment loss is equal to the carrying balance of the receivables. Factors considered in individual assessment are payment history, inactive accounts, past due and term. The collective assessment would require the Group to classify its receivables based on the credit risk characteristics (customer type, payment history, past-due status and term) of the customers. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any period would differ depending on the judgments and estimates made during the year.


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- 20 - As of December 31, 2007 and 2006, the carrying value of accounts receivable amounted to P=1,333.72 million and P=987.36 million, respectively (see Note 6). The related allowance for doubtful accounts amounted to P=670.68 million and P=628.57 million as of December 31, 2007 and 2006, respectively (see Note 6). Estimation of percentage of completion of the project The Group estimates the percentage of completion of the project for the purpose of accounting for the revenue to be recognized. The percentage of completion is determined after considering the relationship of actual cost incurred to total estimated cost to be incurred on project completion. Cancellations during the year relating to prior years’ sales are deducted from current year’s revenue and cost. Realized gross profit on prior years’ sales amounted to P=35.11 million in 2007, P=101.36 million in 2006 and P=37.16 million in 2005, respectively.

Estimation of inventory obsolescence The Group estimates the allowance for inventory obsolescence related to inventories based on a certain

percentage of non-moving inventories. The level of allowance is evaluated by management based on past experiences and other factors affecting the saleability of goods such as present demand in the market and emergence of new products, among others.

Allowance for inventory obsolescence amounted to P=185.56 million as of December 31, 2007 and 2006 (see

Note 8). Estimation of NRV of inventories

The Group determines the NRV of inventories annually in accordance with the accounting policy stated in Note 2. In determining the NRV, the Group considers the current selling price of the inventories and the estimated costs of completion and costs to sell.

Inventories amounted to P=4,004.65 million and P=3,738.60 million as of December 31, 2007 and 2006. The cost of finished goods and raw materials at NRV amounted to P=185.56 million as of December 31, 2007 and 2006, respectively, and are fully provided for (see Note 8).

Provision for decline in value of land held for future development amounted to P=64.34 million in both years

(see Note 8). Allowance for decline in value of condominium and residential units for sale amounted to P=23.78 million (see Note 8).

Estimation of residual values and useful lives of investment properties and property, plant and equipment

The Group estimates the residual value and useful life of depreciable investment properties and property, plant and equipment based on a collective assessment of similar businesses, internal technical evaluation and experience with similar assets. Estimated useful lives are based on the periods over which the assets are expected to be available for use. The estimated useful lives are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical and commercial obsolescence and legal or other limits on the use of the assets. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any item of investment properties and property, plant and equipment would increase the recorded operating expenses and decrease the carrying value of the assets and vice versa.


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The carrying values of investment properties amounted to P=238.00 million and P=249.47 million as of December 31, 2007 and 2006, respectively. The carrying values of property, plant and equipment amounted to P=1,100.16 million and P=1,145.34 million as of December 31, 2007 and 2006, respectively (see Notes 12 and 13).

Determination of impairment of nonfinancial assets The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation

of the recoverable amounts which is determined based on the value in use calculation, which requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of the asset.

Assessing property, plant and equipment and investment properties and other nonfinancial

long-lived assets for impairment includes considering certain indicators of impairment such as significant changes in asset usage, significant decline in market value, obsolescence or physical damage of an asset. If such indicators are present, and where the carrying amount of the asset exceeds its net selling price, the asset is considered impaired and is written down to its recoverable amount.

Determining the fair value of property, plant and equipment and investment properties, which requires the

determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the Group to make estimates and assumptions that can materially affect the consolidated financial statements. Any resulting impairment loss could have a material impact on the consolidated financial statements.

Goodwill amounted to P=190.56 million as of December 31, 2007 and 2006. Impairment loss on goodwill charged to income amounted to P=7.95 million in 2005. There was no impairment in 2007 and 2006 (see Note 14).

Impairment loss recognized on property, plant and equipment amounted to P=24.73 million

in 2005 (see Note 12). There was no impairment loss recognized on investment properties in 2007, 2006 and 2005 (see Note 13).

Recognition of deferred income tax assets

The Group reviews the carrying amounts of deferred income tax assets at each balance sheet date and adjusts the balance of deferred income tax assets to the extent that it is no longer probable that sufficient future taxable profits will be available to allow all or part of the deferred income tax assets to be utilized.

As of December 31, 2007 and 2006, deferred income tax assets recognized amounted to P=112.27 million and P=107.03 million, respectively (see Note 30).

Estimation of pension benefits obligation and costs

The determination of the Group’s obligation and costs of pension benefits depends on the selection by management of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 28 and include among others, discount rate, expected rate of return and rate of salary increase. Actual results that differ from the Group’s assumptions are taken in full to the consolidated SORIE, affecting the recorded obligation. While management


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believes that the Group’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group’s pension obligation. Net pension obligations amounted to P=75.73 million and P=78.53 million as of December 31, 2007 and 2006, respectively. Pension benefits costs amounted to P=18.03 million in 2007, P=5.74 million in 2006 and P=22.48 million in 2005 (see Note 28).

Use of effective interest rate The Group made reference to the prevailing market interest rates for instruments of the same tenor in choosing the discount rates used to determine the net present value of long-term, noninterest-bearing receivable from Manila Electric Company (Meralco), advances to and from associates and other related parties and other long-term financial assets and obligations. Receivable from Meralco (including current maturities) included under “Other current assets” and “Other noncurrent assets” accounts in the 2007 and 2006 consolidated balance sheets amounted to P=23.50 million and P=29.54 million, respectively (see Notes 9 and 14). Noncurrent advances from related parties amounted to P=12.69 million as of December 31, 2006 (see Note 27).

4. Segment Information

The primary segment reporting format is determined to be the Group’s operating business segments. The Group is organized into the following operating business segments, namely: (1) Branded Food, (2) Flour and Bakery Products, (3) Real Estate, and (4) Others. The branded food segment manufactures and sells meat, pasta, fats and oil and milk and juices. Flour and bakery products segment manufactures and sells flour, bakery and other bakery products. The real estate segment develops and sells real estate properties and leases office and other premises owned by the Group, but which are surplus to the Group’s requirements. Others consist of insurance, financing, lighterage moving, cargo handling and other services shown in aggregate as “Other Operations.”

The operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Segment assets include all operating assets used by a segment and consist principally of operating cash, receivables, inventories and property, plant and equipment, net of allowance and provisions. Segment liabilities include all operating liabilities and consist principally of trade, wages and taxes currently payable and accrued liabilities.

Intersegment transactions, i.e. segment revenues, segment expenses and segment results, include transfers between business segments. Those transfers are eliminated in consolidation.


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- 23 - Information with regard to the Group’s significant business segments is as follows:

2007

Branded Foods

Flour and Bakery

Products

Real

Estate

Other

Operations

Unallocated Corporate Balances

Eliminations

Consolidated Net sales External sales P=1,976,876 P=2,744,557 P=892,668 P=1,373,704 P=– P=– P=6,987,805 Intersegment sales – 232,999 – 23,308 – (256,307) – P=1,976,876 P=2,977,556 P=892,668 P=1,397,012 P=– (P=256,307) P=6,987,805

Results Income (loss) from operations

before provision for income tax and minority interest

(P=263,195)

P=505,044

P=7,742

P=95,485

P=46,980

(P=77,697)

P=314,359 Provision for doubtful accounts 31,393 3,183 – 3,609 – (3,183) 35,002 Impairment losses – – 100,812 10 – – 100,822 Interest and other financial

income (charges) - net

(116,745)

33,144

19,990

(47,428)

52,417

–

(58,622) Equity in net losses of associates – – – – – – (7,366) Provision for income tax – – – – – – 80,041 Net income – – – – – – 234,318

Other information Segment assets P=2,954,807 P=2,857,155 P=4,728,934 P=1,348,870 P=2,609,894 (P=5,827,132) P=8,672,528 Investments 334,213 312,960 388,812 278,153 4,069,015 (4,019,652) 1,363,501 Deferred income tax assets (145) 7,166 34,343 51,408 19,498 – 112,270 Consolidated Total Assets P=3,288,875 P=3,177,281 P=5,152,089 P=1,678,431 P=6,698,407 (P=9,846,784) P=10,148,299

Consolidated Total Liabilities P=931,834 P=629,019 P=3,537,178 P=1,484,288 P=1,557,457 (P=2,730,047) P=5,409,729

Capital expenditures P=24,704 P=24,404 P=10,302 P=86,675 P=2,942 P=– P=149,027 Depreciation and amortization 41,013 39,493 12,763 38,505 1,398 – 133,172 Noncash expenses other than

depreciation and amortization

116,745

–

(19,990)

36,937

(52,417)

–

81,275

2006 Net sales External sales P=1,709,924 P=2,239,066 P=967,890 P=1,222,452 P=– P=– P=6,139,332 Intersegment sales – 185,011 – 24,215 – (209,226) –

P=1,709,924 P=2,424,077 P=967,890 P=1,246,667 P=– (P=209,226) P=6,139,332

Results Income (loss) from operations before provision for income tax and minority interest

(P=294,273)

P=424,325

(P=48,801)

P=147,324

(P=40,274)

P=27,271

P=215,572 Provision for doubtful accounts – – 2,740 3,400 – – 6,140 Impairment losses – – 64,876 24,708 10,800 (55,592) 44,792 Interest and other financial


(123,258)

29,472

36,977

(5,990)

(6,159)

–

(68,958) Equity in net earnings of

associates

–

–

–

–

–

–

7,346 Provision for income tax – – – – – – 13,015 Net income – – – – – – 202,557

Other information Segment assets P=2,441,206 P=2,374,672 P=4,507,987 P=1,294,080 P=2,524,871 (P=5,043,462) P=8,099,354 Investments 468,796 41,223 400,758 317,926 4,696,730 (4,687,703) 1,237,730 Deferred income tax assets (145) 8,449 35,050 25,458 38,218 – 107,030 Consolidated Total Assets P=2,909,857 P=2,424,344 P=4,943,795 P=1,637,464 P=7,259,819 (P=9,731,165) P=9,444,114

Consolidated Total Liabilities P=1,018,950 P=394,136 P=3,351,010 P=144,981 P=2,254,211 (P=2,190,219) P=4,973,069

Capital expenditures P=18,798 P=27,733 P=5,946 P=72,615 P=2,131 P=– P=127,223 Depreciation and amortization 37,800 46,883 9,767 41,033 1,421 – 136,904 Noncash expenses other than


123,258

–

(34,236)

18,483

6,159

–

113,664


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2005

Branded Foods

Flour and Bakery

Products

Real

Estate

Other

Operations

Unallocated Corporate Balances

Eliminations

Consolidated Net sales External sales

P=1,696,742

P=2,558,021

P=719,405

P=1,071,176

P=–

P=–

P=6,045,344

Intersegment sales – 152,595 – 27,491 – (180,086) – P=1,696,742 P=2,710,616 P=719,405 P=1,098,667 P=– (P=180,086) P=6,045,344

Results Income (loss) from operations

before provision for income tax and minority interest

(P=199,435)

P=441,981

P=69,773

P=102,377

P=5,004

(P=162,609)

P=257,091 Provision for doubtful accounts – – – 17,780 9,608 – 27,388 Impairment losses – – – 49,728 14,232 – 63,960 Interest and other financial


(80,124)

21,547

(27,097)

(9,517)

(2,520)

–

(97,711) Equity in net losses of associates – – – – – – (5,618) Provision for income tax – – – – – – 43,398 Net income – – – – – – 213,693

Other information Segment assets P=3,620,177 P=1,928,938 P=4,786,525 P=1,226,162 P=2,900,738 (P=6,459,794) P=8,002,746 Investments 377,087 45,032 112,120 344,616 4,654,113 (4,321,606) 1,211,362 Deferred income tax assets (145) 8,986 32,709 32,507 (5,892) – 68,165 Consolidated Total Assets P=3,997,119 P=1,982,956 P=4,931,354 P=1,603,285 P=7,548,959 (P=10,781,400) P=9,282,273

Consolidated Total Liabilities P=1,020,179 P=263,389 P=3,368,071 P=313,310 P=2,443,822 (P=2,282,834) P=5,125,937

Capital expenditures P=59,715 P=21,299 P=5,375 P=88,017 P=118 P=– P=174,524 Depreciation and amortization 38,187 47,140 10,249 49,087 1,740 – 146,403 Noncash expenses other than


90,764

85

38,789

139,541

63,970

–

333,149

5. Cash and Cash Equivalents

2007 2006 Cash on hand and in banks P=483,862 P=279,035 Short-term deposits 201,871 276,299 P=685,733 P=555,334

Cash in banks earns interest at the respective bank deposit rates. Short-term investments are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term investment rates.

6. Accounts Receivable

2007 2006 Trade receivables P=1,308,380 P=1,372,256 Advances to a joint venture partner 113,049 – Advances to related parties (Note 27) 70,763 49,606 Other receivables 512,209 194,053 2,004,401 1,615,915 Less allowance for doubtful accounts 670,680 628,557 P=1,333,721 P=987,358

Trade receivables are noninterest-bearing and are generally on 30 to 60 days’ terms.


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7. Installment Contracts Receivables

2007 2006 Installment contracts receivable (ICR) (Notes 15

and 21)

P=823,549

P=886,909 Current portion of installment contracts receivable - net of

unearned interest income of P=45.727 million in 2007 and P=48.065 million in 2006

(778,921)

(761,184) Long-term portion - net of unearned interest income

of P=2.914 million in 2007 and P=0.911 million in 2006

P=44,628

P=125,725

The effective interest rates on ICR ranged from 9% to 12% in 2007 and 2006, respectively. OMP’s installment contracts receivables totaling P=47.3 million (share of the Group - P=23.7 million ) and P=303.4 million (share of the Group - P=151.7 million) as of December 31, 2007 and 2006, respectively, were assigned to Export and Industry Bank (EIB), stockholders and the Parent Company, to secure the loans obtained from EIB, and cash advances from OMP’s stockholders and the Parent Company (see Note 15). Philtown’s installment contracts receivables with total carrying value of P=455.35 million and P=511.42 million as of December 31, 2007 and 2006, respectively, were used to secure short-term loans obtained from local banks (see Note 15).

The fair value of long-term ICR that carries no interest at initial recognition can be estimated at present value

of the future cash payment, discounted using the prevailing interest rates from a similar instrument with similar credit rating. Accordingly, the ICR were discounted to reflect fair value. The accretion of interest income amounted to P=5.33 million and P=63.82 million in 2007 and 2006, respectively.

In 2007, Philtown executed a deed of assignment of receivables without recourse under which the Philtown

assigned a portion of the receivables arising from the pre-selling of condominium and residential units for sale from the Fairways Tower and Metropolitan Tower projects to Filipinas Investments Ltd. (FIL), an indirect subsidiary of Capmark Financial Group, Inc. The total cash proceeds from the assignment of receivables amounted to P=627.09 million, of which P=378.89 million pertain to existing installment contracts receivables that were sold without recourse. Philtown derecognized these receivables upon assignment and from which a loss amounting to P=58.51 million was recognized. The remaining portion of the proceeds amounting to P=248.21 million is treated as loans from FIL and measured at amortized cost of P=220.21 million as of December 31, 2007 (see Note 16). As of December 31, 2007, there was no substantial construction works done in the Metropolitan Tower project. The Company will amortize the said loan as revenues and the corresponding receivables are recognized on the units sold.

8. Inventories

2007 2006 Manufacturing At cost: Finished goods P=176,312 P=154,250 Goods in process 5,342 6,485

(Forward)


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2007 2006 Raw materials P=752,340 P=558,371 Spare parts and supplies 32,284 43,366 In transit 5,697 501 Real Estate At cost: Land held for sale and development 1,173,821 1,259,026 Condominium and residential units for sale

(Notes 15 and 21)

1,231,357

794,251 At NRV: Condominium and residential units for sale

(Notes 15 and 21)

51,970

252,610 Land held for future development - net of

allowance for impairment loss of P=64.344 million in 2007 and 2006

575,529

669,735 P=4,004,652 P=3,738,595

The cost of finished goods and raw materials at NRV amounted to P=185.56 million as of December 31, 2007

and 2006, respectively, and are fully provided for. Under the terms of the agreements covering trust receipts payable, certain raw materials and spare parts with carrying values of P=208.31 million and P=234.86 million as of December 31, 2007 and 2006, respectively have been released to the Group in trust for the banks. The Group is accountable to the banks for the value of the trusteed items or their sales proceeds.

Land held for future development stated at NRV represents Philtown’s parcels of land acquired from different sellers which are either covered by Tax Declaration or Transfer Certificate of Title or Original Certificate of Title still in the name of the sellers. The conversion from agricultural land to either industrial or residential land is still ongoing. These parcels of land are located mainly in Tanauan City and Sto. Tomas, Batangas. Total unpaid balance related to these parcels of land amounted to P=53.98 million and P=64.79 million as of December 31, 2007 and 2006, respectively, which are included under “Accounts payable and accrued liabilities” account in the consolidated balance sheets. Management and its internal legal counsel believe that they can convert the agricultural land to either industrial or residential land and they do not anticipate any problem in transferring the land titles to Philtown. The unpaid balance for the purchase of a parcel of land at Guadalupe Viejo, Makati City, the site of “Metropolitan Tower and Athletic Club” project amounted to P=16.51 million and P=20.94 million as of December 31, 2007 and 2006, respectively. The total cost of the land amounted to P=113.35 million. Allowance for impairment in value of land held for future development amounted to P=64.34 million as of December 31, 2007 and 2006. Land held for sale and development include costs of parcels of land at Xavierville Ave., Loyola Heights, Quezon City and Taft Avenue, Manila where the Asiana Quezon City and WH Taft Residences projects are located which amounted to P=60.00 million and P=110.12 million, respectively, and with outstanding payables to landowners amounting to P=34.00 million and P=52.32 million, respectively as of December 31, 2007 (see Note 17).


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Provision for impairment in value of condominium units of OMP and Philtown amounted to P=23.78 million in 2007, P=15.09 million in 2006 and P=21.99 million in 2005. As of December 31, 2006, OMP’s condominium units (including the related parking lots) with carrying value of P=220.48 million (share of the Group - P=110.24) (20 units) were assigned to the Parent Company and another stockholder of OMP to secure their outstanding cash advances to OMP (see Note 11). There was no assignment of units in 2007 and 2006.

9. Other Current Assets

2007 2006 Deposits on purchases P=106,993 P=55,472 Creditable withholding taxes 51,354 32,028 Current portion of receivable from Meralco - net of

deferred interest income of P=2,639 in 2007 and P=3,457 in 2006 (Note 14) 6,858 6,040

Financial assets at FVPL – 25,536 Prepaid expenses and other current assets - net

of allowance for probable losses of P=33,649 in 2007 and 2006

72,961 76,446

P=238,166 P=195,522

Financial assets at FVPL in 2006 represent investment in the bond fund of a local insurance company stated at fair value.

10. AFS Investments/Investments in Associates a. AFS Investments AFS investments as of December 31 stated at fair value consist of:

2007 2006 Investment in Swift preferred shares P=836,799 P=836,799 Marketable equity securities - quoted 152,612 124,043 P=989,411 P=960,842

Investment in Swift’s preferred shares have no voting rights. These are convertible to common shares

anytime at the ratio of 10 common shares for every preferred share held and are redeemable at the option of Swift. Accumulated impairment loss on the Swift preferred shares as of December 31, 2007 and 2006, recognized in 2004, amounted to P=555.66 million. As of December 31, 2007, the Parent Company has no plan of disposing this investment.

Marketable equity securities consist mainly of Swift’s common shares stated at fair value. Impairment

loss recognized amounted to P=14.23 million in 2005 (see Note 26). The Parent Company has neither control nor significant influence over Swift’s operations.


*SGVMC308120*

- 28 - b. Investments in Associates

2007 2006 Investments in associates - at equity: Acquisition cost P=327,679 P=327,679 Accumulated impairment loss (48,208) (48,208) 279,471 279,471 Accumulated equity in net earnings (losses): Balance at beginning of year (508) 2,904 Equity in net earnings (losses) (7,366) 7,346 Dividends received (10,556) (10,758) Balance at end of year (18,430) (508) P=261,041 P=278,963

The carrying value of certain investments in associates as of December 31, 2007 and 2006 exceeded the

underlying share in the net assets of the investees as of those dates by P=5.37 million. Impairment losses on the investment in associates pertaining to RFM-SPPI amounting to

P=52.91 million and P=5.00 million are shown in the 2007 and 2006 consolidated statements of income (see Note 26).

The condensed aggregate financial information of the associates as of December 31, 2007 and 2006 follows:

2007 2006 Total assets P=1,026,722 P=1,028,164 Total liabilities 467,606 423,541 Revenue 57,111 63,339 Net income (loss) (28,318) 9,705

11. Interests in Joint Ventures

Information about the Group’s joint ventures follows: OMP

OMP is a joint venture of Philtown (a wholly-owned subsidiary of the Parent Company) and EIB Realty, Inc. (EIBR), formerly Urbancorp Realty Developers, Inc. (URDI), sharing 50:50 interest for the construction and development of One McKinley Place, (the Project) in Fort Bonifacio, Makati City.

As required in the Memorandum of Agreement (MOA) signed by Philtown, OMP, EIB and URDI in May 2002, Philtown, its joint venture partner and the Parent Company infused additional advances to OMP to complete the Project through the direct purchase from OMP of residential condominium units and installment contracts receivable at the terms and conditions specified in the MOA. Also, if the initial cash infusion shall not be sufficient to complete the Project and after exhausting other third party project financing alternatives, the stockholders shall each simultaneously infuse additional amounts as may be necessary through a combined bulk purchase of units and installment contracts receivable from OMP on a 50:50 sharing.


*SGVMC308120*

- 29 -

After the completion of the Project, the MOA further provides that any remaining unsold residential condominium units, after full settlement of the Project financing loans, stockholders’ advances and other loans or obligations of OMP, shall be assigned to the stockholders on a 50:50 sharing (see Note 8).

Between April and May 2006, after capital infusion from several parties, the management of EIB was subsequently changed. Despite the transformation, the 50:50 joint venture between Philtown and EIBR remains the same.

On September 27, 2007, Philtown, EIB, and EIBR, with the conformity of AOCZ Investments 1 B.V. (AOCZ), and OMP entered into a MOA whereby the contribution of EIBR in the joint venture was reduced from P=150 million to P=115 million. They further agreed on the following: (a) that Philtown will remit to EIB the sum of P=35.7 million representing the balance of the amount applied as EIBR’s contribution to the joint venture; (b) for Philtown to takeover and be solely responsible for the total completion of the Project and the formal turnover of the residential units and parking slots; (c) for Philtown to continue to shoulder the applicable taxes for the transfer of residential and commercial units from Philtown to third party buyers until the ownership of all such units and parking slots have been transferred to the buyers; (d) for Philtown to remit to EIB all subsequent payments of buyers made through Philtown and/or Philtown, the receivables of which have already been assigned to EIB pursuant to the Receivables Financing Facility granted to Philtown; (e) for Philtown to continue assisting EIB in collecting from various buyers on the outstanding receivables assigned to it and; (f) for Philtown to pay AOCZ the sum of P=24.3 million representing the balance of Philtown’s receivables sold by EIB to AOCZ, which were not remitted by Philtown to EIB. The balance is payable within six months from the signing of this Agreement. As of December 31, 2007, Philtown and OMP have already paid the P=35.7 million as agreed in the 2007 MOA. URICI

URICI, a 50% joint venture of the Parent Company and Unilever Philippines, Inc. (ULP), is engaged in manufacturing, distributing, marketing, selling, importing, exporting and dealing in ice cream, ice cream desserts and ice cream novelties and similar food products. Based on the buy-out formula as stipulated in its shareholders’ agreement with its joint venture partner, the value of the Parent Company’s 50% ownership share interest in URICI is P=1,227.62 million as of December 31, 2007.

Summarized financial information of the joint ventures, showing the Group’s 50% share, follows:

2007 2006 OMP: Current assets P=154,034 P=390,829 Noncurrent assets 2,496 2,496 Current liabilities 399,856 604,255 Revenue 180,440 100,145 Cost and expenses 209,878 138,185 Net loss (32,400) (53,316)

(Forward)


*SGVMC308120*

- 30 -

2007 2006 URICI: Current assets P=365,467 P=330,999 Noncurrent assets 219,699 175,907 Current liabilities 442,815 351,330 Noncurrent liabilities 3,214 2,043 Revenue 1,332,872 1,130,551 Cost and expenses 1,212,073 974,713 Net income 73,900 93,791

12. Property, Plant and Equipment As of December 31, 2007:

Land Silos, Machinery Transportation Office Proportionate and Land Buildings and and and Delivery Furniture Share in Improvements Improvements Equipment Equipment and Fixtures Joint Ventures Total Cost At January 1 P=283,603 P=347,851 P=1,532,634 P=116,093 P=131,188 P=477,609 P=2,888,978 Additions (Note 19) – 9,336 55,802 18,215 5,881 56,029 145,263 Write-off/disposal – (1,700) (62,647) (7,243) (14,238) (46,120) (131,948) Reclassification (351) (4,073) (5,872) – – – (10,296) At December 31 283,252 351,414 1,519,917 127,065 122,831 487,518 2,891,997 Accumulated Depreciation and Amortization At January 1 9,209 157,868 830,609 97,373 99,556 328,712 1,523,327 Depreciation and Amortization 273 11,741 69,090 9,216 11,069 27,195 128,584 Write-off/disposal – – (17,070) (6,441) (12,692) (44,181) (80,384) At December 31 9,482 169,609 882,629 100,148 97,933 311,726 1,571,527 Accumulated Impairment Loss

–

–

220,310

–

–

–

220,310

Net Book Values at December 31

P=273,770

P=181,805

P=416,978

P=26,917

P=24,898

P=175,792

P=1,100,160

As of December 31, 2006:

Land Silos, Machinery Transportation Office Proportionate and Land Buildings and and and Delivery Furniture Share in Improvements Improvements Equipment Equipment and Fixtures Joint Ventures Total Cost At January 1 P=283,603 P=322,011 P=1,498,331 P=105,901 P=130,157 P=444,274 P=2,784,277 Additions (Note 19) – 26,122 51,761 12,729 2,048 34,376 127,036 Write-off/disposal – (282) (17,458) (2,537) (1,017) (1,041) (22,335) At December 31 283,603 347,851 1,532,634 116,093 131,188 477,609 2,888,978

Accumulated Depreciation and Amortization At January 1 8,725 146,384 772,905 93,615 89,738 299,594 1,410,961 Depreciation and Amortization 484 11,766 73,528 6,295 10,835 29,118 132,026 Write-off/disposal – (282) (15,824) (2,537) (1,017) – (19,660) At December 31 9,209 157,868 830,609 97,373 99,556 328,712 1,523,327 Accumulated Impairment Loss

–

–

220,310

–

–

–

220,310

Net Book Values at December 31

P=274,394

P=189,983

P=481,715

P=18,720

P=31,632

P=148,897

P=1,145,341

Property, plant and equipment include machinery and equipment with net carrying amount of

P=36.96 million as of December 31, 2007 and P=81.51 million as of December 31, 2006 where the Group is a lessee under finance leases (see Note 19).


*SGVMC308120*

- 31 - In addition, machinery and equipment purchased on installment included under property, plant and

equipment amounted to P=16.44 million as of December 31, 2007 and P=28.49 million as of December 31, 2006 (see Note 19).

Property, plant and equipment with carrying value of P=490.00 million in 2007 and

P=478.71 million in 2006 were used as collateral for the Group’s various obligations (see Notes 15 and 21).

13. Investment Properties


Land

Building and Improvements

Total

Cost Beginning balances P=215,215 P=101,555 P=316,770 Additions – 3,765 3,765 Disposals (3,475) (52,687) (56,162) Ending balances 211,740 52,633 264,373 Accumulated Depreciation Beginning balances – 67,302 67,302 Depreciation – 4,588 4,588 Disposals – (45,518) (45,518) Ending balances – 26,372 26,372 Net Book Values P=211,740 P=26,261 P=238,001


Land

Building and Improvements

Total

Cost Beginning balances P=215,215 P=101,368 P=316,583 Additions – 187 187 Ending balance 215,215 101,555 316,770 Accumulated Depreciation Beginning balances – 62,424 62,424 Depreciation – 4,878 4,878 Ending balances – 67,302 67,302 Net Book Values P=215,215 P=34,253 P=249,468

Investment properties are leased out to third parties and related parties at different rates, generally for one to two years, renewable at the option of both parties. Rental income from investment properties amounted to P=27.71 million in 2007, P=17.10 million in 2006 and P=19.94 million in 2005. Outstanding non-refundable deposits included as part of “Customers and Tenants Deposits” in the consolidated balance sheets, amounted to P=21.48 million and P=6.16 million as of December 31, 2007 and 2006, respectively.


*SGVMC308120*

- 32 -

On December 28, 2007, Philtown sold certain parcels of land together with the RFM Corporate Center on which it is located to Invest Asia Corporation (Invest Asia), a related party, for the consideration of P=304.54 million (inclusive of VAT), which was based on the appraised value as of July 19, 2007 as determined by an independent appraiser. The resulting income from the sale of investment property amounted to P=226.79 million, which is net of the carrying value of the parcel of land and building of P=10.64 million and gain on sale of property and equipment amounted to P=32.93 million, which is net of the carrying value of P=1.55 million (see Note 10). On the date of sale, the Company received P=80.00 million as downpayment and the balance to be received in five equal annual installments of P=59.23 million. The balance of P=224.54 million bears interest at 10% per annum. The receivable is guaranteed by the application of the rental income to be derived by Invest Asia from the property as part of the payment of the annual amortization. The fair value of investment properties amounted to P=356.40 million and P=406.53 million as of December 31, 2007 and 2006, respectively. The fair value of investment properties were determined by an independent professionally qualified appraiser.

14. Other Noncurrent Assets

2007 2006 Goodwill P=190,562 P=190,562 Receivable from Meralco - net of current portion

of P=6,857 in 2007 and P=6,040 in 2006 (Note 9) 16,642 23,499 Interest-bearing refundable deposits from Meralco 4,362 4,117 Others 150,029 120,574 P=361,595 P=338,752

In 2006, the Parent Company received refunds of previous billings from Meralco under

Phase IV of Meralco’s refund scheme. The 2006 refund of P=10.47 million will be recovered through receipt of quarterly post-dated checks up to

December 2010. The Parent Company recognized a receivable from Meralco of P=8.64 million, net of deferred interest income of P=1.83 million (credited to “Other income” in the 2006 consolidated statement of income) in June 2006.

The balance of the receivable from the Meralco refund scheme as of December 31 follows:

2007 2006 Nominal amount of receivable P=28,492 P=37,989 Deferred interest income 4,992 8,450 23,500 29,539 Less current portion (Note 9) 6,858 6,040 P=16,642 P=23,499


*SGVMC308120*

- 33 - 15. Bank Loans

This account represents short-term loans from local banks as follows:

2007 2006 Parent Company Peso-denominated loans with interest rate equivalent to 1-

day Philippine Dealing System Treasury Fixing (PDST-F) plus spread of 2.5%, collateralized by the Parent Company’s real estate and Mortgage Trust Indentures (MTI) (Note 21)

P=50,000

P=30,000

Philtown Peso-denominated loans from local banks with interest

ranging from 9.25% to 14.5% per annum; secured by installment contracts receivable and MTI (Notes 7 and 21)

455,220 510,659

Proportionate share in loans of joint ventures:

OMP Peso-denominated loans from EIB with interest ranging

from 10% to 14% per annum; secured by installment contracts receivable (Note 7)

23,964 81,952

URICI Unsecured short-term loans from local banks and lending

investors bearing effective annual interest rate within the range of 5.6% to 6.6% in 2007 and 5.20% in 2006

146,250 101,000

P=675,434 P=723,611 Interest capitalized to projects amounted to P=57.20 million in 2007 and P=71.60 million in 2006. 16. Loans from Filipinas Investments Ltd.

In 2007, Philtown together with FIL executed a deed of assignment of receivables without recourse with August 31, 2007 as the assignment’s effective date. Under this deed of assignment, Philtown assigned to FIL portion of the contracts to sell arising from the pre-selling of residential condominium units with parking units at the Metropolitan Tower and Athletic Club Project to FIL. The loans are expected to be fully amortized in December 2010, which is the expected completion of the Metropolitan Tower Project. The total cash proceeds amounting to P=248.21 million were treated as loans from FIL. These loans were discounted at the date of grant using 9% discount rate. The difference between the nominal amount and the fair value of the loans at date of grant amounting to P=33.98 million was recognized as interest income in the 2007 statement of income. Interest expense in the statement of income includes accretion of interest amounting to P=5.98 million in 2007. The current and noncurrent portion of the loan amounted to P=50.64 million and P=169.57 million, respectively, as of December 31, 2007.

- 34 -

17. Accounts Payable and Accrued Liabilities

2007 2006 Trade payables P=857,805 P=686,593 Accrued liabilities 423,607 573,703


*SGVMC308120*

Accrued importation 260,859 173,601 Payable for land purchases (Note 8) 189,609 85,727 Retention payable 95,099 47,281 Accrued interest 47,920 55,009 Accrued payroll 20,053 25,264 Income tax payable 9,316 18,885 Subscriptions payable 2,258 2,258 Other payables 218,104 213,609 P=2,124,630 P=1,881,930

18. Customers’ and Tenants’ Deposits

This account consists of deposits from customers for the “Fairways Tower” project, a high-rise condominium located in Fort Bonifacio, Taguig City, “Metropolitan Tower and Athletic Club” project located at Guadalupe Viejo, Makati City and “W.H. Taft Residences” (W.H. Taft) project located along Taft Avenue, Manila. The remaining deposit from customers for Fairways Tower (FWT) pertains to the collection not reaching 25% of the total contract price. As of December 31, 2007, there was no substantial construction works done in the Metropolitan Tower and Athletic Club and W.H. Taft Residences projects.

19. Long-term Obligations This account consists of obligations under:

2007 2006 Finance leases P=40,517 P=96,238 Installment contracts 16,769 32,237 Other long-term payables – 44,654 57,286 173,129 Less current portion 8,086 57,959 P=49,200 P=115,170

a. Machinery and equipment under finance lease arrangements, shown as part of “Property, plant and

equipment” account in the consolidated balance sheets, follows:

2007 2006 Cost P=49,557 P=100,788 Less accumulated depreciation 12,600 19,283 P=36,957 P=81,505


*SGVMC308120*

- 35 - The aggregate future minimum payments under capital leases are as follows:

2007 2006 Within one year P=10,289 P=57,265 Over one year up to 2014 43,763 97,178 Total minimum lease obligations 54,052 154,443 Less amounts representing interest 13,535 58,205 Present value of minimum lease payments 40,517 96,238 Less current portion 6,288 23,615 Long-term portion P=34,229 P=72,623

b. Machinery and equipment under installment purchase arrangements, shown as part of “Property, plant

and equipment” account in the consolidated balance sheets, follows:

2007 2006 Cost P=19,250 P=34,038 Less accumulated depreciation 2,809 5,547 P=16,441 P=28,491

The total original obligation of the Group amounting to P=57.76 million is noninterest- bearing and is

payable in monthly installments until 2014. As of December 31, 2007 and 2006, the balance of the outstanding obligation at amortized cost using the effective interest rate of 11.44% per year follows:

2007 2006 Within one year P=1,436 P=5,266 Over one year up to 2014 15,333 26,971 P=16,769 P=32,237

Discount on the long-term obligations under the installment contract amounted to

P=8.96 million and P=14.76 million as of December 31, 2007 and 2006, respectively, net of discount amortization of P=20.33 million in 2007 and P=8.96 million in 2006.

c. Other long-term payables represent the present value of the P=121.75 million total cost of labor case

settlement of the meat division employees based on the compromise settlement agreed among the Parent Company, Swift and the meat division employees in February 2006. The amount is payable as follows: (a) lump-sum payment of P=49.78 million payable on March 1, 2006; and (b) the balance of P=71.97 million payable in 27 equal monthly installments from April 1, 2006 to July 1, 2008. The balance of the long-term payable amounting to P=49.74 million as of December 31, 2006 was transferred by the Parent Company to CMPC in January 2007, as agreed by both parties. As of December 31, 2007, the whole amount of the compromise agreement has been paid out to the respective employees. A release waiver and quit claim has been executed by each employee to release CMPC from any liability.


*SGVMC308120*

- 36 - 20. Provisions

2007 2006 Balance at beginning of year P=15,725 P=18,124 Used during the year (796) (2,399) Balance at end of year P=14,929 P=15,725

A provision is recognized for expected claims against the Group arising from the ordinary course of business.

21. Long-term Debt

The details of the long-term debt are as follows:

Interest rates Repayment terms 2007 2006

Parent Company

Philippine Veterans Bank

90-day PDST-F plus spread of 2.5%

Payable in full in December 2012.

P=139,778 P=–

ULP 8.99% per annum Payable out of the Parent Company’s share of future dividends declared by URICI.

136,919 234,279

Equitable PCI-Bank, Inc. (EPCIB)

91-day T-bill plus spread of 2.5%

Payable in 17 equal quarterly installments of P=11,582 to starting in September 2006.

127,406 173,735

May Bank Philippines

3-month PDST-F plus spread of 2.5%

Payable in equal quarterly amortization of 5 years, to start in November 2008.

100,000 –

United Coconut Planters Bank

91-day T-bill plus spread of 2.5%

Payable in 17 equal quarterly installments of P=7,671 starting in October 2006.

92,047 122,730

Banco De Oro

90-day PDST-F of 6.885% Payable in full in December 2012.

54,000 –

Bank of the Philippine Islands

90-day T-bill plus spread of 2.5%, payable quarterly

Payable in 4 equal quarterly installments of P=2,250 over one year to start after one year grace period from August 2005, and 13 equal quarterly installments of P=6,231 over three years thereafter.

43,615 68,538

Philippine Bank of Communications (PBCom) - Trust Group


Payable in 16 equal quarterly installments of P=3,417 to start in January 2007.

41,006 54,675


*SGVMC308120*

- 37 -

Interest rates Repayment terms 2007 2006

EPCIB


Payable in 36 equal monthly amortization of P=1.5 million starting February 2006 with the remaining balances to be paid in lumpsum in January 2009.

P=27,685

P=45,684

BDO

11.67% per annum Payable in 36 monthly amortization starting in June 2007.

1,121 –

Philtown

Land Bank of the Philippines (LBP) (restructured)

Interest equivalent to LBP prevailing lending rate subject to monthly repricing

Payable monthly until May 31, 2010 based on the schedule of contracts to sell assigned to LBP.

124,109 179,280

United Coconut Planters Life Assurance Corporation (Cocolife)

12% per annum. Payable in equal monthly amortization of: P=500 from July 5, 2006 up to December 31, 2008; P=1,167 from October 29, 2006 up to September 29, 2009; P=1,111 from December 9, 2006 up to November 9, 2009; and P=842 from December 9, 2007 to November 9, 2010.

92,883 93,456

PBCom (restructured)

14% per annum for the first year subject to annual repricing

Payable in monthly amortization of P=1,340 for the first six months and in 18 quarterly amortization of P=4,030 thereafter.

48,309 64,502

1,028,878 1,036,879 Less current portion 246,385 323,193 Noncurrent portion P=782,493 P=713,686

Parent Company The loan from ULP is collateralized by the equivalent number of shares of the Parent Company’s investment in URICI with a carrying value of P=290.87 million as of December 31, 2007 and 2006.

In accordance with the loan agreements, the Parent Company is restricted from performing certain corporate acts without the prior consent or approval of the creditors, the more significant of which relate to entering into merger or consolidation, acting as guarantor or surety of obligation and acquiring treasury stock. The Parent Company is also required to maintain certain financial ratios (based on the consolidated financial statements). As of December 31, 2007 and 2006, the Parent Company is in compliance with the terms and conditions of the loan agreements with these banks.


*SGVMC308120*

- 38 -

The Parent Company (as Mortgagor) and EPCIB (as Trustee) based on the loan covenants with EPCIB and PBCOM have a Collateral Trust Agreement (CTA) providing a collateral pool, which includes certain property, plant and equipment of the Group for its long-term and short-term borrowings (see Note 12). The Trustee’s annual report for the years ended December 31, 2007 and 2006 covers the following:

2007 2006 Fair value of the collateral pool P=2,150,601 P=2,088,845 Outstanding loan secured by the CTA 1,120,521 923,407 Remaining loanable amount 29,479 254,474

The Parent Company (Mortgagor/Borrower) and Banco de Oro Universal

Bank-Trust Banking Group (Trustee) entered into a Mortgage Trust Indenture (MTI) providing a collateral pool for the Parent Company’s obligations consisting of a parcel of land and building (warehouse). A total of P=143.62 million and P=68.54 million loan was secured by the MTI as of December 31, 2007 and 2006, respectively. Total fair market value of the collateral pool as of November 23, 2006 amounted to P=220.02 million.

Philtown a. The long-term debt was originally obtained from LBP in 2001 with maturity

date on February 24, 2005 which was restructured on June 7, 2002.

On May 31, 2005, LBP approved the restructuring of the P=239.25

million loan outstanding as of December 31, 2004. Under the new loan agreement, the terms of payment of the remaining balance of the loan was changed to five years from May 31, 2005 to May 31, 2010. The principal is payable monthly based on the schedule of contract to sell (CTS) up to an aggregate amount of P=301.00 million as stated in the assignment of CTS assigned to LBP. The proceeds from the said CTS will be the source of repayment of the restructured loan.

The loan is secured by MTI with another local bank. Properties included in the collateral pool consist of land held for sale and development and investment property with carrying value of P=570.7 million and P=581.3 million in 2007 and 2006, respectively (see Notes 8 and 13).

b. In 2006, a three-year loan was obtained from Cocolife amounting to P=100

million, released in three drawdowns: P=18.00 million on June 5, 2006; P=42.00 million on September 29, 2006; and P=40.00 million on November 9, 2006, to finance its ongoing projects. The loan is collateralized by the MTI mentioned above. The loans are payable in 36 monthly installments.

c. The three-year term loan obtained from PBCom is also covered by the MTI

previously mentioned. The terms of the loan prior to April 5, 2006 follows: principal amount is payable in 10 equal quarterly amortizations of P=7.09 million starting February 7, 2005 up to May 7, 2007. Interest is based on a 91-day


*SGVMC308120*

Treasury bill rate plus a spread of 4% per year, subject to quarterly repricing and payable quarterly in arrears.


*SGVMC308120*

- 39 - On April 5, 2006, PBCom approved the restructuring of the aforementioned loan. The restructured loan has a term of five years from January 2, 2006 to January 3, 2011. The principal amount is payable in monthly installments amounting to P=1.34 million for the first six months and P=4.03 million in 18 quarterly installments.

22. Changes in Equity (Refer to page 40 for the Changes in Equity)

Capital Stock The details of the Parent Company’s capital stock follows:

Number of Shares 2007 2006 Preferred stock, 10% cumulative and convertible -

P=1 par value Authorized

Balance at beginning of year 300,000,000 300,000,000 Conversion to common stock (45,575,527) –

Balance at end of year 254,424,473 300,000,000

Common stock - P=1 par value Authorized

Balance at beginning of year 2,350,000,000 2,350,000,000 Result of change in par value 2,350,000,000 – Conversion to common stock 45,575,527 –

Balance at end of year 4,745,575,527 2,350,000,000

Issued and outstanding: Balance at beginning of year 1,575,850,330 1,554,754,799 Sale of treasury shares 4,351,603 21,095,531 Result of change in par value 1,580,201,933 – Balance at end of year 3,160,403,866 1,575,850,330

As of December 31, 2007 and 2006, the Parent Company has 767,310,502

and 776,013,308 common shares, respectively, held in treasury.

On June 28, 2007, the stockholders and the BOD approved the change in the par value of the common shares of the Parent Company from P=2 to P=1 resulting to an increase the authorized number of common stocks from 2.50 billion to 5.00 billion shares, and the conversion of 45,575,527 preferred shares to common shares. The change in par value of the common shares and the conversion of preferred shares to common shares were approved by the SEC on September 11, 2007. All per share and share amount in the consolidated financial statements have been adjusted to reflect the change in par value of the common shares of the Parent Company.


*SGVMC308120*

- 40 - 22. Changes in Equity Attributable to Equity Holders of the Parent Cumulative Actuarial Gains Capital Net Unrealized (Losses) on Share-Based Capital In Excess Gains on AFS Defined Benefit Retained Compensation Treasury Minority Total Stock of Par Value Financial Assets Plan Earnings (Note 29) Stock Total Interest Equity

BALANCES AT JANUARY 1, 2005 P=3,927,714 P=1,053,878 P=27,611 (P=4,420) P=11,745 (P=1,056,072) P=3,960,456 P=27,555 P=3,988,011 Net income for the year – – – 569 228,487 – – 229,056 (14,794) 214,262 Net unrealized gain on AFS investments – – 5,189 – – – – 5,189 – 5,189 Total recognized income (loss) for the year – – 5,189 569 228,487 – – 234,245 (14,794) 219,451 Dividends of minority interest – – – – – – – – (3,320) (3,320) Net movement in treasury stock – – – – – – (1,092) (1,092) – (1,092) BALANCES AT DECEMBER 31, 2005 3,927,714 1,053,878 32,800 (3,851) 240,232 – (1,057,164) 4,193,609 9,441 4,203,050 Net income for the year – – – – 205,111 – – 205,111 (2,554) 202,557 Net unrealized gain on AFS investments – – 43,909 – – – – 43,909 – 43,909 Actuarial gain for the year (Note 28) – – – 4,424 – – – 4,424 – 4,424 Total recognized income (loss) for the year – – 43,909 4,424 205,111 – – 253,444 (2,554) 250,890 Share-based compensation plan in accordance with PFRS 2 – – – – – 2,937 – 2,937 – 2,937 Dividends of minority interest – – – – – – – – (2,175) (2,175) Net movement during the year – (34,018) – – – – 50,767 16,749 (406) 16,343

BALANCES AT DECEMBER 31, 2006 3,927,714 1,019,860 76,709 573 445,343 2,937 (1,006,397) 4,466,739 4,306 4,471,045 Net income for the year – – – – 232,199 – – 232,199 2,119 234,318 Net unrealized gain on AFS investments – – 33,469 – – – – 33,469 – 33,469 Actuarial gain for the year (Note 28) – – – (1,603) – – – (1,603) – (1,603) Total recognized income for the year – – 33,469 (1,603) 232,199 – – 264,065 2,119 266,184 Share-based compensation plan in accordance with PFRS 2 – – – – – 505 – 505 – 505 Dividends of minority interest – – – – – – – – (3,585) (3,585) Net movement during the year – (6,763) – – – – 11,184 4,421 – 4,421

BALANCES AT DECEMBER 31, 2007 P=3,927,714 P=1,013,097 P=110,178 (P=1,030) P=677,542 P=3,442 (P=995,213) P=4,735,730 P=2,840 P=4,738,570

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- 41 -

Stock Grants The Parent Company has a stock purchase plan covering its officers through stock grants from the Parent Company’s treasury shares. The grant vests immediately at grant date and is exercised at grant date. There is no vesting requirement. The stock grant was made for the purpose of motivating further and aligning more closely the interest of management with that of its officers by way of stock grants. On April 6, 2005, the Parent Company’s BOD approved the grant of 9,348,101 of its treasury shares to the officers of the Parent Company at an issue price of P=0.98 per share, payable in cash. On January 31, 2006, the BOD approved the grant of an additional 6,831,050 of the Parent Company’s treasury shares to the officers at the same issue price of P=0.98 per share, payable in cash, due to the fluctuation of the average market price of the RFM common shares over the last 10 trading days of the second, third and fourth quarters of 2005 and the additional of two officers who became qualified to be covered by the stock grant.

The BOD approved on August 30, 2006 the second tranche of the stock grant to its officers totalling 4,916,380 treasury shares at an issue price of P=0.70 per share, and on January 31, 2007 the last tranche of stock grant to its officers totalling 4,351,603 treasury shares with an issue price of P=1.02, payable in cash. The treasury shares were transferred from the Parent Company to the officers by way of block sale at the PSE at the transfer price, which is the trading price of the Parent Company’s common shares on the date of the sale. Retained Earnings The Parent Company’s retained earnings as of December 31, 2007 and 2006 is restricted in the amount of P=991.76 million and P=1.00 billion, respectively, representing the cost of shares held in treasury. Also, any undistributed equity in net earnings of subsidiaries, joint ventures and associates that is included in retained earnings, will only be available for declaration as dividends when these are actually received.

23. Direct Costs and Expenses

2007 2006 2005 Manufacturing (Cost of goods sold):

Raw materials used P=3,664,866 P=2,991,397 P=3,255,623 Personnel costs (Notes 26 and 28)

238,073

222,019

216,110

Utilities 173,592 168,159 146,421 Outside services 147,490 149,569 81,291 Repairs and maintenance 86,235 59,132 33,023 Depreciation and amortization (Note 26)

82,677

94,365

97,701

Rental 23,190 18,243 42,335 Other expenses 147,414 146,457 122,713 4,563,537 3,849,341 3,995,217

(Forward)



- 42 -

2007 2006 2005 Real estate: Cost of real estate sold P=847,315 P=810,287 P=462,700 Depreciation and amortization (Note 26)

4,588

4,878

5,573

Impairment loss on condominium units (Note 8)

1,936

15,084

9,489 Other expenses 2,070 9,379 9,103 855,909 839,628 486,865 Services and others: Outside services 10,942 15,106 13,711 Depreciation and amortization (Note 26)

413

729

729

Other expenses 20,795 21,760 20,360 32,150 37,595 34,800 P=5,451,596 P=4,726,564 P=4,516,882

24. Selling and Marketing Expenses

2007 2006 2005 Advertisements P=179,850 P=171,311 P=135,267 Personnel costs (Notes 26 and 28) 174,350 167,885 170,310 Transportation and travel 125,963 107,830 71,713 Outside services 123,239 113,319 96,200 Freight and handling 66,096 55,399 59,977 Rental 58,733 49,322 52,850 Provision for doubtful accounts 35,002 6,140 27,388 Depreciation and amortization (Note

26) 18,819 20,996 26,734 Other expenses 213,602 186,850 167,562 P=995,654 P=879,052 P=808,001

25. General and Administrative Expenses

2007 2006 2005 Personnel costs (Notes 26 and 28) P=130,494 P=91,379 P=84,073 Taxes and licenses 39,627 17,438 18,154 Outside services 30,002 18,839 47,521 Depreciation and amortization (Note

26)

26,675

15,936

15,666 Impairment losses (Note 12) 23,230 39,792 49,728 Other expenses 165,649 111,754 149,475 P=415,677 P=295,138 P=364,617



- 43 - 26. Additional Information on Income and Expense Accounts

Personnel Costs

2007 2006 2005 Salaries and wages P=381,107 P=460,680 P=434,117 Pension benefits costs (see Note 28) 18,028 5,740 22,482 Other employee benefits 143,782 14,863 13,894 P=542,917 P=481,283 P=470,493

The above amounts are distributed as follows:

2007 2006 2005 Direct costs and expenses (Note 23) P=238,073 P=222,019 P=216,110 Selling expenses (Note 24) 174,350 167,885 170,310 Administrative expenses (Note 25) 130,494 91,379 84,073 P=542,917 P=481,283 P=470,493

Depreciation and Amortization

2007 2006 2005

Direct costs and expenses (Note 23):

Property, plant and equipment P=83,090 P=95,094 P=98,430 Investment properties 4,588 4,878 5,573 87,678 99,972 104,003 Selling and marketing expenses - Property, plant and equipment (Note 24) 18,819 20,996 26,734 General and administrative expenses - Property, plant and equipment (Note 25) 26,675 15,936 15,666 P=133,172 P=136,904 P=146,403

Interest and Financing Income

2007 2006 2005 Interest on cash and cash equivalents and investments P=30,108 P=66,088 P=55,803 Interest income on accretion of ICR and other long-term receivables 58,824 96,123 89,126 P=88,932 P=162,211 P=144,929



- 44 - Interest Expense and Financing Charges

2007 2006 2005 Interest expense on loans and other borrowings

P=139,933

P=195,029

P=227,123

Interest expense on accretion of long-term advances from stockholders

7,621

36,140

15,517 P=147,554 P=231,169 P=242,640

Other Income (Charges) - Net

2007 2006 2005

Gain on sale of investment properties and property and equipment P=259,722 P=– P=– Loss on sale of installment contracts receivable (58,512) – – Impairment loss on investment in an associate (Note 10) (29,681) (5,000) – Foreign exchange gain - net 23,012 5,896 8,457 Income from toll processing 22,523 – – Dividend income 9,269 1,802 1,539 Equity in net earnings (losses) of associates (Note 10) (7,366) 7,346 (5,618) Gain on sale of investments in shares of stock (Note 27) 2,017 – – Income from rental of silos 1,224 – – Reversal of allowance for inventory obsolescence and doubtful accounts – 10,099 – Income from Meralco refund (Note 14) – 8,647 – Reversal of accruals – 8,000 – Impairment loss on AFS investment (Note 10) – – (14,232) Other income 25,895 9,162 8,812

P=248,103 P=45,952 (P=1,042)



- 45 - 27. Related Party Transactions Significant related party transactions are as follows: Transactions within the Group a. Sales and purchases of products and services to/from subsidiaries:

Sales Purchases 2007 2006 2005 2007 2006 2005

Parent Company P=83,011 P=66,073 P=66,418 P=173,296 P=143,154 P=113,667

Interbake Commissary Corporation

149,989 118,939 86,175 83,011 66,073 66,418

Rizal Lighterage Corporation

23,307 24,215 27,492 – – –

b. Availments/extensions of both interest-bearing and noninterest-bearing cash advances mainly for working

capital purposes and investment activities from/to subsidiaries and other related parties with no fixed repayment terms. Advances to a subsidiary are subject to annual interest of 9% on the monthly outstanding balance. Total interest earned by the Parent Company amounted to P=8.00 million in 2007, P=4.84 million in 2006 and P=7.20 million in 2005.

c. Distributorship services provided by the Parent Company to URICI, a joint venture entity, for the export of

frozen dairy dessert/mellorine. URICI pays service fees equivalent to 7% of the total net sales value of goods distributed. Service fees amounted to P=5.89 million, P=6.36 million and P=4.96 million for the years ended December 31, 2007, 2006 and 2005, respectively.

d. The Parent Company and Swift entered into a Memorandum of Agreement

(MOA) in 2003 for the Parent Company to purchase Swift’s meat manufacturing plant (Plant) in Cabuyao, Laguna. The MOA also provided that the Parent Company will shoulder the cost of the settlement of the ongoing labor case of the striking plant employees. In 2004, CMPC acquired the Plant after the Parent Company assigned its right to acquire the Plant to CMPC.

On November 25, 2004, Swift transferred its Meat Division to the Parent Company through CMPC

together with the obligation on the settlement of the striking Meat Division’s employees. In February 2006, the Parent Company, Swift and the striking labor union entered into a compromise settlement of the labor case totaling P=121.75 million. Based on the evaluation of the Parent Company at that time, the Parent Company accrued P=50.00 million as its estimate for the labor cost. In accordance with the provision of the MOA, RFM billed CMPC the amount of P=71.97 million accounted for in the Parent Company’s books as follows: P=64.77 million representing the present value of the amount payable to the meat division employees; P=44.70 million receivable from CMPC equivalent to the present value of the receivable; and P=27.77 million investment in CMPC equivalent to the amount of the discount on the receivable (see Note 19c). In January 2007, the Parent Company transferred to CMPC the remaining balance of the settlement liability amounting to P=44.65 million as agreed by both parties. The balance of the liability was paid in full by the end of 2007.

e. Management services of the Parent Company to RIBI, a majority-owned subsidiary wherein RIBI pays the

Parent Company a yearly management fee equivalent to 5% of income before tax or a fixed amount based on the level of net sales, whichever is higher. Management fee for the years ended December 31, 2007, 2006 and 2005 amounted to P=0.50 million each year.



- 46 -

f. Lease of certain warehouse and office spaces by the Parent Company and other subsidiaries from Philtown with automatic renewal every year unless terminated by the lessee. Rental income of Philtown amounted to P=14.48 million in 2007, P=9.28 million in 2006 and P=5.50 million in 2005.

g. Noninterest-bearing cash advances received by OMP from Philtown and the

Parent Company. Net advances availed by OMP in 2007 and 2006 amounted to P=5.16 million and P=27.07 million, respectively. Outstanding payable by OMP to Philtown and the Parent Company amounted to P=426.81 million and P=421.65 million as of December 31, 2007 and 2006, respectively. After the eliminations upon consolidation, Philtown’s advances to OMP amounted to P=113,049 as of December 31, 2007.

h. Sale of certain parcels of land and building and improvements to Invest Asia (see Note 13).

Material intercompany transactions and outstanding balances of the Group were eliminated in the consolidated financial statements. Transactions with Other Related Parties Advances to related parties, mainly to RFM-SPPI, an associate, amounted to P=51.61 million and P=49.61 million (included under “Accounts Receivable”) as of December 31, 2007 and 2006.

Advances to other related companies with full valuation allowance

(also included under “Other Noncurrent Assets”) represent the receivables from Asia Food Franchising Corporation amounting to P=662.33 million and Rolling Pin, Inc. amounting to P=127.40 million, totaling to P=789.73 million in both years, and from other related parties amounting P=56.57 million and P=48.34 million in 2007 and 2006, respectively.

Advances from other related companies consist of:

2007 2006 Current: Philtown stockholders P=326,342 P=287,149 Proportionate share in advances from related

companies of joint ventures – 2,782 Others 35,351 10,059 361,693 299,990 Noncurrent: Invest Asia (Parent Company stockholder) – 12,689 P=361,693 P=312,679

The advances from Philtown stockholders are payable on demand and are subject to 20% interest per year.



- 47 -

Compensation of key management personnel of the Group by benefit type follows:

2007 2006 2005 Salaries and other short-term benefits

P=77,149

P=44,870

P=36,493

Pension benefits cost 6,751 8,540 7,180 Share in share-based compensation

3,669

3,857

–

P=87,569 P=57,267 P=43,673

28. Pension Benefits

The Parent Company and certain subsidiaries have funded, noncontributory defined benefit retirement plans (the Plans) covering substantially all permanent employees. a. Pension Benefits Costs

The components of pension benefits costs recognized in the consolidated statements of income for the years

ended December 31 are as follows:

2007 2006 2005 Current service cost P=15,454 P=10,979 P=7,111 Interest cost on benefit obligation

17,723

21,328

23,058

Expected return on plan assets (15,149) (10,670) (7,687) Curtailment gain – (15,897) – Pension benefits costs P=18,028 P=5,740 P=22,482

Curtailment gain refers to the decrease in defined benefit obligation due to decrease in number of

employees covered by the Plans. In 2006, the Parent Company retrenched 118 employees, the retirement pay of which were paid directly by the Parent Company.

b. Pension Obligations The details of the net pension obligations and the amounts recognized in the consolidated balance sheets as

of December 31, 2007 and 2006 are as follows:

2006 Defined benefit obligations P=243,942 P=212,891Fair value of plan assets (168,213) (134,363)Net pension obligations P=75,729 P=78,528

Changes in the present value of the defined benefit obligation are as follows:

2007 2006 Defined benefit obligation, January 1 P=212,891 P=191,889 Current service cost 15,454 10,979 Interest cost 17,723 21,328

(Forward)



- 48 -

2007 2006 Actuarial loss (gain): Due to change in assumptions P=3,375 P=15,726 Due to experience adjustment (3,306) (9,728) Benefits paid (2,195) (17,303) Defined benefit obligation, December 31 P=243,942 P=212,891

Changes in the fair value of plan assets are as follows: 2007 2006 Fair value of plan assets, January 1 P=134,363 P=94,175 Expected return on plan assets 15,149 10,670 Contributions 21,576 21,215 Benefits paid (477) (1,357) Actuarial gain (loss) for the year: Due to change in assumptions (2,398) 7,937 Due to experience adjustment – 1,723 Fair value of plan assets, December 31 P=168,213 P=134,363

Categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2007 2006 Cash and cash equivalents 0.03% 1.18% Loans and receivables 1.9% 11.52% Other receivables 1.28% 2.06% Investments in bonds 77.63% 62.26% Investments in debt instruments 19.16% 22.98%

The overall expected return on the plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled. There have been no significant changes in the expected rate of return on plan assets. The principal assumptions used in determining pension obligations for the Group’s plan are as follows:

January 1 2007 Discount rate per annum 8% 10% Expected annual rate of return on plan assets 10% 11% Future annual increase in salary 7% 7%

Actuarial valuation is made at least every three years. Annual contribution to the retirement plan consists of a payment to cover the current service cost for the year plus payment toward funding the actuarial accrued liability.



- 49 - 29. Share-Based Compensation Plan

URICI has the following share-based compensation plan, wherein key management of URICI are participating in the following stock options and purchase plans of Unilever NV, URICI’s ultimate parent company:

Executive Option Plan The plan was introduced in 2005 to reward key employees of URICI of Unilever NV shares for their contribution to the enhancement of URICI’s longer term future and their commitment to URICI over a sustained period. The grant is dependent on the performance of URICI and the individual. The plan vests for a period of three years.

Under this plan, options are granted to key employees on a discretionary basis. The exercise price is the market price at the date of grant. Since the introduction of Unilever’s global performance share plan in 2005, it is the intention to make no further grants under this plan except for a few premium option grants which resulted from prior commitments.

Global Performance Share Plan (GPSP) The GPSP was introduced in 2005. Under this plan, managers can be awarded conditional shares which will vest three years later at a level between 0% and 150% (for middle management) or 200% (for higher executives) depending on the achievement of set targets for underlying sales growth and free cash flow over the three year performance period. The amount to be paid by participants to obtain the shares at vesting is zero. Each award of performance shares is conditional and vests subject performance conditions three years after the date of the award. The economic fair value of the share options awarded is calculated using an option pricing model (usually an adjusted Black Scholes model) and the resulting cost is recognized as employee benefit cost over the vesting period of the grant.

No new awards from 2007 will be made under this plan as a new plan was approved by shareholders in 2007. The new plan is called the Global Share Incentive Plan (GSIP) which integrates and replaces the former, making Unilever NV’s long-term arrangements simpler, easier to understand and supportive of URICI’s strategic remuneration principles for its executives.

Share Matching Plan Under these plans, managers can invest up to 25% of their gross bonus in Unilever NV or PLC shares. URICI matches this with the same number of shares on condition that all shares are held for the agreed period of three years, and that the manager has not resigned from URICI at the end of the period. The Share Matching Plan is linked to the annual incentive, 25% of which is paid shares, these are matched one for one.

Beginning 2007 onwards, it has been agreed that URICI shall be recharged by ULP of the cost of the options granted. The recharge shall effectively be a "return of the equity" which was initially invested by ULP when it decided to grant options for the qualified employees of URICI. Each award of performance shares is conditional and vests subject performance conditions three years after the date of the award.



- 50 - The outstanding share-based compensation plan as of December 31, 2007 and 2006 are shown below:

2007 2006

Executive option plan P=3,802 P=3,466 Global performance share plan 3,082 1,536 Share matching plan – 873 P=6,884 P=5,875

The Group’s share amounts to P=3.44 million and P=2.94 million as of December 31, 2007 and 2006, respectively.

The summary of the status and changes of the Executive Option Plan, Global Performance Share Plan and Share Matching Plan for the years ended December 31 consist of the following:

Executive Option Plan

2007 2006 Unilever NV Shares Unilever PLC Shares Unilever NV Shares Unilever PLC Shares

Number of Options

WeightedAverage Exercise

Price

Number of Options


Price

Number of Options


Price Number of

Options


Price Outstanding at January 1 and December 31

5,775

17.53

5,670 17.53

5,775 18.31 5,670 18.31

Exercisable at December 31(a) (b) 5,775 17.35 5,670 17.35 5,775 18.46 5,670 18.46(a) Weighted average of share awards granted during the period. (b) Estimated using the Black-Scholes option pricing method.

Executive Option Plan 2007 2006 Valuation Assumptions: Expected option term 3.5 years 3.5 years Expected volatility(c) 27.5 % 27.5% Expected dividend yield(d) 3.2% 3.8% Risk free interest rate 4.6% 3.8%

(c) Based on historic volatility during the last six years. (d) Based on dividend yield in grant year.

Global Performance Share Plan

2007 2006 Unilever NV Shares Unilever NV Shares

Number of

Options

Weighted Average

Exercise Price

Number of

Options

Weighted Average

Exercise Price Outstanding at January 1 2,655 17.40 500 17.67 Stock Split – – 1,000 17.67 Grant 1,380 19.06 1,155 17.07 Outstanding at December 31 4,035 17.97 2,655 17.40 Exercisable at December 31 4

,035

17.97

2,

655

17.40

Fair value per share in Euro/Pound (a) (b) 1 1



9.

06

7.

07

Fair value per share in Peso 1,

231

1,

045

(a) Weighted average of share awards granted during the period. (e) Estimated based on par achievement target.



- 51 -

Share Matching Plan

2007 2006

Unilever NV Shares Unilever PLC

Shares

Unilever NV Shares Unilever PLC

Shares

Number of

Options

Weighted Average Exercise

Price

Number of Options


Price

Number of Options


Price

Number of Options


Price Outstanding at January 1 459 18.70 480 12.34 279 18.44 296 11.92 Grant 211 21.33 206 14.88 180 19.10 184 13.02 Recharge (670) 20.07 (686) 13.55 – – – – Outstanding at December 31 670 19.53 686 13.10 459 18.70 480 12.34 Exercisable at December 31 6

70

Fair value per share in Euro/Pound(a) 21.33

Fair value per share in Peso 1,326

(a) Weighted average of share awards granted during the period.

The Share Matching Plan has an expected option term of 2-3 years in 2007 and 2006. 30. Income Taxes

a. The significant components of the Group’s net deferred income tax assets are as follows:

2007 2006 Deferred income tax assets: Allowance for: Doubtful accounts and possible losses P=60,598 P=44,782 Inventory losses and obsolescence 9,069 10,957 Employee performance bonus 4,868 5,426 Cumulative actuarial losses – 2,675 Others 39,028 45,264

113,563 109,104 Deferred income tax liability on cumulative actuarial gains 1,293 2,074 P=112,270 P=107,030

b. Net deferred income tax liabilities, which represent the proportionate share of the

Parent Company on the deferred income taxes of its joint venture companies, consist of:



2007 2006 Deferred income tax assets: NOLCO P=768 P=1,594 Allowance for doubtful accounts – 6,296 Allowance for decline in value of condominium units – 5,279 768 13,169 Deferred income tax liabilities on capitalized interest 768 13,169 P=– P=–



- 52 -

c. Deferred income tax assets have not been recognized by the individual subsidiaries in the Group to which these deductible temporary differences, NOLCO and MCIT relate because they do not expect availability of taxable income to realize the benefit:

2007 2006 Allowance for: Doubtful accounts and possible losses P=1,746,487 P=1,821,953 Impairment losses on property, plant and

equipment

231,567

195,582 Inventory losses and obsolescence 215,454 143,178 Possible losses on prepayments – 33,649 NOLCO 210,718 82,965 Unamortized past service cost 106,160 96,311 Net pension obligations 71,471 78,528 MCIT 33,204 48,755 Provision for impairment loss – 84,700 Unrealized gross profit – 6,335 Others 48,578 18,647

d. The NOLCO and MCIT will expire as follows:

NOLCO:

Inception Year Amount Applied/Expired Balance Expiry Year 2004 P=21,632 P=21,632 P=– 2007 2005 137,313 – 137,313 2008 2006 28,574 – 28,574 2009 2007 25,359 – 25,359 2010 P=212,878 P=21,632 P=191,246

MCIT:

Inception Year Amount Applied/Expired Balance Expiry Year 2004 P=18,300 P=18,300 P=– 2007 2005 15,799 – 15,799 2008 2006 14,656 – 14,656 2009 2007 3,718 – 3,718 2010 P=52,473 P=18,300 P=34,173

e. A reconciliation of income tax computed at statutory income tax rates to the

provision for income tax follows:

2007 2006 2005 Provision for (benefit from)

income tax at 35% in 2007 and 2006, and 32.5% in 2005

P=110,026

P=75,450

P=83,555 Additions to (reductions in) income tax resulting from:



- 53 -

2007 2006 2005 Interest income subjected to

final tax

(P=10,537)

(P=43,484)

(P=38,778) Temporary differences,

NOLCO and MCIT without deferred income tax set-up

9,451

36,215

36,583 Utilization of NOLCO and

MCIT

(25,871)

(13,672)

(36,479) Prior year temporary difference

without deferred income tax set up

–

(46,184)

– Nondeductible portion of

interest expense

1,936

4,234

6,445 Effect of change in income

tax rate

–

–

(1,266) Equity in net losses (earnings)

of associates

(2,578)

(2,571)

1,826 Others (2,386) 3,027 (8,488) P=80,041 P=13,015 P=43,398

f. On May 24, 2005, the new Expanded Value-Added Tax (E-VAT) law was signed as Republic Act (RA)

No. 9337 or the E-VAT Act of 2005 which took effect on November 1, 2005. Among the relevant provisions of RA No. 9337 are:

i. Change in regular corporate income tax rate from 32% to 35% for the next three years effective on

November 1, 2005, and 30% starting January 1, 2009 and thereafter;

ii. Change in the deductible interest expense rate from 38% to 42% of interest income subjected to final tax for the next three years effective on November 1, 2005 and 33% starting January 1, 2009 and thereafter;

iii. Input value added tax (VAT) on capital goods should be spread evenly over the useful life or 60

months, whichever is shorter, if the acquisition cost, excluding the VAT component thereof, exceeds P=1 million;

iv. Input VAT credit in every quarter shall not exceed 70% of the output VAT; and,

v. Increase in the VAT rate imposed on goods and services from 10% to 12% effective February 1, 2006.

On October 9, 2006, RA No. 9361 “an Act Amending Section 110(B) of the National Internal Revenue Code of 1997, As Amended, and for Other Purposes,” was passed by the House of Senate, removing the 70% cap on input VAT.



- 54 - 31. Registration with the Board of Investments (BOI)

Philtown is registered with the BOI under the Omnibus Investment Code of 1987 as a new operator of industrial

estate on a nonpioneer status. As a registered enterprise, Philtown is entitled to certain tax and nontax incentives and privileges. No tax and nontax incentives and privileges were availed in 2007 and 2006.

32. Commitments and Contingencies

a. As discussed in Note 19, the Group entered into finance leases and installment contract arrangements covering various machineries and equipment with a third party supplier.

c. The Parent Company entered into a Trademark License Agreement with Sunkist Growers, Inc. (Sunkist) whereby the latter granted the Parent Company exclusive right to use certain of Sunkist’s trademark and trade dress in connection with the manufacture, marketing, distribution and sale of non-carbonated beverages. The Parent Company agreed to pay a fixed amount of royalty, as stipulated in the Agreement, every year. The Agreement will cease upon mutual consent of the Parent Company and Sunkist.

c. As of December 31, 2007 and 2006, there are pending legal cases against the Group. Management believes that its position has legal merit and that the resolution of the cases will not materially affect the consolidated financial statements.

33. Basic/Diluted Earnings Per Share

2007 2006 2005 a. Net income attributable

to equity holders of the Parent P=232,199 P=205,111 P=228,487

b. Weighted average common shares outstanding 3,156,052,263 3,159,678,599 3,109,509,598

c. Basic/diluted earnings per share (a/b) P=0.074 P=0.065 P=0.074

The Group does not have dilutive potential common shares as of December 31, 2007, 2006 and 2005. Therefore, the basic and dilutive earnings per share are the same as of those dates.

34. Financial Risk Management Objectives and Policies The Group’s principal financial instruments include nonderivative instruments such as cash in banks and cash

equivalents, AFS investments, installment contracts receivables, financial assets at FVPL, other receivables, bank loans, short-term and long-term debt and obligations, loans, and advances from and payable to related parties. The main purpose of these financial instruments includes raising funds for the Group’s operations and managing identified financial risks. The Group has various other financial assets and financial liabilities such as trade receivables, trade and trust receipts payables, customers’ and tenants’ deposits which arise directly from its operations. The main risk arising from the use of financial instruments are credit risk, liquidity risk, interest rate risk and foreign exchange risk.



- 55 - Credit risk Credit risk arises from the risk of counterparties defaulting. Management is tasked to minimize credit risk

through strict implementation of credit, treasury and financial policies. The Group deals only with reputable counterparties, financial institutions and customers. To the extent possible, the Group obtains collateral to secure sales of its products to customers. Also, the Group transacts with financial institutions belonging to the top 25% of the industry, and/or those which provide the Group with long-term loans and/or short-term credit facilities.

The Group does not have significant concentrations of credit risk and does not enter into financial instruments

to manage credit risk. With respect to credit risk arising from financial assets other than installment contracts and accounts receivable (such as cash and cash equivalents and AFS investments), the Group's exposure to credit risk arises from default of the counterparties, with a maximum exposure equal to the carrying amount of these instruments.

The maximum exposure to credit risk as of December 31, 2007 for the components of the consolidated balance sheet before the effect of mitigation through the use of master netting and collateral agreements follows:

2007 Loans and receivables: Cash and cash equivalents, excluding cash on hand P=659,331 Trade receivable: Manufacturing 929,145 Services and others 31,215 Installment contracts receivables 823,549 Advances to related parties 97,940 Other receivables 275,421 2,816,601 Commitments (185,039)

Total credit risk exposure P=2,631,562

Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

The credit quality of financial assets is managed by the Group using internal credit ratings. The credit quality by class of asset for loan-related balance sheet lines as of December 31, 2007, based on the Group’s credit rating system follows:

Neither past due Past due and nor impaired Past due but individually Excellent Good not impaired impaired Total Loans and receivables:

Cash and cash equivalents, excluding cash on hand P=659,331 P=– P=–

P=– P=659,331

Trade receivable : Manufacturing 159,669 353,639 422,250 340,819 1,276,377

Services and others 24,312 6,903 – 1,054 32,269 Installment contracts receivables 58,081 740,729 24,739

– 823,549

Advances to related parties – 52,608 116,337 1,553 170,498 Other receivables 16,044 297,464 125,867 159,123 598,498

P=917,437 P=1,451,343 P=689,193 P=502,549 P=3,560,522



- 56 - Financial assets that are neither past due nor impaired are classified as Excellent account when these are

expected to be collected or liquidated on or before their due dates, or upon call by the Group if there are no pre-determined defined due dates. All other assets that are neither past due or impaired are classified as Good accounts.

The aging analysis of financial assets as of December 31, 2007 follows:

Neither past due nor Less than 31 to 91 to More than Individually impaired 30 days 90 days 120 days 120 days impaired Total

Loans and receivables: Cash and cash

equivalents, excluding cash on hand

P=659,331

P=–

P=–

P=– P=–

P=–

P=659,331 Trade receivable Manufacturing 513,308 223,330 133,087 30,394 35,439 340,819 1,276,377 Services and others 31,215 – – – – 1,054 32,269 Installment contracts

receivables

798,810

7,254

5,846

11,639

–

–

823,549 Advances to related

parties

65,922

–

–

–

103,023

1,553

170,498 Other receivables 313,508 5,388 – 20,899 99,580 159,123 598,498 P=2,382,094 P=235,972 P=138,933 P=62,932 P=238,042 P=502,549 P=3,560,522

A reconciliation of the allowance for doubtful accounts for loans and receivables by class is as follows:

December 31, 2007:

January 1,

2007 Charges for

the year Recoveries

Write-offs Reclassifications December 31,

2007 Trade receivables (Note 6) Manufacturing P=307,962 P=17,075 (P=493) P=– P=22,688 P=347,232 Services and others 970 – (192) 778 Other receivables (Note 6) 232,944 – – – 3,844 236,788 Advances to subsidiaries, joint ventures and associates

1,362,349 92,486 –

(83,103) (26,532)

1,345,200 Investment in associates 45,678 1,391 – – – 47,069 P=1,949,903 P=110,952 (P=685) (P=83,103) P=– P=1,977,067

Individual impairment P=494,589 P=32,078 (P=685) (P=5,643) (P=17,790) P=502,549 Collective impairment 1,455,314 78,874 – (77,460) 17,790 1,474,518 P=1,949,903 P=110,952 (P=685) (P=83,103) P=– P=1,977,067

December 31, 2006:

January 1,

2007 Charges for

the year Recoveries

Write-offs Reclassifications December 31,

2007 Trade receivables (Note 6) Manufacturing P=323,034 P=3,400 (P=5,670) (P=12,800) P=– P=307,964 Services and others 970 – – – – 970 Other receivables (Note 6) 209,748 – – – 23,195 232,943 Investment in associates 47,136 (1,458) – 45,678 Advances to subsidiaries, joint ventures and associates

1,425,042 59,361 (98,860)

– (23,195)

1,362,348 P=2,005,930 P=62,761 (P=105,988) (P=12,800) P=– P=1,949,903

Individual impairment P=524,156 P=62,761 (P=102,722) (P=12,800) P=23,195 P=494,589 Collective impairment 1,481,775 (3,266) – (23,195) 1,455,314 P=2,005,931 P=62,761 (P=105,988) (P=12,800) P=– P=1,949,903



- 57 -

Liquidity risk Liquidity risk arises from the possibility that the Group may encounter difficulties in raising fund to meet

commitments from financial instruments. Management is tasked to minimize liquidity risk though prudent financial planning and execution to meet the

funding requirements of the various operating divisions within the Group; although long-term and short-term loans obtained from financial institutions, through strict implementation of credit and collection policies, particularly in containing trade receivables; and through capital raising, including equity, as may be necessary. Presently, the Group has existing long-term loans that fund capital expenditures. Working capital requirements, on the other hand, are adequately addressed through short-term credit facilities from financial institutions. Trade receivables are kept within manageable levels.

The maturity profile of the Group’s financial liabilities as of December 31, 2007 based on contractual undiscounted repayment obligations follows:

Within 1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over 5 years

Total

Bank loans P=675,726 P=– P=– P=– P=– P=– P=675,726 Accounts payable

and accrued liabilities

2,124,630

–

–

–

–

–

2,124,630 Trust receipts and

acceptances payable

208,306

–

–

–

–

–

208,306 Customers’ and

tenants’ deposits

604,445

–

–

–

–

–

604,445 Loan from Filipinas

Investment, Ltd.

85,866

103,758

58,582

–

–

–

248,206

Long-term debt, including current maturities

243,826

580,023

158,225

–

–

193,778

1,175,852 Long-term

obligations, including current maturities

8,086

12,619

11,715

11,372

11,156

19,026

73,974 Advances from a

subsidiary, joint venture and other related parties

361,693

405,702

–

–

–

–

767,395

P=4,312,578 P=1,102,102 P=228,522 P=11,372 P=11,156 P=212,804 P=5,878,534

Refer to Notes 11 and 15 for the interest rate profile of these liabilities.

Interest rate risk The Group’s exposure to changes in interest rates relate primarily to the Group’s short-term and long-term debt obligations.

Management is tasked to minimize interest rate risk through interest rate swaps and options, and having a mix

of variable and fixed interest rates on its loans. Presently, the Group’s short-term and long-term bank loans are market-determined, with the long-term loan interest rates based on PSDT-F-1 plus a certain mark-up. The Group has not entered into interest rate swaps and options during 2007 and 2006.



- 58 -

The sensitivity to a reasonably possible change in interest rates with all other variables held constant of the Group’s profit before tax for the year ended December 31, 2007 follows:

Change in interest rates (in basis points) 40bp rise 20bp rise 40bp fall 20bp fall Effect in income before

income tax P=135,442 P=72,663 (P=135,442) (P=72,663)

1 basis point is equivalent to 0.01%

There is no other impact on the Group’s equity other than those affecting the income. Foreign exchange risk The Group’s exposure to foreign exchange risk results from the Parent Company and URICI’s business

transactions and financing agreements denominated in foreign currencies.

Management is tasked to minimize foreign exchange risk through the natural hedges arising from its export business and through external currency hedges. Presently, trade importations are immediately paid or converted into Philippine peso obligations as soon as these are negotiated with suppliers. The Group has not done any external currency hedges in 2007 and 2006.

Parent Company

A reasonably possible change of -/+ 5% in United States (US) dollar exchange rate at December 31, 2007 would lead to the following income before tax movements in the Parent Company statement of income:

Peso equivalent of US dollar denominated

US dollar weakened by 5% against

US dollar strengthened by 5% against

Assets/liabilities Philippine Peso Philippine Peso Cash and cash equivalents (P=11,213) (P=561) P=561 Trade receivables (3,023) (151) 151 Accounts payable 49,091 2,455 (2,455) Increase (decrease) in income before tax

P=34,855

P=1,743

(P=1,743)

URICI A reasonably possible -/+ 10% in US dollar exchange rate at December 31, 2007 would lead to the following income before tax movements in URICI’s statement of income:

Peso equivalent of US

dollar denominated US dollar weakened

by 10% against US dollar strengthened

by 10% against Assets/liabilities Philippine Peso Philippine Peso Cash and cash equivalents, excluding cash on hand

(P=321,650)

(P=32,165)

P=32,165 Trade receivables (9,989,630) (998,963) 998,963 (Forward)



- 59 -

Peso equivalent of US dollar denominated

US dollar weakened by 10% against

US dollar strengthened by 10% against

Assets/liabilities Philippine Peso Philippine Peso Advances to subsidiaries, associates and other related parties

(P=1,393,890)

(P=139,389)

P=139,389 Accounts payable 14,699,030 1,469,903 (1,469,903) Advances from subsidiaries, associates and other related parties

7,583,920

758,392

(758,392) Increase (decrease) in income before tax

P=10,577,780

P=1,057,778

(P=1,057,778)

35. Financial Assets and Financial Liabilities

The following summarizes the carrying and fair values of the Group’s financial assets and financial liabilities as of December 31, 2007 and 2006:

December 31, 2007 December 31, 2006

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Manufacturing Financial Assets Loans and receivables: Cash in banks and cash equivalents P=685,733 P=685,733 P=555,334 P=555,334 Trade receivable – net Manufacturing 929,145 929,145 913,705 913,705 Services and others 31,215 31,215 42,059 42,059 Advances to related parties 97,940 97,940 49,606 49,606 Installment contracts receivable 823,549 729,082 886,909 888,670 Other receivables and deposits, including current maturities

275,421

275,421

196,654

201,608

Financial assets at FVPL – – 25,536 25,536 AFS investments 989,411 989,411 960,842 960,842 P=3,832,414 P=3,737,947 P=3,630,645 P=3,637,360

Financial Liabilities Other financial liabilities: Bank loans P=675,434 P=675,434 P=723,611 P=723,611 Accounts payable and accrued liabilities

2,124,630

2,124,630

1,881,930

1,881,930

Trust receipts and acceptances payable

208,306

208,306

234,863

234,863

Customers’ and tenants’ deposits

642,637 642,637 515,725 515,725

Loans from Filipinas Investments, Ltd., including current maturities

220,207

224,401

–

–

Long-term debt and obligations,



including current maturities

1,086,164 1,105,692 1,210,008 1,236,773

Advances from related parties 361,693 361,693 312,679 313,627 P=5,319,071 P=5,342,793 P=4,878,816 P=4,906,529



- 60 -

Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value.

Due to the short-term nature of the transactions, the carrying amounts of cash and cash equivalents, accounts receivable, bank loans, accounts payable and accrued liabilities and trust receipts payable approximate their fair market values. The fair market value of AFS financial assets has been determined by reference to quoted market prices at the close of business on December 31, 2007 and 2006. Investments in unquoted equity securities are carried at historical cost, net of impairment.

The fair value of advances to/from subsidiaries, joint ventures and associates, refundable deposits, receivable from Meralco and long-term obligations are based on the discounted value of future cash flows using the applicable rates for similar types of loans.

The carrying value of long-term debt, for which interest rates are repriced quarterly based on market rates,

approximates the fair value. Refer to Notes 15 and 20 for the interest rate profile of these liabilities. 36. Capital Management

It is the objective of the Group to maintain a capital base that adequately services the needs of its present and future operations while keeping within the capital level required by creditors. The capital base is also sufficient to address present and future uncertainties and risks inherent in the business and changes in the economic conditions. Payment of dividends, return of capital, or issuance of shares to increase capital shall be made accordingly and as may be necessary. No changes were made in the objectives, policies and processes as of December 31, 2007 and 2006. The following table summarizes the total capital considered by the Group:

2007 2006 Capital stock P=3,927,714 P=3,927,714 Additional paid-in capital 1,013,097 1,019,860 Retained earnings 677,542 445,343 Treasury shares (995,213) (1,006,397) Other capital items 112,590 80,219 P=4,735,730 P=4,466,739



- 61 - 37. Notes to Consolidated Statements of Cash Flows The Group’s noncash investing and financing activities pertain to the following:

a. Exercise of the Parent Company’s right to put 10,947,678 of its 150,193,647 preferred shares in Swift at an offer price of P=10.00 per share or P=109,476,780. The proceeds of the put exercise were applied as payment of the Parent Company’s unpaid subscriptions in Swift’s common shares in 2005. The exercise was done prior to the amendment of the terms of the preferred shares of Swift; and

b. Cancellation of finance lease on machinery and equipment with net book value of

P=55.99 million in 2005 (see Note 13).


Consolidated IS RFM 17 May08 · *SGVMC308120* 19 May 2008 Philippine Stock Exchange, Inc. PSE Center, Exchange Road Ortigas Center, Pasig City Attention: Atty. Pete M. Malabanan

Documents

Consolidated IS RFM 17 May08 · SGVMC308120 19 May 2008 Philippine Stock Exchange, Inc. PSE Center, Exchange Road Ortigas Center, Pasig City Attention: Atty. Pete M. Malabanan