COVER SHEET. (Company s Full Name) C h e m p h i l B u i l d i n g, A. A r n a i z. A v e n u e, L e g a s p i V i l l a g e,

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1 COVER SHEET SEC Registration Number L M G C H E M I C A L S C O R P. A N D S U B S I D I A R I E S (Company s Full Name) C h e m p h i l B u i l d i n g, A. A r n a i z A v e n u e, L e g a s p i V i l l a g e, M a k a t i C i t y (Business Address: No. Street City/Town/Province) Carmelita G. Salgado (Contact Person) (Company Telephone Number) A A C F S Month Day (Form Type) Month Day (Calendar Year) (Annual Meeting) (Secondary License Type, If Applicable) Not Applicable Dept. Requiring this Doc. Not Applicable Amended Articles Number/Section Total Amount of Borrowings Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document ID Cashier S T A M P S Remarks: Please use BLACK ink for scanning purposes.

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3 LMG CHEMICALS CORP. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2004 and 2003 and Years Ended December 31, 2004, 2003 and 2002 and Report of Independent Auditors

4 BOA/PRC Reg. No SEC Accreditation No F Report of Independent Auditors The Stockholders and the Board of Directors LMG Chemicals Corp. We have audited the accompanying consolidated balance sheets of LMG Chemicals Corp. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders equity and cash flows for each of the three years in the period ended December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LMG Chemicals Corp. and Subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the Philippines. Aldrin M. Cerrado Partner CPA Certificate No SEC Accreditation No A Tax Identification No PTR No , January 3, 2005, Makati City April 4, 2005

5 SGV & CO SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Phili ppines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No F Report of Independent Auditors The Stockholders and the Board of Directors LMG Chemicals Corp. Chemphil Building, 851 A. Arnaiz Avenue Legaspi Village, Makati City We have audited the accompanying consolidated balance sheets of LMG Chemicals Corp. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders equity and cash flows for each of the three years in the period ended December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LMG Chemicals Corp. and Subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the Philippines. Aldrin M. Cerrado Partner CPA Certificate No SEC Accreditation No A Tax Identification No PTR No , January 3, 2005, Makati City April 4, 2005 SGV & Co is a member practice of Ernst & Young Global

6 SGV & CO SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Phili ppines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No F Report of Independent Auditors On Supplementary Schedules The Stockholders and the Board of Directors LMG Chemicals Corp. Chemphil Building, 851 A. Arnaiz Avenue Legaspi Village, Makati City We have audited in accordance with auditing standards generally accepted in the Philippines the consolidated financial statements of LMG Chemicals Corp. and Subsidiaries included in this Form 17-A and have issued our report thereon dated April 4, Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Supplementary Schedules are the responsibility of the Company s management and are presented for purposes of complying with the Securities Regulation Code Rule 68 and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Aldrin M. Cerrado Partner CPA Certificate No SEC Accreditation No A Tax Identification No PTR No , January 3, 2005, Makati City April 4, 2005 SGV & Co is a member practice of Ernst & Young Global

7 LMG CHEMICALS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December (As restated Note 2) ASSETS Current Assets Cash and cash equivalents (Note 3) P=7,109,229 P=6,744,027 Receivables - net (Note 4) 106,150, ,184,282 Inventories (Note 5) 35,410,832 34,399,457 Other current assets (Note 6) 15,487,196 13,836,334 Total Current Assets 164,157, ,164,100 Noncurrent Assets Investments in shares of stock at cost - net of allowance for decline in value of P=224,985,248 in 2004 and P=229,176,696 in 2003 (Note 7) 909,500 2,718,052 Property, plant and equipment (Note 8) At cost - net 190,070, ,222,720 At revalued amounts 746,182, ,182,494 Deferred income tax assets (Note 21) 21,955,608 32,578,925 Other noncurrent assets (Note 9) 40,253,113 50,299,517 Total Noncurrent Assets 999,371,321 1,039,001,708 TOTAL ASSETS P=1,163,529,297 P=1,196,165,808 LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Notes payable (Note 10) P=19,621,667 P= 28,600,000 Accounts payable and accrued expenses (Note 11) 76,016, ,449,074 Liabilities under letters of credit and trust receipts (Note 5) 13,358,814 22,346,070 Due to related parties (Note 14) 6,670,123 6,154,005 Income tax payable 88,065 Current portion of long-term debt (Note 12) 22,974,392 28,872,204 Total Current Liabilities 138,641, ,509,418 Noncurrent Liabilities Long-term debt - net of current portion (Note 12) 11,990,000 36,996,876 Other long-term liabilities (Note 13) 72,231,229 73,377,572 Deferred income tax liability (Notes 2 and 21) 214,224, ,224,141 Total Noncurrent Liabilities 298,445, ,598,589 Total Liabilities 437,086, ,108,007 Minority Interest 39,342,036 30,211,862 Stockholders Equity Capital stock - P=1 par value Authorized - 200,000,000 shares Issued - 193,644,204 shares 193,644, ,644,204 Additional paid-in capital 51,480,533 51,480,533 Revaluation increment in land (Notes 2, 15 and 17) 359,120, ,120,490 Retained earnings (Note 15) Appropriated 289, ,000 Unappropriated 82,855,056 38,600, ,389, ,134,939 Less cost of 100,028 shares held in treasury 289, ,000 Total Stockholders Equity 687,100, ,845,939 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY P=1,163,529,297 P=1,196,165,808 See accompanying Notes to Consolidated Financial Statements.

8 LMG CHEMICALS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December REVENUE Net sales (Note 14) P=425,525,396 P=397,057,640 P=335,658,401 Rental (Note 23) 8,369,246 15,093,430 13,837, ,894, ,151, ,496,016 COST OF GOODS SOLD (Note 16) 300,007, ,695, ,169,611 GROSS PROFIT 133,887, ,455,997 57,326,405 OPERATING EXPENSES (Note 17) 61,839,153 62,657,774 57,347,496 INCOME (LOSS) FROM OPERATIONS 72,048,255 40,798,223 (21,091) OTHER INCOME (CHARGES) - Net Interest expense (Notes 11, 12 and 14) (10,771,477) (17,603,608) (22,740,116) Reversal of various accrued expenses 8,037,425 Interest income (Note 14) 1,039, , ,499 Scrap sales 585, ,972 3,172,319 Gain (loss) on sale of investments in shares of stock (508,552) 1,230,000 Loss on decline in value of investments in shares of stock (Note 7) (111,400,223) Gain (loss) on sale of property and equipment - net 2,727,273 (10,121,469) Commission 2,833,020 Others - net (477,537) 8,738,244 2,224,706 (2,095,088) (4,009,806) (135,675,264) INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST 69,953,167 36,788,417 (135,696,355) PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 21) Current 5,945,332 1,838,906 1,651,405 Deferred 10,623,317 (1,917,478) 5,246,470 16,568,649 (78,572) 6,897,875 INCOME (LOSS) BEFORE MINORITY INTEREST 53,384,518 36,866,989 (142,594,230) MINORITY INTEREST (9,130,174) 1,733,723 1,939,927 NET INCOME (LOSS) P=44,254,344 P=38,600,712 (P=140,654,303) Earnings (Loss) Per Share (Note 20) P=0.23 P=0.20 (P=0.73) See accompanying Notes to Consolidated Financial Statements.

9 LMG CHEMICALS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Additional Revaluation Capital Paid-in Increment in Retained Earnings (Deficit) Treasury Stock Capital Land Appropriated Unappropriated Stock Total BALANCES AT DECEMBER 31, 2001 P=193,644,204 P=51,480,533 P= P=45,289,000 P=622,245 (P=289,000) P=290,746,982 Reversal of appropriated retained earnings (45,000,000) 45,000,000 Revaluation increment in land 593,782, ,782,303 Effect of change in accounting for income taxes (Note 2) (190,010,337) (190,010,337) Net loss for the year (140,654,303) (140,654,303) BALANCES AT DECEMBER 31, ,644,204 51,480, ,771, ,000 (95,032,058) (289,000) 553,864,645 Quasi-reorganization - application of revaluation increment in land to eliminate the accumulated deficit as of December 31, 2002 (Note 17) (95,032,058) 95,032,058 Revaluation increment in land (Notes 6 and 7) 74,089,091 74,089,091 Effect of change in accounting for income taxes (Note 2) (23,708,509) (23,708,509) Net income for the year 38,600,712 38,600,712 BALANCES AT DECEMBER 31, ,644,204 51,480, ,120, ,000 38,600,712 (289,000) 642,845,939 Net income for the year 44,254,344 44,254,344 BALANCES AT DECEMBER 31, 2004 P=193,644,204 P=51,480,533 P=359,120,490 P=289,000 P=82,855,056 (P=289,000) P=687,100,283 See accompanying Notes to Consolidated Financial Statements.

10 LMG CHEMICALS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax and minority interest P=69,953,167 P=36,788,417 (P=135,696,355) Adjustments for: Depreciation (Note 8) 34,262,788 35,705,597 46,904,490 Interest expense 10,771,477 17,603,608 22,740,116 Reversal of various accrued expenses (8,037,425) Amortization of goodwill and others 2,549,475 1,133,100 1,073,740 Interest income (1,039,077) (391,313) (356,499) Loss on disposal of other noncurrent assets 978,619 Loss (gain) on sale of : Investments in shares of stock 508,552 (1,230,000) Property and equipment (2,932,948) 10,121,469 Provisions for: Doubtful accounts 74,931 38, ,661 Inventory losses 152,083 9,352, ,381 Probable losses (Note 9) 2,565,751 Unrealized foreign exchange loss (gain) (16,585) 33,650 Loss on decline in value of investments in shares of stock 111,400,223 Write-off of accounts receivable 2,585,582 Operating income before working capital changes 110,158,005 98,633,279 59,546,458 Decrease (increase) in: Receivables (3,843,324) (23,762,594) 26,391,187 Inventories (2,383,802) 9,999,093 7,601,147 Other current assets (1,650,862) 9,119,789 15,705,096 Increase (decrease) in: Accounts payable and accrued expenses (35,375,151) 14,239,499 (12,046,504) Due to related parties (162,596) (15,748,144) 30,349,566 Liabilities under letters of credit and trust receipts (8,987,256) (5,755,051) (11,122,161) Cash from operations 57,755,014 86,725, ,424,789 Interest paid (11,150,074) (17,268,902) (22,349,369) Interest received 841, , ,861 Income taxes paid (6,033,397) (1,903,106) (3,114,518) Net cash flows from operating activities 41,412,576 67,747,689 91,325,763 (Forward)

11 - 2 - Years Ended December CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property, plant and equipment (Note 8) (P=17,110,674) (P=10,110,737) (P=23,238,464) Investments in shares of stock (2,000) Proceeds from sale of: Investments in shares of stock 1,300,000 1,300,000 Property and equipment 2,978,706 1,065,657 Other noncurrent assets 5,281,996 Nonmoving inventories 1,220,344 Decrease (increase) in other noncurrent assets 1,236,314 (1,517,621) (15,995,838) Redemption of investments in shares of stock 55,180 Net cash flows used in investing activities (8,072,020) (7,349,652) (38,115,465) CASH FLOWS FROM FINANCING ACTIVITIES Payments of: Long-term debt (30,904,688) (35,107,402) (1,470,314) Notes payable (8,978,333) (12,245,898) (13,960,622) Proceeds from notes payable 700,000 Increase in other long-term liabilities 6,891,082 (6,795,831) (52,252,270) Increase (decrease) in minority interest (3,877,493) 13,311,499 Net cash flows used in financing activities (32,991,939) (58,026,624) (53,671,707) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 16,585 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 365,202 2,371,413 (461,409) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,744,027 4,372,614 4,834,023 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 3) P=7,109,229 P=6,744,027 P=4,372,614 See accompanying Notes to Consolidated Financial Statements.

12 LMG CHEMICALS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information and Status of Operations LMG Chemicals Corp. (the Parent Company) and its subsidiaries (collectively referred to as the Group) are incorporated in the Philippines and are primarily engaged in the manufacture and distribution of industrial chemicals. The average number of employees of the Group was 116 in 2004 and 119 in The registered office address of the Parent Company is Chemphil Building, 851 A. Arnaiz Avenue, Legaspi Village, Makati City. The Parent Company is a 73.93%-owned subsidiary of Chemphil Industries of the Philippines, Inc. (CIP), the ultimate parent company, also incorporated in the Philippines. The accompanying consolidated financial statements of the Group were authorized for issue by its Executive Committee, as authorized by the Board of Directors, on April 4, Summary of Significant Accounting Policies and Reporting Practices Basis of Preparation The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the Philippines using the historical cost basis, except for land which is carried at revalued amount. Change in Accounting Policy Effective January 1, 2004, the Group adopted the following Statements of Financial Accounting Standard (SFAS) 12/International Accounting Standard (IAS) 12, Income Taxes, which prescribes the accounting treatment for income taxes. The standard requires the use of the balance sheet liability method in accounting for deferred income taxes. It also provides for the recognition of a deferred income tax liability with respect to asset revaluations. The adoption of the standard resulted in the recognition of deferred income tax liabilities on the revaluation increment in land amounting to P=214,224,141 as of December 31, 2004 and Liabilities as of December 31, 2002 and 2001 increased by P=23,708,509 and P=190,010,337, respectively, while stockholders equity as of the same dates decreased by the same amounts. Deferred income tax assets amounting to P=32,396,863 and P=30,257,660 as of December 31, 2003 and 2002, respectively, were reclassified from current to noncurrent. New Accounting Standards Effective in 2005 The Accounting Standard Council (ASC) has approved the issuance of new and revised accounting standards which are based on revised IAS and new International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The ASC has re-named the standards that it issues to correspond better with the issuances of the IASB. Philippine Accounting Standards (PAS) correspond to adopted IAS while Philippine Financial Reporting Standards (PFRS) correspond to adopted IFRS.

13 - 2 - The Group will adopt the following new accounting standards that are relevant to the Group beginning January 1, PAS 19, Employee Benefits, requires the use of the projected unit credit method in measuring retirement benefits expense and results in a change in the manner of computing benefits expense relating to past service cost and actuarial gains and losses. It requires the company to determine the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity so that the amounts recognized in the financial statements do not differ materially from the amounts that would be determined at the balance sheet date. The Company will avail of the services of a qualified actuary to perform an actuarial valuation of the Company s retirement benefits obligation in accordance with PAS 19, and to determine the amount of transitional liability or asset that will be adjusted against retained earnings upon adoption of this standard. PAS 21, The Effects of Changes in Foreign Exchange Rates, provides restrictive conditions for the capitalization of foreign exchange losses. The Company will adopt the standard in 2005 and, based on current circumstances, believes that the adoption of this new accounting standard will have no effect on the consolidated financial statements. PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about a company s financial instruments, whether recognized or unrecognized in the financial statements. The standard also requires financial instruments to be classified as liabilities or equity in accordance with its substance and not in legal form. PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and reporting standards for recognizing and measuring the company s financial assets and financial liabilities. It also covers the accounting for derivative instruments. The initial adoption of PAS 32 and 39 is not expected to have a material impact on the Group. PAS 33, Earnings Per Share, prescribes principles for the determination and presentation of earnings per share for companies with publicly traded shares, companies in the process of issuing ordinary shares to the public, and companies that calculate and disclose earnings per share. The standard also provides additional guidance in computing earnings per share including the effects of mandatorily convertible instruments and contingently issuable shares, among others. PAS 40, Investment Property, prescribes the accounting treatment for investment property and related disclosure requirements. This standard permits the company to choose either the fair value model or cost model in accounting for investment property. Fair value model requires an investment property to be measured at fair value with fair value changes recognized directly in the statements of income. Cost model requires that an investment property should be measured at depreciated cost less any accumulated impairment losses. Upon adoption of PAS 40, the Group will adopt the cost model and will continue to carry its investment property at depreciated cost less accumulated impairment losses, if any.

14 - 3 - PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, specifies the accounting for assets held for sale and the presentation and disclosure of discontinued operations. It requires assets that meet the criteria to be reclassified as held for sale to be measured at the lower of the carrying amount and fair value less costs to sell, and the depreciation on such assets to cease. Furthermore, assets that meet the criteria to be classified as held for sale should be presented separately on the face of the consolidated balance sheet and the results of discontinued operations to be presented separately in the consolidated statements of income. The adoption of PFRS 5 is not expected to have a significant impact in the consolidated financial statements of the Group. The Group will also adopt in 2005 the following revised standards: PAS 1, Presentation of Financial Statements, provides a framework within which an entity assesses how to present fairly the effects of transactions and other events, provides the base criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income from operating activities and extraordinary items as separate line items in the statements of income; and specifies the disclosures about key sources of estimation, uncertainty and judgments management has made in the process of applying the entity s accounting policies. It also requires changes in the presentation of minority interest in the balance sheets and statements of income. PAS 2, Inventories, reduces the alternatives for measurement of inventories. PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It defines material omission or misstatements, and describes how to apply the concept of materiality when applying accounting policies and correcting error. PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the accounting for dividends declared after the balance sheet date. PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on recognition and measurement of items of property, plant and equipment. It also provides that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and buildings and prohibits expensing of initial direct costs in the financial statements of the lessors.

15 - 4 - PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of the standard, the definitions and disclosures for related parties. It also requires disclosure of the compensation of key management personnel by benefit type. PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting for subsidiaries in consolidated financial statements and in accounting for investments in the separate financial statements of a parent, venturer or investor. Investments in subsidiaries will be accounted for either at cost or in accordance with PAS 39 in the separate financial statements. Equity method of accounting will no longer be allowed in the separate financial statements. This standard also requires strict compliance with adoption of uniform accounting policies and requires the parent to make appropriate adjustments to the subsidiary s financial statements to conform them to the parent s accounting policies for reporting like transactions and other events in similar circumstances. PAS 36, Impairment of Assets,requires a company to measure the recoverable amount of an intangible asset with an indefinite useful life annually, whether or not there is an indication of impairment. Goodwill acquired in business combination is required to be tested for impairment annually. The Group does not expect any significant changes in the accounting policies when it adopts the above revised standards in 2005, except for the change in accounting for the Group s investments in subsidiaries as required by PAS 27. Upon adoption of PAS 27, the Group will account for its investments in subsidiaries at cost less impairment in value in the separate financial statements. The accumulate equity in net losses of the subsidiaries amounting to P=5,584,111 as of December 31, 2004 will be adjusted in the 2005 parent company financial statements on a retroactive basis. Correspondingly, an allowance for decline in value of the Parent Company s investments in subsidiaries of the same amount will be recognized. Principles of Consolidation The consolidated financial statements include the accounts of the Parent Company and the following subsidiaries: Percentage of Ownership Subsidiaries Chemphil Marketing Corp. (CMC) Kemwater Phil. Corp. (KPC) Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. This control is normally evidenced when the Parent Company owns, either directly or indirectly, more than 50% of the voting rights of the subsidiary s share in capital and/or is able to govern the financial and operating policies of an enterprise so as to benefit from its activities.

16 - 5 - The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Significant intercompany transactions and balances, including intercompany profits and unrealized gains and losses are eliminated. The excess or deficiency on the Parent Company s cost of such investments over its proportionate share in the underlying net assets of the subsidiaries at the dates of acquisition is amortized on a straight-line basis over its estimated useful economic life of 20 years. Minority interests represent the interests in subsidiaries, which are not owned, directly or indirectly through subsidiaries, by the Parent Company. The stockholders equity and net income attributable to minority interest are shown separately in the consolidated balance sheets and consolidated statements of income, respectively. Revenue Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of revenue can be reliably measured. Sales is recognized when goods are delivered to and accepted by customers. Rental income from land and storage tanks is recognized on a straight-line basis over the term of the lease. Interest income is recognized as the interest accrues. Cash and Cash Equivalents Cash consists of cash on hand and with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. Receivables Receivables are recognized at face value less an allowance for any uncollectible amount. Inventories Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials, merchandise and spare parts and factory supplies Finished goods and semi-processed goods - Purchase cost determined on a movingaverage method - Cost includes direct materials and labor and a proportion of manufacturing costs determined on a moving-average method Net realizable value of finished goods and semi-processed goods is the selling price in the ordinary course of business, less the estimated costs of completion, marketing and distribution. For raw materials, merchandise and spare parts and factory supplies, the net realizable value is the current replacement cost.

17 - 6 - Investments in Shares of Stock Investments in shares of stock of investee companies, where the Parent Company does not have the ability to significantly influence their financial and operating affairs or when the investment is held on a temporary basis, are carried at cost less any impairment in value. An allowance is set up for any substantial and presumably permanent decline in the carrying value of the investments. Goodwill represents the excess of the cost of the acquisition over the fair value of identifiable net assets of a subsidiary at the date of acquisition. Goodwill is stated at cost less accumulated amortization and any impairment in value. Goodwill is amortized on a straight-line basis over its estimated useful economic life of 20 years. Property, Plant and Equipment Property, plant and equipment are carried at cost less accumulated depreciation and any impairment in value, except for land which is carried at revalued amounts, less any impairment in value, as determined by independent appraisers. The initial cost of property, plant and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operations, 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 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 additional cost of property, plant and equipment. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and any impairment in value are removed from the accounts; any resulting gain or loss is included in the consolidated statements of income. The net appraisal increment resulting from the revaluation was credited to the Revaluation increment in land account shown under the stockholders equity section of the consolidated balance sheets. Any revaluation decrease as a result of subsequent revaluation should be charged directly against any related revaluation increase to the extent that the decrease does not exceed the amount held in the revaluation increment in respect of the same asset; any excess should be recognized as an expense. Depreciation is computed on a straight-line basis over the estimated useful life of the asset as follows: Years Land improvements 10 Buildings and structures 8-10 Machinery and equipment 10 Transportation equipment 5 Office furniture and fixtures 2-5

18 - 7 - The estimated useful lives and depreciation method are reviewed periodically to ensure that the periods and method of depreciation are consistent with the expected pattern of economic benefits from the items of property, plant and equipment. Construction in progress is stated at cost. This includes cost of construction and other direct costs. Construction in progress is not depreciated until the relevant assets are completed and put into operational use. Property, Plant and Equipment Not Used in Operations Property, plant and equipment not used in operations included under Other noncurrent assets in the consolidated balance sheets are carried at the lower of net realizable values and net carrying values. Impairment of Assets The carrying values of property, plant and equipment, investments in shares of stock and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset 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 values 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 cashgenerating unit to which the asset belongs. Impairment losses, if any, are recognized in the consolidated statements of income. Retirement Benefits Cost Retirement benefits cost is determined using the projected unit credit method. This method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning employees projected salaries. Retirement benefits cost includes current service cost plus amortization of past service cost, experience adjustments, and the effects of the changes in the actuarial assumptions over the expected remaining working lives of the employees. Foreign Currency-Denominated Transactions and Translations Transactions denominated in foreign currencies are recorded using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing exchange rate at the balance sheet date. Foreign exchange gains or losses arising from foreign currency transactions and translations of foreign currency-denominated monetary assets and liabilities are taken to the consolidated statements of income. Income Taxes Deferred income tax is provided using the balance sheet liability method, on all temporary differences, including asset revaluations, at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

19 - 8 - Deferred income tax liabilities are recognized for all taxable temporary differences, including asset revaluation. Deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences 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 taxable profit will be available to allow all or part of deferred income tax asset to be utilized. Deferred income tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries. With respect to investments in other subsidiaries, deferred income tax liabilities are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period 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. 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 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. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefit is probable. Earnings (Loss) Per Share Earnings (loss) per share is determined by dividing net income (loss) by the weighted average number of shares issued, net of treasury shares, after retroactive adjustment for any stock dividends and stock splits declared during the year. The Group has no financial instrument or other contract that may entitle its holder to common shares.

20 - 9 - Subsequent Events Post year-end events that provide additional information about the Group s position at 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. 3. Cash and Cash Equivalents Cash on hand and in banks P=7,109,229 P=2,744,027 Short-term deposits 4,000,000 P=7,109,229 P=6,744,027 Cash in banks earn interest at the respective bank deposit rates. Short-term deposits 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 deposit rates. 4. Receivables Trade P=53,047,323 P=62,591,527 Refundable tax 27,587,090 25,957,137 Related parties (Note 14) 30,307,178 12,530,746 Others 6,377,788 13,301, ,319, ,380,871 Less allowance for doubtful accounts 11,168,660 12,196,589 P=106,150,719 P=102,184, Inventories At cost: Finished goods P=1,439,175 P=10,609,888 Semi-processed goods 7,104,747 2,291,596 Raw materials: On hand 4,026,426 4,302,526 In transit 8,892,070 13,824 Merchandise On hand 84, ,152 In transit 531,373 (Forward)

21 Spare parts and factory supplies P= P=55,393 At net realizable value: Finished goods 1,497,169 4,247,005 Raw materials 846,523 Spare parts and factory supplies 11,835,779 11,845,550 P=35,410,832 P=34,399,457 Certain inventories were written down to their net realizable value and as a result, a provision for inventory losses amounting to P=152,083 and P=9,352,199 was charged to cost of sales in 2004 and 2003, respectively. Under the terms of the trust receipt agreements covering liabilities under letters of credit, open accounts, and/or documents against payment, some raw materials were released to the Parent Company and KPC in trust for the banks. The Parent Company and KPC are accountable to the banks for the trusteed raw materials or their sales proceeds. 6. Other Current Assets Prepaid taxes P=7,467,043 P=6,175,112 Input taxes 5,608,310 5,756,282 Deposits - net of allowance for probable losses of P=500, , ,312 Prepaid expenses 1,617, ,637 Others 115, ,991 P=15,487,196 P=13,836, Investments in Shares of Stock Investments in shares of stock carried at cost include: a. Investment in Petrochemicals Corporation of Asia-Pacific (Petrocorp) amounting to P=216,607,775 representing 9.11% ownership which was provided for with full allowance for decline in value. b. Investment in Bataan Industrial Gases, Inc. (BIGI) amounting to P=6,000,000 representing 20% of BIGI s paid-up capital. The Parent Company has an allowance for the decline in value of investment in BIGI amounting to P=4,191,448 in The Parent Company sold its investment in BIGI on December 9, c. Investment in All Asia Capital and Trust Corporation (All Asia) amounting to P=8,377,473 which was fully provided with an allowance for the decline in value of its investment.

22 d. Other investments amounting to P=909,500 representing club shares and other proprietary shares accounted for under the cost method. 8. Property, Plant and Equipment Office Land Buildings and Machinery Transportation Furniture Construction Improvements Structures and Equipment Equipment and Fixtures in Progress Total Total At Cost: Cost Beginning balances P=23,185,440 P=125,849,740 P=373,188,005 P=12,299,145 P=9,755,471 P=3,850,863 P=548,128,664 P=542,266,896 Additions 219, ,946 5,859, , ,387 9,775,863 17,110,674 10,110,737 Disposals (4,248,969) Reclassifications 97, ,936 10,139, ,364 (11,327,253) - Ending balances 23,502, ,177, ,186,763 12,957,487 10,115,222 2,299, ,239, ,128,664 Accumulated Depreciation Beginning balances 13,141,973 80,407, ,966,335 9,007,316 9,382, ,905, ,403,558 Depreciation (see Notes 15 and 16) 1,410,591 8,624,597 22,497,505 1,453, ,619 34,262,788 35,705,597 Disposal (4,203,211) Ending balances 14,552,564 89,032, ,463,840 10,460,792 9,659, ,168, ,905,944 Net Book Values P=8,950,207 P=38,145,342 P=137,722,923 P=2,496,695 P=455,966 P=2,299,473 P=190,070,606 P=207,222,720 Land At Revalued Amounts: Cost Beginning balances P=76,732,055 P=75,632,055 Transferred from noncurrent asset 1,100,000 Ending balances 76,732,055 76,732,055 Appraisal Increase Beginning balances 669,450, ,550,439 Additions 73,900,000 Ending balances 669,450, ,450,439 Revalued Amount P=746,182,494 P=746,182,494 Some parcels of land with a carrying value of P=68,634,109 as of December 31, 2004 are used as collaterals to bank loans and long-term debt (see Notes 11 and 12). 9. Other Noncurrent Assets Property, plant and equipment not used in operations - net of allowance for probable losses of P=2,565,751 in 2003 P=16,827,042 P=23,643,753 License fee (Note 22) 7,648,425 10,197,900 Receivables 8,478,118 8,873,248 Refundable deposits 5,299,100 4,157,730 Restricted cash 959,161 Others 2,000,428 2,467,725 P=40,253,113 P=50,299,517

23 Property, plant and equipment not used in operations consists of the following: Office Land and Buildings Machinery Furniture Land and and Transportation and Improvements Structures Equipment Equipment Fixtures Total Total Cost P=3,852,489 P=26,601,806 P=88,034,752 P=2,338,102 P=5,284,883 P=126,112,032 P=127,212,032 Disposals (5,990,482) (2,835,885) (8,826,367) Transferred to property, plant and equipment (556,095) (556,095) (1,100,000) 3,852,489 20,611,324 84,642,772 2,338,102 5,284, ,729, ,112,032 Less: Accumulated depreciation 1,967,010 6,921,213 86,299,131 2,338,086 4,942, ,468,279 99,902,528 Disposals (2,565,751) (2,565,751) Allowance for probable losses 2,565,751 1,967,010 6,921,213 83,733,380 2,338,086 4,942,839 99,902, ,468,279 Net book values P=1,885,479 P=13,690,111 P=909,392 P=16 P=342,044 P=16,827,042 P=23,643,753 As of December 31, 2004 and 2003, the appraised value of the land not used in operations amounted to P=72,760,700 as determined by independent appraisers. The excess of the appraised value of the land over their carrying amount is not recognized in the consolidated financial statements. Receivables represent the balance of the local tax credit from the Municipality of San Pascual, Batangas which management believes is expected to be recovered in due time but beyond one year. Restricted cash pertains to funding from a supplier specifically for liquid caustic soda operations of CMC. 10. Notes Payable Parent Company s short-term loans from local banks: Secured loan with interest rate based on 91-day Treasury Bill (T-Bill) rate plus 2% with monthly repricing. The principal amount is payable in February This loan is collateralized by a parcel of land with a carrying value of P=37,594,800. P=12,800,000 P=12,800,000 Secured loan with interest rate of 14% per annum. The principal amount is payable in August This loan is collateralized by a parcel of land with a carrying value of P=27,007,104. 6,000,000 6,000,000 Unsecured loan with interest rate based on 91-day T-Bill rate plus 2% with monthly repricing. The loan was fully paid in ,667 6,500,000 Unsecured loan with interest rate of 12% with monthly repricing. 280,000 3,300,000 P=19,621,667 P=28,600,000

24 Accounts Payable and Accrued Expenses Trade P=48,356,968 P=80,626,624 Accrued expenses 24,548,883 17,662,824 Accrued personnel expenses (Note 19) 487,640 1,590,225 Unearned rental income (Note 23) 8,369,248 Others 2,623,121 4,200,153 P=76,016,612 P=112,449, Long-term Debt Parent Company s long-term loans from local banks: Secured with interest equivalent to 3-month PHIBOR plus spread of 2.5% payable monthly up to December The principal amount is payable in 12 quarterly installments starting March 2003 until December This loan is collateralized by a parcel of land with a carrying value of P=4,032,205 and appraised value of P=192,315,000. P=18,614,392 P=39,333,334 Secured with interest rate based on prevailing lender s rate of 13.25% and 11.25% in 2004 and 2003, respectively, subject to monthly repricing, payable monthly starting September 2002 until August The principal amount is payable in 20 equal amortizations starting in December 2003 until August This loan is collateralized by a Mortgage Participation Certificate on land worth P=22,000, ,350,000 20,710,000 Secured with interest rate based on 91-day T-Bill plus 2% payable monthly until June The principal amount is payable in 36 equal monthly amortizations until June This loan is collateralized by a Mortgage Participation Certificate on land worth P=9,722,222. The loan was settled in full in ,166,667 Unsecured with interest rate based on 5% spread over 91-day T-Bill rate. Principal and interest payable on a quarterly basis up to October The loan was fully paid in ,659,079 34,964,392 65,869,080 Less current portion of long-term debt 22,974,392 28,872,204 P=11,990,000 P=36,996,876

25 Other Long-term Liabilities Accrued employee benefits P=45,394,450 P=39,996,506 Due to related parties (Note 14) 26,836,779 28,432,125 Others 4,948,941 P=72,231,229 P=73,377,572 These liabilities were classified as noncurrent because management believes that these liabilities will not be settled in the next 12 months. 14. Related Party Transactions Significant transactions with related parties consist of: a. The Parent Company and KPC lease their office space from CIP for one year renewable at the option of both parties. Rental expense amounted to P=480,578 in 2004, P=603,999 in 2003 and P=702,922 in b. KPC purchases merchandise inventories from Kemira Chemical Oy of Finland (Kemira), a stockholder. Total purchases amounted to P=1,535,919 in 2004 and P=4,355,739 in There were no purchases of merchandise inventories from Kemira in c. CMC sells merchandise inventories to CAWC, Inc. (CAWC), an affiliate, amounting to P=828,013 in There were no sales of merchandise inventories to CAWC in 2004 and e. The Group shares in common costs and expenses. The Parent Company pays management fees under a management support service agreement with CIP based on activity-based costing, whereby services rendered are based on man hours spent or number of items or output produced as applicable. Management fees, amounting to P=5,000,000 in 2004, 2003 and 2002, represent the share of the Parent Company in the general overhead incurred by CIP. Share in common expenses of the Group amounted to P=24,504,580 in 2004, P=23,824,397 in 2003 and P= 22,245,280 in 2002 (see Note 17). e. In 2004, Vision Insurance Consultants, Inc. (VIC), an affiliate, provided risk management services for the Parent Company and KPC related to their production operations. Amount billed is based on actual time charges. Risk management fees under share in common services charged to cost of goods sold amounted to P=135,479. f. The Parent Company is a guarantor of BIGI s P=59.5 million loan from a local bank to the extent of 20%. On January 17, 2005, the local bank issued a Release of Chattel Mortgage Certification releasing the Company from any liability as a result of the full settlement of the loan. g. The Parent Company sells steam to CAWC. Total sales amounted to P=153,511 in 2004, P=2,245,474 in 2003 and P=2,531,830 in 2002.

26 h. The Parent Company and its subsidiaries receive noninterest and interest-bearing advances and reimbursement of expenses from related companies. The interest-bearing cash advances bear annual interest rates ranging from 8.25% to 9.75% in 2004, 7.0% to 9.0% in 2003 and 7.0% to 13.5% in Related interest expense amounted to P=928,322 in 2004, P=1,851,756 in 2003 and P=2,107,995 in Related interest income amounted to P=1,167,114 in 2004, P=234,898 in 2003 and P=263,354 in i. The Parent Company has a facility agreement with CAWC for the use of the Parent Company s truck scale. The shared service fee is billed to CAWC using activity-based costing, whereby services are based on the number of times of truck scale weighings. Share in common services billed to CAWC amounted to P=691,038 in 2004, P=612,980 in 2003 and P=722,821 in j. In April 2002, the Parent Company executed a promissory note for a portion of its payable to CAWC, amounting to P=14,403,810 with interest based on a 91-day treasury bill rate plus 5% per annum. The note pertains to the advances the Parent Company received from CAWC for the flood control project. The loan was fully paid in Outstanding interest payable to CAWC amounted to P=218,000 in The balance of P=14,585,700 as of December 31, 2004 and 2003 pertains to the exchange of land executed in Outstanding net receivables from and payables to related parties are as follows: Advances Loans Interest Insurance Total Total Current: Due from (included in Receivables account): CAWC P=1,711,859 P=2,571,767 P=18,377,556 P= P=176,538 P= P= P= P=20,265,953 P=2,571,767 CIP 4,376,628 4,600,000 2,562,698 1,043,517 10,020,145 2,562,698 VIC 7,375,201 7,375,201 Others 21,080 21,080 21,080 21,080 P=6,109,567 P=2,592,847 P=22,977,556 P=2,562,698 P=1,220,055 P= P= P=7,375,201 P=30,307,178 P=12,530,746 Due to: VIC P=2,532,195 P= P=681,581 P= P=655,607 P= P=2,250,156 P= P=6,119,539 P= Kemira 531,373 2,151, ,373 2,151,180 Perfumeria Española Corp. 19, ,002,115 19,211 4,002,825 P=3,082,779 P=2,151,890 P=681,581 P=4,002,115 P=655,607 P= P=2,250,156 P= P=6,670,123 P=6,154,005 Payable Arising from Sale of Land Insurance Premiums Total Total Noncurrent: Due to: CAWC P=14,585,700 P=14,585,700 P= P=14,585,700 P=14,585,700 VIC 12,251,079 13,846,425 12,251,079 13,846,425 P=14,585,700 P=14,585,700 P=12,251,079 P=13,846,425 P=26,836,779 P=28,432, Stockholders Equity Quasi - Reorganization On October 10, 2003, the Board Executive Committee approved the quasi - reorganization of the Parent Company with the objective of eliminating its accumulated deficit as of December 31, 2002 amounting to P=95,032,058 by applying the revaluation increment in land as of such date.