COVER SHEET C H E M I C A L I N D U S T R I E S O F T H E. (Company s Full Name) C h e m p h i l B u i l d i n g, A.

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1 COVER SHEET SEC Registration Number C H E M I C A L I N D U S T R I E S O F T H E P H I L I P P I N E S, I N C. 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) Ms. Carmelita G. Salgado (Contact Person) (Company Telephone Number) A A C F S Month Day (Form Type) Month Day (Calendar Year) (Annual Meeting) Not Applicable (Secondary License Type, If 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.

2 CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2004 and 2003 and Years Ended December 31, 2004, 2003 and 2002 and Report of Independent Auditors

3 Report of Independent Auditors BOA/PRC Reg. No SEC Accreditation No F The Stockholders and the Board of Directors Chemical Industries of the Philippines, Inc. We have audited the accompanying consolidated balance sheets of Chemical Industries of the Philippines, Inc. 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 Chemical Industries of the Philippines, Inc. 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

4 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 Chemical Industries of the Philippines, Inc. Chemphil Building, 851 A. Arnaiz Avenue Legaspi Village, Makati City We have audited the accompanying consolidated balance sheets of Chemical Industries of the Philippines, Inc. 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 Chemical Industries of the Philippines, Inc. 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

5 SGV & CO Report of Independent Auditors On Supplementary Schedules SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Phili ppines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No F The Stockholders and the Board of Directors Chemical Industries of the Philippines, Inc. 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 Chemical Industries of the Philippines, Inc. 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

6 CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS December (As restated Note 2) Current Assets Cash and cash equivalents (Note 3) P=17,540,932 P=10,798,710 Investment in trust fund (Note 4) 1,711,208 2,346,027 Receivables - net (Note 5) 143,025, ,489,808 Inventories - net (Note 6) 157,562, ,586,764 Due from related parties - net (Note 15) 3,926,462 6,769,041 Other current assets (Note 7) 22,121,565 17,381,686 Total Current Assets 345,888, ,372,036 Noncurrent Assets Investments - net (Notes 8 and 11) 19,650,464 22,589,763 Property, plant and equipment (Notes 9, 11, 13, 24 and 26) At cost - net 319,498, ,204,488 At revalued amounts 1,210,408,482 1,210,408,482 Deferred income tax assets (Note 22) 27,066,896 37,677,854 Other noncurrent assets (Note 10) 100,037, ,475,632 Total Noncurrent Assets 1,676,661,696 1,700,356,219 TOTAL ASSETS P=2,022,549,906 P=2,106,728,255 LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Notes payable (Notes 9 and 11) P=76,258,913 P=96,837,246 Accounts payable and accrued expenses (Notes 12 and 27) 181,474, ,924,172 Liabilities under letters of credit and trust receipts (Note 6) 80,949, ,360,939 Due to related parties (Note 15) 13,274,857 6,499,766 Income tax payable - 88,065 Current portion of long-term debt (Note 13) 27,774,392 35,922,204 Total Current Liabilities 379,731, ,632,392 Noncurrent Liabilities Long-term debt - net of current portion (Note 13) 24,790,000 52,996,876 Deferred income tax liabilities (Notes 2 and 22) 363,788, ,788,921 Deferred credits - net of accumulated amortization of P=37,543,826 in 2004 and P=18,771,913 in 2003 (Note 8) 123,862, ,634,006 (Forward)

7 - 2 - December (As restated Note 2) Other long-term liabilities (Note 14) P=71,188,178 P=68,185,654 Total Noncurrent Liabilities 583,629, ,605,457 Total Liabilities 963,360,972 1,072,237,849 Minority Interest 219,664, ,150,060 Stockholders Equity Capital stock - P=10 par value Authorized - 19,000,000 shares Issued - 10,296,688 shares 102,966, ,966,880 Additional paid-in capital 16,621,243 16,621,243 Net unrealized loss on decline in value of investments in noncurrent marketable securities (Note 8) (11,417,996) (10,815,496) Revaluation increment in land (Notes 2 and 9) 599,467, ,467,490 Retained earnings (Note 16) 131,887, ,101, ,524, ,341,216 Less cost of 87 shares held in treasury Total Stockholders Equity 839,524, ,340,346 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY P=2,022,549,906 P=2,106,728,255 See accompanying Notes to Consolidated Financial Statements.

8 CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December REVENUE Net sales (Note 25) P=1,377,002,771 P=1,245,140,191 P=1,225,993,499 Rental (Notes 15 and 25) 11,799,519 20,314,730 18,643,272 1,388,802,290 1,265,454,921 1,244,636,771 COSTS AND EXPENSES Costs of sales (Notes 15, 17 and 25) 1,256,772,748 1,146,453,483 1,133,571,994 Operating expenses (Note 18) 99,905, ,984, ,914,464 1,356,678,245 1,259,437,552 1,252,486,458 INCOME (LOSS) FROM OPERATIONS 32,124,045 6,017,369 (7,849,687) OTHER INCOME (CHARGES) - Net Interest expense (Note 15) (27,578,097) (35,379,032) (35,106,438) Amortization of negative goodwill (Note 8) 18,771,913 18,771,913 Reversal of various accrued expenses 9,358,459 2,713,169 Scrap sales 4,449,412 3,058,771 5,683,508 Equity in net earnings of associates (Note 8) 2,411,753 1,859,407 2,927,128 Land lease 1,530,303 1,779, ,258 Interest income 772, ,045 2,164,146 Foreign exchange gain (loss) - net (303,380) (39,305) 1,199,109 Gain (loss) on sale of investments and property and equipment - net (Notes 8 and 9) (276,577) 25,007, ,815 Provision for waste treatment (6,900) (1,467,370) (606,057) Loss on decline in value of investments (365,476,727) Commission 2,833,020 Gain on insurance claims 2,023,423 Others - net 756,927 2,140,953 2,506,585 9,886,552 18,842,195 (380,310,230) INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 42,010,597 24,859,564 (388,159,917) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY (Notes 2 and 26) 21,314,166 INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST 42,010,597 24,859,564 (366,845,751) (Forward)

9 - 2 - Years Ended December PROVISION FOR INCOME TAX (Note 22) Current P=6,098,611 P=2,235,031 P=3,889,344 Deferred 10,610,958 4,638,272 2,823,755 16,709,569 6,873,303 6,713,099 INCOME (LOSS) BEFORE MINORITY INTEREST 25,301,028 17,986,261 (373,558,850) MINORITY INTEREST (20,514,754) (8,238,195) 99,022,617 NET INCOME (LOSS) P=4,786,274 P=9,748,066 (P=274,536,233) Earnings (Loss) Per Share (Note 21) P=0.46 P=0.95 (P=26.66) See accompanying Notes to Consolidated Financial Statements.

10 CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax and minority interest P=42,010,597 P=24,859,564 (P=366,845,751) Adjustments for: Depreciation (Notes 9, 17 and 18) 64,731,909 67,739,261 78,586,595 Interest expense 27,578,097 35,379,032 35,106,438 Amortization of negative goodwill (Note 8) (18,771,913) (18,771,913) Reversal of various accrued expenses 9,358,459 2,713,169 Provisions for: Inventory losses 8,003,103 9,970,172 1,305,430 Doubtful accounts 123,783 2,750,222 6,688,825 Probable losses 2,565,751 Equity in net earnings of associates (Note 8) (2,411,753) (1,859,407) (2,927,128) Amortization of goodwill and others (Note 25) 2,549,475 1,133,100 1,073,740 Interest income (772,739) (396,045) (2,164,146) Loss on sale of: Other noncurrent assets 978,619 Investments 508,552 Loss on decline in value of investments (Note 8) 365,476,727 Transfers of property, plant and equipment 246,137 Gain on sale of investments and property and equipment - net (244,760) (25,007,800) (885,815) Unrealized foreign exchange loss (gain) (12,825) 15,697 (6,292) Cumulative effect of change in accounting policy (Notes 2 and 26) (21,314,166) Write-off of accounts receivable 2,585,582 Operating income before working capital changes 133,874, ,090,803 96,680,039 Decrease (increase) in: Investment in trust fund 634, ,175 (3,020,202) Receivables 38,643,504 (14,276,089) 60,008,250 Inventories 20,801,256 (35,574,456) 64,338,594 Amounts due from related parties 2,792,708 (6,666,501) (788,051) Other current assets (4,739,879) 16,845,080 17,885,151 Increase (decrease) in: Accounts payable and accrued expenses (3,024,430) 4,976,145 (16,588,649) Liabilities under letters of credit and trust receipts (38,411,573) 27,747,370 (121,113,882) Amounts due to related parties 5,210,461 (8,487,680) (3,041,981) (Forward)

11 - 2 - Years Ended December Cash from operations P=155,781,607 P=86,328,847 P=94,359,269 Interest paid (27,438,957) (33,150,979) (39,820,484) Interest received 519,149 1,862,491 3,441,352 Income taxes paid (6,186,676) (2,325,631) (12,357,619) Net cash flows from operating activities 122,675,123 52,714,728 45,622,518 CASH FLOWS FROM INVESTING ACTIVITIES Reductions in (additions to): Property, plant and equipment (Note 9) (67,273,777) (18,008,593) (49,437,710) Investments 232,636 Proceeds from sale of: Noncurrent assets 5,528,379 Investments and property and equipment - net 1,300,000 24,637,525 12,873,296 Nonmoving inventory 1,220,344 Additional investment in shares of stock of a subsidiary (Note 8) (14,017,500) Increase in other noncurrent assets 3,628,284 (11,493,526) (31,894,197) Dividends received from associates (Note 8) 2,940,000 3,920,000 1,960,000 Net cash flows used in investing activities (52,656,770) (14,962,094) (66,265,975) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 29,700,000 16,263,338 Payments of: Notes payable (20,578,333) (22,300,000) (29,831,714) Long-term debt (36,354,688) (41,057,402) (4,970,314) Increase in minority interest 47,525,439 Increase (decrease) in other long-term liabilities (6,355,935) (11,314,799) (28,404,649) Net cash flows from (used in) financing activities (63,288,956) (44,972,201) 582,100 EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 12,825 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,742,222 (7,219,567) (20,061,357) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,798,710 18,018,277 38,079,634 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 3) P=17,540,932 P=10,798,710 P=18,018,277 See accompanying Notes to Consolidated Financial Statements.

12 CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information and Status of Operations Chemical Industries of the Philippines, Inc. (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, leasing of office space to its related parties and all the mango-fruit bearing trees of the farm to a third party, and, in prior years, sale of agricultural products. The registered office address of the Parent Company is Chemphil Building, 851 A. Arnaiz Avenue, Legaspi Village, Makati City. The average number of employees of the Group was 227 in 2004, 258 in 2003, and 261 in Effective June 1, 2002, the Parent Company s Board Executive Committee (Board ExCom) approved management s proposal to discontinue or suspend the Parent Company s agribusiness operations in Cuyapo, Nueva Ecija due to continuing losses. In addition, the Board ExCom authorized management to offer the farm of the agribusiness operations for lease. On September 2, 2002, the Parent Company entered into a lease agreement with a third party for the lease of all the mango-fruit bearing trees of the farm renewable annually by mutual consent of the parties involved. On September 10, 2003, the lease agreement was extended until August 31, The lease contract was no longer renewed in 2004, instead, the Parent Company offered the property to Department of Agrarian Reform (DAR) under the Voluntary Offer to Sell (VOS) scheme, subject to the provision that the price, terms and conditions for the eventual acquisition of the said property by the Philippine Government, shall be subject to the approval of the Board of Directors (BOD). The accompanying consolidated financial statements of the Group were authorized for issue by its Board ExCom, as authorized by the BOD on April 4, Summary of Significant Accounting Policies Basis of Preparation The accompanying 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 amounts. Change in Accounting Policy Effective January 1, 2004, the Group adopted the 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 a balance sheet liability method in accounting for deferred income taxes. It also provides for the recognition of deferred income tax liabilities on 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=363,788,921 as of December 31, 2004 and Liabilities as of December 31, 2003, 2002 and 2001 increased by P=17,467,192, P=249,910,074 and P=14,725,083, respectively, while stockholders equity as of the same dates decreased by the same amounts. Deferred income tax assets amounting to P=37,006,279 and P=40,146,993, as of December 31, 2003 and 2002, respectively, were reclassified from current to noncurrent.

13 - 2 - New Accounting Standards Effective in 2005 The Accounting Standards Council (ASC) approved the issuance of new and revised accounting standards, which are based on the revised IAS and new International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The ASC has renamed 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 correspond to adopted IFRS. The Group will adopt the following new accounting standards that are relevant to the Group beginning January 1, 2005: PAS 19, Employee Benefits, requires the use of the projected unit credit method in measuring retirement benefit expense and a change in the manner of computing benefit expense relating to past service cost and actuarial gains and losses. It requires a company to determine the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity to ensure 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 Group will avail of the services of a qualified actuary to perform an actuarial valuation of the Group s retirement benefit obligations in accordance with PAS 19, and to determine the amount of transitional liability or asset that will be adjusted against beginning 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 group 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 Instrument: Disclosure and Presentation, covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about a Group 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 its legal form. PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and reporting standards for recognizing and measuring a 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 a 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

14 - 3 - directly in the consolidated 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 any accumulated impairment losses, if any. PFRS 3, Business Combination, results in the cessation of the amortization of goodwill and a requirement for an annual test for goodwill impairment. Any resulting negative goodwill after performing reassessment will be credited to income. Upon adoption of PFRS 3, the Parent Company will discontinue amortizing goodwill and will eliminate the carrying amount of the related accumulated amortization with a corresponding decrease in goodwill. Unamortized goodwill, as of December 31, 2004 amounted to P=745,167. Negative goodwill will be derecognized against the balance of retained earnings as of December 31, Unamortized negative goodwill as of December 31, 2004 and 2003 amounted to P=123,862,093 and P=142,634,006, respectively. 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 classified as held for sale to be measured at the lower of 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 on the 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 consolidated 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 consolidated 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.

15 - 4 - 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. 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. 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 28, Investments in Associates, reduces alternatives in accounting for associates in consolidated financial statements and in accounting for investments in the separate financial statements of an investor. Investments in associates 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 and associates as required by PAS 27 and 28. Upon adoption of PAS 27 and 28, the Group will account for its investments in subsidiaries and associates at cost less impairment in value in the separate financial statements. The accumulated equity in net losses of the subsidiaries and associates amounting to P=104,886,368 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 and associates of the same amount will be recognized. The adoption of the revised standards in 2005 will not have a significant impact on the Group s financial position and results of operations.

16 - 5 - Principles of Consolidation The consolidated financial statements include the accounts of the Parent Company and the following subsidiaries: Percentage of Ownership Subsidiaries CAWC, Inc. (CAWC) LMG Chemicals Corp. (LMG) 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. The control is normally evidenced when the Parent Company owns, directly or indirectly, more than 50% share of the voting rights of the subsidiaries share in capital and/or is able to govern the financial and operating policies of the subsidiaries so as to benefit from their activities. 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 of 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. 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 to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: a. Revenue from sale of goods is recognized when goods are delivered to and accepted by customers. b. Revenue from management services is recognized as services are rendered. c. Rental income subject to operating leases is recognized on a straight-line over the lease term. d. Interest income is recognized as the interest accrues. Cash and Cash Equivalents Cash consists of cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with maturities of three months or less and that are subject to an insignificant risk of change in value. Investment in Trust Fund Investment in trust fund is carried at net asset value. Gain or loss in net asset value is credited to or charged against current operations.

17 - 6 - Receivables Receivables are stated 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 moving-average 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 estimated selling price in the ordinary course of business, less estimated costs of completion, marketing and distribution. For raw materials, merchandise and spare parts and factory supplies, the net realizable value is the current replacements cost. Investments in Associates The Parent Company carries its investments in shares of stock of associates, where it holds 20% or more stock ownership interest or where it has the ability to significantly influence their operating and financial affairs, at cost plus post-acquisition changes in the Parent Company s share of the net assets of the associates, less any impairment in value. The carrying amount of investments in associates is increased or decreased to recognize the Parent Company s share of the profits or losses of the associates after the dates of acquisitions. Dividends received from associates reduce the carrying amount of the investments. Adjustments are made to the carrying amount for changes in the Parent Company s proportionate interest in the associates arising from changes in the associates equity that have not been included in the consolidated statements of income. Such changes include proportionate adjustments arising from the revaluation of land. If the Parent Company s share of losses in the associates equals or exceeds the carrying amount of an investment, the Parent Company ordinarily discontinues including its share of further losses. The investment is reported at zero value. Additional losses are provided for to the extent that the Parent Company has incurred obligations or made payments on behalf of the associates to satisfy the obligations of the associates that the Parent Company has guaranteed or otherwise committed. If the associates subsequently report profits, the Parent Company resumes including its share of those profits only after its share of the profits equals the share of net losses not recognized. When investment in shares of stock is sold or disposed of, the cost and the related accumulated equity in earnings or losses and share in any recognized revaluation increment in property of the associates and any impairment in value, are removed from the accounts and any resulting gain or loss is taken to the consolidated statements of income. Negative Goodwill Negative goodwill represents the excess of the fair value of identifiable net assets of a subsidiary at the date of acquisition over the cost of the acquisition. Negative goodwill is stated at cost less accumulated amortization. Amortization is based on a straight-line basis over its estimated useful economic life of 10 years.

18 - 7 - Other Investments Investments in marketable securities classified as noncurrent are stated at the lower of aggregate cost or market value, determined at the balance sheet date. The amount by which aggregate cost exceeds market value is accounted for as a valuation allowance. Accumulated changes in the valuation allowance are included in a separate account under stockholders equity. Realized gains or losses from the sale of noncurrent marketable securities are taken to the consolidated statements of income. Other long-term investments in stocks are carried at cost less any significant and apparently permanent decline in value. Property, plant and equipment are carried at cost less accumulated depreciation and any impairment in value, except for land, which is carried at revalued amount, less any impairment in value, starting in 2002 as determined by an independent firm of appraisers. Property, Plant and Equipment As permitted under SFAS 16/IAS 16, Property, Plant and Equipment, the Group in 2002 reverted to the cost basis of accounting for its property, plant and equipment, except for land which is still carried at revalued amounts (see Note 9). In prior years, certain property and equipment of the Parent Company were carried at revalued amounts. Accordingly, the Parent Company in 2002 reversed the revaluation increment amounting to P=30,026,346 against the related property and equipment, with net book value of P=8,712,180 as of such date. Net adjustment of P=21,314,166 representing the effect of the change on prior years depreciation expense was reflected in the determination of the net income for the year ended December 31, 2002 under the caption Cumulative effect of change in accounting policy (see Note 26). The initial cost of all items of property, plant and equipment consists of their purchase price, including import duties, taxes and directly attributable costs of bringing the assets to their working condition and location for their 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 year 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 property, plant and equipment. When assets are retired or otherwise disposed of, the cost, revaluation increment, related accumulated depreciation and any impairment in value are removed from the accounts and any resulting gain or loss is included in the consolidated statements of income. The net revaluation increment pertaining to land resulting from the revaluation is shown as Revaluation increment in land account in the stockholders equity section of the consolidated balance sheets. Any revaluation decrease as a result of subsequent revaluation is 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 is recognized as an expense.

19 - 8 - Depreciation is computed on a straight-line basis over the estimated useful life of the asset as follows: Years Land improvements 5-10 Buildings, structures and improvements 8-30 Machinery and equipment 3-10 Transportation equipment 3-5 Standing crops 10 Office furniture and fixtures 1-3 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 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 such time 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 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 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 an asset is the greater of its 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 cash-generating unit to which the asset belongs. Any impairment loss is 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 assumption. The unfunded past service liability, experience adjustments, and the effects of the change in the actuarial assumptions are amortized over the expected remaining working lives of the covered employees.

20 - 9 - Borrowing Costs Borrowing costs generally are expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in 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 carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. 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 and losses arising from foreign currency-denominated transactions and translations of foreign currencydenominated 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 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, including asset revaluations. Deferred income tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) and net operating loss carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carryforward benefits of unused tax credits from excess MCIT and NOLCO can be utilized. Deferred income tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries, associates and interests in joint ventures. With respect to investments in associates and interests in joint ventures, 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 assets 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

21 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, and after retroactive adjustment for any stock dividends and stock splits declared during the year. The Group has no financial instrument or any other contract that may entitle its holder to common shares. 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=7,940,932 P=6,798,710 Short-term deposits 9,600,000 4,000,000 P=17,540,932 P=10,798,710 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 respective short-term deposit rates. 4. Investment in Trust Fund The Parent Company has an existing trust fund for its employees. The details of the trust fund are as follows: Cash in bank P=339,431 P=189,000 Loans receivable net of allowance for doubtful accounts of P=20,559 in 2004 and P=13,896 in ,229,945 2,411,230 (Forward)

22 Interest receivable P=8,352 P=11,385 Investment in bonds and other debt instruments 167, ,879 1,744,728 2,792,494 Liabilities 33, ,467 P=1,711,208 P=2,346, Receivables Trade P=115,905,420 P=147,617,625 Refundable tax 27,587,090 25,957,137 Officers and employees 379, ,204 Others 17,395,909 26,660, ,268, ,711,575 Less allowance for doubtful accounts 18,242,344 19,221,767 P=143,025,982 P=181,489, Inventories At cost: Finished goods P=1,439,175 P=10,609,888 Semi-processed goods 7,104,747 2,291,596 Merchandise 84, ,152 Raw materials: On hand 4,026, ,084,518 In transit 11,454,979 6,207,690 Spare parts and factory supplies: On hand 26,447,809 In transit 1,222,463 1,225,258 At net realizable value: Finished goods 27,923,317 16,840,780 Raw materials 57,262, ,523 Spare parts and factory supplies 47,044,018 11,845,550 P=157,562,061 P=187,586,764 Certain inventories were written down to their net realizable value and, as a result, a provision for inventory losses amounting to P=7,851,020 and P=9,970,172 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 LMG and KPC in trust for the banks. LMG and KPC are accountable to the banks for the trusteed raw materials or their sales proceeds.

23 Other Current Assets Prepaid taxes P=14,167,845 P=7,564,068 Input taxes 3,595,843 5,756,282 Deposits - net of allowance for probable losses of P=500,000 1,125,537 1,332,766 Others 3,232,340 2,728,570 P=22,121,565 P=17,381, Investments Shares of stock: At equity: Acquisition costs P=119,240,806 P=119,240,806 Accumulated equity in net losses: Balance at beginning of year (104,358,121) (102,297,528) Equity in net earnings during the year 2,411,753 1,859,407 Dividends received (2,940,000) (3,920,000) Balance at end of year (104,886,368) (104,358,121) 14,354,438 14,882,685 At cost: Acquisition costs 755,560, ,560,965 Disposal (6,000,000) 749,560, ,560,965 Allowance for decline in value of investments: Balance at beginning of year 748,145, ,330,200 Loss on decline in value of noncurrent marketable securities 602,500 10,815,496 Disposal (4,191,448) Balance at end of year 744,556, ,145,696 5,004,217 7,415,269 19,358,655 22,297,954 Bonds 291, ,809 P=19,650,464 P=22,589,763 The Parent Company s investments in shares of stock accounted for under the equity method are: Investee Company Percentage of Ownership Perfumeria Española Corp. (PEC) All Asia Capital and Trust Corporation (All Asia) 14.00

24 Investment in All Asia The Parent Company s cost of investment in All Asia amounting to P=108,437,500 has been reduced to zero following the latter s recurring losses, negative working capital and capital deficiency. Investments in Shares of Stock Carried at Cost a. Petrochemicals Corporation of Asia-Pacific (Petrocorp) Investments of the Group in Petrocorp are as follows: Percentage of Ownership Direct - Parent Company 7.63 P=181,784,776 P=181,784,776 Indirect through: CAWC ,368, ,368,728 LMG ,607, ,607, ,761, ,761,279 Allowance for decline in value of Investment 724,761, ,761,279 P= P= Investment in shares of stock of Petrocorp is accounted for under the cost method since the Group intends to hold the investment on a temporary basis. Petrocorp has suffered recurring losses, has substantial negative working capital and has a capital deficiency. It has also temporarily shut down its plant operations since April 2000 due to the unfavorable market prices of its products and tight working capital requirements. Accordingly, the investment in Petrocorp was fully provided with an allowance for decline in value of P=724,761,279. b. Bataan Industrial Gases, Inc. (BIGI) The investment of LMG in BIGI amounting to P=6,000,000 represents 20% of BIGI s paid-up capital. This investment is carried at cost because the subsidiary has no significant influence on BIGI s operating and financial affairs. BIGI is a joint venture undertaking of a subsidiary with two other companies to manufacture nitrogen and hydrogen gases to supply Petrocorp s polypropylene plant requirements. LMG has provided an allowance for the decline in value of its investment in BIGI as of December 31, 2003 amounting P=4,191,448. On December 9, 2004, LMG sold its investment in BIGI. Investments in Noncurrent Marketable Securities The Parent Company recognized a decline in value of investments in noncurrent marketable securities amounting to P=602,500 and P=10,815,496 in 2004 and 2003, respectively. The decline in value was deemed temporary and as such, the decline in value was recorded as Net unrealized loss on decline in value of investments in noncurrent marketable securities account in the stockholders equity section of the consolidated balance sheets.