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Life can be betterPHINMA

May 29,2013

PHILIPPINE STOCK EXCHANGE, INC.a/F Philippine Stock Exchange CenterExchapge Road,Ortigas Center, Pasig

Attention : MS.IANET A. ENCARNACIONHead. Disclosure DePartment

Gentlemen:

Attached is Phinma Corporation (PHN) amended SEC 17-A for Calendat Yeat 2072

which incorporates the comments of the Securities and Exchange Commissioru as

follows:

1) No. of employees by type (clerical, operations, administrative, etc.), whether or

not ur,y of thum arssubject to Collection Bargaining Agreements (CBA) and the

expiration dates of any CBA. Please refer to revised Pages 12 and13.

2) Price information of PHN shares as of the latest practicable trading date. Please

see revised page17.

3) Indicate type of shares owned by foreign shareholders. Please refer to Table 8 of

pagel7.

4) Additional signatories on the signature page of SEC 77'A rcport to include the

Chief Executive Officer and Chief Operating Officer. Please refer to revised page

70.

5) Financial soundness indicators shown on page 27 and28 arc now added as part

of Annex B.

Very truly yours,

{ffiWFinanceU

PHlNMACorporationl2eFloorPhinmaPlaza,3g?lazaorive,nockwell Center,Makati City1210l Tel:870-0100 lFax:870-0456

SEC Number 12397 File Number _____ PHINMA CORPORATION 12/f, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City Telephone No. : 8700100 Company’s Calendar Year Ending : December 31

AMENDED ANNUAL REPORT (SEC Form 17 – A) ______________________________________ Amendment Designation (If Applicable) December 31, 2012 Period Ended Date ________________________________________ Secondary License Type and File No.

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17- A

ANNUAL REPORT PURSUANT TO SECTION 17

OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the calendar year ended December 31, 2012

2. SEC Identification Number 12397 3. BIR Tax Identification No. 321-000-107-026 4. Exact name of issuer as specified in its charter PHINMA Corporation 5. . Manila, Philippines 6. (SEC Use Only) Province, Country or other jurisdiction of

incorporation or organization Industry Classification Code:

7. 12/F, Phinma Plaza, No. 39 Plaza Drive, Rockwell Center, Makati City 1210 Address of principal office Postal Code 8. (632) 8700-100 Issuer's telephone number, including area code 9. __________________________________________________________________ Former name, former address, and former fiscal year, if changed since last report. 10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA Title of Each Class

Number of Shares of Common Stock

Outstanding and Amount of Debt Outstanding

(as of Dec. 31, 2012– audited) Common Shares 258,907,058 shares Amount of Debt Outstanding- (in thousands) P2,659,483 11. Are any or all of these securities listed on a Stock Exchange. Yes [ x ] No [ ]

If yes, state the name of such stock exchange and the classes of securities listed therein: Philippine Stock Exchange, Inc. Common Shares 12. Check whether the issuer: (a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17 thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding twelve (12) months (or for such

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shorter period that the registrant was required to file such reports); Yes [ x ] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days.

Yes [ x ] No [ ] 13. Aggregate Market Value of the Voting Stock held by Non-affiliates of the Registrant.

P 1,460,680,420

14. Check whether the issuer has filed all documents and reports required to be filed by Section

17 of the Code subsequent to the distribution of securities under a plan confirmed by a court or the Commission.

NOT APPLICABLE

DOCUMENTS INCORPORATED BY REFERENCE 15. The following documents are incorporated by reference as part of SEC Form 17-A:

(a) Audited Consolidated Financial Statements for the calendar year ended December 31,

2012 and 2011 - Annex A

(b) Supplementary Schedules to the Audited Financial Statements - Annex B (c) Statement of Management’s Responsibility for Financial Statements

(d) SEC Form 17 – C (Current Report) - Annex C (e) SEC Form 17 – Q (Quarterly Report) - Annex D

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TABLE OF CONTENTS PART I - BUSINESS AND GENERAL INFORMATION

Item 1 Business and General Information 4 Item 2 Properties 14 Item 3 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 15

PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5 Market for Issuer’s Common Equity and Related Stockholder Matters

16

Item 6 Management’s Discussion and Analysis or Plan of Operation 19 Item 7 Financial Statements 56 Item 8 Changes in and Disagreements with Accountants and

Financial Disclosure 56

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9 Directors and Executive Officers of the Issuer 57 Item 10 Executive Compensation 62 Item 11 Securities Ownership of Certain Beneficial Owners and

Management 63

Item 12 Certain Relationships and Related Transactions 65 PART IV - CORPORATE GOVERNANCE

Item 13 Compliance Program 66-67 PART V - EXHIBITS AND SCHEDULES

Item 14 Exhibits 68-69

SIGNATURES 70

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PART 1 – BUSINESS AND GENERAL INFORMATION Item 1. Business A) Parent Company

Phinma Corporation, formerly Bacnotan Consolidated Industries, Inc. (“PHN” or the “Parent Company”), was incorporated in the Philippines on March 12, 1957. PHN is a holding company with investments in the education, steel products, housing, business process outsourcing and energy sectors. The ultimate parent company of PHN and its subsidiaries is Philippine Investment-Management (PHINMA), Inc. The change in corporate name to PHINMA Corporation was approved by the Securities and Exchange Commission (SEC) on May 27, 2010. As of December 31, 2012, the Company’s principal subsidiaries and its percentage of ownership are as follows: Table 1 - List of Subsidiaries

Name of Subsidiaries

% of Ownership

Union Galvasteel Corporation (UGC) 98.08 Fuld & Company, Inc. 85.00 Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) 85.00 One Animate Limited (OAL) 80.00 Pamantasan ng Araullo (Araullo University), Inc. 78.64 Cagayan de Oro College, Inc. (COC) 74.21 University of Iloilo (UI) 69.79 University of Pangasinan (UPANG) 69.75 P & S Holdings Corporation (PSHC) 60.00 Asian Plaza, Inc. 57.62 The principal activities of the subsidiaries are as follows :

Name of Subsidiaries Principal Activities Union Galvasteel Corporation

Manufacture of galvanized & pre-painted iron sheets and allied products for roofing

One Animate Limited BPO – Animation services P&S Holdings Corporation Investment and real estate holding Araullo University Educational institution Cagayan de Oro College, Inc. Educational institution University of Pangasinan Educational institution University of Iloilo Educational institution Asian Plaza, Inc. Investment in real properties Fuld & Company, Inc. Business research and consulting Fuld & Company (Philippines), Inc. Business research

The Company also has direct minority interest in the following companies:

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Table 2 - Associates

Name of Associates % of

ownership Phinma Property Holdings Corporation (PPHC 35.35% Trans-Asia Oil and Energy Development Corporation 26.21% AB Capital and Investment Corporation (AB Capital) (c) 26.51% Luzon Bag Corporation (Luzon Bag) (b) 21.05% Asia Coal Corporation (a) 12.08%

(a) ceased commercial operations and considered an associate although percentage of ownership is below 20% since the Company has significant influence as evidenced in its representation in the BOD of Asia coal. (b) Liquidated in 2012. (c) Represents the shares to be received by PHN from AB Capital upon return of capital.

B) Subsidiaries : Steel Business UGC, formerly Bacnotan Steel Corporation, was incorporated in June 1993. UGC is a leading manufacturer of pre-painted galvanized iron roofing products and other steel products such as steel decking, frames and insulated panels used for cold storage and other facilities. The corporate name was changed to Union Galvasteel Corporation (UGC) in April 2000. UGC’s main manufacturing facilities are located in Calamba, Laguna. UGC operates rollforming plants in Poro, San Fernando, La Union, Ilang, Davao City, Cebu City, Sta. Rosa, Nueva Ecija, and Cagayan de Oro City. UGC started operations at the Poro and Davao steel plants in 1963 and 1968, respectively. The Calamba plant commenced operations in 1991 and now includes a color coating line which was commissioned in January 1993.

On December 21, 2009, PHN acquired the remaining 19.5% non-controlling interest in UGC thereby increasing BCII’s ownership to 100%, thus making UGC a wholly owned subsidiary of BCII. The total consideration was P36.3 million of which P9.1 million was paid as of December 31, 200. The remaining balance amounted to P27.2 million will be payable in January 2010.

UGC repurchased all of the preferred shares at par in the amount of P167.8 million on December 21, 2009.

On December 22, 2010, the SEC approved the merger of UGC and Atlas Holdings Corporation, a 90%-owned subsidiary of PHN. UGC is the surviving entity. After the merger, the Company’s ownership interest in UGC decreased from 100% to 98.36%. Business Process Outsouring One Animate Limited (OAL), is a limited liability company incorporated in Hong Kong in October 2008 and is engaged in business process outsourcing for animation services.

One Animate owns ninety five percent (95%) interest in Toon City Animation, Inc. (“Toon City”), a corporation organized and existing under Philippine law. Toon City is a fifteen (15) year old animation studio providing services to clients like Walt Disney and Universal Studios, among others. Toon City provides 2D, Flash and 3D CGI Animation services for various TV, Direct to Video and Theater Feature release production. Educational Services On April 28, 2004, PHN purchased 56.77% ownership interest in Araullo University.

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Araullo University (AU) is located in Cabanatuan City, Nueva Ecija and serves a population of approximately 5,800 students. In December 2004, PHN subscribed to an additional 12,711,886 shares from the increase in capital stock of Araullo University for P127.1 million. This increased PHNs ownership interest in Araullo University to 78.64%. On June 29, 2005, the Company purchased 1,951,038 shares of stock of Cagayan de Oro College (COC) representing 66.95% ownership interest for P=204.5 million. COC is a public corporation incorporated in the Philippines.

In 2007, PHN’s advances to COC amounting to P=28.0 million was converted to equity, thus increasing PHN’s ownership interest to 74.34%. On February 2, 2009, PHN purchased 5254,351 shares of stock of University of Pangasinan (UPANG) representing 70% ownership interest. UPANG is a private educational institution incorporated in the Philippines with campus located at Dagupan City, Pangasinan. On February 25, 2009, PHN purchased 34,997 shares of stock of University of Iloilo (UI) from Inaec Agro Industrial Corporation and completed the subscription and payment of 1,190,000 shares of said university at P100 per share. The shares represent 70% ownership interest in UI, a private educational institution incorporated in the Philippines located in Iloilo City. Business Research and Consulting On June 10, 2011, PHN acquired an 85% interest in Fuld U.S., a business research and consulting firm focusing on business and competitive intelligence. Fuld U.S. is incorporated in the United States with offices in the U.S., United Kingdom and China. Founded in 1979, Fuld U.S. has served more than 300 of the largest companies worldwide providing customized research and analysis on markets, competitors, suppliers and customers. The company enables clients to make more informed judgments related to mergers and acquisitions, new product introductions, market entry, tactical sales plans, distribution channels, cost reduction programs, restructuring, supply chain management, employee recruitment and retention and a variety of other critical business decisions. Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) was acquired on July 25, 2011. It is a Philippine-based firm that provides business intelligence research services for consulting firms and corporations worldwide. Established in 2002, Fuld Philippines has since worked on over 400 research projects across multiple industries and markets worldwide, providing phone-based intelligence collection and analysis on critical business issues for top management. Investment in Real Properties Asian Plaza, Inc. (API) was incorporated on January 26, 2005 and started commercial operations on the same date. The Company’s primary purpose is investment in real properties. API owned a fully leased building along Sen. Gil Puyat Avenue, Makati City. On March 31, 2011, API signed a Deed of Absolute Sale with Shang Property Developers, Inc. for the sale of API’s property for P615 million. Investment Holdings P & S Holdings Corporation, a 60% owned subsidiary of Phinma Corporation was incorporated on September 11, 1998. The company’s primary purpose is to invest in real and personal properties. The company currently owns and leases land located in Bulacan.

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Product Lines Steel UGC’s product lines are: Table 3 - Steel Products

Product Type Colored or Prepainted GI

In Coil or in Sheets Rollformed

Heavy Gauge GI In sheets, coils and rollformed Long Span GI Sheets Rollformed – in sheets Claddings and Sidings Rollformed – in sheets Deckings / C. Purlins Rollformed – in sheets Metal frames / Studs Rollformed – in sheets Spandrel Rollformed – in sheets Polyurethane Panels Rollformed – in sheets Roofing Accessories Bended or Rollformed

UGC accounted for 64% of PHN’s revenues for Calendar Year 2012. The following table shows the contribution of the various products of UGC.

Table 4 – Sales Revenues By Product Line (in thousands) (in Thousand pesos)

Calendar Year Ended

December 31, 2012

Calendar Year Ended

December 31, 2011

Calendar Year Ended

December 31, 2010 Colored / Prepainted 2,146,883 2,100,597 2,166,493 Heavy Gauge 482,256 362,844 320,247 Long span GI 282,054 177,420 173,872 Total 2,911,193 2,640,861 2,660,612 Education Araullo University in Cabanatuan, Nueva Ecija, Cagayan de Oro College in Cagayan de Oro City, University of Pangasinan in Dagupan City and University of Iloilo in Iloilo City offer basic, secondary and tertiary education. The schools offer undergraduate courses in commerce, criminology, education, engineering and nursing, among others, and likewise offer graduate studies. In June 2012, overall enrollment grew by three percent to 27,000 students from 26, 200 students in June 2011 due to a strong increase in COC enrollment driven by its expansion in the eastern section of Cagayan de Oro City. Animation Services Toon City is an award-winning animation studio providing 2D, flash and 3D CGI animation services, and it counts among its clients such as international companies as Walt Disney and Universal Studios. In 2012 and 2011, OAL booked revenues amounting to P80.4 million and P26.7 million respectively. Projects included one season and two TV specials of Curious George for Universal Studios. Contribution of Export Sales UGC has no export sales.

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Supply a) Steel The actual capacity of the Galvanizing industry is 960,000 MT while capacity utilization is on the average at 30% while total pre-painted GI capacity is 250,000 MT per year and utilization is about 60%. In addition to locally-produced Galvanized Iron (GI) and Pre-painted Galvanized Iron (PPGI) products, there are importations of PPGI, Heavy Gauge and GI products which account for around 50% of the total consumption. Marketing and Distribution a) Steel

UGC serves the steel roofing requirements of end-users, developers, contractors, and dealers for residential, commercial building applications and government projects such as school buildings, military housing units, and shelter relocation projects in Mindanao. Its secondary markets are facilities for the agribusiness sector such as cold storage, poultry structures and government projects for school buildings and public markets. UGC’s main manufacturing facilities are located in Calamba City, Laguna and maintains a nationwide distribution network consisting of 11 roll-forming plants, 15 warehouses and sales offices located in strategic regions around the Philippines. Competition a) Steel UGC’s principal competitors are Manufacturers such as Philippine Steel Coating Corporation, Puyat Steel Corporation, Chuayuco Steel Manufacturing Corporation and Sonic Steel Industries, Inc. there are also major rollformers such as DN Steel, Color Steel, Dwight Steel, United Steel Tech, The Everglory Group and Philmetal. These rollformers are importing finished steel products bringing the market to a more competitive situation putting pressure on prices and margins.

b) Education

AU’s principal competitors in Nueva Ecija are the Wesleyan University and Nueva Ecija University of Science and Technology, COC’s major competitors in Cagayan de Oro City are Xavier University and Liceo de Cagayan University, UPANG’s major competitors in Pangasinan are Colegio de Dagupan, University of Luzon and Lyceum Northwestern University and UI’s major competitors in Iloilo City are University of San Agustin, Central Philippine University and Iloilo Doctors College. Effect of Existing or Probable Government Regulations on the Business.

a) Steel

The present tariff on importation of both raw materials and finished products are: AFTA-China MFN GI/PPGI - 0% 7-10% Cold Rolled Coils - 0% 0% Hot Rolled Coils - 0% 0%

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Despite the liberalized tariff rates, technical smuggling in the importation of steel products remains an industry and a government concern. Governmental Evaluation of Products a) Steel The enforcement of products standards, both for local and imported materials is weak, and generally ineffective creating an uneven playing field in favor of manufacturers and importers of standard products. The Department of Trade and Industry through the Bureau of Product Standards (BPS) conducts an annual product assessment to evaluate the company’s compliance with the requirements relative to the company’s PS Quality Certification Mark License for Galvanized Steel Sheets. UGC, being ISO certified under ISO 9001;2000 for Quality Management Systems, and ISO 14001;2004 for Environmental Management Systems, undergoes periodic audit by an accredited certifying body. Raw Materials a) Steel UGC’s major raw material in the production of color coated sheets are galvanized iron sheets in coils or zinc-aluminum coated sheets in coils. The sources of galvanized and zinc aluminum coated materials are Japan, Thailand and China. There are several local manufacturers of these materials but they are not competitive as to price and quality as compared with the imported supply. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party in making financial and operating decisions and the parties are subject to common control. Related parties may be individual or corporate entities.

Outstanding balances at year-end are unsecured and settlement occurs in cash throughout the financial year. There have been no guarantees provided or received for any related party receivables or payables. For the years ended December 31, 2012, 2011 and 2010, the Company has not recorded any impairment of receivables from related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

The significant related party transactions entered into by the Company with its associates and entities under common control and the amounts included in the consolidated financial statements with respect to such transactions follow:

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2012

Company Nature Amount/Volume

Amount Due to

Related Parties

Amount Due from

Related Parties

(see Note 9) Terms Conditions

(In Thousands)

Ultimate Parent

Share in expenses,

management fees P=28,231 P=12,608 P=299 Non-interest

bearing Unsecured, no

impairment

Associates

Grant of interest

bearing advances 1,500 – 1,500 4.87%-5.07%

30-60 days Unsecured, no

impairment

Share in expenses 1,563 – 821 Non-interest

bearing Unsecured, no

impairment

Other Related Parties

Share in expenses 5,687 5,047 293 Non-interest

bearing Unsecured, no

impairment

P=17,655 P=2,913

2011

Company Nature Amount/Volume

Amount Due to

Related Parties

Amount Due from

Related Parties

(see Note 9) Terms Conditions

(In Thousands)

Ultimate Parent

. Share in expenses,

management fees P=85,310 P=20,200 P=58,258 Non-interest

bearing Unsecured, no

impairment

Associates

Grant of interest

bearing advances 131,307 – 643 4.87%-5.07%

30-60 days Unsecured, no

impairment

Share in expenses 1,589 – 3,010 Non-interest

bearing Unsecured, no

impairment

Other Related Parties

Purchase of assets – – – Non-interest

bearing Unsecured, no

impairment

Share in expenses 22,542 4,296 13,742 Non-interest

bearing Unsecured, no

impairment

P=24,496 P=75,653

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PHINMA, Inc. The Company has a management contract with PHINMA, Inc. up to June 30, 2013, renewable thereafter mutual agreement. Under this contract, PHINMA, Inc. has a general management authority with corresponding responsibility over all operations and personnel of the Company including planning, direction, and supervision of all the operations, sales, marketing, distribution, finance and other business activities of the Company. Under the existing management agreement, the Parent Company pays PHINMA, Inc. a fixed monthly management fee plus an annual incentive based on a certain percentage of the Parent Company’s net income.

TA Oil and TA Power. TA Oil and TA Power are likewise controlled by PHINMA, Inc. through a management agreement. Phinma Corporation bills TA Oil and TA Power for their share in expenses. PPHC. The Company grants interest bearing advances to PPHC for a period a 30-60 days. The Company also bills PPHC their share in expenses.PSHC. PSHC has outstanding long-term debt to UPPC arising from the acquisition of land from UPPC, then an associate of the Company (see Note 19). PSHC leases the land to UPPC for a period of 50 years, renewable for another 25 years upon the approval of the Philippine Department of Trade and Industry. Annual lease income during the entire lease term is initially fixed at P=14.6 million. In connection with the lease, UPPC was required to make a lease deposit with PSHC of P=55.5 million in July 2003 and an additional P=2.9 million in April 2005, aggregated and reflected as part of “Other noncurrent liabilities” at amortized cost at the end of the reporting period, and refundable to UPPC upon the expiration of the lease. The lease deposit’s present value was calculated using an effective interest rate of 12.0% per annum. On August 2, 2006, PSHC and UPPC amended the lease agreement increasing the annual rent revenue from P=14.6 million to P=19.2 million effective January 1, 2006.

The difference between the face value of the lease deposit and its corresponding present value at inception was aggregated and reflected as unearned revenue that is being amortized as rent revenue simultaneous with the accretion of the lease deposit. The consolidated statements of financial position include the following outstanding balances as of December 31 resulting from the aforementioned transactions:

2012 2011

(In Thousands)

Trade and other receivables P=– P=1,712 Unearned revenues 47,228 48,394 Trade and other payables – 1,144 Long-term debt 152,873 151,050 Other noncurrent liabilities 595 531

Retirement Fund. The Parent Company has established a retirement fund that is managed by a trustee. The carrying value and fair value of the retirement fund of the Parent Company amounts to P=46.0 million and P= 37.3 million as of December 31, 2012 and 2011, respectively.

Management and Directors’ Compensation PHN, UGC, COC, AU, UPANG and UI are under common management by PHINMA, Inc. and pay PHINMA, Inc. a fixed annual management fee plus an annual bonus based on a certain percentage of the respective companies’ adjusted net income, as defined in the management contract between PHINMA, Inc. and the respective companies, pursuant to the provisions of the same contract.

Management fees and bonuses, included in “Professional fees and outside services” account under “General and administrative expenses”, amounted to P=35.5 million, P=42.0 million and

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P=110.2 million in 2012, 2011 and 2010, respectively. The related unpaid amount, included in “Accruals for professional fees and others” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=13.7 million and P=16.5 million as of December 31, 2012 and 2011, respectively.

PHN, UGC, AHC, UI and AU recognized bonus to directors computed based on net income with pre-agreed adjustments. Directors’ bonus, included in “Personnel costs” account under “General and administrative expenses”, amounted to P=12.5 million, P=20.9 million and P=43.2 million in 2012, 2011 and 2010, respectively. The related unpaid amount, included in “Accruals for personnel costs” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=6.7 million and P=7.2 million as of December 31, 2012 and 2011, respectively.

Research and Development a) Steel

UGC is engaged in a continuing improvement program in order to enhance quality and cost competitiveness. Cost and Effects of Compliance with Environmental Matters UGC, as a corporate citizen, is committed to protect the environment and safeguard the health and safety of its employees. It strictly conforms to government environmental regulatory standards through its pollution control facilities for water and air. It continuously monitors its wastewater and air emissions and maintains and improves such facilities and processes to ensure environment friendly results Regular tests conducted internally and third parties show that effluents consistently met Dept. of Environmental and Natural Resources (DENR) and Laguna Lake Development Authority (LLDA) standards. In addition, UGC is a member of the Local Government Units (Calamba Green Stream Brigade and Laguna Water Conservancy), Pollution Control Association of the Philippines, Inc. (PCAPI) and Water Environment Association of the Philippines (WEAP) to strengthen its commitment and involvement for a better environment. To oversee its overall environmental program, an Environmental Group was created and headed by a fulltime Environmental Management Officer / Pollution Control Officer who is accredited by the DENR and LLDA. Employees As of December 31, 2012, PHN and its subsidiaries had a total of 1,508 employees broken down as follows:

Table 5 – Officers and Employees

Company No. of employees

CY 2012 CY 2011 PHN (Holding Company) Management 10 10 Staff 15 25 15 25 UGC Executive 11 11 Managers 38 27 Supervisors 248 230 Rank and File 108 405 97 365 Araullo University Academic 127 128 Administrative 60 187 60 188

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Cagayan de Oro College Academic 159 120 Administrative 73 232 73 193 University of Pangasinan Academic 271 297 Administrative 73 344 73 370 University of Iloilo Academic 175 161 Administrative 68 243 68 229 Fuld & Company, Inc. Management 8 6 Staff 27 35 30 36 Fuld & Company (Phils.) Inc. Management 3 3 Staff 29 32 23 26 One Animate Limited Management 2 5 Staff 3 5 75 80* TOTAL 1,508 1,512 *Includes Toon City regular employees Employees of PHN and its subsidiaries are not subject to a Collective Bargaining Agreement (CBA) except for the following subsidiaries :

a) University of Pangasinan – CBA will expire in July 2015 ; and b) Union Galvasteel Corporation (only 5 employees of its Davao Plant) - CBA will

expire in June 30, 2013. Risk Factors Steel Political and Economic Factors UGC is primarily engaged in the manufacture of pre-painted iron sheets for construction in the Philippines. UGC sales are highly dependent on general economic conditions in the country considering that the industry is a construction driven market. Heightened Competition in the Steel Industry The industry competition is very stiff because of excess capacity and the proliferation of finished products imported principally by rollformers and stockists as a result of zero tariffs for raw materials and finished products under the various Free Trade Agreements (FTA). Availability of Raw Materials

The industry is dependent on imports for raw materials. Supply was stable in 2012, however prices were soft.

Impact of Tariff Rates and Exchange Rate Fluctuations Considering that the industry is import dependent on both the upstream (raw materials) and downstream (intermediate and finished products), any adjustment in the tariff rates will certainly impact on product cost and price . Compliance With Financial Covenants UGC’s existing syndicated loan and convertible notes provide certain restrictions and requirements, including restrictions on declaration and payment of dividends, incurrence of new

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long-term debt, entering into management agreement other than with PHINMA, entering into merger or consolidation with any other company without prior consent of the creditors and maintenance of financial ratios. As of December 31, 2011, UGC is in compliance with the debt covenants. Dependence on Key Facilities

Substantially all of UGC’s income has been, and will be derived from the sale of products produced at UGC’s production facilities in Luzon. Any breakdown of or significant damage to, UGC’s production facilities could have a material adverse effect on the results of its operations. UGC maintains comprehensive property and casualty insurance policies on its production facilities under a broad name peril policy. However, there can be no assurance that the proceeds of UGC’s insurance would be sufficient to insulate UGC from all effects of possible loss or damage. Item 2. Properties As of December 31, 2012, Property, Plant and Equipment of PHN and subsidiaries are valued as follows:

Table 6 - Property, Plant and Equipment (in thousands) Cost Dec. 31, 2012 Dec. 31, 2011 Land and plantsite improvements 1,098,305 1,085,875 Plantsite improvements 28,656 22,834 Buildings and improvements 1,302,539 1,252,026 Machinery and equipment 730,327 723,353 Transportation and other equipment 473,915 469,532 3,633,742 3,553,620 Less : accumulated depreciation Plantsite improvements 23,784 17,809 Buildings and improvements 534,588 482,495 Machinery and equipment 567,105 568,813 Transportation and other equipment 343,377 339,065 1,468,854 1,408,182 2,164,888 2,145,438 Construction in progress 93,737 115,306 Net Book Value 2,258,625 2,260,744 Source : Audited financial statements as of December 31, 2011

PHN’s property, plant and equipment , as a parent company, are located in Makati and are free from any mortgage liens. UGC’s property, plant and equipment are located in Calamba, Laguna , Poro, San Fernando, La Union, Ilang, Davao City and in Cebu City. Araullo University’s property, plant and equipment are located in Cabanatuan, Nueva Ecija, Cagayan de Oro College property, plant and equipment are located in Cagayan de Oro City, UPANG property, plant and equipment are located in Dagupan City, Pangasinan and UI property, plant and equipment are located in Iloilo City.

Certain property, plant and equipment of UGC, AU and UPANG totaling P=.92 billion and P=1.1 billion as of December 31, 2012 and 2011, respectively, were used as security for their respective long-term debt.

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Item 3. Legal Proceedings Some of PHN’s subsidiaries are from time to time, involved in routine litigation and various legal actions incidental to its operations. In the opinion of the Company’s management, none of these legal matters or any property subject to legal proceedings in which the Company, its subsidiaries and affiliates are involved, is material to the Company’s financial condition and results of operations. Item 4. Submission of Matters to a Vote of Security Holders During the calendar year covered by this report, no matter was submitted to a vote of security holders through solicitation of proxies or otherwise.

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PART II – OPERATIONAL AND FINANCIAL INFORMATION Item 5. Market For Registrant’s Common Equity and Related Stockholders’ Matters Cash Dividends Payment on Common Shares PHN is authorized to pay cash or stock dividends or combinations thereof, subject to approval by the Board of Directors. Holders of outstanding shares on a dividend record date for such shares are entitled to the full dividend declared without regard to any subsequent transfer of shares. There are no limitations for the Company’s declaration of dividends to its stockholders. On October 5, 2005 the Board of Directors approved appropriation of retained earnings in the amount of P 1.0 billion for investments. There are no other limitations for the Company’s declaration of dividends to its common stock. On March 9, 2009 the Board of Directors declared cash dividend of P 0.40 per share to all shareholders of record as of March 30, 2009 payable April 24, 2009. On March 3, 2010 the Board of Directors declared cash dividend of P 0.40 per share to all shareholders of record as of March 29, 2010 payable April 23, 2010. On March 3, 2011 the Board of Directors declared cash dividend of P 0.40 per share to all shareholders of record as of March 29, 2011 payable April 26, 2011. On March 22, 2012, the Board of Directors declared cash dividend of P0.40 per share to all shareholders of record as of April 11, 2012 payable April 26, 2012. As of December 31, 2012, total distributable retained earnings of PHN is P1.8 billion. Stock Dividends Payment on Common Shares PHN paid out 20% stock dividend September 6, 2006 to all shareholders of record as of August 11, 2006. On March 30, 2007, the Board of Directors declared a 15% stock dividend to all shareholders of record as of June 5, 2007 which was paid June 30, 2007. On April 14, 2008, the Board of Directors declared a 10% stock dividend to all shareholders of record as of June 13, 2008 which was paid July 8, 2008. Market Information The shares of stock of PHN are listed and traded in the Philippine Stock Exchange, Inc. (PSE). The high and low market prices of the shares of stock of PHN for each quarter within the last three (3) years are as follows : Table 7 – Market Prices

Period High Low Calendar Year 2012 January – March 12.30 11.10 April – June 12.10 10.20 July - September 11.00 10.16

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October - December 11.80 10.20 Calendar Year 2011 January – March 14.00 11.10 April – June 13.80 11.70 July - September 13.70 10.50 October - December 12.30 10.30 Calendar Year 2010 January – March 10.50 9.00 April – June 10.00 9.60 July - September 15.00 9.20 October - December 13.90 10.04 The price of PHN common shares as of the close of the latest practicable trading date, April 10, 2013 was P13.00. The market capitalization of the Company as of end-2012, based on the closing price of P11.70, was approximately P3.03 billion. Stockholders: As of December 31, 2012, PHN has 258,907,058 common shares outstanding held by 1,276 stockholders. The list of the top twenty (20) stockholders of the Company as recorded by the Stock Transfer Service, Inc., the Company’s stock transfer agent, is as follows : Table 8 - Top 20 Shareholders

Rank

Stockholders

No. of Common Shares

% of

ownership 1. PCD Nominee Corp. (Non-Filipino) 94,297,055 36.42% 2. Philippine Investment Management, Inc. (PHINMA) 92,486,823 35.72% 3. PCD Nominee Corp. (Filipino) 35,382,407 13.67% 4 Magdaleno B. Albarracin, Jr. 8,246,258 3.19% 5 Trans-Asia Oil & Energy Development Corporation 8,139,812 3.14% 6 Trans-Asia Power Generation Corp. 4,648,896 1.80% 7 Bibiano M. Gavino 1,473,241 .57% 8 Allen Cham 1,094,059 .42% 9 Philippine Remnants Company 1,069,371 .41% 10 Victor J. del Rosario 569,010 .22% 11 Salud D. De Castro 500,000 .19% 12 Kayumanggi Publishers Co. 470,693 .18% 13 Roberto M. Lavina 327,000 .12% 14 Regina B. Alvarez 317,399 .12% 15 Ramon R. del Rosario, Jr. 298,168 .12% 16 Albert Awad 276,764 .11% 17 Cipriano V. Amando 247,738 .10% 18 Phinma Jumbo Retirement Fund 171,727 .07% 19 Ho Doris Teresa 168,601 .07% 20 Virginia S. Syjuco 162,004 .06% TOTAL 250,347,026 96.70% Stock Purchase Plan for Senior Officers Following are the salient features of the Company’s Stock Purchase Plan:

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Purpose To motivate the Senior Officers to achieve the Company’s goals, to help make the personal goals and corporate goals congruent and to reward the officers for the resulting increase in the value of PHN shares.

Prices of share The officers shall purchase shares of stock of PHN from those set aside under the Stock Purchase Plan at the average closing price of PHN shares in the stock market for 20 trading days, in no case shall the price be lower than par value.

Tranches 1/3 of the maximum shares can be purchased upon date of first notice and 1/3 each every year thereafter provided that work performance is deemed acceptable.

Holding period One-third of the shares shall not be sold or transferred to a 3rd party for at least one year from the date of each purchase or until retirement whichever comes first. Another one-third of the shares shall not be sold or transferred to a 3rd party for at least two years from the date of each purchase or until retirement whichever comes first. The last one-third of the shares shall not be sold or transferred to a 3rd party for at least three years from the date of each purchase or until retirement whichever comes first. Any such sale or transfer shall be considered null and void.

On April 2, 2009 and April 20, 2010, the BOD and shareholders of PHN respectively, approved the setting aside of 8.4 million shares from the unsubscribed portion of the Corporation’s 420 million authorized common shares for stock purchase by the Senior Officers of this Corporation. On January 26, 2012, the Philippine SEC approved the Company’s Stock Purchase Plan while the PSE approved for listing the 8.4 million shares last May 23, 2012.

As of December 31, 2012, under its Stock Purchase Plan, Senior Officers of the Company can purchase P=30.5 million worth of shares over three years, subject to certain conditions. The shares can be purchased at the average closing price of PHN shares in the market 20 days prior to each notice, but in no case shall the price be less than par value.

As of December 31, 2012, total shares acquired under the Stock Purchase Plan amount to 1,169,751 or P=12.4 million. Total cumulative expense recognized in relation to the Stock Purchase Plan amounted to P=24.3 million as of December 31, 2012. There were no unexercised vested shares as of December 31, 2012. Sale of Unregistered Securities Within the Last Three (3) Years PHN had no unregistered securities and hence no sale of said securities within the last three (3) years.

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Item 6. Management’s Discussion and Analysis or Plan of Operation CALENDAR YEAR 2012 The year 2012 was a year of broad-based growth for the Philippine economy which grew an estimated 6.6%, buoyed by strong contribution from the services, manufacturing, and construction sectors. Strong macroeconomic fundamentals and President Aquino’s no-nonsense “Daang Matuwid” program sent further positive signals to the institutional investment community as the local stock market index climbed throughout the year, closing 33% higher and posting one of the best performances in the region. In the face of this business environment, your Company’s consolidated revenue for 2012 amounted to P4.5 billion, an increase of 15% over the P3.9 billion posted in 2011 on stronger demand for our steel products as well as a full year’s consolidation of revenue from the competitive intelligence company we acquired in the middle of 2011. Core income attributable to shareholders of the parent, before one-off provisions and other non-recurring items, amounted to P131.5 million for the year. This includes the favorable financial results of Trans-Asia Oil and Energy Development Corporation and Phinma Education Network (PEN). This was offset, however, by lower income levels of the steel and property businesses and further losses in the BPO businesses. As a result, core income attributable to shareholders of the parent decreased to P131.5 million from P174.1 million in 2011. In view of the prospects of One Animate Limited (OAL), your Company has taken a conservative stance and written-off the balance of goodwill in OAL amounting to P212 million. This represents a total write-off of the Corporation’s exposure in OAL, resulting in a consolidated net loss of P90 million for 2012. 2012 Highlights Union Galvasteel Corporation (UGC), our subsidiary engaged in steel roofing, posted a 10% growth in sales revenues during the year. However, net income declined by 35%, from P108 million in 2011 to P70 million in 2012, due to competitive pressures and due to a non-cash impairment on machinery which will not be used in the ongoing conversion of the Continuous Galvanizing Line to a Color Coating Line. The company maintained, however, its leadership in the pre-painted roofing industry and is poised for stronger growth as it implements an expansion program which will make it the largest manufacturer of color-coated steel roofing products. In 2012, core income from the four schools under the Phinma Education Network (PEN) amounted to P103.4 million, an increase from P96.9 million in 2011. Total enrollment at June 2012 reflected a 3% increase over total enrollment in the previous year. In 2012, Cagayan de Oro College (COC) established a satellite campus in Barangay Puerto to serve up to 1,000 students from nearby areas. We are also pleased to report that PEN schools continued to perform well in terms of board examination passing rates. Demand for animation services from US studios continued to be weak as the US economy contracted in the fourth quarter of the year, to end 2012 with a GDP growth rate of 2.2%. During the year, net loss from operations and from provisions on receivables amounted to P161.5 million. In addition, your Company has conservatively booked an impairment loss on the remaining goodwill in OAL in the amount of P212 million. On the other hand, Trans Asia Oil and Energy Development Corporation (TA Oil) continues to post strong results as earnings increased 15% from P408.2 million in 2011 to P471.2 million in 2012. The Power Group contributed P747 million to the company’s revenues through sales of 533 million KWh to the Wholesale Electricity Spot Market (WESM) and to its bilateral customers Holcim Philippines, Quezon Electric Cooperative II, and Sorsogon Electric Cooperative I.

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During the year, TA Oil raised over P2 billion in a successful rights issue and private placement to fund its power expansion program and completed the transfer of the 21 MW CIP II bunker power plant to Bacnotan, La Union. Also, the construction of the first 135 MW coal-fired power plant of South Luzon Thermal Energy Corporation (SLTEC), a joint venture with the Ayala group, is on schedule and is expected to commence operations in the second half of 2014. Phinma Property Holdings Corporation (Phinma Properties), despite the strong markets in 2012, was challenged by new building regulations passed early in the year as well as unfavorable weather, which both resulted in delayed construction and recognition of revenues. Phinma Properties posted a decrease in net income from P70.9 million in 2011 to P4.7 million in 2012. As a result, equity in net earnings of affiliates during the year decreased by 14% from P137.7 million in 2011 to P118.9 million in 2012. Fuld & Company and Business Backoffice, Inc. (now rebranded as Fuld Philippines) together completed their first calendar year under Phinma. In 2012, Fuld reorganized new teams in the US and UK and integrated Fuld Philippines into the business but, challenged by weak demand due to the slow nature of the US economic recovery, the Fuld group posted a net loss of P20.7 million. Moving forward, Fuld intends to diversify revenue sources, grow its Asian business out of a new office in Singapore, and build a strong Philippine back office. Phinma Corporation ended 2012 with a strong balance sheet, with total assets of P9.6 billion and a current ratio and debt-to-equity ratio of 1.76 and 0.04 respectively. Your Company also has funds of approximately P1.0billion available for investment, should attractive opportunities become available. We are pleased to report that, based on a core net income of P131.5 million, your Board has declared a cash dividend of P0.40 per share payable on April 17, 2013. 2013 Outlook Despite the challenges faced by your Company in 2012 arising from weak demand in its US markets, the Philippine business environment remains strong. For 2013, the Philippine economy − despite the continuing weakness in the global market − is expected to grow by 6% to 7% on strong household consumption, fueled by inflows from overseas Filipinos and rising investments from the private sector, as well as from Government infrastructure spending. The Philippine stock market, echoing international institutional investor confidence in the country, again reached new highs in 2013, with the main index breaching the 6,800 mark in early March. Standard & Poor’s raised its Philippine outlook to “positive” in late 2012, citing the stability of the Aquino administration and economic growth. Indications are that the country’s credit rating will again be upgraded in the first half of 2013. Interest rates are expected to again remain soft during the year, further encouraging local investment. Moving forward, your Company continues to be particularly optimistic about the energy sector and intends to participate fully in its expected growth. Already, TA Oil has begun to implement expansion plans that provide for an increase in its current generation portfolio by 500 megawatts over the next five years. SLTEC, on the other hand, is in the final stage of the feasibility study for a second 135-MW clean coal-fired unit. Estimated to cost P10 billion, the second unit will also utilize the Atmospheric Circulating Fluidized Bed boiler technology which will minimize the environmental impact of emissions from the power plant. For 2013, Phinma Properties intends to leverage on its socialized housing expertise as it delivers 600 socialized housing units to the National Housing Authority. The company is also poised for a recovery based on a larger sales network and a healthy pipeline of over 4,400 condominium units over the next three years. Outside the area of reliable and renewable power and housing, your Company anticipates growth

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in its other businesses and expects various expansion projects to boost profitability in the future. UGC’s new Color Coating Line will be the largest in the industry when it becomes operational in 2014. At the same time, PEN is establishing new satellite campuses in both Cabanatuan and Cagayan de Oro which will come onstream in June 2013. Your Company remains committed toward its customers, employees, suppliers, business partners, and creditors. Through its chosen areas of quality education, reliable and renewable power, and affordable homes, the Company remains steadfast in its commitment toward nation building through good businesses that will provide attractive returns to our shareholders and improve the lives of Filipinos. Education Phinma Corporation, through the Phinma Education Network (PEN), seeks to provide a better future for thousands of students by offering quality education at affordable rates. The PEN network comprises four schools namely Araullo University (AU), Cagayan de Oro College (COC), University of Pangasinan (UPang) and University of Iloilo (UI), providing basic, secondary and tertiary education. In addition to offering affordable tuition ranging from P14,000 to P20,000 a semester, the schools continue to offer financial assistance and, through various programs, grant scholarships to children of government employees and high school students graduating with honors. Total network enrollment grew by three percent from 26,200 students in June 2011 to 27,000 in June 2012 due to a strong increase in COC enrollment, driven by its expansion in the eastern section of Cagayan de Oro City. The Agusan – Puerto satellite campus saw an 80-percent growth in freshman enrollment from 2011 to 2012. In June 2012, COC formally inaugurated the new COC-Puerto campus in Barangay Puerto which accommodates 1,000 more students. In terms of academic results, COC and AU both achieved a 100-percent passing rate for fresh graduates in the accountancy board exams in May and October 2012, respectively. UPang remains the best performing nursing school in Region 1, hitting an all-time high passing rate of 83 percent for first-timers in the June 2012 nursing board exams, while COC produced a first placer and third placer in the March 2012 criminology board exams. The COC results for electrical and mechanical engineering boards were also 100 percent for first timers in the September 2012 examination. In 2012, UI produced two board topnotchers – an eighth placer in the March 2012 criminology board exams and a fourth placer in the November 2012 nursing board exams In 2012, core income from the four schools under the Phinma Education Network (PEN) amounted to P103.4 million, an increase from P96.9 million in 2011. The combined assets of the network grew by five percent from P2.21 billion to P2.31 billion. In 2012, PEN standardized processes, including salaries and benefits, and introduced a new faculty ranking system and in-house training module across its network. Standards were set for electricity consumption as the network moved towards energy-saving cooling and lighting methods. PEN expects reductions in utility costs for school year 2012 – 2013. The PEN schools also made a shift toward open source software, reducing laboratory and software costs of the students and the schools. A new system adopting a single registration process was also introduced. The system will eventually allow online and off-site enrollment and online payments processing, thus improving convenience and providing better and faster services to the students. In 2012, PEN piloted a new learning system integrating online material with drills and guided self-learning. Initial positive results indicate the new system is potentially more effective than traditional teaching methods. PEN will rapidly expand the use of this learning system in the next school year. UI signed a Memorandum of Agreement with Magsaysay Lines to bring the latter’s training services to Region VI through a world-class training center located on the UI campus,

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while UPang partnered with DMCI and TA Power to renovate and upgrade the engineering laboratories. Moving forward, PEN is expanding COC’s Basic Education Department and is establishing a new AU campus. The new COC Basic Education complex, a five-storey building with 28 to 30 classrooms, broke ground in October 2012 while AU South, AU’s new campus located in the Southern district of Cabanatuan, broke ground in November 2012. The facilities will be open for enrollment in June 2013. PEN schools continue to standardize processes, improve efficiencies, introduce innovation, and expand, pursuant to the continuing mission of your Company to provide a better life for its students and their families through affordable yet quality education. Energy Phinma Corporation, through its affiliate Trans-Asia Oil and Energy Development Corporation (TA Oil), provides sustainable and reliable power to its customers. We are pleased to report that 2012 was another strong year for TA Oil, with the company posting a consolidated net income of P471.2 million, an increase of 15% over the net income of P408.2 million for 2011. As of December 31, 2012, total consolidated assets stood at P7.7 billion, total liabilities at P747.4 million and total equity at P6.9 billion. In 2012, TA Oil renewed its license as a Wholesale Aggregator (WA) from the Energy Regulatory Commission (ERC) which will enable it to provide quality and affordable supply of power to electric cooperatives in the country. The company also signed an Auxiliary Service Provision Agreement (ASPA) with the National Grid Corporation of the Philippines (NGCP) as it prepares to enter the market for reserve power. During the year, TA Oil’s 3.4 MW bunker-fired Power Plant continued to supply power to the Guimaras electric cooperative and to the Wholesale Electicity Spot Market (WESM) in the Visayas, delivering a total of 4.3 GWh of power. Trans-Asia Power Generation Corporation (TA Power), a subsidiary of TA Oil, also continued to provide power to major customer Holcim Philippines, Inc. (Holcim). Out of the total energy sales of 253 GWh, 91% or 231 GWh were delivered to Holcim while the remaining 9% or 22 GWh were exported to the WESM. In January 2013, TA Power became a 100%-owned subsidiary of TA Oil upon the latter’s acquisition of Holcim’s 50% interest in TA Power. In 2012, TA Oil completed the transfer of subsidiary CIP II Power Corporation’s 21 MW Bunker power plant from Calamba, Laguna to Bacnotan, La Union. Testing, commissioning, and interconnection of the plant to the Grid were completed in December 2012. In 2013, the power plant will operate as a merchant plant and will support the electricity supply business of TA Oil. TA Oil affiliate Maibarara Geothermal Inc. continued to develop the Maibarara geothermal power plant project which is around 60% complete at yearend 2012. The project is expected to be operational within the last quarter of 2013. This project is the first renewable energy undertaking declared commercial by the government under the Renewable Energy Act of 2008. Upon commercial operation, the Maibarara geothermal power plant will be the first geothermal power station in Luzon in 16 years. South Luzon Thermal Energy Corporation (SLTEC) is TA Oil’s venture with Ayala Corporation’s energy arm, AC Energy Holdings Corporation. The construction of the first 135-MW environmentally friendly Circulating Fluidized Bed coal-fired plant is proceeding as scheduled and the plant is expected to start operations in the second half of 2014. The commitment of TA Oil towards other renewable energy sources such as wind projects

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remains steadfast through its wholly-owned subsidiary, Trans-Asia Renewable Energy Corporation (TAREC). With the approval of the Feed-In-Tariff rate for wind projects in July 2012, TAREC advanced further its 54 MW San Lorenzo Wind Project, completing negotiations on the EPC Contract, Loan Agreement, and Operation & Maintenance and Project Management Contracts. To fund its continued expansion, TA Oil raised fresh capital in 2012, raising over P1.6 billion from a rights issue and another P400 million via a private placement to institutional investors. Both issuances were oversubscribed, and the total P2 billion in proceeds will be used primarily to finance TA Oil’s equity investments in the 54 megawatt wind project in San Lorenzo, Guimaras and the planned second 135 megawatt unit of SLTEC’s coal-fired power plant in Calaca, Batangas. On the exploration front, in December 2012 TA Oil signed agreements assigning participating interests in various service contracts to wholly-owned subsidiaries Trans-Asia Petroleum Corporation and Palawan 55 Exploration & Production Corporation. The spin-off of oil and gas assets will bring focus to TA Oil’s oil and gas exploration efforts and facilitate additional capital raising which may be required for oil and gas activities in the future. For 2013, TA Oil looks forward to the implementation of the open-access regime and is well poised to capitalize on this opportunity and the expected robust growth of the Philippine economy to generate higher revenues and income. Beyond 2013, TA Oil expansion plans provide for an increase in the current generation portfolio by 500 megawatts over the next five years as it supports the government’s thrust to ensure adequate and reliable supply of power for the growth of the nation. Steel Products Union Galvasteel Corporation (UGC) is the market leader in the manufacture of pre-painted galvanized roofing and other steel products, such as steel decking, frames and insulated panels used for cold storage and other facilities. The company has the largest and most diversified distribution network in the industry, with roll-forming plants and warehouses in key locations throughout the country. In 2012, the strong economy spurred a robust growth in construction activity, increasing demand for construction materials. UGC leveraged its distribution network, distinct product quality, and customer service, increasing sales to industrial estates, large contractors, and major housing developers. The company also maintained its strong participation in government projects such as school buildings, military housing units, and shelter relocation projects for typhoon-damaged areas of Mindanao. UGC revenue increased 10% from P2.64 billion in 2011 to P2.9 billion in 2012. As the company’s market base expanded and products were innovated during the year, UGC institutionalized its Customer and Technical Services program to strengthen its commitment to provide total customer satisfaction. With the pick-up of construction activity, the company expanded its production capabilities with the commercial operation in August 2012 of its new polyurethane line in Calamba, Laguna, producing polyurethane panels for agro-industrial facilities and insulated roofing panels and augmenting its existing polyurethane line in Davao. Under the current liberalized tariff regime, it is now more economical for UGC to import galvanized coils rather than doing the galvanizing in our plant. Hence, the company has decided to convert its idle continuous galvanizing line (CGL) in Calamba into a higher-capacity color coating line (CCL), in anticipation of further growth in the demand for steel roofing. This CCL, expected to be operational in early 2014, will have a capacity of 60,000 metric tons per year of color coated GI materials, making it the largest in the industry and further strengthening UGC’s market leadership in the pre-painted roofing sector. To support the growing market in the Visayas, the company is also upgrading its rollforming plant and regional office in Cebu, which will be operational by the

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second quarter of 2013. Investing in information technology to support its growing business and information needs, UGC has selected the Oracle E-Business suite to streamline business processes across its nationwide business units. The system is undergoing parallel runs before it goes live by the second quarter of 2013. The company ended 2012 with a net income of P70 million, a 35% decrease compared to net income of P108 million in 2011. Although demand for construction materials increased, there was also increased competition from imported steel products under the liberalized tariff regime. Moreover, the conversion of the CGL to a CCL resulted in an impairment charge of P25 million on machinery unutilized in the conversion. Without this non-cash charge, UGC net income for 2012 would have increased accordingly. The company declared dividends to shareholders and settled the balance of its long-term obligations in anticipation of refinancing with new long-term loans at more attractive rates. Total assets amounted to P1.98 billion, total liabilities stood at P1.08 billion and stockholders’ equity at P894.6 million. In 2013, UGC marks its 50th year of operations. Although it has been a challenging journey, we are proud that the company has attained market leadership and financial stability while maintaining quality and integrity. UGC looks forward to more years of contribution to the growth of the country as it fulfills Phinma’s commitment to a better life. Housing Phinma Property Holdings Corporation (Phinma Properties), a 35%-owned affiliate of the Company, is a leading developer of affordable medium- and high-rise condominium units in Metro Manila. Phinma Properties is the Philippine’s first and only triple ISO certified housing developer, recognized for its quality, safety, and environment-friendly designs. Phinma Properties had another challenging year in 2012. A new fire code was introduced in January 2012 as a knee-jerk reaction to a tragic fire in Tuguegarao. This forced the building plans of Arezzo Place Pasig and Solano Hills back to the drawing boards and pushed back the project starts to the second quarter, into the rainy season. Although Temporary Licenses to Sell for the projects were secured and strong sales commenced in June 2012, the unusually long rainy season of 2012 hampered construction. Reservations for the aforementioned projects totaled 813 units by the end of 2012. Construction, however, fell behind with Solano Hills and Arezzo Place ending the year with only 270 and 180 units at finishing stages of construction, respectively. In 2012, Phinma Properties also experienced delays in the delivery of its Bistekville 2 socialized housing for the Quezon City Local Government Unit (LGU). Only 422 row houses were completed in 2012, compared to a target of 894 units, due to the LGU’s delay in clearing the construction area. The result was a lag in revenue recognition based on construction completion, resulting in net income of P4.7million in 2012 compared to net income of P70.9 million in 2011. During the year, paid-up capital increased to P1.088 billion due to a stock rights offer of P180.1 million which is earmarked for property acquisition. Total assets increased to P2.87 billion as of end 2012 from P2.63 billion in 2011. For 2013, Phinma Properties looks forward to Hacienda Balai, a 1,260-unit medium-rise building (MRB) project over a 2.9-hectare land in Quezon City, scheduled for groundbreaking by the middle of the year. Phinma Properties’ pipeline also includes projects outside Metro Manila: a total of 1,350 units in Santa Rosa, Laguna, 1,080 units in Davao City, and Phinma Properties’ first of three 15-storey condominium buildings in Pasay City. This project pipeline will add another 4,450 condominium units over the next three years.

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Phinma Properties also leveraged on socialized housing efficiencies learned in Bistekville 2 and participated in project biddings of the National Housing Authority (NHA). In December 2012, the company was awarded a 600-unit MRB project, subsequently approved by the NHA board in February 2013. Phinma Properties has likewise been awarded the contract for the construction of the 120-room Microtel Technohub. Phinma Properties’ network of brokers has grown from 342 in January 2012 to 618 in December 2012. The expansion of the network is a continuing program and Phinma Properties expects to grow to at least 1,000 active brokers by year end 2013. The strong sales force and robust pipeline ensure that Phinma Properties is well poised for a recovery in 2013 as it continues to make life better for the urban Filipino family by providing quality, affordable homes. Business Process Outsourcing Fuld & Company, acquired by PHINMA in June 2011, and Business Back office Inc. (BBI), have together completed their first full year of operations as part of the PHINMA group. The joint acquisitions were designed to showcase Filipino talent to the world by producing high-value research services for the world’s largest corporations. Fuld & Company is a global consulting firm that pioneered the field of competitive intelligence to improve corporate strategy and operations. Since 1979, Fuld has served more than 300 of the largest global firms, providing customized research and analysis on markets, competitors, suppliers, and customers. Fuld’s well-known strategic gaming workshops help clients improve their market positions by evaluating the implications of planning decisions and anticipating market and competitive responses. BBI, now re-branded as Fuld Philippines (Fuld PH), was established in 2002 and has completed over 400 research projects across multiple industries and markets worldwide, providing phone-based intelligence collection and analysis on critical business issues for top management. Together, these operations, based in Manila, Singapore, London, and Cambridge, Massachusetts, offer multinationals a broad array of services to address client tactical market needs, as well as longer term assessments of future markets. 2012 was year of change for Fuld & Company. The firm hired and integrated a new management team in the US and the UK and also made some key additions to the management team in Manila. In August, Fuld acquired Outward Insights, Inc., a strong brand in the competitive intelligence world best known for strategic services such as war games, scenario planning, and consulting. Fuld moved almost all of its secondary research from US/UK -based companies to Fuld PH. 2012 was also a year of transition and integration for Fuld PH, with initiatives focused on the employment of key personnel, streamlining the communication chain, and the review and alignment of current Fuld PH policies and standards with the rest of the Fuld organization. In 2012, Fuld’s business in the US continued to be challenged by the major re-organization and the costs thereof and by weak demand in light of the slow pace of the US economic recovery. In its first full year of operation under Phinma, the Fuld group posted revenue of P471.2 million and net loss of P20.7 million. Moving forward, Fuld Asia, launched in Singapore in late 2012, opens an important new market. The current recognition of the brand is very positive and Fuld expects to grow the Asian business significantly in the coming years. 2013 sees Fuld PH striding towards integration and development, continuing efforts to recruit more staff with advanced industry experience. This will be coupled with multi-skill training, fostering extensive integration programs with its counterparts in the US and UK, and developing strategic plans to reconcile its goals and objectives within the Fuld framework. The overall goal for Fuld & Company – and a fundamental part of its growth strategy - remains the building of a strong Philippine back office, which is expected to employ hundreds of Filipinos in the years ahead.

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One Animate Limited (One Animate) is an 80% owned subsidiary of Phinma Corporation and is the parent company of Toon City Animation, Inc., a domestic BPO company specializing in animation services for film studios. In 2012, One Animate booked revenues of P80.4 million, an increase over revenues of P26.7 million in 2011. Projects for 2012 included one season and two TV specials of Curious George for Universal Studios. During the year, One Animate continued to be challenged by weak demand from US animation studios as the US economy contracted in the fourth quarter of 2012. Delayed production on existing contracts also resulted in cost overruns as the company subcontracted additional capacity to meet deadlines. In 2012 the company also provided for the write off of doubtful receivables related to production on the Voltron account in 2011. All told, net loss from operations of One Animate amounted to P161.5 million. To prevent further losses, in December 2012, Toon City retrenched most of its employees, in line with a shift to a contractual production model. Your Company has decided to take a conservative stance and book a non-cash impairment of the remaining goodwill in OAL in the amount of P212 million. Hotels In view of increasing tourist arrivals and the need for tourism infrastructure, Phinma Corporation ventured into the hospitality industry. Today, part of Phinma Corporation’s mission is to provide affordable quality hotel services in the Philippines. Coral Way City Hotel Corporation owns the 150-room Microtel by Wyndham (Microtel) Mall of Asia which commenced full commercial operations in September 2010. The hotel is managed by Microtel Development Corporation. Microtel is an international chain of hotels under Wyndham Hotel Group with more than 300 properties worldwide. Microtel pioneered the no-frills hotel concept in the Philippines that targets the mid-market. Its approach is back-to-basics and focuses on providing consistently clean, comfortable and secure accommodations at value rates. In the Philippines, there 10 hotels located in key regional hubs and resort locations such as Baguio, Batangas, Boracay, Cabanatuan, Cavite, Davao, General Santos, Mall of Asia, Puerto Princesa, and Tarlac. Three more Hotels - in Acropolis, Quezon City, UP Technohub, Quezon City, and Sta. Rosa, Laguna - will open soon. In 2009, Phinma Corporation invested P66.2 million in preferred shares of Coral Way, subsidiary of MDC. These preferred shares are convertible to common shares and bear cumulative dividends at a rate of 10%. Strategically situated near SMX Convention Center and SM Mall of Asia, Microtel Mall of Asia (MOA) caters to local and international travelers, both on business and leisure trips. In 2012, the hotel had an occupancy rate of 83%, with 68% of the bookings coming from the leisure market and the rest from corporate bookings and attendees of conventions, meetings and events in the area. In 2012, Microtel MOA achieved gross revenue of P175 million, gross operating profit of P71.8 million and net income of P3.6 million. For 2013, Microtel MOA will aggressively promote through various channels such as print, television, online partnerships, and events. It will also continue to focus its sales and marketing efforts to tap the corporate accounts and meetings, incentives, conventions and events market. The hotel will likewise fully utilize web-based sales and marketing tools to achieve greater Internet visibility and availability and generate more online bookings

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Key Performance Indicators (KPI) The top five (5) KPI’s used to measure the financial performance of PHN and its subsidiaries as of December 31, 2012 compared to the same period last year are shown in the following table :

Financial KPI Definition 2012 2011 Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income (loss) attributable to

PHN equity holders Ave. total equity attributable to PHN

equity holders

Gross profit Net sales

(0.56%)

32.33%

1.24%

28.97% Efficiency

Cash Flow Margin

Cash flow from operating Activities

Net sales

15.32%

8.60%

Liquidity

Current Ratio

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

1.76 : 1.00 0.38 : 1.00

2.63 : 1.00 0.35 : 1.00

Profitability The decline in the return on equity reflects the net loss of P 36 million for CY 2012. However, gross profit margin increased from 28.97% in CY 2011 to 32.33% in CY 2012 mainly due to gross profit margin contribution of Fuld US which was acquired and consolidated beginning June 2011. Efficiency Net cash inflow from operations was P695 million in CY 2012 compared to P340 million in CY 2011 as shown in the consolidated statements of cash flows. The net cash inflow in CY 2012 is largely due to an increase in trust receipts payable of UGC from P104 million in CY 2011 to P555 million in CY 2012 Liquidity Current ratio as of December 31, 2012 decreased from 2.63:1.00 last year to 1.76:100 this year due to an increase in current liabilities of UGC. Debt-equity ratio of PHN and its subsidiaries as of end December 31, 2012 increased from 0.35:1.00 to 0.38:1.00 due to the increase in current liabilities.

Other Financial Ratios are as follows :

Financial Ratio

Definition

2012

2011

Asset to Equity

Total Assets Total Equity

1.38

1.35

Interest rate coverage ratio

EBITDA Interest expense

4.81

5.06

Asset to Equity ratio of PHN and subsidiaries as of end December 31, 2012 increased slightly

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from 1.35 to 1.38.

Interest rate coverage ratio decreased from 3.97 in CY 2011 to 2.69 in CY 2012 due to lower EBITDA. Accounting Policies and Principles The accompanying consolidated financial statements of Phinma Corporation have been prepared in compliance with accounting principles generally accepted in the Philippines as set forth in Philippine Financial Reporting Standards (PFRS). The consolidated financial statements have been prepared on a historical cost basis, except for financial assets at fair value through profit and loss, available for sale investments and derivative investments that have been measured at fair value.

The consolidated financial statements are prepared in Philippine pesos, the company’s functional and presentation currency.

Below are additional disclosures on the Company’s operations :

a. Any known trends, demands, commitments, events and uncertainties that will result in or

likely to decrease its liquidity in any material way.

PHN does not anticipate having any cash flow or liquidity problems nor does it anticipate any default or breach of any of its existing loans.

b. Any events that will trigger direct or contingent financial obligation that is material to the

company, including any default or acceleration of an obligation.

None c. All material off-balance sheet transactions, arrangements, obligations (including contingent

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

None

d. Any material commitments for capital expenditures, the general purpose of such

commitments and the expected sources of funds for such expenditures.

None e. Any known trends, events or uncertainties that have had or that are reasonably expected to

have a material favorable or unfavorable impact on net sales/revenues/income from continuing operations.

The operations of Phinma Corporation and its subsidiaries continue to be affected by the economic performance of the Philippines and in the countries in which they operate.

f. Any significant elements of income or loss that did not arise from the Issuer’s continuing

operations.

None. g. The causes for any material change from period to period which shall include vertical and

horizontal analyses of any material item.

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Any increase or decrease of 5% or more in the financial statement accounts is discussed below.

h. Any seasonal aspects that had a material effect on the financial condition or results of

operations.

Like any other company in the construction industry, the operations of UGC is affected by seasonal demand. During the summer months starting December to May, demand for roofing materials are greater than during the rainy months of June to November. The demand for the first semester of the calendar year is normally higher than that of the second semester.

The revenues of the schools under the Phinma Education network decline during summer months.

For the parent company and the other subsidiaries, there are no seasonal aspects that materially affect operations.

Material Changes in Balance Sheet Accounts ASSETS Cash and cash equivalents The movements in cash and cash equivalents are shown in the cash flow statement. Investments held for Trading The P 29 million increase in Investments Held for Trading represents additional investments in Unit Investment Trust Funds (UITFs) by Asian Plaza, Inc. Input tax The decrease in the account of P35 million is due to a provision on input tax of OAL in the amount of P29 million as well as a decrease in input tax of UGC amounting to P8 million. Other current assets The decrease in the account of P4 million is mainly due to a decrease in various assets of Fuld US. Investments in associates – at equity The increase in the account of P509 million is due to the Parent Company’s participation in the stockrights offering of Trans-Asia Oil and Energy Development Corporation and Phinma Property Holdings Corporation in the amount of P474 million and P64 million, respectively. Available for sale investments The P 91 million increase in the account represents reclassification of investments in AB Capital and Investment Corporation to available for sale investments.

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Intangibles The decrease in the account of P216.9 million represents the impairment loss on goodwill in One Animated Limited in the amount of P 212 million. Deferred Tax Assets The P36 million increase in the account represents increase in deferred tax assets of AU, COC and Fuld US in the amount of P8 million, P12 million and P17 million respectively. Other noncurrent assets The P 5 million increase in other assets is attributable to the increase in various deferred charges of COC, Fuld Philippines, and UI in the amount of P3 million, P 1.3 million and P1.3 million respectively. LIABILITIES Notes payables The decrease in the account of P82 million represents payments made by UGC on its short-term borrowings. Trade and other current liabilities The increase in the account from P402 million to P537 million is partly due to a P 97 million deposit payable as well as an increase in the combined trade payables of Fuld US, UGC, UI and UPANG in the amount of P50 million. Trust receipts payable The P451 million increase in the account is attributable to the increase in UGC’s trust receipts payable from P104 million in December 2011 to P555 million this year. Income and other taxes payable The decrease in the account of P3 million represents a decrease in income tax payable of UGC . Due to related parties The decrease in the account represents payments by UGC of various liabilities to Phinma, Inc. Derivative liability The decrease in the account is due to the full settlement of non-deliverable forward contracts of PHN which were outstanding as of December 31, 2011. Long-term loan payable The decrease in the amount of P30 million represents partial principal payments made by PHN to selling stockholders of Fuld US in June 2012.

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Long-term debt The decrease of P328 million represents UGC’s pre-termination of its long term debt with Banco de Oro and Rizal Commercial Banking Corporation amounting to P240 million, and AU’s and Upang’s loan payments during the first semester of CY 2012. Pension and other post-employment benefits The increase in the account of P 30 million is due to retirement plan upgrade of UGC as well accruals for post-employment benefits of AU, COC and UI. Other Noncurrent liabilities The increase in the account is attributable to an increase in non-current liabilities of Fuld US. EQUITY Unrealized gain (loss) on change in fair value of available for sale investments The change is due to the increase in prices of First Philippine Holdings preferred shares held by Phinma Corporation. Share in unrealized gains on financial assets of associates The increase in the account is due to mark-to-market gains booked by an affiliate, Trans-Asia Oil and Energy Development Corporation. Cumulative translation adjustments The decrease of P6 million in the account represents cumulative translation adjustments arising from the consolidation of OAL and Fuld US. Reserve for stock purchase plan This is a reserve account for the stock purchase plan of officers of the parent company, PHN. Acquisition of minority interest This account represents the acquisition by OAL of the remaining 5% equity interest in Toon City. Material Changes in Income Statement Accounts Revenues The increase in revenues in the amount of P583 million is due to increase in revenues of UGC amounting to P269 million as a result of increase in sales volume. Likewise, consultancy revenues of Fuld US increased from P248 million to P 440 million for calendar year 2012. The former reflects revenues for the seven (7) months ended December 31, 2011, since the company was acquired and consolidated only beginning June 2011 while the latter reflects consultancy services for twelve months.

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Cost of sales The increase in cost of sales amounting to P286 million is mainly due to an increase in UGC’s cost of raw materials as a result of increase in sales volume. Operating expenses The P 363 million increase in the account is due to the consolidation of operating expenses of Fuld US for twelve (12) months ended December 31, 2012 compared to 7 months in 2011. Fuld US was consolidated by PHN only starting June 2011. Interest expense and other financial charges The decrease of P7 million in the account is due to the decrease in UPang’s long-term debt. Equity in net earnings of associates The decrease in the account of P19 million is largely due to a decline in equitized income in Phinma Property Holdings Corporation (PPHC), from P25 million in CY 2011 to P2 million in CY 2012. Net gain (loss) on derivatives This account reflects a net gain in derivatives amounting to P12.3 million for CY 2012 compared to P7 million of the same period last year. As of December 31, 2012, the company has outstanding non-deliverable contracts with an aggregate notional amount of US$4.3 million transacted at an average rate of P41.12 to $1.00. As of the end of the year, the average forward rate was P 40.99 to $1.00, resulting in an unrealized gain of P.5 million. Net derivative gain on settled contracts amounted to P 11.7 million. Foreign exchange gain (loss) PHN booked foreign exchange losses as of December 31, 2012 due to the movement in foreign exchange rate from P43.84 as of Dec. 31, 2011 to P41.05 as of December 31, 2012. Gain on sale of investment properties This represents the gain on sale of land of PHN in Nasugbu, Batangas and General Santos City. Impairment loss on goodwill This represents the write-off of the balance of goodwill in One Animate. Other income (charges) The decrease in other income of P39.7 million represents the decrease in other income of UPANG and UI in the amount of P14 million and P17 million respectively. Provision for income tax The decrease in provision for income tax from P46 million to P43 million is mainly due to UGC, the income of which declined from P108 million in 2011 to P70 million in 2012.

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Comprehensive Income Comprehensive income decreased from P58 million in calendar year 2011 to a loss of P92 million this year due to the decrease in net income from P57.5 million last year to a net loss P90 million this year. For other comprehensive income / (charges), kindly refer to the comments on equity accounts. CALENDAR YEAR 2011 The year 2011 was a year of challenges in the face of a slowdown in the world economy from continued uncertainty in the US, Europe, and the Middle East. Closer to home, a series of typhoons and delays in implementation of our government’s infrastructure programs also impacted the construction industry. Amidst this difficult business environment, your Company’s consolidated revenue for 2011 amounted to P3.9 billion, only a modest 3% increase over the P3.8 billion posted in 2010. Consolidated net income decreased to P57.5 million from net income of P254.0 million excluding one-off gains in 2010. Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) for the year amounted to P 596 million.

2011 Highlights Union Galvasteel Corporation (UGC), our subsidiary engaged in steel roofing, posted a decline in net income, from income of P202 million excluding extraordinary gains in 2010 to P107.9 million in 2011. This decrease is attributed to a slowdown in the construction industry from a series of typhoons as well as delays in government infrastructure spending. Inspite of these, the company maintained its leadership in the prepainted roofing industry, and is poised for a recovery as the government accelerates implementation of its Public Private Partnership (PPP) programs and as the nation rebuilds in the face of the natural calamities of 2011. During the year, income of the four schools under the Phinma Education Network (PEN) amounted to P131.3 million, an increase of 5% compared to P125.4 million in 2010. Total enrollment increased to 25,964 students, a 2% increase over the previous year. In 2011, the schools improved facilities and continued to perform well in terms of graduate examination passing rates. In 2011, One Animate limited posted a net loss of P97.1 million due to delayed projects from clients and production and cost challenges as the company took on more complex Computer Generated Imagery (CGI) work. One Animate has since instituted measures to better manage client relationships and improve CGI capabilities to control costs and margins. Despite these measures, your Company has nonetheless taken a conservative stance and has elected to book in 2011 a non-cash provision for impairment of goodwill in the amount of P166.4 million. During the year, equity in net earnings of affiliates increased from P59.4 million in 2010 to P137.7 million in 2011 due to the strong performance of our energy business. Trans Asia Oil and Energy Development Corporation (TA Oil) delivered stellar results, with consolidated net income surging from P14.7 million in 2010 to P408.2 million in 2011. TA Oil continued its active participation in the Wholesale Electricity Supply Market (WESM), ramping up access to generation capacity to reduce its vulnerability to volatilities in the market. During the year, TA Oil entered into a fifty-fifty joint venture with Ayala Corporation’s AC Energy Holdings Corporation to undertake the construction and operation of a modern 135 MW coal-fired power plant in Calaca, Batangas. Phinma Property Holdings Corporation (Phinma Properties), faced with industry-wide challenges such as more conservative loan value appraisals and longer loan approval cycles from the Home Development Mutual Fund (HDMF), posted a decrease in income from operations from P134 million in 2010 to P70.9 million in 2011. Despite this, Phinma Properties launched its ASiA

33

Enclaves project in Alabang and entered into a development agreement with the Quezon City local government for a 1,000-unit urban relocation program. While equity in net earnings of Phinma Properties decreased from P47.5 million in 2010 to P25.0 million in 2011, equity in net earnings of AB Capital and Investment Corporation increased from P 5.3 million in 2010 to P 7.5 million in 2011. In June 2011, the Company, in search for opportunities in the high value-added services sector, increased its Business Process Outsourcing portfolio through the acquisition of Fuld & Company, a Cambridge, Massachusetts-based global consulting firm and a leader in the field of competitive intelligence. The Company also acquired in 2011 Business Backoffice, Inc. (now Fuld Philippines, Inc.), a knowledge process outsourcing (KPO) firm. The acquisition of these companies will be accretive, with synergies expected as Fuld and Co. continues to provide competitive business research services, with additional support and a wider geographic reach through Fuld Philippines, Inc. Phinma Corporation ended 2011 with a strong balance sheet, with total assets of P9.7 billion and a current ratio and debt-to-equity ratio of 2.6 : 1 and 0.35: 1 respectively. Your Company has funds of P 1.6 billion available for investment, should attractive opportunities become available. Despite the modest income for 2011, given the consolidated EBITDA of P 596 million, your Board deemed it appropriate to maintain its cash dividends at the same level of P0.40 per share, which was paid on April 26, 2012.

Improving Lives Despite the challenges, your Company remains committed toward its customers, suppliers, employees, and the public. Although 2011 was a year of external challenges and internal growth pains, we maintain our conviction that doing good is good business. Through good business, we build the nation, address the aspirations of our stakeholders, and improve the lives of Filipinos - providing quality education, reliable and renewable power, and attractive homes, all at affordable costs. Education Phinma Corporation, through the Phinma Education Network (PEN), seeks to provide a better future for thousands of students by offering quality education at affordable rates. PEN comprises four schools namely Araullo University (AU), Cagayan de Oro College (COC), University of Pangasinan (UPang) and University of Iloilo (UI), providing basic, secondary and tertiary education to approximately 26,000 students. PEN has strived to make its schools among the most affordable private institutions in their respective areas, with tuition fees ranging from P15,000 to P20,000 per semester. To keep tuition fees low, the schools continue to manage costs and streamline operations. As a result, the ratio of non-teaching employees to faculty today averages at an efficient level of about 1:3. To provide education to even more students, the PEN schools introduced the PHINMA Scholarship program, which offers fifty percent scholarship on tuition and fees to those in financial need. In 2011, over 4,400 students enrolled under this program. For the school year 2011, overall PEN enrollment grew by two percent to 25,964. During the year, income of the four schools under the Phinma Education Network (PEN) amounted to P131.3 million, an increase of 5% compared to P125.4 million in 2010 The schools continue to perform well and are continuously improving their programs and facilities. In AU, 100% of accountancy examinees passed both board exams in 2011. In addition, the school was the top school among private schools in Cabanatuan in both its criminology and nursing program in terms of passing average for fresh graduates.

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Upang has completed the renovation of its Arts and Sciences building. The school continues to perform well in terms of passing rates for graduates of its nursing, medical technology, and law programs, and has instituted retention policies and standards in its board courses to further improve the quality of its graduates. COC’s Criminology department has been recognized by the Commission on Higher Education as a Center of Development for demonstrating institutional leadership and high standards in the areas of instruction and research. In 2011, one criminology student and one mechanical engineering student scored in the Top 10 in the nationwide board exams. In 2011, COC continued to further improve teaching performance of faculty through intensive training, seminars and workshops. UI continues to improve its programs, with a March 2011 nursing graduate scoring in the Top 5 in the nationwide licensure exam in December. In March 2012, UI’s marine engineering course received its ISO 9001:2008 certification. Energy Phinma Corporation, through its affiliate Trans-Asia Oil and Energy Development Corporation (TA Oil), continued its commitment to provide sustainable and reliable power to its customers. We are pleased to report that the year 2011 was a good year for TA Oil, with the company posting a consolidated net income of P408.2 million, a substantial improvement over the modest P14.7 million net income of the prior year. As of December 31 2011, total consolidated assets stood at P5.3 billion, total liabilities at P696.6 million and total equity at P4.6 billion. Trans-Asia Power Generation Corporation (TA Power), a subsidiary of TA Oil, continued to provide power to major customer Holcim Philippines, Inc. (Holcim). Out of the total energy sales of 240 GWh, 90% or 217 GWh were delivered to Holcim while the remaining 10% or 23 GWh were exported to the Wholesale Electricity Spot Market (WESM). During the year, TA Oil’s 3.4MW bunker-fired Power Plant began supplying power to the WESM in the Visayas, in addition to providing reliable and stable peaking power to the island of Guimaras. A total of 3.63 GWh of power was produced, with 89.7% sold to the Guimaras cooperative and the balance of 10.3% sold on the WESM, resulting in total revenues of P61.9 million and net income from operations of P13.5 million. In 2011, TA Oil signed a long-term contract to supply the electricity requirement of Holcim Philippines. The ongoing transfer of the 21 MW bunker power station assets of the CIP II Power Corporation (CIPP), a wholly-owned subsidiary of TA Oil, to Bacnotan, La Union will maximize its operating capacity as a merchant plant and at the same time provide reliable embedded-power to serve better the contract with Holcim. TA Oil continued its active participation in the WESM, ramping up its access to generation capacity, to better manage trading risks and enlarge its customer base. In 2011, TA Oil entered into an energy purchase agreement covering the SEM Calaca Plant in Batangas. On the demand side, in addition to the long term contract with Holcim, TA Oil also signed contracts with electric cooperatives in Batangas, Sorsogon, and Quezon for the supply of power to their customers. In July 2011, TA Oil joined forces with Ayala Corporation’s energy arm, AC Energy Holdings Corporation, to form South Luzon Thermal Energy Corporation (SLTEC), the vehicle undertaking the construction and operation of a modern 135 MW coal-fired power plant employing the environment-friendly Atmospheric Circulating Fluidized Bed boiler technology. The Project will be implemented on a 14-hectare parcel of land inside Phoenix Petro Terminal and Industrial Park in Calaca, Batangas. The project officially commenced in December 2011 and the plant is expected to start commercial operations by the third quarter of 2014.

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TA Oil is now re-evaluating its commitment to the development of its wind projects due to the long delays in the approval of Feed-In-Tariff (FIT) rates. The San Lorenzo Project in Guimaras was brought to the final investment-decision stage but is awaiting approval of an acceptable FIT. Steel Products Union Galvasteel Corporation (UGC) is the market leader in the manufacture of pre-painted galvanized roofing and other steel products, such as steel decking, frames and insulated panels used for cold storage and other facilities. The company has the largest and most diversified distribution network in the industry, with roll-forming plants and warehouses in key locations throughout the country. 2011 proved to be more challenging than expected as delays in the implementation of the Government’s Public Private Partnership (PPP) programs and adverse climate conditions dampened demand and resulted in some delays of construction activity. As demand for construction materials improved slightly, there was also increased competition due to the continuous importation of steel products under the liberalized tariff regime. Inspite of these market conditions, UGC maintained its competitive advantage and leadership in the prepainted roofing industry due to its strategic distribution network. Customers continued to choose UGC products and services due to the company’s commitment to quality, availability, and timely delivery. Amidst the challenges, sales revenues grew modestly by 4% mainly due to the growing acceptance of the Company’s polyurethane insulated roofing materials. The Company also saw strong demand from the agro-industrial market for its insulated panels for cold storage facilities. In 2011, the Company adopted an aggressive strategy to service the requirement for heavy gauges and steel frame building systems for the commercial and industrial sector. This broadened the company’s product offering and, together with the ISO Certified Quality Management System, reinforced UGC’s Customer and Technical Service Program. UGC’s Color Coating Line (CCL) operated at optimum productivity and efficiency levels. The Company also pursued skills development and training for its workforce to keep up with changes in process technology, products, and demands of its consumers. Net income for 2011 of P107.9 million was 46% lower than the P202 million income in 2010 excluding extraordinary income. UGC’s financial condition at year end 2011 remained healthy, with total assets of P1.9 billion, total liabilities of P1.0 billion, and stockholders’ equity of P924.7 million. Housing Phinma Property Holdings Corporation (Phinma Properties), a 35% owned affiliate of the Company, is a leading developer of affordable medium- and high-rise condominium units in Metro Manila. The year 2011 was a year of challenge for Phinma Properties. The tightening of policies and procedures by the Home Development Mutual Fund (HDMF) on the heels of the Globe Asiatique controversy resulted in conservative loan value appraisals and extended conversion cycles from loan application to approval. The Fukushima earthquake in March 2011 and subsequent reviews of building codes and metrics for structural integrity contributed further procedural delays, despite the fact that all of Phinma Properties’ designs, which adhered to Zone 4 earthquake codes exceeding compliance requirements, were approved without retrofit.

Despite these challenges, Phinma Properties launched one project in May of 2011. ASiA

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Enclaves Alabang marked the entry of Phinma Properties into the upper mid-affordable market, and a re-entry into the south after the success of Fountain Breeze in Sucat Road. Although the project experienced a slow start due partly to the conservative stance of the HDMF, sales have since picked up and are now on track. Nevertheless, Phinma Properties saw the delays as an opportunity to venture into an alternative revenue stream. Leveraging on its engineering efficiency, the company entered into urban renewal programs to unlock previously inaccessible land values. In the last quarter of 2011, the company entered into a development agreement with the Quezon City local government for an urban relocation project, Bistekville II, involving the delivery of close to 1,000 low-cost housing units, the first of its kind in Metro Manila. There is a growing opportunity for the company to duplicate this model for similar projects with other government institutions. In 2011, Phinma Properties posted operating income of P70.9 million, lower than the P134 million net income posted in 2010. During the year, Phinma Properties raised P1.0 billion via the issuance of corporate notes through partnerships with several financial institutions. This substantially increased total assets to P2.6 billion by end 2011 from P2.0 billion in 2010. The new funds are earmarked for land and technology acquisitions to support the company’s development plans. For 2012, Phinma Properties looks forward to the launch of three new projects located south and east of Manila. Coupled with the ASiA Enclaves Alabang development, these projects will bring the company’s inventory to 2,000 units ready for turnover by the end of the year. The company also plans to form a research and development team to further improve engineering efficiency and build up its sales network in each area of operation. With the recovery of loan value appraisals by the HDMF, these factors present Phinma Properties with a more positive outlook for the year. Business Process Outsourcing One Animate Limited (One Animate) is an 80% owned subsidiary of Phinma Corporation and is the parent company of Toon City Animation, Inc., a domestic BPO company specializing in animation services for film studios. In 2011, One Animate booked revenues amounting to US$3.3 million, up from revenues of US$1.1 million in 2010. Projects for 2011 included Geronimo Stilton and Henry & Me, augmenting projects carried over from 2010 such as Looney Tunes and Voltron Force. One Animate was posed with several challenges in 2011. The slowdown in the world economy dampened demand from international clients and delayed production of existing contracts. One Animate also incurred additional production costs as it moved into more complex Computer Generated Imagery (CGI) work. As a result, One Animate posted a net loss of P97.1 million in 2011. In addition to this loss, your Company took a conservative stance and opted to book a non-cash provision for impairment of goodwill in the amount of P166.4 million. One Animate has instituted measures to better manage client relationships for first-time animation clients and is also conducting continuous staff training in CGI to enhance its capabilities on more complex work. The company is also exploring new revenue sources such as content development and pre-production services including storyboarding and layout. Moreover, the company is improving production efficiency by introducing a production tracking system and shifting from traditional 2D animation to paperless animation. In 2011, reaffirming the Company’s ongoing mission of providing high value-added services that are globally competitive, Phinma Corporation acquired Fuld & Company (Fuld) in June and Business Backoffice Inc. (BBI). Fuld is a global consulting firm based in Cambridge, Massachusetts that pioneered the field of using competitive intelligence to improve strategy and operations. Since 1979, Fuld has served

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more than 300 of the largest companies worldwide providing customized research and analysis on markets, competitors, suppliers, and customers. The company enables clients to make more informed judgments related to mergers and acquisitions, new product introductions, market entry, tactical sales plans, distribution channels, cost reduction programs, restructuring, supply chain management, employee recruitment and retention, and a variety of other critical business decisions. Fuld’s well-known strategic gaming workshops help clients improve their market positions by evaluating the implications of strategic decisions and anticipate market and competitive responses. BBI is a Philippine-based firm that provides business intelligence research services for consulting firms and corporations worldwide. Established in 2002, BBI has since worked on over 400 research projects across multiple industries and markets worldwide, providing phone-based intelligence collection and analysis on critical business issues for top management. Originally operating under the Global Business Research Support brand, BBI was rebranded as Fuld Philippines following the company’s integration under Fuld & Company in January 2012. The combined US and Philippine operations will allow Fuld & Company to truly serve a global client base with flexible and a broad array of service offerings, including ongoing competitive monitoring. An important element of this growth strategy is the building of a strong Philippine backoffice, which is expected to employ hundreds of Filipinos in the years ahead. Hotels In 2009, Phinma Corporation invested P66.2 million in preferred shares of Coral Way City Hotel Corporation (Coral Way), a subsidiary of Microtel Development Corporation. These preferred shares are convertible to common shares and bear cumulative dividends at a rate of 10%. Microtel is an international chain of hotels under Wyndham Hotel Group with more than 300 properties worldwide. In the Philippines, Microtel has eleven (11) properties in key regional hubs and resort locations such as Baguio, Batangas, Boracay, Cabanatuan, Cavite, Davao, Mall of Asia, Puerto Princesa and Tarlac and will soon open properties in Libis, Quezon City and General Santos City. Microtel pioneered the no-frills hotel concept in the Philippines that target the mid-market. Its approach is back-to-basics: offer consistently clean, comfortable and secure accommodations at value rates. Coral Way owns the 150-room Microtel Mall of Asia which commenced full commercial operations in September 2010. Strategically situated near SMX Convention Center and SM Mall of Asia, Microtel Mall of Asia caters to local and international travelers, on business or leisure trips. In 2011, about 68% of the hotel guests were leisure travelers while the rest were corporate bookings and attendees of conventions, meetings and events in the area. On its first full year of operations, Microtel Mall of Asia achieved an occupancy rate of 77% and revenues of P155.2 million in 2011. Gross operating profit was P67.2 million and net income was P11.2 million. In 2012, Microtel Mall of Asia will continue to aggressively tap corporate clients, and sustain production from the leisure market through promotions and strategic alliances. It will also utilize web-based sales and marketing tools to strengthen internet presence and generate more online bookings. Consolidated Statements of Financial Position The Company’s financial position remained strong with total assets of P 9.7 billion compared to total liabilities of P 2.5 billion. Of total assets of P 9.7 billion, P 1.7 billion or 17% are in cash and near-cash investments such as short-term placements, bonds and investments in UITFs.

The company has maintained healthy financial ratios, with current ratio of 2.63:1.00 and debt-to-

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equity ratio of 35:1.00. Key Performance Indicators (KPI)

The top five (5) KPI’s used to measure the financial performance of PHN and its subsidiaries as of December 31, 2011 compared to the same period last year are shown in the following table :

Profitability

The return on equity for the calendar year 2011 of 1.24% is lower than the 7.51% return for the same period last year. The decrease was due to the decline in net income attributable to equity holders of the parent from P476 million in 2010 to P81 million in 2011.

Gross profit margin slightly decreased from 30.80% in CY 2010 to 28.97% in CY 2011. This was mainly due to the decrease in gross profits of Union Galvasteel Corporation, University of Iloilo and One Animate Limited. Efficiency

Net cash inflow from operations was P340 million in 2011 compared to net cash outflow of P108 million in CY 2010 as shown in the consolidated statement of cash flows. The net cash inflow in 2011 is largely due to the collection of contracts receivable form the sale of Asian Plaza building in the amount of P400 million.

Liquidity Current ratio decreased to 2.63 :1.00 in CY 2011 from 3.41:1.00 in CY 2010 mainly due to a decrease in cash and financial assets. The Company participated in the stock rights offering of Trans-Asia Oil in the amount of P395 million and made an initial payment of P242 million for its

Financial KPI Definition 2011 2010

Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income (loss) Ave. total equity

attributable to PHN equity holders

Gross profit Net sales

1.24%

28.97%

7.51%

30.80%

Efficiency Cash Flow Margin

Cash flow from operating Activities

Net sales

8.60% (2.87%)

Liquidity

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

2.63 : 1.00

0.35 : 1.00

3.41 : 1.00

0.33 : 1.00

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acquisition of an 85% ownership in Fuld. The Company likewise invested P8.5 million in Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) and paid cash dividends amounting to P104 million during the year.

The debt-equity ratio of PHN and its subsidiaries as of December 31, 2011 was slightly higher at 0.35 compared to 0.33 as of December 31, 2010 due to an increase in notes payable and trade-related accounts payable. Phinma Corporation is not aware of the followng :

(1) Any trends or any demands, commitments, events or uncertainties that will result

in or likely to decrease its liquidity in any material way. PHN does not anticipate having within the next twelve (12) months any cash flow or liquidity problems nor does it anticipate any default or breach of any its existing notes, loans, other indebtedness or financing arrangements requiring it to make payments ;

(2) Any events that will trigger direct or contingent material financial obligations to the

company, including any default or acceleration of its existing obligations ;

(3) Any material off-balance sheet transactions , arrangements, obligations, (direct or contingent) and other relationships the Company with unconsolidated entities or other persons created during the year ;

(4) Any material commitments for capital expenditures ;

(5) Any known trends, events or uncertainties that have had or that are reasonably

expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations; and

(6) Any significant elements of income or loss that did not arise from the registrant’s

continuing operations.

Material Changes in Statement of Financial Position Accounts ASSETS Cash and cash equivalents The decrease in cash and cash equivalents are shown in the cash flow statement. Short-term Investments The decrease of P47 million in the account resulted from conversion of short-term investments into placements with maturities of less than 90 days. These placements are classified under the cash and cash equivalent account. Investments held for Trading Investments held for trading were used to fund the initial payment of P242 million for the acquisition of Fuld as well as participation in the stock rights offering of TA Oil, hence the decrease in the account. Trade and other receivables - net The decrease of P213 million is mainly due to the collection of the contract receivable of API in the amount of P 400 million. However, this was offset by the increase in trade receivables of Fuld, a company which was acquired in June 2011 and consolidated by Phinma Corporation in 2011.

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Inventories The increase in inventories in the amount of P147 million comes largely from the increase in UGC’s finished goods inventories as of December 31, 2011. Input tax The decrease in the account of P33 million represents a decrease in input tax of UGC in the amount of P36 million. Derivative assets The account represents derivative assets of PHN and OAL in the amount of P 3 million and P1 million arising from its non-deliverable forward contracts. Other current assets The increase of P56 million is mainly due to the first-time consolidation of Fuld & Co., and Fuld & Company (Philippines) with current assets in the amount of P40 million and P2 million respectively. UI and COC also registered an increase in other current assets in the amount of P6 million and P5 million respectively. Investment in associates – at equity The significant increase in the amount of P470 million represents the participation of the company in the stock rights offering of TA Oil in the amount of P 350 million and equitized earnings, net of dividends. Available-for-sale investments The P258 million decrease in the account represents redemption of preferred shares of AB Capital and Investment Corporation and Ayala Corporation in the amount of P250 million and P8 million respectively. Intangibles The P131 million increase in the account represents provisional goodwill arising from the acquisition of Fuld & Company, Inc. in June 2011 and Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) in July 2011. Deferred tax assets The P 5 million increase in the account represents the deferred tax asset on trademarks booked in CY 2011 which was however reduced by the deferred tax assets booked by API in 2010 when it availed of the Optional Standard Deduction on its taxable income in 2011. Installment contract receivable-net of current portion The P21 million decrease in this account is due to full collection of receivable on the sale of an investment property of COC. Other noncurrent assets The increase in the amount of P6 million is attributable to the first-time consolidation of Fuld’s other noncurrent assets.

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LIABILITIES Notes payable The increase of P206 million arises from the additional short-term borrowings of UGC. Trust receipts payable The decrease of P18 million is attributable to the decrease in UGC’s trust receipts payable from P122 million as of December 31, 2010 to P104 million as of December 31, 2011. Unearned revenues The unearned revenues of AU, COC, UI and Upang increased from P195 million as of December 31, 2010 to P205 million as of December 31, 2011. Tuition fees collected at the beginning of the semester in June are booked under Unearned Revenues; the account is eventually reduced as the income is earned over the semester. Derivative liability The P2.3 million in the account balance represents unrealized losses on non-deliverable forward contracts of PHN. Income and other taxes payable The P39 million decrease in the account is due to the payment of income taxes by API. Due to related parties The decrease in the account represents payment of management bonus by UGC during the year. Current portion of long-term payable and long-term debt The amount of P22 million included under the current portion of long-term payable and P78 million long-term payable represents the balance on the acquisition of Fuld, which is payable in equal installments over four years beginning 2012. Long-term Debt – net of current portion The decrease in the long-term debt in the amount of P104 million is attributable to partial payment of loans of UGC, UPANG and AU. Deferred tax liabilities The decrease in the account of P75 million is attributable to the difference in the gain on sale of the API property recognized under the accounting standards and the gain recognized under tax rules. Pension and other post-employment benefits The P18 million increase in the account represents accrual for post-employment benefits of PHN, AU, COC, UPANG, UI and OAL.

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Other noncurrent liabilities The decrease in the non-current liabilities in the amount of P8 million resulted from the reclassification to current liabilities of API’s lease deposits amounting to P 10.4 million. EQUITY Unrealized gain (loss) on change in fair value of available for sale investments The decrease of P0.37 million is due to the loss recognized upon the redemption of Ayala Corporation preferred shares. Cumulative translation adjustments The increase in the account of P.8 million represents cumulative translation adjustments arising from the consolidation of OAL. Non-controlling interest The P101 million decrease in the non-controlling interest is due to the declaration of significant cash dividends by API and UGC. The companies declared cash dividends in the amount of P 159 million and P250 million respectively during the first semester of 2011.

Material Changes in Income Statement Accounts Revenues The increase in revenue account in the amount of P180 million represents revenue of Fuld & Company, Inc. and Fuld & Company (Philippines), Inc. in the amount of P248 million and P10 million respectively which were consolidated for the first time in 2011. Cost of sales The increase in cost of sales of P197 million represents increase in UGC’s cost of raw materials as well as the first time consolidation of Fuld & Company, Inc. and Fuld & Company (Philippines), Inc. Operating expenses The increase in the operating expenses of P180 million represents operating expenses of Fuld, & Company and Fuld & Company (Philippines) in the amount of P172 million and P6 million respectively which were consolidated for the first time during the second quarter of 2011. Equity in net earnings of associates The increase in the account of P78 million is largely due to the surge in equitized earnings from Trans-Asia Oil and Energy Development Corporation (TA Oil) amounting to P115 million as of December 31, 2011 compared to P4 million in CY 2010. Net gain (loss) on derivatives This account reflects a net gain on derivatives amounting to P7 million in CY 2011 compared to P50 million in CY 2010.

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The Company has outstanding non-deliverable contracts with an aggregate notional amount of US$6.4 million transacted at an average rate of P43.486 to $1.00. As of December 31, 2011, the average forward rate was P43.845 to $1.00, resulting in an unrealized loss of P2.3 million. This was offset by the net derivative gain on settled contracts amounting to P9.4 million. Foreign exchange gain (loss) Foreign exchange loss as of December 31, 2011 was P6.3 million compared to P32 million in CY 2010. The peso strengthened in CY 2010 from an exchange rate of P46.20 in CY 2009 to P43.84 in 2010 and 2011. Provision for impairment loss on investments in a subsidiary In view of losses sustained by OAL, management took a conservative stance and elected to book an impairment loss on its investments in OAL in the amount of P166.4 million. Gain from sale of investment property This represents the gain on sale of Asian Plaza property to Shang Property Developers, Inc. in December 2010. Income from reversal of unrecoverable input vat This represents a reversal of provision on input tax in the amount of P52 million which UGC expects to fully utilize. Other income (charges) The increase in other income of P35 million is attributable to the payment of various receivables. which were written-off in previous years. Provision for income tax The decrease in provision for income tax from P167 million to P46 million is due to the decline in income of UGC from P249 million last year to P108 million this year. Comprehensive Income Comprehensive income decreased from P654 million in December 2010 to P58 million in December 2011 largely due to the decrease in net income from P640 million in 2010 to P58 million this year. For other comprehensive income / (charges), kindly refer to the comments on equity accounts. CALENDAR YEAR 2010 The year 2010 marked our Company's first year of operations under its new name, Phinma Corporation. We are pleased to report that 2010 was a period of robust growth for the company. Consolidated net income in 2010 amounted to P 640 million, a 27 % increase over income in 2009 of P 504.5 million. Net income attributable to equity holders of the parent amounted to P 475.8 million, compared to P 447.4 million in 2009.

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Life Can Be Better Our mission, which has determined our business path for the past years and for the years ahead, is to make life better for our customers and suppliers, our employees, and the various other publics that we serve, while providing attractive returns for our shareholders. The strong financial results of the Company's operations reinforces our conviction that our twin objectives are not mutually exclusive, and that we can provide better returns for our shareholders, while making life better for our fellow Filipinos by providing them with attractive and decent homes in wholesome communities, reliable power and renewable energy sources, and high-quality education at affordable cost. 2010 Highlights Union Galvasteel Corporation (UGC), the Company’s steel-roofing subsidiary, again surpassed its own record performance of the past two years. UGC posted net income of P 249.4 million compared to P 151.9 million in 2009. These figures represent an impressive 28% return on equity, and is the result of its exceptional supply chain management, aided by the company’s top-class customer service and the expansion of its distribution facilities. During the year, aggregate income contribution from our four schools under the Phinma Education Network (PEN), amounted to P 123.4 million, compared to P 79 million in 2009. The year's results reflects a 5% increase in enrollment over last year and the consolidation of full-year results of operations of University of Pangasinan and University of Iloilo, both of which were consolidated by PEN in February and March 2009, respectively. Income contribution from our animation business, however, declined during the year. In 2010, the Company picked up a P 62.2 million net loss from One Animate Limited (OAL), due to delays in the implementation of various contracts, most of which have been postponed to 2011. As evidence of the company’s brighter prospects in 2011 and future years, OAL has built up its workforce from a low level of less than 300 in the first half of 2010 to 800 to-date, and is gearing up to further increase it to 1,000 in the coming months. During the year, equity in net earnings of affiliates dropped from P 117.7 million in 2009 to P 59.4 million. Equitized earnings from Trans Asia Oil and Energy Development Corporation (TA Oil) decreased from P 76.5 million to P 4 million in 2010 due to the volatile Wholesale Electricity Supply Market (WESM) and fuel prices. Nevertheless, TA Oil faces the future with renewed confidence that it has reduced its vulnerability to the volatilities of WESM by entering into various contracts to increase its capacity and hedge against price fluctuations, thus enabling it to take fuller advantage of the opportunities in the WESM market in the future. Phinma Property Holdings Corporation (PPHC) posted stellar performance in 2010, as it achieved income from operations of P 230.5 million, the first time the company has exceeded the P 200 million mark. During the year, however, it was determined that legal procedures required to address a delayed extension of the company’s corporate life may result in some liabilities for PPHC, all of which are now being addressed. Nevertheless, the company has taken a conservative stance and has provided for the maximum cost of resolving the pending issues. As a result, equity in net earnings of PPHC remained flat at P 47.5 million in 2010. On the other hand, equity in net earnings of AB Capital and Investment Corporation, decreased from P 17.4 million in 2009 to P 5.3 million in 2010. Despite the above, we are pleased to note that our Company unlocked significant asset values that offset the earnings decline in some of the business sectors. During the year, Asian Plaza, Inc. (API), a 57% owned subsidiary of Phinma Corporation, signed an agreement to conclude the sale of its property at a handsome premium over market rates. The transaction yielded a net gain on sale of P 386 million for API.

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Phinma Corporation continued to effectively manage its foreign exchange exposure through non-deliverable forward contracts (NDF). The company booked a gain on the NDF contracts amounting to P 50.1 million, which has more than offset a foreign exchange loss of P 32.4 million due to the strengthening of the Philippine peso, resulting in a net foreign exchange gain of P 17.7 million. In 2010, the Securities and Exchange Commission (SEC) approved the merger of 100% owned UGC and 90% owned Atlas Holdings Corporation (AHC), with UGC as the surviving entity. The merger will make possible the more productive use of the financial assets of AHC and will reduce the financing costs of UGC. The integration of the administration of the two corporations will likewise result in economies of scale and improved efficiency of operations. Phinma Corporation ended the year with a strong balance sheet, with total assets of P 9.7 billion and a current ratio and debt-to-equity ratio at strong levels of 3.41 and 0.33 respectively. In view of its financial performance in 2010, your Company declared a cash dividend of P 0.40 per share, which was paid out on April 26, 2011. Education Phinma Corporation, through the Phinma Education Network (PEN), seeks to provide a better future for thousands of students by offering quality education at affordable rates. PEN comprises four schools namely Araullo University (AU), Cagayan de Oro College (COC), University of Pangasinan (UPang) and University of Iloilo (UI), providing basic, secondary and tertiary education to approximately 25,000 students. PEN has strived to make its schools among the most affordable private institutions in their respective areas, with tuition fees ranging from P 14,000 to P 17,000 per semester. To keep tuition fees low, the schools continue to manage costs and streamline operations. As a result, the ratio of non-teaching employees to faculty today averages at an efficient level of about 1:3. To provide education to even more students, the PEN schools introduced the PHINMA Scholarship program, which offers fifty percent scholarship on tuition and fees to those in financial need. Today, there are 1,963 students who are enrolled under this program. Despite competition from state and local government universities and colleges, overall network enrollment grew by five percent to 25,719 students during the year. For the year 2010, Phinma Corporation equitized earnings from PEN amounting to P 123.4 million, compared to P 79 million in 2009. These results reflect the increase in enrollment and the consolidation of full-year results of operations of University of Pangasinan and University of Iloilo, both of which were consolidated by Phinma Corporation in February and March 2009, respectively. PEN has instituted various changes in all of its schools to further improve academic quality. It has institutionalized pre-and post-graduation review programs and has set internal targets for board examinations. It has likewise expanded the number of PEN-wide final exams in order to standardize learning outcomes and track teaching performance. PEN has also begun to re-introduce the College Scholastic Aptitude Test in the higher years to track the development of general competencies of our students. The schools have shown significant improvements in many areas. AU and COC continue to be the leading Criminology programs in their areas. COC was the top-performing school in the nation in terms of first takers for schools with more than 100 examinees, while AU produced a third placer in the August 2010 board examination. In accountancy, 100% of AU’s 2010 graduates passed the September 2010 board. COC experienced similar results in Mechanical Engineering, with 100% of its first-time takers passing the examination. In AU’s nursing program, although the passing rate has dropped from last year, it remained the best performing among the private schools in Cabanatuan. Also, in other board programs, both AU’s and COC’s first takers performed above the national passing average. Upang, on the other

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hand, remained to be the best performing nursing program for 100 or more takers in Region I. In 2010, UI established a partnership with Philippine Transmarine Carriers, Inc, a local maritime company, to improve the employment opportunities of the graduates of its Marine Engineering Program. UI also partnered with the Ateneo de Manila Professional Schools. The University will now offer Ateneo’s MBA program in Iloilo and a joint Law – Master in Public Management Degree with the Ateneo School of Government. With the financial support of the Lopez Group Foundation, UI has likewise set up the Center for Enterprise Development which seeks to assist, through training programs and consulting services, the province’s micro and small enterprises. More recently CED signed a partnership agreement with the Iloilo Central Market Vendors’ Association (ICMVA) to provide ICMVA training while the Association will open their doors to UI’s students for research and on-the-job training opportunities. While we are proud to report that significant gains have been achieved in the PHINMA Education Network, PEN continues to work toward its goal of transforming the PEN schools into truly national class institutions, while remaining accessible to its students. Steel Products Union Galvasteel Corporation (UGC) is the market leader in the manufacture of pre-painted galvanized roofing and other steel products, such as steel decking, frames and insulated panels used for cold storage and other facilities. The company has the largest and most diversified distribution network in the industry, with roll-forming plants and warehouses in key locations throughout the country. In 2010, the Philippine economy registered robust growth of 7%, and the construction industry performed creditably as well. However, competition in the roofing market was keen, with the onslaught of imported steel products due to the liberalized tariff regime. Against this business backdrop, UGC nevertheless registered impressive gains in its operations and in its financial performance. UGC increased its sales volume by 14% during the year, boosted by sales of high value steel products with innovative profiles. This growth was the result of the expansion of the company’s distribution facilities in more strategic locations around the country. Consequently, UGC ended the year with net income of P 249 million, exceeding its previous record income of P 152 million in 2009. These gains were matched by the operational efficiencies attained in its manufacturing facilities. UGC’s Galvanizing and Color Coating lines located in Calamba, Laguna have been recognized by the Laguna Lake Development Authority (LLDA) with the Lakan ng Lawa award for maintaining effluents discharge to the Laguna Lake better than the LLDA standards and requirements. This is the second year UGC has received this award. Also, UGC’s Davao roll-forming and polyurethane plants have been certified under ISO 9001-2008 for its Quality Management System, the first in Mindanao. In 2011, competition in the roofing market will remain tough, brought about by importations of steel products under liberalized tariffs. These are expected to put further pressure on revenues and margins. The surging prices of oil products will likewise adversely impact UGC’s operating costs. In response to these challenges, UGC will focus on strengthening its business model by exploring new products, new markets and new raw material sources, implementing a stronger customer service program and enhancing its organizational efficiencies. The company will utilize its financial resources with prudence to enable it to withstand any economic shock in the coming months.

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Housing Phinma Property Holdings Corporation (Phinma Properties), a 35% owned affiliate of the Company, is the leading developer of affordable medium- and high-rise condominium units in Metro Manila. The year 2010 was another stellar year for Phinma Properties, as it achieved income from operations of P230.1 million. The year marked the first time the company breached the P 200 million level and this augers well for the company’s expansion plans for the next three years. The company’s financial performance for 2010 was driven not only by income from its three ongoing projects namely, Fountain Breeze, Sofia Bellevue and Flora Vista, but also by the sale of part of its Cagayan de Oro property to Robinson’s Land Corporation, and by various commissions earned. Phinma Properties’ strong balance sheet will continue to grow and support its real estate developments going forward. As of December 31, 2010, total assets of Phinma Properties surpassed P 2 billion while total revenues reached P 1.8 billion during the year. On the whole, Phinma Properties considers itself to be well positioned in the very competitive real estate environment and is confident of growing its business, particularly due to its positioning as being the best-value-for-money home option, with fast delivery of projects and its emphasis on community living. Energy Phinma Corporation, through its affiliates Trans-Asia Oil and Energy Development Corporation (TA Oil) and Trans-Asia Power Generation Corporation (TA Power), continued its commitment to provide sustainable and reliable supply of power to its customers. During the year, TA Power continued to supply reliable quality power to Holcim Philippines, Inc. (Holcim). Out of the total energy produced of 185 GWh, 65% or 121 GWh were delivered to Holcim while the remaining 35% were exported to the Philippine Wholesale Electricity Spot Market (WESM). In 2010, Trans-Asia Power registered a net income of P 45 Million. TA Oil’s 3.4MW bunker-fired power plant in Guimaras continued to operate as a peaking plant and provided reliable peaking power to the island. In 2010, the plant generated 4.3GWH of electricity resulting in total revenues of P55.5Million and net income from operations of P9.6Million. CIP II Power Corporation (CIPP), a wholly owned subsidiary of TA Oil, will move and operate its 21 MW bunker C-fired power plant to Bacnotan, La Union. Transfer begun in February 2011 and the power plant is expected to be on stream by January 2012. It will operate as a merchant plant and will support the electricity supply business of its parent company. TA Oil also continued its active participation in the WESM by trading the electricity requirements of its customers and the excess generation of Trans-Asia Power. In 2010, the total energy bought for its customer, Holcim, reached 191 GWh. To ensure the sustainability and reliability of the supply business, TA Oil has entered into a partnership with One Subic Power Generation Corporation to manage and administer the 116 MW diesel power plant and has renewed the contract to purchase the generated energy of NIA-Baligatan HEP. TA Oil has chosen Calaca, Batangas as the location for its new 135MW coal-fired power plant, which will employ the environment-friendly Atmospheric Circulating Fluidized Bed boiler technology. An option to acquire about 13.1 hectares of land inside Phoenix Petro Terminal and Industrial Park had been exercised in November 2010. The project has been granted an

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Environmental Compliance Certificate by the Department of Environment and Natural Resources in April 2010 and has been endorsed by the Department of Energy for registration with the Board of Investments in October 2010.The power plant is envisioned to begin commercial operation in 2014 and will be the first base-load plant of TA Oil, which will further support its electricity supply business. In February 2010, Trans-Asia Renewable Energy Corporation (TAREC), a wholly owned subsidiary of TA Oil focusing on developing wind resource development, obtained an additional 10 service contracts from the Department of Energy (DOE), expanding TAREC’s wind farm portfolio to 20 sites capable of supporting an aggregate energy production of 350 MW. TAREC installed three more wind masts, a second one in San Lorenzo, Guimaras and Ballesteros, Cagayan as well as one in Aparri, Cagayan. This brings to eight the total number of wind measuring devises that were installed by TAREC in various sites. Continuous readings from these sites have showed very encouraging results. To facilitate sourcing of the much needed funds to develop the San Lorenzo Wind Project, TAREC continues to discuss with potential partners and lenders. During the year, TA Oil was able to generate US$1.325 million from the sale to Peak Royalties Limited (BVI) of its royalty interest in the Cadlao Production Area, Northwest Palawan under SC No. 6. TA Oil was also able to realize higher returns from financial assets and recoup certain economic values from its non-operating assets in Laguna. We are pleased to report that, despite difficult challenges in 2010, TA Oil ended the year with a consolidated net income of P14.7 million and a strong balance sheet. As of December 31, 2010, total consolidated assets stood at P3.4 billion, total liabilities at P387 million and total equity at P3 billion. Animation In 2008, Phinma Corporation invested US $6.734 million for an 80% interest in One Animate Limited, a company that owns 95% of Toon City Animation, Inc., a domestic BPO company which specializes in providing 2-D animation services for major film studios abroad. This investment is part of Phinma Corporation’s mission of providing high value-services that are globally competitive. During the year, One Animate booked revenues amounting to US$1.4 million on various projects, including Warner Brothers’ Looney Tunes, Kickstart/World Events Production’s Voltron Force, and Titeuf from Antefilms. However, due to delays in the implementation of these and other contracts, OAL posted a net loss of P77.8 million. Many of OAL’s delayed contracts, however, have been postponed to 2011. Its ongoing projects include Geronimo Stilton, Looney Tunes, Henry and Me, and Voltron. As evidence of the company’s brighter prospects in 2011, OAL has built up its its workforce from 300 employees in the first half of 2010 to 800 today, and is gearing up to further increase it to 1,000 in the coming months. Phinma Corporation supports the animation services sector which harnesses and showcases Filipino talents and skills. One Animate offers its employees work opportunities locally, in the process keeping world-class talent home. Hotels Phinma Corporation also made it its mission to provide affordable quality hotel services in the Philippines. In 2009, Phinma Corporation invested P66.2 million in preferred shares of Coral Way City Hotel Corporation (Coral Way), a subsidiary of Microtel Development Corporation (Microtel). These preferred shares are convertible to common shares and bear cumulative dividends at a

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rate of 10%. Microtel is part of the international Microtel group with more than 300 properties worldwide. In the Philippines, Microtels inns and resorts are located in key commercial and industrial areas, as well as in choice resort locations. Its portfolio of hotels includes properties in Baguio, Batangas, Boracay, Cabanatuan, Cavite, Davao, Palawan, Tarlac, and Manila. Coral Way owns and operates the 150-room Microtel Mall of Asia (MOA) which was soft launched in May 2010 and which commenced full commercial operations in September 2010. Located close to SMX Convention Center and the Mall of Asia, the hotel caters to both local and international business travelers and value-minded tourists as well. On its first months of operations, Microtel MOA achieved an occupancy rate of over 50% and revenues of P 57.1 million. Microtel MOA posted a net loss of P 12.9 million before financing charges due to accrual of operating expenses for the full year; however, gross operating profit amounted to P 11.5 million. In 2011, Microtel MOA fully intends to strengthen its internet presence and tap more corporate and convention accounts. Although Microtel MOA still has some way to go in improving its profitability, we believe it is extremely well-located and is a good business model. Consistent with all Microtel properties world-wide, Microtel MOA is a no-frills hotel that meets the needs of the mid-market category of the hotel industry. Our approach is back to basics: we make life better for guests by offering consistently clean, comfortable, and safe accommodations at value rates. Consolidated Statements of Financial Position The Company’s financial position remained strong with total assets of P 9.7 billion compared to total liabilities of P 2.4 billion. Of total assets of P 9.7 billion, P 2.1 billion or 22% are in cash and near-cash investments such as short-term placements, bonds and investments in UITFs.

The company has maintained healthy financial ratios, with current ratio of 3.41 :1.00 and debt-to-equity ratio of 33:1.00. Key Performance Indicators (KPI)

The top five (5) KPI’s used to measure the financial performance of PHN and its subsidiaries as of December 31, 2010 compared to the same period last year are shown in the following table :

Financial KPI Definition 2010 2009 Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income attributable to

PHN equity holders Ave. total equity attributable to PHN

equity holders

Gross profit Net sales

7.51%

30.80%

7.50%

31.39% Efficiency

Cash Flow Margin

Cash flow from operating Activities Net sales

(2.99%)

14.90%

Liquidity

Current Ratio

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

3.41 : 1.00 0.33 : 1.00

2.45 : 1.00 0.33 : 1.00

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Profitability

Return on equity for the calendar year 2010 remained at 7.51%. Net income attributable to equity holders of the parent increased modestly from P 447 million in 2009 to P 476 million in 2010.

The gross profit margin slightly declined from 31.39% in CY 2009 to 30.80% in CY 2010. This was mainly the result of the operating losses of One Animate Limited in 2010.

Efficiency

Net cash outflow from operations was P 113 million in 2010 compared to net cash inflow of P 555 million in 2009 as shown in the consolidated statement of cash flows. The outflow was mainly due to transfer from cash to investments held for trading, increase in inventories of Union Galvasteel Corporation and payments of trade and other payables.

Liquidity Current ratio improved to 3.41 :1.00 in CY 2010 from 2.45:1.00 last year mainly due to receipt of payment from Phoenix Petroleum Philippines on long-term contract receivables arising from its purchase of PHN’s shares in Bacnotan Industrial Park Corporation as well as the sale of the Asian Plaza property in December 2010.

The debt-equity ratio of PHN and its subsidiaries as of December 31, 2010 remained at 0.33: 1.00

Phinma Corporation is not aware of the followng :

1. Any trends or any demands, commitments, events or uncertainties that will result in or

likely to decrease its liquidity in any material way. PHN does not anticipate having within the next twelve (12) months any cash flow or liquidity problems nor does it anticipate any default or breach of any its existing notes, loans, other indebtedness or financing arrangements requiring it to make payments ;

2. Any events that will trigger direct or contingent material financial obligations to the

company, including any default or acceleration of its existing obligations ;

3. Any material off-balance sheet transactions , arrangements, obligations, (direct or contingent) and other relationships the Company with unconsolidated entities or other persons created during the year ;

4. Any material commitments for capital expenditures ;

5. Any known trends, events or uncertainties that have had or that are reasonably

expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations; and

6. Any significant elements of income or loss that did not arise from the registrant’s

continuing operations.

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Material Changes in Statement of Financial Position Accounts ASSETS Cash and cash equivalents The consolidated Statements of Cash Flows shows details of material changes in cash and cash equivalents. Short-term investments The increase in the account represents transfer of placements from 30 days maturity period to placements with maturity of three months up to one year. Investments held for Trading The increase in the account represents additional investments in bonds, mutual fund and UITF. Trade and other receivables - net As of December 31, 2010, Asian Plaza Inc. had receivables of P 461 million arising from the sale of its property to Shang Property Developers, Inc. Inventories The increase in inventories comes mainly from the increase in UGC’s finished goods inventory from P 502 million in December 2009 to P 732 million in December 2010. Input tax The increase in the account represents a reversal of provision on input tax in the amount of P 52 million which UGC expects to fully utilize. Derivative assets PHN had outstanding non-deliverable contracts with an aggregate notional amount of US$8.2 million transacted at an average rate of P 47.57 to $1.00. As of December 31, 2010, the average forward rate was P 45.81 to US$1.00, resulting in an unrealized gain of P 3.1 million. Other current assets The decrease in the account represents a decrease in the prepayments of UGC. Investment properties The decrease in the account represents the sale of Asian Plaza land and building in December 2010. Installment contract receivable The decrease in the account represents full payment received from Phoenix Petroleum Philippines, Inc. on receivables arising from the sale of PHN’s shares in Bacnotan Industrial Park Corporation.

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Deferred tax assets The increase in the account represents the tax benefit on the availment of OSD in CY 2011 of Asian Plaza, Inc. Other assets The increase in the account represents increase in deferred charges of COC. LIABILITIES Notes payable The increase in notes payable represents additional short-term borrowings of UGC. Trade and other payables The decrease in this account represents payment by UGC in the amount of P 126 million for the redemption of UGC preferred shares held by Hi Precision Steel Center Inc. Trust receipts payable The decrease in the account is attributable to the decrease in UGC’s trust receipts payable from P 131 million in December 2009 to P 122 million in 2010. Unearned revenues Tuition fees received by the schools are first charged to unearned revenues and are then recognized as revenues monthly throughout the semester. The increase in the account is due to the increase in revenues of AU, COC, UI and UPANG during the period. Income and other taxes payable The increase in the account represents higher income tax payable of Asian Plaza, Inc. as a result of a P 404 million gain on the sale of its property in December 2010. Due to related parties The decrease in the account represents payment made by UPANG on advances from its shareholders, Silverman Holdings, Inc. and JIH Prime Management and Development Corporation. Current portion of Long-term debt The increase in the account represents reclassification of long-term debt of UPANG which will fall due within the year. Long-term debt The increase in the account represents a loan obtained by UGC in June 2010 amounting to P 400 million.

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Deferred tax liabilities The increase in the account from P 322.9 million to P 385.9 million represents the tax effect on the unrealized gain of sale of building booked by Asian Plaza, Inc. Pension and other post-employment benefits The increase in the account represents accrual for post-employment benefits of PHN,UGC, COC and UPang. Other noncurrent liabilities The increase in the account represents increase in provision for student refund of UPang EQUITY Share in equity component of convertible notes In December 2010, the Securities and Exchange Commission (SEC) approved the conversion of the above account to retained earnings. Share in unrealized gains on financial assets of associates The increase in the account represents mark to market gains on securities held by Trans Asia Oil and Energy Development Corporation. Unrealized gain (loss) on change in fair value of available for sale investments The change is due to the improvement in prices of First Philippine Holdings preferred shares. Cumulative translation adjustments The increase in the account represents cumulative translation adjustments arising from the consolidation of OAL. Other reserves This increase in the account represents the impact of the change in ownership interest of PHN in UGC as a result of the merger between AHC and UGC. Retained earnings The increase in the account represents increase in net income. Material Changes in Income Statement Accounts Revenues The increase in revenues is attributable to an increase in revenues of Union Galvasteel Corporation, University of Pangasinan, and University of Iloilo. General and administrative expenses The decrease in the account represents decrease in personnel costs of AU, COC, UPANG and UI as well as a decrease in the amortization charges in OAL.

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Selling expenses The increase in the account represents increase in freight and handling costs of UGC from P 35 million to P 49 million as well as an increase in personnel costs. Equity in net earnings of associates The decrease in the account is largely due to equitized income from Trans-Asia Oil and Energy Development Corporation from P 76 million in CY 2009 compared to P 4 million this year as a result of substantial trading losses. Equity in net earnings from Phinma Property Holdings Corporation and AB Capital and Investment Corporation declined as well. Net gain (loss) on derivatives This account reflects a net gain on derivatives of PHN amounting to P 50 million in 2010 and P 58.3 million in 2009. Negative goodwill Negative goodwill in 2009 arose from the acquisition of shared in UGC and represents the difference between the P 36.3 million consideration paid for the 19.5% minority interest of HPSCI in UGC and its carrying value in the amount of P 121 million in 2009. Gain on sale of fixed assets This represents the gain on sale of Asian Plaza property to Shang Property Developers, Inc. in December 2010. Income from reversal of unrecoverable input tax This represents a reversal of provision on input tax in the amount of P 52 million which UGC expects to fully utilize. Foreign exchange gain (loss) PHN and AHC booked foreign exchange losses during the year as a result of the strengthening of the peso from P 46.20 as of December 31, 2009 to P 43.84 as of year-end 2010. Other income (charges) The increase in the account is mainly due to fees received by PHN from United Pulp and Paper Company, Inc. Provision for income tax The increase in provision for income tax was brought about by the significant income generated by UGC from P 152 million in 2009 to P 249 million this year as well as the gain on sale of fixed assets booked by Asian Plaza, Inc. in the amount of P 404 million. Comprehensive income increased from P 511 million in CY 2009 to P 655 million this year due to the increase in net income from P 504 million in 2009 to P 640 million in 2010. For other comprehensive income and charges, please refer to the comments on equity accounts.

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Information on Independent Accountant and other Related Matters Audit and Audit-Related Fees The Company paid or accrued the following fees for professional services rendered by SGV and Co. for the past three years: Table 9 – Audit and audit related fees

Year Audit Fees Tax Fees Other Fees 2012 P4,000,000.00 - - 2011 4,000,000.00 - - 2010 3,700,000.00 - -

The above audit fees are for the audit of the Company’s annual financial statements or services normally provided in connection with statutory and regulatory filings or engagements for CY 2012, CY 2011 and 2010. There were no fees for other services.

The Audit Committee makes recommendations to the Board of Directors concerning the external auditors and pre-approves audit plans, scope and frequency before the conduct of the external audit. The reappointment of SGV and Co. as the Company’s external auditor was approved by the stockholders in the Annual Stockholders Meeting held last May 14, 2012. Item 7. Financial Statements Please find the audited consolidated financial statements of the Company for the calendar year ended December 31, 2012 attached hereto as Annex A . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures For the last five (5) years, there have been no disagreements with the independent accountants on any matter pertaining to accounting principles or practices, financial statement disclosures or auditing scope or procedure.

The Company is in compliance with SRC Rule 68, paragraph 3(b) (iv) requiring the rotation of external auditors or engagement partners who have been engaged by the company for a period of five (5) consecutive years or more as of December 31, 2002. The engagement partner who conducted the audit for Calendar Year 2012 is Ms. Catherine E.Lopez, an SEC accredited auditing partner of SGV. This is the first year of Ms. Lopez as audit partner of the company.

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PART III – CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers of the Issuer a) Board of Directors The Company’s Board of Directors is responsible for the overall management and direction of the Company. The Board meets quarterly or as often as required, to review and monitor the Company’s financial position and operations. The directors of the Company are elected at the Annual Stockholders Meeting to hold office for one year and until their respective successors have been elected and qualified.

The officers are likewise elected annually by the Board of Directors and serve for one year and until their respective successors have been elected and qualified.

Except for Dr. Magdaleno B. Albarracin, Jr., a member of the Board of Directors and an Officer of the Company who directly owns 3.15% of PHN shares, none of the members of the Board of Directors and Officers directly own more than 2% of PHN shares.

Listed are the incumbent directors of the Company as of December 31, 2012 with their qualifications which include their ages, citizenship, current and past positions held and business experience for the past five years. Table 10 - Board of Directors

Directors

Citizenship

Age

Position

Oscar J. Hilado Filipino 75 Director and Chairman of the Board Ramon R. del Rosario, Jr. Filipino 68 Director , Vice Chairman and President Roberto M.Laviña Filipino 62 Director, Sr. Exec. Vice President & COO Magdaleno B. Albarracin, Jr. Filipino 76 Director and Sr. Exec. Vice President Victor J. del Rosario Filipino 64 Director, Exec. Vice Pres. and CFO Jose L. Cuisia, Jr. Filipino 68 Director Omar T. Cruz Filipino 58 Director Filomeno G. Francisco Filipino 61 Director Felipe B. Alfonso + Filipino 75 Independent Director Guillermo D. Luchangco Filipino 73 Independent Director Roberto F. de Ocampo Filipino 67 Independent Director Oscar J. Hilado has been Chairman of the Board of the Company since 2003. He is also Chairman of the Board of Phinma, Inc., Holcim Philippines, Inc., Trans Asia Oil and Energy Development Corporation, Phinma Property Holdings Corporation, and Union Galvasteel Corporation. Mr. Hilado is also a director of A. Soriano Corporation, First Philippine Holdings Corporation, Philex Mining Corporation, Manila Cordage Corporation, Beacon Property Ventures, Inc., Pueblo de Oro Development Corporation, United Pulp and Paper Co., Inc. and Seven Seas Resorts and Leisure, Inc. He has been a Director of the Company since 1969 and is also the Chairman of the Executive Committee and Nomination Committee of the Company. Mr. Hilado is a Certified Public Accountant with a Bachelor of Science degree in Commerce from the De La Salle College in Bacolod and a Master’s degree in Business Administration from Harvard Business School.

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Ramon R. del Rosario, Jr, is President and Chief Executive Officer, and Vice Chairman of the Board of the Company. He is also the President and Chief Executive Officer of Phinma, Inc., Chairman of Araullo University, Cagayan de Oro College, University of Iloilo, and University of Pangasinan, educational institutions under the Phinma Education Network. He is also Chairman of Trans-Asia Power Generation Corp., Trans-Asia Renewable Energy Corp., Microtel Inns and Suites (Pilipinas), Inc., Microtel Development Corp., United Pulp and Paper, Inc., Fuld & Co., Inc. and Fuld & Co. (Philippines), Inc. and a member of the Board of Directors of other Phinma managed companies. He is Vice Chairman and Executive Committee Chairman of Trans-Asia Oil and Energy Development Corp. He is also a member of the Board of Directors of Ayala Corp. and Holcim Philippines, Inc. Mr. del Rosario is Chairman of the Makati Business Club and Philippine Business for Education. He served as Philippine Secretary of Finance in 1992-1993. He is the brother of Victor J. del Rosario. He has been a Director of the Company since 1979 and became President and Vice-Chairman of the Board on December 12, 2003. Mr. del Rosario is a graduate of De La Salle University and Harvard Business School. Magdaleno B. Albarracin, Jr. has been Senior Executive Vice President of the Company since 1988 and is Vice-Chairman of Phinma, Inc. He is also a director of Holcim Philippines, Inc. and holds directorates in various Phinma companies. Dr. Albarracin served as Dean of the University of the Philippines College of Business Administration, as member of the Board of Regents of UP, as member of the Board of Trustees of the University of San Carlos, Cebu City and as President of the Asean Federation of Cement Manufacturers. Dr. Albarracin has a Bachelor of Science degree in Electrical Engineering from the University of the Philippines and a Master of Science degree in Electrical Engineering from the University of Michigan. He obtained his Master in Business Administration degree from the University of the Philippines and his Doctorate in Business Administration from Harvard University. He has been a Director of the Company since 1980. Roberto M. Laviña was appointed as Senior Executive Vice President and Chief Operating Officer last July 27, 2012. Mr. Laviña is also the Senior Executive Vice President and Chief Operating Officer/ Phinma Group Chief Financial Officer of Phinma, Inc. and Senior Executive Vice President / Treasurer of Trans-Asia Oil and Energy Development Corporation. He also occupies various executive posts in Phinma-managed companies. He holds a Bachelor of Science degree in Economics from Ateneo de Manila University and obtained his Master’s degree in Business Management from the Asian Institute of Management. He became a Director of the Company on May 20, 2004.

Victor J. del Rosario has been the Executive Vice President / Chief Financial Officer of the company since 1995. He is also the Vice-Chairman and Chief Executive Officer of Union Galvasteel Corporation and the Chief Strategy Officer of Phinma, Inc. He is also a member of the Board of Directors of Phinma, Inc. and various Phinma-managed companies. Mr. del Rosario is an Economics and Accounting graduate of the De La Salle University and holds a Master of Business Administration degree from Columbia University. He is the brother of Mr. Ramon R. del Rosario, Jr. He has been a Director of the Company since 1987. Jose L. Cuisia, Jr. is the Ambassador Extraordinary and Plenipotentiary to the United States of America and is the Vice-Chairman of The Philippine American Life and General Insurance Company. He is also the Chairman of the Board for The Covenant Car Company, Inc. (TCI) and the Vice-Chairman of the Board of SM Prime Holdings (SMPHI). He holds directorates in BPI-Philam Life Assurance Co. (BPLAC), Phinma Corporation, Holcim Philippines, Inc., Manila Water Company, Inc., Integra Business Processing Solutions, Inc. (Integra BPSI), ICCP Holdings and Beacon Property Ventures (all of which are publicly listed companies). Ambassador Cuisia previously served the Philippine Government as Governor of the Philippine Central Bank and Chairman of its Monetary Board from 1990-1993. He was also appointed Commissioner, representative of the Employer’s Group, for the Social Security System (SSS) last September-December 2010. The Ambassador was also Governor for the Philippines to the International

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Monetary Fund (IMF) and Alternate Governor to the World Bank. Prior to service in the Central Bank, he was also Administrator and CEO of the Philippine Social Security System from 1986- 1990. He received his Bachelor Science degree in Commerce from De La Salle University and holds a Master’s degree in Business Administration from the Wharton School of Business. Ambassador Cuisia has been a Director of the Company since 1994. Felipe B. Alfonso+ was the Vice-Chairman of the Board of Trustees of the Asian Institute of Management (AIM) Scientific Research Foundation, Inc. He was previously President of the Asian Institute of Management, Chairman and subsequently Vice Chairman of Manila Electric Company and was Chairman of H&Q Philippine Holdings, Inc. He was the Chairman of the Board of e-Meralco Ventures, Inc. (EMVI), Radius Inc., and STI Inc. and I-Academy Inc. He was a member of the board of directors of AIG Global Fund, Inc., Lopez Holdings Corporation, Jollibee Foods Corporation, PHILAM Bond Fund, Inc., PHILAM Dollar Bond Fund, Inc., PHILAM Fund, Inc., PHILAM Managed Income Fund, Inc., PHILAM Strategic Growth Fund, Inc., and Philippine Investment Management, Inc. (Phinma) and served in Andorra Ventures Corporation and First Private Power Corporation. He was a Trustee of the Coca-Cola Foundation of the Philippines, First Philippine Conservation, Inc. (FPCI), Knowledge Channel Foundation, Inc., and STI Foundation. He was also the Vice Chairman of the Lopez Group Foundation, Inc. Mr. Alfonso obtained his Bachelor of Laws degree from the Ateneo de Manila University and obtained his Master’s degree in Business Administration from New York University. He became an Independent Director of the Company on April 19, 2001. Mr. Alfonso passed away April 5, 2013. Guillermo D. Luchangco is the Chairman and CEO of various companies under the ICCP Group and is Chairman and President of Beacon Property Ventures, Inc. He is a director of various companies including Phinma Property Holdings Corp., Fuld Philippines, Inc., Globe Telecom, Inc., Roxas & Company, Inc., Ionics Inc., Ionic Circuits, Ltd. He was formerly the Vice-Chairman and President of Republic Glass Corporation in 1987 and the Managing Director of SGV & Co. in 1980. Mr. Luchangco received his Bachelor of Science degree in Chemical Engineering (Magna cum Laude), from De La Salle University and holds a Master’s degree in Business Administration from the Harvard Business School. He became an Independent Director of the Company on April 11, 2005.

Roberto F. de Ocampo previously served as Secretary of Finance and was the former Chairman and Chief Executive Officer of the Development Bank of the Philippines. He is currently President of Philam Fund, Inc., Philam Bond Fund, Inc., Philam Strategic Growth Fund, Inc. and director of Alaska Milk Corp., Rizal Commercial Banking Corporation, Robinson’s Land Corporation and EEI Corporation. He has a Bachelor of Arts degree (major in Economics) from the Ateneo de Manila University, a Master’s degree in Business Administration from the University of Michigan, and a post-graduate diploma from the London School of Economics. He has been conferred Doctorates (Honoris Causa) by San Beda College, De La Salle University, Philippine Women’s University and University of Angeles City. He became an Independent Director of the Company on April 2, 2009. Omar T. Cruz is the President and Chief Executive Officer of BPI-Philippine-American Life Assurance Corporation. He was the National Treasurer of the Republic of the Philippines from March 1, 2005 to May 31, 2007. He was previously Vice President in Treasury, Risk Management, Financial Institution Group and Private Banking Group at Citibank N.A., President at Citicorp Securities International, Inc, Director of ABN AMRO Bank and Governor at the Philippine Stock Exchange. He has a Bachelor of Science degree in Industrial Management Engineering from De La Salle College and a Master of Science degree in Industrial Economics from the University of Asia and the Pacific. Filomeno G. Francisco was formerly President and Chief Operating Officer of AB Capital and Investment Corporation (ABCIC). He is currently President of Brown Cross Investments Corporation and Chairman of Ginory Holdings Corporation. Mr. Francisco served on the Boards of trade organizations, Investment House Association of the Philippines, Philippine Stock Exchange, PSE Foundation and Manila Stock Exchange. Mr. Francisco also held directorates in ABCIC, Cebu Holdings, Inc, Philippines Long-Term Equity Fund, Hi Cement Corporation, and

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United Pulp and Paper Co., Inc. He has a Bachelor of Science degree in Management Engineering from the Ateneo de Manila University. b) Executive Officers – (as of December 31, 2012)

Table 11 - Executive Officers

Name

Citizenship

Age

Position

Ramon R. del Rosario, Jr Filipino 68 President & CEO Roberto M. Laviña Filipino 62 Senior Executive Vice President & COO Victor J. del Rosario Filipino 64 Executive Vice President and CFO Magdaleno B. Albarracin, Jr. Filipino 76 Senior Executive Vice President Pythagoras L. Brion Filipino 60 Senior Vice President and Treasurer Regina B. Alvarez Filipino 46 Senior Vice President – Finance Cecille B. Arenillo Filipino 55 Vice President - Treasury and Compliance

Officer Rizalina P. Andrada Filipino 53 Vice President – Finance Rolando Soliven Filipino 38 Assistant Vice Pres. – Internal Audit Juan J. Diaz Filipino 82 Corporate Secretary

Ramon R. del Rosario, Jr, is President and Chief Executive Officer, and Vice Chairman of the Board of the Company. He is also the President and Chief Executive Officer of Phinma, Inc., Chairman of Araullo University, Cagayan de Oro College, University of Iloilo, and University of Pangasinan, educational institutions under the Phinma Education Network. He is also Chairman of Trans-Asia Power Generation Corp., Trans-Asia Renewable Energy Corp., Microtel Inns and Suites (Pilipinas), Inc., Microtel Development Corp., United Pulp and Paper, Inc., Fuld & Co., Inc. and Fuld & Co. (Philippines), Inc. and a member of the Board of Directors of other Phinma managed companies. He is Vice Chairman and Executive Committee Chairman of Trans-Asia Oil and Energy Development Corp. He is also a member of the Board of Directors of Ayala Corp. and Holcim Philippines, Inc. Mr. del Rosario is Chairman of the Makati Business Club and Philippine Business for Education. He served as Philippine Secretary of Finance in 1992-1993. He is the brother of Victor J. del Rosario. He has been a Director of the Company since 1979 and became President and Vice-Chairman of the Board on December 12, 2003. Mr. del Rosario is a graduate of De La Salle University and Harvard Business School. Roberto M. Laviña was appointed as Senior Executive Vice President and Chief Operating Officer on July 27, 2012. Mr. Laviña is also the Senior Executive Vice President and Chief Operating Officer/ Phinma Group Chief Financial Officer of Phinma, Inc. and Senior Executive Vice President / Treasurer of Trans-Asia Oil and Energy Development Corporation. He also occupies various executive posts in Phinma-managed companies. He holds a Bachelor of Science degree in Economics from Ateneo de Manila University and obtained his Master’s degree in Business Management from the Asian Institute of Management. He became a Director of the Company on May 20, 2004. Magdaleno B. Albarracin, Jr. has been Senior Executive Vice President of the Company since 1988 and is Vice-Chairman of Phinma, Inc. He is also a director of Holcim Philippines, Inc. and holds directorates in various Phinma companies. Dr. Albarracin served as Dean of the University of the Philippines College of Business Administration, as member of the Board of Regents of UP, as member of the Board of Trustees of the University of San Carlos, Cebu City and as President of the Asean Federation of Cement Manufacturers. Dr. Albarracin has a Bachelor of Science degree in Electrical Engineering from the University of the Philippines and a Master of Science degree in Electrical Engineering from the University of Michigan. He obtained his Master in Business Administration degree from the University of the Philippines and his Doctorate in Business Administration from Harvard University. He has been a Director of the Company since 1980.

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Victor J. del Rosario has been the Executive Vice President / Chief Financial Officer of the company since 1995. He is also the Vice-Chairman and Chief Executive Officer of Union Galvasteel Corporation and the Chief Strategy Officer of Phinma, Inc. He is also a member of the Board of Directors of Phinma and various Phinma-managed companies. Mr. del Rosario is an Economics and Accounting graduate of the De La Salle University and holds a Master of Business Administration degree from Columbia University. He is the brother of Mr. Ramon R. del Rosario, Jr. He has been a Director of the Company since 1987. Pythagoras L. Brion, Jr. was appointed as Senior Vice President and Treasurer of the Company on July 27, 2012. He is Executive Vice President/ Chief Finance Officer of Phinma Property Holdings, Corporation and Senior Vice President/Treasurer of Phinma, Inc. He was elected Senior Vice president and Chief Financial Officer of Trans-Asia Oil & Energy Development Corporation on March 20, 2012. He received his Bachelor of Science in Management Engineering degree from Ateneo de Manila University and holds a Master in Business Administration degree from the University of the Philippines. Regina B. Alvarez has been the Senior Vice President-Finance since April 2005. She holds a Bachelor of Science degree in Business Administration and Accountancy from the University of the Philippines and a Master’s degree in Business Administration from the Wharton School of Business. Ms. Alvarez is also a Certified Public Accountant and is also a Senior Vice President of PHINMA, Inc. Cecille B. Arenillo was appointed Vice President - Treasury in May 2007. She holds a Bachelor of Science in Commerce degree major in Accounting from the University of Santo Tomas and is a Certified Public Accountant. She was elected as the Company’s Compliance Officer effective August 1, 2009.

Rizalina P. Andrada was appointed Vice President- Finance in March 2012. She is a Certified Public Accountant with a Bachelor of Science in Commerce degree major in Accounting from the Polytechnic University of the Philippines.

Rolando D. Soliven was elected Assistant Vice President – Internal Audit in March 2012. He holds a Bachelor of Science degree in Accountancy from San Beda College. He is a Certified Public Accountant (CPA), Certified Internal Auditor (CIA) and Certified Fraud Examiner (CFE).

Juan J. Diaz is a member of the Philippine Bar and has a Master of Laws degree from Harvard Law School. He is also the Corporate Secretary of Philippine Investment-Management Inc., (PHINMA), Trans-Asia Oil and Energy Development Corporation, Phinma Property Holdings Corporation and other Phinma managed companies. He has been the Corporate Secretary of the Company since 1993. Significant Employees

Other than the afore-named Directors and Executive Officers identified in the item on Directors and Executive Officers in this Information Statement, there are no other employees of the Company who may have significant influence in the Company’s major and/or strategic planning and decision-making.

Family Relationships Ramon R. del Rosario, Jr. is the brother of Victor J. del Rosario. There is no other member of the Board of Directors nor any Executive Officer of the Company related by affinity or consanguinity other than the ones disclosed.

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Pending Legal Proceedings

To the knowledge and/or information of the Company, the nominees for election as Directors of the Company, the present members of the Board of Directors or the Executive Officers of the Company and its subsidiaries, are not presently or during the last five (5) years up to December 31, 2012, involved or have been involved in criminal, bankruptcy or insolvency investigations or proceedings affecting / involving themselves and/or their property. To the knowledge and/or information of the Company, the said persons have not been convicted by final judgment of any offense punishable by the laws of the Republic of the Philippines or of the laws of any other nation/country or being subjected to any order, judgment or decree or violation of a Securities Commodities Law.

Independent Directors The following were the Company’s independent directors as of December 31, 2012. They are neither officers nor substantial shareholders of Phinma Corporation :

a. Mr. Felipe B. Alfonso + b. Mr. Guillermo D. Luchangco c. Mr. Roberto F. de Ocampo

Item 10. Executive Compensation The Directors are paid a bonus based on the net income of the Company for each calendar year. The compensation received by the officers who are not included in the Board of Directors of the Company represents salaries and bonuses.

For the calendar years ended December 2012 and 2011, the total salaries, allowances and bonuses paid by the Company to the directors and executive officers as well as estimated compensation of directors and executive officers for CY 2013 are as follows :

Table 12 - Compensation of Directors and Executive Officers

Name and Principal Position

Year

Salary

Bonus

Others Chairman and Top 4 Oscar J. Hilado Chairman

Ramon R. del Rosario, Jr. President & CEO

Magdaleno B. Albarracin, Jr. Senior Exec. Vice President

Roberto M. Laviña Senior Exec. Vice President & COO

Victor J. del Rosario Exec. Vice President & CFO

TOTAL

2013* 2012 2011

10,615,726 10,408,350 9,313,500

11,647,935 15,875,680 16,667,924

910,000 910,000

1,070,000

All other Directors and Officers as a group unnamed

2013* 2012 2011

10,457,571 10,485,293 8,163,246

3,302,325 6,167,893 11,588,182

1,110,000 1,000,000 1,020,000

*Estimated compensation of directors and executive officers for the year .

**Based on income for the previous year.

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a) Compensation of Directors

The Directors receive allowances, per diem and bonus based on a percentage of the net income of the Company for each calendar year. There are no other existing arrangements/agreements under which said directors are to be compensated during the last completed calendar year and the ensuing year. b) Employment Contracts and Termination of Employment and Change-in Control Arrangements There is no existing contract between the Company the executive officers or any significant employee.

Under Article VI, Section 1 of the Company’s By-Laws, the officers of the Corporation shall hold office for one year and until their successors are chosen and qualified in their stead. Any officer elected or appointed by the majority of the Board of Directors maybe removed by the affirmative vote of the Board of Directors. c) Compensatory Plan or Arrangement The compensation received by officers who are not members of the Board of Directors of the Company represents salaries, bonuses and other benefits. d) Compensation Committee The members of the Compensation Committee as of December 31, 2012 were as follows : Amb. Jose L. Cuisia, Jr. - Chairman Mr. Oscar J. Hilado - Member Mr. Ramon R. del Rosario, Jr. - Member Mr. Felipe B. Alfonso + - Member Item 11. Security Ownership of Certain Beneficial Owners and Management a) Security Ownership of Certain Record and Beneficial Owners: The table below shows persons or groups known to PHN as of December 31, 2012 to be directly or indirectly the record or beneficial owners of more than 5% of the company’s voting securities:

Table 13 – Owners of Voting Securities

Title of Class

Name & Address of Record Owner and Relationship with Issuer

Name of Beneficial Owner And Relationship with

with Record Owner

Citizenship

# of Shares

Held

%

Common Philippine Depository and Trust Corporation2

MSE Bldg.Ayala Avenue Makati City Stockholder

Various

Foreign – 36.42% Filipino – 13.67%

129,679,462

50.09%

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Common

Phil. Investment Mgmt.(PHINMA), Inc. 1

Level 12, Phinma Plaza, No. 39 Plaza Drive Rockwell Center Makati City Stockholder

Phil. Investment Mgmt. (PHINMA), Inc. which is also t record owner. Mr. Oscar J. Hilado, Chairman of the B is the person appointed to exercise voting Power.

Filipino

92,486,823

35.72%

1Phinma Inc.’s principal stockholders are : 1) EMAR Corporation (44.28%), a Filipino company principally owned by the immediate family of the late Amb. Ramon V. del Rosario, Sr. 2) Mariposa Properties, Inc., (28.62%), which is owned by Mr. Oscar J. Hilado and the members of his immediate family and 3) Dr. Magdaleno B. Albarracin, Jr. who owns 13.61% of Phinma Inc.’s outstanding shares. The Del Rosario and Hilado Families are expected to direct the voting of the shares held by EMAR Corp. and Mariposa Properties, Inc.

2 Philippine Depository and Trust Corporation (“PDTC”) is a wholly-owned subsidiary of Philippine Central Depository, Inc., (“PCD”) which acts as trustee-nominee for all shares lodged in the PCD system. It was formerly known as PCD Nominee Corporation. The beneficial owners of such shares are PCD participants who hold the shares on their behalf or in behalf of their clients.

3 Citibank N.A. – CITIFAOPHILAM is the only PCD Nominee who holds more than 5% of the Company’s securities. The beneficial owner of these shares is Philamlife and General Insurance Company for 25,671,164 shares. Mr. Omar T. Cruz, President & Chief Executive Officer of BPI-Philam Life Assurance Corporation is the person appointed to exercise voting power.

b) Security Ownership of Management

The table below shows the securities beneficially owned by all directors, nominees and executive officers of PHN as of December 31, 2012 :

Table 14 - Security Ownership of Management

Title of Class

Name of Beneficial Owner

Amount

Nature of Beneficial Ownership

Citizenship

% of Ownership

Common Oscar J. Hilado 1,000,000 2,582,160

Direct Indirect

Filipino .039% .100%

Common Magdaleno B. Albarracin, Jr. 81,362,580 Direct Filipino 3.143% Common Victor J. del Rosario 5,690,100 Direct Filipino .220% Common Jose L. Cuisia 99,340 Direct Filipino .004% Common Ramon R. del Rosario, Jr. 2,981,680

43,999,000 Direct

Indirect Filipino .115%

1.699% Common Roberto M. Laviña 3,620,000 Direct Filipino .140% Common Felipe B. Alfonso + 10 Direct Filipino .000% Common Guillermo D. Luchangco 10 Direct Filipino .000% Common Roberto F. de Ocampo 10 Direct Filipino .000% Common Omar T. Cruz 10 Direct Filipino .000% Common Filomeno D. Francisco 10 Direct Filipino .000% Common Pythagoras L. Brion, Jr. 2,049,780 Direct Filipino .079% Common Regina B. Alvarez 3,173,990 Direct Filipino .123% Common Cecille B. Arenillo 9,330 Direct Filipino .000% Common Rizalina P. Andrada 2,860 Direct Filipino .000% Common Rolando D. Soliven - Filipino .000% Common Juan J. Diaz - Filipino .000% Directors and Officers as a Group 146,570,870 5.661%

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Item 12. Certain Relationships and Related Transactions: During the last two years, the Company was not a party in any transaction in which a Director or Executive Officer of the Company, any nominee for election as a director, any security holder owning more than 10% of the Company’s issued and outstanding shares and/or any member of his immediate family had a material interest thereon, except as disclosed below.

The Company has a management contract with Philippine Investment-Management (PHINMA), Inc. up to June 30, 2013, renewable thereafter upon mutual agreement. Under this contract, PHINMA has a general management authority with the corresponding responsibility over all operations and personnel of the Company including planning, direction, and supervision of finance and other business activities of the Company. PHINMA owns 92,486, 823 shares, which represent 35.72% of total outstanding shares of stock of the Company.

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PART I V – CORPORATE GOVERNANCE

Compliance Policy

In accordance with the State’s policy to actively promote corporate governance reforms aimed to raise investor confidence, develop capital market and help achieve high sustained growth for the corporate sector and the economy, the Board of Directors, Management, and Employees of Phinma Corporation (the “Corporation”) commit to the principles and best practices contained in the Manual on Good Corporate Governance approved in August 2002 and as amended in March 2004, February 2008 and March 2011.

To ensure adherence of the Corporation to corporate principles and best practices contained in the Manual, a Compliance Evaluation System was developed by the Corporation’s Compliance Officer and approved by the Board of Directors on July 29, 2003. Compliance Evaluation System

A. Develop a Corporate Governance Evaluation Form indicating compliance risk,

reference to Code of Corporate Governance and/or Manual, compliance risk owners, compliance frequency, compliance status, compliance plan and timetable.

B. Identify Compliance Risk Owners.

C. Conduct an annual compliance survey by accomplishing the Corporate Governance

Evaluation Form.

D. Compliance Monitoring

1. Include compliance requirements on organizational and procedural control in internal audit plan and activities.

2. Obtain external and internal audit findings on the effectiveness of implementation and oversight of Corporation’s accounting and financial processes.

3. Obtain Agenda and Minutes of meetings of the Board, Audit Committee, Nomination Committee and Executive Compensation Committee.

4. Attend Board meetings periodically. 5. Conduct compliance checks thru direct interface with compliance risk owners

and/or internal audit and/or legal department.

E. Identify and monitor compliance violations.

1. Advise responsible Compliance Risk Owners of compliance violations. 2. Require plan of compliance to include a definitive timetable from the Compliance

Risk Owners. 3. Review plan of compliance and monitor implementation. 4. Identify unresolved compliance issues and agree on a revised plan and deadline

for regularization. 5. Compile unresolved compliance violations not regularized by the agreed revised

deadline and determine possible penalties.

F. Accomplish the Corporate Governance Evaluation Form at the end of the Corporation’s calendar year.

66

G. Report to the Chairman of the Board the extent of compliance to the Manual including recommendation of non-compliance penalties for review and approval of the Board.

H. Submit to the Securities and Exchange Commission (SEC) and Philippine Stock

Exchange (PSE) a certification on the extent of the Corporation’s compliance with the Manual for the completed year.

I. Subject Manual to periodic review and recommend appropriate changes to the

Chairman for endorsement and approval of the Board. Compliance Certification As of December 31, 2012, the Corporation substantially complied with the principles and best practices contained in the Manual on Good Corporate Governance and as required by the SEC, the Vice President-Compliance Officer, on January 23, 2013 submitted the Corporate Governance Compliance Certification (SEC Form MCG-2002) to the SEC and PSE. Since there were no major deviations from the Manual, the Corporation has not imposed any sanctions on any director, officer or employee.

Corporate Governance Compliance Report As required by the Philippine Stock Exchange, the Corporation submitted last March 20, 2013, a Compliance Report on Corporate Governance for Year 2012 based on the Corporate Governance Guidelines for Listed Companies. Compliance Monitoring and Improving Corporate Governance The Compliance Officer and the Internal Auditor monitor the Corporation’s compliance with the Manual and the timely submission of reports and disclosures to both SEC and PSE. In addition, the SEC and PSE websites are constantly monitored for relevant circulars or memorandums affecting, improving, and updating the corporate governance of the Corporation and amending the Manual, if necessary. As a result of the Compliance Program, there is effective management of the relationships between shareholders, stakeholders, directors, creditors, government, and employees. Furthermore, the internal workings of the Corporation are directed and controlled leading to corporate integrity, transparency, and enhanced corporate performance, a dominant theme of Good Corporate Governance.

67

PART V – EXHIBITS AND SCHEDULES

Item 13. List of Exhibits

Annex A - Audited Financial Statements - Consolidated For Calendar Years 2012, 2011 and 2010

Statement of Management’s Responsibility For Financial Statements Report of Independent Public Accountants Consolidated Statements of Financial Position as of December 31, 2012 and 2011 Consolidated Statements of Income for the Years ended December 31, 2012, 2011 and 20010 Consolidated Statements of Comprehensive Income for the Years ended December 31, 2012, 2011 and 2010 Consolidated Statements of Changes in Equity for the Years ended December 31, 2012, 2011 and 2010. Consolidated Statements of Cash Flows for the Years ended December 31, 2012, 2011 and 2010 Notes to Consolidated Financial Statements

Annex B - Supplementary Schedules to the Audited Financial Statements

SCHEDULE DESCRIPTION A Financial Assets B Accounts Receivable from Directors, Officers, Employees, Related Parties and

Principal Stockholders (Other than Related Parties) C Amounts Receivable from Related Parties which are Eliminated during the

Consolidation of Financial Statements D Intangible Assets – Other Assets E Long-term Debt F Indebtedness to Related Parties (Long-term loans from Related Companies) G Guarantees of Securities of Other Issuers H Capital Stock

Additional Components : i) Reconciliation of Retained Earnings Available for Dividend Declaration ii) List of Philippine Financial Reporting Standards Effective as at December 31,

2012 iii) Map of Relationships of the Companies within the Group

Annex C - SEC Form 17 - C

Date Filed Description January 12, 2012 PHN Certification on Compliance with Manual of Corporate

Governance for CY 2011. March 22, 2012 PHN’s submission on the Corporate Governance Guidelines:

Disclosure Survey March 23, 2012 An advisory on the date of the Shareholders Meeting, record

date for the determination of shareholders entitled to vote, the agenda for the said meeting, declaration of cash dividend of P0.40 per share and approval of the audited financial statements for the year 2011.

May 3, 2012 Certification of Board Attendance for the year 2012.

68

May 15, 2012 An advisory on the highlights of the Annual Meeting of the Shareholders held last May 14, 2012

July 27, 2012 An advisory on the highlights of the Company’s Board Meeting held last July 27, 2012.

November 13, 2012 An advisory on the highlights of the Company’s Board Meeting held last November 13, 2012.

Annex D - SEC Form 17 - Q Quarter Ending Date Filed

March 31, 2012 May 15, 2012 June 30, 2012 August 14, 2012 September 30, 2012 November 14, 2012

69

ANNEX A

Audited Consolidated Financial Statements December 31, 2012

NMALife can be better

PHINMA

STATEMENT OF MANAGEMENT RESPONSIBILITY FOR THECONSOLIDATED FINANCIAL STATEMENTS

The management of PHINMA CORPORATION AND SUBSIDIARIES is responsiblefor the preparation and fair presentation of the consolidated financial statements for theyears ended December 31,20t2 and 2011, including the additional components attachedtherein, in accordance with Philippine Financial Reporting Standards. Thisresponsibility includes designing and implementing intemal controls relevant to thepreparation and fair presentation of the consolidated financial statements that are freefrom material misstatement, whether due to fraud or error, selecting and applyingappropriate accounting policies, and making accounting estimates that are reasonable inthe circumstances.

The Board of Directors reviews and approves the consolidated financial statements andsubmits the same to the stockholders.

Sycip Gorres Velayo & Co., the independent auditors, appointed by the stockholders has

examined the consolidated financial statements of the company in accordance withPhilippine Standards on Auditing and in its report to the stockholders, has expressed itsopinion on the fairness of presentation upon completion of such examination.

Signed this 6th day of March 2013.

RAMON R. DEL ROSARIO, JR.President and Chief Executive Officer

Executive Vice President and Chief Financial Officer

OSCAR J. HILADOChairman of the Board

VI J. DEL ROSARIO

PHINMACorporationl2sFloorPhinmaPlaza,39PlazaDrive,Rockwell Center,Makati City1210 lTel:870-0100 lFax:870-0456

Life can be better

--\ --/\-\. -\ /r_-- / ----=--:-

PHN Statement of Management ResponsibilityFor Consolidated Financial Statements

March 6, 2013Page....2

SUBSCRIBED AND SWORN to before me this day of.MAR

1 5 20132013 in Makati City, affiants exhibiting to me their Passport and Community TaxCertificates, as follows :

rraregnrnm&/m/rcsahuDAD

Doc. No. A c{ IPage No. --WBook No. q bSeries of ndf

NOTARYPIjBLIC'UntilDeoember 3f,2013

Appointment No. M42 (20 12-?41 3\.IEF No. 926662; 01-18-13; Makati ChapterPTR No. 36!{440; 01-18-13; Makati Cig

RollNo.33861

Name

Passport No. /Community Tax

Cert. No. Date of IssuePlace of

IssueOscar J. Hilado xx4476833 September 17,2009 ManilaRamon R. del Rosario. Jr- l 0675885 January 25,2013 Makat CitvVictor J. del Rosario I 07 I 5863 February 27,2013 Makat Citv

PHINMA Corporation 1 2'h Floor Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City '121 0 | Tel: 870-0100 | Fax: 870-045!

PHINMA Corporation and Subsidiaries

Consolidated Financial Statements December 31, 2012 and 2011 and Years Ended December 31, 2012, 2011 and 2010 and Independent Auditors’ Report SyCip Gorres Velayo & Co.

*SGVMG600202*

INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors PHINMA Corporation We have audited the accompanying consolidated financial statements of PHINMA Corporation and Subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

A member firm of Ernst & Young Global Limited

*SGVMG600202*

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Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of PHINMA Corporation and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Catherine E. Lopez Partner CPA Certificate No. 86447 SEC Accreditation No. 0468-AR-2 (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No. 102-085-895 BIR Accreditation No. 08-001998-65-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3669691, January 2, 2013, Makati City March 6, 2013

*SGVMG600202*

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31

2012

2011 (As restated -

Note 6) (In Thousands)

ASSETS

Current Assets Cash and cash equivalents (Notes 7, 31 and 32) P=465,179 P=916,157 Investments held for trading (Notes 8, 31 and 32) 800,415 771,517 Trade and other receivables (Notes 9, 28, 31 and 32) 871,881 857,649 Inventories (Note 10) 956,472 977,919 Input value-added taxes 5,425 40,697 Derivative asset and other current assets (Notes 31 and 32) 81,363 85,371 Total Current Assets 3,180,735 3,649,310

Noncurrent Assets Investments in associates - at equity (Note 11) 2,344,065 1,835,145 Available-for-sale (AFS) investments (Notes 12, 31 and 32) 232,406 140,990 Property, plant and equipment (Notes 13 and 19) 2,258,625 2,260,744 Investment properties (Notes 14 and 19) 421,707 410,890 Intangibles (Notes 6 and 15) 1,091,033 1,307,946 Deferred tax assets - net (Note 29) 85,231 49,245 Other noncurrent assets (Note 16) 31,515 26,640 Total Noncurrent Assets 6,464,582 6,031,600

P=9,645,317 P=9,680,910

LIABILITIES AND EQUITY

Current Liabilities Notes payable (Notes 17, 31 and 32) P=373,676 P=455,193 Trade and other payables (Notes 18, 31 and 32) 536,683 402,495 Unearned revenues - inclusive of current portion of deferred rent

revenue of P=1.2 million in 2012 and 2011 (Notes 4 and 28) 197,051 204,567 Trust receipts payable (Notes 10, 31 and 32) 554,797 103,735 Income and other taxes payable 41,796 44,889 Due to related parties (Notes 28, 31 and 32) 17,655 24,496 Derivative liability (Notes 31 and 32) – 2,281 Current portion of long-term loan payable (Notes 6, 31 and 32) 23,645 22,095 Current portion of long-term debt (Notes 19, 28, 31 and 32) 64,654 141,063 Total Current Liabilities 1,809,957 1,400,814

(Forward)

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December 31

2012

2011 (As restated -

Note 6) (In Thousands)

Noncurrent Liabilities Long-term debt (Notes 19, 28, 31 and 32) P=347,532 P=599,659 Long-term loan payable (Notes 6, 31 and 32) 47,290 78,912 Deferred tax liabilities - net (Note 29) 313,736 310,995 Pension and other post-employment benefits (Note 30) 88,179 58,249 Deferred rent revenue - net of current portion (Note 28) 46,062 47,228 Other noncurrent liabilities (Note 28) 6,727 7,477 Total Noncurrent Liabilities 849,526 1,102,520 Total Liabilities 2,659,483 2,503,334

Equity Attributable to Equity Holders of the Parent Capital stock (Note 20) 2,588,946 2,577,249 Additional paid-in capital 256,495 255,785 Other components of equity (Note 20) 36,032 33,914 Retained earnings (Note 20) 3,510,855 3,649,960 Equity attributable to equity holders of the parent 6,392,328 6,516,908

Equity Attributable to Non-controlling Interest (Note 6) 593,506 660,668 Total Equity 6,985,834 7,177,576

P=9,645,317 P=9,680,910 See accompanying Notes to Consolidated Financial Statements.

*SGVMG600202*

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31 2012 2011 2010 (In Thousands, Except Per Share Data)

REVENUE Sale of goods P=3,082,380 P=2,695,638 P=2,795,576 Tuition and school fees 726,872 823,964 754,323 Consultancy services 471,262 258,065 – Investment income (Notes 8 and 21) 133,068 102,335 84,067 Animation services 80,396 26,631 60,127 Rental income (Note 14) 42,655 46,872 79,639 4,536,633 3,953,505 3,773,732

COSTS AND EXPENSES Cost of sales (Notes 22, 25 and 26) (2,403,519) (2,117,967) (2,038,152) Cost of educational, animation and consultancy services

(Notes 22, 25 and 26) (666,489) (690,310) (573,259) General and administrative expenses (Notes 9, 16, 23,

25, 26 and 28) (914,608) (641,444) (561,983) Selling expenses (Notes 9, 24, 25 and 26) (442,086) (329,018) (228,987) (4,426,702) (3,778,739) (3,402,381)

OTHER INCOME (CHARGES) Impairment loss on goodwill (Notes 4 and 15) (212,300) (166,369) – Equity in net earnings of associates (Note 11) 118,944 137,656 59,391 Interest expense and other financial charges (Note 27) (101,303) (108,381) (113,421) Foreign exchange losses - net (Note 31) (22,874) (6,298) (32,402) Gain on sale of investment properties (Notes 9 and 14) 16,277 1,611 386,073 Net gains on derivatives (Note 32) 12,270 7,121 50,061 Income from reversal of unrecoverable input

value-added tax 1,542 – 52,349 Others – net (Note 11) 30,399 63,424 33,428 (157,045) (71,236) 435,479

INCOME (LOSS) BEFORE INCOME TAX (47,114) 103,530 806,830

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 29)

Current 69,535 128,294 135,619 Deferred (26,592) (82,273) 31,208 42,943 46,021 166,827

NET INCOME (LOSS) (P=90,057) P=57,509 P=640,003

Attributable to Equity holders of the Parent (P=36,010) P=81,018 P=475,846 Non-controlling interest (54,047) (23,509) 164,157 Net income (loss) (P=90,057) P=57,509 P=640,003

Basic/Diluted Earnings (Loss) Per Common Share - Attributable to Equity Holders of the Parent (Note 34) (P=0.14) P=0.31 P=1.85

See accompanying Notes to Consolidated Financial Statements.

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PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 2012 2011 2010 (In Thousands)

NET INCOME (LOSS) (P=90,057) P=57,509 P=640,003

OTHER COMPREHENSIVE INCOME (LOSS) Cumulative translation adjustments (5,803) 790 6,184 Unrealized gain (loss) on change in fair value of AFS

investments (Note 12) (635) (367) 1,060 Share in unrealized gain (loss) on change in fair value of

AFS investments of associates (Note 11) 4,713 (175) 7,731 (1,725) 248 14,975

TOTAL COMPREHENSIVE INCOME (LOSS) (P=91,782) P=57,757 P=654,978

Attributable to Equity holders of the Parent (P=37,735) P=81,266 P=489,576 Non-controlling interest (54,047) (23,509) 165,402 Total Comprehensive Income (Loss) (P=91,782) P=57,757 P=654,978 See accompanying Notes to Consolidated Financial Statements.

*SGVMG600202*

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Equity Attributable to Equity Holders of the Parent Company

Capital Additional

Share in Equity

Component of Convertible

Share in Unrealized

Gain (Loss) on Change in Fair

Value of AFS Investments of

Associates

Unrealized Gain (Loss) on

Change in Fair Value

of AFS Investments

Cumulative Translation Other

Non- Retained Earnings

Stock

(Note 20) Paid-in Capital

Notes (Note 20)

(Notes 11 and 20)

(Notes 12 and 20)

Adjustments (Note 20)

Reserves (Note 20)

Appropriated (Note 20) Unappropriated Subtotal

controlling Interest

Total Equity

(In Thousands)

Balance, January 1, 2012 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576 Total comprehensive income (loss) 4,713 (635) (5,803) (36,010) (37,735) (54,047) (91,782) Cash dividends - P=0.40 a share (Note 20) – – – – – – – – (103,095) (103,095) – (103,095) Issuance of stocks from stock purchase

plan (Note 20) 11,697 710 – – – – (12,407) – – – – – Stock purchase plan (Note 20) – – – – – – 24,315 – – 24,315 – 24,315 Dividends received – – – – – – – – – – (21,585) (21,585) Acquisition of subsidiaries (Note 6) – – – – – – – – – – 9,971 9,971 Acquisition of non-controlling interest

(Note 6) – – – – – – (8,065) – – (8,065) (2,016) (10,081) Subscriptions – – – – – – – – – – 515 515 Balance, December 31, 2012 P=2,588,946 P=256,495 P=– P=23,764 P=350 (P=868) P=12,786 P=1,000,000 P=2,510,855 P=6,392,328 P=593,506 P=6,985,834

Balance, January 1, 2011 P=2,577,249 P=255,785 P=– P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – (175) (367) 790 – – 81,018 81,266 (23,509) 57,757 Cash dividends - P=0.40 a share (Note 20) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (98,914) (98,914) Acquisition of subsidiaries (Note 6) – – – – – – – – – – 11,902 11,902 Subscriptions – – – – – – – – – – 9,236 9,236 Balance, December 31, 2011 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576

Balance, January 1, 2010 P=2,577,249 P=255,785 P=13,443 P=11,495 P=300 (P=802) P=– P=1,000,000 P=2,282,587 P=6,140,057 P=626,309 P=6,766,366 Total comprehensive income – – – 7,731 1,052 4,947 – – 475,846 489,576 165,402 654,978 Cash dividends - P=0.40 a share (Note 20) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (25,218) (25,218) Subscriptions – – – – – – – – – – 4,403 4,403 Reclassification of share in equity

component of convertible notes (Note 20) – – (13,443) – – – – – 16,699 3,256 – 3,256

Change in ownership interest without loss of control (Note 1) – – – – – – 8,943 – – 8,943 (8,943) –

Balance, December 31, 2010 P=2,577,249 P=255,785 P=– P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 See accompanying Notes to Consolidated Financial Statements.

*SGVMG600202*

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2012 2011 2010 (In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax (P=47,114) P=103,530 P=806,830 Noncash adjustment to reconcile income before income tax to net

cash flows: Depreciation and amortization (Note 26) 233,048 218,079 238,380 Impairment loss on goodwill (Note 15) 212,300 166,369 – Equity in net earnings of associates (Note 11) (118,944) (137,656) (59,391) Interest expense and other financial charges (Note 27) 101,303 108,381 113,421 Retirement cost (Note 30) 63,721 38,478 38,168 Interest income (Note 21) (58,303) (61,287) (60,252) Provision for unrecoverable input value-added tax

(Note 23) 45,471 7,372 4,063 Dividend income (Note 21) (23,896) (2,454) (4,469)

Stock purchase plan expense (Note 20) 19,821 – – Gain on sale of investment property (16,276) (1,611) (386,073) Net gains on derivatives - net (Note 32) (12,270) (7,121) (50,061) Unrealized foreign exchange loss - net 3,107 4,672 17,442 Loss (gain) on sale of property and equipment (1,992) (56) 72 Income from reversal of unrecoverable input value-added tax – – (52,349) Gain on sale of AFS investments – (4) (16) Operating income before working capital changes 399,976 436,692 605,765 Decrease (increase) in: Short-term investments – 47,316 (47,316) Investments held for trading (27,206) 67,707 (291,404) Trade and other receivables (16,665) 309,983 308,999 Inventories 21,447 (147,009) (229,669) Other current assets 37,336 (6,586) (11,066) Increase (decrease) in: Trade and other payables 5,497 (83,689) (219,211) Trust receipts payable 451,061 (18,589) (9,484) Other taxes payable (6,424) (63,614) (5,694) Unearned revenues (7,515) 9,683 6,419 Cash generated from operations 857,507 551,894 107,339 Interest paid (103,835) (109,266) (127,981) Income tax paid (63,734) (102,452) (87,618) Net cash provided by (used in) operating activities 689,938 340,176 (108,260)

CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Investments in associates (533,153) (350,364) – Property, plant and equipment and investment properties (Notes

13, 14 and 37) (250,638) (315,790) (222,202) Proceeds from sale/settlement of: AFS investments 9,502 257,940 258 Forward currency contracts 9,460 13,844 52,484 Investment properties 24,538 9,986 135,300 Property, plant and equipment 26,196 766 47,141

Purchase price adjustment (Note 15) 7,063 – – Receipt of deposits for investment 96,120 – – Acquisition of subsidiaries - net of cash acquired (Note 6) – (235,141) – Interest received 59,424 58,381 60,372 Decrease (increase) in other noncurrent assets (66,829) 19,640 9,333 Dividends received 54,201 17,986 43,570 Acquisition of non-controlling interest (Note 6) (10,081) – – Net cash provided by (used in) investing activities (574,197) (522,752) 126,256

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Years Ended December 31 2012 2011 2010

(In Thousands)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from availment of: Notes payable 380,792 447,133 212,991 Long-term debt – 37,841 400,000 Payments of: Notes payable (462,309) (241,737) (67,634) Long-term debt (330,359) (142,474) (256,440) Cash dividends (102,014) (101,874) (103,095) Long-term loan payable (34,894) (4,160) – Increase (decrease) in: Non-controlling interest (11,099) (89,677) (16,314) Due to related parties (6,841) (8,433) (27,341) Net cash provided by (used in) financing activities (566,724) (103,381) 142,167

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 5 (56) (10,210)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (450,978) (286,013) 149,953

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 916,157 1,202,170 1,052,217

CASH AND CASH EQUIVALENTS AT END OF YEAR P=465,179 P=916,157 P=1,202,170 See accompanying Notes to Consolidated Financial Statements.

*SGVMG600202*

PHINMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information

PHINMA Corporation (PHN or the Parent Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on March 12, 1957. On August 2, 2006, the Philippine SEC approved the extension of the Parent Company’s corporate life for another 50 years. Also, on May 27, 2010, the Philippine SEC approved the change in the Parent Company’s corporate name from Bacnotan Consolidated Industries, Inc. to PHINMA Corporation. Its principal activity is investment holdings of shares in various subsidiaries, associates and affiliates and other financial instruments.

Following are the subsidiaries of the Parent Company and the nature of their principal business activities:

Calendar/Fiscal Percentage of Ownership Name of Subsidiaries Nature of Business Yearend 2012 2011 Union Galvasteel Corporation (UGC) (a) Manufacture and distribution

of steel products December 31 98.08 98.08 One Animate Limited (OAL) and Subsidiary (b) Business Process Outsourcing

-Animation services December 31 80.00 80.00 Pamantasan ng Araullo (Araullo University),

Inc.(AU) (c) Educational institution March 31 78.64 78.64 Cagayan de Oro College, Inc. (COC) (c) Educational institution March 31 74.21 74.21 University of Iloilo (UI) (c) Educational institution March 31 69.79 69.79 University of Pangasinan (UPANG) and Subsidiary(c) Educational institution March 31 69.75 69.75 P & S Holdings Corporation (PSHC) Investment and real estate

holdings December 31 60.00 60.00 Asian Plaza, Inc. (API) Lease of real property December 31 57.62 57.62 Fuld & Company, Inc. (Fuld U.S.) and Subsidiary (d) Business Research December 31 85.00 85.00 Fuld & Company (Philippines), Inc.

(Fuld Philippines) (e) Business Research December 31 85.00 85.00 (a) On December 22, 2010, the SEC approved the merger of UGC and Atlas Holdings Corporation (AHC) with UGC as the surviving

entity. The execution of the merger involved a share swap between UGC and the holder of the non-controlling interest in AHC. This resulted in a decrease of the Parent Company’s ownership in UGC from 98.36% .

(b) OAL owns 100% interest in Toon City Animation, Inc. (Toon City) in 2012 and 95% in 2011. (c) Balances of these subsidiaries as of and for the year ended December 31 were used for consolidation purposes, which is the same

reporting period of PHN. (d) Acquired by PHN on June 10, 2011. (e) Acquired by PHN on July 25, 2011.

The Parent Company and its subsidiaries (collectively referred to as “the Company”) are all incorporated in the Philippines except for OAL and Fuld U.S. OAL is incorporated in Hong Kong while Fuld U.S. is incorporated in the United States of America (USA). The Company’s ultimate parent company is Philippine Investment-Management (PHINMA), Inc., which is also incorporated in the Philippines.

The information on the segments of the Company is presented in Note 35.

The registered office address of the Parent Company is 12th Floor, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City.

The accompanying consolidated financial statements were approved and authorized for issuance by the Board of Directors (BOD) on March 6, 2013.

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2. Basis of Preparation and Statement of Compliance

The accompanying consolidated financial statements of the Company have been prepared using the historical cost basis, except for investments held for trading, available-for-sale (AFS) investments and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, the Parent Company’s functional currency. All values are rounded to the nearest thousand peso unless otherwise stated.

The accompanying consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from the International Financial Reporting and Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).

3. Changes in Accounting Policies and Disclosures

Current Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year except for the following amended PFRS which were adopted on January 1, 2012.

§ PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets (Amendments)

The amendments require additional disclosures about financial assets that have been transferred but not derecognized to enhance the understanding of the relationship between those assets that have not been derecognized and their associated liabilities. In addition, the amendments require disclosures about continuing involvement in derecognized assets to enable users of financial statements to evaluate the nature of, and risks associated with, the entity’s continuing involvement in those derecognized assets. The amendments affect disclosures only and have no impact on the Company’s financial position or performance.

§ PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (Amendments) This amendment to PAS 12 clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a ‘sale’ basis. The presumption is rebutted if the investment property is depreciable and it is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time (‘use’ basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset. The amendments have no impact on the Company’s financial statements since the Company has no investment properties and property and equipment carried at revalued amounts.

Standards and Interpretations Issued but not yet Effective Standards and interpretations issued effective subsequent to December 31, 2012 are listed below. The Company intends to adopt these standards and interpretations when they become effective.

§ PFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial

Liabilities (Amendments), These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new

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disclosures are required for all recognized financial instruments that are set-off in accordance with PAS 32, Financial Instruments: Presentation. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: (a) The gross amounts of those recognized financial assets and recognized financial liabilities; (b) The amounts that are set-off in accordance with the criteria in PAS 32 when determining

the net amounts presented in the statement of financial position; (c) The net amounts presented in the statement of financial position; (d) The amounts subject to an enforceable master netting arrangement or similar agreement

that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of

the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and

(e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be retrospectively applied and are effective for annual periods beginning on or after January 1, 2013. The amendments affect disclosures only and have no impact on the Company’s financial position or performance.

§ PFRS 10, Consolidated Financial Statements, PFRS 10 replaces the portion of PAS 27,

Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standing Interpretation Committee (SIC) 12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. The standard becomes effective for annual periods beginning on or after January 1, 2013.

A reassessment of control was performed by the Parent Company on all its subsidiaries in accordance with the provisions of PFRS 10. Following the reassessment, the Parent Company determined that it still controls all of its subsidiaries.

§ PFRS 11, Joint Arrangements, PFRS 11 replaces PAS 31, Interests in Joint Ventures, and SIC

13, Jointly Controlled Entities - Non-Monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method. The standard becomes effective for annual periods beginning on or after January 1, 2013. The Company does not expect this Standard to have any impact on its financial statements.

§ PFRS 12, Disclosure of Interests in Other Entities, PFRS 12 includes all of the disclosures

related to consolidated financial statements that were previously in PAS 27, as well as all the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The standard becomes effective for annual periods beginning on or after January 1, 2013.

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The adoption of PFRS 12 will affect disclosures only and have no impact on the Company’s financial position or performance.

§ PFRS 13, Fair Value Measurement, PFRS 13 establishes a single source of guidance under

PFRSs for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The standard becomes effective for annual periods beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this standard will have a significant impact on its financial position and performance.

§ PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive

Income (OCI) (Amendments), The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon derecognition or settlement) will be presented separately from items that will never be recycled. The amendments affect presentation only and have no impact on the Company’s financial position or performance. The amendments are not expected to have any impact on the Company’s financial position or performance. The amendments become effective for annual periods beginning on or after July 1, 2012.

§ PAS 19, Employee Benefits (Revised), Amendments to PAS 19 range from fundamental

changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. The amendments become effective for annual periods beginning on or after January 1, 2013. Once effective, the Company has to apply the amendments retroactively to the earliest period presented.

The Company reviewed its existing employee benefits and determined that the amended standard has significant impact on its accounting for retirement benefits. The Company obtained the services of an external actuary to compute the impact to the financial statements upon adoption of the standard. The effects are detailed below:

As at December 31,

2012

As at January 1,

2012 P=’000 P=’000 Increase (decrease) in: Consolidated balance sheet Net defined benefit asset/liability 104,787 85,997 Deferred tax asset/liability 26,031 14,187 Other comprehensive income 21,106 (5,340) Retained earnings (99,862) (66,471)

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2012 P=’000 Consolidated income statement Net benefit cost 45,235 Income tax expense (11,844) Profit for the year 33,391

§ PAS 27, Separate Financial Statements (as revised in 2011), As a consequence of the

issuance of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in the separate financial statements. The adoption of the amended PAS 27 will not have a significant impact on the separate financial statements of the entities in the Company. The amendment becomes effective for annual periods beginning on or after January 1, 2013.

§ PAS 28, Investments in Associates and Joint Ventures (as revised in 2011), As a consequence

of the issuance of the new PFRS 11, Joint Arrangements, and PFRS 12, Disclosure of Interests in Other Entities, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, 2013.

§ Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, This interpretation applies to waste removal costs (“stripping costs”) that are incurred in surface mining activity during the production phase of the mine (“production stripping costs”). If the benefit from the stripping activity will be realized in the current period, an entity is required to account for the stripping activity costs as part of the cost of inventory. When the benefit is the improved access to ore, the entity should recognize these costs as a non-current asset, only if certain criteria are met (“stripping activity asset”). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost or revalued amount less depreciation or amortization and less impairment losses, in the same way as the existing asset of which it is a part. The interpretation is effective for annual periods beginning on or after January 1, 2013. This new interpretation is not relevant to the Company.

§ PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (Amendments). The amendments clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only and have no impact on the Company’s financial position or performance. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014.

§ PFRS 9, Financial Instruments, PFRS 9, as issued, reflects the first phase on the replacement

of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not

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invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets, but will potentially have no impact on the classification and measurement of financial liabilities.

PFRS 9 will become effective for annual periods beginning on or after January 1, 2015.

Annual Improvements to PFRSs (2009-2011 cycle) The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted.

§ PFRS 1, First-time Adoption of PFRS - Borrowing Costs

The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Company as it is not a first-time adopter of PFRS.

§ PAS 1, Presentation of Financial Statements - Clarification of the requirements for

comparative information

The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments are not expected to have an impact on the Company’s financial position or performance.

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§ PAS 16, Property, Plant and Equipment - Classification of servicing equipment The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory, if otherwise. The amendment will not have any significant impact on the Company’s financial position or performance.

§ PAS 32, Financial Instruments: Presentation - Tax effect of distribution to holders of equity

instruments

The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12. The Company expects that this amendment will not have any impact on its financial position or performance.

§ PAS 34, Interim Financial Reporting - Interim financial reporting and segment information

for total assets and liabilities

The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity’s previous annual financial statements for that reportable segment. The amendment affects disclosures only and has no impact on the Company’s financial position or performance.

4. Summary of Significant Accounting and Financial Reporting Policies

Principles of Consolidation The consolidated financial statements include the accounts of the Parent Company and all the subsidiaries mentioned in Note 1. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

All intercompany balances, transactions, income and expenses and profits and losses resulting from intercompany transactions are eliminated in full.

Subsidiaries are fully consolidated from the date control is transferred to the Company and cease to be consolidated from the date control is transferred out of the Company.

Non-controlling interest represents the portion of profit or loss and net assets in the subsidiaries not held by the Company and is presented in the consolidated statements of income, consolidated statements of comprehensive income and within equity in the consolidated statements of financial position, separately from equity attributable to equity holders of the parent. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction and is shown as “Other reserves” under “Other Components of Equity” in the consolidated statements of changes in equity. If the Company loses control over a subsidiary, it:

§ derecognizes the assets (including goodwill) and liabilities of the subsidiary; § derecognizes the carrying amount of any non-controlling interest; § derecognizes the cumulative translation differences, recorded in equity; § recognizes the fair value of the consideration received; § recognizes the fair value of any investment retained;

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§ recognizes any surplus or deficit in profit or loss; § reclassifies the parent’s share of components previously recognized in other comprehensive

income to profit or loss or retained earnings, as appropriate.

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

Financial Instruments - Initial Recognition and Subsequent Measurement

Date of Recognition. The Company recognizes a financial instrument in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date that the Company commits to purchase the assets. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Derivatives are recognized on a trade date basis.

Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial instruments, except for financial instruments measured at fair value through profit or loss (FVPL).

The Company classifies its financial instruments into the following categories: financial assets and liabilities at FVPL, loans and receivables, held-to-maturity (HTM) investments, AFS investments and other financial liabilities. The classification depends on the purpose for which the instruments are acquired and whether they are quoted in an active market. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every financial reporting date.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

Determination of Fair Value. The fair value of financial instruments traded in active markets at the end of the reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

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Day 1 Difference. Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statements of income unless it qualifies for recognition as some other type of asset. In cases where unobservable data is used, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the ‘Day 1’ difference amount.

Financial Assets and Liabilities at FVPL. This category includes financial assets and liabilities held for trading and financial assets and liabilities designated upon initial recognition as at FVPL. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including any separated derivatives, are also classified under financial assets or liabilities at FVPL, unless these are designated as hedging instruments in an effective hedge or financial guarantee contracts. Instruments under this category are classified as current assets/liabilities if these are hold primarily for the purpose of trading or expected to be realized/settled within 12 months from reporting date. Otherwise, these are classified as noncurrent assets/liabilities.

Financial assets or financial liabilities may be designated by management on initial recognition as at FVPL when the following criteria are met:

§ the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

§ the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

§ the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities designated at FVPL are recorded in the consolidated statements of financial position at fair value. Subsequent changes in fair value on financial assets and liabilities designated at FVPL are recorded in the consolidated statements of income as “Net gains from fair value change of investments held for trading” under “Investment income” account. Interest earned or incurred is recorded in “Investment income” account or “Interest expense and other financial charges” account, respectively. Dividend income is recorded according to the terms of the contract, when the right to receive payment has been established.

The Company’s investments held for trading and derivative asset are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=800.9 million and P=771.5 million as of December 31, 2012 and 2011, respectively (see Note 32). Included under financial liability at FVPL is the Company’s derivative liability. The carrying values of financial liability at FVPL amounted to P=2.3 million as of December 31, 2011 (see Note 32).

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Derivative Financial Instruments The Company enters into short-term forward currency contracts to hedge its currency exposure (see Note 32). Such derivative financial instruments are initially recorded at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and liabilities when the fair value is negative. Consequently, gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income. The Company has opted not to designate its derivative transactions under hedge accounting. The fair values of freestanding forward currency transactions are calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Embedded Derivative. An embedded derivative is a component of a hybrid (combined) instrument that also includes a nonderivative host contract with the effect that some of the cash flows of the hybrid instrument vary in a way similar to a stand-alone derivative. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) the hybrid or combined instrument is not recognized at FVPL.

The Company assesses whether embedded derivatives are required to be separated from the host contracts when the Company becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Company determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flow on the contract.

Embedded derivatives are measured at fair value and are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income.

The Company has no embedded derivatives in 2012 and 2011.

Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. Loans and receivables are included in current assets if maturity is within 12 months from the financial reporting date. Otherwise, these are classified as noncurrent assets.

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After initial measurement, loans and receivables are carried at amortized cost using the effective interest method less any allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest method. Gains and losses are recognized in the consolidated statements of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

The Company’s cash and cash equivalents, trade and other receivables and installment contract receivables are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=1,337.0 million and P=1,773.8 million as of December 31, 2012 and 2011, respectively (see Note 32).

HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Company’s management has the positive intention and ability to hold to maturity. Where the company sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, such assets are carried at amortized cost using the effective interest method less any impairment in value. Gains and losses are recognized in the consolidated statements of income when the HTM investments are derecognized or impaired, as well as through the amortization process. HTM Investments are classified as current if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Company has no financial assets classified as HTM as of December 31, 2012 and 2011.

AFS Investments. AFS investments are nonderivative financial assets that are designated in this category or are not classified in any of the three preceding categories. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS investments are carried at fair value in the consolidated statements of financial position. Changes in the fair value of such assets are reported as unrealized gain or loss on change in fair value of AFS investments recognized as other comprehensive income in the consolidated statements of comprehensive income until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in consolidated statements of comprehensive income is transferred to the consolidated statements of income. AFS investments are classified as current if they are expected to be realized within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent assets.

The Company’s investments in quoted and unquoted equity securities and other investments are classified under this category. The carrying values of financial assets under this category amounted to P=232.4 million and P=141.0 million as of December 31, 2012 and 2011, respectively (see Note 32).

Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. This includes liabilities arising from operations or loans and borrowings.

Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized, as well as through the amortization process. Other financial liabilities are classified as current liabilities if settlement is within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent liabilities.

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The Company’s notes payable, trade and other payables, trust receipts payable, due to related parties, long-term loan payable and long-term debt are classified under this category. The aggregate carrying values of financial liabilities under this category amounted to P=1,965.9 million and P=1,827.6 million as of December 31, 2012 and 2011, respectively (see Note 32).

Convertible Notes Convertible notes which contain both a liability and an equity element, are separated into two components on initial issuance based on the present value of the expected cash flows of the notes, and each is accounted for separately. Upon issuance of the convertible notes, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note and this amount is carried as a long-term liability at amortized cost until extinguished on conversion or repayment. Amortization of discount is based on the effective interest rate method. The remainder of the proceeds is allocated to the conversion option. The Parent Company’s share is recognized and included in equity as “Share in equity component of convertible notes.”

Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to:

§ deliver cash or another financial asset to another entity; § exchange financial assets or financial liabilities with another entity under conditions that are

potentially unfavorable to the Company; or § satisfy the obligation other than by the exchange of a fixed amount of cash or another financial

asset for a fixed number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

Impairment of Financial Assets The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired.

Assets Carried at Amortized Cost. If there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Company. If in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the

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allowance account. If a write-off is later recovered, the recovery is recognized in the consolidated statements of income. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. For the purpose of specific evaluation of impairment, the Company assesses whether financial assets are impaired through assessment of collectability of financial assets considering the debtor’s capacity to pay, history of payment, and the availability of other financial support. For the purpose of a collective evaluation of impairment, if necessary, financial assets are grouped on the basis of such credit risk characteristics such as debtor type, payment history, past-due status and terms.

Assets Carried at Cost. If there is objective evidence (such as continuing losses or significant financial difficulties of the investee company) that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

AFS Investments. In the case of equity instruments classified as AFS investments, evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of income, is removed from the consolidated statements of comprehensive income and recognized in the consolidated statements of income. Impairment losses on equity investments are not reversed through the consolidated statements of income. Increases in the fair value after impairment are recognized directly in consolidated statements of comprehensive income.

In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount of the asset and is accrued based on the rate of the interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the consolidated statements of income. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the consolidated statements of income, the impairment loss is reversed through the consolidated statements of income.

Derecognition of Financial Assets and Liabilities

Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

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

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§ the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

§ the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset or has entered into a “pass-through” arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts, of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of income.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statements of financial position if and only if there is a currently legal right to offset the recognized amounts and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated statements of financial position.

Inventories Inventories are valued at the lower of cost or net realizable value. Costs incurred in bringing each inventory to its present location and conditions are accounted for as follows:

Finished goods – determined using the moving average method;

cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excludes borrowing costs;

Raw materials, spare parts and others – determined using the moving average method.

The net realizable value of inventories, except spare parts, is the selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The net realizable value of spare parts is the current replacement cost.

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Investments in Associates Investments in associates are accounted for under the equity method. These are entities in which the Company has significant influence and which are neither subsidiaries nor joint ventures of the Company. The investments in associates are carried in the consolidated statements of financial position at cost plus post-acquisition changes in the Company’s share in net assets of the associates, less any impairment in value. The consolidated statements of income reflect the Company’s share in the results of operations of the associates. Unrealized gains arising from transactions with its associates are eliminated to the extent of the Company’s interest in the associates against the related investments. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred. The Company shall discontinue the use of the equity method from the date when it ceases to have significant influence over an associate and shall account for the investment in accordance to PAS 39 from that date, provided that the associate does not become a subsidiary or joint venture. On the loss of significant influence, the Company shall measure at fair value any investment the Company retains in the former associate. The Company shall recognize in profit or loss the difference between: a. the fair value of any retained investment and any proceeds from disposing of the part interest

in the associate; and b. the carrying amount of the investment at the date when significant influence is lost.

When the Company’s accumulated share in net losses of an associate equals or exceeds the carrying amount of the investment, including advances for future conversion to equity, the Company discontinues the recognition of its share in additional losses and the investment is reported at nil value. If the associate subsequently reports net income, the Company will resume applying the equity method only after its share in that net income equals the share in net losses not recognized during the period the equity method was suspended.

Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less accumulated depreciation and any impairment loss. Land is carried at cost less any impairment loss. The cost of property, plant and equipment comprises its purchase price, including any applicable import duties and capitalized borrowing costs (for property, plant and equipment other than land) and other costs directly attributable in 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 operation, such as repairs and maintenance, are normally charged to current operations in the year 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 and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment.

Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

Plant site improvements 10–20 years Buildings and improvements 10–20 years Machinery and equipment 5–20 years Transportation and other equipment 2–10 years

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

When each major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are met.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is credited or charged to consolidated statements of income.

Construction in-progress represents properties and structures under construction/development and is stated at cost. This includes cost of construction, plant and equipment, any borrowing costs directly attributable to such asset during the construction period and other direct costs. Construction in-progress is not depreciated until such time when the relevant assets are completed and ready for operational use.

Investment Properties Investment properties are measured initially at cost, including direct transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties (except land) are stated at cost less accumulated depreciation and impairment loss. Land is carried at cost less any impairment in value.

Depreciation of buildings for lease is calculated on a straight-line basis over the estimated useful lives of 15 to 20 years.

Investment property is derecognized when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statements of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.

Business Combinations, Goodwill and Goodwill Impairment Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses.

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When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Intangible Assets The cost of intangible assets acquired separately is measured on initial recognition at cost. The cost of intangible assets (student lists and customer contracts) acquired in a business combination is measured at the fair value as of date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Student lists are amortized over three years and assessed for impairment whenever there is an indication that the student lists acquired may be impaired. Customer contracts are amortized over the estimated economic life of one year.

The useful lives of intangible assets are assessed to be either finite or indefinite. The amortization periods and method are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite lives (trademarks) are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level.

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Impairment of Nonfinancial Assets The Company assesses at each reporting date whether there is an indication that a nonfinancial asset may be impaired when events or changes in circumstances indicate that the carrying value of a nonfinancial asset may not be recoverable. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.

For nonfinancial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. However, that increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in consolidated statements of income. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the Company’s investments in associates. The Company determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Company calculates the amount of impairment being the difference between the fair value and the carrying value of the investee company and recognizes the difference in the consolidated statements of income.

The following assets have specific characteristics for impairment testing:

Goodwill. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit (or group of cash generating units) to which the goodwill relates. When the recoverable amount of the cash generating unit is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Intangible assets. Intangible assets with indefinite useful lives are tested for impairment annually as either individually or at the cash generating unit level, as appropriate, and when circumstances indicate that the carrying value may be impaired.

Capital Stock Capital stock is measured at par value for all shares issued. When the Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued.

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When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account in the consolidated statement of financial position. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received.

Direct costs incurred related to equity issuance, such as underwriting, accounting and legal fees, printing costs and taxes are chargeable to the “Additional paid-in capital” account in the consolidated statements of financial position.

Retained Earnings Retained earnings represent accumulated net profits, net of dividend distributions and other capital adjustments.

Revenue Recognition Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized:

Sale of Goods. Revenue from sale of roofing and other steel products, books and incidentals is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.

Tuition and School Fees. Revenue is recognized as income over the corresponding school term to which they pertain. Tuition and school fees received pertaining to the summer semester and the next school year are recorded as part of “Unearned revenues” account in the consolidated statements of financial position.

Consultancy Services. Revenue is recognized when services are rendered.

Animation Services. Income from animation services is recognized by reference to the stage of completion. Stage of completion is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Where the contract outcome cannot be measured reliably, revenue is recognized only to the extent that the expenses incurred are eligible to be recovered.

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

Investment Income. Investment income includes net gains and losses on investments held for trading (see accounting policy on Financial Assets) and interest income. Interest income is recognized as the interest accrues, taking into account the effective yield on the asset.

Cost of Sales, Educational, Animation and Consultancy Services Cost of sales includes direct materials used, personnel costs, as well as repair and power and fuel used to run production of steel products. Cost of educational services constitutes costs incurred to administer academic instruction. Costs of animation services include all direct materials, labor costs and indirect costs related to contract performance. Cost of consultancy services includes labor cost and other direct costs related to the performance of consultancy services. These expenses are expensed as incurred.

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*SGVMG600202*

General and Administrative Expenses General and administrative expenses constitute costs of administering the businesses and are expensed as incurred.

Selling Expenses Selling expenses include costs of distribution of steel products, books, incidentals, personnel costs, freight expenses, commission and advertising. Selling expenses are expensed as incurred.

Retirement Costs PHN, UGC, Toon City, UPANG and AU have distinct funded, noncontributory defined benefit retirement plans while UI and COC have a defined, unfunded, noncontributory retirement plans covering all permanent employees, each administered by their respective Retirement Committees. Retirement costs are actuarially determined using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each plan at the end of the previous financial reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

Stock Purchase Plan The Company has a stock purchase plan offered to senior officers which gives the right to purchase shares of the Company set aside by the plan.

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*SGVMG600202*

The cost of equity-settled transactions with employees is measured by reference to their fair value at the date they are granted, determined using the acceptable valuation techniques. The amount is fixed at grant date. The cost of equity-settled transactions, together with a corresponding increase in equity, is recognized over the period in which the performance and/or service conditions are fulfilled ending on the date on which the employees become fully entitled to the award (“vesting date”). The cumulative expense recognized for equity-settled transactions at each reporting date up to and until the vesting date reflects the extent to which the vesting period has expired, as well as the Company’s best estimate of the number of equity instruments that will ultimately vest. The consolidated statements of income charge or credit for the period represents the movement in cumulative expense recognized at the beginning and end of that period. No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which awards are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized as if the terms had not been modified. An additional expense is likewise recognized for any modification which increases the total fair value of the share-based payment arrangement or which is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. If a new award, however, is substituted for the cancelled awards and designated as a replacement award, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term;

c. There is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario b.

Company as Lessee. Leases where the lessor retains substantially all the risks and benefits of ownership of the leased asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statement of income on a straight-line basis over the lease term.

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*SGVMG600202*

Company as Lessor. Leases where the Company does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Lease payments received are recognized as an income in the consolidated statement of income on a straight-line basis over the lease term.

Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 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 assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase due to the passage of time is recognized as interest expense in the consolidated statements of income.

Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing cost consists of interest and other costs that an entity incurs in connection with the borrowing of funds.

Foreign Currency-denominated Transactions and Translation The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency. The subsidiaries determine their own functional currency and items included in the financial statements of each subsidiary are measured using that functional currency. The Company has elected to recycle the gain or loss that arises from direct method of consolidation, the method the Company uses to complete its consolidation.

Transactions in foreign currencies are recorded using their functional currency exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange at the end of the reporting period. Exchange gains or losses arising from foreign currency translations are credited or charged to current operations. Nonmonetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

Other than OAL and Fuld U.S., the functional and presentation currency of the subsidiaries within the Company is Philippine peso. The functional currency of OAL and Fuld U.S. is U.S. dollar. The assets and liabilities of foreign operations are translated into Philippine peso at the rate of exchange prevailing at the reporting date and their income statements are translated at exchange rates prevailing at the date of the transactions. The exchange differences arising on the translation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statements of income.

Taxes

Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.

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*SGVMG600202*

Deferred Tax. Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:

§ where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused 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 the carryforward of unused excess MCIT and unused NOLCO can be utilized except:

§ where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of deductible temporary differences associated with investments in subsidiaries and associates. Deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.

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

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Value-Added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT, except:

§ Where the VAT incurred on a purchase of assets or services are not recoverable from the taxation authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

§ Receivables and payables that are stated with the amount of VAT included. The net amount of VAT recoverable from, or payable to, the tax authority is included as part of “Input value-added taxes” or “Income and other taxes payable” accounts in the consolidated statements of financial position.

Earnings Per Common Share (EPS) Attributable to the Equity Holders of the Parent Basic EPS is computed by dividing net income (after deducting dividends on preferred shares) attributable to equity holders of the parent by the weighted average number of issued and outstanding common shares during the year after giving retroactive effect to any stock dividend declared during the year. Diluted Earnings Per Share Diluted earnings per share amounts are calculated by dividing the net income attributable to equity holders of the Parent Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.

Segment Reporting The Company is organized into five major business segments. Such business segments are the bases upon which the Company reports its primary segment information. Financial information on business segments is presented in Note 35 to the consolidated financial statements.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable.

Events After the Reporting Period Post year-end events that provide additional information about the Company’s financial position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

5. Significant Accounting Judgments, Estimates and Assumptions

The accompanying consolidated financial statements prepared in conformity with PFRS require management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. In preparing the Company’s consolidated financial statements, management has made its best judgments, estimates and assumptions of certain amounts, giving due consideration to materiality. The judgments, estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

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The Company believes the following represents a summary of these significant judgments, estimates and assumptions and related impact and associated risks in its consolidated financial statements.

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

Operating Lease - Company as Lessor. The Company has entered into commercial property leases on its investment property portfolio. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Rental income amounted to P=42.7 million, P=46.9 million and P=79.6 million in 2012, 2011 and 2010, respectively.

Revenue Recognition. Selecting an appropriate revenue recognition method for a particular sale transaction requires certain judgments based on sufficiency of cumulative payments by the buyer and completion of development. The Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all its revenue arrangements.

Functional Currency. The Parent Company has determined that its functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Parent Company operates. The subsidiaries determine their own functional currencies depending on the primary economic environment in which they operate.

Derecognition of Financial Assets. Pursuant to an agreement between PHN and Vicsal Investment Inc. (Vicsal), PHN agreed to sell its shares in AB Capital subject to certain conditions, including the following: (a) Approval of the Bangko Sentral ng Pilipinas (BSP) (b) Removal of assets other than those identified and agreed to be retained by Vicsal in

AB Capital, by transfer to a New Company in exchange for shares in New Company and/or by sale or assignment of assets to the New Company

(c) Return of capital to PHN pertaining to shares in New Company (d) Selling Shareholders shall secure all Government Authorizations, including approvals

and clearances, required for the return of capital of AB Capital to PHN and other sellers (e) On Closing Date, PHN shall transmit to the Buyer the Deed of Absolute Sale

Management assessed that the transaction is not yet completed since certain conditions are not yet complied with.

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

Impairment of Goodwill and Trademarks. The Company performs impairment testing of goodwill and trademarks on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use

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of the cash-generating unit to which the goodwill is allocated. Value in use is determined by making an estimate of the expected future cash flows from the cash-generating unit and applies a discount rate to calculate the present value of these cash flows. Goodwill acquired through business combination has been allocated to one cash-generating unit which is also the operating entity acquired through business combination and to which the goodwill relates. The recoverable amount of the goodwill and trademarks has been determined based on value in use calculation using cash flow projections covering a five-year period. The calculation of value in use for the Company’s goodwill and trademark is sensitive to revenue growth rates and discount rates. Revenue growth rates estimates are based on values achieved in previous years and also takes into account anticipated increase from various market initiatives. The pre-tax discount rates applied to cash flow projections ranges from 9% to 12% in 2012 and 2011. Discount rate reflects the current market assessment of the risk specific to each cash-generating unit. The discount rate is based on the average percentage of the weighted average cost of capital for the industry. This rate is further adjusted to reflect the market assessment of any risk specific to the cash-generating unit for which future estimates of cash flows have not been adjusted. Management believes that no reasonably possible change in these key assumptions would cause the carrying values to materially exceed its recoverable amount. The Company performs its annual testing of goodwill and trademarks at December 31.

Impairment loss on goodwill amounting to P=212.3 million and P=166.4 million was recognized in 2012 and 2011 respectively. No impairment loss on trademarks was recognized in 2012 and 2011. The carrying amount of goodwill and trademarks amounted to P=1,091.0 million and P=1,304.4 million as of December 31, 2012 and 2011, respectively, and is presented as part of the “Intangibles” account in the consolidated statements of financial position (see Note 15).

Impairment of Nonfinancial Assets, other than Goodwill. The Company assesses whether there are any indicators of impairment for all nonfinancial assets, other than goodwill, at each reporting date. These nonfinancial assets (investment in associates, property, plant and equipment, investment properties and intangibles) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This requires an estimation of the value in use of the cash-generating units. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. In cases where the value in use cannot be reliably estimated, the recoverable amount is based on the fair value less costs to sell. The recoverable amount of investments in associates is based on fair value less cost to sell. Fair value less costs to sell is determined to be the amount obtainable from the sale of the underlying net assets of the associate.

There are no impairment of nonfinancial assets in 2012 and 2011. The carrying amounts of investments in associates amounted to P=2,334.1 million and P=1,835.1 million as at December 31, 2012 and 2011, respectively (see Note 11). The carrying amounts of property, plant and equipment amounted to P=2,258.6 million and P=2,260.7 million as of December 31, 2012 and 2011, respectively (see Note 13). The carrying amounts of investment properties amounted to P=421.7 million and P=410.9 million as of December 31, 2012 and 2011, respectively (see Note 14).

The carrying amounts of intangibles, other than goodwill and trademarks, amounted to nil and P=3.6 million as of December 31, 2012 and 2011, respectively (see Note 15).

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Impairment of AFS Investments. The Company treats AFS equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Company treats “significant” generally as 20% or more of the original cost of investment, and “prolonged” as period longer than six months. In addition, the Company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Based on management’s assessment, the Company’s AFS investments are not impaired. The carrying values of AFS investments amounted to P=232.4 million and P=141.0 million as of December 31, 2012 and 2011, respectively (see Note 12). Impairment of Trade Receivables. The Company maintains allowance for doubtful accounts based on the result of the individual and collective assessments under PAS 39. Under the individual assessment, which considers the significant financial difficulties of the debtor, the Company is required to obtain the present value of estimated cash flows using the receivable’s original effective interest rate. Impairment loss is determined as the difference between the receivables’ carrying balance and the computed present value. The collective assessment would require the Company to group its receivables based on the credit risk characteristics (debtor type, past-due status and terms) of the debtors. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any year would differ depending on the judgments and estimates made for the year.

The carrying amounts of trade and other receivables amounted to P=871.9 million and P=857.6 million as of December 31, 2012 and 2011, respectively (see Note 9). The allowance for impairment of receivables amounted to P=197.8 million and P=164.8 million as of December 31, 2012 and 2011, respectively (see Note 9).

Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. This is based on the Company’s projection of the future results of operations.

Deferred tax assets amounted to P=103.1 million and P=78.9 million as of December 31, 2012 and 2011, respectively (see Note 29).

Deductible temporary differences, unused NOLCO and MCIT for which no deferred tax assets were recognized in the consolidated statements of financial position amounted to P=464.7 million and P=374.7 million as of December 31, 2012 and 2011, respectively (see Note 29).

Recoverability of Input VAT. The carrying amounts of input taxes were reduced to the extent that it is no longer probable that sufficient revenue subject to VAT will be available to allow all or part of the input VAT to be utilized.

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Allowance for unrecoverable input VAT amounted to P=118.6 million and P=89.2 million as of December 31, 2012 and 2011, respectively (see Note 16). The carrying amount of input VAT classified as current assets amounted to P=5.4 million and P=40.7 million as of December 31, 2012 and 2011, respectively. Input VAT classified as other noncurrent assets amounted to P=0.6 million and nil as of December 31, 2012 and 2011, respectively (see Note 16).

Estimating Useful Lives of Property, Plant and Equipment, Investment Properties and Intangibles. The Company estimates the useful lives of depreciable property, plant and equipment, depreciable investment properties and intangibles with finite useful lives based on the period over which the property, plant and equipment, investment properties and intangibles with finite useful lives are expected to be available for use and on the collective assessment of industry practice, internal technical evaluation and experience with similar assets and in the case of intangibles, useful lives are also based on the contracts covering such intangibles. The estimated useful lives of property, plant and equipment and investment properties are reviewed periodically and updated if expectations differ materially from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the property, plant and equipment and investment properties. However, it is possible that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recording of expenses for any period would be affected by changes in these factors and circumstances.

The carrying amounts of depreciable property, plant and equipment amounted to P=1,066.6 million and P=1,059.6 million as of December 31, 2012 and 2011, respectively (see Note 13). The carrying amounts of depreciable investment properties amounted to P=74.4 million and P=80.6 million as of December 31, 2012 and 2011, respectively (see Note 14). The carrying amounts of intangibles with finite useful lives amounted to nil and P=3.6 million as of December 31, 2012 and 2011, respectively (see Note 15).

Estimating Net Realizable Value of Inventories. The Company carries inventories at net realizable value when this becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes.

The carrying amounts of inventories amounted to P=956.5 million and P=977.9 million as of December 31, 2012 and 2011, respectively (see Note 10).

Estimating the Fair Values of Acquiree’s Identifiable Assets and Liabilities. Where the fair values of the acquiree’s identifiable assets and liabilities cannot be derived from active markets, the Company determined the fair values using internal valuation techniques and generally accepted valuation approaches. The inputs to these valuation approaches are taken from historical experience and observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. The estimates may include discount rates and assumptions used in cash flow projections.

The fair values of the identifiable net assets acquired (liabilities assumed) from Fuld U.S. and Fuld Philippines amounted to P=83.8 million and (P=4.5 million), respectively, in 2011 (see Note 6).

Pension Benefits. The determination of the Company’s obligation and cost of pension benefits is dependent on the selection of certain assumptions made by management and used by actuaries in calculating such amounts. The assumptions presented in Note 30 include among others, discount rates, expected rates of return on plan assets and rates of future salary increase. In accordance

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with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.

Net pension liability, included under “Pension and other post-employment benefits” account in the consolidated statements of financial position, amounted to P=51.8 million and P=31.8 million as of December 31, 2012 and 2011, respectively. Net pension expense amounted to P=53.8 million, P=31.7 million and P=34.3 million in 2012, 2011 and 2010, respectively (see Note 30).

Fair Value of Financial Assets and Liabilities. The Company carries certain financial assets and liabilities at fair value in the consolidated statements of financial position. Determining the fair value of financial assets and liabilities requires extensive use of accounting estimates and judgment. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates).

However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any changes in the fair value of these financial assets and liabilities would affect profit and loss and other comprehensive income.

The methods and assumptions used to estimate the fair value of financial assets and liabilities are discussed in Note 32.

6. Business Combinations and Acquisition of Non-controlling Interests

Acquisition of Fuld U.S. On June 10, 2011, PHN purchased 85% voting shares of stock of Fuld U.S. Fuld U.S. is a business research and consulting firm focusing on business and competitive intelligence. Fuld U.S. is incorporated in the USA with offices in the USA, United Kingdom and China. Founded in 1979, Fuld U.S. delivers customized proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges. The Company acquired Fuld U.S. to increase its BPO portfolio which will provide opportunities in the high value-added services sector.

The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Cash on hand and in banks P=8,969 P=8,969 Receivables 69,340 69,340 Prepaid expenses and other assets 20,453 20,453 Property and equipment 8,491 8,491 Intangibles (Note 15) 47,156 – 154,409 107,253

(Forward)

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Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Accounts payable and accrued liabilities (P=56,429) (P=56,429) Deferred tax liabilities (14,147) - (70,576) (56,429) Total identifiable net assets 83,833 P=50,824 Non-controlling interest at fair value (12,575) Goodwill arising from acquisition (Note 15) 284,252 Total consideration transferred P=355,510

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree’s net identifiable assets.

The cost of acquiring Fuld U.S. amounted to U.S.$8.2 million (P=355.5 million) consisting of cash payment of U.S.$5.8 million and the remaining balance of U.S.$2.4 million payable in four years at four equal installments with an interest rate of 4.5% per annum. As of December 31, 2012, current and noncurrent portions of long-term loan payable related to the acquisition of Fuld U.S. amounted to P=23.6 million ($0.6 million) and P=47.23 million ($1.1 million), respectively.

As of December 31, 2011, current and noncurrent portions of long-term loan payable related to the acquisition of Fuld U.S. amounted to P=22.1 million ($0.5 million) and P=78.9 million ($1.8 million), respectively, (non-cash investing transaction).

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=242,215)

Transaction cost (included as part of administrative expenses and cash flows from operating activities) (10,610)

Less cash of acquired subsidiary 8,969 Net cash outflow (P=243,856)

The fair value of receivables amounted to P=69.3 million. These receivables are not impaired and are expected to be collected in full.

The total consideration in the 2011 consolidated financial statements was based on a provisional assessment of fair values. The total consideration and the purchase price allocation were finalized in 2012. The 2011 comparative information was restated to reflect the adjustment to the provisional amounts. Total liabilities increased by P=9.3 million with a corresponding increase in goodwill of the same amount. This resulted in P=284.2 million of goodwill arising on the acquisition. The goodwill includes the value of expected synergies arising between Fuld U.S. and the Company’s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld U.S. has contributed P=248.3 million of revenue and P=12.5 million loss to the consolidated income before income tax of the Company in 2011. If the combination had taken place at the beginning of 2011, consolidated revenue from continuing operation would have been P=4,174.4 million and consolidated net income would have been P=72.4 million in 2011.

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Acquisition of Fuld Philippines (formerly Business Back Office, Inc.) On July 25, 2011, PHN purchased 85% voting shares of stock of Fuld Philippines. Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002. The Company acquired Fuld Philippines to increase its BPO portfolio which will provide opportunities in the high value-added services sector.

The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Cash on hand and in banks P=1,012 P=1,012 Receivables 1,756 1,756 Advances to employees 163 163 Property and equipment 636 636 3,567 3,567 Accrued payable and accrued expenses (5,157) (5,157) Loans payable (961) (961) Retirement payable (78) (78) Taxes payable (1,857) (1,857) (8,053) (8,053) Total identifiable net liabilities (4,486) (P=4,486) Non-controlling interest at fair value 673 Goodwill arising from acquisition (see Note 15) 14,120 Total consideration transferred P=10,307

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree’s net liabilities.

The cost of acquiring Fuld Philippines amounted to P=10.3 million, of which P=4.0 million (non-cash investing transaction) was retained by the Company. As of December 31, 2012 and 2011, retained portion amounted to P=3.0 million and P=4.0 million, respectively, included as part of “Trade and other payables” account in the statements of financial position.

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=2,907)

Transaction costs (included as part of administrative expenses and cash flows from operating activities) (6)

Less cash of acquired subsidiary 1,012 Net cash outflow (P=1,901)

The fair value of receivables amounted to P=1.8 million. These receivables are not impaired and are expected to be collected in full.

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The total consideration in the 2011 consolidated financial statements was based on a provisional assessment of fair values. The total consideration and the purchase price allocation were finalized in 2012. The 2011 comparative information was restated to reflect the adjustment to the provisional amounts. Total liabilities increased by P=3.4 million. There was also a corresponding increase in goodwill amounting to P=3.4 million resulting in P=14.1 million of goodwill arising on the acquisition. The goodwill includes the value of expected synergies arising between Fuld Philippines and the Company’s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld Philippines has contributed P=9.7 million of revenue and P=0.2 million loss to the consolidated income before income tax of the Company in 2011. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operations would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

Acquisition of non-controlling interest in Toon City On February 29, 2012, OAL acquired the remaining 5% non-controlling interest in Toon City for P=10.1 million. The difference between the acquisition cost and the book value of the interest acquired amounting to P=8.1 million was recognized as “Other reserves” in the equity section of the consolidated statement of financial position.

Acquisition in Fuld US In August 2012, FULD US acquired Outward Insights, LLC by issuing FULD US common stock. Goodwill arising from acquisition amounted to P=6.1 million. The carrying value of the net assets acquired approximates its fair values. The net assets of Outward Insights, LLC recognized in the Company’s December 31, 2012 financial statements were based on provisional assessment of fair values as the audit and fair valuation of the identifiable net assets acquired were not yet completed.

7. Cash and Cash Equivalents

This account consists of:

2012 2011 (In Thousands) Cash on hand and in banks P=150,264 P=83,853 Short-term deposits 314,915 832,304 P=465,179 P=916,157

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

Interest income from cash and cash equivalents amounted to P=22.1 million, P=32.3 million and P=29.6 million in 2012, 2011 and 2010, respectively (see Note 21).

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8. Investments Held for Trading

This account consists of investments in:

2012 2011 (In Thousands) Bonds P=491,127 P=414,525 Unit Investment Trust Funds (UITFs) 302,687 353,065 Marketable equity securities 6,601 3,927 P=800,415 P=771,517

Net gains from fair value change of investments held for trading amounted to P=50.9 million, P=38.6 million and P=19.3 million in 2012, 2011 and 2010, respectively (see Note 21). The unrealized gains from fair value change of investments held for trading amounted to P=42.1 million, P=27.9 million and P=13.0 million in 2012, 2011 and 2010, respectively. Cumulative unrealized gains from fair value change of investment held for trading amounted to P=14.3 million and P=18.6 million as at December 31, 2012 and 2011, respectively.

Investments held for trading have yields ranging from 1.06% to 6.55% in 2012, 3.66% to 7.98% in 2011 and 3.27% to 10.46% in 2010. Interest income from investments held for trading amounted to P=23.7 million, P=15.0 million and P=20.3 million in 2012, 2011 and 2010, respectively (see Note 21).

9. Trade and Other Receivables

This account consists of:

2012 2011 (In Thousands)

Trade P=889,284 P=780,742 Installment contract receivables (see Note 14) 68,884 72,617 Advances to suppliers and contractors 56,002 13,449 Accrued interest 10,696 11,817 Receivable from PHN Retirement/Gratuity Plan

(PHN Retirement) 8,939 8,939 Advances to officers and employees 8,875 6,094 Due from related parties (see Note 28) 2,913 75,653 Others 24,062 53,144 1,069,655 1,022,455 Less allowance for doubtful accounts 197,774 164,806 P=871,881 P=857,649

Trade receivables include receivables from sale of roofing and other steel products to customers like developers and contractors, which are normally on a 30-60 days term. Trade receivables also include tuition and other school fees receivables which are normally collected within the current school semester. Other trade receivables are noninterest-bearing and normally collected throughout the financial year.

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Installment contract receivables mainly represent the balance of receivable from a third party for the sale of API’s property (see Note 14). The receivables are noninterest-bearing and are short-term in nature.

The terms and conditions of the amounts due from related parties are discussed in Note 28.

Other receivables are noninterest-bearing and normally collected throughout the financial year. Movements in the allowance for doubtful accounts are as follows:

2012 Trade Others Total (In Thousands)

Balance at January 1, 2012 P=156,561 P=8,245 P=164,806 Provisions (Notes 23 and 24) 36,374 – 36,374 Reversals/write-offs (730) (2,676) (3,406) Balance at December 31, 2012 P=192,205 P=5,569 P=197,774 Individual impairment P=33,910 P=1,364 P=35,274 Collective impairment 158,295 4,205 162,500 P=192,205 P=5,569 P=197,774

2011 Trade Others Total (In Thousands)

Balance at January 1, 2011 P=138,052 P=8,245 P=146,297 Provisions (Notes 23 and 24) 36,192 – 36,192 Reversals/write-offs (17,683) – (17,683) Balance at December 31, 2011 P=156,561 P=8,245 P=164,806 Individual impairment P=38,536 P=6,640 P=45,176 Collective impairment 118,025 1,605 119,630 P=156,561 P=8,245 P=164,806

10. Inventories

This account consists of:

2012 2011 (In Thousands)

At cost: Finished goods P=875,576 P=886,342 Raw materials 19,796 36,303 Other inventories 27,350 20,633 At net realizable value - Spare parts and others 33,750 34,641 P=956,472 P=977,919

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Under the terms of the agreements covering liabilities under trust receipts, certain inventories amounting to P=554.8 million and P=103.7 million as of December 31, 2012 and 2011, respectively, have been released to UGC in trust for the banks. UGC is accountable to the banks for the inventories under trust or its sales proceeds.

Finished goods mainly represent roofing and other steel products of UGC.

The cost of spare parts and other inventories carried at net realizable value amounted to P=35.1 million and P=36.0 million as of December 31, 2012 and 2011, respectively.

Cost of inventories sold, presented as “Inventories used” under “Cost of Sales”, amounted to P=2,083.9 million, P=1,844.9 million and P=1,740.5 million in 2012, 2011 and 2010, respectively (see Note 22).

11. Investments in Associates

This account consists of investments in the following entities:

Percentage of Ownership 2012 2011 PHINMA Property Holdings Corporation (PPHC) 35.35 35.35 Trans-Asia Oil and Energy Development

Corporation (TA Oil) 26.21 28.26 AB Capital and Investment Corporation

(AB Capital) (a) 26.51 26.51 Luzon Bag Corporation(b) 21.05 21.05 Asia Coal Corporation (Asia Coal) (c) 12.08 12.08 (a) In 2012, represents the shares to be received by PHN from AB Capital upon return of capital. (b) Liquidated in 2012. (c) Ceased commercial operations and considered as an associate although percentage of ownership is below

20% since the Company has significant influence as evidenced in its representation in the BOD of Asia Coal.

The movements and details of investments in associates are as follows:

2012 2011 (In Thousands)

Acquisition costs: Balance at beginning of year P=1,888,248 P=1,537,282 Additions 533,153 350,966

Reclassified to AFS investment (116,222) – Balance at end of year 2,305,179 1,888,248 Accumulated equity in net income (losses): Balance at beginning of year (72,154) (191,824) Equity in net earnings for the year 118,944 137,656 Dividends received (54,201) (17,986)

Reclassified to AFS investment 22,533 – Balance at end of year 15,122 (72,154)

(Forward)

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*SGVMG600202*

2012 2011 (In Thousands) Share in net unrealized gain on change in fair value

of AFS investments of associates: Balance at beginning of year P=19,051 P=19,226 Change in fair value during the year 4,713 (175)

Balance at end of year 23,764 19,051 P=2,344,065 P=1,835,145

The detailed carrying values of investments in associates which are accounted for under the equity method are as follows:

2012 2011 (In Thousands)

TA Oil* P=1,828,597 P=1,267,692 PPHC 413,034 373,630 AB Capital 100,227 191,397 Academy of Competitive Intelligence** 1,939 2,158 Asia Coal 268 268 P=2,344,065 P=1,835,145 *The fair value based on quoted share price amounted to P=1,476.9 million and P=896.0 million as of December 31,,2012 and 2011, respectively. **Associate of Fuld U.S.

The following table summarizes the financial information of the Company’s investments in associates:

2012 2011 (In Thousands)

Share in the associates’ net assets: Current assets P=2,168,209 P=1,683,679 Noncurrent assets 963,642 945,154 Current liabilities (410,191) (410,481) Noncurrent liabilities (389,124) (388,283) Net assets attributable to common stockholders P=2,332,536 P=1,830,069 Share in the associates’ revenue and net income: Revenue P=732,538 P=694,215 Net income 118,705 146,875 Carrying amount of the investments P=2,344,065 P=1,835,145

Following are the status of operations and significant transactions of certain associates:

a. TA Oil

TA Oil is involved in power generation and oil and mineral exploration activities.

On February 16, 2012, the BOD of TA Oil declared cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 1, 2012. This was paid on March 27, 2012.

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On March 20, 2012, the stockholders of TA Oil approved the increase in the authorized capital stock subject to the approval of the SEC from P=4.2 billion divided into 4.2 billion shares with a par value of P=1 per share to P=8.4 billion divided in to 8.4 billion shares with a par value of P=1 per share. The said increase in authorized capital stock shall be funded by a stock rights offering, the terms and conditions of which, including the final issue size, rights entitlement, offer price and record date shall be determined by the board of directors. The application for the increase in authorized capital stock was approved by the SEC in November 2012.

On October 3, 2012, the SEC approved the stock rights offering of 1.415 billion shares of TA Oil at the rate of one share for every two shares held as of record date of November 14, 2012, at a price of P=1.00 per share. The offer period commenced on November 14, 2012 and ended on November 20, 2012. TA Oil also offered an additional 212.25 million shares to meet additional demand from eligible stockholders (“Overallotment Option”). Total proceeds will be used to finance its equity investments in a 54MW wind energy project in San Lorenzo, Guimaras and the second 135MW clean coal-fired power plant in Calaca, Batangas, and other power project opportunities.

On June 6, 2011, the SEC approved the increase in the TA Oil’s authorized capital stock` from P=2 billion divided into 2 billion shares, to P=4.2 billion divided into 4.2 billion shares.

On March 30, 2011, the SEC approved the stock rights offering of 1,165.24 million shares of TA Oil at the rate of seven shares for every ten shares held as of record date of May 18, 2011, at a price of P=1.00 per share. The offer period commenced on May 30, 2011 and ended on June 3, 2011. Total proceeds raised from the stock rights offering, net of direct costs incurred, amounted to P=1,154.53 million. The proceeds will be used as equity investment in new 135 MW clean coal power project and in Maibarara Geothermal, Inc. Additional investments made to TA Oil as a result of stock rights offering and issuance of new shares amounted to P=350.4 million in 2011.

On March 21, 2011, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of April 11, 2011. This was paid on May 4, 2011.

On March 24, 2010, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of May 3, 2010. This was paid on May 28, 2010.

Dividend income recognized by the Parent Company from TA Oil amounted to P=18.0 million each in 2012, 2011 and 2010.

TA Oil has 100% equity interest in CIP II Power Corporation (CIPP) which operates a 21MW Bunker C-fired power plant in CIP II Special Economic Zone in Calamba, Laguna. In April, 2009, the terms of the sale of the distribution assets to Manila Electric Company was finalized resulting in the cessation of CIPP’s operations starting April 2009. Also, the separation of substantially all of CIPP’s employees effective January 2010 was announced. On February 22, 2010 and March 24, 2010, the BOD and stockholders of TA Oil and CIPP approved the proposed merger of TA Oil and CIPP, respectively, subject to the approval by the SEC. As of December 31, 2012, CIPP has not filed its application for merger with SEC and has deferred its plan for merger.

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b. PPHC

PPHC is engaged in real estate development, particularly in the development of affordable medium and high-rise condominium units.

On November 27, 2012, the BOD approved the stock rights offering at the rate of one share for every five shares held as of record date of November 28, 2012, at a price of P=0.10 per share. The existing shareholders of PPHC subscribed to and fully paid for 1,801,470,025 shares valued at P=180.1 million.

On March 13, 2012, the BOD of PPHC declared a cash dividend amounting to P=63.5 million or 7% of outstanding capital stock to all shareholders of record as of March 23, 2012. This was paid in 2012.

On March 1, 2010, the BOD of PPHC declared a cash dividend amounting to P=59.7 million, equivalent to P=0.01 per share to all common stockholders of record as of March 15, 2010. This was paid in 2010.

Dividend income recognized by the Parent Company from PPHC amounted to P=22.5 million and P=21.1 million each in 2012, 2011 and 2010, respectively.

c. AB Capital

AB Capital is an investment house that engages in corporate finance, fixed-income securities dealership, stock brokerage and fund management.

Pursuant to an agreement between PHN and Vicsal Investment Inc. (Vicsal), PHN agreed to sell its shares in AB Capital subject to certain conditions, including the following: (a) Approval of the Bangko Sentral ng Pilipinas (BSP) (b) Removal of assets other than those identified and agreed to be retained by Vicsal in

AB Capital, by transfer to a New Company in exchange for shares in New Company and/or by sale or assignment of assets to the New Company

(c) Return of capital to PHN pertaining to shares in New Company (d) Selling Shareholders shall secure all Government Authorizations, including approvals

and clearances, required for the return of capital of AB Capital to PHN and other sellers

(e) On Closing Date, PHN shall transmit to the Buyer the Deed of Absolute Sale

On June 29, 2012, in accordance with PAS 28, PHN discontinued the use of the equity method on the AB Capital shares to be sold to Vicsal due to the change in relationship of PHN with AB Capital. The investment in AB Capital to be sold to Vicsal is accounted for in accordance with PAS 39 from that date.

The AB Capital shares to be sold to Vicsal are presented at its fair value as an available-for-sale financial asset in accordance with PAS 39 amounted to P=101.8 million. The difference between the fair value and carrying amount of the AB Capital shares to be sold to Vicsal amounting to P=6.7 million is recorded as “Unrealized fair value adjustment on AFS investment previously held as associate” and included under “Others-net” in the consolidated statements of comprehensive income.

Investment in AB Capital presented as part of Investments in Associates in the statements of consolidated financial position represents the New Company shares to be received by PHN from AB Capital upon return of capital.

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d. Asia Coal

Asia Coal is engaged in the trading of coal. On March 19, 2009, the BOD and stockholders of Asia Coal approved the shortening of the term of Asia Coal’s corporate existence until October 31, 2009, thereby causing the dissolution of Asia Coal as of such date, subject to the approval of the SEC. As of December 31, 2012, Asia Coal is in the process of securing a tax clearance with the Bureau of Internal Revenue (BIR) in connection with the filing with the SEC of its application for dissolution.

12. AFS Investments

This account consists of investments in quoted and unquoted equity securities:

2012 2011 (In Thousands) Quoted P=10,101 P=20,620 Unquoted (Note 11) 267,822 165,887 277,923 186,507 Less accumulated impairment losses 45,517 45,517 P=232,406 P=140,990

AFS investments consist of investment in shares, and therefore have no fixed maturity date or coupon rate.

The unquoted AFS investments are carried at cost less accumulated impairment losses since their fair value cannot be reliably measured. The quoted AFS securities which are listed in the Philippine Stock Exchange (PSE) are carried at fair value. Unrealized gain (loss) on change in fair value on such quoted AFS amounting to (P=0.6 million), (P=0.4 million) and P=1.1 million were recognized in 2012, 2011 and 2010, respectively.

Full provision for impairment loss has been made on unquoted AFS investments in Unicon Phinma Concrete Corporation and United Industrial Bag Corporation, which discontinued their operations on March 21, 2000 and in October 2000, respectively.

13. Property, Plant and Equipment

This account consists of:

January 1,

2012 Additions Disposals Reclassification December 31,

2012

(In Thousands)

Cost Land P=1,085,875 P=36,190 (P=23,760) P=– P=1,098,305 Plant site improvements 22,834 528 (119) 5,413 28,656 Buildings and improvements 1,252,026 52,233 (4,522) 2,802 1,302,539 Machinery and equipment 723,353 50,514 (115,222) 71,682 730,327 Transportation and other equipment 469,532 65,519 (20,682) (40,454) 473,915 3,553,620 204,984 (164,305) 39,443 3,633,742

(Forward)

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January 1,

2012 Additions Disposals Reclassification December 31,

2012

(In Thousands)

Less Accumulated Depreciation Plant site improvements P=17,809 P=2,555 (P=119) P=3,539 P=23,784 Buildings and improvements 482,495 55,268 (2,328) (847) 534,588 Machinery and equipment 568,813 100,794 (114,754) 12,252 567,105 Transportation and other equipment 339,065 64,679 (17,643) (42,724) 343,377 1,408,182 223,296 (134,844) (27,780) 1,468,854 2,145,438 (18,312) (29,461) 67,223 2,164,888 Construction in progress 115,306 45,654 – (67,223) 93,737 Net Book Value P=2,260,744 P=27,342 (P=29,461) P=– P=2,258,625

January 1,

2011 Additions Disposals Reclassification December 31,

2011

(In Thousands)

Cost Land P=1,044,497 P=67,436 P=– (P=26,058) P=1,085,875 Plant site improvements 23,469 – (635) – 22,834 Buildings and improvements 1,202,671 54,955 – (5,600) 1,252,026 Machinery and equipment 694,524 31,459 (3,008) 378 723,353 Transportation and other equipment 398,435 76,060 (3,075) (1,888) 469,532 3,363,596 229,910 (6,718) (33,168) 3,553,620 Less Accumulated Depreciation Plant site improvements 15,978 2,466 (635) – 17,809 Buildings and improvements 429,305 53,190 – – 482,495 Machinery and equipment 494,608 76,970 (2,765) – 568,813 Transportation and other equipment 280,996 64,410 (2,608) (3,733) 339,065 1,220,887 197,036 (6,008) (3,733) 1,408,182 2,142,709 32,874 (710) (29,435) 2,145,438 Construction in progress 33,818 98,406 – (16,918) 115,306 Net Book Value P=2,176,527 P=131,280 (P=710) (P=46,353) P=2,260,744

Undepreciated capitalized borrowing costs amounted to P=1.4 million and P=1.7 million as at December 31, 2012 and 2011, respectively. There were no borrowing costs capitalized in 2012, 2011 and 2010.

Certain property, plant and equipment of UGC, AU and UPANG totaling P=0.92 billion and P=1.1 billion as of December 31, 2012 and 2011, respectively, were used as security for their respective long-term debt as disclosed in Note 19 to the consolidated financial statements.

14. Investment Properties

This account consists of:

January 1,

2012 Additions Disposals December 31,

2012 (In Thousands)

Cost Land P=330,314 P=25,226 (P=8,261) P=347,279 Buildings for lease 93,316 – – 93,316 423,630 25,226 (8,261) 440,595 Less accumulated depreciation Buildings for lease 12,740 6,148 – 18,888 P=410,890 P=19,078 (P=8,261) P=421,707

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January 1,

2011 Additions/

Reclassifications Disposals

(see Note 9) December 31,

2011 (In Thousands)

Cost Land P=321,085 P=9,229 P=– P=330,314 Buildings for lease 106,175 10,000 (22,859) 93,316 427,260 19,229 (22,859) 423,630 Less accumulated depreciation Buildings for lease 20,971 6,253 (14,484) 12,740 P=406,289 P=12,976 (P=8,375) P=410,890

The fair value of investment properties based on the latest valuation performed by independent firms of appraisers on various dates in 2012 and 2011 amounted to P=894.7 million and P=810.6 million as of December 31, 2012 and 2011, respectively. The valuation of investment properties was based on market values using sales comparison approach, which considers the sales of similar or substitute properties and related market data and establishes value estimate by processes involving comparison.

On December 9, 2011, API acquired a condominium unit amounting to P=10.0 million from AB Capital, an affiliate, for cash.

On December 28, 2010, API signed a Memorandum of Agreement with Shang Property Developers, Inc. (SPDI) for the sale of API’s property for P=615.0 million. Outstanding receivable from SPDI amounted to P=68.9 million and P=72.6 million, presented in “Installment contract receivables” account under “Trade and other receivables”, as at December 31, 2012 and 2011, respectively (see Note 9).

Land include PSHC’s land amounting to P=220.0 million which was used as security for its long-term debt as disclosed in Note 19 to the consolidated financial statements.

Rental income amounted to P=42.7 million, P=46.9 million and P=79.6 million in 2012, 2011 and 2010, respectively, and presented in the consolidated statements of income. While direct costs and expenses incurred amounted to P=6.2 million, P=6.3 million and P=26.7 million in 2012, 2011 and 2010, respectively, and included as part of “General and administrative expenses” account in the consolidated statements of income (see Note 23).

15. Intangibles

Following are the details and movements in this account:

January 1,2012 Additions

Adjustment Impairment

December 31, 2012

(In Thousands)

Cost Goodwill (Note 6) P=1,257,186 P=6,054 (P=7,063) (P=212,300) P=1,043,877 Student lists 131,120 – – – 131,120 Trademarks (Note 6) 47,156 – – – 47,156 Customer contracts 22,080 – – – 22,080 1,457,542 6,054 (7,063) (212,300) 1,244,233 Accumulated amortization Student lists 127,516 3,604 – – 131,120 Customer contracts 22,080 – – – 22,080 149,596 3,604 – – 153,200

P=1,307,946 P=2,450 (P=7,063) (P=212,300) P=1,091,033

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January 1, 2011 Additions Adjustment Impairment

December 31, 2011 (As restated -

Note 6) (In Thousands)

Cost Goodwill (Note 6) P=1,125,183 P=298,372 P=– (P=166,369) P=1,257,186 Student lists 131,120 – – – 131,120 Trademarks (Note 6) – 47,156 – – 47,156 Customer contracts 22,080 – – – 22,080 1,278,383 345,528 – (166,369) 1,457,542 Accumulated amortization Student lists 92,268 35,248 – – 127,516 Customer contracts 22,080 – – – 22,080 114,348 35,248 – – 149,596 P=1,164,035 P=310,280 P=– (P=166,369) P=1,307,946

The Company recognized impairment loss on goodwill amounting to P=212.3 million in 2012 and P=166.4 million in 2011.

In 2012, the Company received P=7.1 million from its escrow fund which pertains to excess payment from the acquisition of UPANG on February 2, 2009. The excess consideration was adjusted to the cost of the business combination in 2012.

16. Other Noncurrent Assets

This account consists of:

2012 2011 (In Thousands) Input VAT - net of allowance for unrecoverable

amount of P=118.6 million and P=89.2 million in 2012 and 2011, respectively (Note 23) P=605 P=–

Refundable deposits 8,349 1,794 Others - net of allowance for doubtful advances of

P=51.5 million in 2012 and P=51.1 million in 2011 22,561 24,846 P=31,515 P=26,640

17. Notes Payable

This account consists of notes payable of the following subsidiaries:

2012 2011 (In Thousands)

UGC P=274,821 P=423,543 AU 50,751 – COC 35,604 11,500 UI 12,500 20,150 P=373,676 P=455,193

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This account consists of unsecured short-term peso-denominated loans obtained from financial institutions with annual interest rates ranging from 4.50% to 5.75% in 2012 and 4.63% to 5.25% in 2011.

18. Trade and Other Payables

This account consists of:

2012

2011 (As restated -

Note 6) (In Thousands)

Trade P=127,079 P=108,901 Payable to third parties 124,583 44,449 Accruals for: Personnel costs (see Notes 25 and 28) 65,400 52,773 Professional fees and others (see Note 28) 38,194 65,912 Interest (see Note 27) 8,291 10,823 Freight, hauling and handling 6,549 883 Customers’ deposits 91,977 44,756 Dividends 30,274 31,916 Others 44,336 42,082 P=536,683 P=402,495

Trade payables are noninterest-bearing and normally settled on 30 to 90-day terms.

Accrued expenses, customers deposits, dividends, payable to third parties and others are normally settled throughout the financial year.

Other liabilities pertains to other accrued and unpaid general and administrative expenses which are normally settled throughout the financial year.

19. Long-term Debt

This account consists of long-term liabilities of the following subsidiaries:

2012 2011 (In Thousands)

UPANG P=228,500 P=259,148 AU 30,000 45,653 UGC – 280,000 258,500 584,801 Less debt issuance cost 2,267 827 256,233 583,974 PSHC 152,873 151,050 Fuld U.S. 3,080 5,698 412,186 740,722 Less current portion - net of debt issuance cost 64,654 141,063 P=347,532 P=599,659

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UPANG

This represents loan obtained from China Banking Corporation (China Bank) on July 21, 2009 used for the acquisition and/or refinancing of its capital expenditures. The terms of the loan are as follows:

Tenure Seven (7) - year term loan with one year grace period for repayment.

Repayment The first principal payment will commence at the end of the 5th quarter from the date of drawdown; amortization will be graduated, at P=12.5 million from the fifth to the 16th quarters; P=15.0 million from the 17th to the 24th quarters and the P=7.5 million for the last four quarters until full settlement.

Funding/Interest rate Interest will be based on the Wholesale Lending Program (third party funder) with a fixed rate of 8% for the first five years. Rates for the remaining two year period of the term shall be based on the prevailing two-year PDST-F rate plus a minimum spread of 2%.

Security The facility will be secured by Real Estate Mortgage amounting to P=300.0 million on the school assets covering land and land improvements (see Note 13).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

§ Maintenance of the following ratios based on the audited year-end financial statements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 3:1. Waived for the first year of the loan but is required for the remaining term of the loan.

UPANG’s current ratio is below the required current ratio of 1:1. Based on the loan agreement, an event of default includes the failure to comply with any of the loan covenants and such noncompliance is either not remediable or if remediable, continues to be unremedied for a period of 30 days from written notice by the bank. The University has not received any notice from the Bank. In March 2013, the University requested from the bank for the waiver of the required current ratio. As of March 6, 2013, the University is awaiting the bank’s response to this request.

§ Restrictions on declaration and payment of dividends, entering into merger or consolidation which would result in a material change in control, sale, lease, mortgage or otherwise dispose of all or substantially all of its assets and amendment of Articles of Incorporation and By-laws that would cause a material adverse change in the financial ability or capacity of the Company to perform.

On December 21, 2012, a Term Loan Agreement was signed by the UPANG and China Bank for a 7-year term loan for a maximum principal amount of P=275 million. The proceeds will be used to refinance existing obligations and to fund the capital expenditures for the school year 2012-2013. The loan was drawn on February 1, 2013 and February 15, 2013 totalling to P=250 million with interest based on 7-year PDSTF plus spread. Under the new term loan, the Company is not allowed to pay dividends for the first 3 years of the loan. Dividends may be paid starting on the 4th year, provided the current ratio shall not be less than 1.25:1.00 and debt-service cover shall at least be 1.50:1.00.

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UGC

As at December 31, 2011, long-term debt includes loans obtained from Banco de Oro Unibank, Inc. (BDO) and Rizal Commercial Banking Corporation (RCBC).

On June 29, 2010, the outstanding long-term debt from BDO and RCBC (the lenders) were pre-terminated by obtaining three-year term loans aggregating to P=400.0 million from the same lenders for which P=2.8 million debt issue cost was paid. The newly obtained loans are to be paid in 11 quarterly installments of P=20.0 million to commence on September 25, 2010 and a lump sum payment in June 2013 amounting to P=180.0 million. The interest is at a fixed rate of 7.624% computed based on 3-year PDST-F plus a spread of 1.75% and applicable taxes at the time of the drawdown.

As of December 31, 2011, the loans from the lenders are collateralized by mortgage agreement on UGC’s land, plantsite improvements, buildings and installations and machinery and equipment of Calamba and Davao plants amounting to P=461.3 million, respectively (see Note 13).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

§ Maintenance of the following ratios for the duration of the loan agreements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 1.5:1

§ Restrictions on declaration and payment of dividends, incurrence of new long-term debt, entering into management agreement other than with PHINMA, entering into merger (except where it is the surviving entity) or consolidation or any change of ownership, sale, lease or otherwise transfer of a substantial portion of its assets except in the ordinary course of business, making any loans, advances or investments, making capital expenditures, prepayment of any other long-term debt and amendment of Articles of Incorporation and By-laws.

Under the loan agreement, failure to comply with the obligation or covenant in the agreement should be remedied within thirty (30) calendar days after notice by the lenders.

As of December 31, 2011, UGC is in compliance with the terms of the loan agreement.

Amortization of debt issue costs, included under “Interest expense and other financial charges” account in the consolidated statements of income, amounted to P=0.8 million, P=0.7 million and P=1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. Interest expense amounted to P=15.1 million, P=25.6 million and P=25.4 million for the years ended December 31, 2012, 2011 and 2010, respectively (see Note 27).

On September 19, 2012, the outstanding long-term debt of P=240 million from BDO and RCBC were pre-terminated.

PSHC

This represents interest-bearing loan obtained from United Pulp and Paper Co., Inc. (UPPC) amounting to P=154.0 million arising from the acquisition of land from UPPC. UPPC was a former associate of the Company.

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This loan is presented at amortized cost as of the end of the reporting period. The present value of the loan at initial recognition in 2006 was calculated using an effective interest rate of 11.0%. The effective interest rate used in computing for the present value of the loan payable was derived based on the rate inherent to the loan after considering the carrying value and the future value of the loan payable at the coupon rate of 9.1%.

Initially, the said loan is payable in two installments amounting to P=44.0 million on July 15, 2008 and P=110.0 million on July 15, 2013. On July 8, 2008, a Memorandum of Agreement was executed by UPPC and PSHC amending the maturity date of P=44.0 million from July 15, 2008 to July 15, 2013. A recomputation of the effective interest rate of 10.52% was made in 2008 to reflect the change in the payment terms of the liability in 2013. On December 20, 2012, a Memorandum of Agreement was executed by UPPC and the Company amending the payment terms of the P=154.0 million from July 15, 2013 to July 15, 2018. A recomputation of the effective interest rate of 9.28% was made to reflect the change in the payment terms in the liability. Additional interest expense resulting from the accretion of loan payable amounted to P=1.82 million, P=1.70 million and P=1.5 million in 2012, 2011 and 2010, respectively (see Note 27). The details of the loan are as follows:

2012 2011 (In Thousands)

Loan payable to UPPC P=154,000 P=154,000 Less unamortized discount 1,127 2,950 P=152,873 P=151,050

To secure the payment of the loan, PSHC constituted a mortgage over its land amounting to P=220.0 million in favor of certain creditors of UPPC (see Note 14).

The payable of PSHC to UPPC incurs an annual interest at a rate subject to mutual agreement by UPPC and PSHC on each anniversary date. Interest expense on the amount payable to UPPC, computed at 9.1% of the outstanding principal balance, amounted to P=14.0 million in 2012, 2011 and 2010 (see Note 27).

AU

AU’s long-term debt consists of:

2012 2011 (In Thousands)

Loan payable to China Bank P=30,000 P=45,653 Less current portion 12,251 9,573 P=17,749 P=36,080

Loan payable to China Bank represents the balance of a 10-year loan from China Bank which was used to preterminate the restructured long-term debt from another local bank, partially finance Araullo University’s building renovation and purchase various school equipment. The debt is payable on fixed monthly amortization of P=750,000 starting April 17, 2006. Interest shall be payable monthly in arrears based on variable pass-on rate plus spread. In 2010, the outstanding loan payable to China Bank of P=53.25 million was restructured with the same lender at a fixed rate interest based on the 5-year prevailing PDST-F rate plus a spread of 1.5% payable quarterly in

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*SGVMG600202*

arrears including the applicable taxes for the account of the borrower. The new debt is to be paid in 19 quarterly installments until February 5, 2015 under a graduated amortization schedule based on the agreement. Transaction costs paid and included in the carrying amount of the new debt amounted to P=2.4 million. Actual average interest rate was 10.3% in 2012 and 2011.

AU’s land, including existing and future improvements thereon, is used as collateral for its loan payable to China Bank. The net book value of the said land and improvements amounted to P=160.0 million and P=163.0 million as of December 31, 2012 and 2011, respectively (see Note 13).

20. Equity

a. Capital Stock

The composition of the Parent Company’s capital stock as of December 31, 2012, 2011 and 2010 is as follows:

Number of Shares 2012 2011 2010 Preferred - cumulative,

nonparticipating, P=10 par value Class AA Authorized 50,000,000 50,000,000 50,000,000

Class BB Authorized 50,000,000 50,000,000 50,000,000

Common - P=10 par value Authorized 420,000,000 420,000,000 420,000,000

Common shares: Issued 258,867,064 257,697,313 257,697,313 Subscribed 39,994 39,994 39,994 Issued and subscribed

(see Note 35) 258,907,058 257,737,307 257,737,307

The issued and outstanding shares as of December 31, 2012, 2011 and 2010 are held by 1,278, 1,292 and 1,306 equity holders, respectively.

Capital stock presented in the statements of financial position is net of subscription receivables amounting to P=124 thousand as at December 31, 2012 and 2011.

The following summarizes the information on the Company’s track record of registration of securities under the Securities Regulation Code:

Date of SEC Approval Authorized

Shares No. of

Shares Issued Issue/Offer

Price March 12, 1957 1,200,000 172,298 P=10 June 30, 1959 – 47,868 10 June 30, 1967* 800,000 – – June 30, 1968* 1,000,000 – – January 21, 1980* 2,000,000 – –

(Forward)

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Date of SEC Approval Authorized

Shares No. of

Shares Issued Issue/Offer

Price November 3, 1988* 10,000,000 – P=– July 21, 1992* 25,000,000 – – January 15, 1995* 60,000,000 – – March 16, 1999* 320,000,000 – –

*Increase in authorized capital stock.

b. Retained Earnings

On March 22, 2012, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of April 11, 2012.

On March 3, 2011, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2011.

On March 3, 2010, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2010.

On October 5, 2005, the BOD of PHN appropriated P=1.0 billion of retained earnings for future investments. As approved by the BOD of PHN last March 6, 2013, the said appropriation shall remain in effect and shall be used for the following, subject to specific terms and conditions as the Board shall fix:

i. Investments in PPHC of up to P=300 million by year 2014;

ii. Investments in Microtel Development Corporation of up to P=200 million by year 2015; and

iii. Investments in Trans-Asia Oil and Energy Development Corporation of up to P=500 million by year 2016.

The BOD of PHN declared the following stock dividends:

Date Dividend Rate Shareholders’ Record Date April 14, 2008 10% June 13, 2008 March 30, 2007 15% June 15, 2007 May 31, 2006 20% August 11, 2006

The retained earnings account is restricted for the payment of dividends to the extent of P=599.1 million and P=594.1 million as of December 31, 2012 and 2011, respectively, representing the accumulated equity in net earnings of the subsidiaries and associates. The accumulated equity in net earnings of the subsidiaries and associates is not available for dividend distribution until such time that the Parent Company receives the dividends from the subsidiaries and associates.

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c. Other Components of Equity

This account consists of:

2012 2011 (In Thousands) Share in unrealized gain on change in fair value of AFS

investments of associates (Note 11) P=23,764 P=19,051 Cumulative translation adjustments (868) 4,935 Unrealized gain on change in fair value of AFS

investments (Note 12) 350 985 Other reserves:

Reserve for Stock Purchase Plan 11,908 – Other reserves resulting from change in ownership

interest in subsidiaries without loss of control (Notes 1 and 6) 878 8,943

P=36,032 P=33,914

In 2010, the convertible debt has been extinguished thus the Company reclassified the remaining balance of share in equity component of convertible notes to retained earnings.

d. Stock Purchase Plan Following are the salient features of the Company’s Stock Purchase Plan:

Purpose To motivate the Senior Officers to achieve the

Company’s goals, to help make the personal goals and corporate goals congruent and to reward the officers for the resulting increase in the value of PHN shares.

Prices of share The officers shall purchase shares of stock of PHN from those set aside under the Stock Purchase Plan at the average closing price of PHN shares in the stock market for 20 trading days, in no case shall the price be lower than par value.

Tranches 1/3 of the maximum shares can be purchased upon date of first notice and 1/3 each every year thereafter provided that work performance is deemed acceptable.

Holding period One-third of the shares shall not be sold or transferred to a 3rd party for at least one year from the date of each purchase or until retirement whichever comes first. Another one-third of the shares shall not be sold or transferred to a 3rd party for at least two years from the date of each purchase or until retirement whichever comes first. The last one-third of the shares shall not be sold or transferred to a 3rd party for at least three years from the date of each purchase or until retirement whichever comes first. Any such sale or transfer shall be considered null and void.

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On April 2, 2009 and April 20, 2010, the BOD and shareholders of PHN respectively, approved the setting aside of 8.4 million shares from the unsubscribed portion of the Corporation’s 420 million authorized common shares for stock purchase by the Senior Officers of this Corporation. On January 26, 2012, the Philippine SEC approved the Company’s Stock Purchase Plan while the Philippine Stock Exchange approved for listing the 8.4 million shares last May 23, 2012.

Under its Stock Purchase Plan, officers of the Company can purchase P=30.5 million worth of shares over three years, subject to certain conditions. The shares can be purchased at the average closing price of PHN shares in the market 20 days prior to each notice, but in no case shall the price be less than par value.

As of December 31, 2012, total shares acquired under the stock purchase plan amount to 1,169,751 or P=12.4 million.

Total cumulative expense recognized in relation to the stock purchase plan amounted to P=24.3 million as of December 31, 2012. There were no unexercised vested shares as of December 31, 2012.

21. Investment Income

This account consists of:

2012 2011 2010 (In Thousands) Interest income: Cash and cash equivalents

(Note 7) P=22,131 P=32,265 P=29,624 Investments held for trading

(Note 8) 23,704 14,998 20,258 Due from related parties

(Note 28) 12,468 14,024 10,370 58,303 61,287 60,252 Net gains from fair value change of

investments held for trading (Note 8) 50,869 38,594 19,346

Dividend income 23,896 2,454 4,469 P=133,068 P=102,335 P=84,067

22. Cost of Sales, Educational, Animation and Consultancy Services

This account consists of:

2012 2011 2010 (In Thousands)

Cost of sales P=2,403,519 P=2,117,967 P=2,038,152 Cost of educational services 510,392 518,249 481,946 Cost of animation services 106,944 87,176 91,313 Cost of consultancy services 49,153 84,885 – P=3,070,008 P=2,808,277 P=2,611,411

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The details of cost of sales, educational, animation and consultancy services are as follows:

2012 2011 2010 (In Thousands)

Inventories used (Note 10) P=2,083,862 P=1,844,916 P=1,740,462 Personnel costs (Note 25) 443,194 534,982 454,703 Depreciation (Note 26) 158,371 133,475 127,399 Laboratory and school supplies 100,062 60,176 51,836 Equipment running 56,836 55,253 18,342 Repairs and maintenance 34,081 39,249 52,265 Educational tour expenses 20,217 23,449 9,044 School affiliations and other

expenses 15,827 12,750 16,557 Sports development and school

activities 9,268 9,508 16,089 Accreditation expenses 4,606 75 19,260 Others 143,684 94,444 105,454 P=3,070,008 P=2,808,277 P=2,611,411

23. General and Administrative Expenses

This account consists of:

2012 2011 2010 (In Thousands) Personnel costs (Notes 25, 28 and

30) P=463,803 P=257,206 P=145,711 Professional fees and outside

services (Note 28) 130,048 120,294 169,323 Depreciation and amortization

(Notes 14 and 26) 66,714 73,067 101,949 Provision for unrecoverable input

value-added tax (Note 16) 45,471 7,372 4,063 Rent, light and water 43,534 18,706 5,935 Taxes and licenses 29,821 20,929 21,937 Transportation and travel 24,109 10,395 5,563 Provision for doubtful accounts

(Note 9) 24,072 23,505 30,189 Advertising and promotions 18,588 22,921 15,987 Insurance 6,189 4,821 4,662 Communications 7,663 2,643 4,199 Office supplies 4,820 5,097 5,475 Donation 3,735 19,393 20,605 Others 46,041 55,095 26,385 P=914,608 P=641,444 P=561,983

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24. Selling Expenses

This account consists of:

2012 2011 2010 (In Thousands) Personnel costs (Note 25) P=227,003 P=135,984 P=64,791 Freight, handling and hauling 71,186 53,147 49,416 Transportation and travel 35,666 30,832 17,990 Commission 23,578 23,541 21,779 Provision for doubtful accounts

(Note 9) 12,302 12,687 12,085 Advertising 12,154 14,858 9,957 Taxes and licenses 10,464 9,378 8,046 Supplies 9,151 8,822 9,243 Repairs and maintenance 8,272 8,215 8,002 Depreciation (Note 26) 7,963 11,537 9,032 Postage, telephone and telegraph 7,339 8,436 7,671 Entertainment, amusement and

recreation 2,830 3,167 3,050 Insurance 2,386 2,596 2,182 Outside services 1,919 1,272 1,418 Rental and utilities 1,325 1,120 1,008 Others 8,548 3,426 3,317 P=442,086 P=329,018 P=228,987

25. Personnel Costs

This account consists of:

2012 2011 2010 (In Thousands)

Salaries, employee benefits and bonuses (Note 28) P=1,017,737 P=875,775 P=605,285

Retirement and other post-employment benefits (Note 30) 63,721 38,478 38,168

Training 10,098 8,381 6,902 Others 42,444 5,538 14,850 P=1,134,000 P=928,172 P=665,205

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26. Depreciation and Amortization

Depreciation and amortization relate to the following assets:

2012 2011 2010 (In Thousands)

Property, plant and equipment and investment properties:

Cost of sales, educational and animation services (Note 22) P=158,371 P=133,475 P=127,399

General and administrative expenses (Note 23) 63,110 37,819 66,704

Selling expenses (Note 24) 7,963 11,537 9,032 Intangibles - General and administrative

expenses (Note 23) 3,604 35,248 35,245 P=233,048 P=218,079 P=238,380

27. Interest Expense and Other Financial Charges

This account consists of:

2012 2011 2010 (In Thousands)

Interest expense on loans and borrowings (Notes 17 and 19) P=101,141 P=107,903 P=104,375

Other financial charges 162 478 9,046 P=101,303 P=108,381 P=113,421

28. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party in making financial and operating decisions and the parties are subject to common control. Related parties may be individual or corporate entities.

Outstanding balances at year-end are unsecured and settlement occurs in cash throughout the financial year. There have been no guarantees provided or received for any related party receivables or payables. For the years ended December 31, 2012, 2011 and 2010, the Company has not recorded any impairment of receivables from related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

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The significant related party transactions entered into by the Company with its associates and entities under common control and the amounts included in the consolidated financial statements with respect to such transactions follow:

2012

Company Nature Amount/Volume

Amount Due to

Related Parties

Amount Due from

Related Parties

(see Note 9) Terms Conditions

(In Thousands)

Ultimate Parent

Share in expenses,

management fees P=28,231 P=12,608 P=299 Non-interest

bearing Unsecured, no

impairment

Associates

Grant of interest

bearing advances 1,500 – 1,500 4.87%-5.07%

30-60 days Unsecured, no

impairment

Share in expenses 1,563 – 821 Non-interest

bearing Unsecured, no

impairment

Other Related Parties

Share in expenses 5,687 5,047 293 Non-interest

bearing Unsecured, no

impairment

P=17,655 P=2,913

2011

Company Nature Amount/Volume

Amount Due to

Related Parties

Amount Due from

Related Parties

(see Note 9) Terms Conditions

(In Thousands)

Ultimate Parent

. Share in expenses,

management fees P=85,310 P=20,200 P=58,258 Non-interest

bearing Unsecured, no

impairment

Associates

Grant of interest

bearing advances 131,307 – 643 4.87%-5.07%

30-60 daysUnsecured, no

impairment

Share in expenses 1,589 – 3,010 Non-interest

bearing Unsecured, no

impairment

Other Related Parties

Share in expenses 22,542 4,296 13,742 Non-interest

bearing Unsecured, no

impairment

P=24,496 P=75,653

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2010

Company Nature Amount/Volume

Amount of Due to

Related Parties

Amount of Due from

Related Parties

(see Note 9) Terms Conditions

(In Thousands)

Ultimate Parent

. Share in expenses, management fees P=63,207 P=29,690 P=239

Non-interest bearing

Unsecured, no impairment

Grant of interest

bearing advances 25,272 – – 3.16%, 32 daysUnsecured, no

impairment

Associates

Share in expenses 2,684 – 740 Non-interest

bearing Unsecured, no

impairment

Grant of interest

bearing advances 37,53 – – 3.16%, 32 daysUnsecured, no

impairment

Other Related Parties

Share in expenses 37,811 3,239 8,336 Non-interest

bearing Unsecured, no

impairment

P=32,929 P=9,315

PHINMA, Inc. The Company has a management contract with PHINMA, Inc. up to June 30, 2013, renewable thereafter mutual agreement. Under this contract, PHINMA, Inc. has a general management authority with corresponding responsibility over all operations and personnel of the Company including planning, direction, and supervision of all the operations, sales, marketing, distribution, finance and other business activities of the Company. Under the existing management agreement, the Parent Company pays PHINMA, Inc. a fixed monthly management fee plus an annual incentive based on a certain percentage of the Parent Company’s net income.

TA Oil and TA Power. TA Oil and TA Power are likewise controlled by PHINMA, Inc. through a management agreement. Phinma Corporation bills TA Oil and TA Power for their share in expenses. PPHC. The Company grants interest bearing advances to PPHC for a period of 30-60 days. The Company also bills PPHC their share in expenses.

PSHC. PSHC has outstanding long-term debt to UPPC arising from the acquisition of land from UPPC, then an associate of the Company (see Note 19). PSHC leases the land to UPPC for a period of 50 years, renewable for another 25 years upon the approval of the Philippine Department of Trade and Industry. Annual lease income during the entire lease term is initially fixed at P=14.6 million. In connection with the lease, UPPC was required to make a lease deposit with PSHC of P=55.5 million in July 2003 and an additional P=2.9 million in April 2005, aggregated and reflected as part of “Other noncurrent liabilities” at amortized cost at the end of the reporting period, and refundable to UPPC upon the expiration of the lease. The lease deposit’s present value was calculated using an effective interest rate of 12.0% per annum. On August 2, 2006, PSHC and UPPC amended the lease agreement increasing the annual rent revenue from P=14.6 million to P=19.2 million effective January 1, 2006.

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The difference between the face value of the lease deposit and its corresponding present value at inception was aggregated and reflected as unearned revenue that is being amortized as rent revenue simultaneous with the accretion of the lease deposit.

The consolidated statements of financial position include the following outstanding balances as of December 31 resulting from the aforementioned transactions:

2012 2011 (In Thousands)

Trade and other receivables P=– P=1,712 Unearned revenues 47,228 48,394 Trade and other payables – 1,144 Long-term debt 152,873 151,050 Other noncurrent liabilities 595 531

Retirement Fund. The Parent Company has established a retirement fund that is managed by a trustee. The carrying value and fair value of the retirement fund of the Parent Company amounts to P=46.0 million and P= 37.3 million as of December 31, 2012 and 2011, respectively.

Management and Directors’ Compensation PHN, UGC, COC, AU, UPANG and UI are under common management by PHINMA, Inc. and pay PHINMA, Inc. a fixed annual management fee plus an annual bonus based on a certain percentage of the respective companies’ adjusted net income, as defined in the management contract between PHINMA, Inc. and the respective companies, pursuant to the provisions of the same contract.

Management fees and bonuses, included in “Professional fees and outside services” account under “General and administrative expenses”, amounted to P=35.5 million, P=42.0 million and P=110.2 million in 2012, 2011 and 2010, respectively. The related unpaid amount, included in “Accruals for professional fees and others” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=13.7 million and P=16.5 million as of December 31, 2012 and 2011, respectively.

PHN, UGC, AHC, UI and AU recognized bonus to directors computed based on net income with pre-agreed adjustments. Directors’ bonus, included in “Personnel costs” account under “General and administrative expenses”, amounted to P=12.5 million, P=20.9 million and P=43.2 million in 2012, 2011 and 2010, respectively. The related unpaid amount, included in “Accruals for personnel costs” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=6.7 million and P=7.2 million as of December 31, 2012 and 2011, respectively.

Compensation of key management personnel of the Company are as follows:

2012 2011 2010 (In Thousands) Short-term employee benefits P=73,340 P=69,168 P=70,227 Post-employment benefits

(Note 30): Retirement benefits 6,686 5,107 4,582 Vacation and sick leave 1,989 1,213 2,064 P=82,015 P=75,488 P=76,873

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29. Income Tax

The components of the Company’s deferred tax assets and liabilities are as follows:

2012 2011 (In Thousands)

Deferred tax assets: NOLCO P=28,769 P=13,753 Allowance for doubtful accounts 25,676 23,676 Pension liability 17,334 8,113 Unearned tuition fee revenue 12,881 4,148 Accrued expenses 6,468 13,118

Stock purchase plan 4,482 – Unrealized foreign exchange losses 2,750 8,524 Excess of straight-line recognition of management fee over contract payment terms 2,709 2,709 Unamortized past service costs 1,137 1,556 Allowance for inventory writedown 409 409

Unrealized loss on change in fair value 314 – Accrued interest expense 156 1,091 Allowance for impairment losses – 1,255 MCIT – 339 Unamortized accrued rent expense – 185 103,085 78,876 Deferred tax liabilities: Fair value adjustments on property and equipment of subsidiaries (244,892) (286,403) Accelerated depreciation (40,800) (33,508) Accrued revenue (25,878) (89) Unrealized gain on change in fair value (10,149) (3,700) Deferred installment sales (7,282) (7,282) Unamortized capitalized borrowing cost (420) (525) Derivative assets (158) (390) Pension asset – (6,104) Unrealized foreign exchange gains – (2,377) Unamortized debt issuance costs – (248)

Others (2,011) – (331,590) (340,626) (P=228,505) (P=261,750)

The deferred tax assets and liabilities are presented in the consolidated statements of financial position as follows:

2012 2011 (In Thousands)

Deferred tax assets - net P=85,231 P=49,245 Deferred tax liabilities - net (313,736) (310,995) (P=228,505) (P=261,750)

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The Company’s deductible temporary differences, unused NOLCO and MCIT for which no deferred tax assets are recognized in the consolidated statements of financial position, are as follows:

2012 2011 (In Thousands)

NOLCO P=279,203 P=212,722 Allowance for unrecoverable input VAT 118,573 89,214 Accrued personnel costs and employee benefits 22,596 31,675 Unrealized foreign exchange losses 21,633 16,980 Unamortized past service costs 14,970 13,443 MCIT 7,758 8,377 Unrealized loss on derivatives – 2,281 P=464,733 P=374,692

Deferred tax assets amounting to P=139.4 million and P=112.4 in 2012 and 2011, respectively, were not recognized since management believes that it is not probable that sufficient future taxable profit will be available to allow said deferred tax assets to be utilized.

AU, UPANG, UI and COC, as private educational institutions, are taxed based on the provisions of Republic Act (R.A.) No. 8424, which was passed into law effective January 1, 1998. Section 27(B) of R.A. No. 8424 defines and provides that: “A Proprietary Educational Institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports, or Commission on Higher Education, or Technical Education and Skills Development Authority, as the case may be, in accordance with the existing laws and regulations - shall pay a tax of ten percent (10%) on their taxable income.”

MCIT totaling P=7.8 million can be deducted against RCIT due while NOLCO totaling P=364.3 million can be claimed as deduction against taxable income, as follows:

Amount Date Paid/Incurred Expiry Date MCIT NOLCO

(In Thousands)

December 31, 2010 December 31, 2013 P=4,788 P=6,507 December 31, 2011 December 31, 2014 1,137 223,104 December 31, 2012 December 31, 2015 1,833 134,705 P=7,758 P=364,316

MCIT amounting to P=2.5 million and P=2.8 million expired in 2012 and 2011, respectively. No MCIT and NOLCO were claimed as deduction against regular taxable income in 2012 and 2011.

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A reconciliation between the statutory tax rates and the Company’s effective tax rates on income before income tax and non-controlling interest is as follows:

2012 2011 2010 Applicable statutory tax rate 30% 30.0% 30.0% Income tax effects of: Tax rate differential of

schools 52.1 (27.4) (3.6) Interest income subjected to

lower final tax rate 19.9 (17.8) (2.2) Dividend income exempt

from tax 1.2 (0.7) (0.2) Change in unrecognized

deferred tax assets and others (208.4) 60.4 (3.3)

Effective tax rates (105.2%) 44.5% 20.7% 30. Pension and Other Post-employment Benefits

Pension and other post-employment benefits consist of:

2012 2011 (In Thousands)

Net pension liability P=51,788 P=31,778 Vacation and sick leave 36,391 26,471 P=88,179 P=58,249

Pension and other employee benefits expenses under “Cost of sales”, “General and administrative expenses” and “Selling expenses”, consist of:

2012 2011 2010 (In Thousands)

Net pension expense P=53,756 P=31,747 P=34,317 Vacation and sick leave 9,965 6,731 3,851 P=63,721 P=38,478 P=38,168

Annual contribution to the retirement plans consists of a payment to cover the current service costs for the year plus a payment toward funding the actuarial accrued liability.

The following tables summarize the components of net pension expense recognized in the consolidated statements of income and the funded status and amounts recognized in the consolidated statements of financial position for the respective plans.

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Net pension expense consists of:

2012 2011 2010 (In Thousands)

Current service cost P=20,822 P=13,764 P=22,764 Interest cost on defined benefit

obligation 14,645 13,911 13,169 Expected return on plan assets (8,435) (7,956) (7,776) Past service cost 22,846 10,105 4,141 Net actuarial loss recognized 3,878 1,923 2,019 Net pension expense P=53,756 P=31,747 P=34,317

Details of net pension liability are as follows:

2012 2011 (In Thousands)

Present value of defined benefit obligation P=300,184 P=219,656 Fair value of plan assets (142,080) (120,150) Unfunded obligation 158,104 99,506 Benefits paid (6,454) (4,182) Unrecognized net actuarial losses (99,862) (63,546) Pension liability P=51,788 P=31,778

Changes in the present value of the defined benefit obligation are as follows:

2012 2011 (In Thousands) Balance at beginning of year P=219,656 P=165,644 Current service cost 20,822 13,764 Interest cost on defined benefit obligation 14,645 13,911 Actuarial losses 29,606 36,236 Benefits paid (7,974) (15,421) Increase in past service cost 23,429 5,522 Balance at end of year P=300,184 P=219,656

Change in the fair value of plan assets are as follows:

2012 2011 (In Thousands)

Balance at beginning of year P=120,150 P=113,945 Contributions by employer 25,310 11,423 Benefits paid (7,974) (15,421) Expected return on plan assets 8,435 7,956 Actuarial gains (losses) (3,841) 2,247 Balance at end of year P=142,080 P=120,150

Actual return on plan assets P=4,594 P=10,203

The Company expects to contribute P=34.3 million to its defined benefit pension plans in 2013.

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The principal assumptions used in determining pension benefits are as follows:

2012 2011 2010 Discount rates 5-8% 7–12% 7–12% Expected rates of return

on plan assets 5-10% 5–8% 5–8% Rates of salary increase 3-8% 5–9% 5–9%

The major categories of plan assets as a percentage of the fair value of the plan assets are as follows:

2012 2011 Fixed income securities and others 84% 66% Equities 14% 32% Property 2% 2% 100% 100%

The expected return on plan assets is based on the Company’s expectation that assets will yield at least equal to the risk-free rate for the applicable period over which the obligation is to be settled.

The Company has established a retirement fund that is managed by a trustee. The carrying value and fair value of the retirement fund of the Company amounts to P=46.0 million and P=37.3 million as of December 31, 2012 and 2011, respectively. The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2012 2011 Cash and short-term investments 83% 83% Property 12 12 Marketable equity securities 5 5 100% 100%

Cash and short-term investments include liquid investments in Special Deposit Accounts (SDAs), government securities and mutual funds and UITFs. Marketable equity securities can be sold through the Philippine Stock Exchange. These include shares of stock of the Parent Company with a fair value of P=2.2 million and P=2.4 million as of December 31, 2012 and 2011, respectively. Cumulative unrealized fair value gains on the shares amount to P=0.5 million. The plan assets also include an investment in a unit in Island Palm Garden Condominium located in Quezon City.

The voting rights over the shares are exercised through the trustee by the retirement committee, the members of which are directors or officers of the Parent Company.

Amounts for the current and previous four periods are as follows:

2012 2011 2010 2009 2008

(In Thousands)

Present value of defined benefit obligation P=300,184 P=219,656 P=165,644 P=156,033 P=47,564

Fair value of plan assets (142,080) (120,150) (113,945) (81,870) (73,022) Unfunded (surplus) obligation 158,104 99,506 51,699 74,163 (25,458) Experience adjustments on plan

liabilities (35) (27) (5,469) (1,284) 1,900 Experience adjustments on plan assets 43 7 2,026 – 36

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31. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments comprise of cash and cash equivalents, short-term investments, corporate promissory notes and bonds, government bonds, quoted and unquoted shares of stocks, currency forwards, investments in UITFs and loans and borrowings in Philippine Peso and U.S. dollar currencies. The main purpose of these financial instruments is to finance the Company’s investments. The Company also has financial assets and liabilities, such as trade and other receivables and trade and other payables that arise directly from operations.

The main risks arising from the Company’s treasury transactions are credit risk, liquidity risk, market risk, foreign currency risk, interest rate risk and equity price risk. Careful study, skill, prudence and due diligence are exercised at all times in the handling of the funds of the Company. An Investment Committee reviews and approves policies and directions for investments and risks management. The basic parameters approved by the Investment Committee are:

Investment Objective Safety of Principal

Tenor Three year maximum for any security, with average duration between one and two years

Exposure Limits a. For banks and fund managers: maximum of 20% of total funds of the Company per bank or fund

b. For peso investments: minimal corporate exposure except for registered bonds

c. For foreign currencies: maximum 50% of total portfolio. Limits on third currencies outside USD are set regularly and reviewed at least once a year by the Investment Committee

d. For investments in equities whether directly managed or managed by professional managers: limits are set as approved by the Investment Committee and based on current market outlook at the time of review

e. For derivative transactions - limits are set up to 100% of asset subject to derivative transaction with the objective of neutrality of gain/loss

Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Due to the Company’s investing and operating activities, the Company is exposed to the potential credit-related losses that may occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations.

In managing credit risk on these financial instruments, the Company transacts only with the Company’s duly accredited domestic and foreign banks. Investments per financial institution are subject to a maximum of 20% of the Company’s investible funds. It is the Company’s policy that investments cannot exceed 10% of the trust or mutual fund’s total assets.

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A comprehensive credit and business review in coordination with dealers or underwriters is performed whenever the Company invests in non-rated securities. Furthermore, the Company monitors the credit quality of corporate and sovereign bonds with reference to credit rating studies and updates from the major rating agencies. The Company’s exposure to credit risk on its cash and cash equivalents, investments held for trading, AFS investments, trade and other receivables and derivative instruments arises from default of the counterparties with maximum exposures equal to the carrying amounts of the instruments.

2012 2011 (In Thousands)

Loans and receivables: Cash and cash equivalents P=465,179 P=916,157 Trade and other receivables 871,881 857,649 Investments held for trading: Investments in bonds 491,127 414,525 Investments in marketable equity securities 6,601 3,927 Derivative assets 528 – AFS investments: Quoted 10,101 20,620 Unquoted - net of accumulated impairment

losses 222,305 120,370 P=2,067,722 P=2,333,248

There are no significant concentrations of credit risk within the Company.

Credit Quality of Financial Assets, Other than Trade and Other Receivables The Company uses the following criteria to rate credit quality of its financial assets, other than trade and other receivables:

Class Description

High Grade Investments in instruments that have a recognized foreign or local third party rating or instruments which carry guaranty/collateral.

Standard Grade Investments in instruments of companies that have the apparent ability to satisfy its obligations in full.

Substandard Grade Investments in instruments of companies that have an imminent possibility of foreclosure; those whose securities have declined materially in value, or those whose audited financial statements show impaired/negative net worth.

Cash and cash equivalents and derivative instruments are classified as high grade since these are deposited in/or transacted with reputable financial institutions which have low probability of insolvency.

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The credit quality of investments held for trading and AFS investments as of December 31 follows:

2012 Neither Past Due nor Impaired

High

Grade Standard

Grade Substandard

Grade Impaired Total

(In Thousands)

Investments held for trading: Investments in bonds P=480,029 P=11,098 P=– P=– P=491,127 Investments in marketable equity

securities – 6,601 – – 6,601 Derivative assets 528 – – – 528 AFS investments: Quoted – 10,101 – – 10,101 Unquoted – 222,305 – 45,517 267,822 P=480,557 P=454,693 P=– P=45,517 P=776,179

2011 Neither Past Due nor Impaired

High

Grade Standard

Grade Substandard

Grade Impaired Total

(In Thousands)

Investments held for trading: Investments in bonds P=387,264 P=27,262 P=– P=– P=414,526 Investments in marketable equity

securities – 3,927 – – 3,927 AFS investments: Quoted – 20,620 – – 20,620 Unquoted – 120,370 – 45,517 165,887 P=387,264 P=172,179 P=– P=45,517 P=604,960

Credit Quality of Trade and Other Receivables Trade and other receivables are classified as (a) high grade when the receivables are secured or covered with collaterals; (b) standard grade when the receivables are unsecured but debtors have good paying habits; or (c) substandard grade when the receivables are unsecured and debtors have poor paying habits.

The credit quality of trade and other receivables (including installment contract receivables) as of December 31 are as follows:

2012 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=697,079 P=192,205 P=889,284 Due from related parties – 2,913 – 2,913 Installment contract receivables – 68,884 – 68,884 Advances to suppliers and contractors – 56,002 – 56,002 Accrued interest 10,696 – – 10,696 Receivable from PHN Retirement – 8,939 – 8,939 Advances to officers and employees – 7,343 1,532 8,875 Others – 20,025 4,037 24,062 P=10,696 P=861,185 P=197,774 P=1,069,655

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2011 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=624,181 P=156,561 P=780,742 Due from related parties – 72,779 2,874 75,653 Installment contract receivables – 72,617 – 72,617 Advances to suppliers and contractors – 10,623 2,826 13,449 Accrued interest 11,817 – – 11,817 Receivable from PHN Retirement – 8,939 – 8,939 Advances to officers and employees – 6,094 – 6,094 Others – 50,599 2,545 53,144 P=11,817 P=845,832 P=164,806 P=1,022,455

As of December 31, 2012 and 2011, the aging analysis of trade and other receivables (including installment contract receivables) are as follows:

2012 Neither Past Past Due nor Past Due but not Impaired Due and Total Impaired <30 Days 30–60 Days 60–90 Days 90–120 Days >130 Days Impaired

(In Thousands)

Trade P=889,284 P=429,005 P=105,587 P=35,363 P=35,023 P=26,405 P=65,696 P=192,205 Due from related parties 2,913 2,913 – – – – – – Installment contract receivables 68,884 68,884 – – – – – – Advances to suppliers

and contractors 56,002 37,077 2,580 2,152 1,782 2,504 9,907 – Accrued interest 10,696 10,696 – – – – – – Receivable from PHN

Retirement 8,939 8,939 – – – – – – Advances to officers

and employees 8,875 4,189 486 548 314 77 1,729 1,532 Others 24,062 17,936 103 10 51 21 1,904 4,037 P=1,069,655 P=579,639 P=108,756 P=38,073 P=37,170 P=29,007 P=79,236 P=197,774

2011 Neither Past Past Due Past Due but not Impaired Due and Total nor Impaired <30 Days 30–60 Days 60–90 Days 90–120 Days >130 Days Impaired

(In Thousands)

Trade P=780,742 P=414,014 P=88,274 P=35,125 P=15,242 P=22,485 P=49,041 P=156,561 Due from related parties 75,653 72,779 – – – – – 2,874 Installment contract receivables 72,617 72,617 – – – – – – Advances to suppliers

and contractors 13,449 7,797 445 874 457 638 412 2,826 Accrued interest 11,817 11,817 – – – – – – Receivable from PHN

Retirement 8,939 8,939 – – – – – – Advances to officers

and employees 6,094 6,094 – – – – – – Others 53,144 46,964 345 345 345 – 2,600 2,545 P=1,022,455 P=641,021 P=89,064 P=36,344 P=16,044 P=23,123 P=52,053 P=164,806

Impaired financial instruments comprise of trade receivables from customers, related parties and other receivables. The past due but not impaired trade and receivables are expected to be collected the following year.

Liquidity Risk Liquidity risk is the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price. The Company manages liquidity risks by restricting investments and continuously monitoring weekly and monthly cash flows as well as updates of annual plans.

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The maturities of the financial liabilities are determined based on the Company’s projected payments and contractual maturities. The average duration adheres to guidelines provided by the Investment Committee. It is the Company’s policy to restrict investment principally to publicly traded securities with a history of marketability and by dealing with only large reputable domestic and international institutions.

The tables below show the maturity profile of the Company’s financial assets used for liquidity purposes based on contractual undiscounted cash flows as of December 31:

2012 Within More than 1 Year 1–2 Years 2–3 Years 3–5 Years 5 Years Total

(In Thousands)

Financial Assets Loans and receivables - Cash and cash equivalents P=465,179 P=– P=– P=– P=– P=465,179 Financial assets at FVPL: Investments in bonds 7,581 27,632 – 21,893 434,021 491,127 Investments in marketable

equity securities 6,601 – – – – 6,601 Derivative assets 528 – – – – 528

AFS investments - Quoted 10,101 – – – – 10,101 P=489,990 P=27,632 P=– P=21,893 P=434,021 P=973,536

2011 Within More than 1 Year 1–2 Years 2–3 Years 3–5 Years 5 Years Total

(In Thousands)

Financial Assets Loans and receivables - Cash and cash equivalents P=916,157 P=– P=– P=– P=– P=916,157 Financial assets at FVPL: Investments in bonds 24,066 7,845 30,743 29,329 322,542 414,525 Investments in marketable

equity securities 3,927 – – – – 3,927 AFS investments - Quoted 20,620 – – – – 20,620 P=964,770 P=7,845 P=30,743 P=29,329 P=322,542 P=1,355,229

The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted payments as of December 31:

2012 Within More than 1 Year 1–2 Years 2–3 Years 3–5 Years 5 Years Total

(In Thousands)

Financial Liabilities Other financial liabilities: Notes payable P=373,676 P=– P=– P=– P=– P=373,676 Trade and other payables 536,683 – – – – 536,683 Trust receipts payable 560,649 – – – – 560,649 Due to related parties 17,655 – – – – 17,655 Long-term loan payable* 26,852 25,773 24,709 – – 77,334 Long-term debt* 98,705 92,192 79,374 113,154 161,591 545,016 P=1,614,220 P=117,965 P=104,083 P=113,154 P=161,591 P=2,111,013 * Including current and noncurrent portions.

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2011 (As restated - Note 6) Within More than 1 Year 1–2 Years 2–3 Years 3–5 Years 5 Years Total

(In Thousands)

Financial Liabilities Other financial liabilities: Notes payable P=459,115 P=– P=– P=– P=– P=459,115 Trade and other payables 402,495 – – – – 402,495 Trust receipts payable 104,240 – – – – 104,240 Due to related parties 24,496 – – – – 24,496 Long-term loan payable* 24,713 26,304 26,304 26,304 – 103,625 Long-term debt* 197,122 477,447 68,985 56,437 23,347 823,338 P=1,212,181 P=503,751 P=95,289 P=82,741 P=23,347 P=1,917,309 * Including current and noncurrent portions.

Market Risk Market risks are managed by constant review of global and domestic economic and financial environments as well as regular discussions with banks’ economists/strategy officers to get multiple perspectives on interest rate trends/forecasts. Regular comparison of the portfolio’s marked-to-market values and yields with defined benchmarks are also made.

Foreign Currency Risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company’s financial assets that are exposed to foreign currency risk are foreign currency denominated cash and cash equivalents, investment in bonds and investments in UITFs.

Foreign exchange risks on the U.S. dollar and other foreign currencies are managed through constant monitoring of the political and economic environment. Returns are also calibrated on a per currency basis to account for the perceived risks with higher returns expected from weaker currencies. The Company also enters into currency forward contracts to manage its foreign currency risk.

The following table shows the U.S. foreign currency-denominated financial assets and financial liabilities and their peso equivalents as of December 31:

2012 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial assets: Cash and cash equivalents US$514 P=21,100 US$3,720 P=163,085 Receivables 339 13,916 151 6,620 Investments in bonds 1,664 68,307 2,284 100,131 US$2,517 P=103,323 US$6,155 P=269,836

Financial liabilities: Trust receipts payable US$935 P=38,382 US$2,366 P=103,725 Long-term loan payable 1,728 70,934 2,304 101,007

US$2,663 P=109,316 US$4,670 P=204,732

In translating foreign currency-denominated financial assets into peso amounts, the exchange rate used was P=41.05 to US$1.00 and P=43.84 to US$1.00 as of December 31, 2012 and 2011, respectively.

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The following table demonstrates the sensitivity to a reasonably possible change in the exchange rate, with all other variables held constant, of the Company’s profit before tax (due to the changes in the fair value of monetary assets) as of December 31, 2012 and 2011. There is no impact on the Company's equity other than those already affecting the profit or loss. The effect on profit before tax already includes the impact of derivatives outstanding as of December 31, 2012 and 2011.

2012

Increase (Decrease)

in Peso-Dollar Exchange Rate Effect on

Profit Before Tax

(In Millions)

PHN P=1.00 P=0.017 (1.00) (0.017) UGC 1.00 0.927 (1.00) (0.927) Fuld Philippines 1.00 0.397 (1.00) (0.397)

2011

Increase (Decrease)

in Peso-Dollar Exchange Rate Effect on

Profit Before Tax

(In Millions)

PHN P=1.00 P=1.5 (1.00) (1.5) UGC 1.00 2.4 (1.00) (2.4) Fuld Philippines 1.00 0.1 (1.00) (0.1)

Interest Rate Risk

a. Cash Flow Interest Rate Risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company is exposed to cash flow interest rate risk due to AU’s variable rate loan from China Bank as at December 31, 2010 (see Note 19). On August 5, 2011, the interest on AU’s loan is fixed based on the 5-year prevailing PDST-F plus a spread of 1.50% payable quarterly.

The following table demonstrates the effect of changes in market interest rates, on the Company’s profit before income tax, based on the Company’s expectation, with all other variables held constant as of December 31, 2010. There is no other significant impact on the Company’s equity other than those already affecting the profit or loss.

2010

Increase/Decrease in Basis Points

Effect on Profit Before Tax

(In Thousands)

Loan payable to China Bank 50 (P=274) (50) 274

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b. Price Interest Rate Risk

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Company accounts for its debt investments at fair value. Thus, changes in benchmark interest rate will cause changes in the fair value of quoted debt instruments.

The following tables set out the carrying amounts, by maturity, of the Company’s financial instruments that are exposed to interest rate risk as of December 31:

2012

Interest

Rates Within 1

Year 1–2 Years 2–3 Years 3–5 Years More than

5 Years Total

(In Thousands)

Fixed Rate Placements (PHP) 1.75%–4.69% 272,546 – – – – 272,546 Placements (AUD) 2.22% 30,141 – – – – 30,141 Investments in bonds (PHP) 5.875%-11.75% 7,582 – – – 415,258 422,840 Investments in bonds (US$) 5.0%–10.375% – 27,632 – 21,893 18,762 68,287

2011

Interest

Rates Within 1

Year 1–2 Years 2–3 Years 3–5 Years More than

5 Years Total

(In Thousands)

Fixed Rate Placements (PHP) 3.60%–3.90% 742,320 – – – – 742,320 Placements (US$) 0.69%–6.47% 162,459 – – – – 162,459 Investments in bonds (PHP) 6.37%–13.00% 24,066 7,845 – – 282,469 314,380 Investments in bonds (US$) 6.25%–10.37% – – 30,743 29,329 40,073 100,145 Advances 3.00%–6.62% 168,238 – – – – 168,238

Interest on financial instruments classified as fixed rate was fixed until the maturity of the instrument.

Other financial assets at FVPL are noninterest-bearing investments and are therefore not subject to interest rate volatility.

The table below set forth the estimated change in the Company’s income before tax due to a reasonably possible change in the market prices of quoted bonds and interest rates for peso placements and trust receipts classified under financial assets at FVPL and short term deposits classified under loans and receivables, brought about by movement in the interest rate as of December 31, 2012 and 2011. There is no impact on the Company’s equity other than those already affecting the profit or loss.

2012

Increase/(Decrease)

in Basis Points Effect on

Profit Before Tax (In Thousands) PHN – peso placement 50 P=219 (50) (219) – dollar placement 25 35 (25) (35) – peso bonds 50 (8,192) (50) 8,192 – dollar bonds 20 114 (20) (114) (Forward)

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2012

Increase/(Decrease)

in Basis Points Effect on

Profit Before Tax (In Thousands)

API, PSHC, PEN – peso placement 50 P=1,285

(50) (1,285) UGC – trust receipts 50 115 (50) (115)

2011

Increase/(Decrease)

in Basis Points Effect on

Profit Before Tax (In Thousands) PHN – peso placement 175 P=1,015 (175) (1,015) – dollar placement 50 1,506 (50) (1,506) – peso bonds 50 (7,758) (50) 7,758 – dollar bonds 100 851 (100) (851)

UGC – trust receipts 25 (37) (25) 37

Peso placements are subject to cash flow interest rate risk while peso and dollar bonds are subject to fair value interest rate risk.

Equity Price Risk Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of the equity indices and the values of individual stocks. The Company’s exposure to equity price risk relates primarily to its equity investments listed in the PSE classified under investments held for trading.

The Company’s policy is to maintain the risk to an acceptable level. Movement of share price is monitored regularly to determine impact on the Company’s financial position.

The following tables demonstrate the effect on the Company’s profit before income tax (as a result of a change in the fair value of equity instruments held as investment held for trading) due to a reasonably possible change in equity indices, based on the Company’s expectation, with all other variables held constant as of December 31, 2012 and 2011. There is no other significant impact on the Company’s equity other than those already affecting the profit or loss.

2012

Increase/Decrease

in Stock Exchange Index Effect on

Profit Before Tax (In Thousands)

PHN +15% P=422 -15% (422)

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2012

Increase/Decrease

in Stock Exchange Index Effect on

Profit Before Tax (In Thousands)

UGC +15% P=167 -15% (167)

API +15% 293 -15% (293)

2011

Increase/Decrease

in Stock Exchange Index Effect on

Profit Before Tax (In Thousands)

PHN +16.2% P=439 -16.2% (439)

UGC +20.2% 218 -20.2% (218)

Capital Management The primary objective of the Company’s capital management is to ensure that the Company maintains a healthy capital structure to maintain strong credit rating and maximize shareholder value.

The Company closely monitors and manages its debt-to-equity ratio, which it defines as total liabilities divided by total equity. Capital includes all the accounts appearing in the “Equity attributable to equity holders of the parent” and “Equity attributable to noncontrolling interest” in the consolidated statements of financial position.

To ensure that there are sufficient funds to settle its liabilities, the Company’s policy is to keep debt-to-equity ratio below 1:1. The Company’s consolidated debt-to-equity ratio as of December 31, 2012 and 2011 are as follows:

2012 2011

(In Thousands)

Total liabilities P=2,659,483 P=2,503,334 Total equity 6,985,834 7,177,576 Debt-to-equity ratio 0.38:1 0.35:1

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32. Financial Instruments

Fair Value Set out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial instruments that are carried in the consolidated statements of financial position as at December 31:

Carrying Amount Fair Value 2012 2011 2012 2011

(In Thousands)

Financial Assets Loans and receivables: Cash and cash equivalents P=465,179 P=916,157 P=465,179 P=916,157 Trade and other receivables 871,881 857,649 871,881 857,649 1,337,060 1,773,806 1,337,060 1,773,806 Financial assets at FVPL: Investments held for trading: Investments in bonds 491,127 414,525 491,127 414,525 Investments in marketable

equity securities 6,601 3,927 6,601 3,927 Derivative asset 528 – 528 – 498,256 418,452 498,256 418,452 AFS investments: Quoted 10,101 20,620 10,101 20,620 Unquoted 222,305 120,370 222,305 120,370 232,406 140,990 232,406 140,990 P=2,067,722 P=2,333,248 P=2,067,722 P=2,333,248 Carrying Amount Fair Value

2012 2011 (As restated -

Note 6) 2012 2011 (As restated -

Note 6)

(In Thousands)

Financial Liabilities Financial liability at FVPL - Derivative liability P=– P=2,281 P=– P=2,281 Other financial liabilities: Notes payable 373,676 455,193 373,676 455,193 Trade and other payables 536,685 402,495 536,685 402,495 Trust receipts payable 554,797 103,735 554,797 103,735 Due to related parties 17,655 24,496 17,655 24,496 Long-term loan payable* 70,935 101,007 78,330 110,460 Long-term debt* 412,186 740,722 364,005 774,019 1,965,934 1,827,648 1,925,148 1,870,398 P=1,965,934 P=1,829,929 P=1,925,148 P=1,872,679 *Including current and noncurrent portion.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents, Short-term Investments, Trade and Other Receivables, Notes Payable, Trade and Other Payables, Trust Receipts Payable and Due to Related Parties. The carrying amounts approximate fair values due to the relatively short-term maturities of the financial instruments.

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Investments Held for Trading and AFS Investments. Quoted market prices have been used to determine the fair value of financial assets at FVPL and listed AFS investments. Unquoted AFS investments are measured at cost less accumulated impairment loss since the fair value is not readily determinable due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. The Company does not intend to dispose the unquoted AFS in the near future.

Long-term Loan Payable and Long-term Debt. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable rates for similar types of loans. Discount rates used range from 3% to 5% in 2012 and 2.7% to 6.0% in 2011.

Derivative Instruments. The fair value of freestanding currency forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Derivative Instruments

Freestanding Derivatives. The Company’s derivative financial instruments are accounted for as financial instruments at FVPL.

The Company enters into sell US$-buy PHP= non-deliverable foreign currency forward contracts to manage the foreign currency risk arising from its US$ denominated assets. These derivatives are transactions not accounted for as accounting hedges.

The Company has outstanding currency forward contracts with an aggregate notional amount of US$4.3 million and US$6.3 million as of December 31, 2012 and 2011, respectively. The weighted average contracted forward rate is P=41.12 to US$1.00 and P=43.49 to US$1.00 as of December 31, 2012 and 2011, respectively. The currency forward contracts outstanding as of December 31, 2012 will mature up to April 2013. The net changes in fair values of these outstanding currency forward contracts amounted to P=0.5 million and negative P=2.3 million as of December 31, 2012 and 2011, respectively.

The net changes in fair value of these derivative assets (liabilities) are as follows:

2012 2011 (In Thousands) Balance at beginning of year (P=2,281) P=4,442 Net change in fair value during the year 12,270 7,121 Fair value of settled contracts (9,461) (13,844) Balance at end of year P=528 (P=2,281)

Embedded Derivatives. In 2009, embedded foreign currency derivatives were bifurcated from certain of the Company’s purchase contracts, which are denominated in a currency that is neither the functional currency of a party to the contract nor the routine currency for the transaction.

The Company’s embedded derivatives have an aggregate notional amount of US$7.2 million as of December 31, 2009. The weighted average contracted forward rate is P=42.72 to US$1.00 as of December 31, 2009. The net fair values of the embedded derivatives amounted to P=2.8 million gain as of December 31, 2009. These embedded derivatives matured in 2010. There are no embedded derivatives as of December 31, 2012 and 2011.

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The net changes in fair values of derivatives are presented as “Net gains on derivatives” in the consolidated statements of income.

Fair Value Hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data

Financial assets measured at fair value are as follows:

2012 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in bonds P=491,127 P=491,127 P=– P=– Investments in marketable equity securities 6,601 6,601 – – AFS investments - Quoted 10,101 10,101 – – P=507,829 P=507,829 P=– P=–

2011 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in bonds P=414,525 P=414,525 P=– P=– Investments in marketable equity securities 3,927 3,927 – – AFS investments - Quoted 20,620 20,620 – – P=439,072 P=439,072 P=– P=–

Derivative assets and liabilities are classified under Level 1 fair value hierarchy.

During the years ended December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.

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33. Commitments and Contingencies

a. Unused Credit Lines

PHN has an unused credit line amounting to P=500.0 million as at December 31, 2012.

UGC has the following unused approved credit lines with local banks and financial institutions as of December 31, 2012:

Nature Amount (In Thousands)

Letters of credit/trust receipts P=332,935 Bills purchase line 158,995 Invoice financing 100,000 Settlement risk 350,000 Forward contract 65,000

b. Commitments Under Operating Lease Agreements

Lessee UGC entered into lease agreements covering its warehouse premises which have terms ranging from one to two years, renewable at the option of UGC under certain terms and conditions.

Future minimum rental payable as of December 31, 2012 are as follows:

Amount (In Thousands) 2013 P=17,498 2014 16,124

c. Property Agreement

On March 2, 2006, API entered into an agreement with Paramount Property Management Company for services to manage, administer, operate and maintain the building for a monthly rate of P=0.07 million exclusive of VAT. In consideration, API shall pay a pre-agreed management fee. Such fee is subject to an annual escalation of 10%. The agreement shall be for a period of five years up to March 2, 2011 and was not renewed as a result of disposal of the property in 2010.

d. Others

There are contingent liabilities arising from lawsuits primarily involving collection cases filed by third parties and for tax assessments occurring in the ordinary course of business. On the basis of information furnished by the Company’s legal counsel, management believes that none of these contingencies will materially affect the Company’s financial position and results of operations.

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34. EPS Computation

Basic EPS is computed as follows:

2012 2011 2010

(In Thousands)

(a) Net income (loss) attributable to equity holders of the parent (P=36,010) P=81,018 P=475,846

(b) Weighted average number of common shares outstanding 258,322 257,737 257,737

Basic EPS attributable to equity holders of the parent (a/b) (P=0.14) P=0.31 P=1.85

Diluted EPS is computed as follows:

2012 2011 2010

(In Thousands)

(a) Net income (loss) attributable to equity holders of the parent (P=36,010) P=81,018 P=475,846

(b) Weighted average number of common shares outstanding adjusted for the effect of exercise of shares from Stock Purchase Plan 259,095 257,737 257,737

Diluted EPS attributable to equity holders of the parent (a/b) (P=0.14) P=0.31 P=1.85

2012 2011 2010

(In Thousands)

Weighted average number of common shares for basic earnings per share 258,322 257,737 257,737

Effect of exercise of shares from Stock Purchase Plan 773 – –

Weighted average number of common shares outstanding adjusted for the effect of exercise of shares from Stock Purchase Plan 259,095 257,737 257,737

The assumed exercise of shares from the Stock Purchase Plan would result in additional 1,545,894 common shares in 2012 and nil in 2011 and 2010. The estimated number of shares to be issued is based on the closing price of the Company’s share as of December 31, 2012.

35. Segment Information

For management purposes, the Company’s operating businesses are organized and managed separately according to business activities and has five reportable operating segments as follows:

§ Investment holdings – The Parent Company and PSHC are engaged in investment holding activities of shares of stocks and other financial instruments.

§ Property development – API leases its real and personal properties.

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§ Steel – UGC manufactures and trades iron and steel products. § Educational services – AU, COC, UPANG and UI offer graduate, tertiary, secondary and

elementary education services. § BPO – OAL and Toon City are engaged in film, video, television and animation services.

Fuld U.S. and Fuld Philippines are engaged in intelligence research.

The Company has no geographical segment for segment reporting format as the Company’s risks and rates of return are substantially in the same economic and political environment, with the companies incorporated and operated in the Philippines.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. However, Company financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transaction with third parties.

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Segment Information

Financial information on the operating segments are summarized as follows:

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) Year Ended December 31, 2012

Revenues Segment revenue P=33,410 P=649 P=2,911,208 P=906,638 P=551,658 P=– P=4,403,563 Investment income 311,242 15,088 1,437 735 18 (195,450) 133,070 Total revenues P=344,652 P=15,737 P=2,912,645 P=907,373 P=551,676 (P=195,450) P=4,536,633

Results Segment results (P=320,521) (P=100,129) P=145,515 P=142,833 (P=393,452) P=327,931 (P=197,823) Investment income 311,242 15,088 1,437 736 18 (195,452) 133,069 Equity in net earnings of an associate – (2,325) – – 3,508 117,760 118,943 Interest expense and financing charges (19,824) – (47,332) (23,758) (10,389) – (101,303) Benefit from (provision for) income tax (9,170) – (29,320) (14,743) 5,826 4,464 (42,943) Share of non-controlling interest – – – (1,114) – 55,161 54,047 Net income attributable to equity holders of parent (P=38,273) (P=87,366) P=70,300 P=103,954 (P=394,489) P=309,864 (P=36,010)

As at December 31, 2012

Assets and Liabilities Segment assets P=1,556,278 P=403,088 P=1,949,318 P=2,313,948 P=226,860 P=762,258 P=7,211,750 Investment in associates 4,778,588 – 10,288 – 1,939 (2,442,479) 2,348,336 Deferred tax assets – – 31,284 26,634 35,146 (7,833) 85,231 Total assets P=6,334,866 P=403,088 P=1,990,890 P=2,340,582 P=263,945 (P=1,688,054) P=9,645,317

Segment liabilities P=438,542 P=484 P=1,017,052 P=778,503 P=482,820 (P=413,445) P=2,303,956 Income and other taxes payable 1,935 – 22,943 16,329 589 – 41,796 Deferred tax liabilities 5,852 7,281 47,317 140,104 83 113,094 313,731 Total liabilities P=446,329 P=7,765 P=1,087,312 P=934,936 P=483,492 (P=300,351) P=2,659,483

Other Segment Information Capital expenditures P=14,071 P=– P=24,906 P=149,375 P=30,929 P=– P=219,281 Depreciation and amortization 11,529 667 98,824 72,410 20,342 14,881 218,653 Provision for impairment loss on investment in a

subsidiary/goodwill 59,779 – – – 212,300 (59,779) 212,300 Provision for unrecoverable input value-added tax 1,542 – – – – – 1,542

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Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) Year Ended December 31, 2011

Revenues Segment revenue P=33,585 P=10,695 P=2,640,861 P=881,333 P=284,696 P=– P=3,851,170 Investment income 508,173 14,867 2,571 2,435 39 (425,750) 102,335 Total revenues P=541,758 P=25,562 P=2,643,432 P=883,768 P=284,735 (P=425,750) P=3,953,505

Results Segment results (P=346,987) (P=35,539) P=198,804 P=168,647 (P=103,272) P=90,267 (P=28,080) Investment income 508,173 14,867 2,571 2,435 39 (425,750) 102,335 Equity in net earnings of an associate – 25,071 – – 1,556 111,029 137,656 Interest expense and financing charges (19,620) – (49,636) (29,052) (10,073) – (108,381) Benefit from (provision for) income tax (2,821) (2,722) (43,794) (9,984) (2,371) 15,671 (46,021) Share of non-controlling interest – – – (716) 1,947 22,278 23,509 Net income attributable to equity holders of parent P=138,745 P=1,677 P=107,945 P=131,330 (P=112,174) (P=186,505) P=81,018

As at December 31, 2011 (As restated - Note 6)

Assets and Liabilities Segment assets P=2,095,305 P=525,506 P=1,928,240 P=2,209,903 P=460,844 P=576,722 P=7,796,520 Investment in associates 4,319,127 – 10,288 – 2,159 (2,496,429) 1,835,145 Deferred tax assets – – 19,904 2,879 22,283 4,179 49,245 Total assets P=6,414,432 P=525,506 P=1,958,432 P=2,212,782 P=485,286 (P=1,915,528) P=9,680,910

Segment liabilities P=419,476 P=977 P=955,196 P=748,466 P=361,363 (P=338,028) P=2,147,450 Income and other taxes payable 2,914 120 25,739 12,870 3,246 – 44,889 Deferred tax liabilities – 7,281 52,759 119,793 83 131,079 310,995 Total liabilities P=422,390 P=8,378 P=1,033,694 P=881,129 P=364,692 (P=206,949) P=2,503,334

Other Segment Information Capital expenditures P=18,026 P=10,000 P=91,710 P=181,516 P=18,300 (P=3,762) P=315,790 Depreciation and amortization 11,748 772 77,975 73,088 7,972 46,524 218,079 Provision for impairment loss on investment in a

subsidiary/goodwill 274,172 – – – 166,369 (274,172) 166,369 Provision for unrecoverable input value-added tax 7,372 – – – – – 7,372

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Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) Year Ended December 31, 2010

Revenues Segment revenue P=28,839 P=44,781 P=2,660,613 P=895,305 P=60,127 P=– P=3,689,665 Investment income 307,107 2,270 742 1,712 28 (227,792) 84,067 Total revenues P=335,946 P=47,051 P=2,661,355 P=897,017 P=60,155 (P=227,792) P=3,773,732

Results Segment results P=234,627 P=351,846 P=372,536 P=174,918 (P=71,621) (P=285,513) P=776,793 Investment income 307,107 2,270 742 1,712 28 (227,792) 84,067 Equity in net earnings of an associate – 47,501 – – – 11,890 59,391 Interest expense and financing charges (24,212) (717) (51,365) (31,287) (5,840) – (113,421) Benefit from (provision for) income tax (6,152) (83,546) (72,563) (19,545) (907) 15,886 (166,827) Share of non-controlling interest – – – (412) 554 (164,299) (164,157) Net income attributable to equity holders of parent P=511,370 P=317,354 P=249,350 P=125,386 (P=77,786) (P=649,828) P=475,846

As at December 31, 2010

Assets and Liabilities Segment assets P=2,752,849 P=763,198 P=2,027,099 P=2,093,216 P=452,936 P=198,271 P=8,287,569 Investment in associates 3,885,950 – 10,288 – – (2,531,554) 1,364,684 Deferred tax assets – 36,407 – 1,963 1,672 4,419 44,461 Total assets P=6,638,799 P=799,605 P=2,037,387 P=2,095,179 P=454,608 (P=2,328,864) P=9,696,714

Segment liabilities P=443,312 P=11,076 P=886,565 P=688,544 P=125,744 (P=228,924) P=1,926,317 Income and other taxes payable 1,366 35,794 37,122 9,081 462 (36) 83,789 Deferred tax liabilities – 91,352 49,902 112,481 923 131,260 385,918 Total liabilities P=444,678 P=138,222 P=973,589 P=810,106 P=127,129 (P=97,700) P=2,396,024

Other Segment Information Capital expenditures P=1,173 P=– P=63,725 P=153,652 P=3,652 P=– P=222,202 Depreciation and amortization 12,456 26,686 72,707 73,112 6,896 46,523 238,380 Reversal of impairment loss on investment in a subsidiary 346,282 – – – – (346,282) – Provision for (reversal of) unrecoverable input value-added

tax 3,891 – (52,177) – – – (48,286)

- 81 -

*SGVMG600202*

36. Events after the Reporting Period

On March 6, 2013, the Parent Company’s BOD declared a cash dividend amounting to P=103.2 million equivalent to P=0.40 a share to all common shareholders of record as of March 22, 2013, which is payable on April 17, 2013.

37. Note to Consolidated Statement of Cash Flows

In 2012, the Company has a noncash investing activity pertaining to acquisition of investment property amounting to P=25.2 million and noncash financing activity pertaining to issuance of shares of stock amounting to P=12.4 million.

ANNEX B

Supplementary Schedules to the Audited Consolidated Financial Statements

*SGVMG600202*

INDEPENDENT AUDITORS’ REPORT ON SUPPLEMENTARY SCHEDULES The Stockholders and the Board of Directors PHINMA Corporation 12th Floor, PHINMA Plaza 39 Plaza Drive, Rockwell Center Makati City We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of PHINMA Corporation and Subsidiaries as at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012, included in this Form 17-A, and have issued our report thereon dated March 6, 2013. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to the Consolidated Financial Statements and Supplementary Schedules are the responsibility of the Company’s management. These schedules are presented for purposes of complying with Securities Regulation Code Rule 68, As Amended (2011) 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 information required to be set forth therein in relation to the basic financial statements taken as a whole. SYCIP GORRES VELAYO & CO. Catherine E. Lopez Partner CPA Certificate No. 86447 SEC Accreditation No. 0468-AR-2 (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No. 102-085-895 BIR Accreditation No. 08-001998-65-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3669691, January 2, 2013, Makati City March 6, 2013

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

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

A member firm of Ernst & Young Global Limited

Annex 68-E

A. Financial Assets Attached

B. Amounts Receivable from Directors, Officers, Employees Related Parties and Principal Stockholders (Other than Related Parties) Not applicable

C. Amounts Receivable from Related parties which are eliminated during the consolidation of financial statements Attached

D. Intangible Assets - Other Assets Attached

E. Long-term Debt Attached

F. Indebtedness to Related Parties (Long-term Loans from Related Companies) Not applicable

G. Guarantees of Securities of Other Issuers Not applicable

H. Capital Stock Attached

Additional Components

i) Reconciliation of Retained Earnings Available for Dividend Declaration Attached

ii) List of Philippine Financial Reporting Standards Effective as at December 31, 2012 Attached

iii) Map of Relationships of the Companies within the Group Attached

DECEMBER 31, 2012

PHINMA CORPORATION AND SUBSIDIARIES

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES

PHINMA CORPORATIONSchedule A. FINANCIAL ASSETS December 31, 2012

Value based onAmount market quotation

Number of Shares Shown in the at end of Income or Principal Amount of Balance reporting received and

Name of Issuing Entity and Association of Each Issue Bonds and Notes Sheet period accrued

Investment in Fixed Treasury Notes (FXTNs) First Metro Investment Corporation P 80,835,811 P 86,619,500 P Php86,619,499.68 International Bank 3,390,575 3,516,028 3,516,028 Rizal Commercial Banking Corporation 54,086,011 62,900,863 62,900,863 China Banking Corporation 230,640,944 265,737,390 265,737,390 BDO Unibank, Inc. 4,000,000 4,065,600 4,065,600

372,953,341 422,839,381 422,839,381 43,092,000 Investment in Bonds in US $ Deutsche Bank (Indon 14) $ 853,816 38,583,839 38,583,839 ING Bank ( Indon 14) 495,489 22,671,617 22,671,617 Metropolitan Bank & Trust Co. (Firpac 17) 150,000 7,031,865 7,031,865

1,499,305 68,287,322 68,287,322 8,153,000

Investment in Unit Investment Trust Fund and Money in shares Market Fund (UITF & MMF) BDO Unibank, Inc. (Peso MMF) 74,168 106,232,758 106,232,758 - Bank of the Philippine Islands (Odyssey bond fund) 645,435 155,911,293 155,911,293 - Metropolitan Bank & Trust Co. (peak earner dollar bond fund) 6,151,605 10,401,817 10,401,817

272,545,868 272,545,868 14,207,000

Investment in Unit Investment Trust Fund and Money Market Fund (UITF & MMF) -in US $ Bank of the Philippine Island (Odyssey dollar bond fund) 29,547 30,141,169 30,141,169 -

29,547 30,141,169 30,141,169 4,719,000

Marketable Equity SecuritiesHolcim Phil. 3 41 41 Universal Robina Corp. 2,920 242,360 242,360 Aboitiz Equity Ventures 3,000 158,700 158,700 First Phil. Holdings Corp. 4,500 402,525 402,525 Globe Telecom Inc. 190 207,480 207,480 Filinvest Land Inc. 4,000 5,960 5,960 Metro Pacific Corp. 10,600 47,170 47,170 Banco de Oro Universal Bank 1,873 136,261 136,261 First Gen Corp 8,000 178,400 178,400 BPI 1,854 174,276 174,276 DMCI 2,000 107,900 107,900 MBTC 78 7,948 7,948 Aboitiz Power 17,000 626,450 626,450 VLL Public Offer 16,000 77,600 77,600 Atlas Consolidated Mining & Dev't Co 8,500 158,950 158,950 Security Bank Corporation 1,473 229,788 229,788 Robinson's Land 14,700 305,025 305,025 Swift Foods, Inc. 219 276 276 East West Bank 4,000 116,000 116,000 D&L Industries, Inc. 80,000 351,200 351,200 Trans-Asia Oil & Energy Development Corp. 2,643,800 3,066,808 3,066,808

6,601,117 6,601,117 1,638,159 Available for sale investmentsQouted:

First Philippine Holdings Corp. - Preferred 97,500 10,101,000 10,101,000 850,502 Unqouted:

AB Capital & Investment Corp. 220,758 101,789,832 101,789,832 - Asian Eye Institute, Inc. 50,000 1,837,075 1,837,075 385,957 Beacon Property Ventures, Inc. 45,000,000 46,328,440 46,328,440 - Manila Cordage Company 18,136 5,612,548 5,612,548 - Coral Way City Hotel Corp.- Preferred 6,625,000 66,250,000 66,250,000 - Club shares various 486,500 486,500 -

232,405,395 232,405,395 1,236,459

1,032,820,252 1,032,820,252 73,045,618

B. Amounts Receivable from Directors, Officers, Employees , Related Parties and Principal Stockholders (Other than Related Parties)

DeductionsBalance at BalanceBeginning Amount Amount at End

Name and Designation of Debtor of Period Additions Collected Written-Off Current Non Current of Period

P P P P P P P - - - - - -

- P - P - P - P - P - P - P -

Schedule

C. Accounts Receivable from Related parties which are eliminated during the consolidation of financial statements

DeductionsBalance at BalanceBeginning Amount Amount at End

Name and Designation of Debtor of Period Additions Collected Written-Off Current Non Current of Period

Pamantasan ng Araullo (Araullo University), Inc. P 9,937,381 P 5,903,012 P 3,878,045 P - P 11,962,348 P - P 11,962,348 Cagayan de Oro College Inc. 18,276,162 4,104,247 14,710,233 - 7,670,175 - 7,670,175 Fuld & Company, Inc. 20,837,878 40,200,715 506,197 - 60,532,396 - 60,532,396 Fuld & Company (Philippines), Inc. 2,888,000 11,005,997 7,058,986 - 6,835,011 - 6,835,011 One Animate Limited / Toon City 238,418,057 72,074,887 24,500 - 310,468,444 - 310,468,444 Union Galvasteel Corporation 180,645 2,546,148 2,356,837 - 369,956 - 369,956 University of Iloilo 22,928,272 3,078,367 17,034,013 - 8,972,626 - 8,972,626 Pangasinan Medical Center Inc. - 1,188,295 - - 1,188,295 1,188,295 University of Pangasinan 11,870,707 24,975,338 28,449,702 - 8,396,343 - 8,396,343

P 325,337,102 P 165,077,005 P 74,018,512 P - P 416,395,595 P - P 416,395,595

Schedule

D. Intangible Assets - Other Assets

DeductionsCharged to Charged to Other Changes-

Beginning Additions Costs Other Additions EndingDescription Balance At Cost and Expenses Accounts (Deductions) Balance

Cost: Goodwill P 1,257,186,321 P - P (212,300,250) P - P (1,008,547) P 1,043,877,524 Student lists 131,120,130 - - - - 131,120,130 Trademarks 47,155,868 - - - - 47,155,868 Customer contracts 22,079,939 - - - - 22,079,939

1,457,542,258 - (212,300,250) - (1,008,547) 1,244,233,461 Accumulated amortization : Student lists 127,516,130 3,604,000 - - - 131,120,130 Customer contracts 22,079,939 - - - - 22,079,939

149,596,069 3,604,000 - - - 153,200,069

P 1,307,946,189 P (3,604,000) P (212,300,250) P - P (1,008,547) P 1,091,033,392

Schedule

E. Long-term Debt

Amount shown underAmount Caption "Current Portion of Amount shown under Caption

Title of Issue and Type of Authorized by Long-Term Debt" in related "Long-Term Debt" in relatedObligation Indenture Balance Sheet Balance Sheet

University of Pangasinan -China Banking Corporation P 226,832,376 P 50,000,000 P 176,832,376

Pamantasan ng Araullo (Araullo University), Inc. - China Banking Corporation 29,400,724 12,251,074 17,149,650

Fuld & Company, Inc. -Bank of the West 3,079,960 2,402,924 677,036

P& S Holdings Corporation -United Pulp and Paper Company, Inc. 152,873,074 - 152,873,074

P 412,186,134 P 64,653,998 P 347,532,136

(a) Net of debt issue cost of P826,695

Schedule

H. Capital Stock

Number ofShares Reserved Number of Shares Held By

Number of for Options,Number of Shares Issued Warrants, Directors,

Shares and Conversions, and Officers andTitle of Issue Authorized Outstanding Other Rights Affiliates Employees Others

Preferred SharesClass AA 50,000,000 - - - - - Class BB 50,000,000 - - - - -

100,000,000 - - - - -

Common Shares 420,000,000 258,907,058 - 110,242,593 14,657,087 134,007,378

520,000,000 258,907,058 - 110,242,593 14,657,087 134,007,378

Schedule

PHINMA CORPORATIONRETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATIONDecember 31, 2012

Unappropriated Retained, Earnings, beginning 2,055,897,716 Adjustments:

Unrealized fair value gains on investments held for trading and derivative assets in 2011 (27,826,537)

Deferred tax asset (5,567,100)

Unappropriated Retained Earnings, as adjusted beginning 2,022,504,079

Net Loss based on the face of AFS (41,055,417) Less: Non-actual/unrealized income net of tax

Unrealized foreign exchange gain - net (except those attributable to cash and cash equivalents) (4,821,120)

Unrealized fair value adjustment on investments (39,602,045) Unrealized fair value adjustment on AFS investment previously held as associate (44,500,248) Unrealized gain on derivatives (528,235) Deferred tax asset in 2011 5,567,100 Deferred tax asset in 2012 (4,454,986) Unrealized fair value gains on investments held for trading

and derivative assets in 2011 27,826,537

Net income actually earned during the period (101,568,414)

Less: Dividend declarations during the period (103,094,923)

Unappropriated Retained Earnings, as adjusted, ending 1,817,840,742

PHINMA CORPORATION PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted

Not

Adopted

Not

Applicable Framework for the Preparation and Presentations of Financial Statements

Conceptual Framework Phase A: Objectives and qualitative characteristics

PFRSs Practice Statement Management Commentary Philippine Financial Reporting Standards

PFRS 1 (Revised)

First-time Adoption of Philippine Financial Reporting Standards

Adopted

Amendments to PFRS 1and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate Adopted Amendments to PFRS 1: Additional Exemptions for First-time Adopters

Not Applicable

Amendments to PFRS 1: Limited Exemptions from Comparative PFRS 7 Disclosures for First-time Adopters

Not Applicable

Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters

Not Applicable

Amendments to PFRS 1: Government Loans Not Applicable

PFRS 2

Share-based payment Adopted Amendments to PFRS 2: Vesting Conditions and Cancellations Adopted Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions Adopted

PFRS 3 (Revised) Business Combinations Adopted

PFRS 4

Insurance Contracts Not Applicable

Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts

Not Applicable

PFRS 5 Non-current Assets Held for Sale and Discontinued Operations Adopted

PFRS 6

Exploration for and Evaluation of Mineral Resources Adopted

PFRS 7

Financial Instruments: Disclosures Adopted Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Adopted Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition Adopted Amendments to PFRS 7: Improving Disclosures about Financial Instruments Adopted Amendments to PFRS 7: Disclosures – Transfers of Financial Assets Adopted Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities

Not early adopted

Amendments to PFRS 7: Mandatory Effective Not early

Date of PFRS 9 adopted PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted

Not

Adopted

Not

Applicable PFRS 8 Operating Segments Adopted

PFRS 9*

Financial Instruments Not early adopted

Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures

Not early adopted

PFRS 10* Consolidated Financial Statements Not early adopted

PFRS 11* Joint Arrangements Not early adopted

PFRS 12* Disclosure of Interests in Other Entities Not early adopted

PFRS 13* Fair Value Measurement Not early adopted

Philippine Accounting Standards

PAS 1 (Revised)

Presentation of Financial Statements Adopted Amendment to PAS 1: Capital Disclosures Adopted Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Adopted Amendments to PAS 1: Presentation of Items of Other Comprehensive

Not early adopted

PAS 2 Inventories Adopted PAS 7 Statement of Cash Flows Adopted

PAS 8 Accounting Policies , Changes in Accounting Estimates and Errors Adopted

PAS 10 Events after the Reporting Period Adopted PAS 11 Construction Contracts Adopted

PAS 12

Income Taxes Adopted Amendment to PAS 12 – Deferred Tax: Recovery of Underlying Assets Adopted

PAS 16 Property, Plant and Equipment Adopted PAS 17 Leases Adopted PAS 18 Revenue Adopted

PAS 19

Employee Benefits Adopted Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures Adopted

PAS 19 (Amended)* Employee Benefits

Not early adopted

PAS 20 Accounting for Government Grants and Disclosure of Government Assistance

Not Applicable

PAS 21

The Effects of Changes in Foreign Exchange Rates Adopted Amendment: Net Investment in a Foreign Operation

Not Applicable

PAS 23 (Revised) Borrowing Costs Adopted PAS 24 (Revised) Related Party Disclosures Adopted

PAS 26 Accounting and Reporting by Retirement Benefit Plans

Not Applicable

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted

Not

Adopted

Not

Applicable

PAS 27 Consolidated and Separate Financial Statements Adopted PAS 27 (Amended)* Separate Financial Statements

Not early adopted

PAS 28 Investment in Associates Adopted PAS 28 (Amended)* Investment in Associates and Joint Ventures

Not early adopted

PAS 29 Financial Reporting in Hyperinflationary Economies

Not Applicable

PAS 31 Interest in Joint Ventures Adopted

PAS 32

Financial Instruments : Disclosure and Presentation Adopted Amendments to PAS 32 and PAS 1 : Puttable Financial Instruments and Obligations Arising on Liquidation Adopted Amendment to PAS 32 : Classification of Rights Issues Adopted Amendment to PAS 32 : Offsetting of Financial Assets and Financial Liabilities

Not early adopted

PAS 33 Earnings per Share Adopted PAS 34 Interim Financial Reporting Adopted PAS 36 Impairment of Assets Adopted

PAS 37 Provisions, Contingent Liabilities and Contingent Assets Adopted

PAS 38 Intangible Assets Adopted

PAS 39

Financial Instruments: Recognition and Measurement Adopted Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities Adopted Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions

Not Applicable

Amendments to PAS 39: The Fair Value Option Not Applicable

Amendments to PAS 39 and PFRS 4 : Financial Guarantee Contracts

Not Applicable

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Adopted Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition Adopted Amendments to Philippine Interpretation IFRC – 9 and PAS 39: Embedded Derivatives Adopted

Amendment to PAS 39: Eligible Hedged Items Not Applicable

PAS 40 Investment Property Adopted

PAS 41 Agriculture Not Applicable

Philippine Interpretations

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

Not Applicable

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted

Not

Adopted

Not

Applicable

IFRIC 2 Members’ Share in Co-operative Entities and Similar Instruments

Not Applicable

IFRIC 4 Determining Whether an Arrangement Contains a Lease Adopted

IFRIC 5

Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

Not Applicable

IFRIC 6

Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

Not Applicable

IFRIC 7

Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationery Economies

Not Applicable

IFRIC 8 Scope of PFRS 2 Adopted

IFRIC 9

Reassessment of Embedded Derivatives Adopted Amendments to Philippine Interpretation IFRC – 9 and PAS 39: Embedded Derivatives Adopted

IFRIC 10 Interim Financial Reporting and Impairment Adopted

IFRIC 11 PFRS 2 - Group and Treasury Share Transactions Not Applicable

IFRIC 12 Service Concession Arrangements Not Applicable

IFRIC 13 Customer Loyalty Programmes Not Applicable

IFRIC 14

The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Adopted Amendments to Philippine Interpretations IFRC – 14, Prepayments of a Minimum Funding Requirement Adopted

IFRIC 16 Hedges of a Net Investment in a Foreign Operationj

Not Applicable

IFRIC 17 Distributions of Non-cash Assets to Owners Adopted IFRIC 18 Transfers of Assets from Customers Adopted

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

Not Applicable

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

Not early adopted

SIC - 7 Introduction of the Euro Not Applicable

SIC – 10 Government Assistance – No Specific Relation to Operating Activities

Not Applicable

SIC – 12

Consolidation – Special Purpose Entities Not Applicable

Amendment to SIC – 12: Scope of SIC 12 Not Applicable

SIC – 13 Jointly-Controlled Entities – Non-Monetary Contributions by Venturers Adopted

SIC – 15 Operating Leases – Incentives Adopted

SIC – 25 Income Taxes – Changes in the Tax Status of an Entity or its Shareholders

Not Applicable

SIC – 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease Adopted

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted

Not

Adopted

Not

Applicable

SIC – 29 Service Concession of Arrangements: Disclosures Not Applicable

SIC – 31 Revenue – Barter Transactions Involving Advertising Services

Not Applicable

SIC – 32 Intangible Assets – Web Site Costs Not Applicable

PHINMA CORP. 35.88% 25.01%

60.34%

31.56%

100%

100%

50%

100%

PHINMA INC.

100%

100%

51%

100%

88.87%

2.25%

29.74%

39.47%

35.4%

26.21%

12.08%

60%

85%

19.92%

18.38%

36.90%

20%

49.01%

8.30%

2.31% 100%

78.64%

74.21%

57.62%

80%

100%

100%

100% 98.08%

69.75%

69.79%

85%

TA OIL

PPHC

Asia Coal * PHINMA A & E

T-O Insurance

PHINMA F & A

MISPI

PVCC*

Unimer*

MDC

UGC

Luzon Bag Corp.*

UI

P & S Holding

TA Power

TA Petroleum Corp.

TA Gold

CIP II Power Corp.

TAREC

21.05%

UPang

Fuld & Company, Inc.

Fuld & Company (Phils.), Inc.

AU

COC

Asian Plaza

OAL Filagro Dev’t*

Filmag*

Calabar Aggregates Corp*

Toon City

Union Packing Corp. 50.91%

Coral Way

Nemo

First Batangas

Diniwid

20%

43.07%

57.14%

5.48%

3.16%

28.18%

Maibarara Geothermal, Inc.

25%

SLTEC 50%

* Ceased operation

Union Aggregates Corp.* 31.25%

1.38%

Map of relationships of the Companies within the Group As of December 31, 2012

Palawan 55

69.35%

30.65%

ACTA Power Corporation 50%

Financial Soundness Indicators The top five (5) KPI’s used to measure the financial performance of PHN and its subsidiaries as of December 31, 2012 compared to the same period last year are shown in the following table :

Financial KPI Definition 2012 2011 Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income (loss) attributable to

PHN equity holders Ave. total equity attributable to PHN

equity holders

Gross profit Net sales

(0.56%)

32.33%

1.24%

28.97% Efficiency

Cash Flow Margin

Cash flow from operating Activities

Net sales

15.32%

8.60%

Liquidity

Current Ratio

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

1.76 : 1.00 0.38 : 1.00

2.63 : 1.00 0.35 : 1.00

Profitability The decline in the return on equity reflects the net loss of P 36 million for CY 2012. However, gross profit margin increased from 28.97% in CY 2011 to 32.33% in CY 2012 mainly due to gross profit margin contribution of Fuld US which was acquired and consolidated beginning June 2011. Efficiency Net cash inflow from operations was P695 million in CY 2012 compared to P340 million in CY 2011 as shown in the consolidated statements of cash flows. The net cash inflow in CY 2012 is largely due to an increase in trust receipts payable of UGC from P104 million in CY 2011 to P555 million in CY 2012 Liquidity Current ratio as of December 31, 2012 decreased from 2.63:1.00 last year to 1.76:100 this year due to an increase in current liabilities of UGC. Debt-equity ratio of PHN and its subsidiaries as of end December 31, 2012 increased from 0.35:1.00 to 0.38:1.00 due to the increase in current liabilities. Other Financial Ratios are as follows :

Financial Ratio

Definition

2012

2011

Asset to Equity Total Assets Total Equity

1.38

1.35

Interest rate coverage ratio

EBITDA Interest expense

4.81

5.06

Asset to Equity ratio of PHN and subsidiaries as of end December 31, 2012 increased slightly from 1.35 to 1.38.

Interest rate coverage ratio decreased from 3.97 in CY 2011 to 2.69 in CY 2012 due to lower EBITDA.

ANNEX C

SEC Form 17 – C Current Reports

l illlll lilil lllll lffil lllll llill illil tilil ilill lill.llllilililililtil ltililillil1fi1efi20m055

SECURITIES Ai.ID EXCHAT.IGE COM M ISSIONSEC Building, EDSA, Greenttlls,Mandduyorg City, Mefo Marita,Philippines

Tel:(632) 72S0SB1 b 39 Fax(6ts2) 72$5290 Email: mis@sec.gov.ph

Barcode Page

The following document has been received:

Receiving Officer/Encoder : Dhanil CurafresReceiving Branch : SEC Head OfficeReceipt Date and Time : January 16,2012 09:06:59 AMReceived From : Head Office

Com pany Representative

Doc Source

Company lnformation

SEC Regi$ration No.

Company Name

lndu$ry ClasificationCompany Type

Document lnformation

000001 2397

PHINMA CORPOMTION

Stock Corporation

Document lDDocument Type

Document Code

Period Covered

No. of Days Late

Department

Remarks

10118201 20000s5LETTER/MISC

LTRJanuary 11,20120

CED/CFD/CRMD/MRD/NTD

PHINMA

DIR. JUSTINA F. CALLANGANCorporate Finance DepartmentSECURITIES AND EXCHANGE COMMISSIONSEC Building, EDSA, GreenhillsMandaluyong City, Metro Manila

MS. JANET A. ENCARNACIONHEAD, Disclosure DepartmentTHE PHILIPPINE STOCK EXCHANGE3F Philippine Stock Exchange PlazaAyala Triangle, Ayala AvenueMakati City

In compliance with SEC Memorandum Circular No. 3 Series of 2007, Section 15,attached is SEC Form MCG 2002 for PHINMA CORPORATION for the Calendar Year2011.

~ ~.U\CECILLE B. ARENILLOVP-Compliance Officer

[ill] [iG]Month Day

Calendar Year

S E C F 0 R M M C G2 0 a 2 F 0 R 2 a 1 1

IT] IT]Month Day

Annual Meeting

=Secondary License Type, If Applicable

[iliIQ]Dept. Requiring this Doc.

IAmended Articles Number/Section

1 1

Total No. of Stockholders

Total Amount of Borrowings=======1 1=======

SECURITIES AND EXCHANGE COMMISSIONSEC Form MCG - 2002

I, Cecille B. Arenillo, of legal age and with office address at 12/F Phinma Plaza, 39 Plaza Drive,Rockwell Center, Makati City, after being sworn to in accordance with law, depose and statethat:

1. I am the incumbent Vice President - Compliance Officer of Phinma Corporation(formerly Bacnotan Consolidated Industries, Inc.) (the "Company"), a corporation dulyorganized and existing in accordance with the laws of the Republic of the Philippines, with officeaddress at 12/F Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City;

2. In 2011, the Company substantially adopted the provisions of the Revised Manual onCorporate Governance, as prescribed by SEC Memorandum Circular No.2, Series of 2002 andSEC Memorandum Circular No.6, Series of 2009;

3. I am issuing this Certificate in compliance with the requirement of the Securities andExchange Commission on the annual reporting on the Company's compliance with the RevisedManual on Good Corporate Governance.

IN WITNESS WHEREOF, I have signed this certificate this __ day of January, 2012at Makati City, Philippines.

~ ~.tJ\CECILLE B ARENILLOVice President-Compliance Officer

Countersigned by:~~cr-RAMON R. DEL ROSARIO, JR.President

SUBSCRIBED AND SWORN TO before me this -i+ day of January, 2012 at Makati City,Philippines, affiants exhibiting tome Community Tax Certificate Nos. as follows:

Name Community Tax Cert. No. DatelPlace IssuedRamon R. del Rosario, Ir. 21630757 Feb 25, 2011IMakati CityCecille B. Arenillo 21633731 Mar. 3, 2011IMakati City

Doc. No. !7Cf;Page No. '>7Book No. g!Series 2012.

PHINMA

22March2012

Philippine Stock Exchange Inc.Phil. Stock Exchange CentreExchange Road, Pasig City

Attention: Ms. Ianet A. EncarnacionHead, Disclosure D ep artment

Gentlemen :

Please be informed that at the Regular Meeting of the Board of Directors of PHINMA

Corporation (the "Corporation") held today, the following actions were taken:

'1. Declaration of a cash dividend of P0.40 per share payable on 26 April 2012to all shareholders

of record as of 3 April2012;

2. Approval of the Corporation's Audited Financial Statements for the year 20L1 showing

co*ofdated net income of P57.5 million (please see attached discussion of the Corporatior/s

results of operations for CY 2011);

3. Scheduling of the Corporation s 2072 Annual Shareholders Meeting on 14 May 2012 at3:00

p.m. at the Palm Grove, Rockwell Club, 23 Amorsolo Drive, Rockwell Center, Makati City,

with 16 Aprrl2012 as the record date for purPoses of the meeting;

4. Approval of the Agenda for the forthcoming Annual Shareholders Meeting as follows:

Call to Order

Proof of Notice and Determination of Quorum

Minutes of the Previous Meeting

Annual Report of Management and Ratification of all acts of the Board of

Directors and Management since the last Annual shareholders Meeting

e. Election of Directors

f. Appointment of External Auditor

g. Other Matters

h. Adjournment

Please be further informed that the Board elected Mr. Rolando D. Soliven Assistant Vicepresident-Internal Audit effective 31. March 2012 vice Mr. Onisimo L. Prado, whose retirement will take

effect the same day.

Very truly yours/

Corporate Seuetary

12th Floor PHINMA Plaza, 39 Plaza Drive, Rockwell Center, Makati City, '1200 Philippines

Tel. No.; (632) 870-0100 ' Fax No.: (632) 870-0456

a.

b.

c,

d.

I llllil il|il llfl lllll illll il|il illll'lllll lllll lill ililt ililt ililt ililt lilfl ilil illttoutzotzwug

SECURITIES AI{D EXCHANIGE COM M ISSIONSEC Bui ldi ng, EDSA Greenht I ts,M ardat uyong Ci ty, M eto M ani I a, phi

I i ppi nesTel(632) 72G0931 b 39 Fax(682) T2*5293 Emait: mis@sec.sov.ph

Barcode Page

The following document has been received:

Receiving Officer/Encoder : Edmundo GuiaReceiving Branch : SEC Head OfficeReceipt Date and Time : March 27 , ZO12 05:33:14 pM

Received From : Head Office

Com pany Representative

Doc Source

Company lnformation

SEC Registration No.

Company Name

lndu$ry Classification

Company Type

Document lnformation

000001 2397

PHINMA CORPORATION

Stock Corporation

Document lDDocument TypeDocument Code

Period Covered

No. of Days Late

Department

Remarks

103272012001 649LETTER/MISC

LTR

March 22,20120

CED/CFD/CRMD/MRD/NTD

tru,turrn1 *qCOVER SHEET

1 2 3 I 7S.E.C. Registration Number

PlHlllNlrulal lclo R P o R A T I o N

(Company's Full Name)

LIEIVIEILI ltlzl _lp H N M A P L A Z A 3 9 P L A Z AplRItlvlEl,l lnlolclx W EIL L CIE N T EIR M A KIAITII

(Business Address: No. Street Cityffown/province)

CIE c LIL E A R E N L L o B 7 0 0 3 I B

tT;l lllltMonth Day

Calendar Year

rcl_'-rrtDept. Requiring

Total No. of Stockholders

Contact Person

this Doc.

FORM ryPE

Company Telephone Number

I-Tt t-t-t. Month Day

AnnualMeeting

Secondary License Type, lf Applicable

L E T T E R

Amended Articles Number/Seetion

Total Amount of Borrowinos

Domestic Foreign

To be accomplished by SEC personnel concerned

LCU

Cashier

File Number

Document l. D.

STAMPS

Remarks = Pls. Use black ink for scanning purposes

tl

PHINMALile can be betler

March 22,2012

SECI]RITMS AND EXCHANGE COMN/IISSIONSEC BuildingEDSA5 Mandaluyong City

Attention: DIR. JUSTINA F. CALLANGAIICorporation and Finance Department

Gentlemen:

This is to formally inform you that Phinma Corporation has submitted the 2011

Corporate Governance Compliance Report to the Philippine Stock Exchange today as

mandated by the Exchange. !

There are no clear instructions to furnish the Commission with copies of the said

compliance report hence this simple notification.

Thank you. '

Very truly yours,

i

I

U"I.' h UACECILLE B. ARENILLOCompliance Officer

Pl-llNMACorl:oratir:n12'hFloorPlrinnraPlaza,3gPlazaDrive,Rockwellcenter'Makaticiq'121olTel:870-0100lFax:870'0a56

l llllll lllll lilll lllll lllll llllllilillllillililililill llil ilill lilll ilil ilililt103262012001099

SECURITIES ANID EXCHANIGE COM M ISSIONSEC Buildirg, EDSA, Greenhills,Mardalr.ryorg City, Mefo Manila,philippines

Tel(632) 72G0931 to 39 Fax(632) 72$5298 Emait: mis@sec.pv.ph

Baicode Page

The following document has been received:

Receiving Officer/Encoder : Femando T. FernandezReceiving Branch : SEC Head OfficeReceipt Date and Time : March 26,2012 03:24:58 pM

Received From : Head Office

Com pany Representative

Doc Source

Company lnformation

SEC Regi$ration No.

Company Name

lndu$ry Classification

Company Type

Document lnformation

000001 2397

PHINMA CORPOMTION

Stock Corporation

Document lD

Document Type

Document Code

Period Covered

No. of Days Late

Department

Remarks

103262012001 099174 (FORM 1 1-C:CURRENT DISCL/RPT)17-C

March 23,20120

CFD

PHINMAlife can be 6etae,

22March2072

Philippine Stock Exchange, Inc.Phil. Stock Exchange CentreExchange Road, Pasig City

Attention: Ms. Ianet A. EncarnacionHead, D isclosure D ep artment

Gentlemen

Please be informed that at the Regular Meeting of the Board of Directors of PHINMACorporation (the "Corporation") held today, the following actions were taken:

1. Declaration of a cash dividend of P0.40 per share payable on 26 April 2012 to all shareholdersof record as of L1 Aptr72072;

2. Approval of the Corporation's Audited Financial Statements for the year 201'1. showingconsolidated net income of P57.5 million (please see attached discussion of the Corporatior/sresults of operations for CY 2011);

3. Scheduling of the Corporation's 2012 Annual Shareholders Meeting on 14 May 2012 at 3:00

p.m. at the Palm Grove, Rockwell Club, 23 Amorsolo Drive, Rockwell Center, Makati City,with 16 April2012 as the record date for purposes of the meeting;

4. Approval of the Agenda for the forthcoming Annual Shareholders Meeting as follows:

a. Call to Order

b. Proof of Notice and Determination of Quorum

c. Minutes of the Previous Meeting

d. Annual Report of Management and Ratification of all acts of the Board of

Directors and Management since the last Annual Shareholders Meeting

Election of Directors

Appointment of External Auditor

Other Matters

Adjournment

Please be further informed that the Board elected Mr. Rolando D. Soliven Assistant Vice

President-Internal Audit effective 31 March 2012 vice Mr. Onisimo L. Prado, whose retirement will take

effect the same day.

Very truly yours,

Corporate Secretary

12th Floor PHINMA Plaza, 39 Plaza Drive, Rockwell Center, Makati City, 1200 PhilippinesTel. No.: (632) 870-0100' Fax No.: (632) 870-0456

e,

f.

g.

h.

PHINMA CORPORATION

The year 201 1 was a yeat of challenges in the face of a slowdown in the world economy fromcontinued uncertainty in the US, Europe, and the Middle East. Closer to home, a series oftyphoons and delays in implementation of our government's infrastructure programs alsoimpacted the construction industry. Amidst this difficult business environment, phinma

Corporation's consolidated revenue for 2011 amounted to P3.g billion, only a modest 3%

increase over the P3.8 billion posted in 2010, mostly due to a softened demand for our steelproducts. Consolidated net income which was P640.0 million in 2010 inclusive of profits ofP386.1 million from a onetime property sale of one of our subsidiaries, decreased to p57.S

million in2011.

Our net income was also affected by continuing challenges faced by our animation company.One Animate Limited (One Animate) posted a net loss of Pg7.1million, as the slowdown in theglobal economy dampened demand from international clients and the company experiencedbirth pains from its expansion into more complex Computer Generated lmagery (CGl) projects.

2011 Highlights

Union Galvasteel Corporation (UGC), our subsidiary engaged in steel roofing, posted a

decrease in net income, from incom e of P202 million before a one-off reversal of p 52.3 millionin 2010, to net income of P107.9 million in2011. This decrease is attributed to a slowdown in

the construction industry from a series of typhoons as well as delays in government

infrastructure spending. ln spite of these, the company maintained its leadership in theprepainted roofing industry, and is poised for a recovery as the government accelerates

implementation of its Public Private Partnership (PPP) programs and as the nation rebuilds in

the face of the natural calamities ol 2011.

During the year, income of the four schools under the Phinma Education Network (pEN)amounted to P131.3 million, an increase of 5o/o compared to P125.4 million in 2010. Totalenrollment increased to 25,964 students, a 2o/o increase over the previous year. ln 2011, theschools improved facilities and continued to perform well in terms of graduate examinationpassing rates.

ln 2011, One Animate limited posted a net loss of Pg7.1 million due to delayed projects fromclients and production and cost challenges as the company took on more complex ComputerGenerated lmagery (CGl) work. One Animate has since instituted measures to better manageclient relationships and improve CGI capabilities to control costs and margins. Despite thesemeasures, your Company has nonetheless taken a conservative stance and has elected tobook in 2011 a non-cash provision for impairment of goodwill in the amount of p166.0 million.

During the year, equity in net earnings of affiliates increased from p5g.4 million in 2010 toP136.1 million in 2Q11 due to the strong performance of our energy business. Net income ofTrans Asia Oil and Energy Development corporation (TA oil) increased from p14.7 million in2010 to P408.2 million in 2011 in part due to TA Oil's earlier efforts at reducing its vulnerabilityto volatilities in the wholesale Electricity supply Market (WESM). During 2o11,TA Oil enteredinto a joint venture with an Ayala company on the construction of a new 135 MW clean coalpower plant in Calaca, Batangas.

Phinma Property Holdings Corporation (Phinma Properties), faced with industry-widechallenges such as more conservative loan value appraisals and longer loan approval cyclesfrom the Home Development Mutual Fund (HDMF), posted a decrease in income fromoperations from P134 million in 2010 to P70.9 million in 2011. Despite this, phinma properties

launched its ASiA Enclaves project in Alabang and entered into a development agreement withthe Quezon City local government for a 1,000-unit urban relocation program. Equity in netearnings of Phinma Properties decreased trom P47.5 million in 2010 to p25.0 million in 20,11.

ABCIC and its wholly-owned subsidiary, AB capital securities, lnc. (ABCSI), our affiliates in thefinanciat services industry, posted robust income in 2011. The total value of trades by ABCSIgrew by 12.2o/o to P 17.5 billion in 2011 from P 15.6 billion in 2010, resulting in net commissionincome of P47.2 million in2011 comparedtoP4l.T million in2010, ora 13.2o/oincrease.ABCIC managed to post strong bottomline growth, with net income growing by 30% to p2g.3million in2011, from P21.T million in 2010.

ln June 2011, the Company, in search for opportunities in the high value-added services sector,increased its Business Process outsourcing portfolio through the acquisition of Fuld &company, a cambridge, Massachusetts-based global consulting firm and a leader in the field ofcompetitive intelligence. The Company also acquired in 2011 Business Backoffice, lnc. (nowFuld Philippines), a knowledge process outsourcing (KPO) firm. The acquisition of thesecompanies will be accretive, with synergies expected as Fuld and Co. continues to provide

..=r ffii'r

competitlve business research services, with additional support and a wider geographic reach

through Fuld Phils., lnc.

2012 Outlook

1n2012, although we expect concerns in the US, Europe and the Middle East to continue to

dampen the world economy, we look forward to a more optimistic dom6stic environment. ThePhilippine stock market has again reached new highs in early 2}l2,evidencing renewed

investor trust in the country. lnterest rates are expected to remain soft in the year, encouraging

local investment and consumer confidence. The Philippine Government is expected to

accelerate the delayed implementation of its Public Private Partnership infrastructure program

as well as its P72 Billion stimulus package, to spur the domestic economy toward a target GDpgrowth of 5o/o. This year is also a year of recovery from natural calamity, and we look forward toparticipating in rebuilding the housing needs of the nation.

14 May 2012 Philippine Stock Exchange, Inc. PSE Center Exchange Road, Ortigas Complex Pasig City

Attention : Ms. Janet A. Encarnacion Head, Disclosure Department Gentlemen:

Please be informed that at the just-concluded Annual Meeting of the Shareholders of PHINMA Corporation held today, the following actions were taken:

(1) The following were elected Directors for the ensuing year:

Oscar J. Hilado Magdaleno B. Albarracin, Jr. Ramon R. del Rosario, Jr. Jose L. Cuisia, Jr. Victor J. del Rosario Roberto M. Laviña Omar T. Cruz Filomeno G. Francisco Roberto F. de Ocampo (Independent) Felipe B. Alfonso (Independent) Guillermo D. Luchangco (Independent)

(2) The auditing firm of SyCip, Gorres, Velayo and Company was reappointed external

auditors for the year 2012;

At the Organizational Meeting of the Board of Directors following the Annual Meeting of the Shareholders, with a quorum present, the following officers were elected for the ensuing year:

Oscar J. Hilado - Chairman of the Board Ramon R. del Rosario, Jr. - Vice Chairman and President & CEO Magdaleno B. Albarracin, Jr. - Senior Executive Vice President Victor J. del Rosario - Executive Vice President/CFO Roberto M. Laviña - Senior Vice President/Treasurer Juan J. Diaz - Corporate Secretary Regina B. Alvarez - Senior Vice President Pythagoras L. Brion, Jr. - Senior Vice President

12th Floor PHINMA Plaza, 39 Plaza Drive, Rockwell Center, Makati City, 1200 Philippines Tel. No.: (632) 870-0100 Fax No.: (632) 870-0456

At the same Organizational Meeting of the Board of Directors, the various committees ofthe Board of Directors were constituted as follows:

Cecille B. ArenilloRizalina P. AndradaRolando D. SolivenGiles R. Katigbak

EXECUTIVE COMMITTEEOscar J. HiladoMagdaleno B. Albarracin, ]r.Ramon R. del Rosario,Ir.]ose L. Cuisia, ]r.Guillermo D. Ludrangco

AUDIT COMMITTEEFelipe B. AlfonsoVictor ]. del RosarioMagdaleno B. Albarracin, fr.Roberto F. de OcampoFilomeno G. Francisco

NOMINATION COMMITTEEOscar ]. HiladoRamon R. del RosarioGuillermo D. Luchangco

COMPENSATION COMMITTEE]ose L. Cuisia,Ir.Ramon.R. del Rosario, ]r.Oscar |. HiladoFelipe B. Alfonso

RETIREMENT COMMITTEEOscar]. HiladoMagdaleno B. Albarracin, Jr.Victor ]. del RosarioRoberto M. Lavifla

- Vice President-Treasury & Compliance Officer- Vice President-Finance- Assistant Vice President-Intemal Audit- Investor Relations Officer

- Chairman- Member- Member- Member- Member

- Chairman- Member- Member- Member- Member

- Chairman- Member- Member

- Chairman- Member- Member- Member

- Chairman- Member- Member- Member

Very truly yours,

€ ( F/AN l.DrAZCorporate Secretary

I|llilillltIililililt

Barcode Page

The following document has been received:

Receiving Officer/Encoder : Fernando T. Fernandez

Receiving Branch : SEC Head OfficeReceipt Date and Time : July 27, 2012 05:14:28 PM

Received From : Head Office

Company Representative

ilil ililI illll illl illil ililt llill lillt tffit ililI ililt llil illl107272012001930

SECURITIES AND EXCHANGE COMMISSIONSECBuilding, EDSA,Greenhitts,MandatuyongCity, MetroManita,philippines

Tel:(632)726-0931 to39 Fax(632)725-S293Emait: mis@sec.gov.ph

Doc Source

Company lnformation

SEC Registration No.

Company Name

lndustry Classification

Company Type

Document lnformation

0000012397

PHINMA CORPORATION

Stock Corporation

Document lD

Document Type

Document Code

Period Covered

No. of Days Late

Department

Remarks

107272012001930

17-C (FORM 11-C:CURRENT DISCL/RPT)

17-C

July 27, 2012

0

CFD

//_l: \ .;= _PHINMA

Life can be better

Jttly 27, 2012

PHILIPPINE STOCK EXCHANGE, INC.3/f Philippine Stock Exchange, Inc.Ayala Triangle, Ayala AvenueMakati City

Attention Ms. Janet EncarnacionHead. Disclosure Department

Gentlemen:

Please be informed that at the regular meeting of the Board of Directors ofPhinma Corporation held today,the following matters were discussed and approved :

l. Consolidated net income of the Company for the period January I to June 30,2012 amounted to P91.9 million of which P86.3 million is income atrributable toequity holders of the company.

2. Exercise of the Company's pre-emptive rights in the forthcoming stock rightsoffering of Trans-Asia Oil and Energy Development Corporation ("TraniAsia";and take-up together with Philippine Investment-Management (PHINMA), Inc.of the Trans-Asia shares that are not subscribed and sold in the stock rightsoffering.

3. The election of Mr. Roberto M. Lavifla as Senior Executive Vice President andChief Operating Officer. ,

4. The election of Mr. Pythagoras L. Brion, Jr. as Senior Vice President andTreasurer.

Very truly yours,

AN J. DIAZ

PHINMA Corporation 12'h Floor Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City 1210 | Tel: 870-0100 | Fax: 870-0456

ffilI lllil lllll lllll lllll lllll llil illililil illil ilil tilil illlilillllil ilil ilil1111320't2002105

SECURITIES AND EXCHANGE COMMISSIONSECBuilding, EDSA, Greenhilts,MandatuyongCity, MetroManila,phitippines

Tel:(632) 726-093 1 to 39 Fax(632)725-SZ9g Ernait: mis@sec.gov.ph

Barcode Page

The following document has been received:

Receiving Officer/Encoder : Julius N. SalustianoReceiving Branch : SEC Head OfficeReceipt Date and Time : November 13, ZO12 05:34:56 pM

Received From : Head Office

Company Representative

Doc Source

Company lnformation

SEC Registration No.

Company Name

lndustry Classification

Company Type

Document lnformation

000001 2397

PHINMA CORPOMTION

Stock Corporation

Document lD

Document Type

Document Code

Period Covered

No. of Days Late

Department

Remarks

1111320120021 05

LETTEFYMISC

LTR

November 13,20120'CED/CFD/CRMDiMRD/NTD

ANNEX D

SEC Form 17 – Q Quarterly Reports

1 2 3 9 7 S.E.C. Registration Number

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

(Company's Full Name)

L E V E L 1 2 - P H I N M A P L A Z A 3 9 P L A Z A

D R I V E , R O C K W E L L C E N T E R M A K A T I

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

L I N A A N D R A D A 8 7 0 0 1 0 0 Contact Person Company Telephone Number

1 2 3 1 S E C - 1 7 Q 0 5 1 5 Month Day FORM TYPE Month Day

Calendar Year

Secondary License Type, If Applicable

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document I. D. Cashier

STAMPS

Remarks = Pls. Use black ink for scanning purposes

COVER SHEET

6.

7.

SECURITIES AND EXCHANGE COMMISSIONsEC FORM 17 - Q

QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITMSREGTTLATTON CODE (SRC) AND SRC RULE t7 (2)(b) THERETTNDER

1. For the quarterly period ended March 31, 2012

2. Commission identification no. 12397 3. BIR Tax Identification No.

4. PHINMA CornorationExact name ofregistrant as specified in its charter

5. Manlla, PhilippinesProvince, country or other jurisdiction of incorporation or organization

Industry Classification Code :

12/F, Phinma Plaza. 39 Plaza Drive, Rockwell Centen Makati Citv l2l0Address of registrant's principal office

8. 632) 870-01-00Registrant's telephone number, including area code

9. Former name, former address, and former fiscal year, if changed since last report : S\10. Common Shares - 257 ,737,307 shares issued and outstanding

11. Are any or all ofthe securities listed on the philippine Stock Exchange ? .

Yes(x) No()

If yes, state the name of such stock exchange and the classes of securities listed therein:

Philippine Stock Exchanee. Inc. Common Shares

L?.. Indicate by check mark whether the registrant :

(a) Has filed all reports required to be filed by Section 17 ofthe Code and SRC Rule 17 thereunder orSection 1l of the RSA and RSA Rule ll (a)-l thereunder, and Sections 26 and l4l of theCorporation Code of the Philippines during the preceding 12 months (or for such shorter period theregistrant was required to file such reports)

Yes [x] No[ ]

(b) Has been subject to such filing requirements for the past 90 days.

Yes Ix ] No[]

$Em

TABLE OF CONTENTS PART I - FINANCIAL INFORMATION

Item 1 Financial Statement Unaudited Consolidated Statements of Financial Position March 31, 2012 and December 31, 2011 3 - 4

Unaudited Consolidated Statements of Income Quarter ended March 31, 2012 and 2011 5 Unaudited Consolidated Statements of Comprehensive Income Quarter ended March 31, 2012 and 2011 6 Statement of Changes in Equity March 31, 2012 and 2011 and December 31, 2011 7 Consolidated Statement of Cash Flows Quarter ended March 31, 2012 and 2011 8 Notes to Consolidated Financial Statements 9 - 65 Item 2 Management’s Discussion and Analysis of Financial Condition And Results of Operations 66 SIGNATURES 75

2

3

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Unaudited Audited March 31, 2012 December 31, 2011 (In Thousands)

ASSETS Current Assets Cash and cash equivalents (Notes 8, 28 and 29) P=856,495 P=916,157 Investments held for trading (Notes 9, 28 and 29) 831,714 771,517 Trade and other receivables - net (Notes 10, 26, 28 and 29 ) 725,701 857,649 Inventories - at lower of cost or net realizable value (Note 11) 1,011,343 977,919 Input value-added taxes 39,312 40,697 Derivative asset and other current assets (Notes 32 and 33) 64,794 85,371 Total Current Assets 3,529,359 3,649,310

Noncurrent Assets Investments in associates - at equity (Note 12) 1,778,873 1,835,145 Available-for-sale (AFS) investments - (Notes 13, 28 and 29) 141,048 140,990 Property, plant and equipment – net (Notes 14 and 20) 2,249,822 2,260,744 Investment properties (Notes 15 and 20) 431,775 410,890 Intangibles (Notes 7 and 16) 1,300,942 1,295,243 Deferred tax assets – net (Note 27) 19,272 49,245 Other noncurrent assets (Note 17) 45,285 26,640 Total Noncurrent Assets 5,967,018 6,018,897

P=9,496,377 P=9,668,207

LIABILITIES AND EQUITY Current Liabilities Notes payable (Notes 18, 28 and 29) P=387,099 P=455,193 Trade and other payables (Notes 18, 28 and 29) 500,190 389,792 Unearned revenues 2,351 204,567 Trust receipts payable (Notes 11, 19, 28 and 29) 242,994 103,735 Income and other taxes payable 42,752 44,889 Due to related parties (Notes 26, 28 and 29) 15,470 24,496 Derivative liability 822 2,281 Current portion of long-term loan payable (Notes 7, 28 and 29) 21,632 22,095 Current portion of long-term debt – net of debt issuance cost (Notes 20, 26, 28 and 29) 140,601 141,063 Total Current Liabilities 1,353,911 1,388,111

4

Unaudited Audited March 31, 2012 Dec. 31, 2011 (In Thousands)

Noncurrent Liabilities Long-term debt - net (Notes 20, 26, 28 and 29) P=556,366 P=599,659 Long-term loan payable (Notes 7, 28 and 29) 77,256 78,912 Deferred rent revenue - net of current portion (Note 26) 47,228 Deferred tax liabilities – net (Note 27) 297,078 310,995 Pension and other post-employment benefits 64,923 58,249 Other noncurrent liabilities (Note 26) 53,737 7,477 Total Noncurrent Liabilities 1,049,360 1,102,520 Total Liabilities 2,403,271 2,490,631 Equity attributable to equity holders of the parent Capital stock (Note 21) 2,577,249 2,577,249 Additional paid-in capital 255,785 255,785 Other components of equity (Note 21) 30,509 33,914 Retained earnings (Note 21) 3,576,937 3,649,960 Equity attributable to equity holders of the parent 6,440,480 6,516,908 Equity Attributable to Non-controlling Interest (Note 7) 652,625 660,668 Total Equity 7,093,105 7,177,576

P=9,496,377 P=9,668,207

5

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME January – March 31, 2012 2011

(In Thousands) REVENUE (Note 1) Sale of goods P=705,590 P=700,870 Tuition and school fees 230,280 251,723 Consultancy services 97,328 Animation services 12,307 35,740 Investment income (Notes 8 and 22) 22,268 3,538 Rental income 4,251 14,969 1,072,024 1,006,840 COSTS AND EXPENSES Cost of sales, educational and animation services (Notes 23) (790,585) (755,236) Operating expenses

(Notes 24) (235,784) (178,945) OTHER INCOME (CHARGES) Equity in net earnings of associates (Note 12) 4,210 23,857 Interest expense and other financial charges (Note 25) (19,336) (19,592) Net gains (losses) on derivatives (Note 29) (1,241) 2,378 Foreign exchange gains (losses) - net (Note 29) (6,080) (5,738) Others - net 21,913 18,417

INCOME BEFORE INCOME TAX 45,121 91,981 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note

27) 10,977 16,369

NET INCOME P=34,144 P=75,612

Attributable To Equity holders of the parent P=30,072 P=64,263 Non-controlling interest 4,072 11,349 Net income P=34,144 P=75,612

Basic/Diluted Earnings Per Common Share - Attributable to Equity Holders of the Parent (Note 30) P=0.12 P=0.25

6

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME January – March 2012 2011 (In Thousands)

NET INCOME P=34,144 P=75,612

OTHER COMPREHENSIVE INCOME (LOSS) Share in unrealized gain (loss) on change in fair value of AFS

investments of associates (Note 12) (314) 4,256 Unrealized gain (loss) on change in fair value of AFS

investments (Note 13) 59 (508) Cumulative translation adjustments (3,150) 261 (3,405) 4,009

TOTAL COMPREHENSIVE INCOME P=30,739 P=79,621

Attributable To Equity holders of the parent P=26,667 P=68,272 Non-controlling interest 4,072 11,349 Total Comprehensive Income P=30,739 P=79,621

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Equity Attributable to Equity Holders of the Parent Company

Capital Additional

Share in Equity Component of

Convertible

Share in Unrealized

Gain (Loss) on Change in Fair

Value of AFS Investments of

Associates

Unrealized Gain (Loss) on

Change in Fair Value

of AFS Investments

Cumulative Translation Other

Non- Retained Earnings

Stock

(Note 21) Paid-in Capital

Notes (Note 21)

(Notes 12 and 21)

(Notes 13 and 21)

Adjustments (Note 21)

Reserves (Note 21)

Appropriated (Note 21) Unappropriated Subtotal

controlling Interest

Total Equity

(In Thousands)

Balance, January 1, 2012 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576 Total comprehensive income – – – (314) 59 (3,150) - - 30,072 26,667 4,074 30,741 Cash dividends (Note 21) – – – - - - - - (103,095) (103,095) - (103,095) Dividends received – – – - - - - - - - (12,117) (12,117) Acquisition of subsidiaries – – – – – – – – – – - - Balance, March 31, 2012 P=2,577,249 P=255,785 P=– P=18,737 P=1,044 P=1,785 P=8,943 P=1,000,000 P=2,576,937 P=6,440,480 P=652,625 P=7,093,105

Balance, January 1, 2011 P=2,577,249 P=255,785 P=– P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – (175) (367) 790 – – 81,018 81,266 (23,509) 57,757 Cash dividends (Note 21) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (98,914) (98,914) Acquisition of subsidiaries – – – – – – – – – – 11,902 11,902 Subscriptions – – – – – – – – – – 9,236 9,236 Balance, December 31, 2011 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576

Balance, January 1, 2011 P=2,577,249 P=255,785 P=- P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – 4,256 (508) 261 – – 64,263 68,271 11,780 80,051 Cash dividends (Note 21) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (72,066) (72,066) Subscriptions – – – – – – – – – – - - Balance, March 31, 2011 P=2,577,249 P=255,785 P=– P=23,482 P=844 P=4,406 P=8,943 P=1,000,000 P=2,633,204 P=6,503,913 P=701,667 P=7,205,580

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PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS January – March 31, 2012 2011 (In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax from continuing operations P=45,121 P=91,981 Adjustments for: Depreciation and amortization 49,777 57,085 Equity in net earnings of associates (Note 12) (4,210) (23,857) Loss (gain) on derivatives 1,241 (2,378) Unrealized foreign exchange loss (gain) - net 6,080 5,738 Dividend income (19,570) (633) Income tax paid 72,661 - Changes in working capital and others (247,293) 75,167 Net cash provided by operating activities (96,193) 203,103

CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in: Available for sale investment - 268 Property and equipment (33,714) (73,098) Other noncurrent assets 11,327 17,772 Investments at equity 8,090 - Investment properties (1,537) - Additional investment in Fuld US (9,303) - Proceeds received from settlement of derivative asset - 5,788 Net settlement of derivative liability (2,700) (2,554) Dividends received 43,398 633 Net cash provided by (used in) investing activities (15,561) (51,191)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (payments of ) : Short-term borrowing 71,165 83,032 Long-term borrowing (45,874) (40,046) Payment of cash dividends (98) (2,028) Net cash used in financing activities 25,193 40,958

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,439 192,870

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4,223) (3,213)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 916,157 1,202,170

CASH AND CASH EQUIVALENTS AT END OF YEAR 856,495 1,391,827

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PHINMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information

PHINMA Corporation (PHN or the Parent Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on March 12, 1957. On August 2, 2006, the Philippine SEC approved the extension of the Parent Company‟s corporate life for another 50 years. Also, on May 27, 2010, the Philippine SEC approved the change in the Parent Company‟s corporate name from Bacnotan Consolidated Industries, Inc. to PHINMA Corporation. Its principal activity is investment holdings of shares in various subsidiaries, associates and affiliates and other financial instruments.

Following are the subsidiaries of the Parent Company and the nature of their principal business activities:

Calendar/Fiscal Percentage of Ownership Name of Subsidiaries Nature of Business Yearend 2011 2010 Union Galvasteel Corporation (UGC) Manufacture and distribution

of steel products December 31 98.08 98.36(a) One Animate Limited (OAL) and Subsidiary BPO-Animation services December 31 80.00 80.00(b) Pamantasan ng Araullo (Araullo University), Inc.(AU) Educational institution March 31(c) 78.64 78.64 Cagayan de Oro College, Inc. (COC) Educational institution March 31(c) 74.21 74.35 University of Iloilo (UI) Educational institution March 31(c) 69.79 69.85 University of Pangasinan (UPANG) and Subsidiary Educational institution March 31(c) 69.75 69.76 P & S Holdings Corporation (PSHC) Investment and real estate holdings December 31 60.00 60.00 Asian Plaza, Inc. (API) Lease of real property December 31 57.62 57.62 Fuld & Company, Inc. (Fuld U.S. and Subsidiary) Business Research December 31 85.00(d) – Fuld & Company (Philippines), Inc. (Fuld Philippines) Business Research December 31 85.00(e) –

(a) On December 22, 2010, the SEC approved the merger of UGC and AHC with UGC as the surviving entity. The execution of the merger involved a

share swap between UGC and the holder of the non-controlling interest in AHC. This resulted in a decrease of the Parent Company’s ownership interest in UGC from 100% to 98.36% (see Note 20). In 2011, the change in percentage of ownership in UGC was a result of UGC’s issuance of shares to the holder of the non-controlling interest.

(b) OAL owns 95.0% interest in Toon City Animation, Inc. (Toon City). (c) Balances of these subsidiaries as of and for the year ended December 31 were used for consolidation purposes, which is the same reporting period

of PHN. (d) Acquired by PHN on June 10, 2011. (e) Acquired by PHN on July 25, 2011.

The Parent Company and its subsidiaries (collectively referred to as “the Company”) are all incorporated in the Philippines except for OAL and Fuld U.S. OAL is incorporated in Hong Kong while Fuld US is incorporated in the United States of America (USA). The Company‟s ultimate parent company is Philippine Investment-Management (PHINMA), Inc., which is also incorporated in the Philippines.

The information on the segments of the Company is presented in Note 31.

The registered office address of the Parent Company is 12th Floor, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City.

The accompanying consolidated financial statements were approved and authorized for issuance by the Board of Directors (BOD) on May 14, 2012.

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2. Basis of Preparation and Statement of Compliance

The accompanying consolidated financial statements of the Company have been prepared using the historical cost basis, except for investments held for trading, available-for-sale (AFS) investments and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, the Parent Company‟s functional currency. All values are rounded to the nearest thousand peso unless otherwise stated.

The accompanying consolidated financial statements have been prepared in compliance with PFRS. PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from the International Financial Reporting and Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).

3. Changes in Accounting Policies and Disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS, PAS and Philippine Interpretations which were adopted on January 1, 2011.

PAS 24, Related Party Disclosures (Amendment), became effective for annual periods beginning on or after January 1, 2011.

PAS 32, Financial Instruments: Presentation (Amendment) - Classification of Rights Issues, became effective for annual periods on or after February 1, 2010.

Philippine Interpretation IFRIC 14, Prepayments of a Minimum Funding Requirement (Amendment), became effective for annual periods beginning on or after January 1, 2011.

Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, became effective for annual periods beginning on or after July 1, 2010.

2010 Improvements to PFRS (Effective 2011).

The standards or interpretations that have been adopted have no material impact on the consolidated financial statements of the Company.

Standards Issued but not yet Effective The following standards, amendments to standards and interpretations have been issued but will become effective subsequent to December 31, 2011. The Company will adopt these standards and interpretations when they become effective.

PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income (OCI), will become effective for annual periods beginning on or after July 1, 2012. The amendments to PAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or „recycled‟) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on the Company‟s financial position or performance.

PAS 12, Income Taxes (Amendment) - Recovery of Underlying Assets, will become effective for annual periods beginning on or after January 1, 2012. The amendment clarified the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in PAS 40, Investment Property, should be determined on the basis that its carrying amount will be recovered through sale. Furthermore, it introduces the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in PAS 16, Property, Plant

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and Equipment, always be measured on a sale basis of the asset. The Company does not expect this amendment to have a significant impact on its consolidated financial statements.

PAS 19, Employee Benefits (Amendment), will become effective for annual periods beginning on or after January 1, 2013. The numerous amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The Company is currently assessing the impact of the amendment to PAS 19.

PAS 27, Separate Financial Statements (as revised in 2011), will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The Company does not expect this revised standard to have any significant impact on its financial position or performance.

PAS 28, Investments in Associates and Joint Ventures (as revised in 2011), will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The Company does not expect this revised standard to have a significant impact on its consolidated financial statements.

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities, will become effective for annual periods beginning on or after January 1, 2014. These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on the net assets of the Company, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. The Company is currently assessing impact of the amendments to PAS 32.

PFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements, will become effective for annual periods beginning on or after July 1, 2011. The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Company‟s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entity‟s continuing involvement in those derecognized assets. The amendment affects disclosures only and has no impact on the Company‟s financial position or performance.

PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities, will become effective for annual periods beginning on or after January 1, 2013. These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or „similar agreement‟, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:

(a) The gross amounts of those recognized financial assets and recognized financial liabilities; (b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts

presented in the statement of financial position; (c) The net amounts presented in the statement of financial position; (d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise

included in (b) above, including:

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i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and

ii. Amounts related to financial collateral (including cash collateral); and (e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be applied retrospectively. The amendment affects disclosures only and has no impact on the Company‟s financial position or performance.

PFRS 9, Financial Instruments: Classification and Measurement, will become effective for annual periods beginning on or after January 1, 2015. This standard reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. In subsequent phases, hedge accounting and impairment of financial assets will be addressed. The completion of this project is expected on the first half of 2012. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Company‟s financial assets, but will potentially have no impact on classification and measurements of financial liabilities. The Company will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

PFRS 10, Consolidated Financial Statements, will become effective for annual periods beginning on or after January 1, 2013. This standard replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standing Interpretations Committee (SIC)-12 Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. This standard will have no significant impact on the consolidated financial statements.

PFRS 11, Joint Arrangements, will become effective for annual periods beginning on or after January 1, 2013. This standard replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions by Venturers, and removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The Company does not expect this standard to have any impact on its financial statements.

PFRS 12, Disclosure of Interests with Other Entities, will become effective for annual periods beginning on or after January 1, 2013. This standard includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entity‟s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The Company expects that this new standard will have no significant effect on its financial position or performance.

PFRS 13, Fair Value Measurement, will become effective for annual periods beginning on or after January 1, 2013. This standard establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. The Company is currently assessing the impact of this standard on its financial position and performance.

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate. This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the FRSC have deferred the effectivity of this interpretation until the final Revenue standard is issued by International Accounting Standards Board and an evaluation of the requirements of the final

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Revenue standard against the practices of the Philippine real estate industry is completed. This interpretation will have no significant impact in the consolidated financial statements.

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, will become effective for annual periods beginning on or after January 1, 2013. This interpretation applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (“production stripping costs”) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset. This interpretation will have no impact in the consolidated financial statements.

4. Summary of Significant Accounting Policies

Principles of Consolidation The consolidated financial statements include the accounts of the Parent Company and all the subsidiaries mentioned in Note 1. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

All intercompany balances, transactions, income and expenses and profits and losses resulting from intercompany transactions are eliminated in full.

Subsidiaries are fully consolidated from the date control is transferred to the Company and cease to be consolidated from the date control is transferred out of the Company.

Non-controlling interest represents the portion of profit or loss and net assets in the subsidiaries not held by the Company and is presented in the consolidated statements of income, consolidated statements of comprehensive income and within equity in the consolidated statements of financial position, separately from equity attributable to equity holders of the parent. Prior to January 1, 2010, acquisitions of non-controlling interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognized as goodwill, otherwise, the difference is recognized as a “negative” goodwill (shown as “Negative goodwill on acquisition of non-controlling interest” in the consolidated statement of income). Starting January 1, 2010, a change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction and is shown as “Other reserves” in the consolidated statements of changes in equity. If the Company loses control over a subsidiary, it:

derecognizes the assets (including goodwill) and liabilities of the subsidiary; derecognizes the carrying amount of any non-controlling interest; derecognizes the cumulative translation differences, recorded in equity; recognizes the fair value of the consideration received; recognizes the fair value of any investment retained; recognizes any surplus or deficit in profit or loss; reclassifies the parent‟s share of components previously recognized in other comprehensive income to profit or loss

or retained earnings, as appropriate.

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

Short-term Investments Short-term investments represent investments that are readily convertible to known amounts of cash with original maturities of more than three months but less than one year.

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Financial Instruments - Initial Recognition and Subsequent Measurement

Date of Recognition. The Company recognizes a financial instrument in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date that the Company commits to purchase the assets. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Derivatives are recognized on a trade date basis.

Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial instruments, except for financial instruments measured at fair value through profit or loss (FVPL).

The Company classifies its financial instruments into the following categories: financial assets and liabilities at FVPL, loans and receivables, held-to-maturity (HTM) investments, AFS investments and other financial liabilities. The classification depends on the purpose for which the instruments are acquired and whether they are quoted in an active market. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every financial reporting date.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

Determination of Fair Value. The fair value of financial instruments traded in active markets at the end of the reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

Day 1 Difference. Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a „Day 1‟ difference) in the consolidated statements of income unless it qualifies for recognition as some other type of asset. In cases where unobservable data is used, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the „Day 1‟ difference amount.

Financial Assets and Liabilities at FVPL. This category includes financial assets and liabilities held for trading and financial assets and liabilities designated upon initial recognition as at FVPL. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including any separated derivatives, are also classified under financial assets or liabilities at FVPL, unless these are designated as hedging instruments in an effective hedge or financial guarantee contracts. Instruments under this category are classified as current assets/liabilities if these are hold primarily for the purpose of trading or expected to be realized/settled within 12 months from reporting date. Otherwise, these are classified as noncurrent assets/liabilities.

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Financial assets or financial liabilities may be designated by management on initial recognition as at FVPL when the following criteria are met:

the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities designated at FVPL are recorded in the consolidated statements of financial position at fair value. Subsequent changes in fair value on financial assets and liabilities designated at FVPL are recorded in the consolidated statements of income as “Net gains from fair value change of investments held for trading” under “Investment income” account. Interest earned or incurred is recorded in “Investment income” account or “Interest expense and other financial charges” account, respectively. Dividend income is recorded according to the terms of the contract, when the right to receive payment has been established.

The Company‟s investments held for trading and derivative asset are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=831.7 million and P=771.5 million as of March 31, 2012 and December 31, 2011, respectively. Included under financial liability at FVPL is the Company‟s derivative liability. The carrying values of financial liability at FVPL amounted to P=.82 and P=2.3 million as of March 31, 2012 and December 31, 2011 respectively. (see Note 29).

Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. Loans and receivables are included in current assets if maturity is within 12 months from the financial reporting date. Otherwise, these are classified as noncurrent assets.

After initial measurement, loans and receivables are carried at amortized cost using the effective interest method less any allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest method. Gains and losses are recognized in the consolidated statements of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

The Company‟s cash and cash equivalents, short-term investments, trade and other receivables and installment contract receivables are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=1,582.2 million and P=1,773.8 million as of March 31, 2012 and December 31, 2011, respectively (see Note 29).

HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Company‟s management has the positive intention and ability to hold to maturity. Where the company sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, such assets are carried at amortized cost using the effective interest method less any impairment in value. Gains and losses are recognized in the consolidated statements of income when the HTM investments are derecognized or impaired, as well as through the amortization process. HTM Investments are classified as current if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Company has no financial assets classified as HTM as of March 31, 2012 and December 31, 2011.

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AFS Investments. AFS investments are nonderivative financial assets that are designated in this category or are not classified in any of the three preceding categories. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS investments are carried at fair value in the consolidated statements of financial position. Changes in the fair value of such assets are reported as unrealized gain or loss on change in fair value of AFS investments recognized as other comprehensive income in the consolidated statements of comprehensive income until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in consolidated statements of comprehensive income is transferred to the consolidated statements of income. AFS investments are classified as current if they are expected to be realized within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent assets.

The Company‟s investments in quoted and unquoted equity securities and other investments are classified under this category. The carrying values of financial assets under this category amounted to P=141.0 million as of March 31, 2012 and December 31, 2011 (see Note 29).

Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. This includes liabilities arising from operations or loans and borrowings.

Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized, as well as through the amortization process. Other financial liabilities are classified as current liabilities if settlement is within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent liabilities.

The Company‟s notes payable, trade and other payables, trust receipts payable, due to related parties, long-term loan payable and long-term debt are classified under this category. The aggregate carrying values of financial liabilities under this category amounted to P=1,941.6 million and P=1,814.9 million as of March 31, 2012 and December 31, 2011, respectively (see Note 26).

Convertible Notes Convertible notes which contain both a liability and an equity element, are separated into two components on initial issuance based on the present value of the expected cash flows of the notes, and each is accounted for separately. Upon issuance of the convertible notes, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note and this amount is carried as a long-term liability at amortized cost until extinguished on conversion or repayment. Amortization of discount is based on the effective interest rate method. The remainder of the proceeds is allocated to the conversion option. The Parent Company‟s share is recognized and included in equity as “Share in equity component of convertible notes.”

Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to:

deliver cash or another financial asset to another entity; exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable

to the Company; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed

number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

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Debt Issuance Cost Debt issuance costs are deducted against long-term debt and are amortized over the terms of the related borrowings using the effective interest method.

Derivative Financial Instruments The Company enters into short-term forward currency contracts to hedge its currency exposure (see Note 29). Such derivative financial instruments are initially recorded at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and liabilities when the fair value is negative. Consequently, gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income. The Company has opted not to designate its derivative transactions under hedge accounting. The fair values of freestanding forward currency transactions are calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Embedded Derivative. An embedded derivative is a component of a hybrid (combined) instrument that also includes a nonderivative host contract with the effect that some of the cash flows of the hybrid instrument vary in a way similar to a stand-alone derivative. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) the hybrid or combined instrument is not recognized at FVPL.

The Company assesses whether embedded derivatives are required to be separated from the host contracts when the Company becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Company determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flow on the contract.

Embedded derivatives are measured at fair value and are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income.

In 2009, the Company bifurcated embedded foreign currency derivatives (see Note 26).

In March 2012 and December 2011, the Company has no embedded derivatives.

Impairment of Financial Assets The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired.

Assets Carried at Amortized Cost. If there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset‟s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Company. If in a subsequent year, the amount of the estimated impairment loss increases or decreases

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because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is recognized in the consolidated statements of income. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. For the purpose of specific evaluation of impairment, the Company assesses whether financial assets are impaired through assessment of collectability of financial assets considering the debtor‟s capacity to pay, history of payment, and the availability of other financial support. For the purpose of a collective evaluation of impairment, if necessary, financial assets are grouped on the basis of such credit risk characteristics such as debtor type, payment history, past-due status and terms.

Assets Carried at Cost. If there is objective evidence (such as continuing losses or significant financial difficulties of the investee company) that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

AFS Investments. In the case of equity instruments classified as AFS investments, evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of income, is removed from the consolidated statements of comprehensive income and recognized in the consolidated statements of income. Impairment losses on equity investments are not reversed through the consolidated statements of income. Increases in the fair value after impairment are recognized directly in consolidated statements of comprehensive income.

In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount of the asset and is accrued based on the rate of the interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the consolidated statements of income. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the consolidated statements of income, the impairment loss is reversed through the consolidated statements of income.

Derecognition of Financial Assets and Liabilities

Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

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

the Company retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

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Where the Company has transferred its rights to receive cash flows from an asset or has entered into a “pass-through” arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company‟s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts, of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of income.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statements of financial position if and only if there is a currently legal right to offset the recognized amounts and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated statements of financial position.

Inventories Inventories are valued at the lower of cost or net realizable value. Costs incurred in bringing each inventory to its present location and condition are accounted for as follows:

Finished goods – determined using the moving average method; cost includes

direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excludes borrowing costs;

Raw materials, spare parts and others – determined using the moving average method.

The net realizable value of inventories, except spare parts, is the selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The net realizable value of spare parts is the current replacement cost.

Investments in Associates Investments in associates are accounted for under the equity method. These are entities in which the Company has significant influence and which are neither subsidiaries nor joint ventures of the Company. The investments in associates are carried in the consolidated statements of financial position at cost plus post-acquisition changes in the Company‟s share in net assets of the associates, less any impairment in value. The consolidated statements of income reflect the Company‟s share in the results of operations of the associates. Unrealized gains arising from transactions with its associates are eliminated to the extent of the Company‟s interest in the associates against the related investments. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred. The Company‟s investment in an associate includes goodwill on acquisition, which is recorded in accordance with the accounting policy for goodwill.

When the Company‟s accumulated share in net losses of an associate equals or exceeds the carrying amount of the investment, including advances for future conversion to equity, the Company discontinues the recognition of its share in additional losses and the investment is reported at nil value. If the associate subsequently reports net income, the Company will resume applying the equity method only after its share in that net income equals the share in net losses not recognized during the period the equity method was suspended.

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Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less accumulated depreciation and any impairment loss. Land is carried at cost less any impairment loss. The cost of property, plant and equipment comprises its purchase price, including any applicable import duties and capitalized borrowing costs (for property, plant and equipment other than land) and other costs directly attributable in 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 operation, such as repairs and maintenance, are normally charged to current operations in the year 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 and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment.

Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

Plant site improvements 10–20 years Buildings and improvements 10–20 years Machinery and equipment 5–20 years Transportation and other equipment 2–10 years

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

When each major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are met.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is credited or charged to consolidated statements of income.

Construction in-progress represents properties and structures under construction/development and is stated at cost. This includes cost of construction, plant and equipment, any borrowing costs directly attributable to such asset during the construction period and other direct costs. Construction in-progress is not depreciated until such time when the relevant assets are completed and ready for operational use.

Investment Properties Investment properties are measured initially at cost, including direct transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties (except land) are stated at cost less accumulated depreciation and impairment loss. Land is carried at cost less any impairment in value.

Depreciation of buildings for lease is calculated on a straight-line basis over the estimated useful lives of 15 to 20 years.

Investment property is derecognized when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statements of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.

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Noncurrent Assets Held for Sale and Discontinued Operations Noncurrent assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

In the consolidated statements of income of the reporting period, and the comparable period of the previous year, income and expenses from discontinued operations are reported separately from normal income and expenses down to the level of profit after taxes, even when the Company retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated statements of income.

Property, plant and equipment and intangible assets once classified as held for sale are no longer depreciated/amortized.

Business Combinations, Goodwill and Goodwill Impairment

Business Combinations from January 1, 2010. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree‟s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses.

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer‟s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Business Combinations Prior to January 1, 2010. Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree‟s identifiable net assets.

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Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognized goodwill.

When the Company acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.

Contingent consideration was recognized if, and only if, the Company had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill.

Business combinations under common control are accounted for using the pooling of interest method. Financial statements for periods prior to the combination under common control are not restated.

Following initial recognition, goodwill is measured at cost less any accumulated impairment loss. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. If the Company‟s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the Company reassesses the identification and measurement of the acquiree‟s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and recognizes immediately in profit or loss any excess remaining after that reassessment.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company‟s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Company are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and

is not larger than a segment based on the Company‟s primary or the Company‟s any secondary reporting format determined in accordance with PFRS 8, “Operating Segments.”

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

Intangible Assets The cost of intangible assets acquired separately is measured on initial recognition at cost. The cost of intangible assets (student lists and customer contracts) acquired in a business combination is measured at the fair value as of date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Student lists are amortized over three years and assessed for impairment whenever there is an indication that the student lists acquired may be impaired. Customer contracts are amortized over the estimated economic life of one year.

The useful lives of intangible assets are assessed to be either finite or indefinite. The amortization periods and method are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the

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function of the intangible asset. Intangible assets with indefinite lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level.

Impairment of Nonfinancial Assets The Company assesses at each reporting date whether there is an indication that a nonfinancial asset may be impaired when events or changes in circumstances indicate that the carrying value of a nonfinancial asset may not be recoverable. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset‟s recoverable amount. An asset‟s recoverable amount is the higher of an asset‟s or cash-generating unit‟s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.

For nonfinancial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset‟s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. However, that increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in consolidated statements of income. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset‟s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the Company‟s investments in associates. The Company determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Company calculates the amount of impairment being the difference between the fair value and the carrying value of the investee company and recognizes the difference in the consolidated statements of income.

The following assets have specific characteristics for impairment testing:

Goodwill. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit (or group of cash generating units) to which the goodwill relates. When the recoverable amount of the cash generating unit is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Intangible assets. Intangible assets with indefinite useful lives are tested for impairment annually as either individually or at the cash generating unit level, as appropriate, and when circumstances indicate that the carrying value may be

impaired.

Capital Stock Capital stock is measured at par value for all shares issued. When the Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued.

When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account in the consolidated statement of financial position. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received.

Direct costs incurred related to equity issuance, such as underwriting, accounting and legal fees, printing costs and taxes are chargeable to the “Additional paid-in capital” account in the consolidated statements of financial position.

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Retained Earnings Retained earnings represent accumulated net profits, net of dividend distributions and other capital adjustments.

Revenue Recognition Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized:

Sale of Goods. Revenue from sale of roofing and other steel products, books and incidentals is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.

Tuition and School Fees. Revenue is recognized as income over the corresponding school term to which they pertain. Tuition and school fees received pertaining to the summer semester and the next school year are recorded as part of “Unearned revenues” account in the consolidated statements of financial position.

Animation Services. Income from animation services is recognized by reference to the stage of completion. Stage of completion is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Where the contract outcome cannot be measured reliably, revenue is recognized only to the extent that the expenses incurred are eligible to be recovered.

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

Investment Income. Investment income includes net gains and losses on investments held for trading (see accounting policy on Financial Assets) and interest income. Interest income is recognized as the interest accrues, taking into account the effective yield on the asset.

Consultancy Services. Revenue is recognized when services are rendered.

Sale of Real Estate. Revenue from the sale of real estate of Bacnotan Industrial Park Corporation (BIPC), included under “Income from discontinued operation” account in the 2009 consolidated statement of income which includes cost of land and development, is accounted for under the percentage of completion method when the Company has material obligations under the sales contracts to complete the project after the property is sold. Under this method, revenue is recognized as the related obligations are fulfilled, measured on the basis of the ratio of actual cost incurred to date over the estimated total costs of the project as determined by the Company‟s contractors and technical personnel. Any excess of collections over the recognized receivables are included under the “Unearned revenues” account in the current liabilities section of the consolidated statements of financial position. If none of the revenue recognition criteria are met, deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers is presented as part of “Other noncurrent liabilities” account in the consolidated statements of financial position.

Port and Cargo Handling Services. Revenue from port operations of BIPC, included under “Income from discontinued operation” account in the 2009 consolidated statement of income, is recognized when services are rendered.

Cost of Sales, Educational, Animation and Consultancy Services Cost of sales includes direct materials used, personnel costs, as well as repair and power and fuel used to run production of steel products. Cost of educational services constitutes costs incurred to administer academic instruction. Costs of animation services include all direct materials, labor costs and indirect costs related to contract performance. Cost of consultancy services includes labor cost and other direct costs related to the performance of consultancy services. These expenses are expensed as incurred.

General and Administrative Expenses General and administrative expenses constitute costs of administering the businesses and are expensed as incurred.

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Selling Expenses Selling expenses include costs of distribution of steel products, books, incidentals, personnel costs, freight expenses, commission and advertising. Selling expenses are expensed as incurred.

Retirement Costs PHN, UGC, Toon City, UPANG and AU have distinct funded, noncontributory defined benefit retirement plans while UI and COC have a defined, unfunded, noncontributory retirement plans covering all permanent employees, each administered by their respective Retirement Committees. Retirement costs are actuarially determined using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each plan at the end of the previous financial reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term;

c. There is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. There is a substantial change to the asset.

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Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario b.

Company as Lessee. Leases where the lessor retains substantially all the risks and benefits of ownership of the leased asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statement of income on a straight-line basis over the lease term.

Company as Lessor. Leases where the Company does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Lease payments received are recognized as an income in the consolidated statement of income on a straight-line basis over the lease term.

Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 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 assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase due to the passage of time is recognized as interest expense in the consolidated statements of income.

Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing cost consists of interest and other costs that an entity incurs in connection with the borrowing of funds.

Foreign Currency-denominated Transactions and Translation The consolidated financial statements are presented in Philippine peso, which is the Parent Company‟s functional and presentation currency. The subsidiaries determine their own functional currency and items included in the financial statements of each subsidiary are measured using that functional currency. The Company has elected to recycle the gain or loss that arises from direct method of consolidation, the method the Company uses to complete its consolidation.

Transactions in foreign currencies are recorded using their functional currency exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange at the end of the reporting period. Exchange gains or losses arising from foreign currency translations are credited or charged to current operations. Nonmonetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

Other than OAL and Fuld U.S., the functional and presentation currency of the subsidiaries within the Company is Philippine peso. The functional currency of OAL and Fuld U.S. is U.S. dollar. The assets and liabilities of foreign operations are translated into Philippine peso at the rate of exchange prevailing at the reporting date and their income statements are translated at exchange rates prevailing at the date of the transactions. The exchange differences arising on the translation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statements of income.

Taxes

Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.

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Deferred Tax. Deferred tax is provided, using the balance sheet liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused 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 the carryforward of unused excess MCIT and unused NOLCO can be utilized except:

where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of deductible temporary differences associated with investments in subsidiaries and associates. Deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.

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

Value-Added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT, except:

Where the VAT incurred on a purchase of assets or services are not recoverable from the taxation authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

Receivables and payables that are stated with the amount of VAT included. The net amount of VAT recoverable from, or payable to, the tax authority is included as part of “Input value-added taxes” or “Income and other taxes payable” accounts in the consolidated statements of financial position.

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Earnings Per Common Share (EPS) Attributable to the Equity Holders of the Parent Basic EPS is computed by dividing net income (after deducting dividends on preferred shares) attributable to equity holders of the parent by the weighted average number of outstanding common shares during the year after giving retroactive effect to any stock dividend declared during the year.

The Company does not have potential common shares nor other instruments that may entitle the holder to common shares. Hence, diluted EPS is the same as basic EPS.

Segment Reporting The Company is organized into five major business segments. Such business segments are the bases upon which the Company reports its primary segment information. Financial information on business segments is presented in Note 36 to the consolidated financial statements.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable.

Events After the Reporting Period Post year-end events that provide additional information about the Company‟s financial position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

5. Significant Accounting Judgments, Estimates and Assumptions

The accompanying consolidated financial statements are prepared in conformity with PFRS require management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. In preparing the Company‟s consolidated financial statements, management has made its best judgments, estimates and assumptions of certain amounts, giving due consideration to materiality. The judgments and estimates and assumptions used in the accompanying consolidated financial statements are based upon management‟s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

The Company believes the following represents a summary of these significant judgments, estimates and assumptions and related impact and associated risks in its consolidated financial statements.

Judgments In the process of applying the Company‟s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the Company‟s consolidated financial statements:

Operating Lease - Company as Lessor. The Company has entered into commercial property leases on its investment property portfolio. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Rental income amounted to P=4.3 million and P=15 million in March 2012 and 2011, respectively.

Revenue Recognition. Selecting an appropriate revenue recognition method for a particular sale transaction requires certain judgments based on sufficiency of cumulative payments by the buyer and completion of development. The

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Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all its revenue arrangements.

Functional Currency. The Parent Company has determined that its functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Parent Company operates. The subsidiaries determine their own functional currencies depending on the primary economic environment to which they operate.

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

Impairment of Goodwill. The Company performs impairment testing of goodwill on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Value in use is determined by making an estimate of the expected future cash flows from the cash-generating unit and applies a discount rate to calculate the present value of these cash flows. Goodwill acquired through business combination has been allocated to one cash-generating unit which is also the operating entity acquired through business combination and to which the goodwill relates. The recoverable amount of the goodwill has been determined based on value in use calculation using cash flow projections covering a five-year period. The pre-tax discount rates applied to cash flow projections ranges from 10% to 15% in December 2011. Discount rate reflects the current market assessment of the risk specific to each cash-generating unit. The discount rate is based on the average percentage of the weighted average cost of capital for the industry. This rate is further adjusted to reflect the market assessment of any risk specific to the cash-generating unit for which future estimates of cash flows have not been adjusted. The Company performs its annual testing of goodwill at December 31.

Impairment loss on goodwill amounting to P=166.4 million was recognized in December 2011. The carrying amount of goodwill amounted to P=1,253.8 million and P=1,244.5 million as of March 31, 2012 and December 31, 2011, respectively, and is presented as part of the “Intangibles” account in the consolidated statements of financial position (see Note 16).

Impairment of Nonfinancial Assets, other than Goodwill. The Company assesses whether there are any indicators of impairment for all nonfinancial assets, other than goodwill, at each reporting date. These nonfinancial assets (investment in associates, property, plant and equipment, investment properties and intangibles) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This requires an estimation of the value in use of the cash-generating units. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. In cases where the value in use cannot be reliably estimated, the recoverable amount is based on the fair value less costs to sell. The recoverable amount of investments in associates is based on fair value less cost to sell. Fair value less costs to sell is determined to be the amount obtainable from the sale of the underlying net assets of the associate.

There are no impairment of nonfinancial assets in March 2012 and December 2011. The carrying amounts of investments in associates amounted to P=1,778.9 million and P=1,835.1 million as at March 31, 2012 and December 31, 2011, respectively (see Note 12). The carrying amounts of property, plant and equipment amounted to P=2,249.8 million and P=2,260.7 million as of March 31, 2012 and December 31, 2011, respectively (see Note 14). The carrying amounts of investment properties amounted to P=431.8 million and P=410.9 million as of March 31, 2012 and December 31, 2011, respectively (see Note 15). The carrying amounts of intangibles, other than goodwill, amounted to P=47.2 million and P=50.8 million as of March 31, 2012 and December 31, 2011, respectively (see Note 16).

Impairment of AFS Investments. The Company treats AFS equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Company treats “significant” generally as 20% or more of the original cost of investment, and “prolonged” as period longer than six months. In

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addition, the Company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Based on management‟s assessment, the Company‟s AFS investments are fairly stated, thus, no impairment loss was recognized in March 2012 and December 2011. The carrying values of AFS investments amounted to P=141.0 million as of March 31, 2012 and December 31, 2011. (see Note 13).

Impairment of Trade Receivables. The Company maintains allowance for doubtful accounts based on the result of the individual and collective assessments under PAS 39. Under the individual assessment, which considers the significant financial difficulties of the debtor, the Company is required to obtain the present value of estimated cash flows using the receivable‟s original effective interest rate. Impairment loss is determined as the difference between the receivables‟ carrying balance and the computed present value. The collective assessment would require the Company to group its receivables based on the credit risk characteristics (debtor type, past-due status and terms) of the debtors. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management‟s judgment and estimate. Therefore, the amount and timing of recorded expense for any year would differ depending on the judgments and estimates made for the year.

The carrying amounts of trade and other receivables amounted to P=725.7 million and P=857.6 million as of March 31, 2012 and December 31, 2011, respectively (see Note 10). The noncurrent portion of installment contract receivables amounted to nil and P=20.6 million as of December 31, 2011, respectively. The allowance for impairment of receivables amounted to P=174.3 million and P=164.8 million as of March 31, 2012 and December 31, 2011, respectively (see Note 10).

Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. This is based on the Company‟s projection of the future results of operations.

Deferred tax assets amounted to P=19.3 million and P=49.2 million as of March 31, 2012 and December 31, 2011, respectively (see Note 27).

Deductible temporary differences, unused NOLCO and MCIT for which no deferred tax assets were recognized in the consolidated statements of financial position amounted to P=374.7 million as of December 31, 2011, respectively (see Note 27).

Recognition of Input VAT. The carrying amounts of input taxes were reduced to the extent that it is no longer probable that sufficient revenue subject to VAT will be available to allow all or part of the input VAT to be utilized.

Allowance for unrecoverable input VAT amounted to P=89.2 million as of March 31, 2012 and December 31, 2011, respectively (see Note 17). The carrying amount of input VAT classified as current assets amounted to P=39.3 million and P=40.7 million as of March 31, 2012 and December 31, 2011, respectively. There are no input VAT classified as other noncurrent assets as of March 31, 2012 and December 31, 2011. (see Note 17).

Estimating Useful Lives of Property, Plant and Equipment, Investment Properties and Intangibles. The Company estimates the useful lives of depreciable property, plant and equipment, depreciable investment properties and intangibles with finite useful lives based on the period over which the property, plant and equipment, investment properties and intangibles with finite useful lives are expected to be available for use and on the collective assessment of industry practice, internal technical evaluation and experience with similar assets and in the case of intangibles, useful lives are also based on the contracts covering such intangibles. The estimated useful lives of property, plant and equipment and investment properties are reviewed periodically and updated if expectations differ materially from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the property, plant and equipment and investment properties. However, it is possible that future results of operations could be materially

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affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recording of expenses for any period would be affected by changes in these factors and circumstances.

The carrying amounts of depreciable property, plant and equipment amounted to P=1,035.9 million and P=1,059.6 million as of March 31, 2012 and December 31, 2011, respectively (see Note 14). The carrying amounts of depreciable investment properties amounted to P=79.0 million and P=80.6 million as of March 31, 2012 and December 31, 2011, respectively (see Note 15). The carrying amounts of intangibles with finite useful lives amounted to P=nil and P=3.6 million as of March 31, 2012 and December 31, 2011, respectively (see Note 16).

Estimating Net Realizable Value of Inventories. The Company carries inventories at net realizable value when this becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes.

The carrying amounts of inventories amounted to P=1,011.3 million and P=977.9 million as of March 31, 2012 and December 31, 2011, respectively (see Note 11).

Estimating the Fair Values of Acquiree’s Identifiable Assets and Liabilities. Where the fair values of the acquiree‟s identifiable assets and liabilities cannot be derived from active markets, the Company determined the fair values using internal valuation techniques and generally accepted valuation approaches. The inputs to these valuation approaches are taken from historical experience and observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. The estimates may include discount rates and assumptions used in cash flow projections.

The fair values of the identifiable net assets acquired (liabilities assumed) from Fuld U.S. and Fuld Philippines amounted to P=83.8 million and (P=4.5 million), respectively, in 2011 (see Note 7).

Pension Benefits. The determination of the Company‟s obligation and cost of pension benefits is dependent on the selection of certain assumptions made by management and used by actuaries in calculating such amounts. The assumptions presented in Note 31 include among others, discount rates, expected rates of return on plan assets and rates of future salary increase. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.

Net pension liability, included under “Pension and other post-employment benefits” account in the consolidated statements of financial position, amounted to P=64.9 million and P=58.2 as of March 31, 2012 and December 31, 2011.

Fair Value of Financial Assets and Liabilities. The Company carries certain financial assets and liabilities at fair value in the consolidated statements of financial position. Determining the fair value of financial assets and liabilities requires extensive use of accounting estimates and judgment. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any changes in the fair value of these financial assets and liabilities would affect profit and loss and other comprehensive income.

The methods and assumptions used to estimate the fair value of financial assets and liabilities are discussed in Note 29. 6. Discontinued Operation

On March 10, 2009, PHN, AHC, Trans-Asia Oil and Energy Development Corporation (TA Oil) and Trans-Asia Power Corporation (TA Power) (collectively referred to as “the Sellers”) signed a Share Purchase Agreement for the sale of all their interests in BIPC to Phoenix Petroleum Philippines, Inc. (Phoenix), an unrelated party, for P=109.8 per share totaling P=642.3 million, P=428.3 million of which pertains to the Company. Outstanding receivable of the Company from this transaction amounted to P=333.5 million as of December 31, 2009. The current portion amounting to P=57.0 million is presented under “Trade and other receivables” account in the 2009 consolidated statement of financial position (see Note

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10). The noncurrent portion amounting to P=276.4 million is shown separately as “Installment contract receivables - net of current portion” account under noncurrent assets in the 2009 consolidated statement of financial position. The sale resulted in the Company‟s recognition of gain amounting to P=65.0 million. On April 16, 2010, Phoenix prepaid all its outstanding payable to the Sellers.

BIPC is presented as Discontinued Operation – Property Development in the 2009 segment information (see Note 36).

The cash inflow related to discontinued operation in 2009 is as follows (amounts in thousands):

Total disposal consideration P=428,250 Less receivable 333,450 Cash received from disposal 94,800 Less: Cash and cash equivalents of a subsidiary disposed of 22,538 Disposal costs 9,386 Net cash inflow P=62,876

The results of BIPC for the period January 1 to March 10, 2009, included in the 2009 consolidated statement of income, are presented below (amounts in thousands):

Revenues P=5,292 Cost and expenses (4,643) Operating income 649 Other expenses – net (479) Income before income tax from discontinued operation 170 Provision for income tax (57) Net income for the year from discontinued operation P=113

Income from discontinued operation, included in the 2009 consolidated statement of income, consists of the following (amounts in thousands):

Gain from sale of discontinued operation, net of tax P=65,039 Net income from discontinued operation 113 Net income for the year from discontinued operation P=65,152

The assets and liabilities of BIPC as of March 10, 2009 are as follows (amounts in thousands):

Current assets: Cash and cash equivalents P=22,538 Trade and other receivables 23,245 Inventories 122,051 Prepaid expenses and other current assets 724 Noncurrent assets: Property, plant and equipment 131,140 Investment property 216,721 Deferred tax assets 283 Installment contracts receivable 58,482 Other noncurrent assets 9,246 Total (Carried Forward) 584,430

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Total (Brought Forward) P=584,430 Current Liabilities: Trade and other payables (23,321) Current portion of long-term debt (7,144) Noncurrent Liabilities: Long-term debt (13,380) Accrued retirement (2,139) Other noncurrent liabilities (2,247) (48,231) Net assets P=536,199

Share in net assets P=353,783 Non-controlling interest 182,416 P=536,199

The net cash flows of BIPC for the period January 1 to March 10, 2009 are as follows (amounts in thousands):

Operating P=22,538 Investing – Financing – Net cash flow P=22,538

Basic EPS from discontinued operation in 2009 is computed as follows (amounts in thousands):

(a) Net income from discontinued operation attributable to equity holders of the parent (see Note 36) P=65,090

(b) Weighted average shares outstanding 257,737 Basic EPS (a/b) P=0.25

7. Business Combinations and Acquisition of Non-controlling Interests

Following are the business combinations in 2011

Acquisition of Fuld & Company, Inc. (Fuld U.S.) On June 10, 2011, PHN purchased 85% voting shares of stock of Fuld U.S. Fuld U.S. is a business research and consulting firm focusing on business and competitive intelligence. Fuld U.S. is incorporated in the USA with offices in the USA, United Kingdom and China. Founded in 1979, Fuld U.S. delivers customized proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges. The Company acquired Fuld U.S. to increase its Business Process Outsourcing (BPO) portfolio which will provide opportunities in the high value-added services sector.

The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Cash on hand and in banks P=8,969 P=8,969 Receivables 69,340 69,340 Prepaid expenses and other assets 20,453 20,453 Property and equipment 8,491 8,491

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Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Intangibles (see Note 16) 47,156 - Total (Carried Forward) 154,409 107,253 Total (Brought Forward) P=154,409 P=107,253 Accounts payable and accrued liabilities (56,429) (56,429) Deferred tax liabilities (14,147) - (70,576) (56,429) Total identifiable net assets 83,833 P=50,824 Non-controlling interest at fair value (12,575) Goodwill arising from acquisition (see Note 16) 274,949 Total consideration transferred P=346,207

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree‟s net identifiable assets.

The cost of acquiring Fuld U.S. amounted to U.S.$7.99 million (P=346.2 million) consisting of cash payment of U.S.$5.6 million and the remaining balance of U.S.$2.4 million payable in four years at four equal installments with an interest rate of 4.5% per annum.

As of December 31, 2011, current and noncurrent portions of long-term loan payable related to the acquisition of Fuld U.S. amounted to P=22.1 million ($0.5 million) and P=78.9 million ($1.8 million), respectively, (non-cash investing transaction).

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=242,215) Transaction cost (included as part of administrative expenses and cash flows

from operating activities) (10,610) Less cash of acquired subsidiary 8,969 Net cash outflow (P=243,856)

The fair value of receivables amounted to P=69.3 million. These receivables are not impaired and expected to be collected in full.

The goodwill amounting to P=274.9 million includes the value of expected synergies arising between Fuld U.S. and the Company‟s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld U.S. has contributed P=248.3 million of revenue and P=12.5 million to the loss to the consolidated income before income tax of the Company. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operation would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

Acquisition of Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) On July 25, 2011, PHN purchased 85% voting shares of stock of Fuld Philippines. Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002. The Company acquired Fuld Philippines to increase its BPO portfolio which will provide opportunities in the high value-added services sector.

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The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Cash on hand and in banks P=1,012 P=1,012 Receivables 1,756 1,756 Advances to employees 163 163 Property and equipment 636 636 3,567 3,567 Accrued payable and accrued expenses (5,157) (5,157) Loans payable (961) (961) Retirement payable (78) (78) Taxes payable (1,857) (1,857) (8,053) (8,053) Total identifiable net liabilities (4,486) (P=4,486) Non-controlling interest at fair value 673 Goodwill arising from acquisition (see Note 16) 10,720 Total consideration transferred P=6,907

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree‟s net liabilities.

The cost of acquiring Fuld Philippines amounted to P=6.9 million, of which P=4.0 million (non-cash investing transaction) was retained by the Company and remain unpaid as at December 31, 2011.

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=2,907) Transaction costs (included as part of administrative expenses and cash flows

from operating activities) (6) Less cash of acquired subsidiary 1,012 Net cash outflow (P=1,901)

The fair value of receivables amounted to P=1.7 million. These receivables are not impaired and expected to be collected in full.

The goodwill amounting to P=10.7 million includes the value of expected synergies arising between Fuld Philippines and the Company‟s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld Philippines has contributed P=9.7 million of revenue and P=0.2 million loss to the consolidated income before income tax of the Company. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operations would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

The net assets of Fuld U.S. and Fuld Philippines recognized in the Company‟s December 31, 2011 consolidated financial statements were based on provisional assessment of fair values as the audit and fair valuation of the identifiable net assets acquired were not yet completed.

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Acquisition of Non-controlling Interest On December 21, 2009, PHN acquired the remaining 19.5% non-controlling interest in UGC thereby increasing PHN‟s ownership to 100%, thus making UGC a wholly owned subsidiary of PHN. The total consideration was P=36.3 million of which P=9.1 million was paid as of December 31, 2009. The carrying value of the net assets of UGC at the date of sale was P=620.6 million, and the carrying value of the additional interest acquired was P=121.0 million. The difference of P=84.7 million between the consideration paid and the carrying value of non-controlling interest acquired is recorded as “Negative goodwill on acquisition of non-controlling interest” in the 2009 consolidated statement of income.

8. Cash and Cash Equivalents

This account consists of:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands) Cash on hand and in banks P=40,707 P=83,853 Short-term deposits 815,788 832,304 P=856,495 P=916,157

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

9. Investments Held for Trading

This account consists of:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands)

Investments in: UITFs P=358,794 P=414,525 Bonds 469,511 353,065 Marketable equity securities 3,409 3,927 P=831,714 P=771,517

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10. Trade and Other Receivables

This account consists of:

Unaudited Audited March 31, 2011 Dec. 31, 2011

(In Thousands)

Trade P=700,947 P=780,742 Due from related parties (see Note 26) 37,046 75,653 Installment contract receivables 5,636 72,617 Advances to suppliers and contractors 6,059 13,449 Accrued interest 7,862 11,817 Receivable from PHN Retirement/Gratuity Plan (PHN

Retirement) 8,939 8,939 Advances to officers and employees 7,520 6,094 Others 124,687 53,144 898,696 1,022,455 Less allowance for doubtful accounts (172,995) (164,806) P=725,701 P=857,649

Trade receivables include receivables from sale of roofing and other steel products to customers like developers and contractors, which are normally on a 30-60 days term. Trade receivables also include tuition and other school fees receivables which are normally collected within the current school semester. Other trade receivables are noninterest-bearing and normally collected throughout the financial year.

The terms and conditions of due from related parties are discussed in Note 26.

Installment contract receivables mainly represent the balance of receivable from a third party for the sale of API‟s property (see Note 15). The receivables are noninterest-bearing and are short-term in nature.

Other receivables are noninterest-bearing and normally collected throughout the financial year.

Movements in the allowance for doubtful accounts are as follows:

March 31, 2012 Trade Others Total

(In Thousands)

Balance at January 1, 2012 P=161,835 P=2,970 P=164,805 Provisions (see Notes 24 and 25) 9,469 - 9,469 Balance at March 31, 2012 P=171,304 P=2,970 P=174,274

Individual impairment P=78,821 P=87,536 P=166,357 Collective impairment 7,917 – 7,917 P=86,738 P=87,536 P=174,274

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December 31, 2011 Trade Others Total (In Thousands)

Balance at January 1, 2011 P=138,052 P=8,245 P=146,297 Additions 5,714 – 5,714 Provisions (see Notes 24 and 25) 36,192 – 36,192 Reversals/write-offs (23,397) – (23,397) Balance at December 31, 2011 P=156,561 P=8,245 P=164,806

Individual impairment P=74,538 P=82,781 P=157,319 Collective impairment 7,487 – 7,487 P=82,025 P=82,781 P=164,806

11. Inventories

This account consists of:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands)

At cost: Finished goods P=827,866 P=886,342 Raw materials 125,620 36,303 Other inventories 24,585 20,633 At net realizable value - Spare parts and others 33,272 34,641 P=1,011,343 P=977,919

Under the terms of the agreements covering liabilities under trust receipts, certain inventories amounting to P=243 million and P=103.7 million as of March 31, 2012 and December 31, 2011, respectively, have been released to UGC in trust for the banks. UGC is accountable to the banks for the inventories under trust or its sales proceeds.

Finished goods mainly represent roofing and other steel products of UGC.

The cost of spare parts and other inventories carried at net realizable value amounted to P=34.6 million and P=36.0 million as of March 31, 2012 and December 31, 2011, respectively.

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12. Investments in Associates

This account consists of the Company‟s investments in the following entities:

Percentage of Ownership Direct Indirect Phinma Property Holdings Corporation (PPHC) 35.35 – TA Oil 28.26 – AB Capital and Investment Corporation (AB Capital) 26.51 1.67 Luzon Bag Corporation(a) 21.05 – Asia Coal Corporation (Asia Coal)(a) (b) 12.08 5.99

(a) Ceased commercial operations (b) Considered as an associate although percentage of ownership is below 20% since the Company has

significant influence as evidenced in its representation in the BOD of Asia Coal.

The movements and details of investments in associates are as follows:

Unaudited Audited March 31, 2012 Dec. 31, 2011 Acquisition costs: Balance at beginning of year P=1,888,248 P=1,537,282 Additions (disposal) (5,989) 350,966 Balance at end of year 1,882,259 1,888,248 Accumulated equity in net losses: Balance at beginning of year (72,154) (191,824) Equity in net earnings for the year 4,230 137,656 Dividends received (54,199) (17,986) Balance at end of year (122,123) (72,154) Share in net unrealized gain on change in fair value of

AFS investments of associates: Balance at beginning of year 19,051 19,226 Change in fair value during the year (314) (175) Balance at end of year 18,737 19,051 P=1,778,873 P=1,835,145

The detailed carrying values of investments in associates which are accounted for under the equity method are as follows:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands)

TA Oil* P=1,241,369 P=1,267,692 PPHC 342,585 373,630 AB Capital 192,473 191,397 Academy of Competitive Intelligence ** 2,178 2,158 Asia Coal 268 268 P=1,778,873 P=1,835,145

***The fair value amounted to P=896.0 million as of December 31, 2011. **Associate of Fuld U.S.

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As of March 31, 2012 and December 31, 2011, the carrying amount of the Company‟s investments in associates exceeded its equity in the net assets of the associates by P=5.1 million representing goodwill related to AB Capital.

Following are status of operations and significant transactions of certain associates:

a. TA Oil

TA Oil is involved in power generation and oil and mineral exploration activities.

On February 16, 2012, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 1, 2012. This was paid on March 27, 2012.

On June 6, 2011, the SEC approved the increase in the Company‟s authorized capital stock from P=2 billion divided into 2 billion shares, to P=4.2 billion divided into 4.2 billion shares.

On March 30, 2011, the SEC approved the stock rights offering of 1,165.24 million shares of TA Oil at the rate of seven shares for every ten shares held as of record date of May 18, 2011, at a price of P=1.00 per share. The offer period commenced on May 30, 2011 and ended on June 3, 2011. Total proceeds raised from the stock rights offering, net of direct costs incurred, amounted to P=1,154.53 million. The proceeds will be used as equity investment in new 135 MW clean coal power project and in Maibarara Geothermal, Inc. Additional investments made to TA Oil as a result of stock rights offering and issuance of new shares amounted to P=350.4 million in 2011.

On March 21, 2011, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of April 11, 2011. This was paid on May 4, 2011.

On March 24, 2010, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to 0.04 a share to all common stockholders of record as of May 3, 2010. This was paid on May 28, 2010.

On March 16, 2009, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 30, 2009. This was paid in 2009.

Dividend income recognized by the Parent Company from TA Oil amounted to P=18.0 million each in 2011, 2010 and 2009.

TA Oil has 100% equity interest in CIP II Power Corporation (CIPP) which operates a 21 MW Bunker C-fired power plant in CIP II Special Economic Zone in Calamba, Laguna. In April, 2009, the terms of the sale of the distributions assets to Manila Electric Company was finalized resulting in the cessation of CIPP‟s operations starting April 2009. Also, the separation of substantially all of CIPP‟s employees effective January 2010 was announced. On February 22, 2010 and March 24, 2010, the BOD and stockholders of TA Oil and CIPP approved the proposed merger of TA Oil and CIPP, respectively subject to the approval by the SEC. As of December 31, 2011, CIPP has not filed its application for merger with SEC and has deferred its plan for merger.

b. PPHC

PPHC is engaged in real estate development, particularly in the development of affordable medium and high-rise condominium units.

On March 13, 2012, the BOD of PPHC declared a cash dividend amounting to P=63.5 million or 7% of outstanding capital stock to all shareholders of record as of March 23, 2012. The 50% was paid on March 30, 2012 and the balance payable on September 28, 2012.

On March 1, 2010, the BOD of PPHC declared a cash dividend amounting to P=59.7 million equivalent to P=0.01 per share to all common stockholders of record as of March 15, 2010. This was paid in 2010.

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On March 3, 2009, the BOD of PPHC declared a cash dividend of P=0.005 per share and a special cash dividend of P=0.005 per share to all common stockholders of record as of March 17, 2009.

Dividend income recognized by the Parent Company from PPHC amounted to P=21.1 million each in 2010 and 2009.

c. AB Capital

AB Capital is an investment house that engages in corporate finance, fixed-income securities dealership, stock brokerage and fund management.

On March 21, 2011, the BOD of PHN approved the sale of all the shares in AB Capital to Vicsal Invesment, Inc. (Vicsal) subject to regulatory approvals. Under the Share Purchase Agreement (SPA), prior to the execution of the sale, AB Capital will effect (a) the transfer of certain assets to a new company (NewCo) in exchange for cash or shares of stock and (b) transfer of the NewCo shares to the stockholders through a return of capital or other appropriate structures.

In December 2011, the Bangko Sentral ng Pilipinas approved the sale of the shares to Vicsal and, on February 2, 2012, the Company received P=5.0 million representing its share of the first installment amounting to P=15.0 million. AB Capital has filed with the SEC for the transfer of certain assets to the NewCo.

d. Asia Coal

Asia Coal is engaged in the trading of coal. On March 19, 2009, the BOD and stockholders of Asia Coal approved the shortening of the term of Asia Coal‟s corporate existence until October 31, 2009, thereby causing the dissolution of Asia Coal as of such date, subject to the approval of the SEC. As of December 31, 2011, Asia Coal is in the process of securing a tax clearance with the Bureau of Internal Revenue (BIR) in connection with the filing with the SEC of its application for dissolution.

13. AFS Investments

This account consists of investments in quoted and unquoted equity securities:

Unaudited Audited March 31, 2012 Dec. 31, 2011 (In Thousands) Quoted: First Philippine Holdings Corporation

(FPHC) - preferred shares P=20,678 P=20,620 Unquoted: Coral Way City Hotel Corporation 66,250 66,250 Beacon Property Ventures Inc. 46,329 46,329 United Industrial Bag Corporation 30,000 30,000 Unicon Phinma Concrete Corporation 12,354 12,354 Others 10.954 10,954 186,565 186,507 Less accumulated impairment losses 45,517 45,517 P=141,048 P=140,990

Investment in AB Capital preferred shares was redeemed in 2011 at par value.

The unquoted AFS investments are carried at cost less accumulated impairment losses since their fair value cannot be reliably measured. The quoted AFS securities which are listed in the Philippine Stock Exchange (PSE) are carried at fair value.

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Unicon Phinma Concrete Corporation and United Industrial Bag Corporation discontinued their operations on March 21, 2000 and October 2000, respectively. Consequently, full provision for impairment loss has been made on such AFS investments

Accumulated impairment losses pertain to certain AFS investments classified as unquoted. 14. Property, Plant and Equipment

This account consists of:

January 1,

2012 Additions Disposals Reclassifi-

cation March 31,

2012

(In Thousands)

Cost Land P=1,085,875 515 - - P=1,086,390 Plant site improvements 22,834 - (119) 719 23,434 Buildings and improvements 1,252,026 6,474 - 1,388 1,259,888 Machinery and equipment 723,353 4,075 (1,060) - 726,368 Transportation and other

equipment 469,532 8,558 ((2,303) - 475,787 3,553,620 19,622 (3,482) 2,107 3,571,867 Less Accumulated

Depreciation Plant site improvements 17,809 584 (119) - 18,274 Buildings and improvements 482,495 13,866 - - 496,361 Machinery and equipment 568,813 20,508 (1,060) - 588,261 Transportation and other

equipment 339,065 9,678 (2,303) - 346,440 1,408,182 44,636 (3,482) - 1,449,336 2,145,438 (25,014) - 2,107 2,122,531 Construction in progress 115,306 14,091 - (2,106) 127,291 Net Book Value P=2,260,744 (10,923) - 1 P=2,249,822

January 1,

2011 Additions Disposals Reclassifi-

cation

December 31,

2011

(In Thousands)

Cost Land P=1,044,497 P=67,436 P=– (P=26,058) P=1,085,875 Plant site improvements 23,469 – (635) – 22,834 Buildings and improvements 1,202,671 54,955 – (5,600) 1,252,026 Machinery and equipment 694,524 31,459 (3,008) 378 723,353 Transportation and other

equipment 398,435 76,060 (3,075) (1,888) 469,532 3,363,596 229,910 (6,718) (33,168) 3,553,620 Less Accumulated

Depreciation Plant site improvements 15,978 2,466 (635) – 17,809 Buildings and improvements 429,305 53,190 – – 482,495

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Machinery and equipment 494,608 76,970 (2,765) – 568,813 Transportation and other

equipment 280,996 64,410 (2,608) (3,733) 339,065 1,220,887 197,036 (6,008) (3,733) 1,408,182 2,142,709 32,874 (710) (29,435) 2,145,438 Construction in progress 33,818 98,406 – (16,918) 115,306 Net Book Value P=2,176,527 P=131,280 (P=710) (P=46,353) P=2,260,744

Certain property, plant and equipment of UGC, AU and UPANG totaling P=1.1 billion as of December 31, 2011 were used as security for their respective long-term debt as disclosed in Note 20 to the consolidated financial statements.

15. Investment Properties

This account consists of:

January 1,

2012 Additions Disposals

(see Note 10) March 31,

2012 (In Thousands)

Cost: Land P=330,314 22,422 - P=352,736 Buildings for lease 93,316 - - 93,316 423,630 22,422 - 446,052 Less accumulated depreciation - Buildings for lease 12,740 1,537 - 14,277 P=410,890 20,885 - P=431,775

January 1,

2010 Additions Disposals

(see Note 10) December 31,

2011 (In Thousands)

Cost: Land P=321,085 P=9,229 P=– P=330,314 Buildings for lease 106,175 10,000 (22,859) 93,316 427,260 19,229 (22,859) 423,630 Less accumulated depreciation - Buildings for lease 20,971 6,253 (14,484) 12,740 P=406,289 P=12,976 (P=8,375) P=410,890

The fair value of investment properties based on the latest valuation performed by independent firms of appraisers on various dates in 2011 and 2012 amounted to P=810.6 million as of March 31, 2012 and December 31, 2011. The valuation of investment properties was based on market values using sales comparison approach, which considers the sales of similar or substitute properties and related market data and establishes value estimate by processes involving comparison.

On December 9, 2011, API acquired a condominium unit amounting to P=10.0 million from AB Capital, an affiliate, for cash.

On December 28, 2010, the API signed a Memorandum of Agreement with Shang Property Developers, Inc. (SPDI) for the sale of API‟s property for P=615.0 million. Outstanding receivable from SPDI amounted to P=68.9 million, presented in “Installment contract receivables” account under “Trade and other receivables”, as at December 31, 2011. (see Note 10).

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Land include PSHC‟s land amounting to P=220.0 million was used as security for its long-term debt as disclosed in Note 20 to the consolidated financial statements.

16. Intangibles

Following are the details and movements of this account:

January 1,

2012 Additions Impairment March 31,

2012

(In Thousands)

Cost: Goodwill (see Note 7) P=1,244,483 P=9,303 P=- P=1,253,786 Student lists 131,120 – – 131,120 Trademarks (see Note 7) 47,156 – – 47,156 Customer contracts 22,080 – – 22,080 1,444,839 9,303 – 1,454,142 Accumulated amortization: Student lists 127,516 3,604 – 131,120 Customer contracts 22,080 - – 22,080 149,596 3,604 – 153,200 P=1,295,243 P=5,699 P=1,300,942

January 1,

2011 Additions Impairment

December 31, 2011

(In Thousands) Cost: Goodwill (see Note 7) P=1,125,183 P=285,669 (P=166,369) P=1,244,483 Student lists 131,120 – – 131,120 Trademarks (see Note 7) – 47,156 – 47,156 Customer contracts 22,080 – – 22,080 1,278,383 332,825 (166,369) 1,444,839 Accumulated amortization: Student lists 92,268 35,248 – 127,516 Customer contracts 22,080 – – 22,080 114,348 35,248 – 149,596 P=1,164,035 P=297,577 (P=166,369) P=1,295,243

In December 2011, the Company recognized impairment loss on goodwill amounting to P=166.4 million pertaining to its investments in OAL.

17. Other Noncurrent Assets

This account consists of:

March 31, 2012 Dec. 31, 2011 (In Thousands)

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Input VAT - net of allowance for unrecoverable amount of P=89.2 million in 2011. P=– P=–

Others - net of allowance for doubtful advances of P=51.1 million in 2011 , respectively 45,286 26,640

P=45,286 P=26,640 18. Notes Payable

This account consists of notes payable of the following subsidiaries:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands)

UGC P=338,860 P=423,543 UI 30,739 20,150 COC 17,500 11,500 P=387,099 P=455,193

This account consists of unsecured short-term peso-denominated loans obtained from financial institutions with annual interest rates ranging from 4.75 % to 5 % in March 2012 and 4.63% to 5.25 % in December 2011.

19. Trade and Other Payables

This account consists of:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands)

Trade P=116,704 P=108,901 Accruals for : Professional fees and others (see Note 26) 80,180 65,912 Personnel costs (see Note 26) 40,870 52,773 Interest (see Note 26) 9,135 10,823 Freight, hauling and handling 2,430 883 Customers‟ deposits 66,615 44,756 Dividends 146,758 31,916 Payable to third parties 14,639 31,746 Others 22,859 42,082 P=500,190 P=389,792

Trade payables are noninterest-bearing and normally settled on 30 to 90-day terms.

Accrued expenses, customers deposits, dividends, payable to third parties and others are normally settled throughout the financial year.

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20. Long-term Debts

This account consists of long-term liabilities of the following subsidiaries:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands)

UPANG P=242,594 P=259,148 UGC: 259,321 280,000 501,915 539,148 Less debt issuance cost - 827 501,915 538,321 PSHC 151,050 151,050 AU 44,002 45,653 Fuld U.S. - 5,698 696,967 740,772 Less current portion - net of debt issuance cost 140,601 141,063 556,366 P=599,659

UPANG

This represents loan obtained from China Banking Corporation (China Bank) on July 21, 2009 used for the acquisition and/or refinancing of its capital expenditures. The terms of the loan are as follows:

Tenure Seven (7) - year term loan with one year grace period for repayment.

Repayment The first principal payment will commence at the end of the 5th quarter from the date of drawdown; amortization will be graduated, at P=12.5 million from the fifth to the 16th quarters; P=15.0 million from the 17th to the 24th quarters and the P=7.5 million for the last four quarters until full settlement.

Funding/Interest rate Interest will be based on the Wholesale Lending Program (third party funder) with a fixed rate of 8% for the first five years. Rates for the remaining two year period of the term shall be based on the prevailing two-year PDST-F rate plus a minimum spread of 2%.

Security The facility will be secured by Real Estate Mortgage amounting to P=300.0 million on the school assets covering land and land improvements (see Note 14).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

Maintenance of the following ratios based on the audited year-end financial statements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 3:1. Waived for the first year of the loan but is required for the remaining term of the loan.

Restrictions on declaration and payment of dividends, entering into merger or consolidation which would result in a material change in control, sale, lease, mortgage or otherwise dispose of all or substantially all of its assets and amendment of Articles of Incorporation and By-laws that would cause a material adverse change in the financial ability or capacity of the Company to perform.

As of March 31, 2012 and December 31, 2011, the University is not yet required to report and comply with the required financial ratios because the year two of the loan is not yet completed.

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UGC

As at March 31, 2012 and December 31, 2011, long-term debt includes loans obtained from Banco de Oro Unibank, Inc. (BDO) and Rizal Commercial Banking Corporation (RCBC).

On June 29, 2010, the outstanding long-term debt from BDO and RCBC (the lenders) were pre-terminated by obtaining three-year term loans aggregating to P=400.0 million from the same lenders for which P=2.8 million debt issue cost was paid. The newly obtained loans are to be paid in 11 quarterly installments of P=20.0 million to commence on September 25, 2010 and a lump sum payment in June 2013 amounting to P=180.0 million. The interest is at a fixed rate of 7.624% computed based on 3-year PDST-F plus a spread of 1.75% and applicable taxes at the time of the drawdown.

As of March 31, 2012 and December 31, 2011, the loans from the lenders are collateralized by mortgage agreement on UGC‟s land, plantsite improvements, buildings and installations and machinery and equipment of Calamba and Davao plants amounting to P=461.3 million and P=494.8 million, respectively (see Note 14).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

Maintenance of the following ratios for the duration of the loan agreements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 1.5:1

Restrictions on declaration and payment of dividends, incurrence of new long-term debt, entering into management agreement other than with PHINMA, entering into merger (except where it is the surviving entity) or consolidation or any change of ownership, sale, lease or otherwise transfer of a substantial portion of its assets except in the ordinary course of business, making any loans, advances or investments, making capital expenditures, prepayment of any other long-term debt and amendment of Articles of Incorporation and By-laws.

Under the loan agreement, failure to comply with the obligation or covenant in the agreement should be remedied within thirty (30) calendar days after notice by the lenders.

As of March 31, 2012 and December 31, 2011, UGC is in compliance with the terms of the loan agreement.

PSHC

This represents interest-bearing loan obtained from United Pulp and Paper Co., Inc. (UPPC) amounting to P=154.0 million arising from the acquisition of land from UPPC. UPPC was a former associate of the Company.

This loan is presented at amortized cost as of the end of the reporting period. The present value of the loan at initial recognition in 2006 was calculated using an effective interest rate of 11.0%. The effective interest rate used in computing for the present value of the loan payable was derived based on the rate inherent to the loan after considering the carrying value and the future value of the loan payable at the coupon rate of 9.1%.

Initially, the said loan is payable in two installments amounting to P=44.0 million on July 15, 2008 and P=110.0 million on July 15, 2013. On July 8, 2008, a Memorandum of Agreement was executed by UPPC and PSHC amending the maturity date of P=44.0 million from July 15, 2008 to July 15, 2013. A recomputation of the effective interest rate of 10.52% was made in 2008 to reflect the change in the payment terms of the liability in 2013. Additional interest expense resulting from the accretion of loan payable amounted to P=1.7 million in December 2011 (see Note 28). The details of the loan are as follows:

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March 31, 2012 Dec. 31, 2011

(In Thousands)

Loan payable to UPPC P=154,000 P=154,000 Less unamortized discount 2,950 2,950 P=151,050 P=151,050

To secure the payment of the loan, PSHC constituted a mortgage over its land amounting to P=220.0 million in favor of certain creditors of UPPC (see Note 15).

The payable of PSHC to UPPC incurs an annual interest at a rate subject to mutual agreement by UPPC and PSHC on each anniversary date. Interest expense on the amount payable to UPPC, computed at 9.1% of the outstanding principal balance, amounted to P=14.0 million in December 31, 2011. (see Note 20).

AU

AU‟s long-term debt consists of:

March 31, 2012 Dec. 31, 2011

(In Thousands)

Loan payable to China Bank P=44,002 P=45,653 Less current portion 11,625 9,573 P=32,377 P=36,080

Loan payable to China Bank represents the balance of a 10-year loan from China Bank which was used to preterminate the restructured long-term debt from another local bank, partially finance Araullo University‟s building renovation and purchase various school equipment. The debt is payable on fixed monthly amortization of P=750,000 starting April 17, 2006. Interest shall be payable monthly in arrears based on variable pass-on rate plus spread. In 2010, the outstanding loan payable to China Bank of P=53.25 million was restructured to the same lender at a fixed rate interest based on the 5-year prevailing PDST-F rate plus a spread of 1.5% payable quarterly in arrears including the applicable taxes for the account of the borrower. The new debt is to be paid in 19 quarterly installments until February 5, 2015 under a graduated amortization schedule based on the agreement. Transaction costs paid on this transaction and included in the carrying amount of the new debt amounted to P=2.4 million. Actual average interest rate was 8.4% in March 2012 and 10.3% in December 2011.

AU‟s land, including existing and future improvements thereon, is used as collateral for its loan payable to China Bank. The net book value of the said land and improvements amounted to P=163.0 million as of December 31, 2011. (see Note 14).

21. Equity

a. Capital Stock

The composition of the Parent Company‟s capital stock as of March 31, 2012 and December 31, 2011 is as follows:

Number of Shares March 31, 2012 Dec. 31, 2011 Preferred - cumulative,

nonparticipating, P=10 par value

Class AA

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Number of Shares March 31, 2012 Dec. 31, 2011 Authorized 50,000,000 50,000,000

Class BB Authorized 50,000,000 50,000,000

Common - P=10 par value Authorized 420,000,000 420,000,000

Common shares : Issued 257,697,313 257,697,313 Subscribed 39,994 39,994 Issued and subscribed (see Note 35) 257,737,307 257,737,307

The issued and outstanding shares as of March 31, 2012 and December 31, 2011 are held by 1,284 and 1,306 equity holders, respectively.

Capital stock presented in the statements of financial position is net of subscription receivables amounting to P=124 thousand as at March 31, 2012 and December 31, 2011.

The following summarizes the information on the Company‟s track record of registration of securities under the Securities Regulation Code:

Date of SEC Approval Authorized

Shares No. of

Shares Issued Issue/Offer

Price March 12, 1957 1,200,000 172,298 P=10 June 30, 1959 – 47,868 10 June 30, 1967* 800,000 – – June 30, 1968* 1,000,000 – – January 21, 1980* 2,000,000 – – November 3, 1988* 10,000,000 – – July 21, 1992* 25,000,000 – – January 15, 1995* 60,000,000 – – March 16, 1999* 320,000,000 – –

*Increased in authorized capital stock.

b. Retained Earnings

On March 22, 2012, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of April 11, 2012, which was paid on April 26, 2012.

On March 3, 2011, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2011, which was paid on April 26, 2011.

On March 3, 2010, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2010, which was paid on April 23, 2010.

On March 9, 2009, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 30, 2009, which was paid on April 24, 2009.

On October 5, 2005, the BOD of PHN appropriated P=1.0 billion of retained earnings for future investments.

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The BOD of PHN declared the following stock dividends:

Date Dividend Rate Shareholders‟ Record Date April 14, 2008 10% June 13, 2008 March 30, 2007 15% June 15, 2007 May 31, 2006 20% August 11, 2006

The retained earnings account is restricted for the payment of dividends to the extent of P=594.1 million as of December 31, 2011, respectively, representing the accumulated equity in net earnings of the subsidiaries and associates. The accumulated equity in net earnings of the subsidiaries and associates is not available for dividend distribution until such time that the Parent Company receives the dividends from the subsidiaries and associates.

c. Other Components of Equity

This account consists of:

Unaudited Audited March 31, 2012 Dec. 31, 2011 (In Thousands)

Share in unrealized gain on change in fair value of AFS investments of associates (see Note 12) P=18,737 P=19,051

Other reserves resulting from change in ownership interest in subsidiaries without loss of control (see Note 1) 8,943 8,943

Cumulative translation adjustments 1,785 4,935 Unrealized gain on change in fair value of

AFS investments (see Note 13) 1,044 985 P=30,509 P=33,914

In 2010, the convertible debt has been extinguished thus the Company reclassified the remaining balance of share in equity component of convertible notes to retained earnings.

22. Investment Income

This account consists of:

January – March 2012 2011 (In Thousands) Interest income P=13,572 P=11,208

Net Net gain from fair value change of investments held for trading 8,696 (7,670)

P=22,268 P=3,538

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23. Cost of Sales, Educational , Animation Services and Consultancy Services

This account consists of:

January – March 2012 2011 (In Thousands) Cost of sales P=610,144 P=572,348 Cost of educational services 133,752 132,856 Cost of animation services 12,454 50,032 Cost of consultancy services 34,235 - P=790,585 P=755,236

24. Operating Expenses

This account consists of:

January – March 2012 2011 (In Thousands) General and administrative expenses P=198,176 P=141,830 Selling expenses 37,608 37,115 P=235,784 P=178,945

25. Interest Expense and Other Financial Charges

This account consists of:

January – March 2012 2011 (In Thousands) Interest expense on loans

and borrowings P=18,127 P=18,948 Other financial charges 1,209 644 P=19,336 P=19,592

26. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party in making financial and operating decisions and the parties are subject to common control. Related parties may be individual or corporate entities.

Outstanding balances at year-end are unsecured and settlement occurs in cash throughout the financial year. There have been no guarantees provided or received for any related party receivables or payables. For the quarter ended March 31,2012 and year ended December 31, 2011, the Company has not recorded any impairment of receivables from receivables owed by the related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

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The significant related party transactions entered into by the Company with its associates and entities under common control and the amounts included in the consolidated financial statements with respect to such transactions follow:

Related Party Nature of Transaction Year

Amount of Transactions

During the Year

Amount of Due to

Related Parties

Amount of Due from

Related Parties

(see Note 10) (In Thousands)

PHINMA, Inc. Interest-bearing advances and share in expenses

2012 P=1,740 P=- P=64 2011 P=85,310 P=20,200 P=58,258

TA Oil Noninterest-bearing advances and share in expenses

2012 32,001 – 225 2011 881 – 131

PPHC Interest-bearing advances and share in expenses

2012 22,545 – 11,878 2011 131,816 – 643

CIP II Sale of property 2012 164 – 7,562 2011 12,116 – 7,565

AB Capital Purchase of property/share in expenses

2012 - – 5 2011 28 – 5

Other Shareholders of UPANG Interest-bearing advances 2012 2,749 - 3,558 2011 11,677 – 397

Others Share in expenses 2012 15,470 15,470 13,754 2011 10,607 4,296 8,654

2012 P=15,470 P=37,046 2011 P=24,496 P=75,653

PSHC. PSHC has outstanding long-term debt to UPPC arising from the acquisition of land from UPPC, then an associate of the Company (see Note 20). PSHC leases the land to UPPC for a period of 50 years, renewable for another 25 years upon the approval of the Philippine Department of Trade and Industry. Annual lease income during the entire lease term is initially fixed at P=14.6 million. In connection with the lease, UPPC was required to make a lease deposit with PSHC of P=55.5 million in July 2003 and an additional P=2.9 million in April 2005, aggregated and reflected as part of “Other noncurrent liabilities” at amortized cost at the end of the reporting period, and refundable to UPPC upon the expiration of the lease. The lease deposit‟s present value was calculated using an effective interest rate of 12.0% per annum. On August 2, 2006, PSHC and UPPC amended the lease agreement increasing the annual rent revenue from P=14.6 million to P=19.2 million effective January 1, 2006.

The difference between the face value of the lease deposit and its corresponding present value at inception was aggregated and reflected as unearned revenue that is being amortized as rent revenue simultaneous with the accretion of the lease deposit.

Management and Directors‟ Compensation PHN, UGC, COC, AU, UPANG and UI are under common management by PHINMA, Inc. and pay PHINMA, Inc. a fixed annual management fee plus an annual bonus based on a certain percentage of the respective companies‟ adjusted

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net income, as defined in the management contract between PHINMA, Inc. and the respective companies, pursuant to the provisions of the same contract.

Management fees and bonuses, included in “Professional fees and outside services” account under “General and administrative expenses”, amounted to P=18.76 million and P=42.0 million in March 31, 2012 and December 31, 2011, respectively. The related unpaid amount, included in “Accruals for professional fees and others” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=14.70 million and P=16.5 million as of March 31, 2012 and December 31, 2011, respectively.

PHN, UGC, AHC, UI and AU recognized bonus to directors computed based on net income with pre-agreed adjustments. Directors‟ bonus, included in “Personnel costs” account under “General and administrative expenses”, amounted to P=6.53 million and P=20.9 million in March 31, 2012 and December 31, 2011, respectively. The related unpaid amount, included in “Accruals for personnel costs” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=15.12 million and P=7.2 million as of March 31, 2012 and December 31, 2011 , respectively.

27. Income Tax

The deferred tax assets and liabilities are presented in the consolidated statements of financial position as follows: Unaudited Audited

March 31, 2012 Dec. 31, 2011

(In Thousands)

Deferred tax assets P=19,272 P=49,245 Deferred tax liabilities (297,078) (310,995) (P=277,806) (P=261,750)

Deferred tax assets were not recognized since management believes that it is not probable that sufficient future taxable profit will be available to allow said deferred tax assets to be utilized.

AU, UPANG, UI and COC, as private educational institutions, are taxed based on the provisions of Republic Act (R.A.) No. 8424, which was passed into law effective January 1, 1998. Section 27(B) of R.A. No. 8424 defines and provides that: “A Proprietary Educational Institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports, or Commission on Higher Education, or Technical Education and Skills Development Authority, as the case may be, in accordance with the existing laws and regulations - shall pay a tax of ten percent (10%) on their taxable income.”

MCIT totaling P=8.4 million can be deducted against RCIT due while NOLCO totaling P=212.3 million can be claimed as deduction against taxable income, as follows:

Amount Date Paid/Incurred Expiry Date MCIT NOLCO

(In Thousands)

December 31, 2009 December 31, 2012 P=2,452 21,581 December 31, 2010 December 31, 2013 4,788 – December 31, 2011 December 31, 2014 1,137 191,141 P=8,377 P=212,722

MCIT amounting to P=2.8 million expired in December 2011.

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The RCIT rate decreased to 30% from 35% effective January 1, 2009, as provided under the provisions of R.A. No. 9337, which amended certain provisions of the Tax Code.

On December 18, 2008, the BIR issued Revenue Regulations (RR) No. 16-2008 which implemented the provisions of Section 34(L) of the Tax Code of 1997, as amended by Section 3 of R.A. No. 9504, which allows individuals and corporations to adopt the Optional Standard Deduction (OSD) in computing their taxable income.

Under RR No. 16-2008, corporations may claim OSD equivalent to 40% of gross income, excluding passive income subjected to final tax, in lieu of the itemized deductions. A corporate taxpayer who elected to avail of the OSD shall signify such in the income tax return. Otherwise, it shall be considered as having availed of the itemized deductions allowed under Section 34 of the National Internal Revenue Code. Election is done on an annual basis. In December 2011, the Parent Company computed its taxable income based on itemized deductions.

28. Financial Risk Management Objectives and Policies

The Company‟s principal financial instruments comprise of cash and cash equivalents, short-term investments, corporate promissory notes and bonds, government bonds, quoted and unquoted shares of stocks, currency forwards, investments in UITFs and loans and borrowings in Philippine Peso and U.S. dollar currencies. The main purpose of these financial instruments is to finance the Company‟s investments. The Company also has financial assets and liabilities, such as trade and other receivables and trade and other payables that arise directly from operations.

The main risks arising from the Company‟s treasury transactions are credit risk, liquidity risk, market risk, foreign currency risk, interest rate risk and equity price risk. Careful study, skill, prudence and due diligence are exercised at all times in the handling of the funds of the Company. An Investment Committee reviews and approves policies and directions for investments and risks management. The basic parameters approved by the Investment Committee are:

Investment Objective Safety of Principal

Tenor Three year maximum for any security, with average duration between one and two years

Exposure Limits a. For banks and fund managers: maximum of 20% of total funds of the Company per bank or fund

b. For peso investments: minimal corporate exposure except for registered bonds

c. For foreign currencies: maximum 50% of total portfolio. Limits on third currencies outside USD are set regularly and reviewed at least once a year by the Investment Committee

d. For investments in equities whether directly managed or managed by professional managers: limits are set as approved by the Investment Committee and based on current market outlook at the time of review

e. For derivative transactions - limits are set up to 100% of asset subject to derivative transaction with the objective of neutrality of gain/loss

Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Due to the Company‟s investing and operating activities, the Company is exposed to the potential credit-related losses that may occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations.

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In managing credit risk on these financial instruments, the Company transacts only with the Company‟s duly accredited domestic and foreign banks. Investments per financial institution are subject to a maximum of 20% of the Company‟s investible funds. It is the Company‟s policy that investments cannot exceed 10% of the trust or mutual fund‟s total assets.

A comprehensive credit and business review in coordination with dealers or underwriters is performed whenever the Company invests in non-rated securities. Furthermore, the Company monitors the credit quality of corporate and sovereign bonds with reference to credit rating studies and updates from the major rating agencies.

The Company‟s exposure to credit risk on its cash and cash equivalents, short-term investments, investments held for trading, AFS investments, trade and other receivables and derivative instruments arises from default of the counterparties with maximum exposures equal to the carrying amounts of the instruments.

Unaudited Audited

March 31, 2012 Dec. 31, 2011

(In Thousands)

Loans and receivables: Cash and cash equivalents P=856,495 P=916,157 Trade and other receivables 725,701 857,649 Investments held for trading: Investments in UITFs 358,794 353,065 Investments in bonds 469,511 414,525 Investments in marketable equity securities 3,409 3,927 AFS investments: Quoted 20,533 20,620 Unquoted - net of accumulated impairment losses 120,515 120,370 P=2,554,958 P=2,686,313

There are no significant concentrations of credit risk within the Company.

Credit Quality of Financial Assets, Other than Trade and Other Receivables The Company uses the following criteria to rate credit quality of its financial assets, other than trade and other receivables:

Class Description

High Grade Investments in instruments that have a recognized foreign or local third party rating or instruments which carry guaranty/collateral.

Standard Grade Investments in instruments of companies that have the apparent ability to satisfy its obligations in full.

Substandard Grade Investments in instruments of companies that have an imminent possibility of foreclosure; those whose securities have declined materially in value, or those whose audited financial statements show impaired/negative net worth.

Cash and cash equivalents, short-term investments and derivative instruments are classified as high grade since these are deposited in/or transacted with reputable financial institutions which have low probability of insolvency.

The credit quality of investments held for trading and AFS investments as of March 31, 2012 and December 31 , 2011 are as follows:

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March 31, 2012 Neither Past Due nor Impaired

High

Grade Standard

Grade Substandard

Grade Impaired Total

(In Thousands)

Investments held for trading: Investments in UITFs P=95,204 263,590 P=– P=– P=358,794 Investments in bonds 438,633 30,878 – – 469,511 Investments in marketable equity securities - 3,409 – – 3,409 AFS investments: Quoted - 20,533 – – 20,533 Unquoted - 120,515 – 45,517 166,032 P=533,837 P=438,925 P=– P=45,517 P=1,018,279

December 31, 2011 Neither Past Due nor Impaired

High

Grade Standard

Grade Substandard

Grade Impaired Total

(In Thousands)

Investments held for trading: Investments in UITFs P=93,684 P=259,381 P=– P=– P=353,065 Investments in bonds 387,264 27,262 – – 414,526 Investments in marketable equity securities – 3,927 – – 3,927 AFS investments: Quoted – 20,620 – – 20,620 Unquoted – 120,370 – 45,517 165,887 P=480,948 P=431,560 P=– P=45,517 P=958,025

Credit Quality of Trade and Other Receivables Trade and other receivables are classified as (a) high grade when the receivables are secured or covered with collaterals; (b) standard grade when the receivables are unsecured but debtors have good paying habits; or (c) substandard grade when the receivables are unsecured and debtors have poor paying habits.

The credit quality of trade and other receivables (including installment contract receivables) as of March 31, 2012 and December 31, 2011 are as follows:

March 31, 2012 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=377,081 P=323,866 P=700,947 Due from related parties – 34,172 2,874 37,046 Installment contract receivables – 5,636 - 5,636 Advances to suppliers and contractors – 3,233 2,826 6,059 Accrued interest 7,862 - - 7,862 Receivable from PHN Retirement – 8,939 - 8,939 Advances to officers and employees – 7,520 - 7,520 Others – 119,688 4,999 124,687 P=7,862 P=556,269 P=334,565 P=898,696

December 31, 2011 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=420,007 P=360,735 P=780,742 Due from related parties – 72,779 2,874 75,653

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December 31, 2011 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Installment contract receivables – 72,617 – 72,617 Advances to suppliers and contractors – 10,623 2,826 13,449 Accrued interest 11,817 – – 11,817 Receivable from PHN Retirement – 8,939 – 8,939 Advances to officers and employees – 6,094 – 6,094 Others – 48,145 4,999 53,144 P=11,817 P=639,204 P=371,434 P=1,022,455

Impaired financial instruments comprise of trade receivables from customers, related parties and other receivables.

Liquidity Risk Liquidity risk is the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price. The Company manages liquidity risks by restricting investments and continuously monitoring weekly and monthly cash flows as well as updates of annual plans.

The maturities of the financial liabilities are determined based on the Company‟s projected payments and contractual maturities. The average duration adheres to guidelines provided by the Investment Committee. It is the Company‟s policy to restrict investment principally to publicly traded securities with a history of marketability and by dealing with only large reputable domestic and international institutions. Market Risk Market risks are managed by constant review of global and domestic economic and financial environments as well as regular discussions with banks‟ economists/strategy officers to get multiple perspectives on interest rate trends/forecasts. Regular comparison of the portfolio‟s marked-to-market values and yields with defined benchmarks are also made.

Foreign Currency Risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company‟s financial assets that are exposed to foreign currency risk are foreign currency denominated cash and cash equivalents, investment in bonds and investments in UITFs.

Foreign exchange risks on the U.S. dollar and other foreign currencies are managed through constant monitoring of the political and economic environment. Returns are also calibrated on a per currency basis to account for the perceived risks with higher returns expected from weaker currencies. The Company also enters into currency forward contracts to manage its foreign currency risk.

The following table shows the U.S. foreign currency-denominated financial assets and financial liabilities and their peso equivalents as of March 31, 2012 and December 31, 2011 :

March 31, 2012 December 31, 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial assets: Cash and cash equivalents US$2,938 P=126,087 US$3,720 P=163,085 Receivables 1,123 48,219 151 6,620 Investments in bonds 2,016 86,543 2,284 100,130 Investments in UITFs 1,432 61,472 1,400 61,376 US$7,510 P=322,321 US$7,555 P=331,211

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March 31, 2012 December 31, 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial liabilities: Trust receipts payable US$5,662 P=242,994 US$2,773 P=121,568 Long-term loan payable 2,304 98,888 – –

US$7,966 P=341,882 US$2,773 P=121,568

In translating foreign currency-denominated financial assets into peso amounts, the exchange rate used was P=42.92 to US$1.00 as of March 31, 2012 and P=43.84 to US$1.00 as of December 31, 2011.

Interest Rate Risk

a. Cash Flow Interest Rate Risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company is exposed to cash flow interest rate risk due to AU‟s variable rate loan from China Bank as at December 31, 2010 (see Note 20). On August 5, 2011, the interest on AU‟s loan is fixed based on the 5-year prevailing PDST-F plus a spread of 1.50% payable quarterly.

b. Price Interest Rate Risk

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Company accounts for its debt investments at fair value. Thus, changes in benchmark interest rate will cause changes in the fair value of quoted debt instruments.

Interest on financial instruments classified as fixed rate was fixed until the maturity of the instrument.

Other financial assets at FVPL are noninterest-bearing investments and are therefore not subject to interest rate volatility.

Peso placements are subject to cash flow interest rate risk while peso and dollar bonds are subject to fair value interest rate risk.

Equity Price Risk Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of the equity indices and the values of individual stocks. The Company‟s exposure to equity price risk relates primarily to its equity investments listed in the PSE classified under investments held for trading.

The Company‟s policy is to maintain the risk to an acceptable level. Movement of share price is monitored regularly to determine impact on the Company‟s financial position.

Capital Management The primary objective of the Company‟s capital management is to ensure that the Company maintains a healthy capital structure to maintain strong credit rating and maximize shareholder value.

The Company closely monitors and manages its debt-to-equity ratio, which it defines as total liabilities divided by total equity. Capital includes all the accounts appearing in the “Equity attributable to equity holders of the parent” and “Equity attributable to non-controlling interest” in the consolidated statements of financial position.

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To ensure that there are sufficient funds to settle its liabilities, the Company‟s policy is to keep debt-to-equity ratio below 1:1. The Company‟s consolidated debt-to-equity ratio as of March 31, 2012 and December 31, 2011 are as follows:

Unaudited Audited March 31, 2012 Dec. 31, 2011

(In Thousands) Total liabilities P=2,403,272 P=2,490,631 Total equity 7,093,105 7,177,576 Debt-to-equity ratio 0.34:1 0.35:1

29. Financial Instruments

Fair Value Set out below is a comparison by category of carrying amounts and fair values of all of the Company‟s financial instruments that are carried in the consolidated statements of financial position :

Carrying Amount Fair Value March 31, 2012 Dec. 31, 2011 March 31, 2012 Dec. 31, 2011

(In Thousands)

Financial Assets Loans and receivables: Cash and cash equivalents P=856,495 P=916,157 P=856,495 P=916,157 Trade and other receivables* 725,701 857,649 725,701 857,649 Total (Carried Forward) 1,582,196 1,773,806 1,582,196 1,773,806

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Carrying Amount Fair Value March 31, 2012 Dec. 31, 2011 March 31, 2012 Dec. 31, 2011

(In Thousands)

Total (Brought Forward) P=1,582,196 P=1,773,806 P=1,582,196 P=1,773,806 Financial assets at FVPL: Investments held for trading: Investments in UITFs 358,794 353,065 358,794 353,065 Investments in bonds 469,511 414,525 469,511 414,525 Investments in marketable equity

securities 3,409 3,927 3,409 3,927 831,714 771,517 831,714 771,517 AFS investments: Quoted 20,533 20,620 20,533 20,620 Unquoted 120,515 120,370 120,515 120,370 141,048 140,990 141,048 140,990 P=2,554,958 P=2,686,313 P=2,554,958 P=2,686,313

Financial Liabilities Financial liability at FVPL - Derivative liability P=822 P=2,281 P=822 P=2,281 Other financial liabilities: Notes payable 387,099 455,193 387,099 455,193 Trade and other payables 500,190 389,792 500,190 389,792 Trust receipts payable 242,994 103,735 242,994 103,735 Due to related parties 15,470 24,496 15,470 24,496 Long-term loan payable* 98,888 101,007 98,888 110,460 Long-term debt* 696,967 740,722 696,967 774,019 1,941,608 1,814,945 1,941,608 1,857,695 P=1,942,430 P=1,817,226 P=1,942,430 P=1,859,976 *Including current and noncurrent portion.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents, Short-term Investments, Trade and Other Receivables, Notes Payable, Trade and Other Payables, Trust Receipts Payable and Due to Related Parties. The carrying amounts approximate fair values due to the relatively short-term maturities of the financial instruments.

Investments Held for Trading and AFS Investments. Quoted market prices have been used to determine the fair value of financial assets at FVPL and listed AFS investments. Unquoted AFS investments are measured at cost less accumulated impairment loss since the fair value is not readily determinable due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. The Company does not intend to dispose the unquoted AFS in the near future.

Long-term Loan Payable and Long-term Debt. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable rates for similar types of loans. Discount rates used range from 2.7% to 6.0% in December 2011.

Derivative Instruments. The fair value of freestanding currency forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

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Derivative Instruments

Freestanding Derivatives. The Company‟s derivative financial instruments are accounted for as financial instruments at FVPL.

The Company enters into sell US$-buy PHP= non-deliverable foreign currency forward contracts to manage the foreign currency risk arising from its US$ denominated assets. These derivatives are transactions not accounted for as accounting hedges.

The Company has outstanding currency forward contracts with an aggregate notional amount of US$6.8 million and US$6.4 million as of March 31, 2012 and December 31, 2011, respectively. The weighted average contracted forward rate is P=43.01 to US$1.00 and P=43.49 to US$1.00 as of March 31, 2012 and December 31, 2011, respectively. The currency forward contracts outstanding as of March 31, 2012 will mature in April to October 2012. The net changes in fair values of these outstanding currency forward contracts amounted to negative P=0.82 million and negative P=2.3 million as of March 31, 2012 and December 31, 2011, respectively.

The net changes in fair value of these derivative assets (liabilities) are as follows: Unaudited Audited

March 31, 2012 Dec. 31,2011

(In Thousands) Balance at beginning of year (P=2,281) P=4,442 Net change in fair value during the year (1,241) 7,121 Fair value of settled contracts 2,701 (13,844) Balance at end of year (P=821) (P=2,281)

Embedded Derivatives. Embedded foreign currency derivatives were bifurcated from certain of the Company‟s purchase contracts, which are denominated in a currency that is neither the functional currency of a party to the contract nor the routine currency for the transaction.

The net changes in fair values of derivatives are presented as “Net gains on derivatives” in the consolidated statements of income.

Fair Value Hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data

Financial assets measured at fair value follow:

March 31, 2012 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in UITFs P=358,794 P=358,794 P=– P=–

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March 31, 2012 Level 1 Level 2 Level 3 Investments in bonds 469,511 469,511 – – Investments in marketable equity securities 3,409 3,409 – – AFS investments - Quoted 20,533 20,533 – – P=852,247 P=852,247 P=– P=–

Dec. 31, 2011 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in UITFs P=353,065 P=353,065 P=– P=– Investments in bonds 414,525 414,525 – – Investments in marketable equity securities 3,927 3,927 – – AFS investments - Quoted 20,620 20,620 – – P=792,137 P=792,137 P=– P=–

Derivative assets and liabilities are classified under Level 1 fair value hierarchy.

During the three (3) months ended March 31, 2012 and the year ended December 31, 2011, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.

30. EPS Computation

Unaudited March 31, 2012 March 31, 2011 (a) Net income attributable to equity holders

of the parent P=30,072 P=64,263

(b) Number of shares outstanding at beginning of year 257,737,307 257,737,307

Basic/Diluted EPS attributable to equity holders of the parent (a/e) P=.12 P=.25

There were no stock issuances, stock dividends or any increases or decreases in capitalization of the Company that would impact the weighted average number of common shares outstanding in March 2012 and December 2011.

31. Segment Information (see page 77 for table presentation)

For management purposes, the Company‟s operating businesses are organized and managed separately according to business activities and has five reportable operating segments as follows:

Investment holdings – The Parent Company and PSHC are engaged in investment holding activities of shares of stocks and other financial instruments.

Property development – API leases its real and personal properties. Steel – UGC manufactures and trades iron and steel products.

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Educational services – AU, COC, UPANG and UI offer graduate, tertiary, secondary and elementary education services.

BPO – OAL and Toon City are engaged in film, video, television and animation services. Fuld U.S. and Fuld Philippines are engaged in intelligence research.

The Company has no geographical segment for segment reporting format as the Company‟s risks and rates of return are substantially in the same economic and political environment, with the companies incorporated and operated in the Philippines.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. However, Company financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments.

Transfer prices between operating segments are on an arm‟s length basis in a manner similar to transaction with third parties.

Segment Information

Financial information on the operating segments are summarized as follows:

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) For the Period January – March 31, 2012

Revenues Segment revenue P=4,096 P=155 P=705,590 P=230,280 P=109,635 P=- P=1,072,024 Investment income 18,526 3,742 - - - - Total revenues P=22,622 P=3,897 P=705,590 P=230,280 P=22,622 P=- P=1,072,024

Results

Segment results P=156,986 (P=1,894) (P=674,857) (P=189,073) (P=126,493) (P=172,195) (P=1,011,777) Investment income 18,526 3,742 705,590 230,280 109,635 - 1,072,024 Equity in net earnings of an associate - (8,576) - - - 12,786 4,210 Interest expense and financing charges (1,058) - (9,836) (6,262) (2,180) - (19,336) Benefit from (provision for) income tax (564) (271) (6,088) (5,738) (131) 1,815 (10,977) Share of non-controlling interest - - - (403) 657 (4,326) (4,072) Net income attributable to equity holders of parent P=173,890 (P=6,999) P=14,809 P=28,804 (P=18,512) (P=161,920) P=30,072

As at March 31, 2012

Assets and Liabilities Segment assets P=2,252,670 P=514,637 P=1,978,034 P=2,040,067 P=490,247 P=422,397 P=7,698,232 Investment in associates 4,331,846 - 10,288 - 2,177 (2,565,438) 1,778,873 Deferred tax assets - - - - 15,155 4,117 19,272 Total assets P=6,584,516 P=514,637 P=1,988,322 P=2,040,067 P=507,759 (P=2,138,924)) P=9,496,377

Segment liabilities P=505,242 P=24,953 P=1,090,005 P=543,005 P=306,462 (P=486,226) P=2,063,441 Income and other taxes payable 3,704 463 25,619 10,196 2,770 - 42,752 Deferred tax liabilities - 7,281 33,081 127,109 - 129,607 297,078 Total liabilities P=508,946 P=32,697 P=1,148,705 P=680,310 P=389,232 (P=356,619) P=2,403,271

Other Segment Information Capital expenditures 2,946 - 11,839 18,211 1,993 - 34,989 Depreciation and amortization 2,582 167 24,152 18,781 269 6,050 52,001

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Continuing Operations

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) January – March 2011

Revenues P=5,852 P=12,655 P=700,870 P=251,723 P=35,740 P=- P=1,006,840 Segment revenue Investment income Total revenues

Results Segment results P=338,197 P=10,703 P=67,537 P=56,565 (P=19,101) (P=366,186) P=87,715 Investment income - - - - - - - Equity in net earnings of an associate - 7,934 - - - 15,923 23,857 Interest expense and financing charges (643) - (10,117) (7,111) (1,721) - (19,592) Benefit from (provision for) income tax (231) (2,122) (17,055) (452) - 3,489 (16,371) Share of non-controlling interest - - - (98) 496 (11,744) (11,346) Net income attributable to equity holders of parent P=337,323 P=16,515 P=40,365 P=48,904 (P=20,326) (P=358,518) P=64,263

As at December 31, 2011

Assets and Liabilities Segment assets P=2,095,305 P=512,803 P=1,928,240 P=2,209,903 P=460,844 P=576,722 P=7,783,817 Investment in associates 4,319,127 – 10,288 – 2,159 (2,496,429) 1,835,145 Deferred tax assets – – 19,904 2,879 22,283 4,179 49,245 Total assets P=6,414,432 P=512,803 P=1,958,432 P=2,212,782 P=485,286 (P=1,915,528) P=9,668,207

Segment liabilities P=406,773 P=977 P=955,196 P=748,466 P=361,363 (P=338,028) P=2,134,747 Income and other taxes payable 2,914 120 25,739 12,870 3,246 – 44,889 Deferred tax liabilities – 7,281 52,759 119,793 83 131,079 310,995 Total liabilities P=409,687 P=8,378 P=1,033,694 P=881,129 P=364,692 (P=206,949) P=2,490,631

Other Segment Information Capital expenditures P=18,026 P=10,000 P=91,710 P=181,516 P=18,300 (P=3,762) P=315,790 Depreciation and amortization 11,748 772 77,975 73,088 7,972 46,524 218,079 Provision for impairment loss on investment in a

subsidiary/goodwill 274,172 – – – 166,369 (274,172) 166,369 Provision for unrecoverable input value-added tax 7,372 – – – – – 7,372

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results Of Operations For the 1st quarter ended March 31, 2012, consolidated revenues of Phinma Corporation (PHN) amounted to P1.1 billion, slightly higher than revenues of P1.0 billion for the same period last year. This is due to the revenues of Fuld & Company, Inc. and Fuld & Company (Philippines) Inc., which were acquired and consolidated beginning June 2011. Consolidated costs and expenses of PHN for the 1st quarter amounted to P1.03 billion , 10% higher compared to the previous year‟s cost and expenses amounting to P934 million. The increase is likewise attributable to the cost and expenses of Fuld and Company, Inc. and Fuld and Company (Philippines), Inc. amounting to P31 million and P3 million respectively, Consolidated net income of the company for the period January to March 2012 amounted to P34 million, of which P30 million is income attributable to equity holders of the parent. In view of the increasingly competitive market under a liberalized tariff regime, income from Union Galvasteel Corporation decreased from P 40.3 million to P 14.8 million. PHN also consolidated losses from One Animate, albeit at a lower amount of P 11 million, compared to P 20 million for the same period last year, and experienced a decline in income contribution of Universtiy of Pangasinan and University of Iloilo as a result of lower student enrollment. Equity in net earnings of associates decreased from P23.9 million for the period January to March 2011 to P4.2 million this year. The decline is mainly due to equitized losses in Phinma Property Holdings Corporation of P 8.6 million, compared to equity in net earnings of P 7.9 million last year. The results of operations of PHN subsidiaries for the period January to March 2012 are as follows :

Union Galvasteel Corporation (UGC)

I. Marketing For the quarter, the company sold 1.535 million sheets or 6% below the budget since demand had not picked up as expected. The market remains very competitive, putting constant pressure on volume and margins

II. Production

The galvanizing line was on shutdown since November last year until February 2012 and only operated in March. The line processed 2,728 MT with a utilization of 55% as against production budget of 2,250 MT and 45% utilization.

The color coating line operated at 65% utilization and produced 6,547 MT as against budget of 68% utilization and production budget of 6,700 MT. The line was on shutdown from December 24, 2011 until January 13, 2012 to give way for the replacement of the old oven. The new oven is designed to improve operational efficiency.

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III. Financials Revenue generated was P706 million with a contribution margin of P160 million resulting to a Gross Profit (GP) rate of 16% and a net income of P14.8 million. This is lower than last year‟s GP rate of 21% and income of P40.3 million. Operating expenses increased by 5% from last year. Financial charges are lower by 3% due to the servicing of the long term loan.

Araullo University (AU) For the period January to March 2012, Araullo University registered revenues amounting to P45 million

while direct costs amounted to P27 million. General and administrative expenses for the same period amounted to P10.6 million. For the three months ended March 31, 2012, Araullo University registered a net income of P6 million or 39% lower compared to the same period last year due to reversal of provision for income tax in March 2011 in the amount of P3 million.

Total assets for the period March 31, 2012 amounted to P450 million while liabilities amounted to P113

million.

Cagayan de Oro College, Inc. (COC)

For the 1st quarter of CY 2012, COC registered revenues amounting to P40 million. Direct cost and operating expenses as of March 31, 2012 were P24 million and P10 million respectively. COC net income increased significantly from P2 million last year to P6 million for the period January to March 31, 2012 due to increase in student enrollment.

University of Pangasinan (UPANG)

On February 2, 2009, the Company acquired a 70% stake in University of Pangasinan in Dagupan City. UPang is the leading educational institution in Pangasinan offering elementary, secondary and tertiary education. UPang offers courses in Nursing, Engineering and Accountancy, among others. UPang also owns 69.75% of Pangasinan Medical Center, also located in Dagupan City. For the 1st quarter 2012, UPANG registered revenues amounting to P98 million and net income of P16 million. UPANG total assets as of end March 31, 2012 amounts to P858 million. Student enrollment slightly decreased from 7,518 for the second semester of school year 2010-11 to 7,236 this year. University of Iloilo (UI)

On February 25, 2009, PHN acquired a 70% interest in University of Iloilo (UI), located in Iloilo City. UI offers elementary, secondary and tertiary education, and currently serves approximately 5,305 students. UI offers courses in nursing, criminology, hotel and restaurant management and accountancy.

For the period January to March 2012, UI posted a net income of P1 million , compared to P6 million in 2011. The decrease was due to a 14% decline in enrollment from 5,360 students for the second semester of school year 2010-11 to 4,591 students.

68

One Animate Limited (OAL)

One Animate Limited is a limited liability company incorporated in Hongkong in October 2008. OAL owns a ninety five (95%) interest in Toon City Animation, Inc. The latter is an award winning animation Studio providing 2D Flash and 3D CGI animation services and counts among its clients international names like Walt Disney and Universal Studios.

For the 1st quarter of CY 2012, OAL registered revenues of P12 million. Although OAL incurred a net

loss of P11 million , the losses are a slight improvement over losses of P20 million last year. OAL total assets as of end March 2012 amounted to P332 million.

Fuld & Company, Inc. (Fuld)

In June 2011, the Company acquired an 85% interest in Fuld & Company, Inc. (Fuld). Fuld is a business research and consulting firm focusing on business and competitive intelligence. Fuld is incorporated in the United States with offices in the US, UK and China. Founded in 1979, Fuld delivers customized, proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges. For the period January – March 2012, Fuld posted a net loss of P 6 million on revenues of P 92 million. Fuld total assets as of end March 2012 amounted to 161 million.

Business Back Office, Inc. (BBI)

In July 2011, PHN acquired an 85% interest in Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc. (BBI). Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002.

For the period January to March 2012, Fuld Philippines registered revenues of P6 million. However, the

company posted a net loss of P2 million. Fuld Philippines total assets as of end March 2012 amounted to P14 million.

Asian Plaza, Inc. (API)

API is a 57.6% subsidiary of PHN and owns and leases the Asian Plaza Building in Sen. Gil Puyat Avenue, Makati City. On December 28, 2010 and March 31, 2011, API signed a Memorandum of Agreement and Deed of Sale respectively, for the sale of Asian Plaza property to Shang Property Developers, Inc. (SPDI) in the amount of P615 million with 25% of the selling price paid already as of December 31, 2010. API recognized the gain from this transaction amounting to P386 million in 2010. On April 4, 2011, API received the 65% payment of SDPI amounting to P399.75 million. For the period January – March 2012, API posted a net income of P1.6 million on revenues of P4 million, compared to net income of P 8.6 million last year. The decline in income is due to the loss of rental revenues, as a result of the sale of the company‟s property last year.

69

Key Performance Indicators (KPI)

The top five (5) KPI‟s used to measure the financial performance of PHN and its subsidiaries as of

March 31, 2012 compared to the same period last year are shown in the following table :

Profitability

The return on equity for the period of .46% is lower than the .99% return for the same period last year. The

decrease was due to the decline in net income for the period January to March 2012. However, the gross profit margin increased from 24.99% in March 2011 to 26.25% in March 2012 mainly due to gross profit margin of Fuld & Company, Inc. which were acquired and consolidated beginning June 2011. Efficiency

Net cash outflow from operations was P100 million for the period January to March 2012 compared to net cash inflow of P203 million for the same period last year. The net cash outflow for the quarter 2012 is due to the purchase of bonds by PHN and inventories by UGC.

Liquidity

Current ratio as of March 31, 2012 slightly decreased from 2.63:1.00 last year to 2.61:100 this year due to decrease in current assets from P3.6 billion to P3.5 billion this year.

Debt-equity ratio of PHN and its subsidiaries as of end March 31, 2012 was slightly lower at 0.34 compared to 0.35 as of end December 31, 2011 mainly due to payment of notes payable and the reduction in unearned revenues, as the schools recognized income over the semester.

Financial KPI Definition 2012 2011

Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income (loss) Ave. total equity attributable to PHN

equity holders

Gross profit Net sales

.46%

26.25%

.99%

24.99%

Efficiency

Cash Flow Margin

Cash flow from operating Activities Net sales

(8.97)%

20.17%

Liquidity

Current Ratio

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

2.61 : 1.00

0.34 : 1.00

2.63 : 1.00

0.35 : 1.00

70

Accounting Policies and Principles

The accompanying consolidated financial statements of Phinma Corporation have been prepared in compliance with accounting principles generally accepted in the Philippines as set forth in Philippine Financial Reporting Standards (PFRS). The consolidated financial statements have been prepared on a historical cost basis, except for financial assets at fair value through profit and loss, available for sale investments and derivative investments that have been measured at fair value.

The consolidated financial statements are prepared in Philippine pesos, the company‟s functional and presentation currency.

Seasonality Aspects of the Business

Like any other company in the construction industry, the operations of UGC is affected by seasonality of cyclicality. During the summer months starting December to May, demand for roofing materials are greater than during the rainy months of June to November. The demand for the first semester of the calendar year is normally higher than that of the second semester. Interim Disclosures on Financial Statements The following financial disclosures do not materially affect or are not applicable to the Company‟s interim operations :

1. Unusual items that affect the assets, liabilities, equity, net income or cash flows because

of their nature, size or incidents. 2. Changes in estimates of amounts reported in prior interim periods of the current

financial year or changes in estimates of amounts reported in prior financial years that have a material effect in the current period.

3. Issuances, repurchases of debt and equity securities.

4. Segment revenue and segment results for business segments and geographical segments.

5. Changes in contingent liabilities or contingent assets since the last annual balance sheet.

6. Existence of material contingencies and other events of transactions that are material to

an understanding of the current interim period.

7. Known trends, demands, commitments, events and uncertainties that will result in or likely to decrease its liquidity in any material way. BCII does not anticipate having within the next twelve (12) months any cash flow or liquidity problems nor does it anticipate any default or breach of any of its existing notes, loans, leases, other indebtedness or financing arrangements requiring it to make payments, except the breach in current ratio requirements of the loan covenants.

8. Events that will trigger direct or contingent material financial obligations to the company,

including any default or acceleration of its existing obligations.

71

9. Material off-balance sheet transactions, arrangements, obligations (direct or contingent) and other relationships of the company with unconsolidated entities or other person created during the year.

10. Material commitments for capital expenditures.

11. Known trends, events or uncertainties that have had or that are reasonably expected to

have a material favorable impact on net sales/revenues/ income from continuing operations.

12. Significant elements of income or loss that did not arise from the company‟s continuing

operations.

Material Changes in Balance Sheet Accounts Cash and cash equivalents The increase in cash and cash equivalents of P190 million are shown in the cash flow statement. Investments held for Trading

The increase in Investments Held for Trading of P60 million represents additional purchases of bonds by PHN.

Trade and other receivables - net The decrease in the account in the amount of P132 million represents a collection of trade receivables by AU, COC, UPang and UI. Inventories The increase in inventories amounting to P33 million comes mainly from the increase in UGC‟s raw materials inventories during the quarter. Other current assets The movement in the account of P21 million is mainly due to a decrease in various assets of Fuld & Company. Investment properties – net The increase in investment properties of P21 million represents PHN‟s share of a property received as liquidating dividend from Luzon Bag Corporation. Other assets The P 19 million increase in other assets is attributable mainly to the increase in deferred charges of Fuld & Company, Inc. in the amount of P12 million.

72

LIABILITIES Notes payable The decrease of P68 million in the account is due to payment of short-term borrowings of UGC. Trust receipts payable The increase of P139 million in the account is attributable to the increase in UGC‟s trust receipts payable from P104 million in December 2011 to P243 million this year. Trade and other payables The increase in the account from P390 million to P500 million represents dividends payable of PHN which were subsequently paid in April. Unearned revenues The account decreased from P205 million in December 2011 to P2 million in March 2012. Tuition fees received at the start of the semester are booked under Unearned Revenues, and the account is decreased as the income is earned over the semester. Income and other taxes payable The decrease in the account of P2 million represents a decrease in income tax payable of COC. Due to related parties The decrease in the account represents payments on various amounts due to affiliates. Long-term debt – net of current portion The decrease in the account of P44 million represents principal payments made by UGC, UPang and AU during the first quarter of CY 2012. Derivative liability The amount of P.8 million represents unrealized loss on outstanding non-deliverable forward contracts of PHN. Pension and other post-employment benefits The increase in the account of P 7 million represents accrual for post-employment benefits of PHN, AU, COC, UPANG and UI.

73

EQUITY Unrealized gain (loss) on change in fair value of available for sale investments The change is due to the increase in prices of First Philippine Holdings preferred shares held by Phinma Corporation and Union Galvasteel Corporation. Cumulative translation adjustments The decrease of P3 million in the account represents cumulative translation adjustments arising from the consolidation of OAL and Fuld & Company, Inc. Material Changes in Income Statement Accounts Revenues The increase in revenues in the amount of P65 million is due to the revenues of Fuld & Company, Inc. and Fuld & Company (Philippines), Inc. totaling P97 million for the 1st quarter of CY 2012. Fuld revenues were consolidated beginning June 2011. Cost of sales and operating expenses Increase in cost of sales and operating expenses amounting to P35 million and P 57 million respectively represent the cost of sales of Fuld & Company, Inc. and Fuld & Company (Philippines), Inc. which were acquired and consolidated beginning June 2011. Equity in net earnings of associates The decrease in the account of P20 million is largely due to equitized loss from Phinma Property Holdings Corporation in the amount of P9 million as of March 31, 2012. For the same period last year, PHN equitized an income amounting to P8 million . Net gain (loss) on derivatives This account reflects a net loss in derivatives amounting to P1.2 million for the three-month ended March 31, 2012 and a net gain of P2.4 million of the same period last year. As of March 31, 2012, the company has outstanding non-deliverable contracts with an aggregate notional amount of US$6.8 million transacted at an average rate of P43.01 to $1.00, which resulted in an unrealized loss of P.8 million. The company also booked a net derivative loss on settled contracts amounting to P.419 million. Last year the company, recognized an unrealized gain on derivatives amounting to P3.6 million and a realized loss on derivatives of P1.2 million.

74

Foreign exchange gain (loss) Foreign exchange loss as of March 31, 2012 was P6.1 million due to the movement in foreign exchange rate from P43.84 as of Dec. 31, 2011 to P42.92 as of March 31, 2012. Other income (charges) The increase in other income of P3 million is mainly due to a liquidating dividend from Luzon Bag Corporation. Provision for income tax

The decrease in provision for income tax from P16 million to P11 million is attributable to the decline in income of UGC from P40 million last year to P15 million this year. Comprehensive Income

Comprehensive income decreased from P80 million for the three-month period ended March 31, 2011 to P31 million this year due to the decrease in net income from P76 million last year to P34 million this year. For other comprehensive income / (charges), kindly refer to the comments on equity accounts.

SIGNATANEE

Purstrant to the requirements of the Securities Regulation Code, the registant has duly causedthis report to be signed on its behalf by the undersigned thereunto duly authorized.

PHII{MA CORPORATION

hwin l, frlrurrhREGII\UT B. ALVAREZ I I

SeniorticePresident - r[h.t

May l5,2Dl2

75

1 2 3 9 7 S.E.C. Registration Number

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

(Company's Full Name)

L E V E L 1 2 - P H I N M A P L A Z A 3 9 P L A Z A

D R I V E , R O C K W E L L C E N T E R M A K A T I

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

L I N A A N D R A D A 8 7 0 0 1 0 0 Contact Person Company Telephone Number

1 2 3 1 S E C 1 7 - Q 0 8 1 4 Month Day FORM TYPE Month Day

Calendar Year

Secondary License Type, If Applicable

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document I. D. Cashier

STAMPS

Remarks = Pls. Use black ink for scanning purposes

COVER SHEET

1ilil illlllillllllil lllil lilllilil[ilil tilltilillll ilil ililtilil IilIilil ilil1@',t42012N11M

SECURITIES ANID EXCHANIGE COM M ISSIONSEC Bui I di rg, EDSA, Greenhi I ls,M andal uyorB Ci ty, M ef o M ani la,Phil i ppi nes

Tel(632) 72C0S31 trc 39 Fax(632) 725-5293Email: mis@sec.gov.ph

Barcode Page

The following document has been received:

Receiving Officer/Encoder : Jojit LicudineReceiving Branch : SEC Head OfficeReceipt Date and Time : August 14, 2012 12:50:05 PM

Received From : Head Office

Com pany Representative

Doc Source

Company lnformation

SEC Registration No.

Company Name

lndu$ry Classification

Company Type

Document lnformation

000001 2397

PHINMA CORPOMTION

Stock Corporation

Document lD

Document Type

Document Code

Period Covered

No. of Days LateDepartment

Remarks

10814201 2001 1 051 7-Q (FORM 1 1 Q:QUARTERLY REPORT/FS)17-Q

June 30, 20120

CFD

1

SECURITIES AND EXCHANGE COMMISSION SEC FORM 17 – Q

QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE (SRC) AND SRC RULE 17 (2)(b) THEREUNDER

1. For the quarterly period ended June 30, 2012 2. Commission identification no. 12397 3. BIR Tax Identification No. 000-107-026 4. PHINMA Corporation Exact name of registrant as specified in its charter 5. Manila, Philippines Province, country or other jurisdiction of incorporation or organization 6. Industry Classification Code : __________ 7. 12/F, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City 1210 Address of registrant’s principal office 8. (632) 870-01-00 Registrant’s telephone number, including area code 9. Former name, former address, and former fiscal year, if changed since last report : N/A 10. Common Shares - 257,737,307 shares issued and outstanding 11. Are any or all of the securities listed on the Philippine Stock Exchange ? Yes ( x ) No ( )

If yes, state the name of such stock exchange and the classes of securities listed therein:

Philippine Stock Exchange, Inc. Common Shares 12. Indicate by check mark whether the registrant :

(a) Has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Section 11 of the RSA and RSA Rule 11 (a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines during the preceding 12 months (or for such shorter period the registrant was required to file such reports) Yes [ x ] No [ ]

(b) Has been subject to such filing requirements for the past 90 days.

Yes [ x ] No [ ]

2

TABLE OF CONTENTS PART I - FINANCIAL INFORMATION

Item 1 Financial Statement Unaudited Consolidated Statements of Financial Position June 30, 2012 and December 31, 2011 3 - 4

Unaudited Consolidated Statements of Income For the Quarter ended June 30, 2012 and 2011 5 Six (6) Months ended June 30, 2012 and 2011 6 Unaudited Consolidated Statements of Comprehensive Income Six (6) Months ended June 30, 2012 and 2011 7 Statement of Changes in Equity June 30, 2012 and 2011 and December 31, 2011 8 Consolidated Statement of Cash Flows Six (6) months ended June 30, 2012 and 2011 9 Notes to Consolidated Financial Statements 10 - 68 Item 2 Management’s Discussion and Analysis of Financial Condition And Results of Operations 69-78 SIGNATURES 79

3

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Unaudited Audited June 30, 2012 December 31, 2011 (In Thousands)

ASSETS Current Assets Cash and cash equivalents (Notes 8, 28 and 29) P=950,472 P=916,157 Investments held for trading (Notes 9, 28 and 29) 705,818 771,517 Trade and other receivables - net (Notes 10, 26, 28 and 29 ) 1,015,728 857,649 Inventories - at lower of cost or net realizable value (Note 11) 990,866 977,919 Input value-added taxes 27,418 40,697 Derivative asset and other current assets (Notes 32 and 33) 118,029 85,371 Total Current Assets 3,808,331 3,649,310

Noncurrent Assets Investments in associates - at equity (Note 12) 1,820,331 1,835,145 Available-for-sale (AFS) investments - (Notes 13, 28 and 29) 136,208 140,990 Property, plant and equipment – net (Notes 14 and 20) 2,288,628 2,260,744 Investment properties (Notes 15 and 20) 432,994 410,890 Intangibles (Notes 7 and 16) 1,300,942 1,295,243 Deferred tax assets – net (Note 27) 52,202 49,245 Other noncurrent assets (Note 17) 51,849 26,640 Total Noncurrent Assets 6,083,154 6,018,897

P=9,891,485 P=9,668,207

LIABILITIES AND EQUITY Current Liabilities Notes payable (Notes 18, 28 and 29) P=274,415 P=455,193 Trade and other payables (Notes 18, 28 and 29) 570,105 389,792 Unearned revenues 301,900 204,567 Trust receipts payable (Notes 11, 19, 28 and 29) 392,552 103,735 Income and other taxes payable 31,074 44,889 Due to related parties (Notes 26, 28 and 29) 2,806 24,496 Derivative liability - 2,281 Current portion of long-term loan payable (Notes 7, 28 and 29) 26,788 22,095 Current portion of long-term debt – net of debt issuance cost (Notes 20, 26, 28 and 29) 141,906 141,063 Total Current Liabilities 1,741,546 1,388,111

4

Unaudited Audited June 30, 2012 Dec. 31, 2011 (In Thousands)

Noncurrent Liabilities Long-term debt - net (Notes 20, 26, 28 and 29) P=514,932 P=599,659 Long-term loan payable (Notes 7, 28 and 29) 48,522 78,912 Deferred rent revenue - net of current portion (Note 26) - 47,228 Deferred tax liabilities – net (Note 27) 320,072 310,995 Pension and other post-employment benefits 77,993 58,249 Other noncurrent liabilities (Note 26) 52,640 7,477 Total Noncurrent Liabilities 1,014,159 1,102,520 Total Liabilities 2,755,705 2,490,631 Equity attributable to equity holders of the parent Capital stock (Note 21) 2,579,187 2,577,249 Additional paid-in capital 256,093 255,785 Other components of equity (Note 21) 32,454 33,914 Retained earnings (Note 21) 3,633,160 3,649,960 Equity attributable to equity holders of the parent 6,500,894 6,516,908 Equity Attributable to Non-controlling Interest (Note 7) 634,886 660,668 Total Equity 7,135,780 7,177,576

P=9,891,485 P=9,668,207

5

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME April - June 30, 2012 2011 (In Thousands) REVENUE (Note 1) Sale of goods P=797,352 P=655,371 Tuition and school fees 165,513 199,808 Animation services 18,018 44,239 Business process outsourcing 127,938 35,361 Investment income (Notes 8 and 21) 14,754 18,185 Rental income 3,017 2,434 1,126,592 955,398

COSTS AND EXPENSES Cost of sales, educational and animation services (Notes 22) (856,247) (721,265) Operating expenses

(Notes 23) (239,357) (228,816)

OTHER INCOME (CHARGES) Equity in net earnings of associates (Note 11) 44,189 39,804 Interest expense and other financial charges (Note 24) (15,890) (20,571) Net gains (losses) on derivatives (Note 27) 5,650 7,003 Foreign exchange gains (losses) - net (Note 27) (3,686) (1,083) Others - net 8,634 (7,340)

INCOME BEFORE INCOME TAX 69,885 23,130

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 28) 12,122 15,634

NET INCOME P=57,763 P=7,496

Attributable To Equity holders of the parent P=56,223 P=20,090 Minority interest 1,540 (12,594) Net income P=57,763 P=7,496

Basic/Diluted Earnings Per Common Share - Attributable to Equity Holders of the Parent (Note 29) P=0.22 P=0.08

6

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME January – June 30, 2012 2011

(In Thousands) REVENUE (Note 1) Sale of goods P=1,502,942 P=1,356,241 Tuition and school fees 395,793 451,531 Consultancy services 225,266 35,361 Animation services 30,325 79,979 Investment income (Notes 8 and 22) 37,022 21,723 Rental income 7,268 17,403 2,198,616 1,962,238 COSTS AND EXPENSES Cost of sales, educational and animation services (Notes 23) (1,646,832) (1,476,501) Operating expenses

(Notes 24) (475,141) (407,761) OTHER INCOME (CHARGES) Equity in net earnings of associates (Note 12) 48,399 63,661 Interest expense and other financial charges (Note 25) (35,226) (40,163) Net gains (losses) on derivatives (Note 29) 4,409 9,381 Foreign exchange gains (losses) - net (Note 29) (9,766) (6,821) Others - net 30,547 11,077

INCOME BEFORE INCOME TAX 115,006 115,111 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note

27) 23,099 32,003

NET INCOME P=91,907 P=83,108

Attributable To Equity holders of the parent P=86,295 P=84,353 Non-controlling interest 5,612 (1,245) Net income P=91,907 P=83,108

Basic/Diluted Earnings Per Common Share - Attributable to Equity Holders of the Parent (Note 30) P=0.33 P=0.33

7

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME January – June 2012 2011 (In Thousands)

NET INCOME P=91,907 P=83,108

OTHER COMPREHENSIVE INCOME (LOSS) Share in unrealized gain (loss) on change in fair value of AFS

investments of associates (Note 12) (3,010) 2,939 Unrealized gain (loss) on change in fair value of AFS

investments (Note 13) (69) (417) Cumulative translation adjustments 1,619 (2,405) (1,460) 117

TOTAL COMPREHENSIVE INCOME P=90,447 P=83,225

Attributable To Equity holders of the parent P=84,835 P=84,470 Non-controlling interest 5,612 (1,245) Total Comprehensive Income P=90,447 P=83,225

8

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Equity Attributable to Equity Holders of the Parent Company

Capital Convertible Additional Investments of

Share in Equity Component of

Share in Unrealized

Gain (Loss) on Change in Fair

Value of AFS

Associates

Unrealized Gain (Loss) on

Change in Fair Value

of AFS Investments

Cumulative Translation Other Retained Earnings Non-

Stock

(Note 21) Paid-in Capital

Notes (Note 21)

(Notes 12and 21)

(Notes 13and 21)

Adjustments (Note 21)

Reserves (Note 21)

Appropriated (Note 21) Unappropriated Subtotal

controlling Interest

Total Equity

(In Thousands)

Balance, January 1, 2012 P=2,577,249

P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576 Total comprehensive income – – – (3,010) (69) 1,619 - - 86,295 84,835 5,612 90,447Cash dividends (Note 21) – – – - - - - - (103,095) (103,095) - (103,095)Dividends received – – – - - - - - - - (31,394) (31,394)Stock purchase plan 1,938 308 – – – – – – – 2,246 - 2,246Balance, June 30, 2012 P=2,579,187 P=256,093 P=– P=16,041 P=916 P=6,554 P=8,943 P=1,000,000 P=2,633,160 P=6,500,894 P=634,886 P=7,135,780

Balance, January 1, 2011 P=2,577,249 P=255,785 P=– P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – (175) (367) 790 – – 81,018 81,266 (23,509) 57,757 Cash dividends (Note 21) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (98,914) (98,914) Acquisition of subsidiaries – – – – – – – – – – 11,902 11,902Subscriptions – – – – – – – – – – 9,236 9,236 Balance, December 31, 2011 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576

Balance, January 1, 2011 P=2,577,249 P=255,785 P=- P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – 2,939 (417) (2,405) – – 84,353 84,470 11,962 96,432 Cash dividends (Note 21) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (98,872) (98,872) Subscriptions – – – – – – – – – – - - Balance, June 30, 2011 P=2,577,249 P=255,785 P=– P=22,165 P=935 P=1,740 P=8,943 P=1,000,000 P=2,653,295 P=6,520,112 P=675,043 P=7,195,155

9

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS January – June 30, 2012 2011 (In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax from continuing operations P=115,005 P=115,114 Adjustments for: Depreciation and amortization 94,181 118,217 Equity in net earnings of associates (Note 12) (48,398) (58,417) Loss (gain) on derivatives (4,409) - Unrealized foreign exchange loss (gain) - net 9,766 - Dividend income (22,412) (6,642) Income tax paid (37,567) (38,362) Changes in working capital and others 98,354 365,529 Net cash provided by operating activities 204,520 495,439

CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in: Available for sale investment 4,712 268 Property and equipment (107,427) (118,037) Other noncurrent assets (1,619) 872 Investments at equity 9,080 (350,348) Investment properties 48 - Downpayment – net of cash from business acquired - (233,246) Additional investment in Fuld US (9,303) - Proceeds received from settlement of derivative asset 964 6,537 Net settlement of derivative liability (3,024) 6,884 Proceeds from sale of investment property - 3,349 Dividends received 43,436 1,295 Net cash provided by (used in) investing activities (63,133) (682,426)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (payments of ) : Short-term borrowing 108,039 117,344 Long-term borrowing (109,582) (64,192) Payment of cash dividends (101,848) (104,448) Issuance of capital stock 2,246 - Net cash used in financing activities (101,145) (51,296)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40,242 (238,283)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (5,927) (942)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 916,157 1,202,170

CASH AND CASH EQUIVALENTS AT END OF YEAR 950,472 962,945

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PHINMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information

PHINMA Corporation (PHN or the Parent Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on March 12, 1957. On August 2, 2006, the Philippine SEC approved the extension of the Parent Company’s corporate life for another 50 years. Also, on May 27, 2010, the Philippine SEC approved the change in the Parent Company’s corporate name from Bacnotan Consolidated Industries, Inc. to PHINMA Corporation. Its principal activity is investment holdings of shares in various subsidiaries, associates and affiliates and other financial instruments.

Following are the subsidiaries of the Parent Company and the nature of their principal business activities:

Calendar/Fiscal Percentage of Ownership Name of Subsidiaries Nature of Business Yearend 2011 2010 Union Galvasteel Corporation (UGC) Manufacture and distribution

of steel products December 31 98.08 98.36(a)

One Animate Limited (OAL) and Subsidiary BPO-Animation services December 31 80.00 80.00(b)

Pamantasan ng Araullo (Araullo University), Inc.(AU) Educational institution March 31(c) 78.64 78.64 Cagayan de Oro College, Inc. (COC) Educational institution March 31(c) 74.21 74.35 University of Iloilo (UI) Educational institution March 31(c) 69.79 69.85 University of Pangasinan (UPANG) and Subsidiary Educational institution March 31(c) 69.75 69.76 P & S Holdings Corporation (PSHC) Investment and real estate holdings December 31 60.00 60.00 Asian Plaza, Inc. (API) Lease of real property December 31 57.62 57.62 Fuld & Company, Inc. (Fuld U.S. and Subsidiary) Business Research December 31 85.00(d) – Fuld & Company (Philippines), Inc. (Fuld Philippines) Business Research December 31 85.00(e) –

(a) On December 22, 2010, the SEC approved the merger of UGC and AHC with UGC as the surviving entity. The execution of the merger involved a

share swap between UGC and the holder of the non-controlling interest in AHC. This resulted in a decrease of the Parent Company’s ownership interest in UGC from 100% to 98.36% (see Note 20). In 2011, the change in percentage of ownership in UGC was a result of UGC’s issuance of shares to the holder of the non-controlling interest.

(b) OAL owns 100 % interest in Toon City Animation, Inc. (Toon City). (c) Balances of these subsidiaries as of and for the year ended December 31 were used for consolidation purposes, which is the same reporting period

of PHN. (d) Acquired by PHN on June 10, 2011. (e) Acquired by PHN on July 25, 2011.

The Parent Company and its subsidiaries (collectively referred to as “the Company”) are all incorporated in the Philippines except for OAL and Fuld U.S. OAL is incorporated in Hong Kong while Fuld US is incorporated in the United States of America (USA). The Company’s ultimate parent company is Philippine Investment-Management (PHINMA), Inc., which is also incorporated in the Philippines.

The information on the segments of the Company is presented in Note 31.

The registered office address of the Parent Company is 12th Floor, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City.

The accompanying consolidated financial statements were approved and authorized for issuance by the Board of Directors (BOD) on July 27, 2012.

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2. Basis of Preparation and Statement of Compliance

The accompanying consolidated financial statements of the Company have been prepared using the historical cost basis, except for investments held for trading, available-for-sale (AFS) investments and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, the Parent Company’s functional currency. All values are rounded to the nearest thousand peso unless otherwise stated.

The accompanying consolidated financial statements have been prepared in compliance with PFRS. PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from the International Financial Reporting and Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).

3. Changes in Accounting Policies and Disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS and PAS which were adopted on January 1, 2012.

PAS 12, Income Taxes (Amendment) - Recovery of Underlying Assets, will become effective for annual periods beginning on or after January 1, 2012.

PFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements, will become effective for annual periods beginning on or after July 1, 2011.

The standards or interpretations that have been adopted have no material impact on the consolidated financial statements of the Company.

Standards Issued but not yet Effective The following standards, amendments to standards and interpretations have been issued but will become effective subsequent to December 31, 2011. The Company will adopt these standards and interpretations when they become effective.

PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income (OCI), will become effective for annual periods beginning on or after July 1, 2012. The amendments to PAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on the Company’s financial position or performance.

PAS 19, Employee Benefits (Amendment), will become effective for annual periods beginning on or after January 1, 2013. The numerous amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The Company is currently assessing the impact of the amendment to PAS 19.

PAS 27, Separate Financial Statements (as revised in 2011), will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The Company does not expect this revised standard to have any significant impact on its financial position or performance.

PAS 28, Investments in Associates and Joint Ventures (as revised in 2011), will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of

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the equity method to investments in joint ventures in addition to associates. The Company does not expect this revised standard to have a significant impact on its consolidated financial statements.

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities, will become effective for annual periods beginning on or after January 1, 2014. These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on the net assets of the Company, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. The Company is currently assessing impact of the amendments to PAS 32.

PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities, will become effective for annual periods beginning on or after January 1, 2013. These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:

(a) The gross amounts of those recognized financial assets and recognized financial liabilities; (b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts

presented in the statement of financial position; (c) The net amounts presented in the statement of financial position; (d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise

included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in

PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and

(e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be applied retrospectively. The amendment affects disclosures only and has no impact on the Company’s financial position or performance.

PFRS 9, Financial Instruments: Classification and Measurement, will become effective for annual periods beginning on or after January 1, 2015. This standard reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. In subsequent phases, hedge accounting and impairment of financial assets will be addressed. The completion of this project is expected on the first half of 2012. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets, but will potentially have no impact on classification and measurements of financial liabilities. The Company will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

PFRS 10, Consolidated Financial Statements, will become effective for annual periods beginning on or after January 1, 2013. This standard replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standing Interpretations Committee (SIC)-12 Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. This standard will have no significant impact on the consolidated financial statements.

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PFRS 11, Joint Arrangements, will become effective for annual periods beginning on or after January 1, 2013. This standard replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions by Venturers, and removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The Company does not expect this standard to have any impact on its financial statements.

PFRS 12, Disclosure of Interests with Other Entities, will become effective for annual periods beginning on or after January 1, 2013. This standard includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The Company expects that this new standard will have no significant effect on its financial position or performance.

PFRS 13, Fair Value Measurement, will become effective for annual periods beginning on or after January 1, 2013. This standard establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. The Company is currently assessing the impact of this standard on its financial position and performance.

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate. This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the FRSC have deferred the effectivity of this interpretation until the final Revenue standard is issued by International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. This interpretation will have no significant impact in the consolidated financial statements.

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, will become effective for annual periods beginning on or after January 1, 2013. This interpretation applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (“production stripping costs”) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset. This interpretation will have no impact in the consolidated financial statements.

4. Summary of Significant Accounting Policies

Principles of ConsolidationThe consolidated financial statements include the accounts of the Parent Company and all the subsidiaries mentioned in Note 1. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

All intercompany balances, transactions, income and expenses and profits and losses resulting from intercompany transactions are eliminated in full.

Subsidiaries are fully consolidated from the date control is transferred to the Company and cease to be consolidated from the date control is transferred out of the Company.

Non-controlling interest represents the portion of profit or loss and net assets in the subsidiaries not held by the Company and is presented in the consolidated statements of income, consolidated statements of comprehensive income and within equity in the consolidated statements of financial position, separately from equity attributable to equity holders of the

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parent. Prior to January 1, 2010, acquisitions of non-controlling interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognized as goodwill, otherwise, the difference is recognized as a “negative” goodwill (shown as “Negative goodwill on acquisition of non-controlling interest” in the consolidated statement of income). Starting January 1, 2010, a change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction and is shown as “Other reserves” in the consolidated statements of changes in equity. If the Company loses control over a subsidiary, it:

derecognizes the assets (including goodwill) and liabilities of the subsidiary; derecognizes the carrying amount of any non-controlling interest; derecognizes the cumulative translation differences, recorded in equity; recognizes the fair value of the consideration received; recognizes the fair value of any investment retained; recognizes any surplus or deficit in profit or loss; reclassifies the parent’s share of components previously recognized in other comprehensive income to profit or loss

or retained earnings, as appropriate.

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

Short-term InvestmentsShort-term investments represent investments that are readily convertible to known amounts of cash with original maturities of more than three months but less than one year.

Financial Instruments - Initial Recognition and Subsequent Measurement

Date of Recognition. The Company recognizes a financial instrument in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date that the Company commits to purchase the assets. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Derivatives are recognized on a trade date basis.

Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial instruments, except for financial instruments measured at fair value through profit or loss (FVPL).

The Company classifies its financial instruments into the following categories: financial assets and liabilities at FVPL, loans and receivables, held-to-maturity (HTM) investments, AFS investments and other financial liabilities. The classification depends on the purpose for which the instruments are acquired and whether they are quoted in an active market. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every financial reporting date.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

Determination of Fair Value. The fair value of financial instruments traded in active markets at the end of the reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price

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of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

Day 1 Difference. Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statements of income unless it qualifies for recognition as some other type of asset. In cases where unobservable data is used, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the ‘Day 1’ difference amount.

Financial Assets and Liabilities at FVPL. This category includes financial assets and liabilities held for trading and financial assets and liabilities designated upon initial recognition as at FVPL. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including any separated derivatives, are also classified under financial assets or liabilities at FVPL, unless these are designated as hedging instruments in an effective hedge or financial guarantee contracts. Instruments under this category are classified as current assets/liabilities if these are hold primarily for the purpose of trading or expected to be realized/settled within 12 months from reporting date. Otherwise, these are classified as noncurrent assets/liabilities.

Financial assets or financial liabilities may be designated by management on initial recognition as at FVPL when the following criteria are met:

the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities designated at FVPL are recorded in the consolidated statements of financial position at fair value. Subsequent changes in fair value on financial assets and liabilities designated at FVPL are recorded in the consolidated statements of income as “Net gains from fair value change of investments held for trading” under “Investment income” account. Interest earned or incurred is recorded in “Investment income” account or “Interest expense and other financial charges” account, respectively. Dividend income is recorded according to the terms of the contract, when the right to receive payment has been established.

The Company’s investments held for trading and derivative asset are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=698.9 million and P=771.5 million as of June 30, 2012 and December 31, 2011, respectively. Included under financial liability at FVPL is the Company’s derivative liability. The carrying value of financial liability at FVPL amounted to P=2.3 million as of December 31, 2011. (see Note 29).

Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. Loans and receivables are included in current

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assets if maturity is within 12 months from the financial reporting date. Otherwise, these are classified as noncurrent assets.

After initial measurement, loans and receivables are carried at amortized cost using the effective interest method less any allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest method. Gains and losses are recognized in the consolidated statements of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

The Company’s cash and cash equivalents, short-term investments, trade and other receivables and installment contract receivables are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=1,966.2 million and P=1,773.8 million as of June 30, 2012 and December 31, 2011, respectively (see Note 29).

HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Company’s management has the positive intention and ability to hold to maturity. Where the company sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, such assets are carried at amortized cost using the effective interest method less any impairment in value. Gains and losses are recognized in the consolidated statements of income when the HTM investments are derecognized or impaired, as well as through the amortization process. HTM Investments are classified as current if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Company has no financial assets classified as HTM as of June 30, 2012 and December 31, 2011.

AFS Investments. AFS investments are nonderivative financial assets that are designated in this category or are not classified in any of the three preceding categories. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS investments are carried at fair value in the consolidated statements of financial position. Changes in the fair value of such assets are reported as unrealized gain or loss on change in fair value of AFS investments recognized as other comprehensive income in the consolidated statements of comprehensive income until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in consolidated statements of comprehensive income is transferred to the consolidated statements of income. AFS investments are classified as current if they are expected to be realized within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent assets.

The Company’s investments in quoted and unquoted equity securities and other investments are classified under this category. The carrying values of financial assets under this category amounted to P=136.2 million as of June 30, 2012 and P=141.0 million as of and December 31, 2011 (see Note 29).

Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. This includes liabilities arising from operations or loans and borrowings.

Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized, as well as through the amortization process. Other financial liabilities are classified as current liabilities if settlement is within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent liabilities.

The Company’s notes payable, trade and other payables, trust receipts payable, due to related parties, long-term loan payable and long-term debt are classified under this category. The aggregate carrying values of financial liabilities under

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this category amounted to P=1,972.0 million and P=1,814.9 million as of June 30, 2012 and December 31, 2011, respectively (see Note 26).

Convertible Notes Convertible notes which contain both a liability and an equity element, are separated into two components on initial issuance based on the present value of the expected cash flows of the notes, and each is accounted for separately. Upon issuance of the convertible notes, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note and this amount is carried as a long-term liability at amortized cost until extinguished on conversion or repayment. Amortization of discount is based on the effective interest rate method. The remainder of the proceeds is allocated to the conversion option. The Parent Company’s share is recognized and included in equity as “Share in equity component of convertible notes.”

Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to:

deliver cash or another financial asset to another entity; exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable

to the Company; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed

number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

Debt Issuance Cost Debt issuance costs are deducted against long-term debt and are amortized over the terms of the related borrowings using the effective interest method.

Derivative Financial Instruments The Company enters into short-term forward currency contracts to hedge its currency exposure (see Note 29). Such derivative financial instruments are initially recorded at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and liabilities when the fair value is negative. Consequently, gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income. The Company has opted not to designate its derivative transactions under hedge accounting. The fair values of freestanding forward currency transactions are calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Embedded Derivative. An embedded derivative is a component of a hybrid (combined) instrument that also includes a nonderivative host contract with the effect that some of the cash flows of the hybrid instrument vary in a way similar to a stand-alone derivative. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

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(c) the hybrid or combined instrument is not recognized at FVPL.

The Company assesses whether embedded derivatives are required to be separated from the host contracts when the Company becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Company determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flow on the contract.

Embedded derivatives are measured at fair value and are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income.

In June 2012 and December 2011, the Company has no embedded derivatives.

Impairment of Financial Assets The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired.

Assets Carried at Amortized Cost. If there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Company. If in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is recognized in the consolidated statements of income. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. For the purpose of specific evaluation of impairment, the Company assesses whether financial assets are impaired through assessment of collectability of financial assets considering the debtor’s capacity to pay, history of payment, and the availability of other financial support. For the purpose of a collective evaluation of impairment, if necessary, financial assets are grouped on the basis of such credit risk characteristics such as debtor type, payment history, past-due status and terms.

Assets Carried at Cost. If there is objective evidence (such as continuing losses or significant financial difficulties of the investee company) that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

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AFS Investments. In the case of equity instruments classified as AFS investments, evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of income, is removed from the consolidated statements of comprehensive income and recognized in the consolidated statements of income. Impairment losses on equity investments are not reversed through the consolidated statements of income. Increases in the fair value after impairment are recognized directly in consolidated statements of comprehensive income.

In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount of the asset and is accrued based on the rate of the interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the consolidated statements of income. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the consolidated statements of income, the impairment loss is reversed through the consolidated statements of income.

Derecognition of Financial Assets and Liabilities

Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

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

the Company retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset or has entered into a “pass-through” arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts, of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of income.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statements of financial position if and only if there is a currently legal right to offset the recognized amounts and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated statements of financial position.

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Inventories Inventories are valued at the lower of cost or net realizable value. Costs incurred in bringing each inventory to its present location and condition are accounted for as follows:

Finished goods – determined using the moving average method; cost includes

direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excludes borrowing costs;

Raw materials, spare parts and others – determined using the moving average method.

The net realizable value of inventories, except spare parts, is the selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The net realizable value of spare parts is the current replacement cost.

Investments in Associates Investments in associates are accounted for under the equity method. These are entities in which the Company has significant influence and which are neither subsidiaries nor joint ventures of the Company. The investments in associates are carried in the consolidated statements of financial position at cost plus post-acquisition changes in the Company’s share in net assets of the associates, less any impairment in value. The consolidated statements of income reflect the Company’s share in the results of operations of the associates. Unrealized gains arising from transactions with its associates are eliminated to the extent of the Company’s interest in the associates against the related investments. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred. The Company’s investment in an associate includes goodwill on acquisition, which is recorded in accordance with the accounting policy for goodwill.

When the Company’s accumulated share in net losses of an associate equals or exceeds the carrying amount of the investment, including advances for future conversion to equity, the Company discontinues the recognition of its share in additional losses and the investment is reported at nil value. If the associate subsequently reports net income, the Company will resume applying the equity method only after its share in that net income equals the share in net losses not recognized during the period the equity method was suspended.

Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less accumulated depreciation and any impairment loss. Land is carried at cost less any impairment loss. The cost of property, plant and equipment comprises its purchase price, including any applicable import duties and capitalized borrowing costs (for property, plant and equipment other than land) and other costs directly attributable in 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 operation, such as repairs and maintenance, are normally charged to current operations in the year 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 and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment.

Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

Plant site improvements 10–20 years Buildings and improvements 10–20 years Machinery and equipment 5–20 years Transportation and other equipment 2–10 years

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

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When each major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are met.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is credited or charged to consolidated statements of income.

Construction in-progress represents properties and structures under construction/development and is stated at cost. This includes cost of construction, plant and equipment, any borrowing costs directly attributable to such asset during the construction period and other direct costs. Construction in-progress is not depreciated until such time when the relevant assets are completed and ready for operational use.

Investment Properties Investment properties are measured initially at cost, including direct transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties (except land) are stated at cost less accumulated depreciation and impairment loss. Land is carried at cost less any impairment in value.

Depreciation of buildings for lease is calculated on a straight-line basis over the estimated useful lives of 15 to 20 years.

Investment property is derecognized when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statements of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.

Noncurrent Assets Held for Sale and Discontinued Operations Noncurrent assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

In the consolidated statements of income of the reporting period, and the comparable period of the previous year, income and expenses from discontinued operations are reported separately from normal income and expenses down to the level of profit after taxes, even when the Company retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated statements of income.

Property, plant and equipment and intangible assets once classified as held for sale are no longer depreciated/amortized.

Business Combinations, Goodwill and Goodwill Impairment

Business Combinations from January 1, 2010. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer

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measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses.

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Business Combinations Prior to January 1, 2010. Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree’s identifiable net assets.

Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognized goodwill.

When the Company acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.

Contingent consideration was recognized if, and only if, the Company had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill.

Business combinations under common control are accounted for using the pooling of interest method. Financial statements for periods prior to the combination under common control are not restated.

Following initial recognition, goodwill is measured at cost less any accumulated impairment loss. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. If the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the Company reassesses the identification and measurement of the

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acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and recognizes immediately in profit or loss any excess remaining after that reassessment.

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

represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and

is not larger than a segment based on the Company’s primary or the Company’s any secondary reporting format determined in accordance with PFRS 8, “Operating Segments.”

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

Intangible Assets The cost of intangible assets acquired separately is measured on initial recognition at cost. The cost of intangible assets (student lists and customer contracts) acquired in a business combination is measured at the fair value as of date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Student lists are amortized over three years and assessed for impairment whenever there is an indication that the student lists acquired may be impaired. Customer contracts are amortized over the estimated economic life of one year.

The useful lives of intangible assets are assessed to be either finite or indefinite. The amortization periods and method are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level.

Impairment of Nonfinancial Assets The Company assesses at each reporting date whether there is an indication that a nonfinancial asset may be impaired when events or changes in circumstances indicate that the carrying value of a nonfinancial asset may not be recoverable. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.

For nonfinancial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication

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exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. However, that increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in consolidated statements of income. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the Company’s investments in associates. The Company determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Company calculates the amount of impairment being the difference between the fair value and the carrying value of the investee company and recognizes the difference in the consolidated statements of income.

The following assets have specific characteristics for impairment testing:

Goodwill. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit (or group of cash generating units) to which the goodwill relates. When the recoverable amount of the cash generating unit is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Intangible assets. Intangible assets with indefinite useful lives are tested for impairment annually as either individually or at the cash generating unit level, as appropriate, and when circumstances indicate that the carrying value may be impaired.

Capital Stock Capital stock is measured at par value for all shares issued. When the Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued.

When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account in the consolidated statement of financial position. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received.

Direct costs incurred related to equity issuance, such as underwriting, accounting and legal fees, printing costs and taxes are chargeable to the “Additional paid-in capital” account in the consolidated statements of financial position.

Retained Earnings Retained earnings represent accumulated net profits, net of dividend distributions and other capital adjustments.

Revenue Recognition Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized:

Sale of Goods. Revenue from sale of roofing and other steel products, books and incidentals is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.

Tuition and School Fees. Revenue is recognized as income over the corresponding school term to which they pertain. Tuition and school fees received pertaining to the summer semester and the next school year are recorded as part of “Unearned revenues” account in the consolidated statements of financial position.

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Animation Services. Income from animation services is recognized by reference to the stage of completion. Stage of completion is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Where the contract outcome cannot be measured reliably, revenue is recognized only to the extent that the expenses incurred are eligible to be recovered.

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

Investment Income. Investment income includes net gains and losses on investments held for trading (see accounting policy on Financial Assets) and interest income. Interest income is recognized as the interest accrues, taking into account the effective yield on the asset.

Consultancy Services. Revenue is recognized when services are rendered.

Sale of Real Estate. Revenue from the sale of real estate of Bacnotan Industrial Park Corporation (BIPC), included under “Income from discontinued operation” account in the 2009 consolidated statement of income which includes cost of land and development, is accounted for under the percentage of completion method when the Company has material obligations under the sales contracts to complete the project after the property is sold. Under this method, revenue is recognized as the related obligations are fulfilled, measured on the basis of the ratio of actual cost incurred to date over the estimated total costs of the project as determined by the Company’s contractors and technical personnel. Any excess of collections over the recognized receivables are included under the “Unearned revenues” account in the current liabilities section of the consolidated statements of financial position. If none of the revenue recognition criteria are met, deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers is presented as part of “Other noncurrent liabilities” account in the consolidated statements of financial position.

Port and Cargo Handling Services. Revenue from port operations of BIPC, included under “Income from discontinued operation” account in the 2009 consolidated statement of income, is recognized when services are rendered.

Cost of Sales, Educational, Animation and Consultancy Services Cost of sales includes direct materials used, personnel costs, as well as repair and power and fuel used to run production of steel products. Cost of educational services constitutes costs incurred to administer academic instruction. Costs of animation services include all direct materials, labor costs and indirect costs related to contract performance. Cost of consultancy services includes labor cost and other direct costs related to the performance of consultancy services. These expenses are expensed as incurred.

General and Administrative Expenses General and administrative expenses constitute costs of administering the businesses and are expensed as incurred.

Selling Expenses Selling expenses include costs of distribution of steel products, books, incidentals, personnel costs, freight expenses, commission and advertising. Selling expenses are expensed as incurred.

Retirement Costs PHN, UGC, Toon City, UPANG and AU have distinct funded, noncontributory defined benefit retirement plans while UI and COC have a defined, unfunded, noncontributory retirement plans covering all permanent employees, each administered by their respective Retirement Committees. Retirement costs are actuarially determined using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each plan at the end of the previous financial reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

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The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term;

c. There is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario b.

Company as Lessee. Leases where the lessor retains substantially all the risks and benefits of ownership of the leased asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statement of income on a straight-line basis over the lease term.

Company as Lessor. Leases where the Company does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Lease payments received are recognized as an income in the consolidated statement of income on a straight-line basis over the lease term.

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Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 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 assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase due to the passage of time is recognized as interest expense in the consolidated statements of income.

Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing cost consists of interest and other costs that an entity incurs in connection with the borrowing of funds.

Foreign Currency-denominated Transactions and Translation The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency. The subsidiaries determine their own functional currency and items included in the financial statements of each subsidiary are measured using that functional currency. The Company has elected to recycle the gain or loss that arises from direct method of consolidation, the method the Company uses to complete its consolidation.

Transactions in foreign currencies are recorded using their functional currency exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange at the end of the reporting period. Exchange gains or losses arising from foreign currency translations are credited or charged to current operations. Nonmonetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

Other than OAL and Fuld U.S., the functional and presentation currency of the subsidiaries within the Company is Philippine peso. The functional currency of OAL and Fuld U.S. is U.S. dollar. The assets and liabilities of foreign operations are translated into Philippine peso at the rate of exchange prevailing at the reporting date and their income statements are translated at exchange rates prevailing at the date of the transactions. The exchange differences arising on the translation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statements of income.

Taxes

Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.

Deferred Tax. Deferred tax is provided, using the balance sheet liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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Deferred tax assets are recognized for all deductible temporary differences, carry forward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused 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 the carry forward of unused excess MCIT and unused NOLCO can be utilized except:

where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of deductible temporary differences associated with investments in subsidiaries and associates. Deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.

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

Value-Added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT, except:

Where the VAT incurred on a purchase of assets or services are not recoverable from the taxation authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

Receivables and payables that are stated with the amount of VAT included. The net amount of VAT recoverable from, or payable to, the tax authority is included as part of “Input value-added taxes” or “Income and other taxes payable” accounts in the consolidated statements of financial position.

Earnings Per Common Share (EPS) Attributable to the Equity Holders of the Parent Basic EPS is computed by dividing net income (after deducting dividends on preferred shares) attributable to equity holders of the parent by the weighted average number of outstanding common shares during the year after giving retroactive effect to any stock dividend declared during the year.

The Company does not have potential common shares nor other instruments that may entitle the holder to common shares. Hence, diluted EPS is the same as basic EPS.

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Segment Reporting The Company is organized into five major business segments. Such business segments are the bases upon which the Company reports its primary segment information. Financial information on business segments is presented in Note 36 to the consolidated financial statements.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable.

Events After the Reporting Period Post year-end events that provide additional information about the Company’s financial position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

5. Significant Accounting Judgments, Estimates and Assumptions

The accompanying consolidated financial statements are prepared in conformity with PFRS require management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. In preparing the Company’s consolidated financial statements, management has made its best judgments, estimates and assumptions of certain amounts, giving due consideration to materiality. The judgments and estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

The Company believes the following represents a summary of these significant judgments, estimates and assumptions and related impact and associated risks in its consolidated financial statements.

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

Operating Lease - Company as Lessor. The Company has entered into commercial property leases on its investment property portfolio. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Rental income amounted to P=7.3 million and P=17.4 million in June 2012 and 2011, respectively.

Revenue Recognition. Selecting an appropriate revenue recognition method for a particular sale transaction requires certain judgments based on sufficiency of cumulative payments by the buyer and completion of development. The Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all its revenue arrangements.

Functional Currency. The Parent Company has determined that its functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Parent Company operates. The subsidiaries determine their own functional currencies depending on the primary economic environment to which they operate.

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

Impairment of Goodwill. The Company performs impairment testing of goodwill on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Value in use is determined by making an estimate of the expected future cash flows from the cash-generating unit and applies a discount rate to calculate the present value of these cash flows. Goodwill acquired through business combination has been allocated to one cash-generating unit which is also the operating entity acquired through business combination and to which the goodwill relates. The recoverable amount of the goodwill has been determined based on value in use calculation using cash flow projections covering a five-year period. The pre-tax discount rates applied to cash flow projections ranges from 10% to 15% in December 2011. Discount rate reflects the current market assessment of the risk specific to each cash-generating unit. The discount rate is based on the average percentage of the weighted average cost of capital for the industry. This rate is further adjusted to reflect the market assessment of any risk specific to the cash-generating unit for which future estimates of cash flows have not been adjusted. The Company performs its annual testing of goodwill at December 31.

Impairment loss on goodwill amounting to P=166.4 million was recognized in December 2011. The carrying amount of goodwill amounted to P=1,253.8 million and P=1,244.5 million as of June 30, 2012 and December 31, 2011, respectively, and is presented as part of the “Intangibles” account in the consolidated statements of financial position (see Note 16).

Impairment of Nonfinancial Assets, other than Goodwill. The Company assesses whether there are any indicators of impairment for all nonfinancial assets, other than goodwill, at each reporting date. These nonfinancial assets (investment in associates, property, plant and equipment, investment properties and intangibles) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This requires an estimation of the value in use of the cash-generating units. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. In cases where the value in use cannot be reliably estimated, the recoverable amount is based on the fair value less costs to sell. The recoverable amount of investments in associates is based on fair value less cost to sell. Fair value less costs to sell is determined to be the amount obtainable from the sale of the underlying net assets of the associate.

There are no impairment of nonfinancial assets in June 2012 and December 2011. The carrying amounts of investments in associates amounted to P=1,820.3 million and P=1,835.1 million as at June 30, 2012 and December 31, 2011, respectively (see Note 12). The carrying amounts of property, plant and equipment amounted to P=2,288.6 million and P=2,260.7 million as of June 30, 2012 and December 31, 2011, respectively (see Note 14). The carrying amounts of investment properties amounted to P=431.3 million and P=410.9 million as of June 30, 2012 and December 31, 2011, respectively (see Note 15). The carrying amounts of intangibles, other than goodwill, amounted to P=47.2 million and P=50.8 million as of June 30, 2012 and December 31, 2011, respectively (see Note 16).

Impairment of AFS Investments. The Company treats AFS equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Company treats “significant” generally as 20% or more of the original cost of investment, and “prolonged” as period longer than six months. In addition, the Company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Based on management’s assessment, the Company’s AFS investments are fairly stated, thus, no impairment loss was recognized in June 2012 and December 2011. The carrying values of AFS investments amounted to P=136.2 million as of June 30, 2012 and P=141.0 million as o f December 31, 2011. (see Note 13).

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Impairment of Trade Receivables. The Company maintains allowance for doubtful accounts based on the result of the individual and collective assessments under PAS 39. Under the individual assessment, which considers the significant financial difficulties of the debtor, the Company is required to obtain the present value of estimated cash flows using the receivable’s original effective interest rate. Impairment loss is determined as the difference between the receivables’ carrying balance and the computed present value. The collective assessment would require the Company to group its receivables based on the credit risk characteristics (debtor type, past-due status and terms) of the debtors. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any year would differ depending on the judgments and estimates made for the year.

The carrying amounts of trade and other receivables amounted to P=1,015.7 million and P=857.6 million as of June 30, 2012 and December 31, 2011, respectively (see Note 10). The noncurrent portion of installment contract receivables amounted to nil and P=20.6 million as of December 31, 2011, respectively. The allowance for impairment of receivables amounted to P=152.7.3 million and P=164.8 million as of June 30, 2012 and December 31, 2011, respectively (see Note 10).

Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. This is based on the Company’s projection of the future results of operations.

Deferred tax assets amounted to P=25.7 million and P=49.2 million as of June 30, 2012 and December 31, 2011, respectively (see Note 27).

Deductible temporary differences, unused NOLCO and MCIT for which no deferred tax assets were recognized in the consolidated statements of financial position amounted to P=374.7 million as of December 31, 2011. (see Note 27).

Recognition of Input VAT. The carrying amounts of input taxes were reduced to the extent that it is no longer probable that sufficient revenue subject to VAT will be available to allow all or part of the input VAT to be utilized.

Allowance for unrecoverable input VAT amounted to P=89.2 million as of June 30, 2012 and December 31, 2011, respectively (see Note 17). The carrying amount of input VAT classified as current assets amounted to P=27.4 million and P=40.7 million as of June 30, 2012 and December 31, 2011, respectively. There are no input VAT classified as other noncurrent assets as of June 30, 2012 and December 31, 2011. (see Note 17).

Estimating Useful Lives of Property, Plant and Equipment, Investment Properties and Intangibles. The Company estimates the useful lives of depreciable property, plant and equipment, depreciable investment properties and intangibles with finite useful lives based on the period over which the property, plant and equipment, investment properties and intangibles with finite useful lives are expected to be available for use and on the collective assessment of industry practice, internal technical evaluation and experience with similar assets and in the case of intangibles, useful lives are also based on the contracts covering such intangibles. The estimated useful lives of property, plant and equipment and investment properties are reviewed periodically and updated if expectations differ materially from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the property, plant and equipment and investment properties. However, it is possible that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recording of expenses for any period would be affected by changes in these factors and circumstances.

The carrying amounts of depreciable property, plant and equipment amounted to P=1,027.2 million and P=1,059.6 million as of June 30, 2012 and December 31, 2011, respectively (see Note 14). The carrying amounts of depreciable investment properties amounted to P=77.5 million and P=80.6 million as of June 30, 2012 and December 31,

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2011, respectively (see Note 15). The carrying amounts of intangibles with finite useful lives amounted to P=nil and P=3.6 million as of June 30, 2012 and December 31, 2011, respectively (see Note 16).

Estimating Net Realizable Value of Inventories. The Company carries inventories at net realizable value when this becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes.

The carrying amounts of inventories amounted to P=990.9 million and P=977.9 million as of June 30, 2012 and December 31, 2011, respectively (see Note 11).

Estimating the Fair Values of Acquiree’s Identifiable Assets and Liabilities. Where the fair values of the acquiree’s identifiable assets and liabilities cannot be derived from active markets, the Company determined the fair values using internal valuation techniques and generally accepted valuation approaches. The inputs to these valuation approaches are taken from historical experience and observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. The estimates may include discount rates and assumptions used in cash flow projections.

The fair values of the identifiable net assets acquired (liabilities assumed) from Fuld U.S. and Fuld Philippines amounted to P=83.8 million and (P=4.5 million), respectively, in 2011 (see Note 7).

Pension Benefits. The determination of the Company’s obligation and cost of pension benefits is dependent on the selection of certain assumptions made by management and used by actuaries in calculating such amounts. The assumptions presented in Note 31 include among others, discount rates, expected rates of return on plan assets and rates of future salary increase. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.

Net pension liability, included under “Pension and other post-employment benefits” account in the consolidated statements of financial position, amounted to P=78.0 million and P=58.2 as of June 30, 2012 and December 31, 2011.

Fair Value of Financial Assets and Liabilities. The Company carries certain financial assets and liabilities at fair value in the consolidated statements of financial position. Determining the fair value of financial assets and liabilities requires extensive use of accounting estimates and judgment. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any changes in the fair value of these financial assets and liabilities would affect profit and loss and other comprehensive income.

The methods and assumptions used to estimate the fair value of financial assets and liabilities are discussed in Note 29. 6. Discontinued Operation

On March 10, 2009, PHN, AHC, Trans-Asia Oil and Energy Development Corporation (TA Oil) and Trans-Asia Power Corporation (TA Power) (collectively referred to as “the Sellers”) signed a Share Purchase Agreement for the sale of all their interests in BIPC to Phoenix Petroleum Philippines, Inc. (Phoenix), an unrelated party, for P=109.8 per share totaling P=642.3 million, P=428.3 million of which pertains to the Company. Outstanding receivable of the Company from this transaction amounted to P=333.5 million as of December 31, 2009. The current portion amounting to P=57.0 million is presented under “Trade and other receivables” account in the 2009 consolidated statement of financial position (see Note 10). The noncurrent portion amounting to P=276.4 million is shown separately as “Installment contract receivables - net of current portion” account under noncurrent assets in the 2009 consolidated statement of financial position. The sale resulted in the Company’s recognition of gain amounting to P=65.0 million. On April 16, 2010, Phoenix prepaid all its outstanding payable to the Sellers.

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BIPC is presented as Discontinued Operation – Property Development in the 2009 segment information (see Note 36).

The cash inflow related to discontinued operation in 2009 is as follows (amounts in thousands):

Total disposal consideration P=428,250 Less receivable 333,450 Cash received from disposal 94,800 Less: Cash and cash equivalents of a subsidiary disposed of 22,538 Disposal costs 9,386 Net cash inflow P=62,876

The results of BIPC for the period January 1 to March 10, 2009, included in the 2009 consolidated statement of income, are presented below (amounts in thousands):

Revenues P=5,292 Cost and expenses (4,643)Operating income 649 Other expenses – net (479)Income before income tax from discontinued operation 170 Provision for income tax (57)Net income for the year from discontinued operation P=113

Income from discontinued operation, included in the 2009 consolidated statement of income, consists of the following (amounts in thousands):

Gain from sale of discontinued operation, net of tax P=65,039 Net income from discontinued operation 113 Net income for the year from discontinued operation P=65,152

The assets and liabilities of BIPC as of March 10, 2009 are as follows (amounts in thousands):

Current assets: Cash and cash equivalents P=22,538 Trade and other receivables 23,245 Inventories 122,051 Prepaid expenses and other current assets 724 Noncurrent assets: Property, plant and equipment 131,140 Investment property 216,721 Deferred tax assets 283 Installment contracts receivable 58,482 Other noncurrent assets 9,246 Total (Carried Forward) 584,430

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Total (Brought Forward) P=584,430 Current Liabilities: Trade and other payables (23,321) Current portion of long-term debt (7,144)Noncurrent Liabilities: Long-term debt (13,380) Accrued retirement (2,139) Other noncurrent liabilities (2,247) (48,231)Net assets P=536,199

Share in net assets P=353,783 Non-controlling interest 182,416 P=536,199

The net cash flows of BIPC for the period January 1 to March 10, 2009 are as follows (amounts in thousands):

Operating P=22,538 Investing – Financing – Net cash flow P=22,538

Basic EPS from discontinued operation in 2009 is computed as follows (amounts in thousands):

(a) Net income from discontinued operation attributable to equity holders of the parent (see Note 36) P=65,090

(b) Weighted average shares outstanding 257,737 Basic EPS (a/b) P=0.25

7. Business Combinations and Acquisition of Non-controlling Interests

Following are the business combinations in 2011

Acquisition of Fuld & Company, Inc. (Fuld U.S.) On June 10, 2011, PHN purchased 85% voting shares of stock of Fuld U.S. Fuld U.S. is a business research and consulting firm focusing on business and competitive intelligence. Fuld U.S. is incorporated in the USA with offices in the USA, United Kingdom and China. Founded in 1979, Fuld U.S. delivers customized proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges. The Company acquired Fuld U.S. to increase its Business Process Outsourcing (BPO) portfolio which will provide opportunities in the high value-added services sector.

The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair ValueRecognized on

Acquisition

PreviousCarrying

Value in theSubsidiary

(In Thousands) Cash on hand and in banks P=8,969 P=8,969 Receivables 69,340 69,340 Prepaid expenses and other assets 20,453 20,453

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Fair ValueRecognized on

Acquisition

PreviousCarrying

Value in theSubsidiary

(In Thousands) Property and equipment 8,491 8,491 Intangibles (see Note 16) 47,156 - Total (Carried Forward) 154,409 107,253 Total (Brought Forward) P=154,409 P=107,253 Accounts payable and accrued liabilities (56,429) (56,429)Deferred tax liabilities (14,147) - (70,576) (56,429)Total identifiable net assets 83,833 P=50,824 Non-controlling interest at fair value (12,575)Goodwill arising from acquisition (see Note 16) 274,949 Total consideration transferred P=346,207

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree’s net identifiable assets.

The cost of acquiring Fuld U.S. amounted to U.S.$7.99 million (P=346.2 million) consisting of cash payment of U.S.$5.6 million and the remaining balance of U.S.$2.4 million payable in four years at four equal installments with an interest rate of 4.5% per annum.

As of December 31, 2011, current and noncurrent portions of long-term loan payable related to the acquisition of Fuld U.S. amounted to P=22.1 million ($0.5 million) and P=78.9 million ($1.8 million), respectively, (non-cash investing transaction).

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=242,215)Transaction cost (included as part of administrative expenses and cash flows

from operating activities) (10,610)Less cash of acquired subsidiary 8,969 Net cash outflow (P=243,856)

The fair value of receivables amounted to P=69.3 million. These receivables are not impaired and expected to be collected in full.

The goodwill amounting to P=274.9 million includes the value of expected synergies arising between Fuld U.S. and the Company’s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld U.S. has contributed P=248.3 million of revenue and P=12.5 million to the loss to the consolidated income before income tax of the Company. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operation would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

Acquisition of Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) On July 25, 2011, PHN purchased 85% voting shares of stock of Fuld Philippines. Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002. The Company acquired Fuld Philippines to increase its BPO portfolio which will provide opportunities in the high value-added services sector.

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The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair ValueRecognized on

Acquisition

PreviousCarrying

Value in theSubsidiary

(In Thousands) Cash on hand and in banks P=1,012 P=1,012 Receivables 1,756 1,756 Advances to employees 163 163 Property and equipment 636 636 3,567 3,567 Accrued payable and accrued expenses (5,157) (5,157)Loans payable (961) (961)Retirement payable (78) (78)Taxes payable (1,857) (1,857) (8,053) (8,053)Total identifiable net liabilities (4,486) (P=4,486)Non-controlling interest at fair value 673 Goodwill arising from acquisition (see Note 16) 10,720 Total consideration transferred P=6,907

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree’s net liabilities.

The cost of acquiring Fuld Philippines amounted to P=6.9 million, of which P=4.0 million (non-cash investing transaction) was retained by the Company and remain unpaid as at December 31, 2011.

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=2,907)Transaction costs (included as part of administrative expenses and cash flows

from operating activities) (6)Less cash of acquired subsidiary 1,012 Net cash outflow (P=1,901)

The fair value of receivables amounted to P=1.7 million. These receivables are not impaired and expected to be collected in full.

The goodwill amounting to P=10.7 million includes the value of expected synergies arising between Fuld Philippines and the Company’s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld Philippines has contributed P=9.7 million of revenue and P=0.2 million loss to the consolidated income before income tax of the Company. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operations would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

The net assets of Fuld U.S. and Fuld Philippines recognized in the Company’s December 31, 2011 consolidated financial statements were based on provisional assessment of fair values as the audit and fair valuation of the identifiable net assets acquired were not yet completed.

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Acquisition of Non-controlling Interest On December 21, 2009, PHN acquired the remaining 19.5% non-controlling interest in UGC thereby increasing PHN’s ownership to 100%, thus making UGC a wholly owned subsidiary of PHN. The total consideration was P=36.3 million of which P=9.1 million was paid as of December 31, 2009. The carrying value of the net assets of UGC at the date of sale was P=620.6 million, and the carrying value of the additional interest acquired was P=121.0 million. The difference of P=84.7 million between the consideration paid and the carrying value of non-controlling interest acquired is recorded as “Negative goodwill on acquisition of non-controlling interest” in the 2009 consolidated statement of income.

8. Cash and Cash Equivalents

This account consists of:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) Cash on hand and in banks P=150,864 P=83,853 Short-term deposits 799,608 832,304 P=950,472 P=916,157

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

9. Investments Held for Trading

This account consists of:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) Investments in: UITFs P=269,610 P=414,525 Bonds 432,539 353,065 Marketable equity securities 3,669 3,927 P=705,818 P=771,517

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10. Trade and Other Receivables

This account consists of:

Unaudited Audited June 30, 2011 Dec. 31, 2011

(In Thousands) Trade P=1,011,783 P=780,742 Due from related parties (see Note 26) 15,549 75,653 Installment contract receivables 68,880 72,617 Advances to suppliers and contractors 6,396 13,449 Accrued interest 10,264 11,817 Receivable from PHN Retirement/Gratuity Plan (PHN

Retirement) 8,939 8,939 Advances to officers and employees 7,408 6,094 Others 62,970 53,144 1,192,189 1,022,455 Less allowance for doubtful accounts (176,461) (164,806) P=1,015,728 P=857,649

Trade receivables include receivables from sale of roofing and other steel products to customers like developers and contractors, which are normally on a 30-60 days term. Trade receivables also include tuition and other school fees receivables which are normally collected within the current school semester. Other trade receivables are noninterest-bearing and normally collected throughout the financial year.

The terms and conditions of due from related parties are discussed in Note 26.

Installment contract receivables mainly represent the balance of receivable from a third party for the sale of API’s property (see Note 15). The receivables are noninterest-bearing and are short-term in nature.

Other receivables are noninterest-bearing and normally collected throughout the financial year.

Movements in the allowance for doubtful accounts are as follows:

June 30, 2012 Trade Others Total

(In Thousands) Balance at January 1, 2012 P=161,835 P=2,970 P=164,805 Provisions (see Notes 24 and 25) 11,656 - 11,656 Balance at March 31, 2012 P=173,491 P=2,970 P=176,461

Individual impairment P=81,008 P=87,536 P=168,544 Collective impairment 7,917 – 7,917 P=88,925 P=87,536 P=176,461

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December 31, 2011 Trade Others Total (In Thousands)

Balance at January 1, 2011 P=138,052 P=8,245 P=146,297 Additions 5,714 – 5,714 Provisions (see Notes 24 and 25) 36,192 – 36,192 Reversals/write-offs (23,397) – (23,397)Balance at December 31, 2011 P=156,561 P=8,245 P=164,806

Individual impairment P=74,538 P=82,781 P=157,319 Collective impairment 7,487 – 7,487 P=82,025 P=82,781 P=164,806

11. Inventories

This account consists of:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) At cost: Finished goods P=871,834 P=886,342 Raw materials 60,029 36,303 Other inventories 20,333 20,633 At net realizable value - Spare parts and others 38,670 34,641 P=990,866 P=977,919

Under the terms of the agreements covering liabilities under trust receipts, certain inventories amounting to P=392.60 million and P=103.7 million as of June 30, 2012 and December 31, 2011, respectively, have been released to UGC in trust for the banks. UGC is accountable to the banks for the inventories under trust or its sales proceeds.

Finished goods mainly represent roofing and other steel products of UGC.

The cost of spare parts and other inventories carried at net realizable value amounted to P=40.0 million and P=36.0 million as of June 30, 2012 and December 31, 2011, respectively.

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12. Investments in Associates

This account consists of the Company’s investments in the following entities:

Percentage of Ownership Direct Indirect Phinma Property Holdings Corporation (PPHC) 35.35 – TA Oil 28.04 – AB Capital and Investment Corporation (AB Capital) 26.51 1.67 Luzon Bag Corporation(a) 21.05 – Asia Coal Corporation (Asia Coal)(a) (b) 12.08 5.99

(a) Ceased commercial operations (b) Considered as an associate although percentage of ownership is below 20% since the Company has

significant influence as evidenced in its representation in the BOD of Asia Coal.

The movements and details of investments in associates are as follows:

Unaudited Audited June 30, 2012 Dec. 31, 2011Acquisition costs: Balance at beginning of year P=1,888,248 P=1,537,282 Additions (disposal) (5,989) 350,966 Balance at end of year 1,882,259 1,888,248 Accumulated equity in net losses: Balance at beginning of year (72,154) (191,824) Equity in net earnings for the year 48,384 137,656 Dividends received (54,198) (17,986) Balance at end of year (77,968) (72,154) Share in net unrealized gain on change in fair value of

AFS investments of associates: Balance at beginning of year 19,051 19,226 Change in fair value during the year (3,011) (175) Balance at end of year 16,040 19,051 P=1,820,331 P=1,835,145

The detailed carrying values of investments in associates which are accounted for under the equity method are as follows:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) TA Oil* P=1,288,761 P=1,267,692 PPHC 333,364 373,630 AB Capital 195,794 191,397 Academy of Competitive Intelligence ** 2,144 2,158 Asia Coal 268 268 P=1,820,331 P=1,835,145

***The fair value amounted to P=896.0 million as of December 31, 2011. **Associate of Fuld U.S.

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As of June 30, 2012 and December 31, 2011, the carrying amount of the Company’s investments in associates exceeded its equity in the net assets of the associates by P=5.1 million representing goodwill related to AB Capital.

Following are status of operations and significant transactions of certain associates:

a. TA Oil

TA Oil is involved in power generation and oil and mineral exploration activities.

On February 16, 2012, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 1, 2012. This was paid on March 27, 2012.

On June 6, 2011, the SEC approved the increase in the Company’s authorized capital stock from P=2 billion divided into 2 billion shares, to P=4.2 billion divided into 4.2 billion shares.

On March 30, 2011, the SEC approved the stock rights offering of 1,165.24 million shares of TA Oil at the rate of seven shares for every ten shares held as of record date of May 18, 2011, at a price of P=1.00 per share. The offer period commenced on May 30, 2011 and ended on June 3, 2011. Total proceeds raised from the stock rights offering, net of direct costs incurred, amounted to P=1,154.53 million. The proceeds will be used as equity investment in new 135 MW clean coal power project and in Maibarara Geothermal, Inc. Additional investments made to TA Oil as a result of stock rights offering and issuance of new shares amounted to P=350.4 million in 2011.

On March 21, 2011, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of April 11, 2011. This was paid on May 4, 2011.

On March 24, 2010, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to 0.04 a share to all common stockholders of record as of May 3, 2010. This was paid on May 28, 2010.

On March 16, 2009, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 30, 2009. This was paid in 2009.

Dividend income recognized by the Parent Company from TA Oil amounted to P=18.0 million each in 2011, 2010 and 2009.

TA Oil has 100% equity interest in CIP II Power Corporation (CIPP) which operates a 21 MW Bunker C-fired power plant in CIP II Special Economic Zone in Calamba, Laguna. In April, 2009, the terms of the sale of the distributions assets to Manila Electric Company was finalized resulting in the cessation of CIPP’s operations starting April 2009. Also, the separation of substantially all of CIPP’s employees effective January 2010 was announced. On February 22, 2010 and March 24, 2010, the BOD and stockholders of TA Oil and CIPP approved the proposed merger of TA Oil and CIPP, respectively subject to the approval by the SEC. As of December 31, 2011, CIPP has not filed its application for merger with SEC and has deferred its plan for merger.

b. PPHC

PPHC is engaged in real estate development, particularly in the development of affordable medium and high-rise condominium units.

On March 13, 2012, the BOD of PPHC declared a cash dividend amounting to P=63.5 million or 7% of outstanding capital stock to all shareholders of record as of March 23, 2012. The 50% was paid on March 30, 2012 and the balance payable on September 28, 2012.

On March 1, 2010, the BOD of PPHC declared a cash dividend amounting to P=59.7 million equivalent to P=0.01 per share to all common stockholders of record as of March 15, 2010. This was paid in 2010.

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On March 3, 2009, the BOD of PPHC declared a cash dividend of P=0.005 per share and a special cash dividend of P=0.005 per share to all common stockholders of record as of March 17, 2009.

Dividend income recognized by the Parent Company from PPHC amounted to P=21.1 million each in 2010 and 2009.

c. AB Capital

AB Capital is an investment house that engages in corporate finance, fixed-income securities dealership, stock brokerage and fund management.

On March 21, 2011, the BOD of PHN approved the sale of all the shares in AB Capital to Vicsal Invesment, Inc. (Vicsal) subject to regulatory approvals. Under the Share Purchase Agreement (SPA), prior to the execution of the sale, AB Capital will effect (a) the transfer of certain assets to a new company (NewCo) in exchange for cash or shares of stock and (b) transfer of the NewCo shares to the stockholders through a return of capital or other appropriate structures.

In December 2011, the Bangko Sentral ng Pilipinas approved the sale of the shares to Vicsal and, on February 2, 2012, the Company received P=5.0 million representing its share of the first installment amounting to P=15.0 million. AB Capital has filed with the SEC for the transfer of certain assets to the NewCo.

d. Asia Coal

Asia Coal is engaged in the trading of coal. On March 19, 2009, the BOD and stockholders of Asia Coal approved the shortening of the term of Asia Coal’s corporate existence until October 31, 2009, thereby causing the dissolution of Asia Coal as of such date, subject to the approval of the SEC. As of December 31, 2011, Asia Coal is in the process of securing a tax clearance with the Bureau of Internal Revenue (BIR) in connection with the filing with the SEC of its application for dissolution.

13. AFS Investments

This account consists of investments in quoted and unquoted equity securities:

Unaudited Audited June 30, 2012 Dec. 31, 2011 (In Thousands) Quoted: First Philippine Holdings Corporation

(FPHC) - preferred shares P=15,693 P=20,475 Unquoted: Coral Way City Hotel Corporation 66,250 66,250 Beacon Property Ventures Inc. 46,329 46,329 United Industrial Bag Corporation 30,000 30,000 Unicon Phinma Concrete Corporation 12,354 12,354 Others 11,099 11,099 181,725 186,507 Less accumulated impairment losses 45,517 45,517 P=136,208 P=140,990

Investment in AB Capital preferred shares was redeemed in 2011 at par value.

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The unquoted AFS investments are carried at cost less accumulated impairment losses since their fair value cannot be reliably measured. The quoted AFS securities which are listed in the Philippine Stock Exchange (PSE) are carried at fair value.

Unicon Phinma Concrete Corporation and United Industrial Bag Corporation discontinued their operations on March 21, 2000 and October 2000, respectively. Consequently, full provision for impairment loss has been made on such AFS investments

Accumulated impairment losses pertain to certain AFS investments classified as unquoted. 14. Property, Plant and Equipment

This account consists of:

January 1,

2012 Additions DisposalsReclassifi-

cation June 30,

2012

(In Thousands) Cost Land P=1,085,875 P=10,115 P=– P=- P=1,095,990Plant site improvements 22,834 - (119) 719 23,434Buildings and improvements 1,252,026 10,910 (428) (1,895) 1,260,613Machinery and equipment 723,353 21,189 (1,060) (4,422) 739,060Transportation and other

equipment 469,532 18,224 (8,685) 2,893 481,964 3,553,620 60,438 (10,292) (2,705) 3,601,061Less Accumulated

Depreciation Plant site improvements 17,809 1,192 (119) - 18,882Buildings and improvements 482,495 26,545 (421) - 508,619Machinery and equipment 568,813 38,318 (1,060) - 606,071Transportation and other

equipment 339,065 13,487 (8,606) 326 344,272 1,408,182 79,542 (10,206) 326 1,477,844 2,145,438 (19,104) (85) (3,031) 2,123,217Construction in progress 115,306 55,165 - (5,060) 165,411Net Book Value P=2,260,744 36,061 (85) (8,091) P=2,288,628

January 1,

2011 Additions DisposalsReclassifi-

cation

December 31,

2011

(In Thousands) Cost Land P=1,044,497 P=67,436 P=– (P=26,058) P=1,085,875Plant site improvements 23,469 – (635) – 22,834Buildings and improvements 1,202,671 54,955 – (5,600) 1,252,026Machinery and equipment 694,524 31,459 (3,008) 378 723,353Transportation and other

equipment 398,435 76,060 (3,075) (1,888) 469,532 3,363,596 229,910 (6,718) (33,168) 3,553,620

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Less Accumulated Depreciation

Plant site improvements 15,978 2,466 (635) – 17,809Buildings and improvements 429,305 53,190 – – 482,495Machinery and equipment 494,608 76,970 (2,765) – 568,813Transportation and other

equipment 280,996 64,410 (2,608) (3,733) 339,065 1,220,887 197,036 (6,008) (3,733) 1,408,182 2,142,709 32,874 (710) (29,435) 2,145,438Construction in progress 33,818 98,406 – (16,918) 115,306Net Book Value P=2,176,527 P=131,280 (P=710) (P=46,353) P=2,260,744

Certain property, plant and equipment of UGC, AU and UPANG totaling P=1.1 billion as of December 31, 2011 were used as security for their respective long-term debt as disclosed in Note 20 to the consolidated financial statements.

15. Investment Properties

This account consists of:

January 1,

2012 Additions

Reclass June 30,

2012 (In Thousands)

Cost: Land P=330,314 25,225 (47) P=355,492 Buildings for lease 93,316 - - 93,316 423,630 25,225 (47) 448,808Less accumulated depreciation - Buildings for lease 12,740 3,074 - 15,814 P=410,890 22,151 (47) P=432,994

January 1,

2010 Additions Disposals

(see Note 10) December 31,

2011 (In Thousands)

Cost: Land P=321,085 P=9,229 P=– P=330,314 Buildings for lease 106,175 10,000 (22,859) 93,316 427,260 19,229 (22,859) 423,630 Less accumulated depreciation - Buildings for lease 20,971 6,253 (14,484) 12,740 P=406,289 P=12,976 (P=8,375) P=410,890

The fair value of investment properties based on the latest valuation performed by independent firms of appraisers on various dates in 2011 and 2012 amounted to P=810.6 million as of June 30, 2012 and December 31, 2011. The valuation of investment properties was based on market values using sales comparison approach, which considers the sales of similar or substitute properties and related market data and establishes value estimate by processes involving comparison.

On December 9, 2011, API acquired a condominium unit amounting to P=10.0 million from AB Capital, an affiliate, for cash.

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On December 28, 2010, the API signed a Memorandum of Agreement with Shang Property Developers, Inc. (SPDI) for the sale of API’s property for P=615.0 million. Outstanding receivable from SPDI amounted to P=68.9 million, presented in “Installment contract receivables” account under “Trade and other receivables”, as at December 31, 2011. (see Note 10).

Land include PSHC’s land amounting to P=220.0 million was used as security for its long-term debt as disclosed in Note 20 to the consolidated financial statements.

16. Intangibles

Following are the details and movements of this account:

January 1,

2012 Additions Impairment June 30,

2012

(In Thousands)

Cost: Goodwill (see Note 7) P=1,244,483 P=9,303 P=- P=1,253,786 Student lists 131,120 – – 131,120 Trademarks (see Note 7) 47,156 – – 47,156 Customer contracts 22,080 – – 22,080 1,444,839 9,303 – 1,454,142 Accumulated amortization: Student lists 127,516 3,604 – 131,120 Customer contracts 22,080 - – 22,080 149,596 3,604 – 153,200 P=1,295,243 P=5,699 P=1,300,942

January 1,

2011 Additions Impairment

December 31,2011

(In Thousands) Cost: Goodwill (see Note 7) P=1,125,183 P=285,669 (P=166,369) P=1,244,483 Student lists 131,120 – – 131,120 Trademarks (see Note 7) – 47,156 – 47,156 Customer contracts 22,080 – – 22,080 1,278,383 332,825 (166,369) 1,444,839 Accumulated amortization: Student lists 92,268 35,248 – 127,516 Customer contracts 22,080 – – 22,080 114,348 35,248 – 149,596 P=1,164,035 P=297,577 (P=166,369) P=1,295,243

In December 2011, the Company recognized impairment loss on goodwill amounting to P=166.4 million pertaining to its investments in OAL.

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17. Other Noncurrent Assets

This account consists of:

June 30, 2012 Dec. 31, 2011 (In Thousands) Input VAT - net of allowance for unrecoverable amount

of P=89.2 million in 2011. P=– P=– Others - net of allowance for doubtful advances of

P=51.1 million in 2011 , respectively 51,849 26,640 P=51,849 P=26,640

18. Notes Payable

This account consists of notes payable of the following subsidiaries:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) UGC P=250,365 P=423,543 COC 23,900 20,150 UI 150 11,500 P=274,415 P=455,193

This account consists of unsecured short-term peso-denominated loans obtained from financial institutions with annual interest rates ranging from 4.25 % to 5 % in June 2012 and 4.63% to 5.25 % in December 2011.

19. Trade and Other Payables

This account consists of:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) Trade P=120,322 P=108,901 Accruals for : Professional fees and others (see Note 26) 43,218 65,912 Personnel costs (see Note 26) 56,880 52,773 Interest (see Note 26) 11,135 10,823 Freight, hauling and handling 2,559 883 Customers’ deposits 86,397 44,756 Dividends 54,412 31,916 Payable to third parties 124,164 31,746 Others 71,018 42,082 P=570,105 P=389,792

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Trade payables are noninterest-bearing and normally settled on 30 to 90-day terms.

Accrued expenses, customers deposits, dividends, payable to third parties and others are normally settled throughout the financial year.

20. Long-term Debts

This account consists of long-term liabilities of the following subsidiaries:

Unaudited Audited June 30, 2012 Dec. 31, 2011

(In Thousands) UPANG P=224,469 P=259,148 UGC: 239,469 280,000 463,938 539,148 Less debt issuance cost - 827 463,938 538,321 PSHC 151,050 151,050 AU 41,850 45,653 Fuld U.S. - 5,698 656,838 740,772 Less current portion - net of debt issuance cost 141,906 141,063 514,932 P=599,659

UPANG

This represents loan obtained from China Banking Corporation (China Bank) on July 21, 2009 used for the acquisition and/or refinancing of its capital expenditures. The terms of the loan are as follows:

Tenure Seven (7) - year term loan with one year grace period for repayment.

Repayment The first principal payment will commence at the end of the 5th quarter from the date of drawdown; amortization will be graduated, at P=12.5 million from the fifth to the 16th quarters; P=15.0 million from the 17th to the 24th quarters and the P=7.5 million for the last four quarters until full settlement.

Funding/Interest rate Interest will be based on the Wholesale Lending Program (third party funder) with a fixed rate of 8% for the first five years. Rates for the remaining two year period of the term shall be based on the prevailing two-year PDST-F rate plus a minimum spread of 2%.

Security The facility will be secured by Real Estate Mortgage amounting to P=300.0 million on the school assets covering land and land improvements (see Note 14).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

Maintenance of the following ratios based on the audited year-end financial statements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 3:1. Waived for the first year of the loan but is required for the remaining term of the loan.

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Restrictions on declaration and payment of dividends, entering into merger or consolidation which would result in a material change in control, sale, lease, mortgage or otherwise dispose of all or substantially all of its assets and amendment of Articles of Incorporation and By-laws that would cause a material adverse change in the financial ability or capacity of the Company to perform.

As of June 30, 2012 and December 31, 2011, the University is not yet required to report and comply with the required financial ratios because the year two of the loan is not yet completed.

UGC

As at June 30, 2012 and December 31, 2011, long-term debt includes loans obtained from Banco de Oro Unibank, Inc. (BDO) and Rizal Commercial Banking Corporation (RCBC).

On June 29, 2010, the outstanding long-term debt from BDO and RCBC (the lenders) were pre-terminated by obtaining three-year term loans aggregating to P=400.0 million from the same lenders for which P=2.8 million debt issue cost was paid. The newly obtained loans are to be paid in 11 quarterly installments of P=20.0 million to commence on September 25, 2010 and a lump sum payment in June 2013 amounting to P=180.0 million. The interest is at a fixed rate of 7.624% computed based on 3-year PDST-F plus a spread of 1.75% and applicable taxes at the time of the drawdown.

As of June 30, 2012 and December 31, 2011, the loans from the lenders are collateralized by mortgage agreement on UGC’s land, plantsite improvements, buildings and installations and machinery and equipment of Calamba and Davao plants amounting to P=461.3 million and P=494.8 million, respectively (see Note 14).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

Maintenance of the following ratios for the duration of the loan agreements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 1.5:1

Restrictions on declaration and payment of dividends, incurrence of new long-term debt, entering into management agreement other than with PHINMA, entering into merger (except where it is the surviving entity) or consolidation or any change of ownership, sale, lease or otherwise transfer of a substantial portion of its assets except in the ordinary course of business, making any loans, advances or investments, making capital expenditures, prepayment of any other long-term debt and amendment of Articles of Incorporation and By-laws.

Under the loan agreement, failure to comply with the obligation or covenant in the agreement should be remedied within thirty (30) calendar days after notice by the lenders.

As of June 30, 2012 and December 31, 2011, UGC is in compliance with the terms of the loan agreement.

PSHC

This represents interest-bearing loan obtained from United Pulp and Paper Co., Inc. (UPPC) amounting to P=154.0 million arising from the acquisition of land from UPPC. UPPC was a former associate of the Company.

This loan is presented at amortized cost as of the end of the reporting period. The present value of the loan at initial recognition in 2006 was calculated using an effective interest rate of 11.0%. The effective interest rate used in computing for the present value of the loan payable was derived based on the rate inherent to the loan after considering the carrying value and the future value of the loan payable at the coupon rate of 9.1%.

Initially, the said loan is payable in two installments amounting to P=44.0 million on July 15, 2008 and P=110.0 million on July 15, 2013. On July 8, 2008, a Memorandum of Agreement was executed by UPPC and PSHC

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amending the maturity date of P=44.0 million from July 15, 2008 to July 15, 2013. A recomputation of the effective interest rate of 10.52% was made in 2008 to reflect the change in the payment terms of the liability in 2013. Additional interest expense resulting from the accretion of loan payable amounted to P=1.7 million in December 2011 (see Note 28). The details of the loan are as follows:

June 30, 2012 Dec. 31, 2011

(In Thousands) Loan payable to UPPC P=154,000 P=154,000 Less unamortized discount 2,950 2,950 P=151,050 P=151,050

To secure the payment of the loan, PSHC constituted a mortgage over its land amounting to P=220.0 million in favor of certain creditors of UPPC (see Note 15).

The payable of PSHC to UPPC incurs an annual interest at a rate subject to mutual agreement by UPPC and PSHC on each anniversary date. Interest expense on the amount payable to UPPC, computed at 9.1% of the outstanding principal balance, amounted to P=14.0 million in December 31, 2011. (see Note 20).

AU

AU’s long-term debt consists of:

June 30, 2012 Dec. 31, 2011

(In Thousands) Loan payable to China Bank P=41,850 P=45,653 Less current portion 12,500 9,573 P=29,350 P=36,080

Loan payable to China Bank represents the balance of a 10-year loan from China Bank which was used to preterminate the restructured long-term debt from another local bank, partially finance Araullo University’s building renovation and purchase various school equipment. The debt is payable on fixed monthly amortization of P=750,000 starting April 17, 2006. Interest shall be payable monthly in arrears based on variable pass-on rate plus spread. In 2010, the outstanding loan payable to China Bank of P=53.25 million was restructured to the same lender at a fixed rate interest based on the 5-year prevailing PDST-F rate plus a spread of 1.5% payable quarterly in arrears including the applicable taxes for the account of the borrower. The new debt is to be paid in 19 quarterly installments until February 5, 2015 under a graduated amortization schedule based on the agreement. Transaction costs paid on this transaction and included in the carrying amount of the new debt amounted to P=2.4 million. Actual average interest rate was 8.426 % in June 2012 and 10.3% in December 2011.

AU’s land, including existing and future improvements thereon, is used as collateral for its loan payable to China Bank. The net book value of the said land and improvements amounted to P=163.0 million as of December 31, 2011. (see Note 14).

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21. Equity

a. Capital Stock

The composition of the Parent Company’s capital stock as of June 30, 2012 and December 31, 2011 is as follows:

Number of Shares June 30, 2012 Dec. 31, 2011Preferred - cumulative,

nonparticipating, P=10 par value

Class AA Authorized 50,000,000 50,000,000

Class BB Authorized 50,000,000 50,000,000

Common - P=10 par value Authorized 420,000,000 420,000,000

Common shares : Issued 257,697,313 257,697,313 Subscribed 39,994 39,994 Stock Purchase Plan 193,752 - Issued and subscribed (see Note 35) 257,931,059 257,737,307

The issued and outstanding shares as of June 30, 2012 and December 31, 2011 are held by 1,283 and 1,306 equity holders, respectively.

Capital stock presented in the statements of financial position is net of subscription receivables amounting to P=124 thousand as at June 30, 2012 and December 31, 2011.

The following summarizes the information on the Company’s track record of registration of securities under the Securities Regulation Code:

Date of SEC Approval Authorized

Shares No. of

Shares Issued Issue/Offer

Price March 12, 1957 1,200,000 172,298 P=10 June 30, 1959 – 47,868 10 June 30, 1967* 800,000 – – June 30, 1968* 1,000,000 – – January 21, 1980* 2,000,000 – – November 3, 1988* 10,000,000 – – July 21, 1992* 25,000,000 – – January 15, 1995* 60,000,000 – – March 16, 1999* 320,000,000 – –

*Increased in authorized capital stock.

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b. Retained Earnings

On March 22, 2012, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of April 11, 2012, which was paid on April 26, 2012.

On March 3, 2011, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2011, which was paid on April 26, 2011.

On March 3, 2010, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2010, which was paid on April 23, 2010.

On March 9, 2009, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 30, 2009, which was paid on April 24, 2009.

On October 5, 2005, the BOD of PHN appropriated P=1.0 billion of retained earnings for future investments.

The BOD of PHN declared the following stock dividends:

Date Dividend Rate Shareholders’ Record Date April 14, 2008 10% June 13, 2008 March 30, 2007 15% June 15, 2007 May 31, 2006 20% August 11, 2006

The retained earnings account is restricted for the payment of dividends to the extent of P=594.1 million as of December 31, 2011, respectively, representing the accumulated equity in net earnings of the subsidiaries and associates. The accumulated equity in net earnings of the subsidiaries and associates is not available for dividend distribution until such time that the Parent Company receives the dividends from the subsidiaries and associates.

c. Other Components of Equity

This account consists of:

Unaudited Audited June 30, 2012 Dec. 31, 2011 (In Thousands) Share in unrealized gain on change in fair value of AFS

investments of associates (see Note 12) P=16,041 P=19,051 Other reserves resulting from change in ownership

interest in subsidiaries without loss of control (see Note 1) 8,943 8,943

Cumulative translation adjustments 6,554 4,935 Unrealized gain on change in fair value of

AFS investments (see Note 13) 916 985 P=32,454 P=33,914

In 2010, the convertible debt has been extinguished thus the Company reclassified the remaining balance of share in equity component of convertible notes to retained earnings.

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d. Stock Purchase Plan Following are the salient features of the Company’s Stock Purchase Plan :

Purpose To motivate the Senior Officers to achieve the company’s goals, to help make the personal goals and corporate goals congruent and to reward the officers for the resulting increase in the value of Phinma Corporation shares.

Prices of share The officers shall purchase shares of stock of Phinma Corporation (PHN) from those set aside under the Stock Purchase Plan at the average closing price of PHN shares in the stock market for 20 trading days , in no case shall the price be lower than par value.

Tranches 1/3 of the maximum shares can be purchased upon date of first notice and 1/3 each every year thereafter provided that work performance is deemed acceptable.

Holding period One-third of the shares shall not be sold or transferred to a 3rd party for at least one year from the date of each purchase or until retirement whichever comes first .Another one-third of the shares shall not be sold or transferred to a 3rd party for at least two years from the date of each purchase or until retirement whichever comes first. The last one-third of the shares shall not be sold or transferred to a 3rd party for at least three years from the date of each purchase or until retirement whichever comes first. Any such sale or transfer shall be considered null and void.

On April 2, 2009 and April 20, 2010, the Board of Directors and shareholders of PHN respectively, approved the setting aside of 8.4 million shares from the unsubscribed portion of the Corporation’s 420 million authorized common shares for stock purchase by the Senior Officers of this Corporation. On January 26, 2012, the Securities & Exchange Commission approved the Company’s Stock Purchase Plan while the Philippine Stock Exchange approved for listing the 8.4 million shares last May 23, 2012. 22. Investment Income

This account consists of:

January – June 2012 2011 (In Thousands) Interest income P=26,738 P=23,884 Net gain from fair value change of

investments held for trading 10,284 (2,161) P=37,022 P=21,723

23. Cost of Sales, Educational , Animation Services and Consultancy Services

This account consists of:

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January – June 2012 2011 (In Thousands) Cost of sales P=1,290,639 P=1,098,103 Cost of educational services 238,115 249,683 Cost of animation services 42,015 115,505 Cost of consultancy services 76,063 13,210 P=1,646,832 P=1,476,501

24. Operating Expenses

This account consists of:

January – June 2012 2011 (In Thousands) General and administrative expenses P=404,304 P=331,475 Selling expenses 70,837 76,286 P=475,141 P=407,761

25. Interest Expense and Other Financial Charges

This account consists of:

January – June 2012 2011 (In Thousands) Interest expense on loans

and borrowings P=34,250 P=39,493 Other financial charges 976 670 P=35,226 P=40,163

26. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party in making financial and operating decisions and the parties are subject to common control. Related parties may be individual or corporate entities.

Outstanding balances at year-end are unsecured and settlement occurs in cash throughout the financial year. There have been no guarantees provided or received for any related party receivables or payables. For the six (6) months ended June 30,2012 and year ended December 31, 2011, the Company has not recorded any impairment of receivables from receivables owed by the related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

The significant related party transactions entered into by the Company with its associates and entities under common control and the amounts included in the consolidated financial statements with respect to such transactions follow:

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Related Party Nature of Transaction Year

Amount ofTransactions

Duringthe Year

Amount of Due to

Related Parties

Amount ofDue from

RelatedParties

(see Note 10) (In Thousands)

2012 P=3,690 P=933 P=417 2011 P=85,310 P=20,200 P=58,258

PHINMA, Inc. Share in expenses and interest -bearing advances in 2011

2012 32,226 – 23 2011 881 – 131

TA Oil Share in expenses and dividend receivable

2012 22,623 – 11,803 2011 131,816 – 643

PPHC Dividend receivable and interest-bearing advances in 2011

CIP II Share in expenses and sale of 2012 214 – 16 property 2011 12,116 – 7,565

2012

-

–

5 2011 28 – 5

AB Capital

Share in expenses

2012 - - - 2011 11,677 – 397

Other Shareholders of UPANG Interest-bearing advances

2012 5,126 1,873 3,285 2011 10,607 4,296 8,654

Others Share in expenses

2012 P=2,806 P=15,549 2011 P=24,496 P=75,653

PSHC. PSHC has outstanding long-term debt to UPPC arising from the acquisition of land from UPPC, then an associate of the Company (see Note 20). PSHC leases the land to UPPC for a period of 50 years, renewable for another 25 years upon the approval of the Philippine Department of Trade and Industry. Annual lease income during the entire lease term is initially fixed at P=14.6 million. In connection with the lease, UPPC was required to make a lease deposit with PSHC of P=55.5 million in July 2003 and an additional P=2.9 million in April 2005, aggregated and reflected as part of “Other noncurrent liabilities” at amortized cost at the end of the reporting period, and refundable to UPPC upon the expiration of the lease. The lease deposit’s present value was calculated using an effective interest rate of 12.0% per annum. On August 2, 2006, PSHC and UPPC amended the lease agreement increasing the annual rent revenue from P=14.6 million to P=19.2 million effective January 1, 2006.

The difference between the face value of the lease deposit and its corresponding present value at inception was aggregated and reflected as unearned revenue that is being amortized as rent revenue simultaneous with the accretion of the lease deposit.

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Management and Directors’ Compensation PHN, UGC, COC, AU, UPANG and UI are under common management by PHINMA, Inc. and pay PHINMA, Inc. a fixed annual management fee plus an annual bonus based on a certain percentage of the respective companies’ adjusted net income, as defined in the management contract between PHINMA, Inc. and the respective companies, pursuant to the provisions of the same contract.

Management fees and bonuses, included in “Professional fees and outside services” account under “General and administrative expenses”, amounted to P=30.6 million and P=42.0 million in June 30, 2012 and December 31, 2011, respectively. The related unpaid amount, included in “Accruals for professional fees and others” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=19.20 million and P=16.5 million as of June 30, 2012 and December 31, 2011, respectively.

PHN, UGC, AHC, UI and AU recognized bonus to directors computed based on net income with pre-agreed adjustments. Directors’ bonus, included in “Personnel costs” account under “General and administrative expenses”, amounted to P=17.1 million and P=20.9 million in June 30, 2012 and December 31, 2011, respectively. The related unpaid amount, included in “Accruals for personnel costs” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=9.6 million and P=7.2 million as of June 30, 2012 and December 31, 2011 , respectively.

27. Income Tax

The deferred tax assets and liabilities are presented in the consolidated statements of financial position as follows: Unaudited Audited

June 30, 2012 Dec. 31, 2011

(In Thousands) Deferred tax assets P=52,202 P=49,245 Deferred tax liabilities (320,072) (310,995) (P=267,870) (P=261,750)

Deferred tax assets were not recognized since management believes that it is not probable that sufficient future taxable profit will be available to allow said deferred tax assets to be utilized.

AU, UPANG, UI and COC, as private educational institutions, are taxed based on the provisions of Republic Act (R.A.) No. 8424, which was passed into law effective January 1, 1998. Section 27(B) of R.A. No. 8424 defines and provides that: “A Proprietary Educational Institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports, or Commission on Higher Education, or Technical Education and Skills Development Authority, as the case may be, in accordance with the existing laws and regulations - shall pay a tax of ten percent (10%) on their taxable income.”

MCIT totaling P=8.4 million can be deducted against RCIT due while NOLCO totaling P=212.3 million can be claimed as deduction against taxable income, as follows:

Amount Date Paid/Incurred Expiry Date MCIT NOLCO

(In Thousands)

December 31, 2009 December 31, 2012 P=2,452 21,581 December 31, 2010 December 31, 2013 4,788 – December 31, 2011 December 31, 2014 1,137 191,141

P=8,377 P=212,722

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MCIT amounting to P=2.8 million expired in December 2011.

The RCIT rate decreased to 30% from 35% effective January 1, 2009, as provided under the provisions of R.A. No. 9337, which amended certain provisions of the Tax Code.

On December 18, 2008, the BIR issued Revenue Regulations (RR) No. 16-2008 which implemented the provisions of Section 34(L) of the Tax Code of 1997, as amended by Section 3 of R.A. No. 9504, which allows individuals and corporations to adopt the Optional Standard Deduction (OSD) in computing their taxable income.

Under RR No. 16-2008, corporations may claim OSD equivalent to 40% of gross income, excluding passive income subjected to final tax, in lieu of the itemized deductions. A corporate taxpayer who elected to avail of the OSD shall signify such in the income tax return. Otherwise, it shall be considered as having availed of the itemized deductions allowed under Section 34 of the National Internal Revenue Code. Election is done on an annual basis. In December 2011, the Parent Company computed its taxable income based on itemized deductions.

28. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments comprise of cash and cash equivalents, short-term investments, corporate promissory notes and bonds, government bonds, quoted and unquoted shares of stocks, currency forwards, investments in UITFs and loans and borrowings in Philippine Peso and U.S. dollar currencies. The main purpose of these financial instruments is to finance the Company’s investments. The Company also has financial assets and liabilities, such as trade and other receivables and trade and other payables that arise directly from operations.

The main risks arising from the Company’s treasury transactions are credit risk, liquidity risk, market risk, foreign currency risk, interest rate risk and equity price risk. Careful study, skill, prudence and due diligence are exercised at all times in the handling of the funds of the Company. An Investment Committee reviews and approves policies and directions for investments and risks management. The basic parameters approved by the Investment Committee are:

Investment Objective Safety of Principal

Tenor Three year maximum for any security, with average duration between one and two years

Exposure Limits a. For banks and fund managers: maximum of 20% of total funds of the Company per bank or fund

b. For peso investments: minimal corporate exposure except for registered bonds

c. For foreign currencies: maximum 50% of total portfolio. Limits on third currencies outside USD are set regularly and reviewed at least once a year by the Investment Committee

d. For investments in equities whether directly managed or managed by professional managers: limits are set as approved by the Investment Committee and based on current market outlook at the time of review

e. For derivative transactions - limits are set up to 100% of asset subject to derivative transaction with the objective of neutrality of gain/loss

Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Due to the Company’s investing and operating activities, the Company is exposed to the potential credit-related losses that may occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations.

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In managing credit risk on these financial instruments, the Company transacts only with the Company’s duly accredited domestic and foreign banks. Investments per financial institution are subject to a maximum of 20% of the Company’s investible funds. It is the Company’s policy that investments cannot exceed 10% of the trust or mutual fund’s total assets.

A comprehensive credit and business review in coordination with dealers or underwriters is performed whenever the Company invests in non-rated securities. Furthermore, the Company monitors the credit quality of corporate and sovereign bonds with reference to credit rating studies and updates from the major rating agencies.

The Company’s exposure to credit risk on its cash and cash equivalents, short-term investments, investments held for trading, AFS investments, trade and other receivables and derivative instruments arises from default of the counterparties with maximum exposures equal to the carrying amounts of the instruments.

Unaudited Audited

June 30, 2012 Dec. 31, 2011

(In Thousands) Loans and receivables: Cash and cash equivalents P=950,472 P=916,157 Trade and other receivables 1,015,728 857,649 Investments held for trading: Investments in UITFs 269,610 353,065 Investments in bonds 432,539 414,525 Investments in marketable equity securities 3,669 3,927 AFS investments: Quoted 15,693 20,620 Unquoted - net of accumulated impairment losses 120,515 120,370 P=2,808,226 P=2,686,313

There are no significant concentrations of credit risk within the Company.

Credit Quality of Financial Assets, Other than Trade and Other Receivables The Company uses the following criteria to rate credit quality of its financial assets, other than trade and other receivables:

Class Description

High Grade Investments in instruments that have a recognized foreign or local third party rating or instruments which carry guaranty/collateral.

Standard Grade Investments in instruments of companies that have the apparent ability to satisfy its obligations in full.

Substandard Grade Investments in instruments of companies that have an imminent possibility of foreclosure; those whose securities have declined materially in value, or those whose audited financial statements show impaired/negative net worth.

Cash and cash equivalents, short-term investments and derivative instruments are classified as high grade since these are deposited in/or transacted with reputable financial institutions which have low probability of insolvency.

The credit quality of investments held for trading and AFS investments as of June 30, 2012 and December 31 , 2011 are as follows:

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Investments in bonds 387,264 27,262 – – 414,526 Investments in marketable equity securities – 3,927 – – 3,927 AFS investments: Quoted – 20,620 – – 20,620 Unquoted – 120,370 – 45,517 165,887 P=480,948 P=431,560 P=– P=45,517 P=958,025

Credit Quality of Trade and Other Receivables Trade and other receivables are classified as (a) high grade when the receivables are secured or covered with collaterals; (b) standard grade when the receivables are unsecured but debtors have good paying habits; or (c) substandard grade when the receivables are unsecured and debtors have poor paying habits.

The credit quality of trade and other receivables (including installment contract receivables) as of June 30, 2012 and December 31, 2011 are as follows:

June 30, 2012 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=843,764 P=168,019 P=1,011,783Due from related parties – 12,675 2,874 15,549Installment contract receivables – 68,880 - 68,880Advances to suppliers and contractors – 3,570 2,826 6,396Accrued interest 10,264 - - 10,264Receivable from PHN Retirement – 8,939 - 8,939Advances to officers and employees – 7,408 - 7,408Others – 57,971 4,999 62,970 P=10,264 P=1,003,207 P=178,718 P=1,192,189

December 31, 2011 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=420,007 P=360,735 P=780,742Due from related parties – 72,779 2,874 75,653Installment contract receivables – 72,617 – 72,617Advances to suppliers and contractors – 10,623 2,826 13,449Accrued interest 11,817 – – 11,817Receivable from PHN Retirement – 8,939 – 8,939Advances to officers and employees – 6,094 – 6,094Others – 48,145 4,999 53,144 P=11,817 P=639,204 P=371,434 P=1,022,455

Impaired financial instruments comprise of trade receivables from customers, related parties and other receivables.

Liquidity Risk Liquidity risk is the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price. The Company manages liquidity risks by restricting investments and continuously monitoring weekly and monthly cash flows as well as updates of annual plans.

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The maturities of the financial liabilities are determined based on the Company’s projected payments and contractual maturities. The average duration adheres to guidelines provided by the Investment Committee. It is the Company’s policy to restrict investment principally to publicly traded securities with a history of marketability and by dealing with only large reputable domestic and international institutions. Market Risk Market risks are managed by constant review of global and domestic economic and financial environments as well as regular discussions with banks’ economists/strategy officers to get multiple perspectives on interest rate trends/forecasts. Regular comparison of the portfolio’s marked-to-market values and yields with defined benchmarks are also made.

Foreign Currency Risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company’s financial assets that are exposed to foreign currency risk are foreign currency denominated cash and cash equivalents, investment in bonds and investments in UITFs.

Foreign exchange risks on the U.S. dollar and other foreign currencies are managed through constant monitoring of the political and economic environment. Returns are also calibrated on a per currency basis to account for the perceived risks with higher returns expected from weaker currencies. The Company also enters into currency forward contracts to manage its foreign currency risk.

The following table shows the U.S. foreign currency-denominated financial assets and financial liabilities and their peso equivalents as of June 30, 2012 and December 31, 2011:

June 30, 2012 December 31, 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial assets: Cash and cash equivalents US$3,210 P=135,201 US$3,720 P=163,085 Receivables - - 151 6,620 Investments in bonds 1,627 68,526 2,284 100,130 Investments in UITFs 1,023 43,086 1,400 61,376 US$5,860 P=246,813 US$7,555 P=331,211

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June 30, 2012 December 31, 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial liabilities: Trust receipts payable US$9,320 P=392,552 US$2,773 P=121,568 Long-term loan payable 1,788 75,311 – –

US$11,108 P=467,863 US$2,773 P=121,568

In translating foreign currency-denominated financial assets into peso amounts, the exchange rate used was P=42.92 to US$1.00 as of June 30, 2012 and P=42.12 to US$1.00 as of December 31, 2011.

Interest Rate Risk

a. Cash Flow Interest Rate Risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company is exposed to cash flow interest rate risk due to AU’s variable rate loan from China Bank as at December 31, 2010 (see Note 20). On August 5, 2011, the interest on AU’s loan is fixed based on the 5-year prevailing PDST-F plus a spread of 1.50% payable quarterly.

b. Price Interest Rate Risk

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Company accounts for its debt investments at fair value. Thus, changes in benchmark interest rate will cause changes in the fair value of quoted debt instruments.

Interest on financial instruments classified as fixed rate was fixed until the maturity of the instrument.

Other financial assets at FVPL are noninterest-bearing investments and are therefore not subject to interest rate volatility.

Peso placements are subject to cash flow interest rate risk while peso and dollar bonds are subject to fair value interest rate risk.

Equity Price Risk Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of the equity indices and the values of individual stocks. The Company’s exposure to equity price risk relates primarily to its equity investments listed in the PSE classified under investments held for trading.

The Company’s policy is to maintain the risk to an acceptable level. Movement of share price is monitored regularly to determine impact on the Company’s financial position.

Capital Management The primary objective of the Company’s capital management is to ensure that the Company maintains a healthy capital structure to maintain strong credit rating and maximize shareholder value.

The Company closely monitors and manages its debt-to-equity ratio, which it defines as total liabilities divided by total equity. Capital includes all the accounts appearing in the “Equity attributable to equity holders of the parent” and “Equity attributable to non-controlling interest” in the consolidated statements of financial position.

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To ensure that there are sufficient funds to settle its liabilities, the Company’s policy is to keep debt-to-equity ratio below 1:1. The Company’s consolidated debt-to-equity ratio as of June 30, 2012 and December 31, 2011 are as follows:

Unaudited Audited

June 30, 2012 Dec. 31, 2011

(In Thousands) Total liabilities P=2,755,705 P=2,490,631 Total equity 7,135,780 7,177,576 Debt-to-equity ratio 0.39:1 0.35:1

29. Financial Instruments

Fair Value Set out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial instruments that are carried in the consolidated statements of financial position :

Carrying Amount Fair Value June 30, 2012 Dec. 31, 2011 June 30, 2012 Dec. 31, 2011

(In Thousands) Financial Assets Loans and receivables: Cash and cash equivalents P=950,472 P=916,157 P=950,472 P=916,157 Trade and other receivables* 1,015,728 857,649 1,015,728 857,649 Total (Carried Forward) 1,966,200 1,773,806 1,966,200 1,773,806

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Carrying Amount Fair Value June 30, 2012 Dec. 31, 2011 June 30, 2012 Dec. 31, 2011

(In Thousands) Total (Brought Forward) P=1,966,200 P=1,773,806 P=1,966,200 P=1,773,806 Financial assets at FVPL: Investments held for trading: Investments in UITFs 269,610 353,065 269,610 353,065 Investments in bonds 432,539 414,525 432,539 414,525 Investments in marketable equity

securities 3,669 3,927 3,669 3,927 705,818 771,517 705,818 771,517 AFS investments: Quoted 15,693 20,620 15,693 20,620 Unquoted 120,515 120,370 120,515 120,370 136,208 140,990 136,208 140,990 P=2,808,226 P=2,686,313 P=2,808,226 P=2,686,313

Financial Liabilities Financial liability at FVPL - Derivative liability P=- P=2,281 P=- P=2,281 Other financial liabilities: Notes payable 274,415 455,193 274,415 455,193 Trade and other payables 570,105 389,792 570,105 389,792 Trust receipts payable 392,552 103,735 392,552 103,735 Due to related parties 2,806 24,496 2,806 24,496 Long-term loan payable* 75,310 101,007 75,310 110,460 Long-term debt* 656,838 740,722 656,838 774,019 1,972,026 1,814,945 1,972,026 1,857,695 P=1,972,026 P=1,817,226 P=1,972,026 P=1,859,976 *Including current and noncurrent portion.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents, Short-term Investments, Trade and Other Receivables, Notes Payable, Trade and Other Payables, Trust Receipts Payable and Due to Related Parties. The carrying amounts approximate fair values due to the relatively short-term maturities of the financial instruments.

Investments Held for Trading and AFS Investments. Quoted market prices have been used to determine the fair value of financial assets at FVPL and listed AFS investments. Unquoted AFS investments are measured at cost less accumulated impairment loss since the fair value is not readily determinable due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. The Company does not intend to dispose the unquoted AFS in the near future.

Long-term Loan Payable and Long-term Debt. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable rates for similar types of loans. Discount rates used range from 2.7% to 6.0% in December 2011.

Derivative Instruments. The fair value of freestanding currency forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

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Derivative Instruments

Freestanding Derivatives. The Company’s derivative financial instruments are accounted for as financial instruments at FVPL.

The Company enters into sell US$-buy PHP= non-deliverable foreign currency forward contracts to manage the foreign currency risk arising from its US$ denominated assets. These derivatives are transactions not accounted for as accounting hedges.

The Company has outstanding currency forward contracts with an aggregate notional amount of US$3.85 million and US$6.4 million as of June 30, 2012 and December 31, 2011, respectively. The weighted average contracted forward rate is P=43.50 to US$1.00 and P=43.49 to US$1.00 as of June 30, 2012 and December 31, 2011, respectively. The currency forward contracts outstanding as of June 30, 2012 will mature in September to November 2012. The net changes in fair values of these outstanding currency forward contracts amounted to P=4.2 million and negative P=2.3 million as of June 30, 2012 and December 31, 2011, respectively.

The net changes in fair value of these derivative assets (liabilities) are as follows: Unaudited Audited

June 30, 2012 Dec. 31,2011

(In Thousands) Balance at beginning of year (P=2,281) P=4,442 Net change in fair value during the year 4,409 7,121 Fair value of settled contracts 2,060 (13,844)Balance at end of year P=4,188 (P=2,281)

Embedded Derivatives. Embedded foreign currency derivatives were bifurcated from certain of the Company’s purchase contracts, which are denominated in a currency that is neither the functional currency of a party to the contract nor the routine currency for the transaction.

The net changes in fair values of derivatives are presented as “Net gains on derivatives” in the consolidated statements of income.

Fair Value Hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data

Financial assets measured at fair value follow:

June 30, 2012 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading:

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June 30, 2012 Level 1 Level 2 Level 3 Investments in UITFs P=269,610 P=269,610 P=– P=– Investments in bonds 432,539 432,539 – – Investments in marketable equity securities 3,669 3,669 – – AFS investments - Quoted 15,693 15,693 – – P=721,511 P=721,511 P=– P=–

Dec. 31, 2011 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in UITFs P=353,065 P=353,065 P=– P=– Investments in bonds 414,525 414,525 – – Investments in marketable equity securities 3,927 3,927 – – AFS investments - Quoted 20,620 20,620 – – P=792,137 P=792,137 P=– P=–

Derivative assets and liabilities are classified under Level 1 fair value hierarchy.

During the three (3) months ended June 30, 2012 and the year ended December 31, 2011, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.

30. EPS Computation

Unaudited June 30, 2012 June 30, 2011 (a) Net income attributable to equity holders

of the parent P=86,295 P=84,353

(b) Number of shares outstanding at beginning of year 257,931,059 257,737,307

Basic/Diluted EPS attributable to equity holders of the parent (a/e) P=.33 P=.33

There were no stock issuances, stock dividends or any increases or decreases in capitalization of the Company that would impact the weighted average number of common shares outstanding in March 2012 and December 2011.

31. Segment Information (see page 77 for table presentation)

For management purposes, the Company’s operating businesses are organized and managed separately according to business activities and has five reportable operating segments as follows:

Investment holdings – The Parent Company and PSHC are engaged in investment holding activities of shares of stocks and other financial instruments.

Property development – API leases its real and personal properties.

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Steel – UGC manufactures and trades iron and steel products. Educational services – AU, COC, UPANG and UI offer graduate, tertiary, secondary and elementary education

services. BPO – OAL and Toon City are engaged in film, video, television and animation services. Fuld U.S. and Fuld

Philippines are engaged in intelligence research.

The Company has no geographical segment for segment reporting format as the Company’s risks and rates of return are substantially in the same economic and political environment, with the companies incorporated and operated in the Philippines.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. However, Company financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transaction with third parties.

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Segment Information

Financial information on the operating segments are summarized as follows:

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) For the Period January – June 30, 2012

593 023 616

811 023 398 227)099)611)295

952 331 655 938

559 074 525 158

870 182

Revenues Segment revenue P=6,957 P=310 P=1,502,942 P=395,793 P=255,591 P=- P=2,161,Investment income 29,715 7,308 - - - 37,Total revenues P=36,672 P=7,618 P=1,502,942 P=395,793 P=255,591 P=- P=2,198,

Results

Segment results P=154,717 (P=2,503) P=81,300 P=52,275 (P=25,801) (P=195,177) P=64,Investment income 29,715 7,308 - - - - 37,Equity in net earnings of an associate - (17,796) - - - 66,194 48,Interest expense and financing charges (2,034) - (21,247) (8,007) (3,939) - (35,Benefit from (provision for) income tax (860) (440) (17,817) (6,439) (316) 2,773 (23,Share of non-controlling interest - - - (391) - (5,220) (5,Net income attributable to equity holders of parent P=181,538 (P=13,431) P=42,236 P=37,438 (P=30,056) (P=131,430) P=86,

As at June 30, 2012

Assets and Liabilities Segment assets P=2,221,667 P=493,024 P=1,993,138 P=2,369,840 P=514,627 P=426,656 P=8,018,Investment in associates 4,331,846 - 10,287 - 2,141 (2,523,943) 1,820,Deferred tax assets - - - 6,444 15,155 4,056 25,Total assets P=6,553,513 P=493,024 P=2,003,425 P=2,376,284 P=531,923 (P=2,093,231) P=9,864,

Segment liabilities P=466,253 P=787 P=1,091,624 P=895,470 P=424,423 (P=473,998) P=2,404,Income and other taxes payable 1,874 229 17,186 10,051 1,734 - 31,Deferred tax liabilities - 7,281 27,623 130,068 83 128,470 293,Total liabilities P=468,127 P=8,297 P=1,136,433 P=1,035,589 P=426,240 (P=345,528) P=2,729,

Other Segment Information Capital expenditures 8,879 - 4,534 40,110 15,347 - 68,Depreciation and amortization 5,278 333 43,992 34,627 709 9,243 94,

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Continuing Operations

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) January – June 2011

238

- 238

613 661 163)003)245 353

817 145 245 207

747 889 995 631

790 079

369 372

Revenues Segment revenue P=22,314 P=16,812 P=1,356,241 P=451,531 P=115,340 P=- P=1,962,Investment income - - - - - - Total revenues P=22,314 P=16,812 P=1,356,241 P=451,531 P=115,340 P=- P=1,962,

Results Segment results P=389,848 (P=2,474) P=134,976 P=65,065 (P=41,590) (P=454,212) P=91,Equity in net earnings of an associate - 16,017 - - - 47,644 63,Interest expense and financing charges (754) - (22,898) (14,148) (2,363) - (40,Benefit from (provision for) income tax (621) (2,245) (33,051) (1,477) (1,588) 6,979 (32,Share of non-controlling interest - - - 341 881 23 1,Net income attributable to equity holders of parent P=388,473 P=11,298 P=79,027 P=49,781 (P=44,660) (P=399,566) P=84,

As at December 31, 2011

Assets and Liabilities Segment assets P=2,095,305 P=512,803 P=1,928,240 P=2,209,903 P=460,844 P=576,722 P=7,783,Investment in associates 4,319,127 – 10,288 – 2,159 (2,496,429) 1,835,Deferred tax assets – – 19,904 2,879 22,283 4,179 49,Total assets P=6,414,432 P=512,803 P=1,958,432 P=2,212,782 P=485,286 (P=1,915,528) P=9,668,

Segment liabilities P=406,773 P=977 P=955,196 P=748,466 P=361,363 (P=338,028) P=2,134,Income and other taxes payable 2,914 120 25,739 12,870 3,246 – 44,Deferred tax liabilities – 7,281 52,759 119,793 83 131,079 310,Total liabilities P=409,687 P=8,378 P=1,033,694 P=881,129 P=364,692 (P=206,949) P=2,490,

Other Segment Information Capital expenditures P=18,026 P=10,000 P=91,710 P=181,516 P=18,300 (P=3,762) P=315,Depreciation and amortization 11,748 772 77,975 73,088 7,972 46,524 218,Provision for impairment loss on investment in a

subsidiary/goodwill 274,172 – – – 166,369 (274,172) 166,Provision for unrecoverable input value-added tax 7,372 – – – – – 7,

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results Of Operations For the 1st half ended June 30, 2012, consolidated revenues of Phinma Corporation (PHN) amounted to P2.2 billion, 12% higher than revenues of P2.0 billion for the same period last year. Revenue of Fuld & Company, Inc. which was acquired and consolidated beginning June 2011, as well as increased revenues from Union Galvasteel Corporation (UGC) offset a decrease in revenue contribution from One Animate Limited, Inc. (OAL), University of Pangasinan (UPANG) and University of Iloilo (UI).

Consolidated costs and expenses of PHN for the period amounted to P1.6 billion, 12% higher compared to the previous year’s cost and expenses amounting to P1.5 billion. The increase is attributable to the increased costs and expenses of Fuld and Company, Inc., Fuld and Company (Philippines), Inc., and UGC as a result of higher volume.

Equity in net earnings of associates decreased from P64 million for the period January to June 2011 to P48 million this year. The decline is mainly due to an P 18 million equitized loss in Phinma Property Holdings Corporation (PPHC), compared to equity in net earnings of P16 million last year. These losses were offset to some extent by equity in net earnings of Trans Asia Oil and Energy Development Corporation (TA Oil) which increased from P 39 million for the first half of 2011 to P62 million in the first half of 2012.

Consolidated net income of the company for the period January to June 2012 amounted to P92 million, an increase of 11% over the P83 million net income for the same period in 2011. Net income attributable to equity holders of the parent of P86 million is an increase of 2% over the P84 million income posted in 2011.

The results of operations of PHN subsidiaries for the period January to June 2012 are as follows:

Union Galvasteel Corporation (UGC) I. Marketing For the 1st semester of CY 2012, the company sold 3.36 million sheets or 4% below the budget as the market remains very competitive, putting constant pressure on volume and margins. II. Production The Galvanizing line produced 6228 MT for the semester and has been on shut down since April 2012 The color coating line operated at 80% utilization for the semester and produced 15.772 MT as against budget of 16,300 MT. For the 1st quarter of the semester the line was undergoing upgrading, however in the 2nd quarter the line was operating at over 90% utilization. III. Financials Revenue generated was P1.5 billion with a Gross Profit (GP) rate of 14% and a net income of P42 million. This is lower than last year’s GP rate of 21% and income of P79 million due to the pressure on margins brought about by the competitive markets.

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Araullo University (AU)

For the period January to June 2012, Araullo University registered revenues amounting to P79 million while direct costs amounted to P40 million. General and administrative expenses for the same period amounted to P20 million. For the six months ended June 30, 2012, Araullo University registered a net income of P7.8 million , 32% lower than the net income of P11.4 million during the same period last year. The latter includes a reversal of provision for income tax in March 2011 in the amount of P3 million.

Total assets for the period June 30, 2012 amounted to P526 million while liabilities amounted to P204

million.

Cagayan de Oro College, Inc. (COC)

For the period January to June 2012, COC registered revenues amounting to P75 million. Direct cost and operating expenses as of June 30, 2012 were P41 million and P24 million respectively. COC net income increased from a net loss of P7.6 million last year to a net income of P2.5 million for the period January to June 30, 2012 due to increase in student enrollment.

University of Pangasinan (UPANG)

On February 2, 2009, the Company acquired a 70% stake in University of Pangasinan in Dagupan City. UPang is the leading educational institution in Pangasinan offering elementary, secondary and tertiary education. UPang offers courses in Nursing, Engineering and Accountancy, among others. UPang also owns 69.75% of Pangasinan Medical Center, also located in Dagupan City.

For the 1st half of 2012, UPANG registered revenues amounting to P148 million and net income of P23 million. These decreased from revenues of P187 million and net income of P25 million over the same period in 2011. Student enrollment slightly decreased from 8,741 for the school year 2010-11 to 8,669 for the school year 2011-12.

University of Iloilo (UI)

On February 25, 2009, PHN acquired a 70% interest in University of Iloilo (UI), located in Iloilo City. UI offers elementary, secondary and tertiary education. UI offers courses in nursing, criminology, hotel and restaurant management and accountancy.

For the period January to June 2012, UI posted a net income of P3.9 million, compared to income of P 21.3 million income over the same period in 2011. The decrease was due to an 8% decline in enrollment from 6,641 students for school year 2010-11 to 6,110 students for school year 2011-12.

One Animate Limited (OAL)

One Animate Limited is a limited liability company incorporated in October 2008. OAL owns one hundred (100%) interest in Toon City Animation, Inc. The latter is an award winning animation studio providing 2D Flash and 3D CGI animation services and counts among its clients international names like Disney and Universal Studios.

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For the 1st half of CY 2012, OAL registered revenues of P30 million, part of a $2.6 million contract with Universal Studios for Curious George. OAL incurred a net loss of P31 million, compared to a net loss of P 48 million for the same period last year.

OAL total assets as of end June 2012 amounted to P334 million. Fuld & Company, Inc. (Fuld) In June 2011, the Company acquired an 85% interest in Fuld & Company, Inc. (Fuld). Fuld is a business research and consulting firm focusing on business and competitive intelligence. Fuld is incorporated in the United States with offices in the US, UK and China. Founded in 1979, Fuld delivers customized, proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges.

For the period January – June 2012, Fuld posted a net income of P 3 million on revenues of P 212 million. Fuld total assets as of end June 2012 amounted to 183 million.

Fuld & Company Philippines, Inc. In July 2011, PHN acquired an 85% interest in Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc. (BBI). Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002.

For the period January to June 2012, Fuld Philippines registered revenues of P13 million and gross margin of P 5.6 million. However, the company posted a net loss of P2 million.

Asian Plaza, Inc. (API)

API is a 57.6% subsidiary of PHN. On December 28, 2010 and March 31, 2011, API signed a Memorandum of Agreement and Deed of Sale respectively, for the sale of Asian Plaza property to Shang Property Developers, Inc. (SPDI) in the amount of P615 million with 25% of the selling price paid already as of December 31, 2010. API recognized the gain from this transaction amounting to P386 million in 2010. On April 4, 2011, API received the 65% payment of SDPI amounting to P399.75 million. For the period January – June 2012, API posted a net income of P4.4 million on revenues of P7.6 million, compared to a net loss of P 4.7 million last year. The increase in net income is due to the reduction in operating expenses in 2012. Expenses in 2011 included one-off expenses for the sale of API’s property.

Key Performance Indicators (KPI)

The top five (5) KPI’s used to measure the financial performance of PHN and its subsidiaries as of

June 30, 2012 compared to the same period last year are shown in the following table :

72

Profitability The return on equity for the period of 1.33% is higher than the 1.29% return for the same period last year. The increase was due to the increase in net income for the period January to June 2012. Moreover, the gross profit margin increased from 24.8% in June 2011 to 25.1% in June 2012 mainly due to gross profit margin contribution of Fuld & Company, Inc. which was acquired and consolidated beginning June 2011.

Efficiency

Net cash inflow from operations was P205 million for the period January to June 2012 compared to P495 million for the same period last year. The lower net cash inflow for the 1st semester of CY 2012 is due to increase in accounts receivable of AU, COC, UPANG, UI & UGC as well as increase in inventories of UGC.

Liquidity

Current ratio as of June 30, 2012 slightly decreased from 2.63:1.00 last year to 2.19:1.00 this year mainly due to the increase in trade payables and trust receipts payables of UGC.

Debt-equity ratio of PHN and its subsidiaries as of end June 30, 2012 was slightly higher at 0.39 compared to 0.35 as of end June 30, 2011 due to above-mentioned increase in current liabilities.

Accounting Policies and Principles

The accompanying consolidated financial statements of Phinma Corporation have been prepared in compliance with accounting principles generally accepted in the Philippines as set forth in Philippine

Financial KPI Definition 2012 2011

Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income (loss) Ave. total equity attributable to PHN

equity holders

Gross profit Net sales

1.33%

25.10%

1.29%

24.75%

Efficiency

Cash Flow Margin

Cash flow from operating Activities Net sales

9.30%

25.25%

Liquidity

Current Ratio

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

2.19 : 1.00

0.39 : 1.00

2.63 : 1.00

0.35 : 1.00

73

Financial Reporting Standards (PFRS). The consolidated financial statements have been prepared on a historical cost basis, except for financial assets at fair value through profit and loss, available for sale investments and derivative investments that have been measured at fair value.

The consolidated financial statements are prepared in Philippine pesos, the company’s functional and presentation currency.

Seasonality Aspects of the Business

Like any other company in the construction industry, the operations of UGC is affected by seasonality of cyclicality. During the summer months starting December to May, demand for roofing materials are greater than during the rainy months of June to November. The demand for the first semester of the calendar year is normally higher than that of the second semester. Interim Disclosures on Financial Statements The following financial disclosures do not materially affect or are not applicable to the Company’s interim operations :

1. Unusual items that affect the assets, liabilities, equity, net income or cash flows because

of their nature, size or incidents. 2. Changes in estimates of amounts reported in prior interim periods of the current

financial year or changes in estimates of amounts reported in prior financial years that have a material effect in the current period.

3. Issuances, repurchases of debt and equity securities.

4. Segment revenue and segment results for business segments and geographical segments.

5. Changes in contingent liabilities or contingent assets since the last annual balance sheet.

6. Existence of material contingencies and other events of transactions that are material to

an understanding of the current interim period.

7. Known trends, demands, commitments, events and uncertainties that will result in or likely to decrease its liquidity in any material way. PHN does not anticipate having within the next twelve (12) months any cash flow or liquidity problems nor does it anticipate any default or breach of any of its existing notes, loans, leases, other indebtedness or financing arrangements requiring it to make payments, except the breach in current ratio requirements of the loan covenants.

8. Events that will trigger direct or contingent material financial obligations to the company,

including any default or acceleration of its existing obligations.

9. Material off-balance sheet transactions, arrangements, obligations (direct or contingent) and other relationships of the company with unconsolidated entities or other person created during the year.

74

10. Material commitments for capital expenditures.

11. Known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable impact on net sales/revenues/ income from continuing operations.

12. Significant elements of income or loss that did not arise from the company’s continuing

operations.

Material Changes in Balance Sheet Accounts Cash and cash equivalents The increase in cash and cash equivalents of P34 million are shown in the cash flow statement. Investments held for Trading The decrease in Investments Held for Trading of P66 million represents additional purchases of bonds by PHN. Trade and other receivables - net The increase in the account in the amount of P158 million represents increase in trade receivables of AU, COC, UPANG & UI in an aggregate amount of P142 million Input tax The decrease in the account of P13 million represents a decrease in input tax of OAL in the amount of P9 million as well as decrease in input tax of UGC amounting to P4 million. Other current assets The increase in the account of P33 million is mainly due to an increase in various assets of UPang , AU & OAL in the amount of P19 million, P12 million and P10 million respectively. Investment properties – net The increase in investment properties of P22 million represents PHN’s share of a property received as liquidating dividend from Luzon Bag Corporation, which ended its corporate life in February 2012. Deferred tax assets The P 3 million increase in the account is mainly due to an increase in deferred tax of UGC arising from its provision for doubtful accounts.

75

Other assets The P 25 million increase in other assets is attributable to the increase in deferred charges of Fuld & Company, Inc. in the amount of P12 million as well as deferred charges of Cagayan de Oro College amounting to P14 million. LIABILITIES Notes payable The decrease of P181 million in the account is due to payment of short-term borrowings of UGC. Trade and other payables The increase in the account from P390 million to P570 million is partly due to a P 97 million deposit received from Vicsal Investments, Inc. pending the finalization of the sale of AB Capital shares, as well as the increase in the combined trade payables of AU, COC, UPANG & UI in the amount of P71 million. Fuld & Company, Inc. trade and personnel costs likewise increased in the amount of P23 million. Trust receipts payable The increase of P289 million in the account is attributable to the increase in UGC’s trust receipts payable from P104 million in December 2011 to P393 million this year. Unearned revenues The unearned revenues of AU, COC, UI and UPANG increased from P205 million in December 2011 to P302 million in June 2012. Tuition fees collected at the beginning of the semester in June are booked under Unearned Revenues ; the account is eventually reduced as the income is earned over the semester. Income and other taxes payable The decrease in the account of P14 million represents a decrease in income tax payable of UGC and COC. Due to related parties The decrease in the account represents payments by UGC of various liabilities to Phinma, Inc. Derivative liability The decrease in the account is due to the full settlement of non-deliverable forward contracts of PHN which were outstanding as of December 2011. Long-term loan payable The decrease in the amount of P26 million represents partial principal payments made by PHN to selling stockholders of Fuld & Company, Inc. last June 2012.

76

Long-term debt – net of current portion The decrease in the account of P84 million represents principal payments made by UGC, UPang and AU during the first semester of CY 2012. Pension and other post-employment benefits The increase in the account of P 20 million represents accrual for post-employment benefits of PHN, AU, COC, UPANG and UI. EQUITY Share in unrealized gains on financial assets of associates The P3 million decrease in the account represents a decrease in the market prices of various securities held by Trans-Asia Oil & Energy Development Corporation. Unrealized gain (loss) on change in fair value of available for sale investments The change is due to the increase in prices of First Philippine Holdings preferred shares held by Phinma Corporation and Union Galvasteel Corporation. Cumulative translation adjustments The increase of P2 million in the account represents cumulative translation adjustments arising from the consolidation of OAL and Fuld & Company, Inc. Material Changes in Income Statement Accounts Revenues The increase in revenues in the amount of P236 million is due to increase in revenues of UGC amounting to P147 million as a result of increase in sales volume. Likewise, revenues of Fuld & Company, Inc. increased from P35 million to P 212 million for the 1st semester of CY 2012. The former reflects only revenues for the month of June 2011, since the company was acquired and consolidated only beginning June 2011. Cost of sales Increase in cost of sales amounting to P170 million represents UGC’s increase due to increase in sales volume as well as increase in cost of raw materials during the 1st half of CY 2012.

77

Operating expenses The P 67 million increase in the account is due to the consolidation of operating expenses of Fuld & Company, Inc for 6 months in 2012 compared to one month in 2011. Fuld & Company was consolidated by PHN only starting June 2011. Financial charges The decrease in the account of P5 million is due to to payment of short-term payables during the 1st half of CY 2012 Equity in net earnings of associates The decrease in the account of P15 million is largely due to equitized loss from Phinma Property Holdings Corporation (PPHC) in the amount of P18 million as of June 30, 2012, compared to P 16 million for the same period last year. The loss of PPHC was partially offset by a P 62 million equitized income from TA Oil. Net gain (loss) on derivatives This account reflects a net gain in derivatives amounting to P4.4 million for the six-month ended June 30, 2012 compared to P9.4 million of the same period last year. As of June 30, 2012, the company has outstanding non-deliverable contracts with an aggregate notional amount of US$3.85 million transacted at an average rate of P43.50 to $1.00. As of the end of the quarter, unrealized gain on said contracts amount to P4.2 million. The company also booked a net derivative gain on settled contracts amounting to P.22 million. Last year, the company recognized an unrealized gain on derivatives amounting to P2.8 million and a realized gain on derivatives of P6.6 million. Foreign exchange gain (loss) Foreign exchange loss as of June 30, 2012 was P9.8 million due to the movement in foreign exchange rate from P43.84 as of Dec. 31, 2011 to P42.12 as of June 30, 2012. Other income (charges) The increase in other income of P19 million is mainly due to a liquidating dividend from Luzon Bag Corporation. Provision for income tax The decrease in provision for income tax from P32 million to P23 million is attributable to the decline in income of UGC from P79 million last year to P42 million this year.

78

Comprehensive Income Comprehensive income increased from P83 million for the six-month period ended June 30, 2011 to P90 million this year due to the increase in net income from P83 million last year to P92 million this year. For other comprehensive income / (charges), kindly refer to the comments on equity accounts.

l.'I

SIGNATURES

Pursuant to the requirements of the S€curities Regulation Code, the regismnt has duly causedthis report to be signed on its behalf by the undersigned thereunto duly authonzd.

PHINMA CORPORATION

fu,il,n;^ fi' ilfi'|rt"REGINA B. AT,VANTIIseni& vice Presid *,

(l

August lO,2Ol2

P. ANDRADA

1 2 3 9 7 S.E.C. Registration Number

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

(Company's Full Name)

L E V E L 1 2 - P H I N M A P L A Z A 3 9 P L A Z A

D R I V E , R O C K W E L L C E N T E R M A K A T I

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

L I N A A N D R A D A 8 7 0 0 1 0 0 Contact Person Company Telephone Number

1 2 3 1 S E C 1 7 - Q 1 1 1 4 Month Day FORM TYPE Month Day

Calendar Year

Secondary License Type, If Applicable

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document I. D. Cashier

STAMPS

Remarks = Pls. Use black ink for scanning purposes

COVER SHEET

l ffilll illil lill lllll illil lllll lllil llil illil ilililtil ililililililHilil ilil ilt111142012002391

SECURITIES AND EXCHANGE COMMISSIONSECBuilding, EDSA, Greenhilts,MandatuyongCity, MetroManita,philippines

Tel :(632) 726-093 1 to 39 Fax(6 g2)7 2i_b2ga Emait : mis@sec. gor.ph - -

Barcode Page

The following document has been received:

Receiving Officer/Encoder : Fernando T. FernandezReceiving Branch : SEC Head OfficeReceipt Date and Time : November 14, 2012 0S:2g:44 pMReceived From ; Head Office

Company Representative

Doc Source

Company lnformation

SEC Registration No.

Company Name000001 2397

PHINMA CORPOMTIONlndustry Classification

Company Type Stock Corporation

Document lnformation

Document lD

Document Type

Document Code

Period Covered

No. of Days Late

Department

Remarks

111142012002391

17-Q (FORM 11-Q:QUARTERLY REPORT/FS)17-Q

September 30,20120

CFD

1

SECURITIES AND EXCHANGE COMMISSION SEC FORM 17 – Q

QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE (SRC) AND SRC RULE 17 (2)(b) THEREUNDER

1. For the quarterly period ended September 30, 2012

2. Commission identification no. 12397 3. BIR Tax Identification No. 000-107-026 4. PHINMA Corporation Exact name of registrant as specified in its charter 5. Manila, Philippines Province, country or other jurisdiction of incorporation or organization 6. Industry Classification Code : __________ 7. 12/F, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City 1210 Address of registrant’s principal office 8. (632) 870-01-00 Registrant’s telephone number, including area code 9. Former name, former address, and former fiscal year, if changed since last report : N/A 10. Common Shares - 257,931,059 shares issued and outstanding 11. Are any or all of the securities listed on the Philippine Stock Exchange ? Yes ( x ) No ( )

If yes, state the name of such stock exchange and the classes of securities listed therein:

Philippine Stock Exchange, Inc. Common Shares 12. Indicate by check mark whether the registrant :

(a) Has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Section 11 of the RSA and RSA Rule 11 (a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines during the preceding 12 months (or for such shorter period the registrant was required to file such reports) Yes [ x ] No [ ]

(b) Has been subject to such filing requirements for the past 90 days.

Yes [ x ] No [ ]

2

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1 Financial Statement Unaudited Consolidated Statements of Financial Position September 30, 2012 and December 31, 2011 3 - 4

Unaudited Consolidated Statements of Income For the Quarter ended September 30, 2012 and 2011 5 Nine (9) Months ended September 30, 2012 and 2011 6 Unaudited Consolidated Statements of Comprehensive Income Nine (9) Months ended September 30, 2012 and 2011 7 Statement of Changes in Equity September 30, 2012 and 2011 and December 31, 2011 8 Consolidated Statement of Cash Flows Nine (9) months ended September 30, 2012 and 2011 9 Notes to Consolidated Financial Statements 10 - 68 Item 2 Management’s Discussion and Analysis of Financial Condition And Results of Operations 69-78 SIGNATURES 79

3

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Unaudited Audited

September 30,

2012 December 31,

2011 (In Thousands)

ASSETS Current Assets Cash and cash equivalents (Notes 8, 28 and 29) P=677,405 P=916,157 Short-term investments 10,425 - Investments held for trading (Notes 9, 28 and 29) 820,393 771,517 Trade and other receivables - net (Notes 10, 26, 28 and 29 ) 980,631 857,649 Inventories - at lower of cost or net realizable value (Note 11) 1,018,399 977,919 Input value-added taxes 32,372 40,697 Derivative asset and other current assets (Notes 32 and 33) 98,671 85,371 Total Current Assets 3,638,296 3,649,310

Noncurrent Assets Investments in associates - at equity (Note 12) 1,850,436 1,835,145 Available-for-sale (AFS) investments - (Notes 13, 28 and 29) 130,509 140,990 Property, plant and equipment – net (Notes 14 and 20) 2,273,129 2,260,744 Investment properties (Notes 15 and 20) 423,243 410,890 Intangibles (Notes 7 and 16) 1,300,942 1,295,243 Deferred tax assets – net (Note 27) 47,443 49,245 Other noncurrent assets (Note 17) 65,106 26,640 Total Noncurrent Assets 6,090,808 6,018,897

P=9,729,104 P=9,668,207

LIABILITIES AND EQUITY Current Liabilities Notes payable (Notes 18, 28 and 29) P=456,303 P=455,193 Trade and other payables (Notes 18, 28 and 29) 519,776 389,792 Unearned revenues 95,900 204,567 Trust receipts payable (Notes 11, 19, 28 and 29) 499,341 103,735 Income and other taxes payable 20,386 44,889 Due to related parties (Notes 26, 28 and 29) 626 24,496 Derivative liability - 2,281 Current portion of long-term loan payable (Notes 7, 28 and 29) 24,019 22,095 Current portion of long-term debt – net of debt issuance cost (Notes 20, 26, 28 and 29) 65,027 141,063 Total Current Liabilities 1,681,378 1,388,111

4

Unaudited Audited

September 30,

2012 December 31,

2011 (In Thousands)

Noncurrent Liabilities Long-term debt - net (Notes 20, 26, 28 and 29) P=344,792 P=599,659 Long-term loan payable (Notes 7, 28 and 29) 48,038 78,912 Deferred rent revenue - net of current portion (Note 26) - 47,228 Deferred tax liabilities – net (Note 27) 301,161 310,995 Pension and other post-employment benefits 89,430 58,249 Other noncurrent liabilities (Note 26) 60,036 7,477 Total Noncurrent Liabilities 843,457 1,102,520 Total Liabilities 2,524,835 2,490,631 Equity attributable to equity holders of the parent Capital stock (Note 21) 2,579,187 2,577,249 Additional paid-in capital 256,093 255,785 Other components of equity (Note 21) 27,488 33,914 Retained earnings (Note 21) 3,698,973 3,649,960 Equity attributable to equity holders of the parent 6,561,741 6,516,908 Equity Attributable to Non-controlling Interest (Note 7) 642,528 660,668 Total Equity 7,204,269 7,177,576

P=9,729,104 P=9,668,207

5

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME July - September 30, 2012 2011 (In Thousands) REVENUE (Note 1) Sale of goods P=691,067 P=660,401 Tuition and school fees 273,066 213,022 Consultancy services 130,038 100,219 Animation services 28,817 47,448 Investment income (Notes 8 and 22) 34,953 19,320 Rental income 3,135 3,625 1,161,076 1,044,035

COSTS AND EXPENSES Cost of sales, educational and animation services (Notes 23) (836,741) (773,384) Operating expenses

(Notes 23) (287,401) (253,152)

OTHER INCOME (CHARGES) Equity in net earnings of associates (Note 12) 24,957 36,629 Interest expense and other financial charges (Note 25) (26,233) (22,635) Net gains (losses) on derivatives (Note 29) 4,093 1,323 Foreign exchange gains (losses) - net (Note 29) (4,471) 79 Gain on sale of asset 12,202 (138) Dividend income 819 646 Others - net 25,050 11,334

INCOME BEFORE INCOME TAX 73,351 44,737

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 27) 9,344 6,445

NET INCOME P=64,007 P=38,292

Attributable To Equity holders of the parent P=65,814 P=35,653 Minority interest (1,807) 2,639 Net income P=64,007 P=38,292

Basic/Diluted Earnings Per Common Share - Attributable to Equity Holders of the Parent (Note 29) P=0.26 P=0.14

6

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME January–September 30, 2012 2011

(In Thousands) REVENUE (Note 1) Sale of goods P=2,194,009 P=2,016,642 Tuition and school fees 668,859 664,553 Consultancy services 355,304 135,580 Animation services 59,142 127,427 Investment income (Notes 8 and 22) 71,975 41,043 Rental income 10,403 21,028 3,359,692 3,006,273 COSTS AND EXPENSES Cost of sales, educational and animation services (Notes 23) (2,483,573) (2,249,885) Operating expenses

(Notes 24) (762,541) (660,913) OTHER INCOME (CHARGES) Equity in net earnings of associates (Note 12) 73,356 100,290 Interest expense and other financial charges (Note 25) (61,459) (62,798) Net gains (losses) on derivatives (Note 29) 8,502 10,704 Foreign exchange gains (losses) - net (Note 29) (14,237) (6742) Gain on sale of asset 16,919 (4,883) Dividend income 23,231 1,941 Others - net 28,467 25,861

INCOME BEFORE INCOME TAX 188,357 159,848 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note

27) 32,443 38,448

NET INCOME P=155,914 P=121,400

Attributable To Equity holders of the parent P=152,109 P=120,007 Non-controlling interest 3,805 1,393 Net income P=155,914 P=121,400

Basic/Diluted Earnings Per Common Share - Attributable to Equity Holders of the Parent (Note 30) P=0.59 P=0.47

7

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME January – September 2012 2011 (In Thousands)

NET INCOME P=155,914 P=121,400

OTHER COMPREHENSIVE INCOME (LOSS) Share in unrealized gain (loss) on change in fair value of AFS

investments of associates (Note 12) 781 (4,449) Unrealized gain (loss) on change in fair value of AFS

investments (Note 13) (742) (464) Cumulative translation adjustments (6,465) 1,664 (6,426) (3,249)

TOTAL COMPREHENSIVE INCOME P=149,488 P=118,151

Attributable To Equity holders of the parent P=145,683 P=116,758 Non-controlling interest 3,805 1,393 Total Comprehensive Income P=149,488 P=118,151

8

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Equity Attributable to Equity Holders of the Parent Company

Capital Additional

Share in Equity Component of

Convertible

Share in Unrealized

Gain (Loss) on Change in Fair

Value of AFS Investments of

Associates

Unrealized Gain (Loss) on

Change in Fair Value

of AFS Investments

Cumulative Translation Other

Non- Retained Earnings

Stock

(Note 21) Paid-in Capital

Notes (Note 21)

(Notes 12 and 21)

(Notes 13 and 21)

Adjustments (Note 21)

Reserves (Note 21)

Appropriated (Note 21) Unappropriated Subtotal

controlling Interest

Total Equity

(In Thousands)

Balance, January 1, 2012 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576 Total comprehensive income – – – 781 (742) (6,465) - - 152,108 145,682 3,745 149,427 Cash dividends (Note 21) – – – - - - - - (103,095) (103,095) - (103,095) Dividends received – – – - - - - - - - (21,886) (21,886) Stock purchase plan 1,938 308 – – – – – – – 2,246 - 2,246 Balance, September 30, 2012 P=2,579,187 P=256,093 P=– P=19,832 P=243 (P=1,530) P=8,943 P=1,000,000 P=2,698,973 P=6,561,741 P=642,528 P=7,204,269

Balance, January 1, 2011 P=2,577,249 P=255,785 P=– P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – (175) (367) 790 – – 81,018 81,266 (23,509) 57,757 Cash dividends (Note 21) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (98,914) (98,914) Acquisition of subsidiaries – – – – – – – – – – 11,902 11,902 Subscriptions – – – – – – – – – – 9,236 9,236 Balance, December 31, 2011 P=2,577,249 P=255,785 P=– P=19,051 P=985 P=4,935 P=8,943 P=1,000,000 P=2,649,960 P=6,516,908 P=660,668 P=7,177,576

Balance, January 1, 2011 P=2,577,249 P=255,785 P=- P=19,226 P=1,352 P=4,145 P=8,943 P=1,000,000 P=2,672,037 P=6,538,737 P=761,953 P=7,300,690 Total comprehensive income – – – (,4,449) (464) 1,664 – – 120,006 116,758 15,321 132,079 Cash dividends (Note 21) – – – – – – – – (103,095) (103,095) – (103,095) Dividends received – – – – – – – – – – (98,872) (98,872) Subscriptions – – – – – – – – – – - - Balance, September 30, 2011 P=2,577,249 P=255,785 P=– P=14,777 P=888 P=5,809 P=8,943 P=1,000,000 P=2,688,949 P=6,552,400 P=678,402 P=7,230,802

9

PHINMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS January – September 30, 2012 2011 (In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax from continuing operations P=188,356 P=159,850 Adjustments for: Depreciation and amortization 158,403 172,933 Equity in net earnings of associates (Note 12) (73,356) (98,178) Loss (gain) on derivatives (8,502) (10,705) Unrealized foreign exchange loss (gain) - net 14,237 3,149 Dividend income (23,231) (1,941) Income tax paid (54,663) (109,415) Changes in working capital and others (107,728) 74,320 Net cash provided by operating activities 93,516 190,013

CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in: Available for sale investment 9,738 258,124 Property and equipment (149,314) (176,964) Other noncurrent assets (8,372) 11,241 Investments at equity - (357,853) Investment properties Downpayment – net of cash from business acquired - (244,701) Deposits for TA Oil stockrights offering (134,271) - Proceeds received from settlement of derivative asset 2,946 17,090 Net settlement of derivative liability (3,024) (2,776) Proceeds from sale of investment property 10,247 3,349 Dividends received 55,490 19,927 Net cash provided by (used in) investing activities (216,560) (472,563)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (payments of ) : Short-term borrowing 396,716 145,997 Long-term borrowing (359,853) 16,624 Payment of cash dividends (151,981) (105,584) Issuance of capital stock 2,246 - Net cash used in financing activities (112,872) 57,037

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (235,916) (225,513)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,836) (1,074)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 916,157 1,202,170

CASH AND CASH EQUIVALENTS AT END OF YEAR P=677,405 P=975,583

10

PHINMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information

PHINMA Corporation (PHN or the Parent Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on March 12, 1957. On August 2, 2006, the Philippine SEC approved the extension of the Parent Company’s corporate life for another 50 years. Also, on May 27, 2010, the Philippine SEC approved the change in the Parent Company’s corporate name from Bacnotan Consolidated Industries, Inc. to PHINMA Corporation. Its principal activity is investment holdings of shares in various subsidiaries, associates and affiliates and other financial instruments.

Following are the subsidiaries of the Parent Company and the nature of their principal business activities:

Calendar/Fiscal Percentage of Ownership Name of Subsidiaries Nature of Business Yearend 2012 2011 Union Galvasteel Corporation (UGC) Manufacture and distribution

of steel products December 31 98.08 98.08 One Animate Limited (OAL) and Subsidiary BPO-Animation services December 31 80.00 80.00 Pamantasan ng Araullo (Araullo University), Inc.(AU) Educational institution March 31(c) 78.64 78.64 Cagayan de Oro College, Inc. (COC) Educational institution March 31(c) 74.21 74.21 University of Iloilo (UI) Educational institution March 31(c) 69.79 69.79 University of Pangasinan (UPANG) and Subsidiary Educational institution March 31(c) 69.75 69.75 P & S Holdings Corporation (PSHC) Investment and real estate holdings December 31 60.00 60.00 Asian Plaza, Inc. (API) Lease of real property December 31 57.62 57.62 Fuld & Company, Inc. (Fuld U.S. and Subsidiary) Business Research December 31 85.00(d) 85.00(d) Fuld & Company (Philippines), Inc. (Fuld Philippines) Business Research December 31 85.00(e) 85.00(e)

(a) On December 22, 2010, the SEC approved the merger of UGC and AHC with UGC as the surviving entity. The execution of the merger involved a

share swap between UGC and the holder of the non-controlling interest in AHC. This resulted in a decrease of the Parent Company’s ownership interest in UGC from 100% to 98.36% (see Note 20). In 2011, the change in percentage of ownership in UGC was a result of UGC’s issuance of shares to the holder of the non-controlling interest.

(b) OAL owns 100 % interest in Toon City Animation, Inc. (Toon City). (c) Balances of these subsidiaries as of and for the year ended December 31 were used for consolidation purposes, which is the same reporting period

of PHN. (d) Acquired by PHN on June 10, 2011. (e) Acquired by PHN on July 25, 2011.

The Parent Company and its subsidiaries (collectively referred to as “the Company”) are all incorporated in the Philippines except for OAL and Fuld U.S. OAL is incorporated in Hong Kong while Fuld US is incorporated in the United States of America (USA). The Company’s ultimate parent company is Philippine Investment-Management (PHINMA), Inc., which is also incorporated in the Philippines.

The information on the segments of the Company is presented in Note 31.

The registered office address of the Parent Company is 12th Floor, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City.

The accompanying consolidated financial statements were approved and authorized for issuance by the Board of Directors (BOD) on November 13, 2012.

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2. Basis of Preparation and Statement of Compliance

The accompanying consolidated financial statements of the Company have been prepared using the historical cost basis, except for investments held for trading, available-for-sale (AFS) investments and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, the Parent Company’s functional currency. All values are rounded to the nearest thousand peso unless otherwise stated.

The accompanying consolidated financial statements have been prepared in compliance with PFRS. PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from the International Financial Reporting and Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).

3. Changes in Accounting Policies and Disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS and PAS which were adopted on January 1, 2012.

PAS 12, Income Taxes (Amendment) - Recovery of Underlying Assets, will become effective for annual periods beginning on or after January 1, 2012.

PFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements, will become effective for annual periods beginning on or after July 1, 2011.

The standards or interpretations that have been adopted have no material impact on the consolidated financial statements of the Company.

Standards Issued but not yet Effective The following standards, amendments to standards and interpretations have been issued but will become effective subsequent to December 31, 2011. The Company will adopt these standards and interpretations when they become effective.

PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income (OCI), will become effective for annual periods beginning on or after July 1, 2012. The amendments to PAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on the Company’s financial position or performance.

PAS 19, Employee Benefits (Amendment), will become effective for annual periods beginning on or after January 1, 2013. The numerous amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The Company is currently assessing the impact of the amendment to PAS 19.

PAS 27, Separate Financial Statements (as revised in 2011), will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The Company does not expect this revised standard to have any significant impact on its financial position or performance.

PAS 28, Investments in Associates and Joint Ventures (as revised in 2011), will become effective for annual periods beginning on or after January 1, 2013. As a consequence of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of

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the equity method to investments in joint ventures in addition to associates. The Company does not expect this revised standard to have a significant impact on its consolidated financial statements.

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities, will become effective for annual periods beginning on or after January 1, 2014. These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on the net assets of the Company, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. The Company is currently assessing impact of the amendments to PAS 32.

PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities, will become effective for annual periods beginning on or after January 1, 2013. These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:

(a) The gross amounts of those recognized financial assets and recognized financial liabilities; (b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts

presented in the statement of financial position; (c) The net amounts presented in the statement of financial position; (d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise

included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in

PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and

(e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be applied retrospectively. The amendment affects disclosures only and has no impact on the Company’s financial position or performance.

PFRS 9, Financial Instruments: Classification and Measurement, will become effective for annual periods beginning on or after January 1, 2015. This standard reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. In subsequent phases, hedge accounting and impairment of financial assets will be addressed. The completion of this project is expected on the first half of 2012. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets, but will potentially have no impact on classification and measurements of financial liabilities. The Group has decided not to early adopt for its 2012 financial reporting, thus , has not conducted a full quantification of the impact of this standard. The Company will quantify the effect in conjunction with the other phases, when issued, to present a more comprehensive picture.

PFRS 10, Consolidated Financial Statements, will become effective for annual periods beginning on or after January 1, 2013. This standard replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standing Interpretations Committee (SIC)-12 Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required

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to be consolidated by a parent, compared with the requirements that were in PAS 27. This standard will have no significant impact on the consolidated financial statements.

PFRS 11, Joint Arrangements, will become effective for annual periods beginning on or after January 1, 2013. This standard replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions by Venturers, and removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The Company does not expect this standard to have any impact on its financial statements.

PFRS 12, Disclosure of Interests with Other Entities, will become effective for annual periods beginning on or after January 1, 2013. This standard includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The Company expects that this new standard will have no significant effect on its financial position or performance.

PFRS 13, Fair Value Measurement, will become effective for annual periods beginning on or after January 1, 2013. This standard establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. The Company is currently assessing the impact of this standard on its financial position and performance.

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate. This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the FRSC have deferred the effectivity of this interpretation until the final Revenue standard is issued by International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. This interpretation will have no significant impact in the consolidated financial statements.

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, will become effective for annual periods beginning on or after January 1, 2013. This interpretation applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (“production stripping costs”) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset. This interpretation will have no impact in the consolidated financial statements.

4. Summary of Significant Accounting Policies

Principles of Consolidation The consolidated financial statements include the accounts of the Parent Company and all the subsidiaries mentioned in Note 1. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

All intercompany balances, transactions, income and expenses and profits and losses resulting from intercompany transactions are eliminated in full.

Subsidiaries are fully consolidated from the date control is transferred to the Company and cease to be consolidated from the date control is transferred out of the Company.

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Non-controlling interest represents the portion of profit or loss and net assets in the subsidiaries not held by the Company and is presented in the consolidated statements of income, consolidated statements of comprehensive income and within equity in the consolidated statements of financial position, separately from equity attributable to equity holders of the parent. Prior to January 1, 2010, acquisitions of non-controlling interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognized as goodwill, otherwise, the difference is recognized as a “negative” goodwill (shown as “Negative goodwill on acquisition of non-controlling interest” in the consolidated statement of income). Starting January 1, 2010, a change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction and is shown as “Other reserves” in the consolidated statements of changes in equity. If the Company loses control over a subsidiary, it:

derecognizes the assets (including goodwill) and liabilities of the subsidiary; derecognizes the carrying amount of any non-controlling interest; derecognizes the cumulative translation differences, recorded in equity; recognizes the fair value of the consideration received; recognizes the fair value of any investment retained; recognizes any surplus or deficit in profit or loss; reclassifies the parent’s share of components previously recognized in other comprehensive income to profit or loss

or retained earnings, as appropriate.

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

Short-term Investments Short-term investments represent investments that are readily convertible to known amounts of cash with original maturities of more than three months but less than one year.

Financial Instruments - Initial Recognition and Subsequent Measurement

Date of Recognition. The Company recognizes a financial instrument in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date that the Company commits to purchase the assets. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Derivatives are recognized on a trade date basis.

Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial instruments, except for financial instruments measured at fair value through profit or loss (FVPL).

The Company classifies its financial instruments into the following categories: financial assets and liabilities at FVPL, loans and receivables, held-to-maturity (HTM) investments, AFS investments and other financial liabilities. The classification depends on the purpose for which the instruments are acquired and whether they are quoted in an active market. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every financial reporting date.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

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Determination of Fair Value. The fair value of financial instruments traded in active markets at the end of the reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

Day 1 Difference. Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statements of income unless it qualifies for recognition as some other type of asset. In cases where unobservable data is used, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the ‘Day 1’ difference amount.

Financial Assets and Liabilities at FVPL. This category includes financial assets and liabilities held for trading and financial assets and liabilities designated upon initial recognition as at FVPL. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including any separated derivatives, are also classified under financial assets or liabilities at FVPL, unless these are designated as hedging instruments in an effective hedge or financial guarantee contracts. Instruments under this category are classified as current assets/liabilities if these are hold primarily for the purpose of trading or expected to be realized/settled within 12 months from reporting date. Otherwise, these are classified as noncurrent assets/liabilities.

Financial assets or financial liabilities may be designated by management on initial recognition as at FVPL when the following criteria are met:

the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities designated at FVPL are recorded in the consolidated statements of financial position at fair value. Subsequent changes in fair value on financial assets and liabilities designated at FVPL are recorded in the consolidated statements of income as “Net gains from fair value change of investments held for trading” under “Investment income” account. Interest earned or incurred is recorded in “Investment income” account or “Interest expense and other financial charges” account, respectively. Dividend income is recorded according to the terms of the contract, when the right to receive payment has been established.

The Company’s investments held for trading and derivative asset are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=826.7 million and P=771.5 million as of September 30, 2012 and December 31, 2011, respectively. Included under financial liability at FVPL is the Company’s derivative liability. The carrying value of financial liability at FVPL amounted to P=2.3 million as of December 31, 2011. (see Note 29).

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Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. Loans and receivables are included in current assets if maturity is within 12 months from the financial reporting date. Otherwise, these are classified as noncurrent assets.

After initial measurement, loans and receivables are carried at amortized cost using the effective interest method less any allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest method. Gains and losses are recognized in the consolidated statements of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

The Company’s cash and cash equivalents, short-term investments, trade and other receivables and installment contract receivables are classified under this category. The aggregate carrying values of financial assets under this category amounted to P=1,668.5 million and P=1,773.8 million as of September 30, 2012 and December 31, 2011, respectively (see Note 29).

HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Company’s management has the positive intention and ability to hold to maturity. Where the company sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, such assets are carried at amortized cost using the effective interest method less any impairment in value. Gains and losses are recognized in the consolidated statements of income when the HTM investments are derecognized or impaired, as well as through the amortization process. HTM Investments are classified as current if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Company has no financial assets classified as HTM as of September 30, 2012 and December 31, 2011.

AFS Investments. AFS investments are nonderivative financial assets that are designated in this category or are not classified in any of the three preceding categories. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS investments are carried at fair value in the consolidated statements of financial position. Changes in the fair value of such assets are reported as unrealized gain or loss on change in fair value of AFS investments recognized as other comprehensive income in the consolidated statements of comprehensive income until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in consolidated statements of comprehensive income is transferred to the consolidated statements of income. AFS investments are classified as current if they are expected to be realized within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent assets.

The Company’s investments in quoted and unquoted equity securities and other investments are classified under this category. The carrying values of financial assets under this category amounted to P=130.5 million as of September 30, 2012 and P=141.0 million as of and December 31, 2011 (see Note 29).

Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. This includes liabilities arising from operations or loans and borrowings.

Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized, as well as through the amortization process. Other financial liabilities are classified as current liabilities if settlement is within 12 months from the end of the reporting period. Otherwise, these are classified as noncurrent liabilities.

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The Company’s notes payable, trade and other payables, trust receipts payable, due to related parties, long-term loan payable and long-term debt are classified under this category. The aggregate carrying values of financial liabilities under this category amounted to P=1,957.9 million and P=1,814.9 million as of September 30, 2012 and December 31, 2011, respectively (see Note 26).

Convertible Notes Convertible notes which contain both a liability and an equity element, are separated into two components on initial issuance based on the present value of the expected cash flows of the notes, and each is accounted for separately. Upon issuance of the convertible notes, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note and this amount is carried as a long-term liability at amortized cost until extinguished on conversion or repayment. Amortization of discount is based on the effective interest rate method. The remainder of the proceeds is allocated to the conversion option. The Parent Company’s share is recognized and included in equity as “Share in equity component of convertible notes.”

Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to:

deliver cash or another financial asset to another entity; exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable

to the Company; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed

number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

Debt Issuance Cost Debt issuance costs are deducted against long-term debt and are amortized over the terms of the related borrowings using the effective interest method.

Derivative Financial Instruments The Company enters into short-term forward currency contracts to hedge its currency exposure (see Note 29). Such derivative financial instruments are initially recorded at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and liabilities when the fair value is negative. Consequently, gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income. The Company has opted not to designate its derivative transactions under hedge accounting. The fair values of freestanding forward currency transactions are calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Embedded Derivative. An embedded derivative is a component of a hybrid (combined) instrument that also includes a nonderivative host contract with the effect that some of the cash flows of the hybrid instrument vary in a way similar to a stand-alone derivative. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

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(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) the hybrid or combined instrument is not recognized at FVPL.

The Company assesses whether embedded derivatives are required to be separated from the host contracts when the Company becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Company determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flow on the contract.

Embedded derivatives are measured at fair value and are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statements of income.

In September 2012 and December 2011, the Company has no embedded derivatives.

Impairment of Financial Assets The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired.

Assets Carried at Amortized Cost. If there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Company. If in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is recognized in the consolidated statements of income. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. For the purpose of specific evaluation of impairment, the Company assesses whether financial assets are impaired through assessment of collectability of financial assets considering the debtor’s capacity to pay, history of payment, and the availability of other financial support. For the purpose of a collective evaluation of impairment, if necessary, financial assets are grouped on the basis of such credit risk characteristics such as debtor type, payment history, past-due status and terms.

Assets Carried at Cost. If there is objective evidence (such as continuing losses or significant financial difficulties of the investee company) that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

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AFS Investments. In the case of equity instruments classified as AFS investments, evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statements of income, is removed from the consolidated statements of comprehensive income and recognized in the consolidated statements of income. Impairment losses on equity investments are not reversed through the consolidated statements of income. Increases in the fair value after impairment are recognized directly in consolidated statements of comprehensive income.

In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount of the asset and is accrued based on the rate of the interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the consolidated statements of income. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the consolidated statements of income, the impairment loss is reversed through the consolidated statements of income.

Derecognition of Financial Assets and Liabilities

Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

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

the Company retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset or has entered into a “pass-through” arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts, of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of income.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statements of financial position if and only if there is a currently legal right to offset the recognized amounts and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated statements of financial position.

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Inventories Inventories are valued at the lower of cost or net realizable value. Costs incurred in bringing each inventory to its present location and condition are accounted for as follows:

Finished goods – determined using the moving average method; cost includes

direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excludes borrowing costs;

Raw materials, spare parts and others – determined using the moving average method.

The net realizable value of inventories, except spare parts, is the selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The net realizable value of spare parts is the current replacement cost.

Investments in Associates Investments in associates are accounted for under the equity method. These are entities in which the Company has significant influence and which are neither subsidiaries nor joint ventures of the Company. The investments in associates are carried in the consolidated statements of financial position at cost plus post-acquisition changes in the Company’s share in net assets of the associates, less any impairment in value. The consolidated statements of income reflect the Company’s share in the results of operations of the associates. Unrealized gains arising from transactions with its associates are eliminated to the extent of the Company’s interest in the associates against the related investments. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred. The Company’s investment in an associate includes goodwill on acquisition, which is recorded in accordance with the accounting policy for goodwill.

When the Company’s accumulated share in net losses of an associate equals or exceeds the carrying amount of the investment, including advances for future conversion to equity, the Company discontinues the recognition of its share in additional losses and the investment is reported at nil value. If the associate subsequently reports net income, the Company will resume applying the equity method only after its share in that net income equals the share in net losses not recognized during the period the equity method was suspended.

Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less accumulated depreciation and any impairment loss. Land is carried at cost less any impairment loss. The cost of property, plant and equipment comprises its purchase price, including any applicable import duties and capitalized borrowing costs (for property, plant and equipment other than land) and other costs directly attributable in 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 operation, such as repairs and maintenance, are normally charged to current operations in the year 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 and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment.

Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

Plant site improvements 10–20 years Buildings and improvements 10–20 years Machinery and equipment 5–20 years Transportation and other equipment 2–10 years

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

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When each major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are met.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is credited or charged to consolidated statements of income.

Construction in-progress represents properties and structures under construction/development and is stated at cost. This includes cost of construction, plant and equipment, any borrowing costs directly attributable to such asset during the construction period and other direct costs. Construction in-progress is not depreciated until such time when the relevant assets are completed and ready for operational use.

Investment Properties Investment properties are measured initially at cost, including direct transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties (except land) are stated at cost less accumulated depreciation and impairment loss. Land is carried at cost less any impairment in value.

Depreciation of buildings for lease is calculated on a straight-line basis over the estimated useful lives of 15 to 20 years.

Investment property is derecognized when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statements of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.

Noncurrent Assets Held for Sale and Discontinued Operations Noncurrent assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

In the consolidated statements of income of the reporting period, and the comparable period of the previous year, income and expenses from discontinued operations are reported separately from normal income and expenses down to the level of profit after taxes, even when the Company retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated statements of income.

Property, plant and equipment and intangible assets once classified as held for sale are no longer depreciated/amortized.

Business Combinations, Goodwill and Goodwill Impairment

Business Combinations from January 1, 2010. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer

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measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses.

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Business Combinations Prior to January 1, 2010. Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree’s identifiable net assets.

Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognized goodwill.

When the Company acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.

Contingent consideration was recognized if, and only if, the Company had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill.

Business combinations under common control are accounted for using the pooling of interest method. Financial statements for periods prior to the combination under common control are not restated.

Following initial recognition, goodwill is measured at cost less any accumulated impairment loss. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. If the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the Company reassesses the identification and measurement of the

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acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and recognizes immediately in profit or loss any excess remaining after that reassessment.

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

represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and

is not larger than a segment based on the Company’s primary or the Company’s any secondary reporting format determined in accordance with PFRS 8, “Operating Segments.”

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

Intangible Assets The cost of intangible assets acquired separately is measured on initial recognition at cost. The cost of intangible assets (student lists and customer contracts) acquired in a business combination is measured at the fair value as of date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Student lists are amortized over three years and assessed for impairment whenever there is an indication that the student lists acquired may be impaired. Customer contracts are amortized over the estimated economic life of one year.

The useful lives of intangible assets are assessed to be either finite or indefinite. The amortization periods and method are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level.

Impairment of Nonfinancial Assets The Company assesses at each reporting date whether there is an indication that a nonfinancial asset may be impaired when events or changes in circumstances indicate that the carrying value of a nonfinancial asset may not be recoverable. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.

For nonfinancial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication

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exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. However, that increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in consolidated statements of income. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the Company’s investments in associates. The Company determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Company calculates the amount of impairment being the difference between the fair value and the carrying value of the investee company and recognizes the difference in the consolidated statements of income.

The following assets have specific characteristics for impairment testing:

Goodwill. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit (or group of cash generating units) to which the goodwill relates. When the recoverable amount of the cash generating unit is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Intangible assets. Intangible assets with indefinite useful lives are tested for impairment annually as either individually or at the cash generating unit level, as appropriate, and when circumstances indicate that the carrying value may be

impaired.

Capital Stock Capital stock is measured at par value for all shares issued. When the Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued.

When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account in the consolidated statement of financial position. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received.

Direct costs incurred related to equity issuance, such as underwriting, accounting and legal fees, printing costs and taxes are chargeable to the “Additional paid-in capital” account in the consolidated statements of financial position.

Retained Earnings Retained earnings represent accumulated net profits, net of dividend distributions and other capital adjustments.

Revenue Recognition Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized:

Sale of Goods. Revenue from sale of roofing and other steel products, books and incidentals is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.

Tuition and School Fees. Revenue is recognized as income over the corresponding school term to which they pertain. Tuition and school fees received pertaining to the summer semester and the next school year are recorded as part of “Unearned revenues” account in the consolidated statements of financial position.

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Animation Services. Income from animation services is recognized by reference to the stage of completion. Stage of completion is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Where the contract outcome cannot be measured reliably, revenue is recognized only to the extent that the expenses incurred are eligible to be recovered.

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

Investment Income. Investment income includes net gains and losses on investments held for trading (see accounting policy on Financial Assets) and interest income. Interest income is recognized as the interest accrues, taking into account the effective yield on the asset.

Consultancy Services. Revenue is recognized when services are rendered.

Sale of Real Estate. Revenue from the sale of real estate of Bacnotan Industrial Park Corporation (BIPC), included under “Income from discontinued operation” account in the 2009 consolidated statement of income which includes cost of land and development, is accounted for under the percentage of completion method when the Company has material obligations under the sales contracts to complete the project after the property is sold. Under this method, revenue is recognized as the related obligations are fulfilled, measured on the basis of the ratio of actual cost incurred to date over the estimated total costs of the project as determined by the Company’s contractors and technical personnel. Any excess of collections over the recognized receivables are included under the “Unearned revenues” account in the current liabilities section of the consolidated statements of financial position. If none of the revenue recognition criteria are met, deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers is presented as part of “Other noncurrent liabilities” account in the consolidated statements of financial position.

Port and Cargo Handling Services. Revenue from port operations of BIPC, included under “Income from discontinued operation” account in the 2009 consolidated statement of income, is recognized when services are rendered.

Cost of Sales, Educational, Animation and Consultancy Services Cost of sales includes direct materials used, personnel costs, as well as repair and power and fuel used to run production of steel products. Cost of educational services constitutes costs incurred to administer academic instruction. Costs of animation services include all direct materials, labor costs and indirect costs related to contract performance. Cost of consultancy services includes labor cost and other direct costs related to the performance of consultancy services. These expenses are expensed as incurred.

General and Administrative Expenses General and administrative expenses constitute costs of administering the businesses and are expensed as incurred.

Selling Expenses Selling expenses include costs of distribution of steel products, books, incidentals, personnel costs, freight expenses, commission and advertising. Selling expenses are expensed as incurred.

Retirement Costs PHN, UGC, Toon City, UPANG and AU have distinct funded, noncontributory defined benefit retirement plans while UI and COC have a defined, unfunded, noncontributory retirement plans covering all permanent employees, each administered by their respective Retirement Committees. Retirement costs are actuarially determined using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each plan at the end of the previous financial reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

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The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term;

c. There is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario b.

Company as Lessee. Leases where the lessor retains substantially all the risks and benefits of ownership of the leased asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statement of income on a straight-line basis over the lease term.

Company as Lessor. Leases where the Company does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Lease payments received are recognized as an income in the consolidated statement of income on a straight-line basis over the lease term.

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Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 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 assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase due to the passage of time is recognized as interest expense in the consolidated statements of income.

Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing cost consists of interest and other costs that an entity incurs in connection with the borrowing of funds.

Foreign Currency-denominated Transactions and Translation The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency. The subsidiaries determine their own functional currency and items included in the financial statements of each subsidiary are measured using that functional currency. The Company has elected to recycle the gain or loss that arises from direct method of consolidation, the method the Company uses to complete its consolidation.

Transactions in foreign currencies are recorded using their functional currency exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange at the end of the reporting period. Exchange gains or losses arising from foreign currency translations are credited or charged to current operations. Nonmonetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

Other than OAL and Fuld U.S., the functional and presentation currency of the subsidiaries within the Company is Philippine peso. The functional currency of OAL and Fuld U.S. is U.S. dollar. The assets and liabilities of foreign operations are translated into Philippine peso at the rate of exchange prevailing at the reporting date and their income statements are translated at exchange rates prevailing at the date of the transactions. The exchange differences arising on the translation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statements of income.

Taxes

Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.

Deferred Tax. Deferred tax is provided, using the balance sheet liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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Deferred tax assets are recognized for all deductible temporary differences, carry forward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused 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 the carry forward of unused excess MCIT and unused NOLCO can be utilized except:

where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of deductible temporary differences associated with investments in subsidiaries and associates. Deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.

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

Value-Added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT, except:

Where the VAT incurred on a purchase of assets or services are not recoverable from the taxation authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

Receivables and payables that are stated with the amount of VAT included. The net amount of VAT recoverable from, or payable to, the tax authority is included as part of “Input value-added taxes” or “Income and other taxes payable” accounts in the consolidated statements of financial position.

Earnings Per Common Share (EPS) Attributable to the Equity Holders of the Parent Basic EPS is computed by dividing net income (after deducting dividends on preferred shares) attributable to equity holders of the parent by the weighted average number of outstanding common shares during the year after giving retroactive effect to any stock dividend declared during the year.

The Company does not have potential common shares nor other instruments that may entitle the holder to common shares. Hence, diluted EPS is the same as basic EPS.

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Segment Reporting The Company is organized into five major business segments. Such business segments are the bases upon which the Company reports its primary segment information. Financial information on business segments is presented in Note 36 to the consolidated financial statements.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable.

Events After the Reporting Period Post year-end events that provide additional information about the Company’s financial position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

5. Significant Accounting Judgments, Estimates and Assumptions

The accompanying consolidated financial statements are prepared in conformity with PFRS require management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. In preparing the Company’s consolidated financial statements, management has made its best judgments, estimates and assumptions of certain amounts, giving due consideration to materiality. The judgments and estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

The Company believes the following represents a summary of these significant judgments, estimates and assumptions and related impact and associated risks in its consolidated financial statements.

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

Operating Lease - Company as Lessor. The Company has entered into commercial property leases on its investment property portfolio. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Rental income amounted to P=10.4 million and P=21.0 million in September 2012 and 2011, respectively.

Revenue Recognition. Selecting an appropriate revenue recognition method for a particular sale transaction requires certain judgments based on sufficiency of cumulative payments by the buyer and completion of development. The Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all its revenue arrangements.

Functional Currency. The Parent Company has determined that its functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Parent Company operates. The subsidiaries determine their own functional currencies depending on the primary economic environment to which they operate.

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

Impairment of Goodwill. The Company performs impairment testing of goodwill on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Value in use is determined by making an estimate of the expected future cash flows from the cash-generating unit and applies a discount rate to calculate the present value of these cash flows. Goodwill acquired through business combination has been allocated to one cash-generating unit which is also the operating entity acquired through business combination and to which the goodwill relates. The recoverable amount of the goodwill has been determined based on value in use calculation using cash flow projections covering a five-year period. The pre-tax discount rates applied to cash flow projections ranges from 10% to 15% in December 2011. Discount rate reflects the current market assessment of the risk specific to each cash-generating unit. The discount rate is based on the average percentage of the weighted average cost of capital for the industry. This rate is further adjusted to reflect the market assessment of any risk specific to the cash-generating unit for which future estimates of cash flows have not been adjusted. The Company performs its annual testing of goodwill at December 31.

Impairment loss on goodwill amounting to P=166.4 million was recognized in December 2011. The carrying amount of goodwill amounted to P=1,253.8 million and P=1,244.5 million as of September 30, 2012 and December 31, 2011, respectively, and is presented as part of the “Intangibles” account in the consolidated statements of financial position (see Note 16).

Impairment of Nonfinancial Assets, other than Goodwill. The Company assesses whether there are any indicators of impairment for all nonfinancial assets, other than goodwill, at each reporting date. These nonfinancial assets (investment in associates, property, plant and equipment, investment properties and intangibles) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This requires an estimation of the value in use of the cash-generating units. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. In cases where the value in use cannot be reliably estimated, the recoverable amount is based on the fair value less costs to sell. The recoverable amount of investments in associates is based on fair value less cost to sell. Fair value less costs to sell is determined to be the amount obtainable from the sale of the underlying net assets of the associate.

There are no impairment of nonfinancial assets in September 2012 and December 2011. The carrying amounts of investments in associates amounted to P=1,850.4 million and P=1,835.1 million as at September 30, 2012 and December 31, 2011, respectively (see Note 12). The carrying amounts of property, plant and equipment amounted to P=2,273.1 million and P=2,260.7 million as of September 30, 2012 and December 31, 2011, respectively (see Note 14). The carrying amounts of investment properties amounted to P=423.2 million and P=410.9 million as of September 30, 2012 and December 31, 2011, respectively (see Note 15). The carrying amounts of intangibles, other than goodwill, amounted to P=47.2 million and P=50.8 million as of September 30, 2012 and December 31, 2011, respectively (see Note 16).

Impairment of AFS Investments. The Company treats AFS equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Company treats “significant” generally as 20% or more of the original cost of investment, and “prolonged” as period longer than six months. In addition, the Company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Based on management’s assessment, the Company’s AFS investments are fairly stated, thus, no impairment loss was recognized in September 2012 and December 2011. The carrying values of AFS investments amounted to P=130.5 million as of September 30, 2012 and P=141.0 million as o f December 31, 2011. (see Note 13).

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Impairment of Trade Receivables. The Company maintains allowance for doubtful accounts based on the result of the individual and collective assessments under PAS 39. Under the individual assessment, which considers the significant financial difficulties of the debtor, the Company is required to obtain the present value of estimated cash flows using the receivable’s original effective interest rate. Impairment loss is determined as the difference between the receivables’ carrying balance and the computed present value. The collective assessment would require the Company to group its receivables based on the credit risk characteristics (debtor type, past-due status and terms) of the debtors. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any year would differ depending on the judgments and estimates made for the year.

The carrying amounts of trade and other receivables amounted to P=980.6 million and P=857.6 million as of September 30, 2012 and December 31, 2011, respectively (see Note 10). The allowance for impairment of receivables amounted to P=167.7 million and P=164.8 million as of September 30, 2012 and December 31, 2011, respectively (see Note 10).

Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting 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 the deferred tax assets to be utilized. This is based on the Company’s projection of the future results of operations.

Deferred tax assets amounted to P=47.4 million and P=49.2 million as of September 30, 2012 and December 31, 2011, respectively (see Note 27).

Deductible temporary differences, unused NOLCO and MCIT for which no deferred tax assets were recognized in the consolidated statements of financial position amounted to P=374.7 million as of December 31, 2011. (see Note 27).

Recognition of Input VAT. The carrying amounts of input taxes were reduced to the extent that it is no longer probable that sufficient revenue subject to VAT will be available to allow all or part of the input VAT to be utilized.

Allowance for unrecoverable input VAT amounted to P=89.2 million as of September 30, 2012 and December 31, 2011, respectively (see Note 17). The carrying amount of input VAT classified as current assets amounted to P=32.3 million and P=40.7 million as of September 30, 2012 and December 31, 2011, respectively. There are no input VAT classified as other noncurrent assets as of September 30, 2012 and December 31, 2011. (see Note 17).

Estimating Useful Lives of Property, Plant and Equipment, Investment Properties and Intangibles. The Company estimates the useful lives of depreciable property, plant and equipment, depreciable investment properties and intangibles with finite useful lives based on the period over which the property, plant and equipment, investment properties and intangibles with finite useful lives are expected to be available for use and on the collective assessment of industry practice, internal technical evaluation and experience with similar assets and in the case of intangibles, useful lives are also based on the contracts covering such intangibles. The estimated useful lives of property, plant and equipment and investment properties are reviewed periodically and updated if expectations differ materially from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the property, plant and equipment and investment properties. However, it is possible that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recording of expenses for any period would be affected by changes in these factors and circumstances.

The carrying amounts of depreciable property, plant and equipment amounted to P=1,047.4 million and P=1,059.6 million as of September 30, 2012 and December 31, 2011, respectively (see Note 14). The carrying amounts of depreciable investment properties amounted to P=76.0 million and P=80.6 million as of September 30, 2012 and December 31, 2011, respectively (see Note 15). The carrying amounts of intangibles with finite useful lives amounted to P=nil and P=3.6 million as of September 30, 2012 and December 31, 2011, respectively (see Note 16).

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Estimating Net Realizable Value of Inventories. The Company carries inventories at net realizable value when this becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes.

The carrying amounts of inventories amounted to P=1,018.4 million and P=977.9 million as of September 30, 2012 and December 31, 2011, respectively (see Note 11).

Estimating the Fair Values of Acquiree’s Identifiable Assets and Liabilities. Where the fair values of the acquiree’s identifiable assets and liabilities cannot be derived from active markets, the Company determined the fair values using internal valuation techniques and generally accepted valuation approaches. The inputs to these valuation approaches are taken from historical experience and observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. The estimates may include discount rates and assumptions used in cash flow projections.

The fair values of the identifiable net assets acquired (liabilities assumed) from Fuld U.S. and Fuld Philippines amounted to P=83.8 million and (P=4.5 million), respectively, in 2011 (see Note 7).

Pension Benefits. The determination of the Company’s obligation and cost of pension benefits is dependent on the selection of certain assumptions made by management and used by actuaries in calculating such amounts. The assumptions presented in Note 31 include among others, discount rates, expected rates of return on plan assets and rates of future salary increase. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.

Net pension liability, included under “Pension and other post-employment benefits” account in the consolidated statements of financial position, amounted to P=89.4 million and P=58.2 as of September 30, 2012 and December 31, 2011.

Fair Value of Financial Assets and Liabilities. The Company carries certain financial assets and liabilities at fair value in the consolidated statements of financial position. Determining the fair value of financial assets and liabilities requires extensive use of accounting estimates and judgment. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any changes in the fair value of these financial assets and liabilities would affect profit and loss and other comprehensive income.

The methods and assumptions used to estimate the fair value of financial assets and liabilities are discussed in Note 29. 6. Discontinued Operation

On March 10, 2009, PHN, AHC, Trans-Asia Oil and Energy Development Corporation (TA Oil) and Trans-Asia Power Corporation (TA Power) (collectively referred to as “the Sellers”) signed a Share Purchase Agreement for the sale of all their interests in BIPC to Phoenix Petroleum Philippines, Inc. (Phoenix), an unrelated party, for P=109.8 per share totaling P=642.3 million, P=428.3 million of which pertains to the Company. Outstanding receivable of the Company from this transaction amounted to P=333.5 million as of December 31, 2009. The current portion amounting to P=57.0 million is presented under “Trade and other receivables” account in the 2009 consolidated statement of financial position (see Note 10). The noncurrent portion amounting to P=276.4 million is shown separately as “Installment contract receivables - net of current portion” account under noncurrent assets in the 2009 consolidated statement of financial position. The sale resulted in the Company’s recognition of gain amounting to P=65.0 million. On April 16, 2010, Phoenix prepaid all its outstanding payable to the Sellers.

BIPC is presented as Discontinued Operation – Property Development in the 2009 segment information (see Note 36).

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The cash inflow related to discontinued operation in 2009 is as follows (amounts in thousands):

Total disposal consideration P=428,250 Less receivable 333,450 Cash received from disposal 94,800 Less: Cash and cash equivalents of a subsidiary disposed of 22,538 Disposal costs 9,386 Net cash inflow P=62,876

The results of BIPC for the period January 1 to March 10, 2009, included in the 2009 consolidated statement of income, are presented below (amounts in thousands):

Revenues P=5,292 Cost and expenses (4,643) Operating income 649 Other expenses – net (479) Income before income tax from discontinued operation 170 Provision for income tax (57) Net income for the year from discontinued operation P=113

Income from discontinued operation, included in the 2009 consolidated statement of income, consists of the following (amounts in thousands):

Gain from sale of discontinued operation, net of tax P=65,039 Net income from discontinued operation 113 Net income for the year from discontinued operation P=65,152

The assets and liabilities of BIPC as of March 10, 2009 are as follows (amounts in thousands):

Current assets: Cash and cash equivalents P=22,538 Trade and other receivables 23,245 Inventories 122,051 Prepaid expenses and other current assets 724 Noncurrent assets: Property, plant and equipment 131,140 Investment property 216,721 Deferred tax assets 283 Installment contracts receivable 58,482 Other noncurrent assets 9,246 Total (Carried Forward) 584,430

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Total (Brought Forward) P=584,430 Current Liabilities: Trade and other payables (23,321) Current portion of long-term debt (7,144) Noncurrent Liabilities: Long-term debt (13,380) Accrued retirement (2,139) Other noncurrent liabilities (2,247) (48,231) Net assets P=536,199

Share in net assets P=353,783 Non-controlling interest 182,416 P=536,199

The net cash flows of BIPC for the period January 1 to March 10, 2009 are as follows (amounts in thousands):

Operating P=22,538 Investing – Financing – Net cash flow P=22,538

Basic EPS from discontinued operation in 2009 is computed as follows (amounts in thousands):

(a) Net income from discontinued operation attributable to equity holders of the parent (see Note 36) P=65,090

(b) Weighted average shares outstanding 257,737 Basic EPS (a/b) P=0.25

7. Business Combinations and Acquisition of Non-controlling Interests

Following are the business combinations in 2011

Acquisition of Fuld & Company, Inc. (Fuld U.S.) On June 10, 2011, PHN purchased 85% voting shares of stock of Fuld U.S. Fuld U.S. is a business research and consulting firm focusing on business and competitive intelligence. Fuld U.S. is incorporated in the USA with offices in the USA, United Kingdom and China. Founded in 1979, Fuld U.S. delivers customized proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges. The Company acquired Fuld U.S. to increase its Business Process Outsourcing (BPO) portfolio which will provide opportunities in the high value-added services sector.

The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Cash on hand and in banks P=8,969 P=8,969 Receivables 69,340 69,340 Prepaid expenses and other assets 20,453 20,453

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Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Property and equipment 8,491 8,491 Intangibles (see Note 16) 47,156 - Total (Carried Forward) 154,409 107,253 Total (Brought Forward) P=154,409 P=107,253 Accounts payable and accrued liabilities (56,429) (56,429) Deferred tax liabilities (14,147) - (70,576) (56,429) Total identifiable net assets 83,833 P=50,824 Non-controlling interest at fair value (12,575) Goodwill arising from acquisition (see Note 16) 274,949 Total consideration transferred P=346,207

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree’s net identifiable assets.

The cost of acquiring Fuld U.S. amounted to U.S.$7.99 million (P=346.2 million) consisting of cash payment of U.S.$5.6 million and the remaining balance of U.S.$2.4 million payable in four years at four equal installments with an interest rate of 4.5% per annum.

As of December 31, 2011, current and noncurrent portions of long-term loan payable related to the acquisition of Fuld U.S. amounted to P=22.1 million ($0.5 million) and P=78.9 million ($1.8 million), respectively, (non-cash investing transaction).

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=242,215) Transaction cost (included as part of administrative expenses and cash flows

from operating activities) (10,610) Less cash of acquired subsidiary 8,969 Net cash outflow (P=243,856)

The fair value of receivables amounted to P=69.3 million. These receivables are not impaired and expected to be collected in full.

The goodwill amounting to P=274.9 million includes the value of expected synergies arising between Fuld U.S. and the Company’s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld U.S. has contributed P=248.3 million of revenue and P=12.5 million to the loss to the consolidated income before income tax of the Company. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operation would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

Acquisition of Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc.) On July 25, 2011, PHN purchased 85% voting shares of stock of Fuld Philippines. Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002. The Company acquired Fuld Philippines to increase its BPO portfolio which will provide opportunities in the high value-added services sector.

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The fair values of the identifiable assets acquired and liabilities assumed as of the date of acquisition are as follows:

Fair Value Recognized on

Acquisition

Previous Carrying

Value in the Subsidiary

(In Thousands)

Cash on hand and in banks P=1,012 P=1,012 Receivables 1,756 1,756 Advances to employees 163 163 Property and equipment 636 636 3,567 3,567 Accrued payable and accrued expenses (5,157) (5,157) Loans payable (961) (961) Retirement payable (78) (78) Taxes payable (1,857) (1,857) (8,053) (8,053) Total identifiable net liabilities (4,486) (P=4,486) Non-controlling interest at fair value 673 Goodwill arising from acquisition (see Note 16) 10,720 Total consideration transferred P=6,907

The Company measured the non-controlling interest in the acquiree by its proportionate share of the acquiree’s net liabilities.

The cost of acquiring Fuld Philippines amounted to P=6.9 million, of which P=4.0 million (non-cash investing transaction) was retained by the Company and remain unpaid as at December 31, 2011.

The cash outflow related to the acquisition is as follows (amounts in thousands):

Cash paid on acquisition date (included in cash flows from investing activities) (P=2,907) Transaction costs (included as part of administrative expenses and cash flows

from operating activities) (6) Less cash of acquired subsidiary 1,012 Net cash outflow (P=1,901)

The fair value of receivables amounted to P=1.7 million. These receivables are not impaired and expected to be collected in full.

The goodwill amounting to P=10.7 million includes the value of expected synergies arising between Fuld Philippines and the Company’s knowledge process outsourcing portfolio.

From the date of acquisition, Fuld Philippines has contributed P=9.7 million of revenue and P=0.2 million loss to the consolidated income before income tax of the Company. If the combination had taken place at the beginning of the year, consolidated revenue from continuing operations would have been P=4,174.4 million and consolidated net income would have been P=72.4 million.

The net assets of Fuld U.S. and Fuld Philippines recognized in the Company’s December 31, 2011 consolidated financial statements were based on provisional assessment of fair values as the audit and fair valuation of the identifiable net assets acquired were not yet completed.

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Acquisition of Non-controlling Interest On December 21, 2009, PHN acquired the remaining 19.5% non-controlling interest in UGC thereby increasing PHN’s ownership to 100%, thus making UGC a wholly owned subsidiary of PHN. The total consideration was P=36.3 million of which P=9.1 million was paid as of December 31, 2009. The carrying value of the net assets of UGC at the date of sale was P=620.6 million, and the carrying value of the additional interest acquired was P=121.0 million. The difference of P=84.7 million between the consideration paid and the carrying value of non-controlling interest acquired is recorded as “Negative goodwill on acquisition of non-controlling interest” in the 2009 consolidated statement of income.

8. Cash and Cash Equivalents

This account consists of:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands) Cash on hand and in banks P=88,575 P=83,853 Short-term deposits 588,830 832,304 P=677,405 P=916,157

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

9. Investments Held for Trading

This account consists of:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

Investments in: UITFs P=378,678 P=414,525 Bonds 438,225 353,065 Marketable equity securities 3,490 3,927 P=820,393 P=771,517

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10. Trade and Other Receivables

This account consists of:

Unaudited Audited

September 30,

2011 December 31,

2011

(In Thousands)

Trade P=836,741 P=780,742 Due from related parties (see Note 26) 142,835 75,653 Installment contract receivables 68,880 72,617 Advances to suppliers and contractors 19,144 13,449 Accrued interest 7,224 11,817 Receivable from PHN Retirement/Gratuity Plan (PHN

Retirement) 8,939 8,939 Advances to officers and employees 6,936 6,094 Others 57,613 53,144 1,148,312 1,022,455 Less allowance for doubtful accounts (167,681) (164,806) P=980,631 P=857,649

Trade receivables include receivables from sale of roofing and other steel products to customers like developers and contractors, which are normally on a 30-60 days term. Trade receivables also include tuition and other school fees receivables which are normally collected within the current school semester. Other trade receivables are noninterest-bearing and normally collected throughout the financial year.

The terms and conditions of due from related parties are discussed in Note 26.

Installment contract receivables mainly represent the balance of receivable from a third party for the sale of API’s property (see Note 15). The receivables are noninterest-bearing and are short-term in nature.

Other receivables are noninterest-bearing and normally collected throughout the financial year.

Movements in the allowance for doubtful accounts are as follows:

September 30, 2012 Trade Others Total

(In Thousands)

Balance at January 1, 2012 P=161,835 P=2,970 P=164,805 Provisions (see Notes 24 and 25) 2,777 99 2,876 Balance at September 30, 2012 P=164,612 P=3,069 P=167,681

Individual impairment P=77,314 P=82,880 P=160,194 Collective impairment 7,487 – 7,487 P=84,801 P=82,880 P=167,681

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December 31, 2011 Trade Others Total (In Thousands)

Balance at January 1, 2011 P=138,052 P=8,245 P=146,297 Additions 5,714 – 5,714 Provisions (see Notes 24 and 25) 36,192 – 36,192 Reversals/write-offs (23,397) – (23,397) Balance at December 31, 2011 P=156,561 P=8,245 P=164,806

Individual impairment P=74,538 P=82,781 P=157,319 Collective impairment 7,487 – 7,487 P=82,025 P=82,781 P=164,806

11. Inventories

This account consists of:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

At cost: Finished goods P=915,402 P=886,342 Raw materials 46,512 36,303 Other inventories 20,221 20,633 At net realizable value - Spare parts and others 36,264 34,641 P=1,018,399 P=977,919

Under the terms of the agreements covering liabilities under trust receipts, certain inventories amounting to P=499.3 million and P=103.7 million as of September 30, 2012 and December 31, 2011, respectively, have been released to UGC in trust for the banks. UGC is accountable to the banks for the inventories under trust or its sales proceeds.

Finished goods mainly represent roofing and other steel products of UGC.

The cost of spare parts and other inventories carried at net realizable value amounted to P=37.6 million and P=36.0 million as of September 30, 2012 and December 31, 2011, respectively.

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12. Investments in Associates

This account consists of the Company’s investments in the following entities:

Percentage of Ownership Direct Indirect Phinma Property Holdings Corporation (PPHC) 35.35 – TA Oil 28.04 – AB Capital and Investment Corporation (AB Capital) 26.51 1.67 Luzon Bag Corporation(a) 21.05 – Asia Coal Corporation (Asia Coal)(a) (b) 12.08 5.99

(a) Ceased commercial operations (b) Considered as an associate although percentage of ownership is below 20% since the Company has

significant influence as evidenced in its representation in the BOD of Asia Coal.

The movements and details of investments in associates are as follows:

Unaudited Audited

September 30,

2012 December 31,

2011 Acquisition costs: Balance at beginning of year P=1,888,248 P=1,537,282 Additions (disposal) (5,989) 350,966 Balance at end of year 1,882,259 1,888,248 Accumulated equity in net losses: Balance at beginning of year (72,154) (191,824) Equity in net earnings for the year 74,698 137,656 Dividends received (54,199) (17,986) Balance at end of year (51,655) (72,154) Share in net unrealized gain on change in fair value of

AFS investments of associates: Balance at beginning of year 19,051 19,226 Change in fair value during the year 781 (175) Balance at end of year 19,832 19,051 P=1,850,436 P=1,835,145

The detailed carrying values of investments in associates which are accounted for under the equity method are as follows:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

TA Oil* P=1,326,032 P=1,267,692 PPHC 326,182 373,630 AB Capital 195,810 191,397 Academy of Competitive Intelligence ** 2,144 2,158 Asia Coal 268 268 P=1,850,436 P=1,835,145

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***The fair value amounted to P=896.0 million as of December 31, 2011. **Associate of Fuld U.S.

As of September 30, 2012 and December 31, 2011, the carrying amount of the Company’s investments in associates exceeded its equity in the net assets of the associates by P=5.1 million representing goodwill related to AB Capital.

Following are status of operations and significant transactions of certain associates:

a. TA Oil

TA Oil is involved in power generation and oil and mineral exploration activities.

On February 16, 2012, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 1, 2012. This was paid on March 27, 2012.

On February 10, 2012, the BOD of TA Oil approved the increase in the authorized capital stock subject to the approval of the shareholders and SEC from P4.2 billion divided into 4.2 billion shares with a par value of P1 per share to P8.4 billion divided in to 8.4 billion shares with a par value of P1 per share. The said increase in authorized capital stock shall be funded by a stock rights offering, the terms and conditions of which, including the final issue size, rights entitlement, offer price and record date shall be determined by the board of directors. On October 2, 2012, TA Oil filed the application for the increase in authorized capital stock with the SEC.

On June 6, 2011, the SEC approved the increase in the Company’s authorized capital stock from P=2 billion divided into 2 billion shares, to P=4.2 billion divided into 4.2 billion shares.

On March 30, 2011, the SEC approved the stock rights offering of 1,165.24 million shares of TA Oil at the rate of seven shares for every ten shares held as of record date of May 18, 2011, at a price of P=1.00 per share. The offer period commenced on May 30, 2011 and ended on June 3, 2011. Total proceeds raised from the stock rights offering, net of direct costs incurred, amounted to P=1,154.53 million. The proceeds will be used as equity investment in new 135 MW clean coal power project and in Maibarara Geothermal, Inc. Additional investments made to TA Oil as a result of stock rights offering and issuance of new shares amounted to P=350.4 million in 2011.

On March 21, 2011, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of April 11, 2011. This was paid on May 4, 2011.

On March 24, 2010, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to 0.04 a share to all common stockholders of record as of May 3, 2010. This was paid on May 28, 2010.

On March 16, 2009, the BOD of TA Oil declared a cash dividend amounting to P=66.5 million equivalent to P=0.04 a share to all common stockholders of record as of March 30, 2009. This was paid in 2009.

Dividend income recognized by the Parent Company from TA Oil amounted to P=18.0 million each in 2011, 2010 and 2009.

TA Oil has 100% equity interest in CIP II Power Corporation (CIPP) which operates a 21 MW Bunker C-fired power plant in CIP II Special Economic Zone in Calamba, Laguna. In April, 2009, the terms of the sale of the distributions assets to Manila Electric Company was finalized resulting in the cessation of CIPP’s operations starting April 2009. Also, the separation of substantially all of CIPP’s employees effective January 2010 was announced. On February 22, 2010 and March 24, 2010, the BOD and stockholders of TA Oil and CIPP approved the proposed merger of TA Oil and CIPP, respectively subject to the approval by the SEC. As of December 31, 2011, CIPP has not filed its application for merger with SEC and has deferred its plan for merger.

b. PPHC

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PPHC is engaged in real estate development, particularly in the development of affordable medium and high-rise condominium units.

On March 13, 2012, the BOD of PPHC declared a cash dividend amounting to P=63.5 million or 7% of outstanding capital stock to all shareholders of record as of March 23, 2012. The 50% was paid on March 30, 2012 and the balance payable on September 28, 2012.

On March 1, 2010, the BOD of PPHC declared a cash dividend amounting to P=59.7 million equivalent to P=0.01 per share to all common stockholders of record as of March 15, 2010. This was paid in 2010.

On March 3, 2009, the BOD of PPHC declared a cash dividend of P=0.005 per share and a special cash dividend of P=0.005 per share to all common stockholders of record as of March 17, 2009.

Dividend income recognized by the Parent Company from PPHC amounted to P=21.1 million each in 2010 and 2009.

c. AB Capital

AB Capital is an investment house that engages in corporate finance, fixed-income securities dealership, stock brokerage and fund management.

On March 21, 2011, the BOD of PHN approved the sale of all the shares in AB Capital to Vicsal Invesment, Inc. (Vicsal) subject to regulatory approvals. Under the Share Purchase Agreement (SPA), prior to the execution of the sale, AB Capital will effect (a) the transfer of certain assets to a new company (NewCo) in exchange for cash or shares of stock and (b) transfer of the NewCo shares to the stockholders through a return of capital or other appropriate structures.

In December 2011, the Bangko Sentral ng Pilipinas approved the sale of the shares to Vicsal and, on February 2, 2012, the Company received P=5.0 million representing its share of the first installment amounting to P=15.0 million. AB Capital has filed with the SEC for the transfer of certain assets to the NewCo.

d. Asia Coal

Asia Coal is engaged in the trading of coal. On March 19, 2009, the BOD and stockholders of Asia Coal approved the shortening of the term of Asia Coal’s corporate existence until October 31, 2009, thereby causing the dissolution of Asia Coal as of such date, subject to the approval of the SEC. As of December 31, 2011, Asia Coal is in the process of securing a tax clearance with the Bureau of Internal Revenue (BIR) in connection with the filing with the SEC of its application for dissolution.

13. AFS Investments

This account consists of investments in quoted and unquoted equity securities:

Unaudited Audited

September 30,

2012 December 31,

2011 (In Thousands) Quoted: First Philippine Holdings Corporation

(FPHC) - preferred shares P=9,994 P=20,475 Unquoted: Coral Way City Hotel Corporation 66,250 66,250 Beacon Property Ventures Inc. 46,329 46,329 United Industrial Bag Corporation 30,000 30,000

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Unicon Phinma Concrete Corporation 12,354 12,354 Others 11,099 11,099 176,026 186,507 Less accumulated impairment losses 45,517 45,517 P=130,509 P=140,990

Investment in AB Capital preferred shares was redeemed in 2011 at par value.

The unquoted AFS investments are carried at cost less accumulated impairment losses since their fair value cannot be reliably measured. The quoted AFS securities which are listed in the Philippine Stock Exchange (PSE) are carried at fair value.

Unicon Phinma Concrete Corporation and United Industrial Bag Corporation discontinued their operations on March 21, 2000 and October 2000, respectively. Consequently, full provision for impairment loss has been made on such AFS investments

Accumulated impairment losses pertain to certain AFS investments classified as unquoted. 14. Property, Plant and Equipment

This account consists of:

January 1,

2012 Additions Disposals Reclassifi-

cation

September 30,

2012

(In Thousands)

Cost Land P=1,085,875 P=10,383 (P=23,760) P=- P=1,072,498 Plant site improvements 22,834 528 (119) 5,413 28,656 Buildings and improvements 1,252,026 43,022 (1,622) (3,989) 1,289,437 Machinery and equipment 723,353 20,928 (15,030) 28,366 757,617 Transportation and other

equipment 469,532 44,961 (17,332) (14,232) 482,929 3,553,620 119,822 (57,863) 15,558 3,631,137 Less Accumulated

Depreciation Plant site improvements 17,809 1,859 (119) 3,447 22,996 Buildings and improvements 482,495 48,412 (1,417) (3,447) 526,043 Machinery and equipment 568,813 51,912 (15,030) 9,619 615,314 Transportation and other

equipment 339,065 34,743 (17,253) (9,619) 346,936 1,408,182 136,926 (33,819) - 1,511,289 2,145,438 (17,104) (24,044) 15,558 2,119,848 Construction in progress 115,305 55,024 - (17,048) 153,281 Net Book Value P=2,260,743 P=37,920 (P=24,044) (P=1,490) P=2,273,129

January 1,

2011 Additions Disposals Reclassifi-

cation

December 31,

2011

(In Thousands)

Cost Land P=1,044,497 P=67,436 P=– (P=26,058) P=1,085,875

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Plant site improvements 23,469 – (635) – 22,834 Buildings and improvements 1,202,671 54,955 – (5,600) 1,252,026 Machinery and equipment 694,524 31,459 (3,008) 378 723,353 Transportation and other

equipment 398,435 76,060 (3,075) (1,888) 469,532 3,363,596 229,910 (6,718) (33,168) 3,553,620 Less Accumulated

Depreciation Plant site improvements 15,978 2,466 (635) – 17,809 Buildings and improvements 429,305 53,190 – – 482,495 Machinery and equipment 494,608 76,970 (2,765) – 568,813 Transportation and other

equipment 280,996 64,410 (2,608) (3,733) 339,065 1,220,887 197,036 (6,008) (3,733) 1,408,182 2,142,709 32,874 (710) (29,435) 2,145,438 Construction in progress 33,818 98,406 – (16,918) 115,306 Net Book Value P=2,176,527 P=131,280 (P=710) (P=46,353) P=2,260,744

Certain property, plant and equipment of UGC, AU and UPANG totaling P=1.1 billion as of December 31, 2011 were used as security for their respective long-term debt as disclosed in Note 20 to the consolidated financial statements.

15. Investment Properties

This account consists of:

January 1,

2012 Additions

Disposal

September 30,

2012 (In Thousands)

Cost: Land P=330,314 25,225 (8,262) P=347,277 Buildings for lease 93,316 - - 93,316 423,630 25,225 (8,262) 440,593 Less accumulated depreciation - Buildings for lease 12,740 4,610 - 17,350 P=410,890 20,615 (8,262) P=423,243

January 1,

2010 Additions Disposals

(see Note 10) December 31,

2011 (In Thousands)

Cost: Land P=321,085 P=9,229 P=– P=330,314 Buildings for lease 106,175 10,000 (22,859) 93,316 427,260 19,229 (22,859) 423,630 Less accumulated depreciation - Buildings for lease 20,971 6,253 (14,484) 12,740 P=406,289 P=12,976 (P=8,375) P=410,890

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The fair value of investment properties based on the latest valuation performed by independent firms of appraisers on various dates in 2011 and 2012 amounted to P=810.6 million as of September 30, 2012 and December 31, 2011. The valuation of investment properties was based on market values using sales comparison approach, which considers the sales of similar or substitute properties and related market data and establishes value estimate by processes involving comparison.

On December 9, 2011, API acquired a condominium unit amounting to P=10.0 million from AB Capital, an affiliate, for cash.

On December 28, 2010, the API signed a Memorandum of Agreement with Shang Property Developers, Inc. (SPDI) for the sale of API’s property for P=615.0 million. Outstanding receivable from SPDI amounted to P=68.9 million, presented in “Installment contract receivables” account under “Trade and other receivables”, as at December 31, 2011. (see Note 10).

Land include PSHC’s land amounting to P=220.0 million was used as security for its long-term debt as disclosed in Note 20 to the consolidated financial statements.

16. Intangibles

Following are the details and movements of this account:

January 1,

2012 Additions Impairment September 30,

2012

(In Thousands)

Cost: Goodwill (see Note 7) P=1,244,483 P=9,303 P=- P=1,253,786 Student lists 131,120 – – 131,120 Trademarks (see Note 7) 47,156 – – 47,156 Customer contracts 22,080 – – 22,080 1,444,839 9,303 – 1,454,142 Accumulated amortization: Student lists 127,516 3,604 – 131,120 Customer contracts 22,080 - – 22,080 149,596 3,604 – 153,200 P=1,295,243 P=5,699 P=1,300,942

January 1,

2011 Additions Impairment

December 31, 2011

(In Thousands) Cost: Goodwill (see Note 7) P=1,125,183 P=285,669 (P=166,369) P=1,244,483 Student lists 131,120 – – 131,120 Trademarks (see Note 7) – 47,156 – 47,156 Customer contracts 22,080 – – 22,080 1,278,383 332,825 (166,369) 1,444,839 Accumulated amortization: Student lists 92,268 35,248 – 127,516 Customer contracts 22,080 – – 22,080

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January 1,

2012 Additions Impairment September 30,

2012

(In Thousands)

114,348 35,248 – 149,596 P=1,164,035 P=297,577 (P=166,369) P=1,295,243

In December 2011, the Company recognized impairment loss on goodwill amounting to P=166.4 million pertaining to its investments in OAL.

17. Other Noncurrent Assets

This account consists of:

September 30,

2012 December 31,

2011 (In Thousands) Input VAT - net of allowance for unrecoverable amount

of P=89.2 million in 2011. P=– P=– Others - net of allowance for doubtful advances of

P=51.1 million in 2011 65,107 26,640 P=65,107 P=26,640

18. Notes Payable

This account consists of notes payable of the following subsidiaries:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

UGC P=401,700 P=423,543 COC 29,900 20,150 UI 12,850 11,500 Fuld US 6,753 - AU 5,100 - P=456,303 P=455,193

This account consists of unsecured short-term peso-denominated loans obtained from financial institutions with annual interest rates ranging from 5.25 % to 5.75 % in September 2012 and 4.63% to 5.25 % in December 2011.

19. Trade and Other Payables

This account consists of:

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Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

Trade P=173,791 P=108,901 Accruals for : Professional fees and others (see Note 26) 39,268 65,912 Personnel costs (see Note 26) 56,147 52,773 Interest (see Note 26) 6,445 10,823 Freight, hauling and handling 3,164 883 Customers’ deposits 58,219 44,756 Dividends 36,178 31,916 Payable to third parties 92,815 31,746 Others 53,749 42,082 P=519,776 P=389,792

Trade payables are noninterest-bearing and normally settled on 30 to 90-day terms.

Accrued expenses, customers deposits, dividends, payable to third parties and others are normally settled throughout the financial year.

20. Long-term Debts

This account consists of long-term liabilities of the following subsidiaries:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

UPANG P=221,469 P=259,148 UGC - 280,000 221,469 539,148 Less debt issuance cost - 827 221,469 538,321 PSHC 151,050 151,050 AU 33,125 45,653 Fuld U.S. 4,175 5,698 409,819 740,772 Less current portion - net of debt issuance cost 65,027 141,063 344,792 P=599,659

UPANG

This represents loan obtained from China Banking Corporation (China Bank) on July 21, 2009 used for the acquisition and/or refinancing of its capital expenditures. The terms of the loan are as follows:

Tenure Seven (7) - year term loan with one year grace period for repayment.

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Repayment The first principal payment will commence at the end of the 5th quarter from the date of drawdown; amortization will be graduated, at P=12.5 million from the fifth to the 16th quarters; P=15.0 million from the 17th to the 24th quarters and the P=7.5 million for the last four quarters until full settlement.

Funding/Interest rate Interest will be based on the Wholesale Lending Program (third party funder) with a fixed rate of 8% for the first five years. Rates for the remaining two year period of the term shall be based on the prevailing two-year PDST-F rate plus a minimum spread of 2%.

Security The facility will be secured by Real Estate Mortgage amounting to P=300.0 million on the school assets covering land and land improvements (see Note 14).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

Maintenance of the following ratios based on the audited year-end financial statements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 3:1. Waived for the first year of the loan but is required for the remaining term of the loan.

Restrictions on declaration and payment of dividends, entering into merger or consolidation which would result in a material change in control, sale, lease, mortgage or otherwise dispose of all or substantially all of its assets and amendment of Articles of Incorporation and By-laws that would cause a material adverse change in the financial ability or capacity of the Company to perform.

As of June 30, 2012 and December 31, 2011, the University is not yet required to report and comply with the required financial ratios because the year two of the loan is not yet completed.

UGC

On September 19, 2012, UGC pre-terminated its long-term debt with BDO and RCBC with a balance of P240 million.

As December 31, 2011, long-term debt includes loans obtained from Banco de Oro Unibank, Inc. (BDO) and Rizal Commercial Banking Corporation (RCBC).

On June 29, 2010, the outstanding long-term debt from BDO and RCBC (the lenders) were pre-terminated by obtaining three-year term loans aggregating to P=400.0 million from the same lenders for which P=2.8 million debt issue cost was paid. The newly obtained loans are to be paid in 11 quarterly installments of P=20.0 million to commence on September 25, 2010 and a lump sum payment in June 2013 amounting to P=180.0 million. The interest is at a fixed rate of 7.624% computed based on 3-year PDST-F plus a spread of 1.75% and applicable taxes at the time of the drawdown.

As of December 31, 2011, the loans from the lenders are collateralized by mortgage agreement on UGC’s land, plantsite improvements, buildings and installations and machinery and equipment of Calamba and Davao plants amounting to P=461.3 million and P=494.8 million, respectively (see Note 14).

The foregoing loan agreements include, among others, certain restrictions and requirements with respect to the following:

Maintenance of the following ratios for the duration of the loan agreements: (1) current ratio of not less than 1:1; (2) debt to equity ratio of not more than 1.5:1

Restrictions on declaration and payment of dividends, incurrence of new long-term debt, entering into management agreement other than with PHINMA, entering into merger (except where it is the surviving entity) or consolidation

49

or any change of ownership, sale, lease or otherwise transfer of a substantial portion of its assets except in the ordinary course of business, making any loans, advances or investments, making capital expenditures, prepayment of any other long-term debt and amendment of Articles of Incorporation and By-laws.

Under the loan agreement, failure to comply with the obligation or covenant in the agreement should be remedied within thirty (30) calendar days after notice by the lenders.

As of December 31, 2011, UGC is in compliance with the terms of the loan agreement.

PSHC

This represents interest-bearing loan obtained from United Pulp and Paper Co., Inc. (UPPC) amounting to P=154.0 million arising from the acquisition of land from UPPC. UPPC was a former associate of the Company.

This loan is presented at amortized cost as of the end of the reporting period. The present value of the loan at initial recognition in 2006 was calculated using an effective interest rate of 11.0%. The effective interest rate used in computing for the present value of the loan payable was derived based on the rate inherent to the loan after considering the carrying value and the future value of the loan payable at the coupon rate of 9.1%.

Initially, the said loan is payable in two installments amounting to P=44.0 million on July 15, 2008 and P=110.0 million on July 15, 2013. On July 8, 2008, a Memorandum of Agreement was executed by UPPC and PSHC amending the maturity date of P=44.0 million from July 15, 2008 to July 15, 2013. A recomputation of the effective interest rate of 10.52% was made in 2008 to reflect the change in the payment terms of the liability in 2013. Additional interest expense resulting from the accretion of loan payable amounted to P=1.7 million in December 2011 (see Note 28). The details of the loan are as follows:

September 30,

2012 December 31,

2011

(In Thousands)

Loan payable to UPPC P=154,000 P=154,000 Less unamortized discount 2,950 2,950 P=151,050 P=151,050

To secure the payment of the loan, PSHC constituted a mortgage over its land amounting to P=220.0 million in favor of certain creditors of UPPC (see Note 15).

The payable of PSHC to UPPC incurs an annual interest at a rate subject to mutual agreement by UPPC and PSHC on each anniversary date. Interest expense on the amount payable to UPPC, computed at 9.1% of the outstanding principal balance, amounted to P=14.0 million in December 31, 2011. (see Note 20).

AU

AU’s long-term debt consists of:

September 30,

2012 December 31,

2011

(In Thousands)

Loan payable to China Bank P=44,259 P=45,653 Less current portion 12,575 9,573 P=31,684 P=36,080

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Loan payable to China Bank represents the balance of a 10-year loan from China Bank which was used to preterminate the restructured long-term debt from another local bank, partially finance Araullo University’s building renovation and purchase various school equipment. The debt is payable on fixed monthly amortization of P=750,000 starting April 17, 2006. Interest shall be payable monthly in arrears based on variable pass-on rate plus spread. In 2010, the outstanding loan payable to China Bank of P=53.25 million was restructured to the same lender at a fixed rate interest based on the 5-year prevailing PDST-F rate plus a spread of 1.5% payable quarterly in arrears including the applicable taxes for the account of the borrower. The new debt is to be paid in 19 quarterly installments until February 5, 2015 under a graduated amortization schedule based on the agreement. Transaction costs paid on this transaction and included in the carrying amount of the new debt amounted to P=2.4 million. Actual average interest rate was 8.426 % in September 2012 and 10.3% in December 2011.

AU’s land, including existing and future improvements thereon, is used as collateral for its loan payable to China Bank. The net book value of the said land and improvements amounted to P=163.0 million as of December 31, 2011. (see Note 14).

21. Equity

a. Capital Stock

The composition of the Parent Company’s capital stock as of June 30, 2012 and December 31, 2011 is as follows:

Number of Shares

September 30,

2012 December 31,

2011 Preferred - cumulative,

nonparticipating, P=10 par value

Class AA Authorized 50,000,000 50,000,000

Class BB Authorized 50,000,000 50,000,000

Common - P=10 par value Authorized 420,000,000 420,000,000

Common shares : Issued 257,697,313 257,697,313 Subscribed 39,994 39,994 Stock Purchase Plan 193,752 - Issued and subscribed (see Note 35) 257,931,059 257,737,307

The issued and outstanding shares as of September 30, 2012 and December 31, 2011 are held by 1,279 and 1,292 equity holders, respectively.

Capital stock presented in the statements of financial position is net of subscription receivables amounting to P=124 thousand as at September 30, 2012 and December 31, 2011.

The following summarizes the information on the Company’s track record of registration of securities under the Securities Regulation Code:

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Date of SEC Approval Authorized

Shares No. of

Shares Issued Issue/Offer

Price March 12, 1957 1,200,000 172,298 P=10 June 30, 1959 – 47,868 10 June 30, 1967* 800,000 – – June 30, 1968* 1,000,000 – – January 21, 1980* 2,000,000 – – November 3, 1988* 10,000,000 – – July 21, 1992* 25,000,000 – – January 15, 1995* 60,000,000 – – March 16, 1999* 320,000,000 – –

*Increased in authorized capital stock.

b. Retained Earnings

On March 22, 2012, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of April 11, 2012, which was paid on April 26, 2012.

On March 3, 2011, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2011, which was paid on April 26, 2011.

On March 3, 2010, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 29, 2010, which was paid on April 23, 2010.

On March 9, 2009, the BOD of PHN declared a cash dividend of P=0.40 a share to all common shareholders of record as of March 30, 2009, which was paid on April 24, 2009.

On October 5, 2005, the BOD of PHN appropriated P=1.0 billion of retained earnings for future investments.

The BOD of PHN declared the following stock dividends:

Date Dividend Rate Shareholders’ Record Date April 14, 2008 10% June 13, 2008 March 30, 2007 15% June 15, 2007 May 31, 2006 20% August 11, 2006

The retained earnings account is restricted for the payment of dividends to the extent of P=594.1 million as of December 31, 2011, respectively, representing the accumulated equity in net earnings of the subsidiaries and associates. The accumulated equity in net earnings of the subsidiaries and associates is not available for dividend distribution until such time that the Parent Company receives the dividends from the subsidiaries and associates.

c. Other Components of Equity

This account consists of: Unaudited Audited

September 30,

2012 December 31,

2011 (In Thousands)

Share in unrealized gain on change in fair value of AFS investments of associates (see Note 12) P=19,832 P=19,051

Other reserves resulting from change in ownership 8,943 8,943

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interest in subsidiaries without loss of control (see Note 1)

Cumulative translation adjustments (1,530) 4,935 Unrealized gain on change in fair value of

AFS investments (see Note 13) 243 985 P=27,488 P=33,914

In 2010, the convertible debt has been extinguished thus the Company reclassified the remaining balance of share in equity component of convertible notes to retained earnings.

d. Stock Purchase Plan

Following are the salient features of the Company’s Stock Purchase Plan :

Purpose To motivate the Senior Officers to achieve the company’s goals, to help make the personal goals and corporate goals congruent and to reward the officers for the resulting increase in the value of Phinma Corporation shares.

Prices of share The officers shall purchase shares of stock of Phinma Corporation (PHN) from those set aside under the Stock Purchase Plan at the average closing price of PHN shares in the stock market for 20 trading days , in no case shall the price be lower than par value.

Tranches 1/3 of the maximum shares can be purchased upon date of first notice and 1/3 each every year thereafter provided that work performance is deemed acceptable.

Holding period One-third of the shares shall not be sold or transferred to a 3rd party for at least one year from the date of each purchase or until retirement whichever comes first .Another one-third of the shares shall not be sold or transferred to a 3rd party for at least two years from the date of each purchase or until retirement whichever comes first. The last one-third of the shares shall not be sold or transferred to a 3rd party for at least three years from the date of each purchase or until retirement whichever comes first. Any such sale or transfer shall be considered null and void.

On April 2, 2009 and April 20, 2010, the Board of Directors and shareholders of PHN respectively, approved the setting aside of 8.4 million shares from the unsubscribed portion of the Corporation’s 420 million authorized common shares for stock purchase by the Senior Officers of this Corporation. On January 26, 2012, the Securities & Exchange Commission approved the Company’s Stock Purchase Plan while the Philippine Stock Exchange approved for listing the 8.4 million shares last May 23, 2012. 22. Investment Income

This account consists of:

January – September 2012 2011 (In Thousands) Interest income P=39,626 P=37,589

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Net Net gain from fair value change of investments held for trading 32,349 3,454

P=71,975 P=41,043 23. Cost of Sales, Educational , Animation Services and Consultancy Services

This account consists of:

January – September 2012 2011 (In Thousands) Cost of sales P=1,876,989 P=1,667,756 Cost of educational services 401,721 358,337 Cost of consultancy services 137,134 46,716 Cost of animation services 67,729 177,076 P=2,483,573 P=2,249,885

24. Operating Expenses

This account consists of:

January – September 2012 2011 (In Thousands) General and administrative expenses P=647,211 P=545,756 Selling expenses 115,330 115,157 P=762,541 P=660,913

25. Interest Expense and Other Financial Charges

This account consists of:

January – September 2012 2011 (In Thousands) Interest expense on loans

and borrowings P=61,459 P=62,798 Other financial charges - - P=61,459 P=62,798

26. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party in making financial and operating decisions and the parties are subject to common control. Related parties may be individual or corporate entities.

54

Outstanding balances at year-end are unsecured and settlement occurs in cash throughout the financial year. There have been no guarantees provided or received for any related party receivables or payables. For the nine (9) months ended September 30,2012 and year ended December 31, 2011, the Company has not recorded any impairment of receivables from receivables owed by the related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

The significant related party transactions entered into by the Company with its associates and entities under common control and the amounts included in the consolidated financial statements with respect to such transactions follow:

Related Party Nature of Transaction Year

Amount of Transactions

During the Year

Amount of Due to

Related Parties

Amount of Due from

Related Parties

(see Note 10) (In Thousands)

PHINMA, Inc. Share in expenses and interest -bearing advances in 2011

2012 P=6,384 P=- P=387 2011 P=85,310 P=20,200 P=58,258

TA Oil Share in expenses and dividend receivable

2012 32,384 – 134,272 2011 881 – 131

PPHC Dividend receivable and interest-bearing advances in 2011

2012 22,670 – 4,928 2011 131,816 – 643

CIP II Share in expenses and sale of 2012 226 – 12 property 2011 12,116 – 7,565

AB Capital

Share in expenses

2012

-

–

5

2011 28 – 5

Other Shareholders of UPANG Interest-bearing advances 2012 - - - 2011 11,677 – 397

Others Share in expenses 2012 5,277 626 3,231 2011 10,607 4,296 8,654

2012 P=626 P=142,835 2011 P=24,496 P=75,653

PSHC. PSHC has outstanding long-term debt to UPPC arising from the acquisition of land from UPPC, then an associate of the Company (see Note 20). PSHC leases the land to UPPC for a period of 50 years, renewable for another 25 years upon the approval of the Philippine Department of Trade and Industry. Annual lease income during the entire lease term is initially fixed at P=14.6 million. In connection with the lease, UPPC was required to make a lease deposit with PSHC of P=55.5 million in July 2003 and an additional P=2.9 million in April 2005, aggregated and reflected as part of “Other noncurrent liabilities” at amortized cost at the end of the reporting period, and refundable to UPPC upon the expiration of the lease. The lease deposit’s present value was calculated using an effective interest rate of 12.0% per

55

annum. On August 2, 2006, PSHC and UPPC amended the lease agreement increasing the annual rent revenue from P=14.6 million to P=19.2 million effective January 1, 2006.

The difference between the face value of the lease deposit and its corresponding present value at inception was aggregated and reflected as unearned revenue that is being amortized as rent revenue simultaneous with the accretion of the lease deposit.

Management and Directors’ Compensation PHN, UGC, COC, AU, UPANG and UI are under common management by PHINMA, Inc. and pay PHINMA, Inc. a fixed annual management fee plus an annual bonus based on a certain percentage of the respective companies’ adjusted net income, as defined in the management contract between PHINMA, Inc. and the respective companies, pursuant to the provisions of the same contract.

Management fees and bonuses, included in “Professional fees and outside services” account under “General and administrative expenses”, amounted to P=45.4 million and P=42.0 million in September 30, 2012 and December 31, 2011, respectively. The related unpaid amount, included in “Accruals for professional fees and others” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=22.9 million and P=16.5 million as of September 30, 2012 and December 31, 2011, respectively.

PHN, UGC, AHC, UI and AU recognized bonus to directors computed based on net income with pre-agreed adjustments. Directors’ bonus, included in “Personnel costs” account under “General and administrative expenses”, amounted to P=19.9 million and P=20.9 million in September 30, 2012 and December 31, 2011, respectively. The related unpaid amount, included in “Accruals for personnel costs” account under “Trade and other payables” in the consolidated statements of financial position, amounted to P=15.2 million and P=7.2 million as of September 30, 2012 and December 31, 2011 , respectively.

27. Income Tax

The deferred tax assets and liabilities are presented in the consolidated statements of financial position as follows: Unaudited Audited

September 30,

2012 December

31, 2011

(In Thousands)

Deferred tax assets P=47,443 P=49,245 Deferred tax liabilities (301,661) (310,995) (P=253,718) (P=261,750)

Deferred tax assets were not recognized since management believes that it is not probable that sufficient future taxable profit will be available to allow said deferred tax assets to be utilized.

AU, UPANG, UI and COC, as private educational institutions, are taxed based on the provisions of Republic Act (R.A.) No. 8424, which was passed into law effective January 1, 1998. Section 27(B) of R.A. No. 8424 defines and provides that: “A Proprietary Educational Institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports, or Commission on Higher Education, or Technical Education and Skills Development Authority, as the case may be, in accordance with the existing laws and regulations - shall pay a tax of ten percent (10%) on their taxable income.”

MCIT totaling P=8.4 million can be deducted against RCIT due while NOLCO totaling P=212.3 million can be claimed as deduction against taxable income, as follows:

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Amount Date Paid/Incurred Expiry Date MCIT NOLCO

(In Thousands)

December 31, 2009 December 31, 2012 P=2,452 21,581 December 31, 2010 December 31, 2013 4,788 – December 31, 2011 December 31, 2014 1,137 191,141 P=8,377 P=212,722

MCIT amounting to P=2.8 million expired in December 2011.

The RCIT rate decreased to 30% from 35% effective January 1, 2009, as provided under the provisions of R.A. No. 9337, which amended certain provisions of the Tax Code.

On December 18, 2008, the BIR issued Revenue Regulations (RR) No. 16-2008 which implemented the provisions of Section 34(L) of the Tax Code of 1997, as amended by Section 3 of R.A. No. 9504, which allows individuals and corporations to adopt the Optional Standard Deduction (OSD) in computing their taxable income.

Under RR No. 16-2008, corporations may claim OSD equivalent to 40% of gross income, excluding passive income subjected to final tax, in lieu of the itemized deductions. A corporate taxpayer who elected to avail of the OSD shall signify such in the income tax return. Otherwise, it shall be considered as having availed of the itemized deductions allowed under Section 34 of the National Internal Revenue Code. Election is done on an annual basis. In December 2011, the Parent Company computed its taxable income based on itemized deductions.

28. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments comprise of cash and cash equivalents, short-term investments, corporate promissory notes and bonds, government bonds, quoted and unquoted shares of stocks, currency forwards, investments in UITFs and loans and borrowings in Philippine Peso and U.S. dollar currencies. The main purpose of these financial instruments is to finance the Company’s investments. The Company also has financial assets and liabilities, such as trade and other receivables and trade and other payables that arise directly from operations.

The main risks arising from the Company’s treasury transactions are credit risk, liquidity risk, market risk, foreign currency risk, interest rate risk and equity price risk. Careful study, skill, prudence and due diligence are exercised at all times in the handling of the funds of the Company. An Investment Committee reviews and approves policies and directions for investments and risks management. The basic parameters approved by the Investment Committee are:

Investment Objective Safety of Principal

Tenor Three year maximum for any security, with average duration between one and two years

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Investment Objective Safety of Principal

Exposure Limits a. For banks and fund managers: maximum of 20% of total funds of the Company per bank or fund

b. For peso investments: minimal corporate exposure except for registered bonds

c. For foreign currencies: maximum 50% of total portfolio. Limits on third currencies outside USD are set regularly and reviewed at least once a year by the Investment Committee

d. For investments in equities whether directly managed or managed by professional managers: limits are set as approved by the Investment Committee and based on current market outlook at the time of review

e. For derivative transactions - limits are set up to 100% of asset subject to derivative transaction with the objective of neutrality of gain/loss

Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Due to the Company’s investing and operating activities, the Company is exposed to the potential credit-related losses that may occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations.

In managing credit risk on these financial instruments, the Company transacts only with the Company’s duly accredited domestic and foreign banks. Investments per financial institution are subject to a maximum of 20% of the Company’s investible funds. It is the Company’s policy that investments cannot exceed 10% of the trust or mutual fund’s total assets.

A comprehensive credit and business review in coordination with dealers or underwriters is performed whenever the Company invests in non-rated securities. Furthermore, the Company monitors the credit quality of corporate and sovereign bonds with reference to credit rating studies and updates from the major rating agencies.

The Company’s exposure to credit risk on its cash and cash equivalents, short-term investments, investments held for trading, AFS investments, trade and other receivables and derivative instruments arises from default of the counterparties with maximum exposures equal to the carrying amounts of the instruments.

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

Loans and receivables: Cash and cash equivalents P=677,405 P=916,157 Short-term investments 10,425 - Trade and other receivables 820,393 857,649 Investments held for trading: Investments in UITFs 378,678 353,065 Investments in bonds 438,225 414,525 Investments in marketable equity securities 3,490 3,927 AFS investments: Quoted 9,994 20,620 Unquoted - net of accumulated impairment losses 120,515 120,370

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September 30,

2012 December 31,

2011 P=2,459,125 P=2,686,313

There are no significant concentrations of credit risk within the Company.

Credit Quality of Financial Assets, Other than Trade and Other Receivables The Company uses the following criteria to rate credit quality of its financial assets, other than trade and other receivables:

Class Description

High Grade Investments in instruments that have a recognized foreign or local third party rating or instruments which carry guaranty/collateral.

Standard Grade Investments in instruments of companies that have the apparent ability to satisfy its obligations in full.

Substandard Grade Investments in instruments of companies that have an imminent possibility of foreclosure; those whose securities have declined materially in value, or those whose audited financial statements show impaired/negative net worth.

Cash and cash equivalents, short-term investments and derivative instruments are classified as high grade since these are deposited in/or transacted with reputable financial institutions which have low probability of insolvency.

The credit quality of investments held for trading and AFS investments as of September 30, 2012 and December 31 , 2011 are as follows:

September 30, 2012 Neither Past Due nor Impaired

High

Grade Standard

Grade Substandard

Grade Impaired Total

(In Thousands)

Investments held for trading: Investments in UITFs P=79,495 P=299,183 P=– P=– P=378,678 Investments in bonds 426,972 11,253 – – 438,225 Investments in marketable equity securities - 3,490 – – 3,490 AFS investments: Quoted - 9,994 – – 9,994 Unquoted - 120,515 – 45,517 166,032 P=506,467 P=444,435 P=– P=45,517 P=996,419

December 31, 2011 Neither Past Due nor Impaired

High

Grade Standard

Grade Substandard

Grade Impaired Total

(In Thousands)

Investments held for trading: Investments in UITFs P=93,684 P=259,381 P=– P=– P=353,065 Investments in bonds 387,264 27,262 – – 414,526 Investments in marketable equity securities – 3,927 – – 3,927 AFS investments: Quoted – 20,620 – – 20,620 Unquoted – 120,370 – 45,517 165,887 P=480,948 P=431,560 P=– P=45,517 P=996,419

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Credit Quality of Trade and Other Receivables Trade and other receivables are classified as (a) high grade when the receivables are secured or covered with collaterals; (b) standard grade when the receivables are unsecured but debtors have good paying habits; or (c) substandard grade when the receivables are unsecured and debtors have poor paying habits.

The credit quality of trade and other receivables (including installment contract receivables) as of September 30, 2012 and December 31, 2011 are as follows:

September 30, 2012 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=672,129 P=164,612 P=836,741 Due from related parties – 139,766 3,069 142,835 Installment contract receivables – 68,880 - 68,880 Advances to suppliers and contractors – 19,144 - 19,144 Accrued interest 7,224 - - 7,224 Receivable from PHN Retirement – 8,939 - 8,939 Advances to officers and employees – 6,936 - 6,936 Others – 57,613 - 57,613 P=7,224 P=973,407 P=167,681 P=1,148,312

December 31, 2011 Neither Past Due nor Impaired Past Due High Grade Standard Grade or Impaired Total

(In Thousands)

Trade P=– P=420,007 P=360,735 P=780,742 Due from related parties – 72,779 2,874 75,653 Installment contract receivables – 72,617 – 72,617 Advances to suppliers and contractors – 10,623 2,826 13,449 Accrued interest 11,817 – – 11,817 Receivable from PHN Retirement – 8,939 – 8,939 Advances to officers and employees – 6,094 – 6,094 Others – 48,145 4,999 53,144 P=11,817 P=639,204 P=371,434 P=1,022,455

Impaired financial instruments comprise of trade receivables from customers, related parties and other receivables.

Liquidity Risk Liquidity risk is the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price. The Company manages liquidity risks by restricting investments and continuously monitoring weekly and monthly cash flows as well as updates of annual plans.

The maturities of the financial liabilities are determined based on the Company’s projected payments and contractual maturities. The average duration adheres to guidelines provided by the Investment Committee. It is the Company’s policy to restrict investment principally to publicly traded securities with a history of marketability and by dealing with only large reputable domestic and international institutions.

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Market Risk Market risks are managed by constant review of global and domestic economic and financial environments as well as regular discussions with banks’ economists/strategy officers to get multiple perspectives on interest rate trends/forecasts. Regular comparison of the portfolio’s marked-to-market values and yields with defined benchmarks are also made.

Foreign Currency Risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company’s financial assets that are exposed to foreign currency risk are foreign currency denominated cash and cash equivalents, investment in bonds and investments in UITFs.

Foreign exchange risks on the U.S. dollar and other foreign currencies are managed through constant monitoring of the political and economic environment. Returns are also calibrated on a per currency basis to account for the perceived risks with higher returns expected from weaker currencies. The Company also enters into currency forward contracts to manage its foreign currency risk.

The following table shows the U.S. foreign currency-denominated financial assets and financial liabilities and their peso equivalents as of September 30, 2012 and December 31, 2011:

September 30, 2012 December 31, 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial assets: Cash and cash equivalents US$2,120 P=88,404 US$3,720 P=163,085 Short-term investments 250 10,425 Receivables 1,140 47,538 151 6,620 Investments in bonds 1,667 69,514 2,284 100,130 Investments in UITFs 1,066 44,452 1,400 61,376 US$6,243 P=260,333 US$7,555 P=331,211

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September 30, 2012 December 31, 2011

Foreign

Currency Peso

Equivalent Foreign

Currency Peso

Equivalent

(In Thousands)

Financial liabilities: Trust receipts payable US$11,975 P=499,341 US$2,773 P=121,568 Long-term loan payable 1,728 72,057 – –

US$13,703 P=571,398 US$2,773 P=121,568

In translating foreign currency-denominated financial assets into peso amounts, the exchange rate used was P=41.70 to US$1.00 as of September 30, 2012 and P=42.12 to US$1.00 as of December 31, 2011.

Interest Rate Risk

a. Cash Flow Interest Rate Risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company is exposed to cash flow interest rate risk due to AU’s variable rate loan from China Bank as at December 31, 2010 (see Note 20). On August 5, 2011, the interest on AU’s loan is fixed based on the 5-year prevailing PDST-F plus a spread of 1.50% payable quarterly.

b. Price Interest Rate Risk

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Company accounts for its debt investments at fair value. Thus, changes in benchmark interest rate will cause changes in the fair value of quoted debt instruments.

Interest on financial instruments classified as fixed rate was fixed until the maturity of the instrument.

Other financial assets at FVPL are noninterest-bearing investments and are therefore not subject to interest rate volatility.

Peso placements are subject to cash flow interest rate risk while peso and dollar bonds are subject to fair value interest rate risk.

Equity Price Risk Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of the equity indices and the values of individual stocks. The Company’s exposure to equity price risk relates primarily to its equity investments listed in the PSE classified under investments held for trading.

The Company’s policy is to maintain the risk to an acceptable level. Movement of share price is monitored regularly to determine impact on the Company’s financial position.

Capital Management The primary objective of the Company’s capital management is to ensure that the Company maintains a healthy capital structure to maintain strong credit rating and maximize shareholder value.

The Company closely monitors and manages its debt-to-equity ratio, which it defines as total liabilities divided by total equity. Capital includes all the accounts appearing in the “Equity attributable to equity holders of the parent” and “Equity attributable to non-controlling interest” in the consolidated statements of financial position.

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To ensure that there are sufficient funds to settle its liabilities, the Company’s policy is to keep debt-to-equity ratio below 1:1. The Company’s consolidated debt-to-equity ratio as of September 30, 2012 and December 31, 2011 are as follows:

Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

Total liabilities P=2,524,835 P=2,490,631 Total equity 7,204,269 7,177,576 Debt-to-equity ratio 0.35:1 0.35:1

29. Financial Instruments

Fair Value Set out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial instruments that are carried in the consolidated statements of financial position :

Carrying Amount Fair Value

September 30,

2012 December 31,

2011 September 30,

2012 December 31,

2011

(In Thousands)

Financial Assets Loans and receivables: Cash and cash equivalents P=677,405 P=916,157 P=677,405 P=916,157 Short-term investments 10,425 - 10,425 - Trade and other receivables* 980,631 857,649 980,631 857,649 Total (Carried Forward) 1,668,461 1,773,806 1,668,461 1,773,806

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Carrying Amount Fair Value

September 30,

2012 December 31,

2011 September 30,

2012 December 31,

2011

(In Thousands)

Total (Brought Forward) P=1,668,461 P=1,773,806 P=1,668,461 P=1,773,806 Financial assets at FVPL: Investments held for trading: Investments in UITFs 378,678 353,065 378,678 353,065 Investments in bonds 438,225 414,525 438,225 414,525 Investments in marketable equity

securities 3,490 3,927 3,490 3,927 820,393 771,517 820,393 771,517 AFS investments: Quoted 9,994 20,620 9,994 20,620 Unquoted 120,515 120,370 120,515 120,370 130,509 140,990 130,509 140,990 P=2,619,363 P=2,686,313 P=2,619,363 P=2,686,313

Financial Liabilities Financial liability at FVPL - Derivative liability P=- P=2,281 P=- P=2,281 Other financial liabilities: Notes payable 456,303 455,193 456,303 455,193 Trade and other payables 519,776 389,792 519,776 389,792 Trust receipts payable 499,341 103,735 499,341 103,735 Due to related parties 626 24,496 626 24,496 Long-term loan payable* 72,057 101,007 72,057 110,460 Long-term debt* 409,819 740,722 409,819 774,019 1,954,922 1,814,945 1,954,922 1,857,695 P=1,954,922 P=1,817,226 P=1,954,922 P=1,859,976 *Including current and noncurrent portion.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents, Short-term Investments, Trade and Other Receivables, Notes Payable, Trade and Other Payables, Trust Receipts Payable and Due to Related Parties. The carrying amounts approximate fair values due to the relatively short-term maturities of the financial instruments.

Investments Held for Trading and AFS Investments. Quoted market prices have been used to determine the fair value of financial assets at FVPL and listed AFS investments. Unquoted AFS investments are measured at cost less accumulated impairment loss since the fair value is not readily determinable due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. The Company does not intend to dispose the unquoted AFS in the near future.

Long-term Loan Payable and Long-term Debt. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable rates for similar types of loans. Discount rates used range from 2.7% to 6.0% in December 2011.

Derivative Instruments. The fair value of freestanding currency forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

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Derivative Instruments

Freestanding Derivatives. The Company’s derivative financial instruments are accounted for as financial instruments at FVPL.

The Company enters into sell US$-buy PHP= non-deliverable foreign currency forward contracts to manage the foreign currency risk arising from its US$ denominated assets. These derivatives are transactions not accounted for as accounting hedges.

The Company has outstanding currency forward contracts with an aggregate notional amount of US$6.2 million and US$6.4 million as of September 30, 2012 and December 31, 2011, respectively. The weighted average contracted forward rate is P=42.76 to US$1.00 and P=43.49 to US$1.00 as of September 30, 2012 and December 31, 2011, respectively. The currency forward contracts outstanding as of September 30, 2012 will mature in October to December 2012. The net changes in fair values of these outstanding currency forward contracts amounted to P=6.3 million and negative P=2.3 million as of September 30, 2012 and December 31, 2011, respectively.

The net changes in fair value of these derivative assets (liabilities) are as follows: Unaudited Audited

September 30,

2012 December 31,

2011

(In Thousands)

Balance at beginning of year (P=2,281) P=4,442 Net change in fair value during the year 8,501 7,121 Fair value of settled contracts 78 (13,844) Balance at end of year P=6,298 (P=2,281)

Embedded Derivatives. Embedded foreign currency derivatives were bifurcated from certain of the Company’s purchase contracts, which are denominated in a currency that is neither the functional currency of a party to the contract nor the routine currency for the transaction.

The net changes in fair values of derivatives are presented as “Net gains on derivatives” in the consolidated statements of income.

Fair Value Hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data

Financial assets measured at fair value follow:

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September 30,

2012 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in UITFs P=378,678 P=378,678 P=– P=– Investments in bonds 438,225 438,225 – – Investments in marketable equity securities 3,490 3,490 – – AFS investments - Quoted 9,994 9,994 – – P=830,387 P=830,387 P=– P=–

Dec. 31, 2011 Level 1 Level 2 Level 3

(In Thousands)

Financial assets at FVPL: Investments held for trading: Investments in UITFs P=353,065 P=353,065 P=– P=– Investments in bonds 414,525 414,525 – – Investments in marketable equity securities 3,927 3,927 – – AFS investments - Quoted 20,620 20,620 – – P=792,137 P=792,137 P=– P=–

Derivative assets and liabilities are classified under Level 1 fair value hierarchy.

During the nine (9) months ended September 30, 2012 and the year ended December 31, 2011, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.

30. EPS Computation

Unaudited

September 30,

2012 September 30,

2011 (a) Net income attributable to equity holders

of the parent P=152,109 P=120,006

(b) Number of shares outstanding at beginning of year 257,931,059 257,737,307

Basic/Diluted EPS attributable to equity holders of the parent (a/e) P=.59 P=.47

31. Segment Information (see page 77 for table presentation)

For management purposes, the Company’s operating businesses are organized and managed separately according to business activities and has five reportable operating segments as follows:

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Investment holdings – The Parent Company and PSHC are engaged in investment holding activities of shares of stocks and other financial instruments.

Property development – API leases its real and personal properties. Steel – UGC manufactures and trades iron and steel products. Educational services – AU, COC, UPANG and UI offer graduate, tertiary, secondary and elementary education

services. BPO – OAL and Toon City are engaged in film, video, television and animation services. Fuld U.S. and Fuld

Philippines are engaged in intelligence research.

The Company has no geographical segment for segment reporting format as the Company’s risks and rates of return are substantially in the same economic and political environment, with the companies incorporated and operated in the Philippines.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. However, Company financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transaction with third parties.

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Segment Information

Financial information on the operating segments are summarized as follows:

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) For the Period January – September 30, 2012

Revenues Segment revenue P=9,937 P=466 P=2,194,009 P=668,859 P=414,446 P=- P=3,287,717 Investment income 61,151 10,824 - - - 71,975 Total revenues P=71,088 P=11,290 P=2,194,009 P=668,859 P=414,446 P=- P=3,359,692

Results

Segment results P=158,262 (P=25,849 P=115,144 P=102,593 (P=35,720) (P=209,945) P=104,485 Investment income 61,151 10,824 - - - - 71,975 Equity in net earnings of an associate - (24,978) - - - 98,334 73,356 Interest expense and financing charges (2,853) - (33,896) (18,290) (6,420) - (61,459) Benefit from (provision for) income tax (1,315) (596) (23,973) (9,817) (361) 3,619 (32,443) Share of non-controlling interest - - - (1,556) - (2,249) (3,805) Net income attributable to equity holders of parent P=215,245 (P=40,599) P=57,275 P=72,930 (P=42,501) (P=110,241) P=152,109

As at September 30, 2012

Assets and Liabilities Segment assets P=2,242,056 P=472,866 P=2,016,317 P=2,193,372 P=504,683 P=401,931 P=7,831,225 Investment in associates 4,351,739 - 10,287 - 2,144 (2,513,734) 1,850,436 Deferred tax assets - - - - 15,155 3,996 19,151 Total assets P=6,593,795 P=472,866 P=2,026,604 P=2,193,372 P=521,982 (P=2,107,807) P=9,700,812

Segment liabilities P=472,953 P=674 P=1,110,617 P=703,659 P=411,590 (P=496,204) P=2,203,289 Income and other taxes payable 1,945 169 11,146 6,135 991 - 20,386 Deferred tax liabilities - 7,281 23,287 109,108 3,117 130,076 272,869 Total liabilities P=474,898 P=8,124 P=1,145,050 P=818,902 P=415,698 (P=366,128) P=2,496,544

Other Segment Information Capital expenditures 13,924 - 15,701 79,043 18,098 - 126,766 Depreciation and amortization 8,363 500 69,391 55,692 8,379 12,062 154,387

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Continuing Operations

Investment

Holdings Property

Development Steel Educational

Services BPO Eliminations Total

Operations (In Thousands) January – September 2011

Revenues Segment revenue P=40,623 P=21,448 P=2,016,642 P=664,553 P=263,007 P=- P=3,006,273 Investment income - - - - - - - Total revenues P=40,623 P=21,448 P=2,016,642 P=664,553 P=263,007 P=- P=3,006,273

Results Segment results P=379,471 P=1,571 P=169,181 P=110,209 (P=75,5255) (P=460,707) P=124,470 Equity in net earnings of an associate - 23,227 - - - 74,948 98,175 Interest expense and financing charges (2,197) - (34,618) (20,349) (5,634) - (62,798) Benefit from (provision for) income tax (688) (2,642) (39,969) (5,617) - 10,468 (38,448) Share of non-controlling interest - - - (264) 1,185 (2,314) (1,393) Net income attributable to equity holders of parent P=376,586 P=22,156 P=94,594 P=83,979 (P=79,704) (P=377,605) P=120,006

As at December 31, 2011

Assets and Liabilities Segment assets P=2,095,305 P=512,803 P=1,928,240 P=2,209,903 P=460,844 P=576,722 P=7,783,817 Investment in associates 4,319,127 – 10,288 – 2,159 (2,496,429) 1,835,145 Deferred tax assets – – 19,904 2,879 22,283 4,179 49,245 Total assets P=6,414,432 P=512,803 P=1,958,432 P=2,212,782 P=485,286 (P=1,915,528) P=9,668,207

Segment liabilities P=406,773 P=977 P=955,196 P=748,466 P=361,363 (P=338,028) P=2,134,747 Income and other taxes payable 2,914 120 25,739 12,870 3,246 – 44,889 Deferred tax liabilities – 7,281 52,759 119,793 83 131,079 310,995 Total liabilities P=409,687 P=8,378 P=1,033,694 P=881,129 P=364,692 (P=206,949) P=2,490,631

Other Segment Information Capital expenditures P=18,026 P=10,000 P=91,710 P=181,516 P=18,300 (P=3,762) P=315,790 Depreciation and amortization 11,748 772 77,975 73,088 7,972 46,524 218,079 Provision for impairment loss on investment in a

subsidiary/goodwill 274,172 – – – 166,369 (274,172) 166,369 Provision for unrecoverable input value-added tax 7,372 – – – – – 7,372

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results Of Operations For the nine months ended September 30, 2012, consolidated revenues of Phinma Corporation (PHN) amounted to P3.3 billion, 10% higher than revenues of P3.0 billion for the same period last year. The increase in revenues is attributable to revenues of Fuld & Company, Inc. and Fuld & Company (Philippines) Inc., which were acquired and consolidated beginning June 2011, as well as increased revenues from Union Galvasteel Corporation (UGC), Araullo University (AU), and Cagayan de Oro College (COC).

Consolidated costs and expenses of PHN for the nine months amounted to P3.2 billion, 12% higher compared to the previous year’s cost and expenses amounting to P2.9 billion. The increase is likewise attributable to the increased costs and expenses of Fuld and Company, Inc., Fuld and Company (Philippines), Inc., COC, UI, and UGC.

Equity in net earnings of associates decreased from P100 million for the period January to September 2011 to P73 million over the same period this year. The decline is mainly due to equitized losses in Phinma Property Holdings Corporation (PPHC) of P25 million, compared to equity in net earnings of P23 million last year, due to delays arising from longer permit and HDMF loan cycles as a result of the Globe Asiatique controversy. The loss were offset to some extent by increased equity in net earnings from Trans Asia Oil and Energy Development Corporation (TA Oil) of P98 million in the first nine months of 2012, compared to equitized net earnings of P66 million for the same period last year.

Consolidated net income of the company for the period January to September 2012 amounted to P156 million, an increase of 29% over the P121 million net income for the same period in 2011, while net income attributable to equity holders of the parent of P152 million is an increase of 27% compared to the P120 million posted over the same period in 2011. Increased net income contribution from TA Oil, the parent company, AU and COC offset net income contribution decreases from other investee companies.

The results of operations of PHN subsidiaries for the period January to September 2012 are as follows:

Union Galvasteel Corporation (UGC)

I. Marketing

For the nine months ended September 30 2012, the company sold 5.0 million sheets or 9% above the 4.6 million sheets sold over the same period of 2011.

II. Production

The galvanizing line was on shutdown since November last year until February 2012 and only operated in March. The line processed 6,226 MT with a utilization of 21% in the nine months ended September 30 2012 compared to 20,061 MT with a utilization of 45% over the same period in 2011.

The color coating line operated at 84% utilization and produced 24,848 MT in the nine months ended September 30 2012 as against a utilization of 79% and production of 23,548 MT over the same period of 2011.

III. Financials

Revenue generated was P2,194 million with a contribution margin of P365 million resulting in a Gross Profit (GP) rate of 17% and a net income of P57 million. This is lower compared to the previous year’s GP rate of 20% and net income of P95 million.

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Araullo University (AU)

For the period January to September 2012, Araullo University registered revenues amounting to P131 million while direct costs amounted to P60 million. General and administrative expenses for the same period amounted to P34 million. For the nine months ended September 30, 2012, Araullo University registered a net income of P20 million or 11% higher than the net income of P18 million over the same period last year due to increase in enrollment, from 5,545 in first semester School Year (SY) 2011-2012 to 6,051 in first semester SY 2012-2013.

Cagayan de Oro College, Inc. (COC)

For the period January to September 2012, COC registered revenues amounting to P156 million. Direct cost and operating expenses as of September 30, 2012 were P85 million and P40 million respectively. COC net income increased from P 6 million last year to a net income of P16 million for the period January to September 30, 2012 due to increase in student enrollment from 5,590 to 6,733 students.

University of Pangasinan (UPANG)

On February 2, 2009, the Company acquired a 70% stake in University of Pangasinan in Dagupan City. UPang is the leading educational institution in Pangasinan offering elementary, secondary and tertiary education. UPang offers courses in Nursing, Engineering and Accountancy, among others. UPang also owns 69.75% of Pangasinan Medical Center, also located in Dagupan City.

For the nine months ended September 2012, UPANG registered revenues amounting to P238 million and net income of P35 million, which was a decrease from revenues of P260 million and net income of P38 million after one-off adjustments in 2011. Student enrollment slightly decreased from 7,518 for the second semester of school year 2011-12 to 7,236 for the second semester of school year 2012-13.

University of Iloilo (UI)

On February 25, 2009, PHN acquired a 70% interest in University of Iloilo (UI), located in Iloilo City. UI offers elementary, secondary and tertiary education. UI offers courses in nursing, criminology, hotel and restaurant management and accountancy.

For the period January to September 2012, UI posted a net income of P2.4 million compared to P26.8 million over the same period in 2011. The decrease was due to a 6% decline in enrollment from 6,160 students for school year 2011-12 to 5,802 students for school year 2012-13.

One Animate Limited (OAL)

One Animate Limited is a limited liability company incorporated in Hongkong in October 2008. OAL owns a ninety five (95%) interest in Toon City Animation, Inc. The latter is an award winning animation Studio providing 2D Flash and 3D CGI animation services. For the nine months ended September 2012, OAL registered revenues of P59 million. OAL incurred a net loss of P44 million for the period, compared to a loss of P72 million over the same period in 2011.

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Fuld & Company, Inc. (Fuld)

In June 2011, the Company acquired an 85% interest in Fuld & Company, Inc. (Fuld). Fuld is a business research and consulting firm focusing on business and competitive intelligence. Fuld is incorporated in the United States with offices in the US, UK and China. Founded in 1979, Fuld delivers customized, proprietary research analysis and consulting designed to help clients understand the competition and anticipate competitive challenges.

For the period January – September 2012, Fuld posted a net income of P 3 million on revenues of P 334 million.

Business Back Office, Inc. (BBI)

In July 2011, PHN acquired an 85% interest in Fuld & Company (Philippines), Inc. (formerly Business Back Office, Inc. (BBI). Fuld Philippines is a knowledge process outsourcing provider based in Manila. It is a multi-industry, multi-market, and multi-company research capability with over 350 projects conducted since 2002.

For the period January to September 2012, Fuld Philippines registered revenues of P21 million. However, the company posted a net loss of P2 million.

Asian Plaza, Inc. (API)

API is a 57.6% subsidiary of PHN and owns and leases the Asian Plaza Building in Sen. Gil Puyat Avenue, Makati City. On December 28, 2010 and March 31, 2011, API signed a Memorandum of Agreement and Deed of Sale respectively, for the sale of Asian Plaza property to Shang Property Developers, Inc. (SPDI) in the amount of P615 million with 25% of the selling price paid already as of December 31, 2010. API recognized the gain from this transaction amounting to P386 million in 2010. On April 4, 2011, API received the 65% payment of SDPI amounting to P399.75 million.

For the period January – September 2012, API posted a net loss of P16 million on revenues of P11 million, compared to a net loss of P 1 million last year. The increase in net loss is due to the increase in operating expenses, from P14 million in 2011 to P26 million in 2012.

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Key Performance Indicators (KPI)

The top five (5) KPI’s used to measure the financial performance of PHN and its subsidiaries as of September 30, 2012 compared to the same period last year are shown in the following table :

Financial KPI Definition 2012 2011 Profitability

Return on Equity (ROE)

Gross Profit Margin

Net income (loss)

Ave. total equity attributable to PHN equity holders

Gross profit

Net sales

2.33% 26.08%

1.83% 25.16%

Efficiency

Cash Flow Margin

Cash flow from operating Activities

Net sales

2.78

6.32%

Liquidity

Current Ratio

Debt-to Equity Ratio

Current assets

Current liabilities

Total liabilities Total equity

2.16 : 1.00 0.35 : 1.00

2.63 : 1.00 0.35 : 1.00

Profitability The return on equity for the period of 2.33% is higher than the 1.83% return for the same period last year. The increase was due to the increase in net income for the period January to September 2012. The gross profit margin likewise increased from 25.2% in September 2011 to 26.1% in September 2012 mainly due to gross profit margin contribution of Fuld & Company, Inc. which were acquired and consolidated beginning June 2011. Efficiency Net cash outflow from operations was P94 million for the period January to September 2012 compared to net cash inflow of P190 million for the same period last year. The lower net cash inflow is due to increase in accounts receivable of UGC and Fuld & Company, as well as an increase in inventories of UGC. Liquidity Current ratio as of September 30, 2012 slightly decreased from 2.63:1.00 last year to 2.16:100 this year due to an increase in current liabilities such as Trust Receipts Payables and Notes Payables from subsidiary UGC. Debt-equity ratio of PHN and its subsidiaries as of end September 30, 2012 remained at 0.35:1.00.

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Other Financial Ratios are as follows :

Financial Ratio Definition 2012 2011 Asset to Equity

Total Assets Total Equity

1.35

1.35

Interest rate coverage ratio

EBITDA Interest expense

6.64

6.30

Asset to Equity ratio of PHN and subsidiaries as of end September 30, 2012 remained at 1.35 Interest rate coverage ratio as of September 30, 2012 slightly increased from 6.30 last year to 6.64 this year due to higher EBITDA.

Accounting Policies and Principles

The accompanying consolidated financial statements of Phinma Corporation have been prepared in compliance with accounting principles generally accepted in the Philippines as set forth in Philippine Financial Reporting Standards (PFRS). The consolidated financial statements have been prepared on a historical cost basis, except for financial assets at fair value through profit and loss, available for sale investments and derivative investments that have been measured at fair value.

The consolidated financial statements are prepared in Philippine pesos, the company’s functional and presentation currency.

Interim Disclosures on Financial Statements Below are additional disclosures on the Company’s operations : a. Any known trends, demands, commitments, events and uncertainties that will result in or likely

to decrease its liquidity in any material way.

PHN does not anticipate having any cash flow or liquidity problems nor does it anticipate any default or breach of any of its existing loans.

b. Any events that will trigger direct or contingent financial obligation that is material to the

company, including any default or acceleration of an obligation. None

c. All material off-balance sheet transactions, arrangements, obligations (including contingent

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

None

d. Any material commitments for capital expenditures, the general purpose of such commitments

and the expected sources of funds for such expenditures.

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None e. Any known trends, events or uncertainties that have had or that are reasonably expected to have a

material favorable or unfavorable impact on net sales/revenues/income from continuing operations.

The operations of Phinma Corporation and its subsidiaries continue to be affected by the economic performance of the Philippines and in the countries in which they operate.

f Any significant elements of income or loss that did not arise from the Issuer’s continuing operations.

None.

g. The causes for any material change from period to period which shall include vertical and

horizontal analyses of any material item.

Increase or decrease of 5% or more in the financial statements are discussed below. h. Any seasonal aspects that had a material effect on the financial condition or results of operations.

The parent company is a holding company and has no seasonal aspects that will have any material effect on its financial condition. Like any other company in the construction industry, the operations of UGC is affected by seasonality demand. During the summer months starting December to May, demand for roofing materials are greater than during the rainy months of June to November. The demand for the first semester of the calendar year is normally higher than that of the second semester. The revenues of the schools under the Phinma Education network decline during summer months. For other subsidiaries, there is no significant seasonality that would materially affect their operations.

Material Changes in Balance Sheet Accounts Cash and cash equivalents The decrease in cash and cash equivalents of P239 million are shown in the cash flow statement. Investments held for Trading

The P 49 million increase in Investments Held for Trading represents additional purchases of Unit Investment Trust Funds (UITFs) and bonds by PHN.

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Trade and other receivables - net The increase in the account in the amount of P123 million represents advances of PHN to Trans- Asia Oil & Energy Development for the latter’s rights offering. Input tax The decrease in the account of P8 million represents a decrease in input tax of OAL in the amount of P8 million as well as decrease in input tax of UGC amounting to P2 million. Other current assets The increase in the account of P13 million is mainly due to an increase in various assets of UPang , UI & API in the amount of P12 million, P18 million and P6 million respectively. Available for sale investments The P 10 million decrease in the account is due to the sale of First Philippine Holdings preferred shares. Other assets The P 38 million increase in other assets is attributable to the increase in various deferred charges of Fuld & Company, Inc. ( P18 million) as well as deferred charges of Fuld & Company Philippines, Inc. & One Animate Limited (P9 million and P11 million, respectively). LIABILITIES Trade and other payables The increase in the account from P390 million to P520 million is partly due to a P 97 million deposit received from Vicsal Investments, Inc. pending the finalization of the sale of AB Capital shares, as well as the increase in the combined trade payables of AU & UI in the amount of P44 million. Trust receipts payable The P396 million increase in the account is attributable to the increase in UGC’s trust receipts payable from P104 million in December 2011 to P499 million this year. Unearned revenues The unearned revenues of AU, COC, UI and UPANG decreased from P205 million in December 2011 to P96 million in September 2012. Tuition fees which were collected at the beginning of the semester are booked under Unearned Revenue; the account is eventually reduced over the semester as income is earned.

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Income and other taxes payable The decrease in the account of P25 million represents a decrease in income tax payable of UGC and COC. Due to related parties The decrease in the account represents payments by UGC of various liabilities to Phinma, Inc. Derivative liability The decrease in the account is due to the full settlement of non-deliverable forward contracts of PHN which were outstanding as of December 2011. Long-term loan payable The decrease in the amount of P33 million represents partial principal payments made by PHN to selling stockholders of Fuld & Company, Inc. last June 2012. Long-term debt The decrease in the account of P331 million represents UGC’s pretermination of its long term debt with Banco de Oro and Rizal Commercial Banking Corporation amounting to P240 million.Also AU and UPANG made some principal payments during the first semester of CY 2012. Pension and other post-employment benefits The increase in the account of P 31 million is due to retirement plan upgrade of UGC as well accruals for post-employment benefits of PHN, AU, COC & UI. Other noncurrent liabilities The increase in the account of P5 million represents an inccrease in other noncurrent liabilities of UPANG. EQUITY Unrealized gain (loss) on change in fair value of available for sale investments The change is due to the increase in prices of First Philippine Holdings preferred shares held by Phinma Corporation.

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Cumulative translation adjustments The decrease of P6 million in the account represents cumulative translation adjustments arising from the consolidation of OAL and Fuld & Company, Inc. Material Changes in Income Statement Accounts Revenues The increase in revenues in the amount of P353 million is due to increase in revenues of UGC amounting to P177 million as a result of increase in sales volume. Likewise, consultancy revenues of Fuld & Company, Inc. increased from P134 million to P 334 million for the nine (9) months ended September 30, 2012. The former reflects only revenues for the four (4) months ended September 30, 2011, since the company was acquired and consolidated only beginning June 2011 while the latter reflects the nine (9) months consultancy services. Cost of sales Increase in cost of sales amounting to P234 million represents UGC’s increase due to increase in sales volume as well as increase in cost of raw materials during the nine (9) months ended September 30, 2012. Also, cost of consultancy services increased from P44 million to P125 million for the period January – September as the former reflects only cost of consultancy services for the four (4) months ended September 30, 2011 as the company was acquired and consolidated only beginning June 2011 whereas the latter reflects the January – September 2012 cost of consultancy services. Operating expenses The P 102 million increase in the account is due to the consolidation of operating expenses of Fuld & Company, Inc for 9 months in 2012 compared to 4 months in 2011. Fuld & Company was consolidated by PHN only starting June 2011. Equity in net earnings of associates The decrease in the account of P27 million is largely due to equitized loss from Phinma Property Holdings Corporation (PPHC) in the amount of P25 million as of September 30, 2012, compared to P 23 million for the same period last year. The loss of PPHC was partially offset by a P 98 million equitized income from TA Oil. Net gain (loss) on derivatives This account reflects a net gain in derivatives amounting to P8.5 million for the nine-month ended September 30, 2012 compared to P6.7 million of the same period last year. As of September 30, 2012, the company has outstanding non-deliverable contracts with an aggregate notional amount of US$6.2 million transacted at an average rate of P42.76 to $1.00. As of the end of the quarter, unrealized gain on said contracts amount to P6.3 million. The company also booked a net derivative gain on settled contracts amounting to P2.2 million.

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Foreign exchange gain (loss) PHN booked a P 14.2 million foreign exchange loss as of September 30, 2012 due to the movement in foreign exchange rate from P43.84 as of Dec. 31, 2011 to P41.70 as of September 30, 2012. Gain on sale of asset This represents the gain on sale of land in Nasugbu, Batangas in the amount of P4 million as well as the gain on sale of land in General Santos City amounting to P12 million Dividend income The increase in the account of P21 million represents a liquidating dividend received by PHN from Luzon Bag Corporation. Other income (charges) The increase in other income of P3 million represents other income of Fuld & Company & COC in the amount of P1.3 million and P1 million respectively. Provision for income tax

The decrease in provision for income tax from P38 million to P28 million is attributable to the decline in income of UGC from P95 million last year to P57 million this year. Comprehensive Income

Comprehensive income increased from P118 million for the nine-month period ended September 30, 2011 to P149 million this year due to the increase in net income from P121 million last year to P156 million this year. For other comprehensive income / (charges), kindly refer to the comments on equity accounts.

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SIGNATURES

Pursuant to the requirements of the Securities Regulation Code, the registant has duly causedthis report to be signed on its behalf by the undersignid thereunto duly auiho ized.

PHII\IMA CORPORATION

4,,rwn fi' illwREflINA B. ALVAREZISenflor Vice Presid ent - [luunce

November 14, 2012

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PHINMA CORPORATION Consolidated Aging of A/R-Trade As of September 30, 2012 in thousands Total Current 548,021 1 - 30 days 60,867 31 - 60 days 32,284 61 - 90 days 24,227 Over 90 days 171,342 TOTAL 836,741 Less : Allowance for doubtful accounts 164,612 Net Trade Receivable 672,129

PHINMA CORPORATION Consolidated Aging of A/R-Nontrade As of September 30, 2012 in thousands Total Current 230,686 1 - 30 days - 31 - 60 days - 61 - 90 days 68,880 Over 90 days 12,005 TOTAL 311,571 Less : Allowance for doubtful accounts 3,069 Net Trade Receivable 308,502