COVER SHEET 9 1 7 0 SEC Registration Number U N I V E R S A L R O B I N A C O R P O R A T I O N A N D S U B S I D I A R I E S (Company’s Full Name) 1 1 0 E . R o d r i g u e z a n , Q u e z o n A v e n u e , B a g u m b a y C i t y (Business Address: No. Street City/Town/Province) Mr. Gerry N. Florencio 671-2935; 635-0751; 671-3954 (Contact Person) (Company Telephone Number) 0 9 3 0 1 7 - A 1 Month Day (Form Type) Month (Fiscal Year) Day (Annual Meeting) (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 ID Cashier STAMPS Remarks: Please use BLACK ink for scanning purposes. SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-A1 ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES 1. For the fiscal year ended September 30, 2005 2. SEC Identification Number 9170 3. BIR Tax Identification No. 000-400-016-000 4. Exact name of issuer as specified in its charter Universal Robina Corporation 5. Quezon City, Philippines Province, Country or other jurisdiction of incorporation or organization 6. Industry Classification Code: (SEC Use Only) 7. 110 E. Rodriguez Ave. Bagumbayan, Quezon City Address of principal office 1110 Postal Code 8. 671-2935;635-0751;671-3954 Issuer's telephone number, including area code 9. Not Applicable 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 Common Shares, P1.00 Par value 1,686,479,549 shares 11. Are any or all of these securities listed on the Philippine Stock Exchange. Yes [ / ] No [ ] 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 shorter period that the registrant was required to file such reports); Yes [ / ] No [ ] b) has been subject to such filing requirements for the past ninety (90) days. Yes [ / ] No [ ] 13. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value of the voting stock held by non-affiliates is P3,050,036,504. APPLICABLE ONLY TO ISSUERS INVOLVED IN INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS DURING THE PRECEDING FIVE YEARS: 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 If any of the following documents are incorporated by reference, briefly describe them and identify the part of SEC Form 17-A into which the document is incorporated: a) Any annual report to security holders; None b) Any proxy or information statement filed pursuant to SRC Rule 20 and 17.1(b); None c) Any prospectus filed pursuant to SRC Rule 8.1-1 None TABLE OF CONTENTS Page No. PART I - BUSINESS AND GENERAL INFORMATION Item 1 Business 1 Item 2 Properties 12 Item 3 Legal Proceedings 13 Item 4 Submission of Matters to a Vote of Security Holders 13 PART II - OPERATIONAL AND FINANCIAL INFORMATION Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters 13 Management’s Discussion and Analysis or Plan of Operation 15 Item 7 Financial Statements 26 Item 8 Changes in and Disagreements with Accountants and Financial Disclosure 26 Item 6 PART III - CONTROL AND COMPENSATION INFORMATION Item 9 Directors and Executive Officers of the Registrant 27 Item 10 Executive Compensation 32 Item 11 Security Ownership of Certain Beneficial Owners and Management 33 Certain Relationships and Related Transactions 34 Item 12 PART IV - CORPORATE GOVERNANCE Item 13 Corporate Governance 34 PART V - EXHIBITS AND SCHEDULES Item 14 (a) Exhibits (b) Reports on SEC Form 17-C (Current Report) 34 35 SIGNATURES 36 INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES 38 INDEX TO EXHIBITS 95 PART I – BUSINESS AND GENERAL INFORMATION Item 1. Business Universal Robina Corporation (URC) is one of the largest branded food product companies in the Philippines and has a growing presence in other Asian markets. It was founded in 1954 when Mr. John Gokongwei, Jr. established Universal Corn Products, Inc., a cornstarch manufacturing plant in Pasig. The Company is involved in a wide range of food-related businesses, including the manufacture and distribution of branded consumer foods, production of hogs and day-old chicks, manufacture of animal and fish feeds, glucose and veterinary compounds, flour milling, and sugar milling and refining. The Company is the market leader in snack foods, candies, chocolates, biscuits, day-old chicks, and fish feeds. No material reclassifications, merger, consolidation, or purchase or sale of significant amount of assets (not ordinary) were made in the past three years. The Company’s financial condition has remained solid in the said period. The Company operates its food business through operating divisions and wholly or majority-owned subsidiaries that are organized into three core business segments: branded consumer foods, agroindustrial products and commodity food products. Branded consumer foods (BCF), including our packaging division, is the Company’s largest segment contributing about 77.1% of revenues for the fiscal year ended September 30, 2005. Established in the 1960s, the Company’s branded consumer foods division manufactures and distributes a diverse mix of snack, chocolate, candy, biscuit, bakery, beverage, noodles and pasta and tomato-based products. The manufacture, distribution, sales and marketing activities for the Company’s consumer food products are carried out mainly through the Company’s branded consumer foods group consisting of snack foods, beverage and grocery divisions, although the Company conducts some of its branded consumer foods operations through its wholly-owned or majority-owned subsidiaries and joint venture companies (i.e. Hunt-URC and Nissin-URC). The Company established URC-Packaging Division to engage in the manufacture of polypropylene films for packaging companies. The bi-axially oriented polypropylene plant (BOPP), located in Batangas, began commercial operation in June 1998. URC also formed Food Service and Industrial Division that supply BCF products in bulk to certain institutions like hotels, restaurants, and schools. The majority of the Company’s branded consumer foods business is conducted in the Philippines. In 2000, the Company began to expand its BCF business more aggressively into other Asian markets, primarily through its subsidiary, URC International and its subsidiaries in China: Tianjin Pacific Foods Co. Ltd., Shanghai Peggy Foods Co. Ltd., Xiamen-Tongan Pacific Foods Co. Ltd., Panyu Peggy Foods Co. Ltd. and URC Hongkong Co. Ltd. (formerly Hongkong Peggy Snack Foods Co. Ltd.); in Malaysia: URC Snack Foods (Malaysia) Sdn. Bhd. (formerly Pacific World Sdn. Bhd.) and Ricellent Sdn. Bhd.; in Thailand: URC (Thailand) Co. Ltd. (formerly Thai Peggy Foods Co. Ltd.); in Singapore: URC Foods (Singapore) Pte. Ltd. (formerly Pan Pacific Snacks Pte. Ltd.) and in 2002, in Indonesia: PT URC Indonesia. In 2005, the Company started operations in Vietnam through its subsidiary URC Vietnam Company Ltd. The Asian operations contributed about 22.7% of the Company’s revenues for the fiscal year ended September 30, 2005. -2The Company has a strong brand portfolio created and supported through continuous product innovation, extensive marketing and experienced management. Its brands are household names in the Philippines and a growing number of consumers across Asia are purchasing the Company’s branded consumer food products. The Company’s agro-industrial products segment operates three divisions, which engage in hog and poultry farming (Robina Farms or “RF”), the manufacture and distribution of animal feeds, glucose and soya products (Universal Corn Products or “UCP”), and the production and distribution of animal health products (Robichem). This segment contributed approximately 12.5% of the net sales in fiscal year 2005. The Company’s commodity food products segment engages in sugar milling and refining through its subsidiaries, Universal Robina Sugar Milling Corporation (URSUMCO), its division, Cagayan Robina Sugar Milling Corporation (CARSUMCO), and Southern Negros Development Corporation (SONEDCO), and flour milling through URC Flour division. In fiscal 2005, the segment contributed approximately 10.4% of aggregate net sales. The Company is a core subsidiary of JG Summit Holdings, Inc. (JGSHI), one of the largest conglomerates listed in the Philippine Stock Exchange based on total net sales. JGSHI has substantial interests in property development, hotel management, textiles, banking and financial services, telecommunications, petrochemicals, air transportation and business interests in other sectors, including power generation, printing, and insurance. The percentage contribution to the Company’s revenues for each of the three years in the period ended September 30, 2003, 2004 and 2005 by each of the Company’s principal product categories is as follows: Branded Consumer Foods Agro-Industrial Products Commodity Food Products For the fiscal years ended September 30 2003 2004 2005 77.0% 75.5% 77.1% 13.0 13.4 12.5 11.1 10.4 10.0 100.0% 100.0% 100.0% The geographic percentage distribution of the Company’s revenues for each of the three years in the period ended September 30, 2003, 2004 and 2005 is as follows: Philippines ASEAN China For the fiscal years ended September 30 2003 2004 2005 80.7% 77.7% 77.3% 17.9 21.0 21.2 1.3 1.5 1.4 100.0% 100.0% 100.0% -3Customers None of the Company’s businesses is dependent upon a single customer or a few customers that a loss of anyone of them would have a material adverse effect on the Company. The Company has no single customer that is based upon existing orders will account for 20.0% or more of the Company’s total sales. Distribution, Sales and Marketing The Company has developed an effective nationwide distribution chain and sales network that it believes provide its competitive advantage. The Company sells its branded food products primarily to supermarkets, as well as directly to top wholesalers, large convenience stores and two types of subdistributors, large scale trading companies and independent business managers which in turn sell its products to other small retailers and downline markets through the Company’s Grandslam Program, an innovative distribution scheme for downscale accounts, which enabled URC Philippines to solidify its presence in sari-sari stores and groceries, effectively locking out competitors in the consumer foods segment in the Philippines. The Company’s branded consumer food products are distributed to approximately 80,000 outlets in the Philippines and sold through its direct sales force, regional distributors and independent business managers. URC intends to enlarge its distribution network coverage in the Philippines by increasing the number of retail outlets that its regional sales force and distributors directly service. By deploying larger and financially stronger regional distributors over the next two years, URC plans to increase the number of outlets serviced directly from 80,000 to 120,000 outlets. URC also plans to increase the product focus of its distribution network by ensuring that relevant products are targeted towards appropriate retail outlets. The branded consumer food products are generally sold by the Company either direct from delivery vans to small retail outlets or by traveling salesman to wholesalers or supermarkets, and regional distributors with delivery subsequently being undertaken by third party road carriers. Direct delivery sales are normally made on cash basis, while 15- to 30-day credit terms are extended to wholesalers, supermarkets and regional distributors. The Company believes that its emphasis on marketing, product innovation and quality, and strong brand equity has played a key role in its success in achieving leading market shares in the different categories where it competes. The Company has dedicated substantial resources to advertising and promotion campaigns and market research, spending on average 8% of its branded consumer food division’s net sales per year. These expenditures are made to maintain or improve a brand’s market share or to introduce a new product. In addition to introducing new products, URC has embarked on branding initiatives that involve organized advertising campaigns to differentiate its products and further expand market share. In particular, URC recently launched Jack and Jill as a master umbrella brand in order to enhance customer recognition of its products. URC devotes significant expenditures to support advertising and branding, both in the Philippines and in its overseas markets, including funding for advertising campaigns such as television commercials and radio and print advertisements, as well as promotions for new product launches. -4Competition The BCF business is highly competitive and competition varies by country, product category and segment. The Company believes that the principal competitive factors include price, taste, quality, convenience, brand recognition and awareness, advertising and marketing, availability of products and ability to get its product widely distributed. Generally, the Company faces competition from both local and multinational companies in all of its markets. Major competitors in the market segments in which it competes include, in the Philippines, Liwayway Manufacturing Corp., Columbia Foods International, General Milling Corporation, Republic Biscuit Corporation, Suncrest Foods Inc., Del Monte Phil. Inc., and Monde Nissin Corporation, Nestle Philippines Inc., San Miguel Pure Foods Company Inc. and Kraft Foods Inc., and internationally, Procter & Gamble, Effem Foods/Mars Inc., Lotte Group, Perfetti Van Melle Group, Mayora Inda PT, Calbee Group, Apollo Food, Frito-Lay, Nestlé S.A., Cadbury Schweppes plc, Groupe Danone S.A. and Kraft Foods International. Competition in the Philippine food and beverage industry is expected to increase in the future with increased liberalization of trade by the Philippine government and the predicted accompanying growth in imports due to the World Trade Organization (WTO) and ASEAN Free Trade Area (AFTA). Under the WTO, tariff rates on food and agricultural items are being decreased and import quotas are being eliminated among member countries, including the Philippines. AFTA is a free trade area formed by 10 southeast asian countries, including the Philippines. Under the AFTA, tariffs on manufactured goods, including processed agricultural products, are being minimized or eliminated over a 15-year period starting from January 1, 1993, and non-tariff barriers will be subsequently phased out. The day-old chicks market is cyclical, very competitive and principally domestic. The Company believes that the principal competitive factors are chick quality, supply dependability, price, low mortality rates, feed conversion efficiency and growth rates for broiler chicks. For layer chicks, competitive factors are productivity and disease resistance. The Company’s principal competitor is STS Corp. and Math Agro for broiler chicks and Bounty Farms, Inc. for layer chicks. The live hog market is highly fragmented, competitive and principally domestic. The Company believes that the principal competitive factors are quality, reliability of supply, price and proximity to market. The Company’s principal competitors are San Miguel Corp. (Monterey and Purefoods) and Foremost Farms, Inc. The main competition is from backyard raisers who supply 70%-80% of the total pork requirement in the country. If tariffs are reduced, the Company believes that there will be minimal competition from imported pork because prices of imported pigs are significantly higher as a result of higher feed costs in their countries of origin. The commercial animal feed market is highly fragmented and its products compete primarily with domestic feed producers. As of September 30, 2005, there were 700 registered feed mills in the Philippines, 50% of which sell commercial feeds. URC believes the principal competitive factors are quality and price. The Company’s principal competitors are B-Meg and Purina Philippines, Inc. A number of multinationals including Cargill, CJ and Sun Jun of Korea, are also key players in the market. -5The animal health products market is highly competitive. The market is dominated by multinationals and the Company is one of only a few Philippine companies in this market. The Company’s principal competitors are Pfizer, Inc., Univet Pharmaceuticals Ltd., and Merial Limited, a company jointly owned by Merk and Co., Inc. and Aventis. S.A. The Company believes that the principal competitive factors are price, product effectiveness, quality and veterinary services. Enhancement and development of New Products The Company intends to continuously introduce innovative new products, product variants and line extensions in the snackfoods (snacks, biscuits, candies, chocolates and bakery), beverage and grocery (instant noodles, tomato-based) segments. In the last two fiscal years, the Company has introduced 105 products. The Company also plans to selectively enter and expand its presence in segments of the Philippine beverage market through the addition of branded beverage products designed to capture market share in niches that complement its existing branded snack food product lines. In fiscal year 2004, the Company has launched water and flavored drinks in PP cup format and tea-based beverages in PET bottles. URC plans to launch energy drinks and additional tea-based beverages, also in PET bottles in fiscal year 2006. Raw Materials A wide variety of raw materials are required in the manufacture of the Company’s food products, including corn, wheat, flour, sugar, glucose and potatoes, some of which are purchased domestically and some of which the Company imports. The Company imports all of its wheat supplies and substantially all of its palm oil and flavors and a large portion of its milk. For its international operations, the Company primarily imports potatoes and flavors. The Company also obtains a major portion of its raw materials from its agro-industrial and commodity food products divisions, such as glucose, flour and sugar. Flexible packaging materials are purchased both locally and from abroad (Korea and Japan), while Tetra-pak packaging is purchased from Singapore. The Company’s policy is to maintain a number of suppliers for its raw and packaging materials to ensure a steady supply of quality materials at competitive prices. However, the prices paid for raw materials generally reflect external factors such as weather conditions, commodity market fluctuations, currency fluctuations and the effects of government agricultural programmes. In the past year, the Company has experienced higher prices for certain core raw materials including wheat and cooking oils. While the Company has increased the prices of certain products to reflect the increased price of raw materials, it has not been able to pass through the full extent of such increases. In response to these developments, the Company realigned its resources to improve its operational efficiencies. This strategy includes manufacturing its products in countries where the raw materials are available at the lowest cost. For its day-old chicks business, the Company requires a number of raw materials, including parent stock for its layer chicks, grandparent stock for its broiler chicks and medicines and other nutritional products. The Company purchases the parent stock for its layer chicks from Hubbard ISA SAS in Canada and from Hy-Line International in the United States under exclusive distribution agreements for the Philippines. The Company purchases the grandparent stock for its broiler chicks from Hubbard ISA SAS in France under an exclusive distribution agreement for the Philippines. The Company -6purchases a significant amount of the vitamins, minerals, antibiotics and other medications and nutritional products used for its day-old chicks business from its Robichem division. The Company purchases vaccines from various suppliers, including Merial, Intervet Philippines, Inc. and Boehringer Ingelheim GmbH. For its live hog business, the Company requires a variety of raw materials, primarily imported breeding stocks. The Company purchases all of the feeds it requires from its Universal Corn Products division and substantially all of the minerals and antibiotics for its hogs from its Robichem Laboratories division. The Company purchases vaccines, medications and nutritional products from a variety of suppliers based on the strengths of their products. Ample water supply is also available in its farms locations. The Company maintains approximately one month of inventory of its key raw materials. For its animal health products, the Company requires a variety of antibiotics and vitamins, which it acquires from suppliers in Europe and China. URC maintains approximately 90 days of inventory. For its commercial animal feed products, the Company requires a variety of raw materials, including corn, soya bean products, wheat, bran and pollard and fish meal. Starch and soya bean seeds, on the other hand, are required for its liquid glucose and soya bean products, respectively. The Company purchases corn locally from corn traders and internationally from suppliers in China and the United States. The Company imports soya bean seeds from suppliers in the United States. For its liquid glucose, the Company also requires solvents. The Company imports starch from a number of suppliers, primarily in Vietnam and Thailand. The Company purchases solvents for use in the manufacture of its soya products locally from Shell Chemicals Philippines, Inc. and Exxon-Mobil Petroleum & Chemical Holdings Inc. The Company maintains approximately two months’ physical inventory and one month’s in-transit inventory for its imported raw materials and approximately one month’s inventory for its local raw materials. The Company obtains sugar cane from local farmers. Competition for sugar cane supply is very intense and is a critical success factor for its sugar business. Additional requirements for the sugar cane milling process are either purchased locally or imported. The Company generally purchases wheat, the principal raw material for its flour milling and pasta business, through forward contracts with suppliers in the United States and Canada. The Company maintains a number of suppliers for its raw materials to ensure a steady supply of quality materials at competitive prices. The Company believes that alternative sources of supplies of the raw materials that it uses are readily available. The Company’s policy is to maintain approximately 30 to 45 days of inventory. Patents, Trademarks, Licenses, Franchises, Concessions or Labor Contract The Company owns a substantial number of trademarks registered with the Bureau of Trademarks of the Philippine Intellectual Property Office. In addition, certain of its trademarks have been registered in other Asian countries in which it operates. These trademarks are important in the aggregate because brand name recognition is a key factor in the success of many of the Company’s product lines. In the Philippines, a certificate of registration of a trademark is effective for an initial 10-year period, which period may be terminated earlier or renewed for 10-year periods thereafter. -7The Company also uses brand names under licences from third parties. These licensing arrangements are generally renewable based on mutual agreement. The Company’s licensed brands include: Swiss Miss milk shakes and cocoa mix for sale in the Philippines; Nissin’s Cup Noodles instant noodles for sale in the Philippines; and Hunt’s tomato and pork and bean products for sale in the Philippines. Intellectual property licences are subject to the provisions of the Philippine Intellectual Property Code. The Company’s licensing agreements are registered with the Philippine Intellectual Property Office. The former Technology Transfer Registry of the Bureau of Patents, Trademarks and Technology Transfer Office issued the relevant certificates of registration for licensing agreements entered into by URC prior to January 1998. These certificates are valid for a 10-year period from the time of issuance. After the Intellectual Property Code of the Philippines (R.A. No. 8293) became effective in January 1998, technology transfer agreements, as a general rule, are no longer required to be registered with the Documentation, Information and Technology Transfer Bureau of the Intellectual Property Office, but the licensee may apply to the Intellectual Property Office for a certificate of compliance with the Intellectual Property Code to confirm that the licensing agreement is consistent with the provisions of the Intellectual Property Code. In the event that the licensing agreement is found by the Intellectual Property Office to be not in compliance with the Intellectual Property Code, the licensor may obtain from the Intellectual Property Office a certificate of exemption from compliance with the cited provision. URC has obtained certificates of registration for its licensing agreements with NissinURC and Hunt-URC. The Company was also able to renew both its licenses for another term. Regulatory Overview As manufacturer of consumer food and commodity food (flour) products, the Company is required to guarantee that the products are pure and safe for human consumption, and that the Company conforms to standards and quality measures prescribed by the Bureau of Food and Drug. The Company’s sugar mills are licensed to operate by the Sugar Regulatory Administration. The Company renews its sugar milling licenses at the start of every crop year. All of the Company’s feed products have been registered with and approved by the Bureau of Animal Industry, an agency of the Department of Agriculture which prescribes standards, conducts quality control test of feed samples, and provides technical assistance to farmers and feed millers. Some of the Company’s projects, such as the sugar mill and refinery and poultry and hog farm operations, certain snacks products and BOPP packaging, are registered with the Board of Investments (BOI) which allows the Company certain fiscal incentives. Effects of Existing or Probable Governmental Regulations on the Business The Company operates its businesses in a highly regulated environment. These businesses depend upon licenses issued by government authorities or agencies for their operations. The suspension or revocation of such licenses could materially and adversely affect the operation of these businesses. -8Research and Development The Company develops new products and variants of existing product lines, researches new processes and tests new equipment on a regular basis in order to maintain and improve the quality of the Company’s food products. In the Philippine operations alone, about = P16.2 million was spent for research and development activities for fiscal year 2005 and approximately = P14.1 million and = P19.2 million for fiscal years 2004 and 2003, respectively. The Company has research and development staff for its branded consumer foods and packaging divisions of approximately 84 people located in its research and development facility in Metro Manila. The Company also has research and development staff in each of its manufacturing facilities. In addition, the Company hires experts from all over the world to assist its research and development staff. The Company conducts extensive research and development for new products, line extensions for existing products and for improved production, quality control and packaging as well as customising products to meet the local needs and tastes in the international markets. The Company’s commodity foods division also utilises this research and development facility to improve their production and quality control. The Company also strives to capitalise on its existing joint ventures to effect technology transfers. The Company has dedicated research and development staff for its agro-industrial business of approximately six persons. Its researchers are continually exploring advancements in breeding and farming technology. The Company regularly conducts market research and farm-test all of its products. The Company also has a diagnostic laboratory that enables it to perform its own serology tests. The Company offers its laboratory services directly to other commercial farms and Robichem Laboratories provides certain of its laboratory services at a minimal cost as a service to some of its customers. Transactions with Related Parties The largest shareholders, JG Summit Holdings, Inc., is one of the largest conglomerates listed on the Philippine Stock Exchange based on total net sales. JG Summit provides the Company with certain corporate center services including corporate finance, corporate planning, procurement, human resources, legal and corporate communications. JG Summit also provides the Company with valuable market expertise in the Philippines as well as intra-group synergies. See Note 16 to Consolidated Financial Statements for transactions with other affiliates. Costs and Effects of Compliance with Environmental Laws The operations of the Company are subject to various laws enacted for the protection of the environment, including the Pollution Control Law (R.A. No. 3931, as amended by P.D. 984), the Solid Waste Management Act (R.A. No. 9003), the Clean Air Act (R.A. No. 8749), the Environmental Impact Statement System (P.D. 1586) and the Laguna Lake Development Authority (LLDA) Act of 1966 (R.A. No. 4850). The Company believes that it has complied with all applicable environmental -9laws and regulations, an example of which is the installation of wastewater treatments in its various facilities. Compliance with such laws has not had, and in the Company’s opinion, is not expected to have, a material effect upon the Company’s capital expenditures, earnings or competitive position. As of September 30, 2005, the Company has invested about = P333.3 million in wastewater treatment in its facilities in the Philippines. Employees and Labor As of September 30, 2005, the number of permanent full time employees engaged in the Company’s respective businesses is 6,613 and are deployed as follows: Business Company or Division Branded consumer foods . . . . . . BCF, Nissin-URC, Hunt-URC Packaging Division, URC Hotloops, URCICL Agro-industrial products Agribusiness . . . . . . . . . . . . . . Livestock feeds, corn products, & vegetable oil . . . . . . . . . . . . . . . . . Veterinary compounds . . . . . Commodity food products Sugar . . . . . . . . . . . . . . . . . Flour . . . . . . . . . . . . . . . . . . . Number 3,982 Robina Farms 942 UCP 367 Robichem 102 URSUMCO, SONEDCO, CARSUMCO CMC 912 308 6,613 Of the above, 1,874 are managerial and administrative staff. As at the same date, approximately 8,308 contractual and agency employees are engaged in the Company’s businesses. The Company does not anticipate any substantial increase in the number of its employees in 2006. For most of the companies and operating divisions, collective bargaining agreements between the relevant representatives of the employees’ union and the subsidiary or divisions are in effect. The collective bargaining agreements generally cover a five-year term with a right to renegotiate the economic provisions of the agreement after three years, and contain provisions for annual salary increases, health and insurance benefits, and closed-shop arrangements. The collective bargaining agreements are with 19 different unions. For fiscal 2005, three collective bargaining agreements were signed and concluded with the URC Administration Union, the CMC Monthlies Union and the UCP Dailies Union. The Company believes that good labor relations generally exist throughout the Company’s subsidiaries and operating divisions. The Company has established non-contributory retirement plan covering all of the regular employees of URC. The plan provides retirement, separation, disability and death benefits to its members. The Company, however, reserves the right to change the rate and amounts of its contribution at anytime on account of business necessity or adverse economic conditions. The funds of the plan are administered and managed by the trustees. Retirement costs charged to operations, including amortization of past service cost, amounted to = P13.8 million in fiscal year 2005. - 10 Risks The major business risks facing the Company and its subsidiaries are as follows: 1) Competition The Company and its subsidiaries face competition in all segments of its businesses both in the Philippine market and in international markets where it operates. The Philippine food industry in general is highly competitive. Although the degree of competition and principal competitive factors vary among the different food industry segments in which the Company participates, the Company believes that the principal competitive factors include price, product quality, brand awareness and loyalty, distribution network, foreign competition, proximity of distribution outlets to customers, product variations and new product introductions. (See page 3, Competition, for more details) The Company’s ability to compete effectively includes continuous efforts in sales and marketing of its existing products, development of new products and cost rationalization. 2) Financial Market The Company has foreign exchange exposure primarily associated with fluctuations in the value of the Peso against the U.S. dollar and other foreign currencies. The substantial majority of the Company’s revenues are denominated in Pesos, while certain of its expenses, including debt service and raw material costs, are denominated in U.S. dollars or based on prices determined in U.S. dollars. In addition, the majority of the Company’s debt is denominated in foreign currencies. Prudent fund management is employed to minimize effects of fluctuations in interest and currency rates. 3) Raw Materials The Company’s production operations depend upon obtaining adequate supplies of raw materials on a timely basis. In addition, its profitability depends in part on the prices of raw materials since a portion of the Company’s raw material requirements are imported including packaging materials. To mitigate these risks, alternative sources of raw materials are used in the Company’s operations. (See page 5, Raw Materials, for more details) 4) Food Safety Concerns The Company’s business could be adversely affected by the actual or alleged contamination or deterioration of certain of its flagship products, or of similar products produced by third parties. A risk of contamination or deterioration of its food products exists at each stage of the production cycle, including the purchase and delivery of food raw materials, the processing and packaging of food products, the stocking and delivery of the finished products to its customers, and the storage and display of finished products at the points of final sale. The Company conducts extensive research and development for new products, line extensions, for existing products and for improved production, quality control and packaging as well as customizing products to meet the local needs and tastes in the international markets for its food business. For its agro-industrial business, its researchers are - 11 continually exploring advancements in breeding and farming technology. The Company regularly conducts market research and farm-test all of its products. Moreover, the Company ensures that the products are safe for human consumption, and that the Company conforms to standards and quality measures prescribed by regulatory bodies such as Bureau of Food and Drug, Sugar Regulatory Administration, Bureau of Animal Industry, and Department of Agriculture. 5) Mortalities The Company’s agro-industrial business is subject to risks of outbreaks of various diseases. The Company faces the risk of outbreaks of hoof-and mouth disease, which is highly contagious and destructive to susceptible livestock such as hogs and avian influenza or bird flu for its chicken farming business. These diseases and many other types could result to mortality losses. Disease control measures were adopted by the Company to minimize and manage this risk. 6) Intellectual Property Rights Approximately 77% of the Company’s net sales and services in fiscal year 2005 were from its branded consumer food group. The Company has put considerable efforts to protect the portfolio of intellectual property rights, including through trademark registrations. Security measures are continuously taken to protect its patents, licenses and proprietary formulae against infringement and misappropriation. Weather and Catastrophe Severe weather condition may have an impact on some aspects of the Company’s business, such as its sugar cane milling operations due to reduced availability of sugar cane. Weather condition may also affect the Company’s ability to obtain raw materials and the cost of those raw materials. Moreover, Philippines has experienced a number of major natural catastrophes over the years including typhoons, droughts, volcanic eruptions, and earthquakes. The Company and its subsidiaries continually maintain sufficient inventory level to neutralize any shortfall of raw materials from major suppliers whether local or imported. 8) Environmental Laws and Other Regulations The Company is subject to numerous environmental laws and regulations relating to the protection of the environment and human health and safety, among others. The nature of the Company’s operations will continue to subject it to increasingly stringent environmental laws and regulations that may increase the costs of operating its facilities above currently projected levels and may require future capital expenditures. The Company is continually complying with environmental laws and regulations, such as the wastewater treatment plants as required by the Department of Environment and Natural Resources, to lessen the effect of these risks. The Company shall continue to adopt what it considers conservative financial and operational policies and controls to manage the various business risks it faces. - 12 Item 2. Properties The Company operates the following manufacturing/farm facilities located in the following: Location (Number of facilities) Pasig City (4) Libis, Quezon City (1) Canlubang, Laguna (1) Mandaue City, Cebu (2) Luisita, Tarlac (1) Davao City, Davao (3) San Fernando, Pampanga (2) Dasmariñas, Cavite (2) Cagayan de Oro (1) Antipolo, Rizal (3) Taytay, Rizal (1) Teresa, Rizal (2) Angono, Rizal (1) San Miguel, Bulacan (2) Novaliches, Quezon City (1) Manjuyod, Negros Oriental (1) Piat, Cagayan (1) Kabankalan, Negros Occidental (2) Simlong, Batangas (1) Calamba, Laguna (1) Bukidnon (1) Samutsakhorn Industrial Estate, Samutsakhorn, Thailand (1) Pasir Gudang, Johor, Malaysia (1) Shiqiao Town, Guandong, China (1) Xiamen, Fujian, China (1) Tianjin Economic Development Area, Tianjin, China (1) Shanghai, China (1) Industrial Town, Indonesia (1) VSIP, Bin Duong Province, Vietnam (1) Type of Facility Owned/Rented Condition Branded consumer food plants, feedmills and flourmill Branded consumer food plant Branded consumer food plant Branded consumer food plant, poultry farm and feedmill Branded consumer food plant Branded consumer food plant (idle) and flourmill Branded consumer food plants Branded consumer food plants Branded consumer food plant Poultry; and Veterinary medicine plant Poultry farm Poultry and piggery farms Poultry farm Poultry and piggery farms Piggery farm Sugar mill Sugar mill Sugar mill BOPP plant Branded consumer food plant White Potato Project Branded consumer food plant Owned Good Owned Owned Owned Good Good Good Owned Owned Good Good Owned Owned Owned Rented Good Good Good Good Rented Owned Owned Owned Owned Owned Owned Owned Owned Rented Owned Owned Good Good Good Good Good Good Good Good Good Good Good (Idle) Good Branded consumer food plant Branded consumer food plant Branded consumer food plant Branded consumer food plant Owned Owned Owned Owned Good Good Good (Idle) Good (Idle) Branded consumer food plant Branded consumer food plant Branded consumer food plant Owned Owned Owned Good Good Good - 13 The Company intends to expand the production and distribution of the branded consumer food products internationally through the addition of manufacturing facilities located in geographically desirable areas, especially in the ASEAN countries, the realignment of the production to take advantage of markets that are more efficient for production and sourcing of raw materials, and increased focus and support for exports from the manufacturing facilities to other markets. It also intends to enter into alliances with local raw material suppliers and distributors. Sugar mill facilities in Kabankalan, Negros Occidental with net book value of P97.3 million and P73.3 million in 2005 and 2004, respectively, were used to secure the loan from Philippine Sugar Corporation. (See Note 15, Long-term Debt, to the Consolidated Financial Statements for more details) Annual lease payment for Calamba plant for fiscal year 2005 amounted to P8.8 million pesos. Lease contract is renewable annually. Farm facilities in Taytay, Rizal and Antipolo, Rizal owned by an affiliate, on the other hand, are rent-free. Item 3. Legal Proceedings The Company is subject to lawsuits and legal actions in the ordinary course of its business. The Company or any of its subsidiaries is not a party to, and its properties are not the subject of, any material pending legal proceedings that could be expected to have a material adverse effect on the Company’s financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II - OPERATIONAL AND FINANCIAL INFORMATION Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters Market Information The principal market for URC’s common equity is the Philippine Stock Exchange. Sales prices of the common stock follow: Low High Fiscal Year 2005 Oct. to Dec. 2004 = P10.00 = P9.10 Jan. to Mar. 2005 12.75 9.30 Apr. to Jun. 2005 17.25 12.00 Jul. to Sep. 2005 17.75 15.75 - 14 - Fiscal Year 2004 Oct. to Dec. 2003 Jan. to Mar. 2004 Apr. to Jun. 2004 Jul. to Sep. 2004 = P5.90 6.60 7.00 9.00 = P5.00 5.30 6.20 6.20 As of January 10, 2006, the latest trading date prior to the completion of this annual report, sales prices of the common stock is at = P20.25 and = P20.0, respectively for high and low. The number of shareholders of record as of September 30, 2005 was approximately 1,357. Common shares outstanding as of September 30, 2005 were 1,686,479,549. List of Top 20 Stockholders of Record September 30, 2005 Name of Stockholders JG Summit Holdings, Inc. Express Holdings, Inc. PCD Nominee Corporation (Non-Filipino) Robinsons Supermarket Corporation PCD Nominee Corporation (Filipino) Elizabeth Y. Gokongwei &/or John Gokongwei, Jr. Litton Mills, Inc. Marcia Gokongwei Sy &/or Elizabeth Gokongwei Hope Gokongwei Tang &/or Elizabeth Gokongwei Faith Gokongwei Ong &/or Elizabeth Gokongwei Lisa Yu. Gokongwei &/or Elizabeth Gokongwei Robina Gokongwei Pe &/or Elizabeth Gokongwei Flora Ng Siu Kheng Eng Si Co Lim Pua Yok Bing Consolidated Robina Capital Corporation Gilbert U. Du &/or Fe Socorro R. Du Cely C. Reaport &/or Senen C. Reaport Lily Cristina G. Ngochua Pan Malayan Management & Investment Corporation JG Summit Capital Services Corporation Shipside, Inc. Calvin Chua Eloisa Tantuco Catalino S. Ngochua Pablo Son Keng Po Number of Shares Held 1,232,301,488 219,904,990 151,071,041 49,911,556 19,248,156 2,156,000 1,945,595 500,000 500,000 500,000 500,000 500,000 330,000 300,000 273,900 220,000 163,900 132,000 132,000 124,080 111,100 110,000 110,000 105,600 74,800 74,360 Percent to Total Outstanding 73.07% 13.04 8.96 2.96 1.14 0.13 0.12 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.00 1,681,300,566 99.69% - 15 Recent Sales of Unregistered Securities Not applicable. All shares of the Company are listed on the Philippine Stock Exchange. Dividends The Company paid dividends as follows: For fiscal year 2005, cash dividend of = P0.30 per share was declared to all stockholders of record as of June 3, 2005 and paid on June 29, 2005. For fiscal year 2004, cash dividend of = P0.30 per share was declared to all stockholders of record as of June 3, 2004 and paid on June 29, 2004. For fiscal year 2003, cash dividend of = P0.30 per share was declared to all stockholders of record as of June 20, 2003 and paid on July 14, 2003. Item 6. Management’s Discussion and Analysis or Plan of Operation The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto, which form part of this Report. The consolidated financial statements and notes thereto have been prepared in accordance with the accounting principles generally accepted in the Philippines. Results of Operations Fiscal Year 2005 Compare to Fiscal Year 2004 Universal Robina Corporation (URC) posted a consolidated net sales and services of = P30.9 billion for the fiscal year ended September 30, 2005, a 13.3% increase over the same period last year. The principal reasons for this increase were as follows: • Net sales in URC’s branded consumer foods segment, including the packaging division, increased by P3.2 billion, or 15.7%, to P23.8 billion in fiscal 2005 from P20.5 billion recorded in fiscal 2004. This increase was primarily due to a 14.8% increase in net sales from URC’s international operations, principally Thailand, Indonesia, Malaysia and China, and a 16.1% increase in net sales from URC’s domestic operations. URC’s domestic branded consumer food operations benefited from increased sales of beverage products, as well as increased sales volumes of its products in core categories such as snacks, candy, chocolate, noodle and biscuit segments which were supported by strong exports. Sales in Thailand benefited primarily from strong sales of biscuits and wafers produced at its new biscuit plant in Thailand. Increased sales in China were driven by candies and snacks, and sales in Indonesia by snacks. - 16 - • Net sales in URC’s agro-industrial segment amounted to P3.9 billion in fiscal 2005, an increase of P222.7 million or 6.1% from P3.7 billion recorded in fiscal 2004. This increase in net sales was due primarily to URC’s animal feeds business, which reported an increase in net sales of 16.7% to P1.6 billion in fiscal 2005 from P1.3 billion recorded in fiscal 2004 as a result of higher sales volume and selling prices. • Net sales in URC’s commodity foods segment increased by P167.8 million, or 5.5%, to P3.2 billion in fiscal 2005 from P3.0 billion recorded in fiscal 2004. The principal reason for the increase was increased net sales from URC’s flour business. Net sales of flour increased by 12.7% due to increased sales volume, which was offset by a decrease of 14.0% in net sales of sugar. The decrease in net sales of sugar in fiscal 2005 was due to an increase in the proportion of sugar sold within URC for internal consumption, as URC does not recognize such intercompany sales as net sales on a consolidated basis. URC’s cost of sales and services consist primarily of raw and packaging materials costs, manufacturing costs and direct labor costs. Costs of sales and services increased by P2.6 billion, or 12.6%, to P22.9 billion in fiscal 2005 from P20.4 billion recorded in fiscal 2004. This increase resulted principally from increased sales volumes and generally higher costs for many major raw materials and packaging materials used in snacks, candies, chocolates, biscuits and flour products, such as coffee, wheat and potatoes, and major raw materials for animal feeds such as soya and for our BOPP films such as resin. The increased cost of raw materials reflected the general increase in many commodity prices during this period while the increased cost of packaging materials reflected the increased price of many oil-based products during this period. URC’s gross profit increased by P1.1 billion, or 15.4%, to P7.9 billion in fiscal 2005 from P6.9 billion recorded in fiscal 2004, as the increase in net sales was greater than the increase in cost of sales. URC’s gross profit as a percentage of net sales increased marginally to 25.7% in fiscal 2005 from 25.2%in fiscal 2004. URC’s operating expenses consist primarily of salaries, wages and other staff costs, advertising and promotion costs, freight and other selling expenses, depreciation, repairs and maintenance expenses and other administrative expenses. Operating expenses increased P654.0 million, or 13.6%, to P5.5 billion in fiscal 2005 from P4.8 billion recorded in fiscal 2004. This increase resulted primarily from the following factors: • an increase in freight and other selling expenses which increased by P218.5 million, or 17.7%, to P1.5 billion in fiscal 2005 from P1.2 billion recorded in fiscal 2004 due to higher volumes of exports and increased freight rate charges associated with higher fuel prices; • an increase in salaries, wages and other staff costs (which increased by P225.4 million, or 29.4%, to P991.8 million in fiscal 2005 from P766.4 million in fiscal 2004) due to hiring of new employees in connection with expansion of URC’s international operations, particularly in China and Vietnam, and the hiring of a dedicated beverage products sales force in the Philippines; and - 17 - • increased advertising and promotion costs both from URC’s domestic and international operations, which offset a P180.7 million, or 42.6%, decrease in depreciation, repairs and maintenance expenses to P243.5 million in fiscal 2005 from P424.2 million recorded in fiscal 2004 resulting from certain plant, property and equipment becoming fully depreciated in fiscal 2005. As a result of the above factors, income from operations increased by P405.2 million, or 19.7%, to P2.5 billion in fiscal 2005 from P2.1 billion recorded in fiscal 2004, and income from operations as a percentage of net sales increased slightly to 8.0% in fiscal 2005 from 7.5% recorded in fiscal 2004. URC’s income from operations by segment was as follows: • Income from operations in URC’s branded consumer foods segment, including the packaging division, increased to P949.3 million in fiscal 2005 from P898.4 million recorded in fiscal 2004. Though the increase in income from domestic operations was 21.2% to P1.3 billion from P1.1 billion, this was trimmed down by higher operating losses incurred by URC’s international operations, which increased from an operating loss of P165.5 million in fiscal 2004 to an operating loss of P340.1 million in fiscal 2005. The higher operating loss in international operations was primarily a result of higher manpower costs from the hiring of new employees and increased costs associated with greater advertising and promotional activity for new products and introduction of Jack and Jill megabrand. • Income from operations in URC’s agro-industrial segment increased by P56.1 million to P524.4 million in fiscal 2005 from P468.3 million in fiscal 2004 due to greater net sales from URC’s animal feeds business and improved gross margin as a result of higher selling prices. • Income from operations in URC’s commodity foods segment increased by P298.5 million, or 43.3%, to P987.2 million in fiscal 2005 from P688.7 million in fiscal 2004 due to increased net sales from flour products which was principally driven by volume increase. Other income (charges) - net consists primarily of investment income, interest and other financing charges, equity in net earnings of associate companies, as well as other miscellaneous income and expenses. URC realized other income of P289.7 million in fiscal 2005 compared to other charges of P256.2 million in fiscal 2004. The principal reasons for this shift from a net charge position to a net income position were an increase in investment income, equity in net earnings of unconsolidated associate companies and other net income, offset by higher interest and finance charges. Specifically: • URC’s investment income consists of interest income from cash and cash equivalents and temporary investments. Investment income increased by 32.6% to P1.9 billion in fiscal 2005 from P1.4 billion in fiscal 2004. This increase was due in part to the additional interest income from investing a significant portion of the proceeds of U.S.$200 million of guaranteed notes issued in January 2005 in temporary investments. In addition, URC earned higher returns in fiscal 2005 on its cash time deposits. - 18 - • URC’s principal investments accounted for under the equity method were its joint ventures: Hunt Universal Robina Corporation, or (“Hunt-URC”) and Robinsons Land Corporation. Equity in net earnings of investees increased to P244.6 million in fiscal 2005 from P184.8 million recorded in fiscal 2004 due mainly to higher equity in net earnings from investment in Robinsons Land Corporation as a result of higher income of Robinsons Land Corporation. • Others - net consists of, among other things, amortization of deferred charges, foreign exchange gains or losses, gain on sale of certain property and equipment and other expenses, such as severance pay to retired employees, net of other income. In fiscal 2005, URC had other net income of P250.9 million compared to other net charges of P331.7 million in fiscal 2004 due to recovery in market value of marketable securities and gain on sale of temporary investments and fixed assets in fiscal 2005. • Interest and other financing charges consists of interest expense. Interest and other financing charges increased by 36.6%, to P2.1 billion in fiscal 2005 from P1.5 billion recorded in fiscal 2004 due primarily to the additional interest payable on the U.S.$200 million of guaranteed notes issued in January 2005, coupled with the increase in the amount of interest payable on URC’s foreign currency-denominated indebtedness due to depreciation in fiscal 2005 in the exchange rate of the peso to other foreign currencies. URC recognized a net provision from income tax in fiscal 2005 of P470.8 million compared to a net benefit from income tax of P10.2 million in fiscal 2004. The increase in provisioning for current income tax was mainly due to a combination of higher taxable income resulting from increased gross income, particularly from URC’s sugar business, and the expiration of an exemption from income tax on URC’s sales in Thailand in fiscal 2005. The increase in provisioning for deferred income tax was due to an increase in unrealized gain on excess of market value over cost of URC’s hog stocks. Minority interests represents primarily the share in net loss (income) attributable to minority shareholders of the following subsidiaries of URC: URC International, URC’s direct subsidiary in which it holds approximately a 77.0% economic interest, Nissin-Universal Robina Corporation (“Nissin-URC”), URC’s 65.0%-owned subsidiary and Southern Negros Development Corporation, URC’s 94.0%-indirectly owned subsidiary. Minority interests in net loss of subsidiaries was P124.6 million in fiscal 2005 compared to P66.2 million recorded in fiscal 2004. The increase in minority interests in fiscal 2005 reflects the increase in loss from URC International. Net income increased by P528.8 million, or 28.2%, to P2.4 billion in fiscal 2005 from P1.9 billion in fiscal 2004 as a result of the factors discussed above. URC generated an EBITDA (earnings before interest, taxes, depreciation and amortization) of P7.0 billion for the current fiscal year 2005, 24.5% more than = P5.6 billion it had in fiscal year 2004. The Company will continue to expand its regional operations and domestically firm up its leadership in its core categories and has again set an aggressive target on the ensuing year to maintain its dominance in the Philippine market as well as in the ASEAN regional market. - 19 The Company is not aware of any material off-balance sheet transactions, arrangements, and obligations (including contingent obligations), and other relationship of the Company with unconsolidated entities or other persons created during the reporting period that would have a significant impact on the Company’s operations and/or financial condition. Fiscal Year 2004 Compared to Fiscal Year 2003 Universal Robina Corporation (URC) registered a consolidated net sales and services of P27.2 billion for the fiscal year ended September 30, 2004, a 16.3% increase over the same period last year despite highly competitive environment and depressed economic condition marked by political and security concerns. Revenue growth was led again by the solid performance of its core business, Branded Consumer Foods (BCF) business, particularly its expanding international operations in Southeast Asia, and improved revenues of its Agro-industrial and Commodity foods businesses, notably farms and sugar businesses, respectively. The Company’s gross margin improved by 13.5% to P6.9 billion compared to the same period last year of P6.0 billion. Income from operations likewise went up by 38.2% to P2.1 billion from P1.5 billion last year due to significant increase in sales, which covered for the slight increase in operating expenses. Operating expenses increased by 5.5% to P4.8 billion as a result of expanding regional operations and sustained marketing activities. As a result of better performance of all business segments, net income for fiscal year 2004 climbed to P1.9 billion, a remarkable 32.6% increase over P1.4 billion recorded last year. Consequently, earnings per share was P1.11, better than last year’s P0.84. The Branded Consumer Foods (BCF) business unit, including the packaging division, posted a net sales and services value growth of 13.9 % to P20.5 billion compared to the same period last year of P18.0 billion. This was attributed to URC International revenue growth of 34.4% and the continued strength of the Company’s products in core categories such as snacks, candy, chocolate, noodle and biscuit segments complemented by strong exports. The Company expects a continued strong performance of the Branded Consumer Foods in the domestic front and ASEAN region as well, with new and exciting product launches, intensive marketing and advertising efforts and extensive distribution network. The Agro-industrial business unit reported a net sales of P3.7 billion, 20.0% higher than last year. The increase in net sales resulted from improvement in prices of feeds and farm products, and higher volume sold by the farm business. URC’s Commodity Foods business unit generated a net sales of P3.0 billion, 29.7% higher compared to last year of P2.3 billion. The increase was due to higher selling prices of flour products and higher volume sold by the flour and sugar businesses. Cost of sales and services increased by P3 billion or 17.3% to P20.4 billion from P17.4 billion last year. The increase was due to higher sales volume and costs of major raw and packaging materials used in our snacks, candies, chocolates, biscuits and flour and feed products. - 20 Other income (charges) - net was P(256.2) million for the current fiscal year compared to P(93.5) million the previous fiscal year. Variance was caused mainly by recording of foreign exchange losses. Provision for income tax this year was substantially lower due to higher non-taxable income and recognition of benefit from deferred income tax on provision for impairment losses on idle fixed assets, unrealized foreign exchange losses, provision for doubtful accounts, among others. Minority interest in net loss of subsidiaries was P66.2 million or P20.0 million lower from last year’s P86.2 million due to improvement in results of operations of subsidiaries. URC generated an EBITDA (earnings before interest, taxes, depreciation and amortization and other non-cash items) of P5.6 billion for the current fiscal year 2004, 16.5% more than = P4.8 billion it had in fiscal year 2003. The Company will continue to expand its regional operations and domestically firm up its leadership in its core categories and has again set an aggressive target on the ensuing year to maintain its dominance in the Philippine market as well as in the ASEAN regional market. The Company is not aware of any material off-balance sheet transactions, arrangements, and obligations (including contingent obligations), and other relationship of the Company with unconsolidated entities or other persons created during the reporting period that would have a significant impact on the Company’s operations and/or financial condition. Fiscal Year 2003 Compared to Fiscal Year 2002 Universal Robina Corporation (URC) reported a consolidated net sales and services of P23.4 billion for the fiscal year ended September 30, 2003, a 10.7% increase over the same period last year despite the depressed economic conditions prevailing in the region and highly competitive environment. Revenue growth was spearheaded by the solid performance of its core business Branded Consumer Foods Group, particularly its international operations in Southeast Asia. In addition, the Company’s agro-industrial and commodity food group operations likewise posted a modest increase in revenue. The Company’s gross margin improved by 10.0% to P6.0 billion compared to the same period last year of P5.5 billion. However, income from operations was lower by 14.7% to P1.5 billion due to higher operating expenses. Operating expenses increased by 21.5% to P4.6 billion as a result of expanding regional operations and sustained marketing activities. Net income for fiscal year 2003 is up by 12.7% to P1.4 billion from last year’s P1.3 billion resulting in earnings per share of P0.84 better than last year’s P0.74. The Branded Consumer Foods (BCF) business unit, including the packaging division, posted a net sales and services value growth of 13.5 % to P18.0 billion compared to the same period last year. This was attributed to URC’s regional snacks food revenue growth of 37.6% and the continued strength of the Company’s products in core categories such as snacks, candy, chocolate and biscuit segments complemented by strong exports. - 21 The Company expects a continued strong performance of the Branded Consumer Foods in the domestic front and ASEAN region as well, with new and exciting product launches and intensive marketing and advertising efforts. The agro-industrial business unit reported net sales of P3.0 billion, the same level as last year. The increase in net sales of the feeds business as a result of a 20.1% volume growth was offset by lower sales volume and prices of farm products. URC’s commodity food business unit generated net sales of P2.3 billion, 4.0% higher compared to the last year of P2.2 billion. The increase was due to a 20.8% volume growth of sugar business and better prices of flour products. Cost of sales and services increased by P1.7 billion or 10.9% to P17.4 billion from P15.7 billion last year. The increase was due to higher sales volume, cost of major raw and packaging materials used in our snacks, candies, chocolates, biscuits and flour products and animal feeds and higher hog mortality. Other income (charges) - net was P(93.5) million for the current fiscal year compared to P(207.5) million the previous fiscal year. Lower other charges – net was due to recognition of increase in value of temporary investments, recovery in value of marketable securities and higher unrealized foreign exchange gain. Provision for income tax this year was substantially lower due to higher non-taxable income and recognition of benefit from deferred income tax. The Company will continue to expand its regional operations and domestically firm up its leadership in its core categories and has again set an aggressive target on the ensuing year to maintain its dominance in the Philippine market as well as in ASEAN regional market. Financial Condition The Company’s financial position remained strong. URC is highly liquid having a current ratio of 4.6:1 as of September 30, 2005 from 2.9:1 as of September 30, 2004. Financial debt to equity ratio went up to 1.1:1 versus 0.7:1 as of September 30, 2004. Total assets amounted to P54.7 billion, up by 26.5% from P43.2 billion as of September 30, 2004. Book value per share improved to P14.31 from P13.18 as at September 30, 2005. The Company’s cash requirements generally have been funded through cash flow from operations. The net cash flow provided by operating activities for the fiscal year ended September 30, 2005 amounted to P2.3 billion. On the other hand, net cash used in investing activities for the period amounted to P12.5 billion primarily to fund acquisitions of property, plant and equipment and temporary investments net of proceeds from sale of property, plant and equipment and receipt of dividends. Net cash provided by financing activities was P8.9 billion, which was substantially from the issuance of $200 million 8.25% guaranteed notes due 2012 net of payments for short and longterm loans and cash dividends. The Company does not anticipate any liquidity problems that may arise in the near future as it enjoys a healthy financial position. - 22 The additional investment in property, plant and equipment amounting to P3.6 billion was used primarily in the construction of layered cake project, snacks, biscuit, candy lines in Rosario, Bagongilog, Pampanga, and Cavite, PET Bottles project in Calamba, Laguna, expansion of sugar refinery in Negros, manufacturing facilities in Malaysia and Thailand and construction of new manufacturing plant in Vietnam. The Company budgeted about P5.6 billion for capital expenditures (including maintenance capex) and investment for fiscal year 2006 which consist of the following: • • • P3.4 billion for continued expansion of the Branded Consumer Foods operations primarily in a multi-product beverage line in PET bottles in the Philippines as well as international markets (China and ASEAN countries) particularly Vietnam; P1.7 billion for the expansion of the raw milling capacity and new refinery in SONEDCO, the additional manufacturing machinery and equipment; and P317.1 million for additional manufacturing facilities for URC’s agro-industrial division. No assurance can be given that the Company’s capital expenditures plan will not change or that the amount of capital expenditures for any project or as a whole will not increase in future years from current expectations. As of September 30, 2005, the Company is not aware of any events that will trigger direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation. - 23 Material Changes in the 2005 Financial Statements (Increase/Decrease of 5% or more versus 2004) Income statements – Year ended September 30, 2005 versus Year ended September 30, 2004 13.3% increase in sales and services was principally due to the following: The Branded Consumer Foods (BCF) business unit, including the packaging division, reported sales and services value growth of 15.7% to P23.8 billion compared to prior fiscal year. This was attributed to a 16.1% increase in net sales from URC’s domestic operations and 14.8% increase in net sales of URC International operations, principally from Thailand, Indonesia, Malaysia and China. URC’s domestic branded consumer food operations benefited from the continued strength, in terms of increased sales, of its products in core categories such as snacks, candy, chocolate, noodle, biscuit and beverage segments which were supported by strong exports sales. The Company’s Agro-industrial business unit posted net sales of P3.9 billion, up by 6.1% from prior fiscal year. URC’s animal feeds business reported an increase in net sales of 16.7% to P1.6 billion in fiscal 2005 from P1.3 billion recorded in fiscal 2004 as a result of higher sales volume. Robina Farms division, on the other hand, has maintained its net sales at P2.3 billion in fiscal 2005. URC’s Commodity Foods business unit registered net sales and services of P3.2 billion, higher by 5.5% compared to prior fiscal year of P3.0 billion. This was attributed to 12.7% increase in net sales of URC’s flour business due to higher sales volume, partially offset by a decrease of 14.0% in net sales of sugar as a result of lower sales volume. 12.6% increase in cost of sales and services This increase resulted principally from increased sales volume, higher costs for imported raw materials and packaging materials used in snacks, candies, chocolates, biscuits, and flour products and an increase in costs of certain major raw materials for animal feeds such as soya and for our BOPP films such as resin. The increased cost of raw materials reflected the general increase in many commodity prices during this period including wheat and cooking oils while the increased cost of packaging materials reflected the increased price of many oil-based products during this period. 13.6% increase in operating expenses This was primarily due to extensive advertising and promotion activities by the Branded Consumer Foods business unit and increase in freight and other selling expenses due to higher volume of sales, strong exports, and upward adjustment in freight rate. Increase in other income (charges) – net Due to increase in investment income, gain on sale of fixed assets and bond investments, and increase in equity earnings from affiliates and recovery in value of marketable securities. Increase in provision for income tax Due to higher taxable income and recognition of deferred income tax liability. 88.2% increase in minority interest in net loss of subsidiaries Due to higher net loss incurred by subsidiaries. - 24 Balance sheets – September 30, 2005 versus September 30, 2004 58.4% decrease in cash and cash equivalents Due to lower money market placements that were used to pay short-term loans. 79.1% increase in temporary investment – net Due to additional acquisitions of debt securities. 18.4% increase in marketable securities Due to recovery in market values of securities held. 15.0% increase in receivables – net Due to higher trade receivables as a result of increase in sales, advances to suppliers, and accrued interest receivable. 15.6% increase in inventories – net Primarily due to increase in finished good, and raw and packaging material inventories, relative to higher production capacity, higher cost of imported raw materials compounded by Philippine peso depreciation relative to U.S. dollar and increase in market value of hog stock. 19.2% increase in other current assets Due to increase in deferred off-milling cost of sugar and other prepaid expenses. 10.7% increase in property, plant and equipment Primarily due to additional investments, specifically in a new production line for the C2 brand teabased beverage and expanded sugar production facilities in the Philippines, a new snack production facility in Vietnam and a new biscuit production line in Thailand. Increase (decrease) in deferred income tax asset and deferred tax liability URC had net deferred income tax assets as at September 30, 2004, which changed to net deferred income tax liabilities as at September 30, 2005. The increase in net deferred income tax liabilities was primarily due to an increase in unrealized gain on excess of market value over cost of URC’s hog stocks during fiscal 2005 and reversal of provision for impairment of assets. 9.9% decrease in other assets – net Due to amortization of goodwill and deferred expenses. 36.0% decrease in loans payable Due to repayment of short-term loans. 43.6% increase in due to affiliated companies Due to additional advances from affiliates. Increase in income tax payable Due to higher taxable income and expiration of exemption from income tax of URC’s sales in Thailand in fiscal year 2005. - 25 89.0% increase in long term debt (including current portion) Due to issuance of US$200 million, 8.25% guaranteed notes due 2012. 13.3% decrease in minority interests in consolidated subsidiaries Mainly due to higher net loss incurred by a foreign subsidiary. 15.1% increase in retained earnings Mainly due to income earned during the fiscal year offset by cash dividends paid. The Company’s key performance indicators are employed across all businesses. Comparisons are then made against internal target and previous period’s performance. The Company and its significant subsidiaries’ top five (5) key performance indicators are as follows: (in Million PhPs) Universal Robina Corporation (Consolidated) Revenues EBIT EBITDA Net Income Total Assets FY 2005 30, 858 2,461 7,028 2,404 54,712 FY 2004 27,233 2,055 5,640 1,876 43,248 Index 113 120 124 128 126 FY 2005 1,910 523 730 467 2,241 FY 2004 1,379 188 407 118 1,886 Index 139 278 179 396 119 FY 2005 588 586 1,269 908 3,427 FY 2004 948 946 1,732 1,377 4,776 Index 62 62 73 66 72 Universal Robina Sugar Milling Corporation Revenues EBIT EBITDA Net Income Total Assets Universal Robina (Cayman), Ltd. Revenues EBIT EBITDA Net Income Total Assets - 26 - URC Philippines, Limited Revenues EBIT EBITDA Net Income (Loss) Total Assets FY 2005 644 619 2,032 619 27,850 FY 2004 581 564 1,191 564 14,224 Index 111 110 169 110 196 FY 2005 853 39 84 37 925 FY 2004 716 21 75 25 628 Index 119 186 112 148 148 Nissin – URC Revenues EBIT EBITDA Net Income Total Assets Revenues of Universal Robina (Cayman), Ltd. and URC Philippines, Ltd. represent financial revenues shown under other income (charges) in the consolidated statements of income. Majority of the above key performance indicators were within targeted levels. Item 7. Financial Statements The consolidated financial statements and schedules listed in the accompanying Index to Financial Statements and Supplementary Schedules (page 38) are filed as part of this Form 17-A (pages 40 to 94). Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. - 27 - PART III - CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers of the Registrant Position Age Citizenship 79 Filipino Director, Chairman and Chief Executive Officer James L. Go 66 Filipino Director, President and Chief Operating Officer Lance Y. Gokongwei 38 Filipino Director, Vice President Patrick Henry C. Go 35 Filipino Director Frederick D. Go 36 Filipino Director Johnson Robert G. Go, Jr. 40 Filipino Independent Director Wilfrido E. Sanchez 68 Filipino Independent Director Robert G. Coyiuto, Jr. 54 Filipino Independent Director Oscar S. Reyes 59 Filipino Executive Vice President Bienvenido S. Bautista 58 Filipino Executive Vice President Patrick O. Ng 62 Filipino Senior Vice President – Chief Financial Officer Eugenie M.L. Villena 57 Filipino Senior Vice President – Corporate Controller Constante T. Santos 57 Filipino Vice President – Controller Geraldo N. Florencio 53 Filipino Vice President – Treasurer Jeanette U. Yu 53 Filipino Corporate Secretary Rosalinda F. Rivera 35 Filipino Director, Chairman Emeritus Name John Gokongwei, Jr. All of the above directors have served their respective offices since May 5, 2005. There are no directors who resigned or declined to stand for re-election to the board of directors since the date of the last annual meeting of stockholders for any reason whatsoever. Messrs. Wilfrido E. Sanchez, Robert G. Coyiuto, Jr. and Oscar S. Reyes are the independent directors of the Company. - 28 The Directors of the Company are elected at the annual stockholders’ meeting to hold office until the next succeeding annual meeting and until their respective successors have been elected, appointed or shall have been qualified. Officers are appointed or elected annually by the Board of Directors at its first meeting following the Annual Meeting of Stockholders, each to hold office until the corresponding meeting of the Board of Directors in the next year or until a successor shall have been elected, appointed or shall have qualified. All of the above directors and officers have no involvement in any pending legal proceedings during the past five (5) years. A brief description of the directors and executive officers’ business experience and other directorships held in other reporting companies are provided as follows: John Gokongwei, Jr. founded URC in 1954 and has been the Chairman Emeritus of URC effective January 1, 2002. He had been Chairman of the Board until his retirement and resignation from this position effective December 31, 2001. He continues to be a member of URC’s Board and is the Chairman Emeritus of JG Summit and certain of its subsidiaries. He also continues to be a member of the Executive Committee of JG Summit. He is currently the Chairman of the Gokongwei Brothers Foundation, Inc., Deputy Chairman and Director of United Industrial Corporation, Ltd. and Singapore Land, Ltd., and a director of JG Summit Capital Markets Corporation, Digital Telecommunications Phils., Inc., Oriental Petroleum and Minerals Corporation, First Private Power Corporation and Bauang Private Power Corporation. He is also a non-executive director of A. Soriano Corporation and Philex Mining Corporation. Mr. Gokongwei received a Master’s degree in Business Administration from De La Salle University and attended the Advanced Management Program at Harvard Business School. James L. Go is the Chairman and Chief Executive Officer of URC. He had been President and Chief Executive Officer and was elected to his current position effective January 1, 2002 upon the resignation of Mr. John Gokongwei, Jr. as Chairman. He is also the Chairman and Chief Executive Officer of JG Summit and as such, he heads the Executive Committee of JG Summit. He is currently the Chairman and Chief Executive Officer of Robinsons Land Corporation (“RLC”), JG Summit Petrochemical Corporation, Manila Midtown Hotels and Land Corporation, Litton Mills, Inc., CFC Corporation, Universal Robina Sugar Milling Corporation, Southern Negros Development Corporation, Robinsons, Inc., and Oriental Petroleum and Minerals Corporation (“OPMC”). He is also the President and a Trustee of the Gokongwei Brothers Foundation, Inc. and a director and Vice Chairman of Digital Telecommunications Phils., Inc. He is also a director of First Private Power Corporation, Bauang Private Power Corporation, OPMC, Cebu Air, Inc., Panay Electric Co., United Industrial Corp., Ltd., Singapore Land, Ltd., Marina Center Holdings, Inc. and JG Summit Capital Markets Corporation. He received a Bachelor of Science degree and a Master of Science degree in Chemical Engineering from the Massachusetts Institute of Technology. Mr. James L. Go is a brother of Mr. John Gokongwei, Jr. and joined URC in 1964. - 29 Lance Y. Gokongwei is the President and Chief Operating Officer of URC. He had been Executive Vice President and was elected President and Chief Operating Officer effective January 1, 2002 upon the resignation of Mr. James L. Go as President. He is also President and Chief Operating Officer of JG Summit, RLC, JG Summit Petrochemical Corporation and Litton Mills, Inc. He is also the President and Chief Executive Officer of Cebu Air, Inc. and Digital Telecommunications Phils., Inc., Chairman of Robinsons Savings Bank, President of Digital Information Technology Services, Inc., Vice Chairman of JG Summit Capital Markets Corporation, and a director of OPMC, United Industrial Corporation, Ltd., and Singapore Land, Ltd. He is also trustee, secretary and treasurer of Gokongwei Brothers Foundation, Inc. He received a Bachelor of Science degree in Economics and a Bachelor of Science degree in Applied Science from the University of Pennsylvania. Mr. Lance Y. Gokongwei is the son of Mr. John Gokongwei, Jr. and joined URC in 1988. Patrick Henry C. Go is a director and Vice President of URC. He is also a director of JG Summit, RLC, CFC Corporation, JG Cement Corporation, Robinsons Savings Bank and JG Summit Petrochemical Corporation where he is also First Vice President for Sales and Marketing. He is a trustee of the Gokongwei Brothers Foundation, Inc. He received a Bachelor of Science degree in Management from the Ateneo de Manila University and attended a General Manager Program at Harvard Business School. Mr. Patrick Henry C. Go is a nephew of Mr. John Gokongwei, Jr. Frederick D. Go has been a director of URC since June 2001. He is the Executive Vice President and a director of RLC and is the Chief Operating Officer of its Commercial Centers, High Rise Buildings, Housing and Land Development and Hotels divisions. He serves as a director of Big R Stores, Robinsons Convenience Store, and Robinsons Recreation Corporation and is a director of RLC, JG Summit Petrochemical Corporation, Robinsons Savings Bank, CFC Corporation, Robinsons Handyman, Inc., Robinsons Venture Corporation, Robinsons-Abenson Appliances Corporation, and the Philippine Retailers Association. He received a Bachelor of Science degree in Management Engineering from the Ateneo de Manila University. Mr. Frederick D. Go is Mr. John Gokongwei, Jr.’s nephew. Johnson Robert G. Go, Jr. was elected director of the Company on May 5, 2005. He is the Business Unit General Manager of Litton Mills, Inc., the textile manufacturing business of JG Summit. He is also a director of Robinsons Land Corporation, Robinsons Savings Bank and CFC Corporation. He is also the Business Unit Group Head of Robinsons Convenience Stores, Inc. He was elected director of JG Summit on August 18, 2005 and was elected trustee of the Gokongwei Brothers Foundation, Inc. on September 1, 2005. He received a Bachelor of Arts degree in Interdisciplinary Studies (Liberal Arts) from the Ateneo de Manila University. He is a nephew of Mr. John Gokongwei, Jr. Wilfrido E. Sanchez has been an independent director of URC since 1995. Mr. Sanchez is also a director of Philippine Education Trust Plan, Inc., Transnational Plans, Inc., Dolphin Ship Management, Inc., Adventure International Tours, Inc., Transnational Diversified Group, Inc., Transnational Diversified Corporation, Magellan Capital Holdings Corporation, Center for Leadership & Change, Inc., House of Investment, Inc., Omico Corporation, Amon Trading Corporation, Grepalife Asset Management Corporation, Grepalife Fixed Income Corporation, and JVR Foundation. - 30 Robert G. Coyiuto, Jr. has been an independent director of URC since October 28, 2002. He is also an independent director of RLC. He is Chairman of Prudential Guarantee & Assurance, Inc., PGA Cars, Inc., and Nissan North Edsa, and Vice-Chairman of First Guarantee Life Assurance Company, Inc. He is also President and Chief Operating Officer of Oriental Petroleum and Minerals Corporation and President of PGA Sompo Japan Insurance, Inc. He is Chairman of Pioneer Tours Corporation and a director of Canon Marketing (Philippines) Inc. and Destiny Financial Plans. Oscar S. Reyes has been an independent director of URC since October 28, 2002. He was also a member of the advisory board of JG Summit Holdings, Inc. from August 2001 up to March 28, 2005 and is a director/adviser of Pilipinas Shell Petroleum Corporation as well as other major corporations. He was Country Chairman and Chief Executive Officer of various Shell companies in the Philippines after holding various positions in the institution worldwide. He was Chairman of the Philippine Institute of Petroleum, Inc. and Director and Treasurer of the Management Association of the Philippines, trustee of Philippine Business for Social Progress, Philippine Business for the Environment and Asia-Europe Foundation of the Phils., Inc. He was the United Nations National Ambassador for HIV-AIDS in the Philippines. Bienvenido S. Bautista was appointed Executive Vice President of URC on April 1, 2004. He is also Managing Director of the URC branded consumer food group in the Philippines. Prior to joining URC, he was Chairman of Kraft Foods Philippines and Vice President and Area Director of Kraft Foods International in South/Southeast Asia. He was formerly President of San Miguel Brewing Philippines and of San Miguel Food Group, President and General Manager of Kraft General Foods Phil., Corporate Marketing Director of Wyeth Philippines, Inc., President and General Manager of PT Warner Lambert Indonesia, and National Sales Director - Pharmaceuticals of Pfizer, Inc. He was the first Asian and first Filipino to be appointed as Chair of the Jakarta International School (1986-87) and in 1994 he was awarded the Agora Award for “Excellence in Marketing Management” by the Philippine Marketing Association. Mr. Bautista received his degree of Bachelor of Science in Economics from the Ateneo de Manila University. He received his Master’s degree in Business Management from, and majored in Marketing and Finance at, the Ateneo Graduate School of Business. Patrick O. Ng is an Executive Vice President of URC. He is also managing director of URC International Co. Ltd., URC Asean Brands Company Limited, Hongkong China Foods Company Limited, and a director of URC Hong Kong Ltd., Panyu Peggy Foods Co. Ltd., Shanghai Peggy Foods Co. Ltd. and Tianjin Pacific Foods Co. Ltd. Mr. Ng joined URC in 1967 and has held various positions in the JG Group including as Vice President of the manufacturing division of CFC Corporation and Vice President and General Manager of Litton Mills, Inc. He received a Bachelor of Science degree in Engineering from the Ateneo de Manila University. Eugenie M.L. Villena is the Senior Vice President — Chief Financial Officer of URC. She is also Senior Vice President and Chief Financial Officer — Treasurer of JG Summit. Prior to joining URC in 1980, she worked for Bancom Development Corporation, Philippine Pacific Capital Corporation and Pacific Basin Securities, Co., Inc. She is a member of the Financial Executives Institute of the Philippines. She received her Bachelor of Science degree in Business Administration and Master’s degree in Business Administration from the University of the Philippines. - 31 Constante T. Santos is the Senior Vice President — Corporate Controller of URC. He is also Senior Vice President — Corporate Controller of JG Summit. Prior to joining URC in 1986, he practiced public accounting with SyCip, Gorres, Velayo & Co. in the Philippines and Ernst & Whinney in the United States. He is a member of the Philippine Institute of Certified Public Accountants. Mr. Santos received his Bachelor of Science degree in Business Administration from the University of the East and attended the Management Development Program at the Asian Institute of Management. Geraldo N. Florencio is the Vice President — Controller of URC. Prior to joining URC in 1992, he practiced public accounting with SyCip, Gorres, Velayo & Co. in the Philippines. He is a member of the Philippine Institute of Certified Public Accountants. Mr. Florencio received a Bachelor of Science degree in Business Administration from the Philippine School of Business Administration. He also attended the Management Development Program at the Asian Institute of Management. Jeanette U. Yu is the Vice President — Treasurer of URC. She is also the Treasurer of JG Summit Petrochemical Corporation. Prior to joining URC in 1980, she worked for AEA Development Corporation and Equitable Banking Corporation. Ms. Jeanette U. Yu received her Bachelor of Science degree in Marketing from St. Theresa’s College in Quezon City. Rosalinda F. Rivera was appointed Corporate Secretary of URC on May 22, 2003 and has been Assistant Corporate Secretary since May 2002. She is also Corporate Secretary of JG Summit, RLC, JG Summit Petrochemical Corporation, CFC Corporation and JG Cement Corporation. Prior to joining URC, she was a Senior Associate at Puno and Puno Law Offices. She received a Juris Doctor degree from the Ateneo de Manila University School of Law and a Master of Law degree in International Banking from the Boston University School of Law. She was admitted to the Philippine Bar in 1995. The members of the Company’s board of directors and executive officers can be reached at the address of its registered office at 110 E. Rodriguez Avenue, Bagumbayan, Quezon City, Philippines. Involvement in Certain Legal Proceedings of Directors and Executive Officers None of the members of the Board of Directors and Executive Officers of the Company are involved in the any criminal, bankruptcy or insolvency investigations or proceedings. Family Relationships Mr. James L. Go is a brother of Mr. John Gokongwei, Jr. while Mr. Lance Y. Gokongwei is his son. Mr. Patrick Henry C. Go, Mr. Frederick D. Go and Mr. Johnson Robert G. Go, Jr. are the nephews of Mr. John Gokongwei, Jr. - 32 - Item 10. Executive Compensation The following summarizes certain information regarding compensation paid or accrued during the last two (2) fiscal years and to be paid in the ensuing fiscal year to the Company’s Directors and Executive Officers: Salary Estimated - FY2006 Bonus Other Actual Total 2005 2004 Chairman of the Board and four most highly compensated Executive Directors/Officers All officers and directors as a group unnamed = P26,031,551 = P300,000 = P90,000 = P26,421,551 = P24,433,288 = P23,961,171 65,061,728 600,000 210,000 65,871,728 60,802,341 57,132,323 The following are the five (5) highest compensated directors and/or executive officers of the Company: 1. Director, Chairman Emeritus – John Gokongwei, Jr.; 2. Director, Chairman and Chief Executive Officer – James L. Go; 3. Director, President and Chief Operating Officer – Lance Y. Gokongwei; 4. Executive Vice President, - Bienvenido S. Bautista; and 5. Executive Vice President – Patrick Ng. Standard Arrangements There are no standard arrangements pursuant to which directors of the Company are compensated, or are to be compensated, directly or indirectly, for any services provided as a director for the last completed fiscal year and the ensuing year. Other Arrangements There are no other arrangements pursuant to which directors of the Company are compensated, or are to be compensated, directly or indirectly, for any services provided as a director for the last completed fiscal year and the ensuing year. - 33 - Item 11. (1) Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Record and Beneficial Owners As of September 30, 2005, URC knows no one who beneficially owns in excess of 5% of URC’s common stock except as set forth in the table below. Name and Address of record/beneficial owner Title of Class Name of beneficial owner and relationship with record owner Amount and nature of record/beneficial ownership (“r”or“b”) Citizenship Percent of class Common JG Summit Holdings,Inc. 1 43/F, Robinsons Equitable-PCI Tower ADB Avenue corner Poveda Street, Pasig City (See Note 1) 1,232,301,488 (r) Filipino 73.07% Common Express Holdings, Inc.2 43/F, Robinsons Equitable-PCI Tower ADB Avenue corner Poveda Street, Pasig City (See Note 2) 219,904,990 (r) Filipino 13.04% Common PCD Nominee Corporation 3(NonFilipino) G/F Makati Stock Exchange Bldg. 6767 Ayala Ave., Makati City (See Note 3) 151,071,041 (r) Non-Filipino 8.96% (2) Security Ownership of Management Title of Class Common Common Common Common Common Common Common Common Common Common Name of beneficial owner John Gokongwei, Jr. James L. Go Lance Y. Gokongwei Bienvenido S. Bautista Patrick Henry C. Go Frederick D. Go Johnson Robert G. Go, Jr. Robert Coyiuto, Jr. Wilfrido E. Sanchez Oscar S. Reyes Position Director, Chairman Emeritus Director, Chairman & CEO Director, President & COO Executive Vice President Director, Vice President Director Director Director (Independent) Director (Independent) Director (Independent) Amount & nature of beneficial ownership 2,156,001 1 1 3,300 39,600 10,001 1 1 1 1 Citizenship Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino % to Total Outstanding 0.13% * * * * * * * * * * 1 As of September 30, 2005, Mr. John Gokongwei, Jr., Chairman Emeritus of JG Summit Holdings, Inc. (JGSHI), holds 1,875,481,099 shares representing 27.6% of the total outstanding shares of the said Corporation. The Chairman and the President are both empowered under the By-Laws of JGSHI to vote any and all shares owned by JGSHI, except as otherwise directed by the Board of Directors. The incumbent Chairman and Chief Executive Officer and President and Chief Operating Officer of JGSHI are Mr. James L. Go and Mr. Lance Y. Gokongwei, respectively. 2 Express Holdings, Inc. is a wholly owned subsidiary of JG Summit Holdings, Inc. Under the By-Laws of Express Holdings, Inc., the President is authorized to represent the corporation at all functions and proceedings. The incumbent President of Express Holdings, Inc. is Mr. Lance Y. Gokongwei. 3 PCD Nominee Corporation, a wholly owned subsidiary of Philippine Central Depository, Inc. (“PCD”), is the registered owner of the shares in the books of the Corporation’s transfer agent in the Philippines. The beneficial owners of such shares are PCD’s participants, who hold the shares on their behalf, and their clients. PCD is a private company organized by the major institutions actively participating in the Philippine capital markets to implement an automated book-entry system of handling securities transactions in the Philippines. Out of this account, “The Hongkong and Shanghai Banking Corp. Ltd. -Clients’ Acct.” holds for various trust accounts 132,237,825 shares representing 7.84% of the Corporation’s outstanding capital stock as of September 30, 2005. The securities are voted by the trustee’s designated officers who are not known to the Corporation. * less than 0.01% - 34 - (3) Voting Trust Holders of 5% or more There are no persons holding more than 5% of a class under a voting trust or similar agreement. Item 12. Certain Relationships and Related Transactions The Company, in its regular conduct of business, had engaged in transactions with its major stockholder, JG Summit Holdings, Inc. and its affiliated companies. See Note 16 (Related Party Transactions) of the Notes to Consolidated Financial Statements (page 66) in the accompanying Audited Financial Statements filed as part of this Form 17-A. PART IV – CORPORATE GOVERNANCE Item 13. Corporate Governance Adherence to the principles and practices of good corporate governance, as embodied in its Corporate Governance Manual, has been reinforced by continuous improvement by the Company in order to implement good governance and management practices. The Board of Directors has approved its Corporate Governance Compliance Evaluation System in late 2003 in order to check and assess the level of compliance of the Company with leading practices on good corporate governance as specified in its Corporate Governance Manual and pertinent SEC Circulars. The System likewise highlights areas for compliance improvement and actions to be taken. One of the system’s output is the Annual Corporate Governance Compliance Evaluation Form submitted to the SEC and PSE on or before January 30 of every year starting with calendar year 2003. Likewise, URC has consistently striven to raise its level of reporting to adopt and implement prescribed international Accounting Standards. PART V - EXHIBITS AND SCHEDULES Item 14. (a) Exhibits and Reports on SEC Form 17-C Exhibits - See accompanying Index to Exhibits (page 95) The following exhibit is filed as a separate section of this report: (18) Subsidiaries of the Registrant The other exhibits, as indicated in the Index to Exhibits are either not applicable to the Company or require no answer. (b) Reports on SEC Form 17-C - 35 - UNIVERSAL ROBINA CORPORATION LIST OF CORPORATE DISCLOSURES/REPLIES TO SEC LETTERS UNDER SEC FORM 17-C APRIL 1, 2005 TO SEPTEMBER 30, 2005 DATE OF DISCLOSURE DESCRIPTION May 5, 2005 May 5, 2005 May 5, 2005 Declaration of Cash Dividends Election of Directors Stockholders’ Approval of the Amendments to the Amended By-Laws of Universal Robina Corporation (URC) Election of Officers Acquisition by an Officer of URC Shares Disclosure on the Filing of an Application with the Philippine Stock Exchange for the Listing of 49,871,556 Common Shares of URC which were Issued to Robinsons Supermarket Corporation as a result of a property-for-share swap transaction Annual Certification as to the Attendance of the Board of Directors during the Board Meetings May 5, 2005 June 23, 2005 September 13, 2005 September 26, 2005 - 38 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES FORM 17- A, Item 7 Page No. Consolidated Financial Statements Statement of Management’s Responsibility for Financial Statements Report of Independent Auditors Consolidated Balance Sheets as of September 30, 2005 and 2004 Consolidated Statements of Income for each of the three years in the period ended September 30, 2005 Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended September 30, 2005 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 2005 Notes to Consolidated Financial Statements 39 40 41 42 43 44 46 Supplementary Schedules Report of Independent Auditors on Supplementary Schedules A. Marketable Securities - (Current Marketable Equity Securities and Other Short-Term Cash Investments) B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Affiliates) C. Non-Current Marketable Equity Securities, Other Long-Term Investments in Stock, and Other Investments D. Indebtedness to Unconsolidated Subsidiaries and Affiliates E. Property, Plant and Equipment F. Accumulated Depreciation G. Intangible Assets - Other Assets H. Long-Term Debt I. Indebtedness to Affiliates and Related Parties (Long-Term Loans from Related Companies) J. Guarantees of Securities of Other Issuers K. Capital Stock ______ 84 85 86 87 88 89 90 91 92 93 ** 94 * Not applicable per section 1(b) (xii), 2(e) and 2 (I) of SRC Rule 68 ** These schedules, which are required by Section 4(e) of SRC Rule 68, have been omitted because they are either not required, not applicable or the information required to be presented is included/shown in the related URC & Subsidiaries’ consolidated financial statements or in the notes thereto. - 41 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30 2005 2004 ASSETS Current Assets Cash and cash equivalents (Notes 4 and 16) Temporary investments - net (Notes 2 and 5) Marketable securities - at market (Notes 2 and 6) Trade and other receivables - net (Notes 2, 7 and 16) Due from affiliated companies (Note 16) Inventories - net (Notes 2 and 8) Other current assets (Note 9) Total Current Assets Noncurrent Assets Investments and advances (Notes 2 and 10) Property, plant and equipment - net (Notes 2, 11 and 17) Deferred income tax - net (Notes 2 and 25) Other assets - net (Note 12) Total Noncurrent Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Loans payable (Notes 2 and 13) Accounts payable and accrued expenses (Notes 14 and 16) Trust receipts and acceptances payable (Note 8) Due to affiliated companies (Note 16) Income tax payable Current portion of long-term debt (Notes 2 and 15) Total Current Liabilities Noncurrent Liabilities Deferred income tax - net (Notes 2 and 25) Long-term debt - net of current portion (Notes 2 and 15) Total Noncurrent Liabilities Minority Interests in Consolidated Subsidiaries Stockholders’ Equity Capital stock (Notes 17 and 25) Additional paid-in capital Deposits on future stock subscriptions (Notes 17 and 25) Cumulative translation adjustments (Notes 2 and 17) Retained earnings (Notes 2 and 18) Total Stockholders’ Equity P =930,303,344 21,753,976,562 896,641,788 3,849,423,174 356,382,031 6,672,701,120 267,399,248 34,726,827,267 = P2,237,278,463 12,143,020,441 757,385,456 3,346,380,700 353,672,552 5,774,089,468 224,272,707 24,836,099,787 1,831,925,876 1,779,943,951 17,184,214,864 15,520,784,949 – 36,095,850 969,030,423 1,075,400,580 19,985,171,163 18,412,225,330 P =54,711,998,430 = P43,248,325,117 P =2,219,274,415 3,138,766,050 1,229,056,178 477,744,763 125,741,036 372,891,534 7,563,473,976 = P3,469,007,663 3,073,806,052 1,221,676,801 332,777,177 45,556,142 320,161,156 8,462,984,991 175,121,631 21,897,308,402 22,072,430,033 29,635,904,009 948,579,793 – 11,464,930,247 11,464,930,247 19,927,915,238 1,093,649,532 1,686,479,549 1,686,479,549 6,843,501,476 6,843,501,476 26,043,533 26,043,533 1,064,556,292 1,062,297,225 14,506,933,778 12,608,438,564 24,127,514,628 22,226,760,347 P =54,711,998,430 = P43,248,325,117 See accompanying Notes to Consolidated Financial Statements. *SGVMC107496* - 42 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME 2005 NET SALES AND SERVICES (Notes 3 and 16) Years Ended September 30 2004 2003 P =30,858,352,367 = P27,233,200,563 = P23,414,734,363 22,938,523,860 20,372,853,630 17,371,895,968 GROSS PROFIT 7,919,828,507 6,860,346,933 6,042,838,395 OPERATING EXPENSES (Notes 16, 20, 21 and 22) 5,458,909,661 4,804,877,386 4,555,050,657 INCOME FROM OPERATIONS 2,460,918,846 2,055,469,547 1,487,787,738 1,908,880,098 244,623,123 1,439,276,063 184,764,758 980,456,992 41,262,628 (2,114,784,811) (1,548,580,869) (1,150,241,552) 250,998,443 289,716,853 (331,668,989) (256,209,037) 35,014,744 (93,507,188) 2,750,635,699 1,799,260,510 1,394,280,550 259,557,329 211,217,481 470,774,810 109,907,979 (120,142,526) (10,234,547) 160,197,714 (93,852,357) 66,345,357 2,279,860,889 1,809,495,057 1,327,935,193 124,578,190 66,180,040 86,203,002 P =2,404,439,079 = P1,875,675,097 = P1,414,138,195 P =1.43 = P1.11 = P0.84 COST OF SALES AND SERVICES (Notes 2, 3, 16, 19, 21 and 22) OTHER INCOME (CHARGES) Investment income (Notes 2, 5, 6 and 16) Equity in net earnings of investees (Note 10) Interest and other financing charges (Notes 2, 13, and 15) Others income (charges) - net (Notes 15, 16, 21 and 24) INCOME BEFORE INCOME TAX AND MINORITY INTEREST PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 25) Current Deferred INCOME BEFORE MINORITY INTERESTS IN NET LOSS OF SUBSIDIARIES MINORITY INTERESTS IN NET LOSS OF SUBSIDIARIES NET INCOME Earnings Per Share (Note 26) See accompanying Notes to Consolidated Financial Statements. *SGVMC107496* - 43 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 2005 Years Ended September 30 2004 2003 CAPITAL STOCK (Notes 17 and 26) Preferred stock - = P1 par value Authorized - 2,000,000 shares Issued - none Common stock - = P1 par value Authorized - 1,998,000,000 shares Issued - 1,686,479,549 shares in 2005, 2004 and 2003 Balance at beginning of year Issuances during the year Balance at end of year P =– = P– = P– 1,686,479,549 – 1,686,479,549 1,686,479,549 – 1,686,479,549 1,636,607,993 49,871,556 1,686,479,549 ADDITIONAL PAID-IN CAPITAL Balance at beginning of year Additions during the year Balance at end of year 6,843,501,476 – 6,843,501,476 6,843,501,476 – 6,843,501,476 6,668,951,032 174,550,444 6,843,501,476 26,043,533 – 26,043,533 26,043,533 – 26,043,533 1,062,297,225 2,259,067 1,064,556,292 1,028,044,149 34,253,076 1,062,297,225 784,271,643 243,772,506 1,028,044,149 3,000,000,000 – 3,000,000,000 3,000,000,000 – 3,000,000,000 – 3,000,000,000 3,000,000,000 9,608,438,564 2,404,439,079 8,238,707,332 1,875,675,097 10,330,513,002 1,414,138,195 DEPOSITS ON FUTURE STOCK SUBSCRIPTIONS (Note 17) Balance at beginning of year Application of deposit and share issuances Balance at end of year CUMULATIVE TRANSLATION ADJUSTMENTS Balance at beginning of year Changes during the year Balance at end of year RETAINED EARNINGS (Notes 2 and 18) Appropriated Balance at beginning of year Appropriation during the year Balance at end of year Unappropriated Balance at beginning of year Net income Cash dividends - = P0.30 per share in 2005, 2004 and 2003 Appropriation for plant expansion Balance at end of year (505,943,865) – 11,506,933,778 14,506,933,778 P =24,127,514,628 (505,943,865) – 9,608,438,564 12,608,438,564 = P22,226,760,347 250,465,533 (224,422,000) 26,043,533 (505,943,865) (3,000,000,000) 8,238,707,332 11,238,707,332 = P20,822,776,039 See accompanying Notes to Consolidated Financial Statements. *SGVMC107496* - 44 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 2005 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax and minority interest Adjustments for: Depreciation, amortization and impairment loss (Note 21) Unrealized gain on excess of market value over cost of hog stocks (Note 19) Net unrealized foreign exchange loss (gain) Investment income Interest expense and other financing charges Amortizations of: Goodwill and debt issuance costs (Notes 20 and 24) Pre-operating expenses Equity in net earnings of investees (Note 10) Recovery in value of marketable securities (Notes 6 and 24) Recovery in value of temporary investments and options (Note 24) Loss (gain) on: Reacquisition of long-term debt Sale of property and equipment Sale of temporary investments Operating income before working capital changes Decrease (increase) in: Receivables (Note 7) Inventories (Note 8) Other current assets (Note 9) Increase (decrease) in: Accounts payable and accrued expenses Trust receipts Due to affiliated companies Cash generated from operations Interest received Income taxes paid Interest paid Net cash provided by operating activities Years Ended September 30 2004 2003 P =2,750,635,699 = P1,799,260,510 = P1,394,280,550 1,843,595,350 2,056,873,685 2,012,539,570 (340,923,379) (192,920,860) (1,908,880,098) 2,114,784,811 (124,677,393) 195,018,771 (1,439,276,063) 1,548,580,869 (73,622,090) (291,493,310) (980,456,922) 1,150,241,552 194,563,136 – (244,623,123) 168,695,990 – (184,764,758) 154,563,745 43,289,088 (41,262,628) (141,767,093) (33,667,018) (59,178,570) (351,551,359) (362,226,465) (264,661,992) – (66,441,653) (64,033,979) – (4,300,029) 199,903,608 3,592,437,452 3,819,421,707 (216,666) (3,829,973) – 3,040,192,354 (296,972,571) (557,688,273) (43,126,541) (491,318,464) (1,041,361,705) 18,439,376 29,267,567 (276,052,162) (35,073,872) (143,522,830) 7,379,377 144,967,586 2,703,474,200 1,702,810,195 (179,372,435) (1,906,301,983) 2,320,609,977 758,166 932,602,669 (159,695,676) 3,078,846,073 1,461,014,597 (120,677,660) (1,545,336,643) 2,873,846,367 (599,105,470) 289,074,132 258,410,452 2,706,713,001 808,484,195 (221,264,972) (1,028,137,447) 2,265,794,777 (Forward) *SGVMC107496* - 45 - 2005 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment (Note 11) Proceeds from sale of property and equipment Decrease (increase) in: Temporary investments Marketable securities Due from affiliated companies Investments and advances (Note 10) Other assets (Note 12) Acquisition of subsidiary - net of cash acquired (Note 28) Dividends received (Note 10) Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Availments of: Short-term borrowings Long-term debt Payments of: Short-term borrowings Long-term debt Cash dividends Increase (decrease) in minority interest in consolidated subsidiaries Net cash provided by (used in) financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Years Ended September 30 2004 2003 (P =3,646,648,409) 208,282,311 (P =2,279,020,790) 43,112,925 (P =2,663,793,663) 59,386,653 (9,195,370,783) – (2,709,479) 78,021,541 (61,426,274) 3,081,574,852 6,393,019 (4,722,698) (542,064,902) 128,876,865 (7,776,507,474) (548,770,000) 256,378,837 144,006,389 (111,015,836) – 114,619,657 (12,505,231,436) (19,761,966) 19,999,943 434,387,248 – 79,022,975 (10,561,292,119) – 11,132,000,000 – – 270,283,488 7,378,751,348 (1,249,733,248) (478,226,060) (505,943,862) (641,424,579) (874,864,610) (505,943,865) (20,491,549) 8,877,605,281 (624,894) (2,022,857,948) 51,388,159 7,194,479,130 (1,307,016,178) 1,285,375,667 (1,101,018,212) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS – – (505,943,865) 41,059 806,128 45,264,330 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,237,278,463 951,096,668 2,006,850,550 CASH AND CASH EQUIVALENTS AT END OF YEAR P =930,303,344 =2,237,278,463 P =951,096,668 P See accompanying Notes to Consolidated Financial Statements. *SGVMC107496* - 46 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information Universal Robina Corporation (referred herein as the “Parent Company” or “URC”) is a stock corporation organized under the laws of the Philippines and is a publicly listed company resulting from the public offering of its common stock in March 1994. The Company is a core subsidiary of J.G. Summit Holdings, Inc. (“JGSHI”), one of the largest diversified conglomerates in the Philippines. The registered office address of URC is 110 E. Rodriguez Avenue, Bagumbayan, Quezon City, Philippines. The average number of employees of the Parent Company, its subsidiaries and associates (collectively referred to herein as “the Group”) was 6,613 in 2005 and 7,038 in 2004. Certain operations of the Group are registered with the Board of Investments (BOI) as pioneer and nonpioneer activities. As a registered enterprise, the Group is subject to some requirements and is entitled to avail of incentives provided for under the Agriculture Investments Act (Presidential Decree (P.D.) No. 1159), Investment Incentives Act (Republic Act (R.A.) No. 5186), Export Incentives Act (R.A. No. 6135), as amended, and Omnibus Investments Code of 1987 (Executive Order No. 226). The operations of the Group are regulated by certain laws. The production, sale, distribution and advertisement of food products is regulated by the Philippine Bureau of Food and Drugs, which implements the Consumer Act of the Philippines (R.A. No. 7394) and the Foods, Drugs, Devices and Cosmetics Act (R.A. No. 3720). The Consumers Act and the Foods, Drugs, Devices and Cosmetics Act prescribe the minimum guidelines for safety and quality of food and food products and minimum branding and labeling requirements for the same. The Philippine Bureau of Animal Industry implements the Livestock and Poultry Feed Act (R.A. No. 1556 as amended by P.D. 7) and regulates the importation and breeding of livestock, such as poultry and hogs. The principal activities of the Group are described in Note 3. 2. Summary of Significant Accounting Policies Basis of Financial Statement Preparation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the Philippines (Philippine GAAP), under the historical cost convention method, except for derivative financial instruments and temporary investments which are stated at market, and hog market stock which is stated at market value less mortality allowance. The accounting policies have been consistently applied in all periods presented. The consolidated financial statements are presented in Philippine Pesos. *SGVMC107496* - 47 - Use of Judgments and Estimates The consolidated financial statements are prepared in conformity with Philippine GAAP which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates. Principles of Consolidation The consolidated financial statements as of September 30, 2005 and 2004 and for each of the three years in the period ended September 30, 2005 comprise the financial statements of the Parent Company and its subsidiaries directly and indirectly owned by the Parent Company. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions, are eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. URC Confectionery Corporation (URCCC) has been consolidated from the date of acquisition (see Note 10). The subsidiaries directly and indirectly owned by the Parent Company follow: Investee Companies CFC Corporation Universal Robina (Cayman), Ltd. URC Philippines, Limited Universal Robina Sugar Milling Corporation (URSUMCO) Southern Negros Development Corporation (SONEDCO) CFC Clubhouse, Incorporated (formerly CFC Keebler, Incorporated) CFC Clubhouse Property, Inc. (formerly CFC Keebler Property, Inc.) URC International Co. Ltd. (URCICL) Hong Kong China Foods Co., Ltd. URC Asean Brands Co., Ltd. URC Hong Kong Company Limited (formerly Hong Kong Peggy Snacks Foods Co., Limited) Tianjin Pacific Foods Manufacturing Co., Ltd. Shanghai Peggy Foods Co., Ltd. Country of Incorporation Philippines Cayman Islands British Virgin Islands Percentage of Ownership Direct Indirect 100 – 100 – 100 – Philippines 100 – Philippines – 94 Philippines 100 – Philippines British Virgin Islands British Virgin Islands British Virgin Islands 100 77 – – – – 77 77 Hong Kong – – 100 China China – 100 100 (Forward) *SGVMC107496* - 48 - Investee Companies Xiamen Tongan Pacific Food Co., Ltd. URC Foods (Singapore) Pte. Ltd. (formerly Pan Pacific Snacks Pte. Ltd.) URC (Thailand) Co., Ltd. (formerly Thai Peggy Foods Co. Ltd.) Panyu Peggy Foods Co., Ltd. URC Snack Foods (Malaysia) Sdn. Bhd. (formerly Pacific World Sdn. Bhd.) Ricellent Sdn. Bhd. PT URC Indonesia URC Vietnam Co., Ltd. Nissin - URC URCCC Country of Incorporation China Percentage of Ownership Direct Indirect – 100 Singapore – 100 Thailand China – – 100 90 Malaysia Malaysia Indonesia Vietnam Philippines Philippines – – – – 65 100 91.52 54.03 100 100 – – Changes in Accounting Policies In recent years, the Philippine Accounting Standards Committee (ASC) has been adopting the International Accounting Standards (IAS) issued by the International Accounting Standards Committee (IASC) with no local equivalent standards and has been replacing existing local standards. The International Accounting Standards Board (IASB) has assumed from the IASC the responsibility for setting IAS. The standards issued by the IASB are designated as International Financial Reporting Standards (IFRS). Upon its adoption, the IASB also adopted the IAS issued by the IASC. The IASB carried on improvements in certain IAS in preparation for the full adoption of IFRS effective January 1, 2005. The ASC has renamed the new standards Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS), to correspond with the adopted IAS and IFRS of the IASB. ASC standards were previously designated as Statements of Financial Accounting Standards (SFAS). New Accounting Standards • PFRS 1, First Time Adoption of PFRS • PFRS 3, Business Combinations, PAS 36 (revised) Impairment of Assets and PAS 38 (revised) Intangible Assets • PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations • PAS 19, Employee Benefits • PAS 21, The Effects of Changes in Foreign Exchange Rates • PAS 32, Financial Instruments: Disclosure and Presentation • PAS 39, Financial Instruments: Recognition and Measurement • PAS 41, Agriculture *SGVMC107496* - 49 - The Group will adopt these new accounting standards beginning October 1, 2005 and the principal effects of these changes in accounting policies are discussed below: PFRS 1, First Time Adoption of PFRS PFRS 1 requires an entity to comply with each PFRS effective at the reporting date for its first PFRS financial statements. The Group will adopt PFRS for these consolidated financial statements as of and for each of the three years ending September 30, 2006. The Group will also restate the comparative amounts as of and for each of the two years ended September 30, 2006 except for the following courses of action that will be taken as allowed under PFRS 1: • Business combinations, goodwill and impairment The Group will elect not to apply PFRS 3, Business Combinations, retrospectively to past business combinations that occurred before the date of transition to PFRS. • Current rate method in the translation of foreign operations The Group will adjust to zero the currency translation adjustments previously recognized in the translation of the financial statements of foreign operations. The adjustment will increase the retained earnings account at the date of transition to PFRS. • Post retirement benefits - Defined benefit schemes The Group will not recognize cumulative actuarial gains or losses using the “corridor approach” that will result from the measurement of such schemes in accordance with PAS 19, Employee Benefits, at the date of transition. Instead, the Group will recognize all cumulative actuarial gains and losses at the date of transition to PFRS. • Classification and measurement of financial instruments The Group will apply PAS 32 and PAS 39 to financial instruments outstanding as of October 1, 2005 only and the resulting cumulative effect upon adoption of these standards on prior years will be charged to the October 1, 2005 retained earnings, as allowed by the Philippine SEC. PAS 19, Employee Benefits PAS 19 prescribes the accounting and disclosures by employers for employee benefits (including short-term employee benefits, post-employment benefits, other long-term employee benefits and termination benefits). The standard requires that short-term employee benefits shall be recognized as an expense on the period in which the employee has rendered service to the Company. For post-employment benefits classified as defined benefit plans, the standard requires (a) the use of the projected unit credit method to measure a company’s obligations and costs; (b) he determination of the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity; and (c) the recognition of a specific portion of net cumulative actuarial gains and losses when the net cumulative amount exceeds 10% of the greater of the present value of the defined benefit obligation and 10% of the fair value of the plan assets, but also permits the immediate recognition of these actuarial gains and losses. *SGVMC107496* - 50 - PAS 21, The Effects of Changes in Foreign Exchange Rates Upon the adoption of PAS 21, the Group will adjust previously recorded undepreciated capitalized foreign exchange losses, net of exchange losses that qualify as borrowing costs and accumulated depreciation, against beginning retained earnings, to the extent that such capitalized amounts do not meet the conditions for capitalization under the new accounting standard, and prior years’ consolidated financial statements will have to be restated. Also, PAS 21 requires that any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are now treated as assets and liabilities of the foreign operation and translated at the closing rate. Exchange differences from any translation of consolidated foreign operations which use a currency other than the functional currency of the Parent Company are taken directly and shown as a separate component within the stockholders’ equity in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. The translation adjustments are derecognized only upon disposal of the foreign operations. In addition, goodwill acquired in a business combination prior to October 1, 2005 and fair value adjustments arising on that acquisition are deemed to be assets and liabilities of the Parent Company. PAS 32, Financial Instruments: Disclosure and Presentation PAS 32 covers the disclosure and presentation of all financial instruments. This standard requires more comprehensive disclosures about a company’s financial instruments, whether recognized or unrecognized in the financial statements. New disclosure requirements include terms and conditions of financial instruments used, types of risks associated with both recognized and unrecognized financial instruments (market risk, price risk, credit risk, liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized financial assets and financial liabilities, and other financial risk management policies and objectives. This standard also requires financial instruments to be classified as liabilities or equity in accordance with their substance and not their legal form. It also provides strict offsetting rules for financial assets and liabilities. PAS 39, Financial Instruments: Recognition and Measurement PAS 39 establishes the accounting and reporting standards for recognizing and measuring financial assets and financial liabilities. This standard requires a financial asset or financial liability to be recognized at cost, which is the fair value of the consideration given (in case of an asset) or received (in the case of a liability). Subsequent to initial recognition, financial assets will be measured at their fair values, except for loans and receivables and held-to-maturity investments, which are measured at cost or amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at cost or amortized cost, except for liabilities classified as “at fair value through profit and loss” and derivatives, which are measured at fair value. PAS 39 also covers the accounting for derivative instruments. This standard has expanded the definition of a derivative instrument to include derivatives (derivative-like provisions) embedded in nonderivative contracts. Under this standard, every derivative instrument is recorded in the balance sheet as either an asset or liability measured at its fair value. Derivatives that are not designated and do not qualify as hedges are adjusted to fair value through income. If the *SGVMC107496* - 51 - derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in equity until the hedged item is recognized in earnings. As allowed by the Philippine Securities and Exchange Commission (SEC), the adoption of PAS 39 will not result in the restatement of prior period financial statements. The cumulative effect of adopting this standard will be charged to the retained earnings at October 1, 2005. PAS 41, Agriculture PAS 41 prescribes the accounting treatment, financial statement presentation, and disclosures related to agricultural activities. Agricultural activity is the management by an entity of the biological transformation of living animals or plants (biological assets) for sale, into agricultural produce, or into additional biological assets. PAS 41 also prescribes, among other things, the accounting treatment for biological assets during the period of growth, degeneration, production, and procreation, and for the initial measurement of agricultural produce at the point of harvest. It requires measurement at fair value less estimated point-of-sale costs from initial recognition of biological assets up to the point of harvest, other than when fair value cannot be measured reliably on initial recognition. Agricultural produce is to be measured at its fair value less estimated point-of-sale costs at the point of harvest. PFRS 3, Business Combinations, PAS 36, Impairment of Assets and PAS 38, Intangible Assets Under PFRS, 3 the amortization of goodwill acquired in a business combination is prohibited. Instead, goodwill is to be tested annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations PFRS 5 specifies the accounting for assets held for sale and the presentation and disclosure of discontinued operations. It requires assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and the depreciation on such assets to cease. Furthermore, assets that meet the criteria to be classified as held for sale should be presented separately on the face of the balance sheet and the results of discontinued operations to be presented separately in the statement of income. Adoption of the above accounting standards will involve changes in accounting policies. Accordingly, these changes will result to the restatement of the comparative consolidated financial statements in accordance with the transitional provisions of PFRS 1 (except for those standards where the Group will avail of the optional exemptions). The increasing (decreasing) effects if such restatement on the consolidated financial statements of the Group for the years *SGVMC107496* - 52 - ended September 30, 2003, 2004 and 2005 and as of September 30, 2005 upon adoption of these new accounting standards with effect from October 1, 2005 are estimated to be as follows: Stockholders’ Equity Net Income (As of September 30, (For the year ended 2005, 2004, 2003) September 30, 2005) (Unaudited) PAS 19 - Employee Benefits PAS 21 - The Effects of Changes in Foreign Exchange Rates, net of tax effect PAS 39 - Financial Instruments: Recognition and Measurement PAS 41 - Agriculture, net of tax effect PFRS 3 - Business Combinations, PAS 36 - Impairment of Assets and PAS 38 - Intangible Assets In Thousand Pesos (‘000) = P392,484 (P =14,893) – – (321) (187,052) – 96,326 – = P301,758 – (P =15,214) The above estimated increasing (decreasing) effects of restating the consolidated financial statements of the Group upon the adoption of the new accounting standards are based on information currently available to the Group. The actual increasing (decreasing) effects may be determined only when the full conversion to PFRS is completed and reflected in the audited financial statements of the Group as of and for the year ended September 30, 2006. The Group will also adopt on October 1, 2005 the following revised accounting standards: • PAS 1, Presentation of Financial Statements, provides a framework within which an entity assesses how to present fairly the effects of transactions and other events; provides the base criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income from operating activities and extraordinary items as separate line items in the consolidated statements of income; and specifies the disclosures about key sources of estimation, uncertainty and judgments that management has made in the process of applying the entity’s accounting policies. It also requires changes in the presentation of minority interest in the consolidated balance sheets and consolidated statements of income. • PAS 2, Inventories, reduces the alternatives for measurement of inventories by disallowing the use of the last in, first out formula. Moreover, the revised accounting standard does not permit foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency to be included in the cost of inventories. • PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It defines material omission or misstatements, and describes how to apply the concept of materiality when applying accounting policies and correcting error. • PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the accounting for dividends declared after the balance sheet date. *SGVMC107496* - 53 - • PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on recognition and measurement of items of property, plant and equipment. It also provides that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. It also requires measurement of an item of property, plant and equipment acquired in exchange for a nonmonetary asset or a combination of monetary and nonmonetary assets at fair value, unless the exchange transaction lacks commercial substance. Under the previous version of the standard, an entity measured such an acquired asset at fair value unless the exchanged assets were similar. Following additional guidelines from PAS 16, the Group will recognize, if any, the initial settlement of the net present value of legal and constructive obligations associated with the retirement of a tangible long-lived asset that resulted from the acquisition, construction or development and the normal operation of a long-lived asset in the period in which it is incurred. The related asset retirement costs are capitalized as part of the carrying amount of the corresponding property, plant and equipment which are being depreciated on a straightline basis over the useful lives of the related assets or the contract periods, whichever is lower. • PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and buildings and prohibits expensing of initial direct costs in the financial statements of the lessors. • PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of the standard, the definitions and disclosures for related parties. It also requires disclosure of the compensation of key management personnel by benefit type. • PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting for investments in subsidiaries in the separate financial statements of a parent, venturer or investor. This standard also requires strict compliance with adoption of uniform accounting policies and requires the parent company to make appropriate adjustments to the subsidiary’s financial statements to conform them to the parent’s accounting policies for reporting like transactions and other events in similar circumstances. The equity method of accounting will no longer be allowed in the separate financial statements. • PAS 28, Investments in Associates, reduces alternatives in accounting for investments in associates in the separate financial statements of an investor. Investments in associates will be accounted for either at cost or in accordance with PAS 39 in the separate financial statements. Equity method of accounting will no longer be allowed in the separate financial statements. PAS 28 also requires strict compliance with adoption of uniform accounting policies and requires the investor to make appropriate adjustments to the associate’s financial statements to conform them to the investor’s accounting policies for reporting like transactions and other events in similar circumstances. • PAS 31, Interests in Joint Ventures, reduces the alternatives in accounting for interests in joint ventures in the separate financial statements of a venturer. Interests in joint ventures are accounted for either at cost or in accordance with PAS 39 in the separate financial statements. Equity method of accounting is no longer allowed in the separate financial statements. *SGVMC107496* - 54 - • PAS 33, Earnings Per Share, prescribes principles for the determination and presentation of earnings per share for entities with publicly traded shares, entities in the process of issuing ordinary shares to the public, and entities that calculate and disclose earnings per share. This standard also provides additional guidance in computing earnings per share, including the effects of mandatorily convertible instruments and contingently issuable shares, among others. • PAS 36, Impairment of Assets, establishes frequency of impairment testing for certain intangibles and provides additional guidance on the measurement of an asset’s value in use. • PAS 38, Intangible Assets, provides additional clarification on the definition and recognition of certain intangibles. Moreover, this revised accounting standard requires that an intangible asset with an indefinite useful life should not be amortized but will be tested for impairment by comparing its recoverable amount with its carrying amount annually and whenever there is an indication that the intangible asset may be impaired. The adoption of the above revised accounting standards will not have a material effect on the Group’s financial statements. Additional disclosures shall be made in the notes to the consolidated financial statements, where applicable. Revenue Recognition Revenue is recognized to the extent that is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sale of Goods Revenue from sale of goods is recognized when the goods are shipped to the buyer. The revenues are measured at the fair value of the consideration received or receivable, net of any trade discounts, prompt payment discounts and volume rebates. Rendering of Services Service fees from tolling activities are recognized as revenue when the related services have been rendered. Interest Interest income is recognized as the interest accrues, taking into account the effective yield on the asset. Dividends Dividend income is recognized when the shareholders’ right to receive the payment is established. Rental Income Rental income is accounted for on a straight-line basis over the lease term. *SGVMC107496* - 55 - Cash Equivalents and Temporary Investments The Group considers temporary cash investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value to be cash equivalents. Long-term debt securities which the Group does not intend to hold to maturity are classified as temporary investments and are stated at market. Marketable Securities Marketable securities are carried at the lower of aggregate cost or market value determined at balance sheet date. The amount by which aggregate cost exceeds market value is included in the determination of net income for the period. Realized gains and losses from the sale of marketable securities are included in income for the period. The cost of marketable securities used for determining the gain or loss on the sale of such securities is computed using the average method. Trade Receivables Trade receivables are recognized and carried at original invoice amount less an allowance for any doubtful accounts. Allowance for doubtful accounts is maintained at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. A review of the age and status of receivables, designed to identify accounts to be provided with allowance, is made on a continuous basis. Doubtful accounts are written off when collectibility is highly remote. Inventories Inventories are valued at the lower of cost and net realizable value except for hog market stocks and by products. Net realizable value (NRV) is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. In determining NRV, the Group considers any adjustment necessary for obsolescence, which is provided 100% for nonmoving items. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Finished goods, work-inprocess, raw materials, containers and packaging materials - cost is determined using the average method; finished goods and work-in-process include direct materials and labor, and a proportion of manufacturing overhead costs based on actual goods processed and produced Spare parts and supplies - cost is determined using the average method Materials in transit - cost is determined using the specific identification method Hog market stocks are measured at market values less mortality allowance. The market values are determined based on market prices of hog stocks of similar age, breed and genetic merit. *SGVMC107496* - 56 - Investments Investments in an associate and interests in a joint venture are accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture (JV) of the Group. A JV is an entity not being a subsidiary nor an associate in which the Group exercises joint control together with one or more venturers. Under the equity method, the investments in an associate and interests in a joint venture are carried in the consolidated balance sheets at cost plus post-acquisition changes in the Group’s share of net assets of the associate and JV. The consolidated statements of income reflect the Group’s share in the results of operations of the associate and JV. Unrealized gains or losses arising from transactions with its associate and JV are eliminated to the extent of the Group’s interest in the associate and JV. Where there has been a change recognized directly in the associate’s equity, the Group recognizes its share of any change and discloses this, when applicable, in the consolidated statements of changes in equity. After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the Group’s net investment in the associate and interest in JV. The reporting dates of the associate and joint venture and the Group are identical and the associate’s and joint venture’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization and accumulated provision for impairment loss, if any. Cost includes interest and other financing charges on borrowed funds used to finance the acquisition of property, plant and equipment to the extent incurred during the period of construction/installation. The initial cost of property, plant and equipment consists of the purchase price, including import duties, taxes and any directly attributable costs of bringing the assets to their working condition and location for their intended use. Expenditures incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to income in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property, plant and equipment. Leasehold improvements are amortized over the shorter of their useful lives or the corresponding lease terms. *SGVMC107496* - 57 - The estimated useful lives of the assets follow: Land improvements Buildings and improvements Machinery and equipment Transportation equipment Furniture, fixture and equipment Years 20 10-30 10 5 5 The useful life and depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment. Assets under construction are stated at cost. This includes costs of construction, plant and equipment and other direct costs. Borrowing costs that are directly attributable to the construction of plant and equipment are capitalized during the construction period. Assets under construction are transferred to the related property, plant and equipment account when the construction or installation and related activities necessary to prepare the plant and equipment for their intended use are complete and the plant and equipment are ready for service. Assets under construction are not depreciated until such time as the relevant assets are completed and put into operational use. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of property, plant and equipment is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the consolidated statements of income. 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 the carrying amount of the asset) is included in income for the year. Borrowing Costs Borrowing costs generally are expensed as incurred. Interest and other related financing charges on borrowed funds used to finance the acquisition of property, plant and equipment to the extent incurred during the period of construction are capitalized as part of the cost of property, plant and equipment. The capitalization of these borrowing costs as part of the cost of property, plant and equipment (a) commences when the expenditures and borrowing costs are being incurred during the construction and related activities necessary to prepare the property for its intended use are in progress; (b) is suspended during extended periods in which active development is interrupted; and (c) ceases when substantially all the activities necessary to prepare the property for its *SGVMC107496* - 58 - intended use are complete. These costs are amortized using the straight-line method over the estimated useful lives of the related property. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Foreign Currency Translation Transactions denominated in foreign currencies are recorded in Philippine Pesos based on the exchange rate prevailing at the transaction date. Foreign currency-denominated monetary assets and liabilities are translated to Philippine Pesos at exchange rates prevailing at the balance sheet dates. Foreign exchange differentials between transaction rate and rate at settlement date or balance sheet date of foreign currency-denominated monetary assets or liabilities are credited or charged to current operations, except (1) those pertaining to foreign currency-denominated monetary liabilities related to the acquisition of property and equipment which are added to or deducted from the carrying amount of the related property account to the extent that the adjusted carrying amount of the asset does not exceed the lower of replacement cost and the amount recoverable from the use or sale of the asset; and (2) those pertaining to restatement of foreign currency-denominated investments in subsidiaries which are presented as cumulative translation adjustments under the Stockholders’ Equity section of the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. Financial statements of consolidated foreign subsidiaries that are integral to the Group’s operations are translated as if the transactions of the foreign operation had been those of the Group. At each balance sheet date, foreign currency monetary items are translated using the closing rate, nonmonetary items which are carried at historical cost are translated using the historical rate as of the date of acquisition and non monetary items which are carried at fair value are translated using the exchange rate that existed when the values were determined. Income and expense items are translated at the exchange rates on the dates of the transactions. Resulting exchange differentials are recognized in the consolidated statement of income. Financial statements of foreign consolidated subsidiaries that are not integral to the Group’s operations are translated at year-end exchange rates with respect to balance sheet accounts, and at the average exchange rates for the year with respect to the statement of income accounts. Resulting translation differentials are included in equity (under cumulative translation adjustments). On disposal of a foreign entity, accumulated exchange differentials are recognized in the consolidated statements of income as a component of the gain or loss on disposal of investments. The functional and presentation currency of the Group (except for foreign subsidiaries) is the Philippine Peso. Upon adoption of PAS 21, The Effects of Changes in Foreign Exchange Rates, the Group will determine the applicable functional currency of the foreign subsidiaries. *SGVMC107496* - 59 - Based on initial assessment, the functional currency of the foreign subsidiaries may be as follows: Subsidiaries Universal Robina (Cayman), Ltd. URC Philippines, Limited URC International Co. Ltd. Hong Kong China Foods Co. Ltd. URC Asean Brands Co. Ltd. URC Hong Kong Company Limited (formerly Hong Kong Peggy Snacks Foods Co., Limited) Tianjin Pacific Foods Manufacturing Co., Ltd. Shanghai Peggy Foods Co., Ltd. Xiamen Tongan Pacific Food Co., Ltd. URC Foods (Singapore) Pte. Ltd. (formerly Pan Pacific Snacks Pte. Ltd.) USURC (Thailand) Co., Ltd. (formerly Thai Peggy Foods Co. Ltd.) Panyu Peggy Foods Co., Ltd. URC Snack Foods (Malaysia) Sdn. Bhd. (formerly Pacific World Sdn. Bhd.) Ricellent Sdn. Bhd. PT URC Indonesia URC Vietnam Co., Ltd. Country of Incorporation Cayman Islands British Virgin Islands British Virgin Islands British Virgin Islands British Virgin Islands Functional Currency US Dollars US Dollars US Dollars US Dollars US Dollars Hong Kong China China China HK Dollars Yuan Yuan Yuan Singapore Singapore Dollars Thailand China Thai Baht Yuan Malaysia Malaysia Indonesia Vietnam Malaysian Ringgit Malaysian Ringgit Indonesia Rupiah Vietnam Dong Upon adoption of PAS 21, as at the reporting date, the assets and liabilities of foreign subsidiaries are translated into the presentation currency of the Group at the rate of exchange ruling at the balance sheet date, and its income and expenses are translated at the weighted average exchange rate for the year. The exchange differences arising on translation are taken directly to a separate component of equity as cumulative translation adjustments. On disposal of a subsidiary, the deferred cumulative amount of translation adjustments recognized in equity relating to the disposed subsidiary shall be recognized in the consolidated statements of income. As allowed under PFRS 1, the Group will adjust to zero the currency translation adjustments previously recognized in the translation of the financial statements of foreign operations upon adoption of the PAS 21. Pre-milling Costs URSUMCO and its subsidiary, SONEDCO, use the sugar crop year as the basis for revenue and expense recognition in its operations. Off-milling costs incurred during the year, which are applicable to the next crop year, are deferred and will be charged to production costs when regular milling for the next crop year commences. The crop year begins and ends on July 1 and June 30, respectively. *SGVMC107496* - 60 - Goodwill The excess of the acquisition cost over the Group’s interest in the fair value of the net identifiable assets acquired of a subsidiary or associate as at the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. With respect to an investment in associate, goodwill is included in the carrying amount of the investment. Goodwill is carried at cost less accumulated amortization. Goodwill is amortized on a straight-line basis over a ten-year period. Goodwill is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Software Acquisition Costs Costs incurred to acquire computer software (not an integral part of its related hardware) and bring it to its intended use are capitalized as intangible assets. These costs are amortized over the estimated useful life of the computer software ranging from 3 to 5 years. A gain or loss arising from derecognition of an software acquisition costs is measured as the difference between the net disposal proceeds and the carrying amount of the asset and is recognized in the consolidated statements of income when the asset is derecognized. Debt Issuance Costs Issuance, underwriting and other related expenses incurred in connection with the issuance of the long-term debts, have been deferred and amortized on a straight-line basis over the lives of the corresponding debt securities issued. Unamortized debt issuance costs are offset against the carrying value of the related debt securities in the consolidated balance sheets. When the related debt securities are retired, the related unamortized debt issuance costs at the date of retirement are charged against current operations. Income Tax Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences, including asset revaluations. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from excess minimum corporate income tax (MCIT) and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carryforward of unused tax credits from MCIT and unused tax losses can be utilized. Deferred income tax, however, is not recognized when it 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. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Deferred income tax assets and liabilities are measured at the tax rate that is expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. *SGVMC107496* - 61 - Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. Pension Cost The Group has a funded, noncontributory defined benefit retirement plan, administered by trustees, covering their permanent employees. Retirement costs are actuarially determined using the projected unit credit method. This method reflects services rendered by employees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Retirement costs include current service cost plus amortization of past service cost, experience adjustments and changes in actuarial assumptions over the expected average remaining working lives of the covered employees. Advertising Expenses Advertising expenses are charged against current operations as incurred. Earnings Per Share Earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year, including fully paid but unissued shares and common stock equivalents as of the end of the year, after giving retroactive effect for any stock dividends (Note 26). Segment Reporting The Group’s operating businesses for management purposes are organized into three major operating businesses (branded consumer food products, agro-industrial products, and commodity food products) which comprise the bases on which the Group reports its primary segment information. The Group’s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business and geographical segments is presented in Note 3. Provisions A provision is recognized only when the Group has: (a) a present obligation (legal or constructive) as a result of a past event; (b) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. 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 in the provision due to the passage of time is recognized as an interest expense. *SGVMC107496* - 62 - Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. Subsequent events Post year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events), are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material. 3. Segment Information SFAS 31/IAS 14, Segment Reporting, requires that a public business enterprise report financial and descriptive information about its reportable segments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The primary segment reporting format is determined to be business segments as the Group’s risks and rates of return are affected predominantly by differences in the products and services produced. Secondary information is reported geographically. The operating businesses are organized and managed separately according to the nature of the products and services provided, which each segment representing a strategic business unit that offers different products and serves different markets. URC derives its revenues from the following reportable segments: • Branded consumer food products - manufactures and distributes a diverse mix of snack foods, instant coffee products, instant noodles, chocolates, soft and hard candies, biscuits, pasta, tomato-based products and ready-to-drink beverages. This segment also includes the packaging division which manufactures bi-axially polypropylene films primarily used in packaging. • Agro-industrial products - engages in hog and poultry farming, manufactures and distributes animal feeds and soya products and manufactures and distributes animal health products. • Commodity food products - engages in sugar milling and refining, and flour milling. The Group generally accounts for inter-segment sales and transfers as if the sales or transfers were to third parties at current market prices. Inter-segment sales and transfers were eliminated in the consolidated statements of income. The Group’s geographical segments are based on the location of the Group’s assets. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers. *SGVMC107496* - 63 - Business Segments The financial information about the operations of these business segments is summarized as follows (in thousands): 2005 Net sales and services Segment results (income from operations) Segment assets Investments and advances Other supplementary businesses* Segment liabilities Other supplementary businesses* Branded = P23,783,623 = P949,328 = P21,559,405 – – = P21,559,405 = P5,304,898 – = P5,304,898 AgroIndustrial = P3,873,941 = P524,428 = P3,325,589 – – = P3,325,589 = P797,110 – = P797,110 Commodity = P3,200,788 = P987,163 = P4,611,224 – – = P4,611,224 = P1,525,615 – = P1,525,615 Other segment information: Capital expenditure Total = P30,858,352 = P2,460,919 = P29,496,218 1,831,926 23,383,854 = P54,711,998 = P7,627,623 22,008,281 = P29,635,904 = P3,646,648 2004 Net sales and services Segment results (income from operations) Segment assets Investments and advances Other supplementary businesses* Segment liabilities Other supplementary businesses* Branded = P20,548,955 = P898,444 = P19,368,173 – – = P19,368,173 = P4,184,969 – = P4,184,969 AgroIndustrial = P3,651,274 = P468,328 = P2,545,690 – – = P2,545,690 = P666,514 – = P666,514 Commodity = P3,032,972 = P688,698 = P4,426,743 – – = P4,426,743 = P1,671,505 – = P1,671,505 Other segment information: Capital expenditure Total = P27,233,201 = P2,055,470 = P26,340,606 1,910,462 14,997,257 = P43,248,325 = P6,522,988 13,404,927 = P19,927,915 = P2,279,021 2003 Net sales and services Segment results (income from operations) Segment assets Investments and advances Other supplementary businesses* Segment liabilities Other supplementary businesses* Other segment information: Capital expenditure Branded = P18,035,150 = P1,033,338 = P17,928,537 – – = P17,928,537 = P4,894,778 – = P4,894,778 AgroIndustrial = P3,041,704 = P19,982 = P2,516,489 – – = P2,516,489 = P543,049 – = P543,049 Commodity = P2,337,880 = P434,468 = P3,638,601 – – = P3,638,601 = P826,895 – = P826,895 Total = P23,414,734 = P1,487,788 = P24,083,627 1,260,371 17,217,061 = P42,561,059 = P6,264,722 14,313,106 = P20,577,828 = P2,663,794 *SGVMC107496* - 64 - Geographical segments The financial information about the operations of these geographical segments is summarized as follows (in thousands): 2005 Net sales and services Segment results (income from operations) Segment assets Investments and advances Other supplementary businesses* Segment liabilities Other supplementary businesses* Domestic = P23,867,558 = P2,801,047 = P18,783,296 – – = P18,783,296 = P1,176,623 – = P1,176,623 Foreign = P6,990,794 (P =340,128) = P10,712,922 – – = P10,712,922 = P6,451,000 – = P6,451,000 Other segment information: Capital expenditure Total = P30,858,352 = P2,460,919 = P29,496,218 1,831,926 23,383,854 = P54,711,998 = P7,627,623 22,008,281 = P29,635,904 = P3,646,648 2004 Net sales and services Segment results (income from operations) Segment assets Investments and advances Other supplementary businesses* Segment liabilities Other supplementary businesses* Domestic = P21,145,345 = P2,221,004 = P18,214,805 – – = P18,214,805 = P4,519,347 – = P4,519,347 Foreign = P6,087,856 (P =165,534) = P8,125,801 – – = P8,125,801 = P2,003,641 – = P2,003,641 Other segment information: Capital expenditure Total = P27,233,201 = P2,055,470 = P26,340,606 1,910,462 14,997,257 = P43,248,325 = P6,522,988 13,404,927 = P19,927,915 = P2,279,021 2003 Net sales and services Segment results (income from operations) Segment assets Investments and advances Other supplementary businesses* Segment liabilities Other supplementary businesses* Other segment information: Capital expenditure Domestic = P18,885,771 = P1,737,974 = P16,631,488 – – = P16,631,488 = P4,017,098 – = P4,017,098 Foreign = P4,528,963 (P =250,186) = P7,452,139 – – = P7,452,139 = P2,247,624 – = P2,247,624 Total = P23,414,734 = P1,487,788 = P24,083,627 1,260,371 17,217,061 = P42,561,059 = P6,264,722 14,313,106 = P20,577,828 = P2,663,794 * These include assets and liabilities of corporate and other businesses, including offshore institutions. The foreign segment includes operations located in Indonesia, Malaysia, Thailand, Singapore, Vietnam and China. *SGVMC107496* - 65 - 4. Cash and Cash Equivalents This account consists of: Cash on hand Cash in banks Cash equivalents 2005 P =62,223,777 443,195,958 424,883,609 P =930,303,344 2004 = P55,629,148 412,728,211 1,768,921,104 = P2,237,278,463 Cash in banks earns interest at the respective bank deposit rates. Cash equivalents are made for varying periods of up to three months and earn interest at the respective short-term deposit rates. Due to the short-term nature of such transactions, the carrying value approximates the fair value of the cash equivalents. 5. Temporary Investments This account represents investments in foreign and domestic securities, public debt securities with a net market value of = P21,754.0 million in 2005 and = P12,143.0 million in 2004. There are certain sold put options on marketable securities with an aggregate notional amount of US$25 million in 2003. The net mark-to-market value loss on these options amounted to = P21.4 million in 2003 and this loss is included in the consolidated net income for the year ended 2003. This is included in the “Other charges” account in the statements of income. The total mark-to-market value of outstanding sold put options as of September 30, 2003 amounted to = P59.4 million. There were no sold put options in 2005 and 2004. Total interest income received on these investments amounted to = P1,764.7 million, = P1,349.4 million and = P877.3 million for the years ended September 30, 2005, 2004 and 2003, respectively. 6. Marketable Securities This account consists of: Marketable securities - at cost Allowance for decline in value Marketable securities - at market 2005 P =901,458,648 (4,816,860) P =896,641,788 2004 = P901,458,648 (144,073,192) = P757,385,456 Dividend income derived from marketable securities for the years ended September 30, 2005, 2004 and 2003 amounted to = P41.53 million, = P40.08 million and = P17.78 million, respectively. These are included under “Investment income” account in the statements of income. *SGVMC107496* - 66 - 7. Trade and Other Receivables This account consists of: Trade Interest receivable Advances to supplier Other receivables Less allowance for doubtful accounts 2005 P =2,801,338,039 619,807,782 341,200,173 544,124,961 4,306,470,955 457,047,781 P =3,849,423,174 2004 = P2,469,080,047 413,737,879 259,526,803 503,016,860 3,645,361,589 298,980,889 = P3,346,380,700 Trade receivables are non interest-bearing and are generally on 30-90 days’ term. The interest receivable pertains mainly to interest income earned on money market placements and temporary investments. Total receivables from related parties as of September 30, 2005 and 2004 amounted to = P34.5 million and = P7.9 million, respectively. These are included in the trade receivables account. The other receivables account with the corresponding allowance for doubtful accounts consists of the following: Advances to officers, employees and suppliers Claims receivable Other receivables Less allowance for doubtful accounts 2005 P =122,255,508 17,594,351 404,275,102 544,124,961 131,428,322 P =412,696,639 2004 = P79,638,111 22,032,935 401,345,814 503,016,860 55,816,155 = P447,200,705 2005 2004 P =1,237,537,219 94,166,963 2,006,916,066 69,099,327 775,114,133 659,644,073 = P1,167,594,473 83,336,699 1,884,768,285 95,739,932 631,418,586 674,861,554 8. Inventories This account consists of: Inventories carried at cost: Finished goods Goods in process Raw materials Poultry stock Containers and packaging materials Spare parts and supplies (Forward) *SGVMC107496* - 67 - Less allowance for inventory write-down Inventories carried at NRV: Hog market stock and by-products Less allowance for mortalities Materials in transit 2005 P =4,842,477,781 44,336,788 4,798,140,993 2004 = P4,537,719,529 57,757,245 4,479,962,284 772,978,676 27,389,735 745,588,941 1,128,971,186 P =6,672,701,120 529,239,030 17,000,000 512,239,030 781,888,154 = P5,774,089,468 The amount of write-down recognized as expense amounted to = P23,362,900, = P53,040,246 and = P10,703,276 in 2005, 2004 and 2003, respectively. As discussed in Note 2, the Group considers any adjustment necessary for obsolescence in determining NRV. Under the terms of the agreements covering liabilities under trust receipts totaling = P1.23 billion in 2005 and = P1.22 billion in 2004, certain inventories have been released to the Parent Company in trust for the banks. The Parent Company is accountable to these banks for the trusteed merchandise or their sales proceeds. 9. Other Current Assets This account consists of: Pre-milling costs Prepaid insurance and other expenses Deposits on purchases Others 2005 P =125,858,317 130,495,071 – 11,045,860 P =267,399,248 2004 = P97,592,867 72,251,381 53,366,081 1,062,378 = P224,272,707 The pre-milling costs represent rehabilitation costs incurred by URSUMCO and its subsidiary, SONEDCO, during the year which is applicable to the next crop year. These will be charged to production costs when regular milling for the next crop year commences. The crop year begins and ends on July 1 and June 30, respectively. *SGVMC107496* - 68 - 10. Investments and Advances This account consists of: Acquisition cost: Balance at beginning of year Additions during the year Cost of URCCC shares previously accounted for under the equity method Balance at end of year Accumulated equity in net earnings (Note 18): Balance at beginning of year Equity in net earnings for the year Accumulated equity in net losses of URCCC previously accounted for under the equity method Dividends received Balance at end of year Advances 2005 2004 P =1,197,593,846 – = P733,281,353 564,312,493 – 1,197,593,846 482,278,659 244,623,123 (100,000,000) 1,197,593,846 274,252,051 184,764,758 43,261,793 – (19,999,943) (114,619,657) 482,278,659 612,282,125 100,071,446 22,049,905 P1,779,943,951 P =1,831,925,876 = The Parent Company has equity interest in Hunt-Universal Robina Corporation (HURC), a joint venture. The joint venture entity manufactures and distributes food products under the Hunt’s brand name, which is under exclusive license to HURC in the Philippines. URC also has an interest in Robinsons Land Corporation (RLC) where it exercises significant influence (together with JGSHI and affiliates) over RLC’s financial and operating policies. In 2004, URC received, by way of assignment, shares of stock of RLC in full settlement for the JGSHI notes that matured amounting to = P564.3 million. This was accounted for at carrying amounts since the transaction was between related parties namely, JGSHI, the transferor and ultimate Parent Company, and URC, the transferee and subsidiary. The percentage of ownership over the associate and joint venture follows: Investee Companies Robinsons Land Corporation (RLC) Hunt-Universal Robina Corporation (HURC) Country of Incorporation Philippines Philippines 2005 19% 50% 2004 19% 50% *SGVMC107496* - 69 - Summarized financial information of investee companies that are accounted for under the equity method follows: Current assets Noncurrent assets Current liabilities Noncurrent liabilities HURC 2004 2005 = P000 P =000 238,153 213,747 3,066 3,463 (199,626) (144,425) – – 2005 P =000 5,396,654 20,789,018 (7,645,839) (4,773,423) RLC 2004 = P000 3,465,821 18,226,456 (6,498,929) (2,421,051) Revenue Costs and expenses Net income 483,788 (438,351) 31,579 449,550 (400,762) 37,283 5,094,143 (3,676,470) 1,289,911 4,701,014 (3,428,400) 920,215 The advances include investments in allied undertakings outside the Philippines. On December 23, 2003, a purchase and sale agreement was entered into by and between the Parent Company and Joyco España for the Parent Company’s acquisition of the remaining 50% interest in URCCC. URCCC was 50% owned by the Parent Company until December 23, 2003. The results of URCCC have been included in the consolidated financial statements from the date of acquisition. The acquisition cost amounted to = P20.0 million. 11. Property, Plant and Equipment The rollforward analysis of this account follows: Furniture, Land (Note 17) Land Buildings and Machinery and Transportation Fixture and Construction Equipment Improvements Improvements Equipment Equipment Equipment in Progress in Transit Total = P19,314,742,886 = P1,385,017,013 = P987,544,038 = P525,195,846 = P231,562,252 = P29,174,777,406 105,820,156 48,720,141 463,279,379 3,646,648,409 – – Cost At October 1, 2004 Additions = P860,053,707 = P842,016,886 = P5,028,644,778 15,761,266 405,254,036 487,254,657 Retirements/disposal – – – Reclassifications and others – – 875,814,973 1,247,270,922 – At September 30, 2005 (3,241,789) 1,948,609,948 (292,041,883) 171,948,826 (25,036,750) (71,818) (68,462) (9,263,509) (120,249,524) (317,150,451) 322,017,057 159,160 5,512,657,646 21,293,328,008 1,532,088,249 1,093,223,914 564,652,478 574,592,107 32,693,628,297 189,352,933 258,743,464 1,987,491,244 9,751,169,957 1,001,131,740 655,456,052 – – 13,653,992,457 1,274,335,582 107,079,463 52,490,736 1,843,595,350 Accumulated Depreciation, Amortization and Impairment Loss At October 1, 2004 Depreciation, amortization and impairment loss – 176,049,337 233,640,232 Retirements/disposal (Note 21) – – – – – (151,139,684) (24,113,852) (56,257) – – Reclassifications and others – – 552,354 138,388,562 48,081,989 112,514 – – At September 30, 2005 – 434,792,801 187,135,419 2,221,683,830 11,012,754,417 1,132,179,340 708,003,045 – – 15,509,413,433 P =875,814,973 P =812,478,121 P =3,290,973,816 P =10,280,573,591 P =399,908,909 P =385,220,869 P =564,652,478 P =574,592,107 P =17,184,214,864 = P860,053,707 = P583,273,422 = P3,041,153,534 = P9,563,572,929 = P383,885,273 = P332,087,986 = P525,195,846 = P231,562,252 = P15,520,784,949 (175,309,793) Net book value as of September 30, 2005 Net book value as of September 30, 2004 *SGVMC107496* - 70 - In 2004 and 2003, impairment losses amounting to = P150.1 million and = P374.0 million, respectively, represent the write-down in the net book value of idle machinery and equipment items to nil amounts in the branded segment. The impairment losses are included in the other income (charges) account in the consolidated statements of income. The impairment losses were determined using the net selling price as the net realizable value. Depreciation and amortization charged to operations amounted to = P1,843.6 million in 2005, = P1,906.8 million in 2004 and = P1,368.5 in 2003. As discussed in Note 2, PAS 21, The Effects of Changes in Foreign Exchange Rates, provides restrictive conditions for the capitalization of foreign exchange losses. The net cumulative capitalized foreign exchange losses amounted to = P187.1 million, net of accumulated depreciation of = P100.9 million as of September 30, 2005 and = P219.8 million, net of accumulated depreciation of = P69.1 million as of September 30, 2004. Upon the adoption of PAS 21 on October 1, 2005, the Group will adjust previously recorded undepreciated capitalized foreign exchange losses against beginning retained earnings and prior years’ consolidated financial statements will have to be restated. The change in property accounts, arising from restatements of foreign currency denominated liabilities to exchange rate as at balance sheet date, resulted to an increase of = P155.4 million in 2003. There are no capitalized foreign exchange losses in 2005 and 2004. Borrowing costs capitalized as part of plant and machinery and equipment in the course of construction amounted to = P5.2 million in 2003. There are no capitalized borrowing costs in 2005 and 2004, as funds used for the construction of qualifying assets are sourced from internally generated funds. The total costs of fully depreciated property, plant and equipment that are still in use amounted to = P5,056.7 million as of September 30, 2005. The Group has contractual commitments for the acquisitions of machinery and equipment with a total contract value of = P1,005.5 million as of September 30, 2005. These acquisitions are intended for the expansion of the production capacities for the beverage and sugar businesses of the Group. 12. Other Assets This account consists of: Goodwill - net Miscellaneous deposits Others - net of allowance for impairment 2005 P =783,202,273 60,988,528 124,839,622 P =969,030,423 2004 = P957,142,218 60,438,823 57,819,539 = P1,075,400,580 *SGVMC107496* - 71 - In March 2000, URCICL formed two-wholly owned subsidiaries namely Hong Kong China Foods Co. Ltd. and URC Asean Brands Co. Ltd. These companies were incorporated in British Virgin Islands. These two wholly-owned subsidiaries acquired majority ownership of certain companies in the Asian region for approximately = P2.8 billion. The excess of the acquisition cost over the fair values of the net assets acquired resulted in goodwill. The unamortized goodwill arising from these acquisitions has been translated at the applicable year-end exchange rate. The acquisition of SONEDCO in 1988 also resulted in goodwill. As discussed in Note 2, the Group has elected not to restate any business combinations that occurred before the date of transition to PFRS. Instead, the carrying amount of these assets at transition date will be tested at least annually for impairment. The rollforward analysis of the goodwill account follows: 2005 Positive Goodwill Cost: Balance at beginning of the year Translation adjustments Balance at end of the year Accumulated amortization: Balance at beginning of the year Amortization for the year Translation adjustments Balance at end of the year Net book value of positive goodwill Negative goodwill Net goodwill 2004 P1,722,450,330 P =1,763,538,477 = 41,088,147 (6,806,666) 1,763,538,477 1,756,731,811 769,658,052 167,838,005 (704,726) 936,791,331 819,940,480 (36,738,207) P =783,202,273 586,536,687 168,695,990 14,425,375 769,658,052 993,880,425 (36,738,207) = P957,142,218 13. Loans Payable This account includes short-term clean loans obtained from local banks. Interest is based on prevailing market rates. Interests on the loans are paid as they become due. Accrued interest payable on the above loans amounted to = P5.2 million and = P35.3 million as of September 30, 2005 and 2004, respectively, and is shown as part of “Accrued expenses” under the “Accounts Payable and Accrued Expenses” account in the consolidated balance sheets (see Note 14). *SGVMC107496* - 72 - 14. Accounts Payable and Accrued Expenses This account consists of: Accounts payable - trade Accrued expenses (Note 13) Advances from stockholders (Note 16) Customers’ deposits Others 2005 P =1,510,800,222 1,110,450,888 269,077,808 87,769,543 160,667,589 P =3,138,766,050 2004 = P1,557,843,919 1,082,557,220 269,893,010 54,532,429 108,979,474 = P3,073,806,052 For terms and conditions relating to related parties, refer to Note 16. Accounts payable-trade are noninterest-bearing and are normally settled on a monthly basis. The details of the accrued expenses account follow: Accrued advertising and promotions Accrued interest expense Accrued freight and handling costs Others 2005 P =482,511,664 462,899,960 51,112,026 113,927,238 P =1,110,450,888 2004 = P663,587,885 254,417,132 34,134,962 130,417,241 = P1,082,557,220 Accrued expenses are normally settled monthly throughout the financial year. 15. Long-Term Debt This account consists of: 2005 Foreign Currencies: Balance of US$200 million, 8.25% Guaranteed Notes Due 2012, interest payable on January 20 and July 20 of each year starting January 20, 2005 P =11,202,000,000 Balance of US$125 million, 9% Guaranteed Notes Due 2008, interest payable on February 6 and August 6 of each year starting August 6, 2003 7,001,250,000 Balance of US$100 million, 8 3/8% Guaranteed Notes Due 2006, interest payable on June 19 and December 19 of each year 2,905,127,240 2004 = P– 7,034,500,000 2,987,524,012 (Forward) *SGVMC107496* - 73 - Balance of loans from a foreign bank, payable in 10 to 16 equal semi-annual amortization Balance of loans from a foreign bank, payable in 14 equal semi-annual amortization Philippine Pesos: Balance of restructured loans from Philippine Sugar Corporation payable in 25 equal annual amortizations Balance of a five-year promissory note payable in 6 semi-annual amortization with remaining balance at maturity Debt issuance costs Less: Current portion Long-term debt Debt issuance costs 2005 2004 P =364,000,841 = P584,131,954 223,018,406 274,010,085 63,050,972 67,846,785 700,000,000 22,458,447,459 188,247,523 22,270,199,936 900,000,000 11,848,012,836 62,921,433 11,785,091,403 321,825,081 376,043,545 1,663,925 3,152,011 320,161,156 372,891,534 P11,464,930,247 P =21,897,308,402 = Guaranteed Notes Due 2012 On January 14, 2005, URC Philippines, Limited, a wholly owned subsidiary, issued US$200 million, 8.25% Guaranteed Notes Due 2012 (Notes due 2012) guaranteed by the Parent Company. Unless previously redeemed or purchased and cancelled, the Notes due 2012 will be redeemed at their principal amount, plus accrued and unpaid interest, on January 20, 2012. Underwriting fees and other expenses incurred in connection with the issuance of the Notes due 2012 have been deferred and are being amortized over the terms of the respective debt securities issued. The unamortized balance of the related debt issuance costs amounted to = P145.3 million as of September 30, 2005. Guaranteed Notes Due 2008 On February 5, 2003, URC Philippines, Limited, a wholly owned subsidiary, issued US$125 million, 9% Guaranteed Notes Due 2008 (Notes due 2008) guaranteed by the Parent Company. Unless previously redeemed or purchased and cancelled, the Notes due 2008 will be redeemed at their principal amount, plus accrued and unpaid interest, on February 6, 2008. Underwriting fees and other expenses incurred in connection with the issuance of the Notes due 2008 have been deferred and are being amortized over the terms of the respective debt securities issued. The unamortized balance of the related debt issuance costs amounted to = P40.4 million and = P58.6 million as of September 30, 2005 and 2004, respectively. Guaranteed Notes Due 2006 On December 19, 1996, Universal Robina (Cayman) Ltd., a wholly owned subsidiary, issued US$100 million, 8 3/8% Guaranteed Notes Due 2006 (Notes due 2006) guaranteed by the Parent Company. Unless previously redeemed or purchased and cancelled, the Notes due 2006 will be redeemed at their principal amount, plus accrued and unpaid interest, on December 19, 2006. The *SGVMC107496* - 74 - subsidiary reacquired US$12 million in 2004 and US$0.5 million in 2003 worth of the Notes due 2006 which resulted in a gain of = P0.2 million in 2003. The gain on reacquisition of the Notes due 2006 is included in the “Other Income (Charges)” account in the 2003 consolidated statement of income. Underwriting fees and other expenses incurred in connection with the issuance of the Notes due 2006 have been deferred and are being amortized over the terms of the respective debt securities issued. The unamortized balance of the related debt issuance costs amounted to = P2.5 million and = P4.3 million as of September 30, 2005 and 2004, respectively. Foreign Bank Loans The Parent Company entered into two credit-term loan facilities with Bayerische Hypo-UND Vereinsbank AG (Vereinsbank), Munich to finance the supply of certain property and equipment for its biaxially-oriented polypropylene film plant. The details of the loans are as follows: Line 1 2005 P =– 2004 = P167,239,495 Maturity Date September 12, 2005 Line 2 364,000,841 416,892,459 April 30, 2008 P = 364,000,841 = P584,131,954 Total Interest Rate EURIBOR/USD LIBOR ranging from 2.954% to 4.061% per annum EURIBOR/USD LIBOR ranging from 2.822% to 4.257% per annum Interest Payment Date March and September October and April These loans contain negative covenants that, among others, prohibit merger or consolidation with other entities, dissolution, liquidation or winding-up except with any of its subsidiaries; prohibit purchase or redemption of any issued shares or reduction of registered and paid-up capital or distribution of assets resulting in capital base impairment. The Parent Company also entered into credit-term loan facilities with Bayerische Hypo-UND Vereinsbank AG (Vereinsbank), Munich to finance the supply of certain property and equipment for its flour mill plant. The outstanding balance bears interest at floating rate based on USD LIBOR plus certain margins per annum. This loan is payable in fourteen equal, consecutive, semi-annual payments starting 6 months after the weighted average delivery period of all units or, at the latest, starting 6 months after August 1, 2002, whichever date shall occur earlier, with the last repayment installment due October 15, 2009. These loans contain negative covenants that, among others, prohibit merger or consolidation with other entities, dissolution, liquidation or winding-up except with any of its subsidiaries; prohibit purchase or redemption of any issued shares or reduction of registered and paid-up capital or distribution of assets resulting in capital base impairment. The foreign bank loans amounting to $2,971,773 in 2004 for Line 1, and $6,498,855 in 2005 and $7,407,997 in 2004 for Line 2 were converted using the September 30, 2005 and 2004 closing rates of = P56.010 to US$1 and = P56.276 to US$1, respectively. *SGVMC107496* - 75 - Philippine Sugar Corporation R.A. No. 7202 dated February 24, 1992 provided for, among others, the condonation of all penalties and surcharges on loans granted to sugar producers from crop year 1974-1975 up to and including 1984-1985. The guidelines for the implementation of R.A. No. 7202 was issued under Executive Order No. 31 dated October 29, 1992, directing all government lending financial institutions to write-off from their respective books the interest in excess of 12% yearly and all penalties and surcharges due. Certain assets of a subsidiary with net book value of = P97.3 million and = P73.3 million as of September 30, 2005 and 2004, respectively, are used to secure the loan. The loan is payable in 25 equal annual amortization of = P9.9 million and bears interest at 7.5% per annum. Unpaid interest on the loan amounted to = P3.5 million and = P3.8 million as of September 30, 2005 and 2004, respectively. Five-Year Promissory Note The Parent Company obtained a five-year loan from Metropolitan Bank and Trust Company, payable in 6 semi-annual amortization of = P100 million to commence on the 30th of the month from draw date, with the remaining balance payable at maturity. The loan, which bears interest at prevailing market rates, is used to finance capital expenditures relative to expansion of snackfood, candy and biscuits operations of the branded consumer foods segment. The loan is collateralized by negative pledge on certain assets. The loan agreement contains certain provisions which, among others, impose negative covenants relating to the Parent Company’s ownership structure and nature of business, merger or consolidation with another entity, and acquisition of its own capital stock. Total interest expense and other related charges on these long-term debts amounted to = P1,741.8 million, = P1,044.9 million and = P810.4 million for the years ended September 30, 2005, 2004 and 2003, respectively. 16. Related Party Disclosures Transactions with related parties The Group, in its regular conduct of business, has engaged in transactions with its major stockholder, JGSHI, and its affiliated companies. These transactions principally consist of sales, purchases and interest-bearing advances, at prevailing market rates, to and from these companies. The following describes the transactions and related amounts which have been entered into with related parties as of and for the years ended September 30, 2005, 2004 and 2003. Sales to affiliated companies amounted to = P460.9 million in 2005, = P336.3 million in 2004 and = P284.2 million in 2003. Other related party transactions include: (a) purchases of polypropylene resin for bi-axially oriented polypropylene film amounting to = P750.4 million, = P795.7 million and = P788.6 million for the years ended September 30, 2005, 2004 and 2003, respectively, from JG Summit Petrochemical Corporation (Petrochem); (b) power purchase amounting to = P199.3 million, = P99.1 million and = P108.2 million for the years ended September 30, 2005, 2004 and 2003, respectively, from Litton *SGVMC107496* - 76 - Mills, Inc. and Petrochem; (c) rental expenses of certain properties amounting to = P19.5 million in 2005, = P15.8 million in 2004 and = P10.7 million in 2003 from JGSHI; and (d) rental income of certain properties amounting to = P32.6 million, = P50.8 million, and = P49.7 million for the years ended September 30, 2005, 2004 and 2003, respectively, mostly from Digital Telecommunications Philippines, Inc. (Digitel) (see Note 27). JGSHI also provides the Group certain corporate services including corporate finance, corporate planning, procurement, human resources, legal and corporate communications. As of September 30, 2005 and 2004, the net due to (from) related parties amounted to = P121.4 million and (P =20.9) million, respectively. Outstanding balances as of year end are unsecured and interest free. As of September 30, 2005 and 2004, the Group has not made any provision for doubtful amounts owed by 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 Group also maintains savings and current accounts and time deposits with Robinsons Savings Bank, an affiliated local commercial bank. The balances are as follows: 2005 P =268,075 91,213,171 P =91,481,246 Savings and current accounts Short-term investments 2004 = P228,482 59,189,000 = P59,417,482 Loans from shareholders As of September 30, 2005 and 2004, the Group has outstanding advances from stockholders of the Group that amounted to = P269.10 million and = P269.90 million, respectively. The advances are included in the “Accounts payable and accrued expenses” account in the consolidated balance sheets which bears interest at prevailing market rates. 17. Capital Stock and Cumulative Translation Adjustments Capital stock The authorized preferred stock is 12% cumulative, nonparticipating, nonvoting and redeemable at par upon dissolution and liquidation of the Parent Company. There are no issuances of preferred stock. On August 3, 2001, the Parent Company’s BOD approved the issuance of 55,659,008 shares to JGSHI, Robinson’s Supermarket Corporation, and its major stockholder in exchange for two (2) parcels of land and certain marketable securities, respectively, valued at = P250,465,533. This is reflected as “Deposits on future stock subscriptions” in the consolidated balance sheets. On June 19, 2003, the SEC approved the issuance of 49,871,556 shares for the two (2) parcels of land. The remaining 5,787,452 shares are subject to the approval of the SEC. *SGVMC107496* - 77 - A reconciliation of the number of common shares outstanding follows: Beginning of the year Issuances during the year End of the year 2004 = P1,686,479,549 – = P1,686,479,549 2005 P = 1,686,479,549 – P = 1,686,479,549 2003 = P1,636,607,993 49,871,556 = P1,686,479,549 Events After the Balance Sheet Date On October 7, 2005, the BOD approved the increase in the authorized capital stock from = P2,000,000,000 divided into 1,998,000,000 common shares and 2,000,000 preferred shares both at = P1 par value per share to = P3,000,000,000 divided into 2,988,000,000 common shares and 2,000,000 preferred shares both at = P1 par value per share. On a special meeting of the stockholders held on November 22, 2005, the stockholders also approved the above increase in the authorized capital stock and the 15% stock dividends to all stockholders of record as of January 14, 2006, which was subsequently approved by the SEC on December 16, 2005. On December 19, 2005, the SEC authorized the issuance of 252,971,932 common shares with = P1 par value per share or P252,971,932 to cover the 15% stock dividends declared by the BOD and ratified by the stockholders. Cumulative translation adjustments The cumulative translation adjustments account is used to record the exchange differences arising from the translation of the financial statements of foreign subsidiaries. 18. Retained Earnings Restriction A portion of the retained earnings representing the undistributed earnings of the investee companies amounting to approximately = P7.3 billion in 2005, = P5.6 billion in 2004 and = P3.5 billion in 2003 are not available for dividend declaration until received in the form of dividends. Appropriation In December 2003, the BOD approved the appropriation of retained earnings amounting to = P3.0 billion for plant expansion. Dividends declared The Parent Company’s BOD declared cash dividends in favor of all its stockholders as follows: Date of declaration Dividend per share Total dividends 2005 May 5, 2005 = P0.30 = P505.9 million 2004 May 4, 2004 = P0.30 = P505.9 million 2003 May 22, 2003 = P0.30 = P505.9 million *SGVMC107496* - 78 - Policy on dividends The Group intends to maintain an annual cash dividend payment ratio of 50% of the Group’s consolidated net income from the preceding fiscal year, subject to the requirements of the applicable laws and regulations and the absence of circumstances which may restrict the payment of such dividends. The BOD may, at any time, modify such dividend payment ratio. 19. Cost of Sales and Services This account consists of: Raw materials used Direct labor (Note 22) Other manufacturing costs (Note 21 and 22) Total manufacturing cost Goods in process Cost of goods manufactured Finished goods 2005 P = 16,636,710,759 669,759,560 2004 = P15,020,126,478 760,571,580 2003 = P12,421,538,161 582,202,880 5,712,826,551 23,019,296,870 (10,830,264) 23,008,466,606 (69,942,746) P = 22,938,523,860 4,935,263,213 20,715,961,271 (20,696,212) 20,695,265,059 (322,411,429) = P20,372,853,630 4,567,441,813 17,571,182,854 (32,431,416) 17,538,751,438 (166,855,470) = P17,371,895,968 20. Operating Expenses This account consists of: Personnel expense (Note 22) Advertising and promotion Freight and other selling expenses Depreciation, impairment, repairs and maintenance (Note 21) Other administrative expenses 2005 P = 991,826,040 1,838,916,104 1,453,400,399 2004 = P766,433,261 1,741,969,942 1,234,915,048 2003 = P940,129,589 1,637,790,242 1,008,432,447 243,501,008 931,266,110 P = 5,458,909,661 424,173,251 637,385,884 = P4,804,877,386 239,236,090 729,462,289 = P4,555,050,657 Revenue Regulation (RR) No. 10-2002 defines expenses to be classified as EAR expenses and sets a limit for the amount that is deductible for tax purposes. EAR expenses are limited to 0.5% of net sales for sellers of goods or properties or 1% of net revenue for sellers of services. For sellers of both goods or properties and services, an apportionment formula is used in determining the ceiling on such expenses. Entertainment and representation (EAR) expenses amounted to = P14.6 million in 2005, = P11.3 million in 2004 and = P14.9 million in 2003. *SGVMC107496* - 79 - 21. Depreciation, Amortization and Impairment Loss Depreciation, amortization and impairment loss are distributed as follows: Cost of sales and services Operating expenses Other charges (Note 23) 2005 P = 1,513,518,513 151,957,986 178,118,851 P = 1,843,595,350 2004 = P1,404,500,544 397,032,084 255,341,057 = P2,056,873,685 2003 = P1,476,333,563 162,181,625 374,024,382 = P2,012,539,570 2005 P = 1,258,083,567 403,502,033 13,823,896 P = 1,675,409,496 2004 = P1,217,985,716 357,183,564 5,770,500 = P1,580,939,780 2003 = P1,160,408,427 341,072,235 79,523,654 = P1,581,004,316 2004 = P814,506,519 766,433,261 = P1,580,939,780 2003 = P640,874,727 940,129,589 = P1,581,004,316 22. Personnel Expenses Personnel expenses consist of: Salaries, wages and other staff cost Employee benefits Retirement costs (Note 23) The above amounts are distributed as follows: Cost of sales and services Operating expenses 2005 P = 683,583,456 991,826,040 P = 1,675,409,496 23. Retirement Costs The Parent Company has a funded, noncontributory defined benefit retirement plan covering all its regular employees. The plan provides retirement, separation, disability and death benefits to its members. The Parent Company, however, reserves the right to discontinue, suspend or change the rates and amounts of its contributions at any time on account of business necessity or adverse economic conditions. The retirement fund is being administered and managed by certain stockholders, as trustee. As of April 1, 2003, the latest actuarial valuation computed under the projected unit credit cost method, the present value of past service benefits amounted to = P522.8 million. The fair value of the fund assets amounted to = P801.6 million. The principal assumptions used to determine retirement benefits were an interest rate of 7% and average salary increases of 5.5% per annum. Retirement costs charged to operations, including amortization of past service cost, amounted to = P13.8 million in 2005, = P5.8 million in 2004 and = P79.5 million in 2003. *SGVMC107496* - 80 - 24. Other Income (Charges) This account primarily consists of recovery (decline) in value of temporary investments and marketable securities, dividend income and foreign exchange gains (losses). Impairment losses on assets are also included under this account. 25. Income Tax The significant components of the Parent Company’s deferred income tax assets and liabilities represent the deferred income tax effects of the following: Deferred tax assets: Allowance for doubtful accounts Provision for inventory write down Allowance for mortality Unamortized past service cost Unrealized foreign exchange loss Accrued retirement cost Allowance for impairment (see Note 11) Unrealized foreign exchange loss on loans Deferred tax liabilities: Unrealized profit on excess of market value over cost of hog market stock Undistributed income of foreign subsidiaries Unamortized capitalized interest Unrealized foreign exchange gain on advances Others Net deferred tax assets (liabilities) 2005 2004 P =165,336,869 13,615,167 9,586,407 7,297,656 3,862,106 2,019,675 – – 201,717,880 = P103,458,108 9,248,152 5,440,000 6,672,142 6,286,290 – 150,861,468 20,663,022 302,629,182 119,323,183 218,750,000 15,394,083 – 23,372,245 376,839,511 (P =175,121,631) 39,896,766 150,000,000 28,710,362 26,557,294 21,368,910 266,533,332 = P36,095,850 The reconciliation of statutory income tax rate to effective income tax rate follows: Statutory income tax rate Additions (reductions): Net income of foreign subsidiaries for which no tax was provided Equity in net earnings of investees not subject to tax Decline in value of marketable securities Income entitled to tax holiday Interest income subjected to final tax Reduction in allowable interest expense Interest income exempt from tax Others Effective income tax rate 2005 32.00% (14.74) (0.57) (1.47) (2.25) (0.32) 0.04 (0.35) 4.77 17.11% 2004 32.00% (30.61) (1.15) – – (0.14) 0.04 (0.07) (0.64) (0.57%) 2003 32.00% (23.13) (1.12) – (1.13) (0.15) 0.05 (0.27) (1.49) 4.76% *SGVMC107496* - 81 - 26. Earnings Per Share Earnings per share amounts were computed as follows: Net income Divide by the issued number of shares 2005 P = 2,404,439,079 1,686,479,549 P = 1.43 2004 = P1,875,675,097 1,686,479,549 = P1.11 2003 = P1,414,138,195 1,686,479,549 = P0.84 27. Commitments and Contingencies The Group has contingent liabilities arising in the ordinary conduct of business which are either pending decision by the courts or are being contested, the outcome of which are not presently determinable. In the opinion of management and its legal counsel, the eventual liability under these labor-related claims, if any, will not have a material or adverse effect on the Group’s financial position and results of operations. The information usually required by SFAS 37/ IAS 37, Provisions, Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected to prejudice the outcome of pending litigations. Capital commitments As of September 30, 2005, the Group had commitments of = P1,005.5 million, principally relating to the expansion and completion of sugar refinery and production lines for SONEDCO and branded consumer food division, respectively. These commitments are for the acquisition of new machinery plant and equipment items. Operating lease commitments - Lessor The Group has entered into a one-year renewable, noncancellable lease with Digitel covering land and building where Digitel’s office spaces are located. The minimum annual rental income under this operating lease amounts to = P35.9 million. 28. BOI Incentives Parent Company Under the terms of their registrations with BOI, the Parent Company is entitled, among others, to the following incentives: a. Income tax holiday b. Tax credits on taxes and duties on raw materials and supplies used in the manufacture of export products and forming parts thereof; c. Tax credit on domestic capital equipment; d. Tax and duty-free importation of capital equipment; e. Exemption from wharfage dues and any export tax, duty, impost and fees; and f. Other non-fiscal incentives that maybe applicable. *SGVMC107496* - 82 - URSUMCO The five (5) year income tax holiday under its old BOI registration as a new domestic producer of refined sugar that was granted to URSUMCO in 1995, had expired in 2000. However, the following incentives are still available to the Company under its old BOI registration: a. Tax credits on taxes and duties on raw materials and supplies used in the manufacture of export products and forming parts thereof; b. Additional deduction from taxable income on wages subject to certain terms and conditions; c. Exemption from wharfage dues and any export tax, duty impost and fees for ten (10) years from date of registration; d. Exemption from taxes and duties on imported spare parts and suppliers for certain producers at least 70% of production; and e. Other non-fiscal incentives that may be applicable. In 2004, the URSUMCO applied for a new registration with the BOI as expanding producer of refined sugar and molasses. The application for registration for the new activity was approved and granted by the BOI in April 2004. Under the terms of its new registration, the URSUMCO is entitled among others to the following incentives: a. Income tax holiday for a period of three (3) years from April 2004 or actual start of operations, whichever is earlier; b. Tax credits on taxes and duties on raw materials and supplies used in the manufacture of export products and forming parts thereof for ten (10) years from start of commercial operations; c. Additional deduction from taxable income on wages subject to certain terms and conditions; d. Exemption from wharfage dues and any export tax, duty impost and fees for ten (10) years from date of registration; e. Exemption from taxes and duties on imported spare parts and suppliers for export producers with Customs Bonded Manufacturing Warehouse exporting at least 70% of production; and f. Importation of consigned equipment for a period of ten (10) years from date of registration. SONEDCO Under the terms of their registrations with BOI, the SONEDCO is entitled, among others, to the following incentives: a. Tax credit on capital equipment b. Tax and duty-free importation of capital equipment c. Tax credit for taxes and duties on raw materials used for its export products and forming part thereof. 29. Supplementary Cash Flow Information In 2004, the noncash investing activity pertains to receipt by way of assignment of RLC shares in full settlement of the = P564.3 million worth of JGSHI notes that matured. *SGVMC107496* - 83 - In 2003, the noncash financing activity pertains to the full settlement of the issuances of shares of stock through the application of deposits for future stock subscriptions amounting to = P224.4 million. 30. Reclassification of Accounts In 2005, the debt issuance cost was presented net of the related debt securities. Accounts affected in prior years’ consolidated financial statements have been reclassified to conform with the 2005 presentation. 31. Other Matter Republic Act (RA) No. 9337 RA No. 9337 was recently enacted into law amending various provisions in the existing 1997 National Internal Revenue Code. Among the reforms introduced by the said RA, which became effective on July 1, 2005, are as follows: • • • • • Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30% beginning January 1, 2009; Grant of authority to the Philippine President to increase the 10% value added tax (VAT) rate to 12%, effective January 1, 2006, subject to compliance with certain economic conditions; Revise invoicing and reporting requirements for VAT; Expand scope of transactions subject to VAT; and Provide thresholds and limitations on the amounts of VAT credits that can be claimed. Due to the enactment of the RA, the deferred tax asset as of September 30, 2005 was measured at 35%. 32. Approval of the Consolidated Financial Statements The accompanying consolidated financial statements of the Group were authorized for issue by the audit committee and the BOD on January 9, 2006. *SGVMC107496* - 84 - - 85 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE A - MARKETABLE SECURITIES (CURRENT MARKETABLE EQUITY SECURITIES AND OTHER SHORT-TERM INVESTMENTS) SEPTEMBER 30, 2005 Name of Issuing Entity and Description of Each Issue Temporary investments Marketable securities Number of Shares or Principal Amount of Bonds and Notes Value Based on Market Quotations at Balance Sheet Date Amount Shown in the Balance Sheet Income Received and Accrued P 21,753,976,562 P 21,753,976,562 P 1,764,739,009 P 21,753,976,562 P 21,753,976,562 P 1,764,739,009 P 896,641,788 P 896,641,788 P 41,526,253 P 896,641,788 P 896,641,788 P 41,526,253 - 86 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE B - ADVANCES TO OFFICERS AND EMPLOYEES RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES AND PRINCIPAL STOCKHOLDERS (OTHER THAN RELATED PARTIES) SEPTEMBER 30, 2005 Beginning Name of Debtor Total Ending Balance Balance Additions Collections Current Non-Current Total P - P - P - P - P - P - P - P - P - P - P - P - - 87 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE C - LONG-TERM INVESTMENTS IN SECURITIES (NONCURRENT MARKETABLE EQUITY SECURITIES, OTHER LONG-TERM INVESTMENTS IN STOCK, AND OTHER INVESTMENTS) SEPTEMBER 30, 2005 BEGINNING BALANCE ADDITIONS DEDUCTIONS ENDING BALANCE Number Number Shares Equity in of Principal Name of Issuing Entity and Description of Investment Robinson's Land Incorporated URC Confectionery Corp. (formerly Joyco - URC) Total Note: Earnings (Losses) Distribution of Amount of Amount in of Investees Earnings by Bonds and Notes Pesos for the Period 435,747,367 HUNT- Universal Robina Corporation Shares P 1,400,000 1,607,553,488 10,000,000 447,147,367 Description of investments P 72,319,017 1,679,872,505 Percentage of ownership HUNT- Universal Robina Corporation 50% Robinson's Land Corporation 19% P 15,789,500 P 228,833,623 Others 244,623,123 Investees P - P - - (94,619,657) Others P (20,000,000) P of Principal P (114,619,657) P Amount of Amount in Bonds and Notes Pesos - 435,747,367 P 1,741,767,454 - 1,400,000 68,108,517 - 10,000,000 - 447,147,367 Dividends Received/accrued from Investments Not Accounted for by the Equity Method P - P 1,809,875,971 - P - - 88 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE D - ADVANCES TO UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES SEPTEMBER 30, 2005 Name of Affiliate Hunt - Universal Robina Corporation P Digital Telecommunications Philippines., Inc. Cebu Air, Inc. Beginning Ending Balance Balance 35,414,184 P 30,420,018 126,067,080 161,654,769 26,339,860 26,643,557 Robinsons Land Corporation 3,009,988 4,237,531 Cebu Pacific Manufacturing Corporation 9,703,494 10,138,027 Chic Centre Corp. 4,582,760 4,469,726 148,555,186 118,818,403 Others P See Note 16 to the Consolidated Financial Statements. 353,672,552 P 356,382,031 - 89 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE E - PROPERTY, PLANT AND EQUIPMENT SEPTEMBER 30, 2005 Other ChangesClassification Beginning Additions at Balance Cost Retirements Additions Ending (Deductions) Balance Cost: Land P Land improvements 860,053,707 P 842,016,886 Buildings and improvements 15,761,266 P 405,254,036 - P - - P - 1,247,270,922 5,028,644,778 487,254,657 Machinery and equipment 19,314,742,886 1,948,609,948 292,041,883 322,017,057 21,293,328,008 Transportation equipment 1,385,017,013 171,948,826 25,036,750 159,160 1,532,088,249 Furniture, fixtures and equipment 987,544,038 105,820,156 71,818 (68,462) 1,093,223,914 Equipment in transit 231,562,252 463,279,379 - (120,249,524) 574,592,107 Construction in progress 525,195,846 48,720,141 - (9,263,509) 564,652,478 P 29,174,777,406 P 3,646,648,409 - 875,814,973 P 317,150,451 (3,241,789) P 189,352,933 5,512,657,646 P 32,693,628,297 - 90 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE F - ACCUMULATED DEPRECIATION SEPTEMBER 30, 2005 Description Additions Other Changes- Beginning Charged to Costs Additions Ending Balance and Expenses (Deductions) Balance Retirements Cost: Land improvements P 258,743,464 P 176,049,337 Buildings and improvements 1,987,491,244 233,640,232 Machinery and equipment 9,751,169,957 1,274,335,582 Transportation equipment 1,001,131,740 107,079,463 655,456,052 52,490,736 Furniture, fixtures and equipment P 13,653,992,457 P 1,843,595,350 P - P - P - P 434,792,801 552,354 2,221,683,830 151,139,684 138,388,562 11,012,754,417 24,113,852 48,081,989 1,132,179,340 56,257 112,514 708,003,045 175,309,793 P 187,135,419 P 15,509,413,433 - 91 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE G - OTHER ASSETS SEPTEMBER 30, 2005 Beginning Balance Description Goodwill Miscellaneous deposits Others Deductions/Amortizations Charged to cost Charged to and expenses Other accounts Additions at cost P 957,142,218 60,438,823 57,819,539 P - P 167,838,005 - P - P 1,075,400,580 P - P 167,838,005 P - Other ChangesAdditions (deductions) P P Ending Balance (6,101,940) 549,705 67,020,083 P 783,202,273 60,988,528 124,839,622 61,467,848 P 969,030,423 - 92 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE H - LONG-TERM DEBT SEPTEMBER 30, 2005 Amount Amount Amount Name of Issuer and Authorized by Shown as Shown as Type of Obligation Indenture Current Long-Term Total Remarks URC Philippines, Ltd. 8.25% Guarantedd Notes Due 2012 $ 200,000,000 $ 125,000,000 P - P 11,202,000,000 P 11,202,000,000 See Note below URC Philippines, Ltd. 9% Guarantedd Notes Due 2008 Bayerische Vereinsbank AG Euro $ - 7,001,250,000 7,001,250,000 - do - 11,430,473 121,333,614 242,667,227 364,000,841 - do - 6,236,038 49,554,432 173,463,974 223,018,406 - do - Philippine Sugar Corporation - 5,155,499 57,895,473 63,050,972 - do - Metrobank and Trust Co. - 200,000,000 500,000,000 700,000,000 - do - 2,905,127,240 2,905,127,240 - do - Universal Robina (Cayman), Ltd. 8 3/8% Guaranteed Notes Due 2006 $ - 100,000,000 P Less: Debt Issuance Cost Note: The terms, interest rate, collaterals and other relevant information are shown in Note 15 to Consolidated Financial Statements. 376,043,545 P 22,082,403,914 P 22,458,447,459 3,152,011 185,095,512 188,247,523 372,891,534 21,897,308,402 22,270,199,936 - 93 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE I - ADVANCES FROM UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES SEPTEMBER 30, 2005 Name of Affiliate JG Summit Petrochemical Corp. P Hello Snack Foods Beginning Ending Balance Balance - P 46,162,434 Litton Mills, Inc. 4,353,006 - - 76,304,923 Terai Industrial Corp. 23,575,656 Cebu Industrial and Mgt. Corp. 34,330,579 - 7,472,991 - Westpoint Industrial Corp. Pan Pacific Investment Co. Ltd. Others P See Note 16 to the Consolidated Financial Statements. 28,731,925 216,458,206 215,433,895 4,777,311 152,921,014 332,777,177 P 477,744,763 - 94 UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES SCHEDULE K - CAPITAL STOCK SEPTEMBER 30, 2005 Title of Issue Number of Shares Authorized Number of Shares Issued and Outstanding Number of Shares Reserved for Options, Warrants, Conversions, and Other Rights Number of Shares Held By Affiliates Preferred stock - P1 par value 2,000,000 Common stock - P1 par value 1,998,000,000 Directors, Officers and Employees Others 2,670,908 179,413,912 None 1,686,479,549 1,504,394,729 - 95 - UNIVERSAL ROBINA CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS Form 17-A Page No. No. (3) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession * Instruments Defining the Rights of Security Holders, Including Indentures * (8) Voting Trust Agreement * (9) Material Contracts * (10) Annual Report to Security Holders, Form 17-Q or Quarterly Report to Security Holders * (13) Letter re Change in Certifying Accountant * (16) Report Furnished to Security Holders * (18) Subsidiaries of the Registrant 96 (19) Published Report Regarding Matters Submitted to Vote of Security Holders * (20) Consent of Experts and Independent Counsel * (21) Power of Attorney * (29) Additional Exhibit Letter re Disclosure Rules on Executive Compensation * (5) _______ * These Exhibits are either not applicable to the Company or require no answer. - 96 - EXHIBIT 18 SUBSIDIARIES OF THE REGISTRANT Universal Robina Corporation has the following subsidiaries that are directly and indirectly owned: Country of Percentage of Ownership Investee Companies Incorporation Direct Indirect CFC Corporation Philippines 100 – Universal Robina (Cayman), Ltd. Cayman Islands 100 – URC Philippines, Limited British Virgin Islands 100 – Universal Robina Sugar Milling Corporation (URSUMCO) Philippines 100 – Southern Negros Development Corporation - do (SONEDCO) – 94 CFC Clubhouse, Incorporated (formerly CFC Keebler, Incorporated) - do 100 – CFC Clubhouse Property, Inc. (formerly CFC Keebler Property, Inc.) - do 100 – URC International Co. Ltd. (URCICL) British Virgin Islands 77 – Hong Kong China Foods Co. Ltd. – 77 - do URC Asean Brands Co. Ltd. 77 - do – URC Hong Kong Company Limited (formerly Hong Kong Peggy Snacks Foods Co., Limited) Hong Kong – 100 Tianjin Pacific Foods Manufacturing Co., – Ltd. China 100 Shanghai Peggy Foods Co., Ltd. - do – 100 Xiamen Tongan Pacific Food Co., Ltd. - do – 100 URC Foods (Singapore) Pte. Ltd. (formerly Pan Pacific Snacks Pte. Ltd.) Singapore – 100 URC (Thailand) Co., Ltd. (formerly Thai Peggy Foods Co. Ltd.) Thailand – 100 Panyu Peggy Foods Co., Ltd. China – 90 URC Snack Foods (Malaysia) Sdn. Bhd. (formerly Pacific World Sdn. Bhd.) Malaysia – 91.52 Ricellent Sdn. Bhd. - do – 54.03 PT URC Indonesia Indonesia – 100 URC Vietnam Co., Ltd. Vietnam – 100 Nissin - Universal Robina Corporation Philippines 65 – URC Confectionery Corporation [(URCCC) (formerly JOYCO-Universal Robina Corporation)] - do 100 –
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