The prospectus is being displayed in the website to make the prospectus accessible to more investors.

The PSE assumes no responsibility for the correctness of any of the statements made or opinions or reports expressed in the Prospectus. Furthermore, the Stock Exchange makes no representation as to the completeness of the Prospectus and disclaims any liability whatsoever for any loss arising from or in reliance in whole or in part on the contents of the Prospectus.

PROSPECTUS

April 24, 2008

San Miguel Brewery Inc.

Primary Offer of 77,052,000 Common Shares Secondary Offer of 693,472,000 Common Shares Offer Price of P 8.00 per Offer Share

Joint Bookrunners and Joint Lead Managers

Citigroup Global Markets Limited

ATR KimEng Capital Partners, Inc.

Co-Lead Manager

DBS Bank Ltd.

Joint Domestic Lead Underwriters

ATR KimEng Capital Partners, Inc.

BDO Capital & Investment Corporation

Domestic Participating Underwriter

ING Bank N.V.

Domestic Selling Agents

The Trading Participants of the Philippine Stock Exchange, Inc.

SAN MIGUEL BREWERY INC. 40 San Miguel Avenue Mandaluyong City The Philippines Telephone Number: +632 632 3000 This prospectus relates to the offer and sale of 770,524,000 common shares (the Offer Shares), par value P 1.00 per share (the Common Shares), of San Miguel Brewery Inc., a corporation organized under Philippine law (the Company). The Offer Shares will comprise (i) 77,052,000 Common Shares to be issued and offered by the Company by way of a primary offer (the Primary Offer, and such Common Shares, the Primary Offer Shares) as further described below and (ii) 693,472,000 existing Common Shares offered by San Miguel Corporation (SMC) pursuant to a secondary offer (the Secondary Offer, and such Common Shares, the Secondary Offer Shares). The Company will not receive any of the proceeds from the sale of the Secondary Offer Shares. The Offer Shares shall be offered at P 8.00 per Offer Share (the Offer Price). An estimated total of up to 15,410,478,960 Common Shares shall be outstanding after the Combined Offer (as defined below). The total proceeds to be raised by the Company and SMC from the sale of the Offer Shares shall be P 6,164.2 million, of which the estimated net proceeds will be approximately P 5,819.5 million. Of the Offer Shares, 231,157,000 Common Shares (the Domestic Offer Shares) are being offered in the Philippines (the Domestic Offer). Of the Domestic Offer Shares, 154,105,000 Common Shares are being offered at the Offer Price to all of the trading participants (the PSE Brokers) of the Philippine Stock Exchange, Inc. (the PSE). An additional 77,052,000 Common Shares will be offered to Local Small Investors through the Domestic Underwriters or authorized selling agents. ATR KimEng Capital Partners, Inc. (ATR KimEng) and BDO Capital & Investment Corporation (BDO) will act as the joint lead underwriters of the Domestic Offer (the Joint Domestic Lead Underwriters). 539,367,000 of the Offer Shares (the International Offer Shares) are being offered and sold outside the Philippines and the United States through Citigroup Global Markets Limited, ATR KimEng Capital Partners, Inc., and DBS Bank Ltd. (collectively, the International Underwriters) in reliance on Regulation S (the Regulation S) under the United States Securities Act of 1933, as amended (the U.S. Securities Act). The Domestic Offer and the International Offer are collectively referred to herein as the Combined Offer. In connection with the Combined Offer, SMC has granted the Joint Stabilizing Agents named herein an option exercisable in whole or in part within 30 days from the date of listing and when trading of the Companys Offer Shares commences on the PSE (the Listing Date) to purchase from SMC additional Common Shares comprising up to 15% of the total number of Offer Shares (the Optional Shares) at the Offer Price, on the same terms and conditions as the Offer Shares as set forth in this prospectus, solely to cover over-allotments, if any (the Over-Allotment Option). The Offer Shares may be reallocated between the International Offer and the Domestic Offer. See Plan of Distribution. In connection with the Combined Offer, the Joint Stabilizing Agents may effect price stabilization transactions from time to time for a period that shall not exceed 30 days from and including the Listing Date. The Joint Stabilizing Agents may purchase Common Shares in the open market only if the market price of the Common Shares is below the Offer Price. This may have the effect of preventing or retarding a decline in the market price of the Common Shares and may also cause the price of the Common Shares to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If the Joint Stabilizing Agents commence any of these transactions, they may discontinue them at any time. All of the Common Shares issued and to be issued pursuant to the Combined Offer have, or will have, identical rights and privileges. The Common Shares may be owned by any person or entity regardless of citizenship or nationality. See Plan of Distribution and Philippine Foreign Investment, Foreign Ownership and Exchange Controls. The net proceeds from the Primary Offer, determined by deducting from the gross proceeds the total issue management, underwriting and selling fees applicable to the Primary Offer (up to 2.4% of the

gross proceeds of the Combined Offer, inclusive of amounts to be paid to other participating underwriters and selling agents, where applicable), listing fees, taxes and other related fees and expenses, will be used for general corporate purposes, including working capital and investments. See Use of Proceeds. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. The International Underwriters may reallocate the Offer Shares between the Domestic Offer and the International Offer. Each holder of a Common Share is entitled to such dividends as may be declared in accordance with the Companys dividend policy. The Companys Board of Directors has resolved that, upon the listing of the Companys shares on the PSE, the Companys cash dividend policy will entitle holders of Common Shares to receive annual cash dividends equivalent to 100% of the prior years recurring net income, which is net income calculated without respect to extraordinary events that are not expected to recur, based on the recommendation of the Board of Directors. Such recommendation will take into consideration factors such as debt service requirements, the implementation of business plans, operating expenses, budgets, funding for new investments and acquisitions, appropriate reserves and working capital, among others. Although the cash dividend policy may be changed by the Companys Board of Directors at any time, the Companys current intention is to pay holders of its Common Shares annual cash dividends at or above the current payout ratio. See the section entitled Dividend Policy. The Companys Board of Directors is authorized to declare dividends. A cash or property dividend declaration does not require any further approval from the Companys shareholders. A stock dividend declaration requires the further approval of shareholders holding or representing not less than two-thirds of the Companys outstanding capital stock. The Corporation Code (as defined herein) defines the term outstanding capital stock to mean the total shares of stock issued to subscribers or shareholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares. Such shareholders approval may be given at a general or special meeting duly called for such purpose. No dealer, salesman, or any other person has been authorized to give any information or to make any representation not contained in this prospectus. If given or made, any such information or representation must not be relied upon as having been authorized by the Company or any of the Underwriters. The distribution of this prospectus and the offer and sale of the Offer Shares and Optional Shares may, in certain jurisdictions, be restricted by law. The Company and the Underwriters require persons into whose possession this prospectus comes to inform themselves of and observe all such restrictions. This prospectus does not constitute an offer of any securities, or any offer to sell, or a solicitation of any offer to buy any of the Companys securities in any jurisdiction, to or from any person to whom it is unlawful to make such offer in such jurisdiction. Prior to the Combined Offer, there has been no public market for the Common Shares. Accordingly, there has been no market price for the Common Shares derived from day-to-day trading. The information contained in this prospectus relating to the Company, its operations and those of its affiliates has been supplied by the Company, unless otherwise stated herein. To the best of its knowledge and belief, the Company (which has taken all reasonable care to ensure that such is the case) confirms that the information contained in this prospectus relating to it, its operations and those of its affiliates is correct, and that there is no material misstatement or omission of fact which would make any statement in this prospectus misleading in any material respect and that the Company hereby accepts full and sole responsibility for the accuracy of the information contained in this prospectus with respect to the same. The Joint Domestic Lead Underwriters confirm that they have exercised the required due diligence in verifying that all material information in this prospectus is true. The Underwriters assume no liability for any information supplied by the Company in relation to this prospectus. Unless otherwise indicated, all information in this prospectus is as of the date of this prospectus. Neither the delivery of this prospectus nor any sale made pursuant to this prospectus shall, under any circumstances, create any implication that the information contained herein is correct as of any date subsequent to the date hereof or that there has been no change in the affairs of the Company since such date.

ii

In making an investment decision, investors must rely on their own examination of the Company and the terms of the Combined Offer, including the material risks involved. The Combined Offer is being made on the basis of this prospectus only. Market data and certain industry forecasts used throughout this prospectus were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified, and neither the Company nor the Underwriters make any representation as to the accuracy of such information. In this prospectus, references to U.S. dollars, or US$ are to the currency of the United States of America. The Company currently maintains its accounts in Philippine pesos, the currency of the Republic of the Philippines, which is referred to as pesos or P . This prospectus contains translations of certain amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, the Philippine Dealing System year-end closing rate as of December 31, 2007, which was P 41.280 to US$1.00, was used in these translations. In addition, unless otherwise indicated, Philippine peso/U.S. dollar exchange rates referred to in this prospectus are Philippine Dealing System weighted average rates for the indicated period or on the applicable date, as relevant. No representation is made that the Philippine peso, U.S. dollar, or other currency amounts referred to herein could have been or could be converted into Philippine pesos, U.S. dollars, or any other currency, as the case may be, at this rate, at any particular rate or at all. This prospectus includes forward-looking statements. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting its business. Words including, but not limited to, believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. In light of the risks and uncertainties associated with forwardlooking statements, investors should be aware that the forward-looking events and circumstances discussed in this prospectus might not occur. The Companys actual results could differ substantially from those anticipated in the Companys forward-looking statements. An application for listing of the Common Shares (including the Offer Shares and all outstanding Common Shares not part of the Combined Offer) was approved on March 26, 2008 by the board of directors of the PSE, subject to the fulfillment of certain listing conditions. The PSE assumes no responsibility for the correctness of any statements made or opinions expressed in this prospectus. The PSE makes no representation as to its completeness and expressly disclaims any liability whatsoever for any loss arising from reliance on the entire or any part of this prospectus. Such approval for listing is permissive only and does not constitute a recommendation or endorsement of the Common Shares by the PSE. Application has been made to the Philippine Securities and Exchange Commission (the Philippine SEC) to register the Offer Shares under the provisions of the Securities Regulation Code of the Philippines (Republic Act No. 8799) (the SRC).

iii

ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL INFORMATION CONTAINED HEREIN IS TRUE AND CORRECT. The Offer Shares are offered subject to receipt and acceptance of any order by the Company and subject to the Companys right to reject any order in whole or in part. It is expected that the Offer Shares will be delivered in book-entry form against payment therefor to the Philippine Depository and Trust Corporation (the PDTC) on or about May 12, 2008. SAN MIGUEL BREWERY INC. SIGNATURE By: Name: Ramon S. Ang Title: Chairman of the Board and President REPUBLIC OF THE PHILIPPINES) CITY OF MANDALUYONG )SS. Before me, a notary public in and for the city named above, personally appeared:
Name Community Tax Certificate No. Date/Place Issued

Ramon S. Ang

11895133

January 15, 2008/ Mandaluyong City

who is personally known to me and to me known to be the same person who presented the foregoing instrument and signed the same in my presence and who took an oath before me as to such instrument. Witness my hand and seal this 24th day of April, 2008. NOTARY PUBLIC Doc. No. 335; Page No. 68; Book No. VIII; Series of 2008.

iv

TABLE OF CONTENTS Page GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY FINANCIAL AND OPERATING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY OF THE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DETERMINATION OF OFFER PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . THE BEER INDUSTRY IN THE PHILIPPINES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BOARD OF DIRECTORS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELLING SHAREHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DESCRIPTION OF PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MATERIAL CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MARKET PRICE OF AND DIVIDENDS ON THE COMPANYS STOCK AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . REGULATORY FRAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GENERAL CORPORATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE PHILIPPINE STOCK MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PHILIPPINE INVESTMENT, FOREIGN OWNERSHIP AND EXCHANGE CONTROLS . . . . . . . PHILIPPINE TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 13 16 21 32 34 35 36 37 38 41 58 64 82 88 89 94 99 100 105 108 111 113 117 122 123 127 128 129 F-1

GLOSSARY OF TERMS In this prospectus, unless the context otherwise requires, the following terms shall have the meanings set out below. ABI . . . . . . . . . . . . . . . . . . . ABV . . . . . . . . . . . . . . . . . . . Adjuncts . . . . . . . . . . . . . . . Asia Brewery Inc. Alcohol-by-volume, expressed as a percentage. Supplementary carbohydrate sources, such as sugar and non-malted grains including rice, corn and tapioca starch, used as raw materials for beer as a substitute for malted barley. Anchor Insurance Brokerage Corporation. An application to subscribe for Offer Shares pursuant to the Combined Offer. Average selling prices of products, net of VAT and trade discounts. A day other than Saturday or Sunday on which banks are open for business in Metro Manila, Philippines. The Philippine Bureau of Internal Revenue. The Board of Directors of the Company. In respect of the market for beer, used to describe a market segment, meaning the middle tier of socio-economic groups. Bangko Sentral ng Pilipinas, the central bank of the Philippines. Canadean Limited, a leading global beverage research company. The report on the Philippine beer industry prepared by Canadean for inclusion in this prospectus. Compound annual growth rate. Collective Bargaining Agreement. Central Clearing and Settlement System. SMCs Corporate Key Accounts Group. The offering for sale of the Offer Shares pursuant to the Domestic Offer and the International Offer on, and subject to, the terms and conditions stated herein. The Companys shares of common stock, par value P 1.00 per share. San Miguel Brewery Inc. Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines.

AIBC . . . . . . . . . . . . . . . . . . Application . . . . . . . . . . . . .

Average Selling Price . . . . Banking Day . . . . . . . . . . .

BIR . . . . . . . . . . . . . . . . . . . . Board of Directors . . . . . . Broad Popular . . . . . . . . . .

BSP . . . . . . . . . . . . . . . . . . . Canadean . . . . . . . . . . . . . . . Canadean Report . . . . . . . .

CAGR . . . . . . . . . . . . . . . . . CBA . . . . . . . . . . . . . . . . . . . CCSS . . . . . . . . . . . . . . . . . . CKAG . . . . . . . . . . . . . . . . . Combined Offer . . . . . . . . .

Common Shares . . . . . . . . . Company . . . . . . . . . . . . . . . Corporation Code . . . . . . .

DENR . . . . . . . . . . . . . . . . . Domestic Offer . . . . . . . . .

The Philippine Department of Environment and Natural Resources. The offer for sale of the Domestic Offer Shares to be made in the Philippines by the Company and the Selling Shareholder. From 9:00 a.m., Manila time, on April 28, 2008 to 11:00 a.m., Manila time, on May 6, 2008, or such other period as may be agreed between the Company and the Underwriters, subject to approval by the Philippine SEC and the PSE. 231,157,000 of the Offer Shares being offered by the Company and the Selling Shareholders pursuant to the Domestic Offer (not including Optional Shares and further subject to reallocation to International Offer Shares).

Domestic Offer Period . . .

Domestic Offer Shares . . .

Domestic Receiving Agent . . . . . . . . . . . . . . . . Domestic Selling Agent . . . . . . . . . . . . . . . .

SMC Stock Transfer Service Corporation.

Trading Participants of the PSE.

Domestic Underwriters . .

The Joint Domestic Lead Underwriters and the domestic participating underwriter, ING Bank N.V.

Domestic Underwriting Agreement . . . . . . . . . . .

Agreement dated as of April 25, 2008 among the Company, SMC and the Domestic Underwriters. Environmental Compliance Certificate. In respect of the market for beer, used to describe a market segment, meaning the bottom tier of socio-economic groups. The Philippine Environmental Impact Statement System. Any natural person of legal age residing in the Philippines regardless of nationality, or any corporation, association, partnership, trust account, fund or entity residing in and organized under the laws of the Philippines and/or licensed to do business in the Philippines, regardless of nationality, subject to the Philippine ownership requirement under relevant Philippine laws. A measure of volume for beer, equal to a 24-bottle case of 320 ml bottles, the standard size for San Miguel Pale Pilsen, equivalent to 7.68 liters. Taxes levied on beer products based on removals from the plant where the products are produced.

ECC . . . . . . . . . . . . . . . . . . . Economy . . . . . . . . . . . . . . .

EIS Law . . . . . . . . . . . . . . . Eligible Investors . . . . . . .

Equivalent Case . . . . . . . . .

Excise Taxes . . . . . . . . . . .

Food Development Center . . . . . . . . . . . . . . .

An agency of the National Food Authority of the Philippines.

Government . . . . . . . . . . . . GSMI . . . . . . . . . . . . . . . . . .

The Government of the Republic of the Philippines. Ginebra San Miguel, Inc.

Group . . . . . . . . . . . . . . . . . . Hectoliter or hl . . . . . . . . . High-Alcohol Beer . . . . . . IFRS . . . . . . . . . . . . . . . . . . . International Offer . . . . . .

SMC and its subsidiaries, including the Company. 100 liters or 13.02 Equivalent Cases. Any beer with ABV of more than 5%. International Financial Reporting Standards. The offer for sale of the International Offer Shares outside of the United States in reliance on Regulation S.

International Offer Shares . . . . . . . . . . . . . . .

539,367,000 of the Offer Shares being offered for sale pursuant to the International Offer (not including Optional Shares and further subject to reallocation from Domestic Offer Shares).

International Underwriters . . . . . . . . .

Citigroup Global Markets Limited, ATR KimEng Capital Partners, Inc. and DBS Bank Ltd. Initial Public Offering. San Miguel Brewery Inc.

IPO . . . . . . . . . . . . . . . . . . . . Issuer . . . . . . . . . . . . . . . . . . Joint Domestic Lead Underwriters . . . . . . . . .

ATR KimEng Capital Partners, Inc. and BDO Capital & Investment Corporation. Citigroup Global Markets Limited and ATR KimEng Capital Partners, Inc.

Joint Lead Managers . . . . . Joint Stabilizing Agents . . . . . . . . . . . . . . . Jumbo Certificate . . . . . . .

Citigroup Global Markets Limited and ATR KimEng Capital Partners, Inc. A new warrant or stock certificate covering all the warrants or shares lodged with the PDTC and issued in the name of the PCD Nominee. Joe White Maltings Pty. Ltd. The date on which trading of the Offer Shares on the PSE begins, expected to be on or about May 12, 2008. Subscriber or purchaser of the Domestic Offer Shares who is willing to subscribe or purchase a minimum board lot or whose subscription or purchase does not exceed P 25,000.00. Any beer with caloric content at least 33% lower than ordinary beer. The Companys Manual on Corporate Governance, approved by the Board of Directors on October 25, 2007, and as amended on April 10, 2008. The minimum corporate income tax under the National Internal Revenue Code of the Philippines, as amended, which is currently fixed at 2.0%. P 8.00 per Offer Share. The Domestic Offer Shares and the International Offer Shares.

JWM . . . . . . . . . . . . . . . . . . Listing Date . . . . . . . . . . . .

Local Small Investors . . . .

Low-Calorie Beer . . . . . . . Manual . . . . . . . . . . . . . . . .

MCIT . . . . . . . . . . . . . . . . . .

Offer Price . . . . . . . . . . . . . Offer Shares . . . . . . . . . . . .

Off-premise . . . . . . . . . . . .

With respect to beer sales, means sales at grocery stores, convenience stores, sari sari stores and other outlets other than on-premise outlets. With respect to beer sales, means sales at consumer outlets where consumers purchase and immediately consume beer, such as bars, restaurants, hotels, food stalls. Up to 115,578,000 Common Shares to be sold upon exercise of the Over-Allotment Option. The option granted by the Selling Shareholder to the Joint Stabilizing Agents within 30 days from the Listing Date to require the Selling Shareholder to sell up to 115,578,000 additional Common Shares. The Philippine Pollution Adjudication Board. Philippine Accounting Standards. PCD Nominee Corporation. Philippine Depository and Trust Corp. The lawful currency of the Republic of the Philippines. Philippine Financial Reporting Standards. The Securities and Exchange Commission of the Philippines. 77,052,000 Common Shares to be issued and offered by the Company. The Common Shares offered in the Primary Offer. The Philippine Stock Exchange, Inc. Trading participants of the PSE. Bank of Commerce. Regulation S under the U.S. Securities Act. A special Philippine court vested with jurisdiction over criminal and civil cases involving graft and corrupt practices and such other offenses committed by public officers and employees.

On-premise . . . . . . . . . . . . .

Optional Shares . . . . . . . . .

Over-Allotment Option . .

PAB . . . . . . . . . . . . . . . . . . . PAS . . . . . . . . . . . . . . . . . . . PCD Nominee . . . . . . . . . . PDTC . . . . . . . . . . . . . . . . . . Peso or P . . . . . . . . . . . . . . PFRS . . . . . . . . . . . . . . . . . . Philippine SEC . . . . . . . . . Primary Offer . . . . . . . . . . . Primary Offer Shares . . . . PSE . . . . . . . . . . . . . . . . . . . PSE Brokers . . . . . . . . . . . . Receiving Bank . . . . . . . . . Regulation S . . . . . . . . . . . . Sandiganbayan . . . . . . . . . .

San Miguel Packaging Group . . . . . . . . . . . . . . . .

A group comprised of SMPSI, SMYAC, SMYFMC, SMRPC and Mindanao Corrugated Fibreboards, Inc. The Securities Clearing Corporation of the Philippines. 693,472,000 existing Common Shares offered by SMC.

SCCP . . . . . . . . . . . . . . . . . . Secondary Offer . . . . . . . . Secondary Offer Shares . . . . . . . . . . . . . . . Selling Shareholder . . . . . SFAS . . . . . . . . . . . . . . . . . .

The Common Shares offered in the Secondary Offer. SMC. Statements of Financial Accounting Standards.

SMBD . . . . . . . . . . . . . . . . .

San Miguel Beer Division, a division of SMC before it was spun off to create the Company. San Miguel Beverages, Inc. San Miguel Corporation. SMC Shipping and Lighterage Corporation. San Miguel Distribution Company, Inc. San Miguel International Limited. SMITS, Inc. San Miguel Properties, Inc. San Miguel Packaging Specialists, Inc. San Miguel Pure Foods Company, Inc. San Miguel Rengo Packaging Corporation. San Miguel Yamamura Asia Corporation. San Miguel Yamamura Fuso Molds Corporation. Republic Act No. 8799, otherwise known as The Securities Regulation Code of the Philippines, as amended from time to time, and including the rules and regulations issued thereunder. Member brokers of the PSE. The Domestic Underwriters and the International Underwriters. In respect of the market for beer, used to describe a market segment, meaning the upper tier of socio-economic groups. The lawful currency of the United States of America. The United States Securities Act of 1933, as amended. Value-added tax.

SMBI . . . . . . . . . . . . . . . . . . SMC . . . . . . . . . . . . . . . . . . . SMCSL . . . . . . . . . . . . . . . . SMDCI . . . . . . . . . . . . . . . . SMIL . . . . . . . . . . . . . . . . . . SMITS . . . . . . . . . . . . . . . . . SMPI . . . . . . . . . . . . . . . . . . SMPSI . . . . . . . . . . . . . . . . . SMPFC . . . . . . . . . . . . . . . . SMRPC . . . . . . . . . . . . . . . . SMYAC . . . . . . . . . . . . . . . . SMYFMC . . . . . . . . . . . . . . SRC . . . . . . . . . . . . . . . . . . .

Trading Participants . . . . . Underwriters . . . . . . . . . . . Upper Popular . . . . . . . . . .

U.S. dollars or US$ . . . . . . U.S. Securities Act . . . . . . VAT . . . . . . . . . . . . . . . . . . .

SUMMARY The following summary is qualified in its entirety by the more detailed information, including the Companys examined pro forma financial statements and notes relating thereto, beginning on page F-1 of this prospectus. For a discussion of certain matters that should be considered in evaluating an investment in the Offer Shares, see the section of this prospectus entitled Risk Factors. Investors are recommended to read this entire prospectus carefully. OVERVIEW OF THE COMPANY The Company is the largest producer of beer in the Philippines, with a total market share of approximately 93% in 2006, according to Canadean Limited (Canadean). The Company has five breweries strategically located across the Philippines and a highly developed distribution system serving approximately 471,000 retail outlets. The Companys beer brands include all of the top four brands in the country, namely San Miguel Pale Pilsen, Red Horse, San Mig Light and Gold Eagle. San Miguel Pale Pilsen , the Companys flagship brand, has a history of over 117 years. San Miguel beer was first produced by La Fabrica de Cerveza de San Miguel (San Miguel Brewery), a small brewery in the Philippines that began its operations in 1890. San Miguel Brewery provided the foundation from which SMC has grown to become the largest food, beverage and packaging company in the Philippines today. San Miguel Brewery was renamed San Miguel Corporation (SMC) in 1963. From a single brewery producing a single product in 1890, SMCs corporate history and business portfolio have evolved over the years. It entered the soft drinks business in 1922 and became the first overseas bottler of The Coca-Cola Company in 1927. To meet the needs of its beer and soft drinks businesses, SMC established a glass packaging plant in Manila in 1938 to supply its own requirements. SMC has expanded to include other food, beverage and packaging products. It has also grown geographically from a Philippine-based beer company to become a regional producer in the Asian beer market. The San Miguel brewery in Hong Kong was founded in 1948 and by the 1970s, San Miguel beer had established a strong market position in Hong Kong. Building on San Miguel beers leading positions in the Philippines and Hong Kong, SMC expanded into new markets, including China in 1991, Indonesia in 1992, Vietnam in 1993, and Thailand in 2004. Prior to the creation of the Company, all of SMCs beer operations were under the San Miguel Beer Division (SMBD), a business unit of SMC. On July 24, 2007, the shareholders of SMC approved the transfer of SMCs domestic Philippine beer business assets to the Company in exchange for additional shares in the Company, a wholly-owned subsidiary of SMC. The assets transferred to the Company comprise the domestic beer business net assets as of June 30, 2007, excluding land, brands and income and other taxes payable. The Company was incorporated on July 26, 2007, and the domestic beer business was spun off from SMC effective October 1, 2007. The spin-off of SMCs domestic beer business into the Company was intended to realize the value of SMCs flagship business. Following approval by the shareholders of SMC of the spin-off of the domestic beer business and the creation of the Company, all plant and equipment used by SMBD in the domestic beer business were transferred to the Company, while SMC retains ownership of the brands and land assets used in the domestic beer business. Under the new structure, the Company will pay SMC royalties for the use of brands and other intellectual property rights of SMC, rentals for the lease of the land assets, fees for shared services and dividends. See Related Party Transactions. Strengths The Company believes that its principal strengths include the following: Strong and popular brand portfolio supported by high quality products. From a single product produced in a single brewery in 1890, San Miguel beer has, over 117 years later, grown into an array of popular beer products catering to the distinct tastes and preferences of beer drinkers across all segments and markets in the Philippines. San Miguel Pale Pilsen , the Companys flagship brand, has been an iconic Philippine brand for most of the 20 th century and

up to today. After considering the Filipino beer drinkers evolving preferences, other brands and products have been introduced, and these have been very successful. Today, the Company offers a portfolio of eight strong and popular brands: Pale Pilsen, Red Horse, San Mig Light, Super Dry, Cerveza Negra, San Mig Strong Ice, Gold Eagle and Cali , the countrys only malt-based non-alcoholic drink. The various products carry distinct attributes that cater to all segments of the Philippine beer market. The Companys products have been internationally recognized for quality, including five Monde Selection International gold medal awards in 2007. Attractive growth prospects. Despite its dominant market position, the Company is well positioned to capture further volume growth and market share in the Philippine beer industry. Strong overall industry growth. According to Canadeans most recent forecast, beer sales volume in the Philippines was forecasted to grow by 5% in 2007. The Company expects industry volumes to continue to grow, driven in part by the forecast strong GDP growth of 6.3-7.0% for 2008, complemented by relatively low inflation. Given its strong brands and leading market position, the Company believes it is best placed to capture a very large portion of the expected overall growth in the industry. Expansion of Coverage Area. In addition, the Company expects to further increase its sales by expanding its coverage of areas it currently under-serves. Despite its overall market dominance, the Company believes there are areas where it holds less than 85% market share. The Company believes it will be able to grow its sales and share in these markets through enhanced distribution and promotional strategies. Increased market share of broader alcoholic beverage segment. Further, the Company also believes additional sales growth can be achieved by increasing its share of the broader alcoholic beverage segment. In particular, the Company believes its low cost, high-alcohol beer, Red Horse , which has enjoyed substantial volume growth in the past few years, will be able to attract hard liquor consumers and take an increasing share of the overall alcoholic beverage market from the hard liquor segment.

Strong market position presenting significant barriers to entry. The Company enjoys a number of advantages that would be difficult for a potential competitor to create, making it difficult for other companies to successfully compete with it in the Philippine beer market. These advantages include: Market leadership and economies of scale. San Miguel Beer products have consistently dominated the market for beer in the Philippines, the countrys largest alcoholic beverage segment. Based on the Companys internal data, the Companys products captured a high market share of 95% in 2007. The countrys top four beer brands are all produced by the Company. Unlike most other markets for beer, in the Philippines, imported brands account for only 0.1% of the market, with distribution limited to upscale bars and hotels and high-end supermarkets. Despite the entry of local competition in 1981 and the introduction of a few locally brewed versions of foreign brands, the Company has maintained an extremely strong market position. The popular acceptance and widespread availability of San Miguel Beer products have helped strengthen San Miguel Beers market position over the years. The Companys size and scale of operations provide significant economies of scale in production, research and development, distribution, and managerial and marketing functions over a diversified product portfolio and geographic base. Its size also results in substantial leverage and significant bargaining power with suppliers and retailers. Proximity of Production Facilities to Consumer Markets. To ensure product availability and freshness, as well as to minimize distribution costs, the Company maintains a network of five local breweries that are strategically located in the three main islands of the Philippines: Luzon, Visayas and Mindanao. The Company has breweries in each of Valenzuela City, Metro Manila; San Fernando City, Pampanga; Mandaue City, Cebu; Bacolod City, Negros Occidental; and Darong, Sta. Cruz, Davao del Sur, with a total annual

production capacity of 15.1 million hectoliters. Each of these breweries is equipped with automated facilities capable of packaging the Companys products in a variety of sizes and formats, including bottles, cans, and kegs. The strategic location of the Companys breweries reduces overall risks by having alternative product sources to avert possible shortages and meet surges in demand in any part of the country. This also assists the Company in ensuring that the beer is freshly delivered to dealers at an optimal cost. The archipelagic nature of Philippine geography and the relative difficulty of transporting products to the countrys substantial rural population make these dispersed production facilities particularly valuable. Extensive and Efficient Distribution System Coverage. The Company has a far-reaching and efficient distribution system, which is based on five strategically located breweries and effective management of third party service providers and provides the Company with a competitive advantage. The Companys 49 sales offices, contracted logistics providers and transportation assets including 271 hauling trucks, 201 routing trucks, 254 pre-sell vans and 392 service pick-ups and its network of 468 dealers across the Philippines enable it to maintain optimum stock levels in terms of quality and quantity in approximately 471,000 on-premise and off-premise outlets nationwide. The Companys products are delivered from any one of the Companys five breweries by contract haulers to a sales office or dealer warehouse within five days of production date or less. The sales office or dealer then delivers the beer to the wholesaler or retailer promptly afterward, ensuring ample stock and quality wherever and whenever San Miguel Beer products are needed. The Companys returnable bottle system helps keep the price of its beer products affordable. With the high retrieval rates achieved under the system, bottle usage is maximized before bottles are replaced. Under this system, the Company is able to achieve a 95% average retrieval rate for its bottles, which substantially reduces its packaging costs. Cost Leadership. The Company maintains a strong cost leadership position through high productivity and efficiency, as well as cost control measures, which facilitate pricing flexibility and greater profit growth by maintaining the Companys margins. The Companys product quality initiatives, process enhancements, and improvement programs for plant operations and facilities management are all expected to be sustained. The Company continuously implements process optimization efforts and technology enhancements to generate cost savings.

Experienced management and production team. The Company has an extensive pool of experienced managers, with many senior managers having been with the Company for an average of 19 years. The management team is well accustomed to the Philippine operating environment, and has been able to effectively manage the Company through periods of crisis and instability in the Philippines. The Company also has established experts in its production process, including 30 brewmasters, each of whom has completed advanced training and has over ten years of on-the-job-training experience working for the Company.

Strategies The Companys principal strategy is to increase the volume of its beer sales, both by increasing its market share and by increasing the size of the market, while maintaining its margins. It plans to achieve this through the following: Increase market share. Although the Company already has a very strong position in the Philippine beer market, it intends to increase its market share by pursuing targeted marketing efforts in the regions and localities in which it believes its market share is lower than it is for the Philippines as a whole, such as in specific areas in North and South Luzon, as well as in Visayas and Mindanao. The Company intends to accomplish this by selecting specific products in appropriate packaging to match competing products and brands. The Company also intends to increase its product visibility in these markets through tactical consumer promotions and

improve outlet penetration through persuasive selling and trade incentives. Similarly, the Company intends to increase its share of the overall market for alcoholic beverages. This effort will focus on those specific regions and localities in which hard liquor sales are higher, and, similar to the efforts to increase market share in the beer segment, will include package specific marketing campaigns, persuasive selling and incentives for retailers. Increase the overall market for beer . The Company also plans to increase its sales volume by increasing the total market for beer sales. The Companys primary strategies to achieve this include: Segmented pricing strategy. The Company intends to keep its products affordable for the middle and lower socio-economic sectors by maintaining a moderate pricing strategy for its products in the Broad Popular and Economy markets, where sales are highly price elastic. For the more upscale, or Upper Popular, market, where sales are less price elastic, the Company plans to increase the pricing of its existing and new specialty brands, supported by image-building activities to strengthen their premium positioning and improve their profitability. For all of its products, the Company intends to manage and align the timing and magnitude of product price increases with increases in taxes on beer and cost increases, as well as with economic growth in the Philippines. The Company intends to pursue this strategy to protect its gains and to sustain the general uptrend for the industry as evidenced by the Companys improved market share and increased level of sales in 2007. Increase the size of the Upper Popular segment. The Upper Popular market for beer in the Philippines is a relatively small segment, but it plays an important role in brandbuilding and overall market development. The segment offers promising prospects, underpinned by rising consumer incomes, increasing consumer sophistication, rapidly changing drinker habits and preferences, as well as increasing urbanization. The Company intends to further develop the high-priced segment of the beer industry by offering higherpriced and higher-margin products catering to this segment. With this strategy, the Company aims to take advantage of opportunities in segmenting the market as well as pre-empting the incursion of foreign brands. Relative to other Asian countries, the Philippine beer market offers greater potential with regard to premium pricing of brands given the current relatively narrow price gap between the Broad Popular and Upper Popular brands. Seasonal brews will be explored as one avenue of growth, targeting specific segments of the market at a particular time or season of the year. This will not only contribute to growth and consumer interest, but will also serve as a tool to tap new customer types and determine promising variants and packaging for further brand development. Strengthen the Brand Portfolio. The Company intends to strengthen its brand portfolio to take advantage of segment-specific growth opportunities, increasing sophistication and changing lifestyles of Philippine consumers and to maintain its market leadership position. The Company plans to maintain the status of its flagship San Miguel Pale Pilsen brand and strengthen its value through an integrated approach of national brand-building campaigns and retail promotional and marketing efforts. Recent examples of brand-building activities include new advertising campaigns for the brand using famous endorsers such as Manny Pacquiao, Erik Morales and Kris Aquino under the Walang Katulad (Beer like no other) and Face to Face campaigns and the recent TV commercial featuring actor Jet Li, which forms part of the regional campaign to uplift the image and positioning of the San Miguel Pale Pilsen brand in the Asian region. The Company intends to implement new programs and initiatives catering to the younger segment of the market to protect its core customers and strengthen the appeal and preference for the brand among new drinkers. The Company expects to maintain the strong growth of its Red Horse , San Mig Light , and Gold Eagle brands through the introduction of new thematic campaigns, special events and volume-generating programs aligned with the respective positioning of these brands in the market. For the Companys specialty brands, including Cerveza Negra , Super Dry , and San Mig Strong Ice , the Company plans on increasing its efforts in on-premise channels by matching these brands with appropriate

on-premise outlets and through event sponsorships, party series and tie-ups with other companies. Specialty brands will also be promoted in off-premise channels through increased visibility and promotions. Optimize Trade Coverage and Efficiencies. The Company intends to further expand its trade reach and increase the visibility and availability of its products in retail outlets through point-of-sale merchandising materials and signage for both on- and off-premise outlets to increase sales and outlet yield. In pursuing this strategy, the Company will focus on improving the efficiency of its trade operations, including trade penetration levels and adherence to suggested retail prices in all distribution channels by strengthening per-outlet management, intensifying route assisting activity and alternative distribution mode management such as pedicabs (bicycle-driven cabs) and tricycles, which help to deliver the Companys products to remote areas. The Company also intends to raise its frequency of calls to retail outlets. Management of the distributors territories will be strengthened through intensified retail-based servicing and territorial reconfiguration. Increase Sales Through Special Events and by Focusing on Fast-growing Trade Channels. The Company intends to continue its volume-generating initiatives and occasion-creation programs. Examples of these activities include the Companys sponsorship of town fiestas and major events, such as San Miguel Beer Oktoberfest, that aim to make the beer drinking experience more relevant and closer to the consumers. The Company recognizes the importance of fast-growing modern trade channels such as large supermarket chains, hypermarkets and modern convenience stores in marketing and carrying its products to consumers, especially in urban areas. Accordingly the Company, primarily through SMCs Corporate Key Accounts Group (CKAG), is focusing on sales and marketing programs for key upscale products to these fast growing segments of the market. New Product and Package Introduction. The Company plans to introduce new products and new package formats. The Company believes this strategy can increase consumer interest and overall market size, as well as address the needs of an increasingly fragmenting market, especially in high growth segments. For example, to increase consumer interest, in May 2007, the Company introduced San Miguel Pale Pilsen in paper label bottles and has sold beer products in plastic bottles for special seasonal promotions. The Company intends to continue to pursue packaging innovations and capitalize on the market trend towards convenience packaging. The Company is developing packaging improvements for existing brands as well as convenience pack formats consistent with faster-paced lifestyles and addressing the various activities and interest of consumers.

RISKS OF INVESTING Before making an investment decision, investors should carefully consider the risks associated with an investment in the Common Shares. These risks include: risks relating to the Company and its business, including: The Companys business and prospects may be adversely affected by changes in consumers preferences or purchasing power. The Companys financial condition and results of operations may be adversely affected by any disruptions in the supply of, or the price fluctuations for, its major raw materials. Demand for the Companys products is highly price elastic, and if the Company increases its prices, sales volumes may fall, potentially negatively affecting the Companys financial results and results of operations. The Company may not be successful in implementing its strategy to increase its sales volume.

10

Competition in the Companys businesses and markets may cause the Company to lose market share or reduce its operating margins, which could adversely affect its results of operations and financial condition. The Companys reputation depends on trademarks and proprietary rights that it has licensed from SMC, and infringement of these rights could adversely affect the Companys competitive position; reputational issues involving other entities entitled to use the brands and trademarks used by the Company could also adversely affect the Company. The Companys controlling shareholder may take actions that may conflict with its public shareholders best interests. The Company is substantially dependent on its relationship with SMC and on its relationship with other third parties. The Companys business and sales are affected by seasonality. An ongoing dispute regarding the ownership of certain shares in SMC could directly affect the current control and management policies of the parent. The Company depends on certain key personnel, and its business and growth prospects may be disrupted if their services were lost. Under certain circumstances, the Company may not be able to meet increased demand for its products and may have to incur significant additional capital expenditures to avoid capacity constraints. Consolidation of sales channels in the Philippines may adversely affect the Companys financial condition and results of operations. Product liability claims or other circumstances could harm the integrity and customer support for the Companys brands and adversely affect the sales of its products. Sales of the Companys products may be adversely affected by its relationship with its distributors. Regulatory decisions and changes in the legal and regulatory environment in which the Company operates could limit its business activities or increase its operating costs. Increases in excise tax rates applicable to beer or increases in other taxes to which the Company is subject may reduce consumption of the Companys products or the Companys margins or reduce both. Philippine environmental laws and regulations create potential liabilities for the Company for non-compliance with prescribed environmental standards and limits. The Company may be adversely affected by any change in environmental, employee health and safety and other laws and regulations. Outbreaks of disease, including avian influenza, could adversely affect the Companys financial condition and results of operations.

risks relating to the Philippines, including: Political or social instability in the Philippines could have a negative effect on the financial results and business of the Company.

11

The Companys business and sales may be negatively affected by slow growth rates and economic instability in the Philippines. If foreign exchange controls were to be imposed, the Companys ability to purchase raw materials, primarily malted barley and technically advanced equipment, could be adversely affected. The occurrence of natural catastrophes or blackouts may materially disrupt the Companys operations.

risks relating to the Offering, including: If an active trading market for the Companys Common Shares does not develop, the price of the Companys Common Shares may suffer and decline below the initial public offering price. The price of the Common Shares may be affected if additional Common Shares are sold by the Companys substantial shareholder or are issued by the Company. There may be a delay or failure in trading of the Common Shares.

risks relating to certain statistical information in this prospectus: Certain statistics in this Prospectus relating to the Philippines, the industries and markets in which the Companys businesses operate have not been independently verified and may not be accurate, complete, up-to-date or consistent with other information compiled within or outside the Philippines.

Please refer to the section of this prospectus entitled Risk Factors, which, while not intended to be an exhaustive enumeration of all risks, must be considered in connection with a purchase of the Offer Shares.

12

SUMMARY FINANCIAL AND OPERATING INFORMATION The following tables present summary financial information for the Company and should be read in conjunction with the independent reports, the Companys examined pro forma financial statements and notes thereto contained in this prospectus and the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company was created as a spin-off of the domestic beer business of SMC, which was effective as of October 1, 2007. In the Companys examined pro forma financial statements, the Companys results are presented as if this spin-off had been completed as of the beginning of the periods presented. The examined pro forma financial statements included in this prospectus are for informational purposes only and do not purport to present what the financial position, financial performance and cash flows of the Company would have been had the spin-off actually occurred on January 1, 2004 or purport to project the financial position, financial performance and cash flows of the Company for any future period. The examined pro forma financial statements included in this prospectus are based on the historical financial information of the Company, as shown in the audited financial statements as of and for the period from July 26, 2007 to December 31, 2007 and the audited carve-out special purpose statements as of and for the nine-month periods ended September 30, 2007 and 2006 and as of and for the years ended December 31, 2006, 2005 and 2004, after giving effect to the assumptions and adjustments described in the following paragraph. The examined pro forma financial statements assume that (i) SMC charged the Company a shared services fee (professional and technical fee for services rendered by SMC to the Company), a rental fee for the use of land owned by SMC, and a royalty fee for the use of the brands and other intellectual property rights owned by SMC; (ii) that total number of shares outstanding had been 15,881,866,112 from January 1, 2004 through December 31, 2006, and 15,333,426,960 in 2007. The decrease of 548,439,152 shares in the number of shares outstanding as of December 31, 2007 represents: (A) the difference of Q 573,449,152 between the value of SMBDs net assets as of December 31, 2003 (Q 15,881,866,112) and as of June 30, 2007 (Q 15,308,416,960), minus (B) the payment of Q 25,000,000 by SMC for its subscription of 25% of the Companys capital stock, and minus (C) the payment of Q 10,000 for the 10,000 shares subscribed for and paid by independent directors; (iii) the Company declared all of its unappropriated earnings at the end of each year to SMC as cash dividends; and (iv) the Companys net assets balance as of December 31, 2003 is the beginning capital stock on January 1, 2004. The examined pro forma financial statements should be read in conjunction with the audited financial statements and audited carve-out special purpose statements of the Company and the notes thereto included elsewhere in this prospectus, as well as other information contained in this prospectus. The Companys examined pro forma financial statements, the audited financial statements and the audited carve-out special purpose statements prepared in compliance with PFRS, were examined and audited, as the case may be, by Manabat Sanagustin & Co., and are included elsewhere in this prospectus. The summary financial information presented below as of and for the years ended December 31, 2007, 2006 and 2005 were derived from the Companys examined pro forma financial statements. Except as otherwise indicated, all financial data and discussions thereof in this prospectus are based on the Companys examined pro forma financial statements, and all descriptions of the Company in this prospectus are made on a basis consistent with the assumptions made in the examined pro forma financial statements. The information below is not indicative of the results of future operations. Furthermore, all translations of peso amounts into U.S. dollars are provided for convenience only.

13

As of and for the years ended December 31, 2005 2006 2007 2007(1)

P P P US$ (in millions, except per share figures or where otherwise indicated)

Income Statement Data Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,978 40,565 44,139 1,069.3 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,808) (20,687) (22,927) (555.4) Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,170 19,878 21,212 513.9 Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,072) (5,284) (5,841) (141.5) Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,864) (3,382) (3,098) (75.1) Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (charges) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,234 11,212 12,273 3 3 39 (0.6) (0.2) 219 55 13 297.3 0.9 0.3

9,455 11,270 12,325 298.6 (3,049) (3,944) (4,310) (104.4) 6,406 7,326 8,015 194.2 0.01

Earning per share basic(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40 0.46 0.52 Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,882 15,882 15,333 Balance Sheet Data Cash and short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plant and equipment (net of accumulated depreciation) . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 4,935 3,169 268 9,366 6,017 5,553 978 4,692 3,202 469 5,262 3,676 2,447 180

127.5 89.1 59.3 4.4 280.2 136.0 131.5 547.7

9,341 11,565 5,660 5,616 5,664 5,427

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,936 20,665 22,608 Current liabilities Interest bearing liabilities Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned Income Obligation under finance lease net of current portion Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,960 3,087 5, 047 7 7 5,054

2,402 2,376 4,778 5 5 4,783

2,360 4,912 7,272 3 3 7,275

57.2 119.0 176.2 0.1 0.1 176.2 371.4 547.7

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,882 15,882 15,333 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,936 20,665 22,608

14

As of and for the years ended December 31, 2005 2006 2007 2007(1)

P P P US$ (in millions, except per share figures or where otherwise indicated)

Cash Flow Data Net cash provided by (used for): Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase/(decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . Other Financial and Operating data EBITDA(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBIT(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBIT margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volume (Equivalent Cases) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volume (Hectoliters) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average selling price/case (in pesos) . . . . . . . . . . . . . . . . . . . . . . . . . . . Average selling price/ Hectoliter (in pesos) . . . . . . . . . . . . . . . . . . . . . .

8,111 (1,707) (6,406) (2) 996 994

8,547 11,775 285.3 (1,237) (1,784) (43.2) (7,326) (5,707) (138.3) (16) 994 978 4,284 978 5,262 103.8 23.7 127.5

10,846 9,234 507 44.3% 26.5% 22.5% 171.58 13.18 238.26 3,102

12,833 11,212 316 49.0% 31.6% 27.6% 155.66 11.96 258.92 3,371

13,925 12,273 706 48.1% 31.6% 27.8% 167.51 12.87 260.23 3,388

337.3 297.3 17.1

6.3 82.1

Note: (1) For the readers convenience, certain amounts in pesos were converted to U.S. dollars using the BSP Rate of P 41.280 to US$1.00 as of December 31, 2007. (2) Computed as net income divided by the weighted average number of Common Shares issued and outstanding each period. (3) EBITDA and EBIT are measures used by the Companys management to internally evaluate the performance of its business. EBITDA is calculated as operating income plus depreciation, amortization and impairment losses and EBIT is calculated as operating income. Neither EBITDA nor EBIT is a measure determined in accordance with PFRS or IFRS, and should not be considered as an alternative to net income as a measure of operating performance or to cash flow as a measure of liquidity. The items of net income excluded from EBITDA are significant components in understanding and assessing the Companys financial performance. Neither EBITDA nor EBIT is intended to be a measure of free cash flow for managements discretionary use, as it does not reflect certain cash requirements such as interest payments, tax payments and capital expenditures. The Companys calculation of EBITDA and EBIT may be different from the calculation used by other companies and, as a result, the Companys EBITDA and EBIT may not be comparable to other similarly titled measures of other companies.

15

SUMMARY OF THE OFFER Issuer . . . . . . . . . . . . . . . . . . San Miguel Brewery Inc., a corporation organized under the laws of the Republic of the Philippines. SMC. The Offer Shares consist of 77,052,000 new Common Shares to be issued and offered by the Issuer and 693,472,000 existing Common Shares offered by the Selling Shareholder. 539,367,000 of the Offer Shares are being offered and sold outside the Philippines and the United States in reliance on Regulation S under the U.S. Securities Act and 231,157,000 of the Offer Shares are being offered and sold at the Offer Price to all of the PSE Brokers and to Local Small Investors, respectively, as part of the Domestic Offer in the Philippines. ATR KimEng Capital Partners, Inc. and BDO Capital & Investment Corporation will act as the Joint Domestic Lead Underwriters. Domestic Offer Shares not taken up by the PSE Brokers and Local Small Investors will be purchased by the Joint Domestic Lead Underwriters and sold to their clients or the general public prior to the close of the Domestic Offer. P 8.00 per Offer Share. The Domestic Offer Period shall commence at 9:00 a.m., Manila time, on April 28, 2008 and end at 11:00 a.m., Manila time, on May 6, 2008. The Company and the Joint Domestic Lead Underwriters reserve the right to extend or terminate the Domestic Offer Period with the approval of the Philippine SEC and the PSE. Applications from the PSE Brokers and Local Small Investors must be received by the Domestic Receiving Agent not later than 11:00 a.m., Manila time, on May 5, 2008, whether filed through a Domestic Selling Agent or filed directly with a Domestic Underwriter. Applications received thereafter or without the required documents will be rejected. Applications shall be considered irrevocable upon submission to the Domestic Selling Agent or Domestic Underwriter, and shall be subject to the terms and conditions of the offer as stated in this prospectus and in the Application. The actual purchase of the Offer Shares shall become effective only upon the actual listing of the Offer Shares on the PSE and upon the obligations of the Domestic Underwriters under the Domestic Underwriting Agreement becoming unconditional and not being suspended, terminated or cancelled on or before the Listing Date in accordance with the provisions of such agreement. Transfer Restrictions . . . . The Offer Shares are being offered and sold outside the United States in reliance on Regulation S. The Offer Shares have not been and will not be registered under the U.S. Securities Act and, subject to certain exceptions, may not be offered or sold within the United States. See Plan of Distribution The International Offer. See Use of Proceeds for details of how the total net proceeds from the Offer will be applied.

Selling Shareholder . . . . . The Offer . . . . . . . . . . . . . .

Offer Price . . . . . . . . . . . . . Domestic Offer Period . . .

Use of Proceeds . . . . . . . . .

16

Lock-up . . . . . . . . . . . . . . . .

The Company and SMC have each agreed with the International Underwriters that, other than in connection with the Over-Allotment Option, for a period of 180 days after the Listing Date, neither it nor any person acting on its behalf will, without the prior written consent of the International Underwriters issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Common Shares or securities convertible or exchangeable into or exercisable for Common Shares or warrants or other rights to purchase Common Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options. Existing shareholders who own an equivalent of at least 10% of the issued and outstanding Common Shares of the Company after the Offer are required under the revised listing rules of the PSE applicable to companies applying for listing on the PSE First Board, not to sell, assign or otherwise dispose of their Common Shares for a minimum period of 180 days after the Listing Date. SMC is covered by this lock-up requirement. This lock-up does not apply to the Optional Shares. Except for the issuance of Offer Shares pursuant to the Combined Offer or Common Shares for distribution by way of stock dividends, the PSE will require the Company, as a condition to the listing of the Common Shares, not to issue new shares in its capital or grant any rights to or issue any securities convertible into or exchangeable for, or otherwise carrying rights to acquire or subscribe to, any shares in its capital or enter into any arrangement or agreement whereby any new shares or any such securities may be issued for a period of 180 days after the Listing Date.

Listing and Trading . . . . .

Application was made to the PSE on November 5, 2007 to list the Primary Offer Shares being issued and sold by the Company, the Secondary Offer Shares to be sold by the Selling Shareholder, and the remaining issued and outstanding Common Shares of the Company. See Description of Securities. All of the Offer Shares are expected to be listed on the PSE on May 12, 2008. Trading is expected to commence on the same date. The Companys Board of Directors has resolved that, upon listing of the Companys shares on the PSE, the cash dividend policy of the Company will entitle holders of the Common Shares to receive annual cash dividends equivalent to 100% of the prior years recurring net income, which is net income calculated without respect to extraordinary events that are not expected to recur, based on the recommendation of the Board of Directors. Such recommendation will take into consideration factors such as the implementation of business plans, debt service requirements, operating expenses, budgets, funding for new investments, appropriate reserves and working capital, among others. The cash dividend policy may be changed by the Companys Board of Directors at any time, and investors should not give undue weight to this current policy in deciding to purchase the Offer Shares. On February 4, 2008, the Companys Board of Directors approved the payment of cash dividends of P 2.3 billion, or P 0.15 per share. On April 10, 2008, the Companys Board of Directors declared a cash dividend of P 2.453 billion, or P 0.16 per share, in respect of the Companys net income in respect of the first quarter of 2008, which was paid in full on April 18, 2008.

Dividends . . . . . . . . . . . . . .

17

Tax Considerations . . . . . .

See Philippine Taxation for further information on the tax consequences of the purchase, ownership and disposition of the Offer Shares. The timetable of the Offer is expected to be as follows (dates provided below are dates in the Philippines): Pricing and allocation of the International Offer Shares . . . . . . . . . . Start of Domestic Offer Period . . . . . . End of Domestic Offer Period . . . . . . . For PSE Brokers . . . . . . . . . . . . . . . For Local Small Investors . . . . . . . For Domestic Underwriters . . . . . .

Expected Timetable . . . . .

April 24, 2008 April 28, 2008 May 6, 2008 11:00 a.m. on May 5, 2008 11:00 a.m. on May 5, 2008 11:00 a.m. on May 6, 2008 May 12, 2008

Settlement Date . . . . . . . . . . . . . . . . . . . . Listing Date and commencement of trading on the PSE . . . . . . . . . . . . . . . . .

May 12, 2008

The dates included above are subject to market and other conditions and may be changed. Risk Factors . . . . . . . . . . . . Prospective investors should carefully consider the risks connected with an investment in the Offer Shares, certain of which are discussed in the section titled Risk Factors. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. The International Underwriters may reallocate the Offer Shares between the Domestic Offer and the International Offer. SMC has granted the Joint Stabilizing Agents an option, exercisable in whole or in part to purchase from SMC up to 15% of the Offer Shares at the Offer Price, on the same terms and conditions as the Offer Shares as set forth in this prospectus, solely to cover over-allotment, if any. The Over-Allotment Option is exercisable within 30 days from the Listing Date. See Plan of Distribution The Over-Allotment Option.

Reallocation . . . . . . . . . . . .

Over-Allotment Option . .

Procedure for Application . . . . . . . . . . .

Application forms to purchase Offer Shares in the Domestic Offer may be obtained from any Domestic Underwriter or Domestic Selling Agent listed in this prospectus. All Applications shall be evidenced by the application to purchase form, duly executed in each case by an authorized signatory of the applicant and accompanied by one completed signature card which, for corporate and institutional applicants, should be authenticated by the corporate secretary, and the corresponding payment for the Offer Shares covered by the Application and all other required documents. The duly executed Application and required documents should be submitted during the Domestic Offer Period to the same office where it was obtained.

18

If the applicant is a corporation, partnership, or trust account, the Application must be accompanied by the following documents: A certified true copy of the applicants latest articles of incorporation and by-laws and other constitutive documents (each as amended to date) duly certified by its corporate secretary or an authorized officer; A certified true copy of the applicants Philippine SEC certificate of registration duly certified by its corporate secretary or an authorized officer; and A duly notarized corporate secretarys certificate or certificate of an authorized officer setting forth the resolution of the applicants Board of Directors or equivalent body authorizing the purchase of the Offer Shares indicated in the Application, identifying the designated signatories authorized for the purpose, including his or her specimen signature.

Foreign corporate and institutional applicants who qualify as Eligible Investors (as defined in the Glossary of Terms of this prospectus), in addition to the documents listed above, are required to submit in quadruplicate, a representation and warranty stating that their purchase of the Offer Shares to which their Application relates will not violate the laws of their jurisdictions of incorporation or organization, and that they are allowed, under such laws, to acquire, purchase and hold the Offer Shares. Payment Terms . . . . . . . . . The Offer Shares in the Domestic Offer must be paid for in full upon submission of the Application. Payments may be made in cash or by a managers corporate or personal check drawn against a bank account with a Bangko Sentral ng Pilipinasauthorized commercial bank or any branch thereof with an online deposit facility to the order of San Miguel Brewery IPO. The check must be dated as of the date of submission of the Application and crossed for deposit. The actual number of Offer Shares that an applicant will be allowed to purchase in the Domestic Offer is subject to the confirmation of the Domestic Underwriters. Applications shall be subject to the final approval of the Company and SMC. The Company and SMC reserve the right to accept or reject, in whole or in part, any Application due to any grounds specified in the Domestic Underwriting Agreement entered into by the Company, SMC and the Domestic Underwriters. Applications where checks are dishonored upon first presentation or Applications which do not comply with the terms of the Domestic Offer shall be rejected. Moreover, any payment received pursuant to the Application does not mean approval or acceptance by the Company or SMC of the Application. An Application, when accepted, shall constitute an agreement among the applicant, the Company and SMC for the purchase of the Offer Shares accepted thereunder, in the manner and subject to terms and conditions set forth in the Application and those described in this prospectus. Notwithstanding the acceptance of any Application by any Domestic Underwriter or its duly authorized representatives, acting for or on behalf of the Company and SMC, the actual purchase by the applicant of the Offer Shares will become effective only upon listing of the Offer Shares on the PSE and upon the obligations of the Domestic Underwriters under the Domestic Underwriting Agreement becoming unconditional and not being suspended, terminated or cancelled, on or before the Listing Date, in

Acceptance/Rejection of Applications . . . . . . . . . .

19

accordance with the provisions of such agreement. If such conditions have not been fulfilled on or before the periods provided above, all application payments will be returned to the applicants without interest and, in the meantime, the said application payments will be held in a separate bank account with the Receiving Bank. Refunds . . . . . . . . . . . . . . . . In the event that the number of Offer Shares to be received by an applicant, as confirmed by the Domestic Underwriters, is less than the number covered by its Application, or if an Application is rejected by the Company and SMC, then upon the instructions of the Company and SMC, the Receiving Bank shall refund, without interest, within five banking days from the end of the Domestic Offer Period, all, or a portion of the payment corresponding to the number of Offer Shares wholly or partially rejected. All refunds shall be made through the Domestic Underwriters, Domestic Selling Agent or Domestic Receiving Agent with whom the applicant has filed the Application, at the applicants risk.

Issuance and Transfer Taxes . . . . . . . . . . . . . . . .

All standard taxes applicable to the issuance of the Primary Offer Shares by the Company pursuant to the Primary Offer shall be for the sole account of the Company. All standard taxes and expenses applicable to the sale and transfer of the Secondary Offer Shares by the Selling Shareholder pursuant to the Secondary Offer shall be for the sole account of the Selling Shareholder.

Registration and Lodgment of Common Shares with the PDTC . . . . . . . . . . . . . . . .

Offer Shares purchased by Applicants will be lodged with the PDTC. The Applicant must indicate in the space provided in the Application and provide the information required for the PDTC-lodgment of the Offer Shares. The Offer Shares will be lodged with the PDTC no later than the Listing Date.

Registration of Foreign Investments . . . . . . . . . .

Banko Sentral ng Pilipinas (BSP) requires that investments in shares of stock funded by inward remittance of foreign currency be registered with the BSP if the foreign exchange needed to service capital repatriation or dividend remittance will be sourced from the Philippine banking system. The registration with the BSP of all foreign investments in the Offer Shares and the Optional Shares (if any) shall be the responsibility of the foreign investor. See Philippine Foreign Investment, Foreign Ownership and Exchange Controls.

20

RISK FACTORS An investment in the Offer Shares involves a number of risks. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. There may be a large difference between the buying price and the selling price of these securities. Investors deal with a range of investments, each of which may carry a different level of risk. This section entitled Risk Factors does not purport to disclose all of the risks and other significant aspects of investing in these securities. Investors should undertake independent research and study the trading of securities before commencing any trading activity. Investors may request publicly available information on the Offer Shares and the Company from the Philippine SEC. Each Investor should seek professional advice if he or she is uncertain of, or has not understood any aspect of, the securities to be invested in or the nature of risks involved in the trading of securities. Prospective investors should carefully consider the risks described below, in addition to the other information contained in this prospectus, including the Companys examined pro forma financial statements and notes relating thereto included herein, before making any investment decision relating to the Offer Shares. The occurrence of any of the events discussed below and any additional risks and uncertainties not presently known to the Company or that are currently considered immaterial could have a material adverse effect on the Companys business, results of operations, financial condition and prospects and cause the market price of the Offer Shares to fall significantly and investors may lose all or part of their investment. The means by which the Company plans to address the risks discussed herein are principally presented in the sections of this prospectus entitled Business Strengths, Business Strategies and Managements Discussion and Analysis of Financial Condition and Results of Operations. RISKS RELATED TO THE COMPANY The Companys business and prospects may be adversely affected by changes in consumers preferences or purchasing power. The ability of the Company to successfully launch new products and maintain demand for its existing products depends on the acceptance of these products by consumers, as well as the purchasing power of consumers. Consumer preferences may shift because of a variety of reasons, including changes in demographic and social trends or changes in leisure activity patterns. For example, younger drinkers tend to be less loyal to any brand or any type of drink than the previous generation of drinkers. Concerns about health effects due to negative publicity regarding alcohol consumption or other factors may also affect consumers purchasing patterns. If the Company does not respond effectively to changes in consumer preference, the Companys business and prospects may be adversely affected. Sales of beer are also tied closely to consumers purchasing power and disposable income levels. Adverse economic developments in the Philippines may affect consumers purchasing power and disposable income levels, thereby adversely affecting the Companys results of operations and financial condition. For example, in periods of economic uncertainty or downturns, consumers may purchase more hard liquor and less beer or they may purchase less alcoholic beverages, either of which would affect the Companys results of operations. The Company intends to expand its product and brand portfolio in higher-priced premium market segments, which would make the Companys business and prospects more closely related to changes in consumer purchasing power. A significant decrease in disposable income levels or consumer purchasing power in the Companys target markets could materially and adversely affect the Companys financial condition and results of operations. For more information, see Business Strategies on page 66 of this prospectus.

21

The Companys financial condition and results of operations may be adversely affected by any disruptions in the supply of, or the price fluctuations for, its major raw materials. The Companys products depend on raw materials that the Company procures from third parties, including purchases of some critical raw materials, primarily malted barley, from abroad. These raw materials are subject to price volatility caused by a number of factors, including changes in global supply and demand, foreign exchange rate fluctuations, weather conditions and governmental controls. For example, the current global focus on bio-ethanol fuels has contributed, and is expected to continue to contribute to, higher prices for malted barley and adjuncts, which are among the Companys most important raw materials, as farmers shift their production out of barley and into grains used to produce those fuels, decreasing available supply. Although the Company actively monitors the availability and prices of raw materials, there can be no assurance that these items will be supplied in adequate quantities to meet the Companys needs or will not be subject to significant price fluctuations in the future. While the Company may, in certain limited instances, be able to shift to alternative raw materials used in the production of its products, the Company cannot assure prospective investors that it will be able to reduce its reliance on these raw materials in the future. The Company does not fully hedge against commodity prices and any such hedging may not work as planned. Moreover, the market prices of raw materials may increase significantly if there are material shortages due to, among other things, competing usage or drastic changes in weather or natural disasters. The Company cannot assure prospective investors that it will be able to pass increases in product costs to consumers. As a result, any significant shortages or material increase in the market price of such raw materials may have a material adverse effect on the Companys financial condition and results of operations. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operations on page 41 of this prospectus. Demand for the Companys products is highly price elastic, and if the Company increases its prices, sales volumes may fall, potentially negatively affecting the Companys financial results and results of operations. The substantial majority of beer drinkers in the Philippines belong to the lower socio-economic classes, where discretionary income is limited. Accordingly, the beer market in the Philippines is highly price elastic. If the Company raises the prices of its products, sales volumes will likely decline, and the decline may result in a lower level of net sales. For example, on March 1, 2006, the Company raised the selling prices of its beer products by an average of 9%. This price rise was in response to a 20% increase in the excise tax on beer that was implemented effective January 1, 2005 and to cover higher costs of raw materials and fuel. As a result, the Companys average selling price in 2006 was 8.7% higher than in 2005. However, primarily as a result of this price increase, the volume of the Companys sales (in case equivalents) in 2006 was 9.0% lower than in 2005, and its net sales in 2006 were 1% lower than in 2005. On April 1, 2008, the Company again raised the selling prices of its beer products by an average of 9%, primarily in response to sharp increases in the prices of the Companys raw materials in 2007 and 2008. This increase may cause the Companys sales volume to fall in 2008 and 2009. Price elasticity of demand for the Companys products may limit the Companys ability to pass on increases in excise taxes, raw material costs or other expenses, which may negatively affect the Companys financial results and results of operations. For more information, see Business Strategies on page 66 of this prospectus. The Company may not be successful in implementing its strategy to increase its sales volume. The Company has a strategy to increase its sales by increasing its market share, in terms of both the beer market and the overall market for alcoholic beverages, and by increasing the total size of the beer market. Both parts of this strategy involve uncertainties and risks, and the Company can offer potential investors no assurance that it will be successful in implementing its strategy. For example, the Companys strategy to increase its sales of higher-priced, higher-margin products depends on its ability to convince consumers to pay more than they have historically paid for beer, and the

22

Company may not be successful in this respect, either for its existing higher-priced products or in respect of any new products that it may introduce. Failure by the Company to implement its strategy to increase the volume of its sales would negatively affect the Companys financial results and growth prospects. For more information, see Business Strategies on page 66 of this prospectus. Competition in the Companys businesses and markets may cause the Company to lose market share or reduce its operating margins, which could adversely affect its results of operations and financial condition. The Company operates in a competitive environment. The Philippine alcoholic beverage industry in general is highly competitive, and, while the Company estimates that it has the largest market share in the Philippines with respect to beer, the Company cannot assure prospective investors that it will be able to maintain its current market share for beer, or that it will be able to increase its market share in the future. The Company faces competition from another domestic producer, which sells both its own brand and foreign brands it produces under license, and from foreign brewers. The Company also competes with producers of other alcoholic beverages, primarily low-priced gin and brandy. In the beer industry, and more generally the alcoholic beverage industry, competitive factors generally include price, product quality, brand awareness and loyalty, distribution coverage, and the ability to respond effectively to shifting consumer tastes and preferences. The Company also competes with other discretionary items, including both other food and beverage products and other goods and services generally. The consolidation of the Companys competitors, the entrance of a new, larger competitor into the Philippine market, or unanticipated actions or irrational behavior by existing competitors, could lead to downward pressure on prices or a decline in the Companys market share. Any such event could materially and adversely affect the Companys financial condition and results of operations. For more information, see Business Competition on page 77 of this prospectus. The Companys reputation depends on trademarks and proprietary rights that it has licensed from SMC, and infringement of these rights could adversely affect the Companys competitive position; reputational issues involving other entities entitled to use the brands and trademarks used by the Company could also adversely affect the Company. The Company has an exclusive license from SMC to use various brand names and related trademarks and other intellectual property rights to prepare, package, advertise, distribute and sell its products in the Philippines. The use of these brand names and related intellectual property rights is key to maintaining the Companys distinctive corporate and market identities. If other parties sell products that use counterfeit versions of the Companys brands or otherwise look like the Companys brands, consumers may confuse the Companys products with products that they consider inferior. This could cause consumers to refrain from purchasing the Companys brands in the future and adversely affect the Companys brand image and sales. Under its license agreement with SMC, SMC has the responsibility of defending against infringements, but the Company cannot assure prospective investors that SMC will be successful in this regard. Any failure by SMC to protect the Companys proprietary rights could have an adverse affect on the Companys competitive position. In addition to risks from infringement, many of these brands and trademarks used by the Company can also be used for products other than beer produced by SMC or other entities that SMC has licensed them to and on beer products produced and sold by SMCs brewing operations outside of the Philippines. As such, the Companys brand image could also be negatively affected by product quality or other reputational issues caused by these other users of the brands and trademarks. Any damage to the Companys brand image caused by other users of the brands and trademarks could have an adverse effect on the Companys sales and results of operations. For more information, see Related Party Transactions on page 89 of this prospectus.

23

The Companys controlling shareholder may take actions that may conflict with its public shareholders best interests. Currently the Companys controlling shareholder is SMC, which is expected to hold approximately 90% of the Companys shares immediately after the closing of this offering, assuming no exercise of the Over-Allotment Option. SMC is able to influence the Companys business through its ability to control actions that require majority shareholders approval and through its representatives on the Companys Board of Directors. SMC is not obligated to provide the Company with financial support or to exercise its rights as a shareholder in the Companys best interests or the best interests of the Companys minority shareholders. In addition, SMC may engage in activities that conflict with such interests. If the interests of SMC conflict with the interests of the Companys other shareholders, or if SMC chooses to cause the Company to pursue strategic objectives that conflict with the interests of the Companys other shareholders, those shareholders could be disadvantaged by the actions that SMC chooses to pursue. For example, a subsidiary of SMC is a major producer of hard liquor in the Philippines, a product that competes directly with many of the Companys products. SMC may take actions through that subsidiary, such as pricing or marketing activities, that could cause the Companys sales or margins to decrease. SMC also owns other producers of beer, which produce and sell their products outside of the Philippines primarily using the same brands and trademarks as those used by the Company. SMC could take actions through these other beer producers, such as competing with the Company in markets outside the Philippines, that would not be in the best interest of the Company or its other shareholders. In addition, the Company currently benefits from its ongoing relationship with SMC and some of its subsidiaries and affiliates through their global reach and relationships. The Company cannot assure potential investors that SMC will continue to allow the Company to have access to such benefits in the future. The Company is substantially dependent on its relationship with SMC and on its relationship with other third parties. The Company has a very limited history of operating as an independent entity, and it previously was a division of SMC. Even after the Companys spin-off from SMC, it remains dependent on its relationship with SMC in a number of critical areas, including with respect to its brands and trademarks, its packaging requirements, some of its brand marketing activities, many of its critical corporate functions including strategic planning, and real estate services, including providing all of the land on which the Companys production facilities are located. For more information, see Related Party Transactions on page 89 of this prospectus. If conflicts were to arise in the Companys relationship with SMC or if SMC were to fail to provide the services it has contracted to provide to the Company, the Company likely could not easily replace SMC as a provider of the services. Any such development could cause a material disruption in the Companys business, negatively impacting its performance and growth prospects. In addition, the Company relies on third parties in a number of critical areas of its operations, including distribution and logistics services, for its finished products and certain raw material supplies. If any of these third parties were to fail to provide these services or materials to the Company, the Companys business could be negatively affected, including its financial performance and growth prospects. The Companys business and sales are affected by seasonality. The Companys sales are affected by seasonality in customer purchase patterns. In the Philippines, alcoholic beverages, including those produced by the Company, experience increased sales during the Christmas season and typically decline in the third quarter as a result of rainy weather. For example, in the past three years, on average, 26.7% of the Companys net sales were in the first three months of the year and 23.8% were in the second quarter; while 22.1% were in the third quarter, typically the slowest period for sales, and 27.4% were in the last three months of the year. As a result of this pattern, the Companys financial condition and results of operations may fluctuate significantly from quarter to quarter. For more information, see Business Strategies on page 66 of this prospectus.

24

An ongoing dispute regarding the ownership of certain shares in SMC could directly affect the current control and management policies of the parent. Court proceedings regarding the ownership of certain shares in SMC are pending before the Sandiganbayan (as defined in the Glossary of Terms of this prospectus) and the Philippine Supreme Court. These proceedings were initiated by the Government in 1987 with respect to shares of SMC held by (i) the Coconut Industry Investment Fund Holding Companies (CIIF Holding Companies), administered by the United Coconut Planters Bank, comprising approximately 24.0% of SMCs total share capital; and (ii) the companies affiliated with Mr. Eduardo M. Cojuangco, Jr., Chairman and Chief Executive Officer of SMC, comprising approximately 16.0% of SMCs total share capital. In its complaints, the Government has alleged that these shares were acquired with public funds and therefore belong to the Government. On May 7, 2004 a partial summary judgment was rendered in favor of the Government with respect to the shares of SMC held by the CIIF Holding Companies. The Philippine Coconut Producers Federation, Inc. representing interests of coconut farmers appealed this judgment to the Philippine Supreme Court. The Governments complaint regarding the shares of SMC owned by companies affiliated with Mr. Cojuangco was dismissed on November 28, 2007; the Government has appealed the said dismissal to the Philippine Supreme Court. The Company cannot predict the outcome of these proceedings, the final results of which could directly affect the control and management policies of SMC and indirectly of the Company. The Company depends on certain key personnel, and its business and growth prospects may be disrupted if their services were lost. The Companys future success is dependent upon the continued service of its key executives and employees. The Company cannot assure potential investors that it will be able to retain these executives and employees. If many of its key personnel were unable or unwilling to continue in their present positions, or if they joined a competitor or formed a competing company, the Company may not be able to replace them easily, and the business of the Company may be significantly disrupted and its financial condition and results of operations may be materially and adversely affected. For example, the Company has only 30 brewmasters, a position critical to its manufacture of beer. These brewmasters typically have degrees in chemistry or chemical engineering, and each of them has over ten years of on-the-job-training experience working for the Company, making them difficult to replace. The Company cannot assure potential investors that it will be able to attract and retain the key personnel that it needs to achieve its business objectives. For more information, see Business Brewing Technology and Product Development on page 74 of this prospectus. Under certain circumstances, the Company may not be able to meet increased demand for its products and may have to incur significant additional capital expenditures to avoid capacity constraints. Although the Company continuously seeks to enhance the efficiency and manufacturing capabilities of its production facilities, the Company may, from time to time, experience production difficulties that may cause shortages and delays in deliveries, as is common in the manufacturing industry. The Company cannot assure prospective investors that it will not experience production difficulties in the future and cannot assure prospective investors that it will be able to increase the efficiency and manufacturing capabilities of its production facilities in line with increased customer demand in the future. Furthermore, the Company cannot assure prospective investors that it will be able to meet increasing demand for its products without having to incur significant additional capital expenditures in the future. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources on page 52 of this prospectus.

25

Consolidation of sales channels in the Philippines may adversely affect the Companys financial condition and results of operations. The Philippine retail market has historically been highly fragmented and dominated by numerous small neighborhood stores. These small neighborhood stores serve limited geographical areas and purchase relatively small quantities of the Companys products from distributors and larger supermarkets. In recent years, larger supermarkets have begun to gain market share in the Philippines. There is a risk that the Companys business may become concentrated in fewer, larger customers, which could increase the relative bargaining power of these customers. The Company cannot assure prospective investors that these customers will not exert downward pressure on wholesale prices of the Companys products, which may adversely affect the Companys financial condition and results of operations. For more information, see Business Strategies on page 66 of this prospectus. Product liability claims or other circumstances could harm the integrity and customer support for the Companys brands and adversely affect the sales of its products. The success of the Company depends in large part upon consumers perception of its brands. The contamination of products by bacteria or other external agents, whether arising accidentally or through deliberate third party action, could result in product liability claims. Product liability claims, whether or not they are successful, could adversely affect the reputation of the brands used by the Company and the sales by the Company. In addition, other manufacturers, primarily affiliates of SMC that produce and sell beer outside of the Philippines, have rights to produce products that carry the same brands and trademarks as used by the Company. Actions by these other manufactures, including producing deficient quality products, could tarnish the overall reputation of the relevant brands. Any of the problems mentioned above may adversely affect the Companys reputation and its ability to charge a premium for its products, which may result in reduced sales and profitability of the affected brand or all of the Companys brands. Sales of the Companys products may be adversely affected by its relationship with its distributors. The Companys products are primarily sold through distributors. Although many of these distributors have been dealing with the Company for many years, there is no assurance that these distributors will continue to purchase and distribute the Companys products, or that these distributors can continue to effectively distribute the Companys products without delays or interruptions. In addition, the financial instability of, contractual disputes with, or labor disruptions at, the Companys distributors could disrupt the distribution of the Companys products and adversely affect the Companys business. For more information, see Business Strengths on page 64 of this prospectus and Business Marketing, Sales and Distribution on page 75 of this prospectus. Regulatory decisions and changes in the legal and regulatory environment in which the Company operates could limit its business activities or increase its operating costs. Regulatory decisions or changes in the legal and regulatory requirements in a number of areas may have adverse effects on the Companys business. In particular, governmental bodies may subject the Company to actions such as product recall, seizure of products and other sanctions, any of which could have an adverse effect on the Companys sales. These governmental bodies may also impose limitations on advertising activities used to market beer, such as prohibitions or limitations on television or print advertising, which may inhibit or restrict the Companys ability to maintain or increase consumer support for and recognition of its brands. In addition, regulatory bodies may seek to restrict consumer access to the Companys products by, among other actions, regulating the hours when outlets are allowed to sell alcohol. These and other legal or regulatory changes could materially and adversely affect the Companys financial condition and results of operations. For more information, see Business Regulation and Taxation on page 77 of this prospectus.

26

Increases in excise tax rates applicable to beer or increases in other taxes to which the Company is subject may reduce consumption of the Companys products or the Companys margins or reduce both. Beer is subject to an excise tax, and increases in excise taxes or value added taxes, or VAT, may reduce overall consumption of the Companys products, the Companys profit margins or both. Additional 8% increases in the excise tax rates applicable to beer are scheduled to be implemented on January 1, 2009 and January 1, 2011, respectively, and additional non-scheduled increases in excise tax or VAT rates are possible. Previous increases in excise tax rates have adversely affected the Companys sales volume. The scheduled increases in excise tax or other increases in excise tax or other taxes to which the Company is subject may reduce consumption of the Companys products, reduce the Companys margins or have both such effects. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operation Factors Affecting Results of Operations Taxes and Regulatory Environment on page 43 of this prospectus and Business Regulation and Taxation on page 77 of this prospectus. Philippine environmental laws and regulations create potential liabilities for the Company for non-compliance with prescribed environmental standards and limits. Various environmental laws and regulations govern the operations of the Company including, but not limited to, the management of solid wastes, water and air quality, toxic substances and hazardous wastes at the Companys breweries. Non-compliance with the legal requirements or violations of prescribed standards and limits under these laws could expose the Company to potential liabilities, including both administrative penalties in the form of fines and criminal liability, which could result in imprisonment for officers of the Company who were involved in or who are otherwise held to be responsible for any such violations. Violations of environmental laws could also result in the suspension and/or revocation of permits or licenses held by the Company or required suspension or closure of operations. For more information, see Business Health, Safety and Environmental Matters on page 80 of this prospectus and Regulatory Framework Environmental Matters on page 111 of this prospectus. The Company may be adversely affected by any change in environmental, employee health and safety and other laws and regulations. The Companys operations are subject to a number of national and local laws and regulations. These include industry laws and regulations relating to environmental protection, employee health and safety, and tax. The Company cannot assure prospective investors that changes in laws or regulations, including environmental, employee health and safety, and tax laws and regulations, will not result in the Company having to incur substantial additional capital expenditures to upgrade or supplement its existing facilities or being subject to an increased rate of taxation or fines and penalties. Any such changes in laws and regulations could have a material adverse effect on the Companys business, financial condition and results of operations. For more information, see Business Health, Safety and Environmental Matters on page 80 of this prospectus. Outbreaks of disease, including avian influenza, could adversely affect the Companys financial condition and results of operations. Several countries in Asia and Europe have reported cases of avian influenza, or bird flu. While there have been no known outbreaks of bird flu in the Philippines, there can be no assurance that the virus will not mutate, thereby causing a human pandemic in the Philippines or elsewhere. Any outbreak of bird flu that results in a human pandemic, or an outbreak of any other contagious disease for which

27

there is no known, effective, or readily available treatment, cure or vaccine, could have a material adverse effect on the Companys financial condition and results of operations. For example, any outbreak of bird flu could adversely affect consumer demand for the Companys products, the Companys ability to adequately staff its operations, the distribution networks for the Companys products, as well as the general level of economic activity in the Philippines. The Company cannot assure prospective investors that any future outbreak of bird flu or any other contagious disease will not have a material adverse effect on the Companys financial condition and results of operations. RISKS RELATING TO THE PHILIPPINES The Company is a Philippine corporation and substantially all of its operations are conducted in and all of its production facilities and other assets are located in the Philippines. As a result, the Companys financial condition and results of operations will be influenced by the political and social situation in the Philippines, as well as the general state of the Philippine economy and the economies in the surrounding region. Political or social instability in the Philippines could have a negative effect on the financial results and business of the Company. The Philippines has from time to time experienced political, social, economic and military instability. For example, in 2000, President Ramoss successor, Joseph Estrada, then President of the Philippines was subject to allegations of corruption, culminating in impeachment proceedings, mass public protests in Manila, withdrawal of support of the military and his eventual replacement. Then Vice President Gloria Macapagal-Arroyo, was sworn in as President on January 20, 2001. Although Estrada questioned the legitimacy of the Arroyo administration, on March 2, 2001, the Supreme Court rendered a unanimous decision confirming the legitimacy of President Arroyos assumption of office. In May 2001, violent clashes between government forces and Estrada loyalists occurred when former President Estrada was imprisoned to face charges of plunder. Former President Estrada was convicted by a special tribunal on charges of plunder on September 12, 2007. On October 25, 2007, he was unconditionally pardoned by President Arroyo. On July 27, 2003, a group of approximately 70 military officers and over 200 soldiers from the Philippine Army, Navy and Air Force attempted a coup detat against the Arroyo administration, and, armed with explosives, occupied the Oakwood Premier Ayala Center and surrounding areas in Metro Manila. The group accused the Arroyo administration of selling ammunition to rebel groups in the Philippines, masterminding airport and wharf bombings in Davao, and planning to declare martial law. After negotiating with the government, the group ended their 20-hour mutiny and agreed to return to barracks. In May 2005, 184 of the soldiers involved in the incident were released from custody and discharged from service after they pled guilty to charges of disrespect and conduct unbecoming of soldiers. However, the other officers and soldiers involved still face civil, criminal and military charges. On July 7, 2006, eight individuals, including six military officers, were arrested in connection with an alleged plot to seize control of the government during President Arroyos State of the Nation address on July 24, 2006. The officers involved have been dismissed from their posts and charges against them are pending. On November 29, 2007, another group of military officers, led by former lieutenant and current Senator, Antonio Trillanes IV, walked out of their ongoing trial for the armed occupation of Oakwood Premier Ayala Center apartment-hotel in 2003 and forcibly occupied and seized control of another luxury hotel in Makati City, calling for President Arroyos resignation. After a brief standoff with government forces, the group peacefully surrendered on the same day. Allegations of fraud and disenfranchisement of voters in relation to the 2004 presidential elections have intensified since early June 2005 in light of revelations that President Arroyo had conversations with an official from the independent Commission on Elections during the counting of votes shortly after the May 2004 presidential elections. As a result of these controversies, several members of the Arroyo Cabinet resigned their posts and, along with certain government officials, various opposition groups and individuals, began to call for the resignation or impeachment of President Arroyo. Impeachment complaints based on allegations of violations of the Constitution, graft and corruption and betrayal of public trust were filed against President Arroyo with the House of Representatives.

28

On August 31, 2005, the House Committee on Justice dismissed all these impeachment complaints. On June 26, 2006 similar impeachment complaints were filed against President Arroyo in the House of Representatives, but these were subsequently dismissed in August of 2006. On October 5, 2007, a new impeachment complaint was filed against President Arroyo following bribery allegations involving government officials allegedly involved in the approval of a government contract with a Chinese telecommunications company. There have been media reports that opposition parties, including former members of the military, continue to call for President Arroyos resignation. Furthermore, the Philippines has been subject to sporadic terrorist attacks in the past several years. The Philippine army has been in conflict with the Abu Sayyaf organization, which has been identified as being responsible for kidnapping and terrorist activities in the Philippines. A series of bombings in the southern part of the Philippines also occurred in 2004. Although no one has claimed responsibility for these attacks, it is believed that the attacks are the work of various separatist groups, including possibly the Abu Sayyaf organization, which is alleged to have ties to the Al-Qaeda terrorist network. On February 14, 2005, three bomb explosions in the Makati financial district in Manila, Davao City and General Santos City resulted in the deaths of eight persons and injured more than 100 persons. The Abu Sayyaf organization claimed responsibility for the attack. On October 19, 2007, an explosion at a shopping mall in the Makati financial district of Metro Manila killed 11 people; the cause and responsibility for this incident have not yet been determined. The Philippine army has also been fighting a counter-insurgency campaign against the communist New Peoples Army (NPA) for decades, and the Arroyo administration has announced plans to increase the intensity of its efforts against the NPA. There can be no assurance that the Philippines will not be subject to further acts of terrorism or negative effects of its counter-insurgency campaign in the future. No assurance can be given that the future political or social environment in the Philippines will be stable or that current or future governments will adopt economic policies conducive to sustaining economic growth. Political or social instability in the Philippines could negatively affect the general economic conditions and operation environment in the Philippines, which could have a material impact on the Companys business, financial condition and results of operation. The Companys business and sales may be negatively affected by slow growth rates and economic instability in the Philippines. The Company derives over 98% of its sales from its Philippine operations. The Companys products are discretionary in nature and may be adversely impacted by weak economic conditions in the Philippines. The Companys future growth depends in large part on continued economic growth in the Philippines. The Philippines has experienced periods of slow or negative growth, high inflation, significant depreciations of the Philippine peso and debt restructuring, and has been significantly affected by economic volatilities in the Asia-Pacific region. After the onset of the Asian financial crisis in mid-1997, the Philippines experienced unfavorable economic conditions, including currency depreciation, reduced availability or higher cost of credit, interest rate volatility and a reduction of foreign currency reserves. There can be no assurance that the Philippines will not experience similar or more serious economic downturns. Historically, the Philippines has experienced volatility in the exchange rate between the Philippine peso and the U.S. dollar, as well as against other currencies. The Philippines has also experienced volatility of the prices of shares traded on the domestic stock market. The Company cannot assure prospective investors that one or more of these factors will not negatively impact Philippine consumers purchasing power or product preferences, which could materially and adversely affect the Companys financial condition and results of operations. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Results of Operations on page 41 of this prospectus.

29

If foreign exchange controls were to be imposed, the Companys ability to purchase raw materials, primarily malted barley and technically advanced equipment, could be adversely affected. Currently the Philippines does not have foreign exchange controls. However, the BSP has statutory authority, with the approval of the President of the Philippines, during a foreign exchange crisis or in times of national emergency, to: suspend temporarily or restrict sales of foreign exchange; require licensing of foreign exchange transactions; or require the delivery of foreign exchange to the BSP or its designee banks for the issuance and guarantee of foreign currency-denominated borrowings.

The Company purchases some critical raw materials, primarily malted barley, and most of its technically advanced equipment from abroad and needs foreign currency to make these purchases. The Company cannot assure prospective investors that foreign exchange controls will not be imposed by the Government in the future. If imposed, these restrictions could materially and adversely affect the Companys ability to obtain malted barley and other materials from abroad, which could materially and adversely affect its financial condition and results of operations. For more information, see Philippine Investment, Foreign Ownership and Exchange Controls on page 122 of this prospectus. The occurrence of natural catastrophes or blackouts may materially disrupt the Companys operations. The Philippines has experienced a number of major natural catastrophes in recent years including typhoons, volcanic eruptions, earthquakes, mudslides, droughts and floods related to the El Nio and La Nia weather events. Natural catastrophes may disrupt the Companys ability to produce or distribute its products and impair the economic conditions in the affected areas, as well as the overall Philippine economy. The Philippines has also experienced electricity blackouts, both from insufficient power generation and from disruptions such as typhoons. These types of events may materially disrupt and adversely affect the Companys business and operations. The Company cannot assure prospective investors that the insurance coverage it maintains for these risks will adequately compensate the Company for all damages and economic losses resulting from natural catastrophes or blackouts, including possible business interruptions. RISKS ASSOCIATED WITH THE OFFERING If an active trading market for the Companys Common Shares does not develop, the price of the Companys Common Shares may suffer and decline below the initial public offering price. Prior to this offering, there has been no public market for the Companys Common Shares. The initial public offering price of the Common Shares was determined through a book-building process or by agreement, in either case following discussions among the Company, the Selling Shareholder and the International Underwriters. For a further discussion on the factors affecting the determination of the initial public offering price of the Common Shares, see Determination of Offer Price. The initial public offering price of the Common Shares may not be indicative of prices that will prevail in the trading market. Investors may not be able to resell their Common Shares at or above the initial public offering price. The Common Shares will be listed on the PSE. An active public market for the Common Shares may not develop or be sustained after this offering. The Company cannot assure potential investors that an active trading market will develop or be sustained following the completion of this offering, or that the market price of the Common Shares will not decline below the initial public offering price.

30

The securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the Common Shares. The price of the Common Shares may be affected if additional Common Shares are sold by the Companys substantial shareholder or are issued by the Company. The Company will have one substantial shareholder immediately after this offering. See General Corporate Information Security Ownership of Certain Beneficial Owners and Management. The Company and the Selling Shareholder have each agreed with the International Underwriters that, other than in connection with the Over-Allotment Option, for a period of 180 days after the Listing Date, neither it nor any person acting on its behalf will, without the prior written consent of the International Underwriters, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Common Shares or securities convertible or exchangeable into or exercisable for any Common Shares or warrants or other rights to purchase Common Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options. The Company cannot assure potential investors that the Companys substantial shareholder will not dispose of its Common Shares or that the Company will not issue additional Common Shares upon the expiration of this 180 - day period. The Company cannot predict the effect, if any, that any future sales of Common Shares by the substantial shareholder, or the availability of Common Shares for sale by the substantial shareholder or the issuance of Common Shares by the Company, may have on the market price of the Companys Common Shares. Sales by the substantial shareholder or issuance by the Company of substantial quantities of Common Shares, or the market perception that such sales or issuance may occur, could materially and adversely affect the prevailing market price of the Common Shares. There may be a delay or failure in trading of the Common Shares. There is an approximately two week gap between the date on which the price of the Offer Shares is determined and the date on which trading of the Common Shares is expected to commence on the PSE. During this period, a delay in or termination of the trading of the Common Shares on the PSE may result from the occurrence of any one or more events, including the Domestic Underwriters and/ or the International Underwriters exercising their rights pursuant to the Domestic Underwriting Agreement and/or the International Purchase Agreement, as the case may be, to discharge themselves from their obligations thereunder. If commencement of trading on PSE does not occur, the Combined Offer may be terminated and investors may not be allocated the Offer Shares for which they initially subscribed. RISKS RELATING TO CERTAIN STATISTICAL INFORMATION IN THIS PROSPECTUS Certain statistics in this prospectus relating to the Philippines, the industries and markets in which the Companys businesses operate, including statistics relating to market size and market share, are derived from various Government and private publications, including those produced by industry associations and research groups and the Canadean Report. This information has not been independently verified and may not be accurate, complete, up-to-date or consistent with other information compiled within or outside the Philippines.

31

USE OF PROCEEDS The Company expects to raise gross proceeds from the Primary Offer of approximately P 616.4 million (US$14.9 million) based on an Offer Price of P 8.00 per Offer Share (without taking into account the proceeds from the sale of Common Shares pursuant to the Over-Allotment Option, if any). After deducting estimated applicable taxes, the applicable underwriting discounts, commissions and expenses of P 29.5 million for the Combined Offer payable by the Company, net proceeds to the Company are expected to be approximately P 586.9 million (US$14.2 million) (without taking into account the proceeds from the sale of Common Shares pursuant to the OverAllotment Option, if any). Approximately P 450 million of the net proceeds from the Primary Offer will be used by the Company to fund its priority capital expenditure for 2008, including the following items:
Amount (In P million) Implementation Period

Purpose/Project Types

Replacement and Maintenance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operations Improvement(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expansion and Diversification(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Priority Capital Expenditure Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

335.6 72.9 29.5 12.3 450.3

2008 2008 2008 2008

Notes: (1) Replacement and maintenance projects mainly comprise parts replacements, repairs and upgrading of beer and water tanks, soakers and conveyor lines. (2) Operations improvement projects include, primarily, the installation of electronic bottle inspectors and bottle coating machines. (3) Expansion and diversification projects include the expansion of warehouse spaces to accommodate higher product volumes.

The Company will use the balance of the net proceeds from the Primary Offer of P 136.6 million to finance part of its additional capital expenditures for 2008, which are expected to be approximately P250 million, including the following items:
Amount (In P million) Implementation Period

Purpose/Project Types

Replacement and Maintenance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operations Improvement(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Additional Capital Expenditure Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . .

205.5 34.1 10.4 250.0

2008 2008 2008

Notes: (1) Additional replacement and maintenance projects consist repairs of transportation equipment, replacement of various plant equipment and machinery, information technology projects, and replacement of computer units. (2) Supplemental operations improvement projects include plant building and sales office repairs, office automation systems and filtration systems improvements.

The Company will use internally generated cash flow and other external financing sources to fund the balance of its capital expenditures. See Managements Discussion and Analysis of Financial Condition and Results of Operations Capital Expenditures on page 53 of this prospectus.

32

The foregoing discussion presents a best estimate of the Companys use of net proceeds from the Primary Offer based on its current plans and anticipated expenditures. Actual allocation of net proceeds may vary from the above discussion as management may find it necessary or advisable to reallocate the net proceeds from the Primary Offer within the categories described above or to use such net proceeds for other corporate purposes. The Company estimates that its total expenses for the Combined Offer will be approximately P 29.5 million (US$0.7 million), consisting of:
In P millions

Underwriting and selling fees for Offer Shares being sold by the Company . . . . . . . . . . . . . . . . . . . . Taxes to be paid by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine SEC filing and legal research fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated PSE listing and processing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated legal and other professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P14.2 P 0.4 P 1.1 P 7.8 P 5.5 P 0.5 P29.5

The Company estimates the net proceeds to be received by SMC from the Secondary Offer will be approximately P 5,232.6 million (US$126.8 million), based on an Offer Price of P 8.00 per Offer Share (without taking into account the proceeds from the sale of Common Shares pursuant to the Over-Allotment Option, if any, after deducting the applicable underwriting discounts and commissions and expenses for the Secondary Offer payable by SMC. None of these net proceeds will be received by the Company. The costs and expenses to be incurred by SMC, as a Selling Shareholder, (assuming no exercise of the Over-Allotment Option) will be approximately P 315.2 million (US$7.6 million), consisting of:
In P millions

Underwriting and selling fees for Offer Shares being sold by the Selling Shareholder . . . . . . . . . . . . Stock transaction tax to be paid by the Selling Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSE Brokers commission and block sale costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine SEC filing and legal research fee to be paid by the Selling Shareholder . . . . . . . . . . . . . . Estimated PSE listing and processing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P128.2 P 32.4 P 20.8 P 10.2 P 69.7 P 49.0 P 4.9 P315.2

The Company intends to pay the costs and expenses of the Combined Offer other than the underwriting commissions, discounts, taxes and other expenses applicable to the Offer Shares being sold by the Selling Shareholder.

33

DIVIDEND POLICY The Company is allowed under Philippine laws to declare dividends, subject to certain requirements. These requirements include, for example, that the Companys Board of Directors is authorized to declare dividends only from its unrestricted retained earnings. Dividends may be payable in cash, shares or property, or a combination of the three, as the Board of Directors shall determine. The declaration of stock dividends is subject to the approval of shareholders holding at least two-thirds of the Companys outstanding capital stock. The Companys Board of Directors may not declare dividends which will impair its capital. The Companys Board of Directors has resolved that, upon listing of the Companys shares on the PSE, the cash dividend policy of the Company will entitle holders of the Common Shares to receive annual cash dividends equivalent to 100% of the prior years recurring net income, which is net income calculated without respect to extraordinary events that are not expected to recur, based on the recommendation of the Board of Directors. Such recommendation will take into consideration factors such as the implementation of business plans, debt service requirements, operating expenses, budgets, funding for new investments and acquisitions, appropriate reserves and working capital, among others. Although the cash dividend policy may be changed by the Companys Board of Directors at any time, the Companys current intention is to pay holders of its Common Shares annual cash dividends at or above the current payout ratio.

34

DETERMINATION OF OFFER PRICE Prior to this offering there has been no public market for the Common Shares. Therefore, the Offer Price for the Offer Shares was determined through a book-building process or by agreement, in either case, following discussions among the Company, the Selling Shareholder and the International Underwriters. The Offer Price was established primarily through the use of market-based valuation methodologies, particularly the price-to-earnings (P/E) multiple valuation approach. The factors considered in determining the Offer Price are, among others, the ability of the Company to generate earnings and cash flow in the context of the Companys record of operations and financial condition; expected market and economic conditions, as well as future prospects in the industry; prevailing conditions in the local and international equities markets; the Companys announced dividend policy; the Companys financial and operating prospects; the current market price and price performance of listed comparable local and regional companies, including, but not limited to, other beverage companies; domestic and international demand for the Companys securities; and the dilution to existing shareholders. Under the P/E multiple valuation approach, the Company and the International Underwriters assessed the prevailing valuation of companies listed on the PSE and on other exchanges in other countries that the Company and the International Underwriters deemed to be comparable to the Company. Specifically, the P/E multiples of these comparable listed companies were used to provide a valuation benchmark. This P/E multiple benchmark was adjusted for certain considerations, including the Companys prospective earnings growth rate, general and business risks, and other factors, and was then applied to the prospective earnings after tax of the Company.

35

DILUTION Through the Combined Offer, the Company and the Selling Shareholder will offer 770,524,000 Offer Shares to the public, consisting of 77,052,000 Common Shares from the authorized and unissued common stock of the Company pursuant to the Primary Offer and 693,472,000 existing Common Shares to be offered by the Selling Shareholder pursuant to the Secondary Offer. The Offer Shares will be sold at the Offer Price, which will be substantially higher than the adjusted book value per share of the outstanding Common Shares, which will result in an immediate material dilution of the new investors equity interest in the Company. The book value of the Company, based on its examined pro forma financial statements as of December 31, 2007, was P 15,333 million, or P1.00 per Common Share. The book value represents the amount of the Companys total assets less the sum of its liabilities. The Companys book value per share is computed by dividing the book value by the equivalent number of Common Shares outstanding. Dilution in pro-forma book value per share to investors of the Offer Shares represents the difference between the Offer Price and the pro-forma book value per Common Share immediately following the completion of the Combined Offer. After giving effect to an increase in the Companys total assets to reflect the receipt of the net proceeds of approximately P 586.9 million from its sale of 77,052,000 Common Shares pursuant to the Primary Offer, assuming the Over-Allotment Option is not exercised and based on an Offer Price of P 8.00 per Offer Share, the Companys book value will be approximately P 15,949.4 million, or P 1.04 per Common Share. This represents an immediate increase in book value of P 0.04 per share to existing shareholders and an immediate decrease of P 6.96 per Common Share to investors of the Offer Shares. The following table illustrates dilution on a per Common Share basis based on an Offer Price of P8.00 per Offer Share in a Combined Offer that includes a Primary Offer of 77,052,000 Offer Shares: Offer Price per Offer Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma Book Value per Common Share as of December 31, 2007 . . . . . . . . . . . . . . . . . . . Increase In Book Value per Common Share attributable to the Offer Shares . . . . . . . . . . . . . Pro forma Book Value per Common Share after the Combined Offer (without giving effect to the Over-Allotment Option) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in Book Value per Common Share to Investors in the Offer Shares . . . . . . . . . . . . . P8.00 P1.00 P0.04 P1.04 P6.96

The following table sets forth the shareholdings and percentage of Common Shares outstanding of existing and new shareholders of the Company immediately after completion of a Combined Offer of 770,524,000 Common Shares:
Common Shares Number Percent

Existing shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,639,954,960 770,524,000 15,410,478,960

95% 5% 100%

The amounts and calculations above do not reflect the payment of a P 0.15 per share dividend declared on February 4, 2008 and paid to the Companys shareholders on February 8, 2008 and the payment of a P0.16 per share dividend, in respect of the Companys net income in respect of the first quarter of 2008, declared on April 10, 2008 and paid in full on April 18, 2008.

36

CAPITALIZATION

The following table sets forth, in accordance with PFRS, the Companys cash and cash equivalents, debt, equity and capitalization as of the date indicated. The capitalization is presented: on a pro forma basis based on the Companys examined pro forma financial statements as of December 31, 2007, as adjusted to give effect to the payment of a P 0.15 per share dividend declared on February 4, 2008 and paid in full on February 8, 2008 and the payment of a P 0.16 per share dividend, in respect of the Companys net income in respect of the first quarter of 2008, declared on April 10, 2008 and paid in full on April 18, 2008, and as further adjusted to reflect the sale of the new Offer Shares, assuming no exercise of the Underwriters Over-Allotment Option, and after deducting Underwriters discounts and commissions and other estimated expenses of the offering.

This table should be read in conjunction with the Companys examined pro forma financial statements, including the notes thereto, included in this prospectus beginning on page F-1. Other than as described below, there has been no material change in the Companys capitalization since December 31, 2007.
As of December 31, 2007 Pro Forma P Pro Forma US$(1) As Adjusted Before the Offering As Adjusted For the Offering P As Adjusted For the Offering US$(1)

P (in millions)

Cash and Cash Equivalents(2) . . . . . . . . . . . . . . . . . . . . . . Short-term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity: Common Shares: P1.00 par value per Common Share; 25,000,000,000 Common Shares authorized; 15,333,426,960 Common Shares issued and fully paid up (before the offering) and 15,410,478,960 (after the offering) . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,262

127.5

5,262

5,848.9

141.7

15,333 15,333 15,333

371.4 371.4 371.4

15,333 15,333 15,333

15,410.0 539.4 15,949.4 15,949.4

373.3 13.1 386.4 386.4

Notes:

(1) For the readers convenience, amounts in pesos were converted to U.S. dollars using the BSP Rate of P 41.280 to US$1.00 as of December 31, 2007.

(2) Cash equivalents include 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.

37

SELECTED FINANCIAL INFORMATION The following tables present summary financial information for the Company and should be read in conjunction with the independent reports, the Companys examined pro forma financial statements and notes thereto contained in this prospectus and the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company was created as a spin-off of the domestic beer business of SMC, which was effective as of October 1, 2007. In the Companys examined pro forma financial statements, the Companys results are presented as if the spin-off had been completed as of the beginning of the periods presented. The examined pro forma financial statements included in this prospectus are for informational purposes only and do not purport to present what the financial position, financial performance and cash flows of the Company would have been had the spin-off actually occurred on January 1, 2004 or purport to project the financial position, financial performance and cash flows of the Company for any future period. The examined pro forma financial statements included in this prospectus are based on the historical financial information of the Company, as shown in the audited financial statements as of and for the period from July 26, 2007 to December 31, 2007 and the audited carve-out special purpose statements as of and for the nine-month periods ended September 30, 2007 and 2006 and as of and for the years ended December 31, 2006, 2005 and 2004, after giving effect to the assumptions and adjustments described in the following paragraph. The examined pro forma financial statements assume that (i) SMC charged the Company a shared services fee (professional and technical fee for services rendered by SMC to the Company), a rental fee for the use of land owned by SMC, and a royalty fee for the use of the brands and other intellectual property rights owned by SMC; (ii) that total number of shares outstanding had been 15,881,866,112 from January 1, 2004 through December 31, 2006, and 15,333,426,960 in 2007. The decrease of 548,439,152 shares in the number of shares outstanding as of December 31, 2007 represents: (A) the difference of P 573,449,152 between the value of SMBDs net assets as of December 31, 2003 (P 15,881,866,112) and as of June 30, 2007 (P 15,308,416,960), minus (B) the payment of P 25,000,000 by SMC for its subscription of 25% of the Companys capital stock, and minus (C) the payment of P 10,000 for the 10,000 shares subscribed for and paid by independent directors; (iii) the Company declared all of its unappropriated earnings at the end of each year to SMC as cash dividends; and (iv) the Companys net assets balance as of December 31, 2003 is the beginning capital stock on January 1, 2004. The examined pro forma financial statements should be read in conjunction with the audited financial statements and audited carve-out special purpose statements of the Company and the notes thereto included elsewhere in this prospectus, as well as other information contained in this prospectus. The Companys examined pro forma financial statements, the audited financial statements and the audited carve-out special purpose statements prepared in compliance with PFRS, were examined and audited, as the case may be, by Manabat Sanagustin & Co., and are included elsewhere in this prospectus. The summary financial information presented below as of and for the years ended December 31, 2007, 2006 and 2005 were derived from the Companys examined pro forma financial statements. Except as otherwise indicated, all financial data and discussions thereof in this prospectus are based on the Companys examined pro forma financial statements, and all descriptions of the Company in this prospectus are made on a basis consistent with the assumptions made in the examined pro forma financial statements. The information below is not indicative of the results of future operations. Furthermore, all translations of peso amounts into U.S. dollars are provided for convenience only.

38

As of and for the years ended December 31, 2005 2006 2007 2007(1)

P P P US$ (in millions, except per share figures or where otherwise indicated)

Income Statement Data Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,978 40,565 44,139 1,069.3 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,808) (20,687) (22,927) (555.4) Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,170 19,878 21,212 513.9 Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,072) (5,284) (5,841) (141.5) Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,864) (3,382) (3,098) (75.1) Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (charges) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,234 11,212 12,273 3 3 39 (0.6) (0.2) 219 55 13 297.3 0.9 0.3

9,455 11,270 12,325 298.6 (3,049) (3,944) (4,310) (104.4) 6,406 7,326 8,015 194.2 0.01

Earning per share basic(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40 0.46 0.52 Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,882 15,882 15,333 Balance Sheet Data Cash and short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plant and equipment (net of accumulated depreciation) . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 4,935 3,169 268 9,366 6,017 5,553 978 4,692 3,202 469 5,262 3,676 2,447 180

127.5 89.1 59.3 4.4 280.2 136.0 131.5 547.7

9,341 11,565 5,660 5,616 5,664 5,427

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,936 20,665 22,608 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligation under finance lease net of current portion . . . . . . . . . . . . . . . Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,960 3,087 5, 047 7 7 5,054

2,402 2,376 4,778 5 5 4,783

2,360 4,912 7,272 3 3 7,275

57.2 119.0 176.2 0.1 0.1 176.2 371.4 547.7

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,882 15,882 15,333 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,936 20,665 22,608

39

As of and for the years ended December 31, 2005 2006 2007 2007(1)

P P P US$ (in millions, except per share figures or where otherwise indicated)

Cash Flow Data Net cash provided by (used for): Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase/(decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . Other Financial and Operating data EBITDA(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBIT(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EBIT margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volume (Equivalent Cases) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volume (Hectoliters) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average selling price/cases (in pesos) . . . . . . . . . . . . . . . . . . . . . . . . . . Average selling price/ Hectoliter (in pesos) . . . . . . . . . . . . . . . . . . . . . .

8,111 (1,707) (6,406) (2) 996 994

8,547 11,775 285.3 (1,237) (1,784) (43.2) (7,326) (5,707) (138.3) (16) 994 978 4,284 978 5,262 103.8 23.7 127.5

10,846 9,234 507 44.3% 26.5% 22.5% 171.58 13.18 238.26 3,102

12,833 11,212 316 49.0% 31.6% 27.6% 155.66 11.96 258.92 3,371

13,925 337.3 12,273 297.3 706 17.1 48.1% 31.6% 27.8% 167.51 12.87 260.23 6.3 3,388 82.1

Note: (1) For the readers convenience, certain amounts in pesos were converted to U.S. dollars using the BSP Rate of P 41.280 to US$1.00 as of December 31, 2007. (2) Computed as net income divided by the weighted average number of Common Shares issued and outstanding each period. (3) EBITDA and EBIT are measures used by the Companys management to internally evaluate the performance of its business. EBITDA is calculated as operating income plus depreciation, amortization and impairment losses and EBIT is calculated as operating income. Neither EBITDA nor EBIT is a measure determined in accordance with PFRS or IFRS, and should not be considered as an alternative to net income as a measure of operating performance or to cash flow as a measure of liquidity. The items of net income excluded from EBITDA are significant components in understanding and assessing the Companys financial performance. Neither EBITDA nor EBIT is intended to be a measure of free cash flow for managements discretionary use, as it does not reflect certain cash requirements such as interest payments, tax payments and capital expenditures. The Companys calculation of EBITDA and EBIT may be different from the calculation used by other companies and, as a result, the Companys EBITDA and EBIT may not be comparable to other similarly titled measures of other companies.

40

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prospective investors should read the following discussion and analysis of the Companys financial condition and results of operations together with examined pro forma financial statements of the Company and the notes thereto included elsewhere in this prospectus. Unless otherwise indicated, this discussion and analysis of the Companys financial condition and results of operations as of and for the years ended December 31, 2007, 2006 and 2005 are based on the Companys examined pro forma financial statements, which are based on the audits of the historical financial information derived from the carve-out special purpose statements prepared in accordance with PFRS, as shown in the audited financial statements as of and for the period from July 26, 2007 to December 31, 2007 and the audited carve-out special purpose statements as of and for the nine-month periods ended September 30, 2007 and 2006 and as of and for the years ended December 31, 2006, 2005 and 2004, after giving effect to the assumptions and adjustments described below. The examined pro forma financial statements assume that (i) SMC charged the Company a shared services fee (professional and technical fee for services rendered by SMC to the Company), a rental fee for the use of land owned by SMC, and a royalty fee for the use of the brands and other intellectual property rights owned by SMC; (ii) that total number of shares outstanding had been 15,881,866,112 from January 1, 2004 through December 31, 2006, and 15,333,426,960 in 2007. The decrease of 548,439,152 shares in the number of shares outstanding as of December 31, 2007 represents: (A) the difference of P 573,449,152 between the value of SMBDs net assets as of December 31, 2003 (P 15,881,866,112) and as of June 30, 2007 (P 15,308,416,960), minus (B) the payment of P25,000,000 by SMC for its subscription of 25% of the Companys capital stock, and minus (C) the payment of P 10,000 for the 10,000 shares subscribed for and paid by independent directors; (iii) the Company declared all of its unappropriated earnings at the end of each year to SMC as cash dividends; and (iv) the Companys net assets balance as of December 31, 2003 is the beginning capital stock on January 1, 2004. OVERVIEW The Company is the largest producer of beer in the Philippines, with a total market share of approximately 93% in 2006, according to Canadean. The Company has five breweries strategically located across the Philippines and a highly developed distribution system serving approximately 471,000 retail outlets. The Companys beer brands include all of the top four brands in the country, namely San Miguel Pale Pilsen , Red Horse , San Mig Light and Gold Eagle. San Miguel Pale Pilsen , the Companys flagship brand, has a history of over 117 years. In 2005, 2006 and 2007, the Companys net sales were P 40,978 million, P 40,565 million and P 44,139 million, respectively, and net income was P 6,406 million, P 7,326 million and P 8,015 million, respectively. FACTORS AFFECTING RESULTS OF OPERATIONS Demand and Pricing Increases in beer prices are driven by increases in raw materials prices, excise tax increases, fuel prices and other costs of doing business. Unlike basic necessities, beer is a discretionary purchase. Since the majority of beer drinkers in the Philippines belong to the lower socio-economic classes, where discretionary income is limited, the beer market is highly price elastic. Consumers tend to cut back on their consumption when beer prices rise and they tend to increase their consumption when prices fall. In addition to beer pricing, demand for beer is also influenced by the relative price relationships between beer and other alcoholic beverages such as hard liquor, as well as the relationship between the prices of beer and non-alcoholic beverages, basic necessities, and other goods and services, in general. Drinkers are prone to adjust their buying choices according to shifts in the perceived value-for-money propositions of beer relative to other alcoholic beverages, non-alcoholic beverages, and other consumer products and services. During periods of relatively weak economic growth, consumers tend to purchase more Economy beer brands, sales of which produce lower profit margins for the Company. In the last few years,

41

consumers have been turning to high-alcohol beers, not only because of their affordability (most high-alcohol beers are relatively low-priced), but also because they need to purchase fewer bottles of these beers to get the same amount of alcohol. The Philippines has historically been primarily an off-premise market, as consumers drink most of their beer at home, mainly because drinking at home is cheaper than in bars, restaurants and other on-premise outlets. The table below presents sales data by volume and average selling prices for the Company for the periods indicated.
For the years ended December 31, 2005 2006 2007

Volume (Equivalent Cases, in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volume (Hectoliters, in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average selling price/case (in pesos) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average selling price/hectoliter (in pesos) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in Consumer Tastes and Preferences

171.58 13.18 238.26 3,102

155.66 11.96 258.92 3,371

167.51 12.87 260.23 3,388

Consumer preferences may change due to a number of factors, including changes in economic conditions and income levels, shifts in demographic and social trends, changes in lifestyle and leisure activity patterns, regulatory actions and negative publicity regarding alcohol consumption, and customer complaints against the alcoholic beverage industry or any company in the industry, any of which may affect consumers perception of beer and their willingness to purchase the Companys products. For example, the recent trend in the Philippines towards health consciousness is encouraging a shift away from beer drinking towards consumption of low-calorie beer, wine and non-alcoholic drinks. The rise of young professionals as a consumer class has led to increased popularity of mixed alcoholic drinks. Demographic changes in the Philippines have increased the number of potential consumers of the Companys products and have also resulted in younger drinkers who tend to be more informed, more adventurous and who live a different lifestyle than the older generation of consumers. However, these consumers, because of their greater exposure to media, other cultures and lifestyles, tend to be less loyal to any brand or any type of drink than the older generation. The future growth of the Company will depend on its ability to maintain the competitive positions of its products and brands by being able to proactively anticipate and react to changes in consumer tastes and preferences. Supply and Prices of Raw Materials The Company depends on raw materials sourced from third parties to produce its products. Beer production requires malted barley and hops, which are sourced primarily from the United States, Australia and Europe, and adjuncts, primarily corn and sugar, which are primarily sourced domestically. Raw materials are subject to price volatility caused by a number of factors, including changes in global supply and demand, weather conditions and governmental controls. The prices of these commodities to the Company are also affected by the Philippine pesos relative strength against other currencies, primarily the U.S. dollar. In recent years, the prices of certain raw materials, primarily malted barley, have been increasing. The current global focus on bio-ethanol fuels has and is expected to continue to contribute further to the recent trend for higher prices for malted barley and adjuncts, as farmers shift their production out of barley and into grains used to produce those fuels, decreasing available supply. The ability to obtain raw materials is also affected by a number of other factors beyond the Companys control, including interruptions in production by suppliers, decisions by suppliers to allocate raw materials to other purchasers and the availability and cost of transportation. Price increases for the Companys raw materials have driven up production costs and adversely affected the Companys operating margins, and this trend could continue. The Company has only limited hedges against commodity prices and, to the extent it does hedge, any such hedging activity may not work as planned. Price fluctuations have been mitigated to some extent by the Company through material substitution, which provides flexibility in using a

42

combination of malted barley and adjuncts that reduces cost while maintaining high quality standards for the Companys beer products. New sources of materials such as malted barely and hops are also being developed to reduce reliance on traditional sources such as the United States, where the thrust towards biofuels, with its consequent upward impact on the prices of barley, continues to gain momentum. Supply and Prices of Packaging Materials Approximately 98% of the Companys beer sales are in returnable glass bottles. The Companys efficient returnable bottle system decreases its exposure to rising packaging costs driven by increases in fuel and aluminum prices, and therefore helps the Company to keep its products affordable. The durable nature of the returnable glass bottles results in an average usage of 60 cycles over a span of 10 years. When beer is sold in returnable bottles, the Company records an account receivable in respect of the deposit amount for the bottles, and this account is later paid by the return of the bottles. Under this deposit-driven system, the Company has achieved a high bottle retrieval rate of 95% on average during the last two years, and, as a result, bottle usage is maximized before bottles are replaced. New glass bottles are purchased only to support accelerating sales and to replace broken and scuffed bottles. The Company sources most of its packaging materials from SMPSI, a subsidiary of SMC, which manufactures, among other packaging products, new glass bottles, aluminum cans, crowns, plastic cases, and carton boxes. Advertising and Promotions Advertising and promotions are important factors for consumer buying choices. Advertising affects consumer awareness of the brands used by the Company, which in turn, affects purchase decisions and therefore sales volumes. Product differentiation and brand loyalty are achieved through the marketing and image-building efforts of competing brands. The Company believes that consumer brand preferences are the cumulative result of exposure to the brands over an extended period of time, rather than of one specific advertisement. Competition The Company faces competition from another domestic producer, which sells both its own brand and foreign brands it produces under license, and from foreign brewers. The Company also competes with producers of other alcoholic beverages, primarily from low-priced gin and brandy. In the beer industry and more generally the alcoholic beverage industry competitive factors generally include price, product quality, brand awareness and loyalty, distribution coverage, and the ability to respond effectively to shifting consumer tastes and preferences. The Company also competes with other discretionary items, including both other food and beverage products and other goods and services generally. Taxes and Regulatory Environment The Companys operations are subject to various taxes. Excise tax accounts for a significant portion of the Companys production costs. In January 2005, the Government increased the excise tax rates applicable to beer products by 20%, and excise tax rates were raised by a further 8% on January 1, 2007. The Government has announced that the excise tax rates applicable to beer will be raised by an additional 8% effective January 1, 2009 and by a further 8% effective January 1, 2011. See Business Regulation and Taxation. In 2006, the Government increased the corporate income tax rate from 32% to 35% and the VAT rate from 10% to 12%. In general, the Company attempts to pass higher taxes to its consumers by raising the prices of its products, although the timing and size of such price rises can be influenced by factors such as inflation and other economic conditions in the Philippines. Price changes the Company makes in reaction to changes in tax rates could affect the demand for the Companys products as well as the Companys profit margins, product pricing and net income.

43

DESCRIPTION OF REVENUE AND COST ITEMS Net Sales The Company generates its net sales primarily from the production and sale of beer. The Companys net sales are net of VAT and discounts. The following table presents the Companys net sales for the periods indicated:
For the year ended December 31, 2005 P 2006 2007 2007 US$

(in millions) P P

Beer Sales Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,475 39,943 43,233 1,047.3 Exports(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406 361 358 8.7 Other Revenues(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 261 548 13.3 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,978 40,565 44,139 1,069.3
(1) The Companys top three export markets in 2007 were the United States, Taiwan and South Korea. Exports to these countries accounted for approximately 24%, 21% and 8% of its total exports, respectively. In 2006, the Companys top four export markets were Taiwan, the United States, Japan and Malaysia; exports to these countries accounted for 24%, 22%, 6% and 6% of its total exports, respectively. In 2005, the Companys top three export markets were Taiwan, the United States and Saudi Arabia, and exports to these countries accounted for 23%, 18% and 12% of its total exports, respectively. (2) Other Revenues include sales of CO 2 and toll - packed products.

Cost of Sales Cost of sales consists of: inventory costs, which are accounted for under the moving average cost method, include the cost of raw materials that the Company uses in the production of its products, including malted barley, adjuncts, hops and water; the cost of taxes and licenses, including excise taxes and tariffs; depreciation and amortization costs, which relate primarily to the depreciation of production equipment, facilities and buildings; aluminum cans and secondary carton packaging; personnel expenses, which include salary and wages, employee benefits and retirement costs for employees involved in the production process; repairs and maintenance costs relating to production equipment, facilities and buildings; fuel and oil costs relating to the production process; communications, light and water expenses relating to the Companys production processes and facilities; and other costs of sales, which include miscellaneous expenses such as supplies, rental, insurance and freight expenses.

44

In 2005, 2006 and 2007, the Companys cost of sales was P 22,808 million, P 20,687 million and P22,927 million, respectively. Operating Expenses The Companys operating expenses consist of selling expenses and administrative expenses. In 2005, 2006 and 2007, the Companys operating expenses were P 8,936 million, P 8,666 million and P 8,939 million, respectively. The Companys selling expenses consist primarily of: trade and consumer promotion expenses, which include the cost of event sponsorships, billboards, merchandising activities and other promotional activities; personnel expenses, including salary and wages, employee benefits and retirement costs for sales employees; freight, trucking and handling expenses in connection with the distribution of the Companys products; and depreciation expenses, which relate to the depreciation of sales-related facilities and equipment.

Selling expenses also consist of repairs and maintenance expenses for the Companys sales offices, communications, light and water expenses, rental expenses, supplies, taxes and licenses and professional fees. In 2005, 2006 and 2007, the Companys selling expenses were P 3,864 million, P3,382 million and P 3,098 million, respectively. The Companys administrative expenses mainly consist of: land rental, shared service fees and royalties, all of which are paid to SMC; personnel expenses, including salaries and wages, employee benefits and retirement costs for executive, administrative, finance and human resource personnel; depreciation, which relates primarily to the depreciation of office buildings, information technology equipment and other office equipment; breakages and loss, primarily those attributable to the Companys returnable beer bottles; repair and maintenance expenses relating to office buildings, information technology systems and other office equipment; professional fees of accountants and financial and legal advisors, as well as information technology systems, administration and project-related fees; certain of the Companys advertising and promotional expenses; and freight, trucking and handling expenses that are related to the Companys production processes or other internal requirements.

Administrative expenses also include supplies, rental expenses, communications, light and water expenses, and taxes and licenses. In 2005, 2006 and 2007, the Companys administrative expenses were P 5,072 million, P 5,284 million and P 5,841 million, respectively.

45

CRITICAL ACCOUNTING POLICIES The Companys significant accounting policies are set out in note 3 to the Companys examined pro forma financial statements included elsewhere in this prospectus. The preparation of the Companys audited carve-out special purpose statements requires the Companys management to make estimates and assumptions that were the bases for the amounts reported in the Companys examined pro forma financial statements and the related notes. Actual results may differ from those estimates and assumptions. The Company has identified the following accounting policies as critical to an understanding of its financial condition and results of operations, as the application of these policies requires significant management assumptions and estimates that could result in the reporting of materially different amounts if different assumptions or estimates are used. Asset Impairment The carrying values of plant and equipment and other long-lived assets, including goodwill, intangible assets and investment properties, are reviewed periodically for impairment. Under PFRS, depending on the type of assets, the Company reviews for impairment annually and/or when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Determining the net recoverable value of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. Changes in these estimates could materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse impact on the Companys financial condition and results of operations. Revenue Recognition Except for interest income and other income, which historically have not been significant for the Company, the Company records its revenue as net sales, which represents the Companys sales of its products, net of VAT and discounts. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. For sales by the Company of its products, revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably, which is normally upon delivery. Taxes Current tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the relevant balance sheet date. Deferred tax. Deferred income tax is provided using the balance sheet liability method on all temporary differences at the financial statements date between the tax bases of the assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

46

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of unused tax credits and unused tax losses can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at the financial statements date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the financial statements date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the financial statements date. Income tax relating to items recognized directly in equity is recognized in equity and not in the examined pro forma statements of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. As of December 31, 2007, the Company had deferred tax assets of P 398 million. The Company reviews its deferred tax assets at each balance sheet date and reduces the carrying amount if it is not probable that sufficient taxable profit will be available in future periods to allow all or part of the deferred tax assets to be utilized. In addition, unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized if it has become probable that future taxable profit will allow the deferred tax asset to be recovered. VAT. Revenues, expenses and assets are recognized net of the amount of VAT, except:

where the VAT incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable, and receivables and payables that are stated with the amount of VAT included.

The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables and payables in the examined pro forma balance sheet. Useful Lives of Plant and Equipment As of December 31, 2007, the Company had plant and equipment net of accumulated depreciation, amortization and impairment losses of P 5,616 million. Plant and equipment are stated at cost less accumulated depreciation, amortization and impairment losses. For a discussion of impairment see Asset Impairment.

47

Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets: Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tools and small equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment, furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 50 years 20 to 50 years 10 to 40 years 5 to 7 years 2 to 5 years 2 to 6 years 5 to 50 years or term of the lease, whichever is shorter

The Company estimates the useful lives of plant and equipment based on the period over which the assets are expected to be available for use. Estimates of the useful lives of plant and equipment are based on a collective assessment of industry practice, internal technical evaluation and the Companys experience with similar assets. The estimated useful lives of plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence or legal or other limits on the use of such assets. Changes in such estimates could significantly affect the Companys results of operations. In particular, a reduction in the estimated useful lives of plant and equipment would increase depreciation expense and reduce operating income. See notes 4 and 9 to the Companys examined pro forma financial statements included elsewhere in this prospectus. Estimating Allowance for Doubtful Accounts As of December 31, 2007, the Company had trade and other receivables of P 3,676 million and allowance for doubtful accounts of P 693 million. Allowances for doubtful accounts are made when there is objective evidence of impairment. The Company evaluates its receivables for impairment based on available facts and circumstances, including, among others, the length of the Companys relationship with the customer, the customers current credit status, third-party credit reports and known market trends, the average age of the account, and the Companys collection and historical loss experience. Estimating Allowance for Inventory Obsolescence The Companys finished goods and in-process inventory and materials and supplies inventory are stated at the lower of cost and net realizable value. Net realizable value for finished goods and in-process inventory is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling costs. Net realizable value for materials and supplies inventory is the current replacement cost. The Company provides allowance for inventories whenever net realizable value is lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other factors. Allowance for inventory obsolescence is reviewed periodically. As of December 31, 2007, inventories net of allowance for inventory obsolescence, were P 2,447 million. See note 7 to the Companys examined pro forma financial statements included elsewhere in this prospectus. Fair Value of Financial Assets and Liabilities A portion of the Companys financial assets and liabilities are carried at fair value, with changes in fair value being recorded directly in the Companys statements of income. Fair value is determined by various valuation methods, including discounted cash flow, that depend on a number of estimates and assumptions, as well as a significant degree of judgment. The determination of fair value could change significantly if different estimates, assumptions and valuation methods were used. Changes

48

in the fair value of the Companys financial assets and liabilities could materially affect the Companys financial condition and results of operations. RESULTS OF OPERATIONS Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 The following comparison of the Companys results of operations is based on the Companys examined pro forma financial statements. Net Sales Net sales increased by 8.8% from P 40,565 million in 2006 to P 44,139 million in 2007, reflecting increased volume of beer sales. The primary reason for the increased volume of sales was the Company maintaining unchanged beer prices during a period of relatively favorable economic conditions in the Philippines. Despite the 8% increase in excise tax rates effective January 1, 2007, the Company did not increase its prices as foreign exchange rates remained favorable and contracted prices of raw materials did not rise appreciably from the previous years levels. Cost of Sales Cost of sales increased by 10.8% from P 20,687 million in 2006 to P 22,927 million in 2007. This increase was primarily the result of higher sales volumes. Higher volumes resulted in a 17.4% increase in excise tax payments from P 12,168 million in 2006 to P 14,284 million in 2007. The Companys cost of direct materials slightly increased by 0.5% from P 3,446 million in 2006 to P 3,464 million in 2007. Gross Profit and Gross Margin As a result of an 8.8% increase in net sales and a 10.8% increase in cost of sales, gross profit increased by 6.7% from P 19,878 million in 2006 to P 21,212 million in 2007. Gross margin decreased slightly from 49.0% in 2006 to 48.1% in 2007. Operating Expenses Operating expenses increased by 3.2% from P 8,666 million in 2006 to P 8,939 million in 2007. The table below sets forth the principal components of operating expenses in the periods indicated:
For the year ended December 31, 2006 2007

(in millions of P)

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,382 5,284 8,666

3,098 5,841 8,939

Selling Expenses. Selling expenses decreased by 8.4% from P 3,382 million in 2006 to P 3,098 million in 2007. This decrease was primarily due to a 69.3% decrease in provision for doubtful accounts from P 131.6 million in 2006 to P 40.4 million in 2007 and a 50.0% decrease in taxes and licenses from P 89.9 million in 2006 to P 44.9 million in 2007. The decrease in provision for doubtful accounts was principally the result of lower trade receivables. The decrease in taxes and licenses was mainly a result of higher returns of containers in 2007, which resulted in a higher level of VAT credits for the Company, and thereby reducing taxes.

49

Administrative Expenses. Administrative expenses increased by 10.5% from P 5,284 million in 2006 to P 5,841 million in 2007. This increase was mainly due to a 22.8% increase in breakages and losses from P 508 million in 2006 to P 624 million in 2007, a 28.2% increase in advertising and promotion from P 799 million in 2006 to P 1,024 million in 2007. The Companys continued implementation of programs to eliminate scuffed bottles, update its containers and its purchase of additional 1,000ml bottles resulted in a sizable increase in container amortization and breakages. Income from Operating Activities As a result of the foregoing, income from operating activities increased by 9.5% from P 11,212 million in 2006 to P 12,273 million in 2007. Operating margin increased slightly from 27.6% in 2006 to 27.8% in 2007. Other Income (Charges) Other income decreased by 10.3% from P 58 million in 2006 to P 52 million in 2007. The decrease was primarily the result of income from mark-to-market gain on derivatives decreasing from P 93 million in 2006 to P 23 million in 2007, which occurred because of changes in the values of the Companys fuel oil and foreign exchange derivatives. Provision for Income Tax Provision for income tax increased by 9.3% from P 3,944 million in 2006 to P 4,310 million in 2007, as a result of a correspondingly large increase in net income before tax from P 11,270 million in 2006 to P 12,325 million in 2007. Net Income As a result of the foregoing, net income increased by 9.4% from P 7,326 million in 2006 to P 8,015 million in 2007. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 The following comparison of the Companys results of operations is based on the Companys examined pro forma financial statements. Net Sales Net sales decreased slightly by 1.0% from P 40,978 million in 2005 to P 40,565 million in 2006, reflecting decreased volume of beer sales. The primary reasons for the decreased volume of sales were the changes in tax rates, including changes to the VAT law, which raised the VAT from 10% to 12% in February 2006 and higher prices for the Companys products that were implemented on March 1, 2006 and that raised the selling prices of the Companys beer products by an average of 9%. The increase in the Companys prices was made in response to a 20% increase in the excise tax on beer that was implemented effective January 1, 2005 and higher costs of raw materials and fuel. The increase in beer prices, however, was not enough to offset the decline in volumes. The decrease in net sales was also a result of relatively weaker economic conditions in the Philippines, caused in part by higher fuel prices and the occurrence of three serious typhoons that hit the country in the third quarter, disrupting distribution and decreasing demand. During 2006, both Red Horse and San Mig Light increased sales and gained market share, as the trends for increased sales of both high-alcohol and low-calorie beer continued. Cost of Sales Cost of sales decreased by 9.3% from P 22,808 million in 2005 to P 20,687 million in 2006. This decrease was primarily the result of a 9.9% decrease in excise tax payments from P 13,505 million in

50

2005 to P 12,168 million in 2006 and a 5.3% decrease in the cost of direct materials from P 3,640 million in 2005 to P 3,446 million in 2006. Tax payments on beer decreased because of slightly lower sales volume and a shift in product mix toward lower priced beer, which is taxed at lower rates. The decrease in cost of direct materials reflected the slightly lower volume of beer sales and a decline in the price of some raw materials, including a 5% decrease in the cost of malted barley, which was primarily a result of the strengthening of the peso relative to the U.S. dollar. The Company improved its manufacturing efficiencies, which helped control total production costs. Efficiency improvements included lower losses of beer in the production process, lower bottle breakage rates and the use of less energy per unit of production. Gross Profit and Gross Margin As a result of the factors discussed above, primarily a slight decrease in net sales being more than offset by a 9.3% decrease in cost of sales, gross profit increased by 9.4% from P 18,170 million in 2005 to P 19,878 million in 2006. Gross margin increased from 44.3% in 2005 to 49.0% in 2006. Operating Expenses Operating expenses decreased by 3.0% from P 8,936 million in 2005 to P 8,666 million in 2006. The table below sets forth the principal components of the operating expenses in the periods indicated:
For the year ended December 31, 2005 2006

(in millions of P)

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,864 5,072 8,936

3,382 5,284 8,666

Selling Expenses. Selling expenses decreased by 12.5% from P 3,864 million in 2005 to P 3,382 million in 2006. This decrease was primarily due to a 47.8% decrease in provision for doubtful accounts from P 253 million in 2005 to P 132 million in 2006, a 13.6% decrease in salaries and wages from P 726 million in 2005 to P 627 million in 2006, and a 49.4% decrease in taxes and licenses from P178 million in 2005 to P 90 million in 2006. The decrease in provision for doubtful accounts was principally the result of lower trade receivables, which occurred because of improved collections by the Company. The decrease in salaries and wages was mainly due to the Company completing a broad personnel review that resulted in reductions in total headcount. Taxes and licenses decreased primarily because of the decline in revenues. Administrative Expenses. Administrative expenses increased by 4.2% from P 5,072 million in 2005 to P 5,284 million in 2006. This increase was mainly due to a 76.4% increase in breakages and losses from P 288 million in 2005 to P 508 million in 2006, and an 20.1% increase in container amortization from P 701 million in 2005 to P 842 million in 2006, which were offset in part by a 17.1% decrease in salaries and wages from P 1,248 million in 2005 to P 1,035 million in 2006. The increases in breakages and losses and in container amortization were both attributable to a program by the Company to eliminate older scratched bottles and replace them with new bottles as well as increased purchases of 1000 ml bottles. Salaries and wages decreased as the Company completed a broad personnel review that resulted in reduction in total headcount. Income from Operating Activities As a result of the foregoing, income from operating activities increased by 21.4% from P 9,234 million in 2005 to P 11,212 million in 2006. Operating margin increased from 22.5% in 2005 to 27.6% in 2006.

51

Other Income (Charges) Other income decreased by 73.8% from P 221 million in 2005 to P 58 million in 2006. This was primarily due to income from mark-to-market gain on derivatives decreasing by 56.0% from P 211 million in 2005 to P 93 million in 2006, which occurred because of changes in the values of the Companys fuel oil and foreign exchange derivatives. Provision for Income Tax Provision for income tax increased by 29.4% from P 3,049 million in 2005 to P 3,944 million in 2006, largely as a result of a 19.2% increase in net income before tax from P 9,455 million in 2005 to P 11,270 million in 2006. The Companys effective tax rate increased from 32.24% in 2005 to 34.99% in 2006. Net Income As a result of the foregoing, net income increased by 14.4% from P 6,406 million in 2005 to P 7,326 million in 2006. LIQUIDITY AND CAPITAL RESOURCES During the years 2005, 2006 and 2007, the Companys cash flows from operations have been sufficient to provide sufficient cash for the Companys operations and capital expenditures. In each of 2005, 2006 and 2007, the Company paid cash dividends to SMC, its parent, and the payment of those cash dividends was the primary reason that there were only small changes in the Companys cash and cash equivalents at the end of period for each of these years. See Net Cash Flows Provided by (Used for) Financing Activities. This maintenance of a relatively stable end of period cash position throughout these periods occurred during a period in which the Company had net cash flows provided by operating activities of P 8,111 million, P 8,547 million and P 11,775 million in 2005, 2006 and 2007, respectively. The Company declared a dividend of P 2.3 billion on February 4, 2008, which was paid in full on February 8, 2008. On April 10, 2008, the Companys Board of Directors declared a cash dividend of P 2.453 billion, or P 0.16 per share, in respect of the Companys net income in respect of the first quarter of 2008, which was paid in full on April 18, 2008. The Companys past practice of paying dividends, which occurred during a period in which the Company was operated as a division of SMC, is not likely to be predictive of future payments of dividends. See Dividend Policy for a discussion of the Companys policy on future payments of dividends. The following table sets out the Companys cash flows in 2005, 2006 and 2007:
For the year ended December 31, 2005 2006 2007

(in millions of P)

Net cash flows provided by/(used for) operating activities . . . . . . . . . . . . . . . . . . . . . . . Net cash flows provided by/(used for) investing activities . . . . . . . . . . . . . . . . . . . . . . . Net cash flows provided by/(used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash Flows from Operating Activities

8,111 8,547 11,775 (1,707) (1,237) (1,784) (6,406) (7,326) (5,707) (2) (16) 4,284

Net cash flows provided by operating activities were P 11,775 million in 2007. The Companys net income before income tax for this period was P 12,325 million, and this amount was positively adjusted for, among other things, depreciation of the Companys plant and equipment of P 762 million, amortization of containers of P 890 million and an adjustment for provision for doubtful accounts and inventory obsolescence of P 254 million, resulting in operating cash flows before working capital changes of P 14,193 million. Aggregate changes in working capital increased this amount by P 1,766 million, resulting in cash generated from operating activities of P 15,959 million. This amount was reduced by income taxes paid of P 4,184 million.

52

Net cash flows provided by operating activities in 2006 were P 8,547 million. The Companys net income before income tax for this period was P 11,270 million, and this amount was positively adjusted for, among other things, depreciation of the Companys plant and equipment of P 779 million, amortization of containers of P 842 million and an adjustment for provision for doubtful accounts and inventory obsolescence of P 327 million, resulting in operating cash flows before working capital changes of P 13,213 million. Aggregate working capital changes reduced this amount by P 782 million, resulting in cash generated from operations of P 12,431 million. This amount was reduced by income taxes paid of P 3,884 million. Net cash flows provided by operating activities were P 8,111 million in 2005. The Companys net income before income tax for this period was P 9,455 million, and this amount was positively adjusted for, among other things, depreciation of the Companys plant and equipment of P 911 million, amortization of containers of P 701 million and an adjustment for provision for doubtful accounts and inventory obsolescence of P 147 million, resulting in operating income before working capital changes of P 11,210 million. Working capital adjustments reduced this amount by P 47 million, resulting in cash generated from operations of P 11,163 million. This amount was reduced by income taxes paid of P 3,051 million. Net Cash Flows Used in Investing Activities Net cash used for investing activities was P 1,784 million in 2007. This reflects replacements of bottles and containers, and equipment upgrades and maintenance. Net cash used for investing activities was P 1,237 million in 2006. This primarily reflects additions to plant and equipment to improve efficiencies and container purchases. Net cash flows used in investing activities were P1,707 million in 2005. This primarily reflects additions to plant and equipment and container purchases. Net Cash Flows Provided by (Used for) Financing Activities Net cash flows used for financing activities were P 5,707 million in 2007. This amount reflects cash dividends paid during the period. Net cash flows used for financing activities were P 7,326 million in 2006. This amount reflects cash dividends paid during the period. Net cash flows used for financing activities were P 6,406 million in 2005. This amount reflects cash dividends paid during the period. Capital Resources As of December 31, 2007, the Company had cash and cash equivalents of P 5,262 million. As of the same date, the Company had no outstanding short-term debt. As of December 31, 2007, the Company had total unearned income of P 3.0 million, representing the unearned rent from certain equipment of the Company leased to a service provider for three years. As of December 31, 2007, the Company had current assets of P 11,565 million and current liabilities of P 7,272 million. As of the same date, the Companys working capital (current assets minus current liabilities) was P 4,293 million. The Company believes that its working capital is sufficient for its present requirements. In the ordinary course of business, the Company makes certain purchase commitments for the procurement of raw materials. As of December 31, 2007, the Companys outstanding purchase commitments were estimated to be approximately P 3,491 million. A significant portion of these purchase commitments is payable within one year. The Company expects to finance these commitments through cash flows from its operations and short-term borrowings. Capital Expenditures The Company has made significant capital expenditures to improve operations, reduce costs and maintain performance of major equipment.

53

The table below set out the Companys capital expenditures in 2005, 2006 and 2007. The Company has historically sourced funding for its capital expenditures from internally-generated funds.
Year ended December 31, Expenditure (in millions)

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P507 P316 P706

The capital expenditures for 2007 include supplementing present equipment capabilities and replacement and maintenance of equipment to ensure plant efficiency. For 2008, the Company currently has budgeted P 700 million for capital expenditures, primarily for repair and maintenance and to make operational improvements. These capital expenditures are expected to be funded by a combination of internally generated cash flow and external financing sources, which include a portion of the net proceeds from the Primary Offer, an approximately P 1.6 billion line of credit that the Company has established with the Bank of the Philippine Islands and other external sources the Company has access to through SMC. See Use of Proceeds on page 32 of this prospectus. The Companys budgeted capital expenditures are based on managements estimates and have not been appraised by an independent organization. In addition, the Companys capital expenditures are subject to various factors, including new product introductions, tolling arrangements and perceived surges in sales volumes of various products. There can be no assurance that the Company will implement its capital expenditure plans as intended at or below estimated costs. Off-Balance Sheet Arrangements The Company does not have any material off-balance sheet arrangements. The Company has, however, entered into derivative transactions to manage its exposures to currency exchange rates and fuel oil prices. See Derivative Financial Instruments. Derivative Financial Instruments The Company has entered into derivative financial instrument transactions, including swaps, options and forwards, to manage its exposure to exchange rate risk and its risk relating to changes in fuel oil prices. A more detailed description of the Companys derivative financial instruments is set out in notes 23 and 24 to the Companys examined pro forma financial statements included elsewhere in this prospectus. KEY PERFORMANCE INDICATORS Following below are the major performance measures that the Company uses. The Company employs analyses using comparisons and measurements based on the financial data for current periods against the same period of the previous year.
For the year ended December 31, 2007 2006

Liquidity: Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solvency: Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profitability: Return on average equity of the Company . . . . . . . . . . . . . . . . . . . . . . . . . Operating efficiency: Volume growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.59 0.47 51.35% 7.3% 8.8%

1.96 0.30 46.13% (8.98)% (1.0)%

54

The manner in which the Company calculates its key performance indicators is set out in the table below:
Key Performance Indicator Formula

Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current Assets Current Liabilities Total Liabilities (Current + non-current) Equity Net Income Average Equity of the Company

Debt-equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . .

Volume growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current period Sales Volume Prior period Sales Volume

Current period Net Sales Prior period Net Sales

-1
-1

Revenue growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RECENT ACCOUNTING PRONOUNCEMENTS New Standards, Amendment to Standards and Interpretations Adopted in 2007 PFRS 7, Financial Instruments: Disclosures, requires extensive disclosures about the significance of financial instruments relative to an entitys financial position and performance, and quantitative and qualitative disclosures on the nature and extent of risks. Amendment to PAS 1, Presentation of Financial Statements Capital Disclosures, requires additional disclosures regarding the entitys objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, requires that a reassessment of whether embedded derivative should be separated from the underlying host contract to be made only when there are changes to the contract that significantly modifies the cash flows. This interpretation has no significant impact on the Companys examined pro forma financial statements. Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment, prohibits the reversal of impairment losses on certain financial assets recognized in interim financial reports even if the impairment is no longer present at the balance sheet date. This interpretation has no significant impact on the Companys examined pro forma financial statements.

New and Revised Standards and Interpretations Not Yet Adopted The following are the new and revised standards and interpretations that are not yet effective as of December 31, 2007 and have not been applied in preparing the Companys examined pro forma financial statements: Revised PAS 1, Presentation of Financial Statements , the revised standards introduce total comprehensive income (that is, changes in equity during a period, other than those changes resulting from transactions with owners in their capacity as owners), a statement of financial position (formerly balance sheet) is required at the beginning of the earliest comparative

55

period following a change in accounting policy, the correction of an error or the reclassification of items in the financial statements, reclassification adjustments to profit or loss of amounts previously recognized in other comprehensive income (formerly recycling) are disclosed for each component of other comprehensive income, income tax is disclosed for each component of other comprehensive income and dividends and related per-share amounts are disclosed either on the face of the statement of changes in equity or in the notes to the financial statements. The revised standard will be effective beginning on January 1, 2009. PFRS 8, Operating Segments, requires an entity to adopt the management approach in reporting segment information. This will be effective January 1, 2009 and will replace PAS 14, Segment Reporting . It is required for adoption only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the SEC for purposes of issuing any class of instruments in a public market. Revised PAS 23, Borrowing Costs , removes the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of qualifying asset as part of the cost of that asset. The revised standard will be effective beginning on January 1, 2009. IFRIC 11, IFRS 2 Group Treasury Share Transactions, describes how to apply PFRS 2, Share-based Payment to share-based payment arrangements involving the entitys own equity instruments and share-based payment arrangements of subsidiaries involving equity instruments. This interpretation will be effective beginning on January 1, 2008. IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction , clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of minimum funding requirement (MFR) on such assets. It also addresses when a MFR might give rise to a liability. IFRIC 14 will become mandatory for the Companys 2008 financial statements, with retrospective application required.

The adoption of the above standards and Philippine interpretations is not expected to have a significant impact on the Companys examined pro forma financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various types of market risks in the ordinary course of business, including interest rate risk, foreign currency exchange rate risk and commodity price risk. Exchange Rate Risk The Companys foreign currency exchange rate risk exposure results primarily from business transactions denominated in foreign currencies. The Company uses a combination of natural hedges, with U.S. dollar revenue from exports providing a partial hedge against U.S. dollar-denominated raw material expenses, and derivative instruments to manage its exchange rate risk exposure. Authorized derivative instruments include currency forwards, currency swaps and currency options. For more information regarding the Companys exchange rate risk exposure and related derivative instruments, see note 23 and 24 to the Companys examined pro forma financial statements included elsewhere in this prospectus.

56

The following table sets forth the Companys foreign currency-denominated assets and liabilities and their peso equivalents as of the date indicated:
As of December 31, 2007 U.S. dollar Peso equivalent

(in millions)

Assets Export receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net foreign currency-denominated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commodity Price Risk

3 1 2

127 29 98

The Companys commodity price risk exposure results primarily from the use of commodities as raw materials and fuel in its production processes. The Company enters into various commodity derivative transactions to manage its commodity price risk exposure, including swaps, futures, options and forwards. The Company enters into commodity swaps, futures and options primarily to manage the price risks of fuel oil. The Company makes commodity forward purchases of a variety of commodities. The prices of the commodity forwards are generally fixed through direct agreements with suppliers or by reference to a commodity price index. For more information regarding the Companys commodity price risk exposure and relative derivative instruments, see note 23 and 24 to the Companys examined pro forma financial statements included elsewhere in this prospectus.

57

THE BEER INDUSTRY IN THE PHILIPPINES The information and data contained in this offering document relating to the Philippine beer industry has been provided by Canadean Limited (Canadean), a leading global beverage research company, and is taken from Canadeans database and other sources. The Company does not have any knowledge that the information provided by Canadean is inaccurate in any material respect. Canadean has advised that (i) some information in Canadeans database is derived from estimates or subjective judgments, (ii) the information in the databases of other data collection agencies may differ from the information in Canadeans database, and (iii) while Canadean has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures and may accordingly contain errors. OVERVIEW Between 2001 and 2006, global beer sales volumes increased at a compound annual growth rate (CAGR) of 3.6%. Over the same time period, the Philippines beer market also grew at a CAGR of 2.9%. Regionally, Asia Pacific beer sales volumes grew at a faster rate than markets in all other regions around the world. The following table sets forth the beer sales volumes CAGR from 2001 and 2006 for the Philippines, Asia Pacific and various regions: Beer Sales Volumes CAGR 2001-2006

6. 3%

3.6% 2.9% 2.8% 1.9%

Philippines

Asia P acific

E urope

Americas

W orld

Source: Canadean The Beer Service, Global Beer Trends 2007 Cycle

The Philippines is the third largest beer market in Southeast Asia (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) and the sixth largest beer market in greater Asia by sales volume. In 2006, sales volumes for beer in the Philippines were 12,662.0 thousand hectolitres. The following table sets forth beer sales volumes in 2006 and the 2001 to 2006 CAGR for various countries in Southeast and greater Asia:

58

Major Asian Beer Countries 2006

Country Sales Volume (HL millions) CAGR (20012006)

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

346.4 67.0 20.3 16.7 12.8 12.6 5.6 1.9 1.6 1.2 0.8 486.9

8.8% -(2.0)% 11.6% -(1.3)% 10.4% 2.9% 9.1% 2.6% 0.7% -(1.6)% 1.6% 6.3%

Between 2001 and 2006, the per capita sales volume of beer for the Philippines grew from approximately 14.2 litres to 15.0 litres. The following tables set forth the largest Asian beer markets ranked by per capita consumption and per capita GDP. Major Asian Beer Countries Beer Consumption Per Capita vs GDP Per Capita, 2006
Indonesia Malay sia Vietnam Philippines Singapore Hong Kong Taiwan China Thailand South Korea Japan 52 31 34 19 22 24 26 7,722 9,193 24, 084 32,530 30,687 15 15 5 3,393 5,365 33,471 38, 714 1 4,356 11,957

Source: Canadean The Beer Service, Global Beer Trends 2007 Cycle, International Monetary Fund (IMF).

The following table sets forth changes in the Philippines per capita sales volume of beer for the periods indicated: Development of Philippines Beer Market Per Capita Sales Volume
Liters

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14.2 15.5 17.5 16.8 15.0 15.5

Source: Canadean, The Beer Service, Annual report 2007 Cycle, Philippines.

59

Beer Segmentation The beer market in the Philippines can be broken down into four segments: (i) economy brands, (ii) standard brands, (iii) premium brands and (iv) super-premium brands, principally differentiated by pricing. Brands from economy and standard segments are heavily advertised and promoted and can be generally differentiated by marketing policy and packaging. Economy brands. Economy brands are low-priced products, which are brewed locally and accounted for approximately 11.3% of sales volume in the Philippines in 2006. Economy beer is widely available to the mass market through a range of different outlets and is distributed mostly in glass bottles through small supermarkets, sari-sari stores (mom and pop) and on-premise channels throughout the country. Consumers in this segment are particularly price-sensitive. The typical retail selling price of a 320 millilitre bottle is between P 12.5 and P 14.0. Economy brands in the Philippines include Beer Na Beer and Gold Eagle . Standard brands. Standard brands are mostly brewed locally and represented approximately 53.0% of the beer market by sales volume in 2006. The brands in this segment are targeted at consumers nationally. The brands within this segment are generally priced 25% to 35% above economy brands, with the typical retail selling price of a 330 millilitre bottle generally between P 14.5 and P 16.0. Standard brands have been increasingly popular with consumers given the stronger alcohol content on leading brands such as Red Horse and Colt 45 . Premium brands. Premium brands are mostly brewed locally and represented approximately 35.1% of sales volume in 2006. The brands in this segment are targeted at consumers mostly in urban areas with a purchasing power greater than the mass market. The brands in this segment are generally priced 10% to 20% above standard brands, with the typical retail selling price of a 330 millilitre bottle generally between P 18.0 and P 19.0. SMC is the dominant force in this segment through San Miguel Pale Pilsen and San Mig Light . Super-premium brands. This segment represented the remaining 0.6% of the beer market by sales volume in the Philippines in 2006, and comprises mainly of local brands and international brands imported into the Philippines. The brands in this segment are targeted at urban consumers with relatively high purchasing power and tourists. These products are mostly sold through high-end bars, restaurants and hotels in the Metro Manila area. Premium brands are significantly more expensive than economy, standard and premium brands and use more sophisticated packaging designed to appeal to urban consumers. The typical retail selling price of a 330 millilitre bottle is approximately peso 20.0 and upwards. The most popular local brands include San Miguel Strong Ice , San Miguel Super Dry and Cerveza Negra whilst imported brands include Tiger , Corona and Fosters . Compared with other leading beer markets in Asia, both off and on premise pricing per litre in the Philippines represent one of the lowest for Asia. The following table sets forth average beer pricing per litre for on and off premise channels in 2006 across the major beer markets in Asia: Leading Asian Beer Markets Average Per Litre Prices 2006 US$
Country Off-Premise On-Premise

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.63 2.43 2.33 3.96 6.47 0.83 5.71 3.10 1.51 1.47

0.99 4.72 2.85 11.43 8.42 2.74 6.39 14.32 2.45 1.11

Source: Canadean The Beer Service, Annual Report 2007 Cycle.

60

Key Industry Trends Economic impact. Farm incomes have been declining in recent years as farmers and farm workers have traditionally been a key consumption segment for beer. In 2006, VAT was raised from 10% to 12% as the government attempts to reduce the fiscal deficit resulted in a softening of consumer demand. Industry profitability has come under increasing pressure as a result of the volatility of the local peso which affects the distribution and raw materials import costs. Preference for mainstream over premium brands. The Philippines beer market is largely a pilsner lager type beer market. In recent years, there is increasing preference for mainstream beer which contains a higher alcohol content than premium beer due to affordability with consumers. Red Horse brewed by SMC contains alcohol-by-volume (ABV) of 6.8% and is the leading brand in the mainstream segment whilst San Miguel Pale Pilsen , the leading brand in the premium segment contains an ABV of 5%. Distribution challenges. The Philippines is composed of over 7,000 islands that renders distribution a highly complex and expensive business and represents a significant barrier to market entry for new brewers wishing to distribute nationally. SMC and Asia Brewery Inc. (ABI) remain dominant players in the beer market and limit competition nationally. Competition The beer market in the Philippines is highly concentrated with SMC continuing to consolidate its leadership locally. SMC has increased its corporate share from 91% in 2000 to 93% in 2006 as a result of strong performance from key brands such as Red Horse and San Mig Light . The other key local player is ABI which started out brewing Carlsberg under license in 1987 and followed in 1988 with the launch of its own Beer na Beer brand. Despite new product introductions in recent years ABIs corporate market share has declined from 9% in 2000 to just under 7% in 2006. ABI is highly dependent on Beer na Beer and competition from Red Horse and Gold Eagle in particular have resulted in loss of its market share. Imported beer comprises a small proportion of the market as these products can only be found in upscale hotels, bars, restaurants and supermarkets in Metro Manila. On January 1, 2005 the Government raised excise taxes by 20% on beer which was unpopular with both the industry and consumers. Unlike other markets where excise tax is levied on the specific gravity of alcohol, excise taxes in the Philippines are charged according to net retail price / per liter of volume capacity. On February 1, 2006, VAT was raised to 12% from 10% as part of the Governments policy to reduce the fiscal deficit. As a result, beer retail prices increased during 2006 which had a dampening effect on beer consumption during the same year. Philippines Leading Brewers / Importers 2004-2006 (000 hl)
Company 2004 2005 2006

San Miguel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,322 13,020 11,830 Asia Brewery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 937 812 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 19 20 Distribution The Philippines is composed of 7,000 islands that renders distribution a highly complex and expensive business, and create a significant barrier to market entry for new brewers wishing to compete nationally. Metro Manila on the island of Luzon is the most densely populated conurbation and accounts for around 35% of all beer consumption in the country.

61

The brewers distribute direct to retailers through a network of independent, exclusive distributors. In the provinces, these distributors work with a large number of sub-distributors known as bookers. In 2004, SMC embarked on a strategic programme of initiatives to improve its distribution system at the expense of local rival ABI. The returnable glass bottle enjoys widespread distribution across all channels as it is popular with consumers. For example, the leading brand Red Horse costs P 46.0 for a one liter returnable glass bottle with a P 6.0 deposit on the bottle when purchased from sari-sari stores. On average, each returnable glass bottle can be used anywhere from 40 to 60 manufacturing cycles depending on the quality of the glass used to make the bottles. Beer distribution covers large modern supermarkets, smaller supermarkets, convenience stores, gas stations and sari-sari stores as well as on-premise outlets such as bars, clubs, hotels and restaurants. Modern retail such as supermarkets is growing from a small base particularly in Metro Manila. The following table sets forth the outlet universe for beer in the Philippines: Outlet Universe for Beer 2006
Number % share

Retail Convenience stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supermarkets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warehouse clubs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sari-Sari stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . On-Premise Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurants, cafes, fast food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clubs, kiosks, others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total On-Premise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,008 80 31 200 350,000 220 351,539

0.29% 0.02% 0.01% 0.06 99.56 0.08 100.00%

3,655 68,400 16,400 88,455

4.13% 77.37% 18.54% 100.00%

Source: Canadean The Beer Service, Annual Report 2007 Cycle, Philippines.

62

The on-premise channel accounts for around 24% of overall beer consumption in 2006 and has been declining in recent years partially due to higher on-premise prices. Increased fuel cost has also added to distribution cost which has also pushed up prices. The following table sets forth distribution of beer in leading Asian markets for 2006: Major Asian Beer Countries Off vs On Premise Volume Sales 2006
100% 28% 75% 45% 68% 50% 72% 25% 55% 32% 0% China Off premise Hong Kong Indonesia On Premise Japan Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 29% 26% 73% 77% 50% 42% 42% 32% 71% 74% 27% 23% 50% 58% 58% 68%

Source: Canadean The Beer Service, Global Beer Trends 2007 Cycle.

Outlook In 2004, the general election boosted beer consumption to a record level due to election-related spending which boosted consumer incomes. However, declining farm incomes, the on-going conflict in Mindanao as well as both political and economic instability have had an impact on beer consumption. Although President Gloria Macapagal Arroyos leadership remains fragile, the parties loyal to the President increased their control over the House of Representatives during the mid-term election in May 2007; hence the prospects for her to remain in power until the end of her term in 2010 have improved. Overall, private consumption will be the key driver of the economy with GDP expected to grow at between 5% to 6% and inflation averaging at 3% over the next three years. Buoyant remittances from Filipinos working overseas will ensure that the current account remains in surplus. For the beer market the forecast is for a return to single-digit growth of 5% per annum in 2007 and 2008 as prices stablises and remittances from overseas Filipino workers continue to increase. Agriculture is expected to rebound after the disastrous typhoons in 2006 when farmers crops and income were drastically reduced. High-alcohol beer volume is expected to continue to grow.

63

BUSINESS OVERVIEW The Company is the largest producer of beer in the Philippines, with a total market share of approximately 93% in 2006, according to Canadean Limited. The Company has five breweries strategically located across the Philippines and a highly developed distribution system serving approximately 471,000 retail outlets. The Companys beer brands include all of the top four brands in the country, namely San Miguel Pale Pilsen, Red Horse, San Miguel Light and Gold Eagle. San Miguel Pale Pilsen , the Companys flagship brand, has a history of over 117 years. San Miguel beer was first produced by La Fabrica de Cerveza de San Miguel (San Miguel Brewery), a small brewery in the Philippines that began its operations in 1890. San Miguel Brewery provided the foundation from which SMC has grown to become the largest food, beverage and packaging company in the Philippines today. San Miguel Brewery was renamed San Miguel Corporation (SMC) in 1963. From a single brewery producing a single product in 1890, SMCs corporate history and business portfolio have evolved over the years. It entered the soft drinks business in 1922 and became the first overseas bottler of The Coca-Cola Company in 1927. To meet the needs of its beer and soft drinks businesses, SMC established a glass packaging plant in Manila in 1938 to supply its own requirements. SMC has expanded to include other food, beverage and packaging products. It has also grown geographically from a Philippine-based beer company to become a regional producer in the Asian beer market. The San Miguel brewery in Hong Kong was founded in 1948 and by the 1970s, San Miguel beer had established a strong market position in Hong Kong. Building on San Miguel Beers leading positions in the Philippines and Hong Kong, SMC expanded into new markets, including China in 1991, Indonesia in 1992, Vietnam in 1993, and Thailand in 2004. Prior to the creation of the Company, all of SMCs beer operations were under the San Miguel Beer Division (SMBD), a business unit of SMC. On July 24, 2007, the shareholders of SMC approved the transfer of SMCs domestic Philippine beer business assets to the Company in exchange for additional shares in the Company, a wholly-owned subsidiary of SMC. The assets transferred to the Company comprise of the domestic beer business net assets as of June 30, 2007, excluding land, brands and income and other tax payable. The Company was incorporated on July 26, 2007, and the domestic beer business was spun off from SMC effective October 1, 2007. The spin-off of SMCs domestic beer business into the Company was intended to realize the value of SMCs flagship business. Following approval by the shareholders of SMC of the spin-off of the domestic beer business and the creation of the Company, all plant and equipment used by SMBD in the domestic beer business were transferred to the Company, while SMC retains ownership of the brands and land assets used in the domestic beer business. Under the new structure, the Company will pay SMC royalties for the use of brands and other intellectual property rights of SMC, rentals for the use of the land assets of SMC, fees for shared services and dividends. See Related Party Transactions. STRENGTHS The Company believes that its principal strengths include the following: Strong and popular brand portfolio supported by high quality products. From a single product produced in a single brewery in 1890, San Miguel beer has, over 117 years later, grown into an array of popular beer products catering to the distinct tastes and preferences of beer drinkers across all segments and markets in the Philippines. San Miguel Pale Pilsen , the Companys flagship brand, has been an iconic Philippine brand for most of the 20 th century and up to today. After considering the Filipino beer drinkers evolving preferences, other brands and products have been introduced, and these have been very successful. Today, the Company offers a portfolio of eight strong and popular brands: Pale Pilsen, Red Horse, San Mig Light, Super Dry, Cerveza Negra, San Mig Strong Ice, Gold Eagle and Cali , the countrys only malt-based non-alcoholic drink. The various products carry distinct attributes that cater to all segments of the Philippine beer market. The Companys products have been internationally recognized for quality, including five Monde Selection International gold medal awards in 2007.

64

Attractive growth prospects . Despite its dominant market position, the Company is well positioned to capture further volume growth and market share in the Philippine beer industry. Strong overall industry growth . According to Canadeans most recent forecast, beer sales volume in the Philippines was forecasted to grow by 5% in 2007. The Company expects industry volumes to continue to grow, driven in part by the forecasted strong GDP growth of 6.3-7.0% for 2008, complemented by relatively low inflation. Given its strong brands and leading market position, the Company believes it is best placed to capture a very large portion of the expected overall growth in the industry. Expansion of Coverage Area. In addition, the Company expects to further increase its sales by expanding its coverage of areas it currently under-serves. Despite its overall market dominance, the Company believes there are areas where it holds less than 85% market share. The Company believes it will be able to grow its sales and share in these markets through enhanced distribution and promotional strategies. Increased market share of broader alcoholic beverage segment. Further, the Company also believes additional sales growth can be achieved by increasing its share of the broader alcoholic beverage segment. In particular, the Company believes its low cost, high-alcohol beer, Red Horse, which has enjoyed substantial volume growth in the past few years, will be able to attract hard liquor consumers and take an increasing share of the overall alcoholic beverage market from the hard liquor segment.

Strong market position presenting significant barriers to entry . The Company enjoys a number of advantages that would be difficult for a potential competitor to create, making it difficult for other companies to successfully compete with it in the Philippine beer market. These advantages include: Market leadership and economies of scale. San Miguel Beer products have consistently dominated the market for beer in the Philippines, the countrys largest alcoholic beverage segment. Based on the Companys internal data, the Companys products captured a high market share of 95% in 2007. The countrys top four beer brands are all produced by the Company. Unlike most other markets for beer, in the Philippines, imported brands account for only 0.1% of the market, with distribution limited to upscale bars and hotels and high-end supermarkets. Despite the entry of local competition in 1981 and the introduction of a few locally brewed versions of foreign brands, the Company has maintained an extremely strong market position. The popular acceptance and widespread availability of San Miguel Beer products have helped strengthen San Miguel Beers market position over the years. The Companys size and scale of operations provide significant economies of scale in production, research and development, distribution, and managerial and marketing functions over a diversified product portfolio and geographic base. Its size also results in substantial leverage and significant bargaining power with suppliers and retailers. Proximity of Production Facilities to Consumer Markets. To ensure product availability and freshness, as well as to minimize distribution costs, the Company maintains a network of local breweries that are strategically located in the three main islands of the Philippines: Luzon, Visayas and Mindanao. The Company has breweries in each of Valenzuela City, Metro Manila; San Fernando City, Pampanga; Mandaue City, Cebu; Bacolod City, Negros Occidental; and Darong, Sta. Cruz, Davao del Sur, with a total annual production capacity of 15.1 million hectoliters. Each of these breweries is equipped with automated facilities capable of packaging the Companys products in a variety of sizes and formats, including bottles, cans, and kegs. The strategic location of the Companys breweries reduces overall risks by having alternative product sources to avert possible shortages and meet surges in demand in any part of the country. This also assists the Company in ensuring that the beer is freshly delivered to dealers at an optimal cost. The archipelagic nature of Philippine geography and the relative difficulty of transporting products to the countrys substantial rural population make these dispersed production facilities particularly valuable. Extensive and Efficient Distribution System Coverage. The Company has a far-reaching and efficient distribution system, which is based on five strategically located breweries and

65

effective management of third party service providers and provides the Company with a competitive advantage. The Companys 49 sales offices, contracted logistics providers and transportation assets including 271 hauling trucks, 201 routing trucks, 254 pre-sell vans and 392 service pick-ups and its network of 468 dealers across the Philippines enable it to maintain optimum stock levels in terms of quality and quantity in approximately 471,000 on-premise and off-premise outlets nationwide. The Companys products are delivered from any one of the Companys five breweries by contract haulers to a sales office or dealer warehouse within five days of production date or less. The sales office or dealer then delivers the beer to the wholesaler or retailer promptly afterward, ensuring ample stock and quality wherever and whenever San Miguel Beer products are needed. The Companys returnable bottle system helps keep the price of its beer products affordable. With the high retrieval rates achieved under the system, bottle usage is maximized before bottles are replaced. Under this system, the Company is able to achieve a 95% average retrieval rate for its bottles, which substantially reduces its packaging costs. Cost Leadership. The Company maintains a strong cost leadership position through high productivity and efficiency, as well as cost control measures, which facilitate pricing flexibility and greater profit growth by maintaining the Companys margins. The Companys product quality initiatives, process enhancements, and improvement programs for plant operations and facilities management are all expected to be sustained. The Company continuously implements process optimization efforts and technology enhancements to generate cost savings.

Experienced management and production team . The Company has an extensive pool of experienced managers, with many senior managers having been with the Company for an average of 19 years. The management team is well accustomed to the Philippine operating environment, and has been able to effectively manage the Company through periods of crisis and instability in the Philippines. The Company also has established experts in its production process, including 30 brewmasters, each of whom has completed advanced training and has over ten years of on-the-job-training experience working for the Company.

STRATEGIES The Companys principal strategy is to increase the volume of its beer sales, both by increasing its market share and by increasing the size of the market, while maintaining its margins. It plans to achieve this through the following: Increase market share . Although the Company already has a very strong position in the Philippine beer market, it intends to increase its market share by pursuing targeted marketing efforts in the regions and localities in which it believes its market share is lower than it is for the Philippines as a whole, such as in specific areas in North and South Luzon, as well as in Visayas and Mindanao. The Company intends to accomplish this by selecting specific products in appropriate packaging to match competing products and brands. The Company also intends to increase its product visibility in these markets through tactical consumer promotions and improve outlet penetration through persuasive selling and trade incentives. Similarly, the Company intends to increase its share of the overall market for alcoholic beverages. This effort will focus on those specific regions and localities in which hard liquor sales are higher, and, similar to the efforts to increase market share in the beer segment, will include package specific marketing campaigns, persuasive selling and incentives for retailers. Increase the overall market for beer. The Company also plans to increase its sales volume by increasing the total market for beer sales. The Companys primary strategies to achieve this include: Segmented pricing strategy. The Company intends to keep its products affordable for the middle and lower socio-economic sectors by maintaining a moderate pricing strategy for its products in the Broad Popular and Economy markets, where sales are highly price elastic.

66

For the more upscale, or Upper Popular, market, where sales are less price elastic, the Company plans to increase the pricing of its existing and new specialty brands, supported by image-building activities to strengthen their premium positioning and improve their profitability. For all of its products, the Company intends to manage and align the timing and magnitude of product price increases with increases in taxes on beer and cost increases, as well as with economic growth in the Philippines. The Company intends to pursue this strategy to protect its gains and to sustain the general uptrend for the industry as evidenced by the Companys improved market share and increased level of sales in 2007. Increase the size of the Upper Popular segment. The Upper Popular market for beer in the Philippines is a relatively small segment, but it plays an important role in brandbuilding and overall market development. The segment offers promising prospects, underpinned by rising consumer incomes, increasing consumer sophistication, rapidly changing drinker habits and preferences, as well as increasing urbanization. The Company intends to further develop the high-priced segment of the beer industry by offering higherpriced and higher-margin products catering to this segment. With this strategy, the Company aims to take advantage of opportunities in segmenting the market as well as pre-empting the incursion of foreign brands. Relative to other Asian countries, the Philippine beer market offers greater potential with regard to premium pricing of brands given the current relatively narrow price gap between the broad popular and Upper Popular brands. Seasonal brews will be explored as one avenue of growth, targeting specific segments of the market at a particular time or season of the year. This will not only contribute to growth and consumer interest, but will also serve as a tool to tap new customer types and determine promising variants and packaging for further brand development. Strengthen the Brand Portfolio. The Company intends to strengthen its brands to take advantage of segment-specific growth opportunities, increasing sophistication and changing lifestyles of Philippine consumers and to maintain its market leadership position. The Company plans to maintain the status of its flagship San Miguel Pale Pilsen brand and strengthen its value through an integrated approach of national brand-building campaigns and retail promotional and marketing efforts. Recent examples of brand-building activities include new advertising campaigns for the brand using famous endorsers such as Manny Pacquiao, Erik Morales and Kris Aquino under the Walang Katulad (Beer like no other) and Face to Face campaigns and the recent TV commercial featuring actor Jet Li, which forms part of the regional campaign to uplift the image and positioning of the San Miguel Pale Pilsen brand in the Asian region. The Company intends to implement new programs and initiatives catering to the younger segment of the market to protect its core customers and strengthen the appeal and preference for the brand among new drinkers. The Company expects to maintain the strong growth of its Red Horse , San Mig Light , and Gold Eagle brands through the introduction of new thematic campaigns, special events and volume-generating programs aligned with the respective positioning of these brands in the market. For the Companys specialty brands, including Cerveza Negra , Super Dry , and San Mig Strong Ice , the Company plans on increasing its efforts in on-premise channels by matching these brands with appropriate on-premise outlets and through event sponsorships, party series and tie-ups with other companies. Specialty brands will also be promoted in off-premise channels through increased visibility and promotions. Optimize Trade Coverage and Efficiencies. The Company intends to further expand its trade reach and increase the visibility and availability of its products in retail outlets through point-of-sale merchandising materials and signage for both on- and off-premise outlets to increase sales and outlet yield. In pursuing this strategy, the Company will focus on improving the efficiency of its trade operations, including trade penetration levels and adherence to suggested retail prices in all distribution channels by strengthening per-outlet management, intensifying route assisting activity and alternative distribution mode management such as pedicabs (bicycle-driven cabs) and tricycles, which help to deliver the

67

Companys products to remote areas. The Company also intends to raise its frequency of calls to retail outlets. Management of the distributors territories will be strengthened through intensified retail-based servicing and territorial reconfiguration. Increase Sales Through Special Events and by Focusing on Fast-growing Trade Channels. The Company intends to continue its volume-generating initiatives and occasion-creation programs. Examples of these activities include the Companys sponsorship of town fiestas and major events, such as San Miguel Beer Oktoberfest, that aim to make the beer drinking experience more relevant and closer to the consumers. The Company recognizes the importance of fast-growing modern trade channels such as large supermarket chains, hypermarkets and modern convenience stores in marketing and carrying its products to consumers, especially in urban areas. Accordingly the Company, primarily through SMCs Corporate Key Accounts Group (CKAG), is focusing on sales and marketing programs for key upscale products to these fast-growing segments of the market. New Product and Package Introduction. The Company plans to introduce new products and new package formats. The Company believes this strategy can increase consumer interest and overall market size, as well as address the needs of an increasingly fragmenting market, especially in high growth segments. For example, to increase consumer interest, in May 2007, the Company introduced San Miguel Pale Pilsen in paper label bottles and has sold beer products in plastic bottles for special seasonal promotions. The Company intends to continue to pursue packaging innovations and capitalize on the market trend towards convenience packaging. The Company is developing packaging improvements for existing brands as well as convenience pack formats consistent with faster-paced lifestyles and addressing the various activities and interest of consumers.

PRODUCTS AND BRANDS In the Philippines, beer has become synonymous with San Miguel , a company and brand that has been known for its quality products for over 117 years. Specifically, Filipinos readily associate beer with a San Miguel product that embodies the attributes and values they look for in their beverage. The Company has differentiated its product offerings through effective marketing programs. With the Companys diverse product portfolio, Filipino beer drinkers can have a San Miguel product that caters to their specific tastes and preferences. The Company considers the strong brand associations and imagery that San Miguel beer brands carry to be among the important selling points for San Miguel beer products. The Company markets its beer under the following brands: San Miguel Pale Pilsen , which is the Companys flagship brand, San Miguel Super Dry , San Mig Light and San Mig Strong Ice . Other beers are marketed under the brand names Cerveza Negra , Red Horse and Gold Eagle . The Company also sells Cali , the countrys only malt-based non-alcoholic drink. Cali is available in three variants: Cali , Cali Ice and Cali Light . The Companys products can be categorized into three classes based on the target market: Upper Popular, Broad Popular, and Economy. Upper Popular products cater to upscale markets especially in highly urbanized areas, while the Broad Popular segment serves the majority of the population or the mass market. The Economy segment caters to the low-end market. Over time, the share of the Companys sales to the Upper Popular segment has been steadily increasing from 2% in 2000 to 11.6% in 2007. In contrast, the shares of the Broad Popular and Economy segments have been decreasing. These trends reflect primarily shifts in consumer preferences given improvements in incomes, increased urbanization and changes in lifestyles.

68

The following table sets forth each of the Companys products, organized by market segment, and includes a description of each product as well as the specific packaging in which the product is sold.
Brand and Product Portfolio Market Segment Brand/ Product Description/Target Market Packaging Product Price1 (P)

San Miguel Super Dry is the first and only dry beer in the Philippine market. The target market for this beer is primarily males, aged 22-44 in higher socio-economic groups. It is a clear light amber lager with strong aromatic hop notes. It is light to medium-bodied with moderate bitterness. Alcohol content: 5% by volume. Cerveza Negra is a full-bodied dark lager with a balance of moderate bitterness and sweetish roasted malt bouquets. Alcohol content: 5% by volume. It is marketed to both men and women, primarily those between the ages of 25 and 44 in higher socioeconomic groups. San Mig Strong Ice is an ice-filtered beer with higher alcohol content than regular beers. It is marketed primarily to men aged 18-24. Alcohol content: 6.3% by volume. San Mig Light is the first light/lowcalorie beer in the market. Alcohol content: 5% by volume. This beer is marketed to men and women aged 1834, primarily those in higher socioeconomic groups. San Miguel Pale Pilsen is a pale golden lager with a clean, hoppy finish. It has a medium body, with a distinct bitter hop character. This beer, the Companys flagship brand, is marketed to all socio-economic groups, primarily to those in the 2444 age group, but also to those aged 18-24. It is marketed through various campaigns, including those linked to national marketing events and local festivals that are sponsored or supported by the Company. Alcohol content: 5% by volume. Red Horse Beer is a full-flavored high-alcohol beer. This beer is marketed primarily to men between the ages of 18 and 24 in middle and lower socio-economic groups. Marketing for this beer is often tied to rock music and sports. Alcohol content: 6.7% by volume

330ml bottle 330ml can

24.24

330ml bottle

24.24

Upper Popular

330ml bottle 330ml can

23.27

330ml bottle 330ml can 15L, 30L & 50L kegs

21.33

320ml bottle 1000ml bottle 330ml can 1500ml plastic bottle 15L, 30L & 50L Kegs

19.00

Broad Popular

330ml bottle 500ml bottle 1000ml bottle 330 ml can

17.45

69

Brand and Product Portfolio Market Segment Brand/ Product Description/Target Market Packaging Product Price1 (P)

Economy

Gold Eagle is a low-priced beer. It has a pale amber hue and is moderately light-bodied. It is brewed to have an easy-drinking character. It is marketed primarily to men aged 24-44 in middle and lower socioeconomic groups. Alcohol content: 4.5% by volume. Cali is a line of clear, non-alcoholic malt-based beverages with fruit flavours and slight effervescence. Cali has four variants: Cali Pineapple, Cali Apple, Cali Ice and Cali 10 (lowcalorie).

320ml bottle 750ml bottle 1000ml bottle

15.00

Non-Alcoholic

330ml bottle 330ml can

17.45

Product prices represent the Companys suggested retail price for each product, expressed in 320ml bottle equivalents. The 320ml bottle is the most common container for San Miguel Pale Pilsen , the Companys flagship brand.

Over the years, the Companys beer products have been the recipient of numerous international awards for product quality and excellence. San Miguel brands are consistent Monde Selection winners. Monde Selection is a Belgian based international institute for quality selections founded in 1961. The Company considers Monde Selection awards to constitute an exceptional advertising asset and a recognized quality assurance for consumers. In 2007, San Miguel Pale Pilsen , San Mig Light , Red Horse , San Miguel Super Dry and Cerveza Negra were gold medal awardees in the recent Monde Selection International for quality Selections 2007. The latest awards give San Miguel a grand total of two grand gold awards, 115 gold medals, 54 silver medals, eight bronzes, 21 International High Quality trophies, and one Crystal Prestige award since 2000. San Miguel beer is also a certified Superbrand in Asia. Superbrands Ltd. (Superbrands) is an independent arbiter on branding based in the United Kingdom that represents over 57 countries (9 in Southeast Asia, including the Philippines) across four continents and is widely regarded as the worlds leading brand recognition program. Superbrands promotes the discipline of branding and pays tribute to exceptional brands that achieve a level of brand trust and reputation in the minds of consumers. The Company has been a consistent award winner for Superbrands, winning the platinum award in the Philippines for the fifth consecutive year after earning a gold citation when the survey began in 1999. PRODUCTION Facilities Due to the high cost of shipping relative to product cost as well as the importance of maintaining freshness and other distribution considerations the Company maintains a system of regional breweries rather than a central consolidated brewing facility. Each of the Companys breweries is equipped with automated facilities capable of packaging the products in a variety of packages to meet market preferences, including bottles, cans and kegs. The Company currently owns and operates five breweries in the Philippines. These breweries are located in the Philippines three main island groups of Luzon, Visayas and Mindanao, and are located close to the intended end-markets in order to reduce transportation costs.

70

In 2007, the overall utilization rate of the Companys breweries, calculated as the quotient of production divided by capacity, was 76.6%. The following table sets forth the year of establishment and annual brewing capacity in hectolitres, of each of the Companys breweries in December 2007:
Brewery Year Established Capacity (in millions of hl)

Polo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Fernando . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mandaue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bacolod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Davao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1947 1982 1968 1990 1995

3.1 5.5 3.4 1.0 2.1 15.1

The Polo Brewery is located north of Metro Manila and serves the Metro Manila and Southern Luzon markets. Established in 1947, it is the Companys oldest operating brewery. The Polo Brewery underwent a modernization program during the 1990s to upgrade its brewhouse facilities. The San Fernando Brewery is located in the Pampanga province, north of Metro Manila and serves Central and Northern Luzon. It was built in 1981 and was expanded and upgraded in the late 1980s and early 1990s. The Mandaue Brewery, located on the island of Cebu, serves part of the Visayas region and Mindanao. This brewery was built in 1967 and its facilities were expanded and modernized in 1992. The Bacolod Brewery was built in 1990 on the island of Negros and serves Negros and the island of Panay. The Davao brewery was built in 1995 and serves the Mindanao market. Although production at each brewery is typically targeted to serve the geographical area around it, the Companys distribution system can shift production from one brewery to other regions if operational issues or demand changes require it. The Company can also make use of excess packaging capacity in one brewery to accommodate shortages elsewhere by, for example, shipping finished beer from the Polo Brewery to the San Fernando Brewery, which has excess packaging capacity, for bottling. The Company employs state-of-the art brewing technology. Its main brewing equipment and technology are sourced from Huppmann Handel GmbH & Co. KG, one of Germanys leading brewing equipment manufacturers. Beer fermentation and maturation are done in stainless steel cylindro-conical tanks. Beer is filtered using vertical filters with horizontal plates made by a German company, SeitzSchenk Filtersystems GmbH. Most of the Companys packaging machines are from leading packaging equipment manufacturers from around the world, including Germanys Klckner, Holstein Seitz AG. The Company also uses washers from Barry-Wehmiller Companies, Inc. and pasteurizers with regenerative energy savings systems from the United States and camera-type electronic bottle inspectors capable of detecting transparent foreign materials in the empty bottles from Kirin Techno-System Corporation of Japan. The Companys labeling equipment is from Krones AG of Germany and Production Engineering (PE) Labellers of Italy. The Companys packaging materials are sourced from SMPSI, a subsidiary of SMC. All of the Companys breweries are in a state of certifiability for ISO 9001:2000 and ISO 14000, as reviewed by SMCs Corporate Quality Management and Environment Management units. All of the breweries are also good manufacturing practices-certified by the Food Development Center (as defined in the Glossary of Terms of this prospectus). Production Process The production of beer involves several raw materials and production stages. The main ingredient (other than water) in beer is malted barley. The Company also uses adjuncts (rice, corn grits and food starch from cassava) as non-malt carbohydrate sources. In the brewing process, malted barley is crushed by milling and mixed with water. This mixture, malt mash, is then fed into a large container called a mash tun. Adjuncts are milled using roller mills and cooked in a cereal cooker until they are gelatinized and eventually liquefied. This mixture, cereal mash, is then combined with the malt mash in the mash tun. The combined mash is heated to a predetermined temperature, allowing malt enzymes to convert starches in the mash into fermentable sugars. The mash is then

71

strained, which filters out the solid materials, or spent grains, and rinsed in a lauter tun to produce a residual liquid, which is high in fermentable sugars, called wort. The wort is then transferred to a wort kettle for boiling to ensure microbial stability. Hops, a type of herb, are added to the wort during the boiling to impart a distinct bitter taste and pleasant hop aroma. Boiling also promotes precipitation and coagulation of protein materials that enhances the haze stability of the beer. Other chemical reactions that occur during the boiling process further contribute to the overall attributes of the beer, such as flavor and color. After the boiling, the wort is transferred to a whirlpool, which filters out coagulated proteins. Clear wort coming out of the whirlpool is cooled and aerated with sterile air and then moved to a fermenter, where a yeast is added to induce fermentation. The clear wort is fermented until the desired alcohol content is achieved. Carbon dioxide is released during this process and is collected for brewery use. The fermentation process normally takes seven days to complete. After fermentation, the beer is cooled to below 0C in storage tanks for maturation of about seven days, during which it clarifies and its full flavor develops. The beer is then filtered with horizontal leaf filters, which remove unwanted residual yeast and protein precipitates. Filtered beer is set to the right specific gravity by blending it with deaerated brewing water. Stabilizers are added to improve shelf life and the beer is carbonated to provide the desired level of fizz. At this point, the beer is in its peak condition and ready for bottling, canning or keg racking. The entire brewing process, from mashing through filtration, is typically completed in approximately 21 days. The chart below illustrates various stages of the beer brewing process:

Raw Materials The main raw materials for brewing beer include malted barley, hops, water and yeast. Adjuncts, such as sugar and non-malted grains including rice, corn grits and food starch from cassava, can also be used in conjunction with malted barley, which is generally more expensive. All of these commodities have experienced, and are expected to continue to experience, price fluctuations. The Company procures key raw materials for its beer operations through a procurement group that uses standardized procurement procedures. Malted barley and hops are generally sourced from the

72

United States, Australia and Europe, while new sources in China and India are being developed. Adjuncts are generally sourced locally. The Company enters into long-term supply contracts with key raw material suppliers with terms ranging from approximately one month to five years. These contracts typically provide for a pre-determined price for the duration of the contract. In addition, depending on considerations such as price trends and the quality of raw materials, the Company also makes spot purchases in the open market. To ensure the quality of its products, the Company closely monitors the quality of its raw materials. The following table indicates the trend of the Companys raw material costs:
For the years ended December 31, 2005 2006 in P per kilogram 2007

Malt price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corn price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20.62 11.83

19.67 15.55

17.86 16.72

The Company expects that the price of malted barley will increase significantly in 2008, as farmers shift their production out of barley and into grains used to produce bio-ethanol fuels, decreasing available supply of malted barley. Packaging costs are also a significant factor in the manufacture of beer. The Company mostly sells its products in returnable glass bottles of varying sizes and shapes, as well as in aluminum cans and kegs. In 2006, approximately 97% of the glass bottles used by the Company were returned bottles. The returnable glass bottle is by far the most important and popular package for beer in the Philippines, accounting for 98% of the Companys sales in 2007. The Company enjoys wide distribution across all trade channels, from supermarkets, grocery and convenience stores to sari-sari (mom and pop) stores and on-premise outlets throughout the country. These returnable glass bottles are used for up to 60 cycles typically over a span of approximately 10 years. Retail outlets selling the Companys products collect deposits on these bottles when customers buy the beer and return the deposit when the bottles are returned. New glass bottles are purchased from time to time to support accelerating sales and to replace broken and scuffed bottles. The existing system for returnable glass bottles shields the Company from rising packaging costs triggered by the uptrend in fuel and aluminum prices. Cans are less popular mainly because they are more expensive, although the volume of cans has been increasing in recent years with greater availability. Kegs for draft beer, which come in 15, 30 and 50 liter sizes, are very limited and represent a decreasing share of the market. All water supply used by the Company in its production is provided by deep wells owned and operated by SMC, except for water used at the Polo Brewery, which is supplied by the Maynilad Water Services, Inc., a privatized water company serving parts of Metro Manila.

73

The following table sets forth the major raw materials and packaging supplies used in the Companys business, the source countries for these items and the Companys typical contract periods for procurement. Major Raw Materials and Packaging Supplies
Key Materials Sources Contract Period

Malted barley

Australia Europe USA, Canada USA Germany Philippines Philippines Thailand, Vietnam Philippines Philippines Philippines Philippines Philippines Philippines Philippines, Malaysia

5 years 5 years 1 year 1 month 1 year 1 month 1 year 3 years one-two months spot 3 years 1 year 1 year 1 year 1 year 1 year 1 year

Hops Adjuncts Corn grits Sugar Food starch (from cassava) Rice Packaging Materials Bottles Crowns Aluminum cans Plastic cases Cartons Labels

BREWING TECHNOLOGY AND PRODUCT DEVELOPMENT The Company employs state-of-the-art brewing technology. Its highly experienced brewmasters and quality assurance practitioners provide technical leadership and direction to continuously improve and maintain high standards in product quality, process efficiency, cost effectiveness and manpower competence. Brewing technology and processes are constantly updated and new product development is ensured through continuing research and development. A research and development group is housed in the technical center building of the Polo Brewery. Research and development activities are primarily undertaken in a pilot plant located in Polo Brewery. The pilot plant is a complete miniature brewery equipped with a 35-hl capacity brewhouse. The Company also has a central analytical laboratory, or CenLab, located in the technical center building of the Polo Brewery. The laboratory is equipped with modern equipment necessary for strategic raw materials (hops, malted barley, adjuncts) analysis and validation, beer product evaluation and new raw material accreditation. Specialized equipment include gas chromatography, high performance liquid chromatography, atomic absorption spectroscopy, protein analyzer, and laboratory scale mashing/milling system for malt analysis. Analytical methods and validation procedures are constantly reviewed and updated, and these are standardized across all San Miguel Beer laboratories. CenLab runs proficiency tests for brewery laboratories and malted barley suppliers to ascertain continuous reliability and quality of analytical test results. CenLab is also tasked with ensuring compliance of all systems with international standards, specifically ISO 17025-2005. The following table presents the amounts spent by the Company on research and development activities, in millions of pesos and as a percentage of net sales, for the periods indicated:
For the years ended December 31, 2005 2006 2007

Amount (in million pesos) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P71.0 P59.0 P23.0 Percentage of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2% 0.1% 0.1%

74

To promote technical manpower development, the Company runs the San Miguel School of Brewing, which offers various programs spanning all levels of professional brewing technical training, starting from the basic brewing course for newly hired personnel to the advanced brewing course for senior technical personnel. Courses offered at the school included those highly advanced classes necessary to qualify the most senior of its technical personnel as brewmasters. Each of the Companys 30 brewmasters has extensive advanced coursework and over ten years of on-the-job-training experience working for the Company. MARKETING, SALES AND DISTRIBUTION Domestic Market The Company markets, sells and distributes its products principally in the Philippines. Many of the Companys products have strong market positions in the Philippines. The Company believes that it maintains the most extensive distribution network in the Philippine beverage market. The Companys beer products are distributed and sold at approximately 471,000 outlets, including off-premise outlets such as supermarkets, grocery stores, sari sari stores, and convenience stores, as well as on-premise outlets such as bars, restaurants, hotels and beer gardens. As of December 31, 2007, the Company had 49 sales offices and 468 dealers throughout the Philippines. Generally, it takes five days or less for a bottle of beer to travel from production in the brewery to a sales outlet anywhere in the country. Beer is transported from the breweries by a variety of methods, mainly through third-party haulers and, in certain circumstances, by a fleet of boats contracted by the Company. The following chart is a graph of the Companys distribution network as of December 31, 2007:
PRODUCTION S a l e s S u p e r v i s o r s & o f f i c e s SALES AND DISTRIBUTIO N END M ARKETS

Dealers (480) (468)

Dealer Sales Persons

Sales Persons W holesalers

SM B (5 Brew eries)

Account Specialists

Sales Persons W holesalers Retailers [c.471,000] [c.470,000]

On - Prem ise Bar/Pub/Lounge Restaurant Fastfood Carinderia Industrial/Office Canteen Refreshem ent/Snack Bar Beer House Hotel/M otel/Pension house Recreation center/Resort Sarinum an Burger House

Call Center Associates (632-BEER)

Corporate Key Accounts G roup (1)

Off - Prem ise Sari-Sari Superm arket M arket Stall Grocery/M inim art W arehouse Club Convenience Store W inehouse/Liquor Shop Drugstore Port/Bus Snack Counter M all Snack Center Bakery

(1) SM Cs CKAG division will provide targeted sales and distribution services to SMB on an arm s length basis. See Related Part y Transactions

Dealers generally provide their own warehouse facilities and trucks, considerably reducing the Companys own investment requirements. To increase distribution efficiency, the Company has gradually reduced the number of its dealers. The Company has also increased the support that it provides to its dealers, including software support with respect to streamlining logistics, promotional support and financial management training. The Company enters into written distribution agreements with its dealers that specify the territory in which the dealer is permitted to sell the Companys products, the brands that the dealer is permitted to sell, the performance standards applicable to the dealer, procedures to be followed by the dealer in connection with the distribution rights and circumstances upon which distribution rights may be terminated. The Companys sales force designs

75

and awards strategic sales territories to dealers based on research of the specific territory covered. Distribution rights, performance standards and sales procedures are developed by the Company and implemented in tandem with dealers to ensure high quality of services. As dealers are given exclusivity over defined geographic areas that the Company actively monitors and enforces, these franchises are heavily sought after by potential dealers. To handle the modern trade accounts, such as hypermarkets, and high-visibility on-premise outlets , SMCs Corporate Key Accounts Group (CKAG) acts as an agent, with the Company as principal, and handles the sale and distribution of the Companys beer brands in key outlets such as hotels, bars and restaurants, supermarkets/malls and convenience stores. CKAG accounts for only 4% of total sales volume. The Company is not at the mercy of the modern trade given its strong relationship and the relatively large contributions of the secondary and tertiary trades. As of December 31, 2007, the Company, together with its distributors and call center associates, had a sales force of approximately 2,400 in the Philippines. The Company recently introduced initiatives to increase sales performance, including sales technique training for the Companys distributors. Training that the Company provides to its dealers includes selling systems and procedures, logistics management systems, finance, quality management and human resource management. The Company also provides training to dealer personnel, including selling systems and procedures, selling skills workshops and quality management. The Company has also instituted systems to improve communication between its sales force and retail outlets, including an electronic sales-booking system for large customers. Marketing Activities The Company actively pursues marketing initiatives to promote new and existing products, as well as to maintain and enhance brand awareness of its existing products. These initiatives include media advertisements featuring well-known Philippine celebrities, sponsorship of special events, conducting various consumer and trade promotions and other merchandising activities. The Company also uses television, radio and print advertisements, outdoor billboards and posters that can be placed on the walls of retail outlets and restaurants, bars and other on-premise outlets. The Company operates a call center, 632-BEER, which provides free beer delivery service for parts of Metro Manila. Advertising and promotion expenses of the Companys domestic beer operations were P 1,257 million in 2006 and P 1,395 million in 2007. The Company holds major events and sponsors numerous music events. San Miguel Beer Oktoberfest has been the brands flagship event for over three decades. This month-long festival of beer and activities takes places at numerous locations simultaneously across the Philippines. Popular bands and celebrities, including San Miguel beer endorsers, are on hand to entertain the crowds. The Company also holds San Miguel Pale Pilsens nationwide SMBabad Summerfest, which is an annual get-together of games, concerts and parties at the countrys popular beaches. In addition to San Miguel Pale Pilsen , Red Horse is also often a major sponsor of concerts, with the brand affiliated with Muziklaban, the countrys biggest annual rock challenge, a band competition. The Company also conducted other brand-specific bar tours, including Cerveza Negra Jazz Improv Tours and San Miguel Trendspotting. International Market In addition to its domestic sales, the Company also exports its beer products to over 40 countries, with key markets in Taiwan, Japan and the United States. The Companys exports are primarily sold under various San Miguel brands as well as under private labels. In 2007, export sales accounted for less than one percent of the Companys total beer sales. SMC also owns brewery operations in Hong Kong, China, Vietnam, Thailand and Indonesia. In addition to serving their local markets, these breweries which have a combined annual capacity of 5 million hl, also sell their products in various export markets. The export operations of all of these breweries, plus those of the Company, are coordinated at the direction of SMC. See Related Parties Transactions.

76

Grupo Mahou San Miguel of Madrid, Spain has the rights to the San Miguel brand for beer in Europe. It is not affiliated with either the Company or SMC. COMPETITION The Company faces competition from another domestic producer, ABI, which sells both its own brand and foreign brands it produces under license, and from foreign brewers. ABI is the Companys largest competitor in the Philippine market. It operates two breweries and also holds the license for Carlsberg beer and Colt 45 in the Philippines. ABI competes, mainly on the basis of price, through its own Beer na Beer and Colt 45 brands. ABI also competes with the Companys market-leading high-alcohol beer product, Red Horse , with its licensed Colt 45 brand. Competition from imported beers is minimal. The Company also competes with producers of other alcoholic beverages, primarily low-priced gin and brandy. In the beer industry and more generally the alcoholic beverage industry competitive factors generally include price, product quality, brand awareness and loyalty, distribution coverage, and the ability to respond effectively to shifting consumer tastes and preferences. The Company believes that its market leadership, size and scale of operations, and extensive distribution network create high entry barriers and provide the Company with a competitive advantage. REGULATION AND TAXATION Philippine national and local legislation require a license to sell alcoholic beverages and prohibit the sale of alcoholic beverages to persons below 18 years of age or within a certain distance from schools and churches. Advertising and marketing of alcoholic beverages is largely unregulated in the Philippines. The Company, however, aims to promote responsible drinking habits through its advertising and marketing programs, and has in fact adopted its own Advertising & Marketing Code of Ethics for Alcoholic Beverages. In the Philippines, excise tax represents a significant component of beer production costs. Excise tax is payable by the producer, and the tax rate varies depending on the type of alcoholic beverage being produced, with more expensive products being subject to higher rates. On January 1, 2005, the Government raised excise tax rates for beer products by 20%, and excise tax rates were raised by a further 8% on January 1, 2007. As of December 31, 2007, the excise tax rates applicable to the Companys products ranged from P 8.93 per liter to P 17.64 per liter. These excise tax rates will be raised by an additional 8% effective January 1, 2009 and by a further 8% effective January 1, 2011. The sale of beer in the Philippines is also subject to a VAT. Effective February 1, 2006, the Government increased the VAT rate from 10% to 12%.

77

The following table sets forth the taxation system, both excise taxes and VAT, applicable to beer from 2000 through 2007. BEER TAXATION IN THE PHILIPPINES
Year Effective Date Excise Tax Structure Specific Excise Tax Rates (P/liter) VAT (in %)

2000

Jan 1

Three-tiered specific 12% increase from 1997 Three-tiered specific 20% increase from 2000, with 8% increases every two years starting Jan 1, 2007 until Jan. 1, 2011 Three-tiered specific

Low-priced(1) 6.89 Medium-priced(2) 10.25 High-priced(3) 13.61 Low-priced(1) 8.27 Medium-priced(2) 12.30 High-priced(3) 16.33

10

2005

Jan 1

10

2006

Feb 1

Low-priced(1) 8.27 Medium-priced(2) 12.30 High-priced(3) 16.33 Low-priced(1) 8.93 Medium-priced(2) 13.28 High-priced(3) 17.64

12

2007

Jan 1

Three-tiered specific, reflecting first set of 8% increases

12

Notes: (1) Low-priced beer net selling price per liter (excluding VAT & excise tax) less than P 14.50. (2) Medium-price beer net retail price per liter (excluding VAT & excise tax) from P 14.50 up to P 22.00. (3) High-priced beer net retail price per liter (excluding VAT & excise) is more than P 22.00.

The following table sets forth the excise tax rates applicable to fermented liquors, including beer, as of January 1, 2007 and as scheduled to be applied on January 1, 2009 and January 1, 2011, respectively. Schedule of Current and Planned Excise Tax Rates on Fermented Liquors
Effectivity Date January 1, 2007 January 1, 2009 January 1, 2011

Fermented liquors, where the net retail price (excluding excise tax and VAT) per liter of volume capacity is: Less than P14.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P14.50 up to P22.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than P22.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fermented liquors brewed and sold at microbreweries or small establishments such as pubs and restaurants, regardless of the net retail price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 8.93 P13.28 P17.64 P17.64

P 9.64 P14.34 P19.05 P19.05

P10.41 P15.49 P20.57 P20.57

78

EMPLOYEES The table below presents the Companys personnel numbers by functional category for the periods indicated.
Number of Employees For the year ended Dec. 31, 2005 For the year ended Dec. 31, 2006 For the Year ended Dec. 31, 2007

Category

Executives (Officers and Managers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Project employees and Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

139 192 2,974 3,305

136 225 2,667 3,028

125 233 2,465 2,823

The Company approved its retirement plan on February 4, 2008. Under the plan, all regular monthlypaid employees and daily-paid workers of the Company are eligible members. Eligible members who reach the age of 60 (65 for employees transferred from SMC) are entitled to compulsory retirement. The Company may, however, at its own discretion, continue an employees membership under the plan on a year-to-year basis after he/she reaches compulsory retirement. Eligible members may opt to retire earlier after they have completed at least 15 years of credited service at the Company. Upon retirement, eligible members will receive a certain percent of their final monthly pay for each year of their credited service. The amount varies depending on the years of service of the retiree. Eligible members may receive certain resignation benefits if they resign before they reach an eligible retirement date if they have completed at least five years of service at the Company. All of the Companys employees are based in the Philippines. The Company does not expect the number of its employees to materially change in the next 12 months. The Company assumed the responsibilities of SMC under 11 existing CBAs that cover approximately 50% of the Companys employees. Details of the CBAs and their expiration dates, in respect of both the term of the agreement for employment and the term for the union to represent employees, are set out in the table below:
NUMBER OF CBAs EXPIRATION ECONOMIC REPRESENTATION

UNION

SMC Employees Union-PTGWO . . . . . . . . . . . . . . . . . . . . . . . . . . . Ilaw at Buklod ng Manggagawa-SMC Chapter . . . . . . . . . . . . . . . . Ilaw at Buklod ng Manggagaws- local 42 . . . . . . . . . . . . . . . . . . . . Ilaw at Buklod ng Manggagaws- local 48 . . . . . . . . . . . . . . . . . . . . New San Miguel Force Union-GMA . . . . . . . . . . . . . . . . . . . . . . . . Philippine Agricultural, Commercial Industrial Workers Union . . . San Miguel Bacolod Brewery Employees Union . . . . . . . . . . . . . . . Ilaw at Buklod ng Manggagawa- Mandaue Chapter . . . . . . . . . . . . New San Miguel Sales Force Union-Cebu . . . . . . . . . . . . . . . . . . . . Samahang Manggagawa ng San Miguel Beer-Workers Alliance Trade Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 1 1 1 1 1 1 1 1 1

30-Jun-10 30-Jun-10 (1) 31-Dec-10 (1) 31-Oct-10 31-Jul-10 31-Dec-08 15-Feb-09 30-Nov-09

30-Jun-09 30-Jun-09 (1) 31-Dec-09 15-Feb-10 31-Oct-08 27-Apr-09 31-Dec-10 31-Jan-11 (1)

(1) The Company intends to renegotiate these agreements.

SMC has not experienced any strikes or work stoppages in the past three years. Neither has the Company experienced any such strikes or work stoppages since the effectivity of the spin-off on October 1, 2007. The Company considers its relationship with its employees to be good.

79

INSURANCE The Company has an all-risk policy that covers its facilities and inventories against a variety of risks, including, among others, fire, lightning, catastrophic perils (typhoon, flood, earthquake, volcanic eruption), machinery breakdown, explosion, civil commotion, riot/strike, malicious damage, and other perils liability. The Company does not maintain business interruption insurance for its production facilities. The total coverage under this policy is approximately US$525 million, with a maximum recovery for any one loss of US$250 million. In addition to the all-risk policy, the Company maintains various general liability and product liability insurance policies covering its operations. These policies do not cover liability as a result of pollution or environmental damage by the Company. The Company has a marine cargo insurance policy to cover domestic and international shipment of goods and equipment. A product liability insurance policy insures all of the Companys exported products. The Companys insurance policies are provided by leading Philippine insurance companies that are generally reinsured by major international insurance companies. HEALTH, SAFETY AND ENVIRONMENTAL MATTERS The Company is subject to a number of employee health and safety regulations in the Philippines. For example, the Company is subject to the occupational safety and health standards promulgated by the Philippine Department of Labor and Employment. The Company believes that a safe and healthy work environment is fundamental to the management of its human resources as well as conducive to greater employee productivity. SMC has a safety management group, and under the Shared Services Agreement it is responsible for formulating, implementing and enforcing the Companys employee health and safety policies as well as ensuring compliance with applicable laws and regulations. See Related Party Transactions for a description of the Shared Services Agreement. The Company is subject to extensive regulation by the Philippine Department of Environment and Natural Resources. SMCs environmental management group is responsible for formulating and implementing an environmental management system based on ISO14001 standards for the Company under the Shared Services Agreement. See Related Party Transactions for a description of the Shared Services Agreement. SMCs environmental management group, with assistance from outside environmental consultants, regularly conducts employee environmental training as well as audits of the Companys facilities and production processes. In addition, the environmental management group conducts an annual compliance audit to ensure compliance with applicable environmental laws and regulations as well as with the Companys internal policies, and advises the Companys senior management of critical environmental issues. As of the date of this prospectus, the permits or licenses of the Company for its operations are in the process of being transferred from SMC to the Company following the spin-off of the domestic beer business, while some are being renewed, subject to compliance by the Company of certain conditions by the Department of Environment and Natural Resources (DENR). As part of the extensive regulation by the DENR on the Companys operations, the Company is also required to comply with various laws and regulations concerning the discharge of materials into the environment. Prior to the spin-off of its domestic beer business, in 2004 SMC received a notice from the Pollution Adjudication Board (PAB) relating to the discharge of ammonia to the immediate surroundings of the Bacolod Brewery. Following SMCs submission of an environmental risk assessment report on this discharge, the PAB, in a resolution dated March 31, 2005, referred the matter to the Regional Office of the Environment Management Bureau (Region VI) of the DENR for their evaluation, after the receipt of which the PAB shall decide on the matter. PAB also referred the matter to the Department of Labor and Employment for its separate independent evaluation. The Company inquired as to the status of these referrals by separate letters to the Regional Office (Region IV) of the DENR and Central Office of the DENR Environment Management Bureau in November 2007. There have been no responses from these offices since those inquiries. In a separate matter, in April 2007 SMC received a notice from the Environmental Management Bureau of the DENR for sulfur dioxide emissions of the boilers in the Mandaue Brewery in excess of the standards

80

of The Clean Air Act of 1999 (the Clean Air Act), which resulted from the use of high sulphur bunker fuel. Subsequent to receiving this notice, SMC has been relying on a grace period granted by the Secretary of the DENR in a memorandum dated July 1, 2007 in favor of all industrial facilities using bunker fuel. The grace period granted under the memorandum allows the continuous use by these industrial facilities of bunker fuel for their operations without penalties, subject to the approved environmental management plan based on guidelines of the Environment Management Bureau. Under this memorandum, the grace period will be available until the DENR formulates definite guidelines for compliance with The Clean Air Act. As of the date of this prospectus, no such definitive guidelines have been issued. Although the Company intends to rely on the grace period, the authority of the Secretary of the DENR to issue the memorandum is not clearly established as a matter of Philippine law. As of the date of this prospectus there has not, to the knowledge of the Company, been a legal challenge to the memorandum. In 2007 the Company spent P 115.6 million in complying with environmental laws and regulations. LEGAL PROCEEDINGS Except as otherwise disclosed above, as of the date of this prospectus, the Company is not a party to any material pending legal proceedings, and none of the properties of SMC that was transferred to the Company pursuant to the spin-off of the domestic beer business of SMC is the subject of any legal proceeding. SMC will continue to be the party to all pending legal proceedings that involve the domestic beer business prior to the effectivity of the spin-off on October 1, 2007.

81

BOARD OF DIRECTORS AND MANAGEMENT BOARD OF DIRECTORS The table below sets forth each member of the Board of Directors of the Company as of the date of this prospectus.
Name Age Citizenship Position

Ramon S. Ang . . . . . . . . . . . . . . . . . . . . Ferdinand K. Constantino . . . . . . . . . . . Francis H. Jardeleza . . . . . . . . . . . . . . . Virgilio S. Jacinto . . . . . . . . . . . . . . . . . Joseph N. Pineda . . . . . . . . . . . . . . . . . . Roberto N. Huang . . . . . . . . . . . . . . . . . Rosabel T. Balan . . . . . . . . . . . . . . . . . . Iigo Zobel . . . . . . . . . . . . . . . . . . . . . . Carmelo L. Santiago . . . . . . . . . . . . . . .

54 56 58 51 44 59 44 51 65

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

Chairman Director Director Director Director Director Director Independent Director Independent Director

Ramon S. Ang has served as Director of the Company since July 26, 2007 and its President since October 8, 2007. He also holds, among others, the following positions: Vice Chairman, President and Chief Operating Officer of SMC; Chairman of San Miguel Properties, Inc. (SMPI), The PurefoodsHormel Company, Inc., San Miguel Packaging Specialists, Inc. (SMPSI), Anchor Insurance Brokerage Corporation (AIBC) and San Miguel Brewery Hong Kong Limited (Hong Kong); and Director of Ginebra San Miguel, Inc. (GSMI) and San Miguel Pure Foods Company, Inc. (SMPFC). He is also the Chairman of Philippine Diamond Hotel & Resort, Inc., Philippine Oriental Realty Development, Inc., Atea Tierra Corporation and Cyber Bay Corporation and an independent director of Philweb Corporation. Mr. Ang has held directorships in various subsidiaries of SMC during the last five years. Ferdinand K. Constantino has served as Director of the Company since July 26, 2007 and its Chief Finance Officer and Treasurer since October 8, 2007. He also holds, among others, the following positions: Senior Vice President, Chief Finance Officer and Treasurer of SMC; President of AIBC; and Director of SMPI, SMPSI, San Miguel Brewery Hong Kong Limited (Hong Kong), Magnolia, Inc. and San Miguel Foods, Inc.. Mr. Constantino previously served as Chief Finance Officer of the San Miguel Beer Division of SMC (1999-2005) and has held directorships in various subsidiaries of SMC during the last five years. Francis H. Jardeleza has served as Director and Corporate Secretary of the Company since July 26, 2007. He also holds, among others, the following positions: Senior Vice President, General Counsel, Corporate Secretary and Compliance Officer of SMC; Corporate Secretary and Compliance Officer of GSMI, SMPFC and SMPI; Corporate Secretary of The Purefoods-Hormel Company, Inc.; Chairman of SMC Stock Transfer Service Corporation (SMCSTSC); and Director of San Miguel Brewery Hong Kong Limited (Hong Kong). Mr. Jardeleza has been a director, corporate secretary and/or assistant corporate secretary of various subsidiaries of SMC during the last five years and is a professorial lecturer at the University of the Philippines, College of Law (1992-2003, 2007-2008). Virgilio S. Jacinto has served as Director of the Company since July 26, 2007. He is Vice President, First Deputy General Counsel of SMC. Mr. Jacinto is also an Associate Professor at the University of the Philippines, College of Law since June 1, 1993. Joseph N. Pineda has served as Director of the Company since July 26, 2007. He also holds, among others, the following positions: Vice President and Deputy Chief Finance Officer of SMC and Director of Monterey Foods Corporation, SMC Shipping and Lighterage Corporation (SMCSL), SMITS, Inc. (SMITS) and Process Synergy, Inc. Mr. Pineda was former President of UCPB Savings Bank (2004), Chief of Staff to the Office of the COO and Vice-President, Officer-in-Charge of the Trust Banking Division of United Coconut Planters Bank (2003) and President and Nominee to the Philippine Stock Exchange of UCPB Securities (1999-2003).

82

Roberto N. Huang has served as Director and General Manager of the Company since October 8, 2007. He also holds the following positions: Senior Vice President of SMC; Director of San Miguel Beverages, Inc. (SMBI); and Director of GSMI and SMPFC. He also served as President of CocaCola Bottlers Philippines, Inc., Cosmos Bottling Corporation and Philippine Beverage Partners, Inc. (2003-2007); and Senior Vice President, Director, Corporate Sales for the Food, Beverage, Corporate Key Accounts and Corporate Export Sales Groups (2002-2003) and Vice President and Director, Corporate Sales for the Beverage Group (2001-2002) of SMC. Rosabel Socorro T. Balan has served as Director of the Company since October 8, 2007. She also holds, among others, the following positions: Vice President and Deputy General Counsel of SMC; Assistant Corporate Secretary of SMC, GSMI, SMPFC and SMPI and Compliance Officer of AIBC and SMCSTSC. Ms. Balan has also been a director, corporate secretary and/or assistant corporate secretary of various subsidiaries of SMC during the last five years. Iigo Zobel has served as Independent Director of the Company since October 8, 2007. He is also an Independent Director of SMC, GSMI, SMPFC and SMPI. Mr. Zobel also holds the following positions: President and Chief Executive Officer of E. Zobel, Inc.; President of Ayala Espaa S.A., Calatagan Golf Club, Inc. and Hacienda Bigaa, Inc.; and a Director of Calatagan Resort, Inc., Calatagan Gulf Realty, Inc., and Mermac, Inc., and has been the President of Diamond Star Agro Products, Inc. during the last five years. Carmelo L. Santiago has served as Independent Director of the Company since October 8, 2007. He is currently an Independent Director of San Miguel Brewery Hong Kong Limited (Hong Kong) and Director of Terbo Concept, Inc. Mr. Santiago is the founder and owner of several branches of Melos Restaurant and has held directorships in SMPI (2001-2004), GSMI (1998-2004), Manila Standard, Inc. (1998-2004), National Power Corporation (1998-2004) and Philippine National Bank Hong Kong (1998-2004). SENIOR MANAGEMENT The table below sets forth the Companys executive officers as of the date of this prospectus.
Name Age Citizenship Position

Ramon S. Ang . . . . . . . . . . . . . . . . . . . . Ferdinand K. Constantino . . . . . . . . . . . Francis H. Jardeleza . . . . . . . . . . . . . . . Roberto N. Huang . . . . . . . . . . . . . . . . . Debbie D. Namalata . . . . . . . . . . . . . . . Rene T. Ceniza . . . . . . . . . . . . . . . . . . . Minerva Lourdes B. Bibonia . . . . . . . . Enrico E. Reyes . . . . . . . . . . . . . . . . . . .

54 56 58 59 42 45 49 45

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

President Chief Finance Officer/Treasurer Corporate Secretary General Manager Head National Sales Head Logistics Head Marketing Head Human Resources

Debbie D. Namalata has served as the National Sales Manager of the San Miguel Beer Division of SMC since July 2007. She was previously Executive Assistant to the San Miguel Beer Division President (April-June 2007); General Manager of San Miguel Super Coffeemix Co., Inc. (20062007); General Manager for butter, margarine, cheese and jellyace of Magnolia, Inc.; and Director of Sugarland Corporation, Star Dari, Inc. and Magnolia, Inc. (2005-2006); and Assistant Vice President, Visayas-Mindanao Business Development Manager of The Purefoods-Hormel Company, Inc. (2002-2003) and Regional Sales Manager (2003-2004). Rene T. Ceniza has served as Assistant Vice President and Manager for National Logistics of the San Miguel Beer Division of SMC since May 2005. He previously served SMC in the following capacities: Manager, National Logistics (2004-2005), Manager, GMA Logistics (2003-2004); and Manager, Logistics Technical Services (2002-2003) of the San Miguel Beer Division. He was also placed on special assignment as Logistics Consultant for Coca-Cola Bottlers Philippines, Inc. in 2001.

83

Minerva Lourdes B. Bibonia has served as Head of Marketing of the Company since October 8, 2007; Senior Vice President for Corporate Marketing of SMC since January 2002; Director of San Miguel Brewery Hong Kong Limited (Hong Kong) and a Commissioner of PT Delta Djarkarta Tbk (Indonesia). She previously served SMC in the following capacities: Vice President and Head of the CKAG (2001) and Consultant to the Office of the Chairman (2000-2001). Enrico E. Reyes has served as Manager for Human Resources of the San Miguel Beer Division of SMC since April 2007. He previously served SMC in the following capacities: Compensation and Benefits Manager, Human Resources Division (2006) and Human Resources and Administration Manager for San Miguel Beer Division, Visayas (1997-2005). The Company has engaged the consultancy services of Mr. Josefino C. Cruz to direct the Companys manufacturing operations. Mr. Cruz has served as Vice President and National Manufacturing Manager of SMC from 2001-2006. Mr. Cruz does not own any shares or other securities of the Company. TERM OF OFFICE Pursuant to the Companys amended by-laws, the directors are elected at each annual shareholders meeting by shareholders entitled to vote. Each director holds office until the next annual election and his successor is duly elected, unless he resigns, dies or is removed prior to such election. QUALIFICATIONS AND DISQUALIFICATIONS The Companys amended by-laws require that directors have at least 5,000 shares registered in their names in the books of the Company. No person shall qualify or be eligible for nomination or election to the Board of Directors if such person is engaged in any business, which competes with or is antagonistic to the business of the Company. Without limiting the generality of the foregoing, a person shall be deemed to be engaged in a business competing with or antagonistic to the Companys business under the following circumstances: (a) If the person is an officer, manager or controlling person of, or the owner (either of record or beneficially) of 10% or more of any outstanding class of shares of, any corporation (other than one in which the corporation owns at least 30% of the capital stock) engaged in a business which the Board of Directors, by at least three-fourths vote, determines to be competitive or antagonistic to that of the Company; or (b) If the person is an officer, manager or controlling person, or the owner (either of record or beneficially) of 10% or more of any outstanding class of shares of, any other corporation or entity engaged in any line of business of the Company, when in the judgment of the Board of Directors, by at least three-fourths vote, the laws against combinations in restraint of trade shall be violated by such persons membership in the Board of Directors of the Company; or (c) If the Board of Directors, in the exercise of its judgment in good faith, determines by at least three-fourths vote that he is the nominee of any person set forth in (a) or (b) above. The Board of Directors may also take into account other factors such as business and family relationship in determining whether or not a person is a controlling person, beneficial owner or the nominee of another. EXECUTIVE COMPENSATION By resolution of the Board of Directors, each director shall receive a reasonable per diem allowance for his attendance at each board meeting. The Company intends to provide each director with reasonable per diem of P 20,000 and P 10,000 for each Board and Board Committee meeting, respectively, attended by such director. Other than these per diem amounts, there are no standard

84

arrangements pursuant to which the directors of the Company are compensated, or are to be compensated, directly or indirectly, by the Company for services rendered by such directors as of the date of this prospectus. The table below sets out the aggregate compensation paid or incurred by the Company from October 1, 2007 and estimated to be paid in the ensuing fiscal year to the President and senior executive officers of the Company:
NAME YEAR SALARY BONUS OTHERS TOTAL

(in P millions)

Total Compensation of the President and the four most highly compensated Senior Executive Officers other than the President(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other officers and directors as a group unnamed . . . . . .

2008 (estimated) 2007(2) 2008 (estimated) 2007(2)

34.7

8.5

9.9

53.1

8.1 54.9 12.2

3.6 18.3 5.0

2.4 23.3 5.1

14.1 96.5 22.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008 (estimated) 2007(2)

89.6 20.3

26.8 8.6

33.2 7.5

149.6 36.4

(1) These Senior Executive Officers are Mr. Roberto N. Huang, Mr. Ferdinand K. Constantino, Ms. Minerva Lourdes B. Bibonia and Ms. Debbie D. Namalata. (2) 2007 figures are from October to December only.

Other arrangements There are no other arrangements pursuant to which the directors of the Company are compensated, or are to be compensated, directly or indirectly, by the Company for services rendered by such directors as of the date of this prospectus. EMPLOYMENT CONTRACTS CHANGE-IN-CONTROL AND TERMINATION OF EMPLOYMENT AND

There are no employment contracts between the Company and its executive officers. There is no compensatory plan nor arrangement with respect to an executive officer which results or will result from the resignation, retirement or any other termination of such executive officers employment with the Company, or from a change-in-control of the Company, or a change in an executive officers responsibilities following a change-in-control of the Company. WARRANTS AND OPTIONS OUTSTANDING As of the date of this prospectus, there are no outstanding warrants or options held by the Companys President, named executive officers and all directors and officers as a group. SIGNIFICANT EMPLOYEES The Company has no individual employee who is not an executive officer but who is expected to make a significant contribution to the business.

85

FAMILY RELATIONSHIPS There are no family relationships up to the fourth civil degree either by consanguinity or affinity among the Companys directors, executive officers or persons nominated or chosen by the Company to become its directors or executive officers. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS None of the directors, executive officers, underwriters or control persons of the Company have been involved in any legal proceeding, including, without limitation, being the subject of any (a) bankruptcy petition, (b) conviction by final judgment, (c) order, judgment or decree of suspension, enjoinment or limitation of his involvement in any type of business, securities, commodities or banking activities, or (d) violation of a securities or commodities law, for the past five years up to the latest date, that is material to the evaluation of his ability or integrity to hold the relevant position in the Company. DISCLOSURE ON GOVERNANCE COMPLIANCE WITH LEADING PRACTICES ON CORPORATE

Manual on Corporate Governance The Companys Manual on Corporate Governance (the Manual) was approved by the Board of Directors on October 25, 2007, as amended on April 10, 2008. Independent Directors Under Section 38 of the SRC, at least 20% of the Companys directors are required to be independent directors. With the Companys current nine-member board, the Company is required to have at least two independent directors in its Board of Directors. The Manual, in turn, requires at least two independent directors to serve on the Companys Audit Committee and one independent director on each of the Nomination and Hearing Committee and the Executive Compensation Committee. Under the implementing rules and regulations of the SRC, an independent director is defined as a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. An independent director must satisfy the qualifications and must have none of the disqualifications of an independent director set out in the SRC and its implementing rules and regulations, the Manual, the amended articles of incorporation and amended by-laws of the Company. Board Committees Audit Committee The Audit Committee is comprised of at least three members of the Board of Directors, at least two of whom shall be independent directors. One of the independent directors shall be the Chairman of the Audit Committee. The Audit Committee is responsible for assisting the Board of Directors in discharging its corporate governance and fiduciary duties in relation to financial reporting, internal control structure, risk management systems and internal and external audit functions. It reviews and monitors, among others, the integrity of the Companys financial statements and reports, and ensures their compliance with pertinent accounting standards and regulatory requirements, and performs oversight financial management functions specifically in the areas of managing credit, market, liquidity, operational, legal and other risks of the Company, and crisis management.

86

Nomination and Hearing Committee The Nomination and Hearing Committee is composed of at least three voting members and one non-voting member in the person of the Human Resources director or manager. One of the three voting members must be an independent director. The Nomination and Hearing Committee shall be responsible for making recommendations to the Board of Directors on matters relating to the directors appointment, election and succession, with the view of appointing individuals to the Board of Directors with the relevant experience and capabilities to maintain and improve the competitiveness of the Company and increase its value. It shall pre-screen and shortlist all nominees in accordance with the qualifications and disqualifications for directors set out in the Manual, the amended articles of incorporation and amended by-laws of the Company and applicable laws, rules and regulations. Executive Compensation Committee The Executive Compensation Committee shall be composed of three members, one of whom must be an independent director. It is responsible for advising and assisting the Board of Directors in the establishment of formal and transparent policies and practices on directors and executive remuneration and providing oversight over remuneration of directors, senior management and other key personnel to ensure that the Companys compensation scheme fairly and responsibly reward directors and executives based on their performance and the performance of the Company, and remain competitive to attract and retain directors and officers who are needed to run the Company successfully. Compliance and Monitoring System The Chairman of the Board of Directors shall designate a Compliance Officer who shall be responsible for monitoring compliance by the Company with the provisions and requirements of the Manual and insure adherence to corporate principles and best practices. The Compliance Officer shall hold the position of a Vice President or its equivalent.

87

SELLING SHAREHOLDER The table below shows the number of Common Shares held by the Selling Shareholder before the Combined Offer, the number of Common Shares to be sold by the Selling Shareholder in the Combined Offer and the number of Common Shares the Selling Shareholder will own immediately after the Combined Offer:
Common Shares to be sold pursuant to exercise of OverAllotment Option

Selling Shareholder

Common Shares before Offer as of date of this Prospectus

% of Common Shares Outstanding

Common Shares to be sold in Offer(1)

Common Shares held after the Offer(2)

San Miguel Corporation(3) . . . . . .

15,333,416,960

100%(4) 693,472,000

115,578,000

14,524,366,960

Notes: (1) Not including the Over-Allotment Option (2) Assuming full exercise of the Over-Allotment Option (3) The authorized representative of San Miguel Corporation is Mr. Ferdinand K. Constantino, Mr. Constantino is Senior Vice President, Chief Financial Officer and Treasurer of SMC. (4) Each of the two independent directors holds 5,000 Common Shares.

For a description of the Selling Shareholder, see the section entitled Market Price of and Dividends on the Companys Stock and Related Stockholder Matters.

88

RELATED PARTY TRANSACTIONS Upon completion of the Combined Offer, SMC will directly own and control approximately 90% of the Companys issued and outstanding Common Shares, assuming no exercise of the Over-Allotment Option. Following the spin-off of the domestic beer business of SMC, which was then conducted by SMC through SMBD, to the Company, SMC and the Company entered into certain agreements, and SMC assigned to the Company all of its rights and obligations under various agreements with third parties relating to SMCs domestic beer business, including those agreements entered into with SMCs subsidiaries. The Companys policy with respect to related party transactions is to ensure that these transactions are entered into on terms comparable to those available from unrelated third parties. Below is a summary of the Companys related party transactions. SMC SMC receives a monthly royalty fee of 2% of the Companys net sales revenue under a License Agreement in consideration for its grant to the Company of an exclusive license to use, in the Philippines, certain know-how relating to the manufacture, packaging and handling of certain beer products currently produced by the Company (the Licensed Products) and certain specified Philippine trade marks, trade dress, copyrights and patents (the IP Rights) in connection with the production, preparation and distribution of the Licensed Products. The license is effective for a period of 25 years from October 1, 2007, renewable for another 25 years at the option of SMC upon request by the Company. It extends to such know-how or intellectual property rights as may be developed or acquired by SMC during the life of the License Agreement, and may not be used outside of the Philippines or applied to other products other than the Licensed Products. The rate of the royalty fee is subject to review by the parties every five years, and no royalty is paid for any IP Rights that expire and cannot be renewed under applicable intellectual property laws. Other key terms under the License Agreement include undertakings (a) by the Company (i) to spend at least 2% of its total sales revenues of the previous year during each year of the term of the License Agreement for the advertising and promotions of the Licensed Products; (ii) not to introduce new beer products and brands in the Philippines, or to manufacture, prepare, package, distribute, sell, deal in or otherwise be concerned with any other alcoholic beverage products (other than the Licensed Products) without SMCs prior written consent; (iii) to secure the consent of SMC in the event of a change in the control of the Company; and (b) by SMC (i) to include in the Licensed Products all new beer products and brands introduced in the Philippines; and (ii) to allocate funds for advertising support in the amount of P 375 million each year for the Licensed Products in the first two years of the License Agreement. SMC receives a monthly service fee equivalent to 0.5% of the Companys net sales revenue for the previous month under a Shared Services Agreement in consideration for rendering to the Company certain corporate services and facilities related to finance, audit, legal, human resources, procurement, facilities audit, safety and property risk management, operations research, product technology and formulations, marketing, government and media affairs, and other similar services such as, mergers and acquisitions. The Company shall likewise pay SMC the actual costs and expenses incurred by SMC in performing the said services, and shall be liable for all taxes due and payable in connection therewith. The Shared Services Agreement has a term of 49 years commencing on October 1, 2007; but may be terminated upon termination of the License Agreement.

89

SMC receives lease payments under a Contract of Lease, as amended, for the lease by the Company of lands owned by SMC on which all of the Companys breweries and plant facilities, as well as certain sales office facilities in the Philippines, are located. The rental payments under the lease are P 154 million for the first year, subject to an escalation of 10% in each succeeding year until the fifth year of the lease. In the sixth year and every five years thereafter, the two parties will negotiate and agree on the rate of escalation. The term of the lease is 49 years commencing on October 1, 2007. SMC receives a service fee on a per-brand per-unit basis to cover actual costs and expenses incurred by its CKAG, a division of SMC, which acts as the Companys sales agent in the on-premise channel, and provides marketing services to the Company, including the formulation of plans and programs in connection with selling and marketing activities and management of the implementation of marketing plans and programs for the Companys beer brands in identified key on-premise and off-premise accounts such as hotels, bars and restaurants, supermarkets, malls and convenience stores, as approved by the Company. SMC, through CKAG, also acts as the Companys dealer in the off-premise channel, for which it receives a service fee that is given as a discount on the wholesale price of the products it purchases from the Company on a per-brand per-unit basis. The term of the agreement is up to September 30, 2009, subject to annual review by the parties. The service fees paid to and discounts earned by SMC for the foregoing services for 2005, 2006 and 2007 were P 208 million, P 238 million and P 337 million, respectively. SMC receives service fees at the rate of 4% of the invoiced value of the products sold in the export market every month following the month when the exports sales were collected for services rendered by its CESBD to the Company. CESBD acts as agents of the Company in handling the marketing, selling and distribution of the Companys beer products in the export markets. The term of the agreement is up to September 30, 2009 subject to annual review of the parties. The service fees paid for such services in 2005, 2006 and 2007 were P 37 million, P 40 million and P 43 million, respectively. SMCSL, a 70% subsidiary of SMC and a joint venture between SMC and KADIWA Transport Corporation, receives fixed service fees for cargo handling, warehousing, and shipping services rendered to the Company for the distribution and delivery of its raw materials and finished goods to and from the Companys Mandaue Brewery. The service fees may be adjusted upward or downward in case of a 10% adjustment in the salary scale and/or benefits of SMCSLs employees or a 5% fluctuation in prevailing fuel and oil prices. The Service Agreement is for a term of 23 years, effective on March 1, 2001, and shall automatically terminate upon the expiration or termination of the Joint Venture Agreement between SMC and KADIWA Transport Corporation. The Company may terminate the Service Agreement by giving SMCSL 60 days prior written notice if the price charged by SMCSL is not the best price available or if the quality of SMCSLs service is not acceptable to the Company, unless such quality of service is remedied by SMCSL to the satisfaction of the Company within 30 days from SMCSLs receipt of the termination notice. The service fees paid for such services in 2005, 2006 and 2007 were P 360 million, P 369 million and P 368 million, respectively.

SMCSL

90

San Miguel Distribution Company, Inc. (SMDCI)

SMDCI, a wholly-owned subsidiary of SMC, receives a service fee per month based on a per-case rate with a minimum guaranteed monthly volume from the Company for management of logistics service providers, provision of logistics advice on the selection criteria for other third party logistics providers, benchmarking of logistics services rates, improvements of logistics, and related business processes, among others. The term of the agreement covering each of the Dasmarias, Zamboanga and Opol sales offices is up to September 30, 2008, while the term of the agreement covering the Mandaue Brewery is up to December 31, 2008. The Company receives from SMBI, a wholly-owned subsidiary of SMC, service fees on a per case basis for warehousing and delivery of SMBIs finished goods in accordance with the plans and schedules provided by SMBI under a Logistics Management Agreement. The Company is also required to provide storage space for SMBIs products only to the extent that such storage space is not needed for the Companys products. Rentals for any delivery truck needed for the services under the agreement in addition to the required fleet complement for the Companys products are paid for by SMBI. The term of the agreement is from April 01, 2007 to March 31, 2008, and after that date on a month-to-month basis if the parties continue their relations under the agreement but no written renewal has yet been executed. The Company receives a fixed discount on a per case basis for SMBIs products that it sells under a Distribution Agreement, pursuant to which the Company, using its sales organization, dealer force and other modes of distribution, acts as the distributor of SMBIs ready-to-drink and powdered mix products in specified areas in the Philippines. The term of the agreement is from April 01, 2007 to March 31, 2008, and after that date on a month-to-month basis if the parties continue their relations under the agreement but no written renewal has yet been executed. The Company also receives rentals for leasing certain equipment and building to a third party contractor, Supa Nova Foods, Inc., which in turn provides toll-manufacturing services to SMBI. The Company receives fees for the toll-manufacturing of SMBIs fruit drink and tea products under the toll-manufacturing arrangement with SMBI. GSMI, a majority-owned subsidiary of SMC, pays a fee on a per case basis in consideration for toll-manufacturing services rendered by the Company for GSMIs alcoholic beverages, which services are performed in the Polo Brewery using the brewerys excess capacities. The Company agrees not to toll-manufacture any other product which directly competes with the products it toll-manufactures for GSMI. The agreement expired on December 31, 2007. The fees received by the Company for such services in 2005, 2006 and 2007 were P 0.8 million, P 0.9 million and 6.5 million, respectively. A subsidiary of GSMI also paid its share for the use of utilities to the Company.

SMBI

GSMI and a subsidiary

91

SMPSI, SMRPC, SMYAC, SMYFMC

SMPSI, SMRPC, SMYAC, SMYFMC, all subsidiaries of SMC, receive payments from the Company for packaging materials such as bottles, crowns, caps, cartons, plastic crates and pallets purchased by the Company. These purchases are covered by various purchase orders which define the prices and delivery schedules negotiated and agreed upon by the parties. These SMC subsidiaries form part of the SMC Packaging Group, which, with its business partners, is one of the leading suppliers of packaging materials in the Philippines and exports packaging materials to more than countries. Purchases of packaging products from SMPSI, SMRPC, SMYAC and SMYFMC in 2005, 2006 and 2007 collectively amounted to P 3,940 million, P 2,368 million and P 1,943 million, respectively. SMPFC, a majority-owned subsidiary of SMC, has a subsidiary which obtains free of charge, spent grains that are among the waste products resulting from the Companys brewing process. SMPFCs subsidiary uses spent grains as a minor component in the production of animal feeds. All costs associated with the withdrawal of the spent grains are for the account of SMPFCs subsidiary. Spent grains would be a pollutant if retained in the Companys facilities, and their disposal would be an expense for the Company. A subsidiary of SMPFC also paid the Company its share in the use of utilities for its chicken processing plant, which is located beside the Companys San Fernando Brewery, up to December 31, 2007. Beginning January 1, 2008, SMPFCs subsidiary and the Company shall pay their respective shares in the use of the utilities and office facilities directly to SMC. The Company purchases products of subsidiaries of SMPFC for its employees annual Christmas gift packages. SMITS, a wholly-owned subsidiary of SMC, and a subsidiary receive fees from the Company on a per-engagement and/or per-service basis for information technology and systems services, including maintenance of the Companys software and hardware facilities, and business process outsourcing and customer care services. SMITS also provides advisory services on the development of new systems and/or up-grade of existing systems which are outsourced to non-related third parties. The term of these engagements/services is usually for a year. The fees paid for such services in 2005, 2006 and 2007 were P 39 million, P 47 million and P 65 million, respectively. AIBC, a subsidiary of SMC, receives service fees on a per transaction or engagement basis from the Company for the Companys share in the insurance brokering services rendered by AIBC for the entire Group (as defined in the Glossary of Terms of this prospectus) for the Groups consolidated insurance requirements such as insurance for motor vehicles, fire insurance, etc. For the comprehensive insurance coverage of the Group which is bidded out to global insurance institutions, AIBC is engaged to assist in the bidding process and pre-qualification of insurance companies under the direction of SMC. The fees paid for such services in 2005, 2006 and 2007 were P 2 million, P 1.8 million and P 2.3 million, respectively. SMIL, a wholly-owned subsidiary of SMC, and its subsidiaries purchase beer products from the Company. These purchases are covered by various purchase orders which define the prices and delivery schedules negotiated and agreed upon by the parties. Purchases of beer products by SMIL and its subsidiaries in 2005, 2006 and 2007 were P 20 million, P 28 million and P 42 million, respectively.

SMPFC and subsidiaries

SMITS and a subsidiary

Anchor Insurance Brokerage Corporation (AIBC)

San Miguel International Limited (SMIL) and subsidiaries

92

For further information on the Companys related-party transactions, including detailed breakdowns of amounts receivable from affiliated companies, see Note 18 of the Companys examined pro forma financial statements as of and for the years ended December 31, 2007, 2006 and 2005 and Note 19 of the audited financial statements for the period from July 26, 2007 to December 31, 2007.

93

DESCRIPTION OF PROPERTIES OWNED PROPERTIES The Companys principal owned properties are consisted of five breweries, 44 out of its 49 sales offices and two warehouses. The land improvements, buildings, machinery, transportation equipment, office equipment and furniture, and/or tools and small equipment owned by the Company in these breweries, region offices, sales offices and warehouses, as well as those in certain terminals and wharfs leased by the Company, have a net book value of P 5.62 billion as of December 31, 2007, and are free from liens and encumbrances. The locations and general asset description of these properties and equipment are set out below: Breweries The Company has 5 breweries in the following locations: Polo Brewery Marulas McArthur Highway, Valenzuela City, Metro Manila San Fernando Brewery SMC Complex, Quebiawan, San Fernando City, Pampanga Bacolod Brewery Brgy. Granada, Sta. Fe, Bacolod City, Negros Occidental Mandaue Brewery SMC Mandaue Complex, Hi-way, Mandaue City, Cebu Davao Brewery Darong Sta. Cruz, Davao del Sur

A more detailed description of these breweries are found in the section entitled Business Production. Sales/Area Offices and Warehouses The Company owns land improvements, buildings, machinery, transportation, office equipment, tools and/or furniture in the following sales/area offices and warehouses located nationwide. Central North Luzon Area SMC Complex, Quebiawan, San Fernando, Pampanga Carmen East, Rosales, Pangasinan Caranglaan Dist., Dagupan City, Pangasinan Irisan, Baguio City, Benguet Madayegdeg, San Fernando, La Union National Highway, S. Fermin, Cauayan, Isabela Mabini, Santiago, Isabela S. Jacinto St., S. Angelo Subdivision, Angeles City, Pampanga Maharlika Rd., Bitas, Cabanatuan City, Nueva Ecija San Nicolas, Ilocos Norte

94

Greater Manila Area North Brgy. Sta. Cruz, Guiguinto, Bulacan Gapan-Olongapo Rd., Poblacion S. Isidro, Nueva Ecija Asistio, Bo. Biglang Awa, Caloocan City, Metro Manila Honorio Lopez St., Tondo, Manila #158, 20th Ave., Cubao District, Quezon City, Metro Manila

Greater Manila Area South GF SMC HOC, #40 San Miguel Ave., Mandaluyong City, Metro Manila (office equipment and furniture only) Brgy. 425, Zone 43, Sampaloc District, Manila M. Carreon St., Brgy. 864, Zone 94, Sta. Ana District, Manila Manila East Rd., Brgy. Dolores, Taytay, Rizal Bernabe Subdivision, Brgy. San Dionisio, Paraaque City, Metro Manila

South Luzon Area Silangan Exit, Canlubang Industrial Estate, Canlubang, Calamba City, Laguna Maharlika Highway, Brgy. Isabang, Lucena City, Quezon Natl Rd., Brgy. Villa Bota, Gumaca, Quezon Maharlika Highway, Brgy. Concepcion Grande, Naga City, Camarines Sur Brgy. Mandaragat, Puerto Princesa City, Palawan Aurora Quezon and Calderron St., Brgy. Labangan, San Jose, Occidental Mindoro Governors Drive, Brgy. Lankaan II, Dasmarias, Cavite Bo. Balagtas, Batangas City, Batangas Ayala Highway, Lipa City, Batangas

Negros/Panay Brgy. Granada, Sta. Fe, Bacolod City, Negros Occidental Muelle Loney, Iloilo Himamaylan, Negros Occidental Brgy. Sum-Ag, Bacolod City, Negros Occidental Camansi Norte, Numancia, Aklan Bo. Libas, Roxas City, Capiz

Central and Eastern Visayas SMC Mandaue Complex, Hi-way, Mandaue City, Cebu Fatima Village, Tacloban City, Leyte

Mindanao National Hi-way, Brgy. Darong Sta. Cruz, Davao del Sur Ulas, Davao City

95

Agusan National Highway, Magugpo, Tagum City, Davao del Norte Sergio Osmea cor Tomas Confessor St., Brgy. Poblacion, Koronadal City, South Cotabato National Highway, Brgy. Lagao, Gen. Santos City, South Cotabato National Highway, Brgy. Luyong Bonbon, Opol, Misamis Oriental R.T. Lim Blvd., Baliwasan Drive, Zamboanga City, Zamboanga del Sur Brgy. Fort Poyohon, Butuan City, Agusan del Norte Brgy. Mangangoy, Bislig City, Surigao del Sur (building only) Sema St., Brgy. Bongtod, Tandag City, Surigao del Sur J.P. Rizal Ave., Poblacion, Digos City, Davao del Sur

Terminals and Wharfs Bataan Malt Terminal, Mariveles, Bataan (building, machineries and equipment, furniture and fixtures only) Ouano Wharf, Ouano, Mandaue City, Cebu LEASED PROPERTIES The Company leases buildings and improvements in various locations in the Philippines. Set out below are the details on the leases of the Company. The Company also leases lands from SMC for its breweries and five out of its 49 sales offices. See Related Party Transactions for information on the rentals under the lease with SMC.
Leased Asset Description Expiration Date

Location

Annual Rental (P)

Terminals and Wharfs Bataan Malt Terminal . . . . . . . . Sales Offices and Warehouse Greater Manila Area North Valenzuela S.O. . . . . . . . . . . . . .

Mariveles, Bataan

Land

5,520,000.00

12/16/2013

Novaliches S.O. . . . . . . . . . . . . .

Bldg. 23 Plastic City Cpd., #8 T. Santiago St., Brgy. Canumay, Valenzuela City, Metro Manila Quirino Highway, Novaliches, Quezon City, Metro Manila

Land Land improvement Land Buildings Land Buildings Land Land improvement Land Leasehold improvement Buildings

2,701,469.30

4/30/2010

7,530,566.40

11/15/2009

Greater Manila Area South Pasig S.O. . . . . . . . . . . . . . . . . . Mercedes Ave., Pasig City, Metro Manila South Luzon Area Legazpi S.O. . . . . . . . . . . . . . . . Corner Cogon and Patricio Streets, Bgy. Cruzada, Leqaspi City, Bicol Negros Pavia S.O. . . . . . . . . . . . . . . . . . Solid Manila Bldg Diversion Road, Bgy, San Rafael, Mandurriao, Iloilo

8,930,249.66

7/31/2011

2,880,000.00

12/31/2010

708,825.60

12/15/2008

96

Location

Leased Asset Description

Annual Rental (P)

Expiration Date

Mindanao Butuan Region Office . . . . . . . . .

Molave St., Butuan City, Agusan del Norte Quezon Blvd., Kidapawan City, North Cotabato Bonifacio St., Lam-an, Ozamis City, Misamis Occidental

Cenmin Region Office . . . . . . . .

Ozamis Region Office . . . . . . . .

Land Land improvement Land Land improvement Land Building

420,000.00 507,276.00

1/31/2010 1/31/2010

504,000

6/19/2009

Land for Breweries

Location

Polo Brewery San Fernando Brewery Bacolod Brewery Mandaue Brewery Davao Brewery-Main

Brgy Potrero/Marulas, Valenzuela City, Metro Manila Brgy. Quebiawan, San Fernando, Pampanga National Road, Brgy. Sta. Fe, Bacolod City, Negros Occidental Brgy. Tipolo, Mandaue City, Cebu National Hi-way, Brgy. Darong, Sta. Cruz, Davao del Sur

Land For Sales Offices and Warehouses

Location

Central North Luzon Area Angeles Region Office Baguio S.O. Carmen S.O. Cauayan Region Office Dagupan Region Office Ilocos S.O. La Union Region Office Lallo S.O. Santiago S.O. San Nicolas Region Office Greater Manila Area North Caloocan S.O. Cubao S.O. Guiguinto S.O. San Isidro S.O. Tondo S.O.

Santo Domingo Subdivision, Angeles City, Pampanga No. 60, Purok 18, Irisan Baguio City Bo. Carmen, Rosales, Pangasinan Brgy. Prenza, Cauayan, Isabela Caranglaan District, Dagupan City, Pangasinan Tablac, Candon, Ilocos Sur Pennsylvania Ave., Bo. Madayegdeg, San Fernando, La Union Sta. Maria, Lallo, Cagayan Mabini, Santiago, Isabela Brgy. Catuguing, San Nicholas, Ilocos Norte

A. Cruz St., Brgy. 96, Caloocan City, Metro Manila No. 158, 20th Ave., Cubao District, Quezon City, Metro Manila Cagayan Valley Rd., Brgy. Sta. Cruz, Guiguinto, Bulacan Provincial Rd., Brgy. San Isidro, Paombong, Bulacan Honorio Lopez Blvd., Buendia, Guidote & Guimba St., Tondo, Metro Manila

Greater Manila Area South Paranaque S.O. Pureza S.O. Sta. Ana S.O. Taytay S.O.

No. 100, Bernabe Subdivision, Brgy. San Dionisio, Sucat, Paranaque City, Metro Manila Brgy. 425, Zone 43, Sampaloc District, Metro Manila M. Carreon St., Brgy. 864, Zone 94, Sta. Ana District, Metro Manila Manila East Rd., Brgy. Dolores, Taytay, Rizal

97

Location

South Luzon Area Area Office Batangas Region Office Gumaca S.O. Lipa S.O. Lucena S.O. Naga S.O. Puerto Princesa S.O. San Jose S.O.

Silangan Exit, Canlubang Industrial Estate, Canlubang, Calamba, Laguna National Rd., Brgy. Balagtas, Batangas City, Batangas National Road, Brgy Villa Bota, Gumaca, Quezon J.P. Laurel Hiway, Brgy. Balintawak, Lipa City, Batangas Maharlika Hiway, Brgy. Isabang, Lucena City, Quezon Brgy. Concepcion Grande, Naga City, Camarines Sur Brgy. Mandaragat, Puerto Princesa City, Palawan Aurora Quezon and Calderon St., Brgy. Labangan, San Jose, Occidental Mindoro

Negros Sum-ag Whse. Himamaylan S.O. Iloilo S.O. Numancia S.O. Roxas S.O. MDE - Tacloban S.O. Mindanao Butuan S.O. Digos S.O. GenSan S.O. Marbel S.O. Opol Region Office Tagum S.O. Tandag S.O. Zamboanga S.O.

Flores St., Brgy. Sum-ag, Bacolod City, Negros Occidental National Hi-way, Brgy. 4, Himamaylan City, Negros Occidental Muelle Loney St., Brgy. Legazpi, Iloilo City, Iloilo Brgy. Camansi Norte, Numancia, Aklan Brgy. Libas, Roxas City, Capiz Access Rd., Fatima Village, Brgy. 73, Tacloban City, Leyte

Brgy. Fort Poyohon, Molave St., Butuan City, Agusan del Norte J.P. Rizal Ave., Brgy. Poblacion, Digos City, Davao del Sur National Hi-way, Brgy. Lagao, Gen. Santos City, South Cotabato Sergio Osmea St. Cor. Tomas Confessor St. Brgy. Poblacion, Koronadal City, South Cotabato National Hi-way, Brgy. Luyong Bonbon, Opol, Misamis Oriental Davao-Agusan National Hi-way, Brgy. Magupo, Tagum City, Davao del Norte Serra St., Brgy. Bongtod, Tandag City, Surigao del Sur R.T. Lim Boulevard, Baliwasan, Zamboanga City

Others Deepwell D Deepwell B Deepwell C Deepwell E Deepwell F Deepwell G Warehouse-Oro Verde Ouano Wharf Tambalan-Budla-an Rd., Brgy. Tambalan, Mandaue City, Cebu A.S. Fortuna St., Brgy. Banilad, Mandaue City, Cebu H. Cortes St., Brgy. Banilad, Mandaue City, Cebu Private Rd., Brgy. Cabancalan, Mandaue City, Cebu Private Rd., Brgy. Cabancalan, Mandaue City, Cebu Private Rd., Brgy. Cabancalan, Mandaue City, Cebu H. Cortes St., Brgy. Banilad, Mandaue City, Cebu Antipolo St., Brgy. Looc, Mandaue City, Cebu

CONDITION OF PROPERTIES The properties owned and leased by the Company are in good condition and are free from liens and encumbrances. The Company does not intend to acquire any material assets except for those in connection with capital expenditure projects. All of the Companys existing lease contracts contain a provision that the contract is renewable upon agreement by the parties.

98

MATERIAL CONTRACTS The following are summaries of the material terms of the principal contracts related to the Companys primary business and should not be considered to be a full statement of the terms and provisions of such contracts. Accordingly, the following summaries are subject to the full text of each contract. Following the spin-off of the beer domestic business of SMC to the Company as discussed in the Business Overview section of this prospectus, SMC assigned to the Company all its rights and obligations under the principal contracts described below. SUPPLY OF RAW MATERIALS The Company sources a portion of its malted barley requirements from Joe White Maltings Pty. Ltd. (JWM) under a supply agreement with a term of five years from January 1, 2007 to December 31, 2011, subject to a renewal for another five years upon mutual agreement of the parties. Under the agreement, JWM is a preferred supplier, with the Company having the option to increase its purchases up to 20% above the agreed minimum tonnage at the agreed prices and up to 50% above the agreed minimum tonnage at prices and conditions to be negotiated by the parties. JWM commits to provide new malted barley capacity in the event of increased malted barley purchases to support the Companys future requirements and agrees to give priority to the Company for the supply of malted barley in the event of drought, change in barley varieties or barley quality variations. AGREEMENTS WITH SMC The Company entered into a License Agreement, a Shared Services Agreement and a Contract of Lease with SMC following the spin-off of the domestic beer business of SMC to the Company. See Related Party Transactions for descriptions of the terms of these agreements. SUPPLY OF PACKAGING MATERIALS The Company principally sources its packaging requirements from SMPSI, SMRPC, SMYAC and SMYFMC. The Company currently has several outstanding purchase orders of various packaging materials from these suppliers with delivery dates averaging 30 days. The terms and conditions of these purchase orders provide, among others, that the seller shall replace any shipment of packaging materials which are not in accordance with the specifications of the Company, without requiring prior receipt thereof by the Company, and the Company shall only return such materials after receipt of the replacement therefor. All costs incurred in the replacement of such non-compliant packaging materials shall be for the sellers account. The Company shall be entitled to cancel its order or any part thereof in the event of failure by the seller to make deliveries in accordance with the purchase orders, without prejudice to such other rights which the Company may be entitled to on account of such failure by the sellers. See also Related Party Transactions.

99

DESCRIPTION OF SECURITIES The following is general information relating to the Companys capital stock but does not purport to be complete or to give full effect to the provisions of law and is in all respects qualified by reference to the applicable provisions of the Companys amended articles of incorporation and amended by-laws. SHARE CAPITAL The Company was incorporated with an authorized capital stock of P 100,000,000 divided into 1,000,000 common shares with a par value of P 100.00 per share. On August 9, 2007 and September 7, 2007, the increase of the authorized capital stock of the Company from P 100,000,000 to P 25,000,000,000 and the corresponding decrease in the par value of the Common Shares from P 100.00 per share to P 1.00 per share were respectively approved by an affirmative vote of at least a majority of the directors and the shareholders of the Company owning or representing at least two-thirds of the outstanding capital stock of the Company during their respective meetings held on those days. On September 27, 2007, the above increase in the Companys authorized capital stock and decrease in the par value of its shares were approved by the Philippine SEC. As a standard condition of the Philippine SEC for approval of applications for increase in authorized capital where the payment for the shares issued pursuant to such increase is made in the form of motor vehicles and receivables, 2,557,573,242 Common Shares that were issued by the Company to SMC in exchange for motor vehicles and receivables out of the 15,308,416,960 Common Shares issued by the Company pursuant to the transfer of net assets of the domestic beer business by SMC to the Company (see Business Overview and Market Price of and Dividends on the Companys Stock and Related Stockholder Matters Recent Sales of Unregistered or Exempt Securities) are being held in escrow by the Philippine SEC pending the transfer of ownership of those motor vehicles in the name of the Company and proof of collection of receivables. Transfer of ownership of those motor vehicles and collection of receivables are currently in process. As of the date of this prospectus, the authorized capital stock of the Company is P 25,000,000,000 divided into 25,000,000,000 Common Shares with a par value of P 1.00 per Common Share. Immediately prior to the Combined Offer, the Company will have 15,333,426,960 outstanding Common Shares. A total of 15,410,478,960 Common Shares will be outstanding after the completion of the Combined Offer. TREASURY SHARES As of the date of this prospectus, there are no Common Shares in treasury. VOTING RIGHTS OF COMMON SHARES The Common Shares of the Company have full voting rights. At each meeting of the shareholders, every shareholder entitled to vote on a particular question or matter involved shall be entitled to one vote for each share of stock standing in his name in the books of the Company at the time of the closing of the transfer books for such meeting. In accordance with Section 24 of the Corporation Code, at each election of directors, every shareholder entitled to vote at such election shall have the right to vote, in person or by proxy, the number of shares owned by him as of the relevant record date for as many persons as there are directors to be elected and for whose election he has a right to vote, or to cumulate his votes by giving one candidate the number of votes equal to the number of directors to be elected multiplied by the number his shares shall equal or by distributing such votes on the same principle among any number of candidates as the shareholder shall see fit.

100

The Corporation Code provides that voting rights cannot be exercised with respect to shares declared delinquent, treasury shares, or if the shareholder has elected to exercise his right of appraisal referred to below. FUNDAMENTAL MATTERS REQUIRING STOCKHOLDERS APPROVAL The Corporation Code provides for certain significant acts that may only be implemented with the approval of shareholders. The following acts require the approval of shareholders representing at least two-thirds of the issued and outstanding capital stock of the corporation: amendment to the articles of incorporation; removal of directors; sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the assets of the corporation; investment of corporate funds in any other corporation or business or for a purpose other than the primary purpose for which the corporation was organized; declaration or issuance of stock dividends; delegation to the Board of Directors of the power to amend or repeal by-laws or adopt new by-laws; merger or consolidation; increase or decrease in capital stock; creation or increase of bonded indebtedness; extension or shortening of corporate term; voluntary dissolution of the corporation where no creditors are affected; ratification of a contract between the corporation and a director or an officer where (i) the presence of such director or officer in the meeting in which such contract was approved is necessary to constitute a quorum for such meeting; or (ii) the vote of such director or officer is necessary for the approval of such contract; ratification of a disloyal act by a director; ratification of contracts with corporations in which a director is also a member of the board, where the interest of the director is substantial in one corporation and nominal in the other; and entering into a management contract where (i) a majority of the directors of the managing corporation constitutes the majority of the board of the managed corporation, or (ii) shareholders of both the managing and managed corporations represent the same interest and own or control more than one third of the outstanding capital stock entitled to vote.

The amendment to by-laws and approval of management contracts in general require the approval of shareholders representing a majority of the corporations outstanding capital stock. Shares denominated as non-voting in the articles of incorporation of a corporation shall likewise be entitled to vote on matters relating to amendment of the articles of incorporation; adoption and amendment of by-laws; sale, lease, exchange, mortgage, pledge or other disposition of all or

101

substantially all of the assets of the corporation; investment of corporate funds in any other corporation or business or for a purpose other than the primary purpose for which the corporation was organized; merger or consolidation; increase or decrease in capital stock; creation or increase of bonded indebtedness; and dissolution of the corporation. The Corporation Code defines the term outstanding capital stock to mean the total shares of stock issued to subscribers or shareholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares. Such shareholders approval may be given at a general or special meeting duly called for such purpose. DIVIDEND RIGHTS The Companys Board of Directors is authorized to declare dividends, which shall be payable in cash, property or stock, or a combination of the three, to all its shareholders on the basis of outstanding capital stock held by them. A cash or property dividend declaration does not require any further approval from the shareholders. A stock dividend declaration requires the further approval of shareholders holding or representing not less than two-thirds of the Companys outstanding capital stock. Under the Corporation Code, the Company may not make any distribution of dividends other than out of its unrestricted retained earnings, and is generally required to declare and distribute as dividends the amount of retained earnings in excess of 100% of its paid-in capital. The Company may, however, retain all or any portion of such surplus in the following cases: (i) when justified by definite expansion plans approved by the Board of Directors of the Company; (ii) when the required consent of any financing institution or creditor to such distribution has not been secured; (iii) when retention is necessary under special circumstances, such as where there is a need for special reserves for probable contingencies; or (iv) when the non-distribution of dividends is consistent with the policy or requirement of a government office. Each holder of a Common Share is entitled to such dividends as may be determined and declared by the Board of Directors from time to time. Recommendations to declare dividends will take into consideration factors such as debt service requirements, the implementation of business plans, operating expenses, budgets, funding for new investments and acquisitions, appropriate reserves and working capital, among others. For further information on the dividend policy of the Company, see the section entitled Dividend Policy. PRE-EMPTIVE RIGHTS The Corporation Code confers pre-emptive rights on shareholders of a Philippine corporation, which entitle them to subscribe to all issues or other disposition of shares of any class by the corporation in proportion to their respective shareholdings, subject to certain exceptions. A Philippine corporation may provide for the exclusion of these pre-emptive rights in its articles of incorporation. The amended articles of incorporation of the Company provide that the shareholders shall not have any pre-emptive rights. APPRAISAL RIGHTS Under Philippine laws, shareholders dissenting from and voting against the following corporate actions may demand payment of the fair value of their shares as of the day prior to the date on which the vote was taken for such corporate action: amendment to the corporations articles of incorporation which has the effect of changing and restricting the rights of any shareholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class; sale, lease, exchange, transfer, mortgage or other disposition of all or substantially all of the corporate property or assets; merger or consolidation;

102

decision by the corporation to invest its funds in another corporation or business or for any purpose other than the primary purpose; and extension or shortening of the term of corporate existence.

The appraisal right may be exercised by the dissenting shareholder by making a written demand on the corporation for the payment of the fair value of his shares within 30 days from the date on which the vote on the corporate action was taken. Failure to make a written demand within such period shall be deemed a waiver of such right. If the corporation and the dissenting shareholder cannot agree on the fair value of the dissenting shares within 60 days from the date of the approval of the corporate action, the fair value of the dissenting shares shall be determined by three disinterested persons, one of whom shall be named by the dissenting shareholder, one by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and the award shall be paid by the corporation within 30 days after such award is made; provided that the corporation has unrestricted retained earnings sufficient to support the purchase of such dissenting shares. Upon payment of the purchase price of the dissenting shares, the dissenting shareholder must transfer his shares to the corporation. From the time a demand for payment of fair value is made until either the abandonment of the corporate action involved or the purchase of the dissenting shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended. If the dissenting shareholder is not paid the fair value of his shares within the foregoing 30-day period, his voting and dividend rights shall be restored. DERIVATIVE SUITS Philippine law recognizes the right of a shareholder to institute, under certain circumstances, proceedings on behalf of the corporation in a derivative action in circumstances where the corporation itself is unable or unwilling to institute the necessary proceedings to redress the wrongs committed against the corporation or to vindicate corporate rights, as for example, where the directors themselves are the malefactors. RIGHTS TO ASSETS OF COMPANY Each holder of a Common Share is entitled to a pro rata share in the assets of the Company available for distribution to the shareholders in the event of dissolution, liquidation and winding up. OTHER FEATURES AND CHARACTERISTICS OF COMMON SHARES The Common Shares are neither convertible nor subject to redemption. All of the Companys issued Common Shares are fully paid and non-assessable and are free and clear of all liens, claims and encumbrances. All documentary stamp taxes due on the issuance of all issued Common Shares have been fully paid. ISSUE OF SHARES AND SHARE CERTIFICATES Subject to applicable limitations, the Company may issue additional Common Shares to any person for consideration deemed fair by the Board of Directors, provided that such consideration shall not be less than the par value of the issued Common Shares. No share certificates shall be issued to a subscriber until the full amount of the subscription together with interest and expenses (in case of delinquent shares) has been paid and proof of payment of the applicable taxes (in case of transfers of shares) shall have been submitted to the Companys corporate secretary. Certificates representing the Common Shares will be issued in such denominations as shareholders may request, except that certificates will not be issued for fractional shares. Shareholders wishing to split their certificates may do so upon application to the Companys stock transfer agent. Common Shares may also be lodged and maintained under the book-entry system of the PDTC. See the section entitled The Philippine Stock Market.

103

MANDATORY TENDER OFFERS In general, under the SRC and its implementing rules and regulations, it is mandatory for any person or group of persons acting in concert intending to acquire at least (a) 35% of (i) any class of any equity security of a corporation listed in the Philippines, or (ii) any class of equity security of a Philippine corporation with assets of at least P 50 million and having 200 or more shareholders with at least 100 hundred shares each; (b) 35% of such equity over a period of 12 months; or (c) less than 35% of such equity that would result in ownership of over 51% of the total outstanding equity, to make a tender offer to all the shareholders of the target corporation on the same terms. Generally, in the event that the securities tendered pursuant to such an offer exceed that which the acquiring person or group of persons is willing to take up, the securities shall be purchased from each tendering shareholder on a pro rata basis, disregarding fractions, according to the number of securities tendered by each security holder. Where a mandatory tender offer is required, the acquirer is compelled to offer the highest price paid by him for such shares during the past six months. Where the offer involves payment by transfer or allotment of securities, such securities must be valued on an equitable basis. However, if any acquisition of even less than 35% would result in ownership of over 51% of the total outstanding equity, the acquirer shall be required to make a tender offer for all the outstanding equity securities to all remaining shareholders of such corporation at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such a tender offer shall be required to accept any and all securities thus tendered. TRANSFER OF SHARES All transfer of Common Shares on the PSE shall be effected by means of a book-entry system. Under the book-entry system of trading and settlement, a registered shareholder shall transfer legal title over the Common Shares to a nominee, but retains beneficial ownership over the Common Shares. The transfer of legal title is done by surrendering the stock certificate representing the Common Shares to any participant of the PDTC system (i.e. brokers and custodian banks) that, in turn, lodges the same with the PCD Nominee Corporation (the PCD Nominee), a corporation wholly owned by the PDTC. A shareholder may request upliftment of the Common Shares from the PDTC in which case a certificate of stock will be issued to the shareholder and the Common Shares will be registered in the shareholders name in the books of the Company. See the section entitled The Philippine Stock Market. RESTRICTIONS ON TRANSFER OF SHARES As of the date of this prospectus, there are no restrictions on the transfer of the Companys Common Shares in its amended articles of incorporation and its amended by-laws. Since the Company is not subject to any foreign equity restrictions because it is not engaged in any business activity nor in possession of an asset that would attract the applicability of foreign ownership restrictions under Philippine law, there are no effective restrictions on the transfer of the Companys Common Shares under the Philippine law. EXECUTIVE STOCK OPTION PLAN The Company currently has no executive stock option plan on its Common Shares. EMPLOYEE STOCK PURCHASE PLAN The Company currently has no employee stock purchase plan on its Common Shares. STOCK TRANSFER AGENT The Company has appointed SMC Stock Transfer Service Corporation as its stock transfer agent.

104

MARKET PRICE OF AND DIVIDENDS ON THE COMPANYS STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Prior to the Combined Offer, there has been no public trading market for any of the Companys Common Shares. HOLDER OF THE COMPANYS COMMON SHARES As of the date of this prospectus, SMC owns 15,333,416,960 or approximately 100% of the Companys issued and outstanding Common Shares. Description of Principal Shareholder SMC is a publicly listed food, beverage and packaging holding company in the Philippines. Established in 1890 as a single-product brewery, the Group today has over 100 facilities in the Philippines, Southeast Asia and China. The Groups extensive product portfolio includes beer, hard liquor, water, powdered juice and juice drinks, processed and packaged food products, meat, poultry, dairy products, snack foods, cooking oil, coconut oil, pet food, animal and aquatic fees and a number of packaging products. Kirin Holdings Co., Ltd., one of the largest beer manufacturing companies in Japan, has a significant stake in SMC. The Group also has strategic partnerships with international companies, among them Hormel Foods Corporation of the United States, Nihon Yamamura Glass Company, Ltd. (NYG), Rengo Co., Ltd. of Japan and Super Coffeemix Manufacturing Ltd. of Singapore. On January 31, 2008, SMC further expanded its partnership with NYG with the completion of the sale of its 35% interest in the packaging businesses comprised of its domestic businesses under SMPSI and regional operations under San Miguel Packaging International, Ltd. Beverage The domestic beer operations of SMC are carried out by the Company. The international beer operations, on the other hand, are carried out by SMC through its foreign subsidiary, San Miguel Brewing International Limited, and its other subsidiaries, which include San Miguel Brewery Hong Kong Limited, PT Delta Djarkarta Tbk and San Miguel Beer (Thailand) Limited. SMC maintains three breweries in Southeast Asia and two breweries in China for its international operations. Apart from beer, SMC also produces hard liquor through its majority-owned subsidiary, GSMI. GSMI is not only the leader in the domestic hard liquor market, but also the worlds largest gin producer by volume and the fourth largest spirits company by volume. SMC participates in the non-carbonated beverage business in the Philippines, Thailand and Indonesia through its wholly owned subsidiary, SMBI. Food The Groups domestic food and agribusiness operations are comprised of SMPFC and its major subsidiaries, which include San Miguel Foods, Inc. and its subsidiary, San Miguel Mills, Inc.; The Purefoods-Hormel Company, Inc.; Magnolia, Inc.; Monterey Foods Corporation; San Miguel Super Coffeemix Co., Inc. and Star Dari, Inc. The Groups business portfolio offers a complete line of food products and services for both individual and food service customers. Its businesses range from vegetable oils, feeds, flour, poultry, fresh and processed meats, coffee, snacks, and dairy products, to food service. The Group carries some of the best-known brands in the Philippine food and agribusiness industry, among them Magnolia, Monterey, Star, Purefoods, Dari Crme, and B-Meg.

105

SMC expanded its food operations in the Southeast Asian region with the increase in equity participation of SMPFC in P.T. San Miguel Pure Foods Indonesia (formerly P.T. Purefoods Suba Indah), a company engaged in the manufacture and trade of processed meats and related products in Indonesia and its 51% investment in San Miguel Pure Foods Investment (BVI) Limited, which wholly owns San Miguel Pure Foods (VN) Co., Ltd., (formerly TTC (VN) Co. Ltd.), a hogs and feed mill business in Binh Duong, Vietnam. Packaging The San Miguel Packaging Group (as defined in the Glossary of Terms of this prospectus) is a Total Packaging Solutions business servicing many of the regions leading food, pharmaceutical, chemical, beverages, and personal care manufacturers. The San Miguel Packaging Group serves clients in the Asia-Pacific, Middle East, and U.S. markets, and manufactures glass bottles, PET bottles, corrugated cartons, paperboard, paper pallets, flexible packaging, plastic crates and pallets, plastic caps, plastic poultry flooring, plastic pails and trays, plastic films, industrial laminates, woven bags, metal closures, two-piece aluminum beverage cans; and offers filling services, as well as graphics design and testing services. The San Miguel Packaging Group also competes in the international market through its packaging businesses in Vietnam, Malaysia and China: San Miguel Plastic Films Sdn Bhd, San Miguel Packaging & Printing Sdn Bhd., San Miguel Woven Products Sdn Bhd, Packaging Research Center Sdn Bhd, San Miguel Yamamura Haiphong Glass Co., Ltd., San Miguel Phu Tho Packaging Company Ltd. and Zhaoqing San Miguel Glass Co., Ltd. It has five international packaging plants located in China (glass, metal, plastic), Vietnam (glass, metal), Indonesia (plastic) and Malaysia (corrugated carton and paperboard, composites, plastic films, laminates and woven bags). Property SMPI is SMCs primary property subsidiary. SMPI is presently primarily engaged in the development, sale and lease of real properties. DIVIDENDS On February 4, 2008, the Company declared cash dividends of P 2.3 billion, or P 0.15 per share, and it was paid to the Companys shareholders on February 8, 2008. On April 10, 2008, the Companys Board of Directors declared a cash dividend of P 2.453 billion, or P 0.16 per share, in respect of the Companys net income in respect of the first quarter of 2008, which was paid in full on April 18, 2008. For information on the Companys dividend policy, see the section entitled Dividend Policy. RECENT SALES OF UNREGISTERED OR EXEMPT SECURITIES The following are issuances of Common Shares constituting an exempt transaction under the SRC which were made by the Company since its incorporation on July 26, 2007 to the date of this prospectus: (1) The Company was incorporated on July 26, 2007 with an authorized capital stock of P100,000,000 divided into 1,000,000 Common Shares with a par value of P 100.00 per Common Share. SMC subscribed to 250,000 Common Shares (then with a par value of P 100.00 per Common Share) prior to the incorporation of the Company to comply with the requirements under the Corporation Code as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered with the Philippine SEC. The subscription is an exempt transaction pursuant to Section 10.1 (i) of the SRC. (2) The Company subsequently approved the increase in its authorized capital from P 100,000,000 to P25,000,000,000, the decrease of the par value of its shares from P 100.00 to P 1.00, and the issuance of a total of 15,308,416,960 Common Shares, comprising of 75,000,000 Common

106

Shares from its unissued authorized capital stock and 15,233,416,960 Common Shares from the increase in its authorized capital stock, in exchange for the net assets of the domestic beer business of SMC with a net book value equivalent to P 15,308,416,960. The transfer of the net assets is pursuant to a Master Deed of Assignment of Domestic Beer Assets dated August 23, 2007 between SMC and the Company as amended by an Amendment to the Master Deed of Assignment of Domestic Beer Assets between the same parties dated September 7, 2007. The issuance of these Common Shares is an exempt transaction under Section 10.1 (e) of SRC. Under the Corporation Code, where the consideration for the issuance of shares is other than actual cash, the valuation thereof shall initially be determined by the Board of Directors, subject to the approval of the Philippine SEC. The Philippine SEC approved the valuation of the net assets of SMC as full payment of the 15,308,416,960 Common Shares issued on September 27, 2007. However, 2,557,573,242 Common Shares issued by the Company to SMC in exchange for motor vehicles and receivables out of the entire 15,308,416,960 Common Shares issued by the Company pursuant to the transfer of the net assets of the domestic beer business by SMC to the Company are held in escrow by the Philippine SEC and shall only be released upon presentation of the transfer of ownership of such motor vehicles in the name of the Company and the proof of collection of receivables. The holding of such Common Shares in escrow is a standard condition of the Philippine SEC for approval of applications for increase in authorized capital where the payment for the shares issued pursuant to such increase is made in the form of motor vehicles and receivables. For more information on the increase of the Companys authorized capital stock and transfer of the assets and liabilities of the domestic beer division of SMC to the Company, see the sections entitled Description of Securities and Business. (3) The issuance of 5,000 Common Shares to each of the independent directors of the Company is an exempt transaction under Section 10.1 (c) of the SRC.

107

PLAN OF DISTRIBUTION 231,157,000 Offer Shares, or approximately 30% of the total number of Offer Shares, are being offered for subscription in the Philippines by the Company and the Selling Shareholder to the PSE Brokers and Local Small Investors and 539,367,000 Offer Shares, or approximately 70% of the total number of Offer Shares, are being offered for subscription outside the Philippines by the International Underwriters. The preceding sentence notwithstanding, the International Underwriters may, at their discretion, reallocate the Offer Shares between the International Offer and the Domestic Offer. The Domestic Underwriters will underwrite the Domestic Offer Shares on a firm commitment basis and the International Underwriters are committed to procure purchasers for, or failing which, to purchase, all of the International Offer Shares. All or a portion of the International Offer Shares may be offered for subscription or sale through the International Underwriters outside the Philippines and the United States through a book-building process. Alternatively, the International Underwriters, the Company and the Selling Shareholder, in consultation with one another, may consider offering the shares to select institutional, anchor and/or strategic investors outside the Philippines and the United States. THE DOMESTIC OFFER Domestic Offer Shares shall be offered by the Company and the Selling Shareholder to the PSE Brokers and Local Small Investors during the Domestic Offer following the pricing of the International Offer. The PSE shall allocate 154,105,000 Common Shares (the PSE Offer Shares) out of the Domestic Offer Shares among the PSE Brokers. Each PSE Broker shall initially be allocated 1,158,000 Offer Shares (computed by dividing the PSE Offer Shares by 133 PSE Brokers and rounding down to the nearest one thousand shares) subject to reallocation as may be determined by the PSE. Prior to the closing of the Domestic Offer, any allocation of Domestic Offer Shares not taken up by the PSE Brokers and Local Small Investors shall be distributed by the Domestic Underwriters to their clients or the general public prior to the close of the Domestic Offer. Domestic Offer Shares not taken up by the PSE Brokers, the Local Small Investors, the Domestic Underwriters clients or the general public shall be purchased by the Domestic Underwriters unless such Offer Shares are reallocated to the International Offer by the International Underwriters. To facilitate the Domestic Offer, the Company has appointed ATR KimEng Capital Partners, Inc. and BDO Capital & Investment Corporation (BDO) as the Joint Domestic Lead Underwriters, and ING Bank N.V. which shall act as the participating Domestic Underwriter. The Company, SMC and the Domestic Underwriters will enter into a Domestic Underwriting Agreement to be dated on or around April 25, 2008 (the Domestic Underwriting Agreement), whereby the Domestic Underwriters shall agree to underwrite the Domestic Offer Shares on a firm commitment basis. ATR KimEng was incorporated in the Philippines in 1990. It has an authorized capital stock of P1,000 million, of which approximately P 760 million represents its paid up capital. ATR KimEng obtained its license to operate an investment house in 1993 and is licensed by the Philippine SEC to engage in underwriting or distribution of securities to the public. Its senior executives have extensive experience in the capital markets and were involved in a lead role in a substantial number of major equity and debt issues, both locally and internationally. ATR KimEng has underwritten several public and private offerings of equity and debt in the Philippines since 1993. BDO was incorporated in the Philippines in 1998. It has an authorized capital stock of P 400 million, of which approximately P 300 million represents its paid-up capital. BDO obtained its license to operate an investment house in 1998 and is licensed by the Philippine SEC to engage in underwriting or distribution of securities to the public. Its senior executives have extensive experience in the capital markets and were involved in a lead role in a substantial number of major equity and debt issues, both locally and internationally. BDO has underwritten several public and private offerings of equity and debt in the Philippines since 1998. Each of the Domestic Underwriters and their respective affiliates may have engaged in transactions with and performed various investment banking and securities brokerage services for the Company

108

and its affiliates in the past and may do so from time to time in the future. None of the Domestic Underwriters has any direct relationship with the Company in terms of Offer Share ownership. Other than as Domestic Underwriters for the Domestic Offer, none of the Domestic Underwriters has any material relationship with the Company. None of the Domestic Underwriters has any right to designate or nominate a member of the Companys Board. On or before April 30, 2008, the PSE Brokers shall submit to the designated representative of the PSE Listings Department their respective firm orders and commitments to purchase Offer Shares. Domestic Offer Shares not taken up by PSE Brokers and Local Small Investors will be distributed by the Domestic Underwriters directly to their clients and the general public and whatever remains will be purchased by the Domestic Underwriters. The Domestic Underwriters shall receive the commitment to purchase forms and the corresponding payments of each PSE Broker and Local Small Investor. The Domestic Underwriters shall receive from the Company a fee equivalent to up to 2.0% of the total proceeds of the Domestic Offer Shares sold in the Domestic Offer. PSE Brokers who take up Domestic Offer Shares shall be entitled to a selling fee of 1.0% of Domestic Offer Shares taken up and purchased by the relevant PSE Brokers. The selling fee, less a withholding tax of 10%, will be paid to the PSE Brokers within five Banking Days after the Listing Date. All of the Domestic Offer Shares are or shall be lodged with PDTC. PSE Brokers may maintain the Domestic Offer Shares in scripless form or opt to have the stock certificates issued to them by requesting an upliftment of the relevant Domestic Offer Shares from PDTCs electronic system after the listing of the Domestic Offer Shares. THE INTERNATIONAL OFFER The Company and the Selling Shareholder, through the International Underwriters, are offering approximately 539,367,000 Offer Shares (excluding the Over-Allotment Option described below) in the International Offer outside the Philippines and the United States in reliance on Regulation S. The International Purchase Agreement dated April 24, 2008, entered into among the Company, the Selling Shareholder and the International Underwriters (the International Purchase Agreement) is subject to certain conditions and may be subject to termination by the International Underwriters if certain circumstances, including force majeure, occur on or before the Offer Shares are listed on the PSE. Under the terms and conditions of the International Purchase Agreement, the International Underwriters are severally committed to procure purchasers for, or failing which, to purchase, all of the International Offer Shares. The closing of the Domestic Offer and the International Offer are expected to occur concurrently and are contingent upon each other. The International Underwriters and their affiliates have engaged in transactions with and performed various investment banking, commercial banking and other services for the Company, the Selling Shareholder and their affiliates in the past and may do so from time to time in the future. However, all services provided by the International Underwriters, including in connection with the Offer, have been provided as an independent contractor and not as a fiduciary to the Company. The International Underwriters do not have any right to designate or nominate a member of the Companys Board. THE OVER-ALLOTMENT OPTION In connection with the Offer, SMC has granted the Joint Stabilizing Agents named herein an OverAllotment Option, which is exercisable in whole or in part within 30 days from the Listing Date to purchase additional Common Shares from SMC comprising up to 15% of the total number of Offer Shares at the Offer Price on the same terms and conditions as the Offer Shares as set forth in this prospectus. In connection therewith, the Joint Stabilizing Agents have entered into a greenshoe agreement with SMC for up to an additional 115,578,000 Common Shares to cover over-allocations

109

under the International Offer. Any Optional Shares that may be delivered to the Joint Stabilizing Agents under the greenshoe agreement will be re-delivered to SMC either through the purchase of Common Shares in the open market by the Joint Stabilizing Agents in the conduct of stabilization activities or through the exercise of the Over-Allotment Option by the Joint Stabilizing Agents. Up to 115,578,000 Optional Shares may be over-allotted and the Joint Stabilizing Agents may effect price stabilization transactions within 30 days of the Listing Date. The Joint Stabilizing Agents may purchase Common Shares in the open market only if the market price of the Common Shares falls below the Offer Price. Such activities may stabilize, maintain or otherwise affect the market price of the Common Shares which may have the effect of preventing a decline in the market price of the Common Shares and may also cause the price of the Common Shares to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If the Joint Stabilizing Agents commences any of these transactions, they may discontinue them at any time and without notice. Once the Over-Allotment Option has been exercised by the Joint Stabilizing Agents, they will no longer be allowed to purchase Common Shares in the open market for the conduct of stabilization activities. LOCK-UP SMC has agreed with the International Underwriters that, other than in connection with the OverAllotment Option, for a period of 180 days after the Listing Date, neither it nor any person acting on its behalf will, without the prior written consent of the International Underwriters, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Common Shares or securities convertible or exchangeable into or exercisable for any Common Shares or warrants or other rights to purchase Common Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options. Existing shareholders who own an equivalent of at least 10% of the issued and outstanding Common Shares of the Company after the Combined Offer are required under the revised listing rules of the PSE applicable to companies applying for listing on the PSE First Board, not to sell, assign or otherwise dispose of their Common Shares for a minimum period of 180 days after the Listing Date. SMC is covered by this lock-up requirement. This lock-up does not apply to the Optional Shares. Except for the issuance of Offer Shares pursuant to the Combined Offer or Common Shares for distribution by way of stock dividends, the PSE will require the Company, as a condition to the listing of the Common Shares, not to issue new shares in its capital or grant any rights to or issue any securities convertible into or exchangeable for, or otherwise carrying rights to acquire or subscribe to, any shares in its capital or enter into any arrangement or agreement whereby any new shares or any such securities may be issued for a period of 180 days after the Listing Date. SELLING RESTRICTIONS Philippines No securities, except of a class exempted under Section 9 of the SRC or unless sold in any transaction exempted under Section 10 thereof, shall be sold or distributed by any person within the Philippines until such securities shall have been registered with the Philippine SEC on Form 12-1 and the registration statement has been declared effective.

110

REGULATORY FRAMEWORK REGULATORY MATTERS Various government agencies in the Philippines regulate the different aspects of the Companys beer manufacturing, sales and distribution business. The Bureau of Food and Drugs (under the Department of Health) administers and enforces the law, and issues rules and circulars, on safety and good quality supply of food, drug and cosmetic to consumers; and regulation of the production, sale, and traffic of the same to protect the health of the people. Pursuant to this, food manufacturers are required to obtain a license to operate as such. The law further requires food manufacturers to obtain a certificate of product registration for each product. The Department of Health also prescribed the Guidelines on Current Good Manufacturing Practice in Manufacturing, Packing, Repacking, or Holding Food for food manufacturers. The Consumer Act of the Philippines, the provisions of which are principally enforced by the Department of Trade and Industry, seeks to protect consumers against hazards to health and safety and against deceptive, unfair and unconscionable sales acts and practices; and provide information and education to facilitate sound choice and the proper exercise of rights by the consumer. This law imposes rules to regulate such matters as (i) consumer product and safety; (ii) the production, sale, distribution and advertisement of food, drugs, cosmetics and devices as well as substances hazardous to the consumers health and safety; (iii) fair, honest consumer transactions and consumer protection against deceptive, unfair and unconscionable sales acts or practices; (iv) practices relative to the use of weights and measures; (v) consumer product and service warranties; (vi) compulsory labeling, and fair packaging; (vii) liabilities for defective products and services; (viii) consumer protection against misleading advertisements and fraudulent sales promotion practices; and (ix) consumer credit transactions. The Standards of Trade Practices and Conduct in the Advertising Industry as formulated by the Philippine Advertising Board, a voluntary association of various companies and groups engaged in the fields of advertising, marketing and media in the Philippines, prescribe rules on the advertising activities of its members. Under the SRC, the Philippine SEC has jurisdiction and supervision over all corporations, partnerships or associations that are grantees of primary franchises, license to do business or other secondary licenses. As the government agency regulating the Philippine securities market, the Philippine SEC issues regulations on the registration and regulation of securities exchanges, the securities market, securities trading, the licensing of securities brokers and dealers and reportorial requirements for publicly listed companies and the proper application of SRC provisions, as well as the Corporation Code, and certain other statutes. ENVIRONMENTAL MATTERS The operations of the Company are subject to various Philippines legislation, which are promulgated for the protection of the environment. The Company is required to comply with the provisions of the Philippine Environmental Impact Statement System (EIS Law). The EIS Law is the general regulatory framework for any project or undertaking that is either (i) classified as environmentally critical; or (ii) is situated in an environmentally critical area. The law is implemented by the DENR. Under the EIS Law, an entity that will undertake any such declared environmentally critical project or operate in any such declared environmentally critical area is required to submit an Environmental

111

Impact Statement and secure an Environmental Compliance Certificate (ECC). This ECC requirement is applicable to each of the five (5) breweries that the Company operates throughout the Philippines. The Company is also subject to the provisions of the Philippine Clean Water Act of 2004 (Clean Water Act) and its implementing rules and regulations. The Clean Water Act requires the Company to secure a wastewater discharge permit, which authorizes it to discharge liquid waste and/or pollutants of specified concentration and volume from its breweries into any water or land resource for a specified period of time. The Environmental Management Bureau of the DENR is responsible for issuing discharge permits and monitoring and inspection of the facilities of the grantee of the permit. The provisions of the Philippine Clean Air Act and its implementing rules and regulations are likewise applicable to the Company. The Clean Air Act provides that before any business may be allowed to operate facilities and equipment, which emit regulated air pollutants, the establishment must first obtain a Permit to Operate Air Pollution Source and Control Installations. The Environmental Management Bureau is responsible for issuing permits to operate air pollution source and control installations as well as monitoring and inspection of the facilities of the grantee of the permit. Other regulatory environmental laws and regulations applicable to the Company are as follows: The Water Code, which governs the appropriation and use by any entity of water within the Philippines. Water permits are issued by the National Water Resources Board. Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990 and its implementing rules and regulations, which requires waste generators to register with the Environmental Management Bureau. The law aims to regulate the management of hazardous wastes generated by various establishments such as the Company.

112

GENERAL CORPORATE INFORMATION INCORPORATION The Company is duly organized as a corporation under the laws of the Philippines and was registered with the Philippine SEC on July 26, 2007. PRIMARY PURPOSE The Companys amended articles of incorporation provide that its primary purpose is to engage in and carry out the business of manufacturing fermented and malt-based beverages, particularly, beer of all kinds and classes, beer yeast (cerevicina), malt extract and carbonic gas, and the preparation, purchase and sale of malt, barley and other cereals, flour, yeast and other products which might be used in connection with the said business or manufacture. Under Philippine law, a corporation may invest its funds in any other corporation or business for any purpose other than the primary purpose for which it was organized when approved by a majority of the Board of Directors and ratified by the shareholders representing at least two-thirds of the outstanding capital stock, at a shareholders meeting duly called for the purpose; provided, however, that where the investment by the corporation is reasonably necessary to accomplish its primary purpose, the approval of the shareholders shall not be necessary. CAPITALIZATION Upon its incorporation on July 26, 2007, the Company had an authorized capital stock of P100,000,000 divided into 1,000,000 Common Shares with a par value of P 100.00 per share. SMC and its nominee directors subscribed to 250,000 Common Shares and paid P 25,000,000. Pursuant to the approval by the Philippine SEC on September 27, 2007, the authorized capital stock of the Company was increased to P 25,000,000,000 and the par value of the Common Shares was decreased from P 100.00 to P 1.00 per Common Share. SMC subscribed to an additional 15,308,416,960 Common Shares in the Company at a par value of P 1.00 per share in exchange for the net assets of the domestic beer business of SMC with a net book value P 15,308,416,960.00 effective October 1, 2007 pursuant to a Master Deed of Assignment of Domestic Beer Assets dated August 23, 2007 between SMC and the Company as amended by an Amendment to the Master Deed of Assignment of Domestic Beer Assets between the same parties dated September 7, 2007. On October 8, 2007, the Company issued 5,000 Common Shares to each of its two independent directors. SHAREHOLDERS MEETINGS Annual or Regular Shareholders Meetings The annual meeting of the shareholders of the Company for the election of directors and for the transaction of such business as may be properly come before the meeting, shall be held at the principal office of the Company or at any place designated by the Board of Directors in Mandaluyong City on the first Tuesday of May of each year. Special Shareholders Meetings A special meeting of the shareholders of the Company, for any purpose or purposes, may be called any time by any of the following: (a) Board of Directors, at its own instance, or at the written request of shareholders representing a majority of the outstanding capital stock, or (b) the President. Quorum Unless otherwise provided by law, the holders of a majority of the outstanding capital stock of the Company, in person or by proxy at any meeting of the shareholders shall constitute a quorum for the transaction of business. If no quorum is constituted, the meeting shall be adjourned until

113

shareholders who own or hold the requisite amount of capital stock shall be present or represented. Every decision of the shareholders representing a majority of the outstanding capital stock present or duly represented at a meeting at which there is a quorum shall be valid as a corporate act, except in cases where the vote of shareholders representing a higher percentage of outstanding capital stock is required by law or the Companys amended by-laws. Voting Unless otherwise provided by law, each shareholder shall at every meeting of the shareholders entitled to one vote, in person or by proxy, for each Common Share held by such shareholder. At meetings of the shareholders, all elections and all matters, except as may be otherwise provided law or by the articles of incorporation of the Company, shall be resolved by a majority vote shareholders present, in person or by proxy and entitled to vote thereat, a quorum being present. Proxies At all meetings of the shareholders, a shareholder may vote in person or by proxy. Unless otherwise provided in the proxy, it shall be valid only for the meeting at which it has been presented to the secretary of the Company. Under the Companys amended by-laws, all proxies must be in the hands of the secretary of the Company before the time set for the meeting. Such proxies filed with the secretary may be revoked by the shareholder either in an instrument in writing duly presented and recorded with the secretary prior to a scheduled meeting or by their personal appearance at the meeting. Fixing of Record Date Under the Companys amended by-laws, the Board of Directors may provide that the stock and transfer books of the Company be closed for a period not to exceed 20 days for the purpose of determining the shareholders entitled to notice of, or to vote at, any meeting of the shareholders or any adjournment thereof, or to receive payment of any dividend, or making a determination of shareholders for any other purpose. If the stock and transfer books be closed for the purpose of determining shareholders entitled to notice of, or to vote at, a meeting of shareholders, such books shall be closed for at least 10 working days immediately preceding such meeting. In lieu of closing the stock and transfer books, the Board of Directors of the Company may fix in advance a record date which shall in no case be more than 20 days prior to the date on which the particular action requiring such determination of shareholders is to be taken, except in instances where applicable rules and regulations provide otherwise. BOARD OF DIRECTORS Powers and functions Unless otherwise provided by law, the corporate powers of the Company shall be exercised, all its business is conducted and all its property is controlled by the Board of Directors. Election The amended articles of incorporation of the Company provides for nine directors. The Board of Directors shall be elected during each regular or annual shareholders meeting at which shareholders representing at least a majority of the outstanding capital stock of the Company are present, either in person or by proxy. Quorum Five directors, which is a majority of the number of directors of the Company as fixed in its articles of incorporation, constitute a quorum for the transaction of corporate business. Except for the election of officers, which shall require the vote of a majority of all the members of the Board of Directors, every decision of at least a majority of the directors present at a meeting at which there is a quorum shall be valid as a corporate act. be all by of

114

Vacancy Any vacancy occurring in the Board of Directors, other than by removal of a director by the shareholders or by expiration of term, may be filled by a vote of at least a majority of the remaining directors, if still constituting a quorum; otherwise, the vacancy must be filled by the shareholders at a meeting duly called for the purpose. Any director elected in this manner by the Board of Directors shall serve only for the unexpired term of the director whom such director replaces. Any vacancy in the Board of Directors resulting from an increase in the number of directors shall be filled only by an election at a regular or at a special shareholders meeting duly called for the purpose, or in the same meeting authorizing the increase of directors if so stated in the notice of the meeting. On the other hand, any vacancy in the Board of Directors resulting from the removal of a director by the shareholders in the manner provided by law may be filled by election of a new director at the same meeting of shareholders without further notice, or at any meeting of the shareholders duly called for the purpose after giving notice. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Record and Beneficial Owners Owners of more than 5% of the Companys voting securities as of the date of this prospectus are as follows:
Name, Address of Record Owner and Relationship with Issuer Name of Beneficial Owner and Relationship with Record Owner

Title of Class

Citizenship

Number of Shares Held

Percent

Common

San Miguel Corporation 40 San Miguel Avenue, Mandaluyong City 1550 Philippines, parent company

Not applicable.

Filipino

15,333,416,960

100.00%(1)

(1) Each of the two independent directors holds 5,000 Common Shares.

Security Ownership of Management The following are the number of Common Shares comprising the Companys capital stock (all of which are voting shares) owned of record by the directors and key executive officers of the Company, as of the date of this prospectus:
Title of Class Name of Owner Amount and Nature of Ownership Citizenship %

Common Common Common Common Common Common Common Common Common

Ramon S. Ang Ferdinand K. Constantino Francis H. Jardeleza Virgilio S. Jacinto Joseph N. Pineda Roberto N. Huang Rosabel Socorro T. Balan Iigo Zobel Carmelo L. Santiago

5,000 (Direct) 5,000 (Direct) 5,000 (Direct) 5,000 (Direct) 5,000 (Direct) 5,000 (Direct) 5,000 (Direct) 5,000 (Direct) 5,000 (Direct)

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

(1) (1) (1) (1) (1) (1) (1) (1) (1)

(1) Shareholding represents less than 0.01% of the Companys capital stock.

115

Except for the two independent directors, each of whom hold 5,000 Common Shares, all directors are nominees of the Company and hold nominee shares in their names. The beneficial ownership of the nominee shares held by such nominee directors remain with the Company. VOTING TRUST HOLDERS OF 5% OR MORE As of the date of this prospectus, there were no persons holding more than 5% of the Common Shares under a voting trust or similar agreement. CHANGES IN CONTROL The amended articles of incorporation and amended by-laws of the Company contain no provisions, which may delay, defer or in any manner prevent a change in control of the Company. It is expected that upon completion of the Combined Offer, SMCs ownership of the Companys Common Shares will allow it to control the Company.

116

THE PHILIPPINE STOCK MARKET BRIEF HISTORY The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was selfregulating, governed by its respective Board of Governors elected annually by its members. Several steps initiated by the Government have resulted in the unification of the two bourses into the PSE. The PSE was incorporated in 1992 by officers of both the Makati and the Manila Stock Exchanges. In March 1994, the licenses of the two exchanges were revoked. While the PSE maintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked by an automated trading system which integrates all bid and ask quotations from the bourses. In June 1998, the Philippine SEC granted the PSE Self-Regulatory Organization status, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies. On August 8, 2001, PSE completed its demutualization, converting from a non-stock membergoverned institution into a stock corporation in compliance with the requirements of the SRC. The PSE has an authorized capital stock of P 36.8 million, of which P 15.3 million is subscribed and fully paid-up. Each of the 184 member-brokers was granted 50,000 common shares of the new PSE at a par value of P 1.00 per share. In addition, a trading right evidenced by a Trading Participant Certificate was immediately conferred on each member broker allowing the use of the PSEs trading facilities. As a result of the demutualization, the composition of the PSE Board of Governors was changed, requiring the inclusion of seven brokers and eight non-brokers, one of whom is the President. On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of a series of reforms aimed at strengthening the Philippine securities industry. Classified into financial, industrial, holding firms, property, services, and mining and oil sectors, companies are listed either on the PSEs First Board, Second Board or the Small and Medium Enterprises Board. Each index represents the numerical average of the prices of component stocks. The PSE has an index, referred to as the PHISIX, which as at the date thereof reflects the price movements of selected stocks listed on the PSE, based on traded prices of stocks from the various sectors. The PSE shifted from full market capitalization to free float market capitalization effective April 3, 2006 simultaneous with the migration to the free float index and the renaming of the PHISIX to PSEi. The PSEi includes 30 selected stocks listed on the PSE. With the increasing calls for good corporate governance, PSE has adopted an online daily disclosure system to improve the transparency of listed companies and to protect the investing public.

117

The table below sets out movements in the composite index from 1995 up to the end of 2007, and shows the number of listed companies, market capitalization, and value of shares traded for the same period:
Composite Index at Closing Number of Listed Companies Aggregate Market Capitalization (in P billions) Combined Value of Turnover (in P billions)

Year 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,594.2 3,170.6 1,869.2 1,968.8 2,142.9 1,494.5 1,168.1 1,018.4 1,442.2 1,822.8 2,096.0 2,982.5 3,621.6

205 216 221 221 226 230 232 234 236 236 237 240 244

P 1,545.7 2,121.1 1,261.3 1,373.7 1,938.6 2,577.6 2,142.6 2,083.2 2,973.8 4,766.2 5,948.37 7,172.8 7,978.5

P 379.0 668.9 588.0 408.7 713.9 357.6 159.5 159.7 145.4 206.6 383.5 572.6 1,338.3

Source: Philippine Stock Exchange, Inc.

TRADING The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To trade, bids or ask prices are posted on the PSEs electronic trading system. A buy (or sell) order that matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders received by one broker at the same price are crossed at the PSE at the indicated price. Payment of purchases of listed securities must be made by the buyer on or before the third trading day (the settlement date) after the trade. Trading on the PSE starts at 9:30 am and ends at 12:00 pm with a 10-minute extension during which transactions may be conducted, provided that they are executed at the last traded price and are only for the purpose of completing unfinished orders. Trading days are Monday to Friday, except legal holidays and days when the BSP clearing house is closed. Minimum trading lots range from 10 to 5,000,000 shares depending on the price range and nature of he security traded. Odd-sized lots are traded by brokers on a board specifically designed for odd-lot trading. To maintain stability in the stock market, daily price swings are monitored and regulated. Under current PSE regulations, when the price of a listed security moves up by 50% or down by 40% in one day (based on the previous closing price or last posted bid price, whichever is higher), the price of that security is automatically frozen by the PSE, unless there is an official statement from the company or a government agency justifying such price fluctuation, in which case the affected security can still be traded but only at the frozen price. If a company fails to submit such explanation, a trading halt is imposed by the PSE on the listed security the following day. Resumption of trading shall be allowed only when the disclosure of the company is disseminated, subject again to the trading ban. SETTLEMENT The Securities Clearing Corporation of the Philippines (SCCP) is a wholly-owned subsidiary of the Philippine Stock Exchange, Inc., and was organized primarily as a clearance and settlement agency

118

for SCCP-eligible trades executed through the facilities of the PSE. It is responsible for (a) synchronizing the settlement of funds and the transfer of securities through Delivery versus Payment (DVP) clearing and settlement of transactions of Clearing Members, who are also Trading Participants of the Philippine SEC; (b) guaranteeing the settlement of trades in the event of a Trading Participants default through the implementation of its Fails Management System and administration of the Clearing and Trade Guaranty Fund (CTGF), and; (c) performance of Risk Management and Monitoring to ensure final and irrevocable settlement. SCCP settles PSE trades on a 3-day rolling settlement environment, which means that settlement of trades takes place three (3) business days after transaction date (T+3). The deadline for settlement of trades is 12:00 noon of T+3. Securities sold should be in scripless form and lodged under PDTCs book entry system. Each Trading Participant maintains a Cash Settlement Account with one of the two existing Settlement Banks of SCCP which are Banco de Oro Unibank, Inc. and Rizal Commercial Banking Corporation. Payment for securities bought should be in good, cleared funds and should be final and irrevocable. Settlement is presently on a broker level. SCCP implemented its new clearing and settlement system called Central Clearing and Central Settlement (CCCS) on May 29, 2006. CCCS employs multilateral netting whereby the system automatically offsets buy and sell transactions on a per issue and a per flag basis to arrive at a net receipt or a net delivery security position for each Clearing Member. All cash debits and credits are also netted into a single net cash position for each Clearing Member. Novation of the original PSE trade contracts occurs, and SCCP stands between the original trading parties and becomes the Central Counterparty to each PSE-Eligible trade cleared through it. SCRIPLESS TRADING In 1995, PDTC (formerly the Philippine Central Depository, Inc.) was organized to establish a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional license by the SEC to act as a central securities depository. All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The depository service of the PDTC provides the infrastructure for lodgment and upliftment of securities, pledge of securities, securities lending and borrowing and corporate actions including shareholders meetings, dividend declarations and rights offerings. The PDTC also provides depository and settlement services for non-PSE trades of listed equity securities. For transactions on the PSE, the security element of the trade will be settled through the book-entry system, while the cash element will be settled through the current settlement banks, Rizal Commercial Banking Corporation and Banco de Oro Unibank, Inc. In order to benefit from the book-entry system, securities must be immobilized into the PDTC system through a process called lodgment. Lodgment is the process by which shareholders transfer legal title (but not beneficial title) over their shares of stock in favor of the PCD Nominee, a corporation wholly owned by the PDTC whose sole purpose is to act as nominee and legal title holder of all shares of stock lodged into the PDTC. Immobilization is the process by which the warrant or share certificates of lodging holders are cancelled by the transfer agent and a Jumbo Certificate is issued in the name of the PCD Nominee. This trust arrangement between the participants and PDTC through the PCD Nominee is established by and explained in the PDTC Rules and Operating Procedures approved by the Philippine SEC. No consideration is paid for the transfer of legal title to PCD Nominee. Once lodged, transfers of beneficial title of the securities are accomplished via book-entry settlement. Under the current PDTC system, only participants (e.g., brokers and custodians) will be recognized by the PDTC as the beneficial owners of the lodged equity securities. All lodgments, trades and uplifts on these shares will have to be coursed through a participant. Ownership and transfers of beneficial interests in the shares will be reflected, with respect to the participants aggregate holdings, in the PDTC system, and with respect to each beneficial owners holdings, in the records of the participants. Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the lodged shares, they must rely on their participant-brokers and/or participant-custodians.

119

Any beneficial owner of shares who wishes to trade his interests in the shares must course the trade through a participant. The participant can execute PSE trades and non-PSE trades of lodged equity securities through the PDTC system. All matched transactions in the PSE trading system will be fed through the SCCP and into the PDTC system. Once it is determined on the settlement date (trading date plus three trading days) that there are adequate securities in the securities settlement account of the participant-seller and adequate cash or an appropriate bank limit in the system cash account of the participant-buyer, the PSE trades are automatically settled in the PDTC system, in accordance with the PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the securities is transferred from the participant-seller to the participant-buyer without the physical transfer of stock certificates covering the traded securities. If a shareholder wishes to withdraw his stockholdings from the PDTC system, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the shareholder the legal title to the shares lodged by surrendering the jumbo certificate of PCD Nominee to a transfer agent which then issues a new stock certificate in the name of the shareholder and a new jumbo certificate of PCD Nominee for the balance of the lodged shares. The expenses for upliftment are on the account of the uplifting shareholder. The SCCP launched its Central Clearing and Settlement System (CCSS) in May 2006. Under this system, the current securities infrastructure in the Philippines is composed of a depositary and a registry system wherein listed shares are traded and settled as book-entry shares. The difference between the depositary and the registry would be on the recording of ownership of the shares in the issuing corporations books. In the depository set-up, shares are simply immobilized, wherein customers certificates are cancelled and a new jumbo certificate is issued in the name of PCD Nominee. Transfers among/ between broker and/or custodian accounts, as the case may be, will only be made within the bookentry system of PDTC. However, as far as the issuing corporation is concerned, the underlying certificates are in the nominees name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing companys transfer agents books or system. Likewise, recording will already be at the beneficiary level (whether it be a client or a registered custodian holding securities for its clients), thereby removing from the broker its current de facto custodianship role. The option of whether a listed security should be housed in the depositary or registry is at the issuers discretion. The migration from the depositary to the registry model aims to eliminate the legal and operational risks brought about by a depositary infrastructure. Likewise, the migration is expected to strengthen measures to protect public investors/shareholders and decrease transaction costs resulting from additional layers in the settlement process. The move will also prepare an infrastructure for a complete name-on registry system. The PSE and the SCCP expect a natural migration to the registry model, with system and cost efficiency as the catalyst, and the market itself initiating the move. Once the CCSS is in place, custodians holding Philippine listed equity securities will have the following options: Stay with the depositary for all its securities, whereby PDTC acts as their implied Custodian. For shares under the PDTC, custodians are direct PDTC account holders, however; with the shares still recorded in the PCD Nominee name as far as the corporation/transfer agent is concerned; for shares under the registry, the custodian appears to be a client under PCD, such that shares are recognized or recorded with PCD as the master/controlling account. Be a system participant of the SCCP wherein the CCSS would offer to the custodians the interface to both the depositary and registry systems. In this option, for shares under the PDTC, custodians will still have the option to maintain their own accounts in the PDTC or have an omnibus account together with the broker accounts in the PDTC as shares are accounted for or segregated per account holder in the CCSS. This simplifies the custodians interface into only one connectivity for both the depositary and the registry systems; for shares under the registry system, the custodian will have its own master account, having the control over its own account.

120

In the registry scenario, custodians are already recognized as the beneficiary holder of the securities on behalf of its clients. The custodian effectively is given a direct relationship with the issuing company wherein it receives the annual reports, dividends, and other communications and information directly. Prospectively, when the custodian is accredited as an indirect clearing member of the SCCP, straight-through processing of trades or settlement can already be done directly with the custodian or with its client. ISSUANCE OF CERTIFICATED SHARES On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply to PDTC through his broker or custodian-participant for a withdrawal from the book-entry system and return to the conventional paper-based settlement. If a shareholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the shareholder the legal title to the shares lodged by surrendering the Jumbo Certificate of the PCD Nominee to a transfer agent which then issues a new stock certificate in the name of the uplifting shareholder and a new Jumbo Certificate to the PCD Nominee for the balance of the lodged shares. The expenses for upliftment are for the account of the uplifting shareholder. Upon the issuance of certificated shares in the name of the person applying for upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement system, and trading on such shares will follow the normal process for settlement of certificated securities. The expenses for upliftment of beneficial ownership in the shares to certificated securities will be charged to the person applying for upliftment. Pending completion of the upliftment process, the beneficial interest in the shares covered by the application for upliftment is frozen and no trading and book-entry settlement will be permitted until certificated shares shall have been issued by the relevant companys transfer agent.

121

PHILIPPINE INVESTMENT, FOREIGN OWNERSHIP AND EXCHANGE CONTROLS REGISTRATION OF FOREIGN INVESTMENTS AND EXCHANGE CONTROLS BSP regulations require registration of investments in Philippine securities if the foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits, and earnings that accrue on such investments will be sourced from the Philippine banking system. If the foreign exchange required to service capital repatriation or dividend remittance will be sourced outside the Philippine banking system, registration is not required. BSP Circular No. 471 (Series of 2005) subjects foreign exchange dealers and money changers to Republic Act No. 9160 (the AntiMoney Laundering Act of 2001, as amended) and requires these non-bank sources of foreign exchange to require foreign exchange buyers to submit, among others, the original BSP registration document in connection with their application to purchase foreign exchange exceeding US$5,000 for purposes of capital repatriation and remittance of dividends. Registration of Philippine securities listed on the PSE may be done with the BSP or through an investors custodian bank which shall issue a registration document on behalf of the BSP. A custodian bank may be any commercial bank or offshore banking unit in the Philippines appointed by the investor to register the investment, hold shares for the investor, and represent the investor in all necessary actions in connection with the investment in the Philippines. Applications for registration must be accompanied by the following: (i) purchase invoice or subscription agreement and/or proof of listing on the PSE; (ii) credit advice or bank certificate showing the amount of foreign currency inwardly remitted and converted to pesos through a commercial bank; and (iii) in certain instances, transfer instructions from the shareholder or dealer, as the case may be. Upon registration of the investment, proceeds of divestments or dividends, of registered investments may be repatriated or remitted immediately and in full through the Philippine banking system, net of applicable taxes, without need of BSP approval. Remittance is allowed upon presentation to the authorized agent bank of the BSP of the BSP registration document, at the exchange rate applicable on the date of the actual remittance. Pending repatriation or reinvestment, divestment proceeds, as well as dividends of registered investments, may be lodged temporarily in interest-bearing deposit accounts. Interest thereon, net of taxes, may also be remitted in full. Divestment proceeds or dividends of registered investments may be reinvested in the Philippines if the investments are registered with the BSP or the investors custodian bank. The Monetary Board of the BSP may, with the approval of the President of the Philippines, temporarily suspend or restrict the sale of foreign exchange in the imminence of or during a foreign exchange crisis, or in times of national emergency. Furthermore, there can be no assurance that BSP foreign exchange regulations will not be made more restrictive in the future. The registration with the BSP of all foreign investments in the Offer Shares shall be the responsibility of the foreign investor. RESTRICTION ON FOREIGN OWNERSHIP The Company is not subject to any foreign equity restrictions because it is not engaged in any business activity nor in possession of an asset that would attract the applicability of foreign ownership restrictions under Philippine law.

122

PHILIPPINE TAXATION The following is a general description of certain Philippine tax aspects of the investment in the Company. This discussion is based upon laws, regulations, rulings, income tax conventions treaties administrative practices and judicial decisions in effect at the date of this prospectus. Subsequent legislative, judicial or administrative changes or interpretations may be retroactive and could affect the tax consequences to the prospective investor. The tax treatment of a prospective investor may vary depending on such investors particular situation and certain investors may be subject to special rules not discussed below. This summary does not purport to address all tax aspects that may be important to an investor. This general description does not purport to be a comprehensive description of the Philippine tax aspects of the investment in the Offer Shares and no information is provided regarding the tax aspects of acquiring, owning, holding or disposing of the Offer Shares under applicable tax laws of other applicable jurisdictions and the specific Philippine tax consequence in light of particular situations of acquiring, owning, holding and disposing of the Offer Shares in such other jurisdictions. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE OFFER SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF LOCAL AND NATIONAL TAX LAWS. As used in this Section, the term resident alien refers to an individual whose residence is within the Philippines and who is not a citizen thereof. A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen thereof; a non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a non-resident alien engaged in trade or business in the Philippines; otherwise, such non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year is considered a non-resident alien not engaged in trade or business in the Philippines. A domestic corporation is created or organized under the laws of the Philippines; a resident foreign corporation is a non-Philippine corporation engaged in trade or business in the Philippines; and a non-resident foreign corporation is a non-Philippine corporation not engaged in trade or business in the Philippines. CORPORATE INCOME TAX A domestic corporation is subject to a tax of 35% (currently scheduled to be reduced to 30% beginning in 2009) of its taxable income (gross income less allowable deductions) from all sources within and outside the Philippines except, among others, (a) gross interest income from Philippine currency bank deposits and yield from deposit substitutes, trust funds and similar arrangements as well as royalties from sources within the Philippines which are generally taxed at the lower final withholding tax rate of 20% of the gross amount of such income; and (b) interest income from depository bank under the expanded foreign currency deposit system which is subject to a final tax at the rate of 7.5% of such income. A minimum corporate income tax of 2% on gross income as of the end of the taxable year is imposed on a domestic corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the ordinary income tax for the taxable year. Nevertheless, any excess of the MCIT (as defined in the Glossary of Terms of this prospectus) over the ordinary corporate income tax shall be carried forward and credited against the latter for the three immediately succeeding taxable years. Further, subject to certain conditions, the MCIT may be suspended with respect to a corporation which suffers losses on account of a prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

123

TAX ON DIVIDENDS Cash and property dividends received from a domestic corporation by individual shareholders who are either citizens or residents of the Philippines are subject to income tax at the rate of 10%. Cash and property dividends received by non-resident alien individuals engaged in trade or business in the Philippines from a domestic corporation are subject to a 20% tax on the gross amount thereof, while cash and property dividends received by non-resident alien individuals not engaged in trade or business in the Philippines from a domestic corporation are subject to tax at 25% of the gross amount, subject, however, to the applicable preferential tax rates under tax treaties executed between the Philippines and the country of residence or domicile of such non-resident foreign individuals. Cash and property dividends received from a domestic corporation by another domestic corporation or by resident foreign corporations are not subject to tax while those received by non-resident foreign corporations (i.e. foreign corporations not engaged in trade or business in the Philippines) are subject to tax at the rate of 35%, which rate shall be decreased to 30% effective January 1, 2009. The 35% rate for dividends paid to a non-resident foreign corporation may be reduced depending on the country of residence of such foreign corporation if it has an existing tax treaty with the Philippines. A country with a tax treaty may have a reduced preferential tax rate depending on the provisions of the corresponding tax treaties. The 35% rate may be reduced to 15% if (i) the country in which the non-resident foreign corporation is domiciled imposes no tax on foreign-sourced dividends or (ii) the country of domicile of the non-resident foreign corporation allows a credit against the tax due from the non-resident foreign corporation, for taxes deemed to have been paid in the Philippines equivalent to 20% (or 15% beginning on January 1, 2009), which represents the difference between the regular income tax of 35% and the 15% tax on dividends. Stock dividends distributed pro-rata to any holder of shares of stock are not subject to Philippine income tax. However, the sale, exchange or disposition of shares received as stock dividends by the holder is subject to the capital gains or stock transaction tax. Philippine tax authorities have prescribed certain procedures, through an administrative issuance, for availment of tax treaty relief. Subject to the approval by the Philippine Bureau of Internal Revenue (BIR) of the recipients application for tax treaty relief, the Company shall withhold taxes at a reduced rate on dividends to be paid to a nonresident holder, if such non-resident holder provides the Company with proof of residence and if applicable, individual or corporate status. Proof of residence for an individual consists of certification from his embassy, consulate, or other equivalent certifications issued by the proper government authority, or any other official document proving residence. If the regular tax rate is withheld by the Company instead of the reduced rates applicable under a treaty, the non-resident holder of the shares may file a claim for refund from the BIR. The refund process in the Philippines requires the filing of an administrative claim with the tax authorities and the submission of supporting information, and may also involve the filing of a judicial appeal. SALE, EXCHANGE OR DISPOSITION OF SHARES Capital Gains Tax Net capital gains realized by a resident or non-resident other than a dealer in securities during each taxable year from the sale, exchange or disposition of shares of stock outside the facilities of the PSE, unless an applicable treaty exempts such gains from tax or provides for preferential rates, are subject to tax as follows: 5% on gains not exceeding P 100,000 and 10% on gains over P 100,000. The rate of tax is the same for both individual and corporation regardless of nationality and domicile. Gains from the sale or disposition of shares in a Philippine corporation may be exempt from capital gains tax or subject to a preferential rate under a tax treaty as noted above. The transfer of shares shall not be recorded in the books of the Company unless the BIR certifies that capital gains and documentary stamp taxes relating to the transfer have been paid or other conditions have been met.

124

Taxes on Transfer of Shares Listed and Traded at the Philippine Stock Exchange A sale or other disposition of shares of stock through the facilities of the PSE by a resident or a non-resident holder, other than a dealer in securities, is subject to a stock transaction tax at the rate of 0.5% of the gross selling price or gross value in money of the shares of stock sold or otherwise disposed, unless an applicable treaty exempts such sale from said tax. Said tax shall be paid by the selling stockbroker on behalf of its client. The stock transaction tax is classified as a percentage tax and is paid in lieu of capital gains tax. In addition, a VAT of 12% is imposed on the commission earned by the PSE-registered broker. DOCUMENTARY STAMP TAX The original issue of shares of stock is subject to documentary stamp tax of P 1.00 for each P 200.00 par value or a fraction thereof, of the shares of stock issued. On the other hand, the sale, transfer or other disposition of shares of stock (including the re-issuance of previously redeemed shares of stock) is subject to a documentary stamp of P 0.75 for each P 200.00 par value or a fractional part thereof of the shares sold, transferred or otherwise disposed of. However, for a period of five years from March 20, 2004, the sale, barter or exchange of shares of stock listed and traded at the PSE shall be exempt from documentary stamp tax. In addition, the borrowing and lending of securities which will be executed under the securities borrowing and lending program to be implemented by a registered exchange, or which are in accordance with regulations prescribed by the appropriate regulatory authority, will likewise be exempt from documentary stamp tax. However, the securities borrowing and lending agreement should be duly covered by a master securities borrowing and lending agreement acceptable to the appropriate regulatory authority, and should be duly registered and approved by the BIR. Otherwise, such agreement would be subject to the documentary stamp tax. ESTATE AND GIFT TAXES The transfer of shares of stock of a Philippine corporation upon the death of an individual holder to his heirs by way of succession, whether such holder was a citizen of the Philippines or an alien, regardless of residence, is subject to Philippine taxes at progressive rates ranging from 5% to 20%, if the net estate is over P 200,000. Individual and corporate holders, whether or not citizens or residents of the Philippines, who transfer shares of stock by way of gift or donation are liable to pay Philippine donors tax on such transfer of shares ranging from 2% to 15% of the net gifts during the year exceeding P 100,000. The rate of tax with respect to net gifts made to a stranger (i.e., one who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of relationship) is a flat rate of 30%. Estate and donors taxes, however, shall not be collected in respect of intangible personal property, such as shares of stock: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. TAXATION OUTSIDE THE PHILIPPINES Shares of stock in a domestic corporation are considered under Philippine law as situated in the Philippines and the gain derived from their sale is entirely from Philippine sources; hence such gain is subject to Philippine income tax and capital gains tax and the transfer of such shares by gift

125

(donation) or succession is subject to the donors or estate taxes stated above. Sales or other dispositions of shares of stock in a domestic corporation through the facilities of the PSE by a resident or a non-resident holder, other than a dealer in securities, are, however, subject to a stock transaction tax at the rate of 0.5% of the gross selling price or gross value in money of the shares of stock sold or otherwise disposed, unless an applicable treaty exempts such sale from said tax. The tax treatment of a non-resident holder of shares of stock in jurisdictions outside the Philippines may vary depending on the tax laws applicable to such holder by reason of domicile or business activities and such holders particular situation. This prospectus does not discuss the tax consideration on non-resident holders of shares of stock under laws other than those of the Philippines.

126

LEGAL MATTERS Certain Philippine legal matters in connection with the Combined Offer have been passed upon for the Company by SyCip Salazar Hernandez & Gatmaitan, Makati, Philippines, and for the International Underwriters and the Joint Domestic Lead Underwriters by Picazo Buyco Tan Fider & Santos, Makati, Philippines. Certain legal matters as to New York state and United States federal law have been passed upon for the Company by Cleary Gottlieb Steen & Hamilton LLP and for the International Underwriters, Citigroup Global Markets Limited, ATR KimEng Capital Partners, Inc., and DBS Bank Ltd. by Allen & Overy. None of SyCip Salazar Hernandez & Gatmaitan, Picazo Buyco Tan Fider & Santos, Cleary Gottlieb Steen & Hamilton LLP, or Allen & Overy have or will receive any direct or indirect interest in the Company or in any securities thereof (including options, warrants, or rights thereto) pursuant to, or in connection with, the Combined Offer. None of SyCip Salazar Hernandez & Gatmaitan, Picazo Buyco Tan Fider & Santos, Cleary Gottlieb Steen & Hamilton LLP, or Allen & Overy has acted or will act as promoter, underwriter, voting trustee, officer or employee of the Company.

127

EXPERTS Canadean, a leading global beverage research company, through a market study commissioned by the Company, provided certain information and statistics set forth in this prospectus. Canadean does not own any interests in the Company.

128

INDEPENDENT PUBLIC ACCOUNTANTS The pro forma financial statements of the Company as of and for the years ended December 31, 2007, 2006 and 2005, the historical financial statements as of and for the year ended December 31, 2007 derived from the Companys balance sheet as of December 31, 2007 and the statement of income, statement of changes in equity and statement of cash flows for the period from July 26, 2007 to December 31, 2007 combined with the statement of income, statement of changes in equity and statement of cash flows for the nine-month period ended September 30, 2007 derived from the carveout special purpose statements of SMBD, and the historical financial statements as of and for the years ended December 31, 2006 and 2005 derived from the carve-out special purpose statements of SMBD as of and for the years ended December 31, 2006, 2005 and 2004 including the notes thereto which are incorporated by reference included in this prospectus, have been examined and audited, as the case may be, without qualification by Manabat Sanagustin & Co., auditors as stated in their reports appearing herein. The Company has not had any disagreements on accounting and financial disclosures with its current external auditors for the same periods or any subsequent interim periods. Manabat Sanagustin & Co., one of the top four auditing firms in the Philippines, has acted as the auditors of San Miguel Corporation (SMC), the parent company where the historical information of SMBD was carved-out, since 2006. The shareholders approved the appointment of Manabat Sanagustin & Co. as the Companys external auditors upon the recommendation of the management. The Company has also engaged the services of Manabat Sanagustin & Co. for the public offering of its shares. The Companys management recommended and engaged Manabat Sanagustin & Co.s services based on their professionalism, efficient services and cost competitiveness. Jorge Ma. S. Sanagustin is the Lead Engagement Partner. Manabat Sanagustin & Co. has neither shareholdings in the Company nor any right, whether legally enforceable or not, to nominate persons or to subscribe for the securities in the Company. Manabat Sanagustin & Co. will not receive any direct or indirect interest in the Company or in any securities thereof (including options, warrants or rights thereto) pursuant to or in connection with the Combined Offer. The foregoing is in accordance with the Code of Ethics for Professional Accountants in the Philippines set by the Board of Accountancy and approved by the Professional Regulation Commission. AUDIT AND AUDIT-RELATED FEES The Companys audit and audit-related fees are as indicated in the table below:
(Peso in Millions)

Audit and Audit Related Fees Professional fees for services rendered in connection with the audit of the special purpose statements of net assets as of June 30, 2007 for purposes of filing with the Securities and Exchange Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees related to the carve-out special purpose statements as of and for the years ended December 31, 2006, 2005 and 2004, and as of and for the nine-month periods ended September 30, 2007 and 2006, the pro forma financial statements of the Company as of and for the years ended December 31, 2007, 2006, 2005 and 2004, and the statutory reports as of and for the period from July 26, 2007 to December 31, 2007 . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 3,150

14,444 P17,594

Apart from the foregoing, no other services were rendered or fees billed by the Companys auditors as of and for the years ended December 31, 2007, 2006, 2005 and 2004, and as of and for the nine-month periods ended September 30, 2007 and 2006. Manabat Sanagustin and Co. does not have any direct or indirect interest in the Company.

129

INDEX TO FINANCIAL STATEMENTS Page Examination Report of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Examined Pro Forma Balance Sheets as of December 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . Examined Pro Forma Statements of Income for the years ended December 31, 2007, 2006 and 2005 . . . . Examined Pro Forma Statements of Changes in Equity for the years ended December 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Examined Pro Forma Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Examined Pro-Forma Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A: Audited Financial Statements as of and for the period from July 26, 2007 to December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix B: Audited Carve-Out Special Purpose Statements as of and for the nine-month periods ended September 30, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix C: Audited Carve-Out Special Purpose Statements as of and for the years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 F-4 F-5 F-6 F-7 F-8 F-50 F-89 F-126

F-1

REPORT OF INDEPENDENT AUDITORS The Board of Directors San Miguel Brewery Inc. 40 San Miguel Avenue Mandaluyong City We have examined the pro forma financial information reflecting the transactions as described in Note 2 to the pro forma financial statements, including the appropriate adjustments to the historical amounts in the assembly of the accompanying pro forma balance sheets of San Miguel Brewery Inc. (the Company) [formerly the domestic beer division of San Miguel Corporation (SMC)] as of December 31, 2007, 2006 and 2005, and the pro forma statements of income, pro forma statements of changes in equity and pro forma statements of cash flows for each of the three years in the period ended December 31, 2007. The historical financial statements as of and for the year ended December 31, 2007 are derived from the Companys balance sheet as of December 31, 2007 and the statement of income, statement of changes in equity and statement of cash flows for the period from July 26, 2007 to December 31, 2007 combined with the statement of income, statement of changes in equity and statement of cash flows for the nine-month period ended September 30, 2007 derived from the carve-out special purpose statements of the domestic beer division of San Miguel Corporation. The historical financial statements as of and for the years ended December 31, 2006 and 2005 are derived from the carve-out special purpose statements of the domestic beer division of San Miguel Corporation as of and for the years ended December 31, 2006, 2005 and 2004. The historical financial statements as of and for the period from July 26, 2007 to December 31, 2007 and the carve-out special purpose statements as of and for the nine-month period ended September 30, 2007 and 2006 and the carve-out special purpose statements as of and for the years ended December 31, 2006, 2005 and 2004 were audited by us, of which our respective reports thereon dated February 4, 2008 and November 16, 2007, respectively, expressed unqualified opinion with respect to those statements which are attached and labeled as Appendices A, B and C, respectively. The pro forma adjustments are based on managements assumptions as described in Note 2 to the pro forma financial statements. The Companys management is responsible for the pro forma financial information. Our responsibility is to express an opinion on the pro forma financial information based on our examination. Our examination was conducted in accordance with the Philippine Standard on Assurance Engagements (PSAE) 3000, Assurance Engagements Other than Audits or Review of Historical Financial Information and Philippine Securities and Exchange Commission Memorandum Circular No. 2, Series of 2008, Guidelines on Reporting and Attestation of Pro Forma Financial Information and, accordingly, included such procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. The objective of this pro forma financial information is to show what the significant effects on the audited financial statements and audited carve-out special purpose statements might have been had the transactions described in Note 2 to the pro forma financial statements occurred at an earlier date. However, the pro forma financial statements are not necessarily indicative of the financial performance or related effects on the financial position and cash flows that would have been attained had the above-mentioned transactions actually occurred earlier.

F-2

In our opinion, managements assumptions to the pro forma information provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transactions described in Note 2 to the pro forma financial statements, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma column reflects the proper application of those adjustments to the audited financial statements and historical carve-out special purpose statements amounts in the pro forma balance sheets of the Company as of December 31, 2007, 2006 and 2005 and the pro forma statements of income, pro forma statements of changes in equity and pro forma statements of cash flows for each of the three years in the period ended December 31, 2007. MANABAT SANAGUSTIN & CO. [Original Signed] JORGE MA. S. SANAGUSTIN Partner CPA License No. 0030399 SEC Accreditation No. 0026-AR-1 Tax Identification No. 124-282-616 BIR Accreditation No. 08-001987-7-2007 Issued July 10, 2007; Valid until July 9, 2010 PTR No. 0988757 J Issued January 7, 2008 at Makati City February 4, 2008 Makati City, Metro Manila

F-3

SAN MIGUEL BREWERY INC. PRO FORMA BALANCE SHEETS (In Millions)
December 31 Note 2007 2006 2005

ASSETS Current Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 24 Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . 4, 6, 23, 24 Inventories net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 7 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . 8, 24 Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Assets Plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 9 4 4, 12 10

Q5,262 3,676 2,447 180 11,565 5,616 3 398 5,026 11,043 Q22,608

P978 4,692 3,202 469 9,341 5,660 4 420 5,240 11,324 P20,665

P994 4,935 3,169 268 9,366 6,017 285 5,268 11,570 P20,936

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . Payable to Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Liabilities Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligation under finance lease net of current portion . . . . . . . . Total Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11, 23, 24 18 12

Q2,360 3,202 1,710 7,272

P2,402 1,305 1,071 4,778 5 5 15,882 P20,665

P1,960 2,252 835 5,047 7 7 15,882 P20,936

23 4, 19

3 3

15,333 Q22,608

See Notes to the Pro Forma Financial Statements.

F-4

SAN MIGUEL BREWERY INC. PRO FORMA STATEMENTS OF INCOME (In Millions)
Years Ended December 31 Note 2007 2006 2005

SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

Q44,139 P40,565 P40,978 22,927 20,687 22,808 21,212 19,878 (8,666) 58 11,270 3,944 P7,326 P0.46 18,170 (8,936) 221 9,455 3,049 P6,406 P0.40

14 17

(8,939) 52 12,325 4,310 Q8,015

12

22

Q0.52

See Notes to the Pro Forma Financial Statements.

F-5

SAN MIGUEL BREWERY INC. PRO FORMA STATEMENTS OF CHANGES IN EQUITY (In Millions, Except for Par Value and Shares of Stock)
Years Ended December 31 Note 2007 2006 2005

CAPITAL STOCK P1 par value Authorized 25,000,000,000 shares Subscribed 15,333,426,960 shares in 2007 and 15,881,866,112 shares in 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RETAINED EARNINGS Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P15,333 8,015 (8,015) P15,333

P15,882 7,326 (7,326) P15,882

P15,882 6,406 (6,406) P15,882

2, 21

See Notes to the Pro Forma Financial Statements.

F-6

SAN MIGUEL BREWERY INC. PRO FORMA STATEMENTS OF CASH FLOWS (In Millions)
Years Ended December 31 Note 2007 2006 2005

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments for: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for doubtful accounts, inventory obsolescence and others . . . . Loss (gain) on sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income before working capital changes . . . . . . . . . . . . . . . . . . . . Decrease (increase) in: Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash generated from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Increase in other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Additions to plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES Increase in unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in obligations under finance lease . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS BEGINNING OF YEAR . . . . . . . CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . .

P12,325 15 17 17 1,652 254 1 (39) 14,193 1,243 274 289 (455) 415 15,959 (4,184) 11,775 (1,104) 16 (735) 39 (1,784) 3 (5) (5,705) (5,707) 4,284 978 P5,262

P11,270 1,621 327 (2) (3) 13,213 172 (290) (201) (504) 41

P9,455 1,612 147 (2) (3) 1 11,210 (2,808) 632 (92) 2,190 31

12,431 11,163 (3,884) (3,051) (1) 8,547 (817) 4 (427) 3 (1,237) (7,326) (7,326) (16) 994 P978 8,111 (914) 2 (798) 3 (1,707) (6,406) (6,406) (2) 996 P994

9 17

21

See Notes to the Pro Forma Financial Statements.

F-7

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (Amounts in Millions, Except Per Share Data) 1. REPORTING ENTITY San Miguel Brewery Inc. (the Company) [formerly the domestic beer division (Division) of San Miguel Corporation (SMC or the Parent Company)] was registered with the Philippine Securities and Exchange Commission (SEC) on July 26, 2007. The Company is engaged in manufacturing, selling and distribution of fermented and malt-based beverages. The registered office address of the Company is 40 San Miguel Avenue, Mandaluyong City, Philippines. SMC is the ultimate parent company. On July 24, 2007, the stockholders of SMC, during the annual stockholders meeting, approved the transfer of the Divisions assets to a wholly-owned subsidiary of SMC, the Company, in exchange for shares of stock. The transfer of the Divisions net assets to the Company is pursuant to the listing with the Philippine Stock Exchange (PSE) and the public offering of the shares of the Company. The actual transfer of the net assets as of June 30, 2007, excluding land, brands and income and other taxes payable in exchange for shares of stock took effect on October 1, 2007. The pro forma financial statements of the Company as of and for the years ended December 31, 2007, 2006 and 2005 were approved and authorized for issue by the Board of Directors on February 4, 2008. 2. BASIS OF PREPARATION The accompanying pro forma financial statements have been prepared as if the spin-off of the Company occurred starting January 1, 2004. The pro forma financial statements are based on the historical information of the Company as shown in the audited financial statements as of and for the period from July 26, 2007 to December 31, 2007, audited carve-out special purpose statements as of and for the nine-month period ended September 30, 2007 and audited carve-out special purpose statements as of and for the years ended December 31, 2006, 2005 and 2004, after giving effect to the assumptions and adjustments described below. The pro forma financial statements are presented in Philippine peso, which is the Companys functional and presentation currency, and all values are rounded to the nearest million (P 000,000), except when otherwise indicated. The accompanying pro forma financial statements are for informational purposes only and do not purport to present what the financial position, financial performance and cash flows would have been had the spin-off actually occurred on January 1, 2004 or purport to project the financial position, financial performance and cash flows for any future period. The pro forma adjustments arising from the transactions described in the succeeding paragraph represent the significant effects directly attributable to those transactions which have been determined based upon available information and certain assumptions that management believes to be reasonable. The accompanying pro forma financial statements assume that (i) SMC charged the Company shared services fee (professional and technical fees for services rendered by SMC to the Company); rental fee for the use of land owned by SMC; and royalty fee for the use of brands owned by SMC, (ii) the Company declared its net income for the year to SMC as cash dividends as shown in the pro forma statements of changes in equity and (iii) the balance of the Companys net assets as of December 31, 2003 is the beginning capital stock on January 1, 2004.

F-8

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Statement of Compliance The accompanying pro forma financial statements were based from the audited financial statements as of and for the period from July 26, 2007 to December 31, 2007, audited cave-out special purpose statement as of and for the nine-month period ended September 30, 2007 and audited carve-out special purpose statements as of and for the years ended December 31, 2006, 2005 and 2004, which were prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and Philippine interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).

F-9

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The following tables show the effects of the pro forma adjustments to the Companys audited financial statements as of and for the period from July 26, 2007 to December 31, 2007, audited carve-out special purpose statements of net assets as of and for the nine-month period ended September 30, 2007 and audited carve-out special purpose statements of net assets as of December 31, 2006, 2005 and 2004 and statements of income for each of the three years in the period ended December 31, 2006 and for the nine month period ended September 30, 2007. The Company started commercial operations on October 1, 2007.
September 30, December 31, September 30, 2007 2007 2007 Audited Carve- Transactions Carve-out Pro Forma out Amounts (3 months) Amounts Adjustments December 31 2007 Pro Forma Adjustments

Pro Forma Amounts

Balance Sheet Accounts ASSETS Current Assets Cash . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . Inventories net . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . Total Current Assets . . . . Noncurrent Assets Plant and equipment net . . . . . . . . Intangible assets . . . . . . . . . . . Deferred tax assets . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . .

P396 2,758 3,084 142 6,380

P5,262(a) 927 (373) 20 5,836

P5,658 3,685 2,711 162 12,216

(P396)(6) P5,262 (9)(6) (264)(6) 18(6) (651) 3,676 2,447 180 11,565

5,413 3 528 24,204 30,148 P36,528

22 10 (1,068)(b) (1,036) P4,800

5,435 3 538 23,136 29,112 P41,328 (P17,722)(1) (17,722) (P17,722)

181(6) (140)(6) (388)(6) (347) (P998)

5,616 3 398 5,026 11,043 P22,608

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses . . . . . . . . Payable to Parent Company . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . Noncurrent Liabilities Obligations under finance lease net of current portion . . . . . . . . . . . . . . . . Unearned income . . . . . . . . . . Total Noncurrent Liabilities . . . . . . . . . . . Equity Capital stock . . . . . . . . . . . . . Retained earnings . . . . . . . . . Total Equity . . . . . . . . . . .

P2,793

P914 892(c)

P3,707 892 1,752 6,351

(P909)(2)

(P438)(6) P2,360 2,310(5) 3,202 1,710 7,272

1,094 3,887

658 2,464

(56)(3) (965)

14(6) 1,886

(2) 3 1 25(a) 2,310(a) 2,335

3 3 25 2,310 2,335 P8,689 15,882(4) 15,882 P14,917 (574)(6) (2,310)(5) (2,884) (P998)

3 3 15,333 15,333 P22,608

P3,889

P4,800

F-10

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data)

(1) Represents the net amount due from/to SMC after payment of shared service fee, rental fee, royalty and dividend plus adjustments for tax and previously charged shared service fee (2) Represents the required contribution to the Companys retirement plan based on actuarial valuation (3) Represents effect of the adjustment to income tax payable (4) Represents Domestic Beer Divisions net assets as of December 31, 2003 (5) Represents the net income for the 4th quarter declared as cash dividends payable to SMC (6) Represents the difference between the net assets as of December 31, 2003 versus June 30, 2007 (a) Excess funds are now managed by the Company unlike before when all excess funds are transferred to the Parent Company (b) Reversal of third quarter income tax payable paid by the Parent Company and net acquisition and amortization of deferred containers expense (c) Includes payable to the Parent Company for royalty fee, shared service and land rental September 30, 2007 Audited Carve-out Amounts (9 months) December 31, 2007 Audited Financial Statements (3 months)

Combined Amounts

Pro Forma Adjustments

Pro Forma Amounts

Income Statement Accounts SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . . . . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . PROVISION FOR INCOME TAX . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . .

P31,959 16,594 15,365 (6,179) 1 9,187 3,215 P5,972

P12,180 6,333 5,847 (2,349) 51 3,549 1,239 P2,310

P44,139 22,927 21,212 (8,528) 52 12,736 4,454 P8,282 (P411)(7)

P44,139 22,927 21,212 (8,939) 52 12,325 4,310 P8,015

(144)(8) (P267)

(7) Represents the net effect of the following adjustments: Adjustments of the previously charged shared service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shared service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalty fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (P491) 157 116 629 P411

(8) Represents the tax effect of the adjustments

F-11

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data)
December 31, 2006 Audited Carveout Amounts Pro Forma Adjustments Pro Forma Amounts

Balance Sheet Accounts ASSETS Current Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Assets Plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P978 4,692 3,202 469 9,341 5,660 4 420 15,482 21,566 P30,907

P978 4,692 3,202 469 9,341 5,660 4 420 5,240 11,324

(P10,242)(1) (10,242)

(P10,242) P20,665

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . Payable to Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Liability Obligation under finance lease net of current portion . . . . . . . . . Equity Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P3,096 1,139 4,235 5 P4,240

(P694)(2) P2,402 1,305(1) 1,305 (68)(3) 1,071 543 4,778 5 15,882(4) P16,425 15,882 P20,665

(1) Represents the net amount due from/to SMC after payment of shared service fee, rental fee, royalty and dividend plus adjustments for tax and previously charged shared service fee (2) Represents contribution to the Companys retirement plan based on actuarial valuation (3) Represents effect of the adjustment to income tax payable (4) Represents Domestic Beer Divisions net assets as of December 31, 2003

F-12

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data)
December 31, 2006 Audited Carveout Amounts Pro Forma Adjustments Pro Forma Amounts

Income Statement Accounts SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) Represents the net effect of the following adjustments:

P40,565 20,687 19,878 (8,166) 58 11,770 4,119 P7,651

P40,565 20,687 19,878 (8,666) 58

(P500)(5)

(500) 11,270 (175)(6) 3,944 (P325) P7,326

Adjustments of the previously charged shared service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . Shared service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalty fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P662) 202 154 806 P500

(6) Represents the tax effect of the adjustments

F-13

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data)
December 31, 2005 Audited Carveout Amounts Pro Forma Adjustments Pro Forma Amounts

Balance Sheet Accounts ASSETS Current Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . Inventories net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Assets Plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P994 4,935 3,169 268 9,366 6,017 285 6,673 12,975 P22,341

P994 4,935 3,169 268 9,366 6,017 285 5,268 11,570 P20,936

(P1,405)(1) (1,405) (P1,405)

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . Payable to Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Liability Obligation under finance lease net of current portion . . . . . . . . Equity Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,438 880 3,318 7 P3,325

(P478)(2) 2,252(1) (45)(3) 1,729

P1,960 2,252 835 5,047 7

15,882(4) P17,611

15,882 P20,936

(1) Represents the net amount due from/to SMC after payment of shared service fee, rental fee, royalty and dividend plus adjustments for tax and previously charged shared service fee (2) Represents contribution to the Companys retirement plan based on actuarial valuation (3) Represents effect of the adjustment to income tax payable (4) Represents Domestic Beer Divisions net assets as of December 31, 2003

F-14

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data)
December 31, 2005 Audited Carveout Amounts Pro Forma Adjustments Pro Forma Amounts

Income Statement Accounts SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) Represents the net effect of the following adjustments:

P40,978 22,808 18,170 (8,390) 221 10,001 3,226 P6,775

P40,978 22,808 18,170 (8,936) 221 9,455 3,049 P6,406

(P546)(5)

(546) (177)(6) (P369)

Adjustments of the previously charged shared service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shared service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalty fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P630) 204 154 818 P546

(6) Represents the tax effect of the adjustments

3.

SIGNIFICANT ACCOUNTING POLICIES Adoption of New Standards, Amendments to Standards and Interpretations The FRSC approved the adoption of new standards, amendments to standards, and interpretations. New Accounting Standards Adopted in 2005 PAS 19, Employee Benefits , results in the use of the projected unit credit method in measuring retirement benefit expense and a change in the manner of computing benefit expense relating to past service cost and actuarial gains and losses. It requires the entity to determine the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity that the amounts recognized in the financial statements do not differ materially from the amounts that would be determined at balance sheet date. The Company chose to recognize the transitional liability arising from the change in accounting for benefits provided under the Parent Companys defined benefit plan as an expense on a straight line basis over five years from January 1, 2005 as permitted under PAS 19, Employee Benefits . PAS 32, Financial Instruments: Disclosure and Presentation , covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about an entitys financial instruments, whether recognized or unrecognized in the financial statements. New disclosure requirements include terms and conditions of financial instruments used by the entity, types of risks associated with both recognized and

F-15

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) unrecognized financial instruments (foreign exchange 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 the entitys financial risk management policies and objectives. The standard also requires financial instruments to be classified as debt or equity in accordance with their substance and not their legal form. PAS 39, Financial Instruments: Recognition and Measurement , establishes the accounting and reporting standards for the recognition and measurement of an entitys financial assets and financial liabilities. PAS 39 requires financial instruments at fair value through profit or loss to be recognized initially at fair value, including related transaction costs. Subsequent to initial recognition, an entity should measure financial assets at their fair values, except for loans and receivables and held-to-maturity investments, which are measured at amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at amortized cost, except for liabilities classified under fair value through profit and loss and derivatives, which are subsequently measured at fair value. PAS 39 also establishes the accounting and reporting standards requiring that every derivative instrument (including certain derivatives embedded in other contracts) be recorded in the balance sheets as either an asset or liability measured at its fair value. PAS 39 requires that changes in the derivatives fair value be recognized currently in the statements of income unless specific hedges allow a derivatives gains and losses to offset related results on the hedged item in the statements of income, or deferred in equity as Cumulative translation adjustments. PAS 39 requires the entity to formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. The Company availed of the exemption under PFRS 1, First-time Adoption of Philippine Financial Reporting Standards and applied PAS 39, Financial Statements: Recognition and Measurement , from January 1, 2005. The cumulative effect of adopting the standard was charged to the January 1, 2005 retained earnings. 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 that the cost of an item of property, plant and equipment should include the costs of its dismantlement, removal or restoration, the obligation for which the entity incurs as a consequence of installing the item or of using the item during a particular period for purposes other than to produce inventories during that period. PFRS states that depreciation should reflect the useful life of the significant components of the assets. Under previous GAAP, depreciation was based on the useful life determined for each category of plant and equipment. In 2005, there were changes in the useful lives of certain machinery and equipment which were accounted for as changes in estimates and recognized in the current and future years. Amendments to Standards and Interpretations Adopted in 2006 Starting January 1, 2006, the Company adopted the following new and amended PAS and Philippine interpretation: Amendment to PAS 19, Employee Benefits Actuarial Gains and Losses, Group Plans and Disclosures, provides an option for recognizing actuarial gains and losses in full in the period in which they occur, outside profit or loss. The amendment also (a) specifies how group entities should account for defined benefit group plans in their separate or individual financial statements and (b) requires entities to provide additional disclosures.

F-16

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Amendment to PAS 21, Effects of Changes in Foreign Exchange Rates , states that all exchange differences arising from a nonmonetary item that forms part of the entitys net investment in foreign operations are recognized in a separate component of equity in the financial statements regardless of the currency in which the monetary item is denominated. Amendment to PAS 39, Financial Instruments: Recognition and Measurement Cash Flow Hedge Accounting of Forecast Intragroup Transactions, permits the foreign currency risk of a highly probable intragroup forecast transaction to qualify as a hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into the transaction and that the foreign currency risk will affect the statements of income. Amendment to PAS 39, Financial Instruments: Recognition and Measurement The Fair Value Option, limits the fair value option to those financial instruments that meet the following conditions: where such designation eliminates or significantly reduces an accounting mismatch, when a group of financial assets, financial liabilities or both are managed and their performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy, and when an instrument contains an embedded derivative that meets particular conditions. Amendment to PAS 39, Financial Instruments: Recognition and Measurement Financial Guarantee Contracts, requires the issuer of a financial guarantee contract to measure the contract: initially at fair value and subsequently at the higher of (a) the amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets and (b) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with PAS 18, Revenue. However, if specified criteria are met, the issuer may use the fair value option in PAS 39. Philippine interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease , provides guidance for determining whether an arrangement, comprising a transaction or a series of related transactions, that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments, is or contains, a lease that should be accounted for in accordance with PAS 17, Leases .

The adoption of the above amendments to PAS and Philippine interpretation did not have a material effect on the Companys pro forma financial statements. New Standard, Amendments to Standards and Interpretations Adopted in 2007 Starting January 1, 2007, the Company adopted the following new standards and amended PAS and Philippine interpretations: PFRS 7, Financial Instruments: Disclosures, requires extensive disclosures about the significance of financial instruments for an entitys financial position and performance, and quantitative and qualitative disclosures on the nature and extent of risks. Amendment to PAS 1, Presentation of Financial Statements Capital Disclosures, requires additional disclosures regarding the entitys objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, requires that a reassessment of whether embedded derivative should be separated from the underlying host contract to be made only when there are changes to the contract that significantly modifies the cash flows.

F-17

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment, prohibits the reversal of impairment losses on certain financial assets recognized in interim financial reports even if the impairment is no longer present at the balance sheet date.

The Company availed of the exemption provided by FRSC under PFRS 7, Financial Instruments: Disclosures , giving transitional relief with respect to the presentation of comparative information for the new risk disclosures about the nature and extent of risks arising from financial instruments. The disclosures required under amendment to PAS 1, Presentation of Financial Statements Capital Disclosures are included in Note 23. The adoption of IFRIC 9, Reassessment of Embedded Derivatives , and IFRIC 10, Interim Financial Reporting and Impairment , did not have any material effect on the Companys pro forma financial statements. New and Revised Standards and Interpretations Not Yet Adopted The following are the new and revised standards and interpretations which are not yet effective as of December 31, 2007 and have not been applied in preparing the Companys pro forma financial statements: Revised PAS 1, Presentation of Financial Statements , the revised standards introduces total comprehensive income (i.e., changes in equity during a period, other than those changes resulting from transactions with owners in their capacity as owners), a statement of financial position (formerly balance sheet) is required at the beginning of the earliest comparative period following a change in accounting policy, the correction of an error or the reclassification of items in the financial statements , reclassification adjustments to profit or loss of amounts previously recognized in other comprehensive income (formerly recycling) are disclosed for each component of other comprehensive income, income tax is disclosed for each component of other comprehensive income and dividends and related per-share amounts are disclosed either on the face of the statement of changes in equity or in the notes to the financial statements. The revised standard will be effective beginning on January 1, 2009. PFRS 8, Operating Segments, requires an entity to adopt the management approach in reporting segment information. This will be effective January 1, 2009 and will replace PAS 14, Segment Reporting . It is required for adoption only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the SEC for purposes of issuing any class of instruments in a public market. Revised PAS 23, Borrowing Costs , removes the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of qualifying asset as part of the cost of that asset. The revised standard will be effective beginning on January 1, 2009. IFRIC 11, IFRS 2 Group Treasury Share Transactions, describes how to apply PFRS 2, Share-based Payment to share-based payment arrangements involving the entitys own equity instruments and share-based payment arrangements of subsidiaries involving equity instruments. This interpretation will be effective beginning on January 1, 2008. IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction , clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of minimum funding requirement (MFR) on such assets. It also addresses when a MFR might give rise to a liability. IFRIC 14 will become mandatory for the Companys 2008 financial statements, with retrospective application required.

F-18

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The adoption of the above standards and Philippine interpretations is not expected to have any significant impact on the Companys pro forma financial statements. The accounting policies set out below have been consistently applied and adopted in the preparation of the pro forma financial statements. Cash and Cash Equivalents Cash includes cash on hand and in banks, Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Financial Assets and Liabilities Date of Recognition. The Company recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the financial instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The fair value of the consideration given or received is determined by reference to the transaction price or other market prices. If such market prices are not reliably determinable, the fair value of the consideration is estimated as the sum of all future cash payments or receipts, discounted using the prevailing market rates of interest for similar instruments with similar maturities. The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction cost. Subsequent to initial recognition, the Company classifies its financial assets and liabilities in the following categories: held-to-maturity (HTM) financial assets, available-for-sale (AFS) investments, FVPL financial assets, and loans and receivables. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of Fair Value. The fair value of financial instruments traded in active markets is based on their quoted market price or dealer price quotation (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Day 1 Profit. Where the transaction price is a non-active market and different from the fair value of the other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a Day 1 Profit) in the pro forma statements of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which are not observable, the difference between the transaction price and model value is only recognized in the pro forma statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the day 1 profit amount.

F-19

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Financial Assets Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognized in the pro forma statements of income. Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on a different basis; or the assets are part of a group of financial assets, financial liabilities or both which are managed and the performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized.

Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. The Company accounts for its derivative transactions (including embedded derivatives) under this category with fair value changes being reported directly to profit or loss, except when the derivative is treated as an effective accounting hedge, in which case the fair value change is deferred in equity under the Cumulative translation adjustments account. The Company has no investments classified as financial assets at FVPL as of December 31, 2007, 2006 and 2005. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS or financial assets at FVPL. Loans and receivables are carried at cost or amortized cost, less impairment in value. Amortization is determined using the effective interest rate method. The Companys trade and other receivables are included in this category (Note 6). HTM Investments . HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Companys management has the positive intention and ability to hold to maturity. Where the Company sells other than an insignificant amount of HTM investments, the entire category would be tainted and classified as AFS investments. After initial measurement, these investments are measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the pro forma statements of income when the HTM investments are derecognized, impaired or amortized.

F-20

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The Company has no investments classified as HTM investments as of December 31, 2007, 2006 and 2005. AFS. AFS investments are those non-derivative financial assets that are designated in this category or are not classified in any of the other categories. Subsequent to initial recognition, AFS investments are carried at fair value in the pro forma financial statements. Changes in the fair values of such assets are reported in the equity section until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gains or losses previously reported in equity is transferred to the pro forma statements of income. Interest earned on holding AFS investments is recognized in the pro forma statements of income using the effective interest rate method. The Company has no investments classified under this category as of December 31, 2007, 2006 and 2005. Financial Liabilities Financial Liability at FVPL. Financial liabilities are classified in this category if these result from trading activities or derivative transactions that are not accounted for as accounting hedges, or when the Company elects to designate a financial liability under this category. Included in this category are the Companys derivative financial instruments with negative fair values that are not accounted for under cash flow hedge accounting (Note 24). Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest rate method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Included in this category are the Companys accounts payable and accrued expenses (Note 11). Derivatives and Hedge Accounting Freestanding Derivatives For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); or b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or c) hedges of a net investment in foreign operation. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

F-21

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in the pro forma statements of income. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in the pro forma statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately. As of December 31, 2007, 2006 and 2005, the Company has no outstanding derivatives accounted for as fair value hedges. Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are included in the pro forma statements of changes in equity under Cumulative translation adjustments account. The ineffective portion is immediately recognized in the pro forma statements of income. If the hedged cash flow results in the recognition of an asset or a liability, all gains and losses previously recognized directly in equity are transferred from equity and included in the initial measurement of the cost or carrying value of the asset or liability. Otherwise, for all other cash flow hedges, gains and losses initially recognized in equity are transferred from equity to profit or loss in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the pro forma statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In this case, the cumulative gains or losses on the hedging instrument that has been reported directly in equity is retained in equity until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gains or losses previously reported in equity is recognized in the pro forma statements of income. As of December 31, 2007, the Company has no outstanding commodity options designated as effective cash flow hedges while in 2006 and 2005, the Company has outstanding commodity options designated as effective cash flow hedges. Net Investment Hedge. As of December 31, 2007, 2006 and 2005, the Company has no hedge of a net investment in a foreign operation. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value on derivatives are taken directly to profit or loss during the year incurred. Embedded Derivatives An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss. Derecognition of Financial Assets and Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; or

F-22

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Companys continuing involvement in the asset. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Company assesses at reporting date whether a financial asset or group of financial assets is impaired. Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial assets original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of loss shall be recognized in the pro forma statements of income. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the pro forma statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Assets Carried at Cost. If there is objective evidence of an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or of a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

F-23

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) AFS Investments. For AFS investments, the Company assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the pro forma statements of income, is removed from equity and recognized in the pro forma statements of income. Impairment losses on equity investments are not reversed through the pro forma statements of income. Increases in fair value after impairment are recognized directly in equity. In the case of debt instruments classified as AFS, impairment is based on the same criteria as loans and receivables and HTM financial assets. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the pro forma statements of income, the impairment loss is reversed through the pro forma statements of income. Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to: Deliver cash or another financial asset to another entity; or Exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Company; or Satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the pro forma balance sheets if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the pro forma balance sheets. Inventories Finished goods, goods in process and materials and supplies are valued at the lower of cost and net realizable value. Costs incurred in bringing each inventory to its present location and conditions are accounted for as follows: Finished goods and goods in process cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs; cost is determined using the moving-average method; and cost is determined using the movingaverage method.

Materials and supplies

F-24

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Net realizable value of finished goods and goods in process is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of materials and supplies is the current replacement cost. Containers (i.e., returnable bottles and shells) are stated at deposit value. The excess of the acquisition cost of the containers over their deposit value is presented under Deferred containers expense account included under Other noncurrent assets account and is amortized over the estimated useful lives of ten years. Plant and Equipment Plant and equipment are stated at cost less accumulated depreciation and amortization and any impairment in value. The initial cost of plant and equipment comprises of its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have improved the condition of the asset beyond the originally assessed standard of performance, the expenditures are capitalized as an additional cost of plant and equipment. Construction in progress represents structures under construction and is stated at cost. This includes the costs of construction 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. Construction in progress is not depreciated until such time that the relevant assets are ready for use. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:
Number of Years

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment, furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tools and small equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1040 2050 550 26 57 25 550 or term of the lease, whichever is shorter

The remaining useful lives, residual values and depreciation and amortization method are reviewed periodically to ensure that such periods and method of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of plant and equipment. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization is credited or charged to current operations.

F-25

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) When each major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. An item of 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 the pro forma statements of income in the year the asset is derecognized. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with finite useful life are reviewed at least at each balance sheet date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by charging the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the pro forma statements of income in the expense category consistent with the function of the intangible asset. Amortization is computed using the straight-line method over the following estimated useful lives of intangible assets with finite lives:
Number of Years

Computer software Leasehold rights

28 20 or term of lease whichever is shorter

Intangible assets with indefinite useful lives, such as trademarks, brands and licenses are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite useful life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from disposition of an intangible asset are measured as the difference between the disposal proceeds and the carrying amount to the asset and are derecognized in the pro forma statements of income when the asset is disposed. Impairment of Non-financial Assets with Definite Useful Lives The carrying values of plant and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and if the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of plant and equipment is the greater of fair value less cost to

F-26

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) sell or value in use. The fair value less cost to sell is the amount obtainable from the sale of an asset in an arms-length transaction less costs to sell. 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 of continuing operations are recognized in the pro forma statements of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sales. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably, which is normally upon delivery. Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Leases Finance leases, which transfer to the Company substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly in current operations. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms. Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the pro forma statements of income on a straight-line basis over the lease term. Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of

F-27

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Research and Development Costs Research costs are expensed as incurred. Development cost incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured. Any expenditure carried forward is amortized in line with the expected future sales from the related project. The carrying value of development cost is reviewed for impairment annually when the related asset is not yet in use. Otherwise, this is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Retirement Costs The Parent Company has a funded, noncontributory retirement plan administered by trustees, covering the Companys permanent employees. Retirement costs are actuarially determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees projected salaries. Actuarial gains and losses are recognized as income or expenses when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. The transitional liability as of January 1, 2005, the date of adoption of PAS 19, is recognized as an expense over five years from date of adoption. The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, the plan, past service cost is recognized immediately. The net retirement liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the resulting asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any

F-28

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately. Foreign Currency Transactions and Translations The Companys pro forma financial statements are presented in Philippine peso, which is also the Companys functional and presentation currency. Transactions in foreign currencies are recorded using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing rate of exchange at the financial statements date. All differences are taken in the pro forma statements of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Taxes Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at financial statements date. Deferred Tax. Deferred income tax is provided using the balance sheet liability method on all temporary differences at the financial statements date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of unused tax credits and unused tax losses can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

F-29

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The carrying amount of deferred tax asset is reviewed at the financial statements date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the financial statements date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the financial statements date. Income tax relating to items recognized directly in equity is recognized in equity and not in the pro forma statements of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Sales Tax. Revenues, expenses and assets are recognized net of the amount of sales tax, except: where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the pro forma financial statements. Earnings Per Share (EPS) Basic EPS is computed by dividing the net income by the weighted average number of common shares outstanding during the year, with retroactive adjustments of any stock dividends declared. Provisions Provisions are recognized only when the Company 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. 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 interest expense. Where the Company expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain. Contingencies Contingent liabilities are not recognized in the pro forma financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the pro forma financial statements but are disclosed when an inflow of economic benefits is probable.

F-30

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Events After the Financial Statements Date Post-financial statements date events that provide additional information about the Companys position at financial statements date (adjusting events) are reflected in the Companys pro forma financial statements. Post- financial statements events that are not adjusting events are disclosed in the notes to the pro forma financial statements when material. 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The Companys pro forma financial statements require management to make judgments and estimates that affect amounts reported in the pro forma financial statements and related notes. Judgments In the process of applying the Companys accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the Companys pro forma financial statements: Operating Leases. The Company has entered into various lease agreements as a lessee. The Company has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under operating lease arrangements. Rent expense charged to operations amounted to P 628, P 654 and P 714 in 2007, 2006 and 2005, respectively (Note 14). Functional Currency. The pro forma financial statements are presented in Philippine peso, which is also the Companys functional currency. Segment Reporting. The Company has determined that it operates as one segment only (both in terms of business and geography), and no segmental reporting is necessary. Estimates The estimates and assumptions used in the Companys pro forma financial statements are based on managements evaluation of relevant facts and circumstances as of the date of the Companys pro forma financial statements. Actual results could differ from such estimates. Allowances for Doubtful Accounts. Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Company evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Companys relationship with the customers, the customers current credit status based on third party credit reports and known market forces, average age of accounts, collection experience, and historical loss experience. The allowance for doubtful accounts amounted to P 693, P 920 and P 849 as of December 31, 2007, 2006 and 2005, respectively. The carrying value of trade and other receivables amounted to P 3,676, P 4,692 and P 4,935 as of December 31, 2007, 2006 and 2005, respectively (Note 6). Allowances for Inventory Losses. The Company provides allowance for inventories whenever net realizable value becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The allowance account is reviewed periodically to reflect the accurate valuation in the financial records.

F-31

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The allowance for inventory losses amounted to P 416 and P 257 as of December 31, 2007 and 2006, respectively. The carrying value of inventories amounted to P 2,447, P 3,202 and P 3,169 as of December 31, 2007, 2006 and 2005, respectively (Note 7). Useful Lives of Plant and Equipment. The Company estimates the useful lives of plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of plant and equipment would increase recorded operating expenses and decrease noncurrent assets. Accumulated depreciation and amortization of plant and equipment amounted to P 15,163, P15,643 and P 14,954 as of December 31, 2007, 2006 and 2005 respectively. Plant and equipment, net of accumulated depreciation and amortization amounted to P 5,616, P 5,660 and P6,017 as of December 31, 2007, 2006 and 2005, respectively (Note 9). Useful Lives of Intangible Assets with Finite Lives. The useful lives of intangibles assets are assessed at the individual asset level as having either a finite or indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all relevant factors, there is not foreseeable limit of the period over which the asset is expected to generate net cash inflows for the Company. Intangible assets with finite useful life amounted to P 3 and P 4 as of December 31, 2007 and 2006, respectively. Realizability of Deferred Tax Assets. The Company reviews its deferred tax assets at each financial statements date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets amounted to P 398, P 420 and P 285 as of December 31, 2007, 2006 and 2005, respectively (Note 12). Impairment of Non-financial Assets. The Company reviews its non-financial assets to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the pro forma financial statements, the Company makes judgments as to whether there are observable data indicating that there is a measurable decrease in the estimated cash flows from its assets. This evidence may include indications of adverse changes in the payment status of debtor, or national or local economic conditions that correlate with defaults on assets. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Retirement Cost and Other Retirement Benefits. The determination of the Companys obligation and cost of retirement benefits is dependent on the selection of certain assumptions used by

F-32

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) actuaries in calculating such amounts. Those assumptions are described in Note 20 to the pro forma financial statements and include discount rate expected return on plan assets and salary increase rates. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. Net unrecognized actuarial losses amounted to P 1,121, P 1,174 and P 242, respectively as of December 31, 2007, 2006 and 2005 (Note 20). Financial Assets and Liabilities . The Company carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. Significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any change in the fair value of these financial assets and liabilities would affect net income and equity. Fair value of financial assets and liabilities is discussed in Note 24. Asset Retirement Obligations. Determining asset retirement obligation requires estimation of the cost of dismantling of plant and equipment and other costs of restoring the leased properties to their original condition. The Company determined that there are no significant asset retirement obligations as of December 31, 2007, 2006 and 2005. 5. CASH AND CASH EQUIVALENTS This account consists of:
2007 2006 2005

Cash in banks and on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P803 4,459 P5,262

P978 P978

P994 P994

Cash in banks earn interest at the respective bank deposit rates. Short-term investments are made for varying periods of up to three months depending on the immediate cash requirements of the Company, and earn interest at the respective short-tem investment rates. 6. TRADE AND OTHER RECEIVABLES This account consists of:
Note 2007 2006 2005

Trade net Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed by related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontrade Amounts owed by related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18 18 19

P2,301 P4,175 P4,522 537 41 41 476 362 P3,676 100 376 P4,692 56 316 P4,935

F-33

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Trade receivables are non-interest bearing and are generally on 30 days credit term. As at December 31, 2007, the aging of trade receivables and the allowance provided for each group is as follows:
Gross Amount Allowance

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due <30 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due 30-60 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due 61-90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,623 575 16 29 273 P3,516

P393 59 1 11 214 P678

Allowance for doubtful accounts related to other receivables as of December 31, 2007, 2006 and 2005 amounted to P 15, P 35 and P 29, respectively. Various collateral securities such as bank guarantees, time deposits and real estate mortgage are held by the Company for credit limits exceeding P 0.275. 7. INVENTORIES This account consists of:
2007 2006 2005

Finished goods and goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Containers at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Materials and supplies at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . Total inventories at lower of cost and net realizable value . . . . . . . . . . . . . . . . .

P689 1,291 467 P2,447

P782 1,697 723 P3,202

P652 1,703 814 P3,169

The cost of containers and material and supplies as of December 31, 2007, 2006 and 2005 amounted to P 2,174, P 2,677 and P 2,517, respectively. 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS This account consists of:
Note 2007 2006 2005

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

P66 42 40 11 21 P180

P74 P179 354 37 9 13 32 39 P469 P268

F-34

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 9. PLANT AND EQUIPMENT The movements in this account are as follows:
Machinery and Equipment Cost: December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization: December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net book value: December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P15,368 583 (13) 15,938 343 (55) 16,226 739 (902) 16,063 Land Improvements P445 14 1 460 11 471 18 (4) 485 Transportation Equipment P559 30 (19) 570 14 (20) 564 2 (172) 394 Leasehold Improvements P75 7 82 16 98 (17) 81 Office Equipment, Furniture and Fixtures P520 11 (4) 527 3 (16) 514 7 (159) 362 Tools and Small Equipment P13 13 1 14 (5) 9 Construction in Progress P356 28 384 3 387 (49) (1) 337

Buildings P2,873 125 (1) 2,997 36 (4) 3,029 18 1 3,048

Total P20,209 798 (36) 20,971 427 (95) 21,303 735 (1,259) 20,779

F-35

11,949 764 (23) 12,690 634 (51) 13,273 613 (883) 13,003 P3,248 P2,953 P3,060

781 72 9 862 83 (4) 941 89 (5) 1,025 P2,135 P2,088 P2,023

346 21 367 13 380 17 (3) 394 P93 P91 P91

462 31 (19) 474 30 (19) 485 26 (171) 340 P96 P79 P54

42 6 48 5 53 5 (16) 42 P34 P45 P39

487 17 (3) 501 13 (16) 498 12 (159) 351 P26 P16 P11

12 12 1 13 (5) 8 P1 P1 P1

P384 P387 P337

14,079 911 (36) 14,954 779 (90) 15,643 762 (1,242) 15,163 P6,017 P5,660 P5,616

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Depreciation and amortization charged to operations amounted to P 762, P 779 and P 911 in 2007, 2006 and 2005, respectively (Note 15). No interest was capitalized in 2007, 2006 and 2005. 10. OTHER NONCURRENT ASSETS This account consists of:
2007 2006 2005

Deferred containers expense net Bottles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P3,091 P3,186 P3,197 Shells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,495 1,586 1,569 4,586 440 P5,026 The movement analysis of deferred containers expenses is as follows:
2007 2006 2005

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,772 468 P5,240

4,766 502 P5,268

Gross carrying amount: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P6,664 P5,934 P4,154 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 730 1,780 Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,283 6,664 5,934

1,892 805 2,697 P4,586

1,168 724 1,892 P4,772

534 634 1,168 P4,766

11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES This account consists of:
Note 2007 2006 2005

Trade Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontrade Amounts owed to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18 18 24

P879 P1,469 P1,466 610 370 73 17 82 772 P2,360 4 24 535 P2,402 3 29 389 P1,960

F-36

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Accrued expenses include accruals for employee benefits, advertising and promotions, utilities and outside labor and others. 12. INCOME TAXES Deferred tax assets arise from the following:
2007 2006 2005

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P242 P322 P297 Allowance for inventory losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 90 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8 (12) P398 The components of the provision for income tax are shown below:
2007 2006 2005

P420

P285

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,316 P4,079 P3,109 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (135) (60) P4,310 P3,944 P3,049

The reconciliation of statutory income tax rate on income before income tax and the Companys effective income tax rate are as follows:
2007 2006 2005

Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory income tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in income taxes rates resulting from: Interest income subjected to final tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P12,325 35.00% (.09) .01 34.92%

P11,270

P9,455

35.00% 32.50% (.01) (.01) (.25)

34.99% 32.24%

On May 24, 2005, Republic Act No. 9337 entitled An Act Amending the National Internal Revenue Code, as amended, with Salient Features (Act), was passed into a law effective November 1, 2005. Among others, the Act revised the corporate income tax rates from 32% to 35% starting November 1, 2005 and 30% starting January 1, 2009 and onwards. 13. COST OF SALES This account consists of:
Note 2007 2006 2005

Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications, light, fuel and water . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P14,017 P12,168 P13,505 5,249 5,127 5,458 1,438 1,354 1,487 16 779 804 963 15 626 594 727 301 354 319 517 286 349 P22,927 P20,687 P22,808

F-37

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 14. ADMINISTRATIVE AND SELLING EXPENSES This account consists of: Administrative and selling expenses consist of:
2007 2006 2005

Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P5,841 P5,284 P5,072 Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,098 3,382 3,864 P8,939 Administrative expenses consist of:
Note 2007 2006 2005

P8,666

P8,936

Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Breakages and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication, light and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

P1,094 P1,035 P1,248 1,024 799 746 15 973 981 835 862 806 818 624 508 288 314 202 204 266 229 225 151 14 14 132 171 179 112 61 58 50 50 48 23 59 71 216 369 338 P5,841 P5,284 P5,072

Selling expenses consist of:

Note 2007 2006 2005

Freight, trucking and handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1,268 P1,233 P1,300 596 627 726 371 458 466 362 425 489 76 74 86 15 53 46 50 45 90 178 327 429 569 16 P3,098 P3,382 P3,864

F-38

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 15. DEPRECIATION AND AMORTIZATION Depreciation and amortization are distributed as follows:
2007 2006 2005

Cost of sales: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and selling expenses: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P626 136 890 P1,652

P594 185 842 P1,621

P727 184 701 P1,612

16. PERSONNEL EXPENSES

Note 2007 2006 2005

Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20

P1,019 P1,150 P1,304 257 216 293 1,193 1,100 1,340 P2,469 P2,466 P2,937

The above amounts are distributed as follows:

2007 2006 2005

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P779 1,094 596 P2,469

P804 1,035 627 P2,466

P963 1,248 726 P2,937

17. OTHER INCOME This account consists of:

Note 2007 2006 2005

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marked-to-market gain net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gain (loss) net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) on sale of plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

P39 23 4 23 (12) (1) (1) P52

P3 93 (37) 2 (3) P58

P3 211 8 2 (3) P221

F-39

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 18. RELATED PARTY DISCLOSURES The Company, in the normal course of business, purchases products and services from and sells products to related parties.
Revenue From Related Parties P654 99 83 23 3 1 5 31 11 7 19 42 28 20 119 111 121 2 2 1 P969 P236 Purchases From Related Parties P 1,865 2,180 3,901 30 29 39 368 369 360 65 47 39 48 159 358 342 3 19 1 4 3 4 P2,758 P3,129 Amounts Owed by Related Parties P916 62 50 10 2 1 5 1 1 20 4 3 18 60 108 109 16 19 10 2 1 P1,097 P183 Amounts Owed to Related Parties P3,202 1,305 2,252 497 252 30 10 11 3 53 33 27 27 3 13 21 71 3 7 1 11 4 P3,829 P1,679

Relationship with Related Parties San Miguel Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . Parent Company Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control

Year 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006

San Miguel Packaging Specialists, Inc. . . . . . . . . . . . . . . . .

San Miguel Rengo Packaging Corporation . . . . . . . . . . . . .

SMC Shipping and Lighterage Corporation . . . . . . . . . . . .

SMITS, Inc. and a subsidiary . . . . . . . . . . . . . . . . . . . . . . .

San Miguel Yamamura Asia Corporation . . . . . . . . . . . . . .

Ginebra San Miguel, Inc. and a subsidiary . . . . . . . . . . . . .

San Miguel Beverages, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .

San Miguel International Ltd. and subsidiaries . . . . . . . . . . San Miguel Pure Foods Company, Inc. and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2005

P177

P4,346

P138

P2,328

a.

Purchases consist of purchase of materials, bottles, shells, cartons and water products from related parties. Amounts owed by related parties consist of trade receivables, share in expenses, and rental and management fees. Amounts owed to related parties consist of trade payables, professional fees, insurance, cash advances and commodity hedges.

b.

c.

F-40

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) d. The compensation of key management personnel of the Company, by benefit type, follows:
2007 2006 2005

Short-term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P56 P51 P74 Retirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11 16 Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5 8 P74 19. LEASING AGREEMENTS Finance Leases Leases as Lessor The Company leases some of its forklifts under finance lease agreements to a third party logistics provider. The Company provides the lessee the option to purchase the equipment at a beneficial price. The current and noncurrent portion of finance lease receivables included under Trade and other receivables and Other noncurrent assets accounts, respectively in the pro forma balance sheets as of December 31, 2007 are as follows:
Minimum lease payments

P67

P98

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P6 11 P17

P1 1 P2

P5 10 P15

Leases as Lessee The Companys finance leases relates to office equipment for a varying period up to 3 years. There is no subleasing. The lease agreement provides the Company with the option to purchase the equipment at a beneficial price at the end of the lease term. As of December 31, 2006 and 2005, the net carrying amount of leased office equipment was P 5 and P 7, respectively.

F-41

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Finance lease liabilities as of December 31, 2006 and 2005 are payable as follows:
2006 Minimum Lease payments

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2.8 2.8 P5.6

P0.2 0.1 P0.3

2005

P2.6 2.7 P5.3

Minimum Lease payments

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2.8 5.6 P8.4

P0.4 0.3 P0.7

P2.4 5.3 P7.7

Operating Leases Leases as Lessee The Company leases the land where its breweries and some of its sales offices and a number of offices and warehouses are situated under operating leases arrangements. The leases typically run for a period of one to forty-nine years. The escalation clause for the lease of the land is reviewed every five years. Some lease agreements provide an option to renew the lease at the end of the lease term and are subject to review to reflect current market rentals. Future minimum lease payments for the lease of the land are as follows:
2007

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P188 752 P940

As of December 31, 2007, 2006 and 2005, the Company has no non-cancellable operating leases. 20. RETIREMENT PLAN The Parent Company has a funded, noncontributory retirement plan covering the Companys permanent employees. Contributions and costs are determined in accordance with the actuarial studies made for the plan. Annual cost is determined using the projected unit credit method. The Companys latest actuarial valuation date is December 31, 2007. Valuations are obtained on a periodic basis. Based on the December 31, 2007 actuarial valuation, retirement costs and other related balances were allocated between the Parent Company and the Company on the basis of percentage of past service liability.

F-42

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Retirement costs charged by the Company to operations amounted to P 257, P 216 and P 293 (Note 16) in 2007, 2006 and 2005, respectively. The Companys annual contribution to the retirement plans consists of payments covering the current service cost and amortization of past service liability. The components of retirement cost recognized in the pro forma statements of income in 2007, 2006 and 2005 and the amounts recognized in the pro forma balance sheets as of December 31, 2007, 2006 and 2005 are as follows:
2007 2006 2005

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of transitional liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P290 141 63 53 (290) P257 P3,499

P456 135 63 (438) P216 P2,904

P524 117 63 (411) P293 P3,650

The retirement cost is recognized in the following line items in the pro forma statements of income:
2007 2006 2005

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P48 209 P257

P55 161 P216

P58 235 P293

The reconciliation of the assets and liabilities recognized in the pro forma balance sheets is as follows:
2007 2006 2005

Present value of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,614 P4,267 P4,144 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,367 (2,904) (3,650) 1,247 (1,121) (126) P 1,363 (1,174) (189) P 494 (242) (252) P

Unrecognized actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transitional liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The changes in the present value of the defined benefit obligation in 2007, 2006 and 2005 are as follows:
2007 2006 2005

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,267 P4,144 P3,741 Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485 99 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 456 524 Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 135 117 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84) (1,953) (337) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,614 P4,267 P4,144

F-43

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The movements in the fair value of the plan assets are as follows:
2007 2006 2005

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,904 P3,650 P3,425 Expected return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 438 411 Contributions by employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 216 293 Actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553 (142) Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84) (1,953) (337) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan assets consist of the following:
In Percentages 2007 2006 2005

P3,367

P2,904

P3,650

Fixed income portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock trading portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100

70 30

70 30

The principal actuarial assumptions used to determine retirement benefits are as follows:
In Percentages 2007 2006 2005

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.1 6.0 10.0

6.8 6.0 10.0

11.0 6.0 12.0

The historical information of the amounts for the current and previous two annual periods is as follows:
2007 2006 2005

Present value of the defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . P4,614 P4,267 P4,144 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,367 2,904 3,650 Experience adjustments on plan liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 (265) The Company expects to pay P 158 in contributions to defined benefit plans in 2008. 21. CASH DIVIDENDS Cash dividends declared and paid amounted to P 5,705, P 7,326 and P 6,406 in 2007, 2006 and 2005, respectively. Additional cash dividends declared but not yet paid amounted to P 2,310 in 2007.

F-44

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 22. BASIC EARNINGS PER SHARE (EPS) Basic EPS is computed as follows:
2007 2006 2005

Net income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P8,015 P7,326 P6,406 Weighted average number of shares outstanding (in millions) (b) . . . . . . . . . . . 15,333 15,882 15,882 Basic EPS (a / b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23. FINANCIAL INSTRUMENTS Financial Risk Management Objectives and Policies The Companys pro forma financial statements include non-derivative instruments, cash and derivative instruments, such as currency forwards and commodity options. The main purpose of these financial instruments is to manage identified financial risks. The Company has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the use of financial instruments are foreign exchange risk, commodity price risk, liquidity risk and credit risk. The Company uses derivatives to manage its exposures to foreign exchange and commodity price risks arising from the Companys operations. It is the Companys policy to ensure that capabilities exist for active and prudent management of its financial risks. The Company does not engage in any speculative derivative transactions. Foreign Exchange Risk The Companys exposure to foreign exchange risk results from its business transactions denominated in foreign currency. The Company uses a combination of natural hedges and derivative hedges to manage its foreign exchange exposure. It uses currency derivatives to reduce earnings volatility related to foreign exchange movements. Short-term currency forward contracts are entered into to manage foreign currency risks arising from importations, revenue and expense transactions, and other foreign currency denominated obligations. Information on the Companys foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalent are as follows:
2007 U.S. Dollar Peso Equivalent U.S. Dollar 2006 Peso Equivalent U.S. Dollar 2005 Peso Equivalent

P0.52

P0.46

P0.40

Assets Trade and other receivables . . . . . . . . . . . . . . . . Liabilities Accounts payable and accrued expenses . . . . . . . Net foreign currency-denominated . . . . . . . . . . .

US$3 1 US$2

P127 29 P98

US$5 US$5

P182 12 P170

US$4 US$4

P158 13 P145

With the translation of these foreign currency-denominated assets and liabilities, the Company reported net foreign exchange loss amounting to P 12 in 2007.

F-45

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Sensitivity Analysis A 10% strengthening of the Philippine peso against USD as of December 31, 2007 would have decreased equity and profit by P 11. A 10% weakening of the Philippine peso against the above currencies as of December 31, 2007 would have had the equal but opposite effect, on the basis that all other variables remain constant. Commodity Price Risk The Company enters into various commodity derivatives to manage its price risk on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Company, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show marked-to-market losses; however, any loss in the marked-to-market positions is offset by the resulting lower physical raw material cost. SMC enters into commodity derivative transactions in behalf of the Company to reduce cost by optimizing purchasing synergies within the SMC Group of Companies and managing inventory levels of common materials. Commodity Options . Commodity options are used to manage the Companys exposures to volatility in prices of certain commodities such as fuel oil. Liquidity Risk Liquidity risk arises from the possibility that the Company may encounter difficulties in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstances. The Companys objectives to manage its liquidity profile are: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities. The table below summarizes the maturity profile of the Companys financial liabilities based on contractual undiscounted payments:
30 - 90 days 91days 1 year >1year 5 years Over 5 years

Total

<30 days

At December 31, 2007 Non-derivative financial liabilities Accounts payable, accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit Risk

P5,480

P4,907

P234

P339

P 3

Credit risk or the risk of counterparties defaulting is controlled by the application of credit approvals, limits and monitoring procedures. It is the Companys policy to enter into transactions with a diversity of creditworthy parties to mitigate any significant concentration of

F-46

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) credit risk. The Company ensures that sales of products are made to customers with appropriate credit history and has internal mechanism to monitor the granting of credit and management of credit exposures. The Company has made provisions, where necessary, for potential losses on credits extended. Where appropriate, the Company obtains collateral or arranges master netting agreements. The Companys exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments, net of the value of collaterals, if any. The Company has no significant concentration of credit risk with any counterparty. Capital Management Management shall maintain a sound capital base to ensure the Companys ability to continue as a going concern, thereby continue to provide returns to shareholders and other stakeholders. Management uses Debt-to-Equity ratio to monitor and review, on a regular basis, the Companys capital, defined as Total Equity in the pro forma balance sheet. The Chief Financial Officer has overall responsibility for monitoring of capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the Companys external environment and the risks underlying the Companys business operations and industry. The Company is not subject to externally imposed capital requirements. 24. FINANCIAL ASSETS AND LIABILITIES The table below presents a comparison by category of carrying amounts and fair values of the Companys financial instruments as of December 31, 2007, 2006 and 2005:
2007 Carrying Amount Fair Value 2006 Carrying Amount Fair Value 2005 Carrying Amount Fair Value

Financial Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . . . . . . . Derivative assets (included under Prepaid expenses and other current assets account) . . . . Financial Liabilities Accounts payable and accrued expenses . . . . . . . . . Derivative liabilities (included under Accounts payable and accrued expenses account) . . . . . .

P5,262 P5,262 3,676 3,676 66 5,480 82 66 5,480 82

P978 P978 4,692 4,692 74 2,378 24 74 2,378 24

P994 P994 4,935 4,935 179 1,931 29 179 1,931 29

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Receivables. The carrying amounts of cash and receivables approximate fair value primarily due to the relatively short-term maturity of these financial instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates.

F-47

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The fair values of derivatives are determined based on prices obtained from the market and counterparties. Fair values are also based on standard valuation models. Accounts Payable and Accrued Expenses. The carrying amount of accounts payable and accrued expenses approximates fair value due to the relatively short-term maturity of these financial instruments. Derivative Financial Instruments The Companys derivative financial instruments according to the type of financial risk being managed and the details of freestanding and embedded derivative financial instruments that are categorized into those accounted for as hedges and those that are not designated as hedges are discussed as follows: The Company enters into commodity options to manage its exposure on commodity price risk covering the Companys requirements on fuel oil. Derivative Instruments Accounted for as Hedges Cash Flow Hedge Commodity Options As of December 31, 2006 and 2005, the Company has outstanding option agreements to buy fuel oil with a notional quantity of 2,228 and 6,016 metric tons, respectively. The call and put options can be exercised at various calculation dates in 2007 and 2006 with specified quantities on each calculation date. There is no outstanding option agreement to buy fuel as of December 31, 2007. Other Derivative Instruments Not Designated as Hedges The Company enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding and embedded derivatives found in host contracts, which are not designated as accounting hedges. Details are as follows: Freestanding Derivatives Freestanding derivatives consist of commodity derivatives entered into by the Company. Commodity Options As of December 31, 2006 and 2005, the Company has outstanding sold options covering its fuel oil requirements with notional quantities of 2,228 and 6,016 metric tons, respectively. These options can be exercised at various calculation dates in 2007 with specified quantities on each calculation date. The net negative fair value of these options as of December 31, 2006 and 2005 amounted to P 0.443 and P 0.274, respectively. There is no outstanding option agreement to buy fuel as of December 31, 2007.

F-48

SAN MIGUEL BREWERY INC. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Embedded Derivatives The Companys embedded derivatives include currency derivatives (forwards) embedded in nonfinancial contracts. Embedded Currency Forwards As of December 31, 2007, 2006 and 2005, the total outstanding notional amount of currency forwards embedded in nonfinancial contracts amounted to P 578, P 1,120, and P 1,217, respectively. These nonfinancial contracts consist mainly of foreign-currency denominated purchase orders, sales agreements and capital expenditures. As of December 31, 2007, 2006 and 2005, the net positive (negative) fair value of these embedded currency forwards amounted to (P 16), P 68 and P 150, respectively. Fair Value Changes on Derivatives The net movements in fair value changes of all derivative instruments for the year ended December 31, 2007 are as follows:
2007

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net changes in fair value of derivatives: Not designated as accounting hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P2) (13) (15) 1 (P16)

Less fair value of settled instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25. OTHER MATTERS a. Commitments

The outstanding purchase commitments of the Company as of December 31, 2007, 2006 and 2005 amounted to P 3,491, P 11,302 and P 1,723, respectively. Amount authorized but not yet disbursed for capital projects as of December 31, 2007, 2006 and 2005 are approximately P 801, P 975 and P 882, respectively. b. Foreign Exchange Rates The foreign exchange rates of P 41.28, P 49.03 and P 53.09 are used in translating the U.S. dollar monetary assets and liabilities to Philippine peso as of December 31, 2007, 2006 and 2005, respectively.

F-49

APPENDIX A: AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007 REPORT OF INDEPENDENT AUDITORS The Stockholders and the Board of Directors San Miguel Brewery Inc. No. 40 San Miguel Avenue Mandaluyong City We have audited the accompanying financial statements of San Miguel Brewery Inc. [a whollyowned subsidiary of San Miguel Corporation (SMC) and formerly the Domestic Beer Division of SMC], which comprise the balance sheet as at December 31, 2007, and the statement of income, statement of changes in equity and statement of cash flows for the period from July 26, 2007 to December 31, 2007 and a summary of significant accounting policies and other explanatory notes. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of San Miguel Brewery Inc. as of December 31, 2007, and its financial performance and its cash flows for the period from July 26, 2007 to December 31, 2007 in accordance with Philippine Financial Reporting Standards. MANABAT SANAGUSTIN & CO. [Original Signed] JORGE MA. S. SANAGUSTIN Partner CPA License No. 0030399 SEC Accreditation No. 0026-AR-1 Tax Identification No. 124-282-616 BIR Accreditation No. 08-001987-7-2007 Issued July 10, 2007; Valid until July 9, 2010 PTR No. 0988757 J Issued January 7, 2008 at Makati City February 4, 2008 Makati City, Metro Manila

F-50

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and Formerly the Domestic Beer Division of San Miguel Corporation) BALANCE SHEET DECEMBER 31, 2007 (In Millions)
Note

ASSETS Current Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 24 Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 6, 23, 24 Inventories net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 7 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 24 Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Assets Plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P5,262 3,676 2,447 180 11,565

4, 9 4 4, 12 10

5,616 3 398 5,026 11,043 P22,608

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Liability Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11, 23, 24

P3,252 1,710 4,962

23

13

15,333 2,310 17,643 P22,608

The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007. See Notes to the Financial Statements.

F-51

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and Formerly the Domestic Beer Division of San Miguel Corporation) STATEMENT OF INCOME FOR THE PERIOD FROM JULY 26, 2007 TO DECEMBER 31, 2007 (In Millions)
Note

SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

P12,180 6,333 5,847 (2,349) 51 3,549 1,239 P2,310

15 18

12

22

P0.15

The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007. See Notes to the Financial Statements.

F-52

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and Formerly the Domestic Beer Division of San Miguel Corporation) STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD FROM JULY 26, 2007 TO DECEMBER 31, 2007 (In Millions, Except for Par Value and Shares of Stock)
Note

CAPITAL STOCK P1 par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Authorized 25,000,000,000 shares Subscribed 15,333,426,960 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RETAINED EARNINGS Net income for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13 P15,333

2,310 2,310 P17,643

The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007. See Notes to the Financial Statements.

F-53

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and Formerly the Domestic Beer Division of San Miguel Corporation) STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JULY 26, 2007 TO DECEMBER 31, 2007 (In Millions)
Note

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments for: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income before working capital changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in: Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash generated from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Increase in other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash flows used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES Increase in unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuances of capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash flows provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . .

P3,549 16 18 18 415 (36) (8) 3,920 (930) 607 218 1,565 466 5,846 (6) 5,840 (448) (208) 10 36 (610) 3 29 32 5,262 5 P5,262

13

The Company was incorporated on July 26, 2007. The net assets of the Domestic Beer Division of San Miguel Corporation were transferred to the Company on October 1, 2007. Actual commercial operations likewise started on October 1, 2007. See Notes to the Financial Statements.

F-54

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (Amounts in Millions, Except Per Share Data) 1. REPORTING ENTITY San Miguel Brewery Inc. (the Company or SM Brewery) [formerly the domestic beer division (Division) of San Miguel Corporation (SMC or the Parent Company)] was registered with the Philippine Securities and Exchange Commission (SEC) on July 26, 2007. The Company is engaged in manufacturing, selling and distribution of fermented and malt-based beverages. The registered office address of the Company is 40 San Miguel Avenue, Mandaluyong City, Philippines. SMC is the ultimate parent company. On July 24, 2007, the stockholders of SMC, during the annual stockholders meeting, approved the transfer of the Divisions assets to a wholly-owned subsidiary of SMC, the Company, in exchange for shares of stock. The transfer of the Divisions net assets to the Company is pursuant to the listing with the Philippine Stock Exchange (PSE) and the public offering of the shares of the Company. The actual transfer of the net assets as of June 30, 2007, excluding land, brands and income and other taxes payable in exchange for shares of stock took effect on October 1, 2007. The financial statements as of and for the year ended December 31, 2007 were approved and authorized for issue by the Board of Directors (BOD) on February 4, 2008. 2. BASIS OF PREPARATION The financial statements of the Company have been prepared on a historical cost basis, except for derivative financial instruments which are measured at fair value. The financial statements are presented in Philippine peso, which is the Companys functional and presentation currency, and all values are rounded to the nearest million (P 000,000), except when otherwise indicated. Statement of Compliance The financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRSs). PFRS includes statements named PFRS and Philippine Accounting Standards (PAS), including Philippine Interpretations from International Financial Reporting Interpretation Committee (IFRIC), issued by the Financial Reporting Standards Council. 3. SIGNIFICANT ACCOUNTING POLICIES Adoption of New Standards, Amendments to Standards and Interpretations The Financial Reporting Standards Council approved the adoption of new standards, amendment to standards, and interpretations.

F-55

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) New Standard, Amendment to Standard and Interpretations Adopted in 2007 The Company adopted the following new PFRS and amended PAS and Philippine Interpretations: PFRS 7, Financial Instruments: Disclosures, requires extensive disclosures about the significance of financial instruments relative to an entitys financial position and performance, and quantitative and qualitative disclosures on the nature and extent of risks. Amendment to PAS 1, Presentation of Financial Statements Capital Disclosures, requires additional disclosures regarding the entitys objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, requires that a reassessment of whether embedded derivative should be separated from the underlying host contract to be made only when there are changes to the contract that significantly modifies the cash flows. Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment, prohibits the reversal of impairment losses on goodwill and available-for-sale investments recognized in interim financial reports even if the impairment is no longer present at the balance sheet date.

The disclosures required under PFRS 7, Financial Instruments: Disclosures are included in Notes 6 and 23, while for amendment to PAS 1, Presentation of Financial Statements Capital Disclosures are included in Note 23. The adoption of IFRIC 9, Reassessment of Embedded Derivatives , and IFRIC 10, Interim Financial Reporting and Impairment , does not have any material effect on the Companys pro forma financial statements. New Standards and Interpretations Not Yet Adopted The following are the new and revised standards and interpretations which are not yet effective for the year ended December 31, 2007, and have not been applied in preparing these financial statements: Revised PAS 1, Presentation of Financial Statements, the revised standards introduces total comprehensive income (i.e., changes in equity during a period, other than those changes resulting from transactions with owners in their capacity as owners), a statement of financial position (formerly balance sheet) is required at the beginning of the earliest comparative period following a change in accounting policy, the correction of an error or the reclassification of items in the financial statements, reclassification adjustments to profit or loss of amounts previously recognized in other comprehensive income (formerly recycling) are disclosed for each component of other comprehensive income, income tax is disclosed for each component of other comprehensive income and dividends and related per-share amounts are disclosed either on the face of the statement of changes in equity or in the notes to the financial statements. The revised standard will be effective beginning on January 1, 2009. PFRS 8, Operating Segments, requires an entity to adopt the management approach to reporting segment information. This will be effective January 1, 2009 and will replace

F-56

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) PAS 14, Segment Reporting . It is required for adoption only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the Philippine Securities and Exchange Commission (SEC) for purposes of issuing any class of instruments in a public market. Revised PAS 23, Borrowing Costs, removes the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised standard will be effective January 1, 2009. IFRIC 11, IFRS 2 Group and Treasury Share Transactions, describes how to apply PFRS 2, Share-based Payment to share-based payment arrangements involving an entitys own equity instruments and share-based payment arrangements of subsidiaries involving equity instruments. This interpretation will be effective January 1, 2008. IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of minimum funding requirement (MFR) on such assets. It also addresses when a MFR might give rise to a liability. IFRIC 14 will become mandatory for the Companys 2008 financial statements, with retrospective application required.

The adoption of the above standards and Philippine interpretations is not expected to have any significant impact on the Companys financial statements. The accounting policies set out below have been consistently applied and adopted in the preparation of the financial statements. Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Financial Assets and Liabilities Date of Recognition. The Company recognizes a financial asset or a financial liability in the balance sheet when it becomes a party to the contractual provisions of the financial instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The fair value of the consideration given or received is determined by reference to the transaction price or other market prices. If such market prices are not reliably determinable, the fair value of the consideration is estimated as the sum of all future cash payments or receipts, discounted using the prevailing market rate of interest for similar instruments with similar maturities. The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction cost.

F-57

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Subsequent to initial recognition, the Company classifies its financial assets and liabilities in the following categories: held-to-maturity (HTM) financial assets, available-for-sale (AFS) investments, FVPL financial assets, and loans and receivables. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of Fair Value. The fair value for financial instruments traded in active markets at the balance sheet date is based on their quoted market price or dealer price quotation (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Day 1 Profit. Where the transaction price in a non-active market is different from the fair value of the other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a Day 1 Profit) in the statement of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which are not observable, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the day 1 profit amount. Financial Assets Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognized in the statement of income. Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on a different basis; or the assets are part of a group of financial assets, financial liabilities or both which are managed and the performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized.

F-58

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. The Company accounts for its derivative transactions (including embedded derivatives) under this category with fair value changes being reported directly to profit or loss, except when the derivative is treated as an effective accounting hedge, in which case the fair value change is deferred in equity under the Cumulative translation adjustments account. The Company has no investments classified as financial assets at FVPL. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS or financial assets at FVPL. Loans and receivables are carried at cost or amortized cost, less impairment in value. Amortization is determined using the effective interest rate method. The Companys trade and other receivables are included in this category (Note 6). HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Companys management has the positive intention and ability to hold to maturity. Where the Company sells other than an insignificant amount of HTM investments, the entire category would be tainted and classified as AFS investments. After initial measurement, these investments are measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the statement of income when the HTM investments are derecognized, impaired or amortized. The Company has no investments classified as HTM investments as of December 31, 2007. AFS. AFS investments are non-derivative financial assets that are designated in this category or are not classified in any of the other categories. Subsequent to initial recognition, AFS investments are carried at fair value in the balance sheet. Changes in the fair value of such assets are reported in the equity section of the balance sheet until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in equity is transferred to the statement of income. Interest earned on holding AFS investments is recognized in the statement of income using effective interest rate method. The Company has no investments classified under this category as of December 31, 2007. Financial Liabilities Financial Liability at FVPL. Financial liabilities are classified in this category if these result from trading activities or derivative transactions that are not accounted for as accounting hedges, or when the Company elects to designate a financial liability under this category. Included in this category are the Companys derivative financial instruments with negative fair values that are not accounted for under cash flow hedge accounting (Note 24).

F-59

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest rate method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Included in this category are the Companys accounts payable and accrued expenses (Note 11). Derivatives and Hedge Accounting Freestanding Derivatives For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or c) hedges of a net investment in foreign operation. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in the statement of income. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in the statement of income. When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately. As of December 31, 2007, the Company has no outstanding derivatives accounted for as fair value hedges. Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are included in the statement of changes in equity under Cumulative translation adjustments account. The ineffective portion is immediately recognized in the statement of income.

F-60

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) If the hedged cash flow results in the recognition of an asset or a liability, all gains and losses previously recognized directly in equity are transferred from equity and included in the initial measurement of the cost or carrying value of the asset or liability. Otherwise, for all other cashflow hedges, gains and losses initially recognized in equity are transferred from equity to net income in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the statement of income. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In this case, the cumulative gain or loss on the hedging instrument that has been reported directly in equity is retained in equity until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gain or loss previously reported in equity is recognized in the statement of income. As of December 31, 2007, the Company has no outstanding commodity options designated as effective cash flow hedges. Net Investment Hedge. As of December 31, 2007, the Company has no hedge of a net investment in a foreign operation. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of derivatives are taken directly to net profit or loss during the year incurred. Embedded Derivatives An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss. Derecognition of Financial Assets and Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Companys continuing involvement in the asset.

F-61

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Company assesses at balance sheet date whether a financial asset or group of financial assets is impaired. Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial assets original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of loss shall be recognized in the statement of income. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Assets Carried at Cost. If there is objective evidence of an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or of a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. AFS Investments. For AFS investments, the Company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the

F-62

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) statement of income, is removed from equity and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized directly in equity. In the case of debt instruments classified as AFS, impairment is based on the same criteria as loans and receivables and HTM financial assets. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of income. Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to: deliver cash or another financial asset to another entity; or exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Company; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the balance sheet. Inventories Finished goods, goods in process and materials and supplies are valued at the lower of cost and net realizable value. Costs incurred in bringing each inventory to its present location and conditions are accounted for as follows: Finished goods and goods in process cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs; cost is determined using the moving-average method; cost is determined using the movingaverage method.

Materials and supplies

F-63

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Net realizable value of finished goods and goods in process is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of materials and supplies is the current replacement cost. Containers (i.e., returnable bottles and shells) are stated at deposit value. The excess of the acquisition cost of the containers over their deposit value is presented under Deferred containers expense account included under Other noncurrent assets account in the balance sheet and is amortized over the estimated useful lives of ten (10) years. Plant and Equipment Plant and equipment, are stated at cost less accumulated depreciation and amortization and any impairment in value. The initial cost of plant and equipment comprises of its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have improved the condition of the asset beyond the originally assessed standard of performance, the expenditures are capitalized as an additional cost of plant and equipment. Construction in progress represents structures under construction and is stated at cost. This includes the costs of construction 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. Construction in progress is not depreciated until such time that the relevant assets are ready for use. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:
Number of Years

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment, furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tools and small equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1040 2050 550 26 57 25 550 or term of the lease, whichever is shorter

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

F-64

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization is credited or charged to current operations. When each major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. An item of 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 the statement of income in the year the asset is derecognized. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of income in the expense category consistent with the function of the intangible asset. Amortization is computed using the straight-line method over the following estimated useful lives of intangible assets with finite lives:
Number of Years

Computer software Leasehold rights

2-8 20 or term of the lease, whichever is shorter

Intangible assets with indefinite useful lives, such as trademarks, brands and licenses, are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from disposition of an intangible asset are measured as the difference between the disposal proceeds and the carrying amount of the asset and are derecognized in the statement of income when the asset is disposed. Impairment of Non-financial Assets with Definite Useful Lives The carrying values of plant and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be

F-65

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) recoverable. If any such indication exists, and if the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of plant and equipment is the greater of fair value less cost to sell or value in use. The fair value less cost to sell is the amount obtainable from the sale of an asset in an arms-length transaction less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. 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 of continuing operations are recognized in the statement of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sales. Sales are recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably, which is normally upon delivery. Interest. Interest is recognized as the interest accrues, taking into account the effective yield on the asset. Leases Finance leases, which transfer to the Company substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized directly in current operations. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms. Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term.

F-66

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Research and Development Costs Research costs are expensed as incurred. Development cost incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured. Any expenditure carried forward is amortized in line with the expected future sales from the related project. The carrying value of development cost is reviewed for impairment annually when the related asset is not yet in use. Otherwise, this is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Retirement Costs The Parent Company has a funded, noncontributory retirement plan, administered by trustees, covering the Companys permanent employees. Retirement costs are actuarially determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees projected salaries. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, the plan, past service cost is recognized immediately. The net retirement liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the resulting asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial

F-67

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately. Foreign Currency Transactions and Translations The Companys financial statements are presented in Philippine peso, which is also the Companys functional and presentation currency. Transactions in foreign currencies are recorded using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing rate of exchange at balance sheet date. All differences are taken to the statement of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Taxes Current tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at balance sheet date. Deferred 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 tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of unused tax credits and unused tax losses can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

F-68

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each 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 tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at balance sheet date. Income tax relating to items recognized directly in equity is recognized in equity and not in the statement of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Sales tax. Revenues, expenses and assets are recognized net of the amount of sales tax, except: where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Earnings Per Share (EPS) Basic EPS is computed by dividing the net income by the weighted average number of common shares outstanding during the year, with retroactive adjustments for any stock dividends declared. Provisions Provisions are recognized only when the Company has (a) a present obligation (legal or constructive) as a result of 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. 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 interest expense. Where the Company expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain.

F-69

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but are disclosed when an inflow of economic benefits is probable. Events After The Balance Sheet Date Post-year end events that provide additional information about the Companys position at balance sheet date (adjusting events) are reflected in the financial statements. Post-year end events that are not adjusting events are disclosed in the notes to the financial statements when material. 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The Companys financial statements prepared in accordance with PFRS requires management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments In the process of applying the Companys accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the financial statements: Operating Leases. The Company has entered into various lease agreements as a lessee. The Company has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under operating lease arrangements. Rent expense charged to operations amounted to P 175 in 2007 (Note 15). Functional Currency. The Company has determined that its functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Company operates. Segment Reporting. The Company has determined that it operates as one segment only (both in terms of business and geography), and no segmental reporting is necessary. Estimates The estimates and assumptions used in the financial statements are based upon managements evaluation of relevant facts and circumstances as of the date of the Companys financial statements. Actual results could differ from such estimates. Allowances for Doubtful Accounts. Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Company evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Companys relationship with the customers, the customers current credit status based on third party credit reports and known market forces, average age of accounts, collection experience, and historical loss experience.

F-70

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The allowance for doubtful accounts amounted to P 693 as of December 31, 2007 (Note 6). The carrying value of trade and other receivables amounted to P 3,676 as of December 31, 2007 (Note 6). Allowance for Inventory Losses. The Company provides allowance for inventories whenever net realizable value becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The allowance account is reviewed periodically to reflect the accurate valuation in the financial records. The allowance for inventory losses amounted to P 416 as of December 31, 2007. The carrying value of inventories amounted to P 2,447 as of December 31, 2007 (Note 7). Useful Lives of Plant and Equipment. The Company estimates the useful lives of plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of plant and equipment would increase recorded operating expenses and decrease noncurrent assets. Accumulated depreciation and amortization of plant and equipment amounted to P 15,163 as of December 31, 2007. Plant and equipment, net of accumulated depreciation and amortization amounted to P 5,616 as of December 31, 2007 (Note 9). Useful Lives of Intangible Assets with Finite Lives. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Company. Intangible assets with finite useful life amounted to P 3 as of December 31, 2007. Realizability of Deferred Tax Assets. The Company reviews its deferred tax assets at each balance sheet date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets amounted to P 398 as of December 31, 2007 (Note 12). Impairment of Non-financial Assets. The Company reviews its non-financial assets to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the financial statements, the Company makes judgments as to whether there are observable data indicating that there is a measurable decrease in the estimated cash flows from its assets. This evidence may include indications of adverse changes in the payment status of debtor, or notional or local economic conditions that correlate with defaults on assets.

F-71

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Retirement Cost and Other Retirement Benefits. The determination of the Companys obligation and cost of retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 21 to the financial statements and include discount rate, expected return on plan assets and salary increase rate. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. Net unrecognized actuarial losses amounted to P 768 as of December 31, 2007 (Note 21). Financial Assets and Liabilities . The Company carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. Significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any change in the fair value of these financial assets and liabilities would affect net income and equity. Fair value of financial assets and liabilities are discussed in Note 24. Asset Retirement Obligations. Determining asset retirement obligation requires estimation of the cost of dismantling plant and equipment and other costs of restoring the leased properties to their original condition. The Company determined that there are no significant asset retirement obligations as of December 31, 2007. 5. CASH AND CASH EQUIVALENTS This account consists of: Cash in banks and on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P803 4,459 P5,262 Cash in banks earn interest at the respective bank deposit rates. Short-term investments are made for varying periods of up to three months depending on the immediate cash requirements of the Company, and earn interest at the respective short-term investment rates.

F-72

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 6. TRADE AND OTHER RECEIVABLES This account consists of:
Note

Trade net Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed by related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontrade Amounts owed by related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 19 20

P2,301 537 476 362 P3,676

Trade receivables are non-interest bearing and are generally on 30 days credit term. As at December 31, 2007, the aging of trade receivables and the allowance provided for is as follows:
Gross Amount Allowance

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due <30 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due 30-60 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due 61-90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,623 575 16 29 273 P3,516

P393 59 1 11 214 P678

Allowance for doubtful accounts related to other receivables as of December 31, 2007 amounted to P 15. Various collateral securities such as bank guarantees, time deposits and real estate mortgage are held by the Company for credit limits exceeding P 0.275. 7. INVENTORIES This account consists of: Finished goods and goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Containers at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Materials and supplies at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total inventories at lower of cost and net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P689 1,291 467 P2,447

The cost of containers and materials and supplies as of December 31, 2007 amounted to P 1,677 and P 497, respectively.

F-73

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS This account consists of:
Note

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

P66 42 40 11 21 P180

F-74

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 9. PLANT AND EQUIPMENT The movements in this account are as follows:
Machinery and Equipment Gross carrying amount: Transferred from SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . P16,083 62 (82) 16,063 12,923 151 (71) 13,003 P3,060 Office Equipment, Furniture and Fixtures P362 1 (1) 362 350 2 (1) 351 P11 Tools and Small Equipment P9 9 8 8 P1

Buildings P3,019 16 13 3,048 1,001 21 3 1,025 P2,023

Land Improvements P483 2 485 390 4 394 P91

Transportation Equipment P401 2 (9) 394 343 6 (9) 340 P54

Leasehold Improvements P81 81 41 1 42 P39

Construction in Progress P212 125 337 P337

Total P20,650 208 (79) 20,779 15,056 185 (78) 15,163 P5,616

F-75

Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization: Transferred from SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Disposals/reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net book value: December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Depreciation and amortization charged to operations amounted to P 185 in 2007 (Note 16). No interest was capitalized in 2007.

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 10. OTHER NONCURRENT ASSETS This account consists of:
Note

Deferred containers expense net Bottles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

P3,110 1,495 4,605 421 P5,026

The movement analysis of deferred containers expense is as follows: Gross carrying amount: Transferred from SMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,422 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization: Amortization for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,814 209 209 P4,605 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES This account consists of:
Note

Trade Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontrade Amounts owed to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 19 24

P879 610 909 82 772 P3,252

Accrued expenses include accruals for employee benefits, advertising and promotions, utilities and outside labor and others.

F-76

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 12. INCOME TAXES Deferred tax assets arise from the following: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for inventory losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P242 146 10 P398 The components of the provision for income tax are shown below: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,249 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) P1,239 The reconciliation of statutory income tax rate on income before income tax and the Companys effective income tax rates are as follows: Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in income tax rate resulting from: Interest income subjected to final tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. CAPITAL STOCK The original authorized capital stock of the Company is 1,000,000 shares at P 100 par value. Of the said amount, 25% has been subscribed and fully paid. On August 9, 2007 and September 7, 2007, by the vote of the stockholders owning or representing at least 2/3 of the subscribed and outstanding capital stock and confirmed by affirmative vote of the majority of the board of directors, the Company subsequently approved the increase of the authorized capital stock from P 100 to P 25,000, the decrease of the par value of its shares from P 100 to P 1 and the issuance of a total of 15,308,416,960 common shares, comprising of 75,000,000 common shares from its unissued authorized capital stock and 15,233,416,960 common shares from the increase in its authorized capital stock in exchange for the net assets of the Division as of June 30, 2007 with a net book value of P 15,308. The transfer of the net assets is pursuant to a Master Deed of Assignment of Beer Assets dated August 23, 2007 between SMC and the Company with amendments dated September 7, 2007. On September 27, 2007, the SEC approved the increase in authorized capital stock and decrease in par value of shares. As a standard condition of the SEC for approval of applications for increase in authorized capital stock, where the payment for the shares issued pursuant to such increase is made in the form of motor vehicles and receivables, 2,557,573,242 common shares P3,549 35.00% (0.28) 0.03 34.75%

F-77

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) that were issued by the Company to SMC in exchange for motor vehicles and receivables out of the 15,308,416,960 common shares issued by the Company are being held in escrow by the SEC pending the transfer of ownership of those motor vehicles in the name of the Company and proof of collection of receivables. Transfer of ownership of those motor vehicles and proof collection of receivables are currently in process. 14. COST OF SALES This account consists of:
Note

Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications, light, fuel and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P3,918 1,473 405 17 194 16 149 85 109 P6,333

15. ADMINISTRATIVE AND SELLING EXPENSES Administrative and selling expenses consist of: Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,584 Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765 P2,349 Administrative expenses consist of:
Note

Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications, light and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16 17

P421 246 243 183 159 151 73 52 28 16 12 P1,584

F-78

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Selling expenses consist of:
Note

Freight, trucking and handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

16

P338 158 102 29 25 22 20 71 P765

16. DEPRECIATION AND AMORTIZATION Depreciation and amortization are distributed as follows: Cost of sales: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and selling expenses: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P149 36 230 P415

17. PERSONNEL EXPENSES

Note

Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

P215 42 278 P535

The above amounts are distributed as follows:

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P194 183 158 P535

F-79

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 18. OTHER INCOME This account consists of:
Note

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marked-to-market gain net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange loss net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

23

P36 14 8 4 (12) 1 P51

19. RELATED PARTY DISCLOSURES The Company, in the normal course of business, purchases products and services from and sells products to related parties.
Revenue Purchases Amounts Amounts From From Owed by Owed to Related Related Related Related Parties Parties Parties Parties

Relationship with Related Parties

San Miguel Corporation . . . . . . . . . . . . . . . . San Miguel Packaging Specialists, Inc. . . . . San Miguel Rengo Packaging Corporation . . . . . . . . . . . . . . . . . . . . . . . . SMC Shipping and Lighterage Corporation . . . . . . . . . . . . . . . . . . . . . . . . SMITS, Inc. and a subsidiary . . . . . . . . . . . . San Miguel Yamamura Asia Corporation . . . Ginebra San Miguel, Inc. and a subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Beverages, Inc. . . . . . . . . . . . . . . San Miguel International Ltd. and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Pure Foods Company, Inc. and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Parent Company Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control

P654 55 2 3 25 24 P763

P 499 10 102 26 29 5 1 2

P916 62 2 1 20 18 60 16 2

P892 497 10 53 27 21 7 1 11

P674 P1,097 P1,519

a. b. c.

Purchases consist of purchase of materials, bottles, shells and cartons from related parties. Amounts owed by related parties consist of trade receivables, share in expenses, and rental. Amounts owed to related parties consist of trade payables, professional fees, insurance, rental and management fees.

F-80

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) d. The compensation of key management personnel of the Company, by benefit type, follows: P15 4 P19 20. LEASING AGREEMENTS Finance Leases Leases as Lessor The Company leases some of its forklifts under finance lease agreements to a third party logistics provider. The Company provides the lessee the option to purchase the equipment at a beneficial price. The current and noncurrent portion of finance lease receivables included under Trade and other receivables and Other noncurrent assets accounts, respectively in the balance sheets as of December 31, 2007 are as follows:
Minimum lease payments

Short-term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P6 11 P17

P1 1 P2

P5 10 P15

Operating Leases Leases as Lessee The Company leases the land where its breweries and some of its sales offices and a number of offices and warehouses are situated under operating leases arrangements. The leases typically run for a period of one to forty-nine years. The escalation clause for the lease of the land is reviewed every five years. Some lease agreements provide an option to renew the lease at the end of the lease term and are subject to review to reflect current market rentals. Lease payments for the lease of the land are as follows: Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P188 752 P940 As of December 31, 2007, the Company has no non-cancellable operating leases.

F-81

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 21. RETIREMENT PLAN The Parent Company has a funded, noncontributory retirement plan covering all of the Companys permanent employees. Contributions and costs are determined in accordance with the actuarial studies made for the plan. Annual cost is determined using the projected unit credit method. The Companys latest actuarial valuation date is December 31, 2007. Valuations are obtained on a periodic basis. Retirement costs charged by the Company to operations amounted to P 42, inclusive or net of imputed interest. The Companys annual contribution to the retirement plan consists of payments covering the current service cost. The components of retirement cost recognized in the statement of income and the amounts recognized in the balance sheet are as follows: Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The retirement cost is recognized in the following line items in the statement of income: Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P12 30 P42 The reconciliation of the assets and liabilities recognized in the balance sheet is as follows: Present value of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,175 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,407) 768 (768) P P42 P42 P3,407

Unrecognized actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The movements in the present value of the defined benefit obligation are as follows: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer from other plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 3,448 769 42 (84) P4,175

F-82

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The movements in the fair value of the plan assets are as follows: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer from other plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions by employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,448 42 (84) 1 P3,407

Plan assets of the Company as of December 31, 2007 are maintained under the fixed income portfolio. The overall expected rate of return is determined based on historical performance of investments. The principal actuarial assumptions used to determine retirement benefits are as follows:
In Percentages

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The historical information of the amounts for the current period is as follows:

7.1 6.0 10.0

Present value of the defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,175 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,407 Deficit in the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experience adjustments on plan liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experience adjustments on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Company expects to pay P 158 in contributions to defined benefit plan in 2008. 22. BASIC EARNINGS PER SHARE Basic EPS is computed as follows: Net income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,310 Weighted average number of shares outstanding (in millions) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,333 Basic EPS (a/b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P0.15 (768) 769 1

F-83

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 23. FINANCIAL INSTRUMENTS Financial Risk Management Objectives and Policies The Companys principal financial instruments include non-derivative instrument, cash and cash equivalents and derivative instruments, such as currency forwards and commodity options. The main purpose of these financial instruments is to manage identified financial risks. The Company has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the use of financial instruments are foreign exchange risk, commodity price risk, liquidity risk and credit risk. The Company uses derivatives to manage its exposures to foreign exchange and commodity price risks arising from the Companys operations. It is the Companys policy to ensure that capabilities exist for active and prudent management of its financial risks. The Company does not engage in any speculative derivative transactions. Foreign Exchange Risk The Companys exposure to foreign exchange risk results from its business transactions and financing arrangements denominated in foreign currency. The Company uses a combination of natural hedges and derivative hedges to manage its foreign exchange exposure. It uses currency derivatives to reduce earnings volatility related to foreign exchange movements. Short-term currency forward contracts (deliverable and non-deliverable) are entered into to manage foreign currency risks arising from importations, revenue and expense transactions, and other foreign currency-denominated obligations. Information on the Companys foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalents are as follows:
U.S. Dollar Peso Equivalent

Assets Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net foreign currency denominated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3 1 $2

P127 29 P98

With the translation of these foreign currency-denominated assets and liabilities, the Company reported net foreign exchange loss amounting to P 12 in 2007. Sensitivity Analysis A 10% strengthening of the Philippine Peso against USD as of December 31, 2007 would have decreased equity and profit by P 11. A 10% weakening of the Philippine Peso against the above currencies as of December 31, 2007 would have had the equal but opposite effect, on the basis that all other variables remain constant.

F-84

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Commodity Price Risk The Company enters into various commodity derivatives to manage its price risks on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Company, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show marked-to-market losses; however, any loss in the marked-to-market positions is offset by the resulting lower physical raw material cost. SMC enters into commodity derivative transactions in behalf of the Company to reduce cost by optimizing purchasing synergies within the SMC Group of Companies and managing inventory levels of common materials. Commodity Options . Commodity options are used to manage the Companys exposures to volatility in prices of certain commodities such as fuel oil. Liquidity Risk Liquidity risk arises from the possibility that the Company may encounter difficulties in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstances. The Companys objectives to manage its liquidity profile are: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities. The table below summarizes the maturity profile of the Companys financial liabilities based on contractual undiscounted payments:
91days 1 year >1 year 5 years Over 5 years

Total

<30 days

30-90 days

At December 31, 2007 Non-derivative financial liabilities Accounts payable, accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . P3,170 Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . Credit Risk

P2,597

P234

P339

P 3

Credit risk or the risk of counterparties defaulting is controlled by the application of credit approvals, limits and monitoring procedures. It is the Companys policy to enter into transactions with a diversity of creditworthy parties to mitigate any significant concentration of credit risk. The Company ensures that sales of products are made to customers with appropriate credit history and has internal mechanism to monitor the granting of credit and management of credit exposures. The Company has made provisions, where necessary, for potential losses on credits extended. Where appropriate, the Company obtains collateral or arranges master netting agreements.

F-85

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The Companys exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments, net of the value of collaterals, if any. Financial information on the Companys exposure to credit risk is presented in Note 6. The Company has no significant concentration of credit risk with any counterparty. Capital Management Management shall maintain a sound capital base to ensure the Companys ability to continue as a going concern, thereby continue to provide returns to shareholders and other stakeholders. Management uses Debt-to-Equity ratio to monitor and review, on a regular basis, the Companys capital, defined as Total Equity in the balance sheet. The Chief Financial Officer has overall responsibility for monitoring of capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the Companys external environment and the risks underlying the Companys business operation and industry. The Company is not subject to externally imposed capital requirements. 24. FINANCIAL ASSETS AND LIABILITIES The table below presents a comparison by category of carrying amounts and fair values of all of the Companys financial instruments as of December 31, 2007:
Carrying Amount

Fair Value

Financial Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets (included under Prepaid expenses and other current assets account in the balance sheet) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities (included under Accounts payable and accrued expenses account in the balance sheet) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P5,262 3,676 66 3,170 82

P5,262 3,676 66 3,170 82

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents and Trade and Other Receivables. The carrying amount of cash and cash equivalents and receivables approximates fair value primarily due to the relatively shortterm maturity of these financial instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. The fair values of commodity derivatives are determined based on prices obtained from the market and counterparties. Fair values are also based on standard valuation models.

F-86

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Accounts Payable and Accrued Expenses. The carrying amount of accounts payable and accrued expenses approximates fair value due to the relatively short-term maturity of these financial instruments. Derivative Financial Instruments The Companys derivative financial instruments according to the type of financial risk being managed and the details of freestanding and embedded derivative financial instruments that are categorized into those accounted for as hedges and those that are not designated as hedges are discussed as follows: The Company enters into various commodity options to manage its exposure on commodity price risk covering the Companys requirement on fuel oil. Derivative Instruments Not Designated as Hedges The Company enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding and embedded derivatives found in host contracts, which are not designated as accounting hedges. Changes in fair value of these instruments are accounted for directly in the 2007 statement of income. Details are as follows: Embedded Derivatives The Companys embedded derivatives include currency derivatives (forwards) embedded in nonfinancial contracts. Embedded Currency Forwards As of December 31, 2007, the total outstanding notional amount of currency forwards embedded in nonfinancial contracts amounted to US$14. These nonfinancial contracts consist mainly of foreign-currency denominated purchase orders, sales agreements and capital expenditures. As of December 31, 2007, the net negative fair value of these embedded currency forwards amounted to P 16. Fair Value Changes on Derivatives The net movements in fair value changes of all derivative instruments for the year ended December 31, 2007 are as follows: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net changes in fair value of derivatives: Not designated as accounting hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (P2) (13) (15) 1 (P16)

Less fair value of settled instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-87

SAN MIGUEL BREWERY INC. (A Wholly-Owned Subsidiary of San Miguel Corporation and formerly the Domestic Beer Division of San Miguel Corporation) NOTES TO THE FINANCIAL STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 25. DECLARATION OF DIVIDENDS On February 4, 2008, the Board of Directors approved the declaration of cash dividends of P0.15 per share with amount aggregating to P 2,300, payable to stockholders of record as of February 4, 2008. 26. OTHER MATTERS a. Commitments The outstanding purchase commitments of the Company as of December 31, 2007 amounted to P3,491. Amount authorized but not yet disbursed for capital projects as of December 31, 2007 is approximately P 801. b. Foreign Exchange Rate The foreign exchange rate of P 41.28 was used in translating the U.S. dollar monetary assets and liabilities to Philippine peso as of December 31, 2007.

F-88

APPENDIX B: AUDITED CARVE-OUT SPECIAL PURPOSE STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2007 REPORT OF INDEPENDENT AUDITORS The Board of Directors San Miguel Corporation and San Miguel Brewery Inc. 40 San Miguel Avenue Mandaluyong City We have audited the accompanying carve-out special purpose statements of the domestic beer division of San Miguel Corporation (SMC), which comprise the carve-out statements of net assets as at September 30, 2007 and 2006, and the carve-out statements of income and carve-out statements of cash flows for the periods ended September 30, 2007 and 2006, and a summary of significant accounting policies and other explanatory notes. Managements Responsibility for the Carve-out Special Purpose Statements Management is responsible for the preparation and presentation of these carve-out special purpose statements in accordance with Philippine Financial Reporting Standards. The carve-out special purpose statements contain an aggregation of financial information relating to the domestic beer division of SMC and have been prepared from the books and records maintained by SMC. Managements responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and presentation of carve-out special purpose statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these carve-out special purpose statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the carve-out special purpose statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the carve-out special purpose statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the carve-out special purpose statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entitys preparation and presentation of the carve-out special purpose statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the carve-out special purpose statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the carve-out special purpose statements present fairly, in all material respects, the financial position of the domestic beer division of San Miguel Corporation as of September 30, 2007 and 2006, and its financial performance and its cash flows for the nine-month period ended September 30, 2007 and 2006 in accordance with Philippine Financial Reporting Standards.

F-89

Emphasis of Matter Without qualifying our opinion, we draw attention to Note 2 to carve-out special purpose statements. The carve-out special purpose statements present aggregated financial information of the domestic beer division of San Miguel Corporation. In preparing the carve-out special purpose statements, corporate overhead costs and income taxes have been allocated to the domestic beer division of San Miguel Corporation using the method of allocation described in Note 2 to carve-out special purpose statements. The carve-out special purpose statements may not necessarily be indicative of the financial performance that would have been achieved if the domestic beer division of San Miguel Corporation had operated as an independent entity. MANABAT SANAGUSTIN & CO. [Original Signed] JORGE MA. S. SANAGUSTIN Partner CPA License No. 0030399 SEC Accreditation No. 0026-AR-1 Tax Identification No. 124-282-616 BIR Accreditation No. 08-001987-7-2007 Issued July 10, 2007; Valid until July 9, 2010 PTR No. 0325120 J Issued January 18, 2007 at Makati City November 16, 2007 Makati City, Metro Manila

F-90

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION CARVE-OUT SPECIAL PURPOSE STATEMENTS OF NET ASSETS (In Millions)
September 30 2007 September 30 2006

Note

ASSETS Current Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5, 20, 21 Inventories net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 6 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . 7, 21 Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Assets Plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P396 2,758 3,084 142 6,380

P705 4,579 3,550 406 9,240

4, 8 4 4, 11 9

5,413 3 528 24,204 30,148 36,528

5,735 318 13,168 19,221 28,461

LIABILITIES Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Liability Obligations under finance lease net of current portion . . . . . . . . . . . .

10, 20, 21 11

2,793 1,094 3,887

3,041 1,066 4,107 5 4,112 P24,349

4, 18

2 3,889

NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P32,639

See Notes to the Carve-out Special Purpose Statements.

F-91

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION CARVE-OUT SPECIAL PURPOSE STATEMENTS OF INCOME (In Millions)
September 30 2007 September 30 2006

Note

SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12 13 16

P31,959 16,594 15,365 (6,179) 1 9,187 3,215 P5,972

P29,436 15,453 13,983 (5,834) 57 8,206 2,872 P5,334

11

See Notes to the Carve-out Special Purpose Statements.

F-92

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION CARVE-OUT SPECIAL PURPOSE STATEMENTS OF CASH FLOWS (In Millions)
September 30 2007 September 30 2006

Note

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments for: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for doubtful accounts, inventory obsolescence and others . . . . . . . Gain (loss) on sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income before working capital changes . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in: Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash generated from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Increase in other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P9,187 14 16 16 1,237 254 9 (3) 10,684 2,161 (363) 327 (304) (90) 12,415 (3,278) 9,137 (9,384) (344) 6 3 (9,719) (582) 978 P396

P8,206 1,171 190 (2) (3) 9,562 266 (481) (138) 603 38 9,850 (2,758) 7,092 (7,088) (298) 2 3 (7,381) (289) 994 P705

8 16

See Notes to the Carve-out Special Purpose Statements.

F-93

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (Amounts in Millions, Except Per Share Data) 1. REPORTING ENTITY The domestic beer division (the Division) of San Miguel Corporation (SMC) was spun-off from SMC resulting in the creation of San Miguel Brewery Inc. (SM Brewery) which was incorporated on July 26, 2007. The Division is engaged in manufacturing, selling and distribution of fermented and malt-based beverages. The registered office address of the Company is 40 San Miguel Avenue, Mandaluyong City, Philippines. SMC (the Parent Company) is the ultimate parent company. The carve-out special purpose statements of the Division as of and for the periods ended September 30, 2007 and 2006 were approved and authorized for issue on November 16, 2007 by the Chief Finance Officer and a Company Director (concurrently the Chief Finance Officer) of SMC and SM Brewery, respectively, as authorized by the Board of Directors of both companies on August 9, 2007 and October 25, 2007, respectively. Incorporation of San Miguel Brewery Inc. On July 24, 2007, the stockholders, during the annual stockholders meeting, approved the transfer of the Divisions assets to a wholly owned subsidiary of SMC, SM Brewery, in exchange for shares of stock. The transfer of the Divisions net assets to SM Brewery is pursuant to its listing with the Philippine Stock Exchange and the public offering of the shares of SM Brewery. The actual transfer of the net assets as of June 30, 2007, excluding land, brands and income and other taxes payable in exchange for shares of stock took effect on October 1, 2007. 2. BASIS OF PREPARATION Statement of Compliance The carve-out special purpose statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRSs). PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and interpretations from International Financial Reporting Interpretation Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC). The carve-out special purpose statements present aggregated financial information of the domestic beer division of SMC. In preparing the carve-out special purpose statements, corporate overhead costs and income taxes have been allocated to the domestic beer division of SMC using the method of allocation set out below. The carve-out special purpose statements may not necessarily be indicative of the financial performance that would have been achieved if the domestic beer division of SMC had operated as an independent entity. The carve-out special purpose statements were derived from the separate accounting records maintained by SMC for the Division. Statements of Net Assets The carve-out statements of net assets represent the historical financial position of the Divisions business. These net assets exclude land and brands. Statements of Income The carve-out special purpose statements of income include allocation of certain general corporate expenses and income taxes. The general corporate expenses allocated to the Division are primarily for corporate officers, corporate governance, corporate finance and accounting, human resources, corporate purchasing and legal and regulatory affairs. These costs have been

F-94

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) allocated on the basis of amounts agreed upon between the Division and the Parent Company. Management believes the costs of these services charged to the Division are a reasonable allocation of the costs historically incurred by the Division. Following the transfer, the Division will be charged a shared service fee by SMC based on certain percentage of net sales. Statements of Cash Flows The cash generated from operations and capital expenditures in the cash flow from investing activities are representative of the historical cash flows of the Division. Basis of Measurement The carve-out special purpose statements of the Division have been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value. Functional and Presentation Currency The carve-out special purpose statements are presented in Philippine peso, which is the Divisions functional and presentation currency, and all values are rounded to the nearest million (P 000,000), except when otherwise indicated. 3. SIGNIFICANT ACCOUNTING POLICIES Amendments to Standards and Interpretations Adopted in 2006 The Division will adopt the following new and amended PAS and Philippine Interpretation from IFRIC in its December 31, 2006 year end financial statements: Amendment to PAS 19, Employee Benefits Actuarial Gains and Losses, Group Plans and Disclosures, provides an option for recognizing actuarial gains and losses in full in the period in which they occur, outside profit or loss. The amendment also (a) specifies how group entities should account for defined benefit group plans in their separate or individual financial statements and (b) requires entities to provide additional disclosures. Amendment to PAS 21, Effects of Changes in Foreign Exchange Rates , states that all exchange differences arising from a nonmonetary item that forms part of the entitys net investment in foreign operations are recognized in a separate component of equity in the financial statements regardless of the currency in which the monetary item is denominated. Amendment to PAS 39, Financial Instruments: Recognition and Measurement Cash Flow Hedge Accounting of Forecast Intragroup Transactions, permits the foreign currency risk of a highly probable intragroup forecast transaction to qualify as a hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into the transaction and that the foreign currency risk will affect the statements of income. Amendment to PAS 39, Financial Instruments: Recognition and Measurement The Fair Value Option, limits the fair value option to those financial instruments that meet the following conditions: where such designation eliminates or significantly reduces an accounting mismatch, when a group of financial assets, financial liabilities or both are managed and their performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy, and when an instrument contains an embedded derivative that meets particular conditions.

F-95

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Amendment to PAS 39, Financial Instruments: Recognition and Measurement Financial Guarantee Contracts, requires the issuer of a financial guarantee contract to measure the contract: initially at fair value and subsequently at the higher of (a) the amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets and (b) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with PAS 18, Revenue. However, if specified criteria are met, the issuer may use the fair value option in PAS 39. Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease , provides guidance for determining whether an arrangement, comprising a transaction or a series of related transactions, that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments, is or contains, a lease that should be accounted for in accordance with PAS 17, Leases .

The adoption of the above amendments to PAS and Philippine interpretation from IFRIC did not have a material effect on the carve-out special purpose statements. New Standard, Amendments to Standards and Interpretations to be Adopted in 2007 The Division will reflect the effect of the following new and amended PAS and Philippine Interpretation from IFRIC in SM Brewerys December 31, 2007 year end financial statements: PFRS 7, Financial Instruments : Disclosures, requires extensive disclosures about the significance of financial instruments for an entitys financial position and performance, and quantitative and qualitative disclosures on the nature and extent of risks. Amendment to PAS 1, Presentation of Financial Statements Capital Disclosures , requires additional disclosures regarding the entitys objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. IFRIC 8, Scope of PFRS 2 Share-based Payment , addresses the accounting for share-based payment transactions in which some or all of goods or services received cannot be specifically identified. IFRIC 9, Reassessment of Embedded Derivatives, requires that a reassessment of whether embedded derivative should be separated from the underlying host contract to be made only when there are changes to the contract that significantly modifies the cash flows. IFRIC 10, Interim Financial Reporting and Impairment , prohibits the reversal of impairment losses on certain financial assets recognized in interim financial reports even if the impairment is no longer present at the balance sheet date.

The adoption of the above standard, amendments to the standards and Philippine interpretation from IFRIC is not expected to have any material effect on SM Brewerys year end financial statements. New Standard and Interpretation Not Yet Adopted The following are the new standard and interpretation which are not yet effective as of December 31, 2007 and have not been applied in preparing the Divisions carve-out special purpose statements: PFRS 8, Operating Segments , requires an entity to adopt the management approach in reporting segment information. This will be effective January 1, 2009 and will replace

F-96

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) PAS 14, Segment Reporting. It is required for adoption only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the SEC for purposes of issuing any class of instruments in a public market. IFRIC 11, IFRS 2 Group Treasury Share Transactions, describes how to apply PFRS 2, Share-based Payment to share-based payment arrangements involving the entitys own equity instruments and share-based payment arrangements of subsidiaries involving equity instruments. This interpretation will be effective beginning on January 1, 2008.

The adoption of the above standard and Philippine interpretation from IFRIC is not expected to have any significant impact on SM Brewerys year end financial statements. The accounting policies set out below have been consistently applied and adopted in the preparation of the carve-out special purpose statements. Cash Cash includes cash on hand and in banks and is stated at face value. Financial Assets and Liabilities Date of Recognition. The Division recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The fair value of the consideration given or received is determined by reference to the transaction price or other market prices. If such market prices are not reliably determinable, the fair value of the consideration is estimated as the sum of all future cash payments or receipts, discounted using the prevailing market rates of interest for similar instruments with similar maturities. The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction cost. Subsequent to initial recognition, the Division classifies its financial assets and liabilities in the following categories: held-to-maturity (HTM) financial assets, available-for-sale (AFS) investments, FVPL financial assets, and loans and receivables. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of Fair Value. The fair value of financial instruments traded in active markets is based on their quoted market price or dealer price quotation (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models.

F-97

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Day 1 Profit. Where the transaction price is a non-active market and different from the fair value of the other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Division recognizes the difference between the transaction price and fair value (a Day 1 Profit) in the carve-out special purpose statements of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which are not observable, the difference between the transaction price and model value is only recognized in the carve-out special purpose statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Division determines the appropriate method of recognizing the day 1 profit amount. Financial Assets Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognized in the carve-out special purpose statements of income. Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on a different basis; or the assets are part of a group of financial assets, financial liabilities or both which are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized.

Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. The Division accounts for its derivative transactions (including embedded derivatives) under this category with fair value changes being reported directly to profit or loss, except when the derivative is treated as an effective accounting hedge, in which case the fair value change is deferred in the carve-out special purpose statements of net assets. The Division has no investments classified as financial assets at FVPL as of September 30, 2007 and 2006. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS or financial asset at FVPL. Loans and receivables are carried at cost or amortized cost, less impairment in value. Amortization is determined using the effective interest rate method. The Divisions trade and other receivables are included in this category (Note 5).

F-98

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) HTM Investments . HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Divisions management has the positive intention and ability to hold to maturity. Where the Division sells other than an insignificant amount of HTM investments, the entire category would be tainted and classified as AFS investments. After initial measurement, these investments are measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the carve-out special purpose statements of income when the HTM investments are derecognized or impaired, or amortized. The Division has no investments classified as HTM investments as of September 30, 2007 and 2006. AFS. AFS investments are those non-derivative financial assets that are designated in this category or are not classified in any of the other categories. Subsequent to initial recognition, AFS investments are carried at fair value in the carve-out special purpose statements of net assets. Changes in the fair values of such assets are reported in the carve-out special purpose statements of net assets until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gains or losses previously reported in carve-out special purpose statements of net assets is transferred to the carve-out special purpose statements of income. Interest earned on holding AFS investments is recognized in the carve-out special purpose statements of income using the effective interest rate. The Division has no investments classified under this category as of September 30, 2007 and 2006. Financial Liabilities Financial Liability at FVPL. Financial liabilities are classified in this category if these result from trading activities or derivative transactions that are not accounted for as accounting hedges, or when the Division elects to designate a financial liability under this category. Included in this category are the Divisions derivative financial instrument with negative fair values that are not accounted for under cash flow hedge accounting (Note 21). Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest rate method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Included in this category are the Divisions accounts payable and accrued expenses (Note 10). Derivatives and Hedge Accounting Freestanding Derivatives For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an

F-99

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) unrecognized firm commitment (except for foreign currency risk); or b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or c) hedges of a net investment in foreign operation. At the inception of a hedge relationship, the Division formally designates and documents the hedge relationship to which the Division wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in the carve-out special purpose statements of income. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in the carve-out special purpose statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately. As of September 30, 2007 and 2006, the Division has no outstanding derivatives accounted for as fair value hedges. Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are included in the carve-out special purpose statements of net assets. The ineffective portion is immediately recognized in the carve-out special purpose statements of income. If the hedged cash flow results in the recognition of an asset or a liability, all gains and losses previously recognized directly in the carve-out special purpose statements of net assets are included in the initial measurement of the cost or carrying value of the asset or liability. Otherwise, for all other cash flow hedges, gains and losses initially recognized in the carve-out special purpose statements of net assets are transferred to profit or loss in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the carve-out special purpose statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In this case, the cumulative gains or losses on the hedging instrument that has been reported directly in the carve-out special purpose statements of net assets is retained in the carve-out special purpose statements of net assets until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gains or losses previously reported in the carve-out special purpose statements of net assets is recognized in the carve-out special purpose statements of income . As of September 30, 2007 and 2006, the Division has outstanding commodity options designated as effective cash flow hedges. Net Investment Hedge. As of September 30, 2007 and 2006, the Division has no hedge of a net investment in a foreign operation.

F-100

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value on derivatives are taken directly to profit or loss during the year incurred. Embedded Derivatives An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss. Derecognition of Financial Assets and Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; or the Division retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Division has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Division has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Divisions continuing involvement in the asset. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Division assesses at reporting date whether a financial asset or group of financial assets is impaired. Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial assets original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of loss shall be recognized in the carve-out special purpose statements of income.

F-101

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The Division first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the carve-out special purpose statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Assets Carried at Cost. If there is objective evidence of an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or of a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. AFS Investments. For AFS investments, the Division assesses at the reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the carve-out special purpose statements of income, is removed from the carve-out special purpose statements of net assets and recognized in the carve-out special purpose statements of income. Impairment losses on equity investments are not reversed through the carve-out special purpose statements of income. Increases in fair value after impairment are recognized directly in the carve-out special purpose statements of net assets. In the case of debt instruments classified as AFS, impairment is based on the same criteria as loans and receivables and HTM financial assets. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the carve-out special purpose statements of income, the impairment loss is reversed through the carve-out special purpose statements of income. Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to: Deliver cash or another financial assets to another entity; or Exchange financial assets or liabilities with another entity under conditions that are potentially unfavorable to the Division; or Satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

F-102

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) If the Division does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the carve-out special purpose statements of net assets if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the carve-out special purpose statements of net assets . Inventories Finished goods, goods in process and materials and supplies are valued at the lower of cost and net realizable value. Costs incurred in bringing each inventory to its present location and conditions are accounted for as follows: Finished goods and goods in process cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs; costs are determined using the moving-average method; and at cost using the moving-average method.

Materials and supplies

Net realizable value of finished goods and goods in process is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of materials and supplies is the current replacement cost. Containers (i.e., returnable bottles and shells) are stated at deposit value. The excess of the acquisition cost of the containers over their deposit value is presented under Deferred containers expense account included under Other noncurrent assets account and is amortized over the estimated useful lives of ten years. Plant and Equipment Plant and equipment are stated at cost less accumulated depreciation and amortization and any impairment in value. The initial cost of plant and equipment comprises of its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have improved the condition of the asset beyond the originally assessed standard of performance, the expenditures are capitalized as an additional cost of plant and equipment. Construction in progress represents structures under construction and is stated at cost. This includes the costs of construction and equipment and other direct costs. Borrowing costs that are

F-103

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) directly attributable to the construction of plant and equipment are capitalized during the construction period. Construction in progress is not depreciated until such time that the relevant assets are ready for use. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:
Number of Years

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment, furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tools and small equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1040 2050 550 26 57 25 550 or term of the lease, whichever is shorter

The remaining useful lives, residual values and depreciation and amortization method are reviewed periodically to ensure that such periods and method of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of plant and equipment. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization is credited or charged to current operations. When each major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. An item of 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 the carve-out special purpose statements of income in the year the asset is derecognized. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with finite useful life are reviewed at least at each balance sheet date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by charging the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the carve-out special purpose statements of income in the expense category consistent with the function of the intangible asset.

F-104

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Amortization is computed using the straight-line method over the following estimated useful lives of intangible assets with finite lives:
Number of Years

Computer software Leasehold rights

28 20 or term of lease whichever is shorter

Intangible assets with indefinite useful lives, such as trademarks, brands and licenses are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite useful life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from disposition of an intangible asset are measured as the difference between the disposal proceeds and the carrying amount to the asset and are derecognized in the carve-out special purpose statements of income when the asset is disposed. Impairment of Non-financial Asset with Definite Useful Life The carrying values of plant and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and if the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of plant and equipment is the greater of fair value less cost to sell or value in use. The fair value less cost to sell is the amount obtainable from the sale of an asset in an arms-length transaction less costs to sell. 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 of continuing operations are recognized in the carve-out special purpose statements of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Provisions Provisions are recognized only when the Division 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. 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

F-105

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) the provision due to the passage of time is recognized as interest expense. Where the Division expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Division and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sales. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably, which is normally upon delivery. Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Leases Finance leases, which transfer to the Division substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly in current operations. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms. Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the carve-out special purpose statements of income on a straight-line basis over the lease term. Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Research and Development Costs Research costs are expensed as incurred. Development cost incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured. Any expenditure carried forward is amortized in line with the expected future sales from the related project. The carrying value of development cost is reviewed for impairment annually when the related asset is not yet in use. Otherwise, this is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

F-106

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Retirement Costs The Parent Company has a funded, noncontributory retirement plan administered by trustees, covering the Divisions permanent employees. Retirement costs are actuarially determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees projected salaries. Actuarial gains and losses are recognized as income or expenses when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. The transitional liability as of January 1, 2005, the date of adoption of PAS 19, is recognized as an expense over five years from date of adoption. The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, the plan, past service cost is recognized immediately. The net retirement liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the resulting asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately. Foreign Currency Transactions and Translations The Divisions carve-out special purpose statements are presented in Philippine peso, which is also the Divisions functional and presentation currency. Transactions in foreign currencies are recorded using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing rate of exchange at the financial statements date. All differences are taken in the carve-out special purpose statements of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

F-107

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Taxes Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at financial statements date. Deferred Tax. Deferred income tax is provided using the balance sheet liability method on all temporary differences at the financial statements date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of unused tax credits and unused tax losses can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at the financial statements date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the financial statements date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the financial statements date. Income tax relating to items recognized directly in the carve-out special purpose statements of net assets is recognized in the carve-out special purpose statements of net assets and not in the carve-out special purpose statements of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

F-108

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Sales Tax. Revenues, expenses and assets are recognized net of the amount of sales tax, except: where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the carve-out special purpose statements. Contingencies Contingent liabilities are not recognized in the carve-out special purpose statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the carve-out special purpose statements but are disclosed when an inflow of economic benefits is probable. Events After the Financial Statements Date Post-financial statements date events that provide additional information about the Divisions position at financial statements date (adjusting events) are reflected in the Divisions carve-out special purpose statements. Post-financial statements events that are not adjusting events are disclosed in the notes to the carve-out special purpose statements when material. 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The Divisions carve-out special purpose statements require management to make judgments and estimates that affect amounts reported in the carve-out special purpose statements and related notes. Judgments In the process of applying the Divisions accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the Divisions carve-out special purpose statements: Operating Leases. The Division has entered into various lease agreements as a lessee. The Division has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under operating lease arrangements. Rent expense charged to operations amounted to P 337 and P 370 in 2007 and 2006, respectively (Note 13). Functional Currency. The carve-out special purpose statements are presented in Philippine peso, which is also the Divisions functional currency. Estimates The estimates and assumptions used in the Divisions carve-out special purpose statements are based on managements evaluation of relevant facts and circumstances as of the date of the Divisions carve-out special purpose statements. Actual results could differ from such estimates.

F-109

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Allowances for Doubtful Accounts. Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Division evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Divisions relationship with the customers, the customers current credit status based on third party credit reports and known market forces, average age of accounts, collection experience, and historical loss experience. The allowance for doubtful accounts amounted to P 693 and P 939 as of September 30, 2007 and 2006, respectively. The carrying value of trade and other receivables amounted to P 2,758 and P4,579 as of September 30, 2007 and 2006, respectively (Note 5). Allowances for Inventory Losses. The Division provides allowance for inventories whenever net realizable value becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The allowance account is reviewed periodically to reflect the accurate valuation in the financial records. The allowance for inventory losses amounted to P 737 and P 100 as of September 30, 2007 and 2006, respectively. The carrying value of inventories amounted to P 3,084 and P 3,550 as of September 30, 2007 and 2006, respectively (Note 6). Useful Lives of Plant and Equipment. The Division estimates the useful lives of plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of plant and equipment would increase recorded operating expenses and decrease noncurrent assets. Accumulated depreciation and amortization of plant and equipment amounted to P 15,057 and P15,495 as of September 30, 2007 and 2006, respectively. Plant and equipment, net of accumulated depreciation and amortization amounted to P 5,413 and P 5,735 as of September 30, 2007 and 2006, respectively (Note 8). Useful Lives of Intangible Assets with Finite Lives. The useful lives of intangibles assets are assessed at the individual asset level as having either a finite or indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all relevant factors, there is not foreseeable limit of the period over which the asset is expected to generate net cash inflows for the Division. Intangible assets with finite useful life amounted to P 3 as of September 30, 2007. Realizability of Deferred Tax Assets. The Division reviews its deferred tax assets at each financial statements date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets amounted to P 528 and P 318 as of September 30, 2007 and 2006, respectively (Note 11).

F-110

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Impairment of Non-financial Assets. The Division reviews its assets to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the carve-out special purpose statements, the Division makes judgments as to whether there are observable data indicating that there is a measurable decrease in the estimated cash flows from its assets. This evidence may include indications of adverse changes in the payment status of debtor, or national or local economic conditions that correlate with defaults on assets. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Retirement Cost and Other Retirement Benefits. The determination of the Divisions obligation and cost of retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 19 to the carve-out special purpose statements and include discount rate expected return on plan assets and salary increase rates. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. Net unrecognized actuarial losses amounted to P 1,132 and P 941 respectively as of September 30, 2007 and 2006 (Note 19). Financial Assets and Liabilities . The Division carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. Significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Division utilized different valuation methodologies and assumptions. Any change in the fair value of these financial assets and liabilities would affect net income and carve-out special purpose statement of net assets . Fair value of financial assets and liabilities is discussed in Note 21. Asset Retirement Obligation. Determining asset retirement obligation requires estimation of the cost of dismantling of plant and equipment and other costs of restoring the leased properties to their original condition. The Division determined that there are no significant asset retirement obligations as of September 30, 2007 and 2006. 5. TRADE AND OTHER RECEIVABLES This account consists of:
Note 2007 2006

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed by related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

P2,861 P4,858 202 148 388 512 3,451 (693) P2,758 5,518 (939) P4,579

Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trade receivables are non-interest bearing and are generally on 30 days credit term.

F-111

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 6. INVENTORIES This account consists of:
2007 2006

Finished goods and goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,001 P1,016 Containers at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,531 1,943 Materials and supplies at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 591 Total inventories at lower of cost and net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . P3,084 P3,550

The cost of containers and material and supplies as of September 30, 2007 and 2006 amounted to P 2,820 and P 2,634, respectively. 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS This account consists of:
Note 2007 2006

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stamp tax inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

P84 14 44 P142

P119 289 (2) P406

F-112

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 8. PLANT AND EQUIPMENT This account consists of:
Machinery and Equipment Cost: December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization: December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net book value: December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost: December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization: December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net book value: December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P16,226 494 (820) 15,900 13,273 462 (812) 12,923 P2,953 P2,977 P15,938 231 (27) 16,142 12,690 471 (27) 13,134 P3,248 P3,008 Land Improvements P471 16 (3) 484 380 13 (3) 390 P91 P94 P460 6 466 367 9 376 P93 P90 Transportation Equipment P564 (163) 401 485 20 (162) 343 P79 P58 P570 10 (7) 573 474 23 (7) 490 P96 P83 Leasehold Improvement P98 (17) 81 53 4 (16) 41 P45 P40 P82 16 98 48 4 52 P34 P46 Office Equipment, Furniture and Fixtures P514 6 (158) 362 498 10 (158) 350 P16 P12 P527 2 (5) 524 501 10 (5) 506 P26 P18 Tools and Small Equipments P14 (5) 9 13 (5) 8 P1 P1 P13 1 14 12 1 13 P1 P1 Construction in Progress

Buildings P3,029 2 (11) 3,020 941 68 (7) 1,002 P2,088 P2,018 P2,997 19 3,016 862 62 924 P2,135 P2,092

Total

P387 P21,303 (174) 344 (1,177) 213 P387 P213 P384 13 397 P384 P397 20,470 15,643 577 (1,163) 15,057 P5,660 P5,413 P20,971 298 (39) 21,230 14,954 580 (39) 15,495 P6,017 P5,735

F-113

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Depreciation and amortization charged to operations amounted to R 577 and R 580 in 2007 and 2006, respectively (Note 14). No interest was capitalized in 2007 and 2006. 9. OTHER NONCURRENT ASSETS This account consists of:
Note 2007 2006

Deferred containers expense net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

P4,724 19,480 P24,204

P5,389 7,779 P13,168

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES This account consists of:
Note 2007 2006

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 21

P935 P1,759 436 160 86 35 1,336 1,087 P2,793 P3,041

Accrued expenses include accruals for employee liabilities, advertising and promotions, utilities and outside labor and others. 11. INCOME TAXES Deferred tax assets arise from the following:
2007 2006

Allowance for inventory losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P258 242 28 P528

P35 328 (45) P318

The components of the provision for income tax are shown below:
2007 2006

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P3,323 P2,905 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (108) (33) P3,215 P2,872

F-114

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The reconciliation of statutory income tax rate on income before income tax and the Divisions effective income tax rate are as follows:
2007 2006

Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory income tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in income taxes rates resulting from: Interest income subjected to final tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P9,187 35.00%

P8,206 35.00%

(0.01) 34.99%

(0.01) 34.99%

On May 24, 2005, Republic Act No. 9337 entitled An Act Amending the National Internal Revenue Code, as amended, with Salient Features (Act), was passed into a law effective November 1, 2005. Among others, the Act increased the corporate income tax rates from 32% to 35% starting November 1, 2005 and 30% starting January 1, 2009 and onwards. 12. COST OF SALES This account consists of:
Note 2007 2006

Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications, light, fuel and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P10,099 3,776 1,033 15 585 14 477 216 408 P16,594

P8,921 3,815 1,008 598 461 256 394 P15,453

13. ADMINISTRATIVE AND SELLING EXPENSES Administrative and selling expenses consist of:
2007 2006

Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P3,846 P3,398 Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,333 2,436 P6,179 P5,834

F-115

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Administrative expenses consist of:
Note 2007 2006

Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Breakages and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication, light and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15 14

P911 727 624 603 104 77 60 34 12 694 P3,846

P763 676 324 502 106 52 35 33 36 871 P3,398

Selling expenses consist of:

Note 2007 2006

Freight, trucking and handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

14

P930 438 346 260 47 33 23 256 P2,333

P927 475 287 318 41 34 59 295 P2,436

14. DEPRECIATION AND AMORTIZATION Depreciation and amortization are distributed as follows:
2007 2006

Cost of sales: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and selling expenses: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred containers and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P477 100 660 P1,237

P461 119 591 P1,171

F-116

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 15. PERSONNEL EXPENSES
Note 2007 2006

Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

P804 215 915 P1,934

P887 162 787 P1,836

The above amounts are distributed as follows:

2007 2006

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P585 911 438 P1,934

P598 763 475 P1,836

16. OTHER INCOME This account consists of:

2007 2006

Marked-to-market gain net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange loss net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) on sale of plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P9 P69 3 3 (14) (9) 2 (2) (3) P1 P57

F-117

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 17. RELATED PARTY DISCLOSURES The Division, in the normal course of business, purchases products and services with related parties.
Revenue From Related Parties Purchases From Related Parties Amounts Owed by Related Parties Amounts Owed to Related Parties

Relationship with Related Parties

Year

San Miguel Corporation . . . . . . . . . . . . . . . . . . San Miguel Packaging Specialists, Inc. . . . . . .

Parent Company Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control

2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006

P 44 34 3 29 3 16 17 22 95 89 2 P206 P148

P P19,480 7,779 1,378 1,493 8 17 266 249 39 37 19 159 358 16 14 2 2 63 12 1 2 35 7 17 74 106 10 21 2

P 380 120 1 4 17 15 19 8 13 1 13 5 P436 P160

San Miguel Rengo Packaging Corporation . . .

SMC Shipping and Lighterage Corporation . . .

SMITS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .

San Miguel Yamamura Asia Corporation . . . .

Ginebra San Miguel, Inc. and a subsidiary . . . .

San Miguel Beverages, Inc. . . . . . . . . . . . . . . . San Miguel International Ltd. and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Pure Foods Co., Inc. and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,084 P19,682 P1,973 P7,927

F-118

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) a. Purchases consist of purchase of materials, bottles, shells, cartons and water products from related parties. Amounts owed by related parties consist of trade receivables, share in expenses, rental and management fees. Amounts owed to related parties consist of trade payables, professional fees, insurance, cash advances and commodity hedges. The compensation of key management personnel of the Division, by benefit type, follows:
2007 2006

b.

c.

d.

Short-term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P41 8 6 P55

P40 11 4 P55

18. LEASING AGREEMENTS Finance Leases Leases as Lessee The Divisions finance leases concern office equipment. There is no subleasing. The lease provides the Division with the option to purchase the equipment at a beneficial price. As of September 30, 2007 and 2006, the net carrying amount of leased office equipment was P 2 and P5, respectively. Finance lease liabilities as of September 30, 2007 and 2006 are payable as follows:
2007 Minimum Lease Payments

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1.9 P1.9

P0.1 P0.1
2006

P1.8 P1.8

Minimum Lease Payments

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2.8 1.9 P4.7

P0.2 0.1 P0.3

P2.6 1.8 P4.4

F-119

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Operating Leases Leases as Lessee The Division leases the land where its breweries and some of its sales offices are situated and a number of offices and warehouses under operating leases. The leases typically run for a period of one to two years. Some leases provide an option to renew the lease after that date and are subject to review to reflect current market rentals. As of September 30, 2007 and 2006, the Division has no non-cancellable operating leases. 19. Retirement Plan The Parent Company has funded, noncontributory retirement plan covering the Divisions permanent employees. Contributions and costs are determined in accordance with the actuarial studies made for the plan. Annual cost is determined using the projected unit credit method. The Divisions latest actuarial valuation date is December 31, 2007. Valuations are obtained on a periodic basis. Based on the December 31, 2007 actuarial valuation, retirement costs and other related balances were allocated between the Parent Company and the Division on the basis of percentage of past service liability. Retirement costs charged by the Division to operations amounted to P 215 and P 162 (Note 15) in September 30, 2007 and 2006, respectively, inclusive or net of imputed interest. The Divisions annual contribution to the retirement plans consists of payments covering the current service cost and amortization of past service liability. The components of retirement cost recognized in the carve-out special purpose statements of income for the periods ended September 30, 2007 and 2006 and the amounts recognized in the carve-out special purpose statements of net assets as of September 30, 2007 and 2006 are as follows:
2007 2006

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of transitional liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P218 126 47 42 (218) P215 P3,122

P342 101 47 (328) P162 P3,090

The retirement cost is recognized in the following line items in the carve-out special purpose statements of income:
2007 2006

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P36 179 P215

P43 119 P162

F-120

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The reconciliation of the assets and liabilities recognized in the carve-out special purpose statement of net assets is as follows:
2007 2006

Present value of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,611 P4,236 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,122) (3,090) Unrecognized actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net transitional liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,489 (1,132) (142) P215 1,146 (941) (205) P

The changes in the present value of the defined benefit obligation in 2007 and 2006 are as follows:
2007 2006

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,267 P4,144 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 342 Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 101 Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,114 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,465) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The movements in the fair value of the plan assets are as follows:
2007 2006

P4,611

P4,236

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,904 P3,650 Expected return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 328 Actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Contributions by employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,465) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan assets consist of the following:
In Percentages 2007 2006

P3,122

P3,090

Stock trading portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed income portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30 70

30 70

The overall expected rate of return is determined based on historical performance of investments.

F-121

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The principal actuarial assumptions used to determine retirement benefits are as follows:
In Percentages 2007 2006

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.8 6.0 10.0

6.8 6.0 10.0

The historical information of the amounts for the current and previous two annual periods is as follows:
2007 2006

Present value of the defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,611 P4,236 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,122 3,090 The Division expects to pay P 285 in contributions to defined benefit plans in 2007. 20. FINANCIAL INSTRUMENTS Financial Risk Management Objectives and Policies The Divisions carve-out special purpose statements include non-derivative instruments such as cash and derivative instruments such as currency forwards and commodity options. The main purpose of these financial instruments is to manage identified financial risks. The Division has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the use of financial instruments are foreign exchange risk, commodity price risk, liquidity risk, and credit risk. The Division uses derivatives to manage its exposures to foreign exchange and commodity price risks arising from the Divisions operations. It is the Divisions policy to ensure that capabilities exist for active and prudent management of its financial risks. The Division does not engage in any speculative derivative transactions. Foreign Exchange Risk The Divisions exposure to foreign exchange risk results from its business transactions denominated in foreign currency. The Division uses a combination of natural hedges and derivative hedges to manage its foreign exchange exposure. It uses currency derivatives to reduce earnings volatility related to foreign exchange movements. Short-term currency forward contracts are entered into to manage foreign currency risks arising from importations, revenue and expense transactions, and other foreign currency denominated obligations.

F-122

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Information on the Divisions foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalent are as follows:
2007 U.S. Dollar Peso Equivalent U.S. Dollar 2006 Peso Equivalent

Assets Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . US$3 Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . Net foreign currency-denominated . . . . . . . . . . . . . . . . . . . . . . . . . . . US$3 Commodity Price Risk

P123 1 P122

US$3 US$3

P171 17 P154

The Division enters into various commodity derivatives to manage its price risk on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Division, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show marked-to-market losses; however, any loss in the marked-to-market positions is offset by the resulting lower physical raw material cost. SMC enters into commodity derivative transactions in behalf of the Division to reduce cost by optimizing purchasing synergies within the Group and managing inventory levels of common materials. Commodity Options . Commodity options are used to manage the Divisions exposures to volatility in prices of certain commodities such as fuel oil. Liquidity Risk Liquidity risk arises from the possibility that the Division may encounter difficulties in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstances. The Divisions objectives to manage its liquidity profile are: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to be able to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities. Credit Risk Credit risk, or the risk of counterparties defaulting, is controlled by the application of credit approvals, limits and monitoring procedures. It is the Divisions policy to enter into transactions with a diversity of creditworthy parties to mitigate any significant concentration of credit risk. The Division ensures that sales of products are made to customers with appropriate credit history and has internal mechanism to monitor the granting of credit and management of credit exposures. The Division has made provisions, where necessary, for potential losses on credits extended. Where appropriate, the Division obtains collateral or arranges master netting agreements.

F-123

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The Divisions exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments, net of the value of collaterals, if any. The Division has no significant concentration of credit risk with any counterparty. 21. FINANCIAL ASSETS AND LIABILITIES The table below presents a comparison by category of carrying amounts and fair values of the Divisions financial instruments as of September 30, 2007 and 2006:
2007 Carrying Amount Fair Value 2006 Carrying Amount Fair Value

Financial assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets (included under Prepaid expenses and other current assets account) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities (included under Accounts payable and accrued expenses account) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P396 2,758 84 2,707 86

P396 2,758 84 2,707 86

P705 4,579 119 3,006 35

P705 4,579 119 3,006 35

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Receivables. The carrying amounts of cash and receivables approximate fair value primarily due to the relatively short-term maturity of these financial instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. The fair values of derivatives are determined based on prices obtained from the market and counterparties. Fair values are also based on standard valuation models. Accounts Payable and Accrued Expenses. The carrying amount of accounts payable and accrued expenses approximates fair value due to the relatively short-term maturity of these financial instruments. Derivative Financial Instruments The Divisions derivative financial instruments according to the type of financial risk being managed and the details of freestanding and embedded derivative financial instruments that are categorized into those accounted for as hedges and those that are not designated as hedges are discussed as follows: The Division enters into commodity options to manage its exposure on commodity price risk covering the Divisions requirements on fuel oil.

F-124

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Derivative Instruments Accounted for as Hedges Cash Flow Hedge Commodity Options As of September 30, 2007 and 2006, the Division has outstanding option agreements to buy fuel oil with a notional quantity of 1,485 and 2,176 metric tons, respectively. The call and put options can be exercised at various calculation dates in 2007 and 2006 with specified quantities on each calculation date. Other Derivative Instruments Not Designated as Hedges The Division enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding and embedded derivatives found in host contracts, which are not designated as accounting hedges. Details are as follows: Freestanding Derivatives Freestanding derivatives consist of commodity derivatives entered into by the Division. Commodity Options As of September 30, 2007 and 2006, the Division has outstanding sold options covering its fuel oil requirements with notional quantities of 1,485 and 2,176 metric tons, respectively. These options can be exercised at various calculation dates in 2007 with specified quantities on each calculation date. The negative fair value of these options as of September 30, 2007 and 2006 amounted to P 6 and P 1, respectively. Embedded Derivatives The Divisions embedded derivatives include currency derivatives (forwards) embedded in non-financial contracts. Embedded Currency Forwards As of September 30, 2007 and 2006, the total outstanding notional amount of currency forwards embedded in non-financial contracts amounted to P 1,092 and P 1,417, respectively. These non-financial contracts consist mainly of foreign-currency denominated purchase orders, sales agreements and capital expenditures. As of September 30, 2007 and 2006, the net positive fair value of these embedded currency forwards amounted to P 21 and P 120, respectively. 22. OTHER MATTERS a. Commitments The outstanding purchase commitments of the Division as of September 30, 2007 and 2006 amounted to P 5,481 and P 3,639, respectively. Amount authorized but not yet disbursed for capital projects as of September 30, 2007 and 2006 is approximately P 1,453 and P 1,037, respectively. b. Foreign Exchange Rate The foreign exchange rates of P 45.04 and P 50.21 were used in translating the U.S. dollar monetary assets and liabilities to Philippine peso as of September 30, 2007 and 2006, respectively.

F-125

APPENDIX C: CARVE-OUT SPECIAL PURPOSE STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 REPORT OF INDEPENDENT AUDITORS The Board of Directors San Miguel Corporation and San Miguel Brewery Inc. 40 San Miguel Avenue Mandaluyong City We have audited the accompanying carve-out special purpose statements of the domestic beer division of San Miguel Corporation (SMC), which comprise the carve-out statements of net assets as of December 31, 2006, 2005 and 2004, and the carve-out statements of income and carve-out statements of cash flows for each of the years in the period ended December 31, 2006, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Carve-out Special Purpose Statements Management is responsible for the preparation and presentation of these carve-out special purpose statements in accordance with Philippine Financial Reporting Standards. The carve-out special purpose statements contain an aggregation of financial information relating to the domestic beer division of SMC and have been prepared from the books and records maintained by SMC. Management's responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and presentation of carve-out special purpose statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors' Responsibility Our responsibility is to express an opinion on these carve-out special purpose statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the carve-out special purpose statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the carve-out special purpose statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the carve-out special purpose statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and presentation of the carve-out special purpose statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the carve-out special purpose statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the carve-out special purpose statements present fairly, in all material respects, the financial position of the domestic beer division of San Miguel Corporation as of December 31, 2006, 2005 and 2004, and its financial performance and its cash flows for each of the years in the period ended December 31, 2006 in accordance with Philippine Financial Reporting Standards.

F-126

Emphasis of Matter Without qualifying our opinion, we draw attention to Note 2 to carve-out special purpose statements. The carve-out special purpose statements present aggregated financial information of the domestic beer division of San Miguel Corporation. In preparing the carve-out special purpose statements, corporate overhead costs and income taxes have been allocated to the domestic beer division of San Miguel Corporation using the method of allocation described in Note 2 to carve-out special purpose statements. The carve-out special purpose statements may not necessarily be indicative of the financial performance that would have been achieved if the domestic beer division of San Miguel Corporation had operated as an independent entity. MANABAT SANAGUSTIN &CO. [Original Signed] JORGE MA. S. SANAGUSTIN Partner CPA License No. 0030399 SEC Accreditation No. 0026-AR-1 Tax Identification No. 124-282-616 BIR Accreditation No. 08-001987-7-2007 Issued July 10, 2007; Valid until July 9, 2010 PTR No. 0325120 J Issued January 18, 2007 at Makati City November 16, 2007 Makati City, Metro Manila

F-127

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION CARVE-OUT SPECIAL PURPOSE STATEMENTS OF NET ASSETS (In Millions)
December 31 Note 2006 2005 2004

ASSETS Current Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Trade and other receivables net . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5, 20, 21 Inventories net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 6 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . 7, 21 Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Assets Plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 8 4 4, 11 9

P978 4,692 3,202 469 9,341 5,660 4 420 15,482 21,566 30,907

P994 4,935 3,169 268 9,366 6,017 285 6,673 12,975 22,341

P996 2,279 3,795 176 7,246 6,130 224 4,293 10,647 17,893

LIABILITIES Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . Payable to Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent Liability Obligation under finance lease net of current portion . . . . . . . .

10, 20, 21 17 11

3,096 1,139 4,235

2,438 880 3,318 7 3,325 P19,016

2,206 2,659 786 5,651 5,651 P12,242

4, 18

5 4,240

NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P26,667

See Notes to the Carve-out Special Purpose Statements.

F-128

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION CARVE-OUT SPECIAL PURPOSE STATEMENTS OF INCOME (In Millions)
Years Ended December 31 Note 2006 2005 2004

SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADMINISTRATIVE AND SELLING EXPENSES . . . . . . . . . . . . . . . . OTHER INCOME Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

P40,565 P40,978 P37,367 20,687 22,808 20,299 19,878 (8,166) 58 11,770 4,119 P7,651 18,170 (8,390) 221 10,001 3,226 P6,775 17,068 (7,705) 6 9,369 2,998 P6,371

13 16

11

See Notes to the Carve-out Special Purpose Statements.

F-129

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION CARVE-OUT SPECIAL PURPOSE STATEMENTS OF INCOME (In Millions)
Years Ended December 31 Note 2006 2005 2004

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments for: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for doubtful accounts, inventory obsolescence and others . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income before working capital changes . . . . . . . . . . . . . . . . . . . . Decrease (increase) in: Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . Income and other taxes payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash generated from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Increase in other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Additions to plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P11,770 14 16 16 1,621 327 (3) (2) 13,713 172 (290) (201) 659 17 14,070 (4,012) 10,058 (9,654) 4 (427) 3 (10,074) (16) 994 P978

P10,001 1,612 147 (3) (2) 1 11,756 (2,808) 632 (92) 231 31

P9,369 1,522 113 (3) 11,001 302 57 (50) 555 28

9,750 11,893 (1) (3,051) (2,274) 6,698 (5,907) 2 (798) 3 (6,700) (2) 996 P994 9,619 (8,613) 3 (682) 3 (9,289) 330 666 P996

See Notes to the Carve-out Special Purpose Statements.

F-130

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (Amounts in Millions, Except Per Share Data) 1. REPORTING ENTITY The domestic beer division (the Division) of San Miguel Corporation (SMC) was spun-off from SMC resulting in the creation of San Miguel Brewery Inc. (SM Brewery) which was incorporated on July 26, 2007. The Division is engaged in manufacturing, selling and distribution of fermented and malt-based beverages. The registered office address of the Company is 40 San Miguel Avenue, Mandaluyong City, Philippines. SMC (the Parent Company) is the ultimate parent company. The carve-out special purpose statements of the Division as of and for the years ended December 31, 2006, 2005, and 2004 were approved and authorized for issue on November 16, 2007 by the Chief Finance Officer and a Company Director (concurrently the Chief Finance Officer) of SMC and SM Brewery, respectively, as authorized by the Board of Directors of both companies on August 9, 2007 and October 25, 2007, respectively. Incorporation of San Miguel Brewery Inc. On July 24, 2007, the stockholders, during the annual stockholders meeting, approved the transfer of the Divisions assets to a wholly owned subsidiary of SMC, SM Brewery, in exchange for shares of stock. The transfer of the Divisions net assets to SM Brewery is pursuant to its listing with the Philippine Stock Exchange and the public offering of the shares of SM Brewery. The actual transfer of the net assets as of June 30, 2007, excluding land, brands and income and other taxes payable in exchange for shares of stock took effect on October 1, 2007. 2. BASIS OF PREPARATION Statement of Compliance The carve-out special purpose statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRSs). PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC). The carve-out special purpose statements present aggregated financial information of the domestic beer division of SMC. In preparing the carve-out special purpose statements, corporate overhead costs and income taxes have been allocated to the domestic beer division of SMC using the method of allocation set out below. The carve-out special purpose statements may not necessarily be indicative of the financial performance that would have been achieved if the domestic beer division of SMC had operated as an independent entity. The carve-out special purpose statements were derived from the separate accounting records maintained by SMC for the Division. Statements of Net Assets The carve-out statements of net assets represent the historical financial position of the Divisions business. These net assets exclude land and brands. Statements of Income The carve-out special purpose statements of income include allocation of certain general corporate expenses and income taxes. The general corporate expenses allocated to the Division are primarily for corporate officers, corporate governance, corporate finance and accounting, human resources, corporate purchasing and legal and regulatory affairs. These costs have been

F-131

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) allocated on the basis of amounts agreed upon between the Division and the Parent Company. Management believes the costs of these services charged to the Division are a reasonable allocation of the costs historically incurred by the Division. Following the transfer, the Division will be charged a shared service fee by SMC based on certain percentage of net sales. Statements of Cash Flows The cash generated from operations and capital expenditures in the cash flow from investing activities are representative of the historical cash flows of the Division. Basis of Measurement The carve-out special purpose statements of the Division have been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value. Functional and Presentation Currency The carve-out special purpose statements are presented in Philippine peso, which is the Divisions functional and presentation currency, and all values are rounded to the nearest million (P 000,000), except when otherwise indicated. 3. SIGNIFICANT ACCOUNTING POLICIES Adoption of New Standards, Amendments to Standards and Interpretations The FRSC, (the successor body to the Accounting Standards Council), approved the adoption of new standards, amendments to standards, and interpretations. The Division applied PFRS 1, First-time Adoption of Philippine Reporting Standards , in preparing the carve-out special purpose statements with January 1, 2004 as the date of transition. PFRS states that depreciation should reflect the useful life of the significant components of the assets. Under previous GAAP, depreciation was based on the useful life determined for each category of plant and equipment. In 2005, there were changes in the useful lives of certain machinery and equipment which were accounted for as changes in estimates and recognized in the current and future years. The Division availed of the exemption under PFRS 1 and applied PAS 39, Financial Statements: Recognition and Measurement , from January 1, 2005. The cumulative effect of adopting the standard was charged to the January 1, 2005 retained earnings. The Division also chose to recognize the transitional liability arising from the change in accounting for benefits provided under the Parent Companys defined benefit plan as an expense on a straight line basis over five years from January 1, 2005 as permitted under PAS 19, Employee Benefits . New Accounting Standards Adopted in 2005 PAS 19, Employee Benefits , results in the use of the projected unit credit method in measuring retirement benefit expense and a change in the manner of computing benefit expense relating to past service cost and actuarial gains and losses. It requires the entity to determine the present value of defined benefit obligations and the fair value of any plan

F-132

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) assets with sufficient regularity that the amounts recognized in the financial statements do not differ materially from the amounts that would be determined at balance sheet date. PAS 32, Financial Instruments: Disclosure and Presentation , covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about an entitys financial instruments, whether recognized or unrecognized in the financial statements. New disclosure requirements include terms and conditions of financial instruments used by the company, types of risks associated with both recognized and unrecognized financial instruments (foreign exchange 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 the entitys financial risk management policies and objectives. The standard also requires financial instruments to be classified as debt or equity in accordance with their substance and not their legal form. PAS 39, Financial Instruments: Recognition and Measurement , establishes the accounting and reporting standards for the recognition and measurement of an entitys financial assets and financial liabilities. PAS 39 requires financial instruments at fair value through profit or loss to be recognized initially at fair value, including related transaction costs. Subsequent to initial recognition, an entity should measure financial assets at their fair values, except for loans and receivables and held-to-maturity investments, which are measured at amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at amortized cost, except for liabilities classified under fair value through profit and loss and derivatives, which are subsequently measured at fair value. PAS 39 also establishes the accounting and reporting standards requiring that every derivative instrument (including certain derivatives embedded in other contracts) be recorded in the financial statements as either an asset or liability measured at its fair value. PAS 39 requires that changes in the derivatives fair value be recognized currently in the statements of income unless specific hedges allow a derivatives gains and losses to offset related results on the hedged item in the statements of income, or deferred in equity as Cumulative translation adjustments. PAS 39 requires the entity to formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. 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 that the cost of an item of property, plant and equipment should include the costs of its dismantlement, removal or restoration, the obligation for which the entity incurs as a consequence of installing the item or of using the item during a particular period for purposes other than to produce inventories during that period.

Other PAS Adopted in 2005 The Division has also adopted the following PAS. The adoption of these standards has no effect on the carve-out special purpose statements of net assets of the Division at January 1, 2004. PAS 1, Presentation of Financial Statements ; PAS 2, Inventories ; PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors ;

F-133

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) PAS 10, Events After the Balance Sheet Date ; PAS 17, Leases ; and PAS 24, Related Party Disclosures .

Amendments to Standards and Interpretations Adopted in 2006 Starting January 1, 2006, the Division adopted the following new and amended PAS and Philippine Interpretation from IFRIC: Amendment to PAS 19, Employee Benefits Actuarial Gains and Losses, Group Plans and Disclosures, provides an option for recognizing actuarial gains and losses in full in the period in which they occur, outside profit or loss. The amendment also (a) specifies how group entities should account for defined benefit group plans in their separate or individual financial statements and (b) requires entities to provide additional disclosures. Amendment to PAS 21, Effects of Changes in Foreign Exchange Rates , states that all exchange differences arising from a nonmonetary item that forms part of the entitys net investment in foreign operations are recognized in a separate component of equity in the financial statements regardless of the currency in which the monetary item is denominated. Amendment to PAS 39, Financial Instruments: Recognition and Measurement Cash Flow Hedge Accounting of Forecast Intragroup Transactions, permits the foreign currency risk of a highly probable intragroup forecast transaction to qualify as a hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into the transaction and that the foreign currency risk will affect the statements of income. Amendment to PAS 39, Financial Instruments: Recognition and Measurement The Fair Value Option, limits the fair value option to those financial instruments that meet the following conditions: where such designation eliminates or significantly reduces an accounting mismatch, when a group of financial assets, financial liabilities or both are managed and their performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy, and when an instrument contains an embedded derivative that meets particular conditions. Amendment to PAS 39, Financial Instruments: Recognition and Measurement Financial Guarantee Contracts, requires the issuer of a financial guarantee contract to measure the contract: initially at fair value and subsequently at the higher of (a) the amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets and (b) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with PAS 18, Revenue. However, if specified criteria are met, the issuer may use the fair value option in PAS 39. Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease , provides guidance for determining whether an arrangement, comprising a transaction or a series of related transactions, that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments, is or contains, a lease that should be accounted for in accordance with PAS 17, Leases .

The adoption of the above amendments to PAS and Philippine interpretation from IFRIC did not have a material effect on the carve-out special purpose statements.

F-134

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) New Standard, Amendments to Standards and Interpretations to be Adopted in 2007 The Division will reflect the effect of the following new and amended PFRS and PAS and Philippine Interpretation from IFRIC in SM Brewerys December 31, 2007 year end financial statements: PFRS 7, Financial Instruments: Disclosures , requires extensive disclosures about the significance of financial instruments for an entitys financial position and performance, and quantitative and qualitative disclosures on the nature and extent of risks. Amendments to PAS 1, Presentation of Financial Statements Capital Disclosures, requires additional disclosures regarding the entitys objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. IFRIC 8, Scope of PFRS 2 Share-based Payment , addresses the accounting for share-based payment transactions in which some or all of goods or services received cannot be specifically identified. IFRIC 9, Reassessment of Embedded Derivatives, requires that a reassessment of whether embedded derivative should be separated from the underlying host contract to be made only when there are changes to the contract that significantly modifies the cash flows. IFRIC 10, Interim Financial Reporting and Impairment , prohibits the reversal of impairment losses on certain financial assets recognized in interim financial reports even if the impairment is no longer present at the balance sheet date.

The adoption of the above standard, amendments to the standards and Philippine interpretation from IFRIC is not expected to have any material effect on SM Brewerys year end financial statements. New Standard and Interpretation Not Yet Adopted The following are the new standard and interpretation which are not yet effective as of December 31, 2007 and have not been applied in preparing the Divisions carve-out special purpose statements: PFRS 8, Operating Segments , requires an entity to adopt the management approach in reporting segment information. This will be effective January 1, 2009 and will replace PAS 14, Segment Reporting . It is required for adoption only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the SEC for purposes of issuing any class of instruments in a public market. IFRIC 11, IFRS 2 Group Treasury Share Transactions , describes how to apply PFRS 2, Share-based Payment to share-based payment arrangements involving the entitys own equity instruments and share-based payment arrangements of subsidiaries involving equity instruments. This interpretation will be effective beginning on January 1, 2008.

The adoption of the above standard and Philippine interpretation from IFRIC is not expected to have any significant impact on SM Brewerys year end financial statements. The accounting policies set out below have been consistently applied and adopted in the preparation of the carve-out special purpose statements.

F-135

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Cash Cash includes cash on hand and in banks and is stated at face value. Financial Assets and Liabilities Date of Recognition. The Division recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The fair value of the consideration given or received is determined by reference to the transaction price or other market prices. If such market prices are not reliably determinable, the fair value of the consideration is estimated as the sum of all future cash payments or receipts, discounted using the prevailing market rates of interest for similar instruments with similar maturities. The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction cost. Subsequent to initial recognition, the Division classifies its financial assets and liabilities in the following categories: held-to-maturity (HTM) financial assets, available-for-sale (AFS) investments, FVPL financial assets, and loans and receivables. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of Fair Value. The fair value of financial instruments traded in active markets is based on their quoted market price or dealer price quotation (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Day 1 Profit. Where the transaction price is a non-active market and different from the fair value of the other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Division recognizes the difference between the transaction price and fair value (a Day 1 Profit) in the carve-out special purpose statements of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which are not observable, the difference between the transaction price and model value is only recognized in the carve-out special purpose statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Division determines the appropriate method of recognizing the day 1 profit amount. Financial Assets Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as at FVPL.

F-136

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognized in the carve-out special purpose statements of income. Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on a different basis; or the assets are part of a group of financial assets, financial liabilities or both which are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized.

Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. The Division accounts for its derivative transactions (including embedded derivatives) under this category with fair value changes being reported directly to profit or loss, except when the derivative is treated as an effective accounting hedge, in which case the fair value change is deferred in the carve-out special purpose statements of net assets. The Division has no investments classified as financial assets at FVPL as of December 31, 2006, 2005 and 2004. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS or financial asset at FVPL. Loans and receivables are carried at cost or amortized cost, less impairment in value. Amortization is determined using the effective interest rate method. The Divisions trade and other receivables are included in this category (Note 5). HTM Investments . HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Divisions management has the positive intention and ability to hold to maturity. Where the Division sells other than an insignificant amount of HTM investments, the entire category would be tainted and classified as AFS investments. After initial measurement, these investments are measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the carve-out special purpose statements of income when the HTM investments are derecognized or impaired, or amortized. The Division has no investments classified as HTM investments as of December 31, 2006, 2005 and 2004. AFS. AFS investments are those non-derivative financial assets that are designated in this category or are not classified in any of the other categories. Subsequent to initial recognition,

F-137

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) AFS investments are carried at fair value in the carve-out special purpose statements of net assets. Changes in the fair values of such assets are reported in the carve-out special purpose statements of net assets until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gains or losses previously reported in carve-out special purpose statements of net assets is transferred to the carve-out special purpose statements of income. Interest earned on holding AFS investments is recognized in the carve-out special purpose statements of income using the effective interest rate. The Division has no investments classified under this category as of December 31, 2006, 2005 and 2004. Financial Liabilities Financial Liability at FVPL. Financial liabilities are classified in this category if these result from trading activities or derivative transactions that are not accounted for as accounting hedges, or when the Division elects to designate a financial liability under this category. Included in this category are the Divisions derivative financial instrument with negative fair values that are not accounted for under cash flow hedge accounting (Note 21). Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest rate method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Included in this category are the Divisions accounts payable and accrued expenses (Note 10). Derivatives and Hedge Accounting Freestanding Derivatives For the purpose of hedge accounting, hedges are classified as either: a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); or b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or c) hedges of a net investment in foreign operation. At the inception of a hedge relationship, the Division formally designates and documents the hedge relationship to which the Division wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

F-138

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in the carve-out special purpose statements of income. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in the carve-out special purpose statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately. As of December 31, 2006, 2005 and 2004, the Division has no outstanding derivatives accounted for as fair value hedges. Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are included in the carve-out special purpose statements of net assets. The ineffective portion is immediately recognized in the carve-out special purpose statements of income. If the hedged cash flow results in the recognition of an asset or a liability, all gains and losses previously recognized directly in the carve-out special purpose statements of net assets are included in the initial measurement of the cost or carrying value of the asset or liability. Otherwise, for all other cash flow hedges, gains and losses initially recognized in the carve-out special purpose statements of net assets are transferred to profit or loss in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the carve-out special purpose statements of income. When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In this case, the cumulative gains or losses on the hedging instrument that has been reported directly in the carve-out special purpose statements of net assets is retained in the carve-out special purpose statements of net assets until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gains or losses previously reported in the carve-out special purpose statements of net assets is recognized in the carve-out special purpose statements of income . As of December 31, 2006, 2005 and 2004, the Division has outstanding commodity options designated as effective cash flow hedges. Net Investment Hedge. As of December 31, 2006, 2005 and 2004, the Division has no hedge of a net investment in a foreign operation. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value on derivatives are taken directly to profit or loss during the year incurred.

Embedded Derivatives An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss.

F-139

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Derecognition of Financial Assets and Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; or the Division retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Division has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Division has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Divisions continuing involvement in the asset. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Division assesses at reporting date whether a financial asset or group of financial assets is impaired. Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial assets original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of loss shall be recognized in the carve-out special purpose statements of income. The Division first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the carve-out special purpose statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

F-140

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Assets Carried at Cost. If there is objective evidence of an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or of a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. AFS Investments. For AFS investments, the Division assesses at the reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the carve-out special purpose statements of income, is removed from the carve-out special purpose statements of net assets and recognized in the carve-out special purpose statements of income. Impairment losses on equity investments are not reversed through the carve-out special purpose statements of income. Increases in fair value after impairment are recognized directly in the carve-out special purpose statements of net assets. In the case of debt instruments classified as AFS, impairment is based on the same criteria as loans and receivables and HTM financial assets. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset. If, in the subsequent year, the fair value of a debt instrument can be objectively related to an asset occurring after the impairment loss was recognized in the carve-out special purpose statements of income, the impairment loss is reversed through the carve-out special purpose statements of income. Classification of Financial Instruments Between Debt and Equity A financial instrument is classified as debt if it provides for a contractual obligation to: Deliver cash or another financial asset to another entity; or Exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Division; or Satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

If the Division does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the carve-out special purpose statements of net assets if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the carve-out special purpose statements of net assets .

F-141

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Inventories Finished goods, goods in process and materials and supplies are valued at the lower of cost and net realizable value. Costs incurred in bringing each inventory to its present location and conditions are accounted for as follows: Finished goods and goods in process cost includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs; costs are determined using the moving-average method; and at cost using the moving-average method.

Materials and supplies

Net realizable value of finished goods and goods in process is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of materials and supplies is the current replacement cost. Containers (i.e., returnable bottles and shells) are stated at deposit value. The excess of the acquisition cost of the containers over their deposit value is presented under Deferred containers expense account included under Other noncurrent assets account and is amortized over the estimated useful lives of ten years. Plant and Equipment Plant and equipment are stated at cost less accumulated depreciation and amortization and any impairment in value. The initial cost of plant and equipment comprises of its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have improved the condition of the asset beyond the originally assessed standard of performance, the expenditures are capitalized as an additional cost of plant and equipment. Construction in progress represents structures under construction and is stated at cost. This includes the costs of construction 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. Construction in progress is not depreciated until such time that the relevant assets are ready for use.

F-142

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:
Number of Years

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment, furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tools and small equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1040 2050 550 26 57 25 550 or term of the lease, whichever is shorter

The remaining useful lives, residual values and depreciation and amortization method are reviewed periodically to ensure that such periods and method of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of plant and equipment. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization is credited or charged to current operations. When each major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. An item of 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 the carve-out special purpose statements of income in the year the asset is derecognized. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with finite useful life are reviewed at least at each balance sheet date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by charging the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the carve-out special purpose statements of income in the expense category consistent with the function of the intangible asset. Amortization is computed using the straight-line method over the following estimated useful lives of intangible assets with finite lives:
Number of Years

Computer software Leasehold rights

28 20 or term of lease whichever is shorter

F-143

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Intangible assets with indefinite useful lives, such as trademarks, brands and licenses are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite useful life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from disposition of an intangible asset are measured as the difference between the disposal proceeds and the carrying amount to the asset and are derecognized in the carve-out special purpose statements of income when the asset is disposed. Impairment of Non-financial Asset with Definite Useful Life The carrying values of plant and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and if the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of plant and equipment is the greater of fair value less cost to sell or value in use. The fair value less cost to sell is the amount obtainable from the sale of an asset in an arms-length transaction less costs to sell. 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 of continuing operations are recognized in the carve-out special purpose statements of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Provisions Provisions are recognized only when the Division 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. 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 interest expense. Where the Division expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain.

F-144

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Division and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sales. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably, which is normally upon delivery. Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Leases Finance leases, which transfer to the Division substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly in current operations. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms. Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the carve-out special purpose statements of income on a straight-line basis over the lease term. Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Research and Development Costs Research costs are expensed as incurred. Development cost incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured. Any expenditure carried forward is amortized in line with the expected future sales from the related project. The carrying value of development cost is reviewed for impairment annually when the related asset is not yet in use. Otherwise, this is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Retirement Costs The Parent Company has a funded, noncontributory retirement plan, administered by trustees, covering the Divisions permanent employees. Retirement costs are actuarially determined using the projected unit credit method. This method reflects service rendered by employees to the date

F-145

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) of valuation and incorporates assumptions concerning employees projected salaries. Actuarial gains and losses are recognized as income or expenses when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. The transitional liability as of January 1, 2005, the date of adoption of PAS 19, is recognized as an expense over five years from date of adoption. The past service cost, if any, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, the plan, past service cost is recognized immediately. The net retirement liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the resulting asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately. Foreign Currency Transactions and Translations The Divisions carve-out special purpose statements are presented in Philippine peso, which is also the Divisions functional and presentation currency. Transactions in foreign currencies are recorded using the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated using the closing rate of exchange at the financial statements date. All differences are taken in the carve-out special purpose statements of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

F-146

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Taxes Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at financial statements date. Deferred Tax. Deferred income tax is provided using the balance sheet liability method on all temporary differences at the financial statements date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of unused tax credits and unused tax losses can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at the financial statements date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the financial statements date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the financial statements date. Income tax relating to items recognized directly in the carve-out special purpose statements of net assets is recognized in the carve-out special purpose statements of net assets and not in the carve-out special purpose statements of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

F-147

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Sales Tax. Revenues, expenses and assets are recognized net of the amount of sales tax, except: where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the carve-out special purpose statements. Contingencies Contingent liabilities are not recognized in the carve-out special purpose statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the carve-out special purpose statements but are disclosed when an inflow of economic benefits is probable. Events After the Financial Statements Date Post-financial statements date events that provide additional information about the Divisions position at financial statements date (adjusting events) are reflected in the Divisions carve-out special purpose statements. Post-financial statements events that are not adjusting events are disclosed in the notes to the carve-out special purpose statements when material. 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The Divisions carve-out special purpose statements require management to make judgments and estimates that affect amounts reported in the carve-out special purpose statements and related notes. Judgments In the process of applying the Divisions accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the Divisions carve-out special purpose statements: Operating Leases. The Division has entered into various lease agreements as a lessee. The Division has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under operating lease arrangements. Rent expense charged to operations amounted to P 500, P 560, and P 503 in 2006, 2005 and 2004, respectively (Note 13). Functional Currency. The carve-out special purpose statements are presented in Philippine peso, which is also the Divisions functional currency. Estimates The estimates and assumptions used in the Divisions carve-out special purpose statements are based on managements evaluation of relevant facts and circumstances as of the date of the Divisions carve-out special purpose statements. Actual results could differ from such estimates.

F-148

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Allowances for Doubtful Accounts. Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Division evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Divisions relationship with the customers, the customers current credit status based on third party credit reports and known market forces, average age of accounts, collection experience, and historical loss experience. The allowance for doubtful accounts amounted to P 920, P 849 and P 697 as of December 31, 2006, 2005 and 2004, respectively. The carrying value of trade and other receivables amounted to P 4,692, P 4,935 and P 2,279 as of December 31, 2006, 2005 and 2004, respectively (Note 5). Allowances for Inventory Losses. The Division provides allowance for inventories whenever net realizable value becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The allowance account is reviewed periodically to reflect the accurate valuation in the financial records. The allowance for inventory losses amounted to P 257 and P 6 as of December 31, 2006, and 2004, respectively. The carrying value of inventories amounted to P 3,202, P 3,169 and P 3,795 as of December 31, 2006, 2005 and 2004, respectively (Note 6). Useful Lives of Plant and Equipment. The Division estimates the useful lives of plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of plant and equipment would increase recorded operating expenses and decrease noncurrent assets. Accumulated depreciation and amortization of plant and equipment amounted to P 15,643, P14,954 and P 14,079 as of December 31, 2006, 2005 and 2004, respectively. Plant and equipment, net of accumulated depreciation and amortization amounted to P 5,660, P 6,017 and P6,130 as of December 31, 2006, 2005 and 2004, respectively (Note 8). Useful Lives of Intangible Assets with Finite Lives. The useful lives of intangibles assets are assessed at the individual asset level as having either a finite or indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all relevant factors, there is not foreseeable limit of the period over which the asset is expected to generate net cash inflows for the Division. Intangible assets with finite useful life amounted to P 4 as of December 31, 2006. Realizability of Deferred Tax Assets. The Division reviews its deferred tax assets at each financial statements date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets amounted to P 420, P 285 and P 224 as of December 31, 2006, 2005 and 2004, respectively (Note 11).

F-149

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Impairment of Non-financial Assets . The Division reviews its assets to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the carve-out special purpose statements, the Division makes judgments as to whether there are observable data indicating that there is a measurable decrease in the estimated cash flows from its assets. This evidence may include indications of adverse changes in the payment status of debtor, or national or local economic conditions that correlate with defaults on assets. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Retirement Cost and Other Retirement Benefits. The determination of the Divisions obligation and cost of retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 19 to the carve-out special purpose statements and include discount rate expected return on plan assets and salary increase rates. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. Net unrecognized actuarial losses amounted to P 1,174 and P 242, respectively as of December 31, 2006 and 2005 (Note 19). Financial Assets and Liabilities . The Division carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. Significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Division utilized different valuation methodologies and assumptions. Any change in the fair value of these financial assets and liabilities would affect net income and carve-out special purpose statement of net assets . Fair value of financial assets and liabilities is discussed in Note 21. Asset Retirement Obligation. Determining asset retirement obligation requires estimation of the cost of dismantling of plant and equipment and other costs of restoring the leased properties to their original condition. The Division determined that there are no significant asset retirement obligations as of December 31, 2006, 2005 and 2004. 5. TRADE AND OTHER RECEIVABLES This account consists of:
Note 2006 2005 2004

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed by related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

P5,018 P5,301 P2,585 183 138 152 411 345 239 5,612 (920) P4,692 5,784 (849) P4,935 2,976 (697) P2,279

Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trade receivables are non-interest bearing and are generally on 30 days credit term.

F-150

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 6. INVENTORIES This account consists of:
2006 2005 2004

Finished goods and goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Containers at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Materials and supplies at net realizable value . . . . . . . . . . . . . . . . . . . . . . . . Total inventories at lower of cost and net realizable value . . . . . . . . . . . . . . . . .

P782 1,697 723 P3,202

P652 1,703 814 P3,169

P893 2,406 496 P3,795

The cost of containers and material and supplies as of December 31, 2006, 2005 and 2004 amounted to P 2,677, P 2,517 and P 2,908, respectively. 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS This account consists of:
Note 2006 2005 2004

Stamp tax inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

P354 74 9 32 P469

P37 179 13 39 P268

P60 14 102 P176

F-151

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 8. PLANT AND EQUIPMENT This account consists of:
Machinery and Equipment Cost: December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . Additions for the year . . . . . . . . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization: December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . Disposals/reclassifications . . . . . . . . . . . . . . . . . December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . Disposals / reclassifications . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . Net book value: December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . P15,070 314 (16) 15,368 583 (13) 15,938 343 (55) 16,226 Land Improvements P446 (1) 445 14 1 460 11 471 Transportation Equipment P533 40 (14) 559 30 (19) 570 14 (20) 564 Leasehold Improvement P67 8 75 7 82 16 98 Office Equipment, Furniture and Fixtures P525 10 (15) 520 11 (4) 527 3 (16) 514 Tools and Small Equipments P12 2 (1) 13 13 1 14 Construction in Progress P120 236 356 28 384 3 387

Buildings P2,801 72 2,873 125 (1) 2,997 36 (4) 3,029

Total P19,574 682 (47) 20,209 798 (36) 20,971 427 (95) 21,303

F-152

11,213 754 (18) 11,949 764 (23) 12,690 634 (51) 13,273 P3,419 P3,248 P2,953

708 71 2 781 72 9 862 83 (4) 941 P2,092 P2,135 P2,088

332 20 (6) 346 21 367 13 380 P99 P93 P91

437 36 (11) 462 31 (19) 474 30 (19) 485 P97 P96 P79

33 4 5 42 6 48 5 53 P33 P34 P45

475 26 (14) 487 17 (3) 501 13 (16) 498 P33 P26 P16

12 1 (1) 12 12 1 13 P1 P1 P1

P356 P384 P387

13,210 912 (43) 14,079 911 (36) 14,954 779 (90) 15,643 P6,130 P6,017 P5,660

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Depreciation and amortization charged to operations amounted to P 779, P 911 and P 912 in 2006, 2005 and 2004, respectively (Note 14). No interest was capitalized in 2006, 2005 and 2004. 9. OTHER NONCURRENT ASSETS This account consists of:
Note 2006 2005 2004

Deferred containers expense net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

P5,240 P5,268 P4,293 10,242 1,405 P15,482 P6,673 P4,293

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES This account consists of:
Note 2006 2005 2004

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts owed to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 21

P1,469 P1,466 P1,618 374 76 78 24 29 1,229 867 510 P3,096 P2,438 P2,206

Accrued expenses include accruals for employee liabilities, advertising and promotions, utilities and outside labor and others. 11. INCOME TAXES Deferred tax assets arise from the following:
2006 2005 2004

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P322 P297 P222 Allowance for inventory losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 2 Derivative assets net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (12) P420 The components of the provision for income tax are shown below:
2006 2005 2004

P285

P224

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,254 P3,286 P3,034 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135) (60) (36) P4,119 P3,226 P2,998

F-153

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The reconciliation of statutory income tax rate on income before income tax and the Divisions effective income tax rate are as follows:
2006 2005 2004

Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in income taxes rates resulting from: Interest income subjected to final tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P11,770 35.00% (.01) 34.99%

P10,001

P9,369

32.50% 32.00% (.01) (.25) (.01)

32.24% 31.99%

On May 24, 2005, Republic Act No. 9337 entitled An Act Amending the National Internal Revenue Code, as amended, with Salient Features (Act), was passed into a law effective November 1, 2005. Among others, the Act increased the corporate income tax rates from 32% to 35% starting November 1, 2005 and 30% starting January 1, 2009 and onwards. 12. COST OF SALES This account consists of:
Note 2006 2005 2004

Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications, light, fuel and water . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P12,168 P13,505 P11,759 5,127 5,458 5,263 1,354 1,487 1,152 15 804 963 839 14 594 727 743 354 319 292 286 349 251 P20,687 P22,808 P20,299

13. ADMINISTRATIVE AND SELLING EXPENSES Administrative and selling expenses consist of:
2006 2005 2004

Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,784 P4,526 P4,115 Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,382 3,864 3,590 P8,166 P8,390 P7,705

F-154

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Administrative expenses consist of:
Note 2006 2005 2004

Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Breakages and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication, light and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15 P1,035 P1,248 P1,012 14 981 835 720 799 746 773 662 630 600 508 288 188 171 179 182 75 71 49 61 58 114 59 71 65 50 48 52 14 14 14 369 P4,784 338 P4,526 346 P4,115

Selling expenses consist of:

Note 2006 2005 2004

Freight, trucking and handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1,233 P1,300 P1,266 627 726 821 425 489 454 458 466 411 90 178 111 74 86 74 14 46 50 59 429 569 394 15 P3,382 P3,864 P3,590

14. DEPRECIATION AND AMORTIZATION Depreciation and amortization are distributed as follows:
2006 2005 2004

Cost of sales: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and selling expenses: Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred containers and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P594 185 842 P1,621

P727 184 701 P1,612

P743 169 610 P1,522

F-155

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 15. PERSONNEL EXPENSES
Note 2006 2005 2004

Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

P1,150 P1,304 P1,171 216 293 185 1,100 1,340 1,316 P2,466 P2,937 P2,672

The above amounts are distributed as follows:

2006 2005 2004

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P804 1,035 627 P2,466

P963 1,248 726 P2,937

P839 1,012 821 P2,672

16. OTHER INCOME This account consists of:

2006 2005 2004

Marked-to-market gain net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P93 P211 P Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 3 Gain on sale of plant and equipment net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 Foreign exchange loss (gain) net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) 8 3 Other financing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (3) P58 P221 P6

F-156

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 17. RELATED PARTY DISCLOSURES The Division, in the normal course of business, purchases products and services from related parties.
Revenue From Related Parties Purchases From Related Parties Amounts Owed by Related Parties Amounts Owed to Related Parties

Relationship with Related Parties

Year

San Miguel Corporation . . . . . . . . . . . . . . . . . . . . . . .

Parent Company Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control Under common control

2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004

P 83 23 9 1 5 11 7 1 28 20 11 111 121 118 2 1 1 P236 P177 P140

P 2,180 3,901 3,112 29 39 33 369 360 364 47 39 44 159 342 3 2 3 4 3 P3,129 P4,346 P3,558

P10,242 1,405 50 10 4 1 5 1 4 3 3 108 109 107 19 10 37 1 1 P10,425 P1,543 P152

P 2,659 252 30 42 11 3 6 33 27 14 3 13 10 71 3 1 5 4 P374 P76 P2,737

San Miguel Packaging Specialists, Inc. . . . . . . . . . . .

San Miguel Rengo Packaging Corporation . . . . . . . .

SMC Shipping and Lighterage Corporation . . . . . . .

SMITS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

San Miguel Yamamura Asia Corporation . . . . . . . . .

Ginebra San Miguel, Inc. and a subsidiary . . . . . . . .

San Miguel Beverages, Inc. . . . . . . . . . . . . . . . . . . . .

San Miguel International Ltd. and subsidiaries . . . . .

San Miguel Pure Foods Company, Inc. and subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-157

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) a. Purchases consist of purchase of materials, bottles, shells, cartons and water products from related parties. Amounts owed by related parties consist of trade receivables, share in expenses, and rental and management fees. Amounts owed to related parties consist of trade payables, professional fees, insurance, cash advances and commodity hedges. The compensation of key management personnel of the Division, by benefit type, follows:
2006 2005 2004

b.

c.

d.

Short-term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P51 P74 P66 Retirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 16 15 Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 8 4 P67 18. LEASING AGREEMENTS Finance Leases Leases as Lessee The Divisions finance leases concern office equipment. There is no subleasing. The lease provides the Division with the option to purchase the equipment at a beneficial price. As of December 31, 2006 and 2005, the net carrying amount of leased office equipment was P 5 and P7, respectively. Finance lease liabilities as of December 31, 2006 and 2005 are payable as follows:
2006 Minimum Lease Payments

P98

P85

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2.8 2.8 P5.6

P0.2 0.1 P0.3

2005

P2.6 2.7 P5.3

Minimum Lease Payments

Interest

Principal

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2.8 5.6 P8.4

P0.4 0.3 P0.7

P2.4 5.3 P7.7

F-158

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Operating Leases Leases as Lessee The Division leases the land where its breweries and some of its sales offices are situated and a number of offices and warehouses under operating leases. The leases typically run for a period of one to two years. Some leases provide an option to renew the lease after that date and are subject to review to reflect current market rentals. As of December 31, 2006, 2005 and 2004, the Division has no non-cancellable operating leases. 19. RETIREMENT PLAN The Parent Company has funded, noncontributory retirement plan covering the Divisions permanent employees. Contributions and costs are determined in accordance with the actuarial studies made for the plan. Annual cost is determined using the projected unit credit method. The Divisions latest actuarial valuation date is December 31, 2006. Valuations are obtained on a periodic basis. Based on the December 31, 2006 actuarial valuation, retirement costs and other related balances were allocated between the Parent Company and the Division on the basis of percentage of past service liability. Retirement costs charged by the Division to operations amounted to P 216 and P 293 (Note 15) in 2006 and 2005, respectively, inclusive or net of imputed interest. The Divisions annual contribution to the retirement plans consists of payments covering the current service cost and amortization of past service liability. The components of retirement cost recognized in the carve-out special purpose statements of income in 2006 and 2005 and the amounts recognized in the carve-out special purpose statement of net assets as of December 31, 2006 and 2005 are as follows:
2006 2005

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of transitional liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P456 135 63 (438) P216 P2,904

P524 117 63 (411) P293 P3,650

The retirement cost is recognized in the following line items in the carve-out special purpose statements of income:
2006 2005

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P55 161 P216

P58 235 P293

F-159

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The reconciliation of the assets and liabilities recognized in the carve-out special purpose statements of net assets is as follows:
2006 2005

Present value of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,267 P4,144 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,904) (3,650) Unrecognized actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net transitional liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,363 (1,174) (189) P 494 (242) (252) P

The changes in the present value of the defined benefit obligation in 2006 and 2005 are as follows:
2006 2005

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,144 P3,741 Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485 99 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 524 Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 117 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,953) (337) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The movements in the fair value of the plan assets are as follows:
2006 2005

P4,267

P4,144

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P3,650 P3,425 Actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553 (142) Expected return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438 411 Contributions by employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 293 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,953) (337) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan assets consist of the following:
In Percentages 2006 2005

P2,904

P3,650

Stock trading portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed income portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30 70

30 70

The principal actuarial assumptions used to determine retirement benefits are as follows:
In Percentages 2006 2005

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.8 6.0 10.0

11.0 6.0 12.0

F-160

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) The historical information of the amounts for the current and previous two annual periods is as follows:
2006 2005

Present value of the defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,267 P4,144 Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,904 3,650 Experience adjustments on plan liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 (265) The Division expects to pay P 285 in contributions to defined benefit plans in 2007. 20. FINANCIAL INSTRUMENTS Financial Risk Management Objectives and Policies The Divisions carve-out special purpose statements include non-derivative instruments such as cash and derivative instruments such as currency forwards and commodity options. The main purpose of these financial instruments is to manage identified financial risks. The Division has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the use of financial instruments are foreign exchange risk, commodity price risk, liquidity risk, and credit risk. The Division uses derivatives to manage its exposures to foreign exchange and commodity price risks arising from the Divisions operations. It is the Divisions policy to ensure that capabilities exist for active and prudent management of its financial risks. The Division does not engage in any speculative derivative transactions. Foreign Exchange Risk The Divisions exposure to foreign exchange risk results from its business transactions denominated in foreign currency. The Division uses a combination of natural hedges and derivative hedges to manage its foreign exchange exposure. It uses currency derivatives to reduce earnings volatility related to foreign exchange movements. Short-term currency forward contracts are entered into to manage foreign currency risks arising from importations, revenue and expense transactions, and other foreign currency denominated obligations. Information on the Divisions foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalent are as follows:
2006 U.S. Dollar Peso Equivalent U.S. Dollar 2005 Peso Equivalent U.S. Dollar 2004 Peso Equivalent

Assets Trade and other receivables . . . . . . . . . . . . . . . . Liabilities Accounts payable and accrued expenses . . . . . . . Net foreign currency-denominated . . . . . . . . . . .

US$5 US$5

P182 12 P170

US$4 US$4

P158 13 P145

US$9 US$9

P208 5 P203

F-161

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Commodity Price Risk The Division enters into various commodity derivatives to manage its price risk on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Division, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show marked-to-market losses; however, any loss in the marked-to-market positions is offset by the resulting lower physical raw material cost. SMC enters into commodity derivative transactions in behalf of the Division to reduce cost by optimizing purchasing synergies within the Group and managing inventory levels of common materials. Commodity Options . Commodity options are used to manage the Divisions exposures to volatility in prices of certain commodities such as fuel oil. Liquidity Risk Liquidity risk arises from the possibility that the Division may encounter difficulties in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstances. The Divisions objectives to manage its liquidity profile are: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to be able to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities. Credit Risk Credit risk, or the risk of counterparties defaulting, is controlled by the application of credit approvals, limits and monitoring procedures. It is the Divisions policy to enter into transactions with a diversity of creditworthy parties to mitigate any significant concentration of credit risk. The Division ensures that sales of products are made to customers with appropriate credit history and has internal mechanism to monitor the granting of credit and management of credit exposures. The Division has made provisions, where necessary, for potential losses on credits extended. Where appropriate, the Division obtains collateral or arranges master netting agreements. The Divisions exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments, net of the value of collaterals, if any. The Division has no significant concentration of credit risk with any counterparty.

F-162

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) 21. FINANCIAL ASSETS AND LIABILITIES The table below presents a comparison by category of carrying amounts and fair values of the Divisions financial instruments as of December 31, 2006, 2005 and 2004:
2006 Carrying Amount Fair Value 2005 Carrying Amount Fair Value 2004 Carrying Amount Fair Value

Financial assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and other receivables net . . . . . . . . . . . . . . . Derivative assets (included under Prepaid expenses and other current assets account) . . . . . . . . . . . . . Financial liabilities Accounts payable and accrued expenses . . . . . . . . . . Derivative liabilities (included under Accounts payable and accrued expenses account) . . . . . . . .

P978 4,692 74 2,378 24

P978 4,692 74 2,378 24

P994 4,935 179 1,931 29

P994 4,935 179 1,931 29

P996 2,279 2,021

P996 2,279 2,021

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Receivables. The carrying amounts of cash and receivables approximate fair value primarily due to the relatively short-term maturity of these financial instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. The fair values of derivatives are determined based on prices obtained from the market and counterparties. Fair values are also based on standard valuation models. Accounts Payable and Accrued Expenses. The carrying amount of accounts payable and accrued expenses approximates fair value due to the relatively short-term maturity of these financial instruments. Derivative Financial Instruments The Divisions derivative financial instruments according to the type of financial risk being managed and the details of freestanding and embedded derivative financial instruments that are categorized into those accounted for as hedges and those that are not designated as hedges are discussed as follows: The Division enters into commodity options to manage its exposure on commodity price risk covering the Divisions requirements on fuel oil. Derivative Instruments Accounted for as Hedges Cash Flow Hedge Commodity Options As of December 31, 2006, 2005 and 2004, the Division has outstanding option agreements to buy fuel oil with a notional quantity of 2,228, 6,016 and 11,000 metric tons, respectively. The call and put options can be exercised at various calculation dates in 2007, 2006 and 2005 with specified quantities on each calculation date.

F-163

SAN MIGUEL CORPORATION DOMESTIC BEER DIVISION NOTES TO THE CARVE-OUT SPECIAL PURPOSE STATEMENTS (continued) (Amounts in Millions, Except Per Share Data) Other Derivative Instruments Not Designated as Hedges The Division enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding and embedded derivatives found in host contracts, which are not designated as accounting hedges. Details are as follows: Freestanding Derivatives Freestanding derivatives consist of commodity derivatives entered into by the Division. Commodity Options As of December 31, 2006, 2005 and 2004, the Division has outstanding sold options covering its fuel oil requirements with notional quantities of 2,228, 6,016 and 11,000 metric tons, respectively. These options can be exercised at various calculation dates in 2007 with specified quantities on each calculation date. The net negative fair value of these options as of December 31, 2006, 2005 and 2004 amounted to P 0.443, P 0.274 and (P 7.346), respectively. Embedded Derivatives The Divisions embedded derivatives include currency derivatives (forwards) embedded in non-financial contracts. Embedded Currency Forwards As of December 31, 2006, 2005 and 2004, the total outstanding notional amount of currency forwards embedded in non-financial contracts amounted to P 1,120, P 1,217 and P 3,740, respectively. These non-financial contracts consist mainly of foreign-currency denominated purchase orders, sales agreements and capital expenditures. As of December 31, 2006, 2005 and 2004, the net positive fair value of these embedded currency forwards amounted to P 68, P 150 and P 116, respectively. 22. OTHER MATTERS a. Commitments The outstanding purchase commitments of the Division as of December 31, 2006, 2005 and 2004 amounted to P 11,302, P 1,723 and P 3,283, respectively. Amount authorized but not yet disbursed for capital projects as of December 31, 2006, 2005 and 2004 is approximately P 975, P 882 and P 823, respectively. b. Foreign Exchange Rate The foreign exchange rates of P 49.03, P 53.09 and P 56.28 used in translating the U.S. dollar monetary assets and liabilities to Philippine peso as of December 31, 2006, 2005 and 2004, respectively.

F-164

SAN MIGUEL BREWERY INC. 40 San Miguel Avenue Mandaluyong City Philippines JOINT BOOKRUNNERS and JOINT LEAD MANAGERS Citigroup Global Markets Limited Citigroup Centre 33 Canada Square Canary Wharf, London E14 5LB United Kingdom ATR KimEng Capital Partners, Inc. 17 th Floor Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue, Makati City Philippines

CO-LEAD MANAGER DBS Bank Ltd. 6 Shenton Way #36-01 DBS Tower One Singapore 068809 JOINT DOMESTIC LEAD UNDERWRITERS ATR KimEng Capital Partners, Inc. 17 th Floor Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue, Makati City Philippines BDO Capital & Investment Corporation 20 th Floor, BDO South Tower Makati Avenue corner H.V. dela Costa St. Makati City Philippines

LEGAL COUNSEL TO THE COMPANY as to United States Federal Law and New York Law Cleary Gottlieb Steen & Hamilton LLP Bank Of China Tower One Garden Road Hong Kong as to Philippine Law SyCip Salazar Hernandez & Gatmaitan SSHG Law Centre 105 Paseo de Roxas, Makati Philippines

LEGAL COUNSEL TO THE UNDERWRITERS as to United States Federal Law and New York Law Allen & Overy 9th Floor Three Exchange Square Central Hong Kong as to Philippine Law Picazo Buyco Tan Fider & Santos 18th Floor Liberty Center 104 H. V. Dela Costa Street Salcedo Village, Makati City Philippines

INDEPENDENT CERTIFIED PUBLIC ACCOUNTS Manabat Sanagustin & Co. 22 nd Floor Philamlife Tower Paseo de Roxas, Makati City Philippines