1

MISSION
To offer time-conscious customers a full range of products and services that meet their ever-changing daily needs through quality, speed, selection, and value in a safe, friendly, and pleasant environment.

VISION
To be the recognized leader in providing time conscious customers with a full range of products and services that meet their ever-changing daily needs.

STRATEGIC PLAN
Basically, further efficiency and effectiveness will be generated through continuous improvement of the corporations supply chain. To achieve the expansion plans and dominate the convenience store market, the company will be continuing its successful franchise program. The Corporation shall continue with setting up an evaluation procedure to measure compliance with the Manual of Corporate Governance. Furthermore, it will also provide workshops and seminars to operationalize the manual evaluation system and compliance review as part of the Companys training program. 7-Eleven maintains corporate values such as, Customer Focused, Teamwork, Leadership Integrity, Personal Accountability, Reliability, and Results Oriented. In addition, the 5 7-Eleven fundamentals are Quality, Speed, Selection, Cleanliness and Value in Safe and Pleasant Environment. An oath is implemented to their employees, which states I want to treat everybody honestly and promise to try my best to serve our customers in order to create a better future for the company, my family, and myself. The Company will likewise continue to adopt the International Accounting Standards as they are approved as Philippine Accounting Standards.

Philippine Seven Corporation was registered with the Securities and Exchange Commission (SEC) in November 1982. One month later, on December 13, 1982, PSC acquired from Southland Corporation (now 7-Eleven Inc.) of Dallas, Texas the license to operate 7-Eleven stores in the Philippines. The incorporators were Jose T. Pardo, Vicente T. Paterno and Francisco R. Sibal. To introduce an entirely new retailing concept to the Filipino consumers, i.e. operating a chain of 24-hrs convenience stores was the companys main mission. PSC sent five of its employees to various Southland installations in the US in order to apply Southland technology in all phases of managing a 7-Elevem convenience store. The team left on February 15, 1983 and consisted of: Executive Vice President Fransisco R. Sibal, General Manager Ramon de Jesus, Merchandising Manager Jose Blanch, Accounting Manager Wilfredo Villanueva, and Store Operations Manager Teodoro Wenceslao. They underwent a five-week in-depth training in their respective fields and immediately applied to practice upon their return to the Philippines. Despite the assassination of Ninoy Aquino in 1983, which triggered a steady deterioration of the economic and political situation in the country, PSC decided to push through with the 7-Eleven projects. In fact, the company needed fresh capital to build its first two stores. Thus, PSC invited two outstanding businessmen, Mr. Jorge L. Araneta and Mr. Ernesto B. Rufino Jr., to contribute capital and then became the first shareholders and directors of PSC. The first 7-Eleven convenience store was opened at the corner of Kamias road EDSA Quezon City, Metro Manila on February 29. On the other hand, the first corporate office was located at the ninth floor of the Century Tower building in Salcedo Village, Makati City. The company grew slowly despite the countrys economic condition. The second store was located at President Ave. BF Homes, Paranaque. Through this opening of two 7-Eleven stores, the company was able to identify their customers which came from the middle class: the salaried, busy employee who preferred a quick fix, while on his/her way home or to office or those people who are labeled as on-the-go.

The company lost money during the years 1984 and 1985, due to impossibility of securing bank loans. Fortunately, PSC sought the assistance of a friendly large Philippine organization, which offered a substantial semi equity loan. Thus, they were able to open the third store located at Pasay City in October 1985. PSC then transferred the Philippine area license to operate 7-Eleven stores to its affiliate, Philippine Seven Properties Corporation (PSPC), and some of its store properties in July 1988. Simultaneously, PSC entered to an agreement with PSPC to operate stores in Metro Manila and suburbs. 7-Eleven today is focused on redefining and enhancing convenience through strategic initiatives designed to take advantage of new technologies and merchandising processes, but remain based on the fundamental principle of the simple business concept to provide customers an ever changing selection of quality products and services at fair prices, through speedy transactions in a clean, safe and friendly environment.

Mr. Chin-Yen Kao

Honorary Chairman of the Board He founded the President Enterprises Group in 1968. It is one of the largest and perhaps the most respected company in Taiwan. Mr. Kao has been its only chairman and in recent years, has formed very successful international joint ventures with the U.S. 7-11 Convenience stores, Pepsi Drinks, Starbucks Coffee, France's Carrefour and Germany's Allianz. Prior to establishing the President's Group, Mr. Kao was the director of sales of Tainan Spinning Company. Due to the long history of successful ventures in Taiwan as well as Mainland China, Mr. Kao is considered a legendary businessman in the Pacific Rim and has held the position of Chairman of Taiwan's Industrial Manufacturer's Association in 1999.

Mr. Vicente T. Paterno

Chairman of the Board and Directors Chairman & President, Store Sites Holding, Inc. Chairman & Trustee, PhilSeven Foundation, Inc, He is the Founding Chairman of the Philippine Seven Corporation and currently sits in the Board of First Philippine Holding Corporation, Cityland Development Corporation and State Land Investment Corporation. A former Senator of the Republic, he also served as Minister of Industry, Minister of Public Works and Highways, Deputy Executive Secretary for Energy, Chairman of the Board of Investments, Chairman and President of the Philippine National Oil Company.

Mr. Victor P. Paterno

President & CEO Chairman & President, Convenience Distribution, Inc. Vice-Chairman & Trustee, PhilSeven Foundation, Inc. Jose Victor P. Paterno has been President of Philippine Seven Corp. since January 1, 2005 and serves as its Chief Executive Officer. Mr. Paterno serves as President of Convenience Distribution, Inc. He served as Vice President of Operations at Philippine Seven Corp. He serves as Chairman of the Board of Convenience Distribution, Inc. and Director of Philippine Seven Corp.

Mr. Chung Jen-Hsu

Director President President Chain Mr. Jen Hsu Chung serves as the Managing Director and President of President Chain Store Corp. Mr. Chung serves as the President of Ren-Hui Investment Corp. Since June 10, 1987, Mr. Chung serves as a Director of Philippine Seven Corp. He has been in service of Philippine Seven Corporation for 8 years. He received MBA from Waseda University.

Mr. Chris Tanco

Senior Vice President International Chris Tanco is the Senior Vice President of International for 7Eleven, Inc. He leads the international team and oversees international licensing and global expansion for 7-Eleven. Previously, Tanco was the Chief Franchise Officer at Yum! Brands. With nearly 20 years of experience, he served in various International, Operations and Franchising leadership roles. He began his career as an Area Manager and later, a Regional Vice President for Pizza Hut. He holds a bachelors degree from Ateneo de Manila (Jesuit) University and a masters degree in business from the University of Virginia Darden School of Business.

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Philippine Seven Corporation, despite of being the leader in the convenient store industry, it also practices Corporate Social Responsibility. In fact, 7-Eleven is committed to being a friendly neighborhood convenience store. It means that, their business is not all about profits and making money, they consider community, especially the Filipinos, an essential part of their business. The company continuously provides various of programs, such as, outreach and services, not only to reach out to their brothers and sisters but also aiming to be one with the community in uplifting the lives of the Filipinos. To site some are the Computer Donation Project, our participation in environmental welfare programs sponsored by local NGOs, and assistance extended to several charitable institutions.

7-Eleven is in partnership with the Philippine National Red Cross (PNRC), a voluntary humanitarian organization that serves as the governments auxiliary arm in providing relief, health, and welfare to the most vulnerable people in need including victims of disaster and other emergencies. And 7-Eleven takes pride in supporting their Coin Can Project which is seen in our stores cash register counters. Their way of saying, 7-Eleven cares for our less fortunate Filipinos.

7-Eleven believes

that

protecting the

environment is one of the best ways to invest in the countrys future. Thus, they took part in ABS-CBN Foundations La Mesa Watershed Project. Said

program aims to reforest some 1,200 hectares of open areas to ensure the sustainability of Metro Manilas water source.

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During 7-Elevens celebration of the 204th Grand Store Opening Celebration, 7-Eleven donated monobloc chairs to the Barangay Satellite of Highway Hills in Mandaluyong City. Barangay Captain Severo Servillon gleefully them. accepted

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Events/Transactions 2005 Rapid Expansion.

Balance Sheet Account Effect

Income Statement Account Effect

The company acquired 35 Bingo Convenience Store Philippines. All but one were converted into 7Eleven Outlets. Likewise, it opened nine franchised stores and 22 companyowned corporate stores last year.

Total Assets

Increase

Revenue (Average sales per store)

Decrease

Company loans caused Finance costs to balloon to P23.83 million from P8.9 million.

Cash

Decrease

Interest Expense

Increase

More supplies, variation of inventory and utilities to operations. facilitate

Operating Expense

Increase

Conversion through the year of 21 company-

Operating Expense (employeerelated)

Increase

owned stores to service agreement (SA) stores, bring the total number of SA stores to37.

2006

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The implementation of EVAT affected the purchasing power of end customers. Customer count dropped by 4% per store per month. Proliferation of retailers offering similar product such as prepaid cards and bills payment and lower denomination e-pins. Various premiums of telecommunications increased the number of post paid subscribers. Fewer support granted by trade suppliers in terms of exclusivity agreement, promotional discounts and display allowances Increased number of franchise operated stores.

Revenue (Sales)

Decrease

Revenue (Commission Income)

Decrease

Other Income (Marketing Income)

Decrease

Revenue (Franchise Revenue)

Increase

Higher occupancy rate and increase in number of rentable spaces. Negotiated rental reductions and increase in sublease rent income

Other Income (Rent Income)

Increase

Expense (Rent Expense)

Decrease

Net increase in bank borrowings amounting to 45.7 million php. The proceeds of the new loan

Expense (Interest expense)

Increase

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were used to pay short and long term loans. 2007 Aggregate merchandise tranfers through the distribution center subsidiary, Convenience Distribution, Inc. (CDI) to franchise-operated stores. The company penalized suppliers when valuable shelf space was vacant due to production problem. Loan pretermination Expense (Interest Expense) Decrease Other Income (Marketing Income) Increase Asset Property and Equipment Increase Revenue Increase

2008 The aggregate merchandise transfers through the distribution center subsidiary, Convenience Distribution, Inc. (CDI) to franchise-operated stores Competition brought about by other retail channels offering physical cards. Decline in occupancy rate brought about by unfavorable market condition Revenue (Commission Income) Other Income (Rent Income) Decrease Decrease Revenue Increase

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Conversion and operation as SA store

Asset Inventories

Increase

General and Administrative Expense (Service Fees)

Increase

Loan Pretermination and lower interest rates

Expense (Interest Expense)

Decrease

Two week holiday declared by the Government in December resulting into the inability of suppliers to collect their accounts from the Company.

Liabilities Accounts Payable

Increase

2009 Aggressive store expansion, highlighted by the strategic alliance with Chevron Philippines and introduction of new products. Intensified marketing and merchandising program introduction of new service items. Expansion program Asset Increase Revenues Increase Sales Increase Net Income Increase

Opening of 90 new stores (Inventories) all over Luzon. Opening of 25 new stores at various Caltex gas

17

stations linking the company with Chevron Philippines. Franchise operators also boosted the store base. Higher present value of retirement obligations assessed by the actuary. Expense (Pension Cost) Increase

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Board of Directors

Auditing Office

Chairman

Prseident

7-ELEVEN Business

Retail Business

Public Relations Office

Finance Office

Administration Group

President Office

Development and Franchise Department

Operations Group

Marketing Group

Finance Department

Procurement Department

Information System Department

Management Support Depertment

Operations Department

Integrated Marketing Department

Accounting Department

General Administration Department

Human Resource Department

E-Shopping Department

Engineering Technology Department

Genral Merchandise Department

Lifestlye Center Department

Service and EBusiness Department

Operations Planning Department

Fresh Food Department

Logistics Department

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Consolidated Income Statement For the Years Ended December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 REVENUE FROM MERCHANDISE SOLD 6,033,322,488 5,412,969,204 4,952,027,491 COST OF MERCHANDISE SOLD 4,371,715,990 3,909,886,731 3,534,557,477 GROSS PROFIT 1,661,606,498 1,503,082,473 1,417,470,014 Operating Expenses 2,050,959,329 1,788,432,900 1,683,290,082 Other Revenue Franchise Revenue 303,815,142 250,855,661 204,271,553 Marketing Income 236,502,860 136,211,215 97,680,051 Rent Income 52,265,323 36,502,151 39,648,977 Commission Income 22,130,513 21,213,531 21,924,224 Interest Income 4,839,945 4,186,908 4,401,096 Other Income 35,685,902 17,988,516 26,795,644 655,239,685 466,957,982 394,721,545 Other Expenses excluding Interest Expense Loss from Typhoon 3,285,171 Unrealized Foreign Exchange Loss 485,170 709,256 901,052 Impairment Loss on Goodwill 4,611,368 Loss on Sale of Property and Equipment 890,771 215,566 Other Expenses 4,802,647 5,335,886 8,572,988 11,547,281 1,116,618 INCOME BEFORE INTEREST & INCOME TAX 257,313,866 170,060,274 127,784,859 Interest Expenses 26,482,817 25,332,855 31,527,417 Provision for Income Tax Current 81,310,466 62,695,883 42,203,284 deferred income tax liability (6,270,068) (2,240,115) (773,980) 75,040,398 60,455,768 41,429,304 NET INCOME 155,790,651 84,271,651 54,828,138 OTHER COMPREHENSIVE INCOME Appraisal increase in value of land - net of deferred income tax liability 2,999,188 Effect of changes in tax rate in 2009 230,707 230,707 2,999,188 TOTAL COMPREHENSIVE INCOME 155,790,651 84,502,358 57,827,326 Average number of shares outstanding 287,074,922 260,977,200 237,252,000 BASIC/DILUTED EARNINGS PER SHARE 0.54 0.32 0.23

2006 4,627,880,441 3,224,082,277 1,403,798,164 1,611,425,160 147,997,380 82,574,708 39,889,745 28,635,785 2,760,331 301,857,949 1,206,673 5,165,280 4,774,307 11,146,260 83,084,693 35,913,785 28,819,683 (1,792,867) 27,026,816 20,144,092

2005 4,587,558,113 3,186,251,240 1,401,306,873 1,532,295,682 58,726,825 96,958,364 35,771,211 37,848,387 3,703,207 233,007,994 6,465 16,717,753 10,848,566 27,572,784 74,446,401 33,792,023 18,646,541 8,247,425 26,893,966 13,760,412

20,144,092 237,252,000 0.08

13,760,412 237,252,000 0.06

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 ASSETS Current Assets Cash and cash equivalents Receivables - net Inventories Prepayments and other current assets Total Current Assets Noncurrent Assets Property and Equipment Deposits Deferred Lease Expense Deferred Income Tax Assets Goodwill Other Noncurrent Assets Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current Liabilities Bank Loans Accounts Payable and Accrued Expenses Income Tax Payable Current Portion of Long-Term Debt Other Current Liabilites Total Current Liabilities Noncurrent Liabilities Long-Term Debt - net of current portion Deposits Payable Net Retirement Obligations Deferred Income Tax Liability Cumulative Redeemable Preferred Shares Deferred Revenue - net of current portion Total Noncurrent Liabilities Total Liabilities Stockholders' Equity Capital Stock - P1 par value Additional Paid-In Capital Unrealized gain on available-for-sale financial assets Retained Earnings Other Component of Equity - revaluation incremental on land Cost of held Treasury Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

2006

2005

448,830,888 140,140,105 415,652,671 174,383,392 1,179,007,056 1,227,244,430 151,328,033 46,008,842 65,567,524 41,520,048 1,531,668,877 2,710,675,933

314,880,357 145,854,513 339,556,385 117,947,178 918,238,433 1,072,041,329 132,695,470 39,738,774 65,567,524 35,904,421 1,345,947,518 2,264,185,951

308,873,944 72,430,653 323,973,849 69,975,102 775,253,548 852,458,158 110,462,198 37,498,659 70,178,892 30,360,222 1,100,958,129 1,876,211,677

329,364,375 47,276,638 331,926,504 59,485,387 768,052,904 800,526,339 17,955,866 54,008,463 197,587,811 1,070,078,479 1,838,131,383

204,310,766 73,481,008 336,193,860 35,449,833 649,435,467 714,453,693 18,718,401 77,598,357 199,715,877 1,010,486,328 1,659,921,795

340,000,000 1,027,609,605 38,354,398 211,934,980 1,617,898,983

330,000,000 848,043,767 25,898,866 174,586,972 1,378,529,605

375,000,000 582,938,913 2,770,870 111,508,592 1,072,218,375

404,700,000 610,222,957 335,684 6,500,000 163,181,870 1,184,940,511 26,888,841 6,000,000 32,888,841 1,217,829,352 237,938,250 293,525,037 10,519,880 81,242,110

240,000,000 556,129,563 304,193 93,000,000 119,649,081 1,009,082,837 32,500,000 22,700,899 6,000,000 61,200,899 1,070,283,736 237,938,250 293,525,037 61,098,018

119,967,054 55,667,123 1,384,241 6,000,000 1,856,046 184,874,464 1,802,773,447 287,761,172 293,525,037 326,309,628

83,252,646 35,827,737 1,384,241 6,000,000 7,079,887 133,544,511 1,512,074,116 261,663,450 293,525,037 196,616,699

98,653,475 30,115,402 1,614,948 6,000,000 136,383,825 1,208,602,200 237,938,250 293,525,037 136,070,248

3,229,895 3,229,895 2,999,188 910,825,732 755,035,081 670,532,723 623,225,277 592,561,305 (2,923,246) (2,923,246) (2,923,246) (2,923,246) (2,923,246) 907,902,486 752,111,835 667,609,477 620,302,031 589,638,059 2,710,675,933 2,264,185,951 1,876,211,677 1,838,131,383 1,659,921,795

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BALANCES AS OF DECEMBER 31, 2004 Effect of change in accounting for refundable security deposits BALANCES AS OF JANUARY 1, 2005 Net income for the year BALANCES AS OF DECEMBER 31, 2005 Unrealized gain on available-for-sale financial assets during the year Total income recognized directly in equity Net income for the year Total income for the year BALANCES AS OF DECEMBER 31, 2006 BALANCES AS OF DECEMBER 31, 2006 Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2007 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2008 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2009

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 Unrealized Revaluation Additional Gain on AFS Retained Increment on Capital Stock Paid-In Capital Financial Assets Earnings Land 237,938,250 293,525,037 47,750,448 293,525,037 293,525,037 293,525,037 293,525,037 293,525,037 293,525,037 293,525,037 10,519,880 10,519,880 10,519,880 10,519,880 (412,842) 47,337,606 13,760,412 61,098,018 20,144,092 20,144,092 81,242,110 81,242,110 54,828,138 136,070,248 (23,725,200) 84,271,651 196,616,699 (26,097,722) 155,790,651 326,309,628

Treasury Stock (2,923,246)

Total 576,290,489 (412,842) 575,877,647 13,760,412 589,638,059 10,519,880 20,144,092 20,144,092 620,302,031 609,782,151 57,827,326 667,609,477 84,502,358 752,111,835 155,790,651 907,902,486

237,938,250 237,938,250 237,938,250 237,938,250 237,938,250 23,725,200 261,663,450 26,097,722 287,761,172

(2,923,246) (2,923,246)

2,999,188 2,999,188 230,707 3,229,895 3,229,895

(2,923,246) (2,923,246) (2,923,246) (2,923,246) (2,923,246)

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax 230,831,049 144,727,419 96,257,442 Adjustments for: Depreciation and Amortization 203,905,718 179,639,006 159,634,386 Interest expense 26,482,817 25,332,855 31,527,417 Accounts written off Loss from typhoon 3,285,171 Loss on sale of property and equipment 890,771 215,566 Loss on Impairment of goodwill 4,611,368 Gain on write-off of long outstanding liability Provision for doubtful accounts 9,798,327 7,069,507 346,678 Interest Income (4,839,945) (4,186,908) (3,401,675) Amortization of deferred revenue on exclusivity contract (3,913,691) (3,913,690) Amortization of software 3,053,728 2,105,126 1,050,536 Amortization of deferred lease expense 1,475,524 1,902,361 1,719,810 Amortization of Deferred revenue on finance lease (1,310,151) (1,310,151) (764,254) Loss on refund of deposit Operating income before working capital changes 468,768,547 356,867,664 286,585,906 Decrease (increase) in: Receivables 1,646,383 (84,012,620) (21,565,134) Prepayments and other current assets (56,529,837) (51,262,076) 2,970,950 Inventories (76,096,286) (15,582,536) 7,952,655 Increase (decrease) in: Accounts payable and accrued expenses 180,337,730 264,264,524 (26,287,053) Other current liabilities 31,737,028 67,121,759 418,348 Deposits payable 36,714,408 (15,400,829) 42,905,608 Net pension liabililities 19,839,386 5,712,335 3,226,561 Deferred revenue 11,741,071 Cash generated from operations 606,417,359 539,449,292 296,207,841 Interest paid (27,254,709) (24,858,765) (32,158,168) Income taxes paid (68,854,934) (39,567,887) (30,940,362) Interest received 3,138,083 2,180,738 928,110 Net cash from operating activities 513,445,799 477,203,378 234,037,421 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (362,393,990) (415,095,771) (224,680,639) Additions to software and other program costs (286,000) (6,788,085) (3,226,000) Deductions from (additions to) deposits (17,644,957) (22,233,272) Deductions from (additions to) goodwill assets & other noncurrent (11,952,821) 49,840 (3,636,183) Collection of lease receivable 2,782,500 2,887,500 686,966 Proceeds from sale of property and equipment 14,982,823 12,528,004 Payment of refundable security deposit Net cash flow from investing activities (389,495,268) (426,196,965) (218,327,852) CASH FLOWS FROM FINANCING ACTIVITIES Availments of bank loans 510,000,000 415,000,000 688,000,000 Payments of: Bank loans (500,000,000) (460,000,000) (717,700,000) Long-term debt (6,500,000) Net cash from financing activities 10,000,000 (45,000,000) (36,200,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 133,950,531 6,006,413 (20,490,431) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 314,880,357 308,873,944 329,364,375 CASH AND CASH EQUIVALENTS AT END OF YEAR 448,830,888 314,880,357 308,873,944

2006 47,170,908 154,046,259 35,913,785 9,571,709 5,165,280 (3,232,879) 2,903,498 (2,760,331) 1,757,238 1,660,064 312,000 252,507,531 22,393,731 5,021,991 4,267,356 57,175,330 43,532,789 4,187,942 389,086,670 (35,762,842) (32,462,976) 1,847,906 322,708,758 (248,336,018) 8,307,564 (6,378,528) 3,051,833 (243,355,149) 446,100,000 (281,400,000) (119,000,000) 45,700,000 125,053,609 204,310,766 329,364,375

2005 40,654,378 124,769,238 33,792,023 16,717,753 (3,703,207) 2,987,458 2,107,225 217,324,868 32,063,346 (4,129,240) (32,993,915) (44,325,854) 35,593,858 4,635,376 208,168,439 (33,619,530) (27,558,116) 2,194,957 149,185,750 (220,866,173) 3,624,663 1,044,776 (20,000,000) (236,196,734) 115,000,000 (35,000,000) (54,000,000) 26,000,000 (61,010,984) 265,321,750 204,310,766

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CORPORATE INFORMATION AND OPERATIONS AND AUTHORIZATION FOR ISSUANCE OF FINANCIAL STATEMENTS

Corporate Information Philippine Seven Corporation was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) on November 29, 1982. The Company and its subsidiaries are primarily engaged in the business of retailing, merchandising, buying, selling, marketing, importing, exporting, franchising, acquiring, holding, distributing, warehousing, trading, exchanging or otherwise dealing in all kinds of consumer needs or requirements and in connection therewith, operating or maintaining warehouses, storages, delivery vehicles and similar or incidental facilities. The Group is also engaged in the management, development, sale, exchange, and holding for investment or otherwise of real estate of all kinds. The Company is controlled by President Chain Store (Labuan) Holdings, Ltd., an investment holding company incorporated in Malaysia, which owns 56.59% of the Companys outstanding shares. The remaining 43.41% of the shares are widely held. The ultimate parent of the Group is President Chain Store Corporation incorporated in Taiwan, Republic of China. The Company has its primary listing on the Philippine Stock Exchange. As of December 31, 2009, 2008, 2007, 2006 and 2005, the Company has 717, 724, 703, 706 and 713 stockholders, respectively. The registered office address of the Company is 7th Floor, The Columbia Tower, Ortigas Avenue, Mandaluyong City.

Authorization for Issuance of Financial Statements The 2009, 2008, 2007 and 2006 consolidated financial statements were authorized for issue by the Board of Directors on February 12, 2010; February 12, 2009; February 4, 2008 and March 6, 2007, respectively.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND FINANCIAL REPORTING PRACTICES

Basis of Preparation The consolidated financial statements have been prepared under the historical cost basis, except for available-for-sale financial assets and land, which are carried at fair value and revalued amount, respectively. The consolidated financial statements are presented in Philippine Peso, which is the Companys functional and presentation currency.

Statement of Compliance The consolidated financial statements, which were prepared for submission to the SEC, have been prepared in compliance with Philippine Financial Reporting Standards.

Changes in Accounting Policies The adoption of PAS 32: Financial Instruments: Disclosure and Presentation, and PAS 39 on January 1, 2005 resulted to the adjustment of the va lue of the Groups refundable security deposits to reflect measurement of these amounts at amortized cost using the effective interest rate method. The difference between the nominal amounts and the present values of the refundable security deposits are recognized as deferred lease expense in the consolidated balance sheets. The deferred lease expense is amortized using the straight-line method over the term of the lease in accordance with PAS 17, Leases.

Retained earnings as of January 1, 2005 decreased by P412,842, which represents the amounts of amortization of deferred lease expense and accretion of interest income from the inception of the lease.

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The accounting policies adopted are consistent with those of the previous year, except that the Group has made changes in accounting policies resulting from adoption of the amendments to existing standards and Philippine Interpretation International Financial Reporting Interpretations Committee (IFRIC) interpretation.

The following are the adoptions of interpretations or amendments to existing Philippine Accounting Standard which became effective beginning January 1, 2006 that has an effect on the consolidated financial statements of the Company: Philippine Accounting Standard 19, Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures, the Group did not change its accounting for actuarial gains and losses but has included the additional disclosures required by the amendment. PAS 21, The Effects of Changes in Foreign Exchange Rates, amended to recognize all exchange differences arising from a monetary item that forms part of the net investment in a foreign operation in a separate component of equity in the financial statements regardless of the currency in which the monetary item is denominated. PAS 39, Financial Instruments: Recognition and Measurement, revised to include in its scope the treatment of financial guarantee contracts by the issuer. Financial guarantee contracts are recognized initially at fair value and generally re-measured at the higher of the amount determined in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with PAS 18, Revenue. Included in the amended PAS 39 is the approval of qualifying the foreign currency risk of a highly probable intragroup forecast transaction as the hedged item in financial statements, 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 profit or loss. PAS 39 is also amended to restrict the use of the option to

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designate any financial asset or any financial liability to be measured at fair value through profit or loss. Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease, provides guidance in determining whether arrangements contain a lease to which lease accounting must be applied. The adoption of the above amendments and interpretation has no material effect on the Groups consolidated financial statements.

The following are the adoptions of interpretations or amendments to existing Philippine Accounting Standard which became effective beginning January 1, 2007 that has an effect on the consolidated financial statements of the Company: PFRS 7, Financial Instruments: Disclosures, introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, as well as sensitivity analysis to market risk. Additional disclosures required by the standard were included in the consolidated financial statements, where applicable. These disclosures included the presentation of rollforward of allowance for impairment on loans and receivables (Note 5), credit quality of financial assets (Note 31), aging of past due but not impaired financial assets (Note 31), maturity profile of the financial liabilities (Note 31) and sensitivity analyses as to changes in interest (Note 31). Amendment to PAS 1, Presentation of Financial Statements: Capital Disclosures, the requires the following additional disclosures: (a) an entitys objectives, policies and processes for managing capital; (b) quantitative data about what the entity regards as capital; (c) whether the entity has complied with any capital requirements; and (d) if it has not complied, the consequences of such noncompliance. Additional disclosures required by the amendment were included in the consolidated financial statements (Note 32).

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Philippine Interpretation IFRIC 9, Re-assessment of Embedded Derivatives, establishes that the date to assess the existence of an embedded derivative is the date an entity first becomes a party to the contract , with re-assessment only if there is a change to the contract that significantly modifies the cash flows. The adoption of this interpretation did not have a significant impact on the consolidated financial statements.

The following are the adoptions of interpretations or amendments to existing Philippine Accounting Standard which became effective beginning January 1, 2008 that have an effect on the consolidated financial statements of the Company: Adoption of these changes in accounting policies did not have any significant effect to the Group: Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions; Philippine Interpretation IFRIC 12, Service Concession Arrangements; Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset, Minimum Funding Requirement and their Interaction; Amendments to PAS 39, Financial Instruments: Recognition and Measurement, and, PFRS 7, Financial Instruments: Disclosures - Reclassification of Financial Assets

The following are the adoptions of interpretations or amendments to existing Philippine Accounting Standard which became effective beginning January 1, 2009 that have an effect on the consolidated financial statements of the Company: PAS 1, Presentation of Financial Statements (Revised), the revised standard separates owner and non-owner changes in equity. The consolidated statement of changes in equity includes only details of transactions with owners, with nonowner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive

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income; it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The Group has elected to present a single consolidated statement of comprehensive income. The adoption of this revised standard resulted to the presentation of income and expense items that are classified as comprehensive income in the consolidated statement of comprehensive income. PFRS 8 Operating Segment replaced PAS 14, Segment Reporting, and adopts a full management approach to identifying, measuring and disclosing the results of an entitys operating segments. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such information may be different from that reported in the consolidated balance sheet and profit or loss and the company will provide explanations and reconciliations of the differences. This standard is only applicable to an entity that has debt or equity instruments that are traded in a public market or that files (or is in the process of filing) its financial statements with a securities commission or similar party. The adoption of this standard resulted to additional disclosures presented in Note 34. PFRS 7 Amendments - Improving Disclosures about Financial Instruments, the amendments to PFRS 7, Financial Instruments: Disclosures require additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognized at fair value. In addition, reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and financial assets used for liquidity management. The fair value measurement disclosures and the liquidity

31

risk disclosures which are not significantly impacted by the amendments are presented in Note 30.

Improvements to PFRS adopted by the Group starting January 1, 2009 In May 2008, the International Accounting Standards Board issued its first omnibus of amendments to certain standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes in accounting policies but did not have any impact on the consolidated financial statements of the Group . PFRS 5, Non-current Assets Held for Sale and Discontinued Operations

When a subsidiary is held for sale, all of its assets and liabilities will be classified as held for sale under PFRS 5, even when the entity retains a non-controlling interest in the subsidiary after the sale. PAS 1, Presentation of Financial Statements

Assets and liabilities classified as held for trading in accordance with PAS 39 are not automatically classified as current in the consolidated balance sheet. PAS 16, Property, Plant and Equipment

Replaced the term net selling price with fair value less cost to sell, to be consistent with PFRS 5 and PAS 36, Impairment of Assets. Items of property, plant and equipment held for rental that are routinely sold in the ordinary course of business after rental, are transferred to inventory when rental ceases and they are held for sale. Proceeds of such sales are subsequently shown as revenue. Cash payments on initial recognition of such items, the cash receipts from rents and subsequent sales are all shown as cash flows from operating activities. PAS 18, Revenue

The amendment adds guidance (which accompanies the standard) to determine whether an entity is acting as a principal or as an agent. The features to consider are whether the entity (a) has primary responsibility for providing the goods or service; (b) has inventory risk; (c) has discretion in establishing prices; and (d) bears the credit risk.

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The amendment specifies no transitional provisions; therefore it is effective immediately and retrospectively. The Group has assessed its revenue arrangements against these criteria and has concluded that it is acting as principal in all arrangements. The revenue recognition policy has been updated accordingly. PAS 19, Employee Benefits

Revises the definition of past service costs to include reductions in benefits related to past services (negative past service costs) and to exclude reductions in benefits related to future services that arise from plan amendments. Amendments to plans that result in a reduction in benefits related to future services are accounted for as a curtailment. Revises the definition of return on plan assets to exclude plan administration costs if they have already been included in the actuarial assumptions used to measure the defined benefit obligation. Revises the definition of short-term and other long-term employee benefits to focus on the point in time at which the liability is due to be settled. The revision deletes the reference to the recognition of contingent liabilities to ensure consistency with PAS 37, Provisions, Contingent Liabilities and Contingent Assets. PAS 20, Accounting for Government Grants and Disclosures of Government Assistance Loans granted with no or low interest rates will not be exempt from the requirement to impute interest. The difference between the amount received and the discounted amount is accounted for as a government grant. PAS 23, Borrowing Costs

The definition of borrowing costs is revised to consolidate the two types of items that are considered components of borrowing costs into one - the interest expense calculated using the effective interest rate method calculated in accordance with PAS 39. PAS 28, Investment in Associates

If an associate is accounted for at fair value in accordance with PAS 39, only the requirement of PAS 28 to disclose the nature and extent of any significant restrictions on the ability of the associate to transfer funds to the entity in the form of cash or repayment of loans will apply. An investment in an associate is a single asset for the

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purpose of conducting the impairment test. Therefore, any impairment test is not separately allocated to the goodwill included in the investment balance. PAS 29, Financial Reporting in Hyperinflationary Economies

The amended PAS 29 revises the reference to the exception that assets and liabilities should be measured at historical cost, such that it notes property, plant and equipment as being an example, rather than implying that it is a definitive list. PAS 31, Interest in Joint Ventures

If a joint venture is accounted for at fair value, in accordance with PAS 39, only the requirements of PAS 31 to disclose the commitments of the venturer and the joint venture, as well as summary financial information about the assets, liabilities, income and expense will apply. PAS 36, Impairment of Assets

When discounted cash flows are used to estimate fair value less cost to sell, additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate value in use. PAS 38, Intangible Assets

Expenditure on advertising and promotional activities is recognized as an expense when a company either has the right to access the goods or has received the services. Advertising and promotional activities now specifically include mail order catalogues. The revision deletes references to there being rarely, if ever, persuasive evidence to support an amortization method for finite life intangible assets that results in a lower amount of accumulated amortization than under the straight-line method, thereby effectively allowing the use of the unit of production method. PAS 39, Financial Instruments: Recognition and Measurement

Changes in circumstances relating to derivatives - specifically derivatives designated or re-designated as hedging instruments after initial recognition - are not reclassifications. When financial assets are reclassified as a result of an insurance company changing its accounting policy in accordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a change in circumstance, not a reclassification. It removes the reference to a segment

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when determining whether an instrument qualifies as a hedge and also requires use of the revised effective interest rate (rather than the original effective interest rate) when re-measuring a debt instrument on the cessation of fair value hedge accounting. PAS 40, Investment Properties

The amendment revises the scope (and the scope of PAS 16) to include property that is being constructed or developed for future use as an investment property. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time as fair value can be determined or construction is complete. PAS 41, Agriculture

It removes the reference to the use of a pre-tax discount rate to determine fair value, thereby allowing use of either a pre-tax or post-tax discount rate depending on the valuation methodology used. The revision also removes the prohibition to take into account cash flows resulting from any additional transformations when estimating fair value. Instead, cash flows that are expected to be generated in the most relevant market are taken into account.

New Accounting Standards, Interpretations, and Amendments to Existing Standards Effective Subsequent to December 31, 2009 The Group will adopt the following standards, interpretations and amendments to existing standards enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have a significant impact on the consolidated financial statements. PFRS 3: Business Combinations (Revised) introduces significant changes in the accounting for business combination occurring after July 1, 2009. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent

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consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs and future reported results.

Improvements to PFRS to be adopted by the Group starting January 1, 2010 The Group has not yet adopted the following amendments and anticipates that these changes will have no material effect on the consolidated financial statements. PFRS 2, Share-based Payment

The amendment clarifies that the contribution of a business on formation of a joint venture and combinations under common control are not within the scope of PFRS 2 even though they are out of scope of PFRS 3, Business Combinations (Revised). PFRS 5, Non-current Assets Held for Sale and Discontinued Operations

It clarifies that the disclosures required in respect of noncurrent assets and disposal groups classified as held for sale or discontinued operations are only those set out in PFRS 5. The disclosure requirements of other PFRSs only apply if specifically required for such noncurrent assets or discontinued operations. PFRS 8, Operating Segment

The revision clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. PAS 1, Presentation of Financial Statements

The improvement clarifies that the terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification. PAS 7, Statement of Cash Flows

Explicitly states that only expenditure that results in a recognized asset can be classified as a cash flow from investing activities. PAS 17, Leases

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- Removes the specific guidance on classifying land as a lease. Prior to the amendment, leases of land were classified as operating lease. The amendment now requires that leases of land are classified as either finance or operating in accordance with the general principles of PAS 17. The amendment will be applied retrospectively. PAS 36, Impairment of Assets

- Clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in PFRS 8 before aggregation for reporting purposes. PAS 38, Intangible Assets

- Clarifies that if an intangible asset acquired in a business combination is identifiable only with another intangible asset, the acquirer may recognize the group of intangible assets as a single asset provided the individual assets have similar useful lives. It also clarifies that the valuation techniques presented for determining the fair value of intangible assets acquired in a business combination that are not traded in active markets are only examples and are not restrictive on the methods that can be used. PAS 39, Financial Instruments: Recognition and Measurement

- Clarifies that (a) a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract; (b) that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date applies only to binding forward contracts, and not derivative contracts where further actions by either party are still to be taken; and (c) that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cash flows affect profit or loss. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives

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- Clarifies that it does not apply to possible reassessment at the date of acquisition, to embedded derivatives in contracts acquired in a business combination between entities or businesses under common control or the formation of joint venture. Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation - States that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of PAS 39 that relate to a net investment hedge are satisfied.

Basis of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are those entities in which the Company has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies through interlocking directorships such that substantial benefits from the subsidiaries activities flow to the Company. The financial statements of the subsidiaries are prepared for the same reporting year as the Company, using uniform accounting policies. Intercompany transactions, balances and unrealized losses are eliminated unless cost cannot be recovered. The company owns 100% of Convenience Distribution Inc. (CDI). SSHIs capital stock, which is divided into 40% common shares and 60% preferred shares are owned by the Company and by Philippine Seven Corporation-Employees Retirement Plan through its trustee, Bank of the Philippines Islands-Asset Management and Trust Group (BPI-AMTG), respectively. These preferred shares which accrue and pay guaranteed preferred dividends and are redeemable at the option of the holder (Note 16) are recognized as a financial liability in accordance with PFRS. The Company owns 100% of SSHI's common shares, which, together with common key management, gives the Company control over SSHI.

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

Financial Instruments The Group recognizes a financial asset or a financial liability in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit and loss. Fair value is determined by reference to the transaction price or other market prices. If such market prices are not readily 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. All regular way purchases and sales of financial assets are recognized on the trade date (the date that the Group commits to purchase the assets). Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. The Group classifies its financial assets as financial assets at FVPL, held-to-maturity (HTM) financial assets, loans and receivables or AFS financial assets. Financial liabilities, on the other hand, are classified as either financial liabilities at FVPL or other financial liabilities. The classification depends on the purpose for which the financial assets and financial liabilities were acquired. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates this designation at every financial reporting date.

Financial Assets

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a. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and those designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also categorized as held for trading, except those derivatives designated and considered as effective hedging instruments. Financial assets classified in this category are designated as at fair value through profit or loss by management on initial recognition when the following criteria are met: first, the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on them on a different basis; or the assets are part of a group of financial assets, or both financial assets and financial liabilities, 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 recorded. Financial assets at fair value through profit or loss are recorded in the consolidated balance sheet at fair value. Changes in fair value are accounted for directly in profit or loss. Interest earned is recorded in interest income, while dividend income is recorded in other income according to the terms of the contract, or when the right of the payment has been established. The Group has not designated any financial asset as at fair value through profit or loss. The Group assesses whether embedded derivatives are required to be separated from the host contracts when the Group first becomes a party to the contract. Re-assessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. An embedded derivative is separated from the host financial or non-financial asset contract and accounted for as a derivative if all of the following conditions are met: first, the economic characteristics and risks of the embedded derivative are not closely

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related to the economic characteristic of the host contract; second, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and lastly, the hybrid or combined instrument is not recognized as financial assets at fair value through profit or loss. Embedded derivatives that are bifurcated from the host contracts are accounted for as financial assets at fair value through profit or loss. Changes in fair values are included in the consolidated statement of income. The Group has no outstanding embedded derivatives.

b. Held-to-maturity financial assets Held-to-maturity (HTM) financial assets are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities wherein the Group has the positive intention and ability to hold to maturity. HTM assets are carried either at cost or amortized cost in the consolidated balance sheet. Amortization is determined by using the effective interest rate method. Assets under this category are classified as current assets if maturity is within twelve months from the balance sheet date and noncurrent assets if maturity is more than a year. The Group has not designated any financial asset as HTM.

c. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are carried either at cost or amortized cost in the consolidated balance sheet. Amortization is determined using the effective interest rate method. Loans and receivables are included in current assets if maturity is within twelve months from the balance sheet date. Otherwise, these are classified as noncurrent assets. The Groups loans and receivables consist of cash and cash equivalents, receivables and deposits.

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d. Available-for-sale financial assets Available-for-sale (AFS) financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. Financial assets may be designated at initial recognition as AFS if they are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. Available-for-sale assets are carried at fair value in the consolidated balance sheet. Changes in the fair value of such assets are accounted for in stockholders equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in stockholders equity is recognized in the consolidated statement of income. These financial assets are classified as noncurrent assets unless the intention is to dispose such assets within twelve months from the balance sheet date. As of December 31, 2009, 2008 and 2007, the Groups AFS financial assets consist of unquoted investments in preferred shares of a public utility company included as part of Goodwill and other noncurrent assets in the consolidated balance sheets. The Group designated its noncurrent investments in marketable securities as available-for-sale financial assets as of December 31, 2006.

Financial Liabilities a. Financial liabilities at fair value through profit or loss Financial liabilities at FVPL include financial liabilities held-for-trading and those designated upon recognition at FVPL. Financial liabilities are classified as held-fortrading if they acquired for the purpose of selling in the near term. Financial liabilities classified under this category are designated by management on initial recognition when the following criteria are met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the liabilities or recognizing gains or losses on them on a different basis; or the liabilities are part of a group of financial liabilities, or both financial assets and financial liabilities, which are managed and their performance is evaluated on a fair

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value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Financial liabilities at fair value through profit or loss are recorded in the consolidated balance sheet at fair value. Changes in fair value are accounted for directly in profit or loss. Interest incurred is recorded in interest expense. The Group has not designated any financial liability as at FVPL.

b. Other financial liabilities This category pertains to financial liabilities that are neither held for trading nor designated as fair value through profit or loss upon the inception of the liability. These include liabilities arising from operations. The 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. The Groups other financial liabilities consist of bank loans, accounts payable and accrued expenses, other current liabilities, cumulative redeemable preferred shares as of December 31, 2009. As of December 31, 2007 other financial liabilities of the Group also include long-term debt and deposits from sub-lessees.

Determination of Fair Values Fair value is determined by reference to the transaction price or other market prices. If such market prices are not readily 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.

Day 1 Profit

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Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit) in the consolidated statement of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the day 1 profit.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated 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.

Impairment of Financial Assets The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.

Financial 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 impairment loss is measured as a difference between the financial assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) 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

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shall be reduced through the use of an allowance account for impairment loss. The amount of loss is recognized in the consolidated statement of income. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. Objective evidence includes observable data that comes to the attention of the Group about loss events such as but not limited to significant financial difficulty of the counterparty, a breach of contract, such as a default or delinquency in interest or principal payments, probability that the borrower will enter bankruptcy or other financial reorganization. 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 the group of financial assets with similar credit risk and 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 continue to be recognized are not included in a collective assessment of impairment. The impairment assessment is performed at each balance sheet date. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics such as customer type, payment history, past-due status and term. Loans and receivables, together with the related allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in 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 consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

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Financial assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, 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 of a similar financial asset.

Financial assets carried at fair value If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment) and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from the stockholders equity to the consolidated statement of income. In case of equity securities classified as AFS financial asset, objective evidence would include a significant or prolonged decline in the fair value of the financial assets below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgment. The Group treats significant generally as 20% or more of the original cost of investmen t, and prolonged as greater than 6 months. In addition, the Group evaluates other factors, including normal volatility in share price for unquoted equities. Impairment losses on equity investments are not reversed through the consolidated statement of income. Increases in fair value after impairment are recognized directly in stockholders equity. Reversals in respect of equity instruments classified as available-for-sale are not recognized in the consolidated statement of income. Reversals of impairment losses on debt instruments are recognized in the consolidated statement of income if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income.

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

Derecognition of Financial Assets and Financial 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: first, the rights to receive cash flows from the asset have expired; second, the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to third party under a pass-through arrangement; lastly, the Group 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 risks and rewards of the asset, but has transferred control of the asset. Where the Group 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 Groups continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

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Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income.

Inventories Inventories are stated at the lower of cost or net realizable value (NRV). NRV is the selling price in the ordinary course of business, less the estimated cost of marketing and distribution. The Group is using the retail method in measuring the cost of its store merchandise inventory. Under this method, cost is determined using the average gross profit and is reviewed on a regular basis to ensure that it approximates actual costs. Cost of warehouse merchandise is determined using the current cost method.

Value-added Tax (VAT) Input value-added tax Input VAT is the 12% indirect tax paid by the Group in the course of the Groups trade or business on local purchase of goods or services, including lease or use of property, from a VAT-registered entity. Value added tax on capital goods are spread evenly over the useful life or 60 months, whichever is shorter.

Output value-added tax Output VAT pertains to the 12% tax due on the sale of merchandise and lease or exchange of taxable goods or properties or services by the Group.

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If at the end of any taxable month the output VAT exceeds the input VAT, the excess shall be paid by the Group. If the input VAT exceeds the output VAT, the excess shall be carried over to the succeeding month or months. Input VAT on capital goods may at the option of the Group be refunded or credited against other internal revenue taxes, subject to certain tax laws. Revenue, expenses and assets are recognized net of the amount of VAT.

Advances to Suppliers Advances to suppliers are down payments for acquisitions of property and equipment not yet received. Once the property and equipment are received, the asset is recognized together with the corresponding liability.

Property and Equipment Property and equipment, except for land, are carried at cost less accumulated depreciation and amortization, and any impairment in value. Land is carried at revalued amount less any impairment in value. The difference between cost and revalued amount or the revaluation increment in land goes to stockholders equity, net of tax. The revalued amount is determined by a professional qualified independent appraiser. The initial cost of property and equipment consists of its purchase price, including import duties, taxes, and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the assets have been put into operations, such as repairs and maintenance and overhaul costs, are normally charged to operations in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of the assets.

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Construction in progress is stated at cost. This includes cost of construction and other direct cost. Construction in progress is not depreciated until such time the relevant assets are completed and put into operational use. Depreciation and amortization commences once the assets are available for use. It ceases at the earlier of the date that it is classified as investment property or noncurrent asset held-for-sale and the date the asset is derecognized. Depreciation is computed on a straight-line method over the estimated useful lives of the assets as follows: 10 to 12 years for buildings and improvements; 5 to 10 years for store furniture and equipment; 3 to 5 years for office furniture and equipment and transportation equipment; and, 3 years for computer equipment. Leasehold improvements are amortized over the estimated useful lives of the improvements, ranging from 5 to 10 years, or the term of the lease, whichever is shorter. The assets residual values, estimated useful lives and depreciation and amortization method are reviewed periodically to ensure that the residual values, period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. When assets are retired or otherwise disposed of, both the cost or revalued amount and the related accumulated depreciation and amortization and any impairment in value are removed from the accounts and any resulting gain or loss is recognized in the statement of income. The revaluation increment in stockholders equity relating to the revalued asset sold is transferred to retained earnings.

Software and Program Cost Software and program costs, which are not specifically identifiable and integral to a specific computer hardware, are shown as part of "Goodwill and other noncurrent assets" in the consolidated balance sheet. These are carried at cost, less accumulated amortization and any impairment in value. Amortization is computed on a straight-line method over their estimated useful life of five years.

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Impairment of Property and Equipment and Software and Program Costs The Group assesses at each balance sheet date whether there is an indication that a nonfinancial asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the assets recoverable amount. An assets recoverable amount is the higher of an assets or cash generating units fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. For land, the assets recoverable amount is the lands net selling pric e, which may be obtained from its sale in an arms length transaction. For goodwill, the assets recoverable amount is its value-in-use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. Impairment losses, if any, are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each balance sheet 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, had no impairment been recognized for the asset in previous years. Such reversal is recognized in the consolidated statement of income, unless the asset is carried at revalued amount, in which case, the reversal is treated as a revaluation increase. After such reversal, the depreciation charge

51

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.

Deposits Deposits are amounts paid as guarantee in relation to non-cancelable agreements entered into by the Group. Deposits include rent deposits for lease, franchise and service agreements. These deposits are recognized at cost and can be refunded or applied to future billings.

Goodwill Goodwill, included in Goodwill and other noncurrent assets in the consolidated balance sheet, represents the excess of the cost of an acquisition over the fair value of the businesses acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cashgenerating unit or group of cash-generating units to which the goodwill relates. Where the recoverable amount of the cash-generating unit or group of cash-generating units is less than the carrying amount of the cash-generating unit or group of cash-generating units to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. The Group performs its annual impairment test of goodwill annually.

Cumulative Redeemable Preferred Shares Cumulative redeemable preferred shares that exhibit characteristics of a liability is recognized as a financial liability in the balance sheet, net of transaction cost. The corresponding dividends on those shares are charged as interest expense in the statement of income.

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Deferred Revenue Deferred revenue is recognized for cash received for income not yet earned. Deferred revenue is recognized over the life of the revenue contract or upon delivery of goods or services.

Capital Stock Capital stock is measured at par value for all shares issued. When the Group issues more than one class of stock, a separate account is maintained for each class of stock and number of shares issued. When the shares are sold at premium, the difference between the proceeds and the par value is credited to the Additional paid-in capital account. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received. In case the shares are issued to extinguish or settle the liability of the Group, the shares shall be measured either at the fair value of the shares issued or fair value of the liability settled, whichever is more reliably determinable.

Treasury Stock Treasury stock is stated at acquisition cost and is deducted from equity. No gain or loss is recognized in the statement of income on the purchase, sale, issue or cancellation of the Groups own equity instruments.

Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. The Group has assessed its revenue arrangements against the criteria enumerated under PAS 18 and concluded that it is acting as principal in all arrangements. The following specific recognition criteria must also be met before revenue is recognized:

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1. Revenue from merchandise sold is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer. Revenue is measured at the fair

value of the consideration received, excluding discounts, returns, rebates and sales taxes. 2. Franchise fee is recognized upon execution of the franchise agreement and performance of initial services required under the franchise agreement. Franchise revenue is recognized in the period earned. 3. Revenue of marketing is recognized when service is rendered. In case of marketing support funds, revenue is recognized upon achievement of the minimum purchase requirement of the suppliers. 4. Commission on services is recognized upon the sale of consigned goods. 5. Rental income is accounted for on a straight-line basis over the lease terms of ongoing sub-leases. 6. Interest income is recognized as it accrues based on effective interest rate method. 7. Revenue from dividends is recognized when the Groups right to receive the payment is established.

Cost and Expenses Recognition Cost is recognized in profit or loss at the point of sale. Expenses are recognized in profit or loss upon utilization of the service or when they are incurred.

Other Comprehensive Income Other comprehensive income comprises items of income and expense (including items previously presented under the statement of changes in equity) that are not recognized in profit or loss for the year in accordance with PFRS.

Retirement Benefit Retirement benefits cost is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognized as income or expense when

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the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceeded 10% of the higher of the defined benefit obligation and the fair value of the plan assets as of that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. Past service cost is recognized as an expense in the consolidated statement of income on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested following the introduction of, or changes to the plan, past service cost is recognized immediately. The net retirement obligation is the aggregate of the present value of the retirement obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of the plan assets out of which obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refund from the plan or reductions in the future contributions to the plan.

Leases Finance leaseswhich transfer to the lessee substantially all the risks and benefits of ownership of the assetare 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 interest income and reduction of the lease receivable so as to achieve a constant rate of interest on the remaining balance of the receivable. Interest income is recognized directly in profit or loss. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term.

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The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: a) there is a change in contractual terms, other than a renewal or extension of the arrangement; or b) a renewal option is exercised or extension is granted, unless the term of the renewal or extension was initially included in the lease term; or c) there is a change in the determination of whether fulfillment is dependent on a specified asset; or d) there is a substantial change to the asset. Where a re-assessment is made, lease accounting shall commence or cease from the date when the change in circumstance gave rise to the re-assessment for scenarios a, c or d above, and the date of renewal or extension for scenario b.

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

Foreign Currency-Denominated Transactions Transactions in foreign currency are initially recorded at the exchange rate at the date of transaction. Outstanding foreign currency-denominated monetary assets and liabilities are retranslated using the applicable exchange rate at balance sheet date. Exchange differences arising from translation of foreign currency monetary items at rates different from those at which they were originally recorded are recognized in the consolidated statement of income.

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Income Tax Current income tax Current income 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 balance sheet date.

Deferred income tax Deferred income tax is recognized on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences and carryforward benefits of unused net operating loss carryover (NOLCO) and excess of minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carryforward benefits of unused NOLCO and MCIT over RCIT can be utilized. Deferred income tax, however, is not recognized when it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of transaction, affects neither the accounting profit nor taxable profit or loss. Deferred income tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries, associates and interest in joint ventures. With respect to investments in other subsidiaries, associates and interests in joint ventures, deferred income tax liabilities are recognized except when the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax relating to items recognized directly in the stockholders equity and not in the consolidated statement of income.

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The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Earnings (Loss) per Share Basic earnings per share is calculated by dividing the income or loss for the year attributable to common shareholders by the weighted average number of shares outstanding during the year, excluding treasury shares.

Diluted earnings per share is calculated by dividing the net income or loss for the year attributable to common shareholders by the weighted average number of shares outstanding during the year, excluding treasury shares and adjusted for the effects of all potential dilutive common shares, if any. In determining both the basic and diluted earnings per share, the effect of stock dividends, if any, is accounted for retroactively.

Segment Reporting Operating segments are components of an entity for which separate financial information is available and evaluated regularly by management in deciding how to allocate resources and assessing performance. The Group considers the store operation as its primary activity and only business segment. Franchising, renting of properties and

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commissioning on bills payment services are considered an integral part of the store operations.

Provisions Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of a past event, (b) it is probable 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 assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. When the Group expects a provision or loss to be reimbursed, the reimbursement is recognized as a separate asset only when the reimbursement is virtually certain and its amount is estimable. The expense relating to any provision is presented in the consolidated statement of income, net of any reimbursement.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefit is probable. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the consolidated financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the consolidated financial statements.

Events after the Balance Sheet Date

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Post year-end events that provide additional information about the Groups position at the balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are non-adjusting events are disclosed in the notes to the consolidated financial statements when material. . Use of Significant Accounting Judgments, Estimates and Assumptions The preparation of the consolidated financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The judgments, estimates and assumptions used in the consolidated financial statements are based upon managements evaluation of relevant facts and circumstances as of balance sheet date. Future events may occur which can cause the assumptions used in arriving at those judgments, estimates and assumptions to change. The effects of any changes will be reflected in the consolidated financial statements of the Group as they become reasonably determinable.

Judgment In the process of applying the Groups 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 consolidated financial statements.

1. Determination of Functional Currency Based on the economic substance of the underlying circumstances relevant to the Group, the functional currency of the Group has been determined to be the Peso. The Peso is the currency of the primary economic environment in which the Group operates. It is the currency that mainly influences the revenue, costs and expenses of the Group. 2. Classification of Financial Instruments The Group classifies a financial instrument, or its components, on initial recognition as a financial asset, liability or equity instrument in accordance with the substance of the

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contractual arrangement and the definitions of a financial asset, liability or equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated balance sheet. Financial assets are classified as financial assets at FVPL, HTM financial assets, loans and receivables and AFS financial assets. Financial liabilities, on the other hand, are classified as financial liabilities at FVPL and other financial liabilities. The Group determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every balance sheet date. The Groups financial instruments include loans and receivables, AFS financial assets and other financial liabilities (Note 30). 3. Classification of Leases a. Finance Lease as Lessor The Group entered into a sale and leaseback transaction with an armored car service provider where it has determined that the risks and rewards related to the armored vehicles leased out will be transferred to the lessee at the end of the lease term. As such, the lease agreement was accounted for as a finance lease (Note 27). b. Operating Lease as Lessee The Group entered into various property leases, where it has determined that the risks and rewards related to the properties are retained with the lessors. As such, the lease agreements were accounted for as operating leases (Note 27). Rent expense amounted to P265,189,314 and P259,266,777 in 2006 and 2005, respectively (see Note 20). Accrued rent as of December 31, 2006 and 2005 amounted to P69,944,073 and P72,985,266, respectively (see Note 12). c. Operating Lease as Lessor The Group entered into property subleases on its leased properties. The Group determined that its lessors retain all the significant risks and rewards of these properties which are leased out on operating leases (Note 27).

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Rent income amounted to P39,889,745 and P35,771,211 in 2006 and 2005, respectively (see Note 22). Unearned rent as of December 31, 2006 and 2005 amounted to P1,382,354 and P462,739, respectively (see Note 13).

Estimates The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities follow: 1. 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 quotations (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. Note 30 presents the fair values of the financial instruments and the methods and assumptions used in estimating the fair values. 2. Impairment of Loans and Receivables The Group reviews its loans and receivables at each reporting date to assess whether a provision for impairment should be recognized in its consolidated statement of income or loans and receivables balance should be written off. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Moreover, management evaluates

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the presence of objective evidence of impairment which includes observable data that comes to the attention of the Group about loss events such as but not limited to significant financial difficulty of the counterparty, a breach of contract, such as a default or delinquency in interest or principal payments, probability that the borrower will enter bankruptcy or other financial re-organization. In addition to specific allowances against individually significant loans and receivables, the Group also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This takes into consideration the credit risk characteristics such as customer type, payment history, past due status and term. The carrying value of loans and receivables amounted to P73,481,008, P503,107,070, P454,474,113, P502,238,014 and P628,448,541 as of December 31, 2005, 2006, 2007, 2008 and 2009, respectively. Allowance for impairment on loans and receivables amounted to P10,843,948, P8,740,174, P7,739,980 and P10,507,939 as of December 31, 2009, 2008, 2007 and 2006, respectively (Note 5). Provision for impairment amounted to P9,798,327 in 2009, P7,069,507 in 2008, P346,678 in 2007 and P2,903,498 in 2006 (Note 5). There was no provision for impairment in 2005. 3. Impairment of AFS Financial Assets In determining the fair values of financial assets, management evaluates the presence of significant and prolonged decline in the fair value of share price below its cost, the normal volatility in the share price, the financial health of the investee and the industry and sector performance like changes in operational and financial cash flows. Any indication of deterioration in these factors can have a negative impact on their fair value. The determination of what is significant or prolonged requires judgment. The Group treats significant generally as 20% more of the original cost of investment, and prolonged greater than 6 months.

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The carrying value of AFS financial assets amounted to P2,314,575 as of December 31, 2009, 2008, 2007, 2006 and 2005 (Notes 10 and 30). No impairment losses were recognized in 2009, 2008, 2007, 2006 and 2005. 4. Decline in Inventory Value Provisions are made for inventories whose NRV are lower than their carrying cost. This entails estimation of cost of completion and costs necessary to make the sale. The estimates are based on a number of factors, the age, status and recoverability of realizable value of inventories. The carrying value of inventories amounted to P415,652,671 and P339,556,385, P323,973,849 and P331,926,504 as of December 31, 2009, 2008, 2007 and 2006, respectively (Note 6). No provisions for decline in inventory value were recognized in 2009, 2008 and 2007, 2006 and 2005. 5. Estimation of Useful Lives of Property and Equipment The Group estimated the useful lives of its property and equipment based on a period over which the assets are expected to be available for use. Property and equipment, net of accumulated depreciation and amortization, amounted to P1,227,244,430, P1,072,041,329, P852,458,158, P800,526,339 and P714,453,693 2009, 2008 2007,2006 and 2005, respectively (Note 8). 6. Impairment of Property and Equipment and Software and Program Costs The Group determines whether items of its property and equipment and software and program costs are impaired on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the assets are allocated. The preparation of the estimated future cash flows in determining value in use involves significant judgment and estimation. While management believes that the assumptions made are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and may lead to future impairment charges. The carrying value of property and equipment and software and program costs amounted to P1,235,255,125, P1,082,819,752, P858,553,622 and P804,446,339 as of December 31, 2009, 2008, 2007 and 2006 respectively (Notes 8 and 10). Based on as of December 31,

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managements assessment, there were no indicators of impairment in the Groups nonfinancial assets, thus, no impairment loss needs to be recognized in 2009, 2008, 2007, 2006 and 2005. 7. Impairment of Goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value-in-use of the cash-generating units to which the goodwill is allocated. Estimating the value-in-use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying value of goodwill amounted to P65,567,524 as of December 31, 2009 and 2008 and P70,178,892 as of December 31, 2007, 2006 and 2005, respectively (Note 10). No impairment losses were recognized in 2009 and 2007, while impairment loss recognized on goodwill amounted to P4,611,368 in 2008 (Note 10). Based on

managements assessment, goodwill is fairly stated, thus, no impairment loss needs to be recognized in 2006 and 2005. 8. Estimation of Retirement Benefits The determination of the obligation and retirement benefits is dependent on managements assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 25 and include, among others, discount rates per annum, expected rate of return on plan assets and salary increase rates. Actual results that differ from the Groups assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Group believes that the assumptions are reasonable and appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect the retirement obligations. The Groups unrecognized net actuarial losses amounted to 15,715,643, 15,950,982, 13,183,698 and 11,412,574 as of December 31, 2008, 2007, 2006 and 2005, respectively (Note 25).

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The Groups net retirement obligations amounted to P55,667,123, P35,827,737 as of December 31, 2009 and 2008, respectively (Note 25) and P26,888,841 and P22,700,899 as of December 31, 2006 and 2005. Retirement benefits cost amounted to P21,979,689 in 2009, P8,720,701 in 2008 and P 7,128,633 in 2007 (Notes 24 and 25). Further details about the assumptions used are disclosed in Note 25. 9. Realizability of Deferred Income Tax Assets Deferred income tax assets are recognized for all temporary deductible differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Management has determined based on business forecast of succeeding years that there is enough taxable profit against which the recognized deferred income tax assets will be realized. The Groups recognized deferred income tax assets amounted to P51,387,363, P41,782,617, P39,583,516, P54,008,463 and P77,598,357 as of December 31, 2009, 2008, 2007, 2006 and 2005, respectively (Note 28).

4. Cash and Cash Equivalents

2009 Cash on hand and in banks Cash equivalents P432,900,994 15,929,894 P 448,830,888 2008 P 314,241,734 638,623 P 314,880,357 2007 P 308,251,838 622,106 P 308,873,944 2006 P 328,754,075 610,300 P 329,364,375 2005 P 197,902,121 6,408,645 P 204,310,766

Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are made for varying periods up to three months depending on the immediate cash requirements of the Group and earn interest at the respective cash equivalent rates.

5. Receivables

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2009 Suppliers Franchisee Employees Rent Lease receivable-current(Note 27) Notes receivable-current(Note 10) Insurance claims Store operators Deposits Due from Philippine Foundation Inc.(Note 26) Receivable from Social Security System Others Less allowance for impairment P69,278,890 50,439,162 6,906,248 4,755,572 2,187,564 1,905,773 1,688,404 1,009,864 323,477 12,489,099 150,984,053 10,843,948 P 140,140,105

2008 P 61,650,671 76,989,185 5,137,033 2,317,248 938,402 53,883 7,508,265 154,594,687 8,740,174 P 145,854,513

2007 P 48,246,882 16,372,484 6,215,487 1,617,536 3,098,193 4,620,051 80,170,633 7,739,980 P 72,430,653

2006 P 40,060,216 4,429,101 783,260 4,985,000 3,875,542 1,023,050 2,628,408 57,784,577 10,507,939 P 47,276,638

2005 P 54,745,519 6,750,663 6,982,232 4,800,000 2,093,321 957,012 4,756,702 81,085,449 7,604,441 P 73,481,008

The classes of receivables of the Group are as follows: Suppliers - pertains to receivables from the Groups suppliers for display allowances, annual volume discount and commission income from different service providers. Franchisee - pertains to receivables for the inventory loans obtained by the franchisees at the start of their store operations. Employees - pertains to car loans, salary loans and cash shortages from stores which are charged to employees. Rent - pertains to receivables from sublease agreements with third parties, which are based on an agreed fixed monthly rate or as agreed upon by the parties. Store operators - pertains to the advances given to third party store operators under service agreements (Note 33).

Receivables from suppliers are non interest-bearing and are generally on 30-90 days terms.

Current portion of lease receivable is net of unearned interest income amounting to P332,436 and P465,251 as of December 31, 2009 and 2008, respectively.

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Notes receivable pertains to the remaining secured, receivable from an armored car service provider for stolen collections amounting to P19,457,864 and bears interest at 8%. In 2006, the difference between the outstanding balance of the notes receivable of P11,396,745 and the fair value of the mortgaged armored vehicles in favor of the Group amounting to P4,985,000 was written off (Note 17). In March 2007, the armored car service provider settled its outstanding account with the Group by transferring the ownership of its mortgaged armored vehicles in favor of the Group under a sale and leaseback finance lease arrangement (Note 27). The settlement of notes receivable through mortgage did not result in the recognition of any gain or loss.

The allowance for impairment pertains to suppliers and others accounts. Movements in allowance for impairment are as follows:
2009 Suppliers Beginning balance Provision for the year(Note 20) Write-off Recovery of bad debts Ending balances P6,605,041 7,535,300 (6,605,041) P 7,535,300 Others P 2,135,133 2,263,027 (976,212) (113,300) P 3,308,648 Total P 8,740,174 9,798,327 (7,581,253) (113,300) P 10,843,948

2008 Suppliers Beginning balance Provision for the year(Note 20) Write-off Ending balances P7,019,993 4,934,374 (5,349,326) P 6,605,041 Others P 719,987 2,135,133 (719,987) P 2,135,133 2007 Suppliers Beginning balance Provision for the year(Note 20) Write-off Ending balances P9,787,952 346,678 (3,114,637) P 7,019,993 Others P 719,987 P 719,987
2006 Suppliers Beginning balance Provision for the year(Note 20) Ending balances P7,604,441 2,183,511 P 9,787,952 Others P 719,987 P 719,987 Total P 7,604,441 2,903,498 P 10,507,939

Total P 7,739,980 7,069,507 (6,069,313) P 8,740,174

Total P 10,507,939 346,678 (3,114,637) P 7,739,980

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6. Inventories
2009 At cost(Note 19): Warehouse merchandise and others Store merchandise P235,157,252 180,495,419 P 415,652,671 P 175,581,160 163,975,225 P 339,556,385 P 184,038,557 139,935,292 P 323,973,849 P 180,818,266 151,108,238 P 331,926,504 P 172,097,722 164,096,138 P 336,193,860 2008 2007 2006 2005

7. Prepayments and Other Current Assets

2009 Deferred input value-added tax (VAT) Creditable withholding taxes Advances to suppliers Prepaid rent Advances for expenses Supplies Deferred lease-current(Note 10 and 27) Prepaid uniform Prepaid taxes and licenses Others P88,368,544 44,291,320 23,163,308 5,460,880 1,445,555 1,425,742 1,105,330 9,122,713 P 174,383,392 2008 P 66,075,401 7,847,838 15,464,928 11,077,907 1,436,762 1,519,365 1,045,510 1,867,481 11,611,986 P 117,947,178 2007 P 43,009,867 1,682,253 4,250,724 1,161,584 1,714,617 1,468,243 7,481,914 9,205,900 P 69,975,102 2006 P 31,337,732 16,259,015 1,358,613 4,224,340 957,770 1,173,479 1,276,440 2,897,998 P 59,485,387 2005 P 11,585,940 12,993,605 650,212 3,555,751 2,653,954 1,331,083 875,815 1,803,473 P 35,449,833

8. Properties and Equipment On February 5, 2007, the Group revalued its land with cost amounting to 39,866,864 at appraised value of 44,481,000, as determined by a professional qualified independent appraiser. The appraisal increase of 3,229,895, net of 1,384,241 tax, resulting from the revaluation was credited to Revaluation increment in land account presented under the stockholders equity section of the consolidated balance sheets. The appraised value was determined using the market data approach, wherein the value of the land is based on sales and listings of comparable properties registered within the vicinity. On September 26, 2009, nine of the Companys stores were devastated by the typhoon Ondoy. The Company recognized loss from the said typhoon amounting to P3,285,171, which represents the net book value of the property and equipment destroyed by the typhoon as of that said date.

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Fully depreciated property and equipment that are still being used in operations amounted to P498,262,619, P472,529,940 and P444,531,992, as of December 31, 2009 and 2008, 2007 and 2006, respectively.

Movements in property and equipment are as follows:

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2009 Buildings and Improvement P 106,053,132 782,102 106,835,234 Store Furniture and Equipment P 713,363,611 158,765,465 (20,377,442) (13,082,543) 838,669,091 Office Furniture and Equipment P 272,075,851 61,112,527 (4,497,653) 13,082,543 341,773,268 Transportation Equipment P 26,056,994 5,420,640 31,477,634 Computer Equipment P 214,549,222 19,997,353 234,546,575 Leasehold Improvements P 599,133,189 53,328,694 (54,962,628) 34,873,275 632,372,530 Construction in Progress P 15,631,887 62,987,209 (34,873,275) 43,745,821

Land Costs/Revalued Amount Beginning balances Additions Disposals Reclassifications Ending balances Accumulated Depreciation and Amortization Beginning balances Depreciation and amortization(Note 20) Disposals Reclassifications Ending balances Net Book Values P 44,481,000 P44,481,000 44,481,000

Total P 1,991,344,886 362,393,990 (79,837,723) 2,273,901,153

49,663,042 5,468,213 55,131,255 P 51,703,979

306,461,568 73,029,711 (20,377,442) (436,085) 358,677,752 P 479,991,339

144,210,934 30,115,489 (4,497,653) 436,085 170,264,855 P 171,508,413

16,959,659 3,434,230 20,393,889 P 11,083,745

117,352,566 44,966,349 162,318,915 P 72,227,660

284,655,788 46,891,726 (51,677,457) 279,870,057 P 352,502,473

P 43,745,821

919,303,557 203,905,718 (76,552,552) 1,046,656,723 P 1,227,244,430

2008 Buildings and Improvement P 104,385,538 1,667,594 106,053,132 Store Furniture and Equipment P 566,198,319 201,696,186 (54,755,870) 224,976 713,363,611 Office Furniture and Equipment P 240,570,651 36,387,334 (4,882,134) 272,075,851 Transportation Equipment P 25,206,994 1,100,000 (250,000) 26,056,994 Computer Equipment P 180,499,131 53,602,342 (19,552,251) 214,549,222 Leasehold Improvements P 492,150,509 109,934,135 (8,586,937) 5,635,482 599,133,189 Construction in Progress P 25,366,630 10,708,180 (14,582,465) (5,860,458) 15,631,887

Land Costs/Revalued Amount Beginning balances Additions Disposals Reclassifications Ending balances Accumulated Depreciation and Amortization Beginning balances Depreciation and amortization(Note 20) Disposals Ending balances Net Book Values P 44,481,000 P44,481,000 44,481,000

Total P 1,678,858,772 415,095,771 (102,609,657) 1,991,344,886

45,179,341 4,483,701 49,663,042 P 56,390,090

307,595,172 52,611,210 (53,744,814) 306,461,568 P 406,902,043

125,146,623 23,859,688 (4,795,377) 144,210,934 P 127,864,917

14,406,685 2,802,974 (250,000) 16,959,659 P 9,097,335

96,201,950 40,509,549 (19,358,933) 117,352,566 P 97,196,656

237,870,843 55,371,884 (8,586,939) 284,655,788 P 314,477,401

P 15,631,887

826,400,614 179,639,006 (86,736,063) 919,303,557 P 1,072,041,329

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2007 Buildings and Improvement P 104,385,538 104,385,538 40,688,891 4,490,450 45,179,341 P 59,206,197 Store Furniture and Equipment P 487,238,357 87,099,729 (8,116,776) (22,991) 566,198,319 269,491,622 46,077,061 (7,974,582) 1,071 307,595,172 P 258,603,147 Office Furniture and Equipment P 219,732,453 26,489,450 (5,673,834) 22,582 240,570,651 108,933,264 21,387,890 (5,174,531) 125,146,623 P 115,424,028 Transportation Equipment P 19,142,793 11,049,201 (4,985,000) 25,206,994 11,896,378 2,510,307 14,406,685 P 10,800,309 Computer Equipment P 161,670,263 19,071,710 (220,260) (22,582) 180,499,131 69,599,604 26,827,428 (225,082) 96,201,950 P 84,297,181 Leasehold Improvements P 449,711,890 66,721,579 (24,305,951) 22,991 492,150,509 191,729,720 58,341,250 (12,199,056) (1,071) 237,870,843 P 254,279,666 Construction in Progress P 11,117,660 14,248,970 25,366,630 P 25,366,630

Land Costs/Revalued Amount Beginning balances Additions Disposals Revaluation increment Reclassifications Ending balances P39,866,864 4,614,136 44,481,000 P 44,481,000

Total P 1,492,865,818 224,680,639 (43,301,821) 4,614,136 1,678,858,772 692,339,479 159,634,386 (25,573,251) 826,400,614 P 852,458,158

Accumulated Depreciation and Amortization

Beginning balances

Depreciation and amortization(Note 20)

Disposals Reclassifications Ending balances Net Book Values

2006 Buildings and Improvement P 104,305,299 17,411 62,828 104,385,538 36,971,748 3,715,544 1,599 40,688,891 P 63,696,647 Store Furniture and Equipment P 411,932,449 75,745,563 (473,131) 33,476 487,238,357 224,534,360 44,957,653 (43,299) 42,908 269,491,622 P 217,746,735 Office Furniture and Equipment P 180,143,089 41,608,928 (2,017,106) (2,458) 219,732,453 93,297,421 17,066,436 (1,428,799) (1,794) 108,933,264 P 110,799,189 Transportation Equipment P 15,491,722 5,751,071 (2,100,000) 19,142,793 10,311,052 1,585,326 11,896,378 P 7,246,415 Computer Equipment P 123,497,773 38,225,638 (42,857) (10,291) 161,670,263 46,114,755 23,476,201 (24,368) 33,016 69,599,604 P 92,070,659 Leasehold Improvements P 390,085,977 75,987,421 (16,277,953) (83,555) 449,711,890 139,757,818 63,245,099 (11,197,468) (75,729) 191,729,720 P 257,982,170 Construction in Progress P 117,674 10,999,986 11,117,660 P 11,117,660

Land Costs/Revalued Amount Beginning balances Additions Disposals Reclassifications Ending balances Accumulated Depreciation and Amortization Beginning balances Depreciation and amortization(Note 20) Disposals Reclassifications Ending balances Net Book Values P 39,866,864 P39,866,864 39,866,864

Total P 1,265,440,847 248,336,018 (20,911,047) 1,492,865,818 550,987,154 154,046,259 (12,693,934) 692,339,479 P 800,526,339

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2005 Buildings and Improvement P 110,413,634 (6,108,335) 104,305,299 35,140,876 4,649,016 (2,818,144) 36,971,748 P 67,333,551 Store Furniture and Equipment P 348,873,835 67,610,217 (5,531,064) 979,461 411,932,449 189,719,325 38,628,254 (3,833,096) 19,877 224,534,360 P 187,398,089 Office Furniture and Equipment P 142,944,090 43,024,203 (5,734,992) (90,212) 180,143,089 83,107,736 14,943,671 (4,757,182) 3,196 93,297,421 P 86,845,668 Transportation Equipment P 11,511,516 3,980,206 15,491,722 9,366,307 944,745 10,311,052 P 5,180,670 Computer Equipment P 58,486,830 66,815,534 (988,103) (816,488) 123,497,773 31,292,164 15,695,267 (884,860) 12,184 46,114,755 P 77,383,018 Leasehold Improvements P 374,702,787 39,211,639 (29,732,205) 5,903,756 390,085,977 101,815,343 49,908,285 (14,748,697) 2,782,887 139,757,818 P 250,328,159 Construction in Progress P 1,020,000 224,374 (1,126,700) 117,674 P 117,674

Land Costs/Revalued Amount Beginning balances Additions Disposals Reclassifications Ending balances Accumulated Depreciation and Amortization Beginning balances Depreciation and amortization(Note 20) Disposals Reclassifications Ending balances Net Book Values P 39,866,864 P39,866,864 39,866,864

Total P 1,087,819,556 220,866,173 (41,986,364) (1,258,518) 1,265,440,847 450,441,751 124,769,238 (24,223,835) 550,987,154 P 714,453,693

9. Deposits
2009 Rent(Note 27) Utilities Supplies Refundable Others P116,115,962 22,131,783 10,326,979 2,753,309 P 151,328,033 2008 P 97,645,367 21,766,646 9,314,578 3,968,879 P 132,695,470 2007 P 87,710,515 20,792,804 1,958,879 P 110,462,198 2006 P 81,446,679 21,901,249 3,284,738 752,710 P 107,385,376 2005 P 84,083,646 19,473,665 9,741,722 493,996 P 113,793,029

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Rent Deposits on rent are computed at amortized cost as follows:

2007 Face value of security deposits Less unamortized discount P108,756,336 21,045,821 P 87,710,515 2006 P 103,687,195 22,240,516 P 81,446,679

Movement in unamortized discount is as follows:

2007 Beginning balance Addition Amortization Ending balance P22,240,516 243,694 (1,438,389) P 21,045,821 2006 P 21,862,724 897,529 (519,737) P 22,240,516

The amortized cost of refundable security deposits included under Rent of Deposits as of December 31, 2006 and 2005 amounted to P9,189,188 and P7,127,440, respectively. Interest income on accretion of the value of the refundable security deposits amounted to P912,425 and P1,508,250 in 2006 and 2005, respectively.

Refundable Refundable deposits on rent are computed at amortized cost as follows:

2009 Face value of security deposits Additions Refunded Unamortized Discount P26,835,877 958,162 (876,000) (16,591,060) P 10,326,979 2008 P 26,835,877 (17,521,299) P 9,314,578 2007 P 7,635,131 20,740,938 (18,689,615) P 9,686,454

Movements in unamortized discount are as follows:

2009 Beginning balance Additions Amortization Refunded Ending balance P17,521,299 235,348 (987,606) (177,981) P 16,591,060 2008 P 18,689,615 (1,392,016) P 17,521,299 2007 P 2,832,415 16,682,414 (825,214) P 18,689,615

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10. Goodwill and Other Noncurrent Assets

2009 Goodwill Deferred lease-net of current portion Garnished accounts Software and program cost-net Notes receivable-net of current portion Lease receivable-net of current portion AFS financial assets Others P65,567,524 11,761,052 10,856,648 8,010,695 4,265,477 2,314,575 4,311,601 P 107,087,572

2008 P 65,567,524 13,058,023 10,778,423 6,453,041 2,314,575 3,300,359 P 101,471,945

2007 P 70,178,892 14,765,132 6,095,464 3,600,295 2,314,575 3,584,756 P 100,539,114

2006 P 70,178,892 3,920,000 12,834,455 3,269,088 P 197,587,811

2005 P 70,178,892 1,477,239 6,265,190 6,319,880 1,681,647 P 199,715,877

Goodwill On March 22, 2004, the Group purchased the leasehold rights and store assets of Jollimart Philippines Corporation (Jollimart) for a total consideration of P130,000,000. The excess of the acquisition cost over the fair value of the assets acquired was recorded as goodwill amounting to P70,178,892. The recoverable amount of the goodwill was estimated based on the value-in-use calculation using cash flow projections from financial budgets approved by senior management covering a five year period. The pre-tax discount rate applied to cash flow projections is 10.27% in 2009, 10.22% in 2008, and 9.00% in 2007, 2006 and 2005. The cash flows beyond the five-year period are extrapolated using a 3% growth rate in 2009 through 2005 that is the same as the long-term average growth rate for the retail industry. As of December 31, 2009 and 2008, the Group has closed one and nine stores, respectively, out of the 35 stores it purchased from Jollimart, which resulted in the recognition of impairment loss on goodwill amounting to P4,611,368 in 2008. No impairment losses were recognized in 2009 and 2007, 2006 and 2005 as management assessed goodwill to be fairly stated.

Key assumptions used in value-in-use calculations: Sales and cost ratio

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Sales and cost ratio are based on average values achieved in the three years preceding the start of the budget period. These are increased over the budget period for anticipated efficiency improvements. Sales are projected to increase by two to three percent per annum while the cost ratio is set at 68.00% - 70.00% of sales per annum. Discount rates Discount rates reflect managements estimates of the risks specific to the CGU. Management computed for its weighted average cost of capital (WACC). In computing for its WACC, the following are considered: average high and low range of average bank lending rates as of year-end, yield on a 10-year Philippine zero coupon bond as of valuation date, market risk premium, company relevered beta and alpha risk. Growth rate estimates Rates are based on average historical growth rate. Annual inflation and rate of possible reduction in transaction count were also considered in determining growth rates used.

Deferred Lease Deferred lease pertains to day 1 loss recognized on refundable deposits on rent, which is amortized on a straight-line basis over the term of the related leases.

Movements in deferred lease are as follows:

2009 Beginning balance Additions Amortization(Note 27) Refunded Ending balance Less current portion Noncurrent portion P14,577,388 235,348 (1,475,524) (150,418) 13,186,794 1,425,742 P 11,761,052 2008 P 16,479,749 (1,902,361) 14,577,388 1,519,365 P 13,058,023 2007 P 17,955,866 243,693 (1,719,810) 16,479,749 1,714,617 P 14,765,132 2006 P 18,718,401 897,529 (1,660,064) 17,955,866 1,702,280 P 16,253,586

Software and Program Cost Movements in software and program cost are as follows:

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2009 Cost Beginning balance Acquisition Write-off Ending balance Accumulated amortization Beginning balance Amortization(Note 20) Write-off Ending balance Net Book Values 3,435,662 3,053,728 6,489,390 P 8,010,695 P14,214,085 286,000 14,500,085

2008 P 7,426,000 6,788,085 14,214,085 1,330,536 2,105,126 3,435,662 P 10,778,423

2007 P 4,200,000 3,226,000 7,426,000 280,000 1,050,536 1,330,536 P 6,095,464

2006 P 16,780,036 4,200,000 (16,780,036) 4,200,000 15,302,798 1,757,238 (16,780,036) 280,000 P 3,920,000

The Groups old inventory management software, ES1/Super Logistics, with acquisition cost of P16,780,037, became fully depreciated in 2006 and was written off during the same year. A new software was acquired with acquisition cost amounting to P4,200,000. Amortization of P280,000 was recognized in 2006.

Notes Receivable Notes receivable pertains to the long-term portion of a secured, receivable from an armored car service provider for stolen collections bearing interest at 8%. Outstanding balance of the notes receivable amounts to P4,985,000, which pertains to the estimated fair value of mortgaged armored vehicles in favor of the Group. The remaining balance was written off in 2006 (see Note 18).

AFS Financial Assets AFS financial assets include unquoted investments in preferred shares of a public utility company. These are carried at cost less any impairment loss, if any.

11. Bank Loans Bank loans represent unsecured Peso-denominated short-term borrowings from various local banks, payable in lump sum in 2009 and 2008 with annual interest rates ranging from 4.90% to 5.50% in 2009, 6.75% to 8.60% in 2008, 7.47% to 8.60% in 2007, 8.60% to

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8.80% in 2006 and from 8.60% to 11.00% in 2005 which are repriced monthly based on market conditions.

Movements in bank loans are as follows:

2009 Beginning balance Availment Payments Ending balance P330,000,000 510,000,000 (500,000,000) P 340,000,000 2008 P 375,000,000 415,000,000 (460,000,000) P 330,000,000 2007 P 404,700,000 688,000,000 (717,700,000) P 375,000,000 2006 P 240,000,000 446,100,000 (281,400,000) P 404,700,000

Interest expense from these bank loans amounted to P26,070,437 in 2009, P24,908,055 in 2008, P31,115,655 in 2007, P35,161,148 in 2006 and P27,702,937 in 2005 (Note 21). Interest payable amounted to P641,417, P1,400,889, P985,359 and P1,616,110 as of December 31, 2009, 2008, 2007 and 2006, respectively (Note 12).

12. Accounts Payable and Accrued Expenses

2009 Trade payable Rent(Note 27) Employee benefits Utilities Advertising and promotion Outsourced services Security services Bank charges Interest(Note 27) Others P864,748,683 80,927,422 26,820,981 17,666,410 7,049,972 6,497,194 2,292,041 1,852,100 1,053,797 18,701,005 P 1,027,609,605 2008 P 697,108,015 85,020,970 22,364,011 12,288,794 4,242,668 5,764,897 2,395,139 1,678,000 1,825,689 15,355,584 P 848,043,767 2007 P 475,227,960 73,333,906 10,342,722 11,381,244 2,630,489 2,054,228 1,418,700 985,359 5,564,305 P 582,938,913 2006 P 493,694,257 69,944,073 10,351,365 11,729,488 10,121,125 1,978,886 2,760,120 1,616,110 8,027,533 P 610,222,957 2005 P 432,922,697 72,985,266 9,070,264 7,098,028 20,809,697 2,143,476 1,838,320 1,465,167 7,796,648 P 556,129,563

13. Other Current Liabilities

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2009 Non-trade accounts payable Deposits from sublessees Payable to franchisee Withholding taxes Retention payable Unearned rent Interest payable Service fees payable Royalty(Note 26) Payable to contractors Current portion of deferred revenue on: Exclusivity contract(Note 17 and 33) Finance lease(Note 17 and 27) Output VAT Others(Note 26) 3,913,690 1,310,151 3,904,917 13,012,717 P 211,934,980 P138,118,326 18,711,796 15,236,991 11,006,733 6,719,659

2008 P 120,494,703 11,929,960 15,129,370 5,671,223 3,913,691 1,310,151 10,099,637 6,038,237 P 174,586,972

2007 P 62,902,460 13,000,672 10,065,404 9,151,719 6,635,208 9,753,129 P 111,508,592

2006 P 62,534,858 55,747,867 11,729,699 10,458,897 6,720,669 1,382,354 546,660 175,447 9,163,433 4,721,986 P 163,181,870

2005 P 31,060,963 53,247,068 12,898,655 1,276,290 462,739 691,320 6,282,112 1,549,221 6,885,322 5,295,391 P 119,649,081

14. Deposits Payable

2009 Franchisees Service agreements Rent P70,812,875 38,309,233 10,844,946 P 119,967,054 2008 P 46,932,856 25,779,332 10,540,458 P 83,252,646

15. Long-term Debt

2007 Unsecured long-term promissory notes with local banks Unsecured long-term promissory notes with various parties under escrow agency agreement with a local bank Secured long-term promissory notes with a local bank: Less current portion of long-term debt 6,500,000 6,500,000 P 6,500,000 6,500,000 P 65,000,000 28,000,000 125,500,000 93,000,000 P 32,500,000 P6,500,000 2006 P 6,500,000 2005 P 32,500,000

Unsecured long-term promissory notes with local banks: Interest is at a fixed rate of 11.67% for the first 24 months, the rate thereafter shall be at the prevailing lender rate. The principal is payable in equal monthly installments starting on the sixth month, until March 2007.

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Unsecured long-term promissory notes with various parties under escrow agency agreement with a local bank: Interest rates range from 10.50% to 11% payable at lumpsum on May 2006. Secured long-term promissory notes with a local bank: Interest is at a fixed rate of 10.50% for three years, payable in equal monthly installments starting on the sixth month, until December 2006. The loan is guaranteed by PCSC.

Long-term debt in 2007 and 2006 consists of unsecured noncurrent promissory notes with a local bank, payable in equal monthly installments starting on the sixth month after the lending date until March 2007 with fixed interest rate of 11.67% for the first 24 months, the rate thereafter shall be at the prevailing lender rate. Full settlement of the loan amounted to 6,500,000 in 2007. Interest expense from these long-term debts amounted to 45,522 in 2007 and 205,977 in 2006 (Note 21).

16. Cumulative Redeemable Preferred Shares Cumulative redeemable preferred shares, which are redeemable at the option of the holder, represent the share of PSC-ERP through its trustee, BPI-AMTG, in SSHIs net assets pertaining to preferred shares. PSC-ERP is entitled to an annual Guaranteed Preferred Dividend in the earnings of SSHI starting April 5, 2002, the date when the 25% of the subscription on preferred shares have been paid, in accordance with the Corporation Code. The guaranteed annual dividends shall be calculated and paid in accordance with the Shareholders Agreement dated November 16, 2000 which provides that the dividend shall be determined by the BOD of SSHI using the prevailing market conditions and other relevant factors. Further, the preferred shareholder shall not participate in the earnings of SSHI except to the extent of guaranteed dividends and whatever is left of the retained earnings be declared as dividends in favor of common shareholders. Guaranteed preferred dividends included as part of Interest expense in the consolid ated statements of

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comprehensive income amounted to P412,380 in 2009, P424,800 in 2008, P366,240 in 2007, P546,660 in 2006 and P691,320 in 2005 (Note 21). Interest payable included under Accounts payable and accrued expenses in the consolidated balance sheets amounted to P412,380 and P424,800 as of December 31, 2009 and 2008, respectively.

17. Deferred Revenue

2009 Deferred revenue on finance lease Deferred revenue on exclusivity contract P1,856,046 P 1,856,046 2008 P 3,166,197 3,913,690 P 7,079,887 2007 P 4,476,348 P 4,476,348

Deferred Revenue on Finance Lease Movements in deferred revenue on finance lease are as follows:
2009 Beginning balance Addition Less amortization(Note 27) Less current portion P4,476,348 1,310,151 3,166,197 1,310,151 P 1,856,046 2008 P 5,786,499 (1,310,151) 4,476,348 1,310,151 P 3,166,197 2007 P 6,550,753 (764,254) 5,786,499 1,310,151 P 4,476,348

Deferred Revenue on Exclusivity Contract Movements in deferred revenue on exclusivity contract are as follows:
2009 Beginning balance Collection(Note 33) Amortization(Note 33) Less current portion Ending balance P7,827,381 (3,913,691) 3,913,690 3,913,690 P 2008 P 11,741,071 (3,913,690) 7,827,381 3,913,691 P 3,913,690

18. Equity On January 9, 1998, the SEC approved the registration of the following:

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a. The 237,938,250 common shares consist of:

Outstanding common shares (including underlying shares for the 122,882 warrant units) Initial public offering Private placement 166,556,250 47,000,000 24,382,000 237,938,250

On February 4, 1998, the Group offered for sale 71,382,000 common shares, consisting of 47,000,000 shares for public offering and 24,382,000 shares for private placement both at an offer price of P4.40 per share. Net proceeds generated from the offering amounted to P288,300,000. The excess of the net proceeds over the cost of common shares amounting to P216,900,000 was credited to Additional paid-in capital.

b. The 122,882 5-year warrants with attached 4% perpetual income bonds. On June 13, 2000, the BOD approved a resolution authorizing the issuance of the Groups shares (Optional Shares) for the exercise of the 122,882 warrants with attached 4% perpetual income bonds consisting of 18,432,300 common shares to be taken from unissued portion of the authorized capital stock and 12,288,200 treasury shares or a total of 30,720,500 shares pursuant to their registration with the SEC. Moreover, upon the actual exercise of the warrants and purchase of the Optional Shares, the Group was authorized to list the 30,720,500 shares with the Philippine Stock Exchange (PSE).

During the period September 15 to 25, 2000, all of the Groups warrants were exercised and the corresponding shares of 30,720,500 were issued at a price of P1.732 per share resulting in an additional paid-in capital of P13,492,444. The excess of cost over re-issue price of treasury shares amounting to P27,902,091 is presented as deduction against additional paid-in capital in the consolidated statements of changes in stockholders equity. Consequently, on September 28, 2000, the Group listed the 30,720,500 with the PSE and delisted the corresponding 122,882 warrants.

Employee Stock Purchase Plan

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The Group has an Employee Stock Purchase Plan (ESPP) which allows all full-time and regular employees, who have rendered at least two years of service to the Group as of December 31, 1996, to purchase the Groups shares in the offering at a purchase price of P4.40 per share. Each eligible employee can purchase a minimum of 1,000 shares and a maximum number of shares with a purchase price equivalent to 1 months basic salary or, in the case of a manager, up to 3 months basic salary. On the stock purchase date, the Group has the right to vote the pledged shares until full payment of the loan, and the participants have the right to receive all cash dividends, but stock dividends shall be held in escrow until full payment of loan.

In 1998, 997,000 shares were subscribed by the employees under the ESPP and the unsold shares were taken by the lead underwriter as part of the offering to the public. In 2001, 686,250 shares were withdrawn by the employees and returned to the Group and accounted for as treasury shares.

On June 25, 2009, the Companys BOD approved the recommendation for a stock dividend declaration corresponding to 10% of the outstanding common shares of the Company of 260,977,200 shares or equivalent of 26,097,722 common shares.

On July 16, 2009, at least 2/3 of the Companys stockholders approved the stock declaration corresponding to 10% of the outstanding common shares and the issuance of 26,097,722 common shares with par value of P1 amounting to P26,097,722. Record date of entitlement is August 14, 2009.

On June 18, 2008, the Companys BOD approved the recommendation for a stock dividend declaration corresponding to 10% of the outstanding common shares of the Company of 237,252,000 shares or equivalent of 23,725,200 common shares (Note 28).

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On July 17, 2008, at least 2/3 of the Companys stockholders approved the stock declaration corresponding to 10% of the outstanding common shares and the issuance of 23,725,200 common shares with par value of P1 amounting to P23,725,200. Record date of entitlement is August 15, 2008. Movement in the number of shares issued and outstanding:
2009 Beginning balance Issuance of stock dividend Ending balance 261,663,450 26,097,722 287,761,172 2008 237,938,250 23,725,200 261,663,450

19. Cost of Merchandise Sales

2009 Merchandise inventory, beginning Net purchases Less merchandise inventory, ending P339,556,385 4,447,812,276 4,787,368,661 415,652,671 P4,371,715,990 2008 P323,973,849 3,925,469,267 4,249,443,116 339,556,385 P3,909,886,731 2007 P331,926,504 3,526,604,822 3,858,531,326 323,973,849 P3,534,557,477 2006 P336,193,860 3,219,814,921 3,556,008,781 331,926,504 P3,224,082,277 2005 P303,199,945 3,219,245,155 3,522,445,100 336,193,860 P3,186,251,240

20. General and Administrative Expenses

2009 Communication, light and water Rent(Note 27) Outside services(Note 33) Personnel costs(Note 24 and 25) Depreciation and amortization Management fee(Note 33) Advertising and promotion Royalties(Note 26) Trucking services Taxes and licenses Repairs and maintenance Supplies Warehousing services Transportation and travel Entertainment, amusement and recreation Accounts written off Inventory losses Provision for impairment of receivables Dues and subscription Insurance Amortization of software and program costs Others P371,580,742 325,249,255 299,568,215 285,712,784 203,905,718 73,763,919 70,386,281 68,511,742 64,648,509 60,593,879 56,019,871 48,668,549 26,539,417 25,874,891 10,639,655 9,798,327 5,123,248 4,634,768 3,053,728 36,685,831 P2,050,959,329 2008 P331,736,206 272,009,467 259,118,700 250,613,003 179,639,006 54,152,935 62,035,597 67,017,425 53,122,933 54,152,174 63,439,914 45,010,978 23,210,852 20,181,424 9,142,227 7,069,507 3,959,684 4,214,915 2,105,126 26,500,827 P1,788,432,900 2007 P327,122,522 259,971,947 95,483,002 316,211,171 159,634,386 83,248,355 44,634,182 54,906,673 55,385,303 67,127,410 43,659,408 53,799,176 39,466,267 16,811,529 20,458,960 16,597,039 346,678 4,044,167 3,851,316 1,050,536 19,480,055 P1,683,290,082 2006 P315,827,699 265,189,314 61,441,165 336,901,558 154,046,259 82,307,663 42,419,622 24,634,225 51,000,456 57,897,515 36,587,772 51,387,785 39,175,543 14,341,622 14,182,789 9,571,709 21,867,776 2,903,498 3,581,679 2,825,865 1,757,239 21,576,407 P1,611,425,160 2005 P318,194,940 259,266,777 58,312,084 336,406,816 124,769,238 63,632,738 31,426,121 47,138,470 44,077,388 50,439,534 32,438,344 50,621,852 32,264,919 14,469,528 5,960,260 33,391,052 2,837,951 3,925,247 2,987,458 19,734,965 P1,532,295,682

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21. Marketing Income

2009 Display charges Promotions Marketing support funds(Note 33) P119,307,326 84,413,455 32,782,079 P 236,502,860 2008 P 76,550,421 37,512,628 22,148,166 P 136,211,215 2007 P 44,573,947 44,216,543 8,889,561 P 97,680,051 2006 P 56,304,980 22,990,810 3,278,918 P 82,574,708 2005 P 68,457,237 5,660,618 22,840,509 P 96,958,364

22. Interest Expense

2009 Interest on: Bank loans Long-term debt(Note 33) Guaranteed preferred dividends P26,070,437 412,380 P 26,482,817 P 24,908,055 424,800 P 25,332,855 P 31,115,655 45,522 366,240 P 31,527,417 P 35,161,148 205,977 546,660 P 35,913,785 P 27,702,937 5,397,766 691,320 P 33,792,023 2008 2007 2006 2005

23. Interest Income

2009 Interest on: Bank deposits Finance lease(Note 27) Accretion of refundable deposits P3,387,088 465,251 987,606 P 4,839,945 P 2,180,738 614,154 1,392,016 P 4,186,908 P 2,228,578 1,347,304 825,214 P 4,401,096 P 1,847,906 912,425 P 2,760,331 P 2,194,957 1,508,250 P 3,703,207 2008 2007 2006 2005

24. Personnel Costs

2009 Salaries and wages Employee benefits Retirement benefits cost(Note 25) P167,739,054 95,994,041 21,979,689 P 285,712,784 2008 P 157,963,246 83,929,056 8,720,701 P 250,613,003 2007 P 195,618,948 113,463,590 7,128,633 P 316,211,171 2006 P 210,336,816 120,085,026 6,479,716 P 336,901,558 2005 P 210,254,837 121,516,603 4,635,376 P 336,406,816

25. Retirement Benefits The Group maintains a trusted, non-contributory defined benefit retirement plan covering all qualified employees. Normal retirement benefits are equal to the employees retirement pay as defined in Republic Act No. 7641 multiplied b y the years of service. Normal retirement date is the attainment of age 60 and completion of at least five years of service.

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The following tables summarize the components of net retirement benefits cost recognized in the consolidated statements of income and the funding status and amounts recognized in the consolidated balance sheets:

a. Net retirement benefits cost

2009 PSC Current service cost Interest cost Expected return on plan assets Net actuarial losses Net retirement benefits cost P345,868 20,284,950 (554,917) 436,078 P 20,511,979 CDI P 146,754 1,347,433 (42,468) 15,991 P 1,467,710 2008 PSC Current service cost Interest cost Expected return on plan assets Net actuarial losses (gains) Net retirement benefits cost P 4,353,211 4,229,201 (543,538) 552,819 P 8,591,693 CDI P 124,321 135,003 (41,597) (88,719) P 129,008 2007 PSC Current service cost Interest cost Expected return on plan assets Net actuarial losses (gains) Net retirement benefits cost P 3,526,882 3,649,522 (675,313) 480,398 P 6,981,489 PSC Current service cost Interest cost Expected return on plan assets Net actuarial losses (gains) Net retirement benefits cost P 1,877,379 4,435,033 (584,243) 265,842 P 5,994,011 CDI P 146,985 140,282 (50,884) (89,239) P 147,144 2006 CDI P 165,501 379,758 (59,554) P 485,705 2005 Current service cost Interest cost Expected return on plan assets Net actuarial losses (gains) Net retirement benefits cost PSC P 1,208,367 3,959,202 (1,020,724) 45,000 P 4,191,845 CDI P 128,848 386,823 (54,140) P 461,531 Total P 1,337,215 4,346,025 (1,074,864) 45,000 P 4,653,376 Total P 2,042,880 4,814,791 (643,797) 265,842 P 6,479,716 Total P 3,673,867 3,789,804 (726,197) 391,159 P 7,128,633 Total P 4,477,532 4,364,204 (585,135) 464,100 P 8,720,701 Total P 492,622 21,632,383 (597,385) 452,069 P 21,979,689

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b. Net retirement obligations recognized by the Group are as follows:

2009 Present value of retirement obligations Less fair value of net plan assets Unfunded retirement obligations Unrecognized net actuarial gain (loss) Net retirement obligations P67,303,404 7,682,259 59,621,145 (3,954,022) P 55,667,123 2008 P 58,180,992 6,637,612 51,543,380 (15,715,643) P 35,827,737 2007 P 52,567,889 6,501,505 46,066,384 (15,950,982) P 30,115,402 2006 P 46,674,326 6,601,787 40,072,539 13,183,698 P 26,888,841 2005 P 40,551,447 6,437,974 34,113,473 11,412,574 P 22,700,899

c. Changes in present value of the retirement obligations are as follows:

2009 Beginning balances Current service cost Interest cost Benefits paid Actuarial losses (gains) Ending balances P58,180,992 492,622 21,632,383 (1,613,202) (11,389,391) P 67,303,404 2008 P 52,567,889 4,477,532 4,364,204 (3,151,919) (76,714) P 58,180,992 2007 P 46,674,326 3,673,867 3,789,804 (4,222,087) 2,651,979 P 52,567,889 2006 P 40,551,447 2,042,880 4,814,791 (2,839,768) 2,104,976 P 46,674,326 2005 P 30,122,500 1,337,215 4,346,025 (4,838,968) 9,584,675 P 40,551,447

d. Changes in the fair value of net plan assets are as follows:

2009 Beginning balances Expected returm on plan assets Contribution Benefits paid Actuarial losses (gains) Ending balances P6,637,612 597,385 2,140,303 (1,613,202) (79,839) P 7,682,259 2008 P 6,501,505 585,135 3,008,366 (3,151,919) (305,475) P 6,637,612 2007 P 6,601,787 726,197 3,902,072 (4,222,087) (506,464) P 6,501,505 2006 P 6,437,974 643,797 2,291,774 (2,839,768) 68,010 P 6,601,787 2005 P 10,478,637 1,047,864 (4,838,968) (249,559) P 6,437,974

Breakdown of the Groups net plan assets are as follows:

2009 Cash in bank Investments in equity securities and trust and mutual funds Liabilities P162 7,686,311 (4,214) P 7,682,259 2008 P 1,303 6,647,004 (10,695) P 6,637,612 2007 P 292,568 7,346,701 (1,137,764) P 6,501,505 2006 P 263 6,612,401 (10,877) P 6,601,787 2005 P 243 6,450,251 (12,520) P 6,437,974

Actual return on plan assets amounted to P485,164 in 2009, P259,779 in 2008, P197,370 in 2007, and P661,982 in 2006 for PSC and P32,382 in 2009, P19,881 in 2008, P22,363 in 2007 and P49,875 in 2006 for CDI and P744,165 in total for PSC and CDI in 2005. The overall expected rate of return on plan assets is determined based on the market prices prevailing on the date applicable to the period over which the obligation is to be

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settled. There has been no significant change in the expected rate of return on plan assets. The Group had planned to contribute P4,000,000 in 2007 and 2008 and P6,794,501 in 2009 to its defined benefit plan. PSC and CDI expect to contribute P4,000,000 and P100,000, respectively, to their defined benefit plan in 2010.

The principal assumptions used in determining net retirement benefits cost for the Groups plan are as follows:
PSC 2009 Number of employees Discountper annum Expected annual rate of return on plan assets Salary increase rate 699 10.81% 6.00% 6.00% 2009 Number of employees Discountper annum Expected annual rate of return on plan assets Salary increase rate 20 10.69% 6.00% 6.00% 2008 742 37.56% 9.00% 5.00% 2008 19 32.28% 9.00% 5.00% 2007 795 8.31% 9.00% 5.00% CDI 2007 19 8.06% 9.01% 5.00% 2006 22 7.86% 11.00% 5.00% 2005 26 11.57% 10.00% 5.00% 2006 826 8.13% 10.00% 5.00% 2005 1,002 11.90% 10.00% 5.00%

Amounts for the current and prior periods are as follows:

2009 PSC Present value of retirement obligations Fair value of net plan assets Unfunded retirement obligations Experience gain adjustments on retirement obligations Experience loss adjustments on plan assets P62,438,440 7,178,008 55,260,432 (12,458,512) (69,753) CDI P 4,864,964 504,251 4,360,713 (857,124) (10,086) Total P 67,303,404 7,682,259 59,621,145 (13,315,636) (79,839)

2008 PSC Present value of retirement obligations Fair value of net plan assets Unfunded retirement obligations Experience loss adjustments on retirement obligations Experience loss adjustments on plan assets P 54,006,788 6,165,743 47,841,045 46,616 (283,759) CDI P 4,174,204 471,869 3,702,335 2,532,432 (21,716) Total P 58,180,992 6,637,612 51,543,380 2,579,048 (305,475)

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2007 PSC Present value of retirement obligations Fair value of net plan assets Unfunded retirement obligations Experience gain adjustments on retirement obligations Experience loss adjustments on plan assets P 50,892,911 6,039,312 44,853,599 2,872,179 (477,943) PSC Present value of retirement obligations Fair value of net plan assets Unfunded retirement obligations Experience gain adjustments on retirement obligations P 44,889,567 6,139,207 38,750,360 (3,964,900) 2005 PSC Present value of retirement obligations Fair value of net plan assets Unfunded retirement obligations Experience gain adjustments on retirement obligations P 37,269,186 5,842,432 31,426,754 (9,579,134) CDI P 3,282,261 595,542 2,686,719 Total P 40,551,447 6,437,974 34,113,473 (9,579,134) CDI P 1,674,978 462,193 1,212,785 (94,636) (28,521) 2006 CDI P 1,784,759 462,580 1,322,179 Total P 46,674,326 6,601,787 40,072,539 (3,964,900) Total P 52,567,889 6,501,505 46,066,384 2,777,543 (449,422)

26. Related Party Transactions Related party relationships exist when one party has the ability to control, directly or indirectly through one or more intermediaries, the other party or exercise significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprise, or between and/or among the reporting enterprises and their key management personnel, directors or its stockholders. Transactions between related parties are accounted for at arms length prices or on terms similar to those offered to non-related entities in an economically comparable market.

Significant transactions with related parties consist of: a. Licensing agreement of the Group with Seven Eleven, Inc. (SEI), a related company organized in Texas, U.S.A. This grants the Group the exclusive right to use the 7-Eleven System in the Philippines. In accordance with the agreement, the Group pays, among

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others, royalty fee to SEI based on a certain percentage of monthly gross sales net of gross receipts tax. In 2006, the Group and SEI entered into a Store Renovation Agreement (Agreement), wherein SEI will waive a maximum amount of USD 10,000 royalty fee per 7-Eleven Store renovated from February 1, 2006 until January 31, 2007. Royalty fees recorded by the Group amounted to P70,386,281, P62,035,597, P54,906,673, P24,634,225 and P47,138,470 in 2009, 2008, 2007, 2006 and 2005, respectively. Royalty fees are paid on a monthly basis. Royalty payable included under Other current liabilities amounted to P6,719,659, P5,671,223 , P9,151,719 , P175,447 and P6,282,112 as of December 31,2009, 2008, 2007, 2006 and 2005, respectively.

b. Rental of post-mix machines from PCSC for three years until June 30, 2005. The Group pays the latter 5% of sales from the said machines. Payments shall be made quarterly before the 20th day of January, April, July and October. Expense recognized on rental of post-mix machines amounted to P3,971,343 in 2005.

c. PSC has transactions with Philippine Foundation Inc. (PFI), a foundation with common key management of the Group, consisting of non-interest bearing advances pertaining primarily to salaries, taxes and other operating expenses initially paid by PSC for PFI. Amounts due from PFI amounted to P323,477 and P53,883 as of December 31, 2009 and 2008, respectively. Amount due to PFI included under others in Other current liabilities amounted to P18,650 as of December 31 2008.

d. Compensation of key management personnel are as follows:

2009 Short-term employee benefits Post-employment benefits Other long-term benefits P32,583,183 1,752,710 376,073 P 34,711,966 2008 P 15,451,726 358,512 294,118 P 16,104,356 2007 P 18,357,896 2,256,441 P 20,614,337 2006 P 18,288,784 356,304 507,563 P 19,152,651 2005 P 14,479,587 2,164,572 447,192 P 17,091,351

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27. Leases a. The Group has various lease agreements with third parties relating to its store operations. Certain agreements provide for the payment of rentals based on various schemes such as an agreed percentage of net sales for the month and fixed monthly rate. Rental expense related to these lease agreements amounted to P295,747,766 in 2009, P242,449,643 in 2008, P231,418,192 in 2007, P236,887,280 in 2006 and P237,616,908 in 2005. Of the total rent expense, P663,802 in 2009, P478,829 in 2008, P1,054,585 in 2007, P1,059,295 in 2006 and P1,752,385 in 2005 pertains to contingent rent of some stores based on percentage ranging from 1.5% to 3.0% of store sales. Amortization of deferred lease expense amounted to P385,024 in 2009, P811,861 in 2008, P1,174,560 in 2007, P569,564 in 2006 and P534,436 in 2005. The approximate annual minimum rental payments of the Group under its existing lease agreements as of December 31, 2006 are as follows:
2009 Within one year After one year but not more than five years More than five years P58,103,466 126,794,701 7,066,790 P 191,964,957 2008 P 69,316,737 164,360,319 17,337,068 P 251,014,124 2007 P 83,777,578 174,286,236 34,157,715 P 292,221,529 2006 P 94,081,531 220,679,560 50,640,438 P 365,401,529

b. The Group has various sublease agreements with third parties which provide for lease rentals based on an agreed fixed monthly rate or as agreed upon by the parties. Rental income related to these sublease agreements amounted to P52,265,323 in 2009, P36,502,151 in 2008, P39,648,977 in 2007, P39,889,745 in 2006 and P35,771,211 in 2005. The approximate annual minimum sublease payments expected to be received under its existing sublease agreements are as follows:
2009 Within one year After one year but not more than five years More than five years P623,731 714,800 P 1,338,531 2008 P 669,515 1,338,531 P 2,008,046 2007 P 25,470,739 45,498,280 1,587,360 P 72,556,379 2006 P 13,130,654 12,448,441 P 25,790,095

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c. CDI entered into a 15-year operating lease contract for the lease of its warehouse starting November 1, 2005, after the expiration of its previous five-year lease contract on November 30, 2005. The lease is subject to an escalation rate of 7% every after two years starting on the third year of the lease. The Group paid security deposits amounting to P20,000,000 related to the lease contract in 2005. The security deposit related to the previous lease contract amounting to P5,640,000 as of December 31, 2005 was refunded to the Group in January 2006. Rent expenses related to these lease agreements amounted to P22,925,240 in 2009, 2008, 2007 and 2006 and P13,213,153 in 2005. Amortization of deferred lease expense amounted to P1,090,500 in 2009, 2008 and 2006, P545,250 in 2007 and P1,572,789 in 2005.

The approximate annual minimum rental payments of the Group under its existing lease contract as of December 31, 2006 are as follows:
2009 Within one year After one year but not more than five years More than five years Total P20,815,812 113,806,440 130,516,307 P 265,138,559 2008 P 19,680,994 110,512,189 154,626,371 P 284,819,554 2007 P 19,454,030 105,631,493 182,430,399 P 307,515,922 2006 P 18,181,336 102,812,604 204,703,318 P 325,697,258

CDI also has other various short-term operating leases. Related rent expense amounts to P3,716,730 in 2006 and P2,358,148 in 2005.

d. In March 2007, PSC entered into a five-year sale and leaseback finance lease agreement with an armored car service provider. The lease has no terms of renewal and no escalation clauses. Unguaranteed residual values accruing to the Company amounted to P300,000.

Future minimum lease payments under this lease as are as follows:

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2009 Within one year After one year but not more than five years Total minimum lease payments Less amounts representing finance charges Present value of future minimum lease payments Less unearned interest income Less current portion P2,520,000 4,500,000 7,020,000 7,020,000 566,959 6,453,041 2,187,564 P 4,265,477

2008 P 2,782,500 7,020,000 9,802,500 9,802,500 1,032,211 8,770,289 2,317,248 P 6,453,041

2007 P 3,374,700 8,490,000 11,864,700 1,434,686 10,430,014 5,212,183 5,217,831 1,617,536 P 3,600,295

2006 P 2,843,932 7,586,082 10,430,014 10,430,014 5,212,183 5,217,831 1,617,536 P 3,600,295

Collection of lease receivable amounted to P2,782,500 in 2009 and P2,887,500 in 2008 and P840,000 in 2007. The sale and leaseback finance lease arrangement resulted in the recognition of Unearned interest income amounting to P6,131,980 upon inception of the lease. The unearned interest income is to be amortized over five years, which is the term of the agreement. Unearned interest income as of December 31, 2009, 2008 and 2007 amounted to P566,959, P1,032,211 and P1,646,365, respectively. Related interest income amounted to P465,251 in 2009, P614,154 in 2008 and P347,883 in 2007.

Present value of lease payments as of December 31 is as follows:

2009 Within one year After one year but not more than five years Total minimum lease payments Less current portion Present value of future minimum lease payments P2,187,564 4,265,477 6,453,041 2,187,564 P 4,265,477 2008 P 2,317,248 6,453,041 8,770,289 2,317,248 P 6,453,041 2007 P 2,273,346 8,770,289 11,043,635 2,273,346 P 8,770,289

Difference between the present values of the minimum lease payments at the date of lease inception against the carrying value of the finance leased asset resulted in a deferred revenue on finance lease amounting to P6,550,753, which is to be amortized on a straight-line basis over the term of the lease. Deferred revenue amounted to P1,856,046, P3,166,197 and P4,476,348 as of December 31, 2009, 2008 and 2007. Amortization of deferred revenue amounted to P1,310,151 in 2009 and 2008 and P764,254 in 2007.

28. Income Tax

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The components of the Groups provision for income tax are as follows:
2009 Current: RCIT MCIT Final tax on interest income Deferred P80,682,849 627,617 81,310,466 (6,270,068) P 75,040,398 P 62,259,735 436,148 62,695,883 (2,240,115) P 60,455,768 P 41,716,094 487,190 42,203,284 (773,980) P 41,429,304 P 28,453,281 366,402 28,819,683 (1,792,867) P 27,026,816 P 17,944,535 263,015 438,991 18,646,541 8,247,425 P 26,893,966 2008 2007 2006 2005

The components of the Companys and CDIs net deferred income tax assets are as follows:
2009 Excess of MCIT over RCIT Deferred tax assets: Accrued rent Net retirement obligations Unamortized discount on refundable deposit Allowance for impairment on receivables Deferred revenue on exclusivity agreement Unamortized past service cost Unamortized discount on receivable Unamortized foreign exchange loss Unearned rent Other accrued expenses 24,278,227 16,700,137 4,977,318 3,253,184 1,174,107 553,912 207,415 145,551 97,512 51,387,363 51,387,363 Deferred tax liabilities: Deferred lease expense Unamortized capitalized interest Unamortized discount on purchase of refundable deposit Accrued rent income 3,956,038 1,002,780 419,703 5,378,521 P 46,008,842 1,502,201 541,642 2,043,843 P 39,738,774 2,084,857 2,084,857 P 37,498,659 2,667,513 2,667,513 P 54,008,463 2,625,895 2,625,895 P 77,598,357 25,506,292 10,748,321 2,622,052 2,348,214 223,161 212,777 121,800 41,782,617 41,782,617 25,666,870 10,540,391 2,708,994 606,183 61,078 39,583,516 39,583,516 24,464,954 9,411,094 3,677,779 932,205 422,336 483,823 39,392,191 56,675,976 25,544,843 7,945,314 2,661,554 1,241,773 2,263 161,959 37,557,706 80,224,252 P 2008 P 2007 P 2006 P 17,283,785 2005 P 42,666,546

The Groups deferred income tax liability as of December 31, 2008 and 2007 pertains to taxable temporary difference on revaluation increment in land of SSHI , which was recognized only in the consolidated financial statements amounting to P1,384,241 as of December 31, 2009 and 2008 and P1,614,948 as of December 31, 2007.

The Groups NOLCO amounting to P37,676,181, P314,887 and P173,301 incurred in 2002, 2003 and 2004, respectively, were applied against taxable income in 2005.

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The Groups MCIT available for deduction from future RCIT payable are as follows:
Year incurred 2003 2004 2005 MCIT P18,416,000 24,114,157 136,389 P 42,666,546 Applied P 18,416,000 6,830,372 136,389 P 25,382,761 Balance P 17,283,785 P 17,283,785 Available until 2006 2007 2008

Movements in excess of MCIT over RCIT available for deduction from future RCIT payable is as follows:
2007 Beginning balance Applied Ending balance P17,283,785 (17,283,785) P 2006 P 42,306,271 (25,022,486) P 17,283,785

The reconciliation of the provision for income tax computed at the statutory income tax rate to provision for income tax shown in the consolidated statements of comprehensive income follow:
2009 P71,911,161 Provision for income tax computed at statutory income tax rate Adjustments for: Nondeductible expenses: Inventory losses Interest expense and others Loss from typhoon Donation expense Impairment loss on goodwill Expired MCIT Others Nontaxable income: Cash dividend from a domestic corporation Bank interest income Other income Interest income on accretion Effect of change in tax rate in 2009 Effect of change in tax rate in 2005 Provision for income tax (2,700,000) (313,809) (74,701) P 75,040,398 (327,110) (2,882,506) (487,206) 6,845,547 P 60,455,768 (365,392) (1,072,495) (365,995) (578,742) P 41,429,304 274,801 319,349 P 27,026,816 274,369 490,181 3,335,599 P 26,893,966 3,353,737 1,662,459 985,551 216,000 3,292,664 1,790,317 1,613,979 5,740,408 3,802,734 7,653,722 2,915,948 541,478 11,807,192 5,542,188 432,062 2008 P 50,610,083 2007 P 34,268,786 2006 P 16,509,818 2005 P 13,212,673

Provision for income tax is computed at statutory income tax rate of 30% in 2009 and 35% in 2008, 2007, 2006 and 2005.

Republic Act (RA) No. 9337, which became effective on November 1, 2005, amended various provisions in the 1997 National Internal Revenue Code. The reforms introduced

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by RA No. 9337 included the increase in the RCIT rate from 32% to 35% beginning November 1, 2005, with a reduction thereof to 30% beginning January 1, 2009. RA No. 9337 also provided for the increase in unallowable interest rate from 38% to 42% beginning November 1, 2005, with a reduction thereof to 33% beginning January 1, 2009.

On January 31, 2006, the President upon recommendation of the Secretary of Finance approved the 2% increase in VAT rates effective February 1, 2006. On November 21, 2006, the President signed into law RA No. 9361 which amends Section 110 (B) of the Tax Code. This law, which became effective on December 13, 2006, provides that if the input tax, inclusive of the input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried over to the succeeding quarter or quarters. The Department of Finance through the Bureau of Internal Revenue issued RR No. 2-2007 to implement the provisions of the said law. Based on this regulation, the amendment shall apply to the quarterly VAT returns to be filed after the effectivity of RA No. 9361 except VAT returns covering taxable quarters ending earlier than December 2006.

RA 9504, effective on July 7, 2008 allows availment of optional standard deductions (OSD). Corporations, except for nonresident foreign corporations, may now elect to claim standard deduction in an amount not exceeding 40% of their gross income. The Group did not avail the OSD for the computation of its taxable income in 2009 and 2008.

29. Basic/ Diluted Earnings per Share

Net income b. Weighted average number of shares issued c. Less weighted number of shares held in treasury (b-c) d. Weighted average number of shares outstanding (a/d) e. Basic/Diluted Earnings per share 2009 P155,790,651 287,761,172 686,250 287,074,922 P 0.54 2008 P 84,271,651 261,663,450 686,250 260,977,200 P 0.32 2007 P 54,828,138 237,938,250 686,250 237,252,000 P 0.23 2006 P 20,144,092 237,938,250 686,250 237,252,000 P 0.08 2005 P 13,760,412 237,938,250 686,250 237,252,000 P 0.06

96

The Groups outstanding common shares as of December 31, 2009 increased from 261,663,450 to 287,761,172 as a result of stock dividend issuance equivalent to 26,097,722 common shares approved on July 16, 2009. As of December 31, 2008, the Groups outstanding common shares increased from 237,938,250 to 261,663,450 as a result of stock dividend issuance equivalent to 23,725,200 common shares approved on June 18, 2008.

The calculation of basic/diluted earnings per share for all periods presented has been adjusted retrospectively.

The Group does not have potentially dilutive common shares as of December 31, 2009, 2008, 2007, 2006 and 2005. Thus, the basic earnings (loss) per share are equal to the diluted earnings (loss) per share as of those dates.

30. Financial Instruments The Groups principal financial instruments comprise of bank loans, and cash and cash equivalents. The main purpose of these financial instruments is to finance the Groups operations. The Group has various other financial assets and liabilities such as receivables, available-for-sale financial assets, refundable security deposits and other assets, accounts payable and accrued expenses, and other current liabilities, which arise directly from its operations.

It is, and has been throughout the year under review, the Groups policy that no trading in financial instruments shall be undertaken.

The following table summarizes the carrying value and fair value of the Groups financial assets and financial liabilities per class as of December 31:

97

2009 Carrying Value FINANCIAL ASSETS Loans and Receivables Cash and cash equivalents Cash Cash equivalents Receivables: Suppliers Franchisee Employees Rent Current portion of lease receivable Insurance claims Store operators Deposits Due from Philippine Foundation Inc. Others Deposits Utilities Refundable Others Other noncurrent assets-lease receivable Total Loans and Receivables AFS Financial Assets TOTAL FINANCIAL ASSETS FINANCIAL LIABILITIES Other Financial Liabilities Bank loans Accounts payable and accrued expenses: Trade payable Rent Employee benefits Utilities Advertising and promotion Outsourced services Security services Bank charges Interest Others Other current liabilities: Non-trade accounts payable Retention payable Service fees payable Royalty Others Cumulative redeemable preferred shares TOTAL FINANCIAL LIABILITIES P 340,000,000 864,748,683 26,820,981 17,666,410 7,049,972 6,497,194 2,292,041 1,852,100 1,053,797 18,701,005 946,682,183 138,118,326 15,236,991 11,006,733 6,719,659 13,012,717 184,094,426 6,000,000 P 1,476,776,609 P 340,000,000 864,748,683 26,820,981 17,666,410 7,049,972 6,497,194 2,292,041 1,852,100 1,053,797 18,701,005 946,682,183 138,118,326 15,236,991 11,006,733 6,719,659 13,012,717 184,094,426 6,000,000 P 1,476,776,609 P432,900,994 15,929,894 448,830,888 61,743,590 50,439,162 6,906,248 4,755,572 2,187,564 1,905,773 1,688,404 1,009,864 323,477 9,180,451 140,140,105 22,131,783 10,326,979 2,753,309 35,212,071 4,265,477 628,448,541 2,314,575 P 630,763,116 P 432,900,994 15,929,894 448,830,888 61,743,590 50,439,162 6,906,248 4,755,572 2,584,612 1,905,773 1,688,404 1,009,864 323,477 9,180,451 140,537,153 22,131,783 14,053,354 2,753,309 38,938,446 4,843,464 633,149,951 2,314,575 P 635,464,526 Fair Value

2008 Carrying Value Fair Value

P 314,241,734 638,623 314,880,357 55,045,630 76,989,185 5,137,033 2,317,248 938,402 53,883 5,373,132 145,854,513 21,766,646 9,314,578 3,968,879 35,050,103 6,453,041 502,238,014 2,314,575 P 504,552,589

P 314,241,734 638,623 314,880,357 55,045,630 76,989,185 5,137,033 2,328,007 938,402 53,883 5,373,132 145,865,272 21,766,646 11,883,424 3,968,879 37,573,766 6,405,327 504,724,722 2,314,575 P 507,039,297

P 330,000,000 697,108,015 85,020,970 22,364,011 12,288,794 4,242,668 5,764,897 2,395,139 1,678,000 1,825,689 15,355,584 848,043,767 120,494,703 15,129,370 5,671,223 6,038,237 147,333,533 6,000,000 P 1,331,377,300

P 330,000,000 697,108,015 85,020,970 22,364,011 12,288,794 4,242,668 5,764,897 2,395,139 1,678,000 1,825,689 15,355,584 848,043,767 120,494,703 15,129,370 5,671,223 6,038,237 147,333,533 6,000,000 P 1,331,377,300

98

2007 Carrying Value FINANCIAL ASSETS Loans and Receivables Cash and cash equivalents Cash Cash equivalents Receivables: Suppliers Franchisee Employees Current portion of lease receivable Current portion of notes receivable Insurance claims Receivable from Social Security System Others Deposits Utilities Rent Others Other noncurrent assets-lease receivable Total Loans and Receivables AFS Financial Assets TOTAL FINANCIAL ASSETS FINANCIAL LIABILITIES Other Financial Liabilities Bank loans Accounts payable and accrued expenses: Trade payable Rent Employee benefits Utilities Advertising and promotion Security services Bank charges Interest Others Current portion of long-term debt Other current liabilities: Non-trade accounts payable Withholding taxes Retention payable Royalty Output VAT Payable to franchisee Others Deposits from sub-lessees Cumulative redeemable preferred shares TOTAL FINANCIAL LIABILITIES P 375,000,000 475,227,960 73,333,906 10,342,722 11,381,244 2,630,489 2,054,228 1,418,700 985,359 5,564,305 582,938,913 62,902,460 13,000,672 10,065,404 9,151,719 6,635,208 9,753,129 111,508,592 98,653,475 6,000,000 P 1,174,100,980 P 375,000,000 475,227,960 73,333,906 10,342,722 11,381,244 2,630,489 2,054,228 1,418,700 985,359 5,564,305 582,938,913 62,902,460 13,000,672 10,065,404 9,151,719 6,635,208 9,753,129 111,508,592 98,653,475 6,000,000 P 1,174,100,980 Fair Value

2006 Carrying Value Fair Value

P308,251,838 622,106 308,873,944 48,246,882 16,372,484 6,215,487 1,617,536 3,098,193 4,620,051 80,170,633 20,792,804 87,710,515 1,958,879 110,462,198 3,600,295 503,107,070 2,314,575 P 505,421,645

P 308,251,838 622,106 308,873,944 48,246,882 16,372,484 6,215,487 1,536,780 3,098,193 4,620,051 80,089,877 20,792,804 89,121,229 1,958,879 111,872,912 2,856,572 503,693,305 2,314,575 P 506,007,880

P 328,754,075 610,300 329,364,375 40,060,216 4,429,101 4,985,000 3,875,542 1,023,050 3,411,668 57,784,577 21,901,249 81,446,679 4,037,449 107,385,377 494,534,329 2,314,575 P 496,848,904

P 328,754,075 610,300 329,364,375 40,060,216 4,429,101 4,985,000 3,875,542 1,023,050 3,411,668 57,784,577 21,901,249 89,088,383 4,037,449 115,027,081 502,176,033 2,314,575 P 504,490,608

P 404,700,000 493,694,257 69,944,073 10,351,365 11,729,488 10,121,125 1,978,886 2,760,120 1,616,110 8,027,533 610,222,957 6,500,000 62,534,858 10,458,897 6,720,669 175,447 9,163,433 11,729,699 6,651,000 107,434,003 55,747,867 6,000,000 P 1,190,604,827

P 404,700,000 493,694,257 69,944,073 10,351,365 11,729,488 10,121,125 1,978,886 2,760,120 1,616,110 8,027,533 610,222,957 6,500,000 62,534,858 10,458,897 6,720,669 175,447 9,163,433 11,729,699 6,651,000 107,434,003 55,747,867 6,000,000 P 1,190,604,827

99

2005 Carrying Value Fair Value FINANCIAL ASSETS Loans and Receivables Cash and cash equivalents Cash Cash equivalents Receivables Deposits Refundable security deposits Other noncurrent assets-lease receivable Total Loans and Receivables AFS Financial Assets TOTAL FINANCIAL ASSETS FINANCIAL LIABILITIES Other Financial Liabilities Bank loans Accounts payable and accrued expenses: Trade payable Rent Employee benefits Utilities Advertising and promotion Security services Bank charges Interest Others Current portion of long-term debt Other current liabilities: Non-trade accounts payable Deposits from sublessees Withholding taxes Retention payable Unearned rent Interest payable Royalty Payable to contractors Output VAT Others Long-term debt- net of current portion Cumulative redeemable preferred shares TOTAL FINANCIAL LIABILITIES P 240,000,000 432,922,697 72,985,266 9,070,264 7,098,028 20,809,697 2,143,476 1,838,320 1,465,167 7,796,648 556,129,563 93,000,000 31,060,963 53,247,068 12,898,655 1,276,290 462,739 691,320 6,282,112 1,549,221 6,885,322 5,295,391 119,649,081 32,500,000 6,000,000 P 1,047,278,644 P 240,000,000 432,922,697 72,985,266 9,070,264 7,098,028 20,809,697 2,143,476 1,838,320 1,465,167 7,796,648 556,129,563 93,000,000 31,060,963 53,247,068 12,898,655 1,276,290 462,739 691,320 6,282,112 1,549,221 6,885,322 5,295,391 119,649,081 32,500,000 6,000,000 P 1,047,278,644

P197,902,121 6,408,645 204,310,766 73,481,008 7,127,440 6,265,190 291,184,404 6,319,880 P 297,504,284

P 197,902,121 6,408,645 204,310,766 73,481,008 9,586,101 6,265,190 293,643,065 6,319,880 P 300,913,342

100

Fair Value Information Current financial assets and financial liabilities Due to the short-term nature of the related transactions, the fair value of cash and cash equivalents, receivables (except for lease receivables), accounts payable and accrued expenses and other current liabilities approximates their carrying amount as of balance sheet date.

Lease receivables The fair value of lease receivable is determined by discounting the sum of future cash flows using the prevailing market rates for instruments with similar maturities as of December 31, 2009 2008, and 2007 which is 5.51%, 6.63%, and 5.97%, respectively.

Utility and other deposits The fair value of utility and other deposits approximates its carrying value as it earns interest based on repriced market conditions.

Refundable deposits The fair value of deposits is determined by discounting the sum of future cash flows using the prevailing market rates for instruments with similar maturities as of December 31, 2009, 2008, 2007 and 2006 ranging from 4.41% to 8.57% 6.73% to 9.52%, 5.86% to 7.61% and 4.98% to 6.69%, respectively.

AFS financial assets The fair value of unquoted AFS financial assets is not reasonably determinable, thus, balances are presented at cost.

Bank loans and Lon-term debt The carrying value approximates fair value because of recent and monthly repricing of related interest based on market conditions.

101

Cumulative redeemable preferred shares The carrying value approximates fair value because corresponding dividends on these shares that are charged as interest expense in profit or loss are based on recent treasury bill rates repriced annually at yearend.

Fair value Hierarchy As of December 31, 2009 and 2008, the Group has no financial instrument measured at fair value.

31. Financial Risk Management Objectives and Policies The main risks arising from the Groups financial instruments are credit risk, liquidity risk and interest rate risk. The BOD reviews and approves policies for managing each of these risks and they are summarized below.

Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation. The receivable balances are monitored on an ongoing basis with the result that the Groups exposure to impairment is managed to a not significant level. The Group deals only with counterparty duly approved by the BOD.

The following table provides information regarding the maximum credit risk exposure of the Group as of December 31:

102

2009 Cash and cash equivalents: Cash in bank Cash equivalents Receivables: Suppliers Franchisee Employees Rent Current portion of lease receivable Notes receivable Insurance claims Store operators Deposits Due from Philippine Foundation Inc. Others Deposits Utilities Rent Refundable Others Other noncurrent assets: Lease receivables-net of current portion AFS financial assets

2008

2007

2006

P340,150,666 P 117,428,091 P 308,251,838 P 328,754,075 15,929,894 638,623 622,106 610,300 356,080,560 118,066,714 308,873,944 329,364,375 61,743,590 50,439,162 6,906,248 4,755,572 2,187,564 1,905,773 1,688,404 1,009,864 323,477 9,180,451 140,140,105 22,131,783 10,326,979 2,753,309 35,212,071 55,045,630 76,989,185 5,137,033 2,317,248 938,402 53,883 5,373,132 145,854,513 21,766,646 9,314,578 3,968,879 35,050,103 48,246,882 16,372,484 6,215,487 1,617,536 3,098,193 4,620,051 80,170,633 20,792,804 87,710,515 1,958,879 110,462,198 40,060,216 4,429,101 4,985,000 3,875,542 4,434,718 57,784,577 21,901,249 81,446,679 4,037,449 107,385,377

4,265,477 6,453,041 3,600,295 2,314,575 2,314,575 2,314,575 2,314,575 6,580,052 8,767,616 5,914,870 2,314,575 P 538,012,788 P 307,738,946 P 505,421,645 P 496,848,904

The following table provides information regarding the credit risk exposure of the Group by classifying assets according to the Groups credit ratings of debtors:

103

2009 Past Due or Neither Past Due nor Impaired Impaired High Grade Standard Grade Cash and cash equivalents: Cash in bank (excluding cash on hand) Cash equivalents Receivables: Suppliers Franchisee Employees Rent Current portion of lease receivable Insurance claims Store operators Deposits Due from Philippine Foundation Inc. Others Deposits Utilities Refundable Others Other noncurrent assets: Lease receivable AFS Financial Assets P340,150,666 15,929,894 356,080,560 P 356,080,560 P 59,836,520 50,439,162 6,906,248 4,755,572 2,187,564 1,905,773 1,688,404 1,009,864 323,477 9,180,451 138,233,035 22,131,783 10,326,979 2,753,309 35,212,071 4,265,477 2,314,575 6,580,052 P 180,025,158 P 9,442,370 3,308,648 12,751,018 P 12,751,018

Total P 340,150,666 15,929,894 356,080,560 69,278,890 50,439,162 6,906,248 4,755,572 2,187,564 1,905,773 1,688,404 1,009,864 323,477 12,489,099 150,984,053 22,131,783 10,326,979 2,753,309 35,212,071 4,265,477 2,314,575 6,580,052 P 548,856,736

2008 Past Due or Neither Past Due nor Impaired Impaired High Grade Standard Grade Cash and cash equivalents: Cash in bank Cash equivalents Receivables: Franchisee Suppliers Employees Current portion of lease receivable Insurance claims Due from Philippine Foundation Inc. Others Deposits Utilities Refundable Others Other noncurrent assets: Lease receivable AFS Financial Assets P117,428,091 638,623 118,066,714 76,989,185 76,989,185 P 195,055,899 P 51,671,352 5,137,033 2,317,248 938,402 53,883 5,373,132 65,491,050 21,766,646 9,314,578 3,968,879 35,050,103 6,453,041 2,314,575 8,767,616 P 109,308,769 P 9,979,319 2,135,133 12,114,452 P 12,114,452

Total P 117,428,091 638,623 118,066,714 76,989,185 61,650,671 5,137,033 2,317,248 938,402 53,883 7,508,265 154,594,687 21,766,646 9,314,578 3,968,879 35,050,103 6,453,041 2,314,575 8,767,616 P 316,479,120

104

2007 Past Due or Neither Past Due nor Impaired Impaired High Grade Standard Grade Cash and cash equivalents: Cash in bank (excluding cash on hand) Cash equivalents Receivables: Suppliers Franchisee Employees Rent Current portion of lease receivable Insurance claims Store operators Deposits Due from Philippine Foundation Inc. Others Deposits Utilities Rent Others Other noncurrent assets: Lease receivable AFS Financial Assets P308,251,838 622,106 308,873,944 39,196,480 39,196,480 P 348,070,424 P 16,372,484 6,215,487 1,617,536 3,098,193 3,900,064 70,400,244 20,792,804 87,710,515 1,958,879 110,462,198 2,952,972 2,314,575 5,267,547 P 186,129,989 P 9,050,402 719,987 9,770,389 647,323 647,323 P 10,417,712

Total P 308,251,838 622,106 308,873,944 48,246,882 16,372,484 6,215,487 1,617,536 3,098,193 4,620,051 80,170,633 20,792,804 87,710,515 1,958,879 110,462,198 3,600,295 2,314,575 5,914,870 P 505,421,645

2006 Past Due or Neither Past Due nor Impaired Impaired High Grade Standard Grade Cash and cash equivalents: Cash in bank (excluding cash on hand) Cash equivalents Receivables: Suppliers Employees Insurance claims Notes receivable Others Deposits Utilities Rent Others Other noncurrent assets: AFS Financial Assets P328,754,075 610,300 329,364,375 P 329,364,375 P 10,050,000 4,429,101 3,875,542 4,985,000 4,434,718 27,774,361 21,901,249 81,446,679 4,037,449 107,385,377 2,314,575 2,314,575 P 137,474,313 P 30,010,216 30,010,216 P 30,010,216

Total P 328,754,075 610,300 329,364,375 40,060,216 4,429,101 3,875,542 4,985,000 4,434,718 57,784,577 21,901,249 81,446,679 4,037,449 107,385,377 2,314,575 2,314,575 P 496,848,904

105

The Group uses the following criteria to rate credit quality as follows:
Class High Grade Standard Grade Description Financial assets that have a recognized foreign or local third party rating or instruments which carry guaranty/collateral. Financial assets of companies that have the apparent ability to satisfy its obligations in full.

The credit quality of the financial assets was determined as follows: Cash and cash equivalents, deposits and AFS financial assets - based on the nature of the counterparty and the Groups internal rating system.

Receivables - satisfactory pertains to receivables from existing and active suppliers while unsatisfactory pertains to receivables from those suppliers that are have already ceased their business operations. Receivables from the franchisees are classified as high grade since collections are automatically obtained from the franchisees holding account. The Group has the custody of the franchisees cash. Receivables excluding receivables from the franchisees, deposits and other noncurrent assets are classified as standard grade since these pertain to receivables considered as unsecured from third parties with good paying habits. The following table provides the analysis of financial assets that are past due but not impaired and past due and impaired:
2009 Aging analysis of financial assets past due but not impaired 31 to 60 days Receivables: Suppliers Others P1,737,877 P 1,737,877 P 60,844 P 60,844 P 108,349 P 108,349 P 1,907,070 P 1,907,070 P 7,535,300 3,308,648 P 10,843,948 P 9,442,370 3,308,648 P 12,751,018 61 to 90 days > 90 days Total Past Due or Impaired Total

2008 Aging analysis of financial assets past due but not impaired 31 to 60 days Receivables: Suppliers Others P 1,353,588 P 1,353,588 P 1,040,457 P 1,040,457 P 980,233 P 980,233 P 3,374,278 P 3,374,278 P 6,605,041 2,135,133 P 8,740,174 P 9,979,319 2,135,133 P 12,114,452 61 to 90 days > 90 days Total Past Due or Impaired Total

106

2007 Aging analysis of financial assets past due but not impaired 31 to 60 days Receivables: Suppliers Others P 1,609,251 P 1,772,313 P 24,034 484,261 P 508,295 P 397,124 P 397,124 P 2,030,409 647,323 P 2,677,732 P 7,019,993 719,987 P 7,739,980 P 9,050,402 647,323 719,987 P 10,417,712 Current portion of lease receivable 163,062 61 to 90 days > 90 days Total Past Due or Impaired Total

2006 Aging analysis of financial assets past due but not impaired 31 to 60 days Receivables: Suppliers Others P 1,234,560 P 1,234,560 P 2,056,425 P 2,056,425 P 16,211,292 P 16,211,292 P 19,502,277 P 19,502,277 P 9,787,952 719,987 P 10,507,939 P 29,290,229 719,987 P 30,010,216 61 to 90 days > 90 days Total Past Due or Impaired Total

There are no significant concentrations of credit risk within the Group.

Liquidity Risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial instruments. The Group seeks to manage its liquidity profile to be able to finance its capital expenditures and service its maturing debts. To cover for its financing requirements, the Group intends to use internally generated funds and sales of certain assets. As part of its liquidity risk management program, the Group regularly evaluates projected and actual cash flow information and continuously assesses conditions in the financial markets for opportunities to pursue fund raising initiatives. These initiatives may include drawing of loans from the approved credit line intended for working capital and capital expenditures purposes and equity market issues.

The table below summarizes the maturity profile of the financial assets of the Group:

107

2009 More than three Three months or months to one More than one More than five less year year to five years years Cash and cash equivalents: Cash Cash equivalents P432,900,994 15,929,894 432,900,994 P 7,643,649 1,653,062 1,905,773 323,477 3,308,648 14,834,609 P 14,834,609 P 22,131,783 10,326,979 2,753,309 35,212,071 4,265,477 4,265,477 P 39,477,548 P 2,314,575 2,314,575 P 2,314,575

Total P 432,900,994 15,929,894 432,900,994 69,278,890 50,439,162 6,906,248 4,755,572 2,187,564 1,905,773 1,688,404 1,009,864 323,477 12,489,099 150,984,053 22,131,783 10,326,979 2,753,309 35,212,071 4,265,477 2,314,575 6,580,052 P 641,607,064

Receivables: Suppliers 61,635,241 Franchisee 50,439,162 Employees 6,906,248 Rent 4,755,572 Current portion of lease receivable 534,502 Insurance claims Store operators 1,688,404 Deposits 1,009,864 Due from Philippine Foundation Inc. Others 9,180,451 136,149,444 Deposits Utilities Refundable Others Other noncurrent assets: Lease receivable AFS Financial Assets P 584,980,332

2008 More than three Three months or months to one More than one More than five less year year to five years years Cash and cash equivalents: Cash Cash equivalents P 314,241,734 638,623 314,880,357 P 7,585,274 1,659,887 938,402 53,883 2,135,133 12,372,579 P 12,372,579 P 21,766,646 9,314,578 3,968,879 35,050,103 6,453,041 6,453,041 P 41,503,144 P 2,314,575 2,314,575 P 2,314,575

Total P 314,241,734 638,623 314,880,357 61,650,671 82,600,166 5,137,033 1,805,472 2,317,248 938,402 53,883 5,702,793 160,205,668 21,766,646 9,314,578 3,968,879 35,050,103 6,453,041 2,314,575 8,767,616 P 518,903,744

Receivables: Suppliers 54,065,397 Franchisee 82,600,166 Employees 5,137,033 Rent 1,805,472 Current portion of lease receivable 657,361 Insurance claims Due from Philippine Foundation Inc. Others 3,567,660 147,833,089 Deposits Utilities Refundable Others Other noncurrent assets: Lease receivable-net of current portion AFS Financial Assets P 462,713,446

108

The table below summarizes the maturity profile of the financial liabilities of the Group based on remaining undiscounted contractual obligations:
2009
Three months or less More than three months to one year More than one year to five years Total

Bank loans Accounts payable and accrued expenses: Trade payable Employee benefits Utilities Advertising and promotion Outsourced services Security services Bank charges Interest Others Other current liabilities: Non-trade accounts payable Retention payable Service fees payable Royalty Others Cumulative redeemable preferred shares

P 100,408,333 864,748,683 26,820,981 17,666,410 7,049,972 6,497,194 2,292,041 1,852,100 1,053,797 18,701,005 946,682,183 6,719,659 6,719,659 P 1,053,810,175
Three months or less

P 244,049,167 138,118,326 15,236,991 11,006,733 13,012,717 177,374,767 P 421,423,934

6,000,000 P 6,000,000
More than one year to five years

P 344,457,500 864,748,683 26,820,981 17,666,410 7,049,972 6,497,194 2,292,041 1,852,100 1,053,797 18,701,005 946,682,183 138,118,326 15,236,991 11,006,733 6,719,659 13,012,717 184,094,426 6,000,000 P 1,481,234,109

2008
More than three months to one year Total

Bank loans Accounts payable and accrued expenses: Trade payable Rent Employee benefits Utilities Outsourced services Advertising and promotion Security services Interest Bank charges Others Other current liabilities: Non-trade accounts payable Retention payable Royalty Others Cumulative redeemable preferred shares

P 697,108,015 85,020,970 22,364,011 12,288,794 5,764,897 4,242,668 2,395,139 1,825,689 1,678,000 15,355,584 848,043,767 P 848,043,767

P 342,807,778 120,494,703 15,129,370 5,671,223 6,038,237 147,333,533 P 490,141,311

P 6,000,000 P 6,000,000

P 342,807,778 697,108,015 85,020,970 22,364,011 12,288,794 5,764,897 4,242,668 2,395,139 1,825,689 1,678,000 15,355,584 848,043,767 120,494,703 15,129,370 5,671,223 6,038,237 147,333,533 6,000,000 P 1,344,185,078

109

2007
Three months or less More than three months to one year More than one year to five years Total

Bank loans Accounts payable and accrued expenses: Trade payable Rent Employee benefits Utilities Advertising and promotion Security services Bank charges Interest Others Other current liabilities: Non-trade accounts payable Withholding taxes Retention payable Royalty Output VAT Others Deposit from sub-lessees Cumulative redeemable preferred shares

P 475,227,960 73,333,906 10,342,722 11,381,244 2,630,489 2,054,228 1,418,700 985,359 5,564,305 582,938,913 P 582,938,913

P 375,000,000 62,902,460 13,000,672 10,065,404 9,151,719 6,635,208 9,753,129 111,508,592 P 486,508,591

P 98,653,475 6,000,000 P 104,653,475

P 375,000,000 475,227,960 73,333,906 10,342,722 11,381,244 2,630,489 2,054,228 1,418,700 985,359 5,564,305 582,938,913 62,902,460 13,000,672 10,065,404 9,151,719 6,635,208 9,753,129 111,508,592 98,653,475 6,000,000 P 1,174,100,979

2006
Three months or less More than three months to one year More than one year to five years Total

Bank loans Accounts payable and accrued expenses: Trade payable Rent Employee benefits Utilities Advertising and promotion Security services Bank charges Interest Others Current portion of long-term debt Other current liabilities: Non-trade accounts payable Withholding taxes Retention payable Royalty Output VAT Payable to franchisee Others Deposit from sub-lessees Cumulative redeemable preferred shares

P 493,694,257 69,944,073 10,351,365 11,729,488 10,121,125 1,978,886 2,760,120 1,616,110 8,027,533 610,222,957 P 610,222,957

P 375,000,000 6,500,000 62,534,858 10,458,897 6,720,669 175,447 9,163,433 11,729,699 4,721,986 107,434,003 P 518,634,003

P 55,747,867 6,000,000 P 61,747,867

P 375,000,000 493,694,257 69,944,073 10,351,365 11,729,488 10,121,125 1,978,886 2,760,120 1,616,110 8,027,533 610,222,957 6,500,000 62,534,858 10,458,897 6,720,669 175,447 9,163,433 11,729,699 4,721,986 107,434,003 55,747,867 6,000,000 P 1,190,604,827

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Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Groups fa ir value and cash flows interest rate risk mainly arise from bank loans with floating interest rates. The Group is expecting to substantially reduce the level of bank loans over time. Internally generated funds coming from its cash generating units and from its franchising business will be used to pay off outstanding debts and consequently reduce the interest rate exposure.

The maturity profiles of financial instruments that are exposed to interest rate risk are as follows:
2009 Due in less than one year Rate Long-term debt Rate P340,000,000 4.90%-5.50% 2008 P 330,000,000 6.75%-8.60% 2007 P 375,000,000 6.50%-8.60% 2006 P 404,700,000 8.60%-8.80% P 6,500,000 2005 P 240,000,000 8.40%-9.50% P 125,500,000

11.67% 10.50%-11.67%

Interest of financial instruments classified as floating rate is repriced at intervals of 30 days. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Groups income before income tax (through the impact on floating rate borrowings):

2009 Increase/ Decrease in Basis Points Bank loans-floating interest rate 100 -100 Effect on Income Before Income Tax P3,400,000 (3,400,000) Increase/ Decrease in Basis Points

2008 Effect on Income Before Income Tax P 3,300,000 (3,300,000)

100 -100

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2007 Increase/ Decrease in Basis Points Bank loans-floating interest rate 100 -100 Effect on Income Before Income Tax P 2,000,000 (2,000,000) Increase/ Decrease in Basis Points

2006 Effect on Income Before Income Tax P 4,047,000 (4,047,000)

100 -100

There is no other impact on the Groups equity other than those already affecting the profit or loss.

32. Capital Management The primary objective of the Groups capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. In the light of changes in economic conditions, the Group manages dividend payments to shareholders, pay-off existing debts, return capital to shareholders or issue new shares. The Group mainly uses financing from local banks. The Group considers equity contributed by shareholders as capital. The Group manages its capital structure by keeping a net worth of between 30% and 50% in relation to its total assets. The Groups net worth ratio is 33% as of

December 31, 2009, 2008 and 2006 and 35% in December 31, 2007. No changes were made in the objectives, policies and processes during the year.

2009 Capital stock Additional paid-in capital Retained earnings Less cost of shares held in treasury Total assets Net worth P287,761,172 293,525,037 326,309,628 907,595,837 2,923,246 P 904,672,591 P 2,710,675,933 33%

2008 P 261,663,450 293,525,037 196,616,699 751,805,186 2,923,246 P 748,881,940 P 2,264,185,951 33%

2007 P 237,938,250 293,525,037 136,070,248 667,533,535 2,923,246 P 664,610,289 P 1,881,423,859 35%

2006 P 237,938,250 293,525,037 81,242,110 612,705,397 2,923,246 P 609,782,151 P 1,827,611,503 33%

2005 P 237,938,250 293,525,037 61,098,018 592,561,305 2,923,246 P 589,638,059 P 1,659,921,795 36%

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33. Significant Agreements The Group has various store franchise agreements with third parties for the operation of certain stores. The agreement includes a one-time franchise fee payment and an annual 7-Eleven charge for the franchisee, which is equal to a certain percentage of the franchised stores gross profit. Franchise fee amounted to P32,828,051, P35,401,274 , P51,389,093, P65,278,976 and P26,931,394 in 2009, 2008, 2007, 2006 and 2005, respectively, and franchise revenue for the 7Eleven charge amounted to P215,454,387, P215,454,387, P152,882,460, P82,718,404 and P31,795,431 in 2009, 2008, 2007, 2006 and 2005, respectively. The Group has service management agreements with third parties for the management and operation of certain stores. In consideration thereof, the store operator is entitled to a management fee based on a certain percentage of the stores gross profit and operating expenses as stipulated in the service management agreement. Management fee amounted to P83,248,355, P82,307,663 and P63,632,738 in 2007, 2006 and 2005, respectively. Service fee included under outside services as shown as part of General and administrative expenses in the consolidated statements of income amounted to P109,601,229 in 2009 and P103,170,576 in 2008, P83,248,355 in 2007. The Group has an agreement with its phone card supplier effective January 1, 2000. Under the arrangement, the Group earns commission on the sale of phone cards based on a certain percentage of net sales for the month and a fixed monthly rate. Commission income amounted to P22,130,513 in 2009, P21,213,531 in 2008, P21,924,224 in 2007, P28,635,785 in 2006 and P37,848,387 in 2005. The Group entered into a Marketing Support and Exclusivity Agreement with San Miguel Pure Foods Group, Inc. (SMPFC) on June 23, 2005. Under the agreement, the Group is appointed as SMPFCs exclusive distributor for the covered products, for a period of 5 years starting retroactively on January 24, 2005. During the term of the agreement, the Group is required to purchase a minimum

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volume of 19,564 metric tons of the covered products. The agreement further stipulates that SMPFC shall grant the Group marketing support funds aggregating P19,989,000 to support the sale of the covered products. The Group received marketing support funds amounting to P19,989,000 in June 2005 which was recognized as marketing income in the consolidated statement of income. The Group has entered into an exclusivity agreement with Unilever RFM Ice Cream, Inc. on October 1, 2007. Upon the effectivity of the agreement, all existing branches of 7-Eleven shall exclusively carry Selecta ice cream products, and 7-Eleven should not carry any other ice cream product including similar or parallel products. The agreement is for a period of three years starting October 1, 2007 and shall continue in force and effect until December 31, 2010. In June 2008, the Group received a total consideration of P11,741,071 in relation to the agreement, to be amortized over three years. Income from exclusivity contract included under Other income in the consolidated statement of income amounted to P3,913,691 in 2009 and P3,913,690 in 2008. The Group has entered into a Memorandum of Agreement (MOA) with Chevron Philippines, Inc. (CPI) on August 6, 2009, wherein CPI has granted the Group as authorized co-locator for a full term of three-years to establish, operate and/or franchise its 7-Eleven stores in CPI service stations. Both parties have identified 22 CPI service stations, wherein the Group will give the Retailers of these service stations a Letter Offer to Franchise (LOF) 7-Eleven stores. Upon acceptance of the Retailers of the LOF, the Retailers will sign a Store Franchise Agreement (SFA) with the Group. If LOF is not accepted by one of the 22 original service stations identified, that service station will be replaced with another mutually acceptable service station site. Upon signing of the MOA, CPI will execute an updated Caltex Retail Agreement with each of the 22 service station Retailers, which shall have a full term of three years and which will be co-terminus with the SFA. As of December 31, 2009, the Company has already opened 25 Retailers franchised stores.

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 Long-term debt in 2007 consists of unsecured noncurrent promissory notes with a local bank, payable in equal monthly installments starting on the sixth month after the lending date until March 2007 with fixed interest rate of 11.67% for the first 24 months, the rate thereafter shall be at the prevailing lender rate. Full settlement of the loan amounted to P6,500,000 in 2007. Interest expense from these long-term debts amounted to P45,522 in 2007.

34. Segment Reporting The Group considers the store operations as its only business segment based on its primary business activity. Franchising, renting of properties and commissioning on bills payment services are considered an integral part of the store operations. The store operations derive its revenues from the products and services in merchandise sales, franchise revenue, marketing income, rent income, commission income and interest income. The segments relevant financial information is as follows:
2009 REVENUE Revenue from merchandise sales Franchise revenue Marketing income Rent income Commission income Interest income Other income EXPENSES Cost of merchandise sales General and administrative expenses: Depreciation and amortization Others Interest expense Impairment loss on goodwill Other expense INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX SEGMENT PROFIT SEGMENT ASSETS SEGMENT LIABILITIES 8,572,988 6,457,731,124 230,831,049 75,040,398 P 155,790,651 P 2,710,675,933 P 1,802,773,447 203,905,718 1,847,053,611 26,482,817 179,639,006 1,608,793,894 25,332,855 4,611,368 6,935,913 5,735,199,767 144,727,419 60,455,768 P 84,271,651 P 2,264,185,951 P 1,512,074,116 159,634,386 1,523,655,696 31,527,417 6,206,645 5,255,581,621 96,257,442 41,429,304 P 54,828,138 P 1,855,901,764 P 1,198,252,210 154,046,259 1,457,378,901 35,913,785 11,146,260 4,882,567,482 47,170,908 27,026,816 P 20,144,092 P 1,838,131,383 P 1,217,829,352 124,769,238 1,407,526,444 33,792,023 27,572,784 4,779,911,729 40,654,378 26,893,966 P 13,760,412 P 1,659,921,795 P 1,070,283,736 4,371,715,990 3,909,886,731 3,534,557,477 3,224,082,277 3,186,251,240 P6,033,322,488 303,815,142 236,502,860 52,265,323 22,130,513 4,839,945 35,685,902 6,688,562,173 P 5,412,969,204 250,855,661 136,211,215 36,502,151 21,213,531 4,186,908 17,988,516 5,879,927,186 P 4,952,027,491 204,271,553 97,680,051 39,648,977 21,924,224 3,401,675 32,885,092 5,351,839,063 P 4,627,880,441 147,997,380 82,574,708 39,889,745 28,635,785 2,760,331 4,929,738,390 P 4,587,558,113 58,726,825 96,958,364 35,771,211 37,848,387 3,703,207 4,820,566,107 2008 2007 2006 2005

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35. Contingencies The Group is a party to various litigations involving, among others, employees suing for illegal dismissal, back wages and damage claims, lessors claiming for lease payments for the unexpired portion of the lease agreements in cases of pre-termination of lease agreements, claims arising from store operations and as co-respondents with manufacturers on complaints with the Bureau of Food and Drugs, specific performance and other civil claims. All such cases are in the normal course of business and are not deemed to be considered as material legal proceedings. Further, these cases are either pending in courts or under protest, the outcome of which are not presently determinable. Management and its legal counsel believe that the liability, if any, that may result from the outcome of these litigations and claims will not materially affect their financial position or financial performance.

36. Note to Consolidated Statements of Cash Flows The principal non-cash transaction of the Group under financing activities pertains to the issuance of stock dividends amounting to P26,097,722 in 2009 and P23,725,200 in 2008. In 2007, the principal non-cash transaction of the Group under investing activities pertains to the disposal of transportation equipment with undepreciated cost of P4,985,000, which was transferred to the Group in settlement of an outstanding receivable from an armored car service provider. This was subsequently transferred back to the latter after entering into a sale and leaseback transaction under a finance lease agreement.

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Common-Size Consolidated Income Statement For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 2006 REVENUE FROM MERCHANDISE SOLD 100% 100% 100% 100% COST OF MERCHANDISE SOLD 72.46% 72.23% 71.38% 69.67% GROSS PROFIT 27.54% 27.77% 28.62% 30.33% Operating Expenses 33.99% 33.04% 33.99% 34.82% Other Revenue Franchise Revenue 5.04% 4.63% 4.13% 3.20% Marketing Income 3.92% 2.52% 1.97% 1.78% Rent Income 0.87% 0.67% 0.80% 0.86% Commission Income 0.37% 0.39% 0.44% 0.62% Interest Income 0.08% 0.08% 0.09% 0.06% Other Income 0.59% 0.33% 0.54% 10.86% 8.63% 7.97% 6.52% Other Expenses excluding Interest Expense Loss from Typhoon 0.05% Unrealized Foreign Exchange Loss 0.01% 0.01% 0.02% 0.03% Impairment Loss on Goodwill 0.09% Loss on Sale of Property and Equipment 0.02% 0.004% 0.11% Other Expenses 0.08% 0.10% 0.10% 0.14% 0.21% 0.02% 0.24% INCOME BEFORE INTEREST & INCOME TAX 4.26% 3.14% 2.58% 1.80% Interest Expenses 0.44% 0.47% 0.64% 0.78% Provision for Income Tax Current 1.35% 1.16% 0.85% 0.62% deferred income tax liability -0.10% -0.04% -0.02% -0.04% 1.24% 1.12% 0.84% 0.58% NET INCOME 2.58% 1.56% 1.11% 0.44% OTHER COMPREHENSIVE INCOME Appraisal increase in value of land - net of deferred income tax liability 0.06% Effect of changes in tax rate in 2009 0.004% 0.004% 0.061% TOTAL COMPREHENSIVE INCOME 2.58% 1.56% 1.17% 0.44%

2005 100% 69.45% 30.55% 33.40% 1.28% 2.11% 0.78% 0.83% 0.08% 5.08% 0.00% 0.36% 0.24% 0.60% 1.62% 0.74% 0.41% 0.18% 0.59% 0.30%

0.30%

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 ASSETS Current Assets Cash and cash equivalents Receivables - net Inventories Prepayments and other current assets Total Current Assets Noncurrent Assets Property and Equipment Deposits Deferred Lease Expense Deferred Income Tax Assets Goodwill Other Noncurrent Assets Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current Liabilities Bank Loans Accounts Payable and Accrued Expenses Income Tax Payable Current Portion of Long-Term Debt Other Current Liabilites Total Current Liabilities Noncurrent Liabilities Long-Term Debt - net of current portion Deposits Payable Net Retirement Obligations Deferred Income Tax Liability Cumulative Redeemable Preferred Shares Deferred Revenue - net of current portion Total Noncurrent Liabilities Total Liabilities Stockholders' Equity Capital Stock - P1 par value Additional Paid-In Capital Unrealized gain on available-for-sale financial assets Retained Earnings Other Component of Equity - revaluation incremental on land Cost of held Treasury Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

2006

2005

448,830,888 140,140,105 415,652,671 174,383,392 1,179,007,056 1,227,244,430 151,328,033 46,008,842 65,567,524 41,520,048 1,531,668,877 2,710,675,933

314,880,357 145,854,513 339,556,385 117,947,178 918,238,433 1,072,041,329 132,695,470 39,738,774 65,567,524 35,904,421 1,345,947,518 2,264,185,951

308,873,944 72,430,653 323,973,849 69,975,102 775,253,548 852,458,158 110,462,198 37,498,659 70,178,892 30,360,222 1,100,958,129 1,876,211,677

329,364,375 47,276,638 331,926,504 59,485,387 768,052,904 800,526,339 17,955,866 54,008,463 197,587,811 1,070,078,479 1,838,131,383

204,310,766 73,481,008 336,193,860 35,449,833 649,435,467 714,453,693 18,718,401 77,598,357 199,715,877 1,010,486,328 1,659,921,795

340,000,000 1,027,609,605 38,354,398 211,934,980 1,617,898,983

330,000,000 848,043,767 25,898,866 174,586,972 1,378,529,605

375,000,000 582,938,913 2,770,870 111,508,592 1,072,218,375

404,700,000 610,222,957 335,684 6,500,000 163,181,870 1,184,940,511 26,888,841 6,000,000 32,888,841 1,217,829,352 237,938,250 293,525,037 10,519,880 81,242,110

240,000,000 556,129,563 304,193 93,000,000 119,649,081 1,009,082,837 32,500,000 22,700,899 6,000,000 61,200,899 1,070,283,736 237,938,250 293,525,037 61,098,018

119,967,054 55,667,123 1,384,241 6,000,000 1,856,046 184,874,464 1,802,773,447 287,761,172 293,525,037 326,309,628

83,252,646 35,827,737 1,384,241 6,000,000 7,079,887 133,544,511 1,512,074,116 261,663,450 293,525,037 196,616,699

98,653,475 30,115,402 1,614,948 6,000,000 136,383,825 1,208,602,200 237,938,250 293,525,037 136,070,248

3,229,895 3,229,895 2,999,188 910,825,732 755,035,081 670,532,723 623,225,277 592,561,305 (2,923,246) (2,923,246) (2,923,246) (2,923,246) (2,923,246) 907,902,486 752,111,835 667,609,477 620,302,031 589,638,059 2,710,675,933 2,264,185,951 1,876,211,677 1,838,131,383 1,659,921,795

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BALANCES AS OF DECEMBER 31, 2004 Effect of change in accounting for refundable security deposits BALANCES AS OF JANUARY 1, 2005 Net income for the year BALANCES AS OF DECEMBER 31, 2005 BALANCES AS OF DECEMBER 31, 2005 Unrealized gain on available-for-sale financial assets during the year Total income recognized directly in equity Net income for the year Total income for the year BALANCES AS OF DECEMBER 31, 2006 BALANCES AS OF DECEMBER 31, 2006 Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2007 BALANCES AS OF DECEMBER 31, 2007 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2008 BALANCES AS OF DECEMBER 31, 2008 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2009

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Common-Size Consolidated Statement of Changes in Stockholders' Equity For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 Unrealized Revaluation Additional Gain on AFS Retained Increment on Capital Stock Paid-In Capital Financial Assets Earnings Land 40.35% 49.78% 8.10% 40.35% 40.35% 38.36% 38.36% 35.64% 35.64% 31.64% 3.15% 34.79% 28.82% 2.87% 31.70% 32.33% 39.03% 32.33% 43.97% 39.03% 49.78% 47.32% 0.00% 47.32% 43.97% 1.70% 1.70% 1.70% 1.70% 49.78% -0.07% 8.03% 2.33% 10.36% 9.85% 0.00% 3.25% 3.25% 13.10% 12.17% 20.38% 18.09% -3.15% 11.20% 26.14% 21.66% -2.87% 17.16% 35.94% 0.45% 0.40% 0.03% 0.43% 0.36% 0.36% 0.00% -

Treasury Stock -0.50% -0.50% -0.50% -0.47% 0.00% -0.47% -0.44% -0.44% -0.39% -0.39% -0.32% -0.32%

Total 97.74% -0.07% 97.67% 2.33% 100.00% 95.06% 1.70% 3.25% 3.25% 100.00% 91.34% 8.66% 100.00% 88.76% 11.24% 100.00% 82.84% 17.16% 100.00%

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Common-Size Consolidated Statement of Cash Flows For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 2006 2005 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax 51.43% 45.96% 31.16% 14.32% 19.90% Adjustments for: Depreciation and Amortization 45.43% 57.05% 51.68% 46.77% 61.07% Interest expense 5.90% 8.05% 10.21% 10.90% 16.54% Accounts written off 0.00% 0.00% 0.00% 2.91% 0.00% Loss from typhoon 0.73% 0.00% 0.00% 0.00% 0.00% Loss on sale of property and equipment 0.00% 0.28% 0.07% 1.57% 8.18% Loss on Impairment of goodwill 0.00% 1.46% 0.00% 0.00% 0.00% Gain on write-off of long outstanding liability 0.00% 0.00% 0.00% -0.98% 0.00% Provision for doubtful accounts 2.18% 2.25% 0.11% 0.88% 0.00% Interest Income -1.08% -1.33% -1.10% -0.84% -1.81% Amortization of deferred revenue on exclusivity contract -0.87% -1.24% 0.00% 0.00% 0.00% Amortization of software 0.68% 0.67% 0.34% 0.53% 1.46% Amortization of deferred lease expense 0.33% 0.60% 0.56% 0.50% 1.03% Amortization of Deferred revenue on finance lease -0.29% -0.42% -0.25% 0.00% 0.00% Loss on refund of deposit 0.00% 0.00% 0.00% 0.09% 0.00% Operating income before working capital changes 104.44% 113.33% 92.78% 76.67% 106.37% Decrease (increase) in: Receivables 0.37% -26.68% -6.98% 6.80% 15.69% Prepayments and other current assets -12.59% -16.28% 0.96% 1.52% -2.02% Inventories -16.95% -4.95% 2.57% 1.30% -16.15% Increase (decrease) in: Accounts payable and accrued expenses 40.18% 83.93% -8.51% 17.36% -21.70% Other current liabilities 7.07% 21.32% 0.14% 13.22% 17.42% Deposits payable 8.18% -4.89% 13.89% 0.00% 0.00% Net pension liabililities 4.42% 1.81% 1.04% 1.27% 2.27% Deferred revenue 0.00% 3.73% 0.00% 0.00% 0.00% Cash generated from operations 135.11% 171.32% 95.90% 118.13% 101.89% Interest paid -6.07% -7.89% -10.41% -10.86% -16.46% Income taxes paid -15.34% -12.57% -10.02% -9.86% -13.49% Interest received 0.70% 0.69% 0.30% 0.56% 1.07% Net cash from operating activities 114.40% 151.55% 75.77% 97.98% 73.02% CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment -80.74% -131.83% -72.74% -75.40% -108.10% Additions to software and other program costs -3.93% -7.06% 0.00% 2.52% 0.00% Deductions from (additions to) deposits -3.93% -7.06% 0.00% 2.52% 0.00% Deductions from (additions to) goodwill assets & other noncurrent -2.66% 0.02% -1.18% -1.94% 1.77% Collection of lease receivable 0.62% 0.92% 0.22% 0.00% 0.00% Proceeds from sale of property and equipment 0.00% 4.76% 4.06% 0.93% 0.51% Payment of refundable security deposit 0.00% 0.00% 0.00% 0.00% -9.79% Net cash flow from investing activities -86.78% -135.35% -70.69% -73.89% -115.61% CASH FLOWS FROM FINANCING ACTIVITIES Availments of bank loans 113.63% 131.80% 222.74% 135.44% 56.29% Payments of: Bank loans -111.40% -146.09% -232.36% -85.44% -17.13% Long-term debt 0.00% 0.00% -2.10% -36.13% -26.43% Net cash from financing activities 2.23% -14.29% -11.72% 13.88% 12.73% NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29.84% 1.91% -6.63% 37.97% -29.86% CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 70.16% 98.09% 106.63% 62.03% 129.86% CASH AND CASH EQUIVALENTS AT END OF YEAR 100.00% 100.00% 100.00% 100.00% 100.00%

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Liquidity Ratios Current Ratio Quick Ratio Cash Ratio Solvency Ratios Debt Utilization Ratios Debt Ratio Debt-Equity Ratio Coverage Ratios Times Interest Earned Ratio Times Fixed Charges Earned (Fixed-Charge Coverage Ratio) Asset Quality (Assset Utilization or Asset Activity) Ratios Inventory Turnover Days Sales in Inventory (Average Age of Inventory) Asset Turnover Fixed Asset Turnover Ratio

2005 64% 28% 20% 2005 64% 182% 220% 114% 2005 9.97 36.62 2.79 6.42

2006 65% 37% 28% 2006 66% 196% 231% 111% 2006 9.65 37.82 2.65 5.78

2007 72% 36% 29% 2007 64% 181% 405% 123%

2008 67% 33% 23% 2008 67% 201% 433% 132%

2009 73% 36% 28% 2009 67% 199% 972% 144%

2007 2008 2009 10.78 11.79 11.58 33.87 30.97 31.53 2.67 2.61 2.42 5.81 5.05 4.92

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Profitability (Earnings) Ratios Net Profit Margin ( Return on Sales - ROS) Gross Profit Margin Return on Assets (ROA) Return on Stockholders' Equity (ROE) Earnings per Share Cash Flow per Share Growth Ratios Total Assets Total Liabilities Total Shareholders' Equity Sales Net Income Market Performance (Market Value) Ratios Price-Earnings Ratio Book Value per Share

2005 0% 31% 1% 2% Php 0.06 63% 2005

2006 0% 30% 1% 3% Php 0.08 137% 2006 11% 14% 5% 1% 46%

2007 1% 29% 3% 9% Php 0.23 112% 2007 3% -1% 9% 7% 172%

2008 2% 28% 4% 12% Php 0.32 201% 2008 21% 25% 13% 10% 54%

2009 3% 28% 6% 57% Php 0.54 189% 2009 19% 19% 21% 11% 85%

2006 2007 2008 2009 2944% 1385% 603% 926% PhP 2.49 PhP 2.61 PhP 2.81 PhP 3.01 PhP 3.16

2005

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A. MINISTOP of Robinsons Convenience Stores, Inc. (RCSI) Mini-Stop is one of the major competitors of PSC. It started as a wholly-owned subsidiary of Jusco Co., Ltd. In Japan and established in the Philippines in December 2000 with the vision of becoming the leader in the convenience store industry. It establishes high standards of quality and maintains wide product lines to satisfy customer preferences top with impeccable services, a product of motivation and intensive training, by store personnel. What makes it unique from other convenience stores in the Philippines is that it offers in-store prepared food products, and with dinein corner along with comfortable sitting facility, customers now take pleasure of indulging the stores freshly-prepared fast food. Every Mini-Stop store has a key component in its daily operations which is technology. Distinct group of activities has its own system and one of which is the Point of Sales System (POS). POS, an integrated and convenient point of sales solution developed by Fujitsu Limited Japan, provides real time sales figure any time, be it every day. Another system is Merchandise System (MD), an ordering tool that helps manage the shelf space ad stock replenishment and includes management of the stores merchandise inventory cost and retail. Other technology systems of Mini-Stop include the Platinum System. It is a stable software used for both accounting and financial management. The system also helps in the purchases and inventory management of the Robinsons Distribution Center, Inc. (RDCI). The last system is the Exceed System, the most advanced tool in warehousing system. It provides an efficient warehousing and logistics operation of RDCI. The system is significant in order and location management, replenishment, cycle counting, inventory control, dispatch, and merchandise visibility. Setting up smaller backrooms and minimal stocks are possible for the stores with the support of responsive logistics.

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B. MERCURY DRUG CORPORATION Mercury Drug Corporation is a wholly-owned subsidiary of Mercury Group of Companies, Inc. Mercury Drug started as a small drugstore in Bambang, Manila. Apart from selling pharmaceutical products as it was before, it now offers basic household commodities such as food, health and personal care products and others for the convenience of its customers. Moreover, it has integrated value-added facilities and services in many of its drugstores. The growth and success that Mercury Drug achieved with its vast network of over 700 stores nationwide, including company-owned and franchised stores, are due to the millions of customers who continuously trust and patronize the drugstore chain. It also owes its achievements to the professionals and dedicated staff of each store, totaling to about 9,000 people. As a sign of gratitude to the people, Mercury Drug guarantees to consistently bring quality, safe medicines and other products offered closer to the public with considerable prices. Now, it is more committed in introducing improved services to better serve customers farther and wider, whoever could they be and wherever may be. Among those services are the Suki card which is a customer program, and the consistent compliance of the 20% discounts to senior citizens. Mercury Drug will continue on considering opportunities to further enable customers to have more easy access to quality and safe medicines in the years to come, and it will always pursue its commitment to satisfy the needs of its customers whose trust and loyalty has allowed Mercury Drug to continue its service to the nation.

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It is seen that the trend of each of the liquidity ratios has relatively little fluctuations and are within its range in most years. But it is clearly seen that current ratios are higher compared to the quick and cash ratios. It goes to show that the company would not be able to pay its short term obligations through liquidating its current assets if there are any immediate needs in the future. However, this does not show an incapability of the companys ability to pay its creditors. The company has alr eady made a good credit name, incase of immediate needs of paying short-term

Liquidity Ratios
80% 70% Ratio Values in Percentage 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 Years 2008 2009 Current Ratio Quick Ratio Cash Ratio

obligations.

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Solvency Ratios
1200%

1000% Debt Ratio 800% Debt-Equity Ratio 600% Times Interest Earned Ratio 400% Times Fixed Charges Earned (Fixed-Charge Coverage Ratio)

Ratio Values in Percentage

200%

0% 2005 2006 2007 Years 2008 2009

Times interest earned ratio drastically increases, this is due to the continuous increase of the income before income taxes and the decrease of the interest expense of the company. Since it is increasing, the company is very less risky. The debt-equity ratios ON the other hand are relatively within the 200% level which means that they are more debt financed. It is also a good sign that the companies debt ratios is below 100% which means that is has a safety cushion for paying debts if ever the company would ever be bankrupt in the future. Also being constant within the range of 100%-145%, the company would be able to pay fixed charges in a range of 1%-45%.

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Asset Quality (Assset Utilization or Asset Activity) Ratios

40.00 35.00 30.00 25.00 Ratio Values 20.00 15.00 10.00 5.00 2005 2006 2007 Years 2008 2009 Inventory Turnover Days Sales in Inventory (Average Age of Inventory) Asset Turnover Fixed Asset Turnover Ratio

Being a merchandising company, it is evident according to the results of its days sales in inventory that they stock their inventories longer than other types of business. It started to drop after 2006 because of increased cost of goods sold which is due to more inventories sold, thus inventory turnover ratio rose up during the said year. Aside from the aforementioned above, being a merchandising firm explains the low asset turnover and low fixed asset turnover ratios since they are not the one making almost all of their goods or products.

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Gross profit margins are relatively the same for the years computed but it is quite obvious in the graph that they are slightly decreasing because the increase in gross profit does not correspond proportionately to the increase of its sales. The net profit margin of the company is showing ratios within the range of .1%-.5% but despite this, the company had a continuous increase in sales and profit for the 5 years which is also

Profitability (Earnings) Ratios

250%

200%

Ratio Values in Percentage

150%

Net Profit Margin ( Return on Sales - ROS) Gross Profit Margin Return on Assets (ROA)

100% Return on Stockholders' Equity (ROE) Cash Flow per Share 50%

0% 2005 2006 2007 Years 2008 2009

why the ratios are also relatively the same. Having these ratios, we could find that the expenses the company has are overwhelming that it makes the income so minimal.

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Earnings per Share

Php0.60

Php0.50

Php0.40 Peso Values

Php0.30 Earnings per Share Php0.20

Php0.10

Php2005 2006 2007 Years 2008 2009

As mentioned above that the company continuous to increase in its profits, it is also the reason why the earnings per share is increasing. The high and low of the ratios of the cash flow per share is mainly due to the fluctuations in the cash flow from operations of the company. It can be noted that the company had their highest cash flow from operations during the year 2008. Also mentioned earlier, the company does not need to work so much using their assets thats why the return on assets are low. Lastly, return on equity is increasing for the same reason that the income is increasing.

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The causes of the increase-decrease of the total assets are due to the buying and selling of its assets. While fluctuations on total liabilities are just because of their normal operations and they either borrow money or pay their debts. Fluctuations of the total shareholders equity are due to the issuance and repurchase of its stocks. Increasing sales are mainly due to more franchises and more effective marketing strategies. Lastly, fluctuating net income are due to fluctuations of their expenses especially other expenses.

Growth Ratios
200% 180% 160% 140% Ratio Values in Percentage 120% 100% 80% 60% 40% 20% 0% 2005 -20% 2006 2007 Years 2008 2009 Total Assets Total Liabilities Total Shareholders' Equity Sales Net Income

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Market Performance (Market Value) Ratios

PhP3.50 PhP3.00 Peso Values PhP2.50 PhP2.00 PhP1.50 PhP1.00 PhP0.50 PhP2005 2006 2007 Years 2008 2009 Book Value per Share

Book value per share is increasing which is good because it implies that there is an increasing value of net assets assigned to common stockholders. Price-earnings ratio on the other hand had a continuous decrease from 2006 to 2008 but it was able to increase by 2009 which is mainly due to the abrupt change in the market prices.

Price-Earnings Ratio
3500% Ratio Values in Percentage 3000% 2500% 2000% 1500% 1000% 500% 0% 2005 2006 2007 Years 2008 2009 Price-Earnings Ratio

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Annual Growth Rates - Consolidated Income Statement For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 2006 REVENUE FROM MERCHANDISE SOLD 11% 9% 7% 1% COST OF MERCHANDISE SOLD 12% 11% 10% 1% GROSS PROFIT 11% 6% 1% 0% Operating Expenses 15% 6% 4% 5% Other Revenue Franchise Revenue 21% 23% 38% 152% Marketing Income 74% 39% 18% -15% Rent Income 43% -8% -1% 12% Commission Income 4% -3% -23% -24% Interest Income 16% -5% 59% -25% Other Income 98% -33% 40% 18% 31% 30% Other Expenses excluding Interest Expense Loss from Typhoon Unrealized Foreign Exchange Loss -32% -21% -25% 18565% Impairment Loss on Goodwill -100% Loss on Sale of Property and Equipment -100% 313% -96% -69% Other Expenses -10% -100% -56% -26% 934% -90% -60% INCOME BEFORE INTEREST & INCOME TAX 51% 33% 54% 12% Interest Expenses 5% -20% -12% 6% Provision for Income Tax Current 30% 49% 46% 55% deferred income tax liability 180% 189% -57% -122% 24% 46% 53% 0% NET INCOME 85% 54% 172% 46% OTHER COMPREHENSIVE INCOME Appraisal increase in value of land - net of deferred income tax liability 0% 0% 0% 0% Effect of changes in tax rate in 2009 0% 0% 0% 0% 0% 0% 0% 0% TOTAL COMPREHENSIVE INCOME 84.36% 46.13% 187.07% 46.39% Average number of shares outstanding 10% 10% 0% 0% BASIC/DILUTED EARNINGS PER SHARE 68% 40% 172% 46%

2005 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

0% 0% 0% 0% 0% 0%

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Annual Growth Rates - Consolidated Balance Sheet December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 ASSETS Current Assets Cash and cash equivalents Receivables - net Inventories Prepayments and other current assets Total Current Assets Noncurrent Assets Property and Equipment Deposits Deferred Lease Expense Deferred Income Tax Assets Goodwill Other Noncurrent Assets Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current Liabilities Bank Loans Accounts Payable and Accrued Expenses Income Tax Payable Current Portion of Long-Term Debt Other Current Liabilites Total Current Liabilities Noncurrent Liabilities Long-Term Debt - net of current portion Deposits Payable Net Retirement Obligations Deferred Income Tax Liability Cumulative Redeemable Preferred Shares Deferred Revenue - net of current portion Total Noncurrent Liabilities Total Liabilities Stockholders' Equity Capital Stock - P1 par value Additional Paid-In Capital Unrealized gain on available-for-sale financial assets Retained Earnings Other Component of Equity - revaluation incremental on land Cost of held Treasury Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

2006

2005

42.54% 1.94% -7.48% 109.12% 22.41% 4.81% 47.85% 68.56% 27.62% 19.17% 14.48% 14.04% 15.78% 0.00% 15.64% 13.80% 19.42%

-6.22% 53.21% -2.40% 17.63% 0.94%

61.21% -35.66% -1.27% 67.80% 18.26% 12.05% -4.07% -30.40% -1.07% 5.90% 10.74%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

25.76% 6.49% 20.13% -100.00% 5.97% -30.57% -6.57% 18.26% -84.63% 22.25% 2.89% 20.98% 2.07%

3.03% -12.00% -7.34% 21.17% 45.48% -4.47% 48.09% 834.68% 725.44% -100.00% 17.61% 61.60% -31.67% 16.89% 29.09% -9.51%

68.63% 9.73% 10.35% -93.01% 36.38% 17.43%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

-100.00% 44.10% -15.61% 55.37% 18.97% 12.00% 18.45% 0.00% -14.29% 0.00% 0.00% 0.00% 0.00% -73.78% 38.44% -2.08% 314.68% -46.26% 18.78% 25.57% -0.76% 13.79% 9.97% 0.00% 65.96% 0.00% 20.63% 0.00% 20.71% 19.42% 9.97% 0.00% 0.00% 0.00% -100.00% 44.50% 67.49% 7.69% 12.60% 7.59% 0.00% 0.00% 12.66% 7.63% 20.98% 2.07% 0.00% 0.00% 32.97% 5.17% 0.00% 5.20% 10.74%

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BALANCES AS OF DECEMBER 31, 2004 Effect of change in accounting for refundable security deposits BALANCES AS OF JANUARY 1, 2005 Net income for the year BALANCES AS OF DECEMBER 31, 2005 BALANCES AS OF DECEMBER 31, 2005 Unrealized gain on available-for-sale financial assets during the year Total income recognized directly in equity Net income for the year Total income for the year BALANCES AS OF DECEMBER 31, 2006 BALANCES AS OF DECEMBER 31, 2006 Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2007 BALANCES AS OF DECEMBER 31, 2007 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2008 BALANCES AS OF DECEMBER 31, 2008 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2009

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Annual Growth Rates - Consolidated Statement of Changes in Stockholders' Equity For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 Unrealized Revaluation Additional Gain on AFS Retained Increment on Capital Stock Paid-In Capital Financial Assets Earnings Land 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 9.97% 9.97% 10.00% 9.97% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 29.07% 46.39% 46.39% 32.97% 32.97% 172.18% 67.49% 67.49% 53.70% 44.50% 44.50% 10.00% 84.87% 65.96% 7.69% 7.69% 0.00% -

Treasury Stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total 0.00% 0.00% 0.00% 0.00% 0.00% 2.39% 5.20% 3.42% 187.07% 9.48% 9.48% 46.13% 12.66% 12.66% 84.36% 20.71%

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Trend Analysis - Consolidated Income Statement For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 2006 REVENUE FROM MERCHANDISE SOLD 132% 118% 108% 101% COST OF MERCHANDISE SOLD 137% 123% 111% 101% GROSS PROFIT 119% 107% 101% 100% Operating Expenses 134% 117% 110% 105% Other Revenue Franchise Revenue 517% 427% 348% 252% Marketing Income 244% 140% 101% 85% Rent Income 146% 102% 111% 112% Commission Income 58% 56% 58% 76% Interest Income 131% 113% 119% 75% Other Income 281% 200% 169% 130% Other Expenses excluding Interest Expense Loss from Typhoon Unrealized Foreign Exchange Loss 7505% 10971% 13937% 18665% Impairment Loss on Goodwill Loss on Sale of Property and Equipment 0% 5% 1% 31% Other Expenses 44% 49% 0% 44% 31% 42% 4% 40% INCOME BEFORE INTEREST & INCOME TAX 346% 228% 172% 112% Interest Expenses 78% 75% 93% 106% Provision for Income Tax Current 436% 336% 226% 155% deferred income tax liability -76% -27% -9% -22% 279% 225% 154% 100% NET INCOME 1132% 612% 398% 146% Average number of shares outstanding 121% 110% 100% 100% BASIC/DILUTED EARNINGS PER SHARE 936% 557% 398% 146%

2005 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

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PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Trend Analysis - Consolidated Balance Sheet December 31, 2009, 2008, 2007, 2006, & 2005 December 31 2009 2008 2007 2006 ASSETS Current Assets Cash and cash equivalents Receivables - net Inventories Prepayments and other current assets Total Current Assets Noncurrent Assets Property and Equipment Deposits Deferred Lease Expense Deferred Income Tax Assets Goodwill Other Noncurrent Assets Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current Liabilities Bank Loans Accounts Payable and Accrued Expenses Income Tax Payable Current Portion of Long-Term Debt Other Current Liabilites Total Current Liabilities Noncurrent Liabilities Long-Term Debt - net of current portion Deposits Payable Net Retirement Obligations Deferred Income Tax Liability Cumulative Redeemable Preferred Shares Deferred Revenue - net of current portion Total Noncurrent Liabilities Total Liabilities Stockholders' Equity Capital Stock - P1 par value Additional Paid-In Capital Unrealized gain on available-for-sale financial assets Retained Earnings Other Component of Equity - revaluation incremental on land Cost of held Treasury Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

2005

119.68% 54.12% 90.72% 106.13% 23.63% 1.00% 391.92% 232.72% 81.54% 42.25% 71.77% -100.00% -40.71% -79.21% 51.58% 63.30% 50.05% -100.00% -48.79% -49.19% 20.07% 28.75%

51.18% -1.43% -3.63% 97.39% 19.37% 19.32% -100.00% -51.68% -84.80% -8.92% 2.15%

61.21% -35.66% -1.27% 67.80% 18.26% 12.05% -4.07% -30.40% -1.07% 5.90% 10.74%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

41.67% 84.78% 12509% -100.00% 77.13% 60.33%

37.50% 52.49% 8413.96% -100.00% 50.61% 37.17%

56.25% 4.82% 810.89% -100.00% -6.80% 6.26%

68.63% 9.73% 10.35% -93.01% 36.38% 17.43%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

-100.00% 145.22% 57.83% 32.66% 18.45% 0.00% 0.00% 0.00% 0.00% 202.08% -31.66% -40.99% -46.26% 68.44% 33.23% 3.56% 13.79% 20.94% 9.97% 0.00% 0.00% 0.00% 0.00% 434.08% 221.81% 122.71% 53.71% 27.42% 13.16% 0.00% 0.00% 0.00% 53.98% 27.55% 13.22% 63.30% 31.22% 6.99% 0.00% 0.00% 32.97% 5.17% 0.00% 5.20% 10.74%

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BALANCES AS OF DECEMBER 31, 2004 Effect of change in accounting for refundable security deposits BALANCES AS OF JANUARY 1, 2005 Net income for the year BALANCES AS OF DECEMBER 31, 2005 BALANCES AS OF DECEMBER 31, 2005 Unrealized gain on available-for-sale financial assets during the year Total income recognized directly in equity Net income for the year Total income for the year BALANCES AS OF DECEMBER 31, 2006 BALANCES AS OF DECEMBER 31, 2006 Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2007 BALANCES AS OF DECEMBER 31, 2007 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2008 BALANCES AS OF DECEMBER 31, 2008 Issuance of stock dividends Total comprehensive income for the year BALANCES AS OF DECEMBER 31, 2009

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES Trend Analysis - Consolidated Statement of Changes in Stockholders' Equity For The Year Ended December 31, 2009, 2008, 2007, 2006, & 2005 Unrealized Revaluation Additional Gain on AFS Retained Increment on Capital Stock Paid-In Capital Financial Assets Earnings Land 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 9.97% 9.97% 20.94% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 29.07% 46.39% 46.39% 32.97% 71.62% 298.45% 122.71% 187.45% 512% 221.81% 315.35% 1032.17% 0.00% -

Treasury Stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total 0.00% 0.00% 0.00% 0.00% 0.00% 2.39% 46.39% 46.39% 5.20% 5.89% 320.24% 13.22% 15.93% 514% 27.55% 30.60% 1032.17% 53.98%

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It can be noted that the company really had their hands in maximizing their profits. Profits really reach the highest growth among all of the companys financial quantities. As a result of the great increase in its net income it can also give the stockholders that earning per share is increasing which means good in their part. As also seen in the trend analysis, the company really is growing not just in terms of its profits but the company as a whole which can be noted visibly in the growths of its assets in the past five years. But furthermore the net income has the most clear and visible increase from 2005 up to 2009. Aside from all these, we also searched the movement of market prices of the companys stocks and it shows that the company had been increasing, although there were slight decreases yet is it still increasing.

San Miguel Food Shop 1%

Market Share
(as of December (2009)

Ministop 27% 7-Eleven 44%

Mercury Self-Serve 28%

It is also hard to compare the company to other retailing company or its major competitors since the 7-Evelen is the only company of its nature which does not form part of any other businesses, unlike the Ministop of Robinsons, San Miguel Food Shop and the Mercury Drugs Self -Serve. With this, we can say that the company recently has

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an advantage over their competitors and, probably, will still be in the coming future since they have been developing new ways of marketing and management. Aside from all of the aforementioned above, 7-Eleven also had the largest market share compared to its known competitors.

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Through our analyses, the financial performance of the company for the past five years has been showing favorable results not only to the shareholders but the other stakeholders of the company as well. Qualitative factors played roles in the business performance as a whole. Continuous improvement was also evident through the positive changes in terms of quantitative data. Philippine Seven Corporation being the leader in its industry had promising figures in their annual financial statements as well as computed financial ratios. These ratios informed stakeholders about different facets of the companys finances and operations that ultimately caused it to prosper. Through the 5-year analysis, we can say that there has been a favorable growth as evidenced by the increase in revenues and decrease in expenses and as also depicted by complimentary solvency, liquidity, profitability and market performance ratios. The increase in sales was brought about by the leap in marketing and merchandising strategies. The company is fully committed in meeting their obligations. And not only that, Earnings per Share which plays a major role in the maximization of wealth in the company had been very much increasing for the past 5 years. The company took steps to facilitate expansion in new and traditional markets to expedite growth. Much of the success of the company was due to the strengthening of franchise selection process and market development plan. There were programs implemented that supported corporate and franchise stores and programs that boost sales, margin and customer count in partnership with suppliers. Collaboration with suppliers was needed to provide the company with high quality products that are more marketable and thus are very much profit-making. In spite of the growing competition in convenience store (C -Store) businesses, the Corporation maintains its leadership in the industry having 43% market share as of the current year being analyzed with Mercury Self Service next in line with just 28%. The company had been seeking development and persisting with a commitment for capital expenditures in 2010 that amounts to P615.0 million. Bulk of the said amount

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will be spent on construction of new stores, acquisition of store and computer equipment. Financing of the capital expenditures will come mainly from internal funds. Thus, with all the input obtained and investigated, we can say that Philippine Seven Corporation is satisfactory in terms of performance and strives to continue to be the promising leader in the C-Store industry.

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In its vision to be an emerging retailer in the industry, Philippine Seven Corporation gains advantage through people, technology, widely recognized brand, and economies of scale so as to achieve customer satisfaction and to maintain a leadership position in the C-store industry. In relation to accomplish such, here are some of the companys future prospects: PSC is considering that available working capital sources and operating activities will provide funds to finance capital expenditures and operating costs. Working capital sources are obtained largely from cash flows provided by retailing operations and franchises, and from borrowings extended by banks under a revolving credit. Mostly, the companys commitments for capital expenditures revolve around expansion the construction of new stores and renovations that are expected to be funded by borrowings and increase in cash flows, if such is needed. The company is expecting to have 1,000 more stores by 2013 and to put up one or two in Cebu. PSC anticipates in decreasing its level of debt, particularly from bank loans with floating interest rates, to reduce its exposure to interest rate risk. Consequently, outstanding debts will be paid using the funds generated internally from its franchising business and cash generating units. The Corporation will continue to strengthen its franchising activities including franchise selection process, and to implement its market development plan. In collaboration with its suppliers, the company shall continue to supply high quality and fresh products that are more profitable and saleable. Moreover, it is also willing to adopt alternative approaches in promotions, pricing, and product mix to ensure that PSC sales will be steady despite unfavorable economic situations and to not just be able to cope but to maintain profitability during these uncertain times. Mr. Paterno, the acting President and CEO of PSC, said that the company is considering e-commerce as a new system in selling.

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Having been able to know the nature and the standing of the company, the group recommends the following:

Since the company is serving on-the-go customers, they must offer faster service at the lowest reasonable prices with the highest quality.

Also for them to maintain their market share, they should be more innovative when it comes to their services offered and products being sold. For example, creating more trademark products which are unique and has an appeal to their customers. It is important to attract customers and offering new and attractive products is one way of achieving it.

Wider product differentiation is also a good move for the company to improve. Increase suppliers with varied products. Such as, more toiletries, medicines, and other needs of the customers which are not yet offered in their stores at present.

Since the increase in their profits are caused greatly by continuous improvement and franchising, the company could do research and delevopment in these aspects. Such as, looking for a better franchising strategy, which is the major source of their revenue. However, doing so, the company should always be careful to protect their company name and not allow franchising to people who are not eligible enough to carry out the good name of the company.

For a better impression to the industry, the company should continue maximizing its shareholders wealth - which is basically their main goal. One way of increasing shareholders wealth is by increasing in profits by which the earnings per share could also increase.

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 Because th company is merchandising in nature, the best way to gain or increase it profits is to minimize or have a good control of the fluctuations of the expenses without damaging the operations of the company, its product quality and customer satisfaction.

For its environmental concerns, stores like 7-eleven, has a great potential in recycling. Products from their suppliers are usually bought by masses. In addition, containers, cartons and the like which are not sold to the customers can be sold to junk shops, or even donated to the people who dont have work. Thus, giving these scraps to them can help those people earn a living.

In their normal operation, which is retailing, they can use paper bags instead of plastic bags in their transactions to the end customers. Through this, it will mold the company to be environmental-friendly. This would not benefit only to the environment itself, but as well as to human beings in the future.

Being aware of the poverty occuring in the country, it is still important that a for-profit company should always try to reach out helping hands to the citizens. Despite of 7-elevens past projects, the group suggests that they create their own small learning center for unfortunate children. We feel that it will not cost the company too much of what they are earning and it will also set a goodexample not only to other successful companies, but as well as the government. We believe that small beginnings can end up to great endings, and these children must not waste their potentials in being future leaders.

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We would like to thank the following who gave not just their financial support but also moral and material: First and foremost, our Lord Jesus Christ who is the source of everything. Without the knowledge and perseverance He had given to us we would not be able to finish this paper in due time. Secondly, to Prof. Betty Jane Martinez, who gave us this project. Although this was a hard task yet we learned so much as we go along. Third, to our parents who never fail to understand our sleepless nights and most of all giving us all our financial needs especially for this paper. Fourth, Mr. Ardie Jose Estrada nad Mr. Leonard Vince Araneta for letting us borrow their laptops. Fifth, to the Villamil Family who welcomed us in their humble home in order for us to be safe and comfortable in the making of this paper. Lastly to our friends and classmates who pressured us to finish this paper on time and of course their moral support to us. We really thank you a lot for! God speed!

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