STRICTLY CONFIDENTIAL

Megaworld Corporation
(incorporated under the laws of the Republic of the Philippines)

Primary and Secondary Offer of 3,923,166,000 Common Shares = Offer Price of P 1.38 per Offer Share
This International Offering Circular relates to the offer of 3,923,166,000 common shares (the Firm Offer, and such shares, the Firm Shares) of common shares, par value = 1.00 per share (the Shares) of Megaworld Corporation, a P corporation organized under Philippine law (Megaworld or the Company). The Firm Shares will comprise (i) 3,500,000,000 new Shares to be issued and offered by Megaworld by way of a primary offer (the Primary Offer, and such Shares, the Primary Offer Shares) as further described below and (ii) 423,166,000 existing Shares offered by Colony-CB Richard Ellis MW, L.P. (the Selling Shareholder) pursuant to a secondary offer (the Secondary Offer, and such Shares, the Secondary Offer Shares). The Company will not receive any of the proceeds from the sale of the Firm Shares being sold by the Selling Shareholder. The Firm Shares shall be offered at = 1.38 per Firm Share (the Offer Price). P 3,727,008,000 of the Firm Shares (the International Offer Shares) are being offered and sold outside the Philippines and the United States through the Lead Manager in reliance on Regulation S (Regulation S) under the United States Securities Act of 1933, as amended (the U.S. Securities Act) (the International Offer). 196,158,000 of the Firm Shares (the Domestic Offer Shares) are being offered by the Selling Shareholder at the Offer Price to all of the trading participants of the PSE (the PSE Brokers) in the Philippines (the Domestic Offer). The Selling Shareholder, a non-Philippine National, will sell and The Andresons Group, Inc. (TAGI), a Philippine National, will purchase 300,000,000 Domestic Block Sale Shares (as defined herein) at the Offer Price on the Listing Date and on the same terms and conditions as the Firm Shares. The Domestic Block Sale will provide leeway for the ownership of Shares by nonPhilippine Nationals. The closings of the Domestic Offer, the Domestic Block Sale and the International Offer are conditional upon each other. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. In the event of an under-application in the International Offer and if there is a corresponding overapplication in the Domestic Offer, International Offer Shares may (at the option of the Domestic Underwriter) be reallocated from the International Offer (with the consent of the Lead Manager) to the Domestic Offer. The Firm Shares will be delivered in book-entry form against payment therefor to the Philippine Depository and Trust Corporation (PDTC) on or about April 24, 2006. See Risk Factors on page 15 and Additional Risk Factors on page W-15 to read about factors investors should consider before making an investment in the Offer Shares. The Company has granted UBS AG, the Stabilizing Agent, an option exercisable in whole or in part within 30 days from the date of listing and when trading of the Companys Offer Shares commences on the PSE (the Listing Date), to purchase up to an additional 588,475,000 Shares at the Offer Price (the Optional Shares, and together with the Firm Shares, the Offer Shares), on the same terms and conditions as the Firm Shares as set forth in this International Offering Circular, solely to cover over-allotments, if any (the Over-Allotment Option). The offer of the Firm Shares, including the Optional Shares, is referred to as the Offer. The Optional Shares will be sold as part of the International Offer. See Plan of Distribution. The Offer Shares have not been registered under the U.S. Securities Act and are being offered and sold within the United States only to persons outside the United States in reliance on Regulation S under the U.S. Securities Act. The Offer Shares offered hereby are not transferable except in accordance with the restrictions described under International Plan of Distribution and Transfer Restrictions.

Sole International Underwriter and Sole Book Runner

The date of this International Offering Circular is April 6, 2006.

This International Offering Circular includes and incorporates the prospectus for the Domestic Offer of the Offer Shares in the Philippines (the Philippine Prospectus) and references to the International Offering Circular are to this document together with the incorporated Philippine Prospectus. Investors should read the entire International Offering Circular, including the incorporated Philippine Prospectus, before making an investment decision with regard to the Offer Shares. IMPORTANT If investors are in any doubt about this International Offering Circular, they should consult their stockbroker, bank manager, legal counsel, professional accountant or other professional advisor. This International Offering Circular is confidential. Investors are authorized to use this International Offering Circular solely for the purpose of considering the purchase of the Offer Shares of the Company offered pursuant to this International Offering Circular. The Company has provided information contained in this International Offering Circular which also includes information from other identified sources which are believed to be reliable. This International Offering Circular does not purport to be all-inclusive or to necessarily contain all the information that an investor may desire in investigating the Company or necessary to make an informed investment decision regarding the Offer. The Lead Manager makes no representation or warranty, express or implied, as to the accuracy or completeness of such information, and nothing contained in this International Offering Circular is, or should be relied upon as, a promise or representation by the Lead Manager. Investors may not reproduce or distribute this International Offering Circular, in whole or in part, and may not disclose any contents of this International Offering Circular or use any information herein for any purpose other than considering an investment in the Offer Shares offered hereby. Investors hereby agree to the foregoing by accepting delivery of this International Offering Circular. The Offer Shares have not been registered under the U.S. Securities Act for offer or sale as part of their distribution and may not be offered or sold in the United States. The Offer Shares are not transferable except in accordance with the restrictions described herein. See International Plan of Distribution and Transfer Restrictions. OFFERS AND SALES OF THE OFFER SHARES ARE SUBJECT TO RESTRICTIONS IN RELATION TO THE EUROPEAN ECONOMIC AREA, THE UNITED KINGDOM, SINGAPORE, THE HONG KONG SPECIAL ADMINISTRATIVE REGION, AUSTRALIA, CANADA, FRANCE, JAPAN, ITALY, SWEDEN, IRELAND, BELGIUM, LUXEMBOURG, FINLAND, NORWAY, THE UNITED ARAB EMIRATES AND DENMARK. DETAILS OF SUCH RESTRICTIONS ARE SET FORTH IN THE SECTION OF THIS INTERNATIONAL OFFERING CIRCULAR ENTITLED INTERNATIONAL PLAN OF DISTRIBUTION. THE DISTRIBUTION OF THIS INTERNATIONAL OFFERING CIRCULAR AND THE OFFER OF THE OFFER SHARES IN CERTAIN OTHER JURISDICTIONS MAY ALSO BE RESTRICTED BY LAW. No person has been authorized to give any information or to make any representations other than those contained in this International Offering Circular and, if given or made, such information or representations must not be relied upon as having been authorized. This International Offering Circular does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy such securities by any person in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this International Offering Circular nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. THE INTERNATIONAL OFFER IS BEING MADE ON THE BASIS OF THIS INTERNATIONAL OFFERING CIRCULAR ONLY. ANY DECISION TO PURCHASE OFFER SHARES IN THE INTERNATIONAL OFFER MUST BE BASED ON THE INFORMATION CONTAINED HEREIN.
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The distribution of this International Offering Circular and the offering and sale of the Offer Shares in certain jurisdictions may be restricted by law. The Company and the Lead Manager require persons into whose possession this International Offering Circular comes to inform themselves about and observe any such restrictions. For a further description of certain restrictions on the International Offer and sale of the Offer Shares, see International Plan of Distribution and Transfer Restrictions contained in this International Offering Circular. Each subscriber of Offer Shares is deemed to instruct and authorize the Company and/or the Lead Manager (or their respective agents or nominees) to execute any transfer forms, contract notes or other documents on its behalf and to do on its behalf all things necessary to effect the registration of any Offer Shares allocated to it or the PDTC, as the case may be, as required by the Companys Articles of Incorporation and otherwise to give effect to the arrangements described in this International Offering Circular. A registration statement relating to the Offer Shares has been filed with the Securities and Exchange Commission of the Philippines (the Philippine SEC) in accordance with the Securities Regulation Code of the Philippines (Republic Act No. 8799) and such registration statement will become effective pursuant to an Order of Effectivity issued by the Philippine SEC. The issuance of such Order of Effectivity is permissive only and does not constitute a recommendation or endorsement of the securities to be offered for sale. The Philippine SEC has not approved these securities or determined if this International Offering Circular is accurate or complete. Any representation to the contrary is a criminal offense and should be immediately reported to the Philippine SEC. The listing of the Offer Shares is subject to the approval of the Board of Directors of the PSE and the Philippine SEC. The approval of the Board of Directors of the PSE was granted, subject to the fulfillment of certain listing conditions, on March 22, 2006. Such approvals for listing are permissive only and do not constitute a recommendation or endorsement by either the PSE or the Philippine SEC of the Offer Shares to be offered. In this International Offering Circular, unless otherwise specified or the context otherwise requires, all references to the Philippines are references to the Republic of the Philippines. All references to the BSP are references to Bangko Sentral ng Pilipinas, the central bank of the Philippines. All references to the Government herein are references to the government of the Republic of the Philippines. All references to United States or U.S. herein are to the United = States of America. All references to Pesos and P herein are to the lawful currency of the Philippines, all references to U.S. dollars or US$ herein are to the lawful currency of the United States and references to Euro or are to the lawful currency of the European Union. For convenience, certain U.S. dollar amounts have been translated into peso amounts, based on the = prevailing exchange rate on December 31, 2005 of P 53.067 = U.S.$1.00, being the average of buying and selling rates of exchange for peso against U.S. dollars quoted by the Philippine Dealing System (the PDS Rate), and published in the major Philippine financial press on that date. Such translations should not be construed as representations that the Philippine peso or U.S. dollar amounts referred to could have been, or could be, converted into pesos or U.S. dollars, as the case may be, at that or any other rate or at all. For further information regarding rates of exchange between the peso and the U.S. dollar, see Exchange Rates. Figures in this Offering Circular have been subject to rounding adjustments. Accordingly, figures shown for the same item of information may vary and figures which are totals may not be an arithmetic aggregate of their components. On = April 6, 2006, the PDS rate was P 50.997 = U.S.$1.00. Punongbayan & Araullo, a member practice of Grant Thornton International, independent certified public accountants, audited Megaworlds financial statements without qualification as of and for the years ended December 31, 2003, 2004 and 2005, included in this International Offering Circular. The 2003, 2004 and 2005 financial information herein was prepared under Philippine Financial Reporting Standards (PFRS). Such financial statements are included in this International Offering Circular based on Punongbayan & Araullos authority as independent public accountants.

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Unless otherwise indicated, the description of Megaworlds business activities in this International Offering Circular is presented on a consolidated basis. For further information on Megaworlds corporate structure, see Subsidiaries and Affiliates. IN CONNECTION WITH THE OFFER, UBS AG, THE STABILIZING AGENT, OR ANY PERSON ACTING FOR UBS AG MAY OVER-ALLOT OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE OFFER SHARES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL FOR A LIMITED PERIOD OF TIME AFTER THE TIME OF DELIVERY. HOWEVER, THERE MAY BE NO OBLIGATION ON UBS AG OR ANY AGENT OF UBS AG TO DO THIS. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME AND MUST BE BROUGHT TO AN END AFTER A LIMITED PERIOD. SEE INTERNATIONAL PLAN OF DISTRIBUTION.

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TABLE OF CONTENTS
Page International Offering Circular Enforceability of Civil Liabilities . . . . . . Forward-Looking Statements . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of the Offering . . . . . . . . . . . . . Selected Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . Additional Risk Factors . . . . . . . . . . . . . . . Dividend Policy . . . . . . . . . . . . . . . . . . . . . . W-6 W-7 W-8 W-10 W-12 W-15 W-18 Exchange Rate Information . . . . . . . . . . Transfer Restrictions . . . . . . . . . . . . . . . . . International Plan of Distribution . . . . Selling Restrictions . . . . . . . . . . . . . . . . . . . Philippine Foreign Exchange Controls Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . Independent Public Accountants . . . . . . W-19 W-20 W-21 W-24 W-29 W-30 W-31

Philippine Prospectus Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . Dividends and Dividend Policy . . . . . . . . Exchange Rates . . . . . . . . . . . . . . . . . . . . . . Market Price Information . . . . . . . . . . . . . Determination of Offer Price . . . . . . . . . . Capitalization . . . . . . . . . . . . . . . . . . . . . . . . Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . Managements Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 15 23 24 25 26 27 28 29 30 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory and Environmental Matters Subsidiaries and Affiliates . . . . . . . . . . . . Board of Directors and Senior Management . . . . . . . . . . . . . . . . Related Party Transactions . . . . . . . . . . . Principal and Selling Shareholders . . . . Description of the Shares . . . . . . . . . . . . The Philippine Stock Market . . . . . . . . . Philippine Foreign Exchange Controls Philippine Taxation . . . . . . . . . . . . . . . . . . Plan of Distribution ................. 59 83 87 89 96 97 100 108 113 114 118 121 122 F-1

Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . 33 45 Independent Public Accountants . . . . . . Consolidated Financial Statements and Independent Auditors Reports .

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ENFORCEABILITY OF CIVIL LIABILITIES The Company is organized under laws of the Republic of the Philippines. All or a substantial portion of the Companys assets are located in the Philippines. The Company has consented to service of process in England. It may be difficult for investors to effect service of process outside of the Philippines upon the Company. Moreover, it may be difficult for investors to enforce judgments against the Company outside the Philippines in any actions pertaining to the Offer Shares. In addition, substantially all of the directors and the officers of the Company are residents of the Philippines, and all or a substantial portion of the assets of such persons are or may be located in the Philippines. As a result, it may be difficult for investors to effect service of process upon such persons, or to enforce against them judgments obtained in courts or arbitral tribunals outside the Philippines predicated upon the laws of jurisdictions other than the Philippines. The Philippines is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments but is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Judgments obtained against Megaworld in any foreign court may be recognized and enforced by the courts of the Philippines in an independent action brought in accordance with the relevant procedures set forth in the Rules of Court of the Philippines to enforce such judgment. However, such foreign judgment or final order may be rejected in the following instances: such judgment was obtained by collusion or fraud, the foreign court rendering such judgment did not have jurisdiction, such order or judgment is contrary to good customs, public order, or public policy of the Philippines, the Company did not have notice of the proceedings before the foreign court or such judgment was based upon a clear mistake of law or fact.

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FORWARD-LOOKING STATEMENTS This International Offering Circular contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to: . . known and unknown risks; uncertainties and other factors which may cause Megaworlds actual results, performance or achievements to be materially different from any future results; and performance or achievements expressed or implied by forward-looking statements.

Such forward-looking statements are based on numerous assumptions regarding the Companys present and future business strategies and the environment in which Megaworld will operate in the future. Among the important factors that could cause some or all of the assumptions not to occur or cause actual results, performance or achievements to differ materially from those in the forward-looking statements include, among other things: . . . . . . the Companys ability to successfully implement its strategy; the condition and changes in the Philippine, Asian or global economies; future political instability in the Philippines; changes in interest rates, inflation rates and the value of the peso against other currencies; changes in Government regulations, including tax laws, or licensing in the Philippines; and competition in the property industry in the Philippines.

Additional factors that could cause Megaworlds actual results, performance or achievements to differ materially include, but are not limited to, those disclosed under Risk Factors. These forward-looking statements speak only as of the date of this International Offering Circular. Each of the Company, the Selling Shareholder and the Lead Manager expressly disclaims any obligation or undertaking to release, publicly or otherwise, any updates or revisions to any forward-looking statement contained herein to reflect any change in the Companys expectations with regard thereto or any change in events, conditions, assumptions or circumstances on which any statement is based.

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SUMMARY
The following summary highlights information contained in, and is qualified in its entirety by, the more detailed information (including financial information and the notes thereto) appearing elsewhere in this International Offering Circular. For a discussion of certain matters that should be considered in evaluating an investment in the Offer Shares, see Risk Factors on page 15 and Additional Risk Factors on page W-15. Capitalised terms not described in this summary are defined in the Glossary of this International Offering Circular. OVERVIEW The Company is one of the leading property developers in the Philippines and is primarily engaged in the development in Metro Manila of large scale mixed-use planned communities, or community townships, that integrate residential, commercial, educational/training, leisure and entertainment components. Founded in 1989, the Company initially established a reputation for building high quality residential condominiums and commercial properties located in convenient urban locations with easy access to offices as well as leisure and entertainment amenities in Metro Manila. Beginning in 1996, in response to demand for the lifestyle convenience of having quality residences in close proximity to office and leisure facilities, the Company began to focus on the development of mixed-use communities, primarily for the middle-income market, by commencing the development of its Eastwood City project. In addition, the Company engages in other propertyrelated activities such as project design, construction oversight and property management. The Companys real estate portfolio includes residential condominium units, subdivision lots and townhouses as well as office projects and retail space. The Company has the following three primary business segments: (i) real estate sales of residential and office developments (ii) leasing of office space, primarily to business process outsourcing (BPO) enterprises and retail space and (iii) management of hotel operations. The Companys total gross revenues for the year ended = = December 31, 2005 were P 4,812.2 million compared to P 4,191.2 million for the year ended December 31, 2004. Real estate sales of residential developments accounted for 66% of the Companys revenues in 2005 and 57% in 2004. The Companys net income (excluding minority = = interest) for the year ended December 31, 2005 was P 1,153.9 million compared to P 807.7 million for the year ended December 31, 2004. The Companys current portfolio of projects comprises the following: . Eastwood City. Eastwood City is the Companys first community township. Eastwood City is located on 15 hectares of land in Quezon City, Metro Manila; Forbes Town Center. The Company is developing Forbes Town Center, a community township located on five hectares of land in Bonifacio Global City in Taguig, Metro Manila; McKinley Hill. The Company is developing McKinley Hill, a community township located on 50 hectares of land in Fort Bonifacio in Taguig, Metro Manila; Newport City. The Company is developing Newport City, a community township located on 25 hectares of land in the Villamor Air Base, Pasay City, Metro Manila; and Araneta Center. In 2005, the Company introduced development plans for the Philippines first major mass transit-oriented residential community, which is expected to consist of 17 residential condominium buildings on a four hectare site at the Araneta Center in Cubao, Quezon City.

In aggregate, the Company owns or has development rights to approximately 116 hectares of land situated primarily in Metro Manila for its current portfolio of five major projects. Most of the Companys development rights were acquired through joint development agreements with the land owners while the remainder relate to land which the Company has purchased or leased.

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STRENGTHS AND STRATEGIES The Company believes its competitive strengths consist of the following: . . . . . Established track record as a market innovator; Strategic landbank; Sound financials with a stable earnings base and low gearing; Well-established brand name and reputation; and Strong residential marketing network.

The Companys objective is to increase its profitability and maintain its leading position as a major property developer in the Philippines, specifically in the middle-income residential condominium market and the market for BPO-related office developments. Megaworld intends to achieve its objective through the following principal strategies: . . . . Maximize earnings through integrated community township developments; Capitalize on brand and reputation; Maintain a strong financial position; and Sustain a diversified development portfolio.

The Company was voted among Asias Best Property Companies by the Euromoney Best Asian Companies Awards for 2003, 2004 and 2005. The Company also received the following awards for excellence from Euromoney: the Philippines Best in Corporate Governance in 2003; among Asias Most Improved Companies in 2005; and among Asian Companies with the Most Convincing and Coherent Strategy in 2005. In 2004, the Company received the Agora Awards for Marketing Company of the Year; was voted among Asias Best Managed Companies and the Philippines Best in Investor Relations by FinanceAsia Best-managed Asian Companies Awards; and was voted the Philippines Best in Investor Relations, Best Website and the Philippines Best in Clearest Corporate Strategy by Asia Money Polls. In addition, the Company was voted among the Philippines Superbrands in the Superbrands Awards 2004/2005. COMPANY INFORMATION Megaworld is a Philippine corporation with its registered office located at 28th Floor, The World Centre, 330 Sen. Gil J. Puyat Avenue, Makati City, Philippines 1227. Megaworlds telephone number is +63-2-867-8826. Its corporate website is www.megaworldcorp.com. The information on the website is not incorporated by reference into this Prospectus.

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SUMMARY OF THE OFFERING

Issuer . . . . . . . . . . . . Selling Shareholder . . . . The Offer . . . . . . . . . Megaworld Corporation, a corporation organized under the laws of the Republic of the Philippines. Colony-CB Richard Ellis, MW, L.P. Offer of 3,923,166,000 Firm Shares, consisting of 3,500,000,000 new Shares to be issued and offered by Megaworld and 423,166,000 existing Shares to be offered by the Selling Shareholder. 3,727,008,000 of the Firm Shares are being offered and sold outside the United States in reliance on Regulation S under the U.S. Securities Act as part of the International Offer and 196,158,000 of the Firm Shares are being offered and sold by the Selling Shareholder at the Offer Price to all of the PSE Brokers as part of the Domestic Offer in the Philippines. BDO Capital will act as the Domestic Underwriter. If the PSE Brokers do not take up all of the Domestic Offer Shares in the Domestic Offer, the Domestic Underwriter shall distribute to its clients or the general public the Domestic Offer Shares which have not been taken up. The Selling Shareholder, a non-Philippine National, shall sell 300,000,000 Domestic Block Sale Shares at the Offer Price to TAGI, a Philippine National, on the Listing Date, on the same terms and conditions as the Firm Shares as set out in this Prospectus. The Domestic Block Sale will provide leeway for the ownership of Shares by non-Philippine Nationals. The closings of the Domestic Block Sale and the Offer are conditional upon each other. The Domestic Offer is expected to commence on April 10, 2006 and end on April 18, 2006, unless shortened or extended by agreement between the Company and the Lead Manager, subject to the approval of the Philippine SEC and the PSE. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. In the event of an underapplication in the International Offer and if there is a corresponding over-application in the Domestic Offer, International Offer Shares may (at the option of the Domestic Underwriter) be reallocated from the International Offer (with the consent of the Lead Manager) to the Domestic Offer. = The Offer Price is P 1.38 per Offer Share. The Company has granted the Stabilizing Agent an option, exercisable in whole or in part within 30 days from and including the Listing Date, to purchase up to 588,475,000 Optional Shares at the Offer Price, on the same terms and conditions as the Firm Shares as set forth in this International Offering Circular, solely to cover over-allotments, if any. See International Plan of Distribution. The Offer Shares are being offered and sold outside the United States in reliance on Regulation S. The Offer Shares have not been and will not be registered under the U.S. Securities Act and may not be offered or sold within the United States. See Transfer Restrictions and International Plan of Distribution. See the section headed Use of Proceeds for details of how the total net proceeds from the Offer will be applied.

Domestic Block Sale . . .

Domestic Offer Period .

Reallocation . . . . . . . .

Offer Price . . . . . . . . . Over-allotment Option .

Transfer Restrictions. . .

Use of Proceeds . . . . . .

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Nationality Restrictions .

The Company owns certain real estate and, as such, it is subject to nationality restrictions found under the Philippine Constitution and other laws, limiting land ownership to Philippine Nationals. The term Philippine National includes a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines or by corporations that are at least 60% owned by citizens of the Philippines. The Company is thus constrained to keep its foreign equity interest below the 40% threshold and any sale or transfer of shares in excess of this threshold shall not be recorded in the stock and transfer book of the Company. The Company, TAGI, New Town Land and Mr. Andrew Tan have each agreed with the Lead Manager that, other than in connection with the Over-Allotment Option and the option granted to Mr. Benedicto V. Yujuico to purchase 147 million shares of the Company owned by TAGI (the TAGI Option), for a period of 180 days after the First Closing Date, neither it nor any person acting on its behalf will, without the prior written consent of the Lead Manager issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options. The Shares, including the Offer Shares being sold by the Selling Shareholder, are listed on the PSE under the symbol MEG. Approval has been obtained to list the newly issued Offer Shares on the PSE. See Description of the Shares. The Offer Shares are expected to be listed on the PSE on April 24, 2006. Trading is expected to commence on the same date. The Company intends to maintain an annual cash dividend payment ratio of 20% of its net income from the preceding year, subject to the requirements of applicable laws and regulations and the absence of circumstances that may restrict the payment of such dividends, such as where the Company undertakes major projects and developments. Megaworlds Board may, at any time, modify its dividend payout ratio depending upon the results of operations and future projects and plans of the Company. See Dividends and Dividend Policy. The BSP requires that investments in shares of stock funded by inward remittance of foreign currency be registered with the BSP if the foreign exchange needed to service capital repatriation or dividend remittance will be sourced from the domestic banking system. The registration with the BSP of all foreign investments in the Offer Shares shall be the responsibility of the foreign investor. See Philippine Foreign Exchange Controls. Prospective investors should carefully consider certain risks connected with an investment in the Offer Shares, as discussed in the sections headed Risk Factors on page 15 and Additional Risk Factors on page W-15.

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

Listing and Trading . . .

Dividends . . . . . . . . .

Foreign Investment Registration . . . . . . .

Risk Factors . . . . . . . .

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables present summary selected consolidated financial information for Megaworld and should be read in conjunction with the auditors reports and with Megaworlds consolidated financial statements and notes thereto contained in this Prospectus and the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. The summary financial information presented below for the years ended December 31, 2003, 2004 and 2005 was derived from the consolidated financial statements of Megaworld, audited by Punongbayan & Araullo, a member practice of Grant Thornton International. The 2003, 2004 and 2005 financial information included in this Prospectus has been prepared in accordance with PFRS. The information below is not necessarily indicative of the results of future operations. For readers convenience only, amounts in Pesos were converted to U.S. dollars using the PDS month= end closing rate as of December 31, 2005 of P 53.067 to US$1.00.
For the years ended December 31, Income Statement Data 2003 2004 2005 = = = P P P (in millions, except per Share figures) 2005 US$

Realized gross profit from real estate sales: Real estate sales . . . . . . . . . . . . . . . . . . Cost of real estate sales . . . . . . . . . . . . . Gross profit. . . . . . . . . . . . . . . . . . . . . Deferred gross profit . . . . . . . . . . . . . . . Realized gross profit Realized gross profit Rental income . . . . . . Hotel income net . . Other revenues (1) . . . . on on . . . . . . current years sales prior years sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,371.8 (1,652.6) 719.2 (294.4) 424.8 153.9 241.4 73.8 627.8 1,521.7 728.1 793.6 (386.7) 406.9 146.9 (7.2) 252.8 0.02

2,396.7 (1,694.9) 701.8 (381.9) 319.9 265.3 454.7 88.7 1,251.0 2,379.6 872.8 1,506.8 (524.3) 982.5 180.3 5.5 807.7 0.08

3,151.2 (2,158.2) 993.0 (367.3) 625.7 506.4 547.8 101.1 1,012.1 2,793.1 976.9 1,816.2 (390.3) 1,425.9 259.0 (13.1) 1,153.8 0.11

59.4 (40.7) 18.7 (6.9) 11.8 9.5 10.3 1.9 19.0 52.5 18.4 34.1 (7.4) 26.7 4.9 0.2 21.6

Revenue . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . Other (charges) . . . . . . . . . . . . . . . . . . . . Income before tax and minority interest . . . . Tax expense . . . . . . . . . . . . . . . . . . . . . . Net income attributable to minority interest . . Net income (after minority interest) . . . . . . . Earnings per Share . . . . . . . . . . . . . . . . . .

Notes: (1) Other revenues consist of interest income, dividend income, foreign currency gain and miscellaneous items.

W-12

As of December 31, Balance Sheet Data 2003 = P 2004 = P (in millions) 2005 = P 2005 US$

Cash and cash equivalents (1) . . . . . . . . . . . . Current portion of trade and other receivables Marketable securities . . . . . . . . . . . . . . . . Residential and condominium units for sale . . Property development costs . . . . . . . . . . . . Prepayments and other current assets net . . Total Current Assets . . . . . . . Trade and other receivables . . . . Advances to landowners and joint Land for future development . . . Investment property . . . . . . . . . Property and equipment. . . . . . . Other assets (2) . . . . . . . . . . . . . . . . . . . . . . . . . ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,021.1 2,708.8 4,753.3 3,636.1 1,274.3 226.1 14,619.7 2,673.4 219.3 1,010.1 3,954.8 788.8 8,386.1 31,652.2 451.0 3,172.5 1,032.2 10,967.6 15,623.3

2,688.9 2,382.1 4,138.4 4,051.5 1,193.3 377.9 14,832.1 1,618.7 246.0 1,552.9 4,119.6 696.6 9,452.6 32,518.5 593.0 4,025.2 1,278.5 9,851.5 15,748.2

2,850.3 2,751.3 3,599.6 3,552.3 1,606.2 619.7 14,979.4 1,868.9 240.6 1,784.0 4,858.6 785.5 8,265.9 32,782.9 641.4 5,754.0 1,243.2 7,269.6 14,908.2

53.7 51.8 67.8 66.9 30.3 11.8 282.3 35.2 4.5 33.6 91.6 14.8 155.8 617.8 12.1 108.4 23.4 137.0 280.9

Total assets . . . . . . . . . . . . . . . . . . . . . Current liabilities Reserve for property development Other current liabilities (3) . . . . . Non-current liabilities Reserve for property development Other non-current liabilities (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Liabilities. . . . . . . . . . . . . . . . . . . . Equity: Equity attributable to parent companys shareholders . . . . . . . . . . . . . . . . . . . Minority Interest . . . . . . . . . . . . . . . . . .

15,318.4 710.5 16,028.9

16,065.3 705.0 16,770.3 32,518.5

17,141.6 733.1 17,874.7 32,782.9

323.1 13.8 336.9 617.8

Total Liabilities and Equity . . . . . . . . . . .

31,652.2

Notes: (1) Cash and cash equivalents consist of cash on hand and in banks and short-term investments. (2) Other non-current assets consist of long-term placements of the non-current portion of trade and other receivables, investments in and advances to subsidiaries and other related parties, deferred tax assets, cash, guarantee deposits, goodwill and other items. (3) Other current liabilities include interest-bearing loans and borrowings, trade and other payables, customers deposits, income tax payable and deferred income on real estate sales. (4) Other non-current liabilities include interest-bearing loans and borrowings, customers deposits, deferred income on real estate sales, advances from associates and other related parties and net deferred tax liabilities.

W-13

For the years ended December 31, Other Financial Data 2003 = P 2004 2005 = = P P (in millions, except percentages) 2005 US$

EBITDA (1) . . . . . . . . . . . . . . . . . . . . . Gross margin (%) (2) . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . Net cash used in investing activities . . . . . Net cash from (used in) financing activities

. . . . . .

. . . . . .

609.5 30 3,519.3 2,154.5 (2,797.0) 400.3

1,360.3 29 2,562.7 2,526.4 (1,694.3) (164.2)

1,874.5 32 3,626.8 810.3 (1,311.5) 662.6

35.3 68.3 15.3 (24.7) 12.5

Notes: (1) EBITDA as used in this prospectus consists of earnings before interest income, interest expense, income tax, depreciation and amortization. EBITDA is presented to provide a better understanding of the Companys consolidated operating results. EBITDA ratios and related computations involving net earnings and equity figures were computed using the figures attributable only to the parent companys shareholders. EBITDA is not a measure of financial performance under generally accepted accounting standards, including PFRS and investors should not consider EBITDA in isolation or as an alternative to operating income or net income as an indicator of the Companys operating performance or to cash flow from operating, investing and financing activities as a measure of liquidity, or any other measures of performance under PFRS. Because there are various EBITDA calculation methods, the Companys presentation of EBITDA may not be comparable to similarly titled measures used by other companies. (2) Represents gross profit as a percentage of net sales.

W-14

ADDITIONAL RISK FACTORS

This International Offer involves certain special risks associated with investing in the Company. Prospective investors should carefully consider, in addition to the risks set out below, the risks set out under Risk Factors beginning on page 15 before investing in the Offer Shares. Certain risks not presently known to the Company may also affect the Companys business operations. RISKS RELATING TO THE PHILIPPINES
Corporate governance and disclosure standards in the Philippines may differ from those in more developed countries.

While a principal objective of Philippine securities laws and PSE listing rules is to promote full and fair disclosure of material corporate information, there may be less publicly available information about Philippine public companies, such as the Company, than is regularly made available by public companies in the U.S. and other countries. In addition, the financial statements of the Company have been prepared in accordance with PFRS, which differ in certain material respects from International Financial Reporting Standards (IFRS). Furthermore, although the Company complies with the requirements of the Philippine SEC with respect to corporate governance standards, these standards may differ from those applicable in other jurisdictions. For example, the SRC requires the Company to have at least two independent directors or such number of independent directors as is equal to 20% of the Board, whichever is the lower number. The Company currently has three independent directors. Many other jurisdictions may require more independent directors.
Investors may face difficulties enforcing judgments against the Company.

The Company is organized under laws of the Republic of the Philippines. A substantial portion of the Companys assets are located in the Philippines. It may be difficult for investors to effect service of process outside the Philippines upon the Company with respect to other claims pertaining to the Offer Shares. Moreover, it may be difficult for investors to enforce outside the Philippines judgments against the Company obtained elsewhere in any actions pertaining to the Offer Shares. In addition, substantially all of the directors and the officers of the Company are residents of the Philippines, and all or a substantial portion of the assets of such persons are located in the Philippines. As a result, it may be difficult for investors to effect service of process upon such persons, or to enforce against them judgments obtained in courts or arbitral tribunals outside the Philippines predicated upon the laws of jurisdictions other than the Philippines. The Philippines is a party to the United Nations Convention on the Enforcement and Recognition of Arbitral Awards but not to any international treaty relating to the recognition or enforcement of foreign judgments. The Philippine Rules of Civil Procedure provide that a judgment or final order of a foreign court are enforceable in the Philippines, unless there is evidence of lack of jurisdiction of the foreign court, lack of notice to the party against whom enforcement is sought, collusion, fraud, clear mistake of law or fact.
Investors may face difficulties in protecting their interests as a shareholder because the Company is subject to Philippine corporate rules and regulations which provide significantly fewer shareholder protections than other jurisdictions.

The Companys corporate affairs are governed by its Articles of Incorporation and By-Laws and the Philippine corporation law, which differ from the legal principles that would apply if the Company were incorporated in a jurisdiction outside the Philippines. In addition, investors rights or the rights of holders of the Shares under the Philippine corporation law to protect their interests relative to actions by the Companys Board of Directors may be fewer and less-defined than under the laws of those other jurisdictions. Although insider trading and price manipulation are crimes under Philippine law, the Philippine securities markets are not as highly regulated and supervised as markets in certain other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well-defined and enforced in the Philippines than elsewhere, putting holders of the Shares at a potential disadvantage.

W-15

ADDITIONAL RISK FACTORS Investors may find it more difficult than Philippine shareholders to exercise their voting rights at the Companys shareholders meetings.

There are no provisions under Philippine law or under the Companys By-laws, as amended, that limit the exercise by foreign holders of their voting rights through the Common Shares. However, there are practical, geographic and logistical limitations upon the ability of foreign holders to timely receive notice of regular or special meetings of the Companys shareholders. All shareholders of record may attend the Companys shareholder meetings in person or by proxy. Under the Companys By-laws, as amended, notices of stockholder meetings must be sent to all shareholders of record at least one week prior to the date of the meeting. However, the Implementing Rules and Regulations of the Securities Regulation Code require the Company to distribute to all shareholders of record an information statement and proxy form (in case of proxy solicitation) relating to a shareholders meeting at least 15 business days before the shareholders meeting. Notices of shareholder meetings may be sent by personal delivery, mail, telegraph or cable to a shareholders last known postal address, or by publication in a Philippine newspaper of general circulation. RISKS RELATING TO THE OFFER SHARES
The Companys shares are subject to Philippine foreign ownership limitations.

The Philippine Constitution and related statutes restrict land ownership to Philippine Nationals. The term Philippine National as defined under the Republic Act No. 7042, as amended, shall mean a citizen of the Philippines, or a domestic partnership or association wholly owned by citizens of the Philippines, or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a corporation organized abroad and registered to do business in the Philippines under the Corporation Code of the Philippines of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine Nationals. As of the date of this Offering Circular, the Company owns private land in the Philippines. Considering the foregoing, as long as the Company owns land, foreign ownership in the Company is limited to a maximum of 40% of the Companys issued and outstanding capital stock. Accordingly, the Company cannot allow the issuance or the transfer of shares to persons other than Philippine Nationals and cannot record transfers in the books of the Company if such issuance or transfer would result in the Company ceasing to be a Philippine National for purposes of complying with the restrictions on foreign land ownership discussed above. These restrictions may adversely affect the liquidity and market price of the Shares to the extent international investors are not permitted to purchase Common Shares in normal secondary transactions.
Shareholders may be subject to limitations on minority shareholders rights.

The obligation under Philippine law of majority shareholders and directors with respect to minority shareholders may be more limited than those in certain other countries such as the United States or United Kingdom. Consequently, minority shareholders may not be able to protect their interests under current Philippine law to the same extent as in certain other countries. The Philippine Corporation Code, however, provides for minimum minority shareholders protection in certain instances wherein a vote by the shareholders representing at least twothirds of the Companys outstanding capital stock is required. See Description of the Shares Fundamental Matters. The Philippine Corporation Code also grants shareholders an appraisal right allowing a dissenting shareholder to require the corporation to purchase his shares in certain instances. See Description of the Shares Rights Relating to Shares Appraisal Rights. Derivative actions are rarely brought on behalf of companies in the Philippines. Accordingly, there can be no assurance that legal rights or remedies of minority shareholders will be the same, or as extensive, as those available in other jurisdictions or sufficient to protect the interests of minority shareholders.

W-16

ADDITIONAL RISK FACTORS Overseas shareholders may not be able to participate in the Companys future rights offerings or certain other equity issues.

Shareholders of the Company are not entitled to pre-emptive rights, such rights having been denied in the Companys Articles of Incorporation. If the Company offers or causes to be offered to holders of the Common Shares rights to subscribe for additional Common Shares or any right of any other nature, the Company will have discretion as to the procedure to be followed in making such rights available to holders of the Common Shares or in disposing of such rights for the benefit of such holders and making the net proceeds available to such holders.
Repatriation of dividends denominated in currencies other than Philippine pesos may be subject to certain restrictions.

Under BSP regulations, Philippine residents may, in general, freely dispose of their foreign exchange receipts and foreign exchange may be freely sold and purchased outside the Philippine banking system. Restrictions exist on the sale and purchase of foreign exchange within the Philippine banking system. In particular, a foreign investment must be registered with the BSP if foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits and earnings which accrue thereon shall be sourced from the Philippine banking system. See Philippine Foreign Exchange Controls. The Government has, in the past, instituted restrictions on the conversion of pesos into foreign currencies. The Philippine Monetary Board, with the approval of the President of the Philippines, has statutory authority, during a foreign exchange crisis or in times of national emergency, to suspend temporarily or restrict sales of foreign exchange, require licensing of foreign exchange transactions or require delivery of foreign exchange to the BSP or its designee. Megaworld is not aware of any pending proposals by the Government regarding such restrictions. The Government has from time to time made public pronouncements of a policy not to impose restrictions on foreign exchange. Any restrictions imposed in the future pursuant to such statutory authority could adversely affect the ability of investors to repatriate foreign currency upon sale of the Shares or dividends or distributions relating to them.

W-17

DIVIDEND POLICY
The payment of dividends, either in the form of cash or stock, will depend upon the Companys earnings, cash flow and financial condition, among other factors. The Company may declare dividends only out of its unrestricted retained earnings. These represent the net accumulated earnings of the Company, with its capital unimpaired, which are not appropriated for any other purpose. The Company may pay dividends in cash, by the distribution of property, or by the issue of shares of stock. Dividends paid in cash are subject to the approval by the Board of Directors. Dividends paid in the form of additional shares are subject to approval by both the Board of Directors and at least two-thirds of the outstanding capital stock of the shareholders at a shareholders meeting called for such purpose. No cash dividends were declared on the Companys common shares for 2003, 2004 or 2005. On February 28, 2006, the Board approved a cash = dividend of P 0.02 per Share, payable on April 10, 2006 to shareholders on record as of March 15, 2006. The Corporation Code prohibits stock corporations from retaining surplus profits in excess of 100% of their paid-in capital stock, except when justified by definite corporate expansion projects or programs approved by the Board of Directors, or when the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its consent, and such consent has not yet been secured, or when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. Megaworld declares cash dividends to shareholders of record usually in the first half of each year. These dividends are paid from unrestricted retained earnings. The Company intends to maintain an annual cash dividend payment ratio of 20% of its net income from the preceding year, subject to the requirements of applicable laws and regulations and the absence of circumstances that may restrict the payment of such dividends, such as where the Company undertakes major projects and developments. Megaworlds Board may, at any time, modify its dividend payout ratio depending upon the results of operations and future projects and plans of the Company. For more information, see Dividends and Dividend Policy and Description of the Shares Rights Relating to Shares elsewhere in this International Offering Circular.

W-18

EXCHANGE RATE INFORMATION

Fluctuations in the exchange rates between the peso and the U.S. dollar and other foreign currencies will affect the equivalent in U.S. dollars or other foreign currencies of the peso price of the Shares on the PSE, of dividends distributed in pesos by Megaworld, if any, and of the peso proceeds received by investors on a sale of the Shares on the PSE, if any. Fluctuations in such exchange rates will also affect the peso value of Megaworlds assets and liabilities which are denominated in currencies other than pesos. The PDS, a computer network supervised by the BSP, through which the members of Bankers Association of the Philippines effect spot and forward currency exchange transactions, was introduced in 1992. The PDS was adopted by the BSP as a means to monitor foreign exchange rates. The PDS Rate is the closing spot rate for the purchase of U.S. dollars with pesos which is quoted by PDS and published in BSPs Reference Exchange Rate Bulletin and the major Philippine = financial press on the following business day. On December 31, 2005, the PDS Rate was P 53.067 = = U.S.$1.00. On April 6, 2006, the PDS Rate was P 50.997 = U.S.$1.00. The following table sets out certain information concerning the PDS Rate between the peso and the U.S. dollar for the periods and dates indicated, expressed in pesos per U.S.$1.00 :
peso/U.S. dollar exchange rate Year Period end Average (1) High Low

2001 2002 2003 2004 2005 2006

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (through April

. . . . . . . . . . 5,

. . . . . . . . . . . . . . . . . . . . 2006)

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

51.404 53.096 55.569 56.267 53.067 50.997

50.993 51.604 54.203 56.040 55.085 51.684

55.013 53.841 55.767 56.443 56.355 53.062

47.550 49.336 52.021 55.142 52.995 50.963

Note: (1) The average of the monthly average exchange rates during the relevant period. Source: Reference Exchange Rate Bulletin, Treasury Department of the BSP

W-19

TRANSFER RESTRICTIONS
As a result of the following restrictions, investors are advised to consult legal counsel prior to making any offer, resale, pledge or other transfer of the Offer Shares offered hereby. The Offer is being made in accordance with Regulation S under the U.S. Securities Act. The Offer Shares have not been registered under the U.S. Securities Act or with a securities regulatory authority of any state or other jurisdiction outside the Philippines and, accordingly, may not be offered, sold, pledged or otherwise transferred or delivered within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) except to persons outside the United States in accordance with Regulation S. Terms used in these Transfer Restrictions that are defined in Regulation S under the U.S. Securities Act are used herein as defined therein. OFFER SHARES OFFERED OUTSIDE THE UNITED STATES The Offer Shares have not been registered under the U.S. Securities Act and may not be offered, sold or delivered in the United States or to, or for the account or benefit of, any U.S. person, unless the Offer Shares are registered under the U.S. Securities Act or an exemption from the registration requirements of the U.S. Securities Act is available, in each case in accordance with all applicable securities laws of the states of the United States. Each purchaser of the Offer Shares offered outside the United States pursuant to Regulation S under the Securities Act (other than in connection with the Domestic Offer) will be deemed to have represented, agreed and acknowledged that: (1) It is authorized to consummate the purchase of the Offer Shares in compliance with all applicable laws and regulations. It acknowledges (or if it is a broker-dealer acting on behalf of a customer, its customer has confirmed to it that such customer acknowledges) that such Offer Shares have not been and will not be registered under the Securities Act. It certifies that either (A) it is, or at the time the Offer Shares are purchased will be, the beneficial owner of the Offer Shares and it is located outside the United States (within the meaning of Regulation S) or (B) it is a broker-dealer acting on behalf of its customer and its customer has confirmed to it that (i) such customer is, or at the time the Offer Shares are purchased will be, the beneficial owner of the Offer Shares, and (ii) such customer is located outside the United States (within the meaning of Regulation S). It agrees (or if it is a broker-dealer acting on behalf of a customer, its customer has confirmed to it that such customer agrees) that prior to the expiration of 40 days after the later of the commencement of the Combined Offer and the latest closing date, it (or such customer) will not offer, sell, pledge or otherwise transfer such Offer Shares except (A) (i) in an offshore transaction complying with Regulation S, (ii) pursuant to any other available exemption from registration under the Securities Act or (iii) pursuant to an effective registration statement under the Securities Act and (B) in accordance with all applicable securities laws of the United States and any other jurisdiction, including the Philippines.

(2)

(3)

(4)

W-20

INTERNATIONAL PLAN OF DISTRIBUTION

3,727,008,000 of the Firm Shares are being offered by the Company and the Selling Shareholder as part of the International Offer and 196,158,000 of the Firm Shares are being offered by the Selling Shareholder at the Offer Price to the PSE Brokers. The Selling Shareholder, a non-Philippine National, will sell and TAGI, a Philippine National, will purchase 300,000,000 Domestic Block Sale Shares. The Company, the Selling Shareholder and the Domestic Underwriter will enter into a domestic underwriting agreement (the Domestic Underwriting Agreement) with respect to the Offer Shares being offered in the Domestic Offer. The Lead Manager and the Domestic Underwriter will enter into an orderly marketing agreement providing for the concurrent offer and sale of the Offer Shares in the International Offer and the Domestic Offer. The Lead Manager will enter into a share purchase agreement (the Share Purchase Agreement) with the Selling Shareholder in connection with the Domestic Block Sale. The closings of the International Offer, the Domestic Offer and the Domestic Block Sale are conditional upon each other and will occur concurrently. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. If there is an under-application in the International Offer and a corresponding over-application in the Domestic Offer, Offer Shares in the International Offer Shares may (at the option of the Domestic Underwriter) be reallocated from the International Offer (with the consent of the Lead Manager) to the Domestic Offer. THE INTERNATIONAL OFFER The Company and the Selling Shareholder, through the Lead Manager, are offering 3,727,008,000 Firm Shares (excluding the Over-Allotment Option described below) in the International Offer outside the Philippines and the United States in reliance on Regulation S under the U.S. Securities Act. The underwriting agreement entered into between the Company, the Selling Shareholder and the Lead Manager (the International Underwriting Agreement) is subject to certain conditions and may be subject to termination by the Lead Manager if certain circumstances, including force majeure, occur on or before the Offer Shares are listed on the PSE. Under the terms and conditions of the International Underwriting Agreement, the Lead Manager is committed to purchase or procure purchasers for all of the Offer Shares to be offered in the International Offer. The Lead Manager and its affiliates have engaged in transactions with and performed various investment banking, commercial banking and other services for Megaworld and its subsidiaries and affiliates in the past and may do so from time to time in the future. However, all services provided by the Lead Manager, including in connection with the Offer, have been provided as an independent contractor and not as a fiduciary to the Company or the Selling Shareholder. The Lead Manager does not have any right to designate or nominate a member of the Companys Board. The Lead Manager has no direct relations with the Company in terms of share ownership and other than as Lead Manager for the Offer, it does not have any material relationship with the Company.

W-21

INTERNATIONAL PLAN OF DISTRIBUTION

The Lead Manager will receive from the Company and the Selling Shareholder a combined transaction fee of 3.50% of the gross proceeds of the International Offer. Investors in the International Offer (but not the Domestic Offer) will be required to pay, in addition to the Offer Price, a brokerage fee of 1.0% of the Offer Price. Approval has been obtained for the listing of the Primary Offer Shares on the PSE. The Offer Price = is P 1.38 per Offer Share. There can be no assurance that the Offer Shares will trade in the public market subsequent to this Offer at or above the Offer Price.
Indemnity

The International Underwriting Agreement provides that the Company and the Selling Shareholder will indemnify the Lead Manager against certain liabilities. OVER-ALLOTMENT In connection with the Offer, the Company has granted the Stabilizing Agent an Over-Allotment Option, which is exercisable in whole or in part for 30 days from the commencement of the trading of the Companys Offer Shares on the PSE to purchase up to 588,475,000 Shares on the same terms and conditions as the Firm Shares as set forth herein. In connection therewith, the Stabilizing Agent has entered into a stock borrowing agreement with the Company to borrow up to an additional 588,475,000 Shares to cover over-allocations under the International Offer. Any Shares of the Company that may be borrowed by the Stabilizing Agent under the stock borrowing agreement will be returned to the Company either through the purchase of Shares in the open market by the Stabilizing Agent in the conduct of stabilization activities or through the exercise of the Over-Allotment Option by the Stabilizing Agent. Up to 588,475,000 Optional Shares may be over-allotted and the Stabilizing Agent may effect price stabilization transactions for a period which shall not exceed 30 days from the Listing Date. The Stabilizing Agent may purchase Shares in the open market only if the market price of the Shares falls below the Offer Price. Such activities may stabilize, maintain or otherwise affect the market price of the Shares which may have the effect of preventing a decline in the market price of the Shares and may also cause the price of the Shares to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If the Stabilizing Agent commences any of these transactions, it may discontinue them at any time. Once the Over- Allotment Option has been exercised by the Stabilizing Agent, it will no longer be allowed to purchase Shares in the open market for the conduct of stabilization activities. DOMESTIC BLOCK SALE The Selling Shareholder, a non-Philippine National, will sell to TAGI, a Philippine National 300,000,000 Domestic Block Sale Shares on the Listing Date at the Offer Price and on the same terms and conditions as the Firm Shares as set forth herein. The Domestic Block Sale will provide leeway for the ownership of Shares by non-Philippine Nationals. The Share Purchase Agreement entered into between the Selling Shareholder, the Lead Manager and TAGI is subject to certain conditions and may be subject to termination by TAGI if certain circumstances, including force majeure, occur on or before the Offer Shares are listed on the PSE. Under the terms and conditions of the Share Purchase Agreement, TAGI is committed to purchase all of the Domestic Block Sale Shares.

W-22

INTERNATIONAL PLAN OF DISTRIBUTION

LOCK-UP The Company, TAGI, New Town Land and Mr. Andrew Tan have each agreed with the Lead Manager that, for a period of 180 days after the First Closing Date, other than in connection with the Over-Allotment Option or the TAGI Option, neither it nor any person acting on its behalf will, without the prior written consent of the Lead Manager, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for any Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options.

W-23

SELLING RESTRICTIONS
UNITED STATES The Offer Shares have not been and will not be registered under the U.S. Securities Act, and may not be offered or sold within the United States except in transactions exempt from, or not subject to, the registration requirements of the U.S. Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S under the U.S. Securities Act. In addition, until 40 days after the commencement of the Offer, an offer or sale of Offer Shares within the United States by a dealer that is not participating in the Offer may violate the registration requirements of the U.S. Securities Act. UNITED KINGDOM The Lead Manager has represented, warranted and agreed that: (1) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (FSMA)) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to Megaworld; and it has complied and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the Offer Shares in, from or otherwise involving the United Kingdom.

(2)

EUROPEAN ECONOMIC AREA In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any shares which are the subject of the offering contemplated by this International Offering Circular (the Shares) may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any Shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State: (a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; (c) by the Managers to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the Lead Manager for any such offer; or (d) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Shares shall result in a requirement for the publication by Megaworld or any Manager of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an offer to the public in relation to any Shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any Shares to be offered so as to enable an investor to decide to purchase any Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

W-24

SELLING RESTRICTIONS

JAPAN The Offer Shares have not been and will not be registered under the Securities and Exchange Law of Japan. None of the Offer Shares may be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Securities and Exchange Law of Japan and in compliance with any other applicable laws and regulations of Japan. SINGAPORE The Lead Manager has acknowledged that this Offering Circular has not been registered as a Offering Circular with the Monetary Authority of Singapore. Accordingly, the Lead Manager has represented, warranted and agreed that it has not offered or sold any Offer Shares or caused such Offer Shares to be made the subject of an invitation for subscription or purchase and will not offer or sell such Offer Shares or cause such Offer Shares to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this Offering Circular or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of such Offer Shares, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor specified in Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provisions of the SFA. The Lead Manager has further represented and agreed to notify and hereby notifies each of the following relevant persons specified in Section 275 of the SFA which has subscribed or purchased the Offer Shares from or through the Lead Manager, namely a person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor,

(b)

that shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the Offer Shares under Section 275 except: (1) to an institutional investor or to a relevant person, or to any person pursuant to an offer that is made on terms that such rights or interest are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets; where no consideration is given for the transfer; or by operation of law.

(2) (3)

HONG KONG The Lead Manager has represented and agreed that (i) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Offer Shares other than (a) to a professional investor as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance or (b) in other circumstances which do not result in the document being a Offering Circular as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance
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SELLING RESTRICTIONS

and (ii) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Offer Shares, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Offer Shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance. AUSTRALIA No Offering Circular or other disclosure document (as defined in the Corporations Act 2001 of Australia) in relation to the Offer Shares has been lodged with the Australian Securities and Investments Commission (ASIC). The Lead Manager has represented and agreed that it: (a) has not offered or invited applications, and will not offer or invite applications, for the issue, sale or purchase of the Offer Shares in Australia (including an offer or invitation which is received by a person in Australia); and has not distributed or published, and will not distribute or publish, any draft, preliminary or definitive offering memorandum, advertisement or other offering material relating to the Offer Shares in Australia

(b)

unless (1) the aggregate consideration payable by each offeree or invitee is at least AUD 500,000 (or its equivalent in other currencies, but disregarding moneys lent by the offeror or its associates) or the offer or invitation otherwise does not require disclosure to investors in accordance with Part 6D.2 of the Corporations Act, (2) such action complies with all applicable laws, regulations and directives, and (3) does not require any document to be lodged with ASIC. BELGIUM This Offering Circular and related documents are not intended to constitute a public offer in Belgium and may not be distributed to the Belgian public. The Belgian Commission for Banking, Finance and Insurance has not reviewed nor approved this document or commented as to its accuracy or adequacy or recommended or endorsed the purchase of Offer Shares. The Lead Manager has represented and agreed that it will not: (a) offer for sale, sell or market in Belgium such Offer Shares by means of a public offer within the meaning of the Law of April 22, 2003 on the public offer of securities; or (b) sell Offer Shares to any person qualifying as a consumer within the meaning of Article 1.7 of the Belgian law of July 14, 1991 on consumer protection and trade practices unless such sale is made in compliance with this law and its implementing regulation. CANADA The Lead Manager has represented and agreed that it has not sold or offered to sell the Offer Shares in Canada or to residents of Canada otherwise than in accordance with applicable Canadian securities laws (Canadian Securities Laws). Without limiting the foregoing, it will only offer and sell the Offer Shares in Canada or to residents of Canada (i) through an appropriately registered securities dealer or in accordance with an available exemption from the applicable registered securities dealer requirements under Canadian Securities Laws and (ii) pursuant to an exemption from the Offering Circular requirements under Canadian Securities Laws. DENMARK This Offering Circular has not been filed with or approved by the Danish Securities Council or any other regulatory authority or stock exchange in Denmark. The Offer Shares have not been offered or sold and may not be offered, sold or delivered directly or indirectly in Denmark by way of a public offering, unless in compliance with the Danish Securities Trading Act and the Danish Executive Orders no. 306 and 307 of April 28, 2005 on Offering Circular in connection with public offers as amended from time to time.
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SELLING RESTRICTIONS

FINLAND The Lead Manager has represented and agreed that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell in Finland any Offer Shares other than in circumstances which do not constitute an offer to the public within the meaning of the Finnish Securities Market Act (26.5.1989/495), as amended. FRANCE The Lead Manager has severally represented, warranted and agreed that, in connection with its initial distribution (i) it has not offered or sold and will not offer or sell, directly or indirectly, any Offer Shares to the public in the Republic of France, and (ii) offers and sales of Offer Shares will be made in the Republic of France only to (A) portfolio managers providing the investment service of portfolio management for the account of their customers and (B) qualified investors acting for their own account as defined in and in accordance with Articles L.411-1, L.411-2 and D.411-1 of the French Code mone taire et financier; except that it may make an offer of Offer Shares to the public in France in the period beginning on the date of publication of a Offering Circular which has been approved by a Member State of the European Economic Area (other than France) which has implemented the EU Offering Circular Directive 2003/71/EC on the date of notification to the Autorite des marche financiers (AMF) in France, in accordance with Articles L.412-1 and s L.621-8 of the French Code mone taire et financier and Article 212-3 of the Re glement ge ral of ` ne the AMF and ending at the latest on the date which is 12 months after the date of such publication. In addition, neither this document nor any offering material relating to the Companys Offer Shares has been distributed or caused to be distributed and will be distributed or caused to be distributed in the Republic of France, other than to those investors to whom offers and sales of the Offer Shares may be made as described above. This document has thus not been submitted to the AMF for prior approval and clearance procedure in accordance with Articles L.412-1 and L.621-8 et seq. of the French Code mone taire et financier. ITALY The offering of the Offer Shares has not been cleared by CONSOB (the Italian Securities Exchange Commission) pursuant to Italian securities legislation and, accordingly, no Offer Shares may be offered, sold or delivered, nor may copies of this document or of any other document relating to the Offer Shares be distributed in the Republic of Italy except: (i) to professional investors (operatori qualificati), as defined in Article 31, second paragraph of CONSOB Regulation No. 11522 of July 1, 1998, as amended; and (ii) in circumstances which are exempt from the rules on solicitation of investments pursuant to Article 100 of Legislative Decree no. 58 of February 24, 1998, as amended (the Financial Services Act) and Article 33, first paragraph, of CONSOB Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of the Offer Shares or distribution of copies of this document or any other document relating to the Offer Shares in the Republic of Italy under (i) or (ii) above must be: (a) made by an investment firm, bank or financial intermediary permitted to conduct such activities in the Republic of Italy in accordance with the Financial Services Act and Legislative Decree No. 385 of September 1, 1993, as amended; and (b) in compliance with any other applicable laws and regulations. IRELAND The Lead Manager has represented and agreed that: (a) in respect of a local offer (within the meaning of section 38(1) of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 of Ireland) of Offer Shares in Ireland, it has complied and will comply with section 49 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 of Ireland; it has complied and will comply with all applicable provisions of the Investment Intermediaries Acts, 1995 to 2000 of Ireland (as amended) with respect to anything done by it in relation to the Offer Shares or operating in, or otherwise involving, Ireland and, in the case of a Manager acting under and within the terms of an authorization to do so for the
W-27

(b)

SELLING RESTRICTIONS

purposes of EU Council Directive 93/22/EEC of May 10, 1993 (as amended or extended), it has complied with any codes of conduct made under the Investment Intermediaries Acts, 1995 to 2000 of Ireland (as amended) and, in the case of a Manager acting within the terms of an authorization granted to it for the purposes of EU Council Directive 2000/12/EC of March 20, 2000 (as amended or extended), it has complied with any codes of conduct or practice made under Section 117(1) of the Central Bank Act, 1989 of Ireland (as amended); and (c) in connection with offers or sales of Offer Shares, it has only issued or passed on, and will only issue or pass on, in Ireland, any document received by it in connection with the issue of such Offer Shares to persons who are persons to whom the documents may otherwise lawfully be issued or passed on.

SWEDEN This document is not a Offering Circular and has not been prepared in accordance with the Offering Circular requirements provided for in the Swedish Financial Instruments Trading Act (Lag (1991 : 980) om handel med finansiella instrument) nor any other Swedish enactment. Neither the Swedish Financial Supervisory Authority nor any other Swedish public body has examined, approved or registered this document. SWITZERLAND The Offer Shares may not be publicly offered or sold in or from Switzerland, and neither the Offering Circular nor any other offering material relating to the Offer Shares may be distributed or otherwise made available in connection with any such offering or sale. The Offer Shares may only be offered or sold and the Offering Circular may only be distributed, or otherwise made available in Switzerland on a private placement basis to a limited number of investors without any public offering. The Offering Circular does not constitute a Offering Circular in the sense of Art. 1156 of the Swiss Federal Code of Obligations or Art. 32 et seq. of the Listing Rules of the SWX Swiss Exchange. UNITED ARAB EMIRATES This Offering Circular has not been approved by the United Arab Emirates (UAE) Central Bank and the Company has not received any authorization from the UAE Central Bank to market or sell the Offer Shares within the UAE. No services relating to the Offering Circular will be rendered in the UAE.

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PHILIPPINE FOREIGN EXCHANGE CONTROLS

Under current BSP regulations, an investment in listed Philippine securities (such as the Shares) must be registered with the BSP if the foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits and earnings derived from such Shares is to be sourced from the Philippine banking system. The application for registration may be done directly with the BSP or through a custodian bank duly designated by the foreign investor. A custodian bank may be a commercial bank or an offshore banking unit registered with the BSP to act as such and appointed by the investor to register the investment, hold shares for the investor, and represent the investor in all necessary actions in connection with his investments in the Philippines. Applications for registration must be accompanied by: (i) purchase invoice, subscription agreement and proof of listing on the PSE (either or both); (ii) credit advice or bank certificate showing the amount of foreign currency inwardly remitted and converted into pesos; and (iii) transfer instructions from the stockbroker or dealer, as the case may be. Upon registration of the investment, proceeds of divestments, or dividends, of registered investments are repatriable or remittable immediately and in full through the Philippine commercial banking system, net of applicable tax, without need of BSP approval. Remittance is permitted upon presentation of the BSP registration document, at the exchange rate applicable on the date of actual remittance. Pending registration or reinvestment, divestment proceeds, as well as dividends of registered investments, may be lodged temporarily in interest-bearing deposit accounts. Interest earned thereon, net of taxes, may also be remitted in full. Remittance of divestment proceeds or dividends of registered investments may be reinvested in the Philippines if the investments are registered with the BSP or the investors custodian bank. The foregoing is subject to the power of BSP, with the approval of the President of the Philippines, to restrict the availability of foreign exchange during an exchange crisis, when an exchange crisis is imminent or in times of national emergency.

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LEGAL MATTERS
Certain legal matters Philippine law relating to the Offer will be passed upon for the Company by Picazo Buyco Tan Fider & Santos Law Office, Manila, Philippines and for the Lead Manager by Romulo Mabanta Buenaventura Sayoc & de los Angeles, Manila, Philippines. Certain legal matters as to English law and United States federal law will be passed upon for the Lead Manager by Allen & Overy.

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INDEPENDENT PUBLIC ACCOUNTANTS

Punongbayan & Araullo, a member practice of Grant Thornton International, independent certified public accountants, audited Megaworlds financial statements without qualification as of and for the years ended December 31, 2003, 2004 and 2005, included in this International Offering Circular. The 2003, 2004 and 2005 financial information included in this International Offering Circular has been prepared under PFRS. Such financial statements are included in this International Offering Circular based on Punongbayan & Araullos authority as independent public accountants. Punongbayan & Araullo gave its consent to the inclusion of its reports in this International Offering Circular.

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Prospectus

April 6, 2006

Megaworld Corporation
Primary and Secondary Offer of 3,923,166,000 Common Shares = Offer Price of P 1.38 per Offer Share

Sole International Underwriter and Sole Book Runner

UBS Investment Bank

Sole Domestic Underwriter and Book Runner

BDO Capital & Investment Corporation

THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION.

Megaworld Corporation 28th Floor, The World Centre 330 Sen. Gil J. Puyat Avenue Makati City Philippines 1227 Telephone Number: (632) 867 8826 This Prospectus relates to the offer and sale of 3,923,166,000 common shares (the Firm Offer, and such shares, the Firm Shares), par value = 1.00 per share (the Shares), of Megaworld P Corporation, a corporation organized under Philippine law (Megaworld or the Company). The Firm Shares will comprise (i) 3,500,000,000 new Shares to be issued and offered by Megaworld by way of a primary offer (the Primary Offer, and such Shares, the Primary Offer Shares) as further described below and (ii) 423,166,000 existing Shares offered by Colony-CB (the Selling Shareholder) pursuant to a secondary offer (the Secondary Offer, and such Shares, the Secondary Offer Shares). The Company will not receive any of the proceeds from the sale of = the Firm Shares being sold by the Selling Shareholder. The Firm Shares shall be offered at P 1.38 per Firm Share (the Offer Price). The determination of the Offer Price is further discussed on = page 27 of this Prospectus, which price has been set at P 1.38 per Offer Share based on the 10-day volume weighted average market price (VWAP) of the Shares on the Philippine Stock Exchange, Inc. (the PSE) on April 6, 2006, subject to a discount of 9%. A total of 14,155,558,501 Shares shall be outstanding after the Firm Offer. The Company estimates that the total proceeds to be raised by Megaworld and the Selling Shareholder from the sale of Firm Shares shall be = 5,413,969,080, of which the estimated net proceeds will be approximately P 5,172,450,139. Please see a more detailed discussion on proceeds from the Firm Offer and use of proceeds under Use of Proceeds on page 23 of this Prospectus. Each holder of Shares will be entitled to such dividends as may be declared by the Companys Board of Directors; provided that any stock dividends declaration requires the approval of shareholders holding at least two-thirds of the Companys total outstanding capital stock. The Philippine Corporation Code has defined outstanding capital stock as the total shares of stock issued, whether paid in full or not, except treasury shares. Dividends may be declared only from the Companys unrestricted retained earnings. See Dividends and Dividend Policy on page 24 of this Prospectus. Details regarding the commission to be received by UBS AG (the Lead Manager) can be found under Plan of Distribution on page 118 of this Prospectus. 3,727,008,000 of the Firm Shares (the International Offer Shares) are being offered and sold outside the United States through the Lead Manager in reliance on Regulation S (Regulation S) under the United States Securities Act of 1933, as amended (the U.S. Securities Act) (the International Offer). 196,158,000 of the Firm Shares (the Domestic Offer Shares) are being offered by the Selling Shareholder at the Offer Price to all of the trading participants of the PSE (the PSE Brokers) in the Philippines (the Domestic Offer). The Selling Shareholder, a non-Philippine National, shall sell and The Andresons Group, Inc. (TAGI), a Philippine National, shall purchase 300,000,000 Domestic Block Sale Shares (as defined herein) at the Offer Price on the Listing Date, on the same terms and conditions as the Firm Shares. The Domestic Block Sale will provide leeway for the ownership of Shares by non-Philippine Nationals. BDO Capital & Investment Corporation (BDO Capital) will act as the domestic underwriter of the Domestic Offer (the Domestic Underwriter). If the PSE Brokers do not purchase all of the Domestic Offer Shares in the Domestic Offer, the Domestic Underwriter shall distribute to its clients or the general public the Domestic Offer Shares which have not been taken up. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. In the event of an underapplication in the International Offer and if there is a corresponding over-application in the Domestic Offer, International Offer Shares may (at the option of the Domestic Underwriter) be reallocated from the International Offer (with the consent of the Lead Manager) to the Domestic Offer.

ii

The Shares being sold by the Selling Shareholder are listed on the PSE under the symbol MEG. On April 6, 2006, the closing price of the Shares on the PSE was = 1.56 per Share. Approval has P been obtained to list the Primary Offer Shares on the PSE. Such an approval for listing is permissive only and does not constitute a recommendation or endorsement by the PSE or the Philippine Securities and Exchange Commission (the Philippine SEC) of the new Shares. The Company has granted UBS AG, the Stabilizing Agent, an option exercisable in whole or in part within 30 days from the date of listing and when trading of the Companys Offer Shares commences on the PSE (the Listing Date), to purchase up to an additional 588,475,000 Shares at the Offer Price (the Optional Shares, and together with the Firm Shares, the Offer Shares), on the same terms and conditions as the Firm Shares as set forth in this Prospectus, solely to cover over-allotments, if any (the Over-Allotment Option). The offer of the Firm Shares, including the Optional Shares, is referred to as the Offer. The Optional Shares will be sold as part of the International Offer. See Plan of Distribution. A registration statement relating to the Offer Shares has been filed with the Philippine SEC under the provisions of the Securities Regulations Code of the Philippines (Republic Act No. 8799) (the SRC). THE PHILIPPINE SEC HAS NOT APPROVED THE OFFER SHARES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE PHILIPPINE SEC. A REGISTRATION STATEMENT RELATING TO THE OFFER SHARES HAS BEEN FILED WITH THE PHILIPPINE SEC BUT HAS NOT YET BEEN DECLARED EFFECTIVE. NO OFFER TO BUY THE OFFER SHARES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE ACCEPTED OR RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. AN INDICATION OF INTEREST IN RESPONSE HERETO INVOLVES NO OBLIGATION OR COMMITMENT OF ANY KIND. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OFFER SHARES. The Offer Shares are offered subject to receipt and acceptance of any order by it and subject to its right to reject any order in whole or in part. It is expected that the Offer Shares will be delivered in book-entry form against payment therefor to the Philippine Depository and Trust Corporation (the PDTC) on or about April 24, 2006. ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL INFORMATION CONTAINED HEREIN IS TRUE AND CORRECT. Andrew L. Tan Chairman and President

iii

No representation or warranty, express or implied, is made by the Lead Manager as to the accuracy or completeness of such information, and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation by the Lead Manager. Any reproduction or distribution of this Prospectus, in whole or in part, and any disclosure of its contents or use of any information herein for any purpose other than considering an investment in the Offer Shares is prohibited. Each offeree of the Offer Shares, by accepting delivery of this Prospectus, agrees to the foregoing. No person has been or is authorized to give any information or to make any representation concerning Megaworld or its subsidiaries or its affiliates, the Selling Shareholder or the Offer Shares not contained in this Prospectus and any information or representation not so contained herein must not be relied upon as having been authorized by Megaworld, the Selling Shareholder or the Lead Manager. Neither the delivery of this Prospectus nor any offer, sale or delivery made in connection with the Offer shall at any time or in any circumstances imply that the information contained herein is correct as at any time subsequent to its date or constitute a representation that there has been no change or development reasonably likely to involve a material adverse change in the affairs of Megaworld since the date hereof. Market data used throughout this Prospectus has been obtained from market research, publicly available information and industry publications. Industry publications generally state that the information that they contain has been obtained from sources believed to be reliable but that the accuracy and completeness of that information is not guaranteed. Similarly, industry forecasts and market research, while believed to be reliable, have not been independently verified, and none of Megaworld, the Selling Shareholder nor the Lead Manager makes any representation as to the accuracy of that information. In connection with the Offer, the Stabilizing Agent may, in accordance with the Philippine SEC approval, effect price stabilization transactions for a period which shall not exceed 30 days from the Listing Date. The Stabilizing Agent may purchase Shares in the open market only if the market price of the Shares falls below the Offer Price. This may have the effect of preventing a decline in the market price of the Shares and may also cause the price of the Shares to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If the Stabilizing Agent commences any of these transactions, it may discontinue them at any time. The Stabilizing Agent is required by the Philippine SEC to disclose any of the foregoing price stabilization transactions. CONVENTIONS WHICH APPLY TO THIS PROSPECTUS In this Prospectus, unless otherwise specified or the context otherwise requires, all references to the Philippines are references to the Republic of the Philippines. All references to the Government herein are references to the Government of the Philippines. All references to the BSP are references to Bangko Sentral ng Pilipinas, the Central Bank of the Philippines. All references to United States or U.S. herein are to the United States of America. All references to United Kingdom herein are to the United Kingdom of Great Britain and Northern Ireland. All references to peso and herein are to the lawful currency of the Philippines, all references to U.S. dollars or U.S.$ herein are to the lawful currency of the United States and all references to Euro or are to the lawful currency of the European Union. For convenience, certain U.S. dollar amounts have been translated into peso amounts, based on the = prevailing exchange rate on December 31, 2005 of P 53.067 = U.S.$1.00, being the closing spot rate on that date for the purchase of U.S. dollars for pesos which is quoted by the Philippine Dealing System (the PDS Rate). Such translations should not be construed as representations that the Philippine peso or U.S. dollar amounts referred to could have been, or could be, converted into pesos or U.S. dollars, as the case may be, at that or any other rate or at all. For further information regarding rates of exchange between the peso and the U.S. dollar, see Exchange Rates. Figures in this Prospectus have been subject to rounding adjustments. Accordingly, figures shown for the same item of information may vary and figures which are totals may not be an = arithmetic aggregate of their components. On April 6, 2006, the PDS Rate was P 50.997 = U.S.$1.00.
iv

Unless otherwise stated, all financial information relating to Megaworld contained herein is stated on a consolidated basis in accordance with Philippine Financial Reporting Standards (PFRS). Unless otherwise indicated, the description of Megaworlds business activities in this Prospectus is presented on a consolidated basis. For further information on Megaworlds corporate structure, see Subsidiaries and Affiliates.

TABLE OF CONTENTS
Page Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends and Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Price Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determination of Offer Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managements Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory and Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subsidiaries and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board of Directors and Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal and Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Philippine Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Foreign Exchange Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 15 23 24 25 26 27 28 29 30

33 45 59 83 87 89 96 97 100 108 113 114 118 121 122 F-1

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GLOSSARY
In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set out below. Alliance. . . . . . . . . . . Araneta . . . . . . . . . . . ASC . . . . . . . . . . . . . BCDA . . . . . . . . . . . . Board . . . . . . . . . . . . BPO . . . . . . . . . . . . . BSP . . . . . . . . . . . . . BWDC . . . . . . . . . . . CCSS . . . . . . . . . . . . Colony-CB . . . . . . . . . Corporation Code . . . . Crossing Broker . . . . . Alliance Global Group, Inc. Araneta Center, Inc. Philippine Accounting Standards Council Bases Conversion Development Authority the board of directors of Megaworld Business Process Outsourcing Bangko Sentral ng Pilipinas, the Philippine Central Bank Bonifacio West Development Corporation Central Clearing and Settlement System Colony-CB Richard Ellis, MW, L.P. Corporation Code of the Philippines, Batas Pambansa Blg. 68 a PSE licensed broker responsible for crossing the number of Domestic Offer Shares specified in the form to the appropriate PSE Broker on the closing of the Domestic Offer Department of Agrarian Reform Philippine Department of Environment and Natural Resources the sale of 300,000,000 common shares of the Company by the Selling Shareholder to TAGI the offer for sale of the Domestic Offer Shares to be made in the Philippines by BDO Capital & Investment Corporation 196,158,000 of the Firm Shares being offered by BDO Capital & Investment Corporation pursuant to the Domestic Offer (not including Optional Shares) BDO Capital & Investment Corporation the offering for sale of the Firm Shares on, and subject to, the terms and conditions stated herein the Domestic Offer Shares and the International Offer Shares, and not including Optional Shares delivery of the Firm Shares, which is expected to occur in Manila on April 24, 2006 or such other date as the Lead Manager and the Company shall agree in writing Gross Domestic Product Gross Floor Area

DAR . . . . . . . . . . . . DENR . . . . . . . . . . . Domestic Block Sale Shares . . . . . . . . . . Domestic Offer . . . . . . Domestic Offer Shares .

Domestic Underwriter . . Firm Offer . . . . . . . . . Firm Shares . . . . . . . . First Closing Date . . . .

GDP . . . . . . . . . . . . . GFA . . . . . . . . . . . . .

GNP. . . . . . . . . . . . . Government . . . . . . . . Group. . . . . . . . . . . . HLURB . . . . . . . . . . . IAS . . . . . . . . . . . . . IT . . . . . . . . . . . . . . International Offer . . . . International Offer Shares . . . . . . . . . . ISO . . . . . . . . . . . . . Jumbo Certificate . . . . Lead Manager. . . . . . . Listing Date . . . . . . . . Metro Manila . . . . . . .

Gross National Product the Government of the Republic of the Philippines Megaworld and its subsidiaries and affiliate Housing and Land Use Regulatory Board International Accounting Standards Information technology the offer for sale of the International Offer Shares outside of the US in reliance on Regulation S 3,727,008,000 of the Firm Shares being offered for sale pursuant to the International Offer (not including Optional Shares and further subject to reallocation from Domestic Offer Shares) International Organization for Standardization a new warrant or stock certificate covering all the warrants or shares lodged with the PDTC and issued in the name of the PCD Nominee UBS AG the date on which trading of the Offer Shares on the PSE begins, expected to be on or about April 24, 2006 the metropolitan area comprising the cities of Kalookan, Las Pin as, Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Paranaque, Pasay, Pasig, Quezon and Valenzuela and the four municipalities of Navotas, Pateros, San Juan and Taguig, which together comprise the National Capital Region and are commonly referred to as Metropolitan Manila Moodys Investors Services, Inc. Ninoy Aquino International Airport New Town Land Partners, Inc. the offering for sale of the Offer Shares pursuant to the Domestic Offer and the International Offer on, and subject to, the terms and conditions stated herein = P 1.38, the price per Offer Share at which the Offer Shares are to be subscribed pursuant to the Offer the Firm Shares and Optional Shares the Shares to be sold upon exercise of the Over-Allotment Option the option to be granted by the Company to the Stabilizing Agent within 30 days after the date on which dealings in the Shares commence on the PSE, to require the Company to sell up to an aggregate of up to 588,475,000 additional Shares Philippine Accounting Standards Philippine Central Depository

Moodys . . . . . . . . . . NAIA . . . . . . . . . . . . New Town Land . . . . . Offer . . . . . . . . . . . .

Offer Price . . . . . . . . . Offer Shares . . . . . . . . Optional Shares. . . . . . Over-Allotment Option .

PAS . . . . . . . . . . . . . PCD . . . . . . . . . . . . .

PCD Nominee . . . . . . . PDS . . . . . . . . . . . . . PDS Rate . . . . . . . . . . PDTC . . . . . . . . . . . . PEZA . . . . . . . . . . . . PFRS . . . . . . . . . . . . Philippine GAAP . . . . . Philippine National . . . Philippine SEC . . . . . . Primary Offer . . . . . . . PSE . . . . . . . . . . . . . PSE Brokers . . . . . . . . Regulation S. . . . . . . . S&P . . . . . . . . . . . . . SCCP . . . . . . . . . . . . Secondary Offer . . . . . Selling Shareholder . . . . Settlement Date . . . . . . SFAS . . . . . . . . . . . . Shares . . . . . . . . . . . . SRC . . . . . . . . . . . . . SRO . . . . . . . . . . . . . Stabilizing Agent . . . . .

PCD Nominee Corporation, a corporation wholly owned by the PDTC the Philippine Dealing System the average of buying and selling rates of exchange for peso against U.S. dollars quoted by the Philippine Dealing System the Philippine Depository and Trust Corp., the central securities depositary of, among others, securities listed and traded on the PSE Philippine Economic Zone Authority Philippine Financial Reporting Standards Generally Accepted Accounting Principles in the Philippines as defined under the Republic Act 7042 the Philippine Securities and Exchange Commission 3,500,000,000 new Shares to be issued and offered by the Company the Philippine Stock Exchange, Inc. trading participants of the PSE Regulation S under the U.S. Securities Act Standard & Poors Rating Services Securities Clearing Corporation of the Philippines 423,166,000 existing Shares offered by the Selling Shareholder Colony-CB the date on which final allocation of the Offer Shares is to be made, expected to be on or about April 24, 2006 Statements of Financial Accounting Standards the common shares of par value = 1.00 each of Megaworld P Securities Regulations Code of the Philippines (Republic Act No. 8799) and its implementing rules, as amended Self-Regulatory Organization UBS, in its role as stabilization agent, whereby it may engage in stabilization activities relating to any over-allotment of Shares from the Company within a period of up to 30 calendar days from and including the Listing Date The Andresons Group, Inc. the United States Securities Act of 1933, as amended value-added tax

TAGI . . . . . . . . . . . . U.S. Securities Act . . . . VAT . . . . . . . . . . . . .

SUMMARY
This summary highlights information contained elsewhere in this Prospectus. This summary is qualified in its entirety by more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. For a discussion of certain matters that should be considered in evaluating an investment in the Offer Shares, see Risk Factors. Investors are recommended to read this entire Prospectus carefully, including Megaworlds consolidated financial statements and related notes. OVERVIEW The Company is one of the leading property developers in the Philippines and is primarily engaged in the development in Metro Manila of large scale mixed-use planned communities, or community townships, that integrate residential, commercial, educational/training, leisure and entertainment components. Founded in 1989, the Company initially established a reputation for building high quality residential condominiums and commercial properties located in convenient urban locations with easy access to offices as well as leisure and entertainment amenities in Metro Manila. Beginning in 1996, in response to demand for the lifestyle convenience of having quality residences in close proximity to office and leisure facilities, the Company began to focus on the development of mixed-use communities, primarily for the middle-income market, by commencing the development of its Eastwood City project. In addition, the Company engages in other propertyrelated activities such as project design, construction oversight and property management. The Companys real estate portfolio includes residential condominium units, subdivision lots and townhouses as well as office projects and retail space. The Company has the following three primary business segments: (i) real estate sales of residential and office developments (ii) leasing of office space, primarily to business process outsourcing (BPO) enterprises and retail space and (iii) management of hotel operations. The Companys total gross revenues for the year ended = = December 31, 2005 were P 4,812.2 million compared to P 4,191.2 million for the year ended December 31, 2004. Real estate sales of residential developments accounted for 66% of the Companys revenues in 2005 and 57% in 2004. The Companys net income (after minority = = interest) for the year ended December 31, 2005 was P 1,153.9 million compared to P 807.7 million for the year ended December 31, 2004. The Companys current portfolio of projects comprises the following: . Eastwood City. Eastwood City is the Companys first community township development. Eastwood City is located on 15 hectares of land in Quezon City, Metro Manila and comprises: Eastwood City Cyberpark, the Philippines first IT-based special economic zone; an IT training center; leisure and entertainment centers; and 17 high-rise residential developments. Eastwood City Cyberpark contains offices that are capable of supporting ITbased operations such as high-speed telecommunications and 24-hour uninterrupted power supply. Complementing the offices are leisure and entertainment hubs which include restaurants and a cinema complex. Development of the community township has occurred in stages. One office tower and a number of high-rise residential towers, including a hotel, are currently under development. Forbes Town Center. The Company is developing Forbes Town Center, a mixed-use development located on five hectares of land in Bonifacio Global City in Taguig, Metro Manila. Forbes Town Center is comprised of residential high-rise towers and retail and entertainment centers. The property is adjacent to the Manila Golf and Country Club, the Philippines most exclusive golf club. The first residential tower was launched in the second quarter of 2003 and construction of this tower is expected to be completed in the fourth quarter of 2006.

McKinley Hill. The Company is developing McKinley Hill, a community township located on 50 hectares of land in Fort Bonifacio in Taguig, Metro Manila. The community township is being designed to include the McKinley Hill Cyberpark which will be a PEZA-designated IT special economic zone, a low density residential subdivision for single detached homes, lowrise residential garden villas, a leisure and entertainment area and an institutional area which is expected to include an embassy and educational institutions, including two international schools. This is the Companys first community township incorporating educational institutions into the live-work-play concept. The residential lots for single-detached homes were officially launched in the fourth quarter of 2004 and approximately 70% of the lots were sold as of December 31, 2005. The first office building commenced construction in the fourth quarter of 2005 and construction of this phase is expected to be completed in the fourth quarter of 2007. Newport City. The Company is developing Newport City, a community township located on 25 hectares of land in the Villamor Air Base, Pasay City, across from the newly built NAIA Terminal 3. The community township, which is adjacent to Villamor golf course, is expected to include medium-rise residential towers, a five-star hotel to be managed by an international chain, retail and commercial areas, a business and technology park, and leisure and tourism components. The first phase of residential condominiums was launched in the fourth quarter of 2005 and is expected to be completed by the end of 2008. Araneta Center. In 2005, the Company introduced development plans for the Philippines first major mass transit-oriented residential community, with connections to the MRT-3 and LRT-2 mass transit lines and a land transportation hub, providing residents with access to amenities and offices throughout Metro Manila. The development is expected to consist of 17 residential condominium buildings, comprising 6,000 units, on a four hectare site at the Araneta Center, a retail, business and entertainment complex in Cubao, Quezon City. The first phase of the project is expected to be launched in the third quarter of 2006.

In aggregate, the Company owns or has development rights to approximately 116 hectares of land situated primarily in Metro Manila, with its current portfolio of five major projects accounting for approximately 80% of its landbank. Sixty-two hectares of land for which the Company has development rights were acquired through joint development agreements with the land owners while 38 hectares of land were purchased by the Company. The Company leases the balance of 16 hectares on a long-term basis. The Companys objective is to increase its profitability and maintain its leading position as a major property developer in the Philippines by continuing to capitalize on the Megaworld brand name and reputation, develop its key corporate and retail relationships, enhance its rental revenue and diversify its business mix. The Companys common stock was first listed on the PSE on June 15, 1994 and following the offering and the Domestic Block Sale, assuming the Over-Allotment Option and the TAGI Option (as defined below) are not exercised, the Companys principal shareholders, TAGI and New Town Land Partners, Inc. (New Town Land) will hold 27% and 16%, respectively, of the Companys share capital. COMPETITIVE STRENGTHS The Company believes its competitive strengths consist of the following: . Established track record as a market innovator. The Company believes it has anticipated market trends faster than other companies in the Philippine property development industry. Although the Company initially focused on the high-end residential property market, it was among the first in the Philippines to identify the growing demand for community township developments, particularly for middle-income purchasers, and to introduce flexible design options and payment plans. In 1996, the Company was also the first to develop offices with the infrastructure capable of supporting expanding IT and BPO businesses. As a result, the Company developed the Eastwood City CyberPark and was instrumental in working with the
5

Government to obtain the first PEZA-designated economic zone specifically for technology and BPO-based companies. The Company is currently the largest developer and owner of office buildings targeting BPO enterprises in the Philippines in terms of leased space. In connection with Eastwood City, the Company was the first Philippine company to focus on community township development. In 1996, the Company was the first Philippine property development company to develop an international sales network targeting overseas Filipinos for residential sales. According to Company estimates, in 2005 sales to overseas Filipinos constituted approximately 20% of its residential sales. In 2005, the Company introduced development plans for the first major mass transit-oriented residential community in the Philippines, with inter-connections to two main mass transit systems and a land transportation hub, facilitating convenient access to offices and amenities throughout Metro Manila. The Company believes that its identification of areas of growth in the property market was instrumental to its continued financial success during the Asian financial crisis when most sectors of the property market contracted. The Companys ability to anticipate market trends and understand the needs of real estate consumers continue to assist it in its efforts to accurately predict trends in market demand, levels of supply and to plan and design its property developments accordingly. . Strategic landbank. The Company either owns or has development rights to approximately 116 hectares of land located primarily in strategic locations in Metro Manila. Where the Company does not own or lease the land, it has entered into joint development agreements with the land owners to develop their land in exchange for a percentage of the revenue from sales or leases of the completed units. Joint development agreements are a cost effective way for the Company to acquire land development rights in desirable areas of Metro Manila at a fixed cost. Although the Company continues to consider strategic landbanking either through additional joint development agreements or property purchases, the Company believes that its current landbank is capable of sustaining the development of its current portfolio of projects for at least the next 15 years. Sound financials with a stable earnings base and low gearing. The Company believes it is currently in sound financial condition with a debt to equity ratio of 0.18 : 1 (after minority interest) as of December 31, 2005, and that its financial strength enhances its ability to invest in new projects while continuing to develop existing projects. The Companys property portfolio includes a balance between income from residential sales and recurring income earned from commercial and office developments. The Companys diverse project portfolio is designed to both limit earnings volatility from potential property market fluctuations and to allow it to enjoy growth upside. The Companys community township portfolio includes a stable revenue base of long term leases from major international BPO tenants as well as retail tenants. With projected growth in the BPO business in the Philippines, the Company expects to benefit from existing long-term BPO lease arrangements while attracting new BPO tenants. The proximity of BPO tenants to retail and entertainment properties within the community township allows the Company to benefit from the complementary revenue stream from its retail and commercial leases. As a result of stable earnings from rental investments in the BPO market and residential sales, the Company has been able to keep its debt to equity ratio low, particularly during the Asian financial crisis, when a number of highly leveraged property development companies went bankrupt. Well-established brand name and reputation. The Company has completed a number of high-quality residential condominium projects, townhouse projects, office projects and leisure and commercial developments throughout Metro Manila. As a result, the Company has developed a strong brand name and reputation as one of the Philippines leading property developers with the credibility of delivering high-quality developments. The Company has been named by Superbrands, an independent organization which identifies and recognizes the most-highly acclaimed brands throughout the world, as one of the Philippines top brands. The Company has also received ISO 9001 : 2000 series certification, which covers all aspects of the Companys operations, including its planning, design, project management and customer service operations, for quality control and systems management. As with other property developers in the Philippines, the Company finances a portion of project development costs through pre-sales of units. Since pre-selling is an industry practice,

buyers place great importance on the track record and reputation of developers to reduce the completion risk relating to their properties. As a result, the Company believes that its reputation as a reliable property developer is particularly important in the Philippines to both attract and maintain quality buyers, tenants and joint development partners. . Strong residential marketing network. The Company maintains an in-house marketing and sales division staffed by a trained group of property consultants who sell residential properties exclusively for the Company. All property consultants undergo intensive training prior to embarking on any sales activity and the Company provides an on-the-job skills enhancement program for its marketing and sales professionals to further develop their skills. In 1997, the Company was the first Philippine property company to create an international marketing and sales division specifically targeted at overseas Filipinos, and sales to this group have increased each succeeding year. The Companys international marketing and sales division is comprised of 23 offices worldwide. The Companys extensive residential marketing network enhances the Companys brand recognition and its ability to pre-sell residential units.

STRATEGY The Companys objective is to increase its profitability and maintain its leading position as a major property developer in the Philippines, specifically in the middle-income residential condominium market and the market for BPO-related office developments. Megaworld intends to achieve its objective through the following principal strategies: . Maximize earnings through integrated community township developments. The Company believes it is able to maximize earnings by integrating residential, business and retail property components in an integrated master-plan approach. This allows the Company to capitalize on the live-work-play-learn concept to maximize its earnings from each sector. The complementary nature of having retail, business and residential properties within proximity to each other enhances the attractiveness, saleability and lease potential of the residential, office and retail properties in the community township. The Companys leadership position in crafting and delivering community township developments has strengthened over the years and continues to be its key strategy in bringing new projects to the market and in entering into new joint venture developments. Capitalize on brand and reputation. The Company believes that its strong brand name and reputation are key to its continued success. Since pre-selling is an industry practice in the Philippines, buyers place great importance on the track record and reputation of developers to reduce the completion risk relating to their properties. The Company intends to continue using its brand name and reputation to attract purchasers, tenants and joint development partners. The Company continues to enhance its reputation by employing and training a dedicated marketing staff and extensive sales network for its residential sales businesses who market the Megaworld brand. In addition, the Company is strategically involved in the aftersales market for the properties it develops by providing building management and other aftersales services such as interior design services. Maintain a strong financial position. The Company intends to maintain its strong financial position by controlling costs and increasing its gearing ratio only when necessary. The Companys gearing ratio is presently low. The Company is able to control development costs by generating a significant portion of its project financing from pre-sales of residential units. The Company typically does not begin construction of its residential buildings until it has sold approximately 70% of the units. Seventy percent of the Companys residential units are typically pre-sold within one year of project launch and over 90% are typically pre-sold prior to completion of construction. By securing post-dated checks and providing a variety of financing options to buyers, the Company limits its cash outlays prior to obtaining project funds. The Company also controls development costs by entering into joint development agreements with landowners, which is a cost-effective means of obtaining rights to develop land as initial costs are fixed and future payments are a fixed percentage of revenue from sales and leasing activity.
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Sustain a diversified development portfolio. An important part of the Companys long-term business strategy is to continue to maintain a diversified earnings base. Because the Companys community townships include a mix of BPO offices, retail, middle-income residential, educational/training facilities, leisure and entertainment properties within close proximity to each other, the Company is able to capitalize on the complementary nature of such properties. In addition, the community township developments enable the Company to generate profits from selling residential projects as well as invest in office and retail assets retained by the Company to generate recurring income and long-term capital gains. The Company intends to continue to pursue revenue and property diversification as it develops community townships with the live-work-play-learn concept in various stages throughout Metro Manila. The Company also intends to continue pursuing innovative product lines that may complement its existing developments, while maintaining a well-diversified earnings base.

The Company was voted among Asias Best Property Companies by the Euromoney Best Asian Companies Awards for 2003, 2004 and 2005. The Company also received the following awards for excellence from Euromoney: the Philippines Best in Corporate Governance in 2003; among Asias Most Improved Companies in 2005; and among Asian Companies with the Most Convincing and Coherent Strategy in 2005. In 2004, the Company received the Agora Awards for Marketing Company of the Year; was voted among Asias Best Managed Companies and the Philippines Best in Investor Relations by FinanceAsia Best-managed Asian Companies Awards; and was voted the Philippines Best in Investor Relations, Best Website and the Philippines Best in Clearest Corporate Strategy by Asia Money Polls. In addition, the Company was voted among the Philippines Superbrands in the Superbrands Awards 2004/2005. COMPANY INFORMATION Megaworld is a Philippine corporation with its registered office located at 28th Floor, The World Centre, 330 Sen. Gil J. Puyat Avenue, Makati City, Philippines 1227. Megaworlds telephone number is +63-2-867-8826. Its corporate website is www.megaworldcorp.com. The information on the website is not incorporated by reference into this Prospectus.

SUMMARY OF THE OFFERING

Issuer . . . . . . . . . . . . Selling Shareholder . . . . The Offer . . . . . . . . . Megaworld Corporation, a corporation organized under the laws of the Republic of the Philippines. Colony-CB Richard Ellis, MW, L.P. Offer of 3,923,166,000 Firm Shares, consisting of 3,500,000,000 new Shares to be issued and offered by Megaworld and 423,166,000 existing Shares to be offered by the Selling Shareholder. 3,727,008,000 of the Firm Shares are being offered and sold outside the United States in reliance on Regulation S under the U.S. Securities Act as part of the International Offer and 196,158,000 of the Firm Shares are being offered and sold by the Selling Shareholder at the Offer Price to all of the PSE Brokers as part of the Domestic Offer in the Philippines. BDO Capital will act as the Domestic Underwriter. If the PSE Brokers do not take up all of the Domestic Offer Shares in the Domestic Offer, the Domestic Underwriter shall distribute to its clients or the general public the Domestic Offer Shares which have not been taken up. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. In the event of an underapplication in the International Offer and if there is a corresponding over-application in the Domestic Offer, International Offer Shares may (at the option of the Domestic Underwriter) be reallocated from the International Offer (with the consent of the Lead Manager) to the Domestic Offer. = The Offer Price is P 1.38 per Offer Share. The Company has granted the Stabilizing Agent an option, exercisable in whole or in part within 30 days from and including the Listing Date, to purchase up to 588,475,000 Optional Shares at the Offer Price, on the same terms and conditions as the Firm Shares as set forth in this Prospectus, solely to cover over-allotments, if any. See Plan of Distribution. The Company owns certain real estate and, as such, it is subject to nationality restrictions found under the Philippine Constitution and other laws limiting land ownership to Philippine Nationals. The term Philippine National includes a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines or by corporations that are at least 60% owned by citizens of the Philippines. The Company is thus constrained to keep its foreign equity interest below the 40% threshold and any sale or transfer of shares in excess of this threshold shall not be recorded in the stock and transfer book of the Company. The Selling Shareholder, a non-Philippine National, shall sell 300,000,000 Domestic Block Sale Shares at the Offer Price to TAGI, a Philippine National, on the Listing Date, on the same terms and conditions as the Firm Shares as set out in this Prospectus. The Domestic Block Sale will provide leeway for the ownership of Shares by Non-Philippine Nationals. The closings of the Domestic Block Sale and the Offer are conditional upon each other.

Reallocation . . . . . . . .

Offer Price . . . . . . . . . Over-Allotment Option .

Nationality Restrictions .

Domestic Block Sale . . .

Transfer Restrictions. . .

The Offer Shares are initially being offered and sold outside the United States in reliance on Regulation S. The Offer Shares have not been and will not be registered under the U.S. Securities Act and, subject to certain exceptions, may not be offered or sold within the United States. See Plan of Distribution. See the section titled Use of Proceeds for details of how the total net proceeds from the Offer will be applied. The Company, TAGI, New Town Land and Mr. Andrew Tan have each agreed with the Lead Manager that, other than in connection with the Over-Allotment Option and the option granted to Mr. Benedicto V. Yujuico to purchase 147 million shares of the Company owned by TAGI (the TAGI Option), for a period of 180 days after the First Closing Date, neither it nor any person acting on its behalf will, without the prior written consent of the Lead Manager issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options. The Shares, including the Offer Shares being sold by the Selling Shareholder, are listed on the PSE under the symbol MEG. Approval has been obtained to list the newly issued Offer Shares on the PSE. See Description of the Shares. The Offer Shares are expected to be listed on the PSE on April 24, 2006. Trading is expected to commence on the same date. The Company intends to maintain an annual cash dividend payment ratio of 20% of its net income from the preceding year, subject to the requirements of applicable laws and regulations and the absence of circumstances that may restrict the payment of such dividends, such as where the Company undertakes major projects and developments. Megaworlds Board may, at any time, modify its dividend payout ratio depending upon the results of operations and future projects and plans of the Company. See Dividends and Dividend Policy. See Taxation for further information on the tax consequences of the purchase, ownership and disposition of the Offer Shares.

Use of Proceeds . . . . . . Lock-up . . . . . . . . . .

Listing and Trading . . .

Dividends . . . . . . . . .

Tax Considerations . . .

10

Expected Timetable . . .

The timetable of the Offer is expected to be as follows: Pricing and allocation of the International Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 6, 2006 Start of Domestic Offer Period . . . . . . . . . . . . . . . April 10, 2006 End of Domestic Offer Period . . . . . . . . . . . . . . . . April 18, 2006 Settlement Date . . . . . . . . . . . . . . . . . . . . . . . . . April 24, 2006 Listing Date and Commencement of Trading on the PSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 24, 2006 although the dates included above are subject to market and other conditions and may be changed.

Risks of Investing . . . .

Before making any investment decision, investors should carefully consider the risks associated with an investment in the Offer Shares. These risks include: . . . risks relating to the Companys business; risks relating to the Philippines; and risks relating to the Offer.

Please refer to the section entitled Risk Factors beginning on page 15 of this Prospectus, which, while not intended to be an exhaustive enumeration of all risks, must be considered in connection with a purchase of the Offer Shares.

11

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following tables present summary selected consolidated financial information for Megaworld and should be read in conjunction with the auditors reports and with Megaworlds consolidated financial statements and notes thereto contained in this Prospectus and the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. The summary financial information presented below for the years ended December 31, 2003, 2004 and 2005 was derived from the consolidated financial statements of Megaworld, audited by Punongbayan & Araullo, a member practice of Grant Thornton International. The 2003, 2004 and 2005 financial information included in this Prospectus has been prepared in accordance with PFRS. The information below is not necessarily indicative of the results of future operations. For readers convenience only, amounts in Pesos were converted to U.S. dollars using the PDS month= end closing rate as of December 31, 2005 of P 53.067 to US$1.00.
For the years ended December 31, Income Statement Data 2003 2004 2005 = = = P P P (in millions, except per Share figures) 2005 US$

Realized gross profit from real estate sales: Real estate sales . . . . . . . . . . . . . . . . . . Cost of real estate sales . . . . . . . . . . . . . Gross profit. . . . . . . . . . . . . . . . . . . . . Deferred gross profit . . . . . . . . . . . . . . . Realized gross profit Realized gross profit Rental income . . . . . . Hotel income net . . Other revenues (1) . . . . on on . . . . . . current years sales prior years sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,371.8 (1,652.6) 719.2 (294.4) 424.8 153.9 241.4 73.8 627.8 1,521.7 728.1 793.6 (386.7) 406.9 146.9 (7.2) 252.8 0.02

2,396.7 (1,694.9) 701.8 (381.9) 319.9 265.3 454.7 88.7 1,251.0 2,379.6 872.8 1,506.8 (524.3) 982.5 180.3 5.5 807.7 0.08

3,151.2 (2,158.2) 993.0 (367.3) 625.7 506.4 547.8 101.1 1,012.1 2,793.1 976.9 1,816.2 (390.3) 1,425.9 259.0 (13.1) 1,153.8 0.11

59.4 (40.7) 18.7 (6.9) 11.8 9.5 10.3 1.9 19.0 52.5 18.4 34.1 (7.4) 26.7 4.9 0.2 21.6

Revenue . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . Other (charges) . . . . . . . . . . . . . . . . . . . . Income before tax and minority interest . . . . Tax expense . . . . . . . . . . . . . . . . . . . . . . Net income attributable to minority interest . . Net income (after minority interest) . . . . . . . Earnings per Share . . . . . . . . . . . . . . . . . .

Note: (1) Other revenues consist of interest income, dividend income, foreign currency gain and miscellaneous items.

12

As of December 31, Balance Sheet Data 2003 = P 2004 = P (in millions) 2005 = P 2005 US$

Cash and cash equivalents (1) . . . . . . . . . . . . Current portion of trade and other receivables Marketable securities . . . . . . . . . . . . . . . . Residential and condominium units for sale . . Property development costs . . . . . . . . . . . . Prepayments and other current assets net . . Total Current Assets . . . . . . . Trade and other receivables . . . . Advances to landowners and joint Land for future development . . . Investment property . . . . . . . . . Property and equipment. . . . . . . Other assets (2) . . . . . . . . . . . . . . . . . . . . . . . . . ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,021.1 2,708.8 4,753.3 3,636.1 1,274.3 226.1 14,619.7 2,673.4 219.3 1,010.1 3,954.8 788.8 8,386.1 31,652.2 451.0 3,172.5 1,032.2 10,967.6 15,623.3

2,688.9 2,382.1 4,138.4 4,051.5 1,193.3 377.9 14,832.1 1,618.7 246.0 1,552.9 4,119.6 696.6 9,452.6 32,518.5 593.0 4,025.2 1,278.5 9,851.5 15,748.2

2,850.3 2,751.3 3,599.6 3,552.3 1,606.2 619.7 14,979.4 1,868.9 240.6 1,784.0 4,858.6 785.5 8,265.9 32,782.9 641.4 5,754.0 1,243.2 7,269.6 14,908.2

53.7 51.8 67.8 66.9 30.3 11.8 282.3 35.2 4.5 33.6 91.6 14.8 155.8 617.8 12.1 108.4 23.4 137.0 280.9

Total assets . . . . . . . . . . . . . . . . . . . . . Current liabilities Reserve for property development Other current liabilities (3) . . . . . Non-current liabilities Reserve for property development Other non-current liabilities (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Liabilities. . . . . . . . . . . . . . . . . . . . Equity: Equity attributable to parent companys shareholders . . . . . . . . . . . . . . . . . . . Minority Interest . . . . . . . . . . . . . . . . . .

15,318.4 710.5 16,028.9

16,065.3 705.0 16,770.3 32,518.5

17,141.6 733.1 17,874.7 32,782.9

323.1 13.8 336.9 617.8

Total Liabilities and Equity . . . . . . . . . . .

31,652.2

Notes: (1) Cash and cash equivalents consist of cash on hand and in banks and short-term investments. (2) Other non-current assets consist of long-term placements of the non-current portion of trade and other receivables, investments in and advances to subsidiaries and other related parties, deferred tax assets, cash, guarantee deposits, goodwill and other items. (3) Other current liabilities include interest-bearing loans and borrowings, trade and other payables, customers deposits, income tax payable and deferred income on real estate sales. (4) Other non-current liabilities include interest-bearing loans and borrowings, customers deposits, deferred income on real estate sales, advances from associates and other related parties and net deferred tax liabilities.

13

For the years ended December 31, Other Financial Data 2003 = P 2004 2005 = = P P (in millions, except percentages) 2005 US$

EBITDA (1) . . . . . . . . . . . . . . . . . . . . . Gross margin (%) (2) . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . Net cash used in investing activities . . . . . Net cash from (used in) financing activities

. . . . . .

. . . . . .

609.5 30 3,519.3 2,154.5 (2,797.0) 400.3

1,360.3 29 2,562.7 2,526.4 (1,694.3) (164.2)

1,874.5 32 3,626.8 810.3 (1,311.5) 662.6

35.3 68.3 15.3 (24.7) 12.5

Notes: (1) EBITDA as used in this prospectus consists of earnings before interest income, interest expense, income tax, depreciation and amortization. EBITDA is presented to provide a better understanding of the Companys consolidated operating results. EBITDA ratios and related computations involving net earnings and equity figures were computed using the figures attributable only to the parent companys shareholders. EBITDA is not a measure of financial performance under generally accepted accounting standards, including PFRS and investors should not consider EBITDA in isolation or as an alternative to operating income or net income as an indicator of the Companys operating performance or to cash flow from operating, investing and financing activities as a measure of liquidity, or any other measures of performance under PFRS. Because there are various EBITDA calculation methods, the Companys presentation of EBITDA may not be comparable to similarly titled measures used by other companies. (2) Represents gross profit as a percentage of net sales.

14

RISK FACTORS
An investment in the Offer Shares involves a number of risks. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance, and there may be a large difference between the buying price and the selling price of these securities. Investors should carefully consider all the information contained in this Prospectus, including the risk factors described below, before deciding to invest in the Offer Shares. The occurrence of any of the following events could have a material adverse effect on Megaworlds business, financial condition and results of operations and cause the market price of the Offer Shares to decline. All or part of an investment in the Offer Shares could be lost. The means by which Megaworld plans to address the risk factors discussed herein are principally presented in this section and under the captions Business Competitive Strengths on pages 61 to 62 and Business Strategy on page 63. This risk disclosure does not purport to disclose all of the risks and other significant aspects of investing in these securities. Investors should undertake independent research and study the trading of securities before commencing any trading activity. Investors should seek professional advice regarding any aspect of the securities such as the nature of risks involved in the trading of securities, and specifically those of high risk securities. Investors may request publicly available information on the Shares and the Company from the Philippine SEC. RISKS RELATED TO THE COMPANYS BUSINESS
The Companys properties are all in the Philippines and the Company is exposed to risks inherent in the Philippine property market.

Megaworld derives substantially all of its revenue and operating profits from its property investment activities in the Philippines and is consequently dependent on the state of the Philippine property market. Historically, the Philippine property market has been cyclical and property values have been affected by supply and demand of comparable properties, the rate of economic growth in the Philippines and political developments. The Philippine property market went through a downturn brought about by the effects of the Asian financial crisis and the slow economic recovery that followed. High-rise office and residential condominium buildings rose at a brisk pace and construction of housing developments were undertaken simultaneously. The abrupt drop in demand following the Asian financial crisis resulted in a glut in the property market and depressed property prices. In addition, the property market is susceptible to changes in interest rates. An increase in interest rates in the Philippines could reduce the demand for the residential properties the Company builds, particularly residential condominium and commercial properties. A reduction in demand could materially adversely affect Megaworlds profitability.
The Company is exposed to portfolio concentration risks.

Property located in Metro Manila, the premier commercial capital of the Philippines, accounts for substantially all of the appraised value of the Companys assets. Further, the Companys current projects are all located within a relatively short distance from the Makati City central business district or the Ortigas business district. Due to the concentration of the Companys property portfolio in Metro Manila, a decrease in property values in Metro Manila would have a material adverse effect on the business and results of operations of the Company.
The Company may be unable to acquire land for future development.

The Companys business is dependent, in large part, on the availability of large tracts of land suitable for development by the Company. As the Company and its competitors attempt to locate sites for development, it may become more difficult to locate parcels of suitable size in locations

15

RISK FACTORS

and at prices acceptable to the Company. To the extent that the Company is unable to acquire such tracts of land at acceptable prices, its business and results of operations could be adversely affected.
The Company is exposed to risks associated with real estate development.

The Company is subject to risks inherent in property development. Such risks include, among other things, the risks that financing for development may not be available on favorable terms, that construction may not be completed on schedule or within budget (for reasons including shortages of equipment, material and labor, work stoppages, interruptions resulting from inclement weather, unforeseen engineering, environmental and geological problems and unanticipated cost increases), that development may be affected by governmental regulations (including changes in building and planning regulations and delays or failure to obtain the requisite construction and occupancy approvals), and that developed properties may not be leased or sold on profitable terms and the risk of purchaser and/or tenant defaults.
The Company is exposed to risks that it will be unable to lease its properties in a timely manner or collect rent at profitable rates or at all.

The Company is subject to risk incidental to the ownership and operation of office and related retail properties including, among other things, competition for tenants, changes in market rents, inability to renew leases or re-let space as existing leases expire, inability to collect rent from tenants due to bankruptcy or insolvency of tenants or otherwise, increased operating costs and the need to renovate, repair and re-let space periodically and to pay the associated costs. In particular, the Company relies on the growth of the BPO business as a continued source of revenue from the rental properties in its community township developments. If the BPO business does not grow as the Company expects or if the Company is not able to continue to attract BPO-based tenants, it may not be able to lease its office space or as a consequence, its retail space, in a timely manner or otherwise at satisfactory rents, which could have a material adverse effect on the Companys operations and financial condition.
A downturn in economic conditions could adversely affect the Companys business.

The Companys ability to generate revenues is directly related to the real estate market in Metro Manila, and to the Philippine economy in general. Considerable economic and political uncertainties currently exist that could have adverse effects on consumer buying habits, construction costs, availability of labor and materials and other factors affecting the Company and the real estate industry in general. Significant expenditures associated with investment in real estate, such as real estate taxes, maintenance costs and debt payments, cannot generally be reduced if changes in the Philippine property market or the Philippine economy cause a decrease in revenues from the Companys properties. In particular, if the growth rate for the Philippine economy declines or if a recession in the Philippine economy occurs, the Companys profitability could be materially adversely affected.
The Companys joint venture partners may have interests that differ from Megaworlds interests and may take actions that adversely affect the Company.

The Company obtains a significant portion of its land bank through joint development agreements with landowners and may initiate future joint development agreements as part of its overall development strategy. A joint venture involves special risks where Megaworld may not have full control over the joint venture or the property development plans; the venture partner at any time may have economic or business interests or goals that are inconsistent with those of the Company; the venture partner may take actions contrary to the Companys instructions or requests, or contrary to the Companys policies or objectives with respect to the real estate investments; or the venture partner could experience financial difficulties.
Significant competition in the Philippine real estate industry could have an adverse effect on the Companys business.

Megaworld operates in a highly competitive industry. A number of residential and commercial developers and real estate services companies, some with greater financial and other resources and more attractive locations, compete with Megaworld in seeking properties for acquisition, resources for development and prospective purchasers and tenants. For example, land for the development of
16

RISK FACTORS

business areas is being offered by the city governments of Quezon, Pasay and Manila, particularly to the developers targeting the BPO industry and who may compete with the Companys current development projects. Competition from other real estate developers and real estate services companies may adversely affect Megaworlds ability to sell its properties or attract and retain tenants.
Services rendered by independent contractors may not always match the Companys requirements for quality or be available within its budget.

The Company engages independent contractors to provide various services, including construction, piling and foundation, building and property fitting-out works and installation of elevators. The Company selects independent contractors by conducting open tenders. Although the Company invites contractors to tender bids according to their reputation for quality and track record, and although once a contract is awarded the Company supervises the construction progress, there can be no assurance that the services rendered by any of its independent contractors will always be satisfactory or match the Companys requirements for quality. In addition, the Company may be required to provide additional capital in excess of the contractors bid to complete a property development. Further, the completion of certain property developments may be delayed, and the Company may incur additional costs, due to a contractors financial or other difficulties. Any of these factors could have a material adverse effect on the Companys business, financial condition and results of operations.
Megaworld operates in a regulated environment and its businesses are affected by the development and application of regulations in the Philippines.

The Company operates its businesses in a regulated environment. Presidential Decree No. 957, as amended, is the principal statute which regulates the development and sale of real property as part of a condominium project or subdivision. Presidential Decree No. 957 covers subdivision projects for residential, commercial, industrial or recreational purposes and condominium projects for residential or commercial purposes. The HLURB is the administrative agency of the Government of the Philippines which, together with local government units, enforces this decree and has jurisdiction to regulate the real estate trade and business. Regulations applicable to the Companys operations include standards regarding the suitability of the site, road access, necessary community facilities, open spaces, water supply, sewage disposal systems, electricity supply, lot sizes, the length of the housing blocks and house construction. All subdivision plans are required to be filed with and approved by the local government unit concerned, while condominium project plans are required to be filed with and approved by the HLURB. Approval of such plans is conditioned on, among other things, completion of the acquisition of the project site and the developers financial, technical and administrative capabilities. Alterations of approved plans that affect significant areas of the project, such as infrastructure and public facilities, also require the prior approval of the relevant government unit. There can be no assurance that the Company, its subsidiaries or associates or partners will be able to obtain governmental approvals for its projects or that when given, such approvals will not be revoked. In addition, owners or dealers of real estate projects are required to obtain licenses to sell before making sales or other disposition of lots or real estate projects. Project permits and any license to sell may be suspended, canceled or revoked by the HLURB by itself or upon complaint from an interested party and there can be no assurance that Megaworld, its subsidiaries, associates or partners will in all circumstances, receive the requisite approvals, permits or licenses or that such permits, approvals or licenses will not be cancelled or suspended.
The market value of Empire East Land Holdings, Inc., an associate of the Company, is significantly lower than its book value as recorded in the Companys financial statements.

The Company retains a 45.22% interest in Empire East Land Holdings, Inc. (EELH), an associate of the Company. As of December 31, 2005, the acquisition cost of the Companys stake in EELH = in the Companys financial statements is P 3,670.4 million. However, the market value of the = Companys stake in EELH based on EELHs share price as of March 23, 2006 is P 1,791.8 million. Because the market value of the Companys stake in EELH is lower than the value of EELH recorded in the Companys financial statements, a sale or disposition of the Companys interest in EELH at its market value would be recorded as a loss in the Companys income statement. There

17

RISK FACTORS

can be no assurance that the Company will retain its interest in EELH or that it will be able to sell EELH at a level higher than its current market value. A sale or disposition of EELH may adversely impact the Companys financial condition and results of operations.
Environmental laws applicable to Megaworlds business could have a material adverse effect on its business, financial condition or results of operations.

In general, developers of residential subdivisions are required to submit project descriptions to regional offices of the DENR. In environmentally critical projects or at the discretion of the regional office of the DENR, a detailed Environmental Impact Assessment may be required and the developer will be required to obtain an Environmental Compliance Certificate to certify that the project will not cause an unacceptable environmental impact. There can be no assurance that current environmental laws and regulations applicable to the Company will not increase the costs of operating its facilities above currently projected levels or require future capital expenditures. In addition, Megaworld cannot predict what environmental legislation or regulations will be amended or enacted in the future, how existing or future laws or regulations will be enforced, administered or interpreted, or the amount of future expenditures that may be required to comply with these environmental laws or regulations or to respond to environmental claims. See Regulatory and Environmental Matters. The introduction or inconsistent application of, or changes in, laws and regulations applicable to Megaworlds business could have a material adverse effect on its business, financial condition or results of operations.
The Company may suffer losses that are not covered by insurance.

The Companys property developments and its business may be adversely affected due to the occurrence of typhoons, severe storms, earthquakes, floods, fires or other natural disasters or similar events. Although the Company carries insurance on its property developments with respect to specified catastrophic events, of types and in amounts and with deductibles that the Company believes are in line with coverage customarily obtained by owners of similar properties in the Philippines, there are losses for which the Company cannot obtain insurance at a reasonable cost or at all. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital invested in a property, as well as the anticipated future turnover from the property. Nevertheless, the Company might remain liable for any project construction costs or other financial obligations related to the property. Any material uninsured loss could materially and adversely affect the Companys business, financial condition and results of operations. RISKS RELATING TO THE PHILIPPINES
Any political instability in the Philippines may adversely affect Megaworld.

The Philippines has from time to time experienced political and military instability. Political instability in the Philippines occurred in the late 1980s when Presidents Ferdinand Marcos and Corazon Aquino held office. In 2000, the then President of the Philippines, Joseph Estrada, was subject to allegations of corruption, culminating in impeachment proceedings, mass public protests in Manila, withdrawal of support of the military and his resignation from office. The Vice President, Gloria Macapagal-Arroyo, was sworn in as President on January 20, 2001. On July 27, 2003, a group of 70 officers and over 200 soldiers from the Philippine Army, Navy and Air Force attempted a coup de tat against the Macapagal-Arroyo administration which ended after 20 hours of negotiation between the group and the Government. Certain individuals identified with the administration of former President Estrada, including Senator Gregorio Honasan, have been implicated as supporters of the failed coup de tat. In May 2004, the Philippines held presidential elections as well as elections for the Senate and the House of Representatives. President Macapagal-Arroyo was elected for a second six-year term. However certain opposition candidates, including defeated presidential candidate Fernando Poe, Jr., questioned the election results, alleging fraud and disenfranchisement of voters. On July 23, 2004, Mr. Poe petitioned the Philippine Supreme Court, acting in its capacity as the Presidential Electoral Tribunal, to order a recount of approximately 60% of votes cast nationwide. In response, President Arroyo asked the tribunal to dismiss the petition for lack of merit. Mr. Poe died on December 14, 2004, after suffering a stroke. On March 28, 2005, the Supreme Court unanimously dismissed the petition on the grounds that no real party in interest had filed a case to intervene or
18

RISK FACTORS

to be a substitute for Mr. Poe. Allegations of fraud committed during the May 2004 election have intensified since early June 2005 in light of revelations that President Arroyo had spoken with an official from the Independent Commission on Elections during the counting of votes. President Arroyo has admitted to speaking with an election official, but insists that she did not participate in fraud or induce the Commission on Elections to tamper with the election. As a result of these controversies, several members of the Arroyo cabinet resigned from their posts. On July 25, 2005, the impeachment complaints that were filed by several citizens and opposition lawmakers in the House of Representatives against President Arroyo, based on the allegations of culpable violation of the Constitution, graft and corruption and betrayal of the public trust, were referred by the Speaker of the House to the Committee on Justice. On September 6, 2005, the House of Representatives voted to uphold a decision of the House Committee on Justice to reject the pending impeachment complaints against President Arroyo. The House vote was 158 for and 51 against, with six abstentions. On August 31, 2005, the House Committee on Justice voted in effect to dismiss all impeachment complaints previously filed; however, the impeachment complaints could have still proceeded to the Senate for trial if at least 79 representatives from the 236-member House of Representatives voted against the House Committees decision. In September 2005, President Arroyo issued Executive Order 464 which requires certain officials of the Government and the uniformed services to obtain the Presidents clearance before appearing before the Senate or House of Representatives. A petition has been filed with the Supreme Court questioning the constitutionality of Executive Order 464. Members of the opposition, including former members of the military, continue to call for President Arroyos resignation. There have also been recent media reports of military plots to remove President Arroyo from office. On February 24, 2006, President Arroyo issued Proclamation 1017 which declared a state of national emergency in response to reports of an attempted coup de tat. In connection with the proclamation, several opposition members were arrested or threatened to be arrested including five party list members of the House of Representatives. All public rallies, including planned demonstrations to mark the twentieth anniversary of the EDSA people power revolution that ended the presidency of former President Marcos, were discouraged. On February 26, 2006, several members of the Philippine marines called on the people to protest the abrupt resignation of the head of the marine corps. After meeting for several hours, the marines disbanded peacefully and reiterated their support for the chain of command of the Armed Forces of the Philippines. Several Constitutional challenges to President Arroyos Proclamation 1017 have since been filed with the Philippine Supreme Court. On March 3, 2006, President Arroyo ended the state of national emergency. No assurance can be given that the political environment in the Philippines will stabilize and any political instability in the future may have an adverse effect on Megaworlds business, results of operations and financial condition. Furthermore, the Philippines has been subject to a number of terrorist attacks in the past three years. The Philippine army has been in conflict with the Abu Sayyaf organization which has been identified as being responsible for kidnapping and terrorist activities in the Philippines. There have been bombing incidents in the Philippines, mainly in the southern cities. Although no one has claimed responsibility for these attacks, it is believed that the attacks are the work of various separatist groups, including possibly the Abu Sayyaf organization, which has ties to the al-Qaeda terrorist network. There can be no assurance that the Philippines will not be subject to further acts of terrorism in the future.
The substantial majority of Megaworlds income is derived from the Philippines and, therefore, a slowdown in economic growth in the Philippines could adversely affect Megaworld.

In 2005, Megaworlds operations in the Philippines accounted for 100% of its net sales; 80% of net sales were derived from the Philippines and the remainder were from sales in the United States, Europe, the Middle East and Asia. Historically, results of operations have been influenced, and will continue to be influenced, to a significant degree by the general state of the Philippine economy. Megaworlds income and results of operations depend, to a significant extent, on the performance of the Philippine economy. In the past, the Philippines has experienced periods of slow or negative growth, high inflation, significant devaluation of the peso and the imposition of exchange controls.
19

RISK FACTORS

From mid-1997 to 1999, the economic crisis in Asia adversely affected the Philippine economy, causing a significant depreciation of the peso, increases in interest rates, increased volatility and the downgrading of the Philippine local currency rating and the ratings outlook for the Philippine banking sector. These factors had a material adverse impact on the ability of many Philippine companies to meet their debt-servicing obligations. In particular, the significant depreciation of the peso made it difficult for many Philippine companies with peso revenue streams and significant U.S. dollar or other foreign currency-denominated loans or costs to meet their repayment obligations. While the Philippine economy registered positive economic growth in the period from 1999 to 2001 as it recovered from the Asian economic crisis, it continues to face a significant budget deficit, limited foreign currency reserves, a volatile peso exchange rate and a relatively weak banking sector. High oil and consumer prices and weak external trade contributed to a slowdown in GDP growth in 2005. In the third quarter of 2005, GDP growth decelerated to 4.6%, compared to growth of 6.3% in the third quarter of 2004, and GNP growth decelerated to 5.4% in the third quarter of 2005 from 6.5% in the third quarter of 2004. Prospects for future growth therefore remain uncertain and the Government may be required to increase borrowings in order to meet its operational needs. Any deterioration in the economic conditions in the Philippines may adversely affect consumer sentiment and lead to a reduction in demand for Megaworlds properties. There can be no assurance that current or future Governments will adopt economic policies conducive to sustaining economic growth.
The Companys Shares are subject to Philippine foreign ownership limitations.

The Philippine Constitution and related statutes restrict land ownership to Philippine Nationals. The term Philippine National as defined under Republic Act No. 7042, as amended, means a citizen of the Philippines, or a domestic partnership or association wholly owned by citizens of the Philippines, or a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a corporation organized abroad and registered to do business in the Philippines under the Corporation Code of the Philippines of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine Nationals. As of the date of this Prospectus, the Company owns private land in the Philippines. Considering the foregoing, as long as the Company owns land, foreign ownership in the Company is limited to a maximum of 40% of the Companys issued and outstanding capital stock. Accordingly, the Company cannot allow the issuance or the transfer of shares to persons other than Philippine Nationals and cannot record transfers in the books of the Company if such issuance or transfer would result in the Company ceasing to be a Philippine National for purposes of complying with the restrictions on foreign land ownership discussed above. This restriction may adversely affect the liquidity and market price of the Shares to the extent international investors are not permitted to purchase Shares in normal secondary transactions.
The low credit ratings of the Government may adversely affect Megaworlds business.

On January 17, 2005, Standard & Poors Ratings Services (S&P), lowered its long-term foreign currency sovereign credit rating for the Philippines to BB- from BB, and its long-term local currency sovereign credit rating for the Philippines to BB+ from BBB-. S&P also lowered its short-term local currency sovereign credit rating on the Government to B from A-3, and affirmed its short-term B foreign currency sovereign credit rating. S&Ps outlook is currently stable. S&P noted that its downgrades reflected the Governments inadequate response to its fiscal problems, citing little progress on the Governments attempts to raise tax revenue and the Governments dependence on foreign debt. S&Ps outlook is currently stable, after raising its outlook from negative on February 9, 2006. On January 27, 2005, Moodys Investors Services, Inc., (Moodys), lowered its long-term foreign currency sovereign credit rating for the Philippines from Ba2 to B1. Moodys outlook is currently negative. On February 13, 2006, Fitch Ratings (Fitch) raised its outlook from negative to stable. Fitchs long term issuer default rating for the Government is BB.

20

RISK FACTORS

The low sovereign ratings of the Government directly adversely affect companies resident in the Philippines as international credit rating agencies issue credit ratings by reference to that of the sovereign. No assurance can be given that Moodys, S&P, Fitch or any other international credit rating agency will not further downgrade the credit ratings of the Government and, therefore, affect Philippine companies, including Megaworld. Any such downgrade could have an adverse impact on the liquidity in the Philippine financial markets, the ability of the Government and Philippine companies, including Megaworld, to raise additional financing and the interest rates and other commercial terms at which such additional financing is available. RISKS RELATING TO THE OFFER
The Company is effectively controlled by the Tan family and their interests may differ significantly from interests of other shareholders.

As of December 31, 2005, the Tan family beneficially owned 99.99% of the issued share capital of TAGI and a controlling interest in New Town Land. As of December 31, 2005, TAGI and New Town Land, together beneficially owned 53% of the issued share capital of the Company. Through its beneficial ownership of shares in TAGI and New Town Land in addition to approximately 7% of the issued share capital of the Company directly held by Andrew Tan, the Tan family effectively controls the Company. Members of the Tan family, either individually or collectively have controlled the Company since its inception and have private interests in a number of companies either alone or together with other family members. Mr. and Mrs. Andrew Tan also serve on the Companys Board and Mr. Tan is also the President and Chairman. The respective businesses or activities of other Tan-related companies currently do not compete with Megaworlds businesses or activities, but they may do so in the future. In addition, certain Tan-controlled companies may have significant commercial transactions with the Company. See Related Party Transactions. These transactions have generally been entered into on arms length commercial terms. The interests of the Tan family, TAGI and New Town Land, as Megaworlds controlling shareholders, may differ significantly from Megaworlds interests or the interests of other shareholders, and there can be no assurance that the Tan family, TAGI and New Town Land will exercise influence over the Company in a manner that is in the best interests of Megaworlds other shareholders.
There can be no guarantee that the Offer Shares will be listed on the PSE.

Purchasers of Offer Shares will be required to pay for such Offer Shares on the Settlement Date which is expected to be on or about April 24, 2006. Although the PSE has approved Megaworlds application to list the new Offer Shares, because the Listing Date is scheduled to occur after the Settlement Date, there can be no guarantee that listing will occur on the anticipated Listing Date or at all. Delays in the admission and the commencement of trading in shares on the PSE have occurred in the past. If the PSE does not admit the Offer Shares onto the PSE, the market for the Offer Shares will be illiquid and shareholders may not be able to trade the Offer Shares. However, they would be able to sell their Shares by negotiated sale. This may materially and adversely affect the value of the Offer Shares.
There has been a limited prior market for the Shares, so there may be no liquidity in the market for the Offer Shares and the price of the Offer Shares may fall.

The Shares are listed on the PSE. Trading volumes on the PSE have historically been significantly smaller than on major securities markets in more developed countries and have also been highly volatile. As there has been little historical liquidity in the Shares, there can be no assurance that an active market for the Offer Shares will develop following the Offer or, if developed, that such market will be sustained. The Offer Price will be determined after taking into consideration a number of factors including, but not limited to, Megaworlds prospects, the market prices for shares of companies engaged in related businesses similar to that of Megaworld and prevailing market conditions. The price at which the Shares will trade on the PSE at any point in time after the Offer may vary significantly from the Offer Price.

21

RISK FACTORS Future sales of Shares in the public market could adversely affect the prevailing market price of the Shares and shareholders may experience dilution in their holdings.

The market price of the Shares could decline as a result of future sales of substantial amounts of the Shares in the public market or the issuance of new Shares, or the perception that such sales, transfers or issuances may occur. This could also materially and adversely affect the prevailing market price of the Shares or Megaworlds ability to raise capital in the future at a time and at a price it deems appropriate. The Company, TAGI, Mr. Andrew Tan and New Town Land have each agreed with the Lead Manager that, other than in connection with the Over-Allotment Option and the TAGI Option, for a period of 180 days after the First Closing Date, neither it nor any person acting on its behalf will issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forwards, sales and options without, in each case, the prior written consent of the Lead Manager. Except for such restrictions, there is no restriction on Megaworlds ability to issue Shares or the ability of any of its shareholders to dispose of, encumber or pledge, their Shares, and there can be no assurance that Megaworld will not issue Shares or that such shareholders will not dispose of, encumber or pledge, their Shares.
Future changes in the value of the Philippine peso against the U.S. dollar or other currencies will affect the foreign currency equivalent of the value of the Shares and any dividends.

Fluctuations in the exchange rate between the Philippine peso and other currencies will affect the foreign currency equivalent of the peso price of the Shares on the PSE. Such fluctuations will also affect the amount in foreign currency received upon conversion of cash dividends or other distributions paid in peso by Megaworld on, and the peso proceeds received from any sales of, the Shares.

22

USE OF PROCEEDS
Megaworld estimates that its net proceeds from the Primary Offer will be approximately = P 4,619,211,375, after deducting the applicable underwriting discounts and commissions and expenses for the Offer payable by Megaworld. Megaworld will not receive any proceeds from the sale of Offer Shares by the Selling Shareholder. Taxes, issue management, underwriting and selling fees and other fees and expenses pertaining to the Secondary Offer will be paid by the Selling Shareholder. Megaworld intends to use its net proceeds from the Offer to finance its capital and project expenditures for 2006 and 2007 for the following projects: . = P 2,500 million for the development and construction of McKinley Hill Cyberpark and McKinley Hill Town Center; and = P 2,000 million for the 1800 and 1880 Eastwood offices (Phases I and II) and Eastwood Mall.

A portion of the net proceeds will also be used by Megaworld for general corporate purposes, including but not limited to working capital and investments. The foregoing discussion represents an estimate of Megaworlds net proceeds from the Offer based on Megaworlds current plans and anticipated expenditures. Actual allocation of net proceeds by Megaworld may vary from the foregoing discussion as management may find it necessary or advisable to reallocate the net proceeds within the categories described above or to use such net proceeds for other corporate purposes. Megaworld estimates the net proceeds to be received by the Selling Shareholder from the Offer will = be approximately P 553,238,764 after deducting the applicable underwriting discounts and commissions and expenses for the Offer payable by the Selling Shareholder. The use of proceeds = calculations are based on the Offer Price of P 1.38 per Offer Share. Megaworld estimates that its total costs and expenses for the Offer (assuming no exercise of the Over-Allotment Option) will be approximately = 210,788,625, consisting of: P
Underwriting and selling fees for Offer Shares being sold by Megaworld Taxes to be paid by Megaworld . . . . . . . . . . . . . . . . . . . . . . . . . Philippine SEC filing and legal research fee . . . . . . . . . . . . . . . . . . PSE listing and processing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,050,000 17,500,000 1,983,211 5,644,800 11,584,055 5,026,559 = P 210,788,625

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

The costs and expenses to be incurred by the Selling Shareholder will be approximately = P 30,730,316, consisting of:
Underwriting and selling fees for Offer Shares being sold by the Stock transaction tax to be paid by the Selling Shareholder . . . Philippine SEC filing and legal research fee . . . . . . . . . . . . . PSE Brokers commission and block sale costs . . . . . . . . . . . . Estimated professional fees . . . . . . . . . . . . . . . . . . . . . . . . Estimated other expenses . . . . . . . . . . . . . . . . . . . . . . . . . Selling Shareholder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,239,060 2,919,845 350,789 2,207,403 2,048,978 964,241 = 30,730,316 P

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

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

23

DIVIDENDS AND DIVIDEND POLICY

The payment of dividends, either in the form of cash or stock, will depend upon the Companys earnings, cash flow and financial condition, among other factors. The Company may declare dividends only out of its unrestricted retained earnings. These represent the net accumulated earnings of the Company, with its capital unimpaired, which are not appropriated for any other purpose. The Company may pay dividends in cash, by the distribution of property, or by the issue of shares of stock. Dividends paid in cash are subject to the approval by the Board of Directors. Dividends paid in the form of additional shares are subject to approval by both the Board of Directors and at least two-thirds of the outstanding capital stock of the shareholders at a shareholders meeting called for such purpose. No cash dividends were declared on the Companys common shares for 2003, 2004 or 2005. On February 28, 2006, the Board approved a cash = dividend of P 0.02 per Share, payable on April 10, 2006 to shareholders on record as of March 15, 2006. The Corporation Code prohibits stock corporations from retaining surplus profits in excess of 100% of their paid-in capital stock, except when justified by definite corporate expansion projects or programs approved by the Board of Directors, or when the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its consent, and such consent has not yet been secured, or when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. Megaworld declares cash dividends to shareholders of record usually in the first half of each year. These dividends are paid from unrestricted retained earnings. The Company intends to maintain an annual cash dividend payment ratio of 20% of its net income from the preceding year, subject to the requirements of applicable laws and regulations and the absence of circumstances that may restrict the payment of such dividends, such as where the Company undertakes major projects and developments. Megaworlds Board may, at any time, modify its dividend payout ratio depending upon the results of operations and future projects and plans of the Company.

24

EXCHANGE RATES
Fluctuations in the exchange rates between the peso and the U.S. dollar and other foreign currencies will affect the equivalent in U.S. dollars or other foreign currencies of the peso price of the Shares on the PSE, of dividends distributed in pesos by Megaworld, if any, and of the peso proceeds received by investors on a sale of the Shares on the PSE, if any. Fluctuations in such exchange rates will also affect the peso value of Megaworlds assets and liabilities which are denominated in currencies other than pesos. The PDS, a computer network supervised by the BSP, through which the members of Bankers Association of the Philippines effect spot and forward currency exchange transactions, was introduced in 1992. The PDS was adopted by the BSP as a means to monitor foreign exchange rates. The PDS Rate is the closing spot rate for the purchase of U.S. dollars with pesos which is quoted by PDS and published in BSPs Reference Exchange Rate Bulletin and the major Philippine = financial press on the following business day. On December 31, 2005, the PDS Rate was P 53.067 = = U.S.$1.00. On April 6, 2006, the PDS Rate was P 50.997 = U.S.$1.00. The following table sets out certain information concerning the PDS Rate between the peso and the U.S. dollar for the periods and dates indicated, expressed in pesos per U.S.$1.00 :
peso/U.S. dollar exchange rate Year Period end Average (1) High Low

2001 2002 2003 2004 2005 2006

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (through April

. . . . . . . . . . 6,

. . . . . . . . . . . . . . . . . . . . 2006)

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

51.404 53.096 55.569 56.267 53.067 50.997

50.993 51.604 54.203 56.040 55.085 51.679

55.013 53.841 55.767 56.443 56.355 53.062

47.550 49.336 52.021 55.142 52.995 50.963

Note: (1) The average of the monthly average PDS Rates during the relevant period. Source: Reference Exchange Rate Bulletin, Treasury Department of the BSP

25

MARKET PRICE INFORMATION

The Shares are traded on the PSE under the symbol MEG. The Shares were listed on the PSE in June 15, 1994. For a description of the PSE, see The Philippine Stock Market. The PSE composite index is composed of 34 company stocks representative of the financial sector, industrial sector, holding firms sector, property sector, services sector, and mining and oil sector of the PSE. The index had a base value of 2,922.21 as of December 31, 1994. Megaworld is currently included in the PSE composite index. The PSE announced that, effective April 1, 2006, it would reclassify its benchmark by using free-float market capitalization to compute the index, as well as to determine which companies will compose the index. The following table sets out, for the periods indicated: . . . the high and low sales price for the Shares as reported on the PSE; the average daily trading volume of the Shares; and the high and lows of the PSE composite index.
Average daily trading volume of the Shares

Price per Share of the Shares High in pesos Low

PSE composite index High Low

Year 2001 2002 2003 2004 2005 2006

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (through April 6,
Bloomberg

. . . . . . . . . . . . . . . . . . . . 2006)

. . . . . .

. . . . . .

0.88 0.75 0.92 1.18 1.60 1.58

0.47 0.47 0.46 0.83 0.92 1.22

4,156,185 2,555,463 3,564,729 3,669,532 6,357,224 10,124,145

1,712.06 1,469.07 1,450.70 1,851.60 2,166.10 2,220.37

979.34 997.78 999.46 1,388.15 1,813.04 2,060.92

Source:

In addition, the high and low sales prices for the Shares as reported on the PSE for each quarter in 2005 and 2004 were as follows:
High Low

2005 January 1, 2005 to March 31, 2005 . . . April 1, 2005 to June 30, 2005 . . . . . . July 1, 2005 to September 30, 2005 . . . October 1, 2005 to December 31, 2005 2004 January 1, 2004 to March 31, 2004 . . . April 1, 2004 to June 30, 2004 . . . . . . July 1, 2004 to September 30, 2004 . . . October 1, 2004 to December 31, 2004

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

1.60 1.28 1.22 1.34

1.02 1.03 0.92 1.12

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

1.36 1.22 1.34 1.44

0.99 1.00 1.06 1.18

= On April 6, 2006, the closing price of the Shares on the PSE was P 1.56 per Share and the closing PSE composite index was 2,220.37. As of December 31, 2005, Megaworld had 3,742 shareholders of record worldwide. Approval has been obtained to list the Primary Offer Shares on the PSE. These Shares are expected to be listed on the PSE on April 24, 2006. Trading is expected to commence on the same date.
26

DETERMINATION OF OFFER PRICE

= The Offer Price has been set at P 1.38 per Offer Share based on the 10-day volume weighted average market price (VWAP) of the Shares on the PSE on April 6, 2006, subject to a discount = of 9%. The 10-day VWAP of the Shares on April 6, 2006 was P 1.5171 per Share. The Offer Price for the Offer Shares was determined through a book-building process and discussions between the Company, the Selling Shareholder and the Lead Manager.

27

CAPITALIZATION
The following table sets out, in accordance with PFRS, Megaworlds consolidated capitalization as of December 31, 2005 and as adjusted to reflect the sale of the new Offer Shares. The table should be read in conjunction with Megaworlds consolidated financial statements, including the notes thereto, included in this Prospectus. Other than as described below, there has been no material change in Megaworlds capitalization since December 31, 2005.
As of December 31, 2005 Actual (in millions) As Adjusted

Short-term debt: Current portion of long-term debt . . . . . . . Long-term debt: Long-term loans (2) net of current portion . Shareholders equity Common shares . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . Treasury shares . . . . . . . . . . . . . . . . . . . Accumulated translation adjustments. . . . . . Retained earnings . . . . . . . . . . . . . . . . . Equity before minority interests in subsidiaries . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . Total shareholders equity . . . . . . . . . . . . . Total short-term debt and capitalization . . . .

= P 963.6 2,132.4 10,655.6 2,227.9 (295.6) (114.6) 4,668.3 17,141.6 733.1 17,874.7 20,970.7

US$18.2(1) 40.2 200.8 42.0 (5.8) (2.6) 88.0 323.0 13.8 336.8 395.2

= P 963.6 2,132.4 14,744.0 3,781.5 (295.6) (114.6) 4,668.3 22,783.6 733.1 23,516.7 26,612.7

US$18.2(1) 40.2 277.8 71.3 (5.8) (2.6) 88.0 428.7 13.8 442.5 500.9

Notes: (1) The translations from pesos to U.S. dollars have been made on the basis of the PDS Rate on December 31, 2005 of = P 53.067 = U.S.$1.00. (2) There has not been any material change in Megaworlds indebtedness or contingent liabilities since December 31, 2005.

28

DILUTION
= As of December 31, 2005, Megaworlds net tangible book value per Share was P 1.57. Net tangible book value per Share represents tangible assets minus total liabilities divided by the total number = of Shares outstanding. After giving effect to the sale of the Offer Shares (at an Offer Price of P 1.38 per Offer Share), after deducting estimated discounts, commissions, estimated fees and expenses of = the Offer, the net tangible book value per Share would be P 1.52 per Offer Share. This represents = an immediate decrease in net tangible book value of P 0.05 per Share to existing shareholders, and = an immediate increase of P 0.14 per Offer Share to purchasers of Offer Shares at the Offer Price. = The following table illustrates dilution on a per Share basis based on the Offer Price of P 1.38 per Offer Share:
Offer Price per Offer Share . . . . . . . . . . . . . . . . . . . . . Net tangible book value per Share as of December 31, 2005 Decrease per Share attributable to the Offer Shares . . . . . . Pro forma net tangible book value per Share after the Offer. Increase per Share to investors in the Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . = P 1.38 = 1.57 P = 0.05 P = 1.52 P = 0.14 P

The following table sets out the shareholdings, and percentage of Shares outstanding, of existing and new shareholders of the Company immediately after completion of the Offer (excluding the Domestic Block Sale and assuming no exercise of the Over-allotment Option):
Shares Number Percent

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

10,232,392,501 3,923,166,000 14,155,558,501

72.3 27.7 100

29

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables present summary selected consolidated financial information for Megaworld and should be read in conjunction with the auditors reports and with Megaworlds consolidated financial statements and notes thereto contained in this Prospectus and the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. The summary financial information presented below for the years ended December 31, 2003, 2004 and 2005 was derived from the consolidated financial statements of Megaworld, audited by Punongbayan & Araullo, a member practice of Grant Thornton International. The 2003, 2004 and 2005 financial information included in this Prospectus has been prepared in accordance with PFRS. The information below is not necessarily indicative of the results of future operations. For readers convenience only, amounts in Pesos were converted to U.S. dollars using the Philippine = Dealing System month-end closing rate only as of December 31, 2005 of P 53.067 to US$1.00.
For the years ended December 31, Income Statement Data 2003 2004 2005 = = = P P P (in millions, except per Share figures) 2005 US$ (1)

Realized gross profit from real estate sales: Real estate sales . . . . . . . . . . . . . . . . . . Cost of real estate sales . . . . . . . . . . . . . Gross profit. . . . . . . . . . . . . . . . . . . . . Deferred gross profit . . . . . . . . . . . . . . . Realized gross profit Realized gross profit Rental income . . . . . . Hotel income net . . Other revenues (1) . . . . on on . . . . . . current years sales prior years sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,371.8 (1,652.6) 719.2 (294.4) 424.8 153.9 241.4 73.8 627.8 1,521.7 728.1 793.6 (386.7) 406.9 146.9 (7.2) 252.8 0.02

2,396.7 (1,694.9) 701.8 (381.9) 319.9 265.3 454.7 88.7 1,251.0 2,379.6 872.8 1,506.8 (524.3) 982.5 180.3 5.5 807.7 0.08

3,151.2 (2,158.2) 993.0 (367.3) 625.7 506.4 547.8 101.1 1,012.1 2,793.1 976.9 1,816.2 (390.3) 1,425.9 259.0 (13.1) 1,153.8 0.11

59.4 (40.7) 18.7 (6.9) 11.8 9.5 10.3 1.9 19.0 52.5 18.4 34.1 (7.4) 26.7 4.9 0.2 21.6

Revenue . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . Other (charges) . . . . . . . . . . . . . . . . . . . . Income before tax and minority interest . . . . Tax expense . . . . . . . . . . . . . . . . . . . . . . Net income attributable to minority interest . . Net income (after minority interest) . . . . . . . Earnings per Share . . . . . . . . . . . . . . . . . .

Note: (1) Other revenues consist of interest income, dividend income, foreign currency gain and miscellaneous items.

30

SELECTED CONSOLIDATED FINANCIAL INFORMATION

As of December 31, Balance Sheet Data 2003 = P 2004 = P (in millions) 2005 = P 2005 US$ (1)

Cash and cash equivalents (2) . . . . . . . . . . . . Current portion of trade and other receivables Marketable securities . . . . . . . . . . . . . . . . Residential and condominium units for sale . . Property development costs . . . . . . . . . . . . Prepayments and other current assets net . . Total Current Assets . . . . . . . Trade and other receivables . . . . Advances to landowners and joint Land for future development . . . Investment property . . . . . . . . . Property and equipment. . . . . . . Other assets (3) . . . . . . . . . . . . . . . . . . . . . . . . . ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,021.1 2,708.8 4,753.3 3,636.1 1,274.3 226.1 14,619.7 2,673.4 219.3 1,010.1 3,954.8 788.8 8,386.1 31,652.2 451.0 3,172.5 1,032.2 10,967.6 15,623.3

2,688.9 2,382.1 4,138.4 4,051.5 1,193.3 377.9 14,832.1 1,618.7 246.0 1,552.9 4,119.6 696.6 9,452.6 32,518.5 593.0 4,025.2 1,278.5 9,851.5 15,748.2

2,850.3 2,751.3 3,599.6 3,552.3 1,606.2 619.7 14,979.4 1,868.9 240.6 1,784.0 4,858.6 785.5 8,265.9 32,782.9 641.4 5,754.0 1,243.2 7,269.6 14,908.2

53.7 51.8 67.8 66.9 30.3 11.8 282.3 35.2 4.5 33.6 91.6 14.8 155.8 617.8 12.1 108.4 23.4 137.0 280.9

Total assets . . . . . . . . . . . . . . . . . . . . . Current liabilities Reserve for property development Other current liabilities (4) . . . . . Non-current liabilities Reserve for property development Other non-current liabilities (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Liabilities. . . . . . . . . . . . . . . . . . . . Equity: Equity attributable to parent companys shareholders . . . . . . . . . . . . . . . . . . . Minority Interest . . . . . . . . . . . . . . . . . .

15,318.4 710.5 16,028.9

16,065.3 705.0 16,770.3 32,518.5

17,141.6 733.1 17,874.7 32,782.9

323.1 13.8 336.9 617.8

Total Liabilities and Equity . . . . . . . . . . .

31,652.2

Notes: (1) For readers convenience, amounts in Pesos were converted to U.S. dollars using the Philippine Dealing System month = end closing rate as of December 31, 2005 of P 53.067 to US$1.00. (2) Cash and cash equivalents consist of cash on hand and in banks and short-term investments. (3) Other non-current assets consist of long-term placements of the non-current portion of trade and other receivables, investments in and advances to subsidiaries and other related parties, deferred tax assets, cash, guarantee deposits, goodwill and other items. (4) Other current liabilities include interest-bearing loans and borrowings, trade and other payables, customers deposits, income tax payable and deferred income on real estate sales. (5) Other non-current liabilities include interest-bearing loans and borrowings, customers deposits, deferred income on real estate sales, advances from associates and other related parties and net deferred tax liabilities.

31

SELECTED CONSOLIDATED FINANCIAL INFORMATION

For the years ended December 31, Other Financial Data 2003 = P 2004 2005 = = P P (in millions, except percentages) 2005 US$

EBITDA (1) . . . . . . . . . . . . . . . . . . . . . Gross margin (%) (2) . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . Net cash used in investing activities . . . . . Net cash from (used in) financing activities

. . . . . .

. . . . . .

609.5 30 3,519.3 2,154.5 (2,797.0) 400.3

1,360.3 29 2,562.7 2,526.4 (1,694.3) (164.2)

1,874.5 32 3,626.8 810.3 (1,311.5) 662.6

35.3 68.3 15.3 (24.7) 12.5

Notes: (1) EBITDA as used in this prospectus consists of earnings before interest income, interest expense, income tax, depreciation and amortization. EBITDA is presented to provide a better understanding of the Companys consolidated operating results. EBITDA ratios and related computations involving net earnings and equity figures were computed using the figures attributable only to the parent companys shareholders. EBITDA is not a measure of financial performance under generally accepted accounting standards, including PFRS and investors should not consider EBITDA in isolation or as an alternative to operating income or net income as an indicator of the Companys operating performance or to cash flow from operating, investing and financing activities as a measure of liquidity, or any other measures of performance under PFRS. Because there are various EBITDA calculation methods, the Companys presentation of EBITDA may not be comparable to similarly titled measures used by other companies. (2) Represents gross profit as a percentage of net sales.

32

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following managements discussion and analysis of Megaworlds financial condition and results of operations should be read in conjunction with Megaworlds consolidated financial statements, including the related notes, contained in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. Megaworld cautions investors that its business and financial performance is subject to substantive risks and uncertainties. Megaworlds actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set out in Risk Factors. In evaluating Megaworlds business, investors should carefully consider all of the information contained in Risk Factors. INTRODUCTION The Company is one of the leading property developers in the Philippines and is primarily engaged in the development in Metro Manila of large scale mixed-use planned communities, or community townships, that integrate residential, commercial, educational/training, leisure and entertainment components. Founded in 1989, the Company initially established a reputation for building high quality residential condominiums and commercial properties located in convenient urban locations with easy access to offices as well as leisure and entertainment amenities in Metro Manila. Beginning in 1996, in response to demand for the lifestyle convenience of having quality residences in close proximity to office and leisure facilities, the Company began to focus on the development of mixed-use communities, primarily for the middle-income market, by commencing the development of its Eastwood City project. In addition, the Company engages in other propertyrelated activities such as project design, construction oversight and property management. The Companys real estate portfolio includes residential condominium units, subdivision lots and townhouses as well as office projects and retail space. The Company has the following three primary business segments: (i) real estate sales of residential and office developments (ii) leasing of office space, primarily to BPO enterprises and retail space and (iii) management of hotel operations. The Companys current portfolio of projects comprises the following: . Eastwood City. Eastwood City is the Companys first community township. Eastwood City is located on 15 hectares of land in Quezon City, Metro Manila; Forbes Town Center. The Company is developing Forbes Town Center, a community township located on five hectares of land in Bonifacio Global City in Taguig, Metro Manila; McKinley Hill. The Company is developing McKinley Hill, a community township located on 50 hectares of land in Fort Bonifacio in Taguig, Metro Manila; Newport City. The Company is developing Newport City, a community township located on 25 hectares of land in the Villamor Air Base, Pasay City, Metro Manila; and Araneta Center. In 2005, the Company introduced development plans for the Philippines first major mass transit-oriented residential community, which is expected to consist of 17 residential condominium buildings on a four hectare site at the Araneta Center in Cubao, Quezon City.

In aggregate, the Company owns or has development rights to approximately 116 hectares of land situated primarily in Metro Manila for its current portfolio of five major projects. Most of the Companys development rights were acquired through joint development agreements with the land owners while the remainder relate to land which the Company has purchased or leased.

33

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue

The following table sets out a breakdown of the Groups revenue by business segment for the periods indicated.
Year ended December 31, 2003 2004 (in millions, except percentages) 2005

Real Estate Sales Rental Income. . Hotel Income . . Other 1 . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

= 2,371.8 P 241.4 73.8 627.8 3,314.8

72% 7 2 19 100

= P 2,396.7 454.7 88.7 1,251.0 4,191.1

57% 11 2 30 100

3,151.2 547.8 101.1 1,012.1 4,812.2

66% 11 2 21 100

Note: (1) Other income comprises marketing services, general and corporate income and expense items.

Foreign sales contributed approximately 20% to the Companys consolidated sales and revenues for the years 2003, 2004 and 2005. Approximately 8.63% of the Companys total sales is derived from sales in the United States, 4.78% is derived from Europe and 3.83% is from the Middle East. The Company derives 2.76% of its sales from Asia, excluding the Philippines.
Real Estate Sales

The table below sets out information on the revenue, GFA and average sale price from real estate sales in 2003, 2004 and 2005.
Year ended December 31, 2003 Property Revenue (millions) = P 2,275.6 96.2 2,371.8 Average GFA Sale Price = P /sq.m. 41,282 1,767 43,049 55,124.0 54,410.0 Revenue (millions) = 2,324.7 P 72.0 2,396.7 2004 Average GFA Sale Price = P /sq.m. 42,625 1,323 43,947 56,111 54,410 Revenue (millions) = 3,052.5 P 98.7 3,151.2 2005 Average GFA Sale Price = /sq.m. P 49,955 1,813 51,768 58,270.0 54,410.0

Residential . . . . . Office . . . . . . . . Total . . . . . . . .

Rental Income

The table below sets out information on rental income received from the Companys investment properties in 2003, 2004 and 2005.
Year ended December 31, Property 2003 2004 (in millions, except percentages) 2005

Office . . . . . . . . . . . . . . . . . . . . Commercial/leisure . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . .

= 38.4 P 203.1 241.5

16% 84 100

= P 275.0 179.6 454.6

60% 40 100

= 344.6 P 203.2 547.8

63% 37 100

34

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is required by the Philippine SEC.

Results of Operations

Review of 2005 versus 2004

For the year 2005, the consolidated net income (after minority interest) of the Company and its Subsidiaries (the Group) was = 1,153.9 million which is 43% higher than the previous years net P = = income of = 807.7 million. Total revenues were P 4,812.2 million in 2005 compared to P 4,191.2 P million in 2004, a 15% increase. Among product groupings, = 3,151.2 million of revenues came from the sale of residential lots, P = condominium and office units in 2005 amounting to a 31% increase from P 2,396.7 million in the previous year. The Groups registered sales came from the following projects: Grand Eastwood Palazzo, Eastwood Excelsior, Olympic Heights, One Orchard Road, Eastwood CyberOne and Eastwood Parkview in Eastwood City; Forbeswood Heights in Fort Bonifacio; and Paseo Parkview, Greenbelt Radissons and Greenbelt Parkplace in Makati City. The other components of consolidated revenues were distributed among leasing and hotel = operations, and other revenue. Rental income for the year 2005 amounted to P 547.8 million compared to = 454.7 million in 2004, a 20% increase, due to the completion of additional rental P = property. The Groups hotel operations contributed = 101.1 million to revenues in 2005 from P 88.7 P = million in 2004 or a 14% increase from 2004. Other revenues for 2005 amounted to P 1,012.1 million which consist of interest income, dividend income, foreign exchange gain and = miscellaneous income. The 19% decrease from P 1,251.1 million in 2004 was due to a decline in miscellaneous income. Cost of sales as a percentage of real estate sales was 68% in 2005 compared to 71% in 2004, = = = which amounted to P 2,158.2 million and P 1,694.9 million, respectively. Gross profit was P 993.0 = million for the year ended December 31, 2005 and P 701.8 million for the same period in 2004, or 32% and 29% of real estate sales, respectively. Realization of gross profit is recognized under the percentage of completion method wherein revenue is recognized by reference to the stage of development of the properties. Realized gross profit on current years sales increased by 96% while realized gross profit on prior years sales increased by 91%. Gross margins may vary depending on product mix. = In general, the growth in operating expenses by 12% from = 872.8 million in 2004 to P 976.9 P million in 2005 was due mainly to the increase in marketing and selling expenses, particularly commission expenses resulting from aggressive marketing activities as well as other administrative and corporate overhead expenses. Operating expenses as a percentage of real estate sales was 31% and 36% in 2005 and 2004, respectively. Payment of interest expenses on bank loans increased = finance cost by 37% from P 205.3 million in 2004 to = 280.8 million in 2005. The 60% decrease in P = = fair value (losses) of a subsidiary in 2005 and 2004 amounted to P 44.8 million from P 111.9 million due to the decline in market value of the investment as of December 31, 2005. Equity in net losses of associates amounted to = 64.6 million and = 207.1 million in 2005 and 2004, P P respectively. The loss was due to lower income of an associate, while the 340% increase in net = = earnings applicable to minority interest, from a loss of P 5.5 million in 2004 to income of P 13.1 million in 2005, was due to higher earnings earned by a subsidiary. Income tax expenses were = 259.0 million in 2005 and P 180.3 million in 2004 due to higher taxable income, representing an = P increase of approximately 44%. For the year 2005, there were no seasonal aspects that had a material effect on the financial condition or results of operations of the Group. Neither were there any trends, events or uncertainties that have had or that are reasonably expected to have a material impact on net sales or revenues or income from continuing operations. The Group is not aware of events that will cause a material change in the relationship between its costs and revenues. There are no significant elements of income or loss that did not arise from the Groups continuing operations.
35

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Condition

= = Total assets as of December 31, 2005 were P 32,782.9 million compared to P 32,518.5 million as of = December 31, 2004, or a P 264.4 million increase. = = Cash and cash equivalents increased by 6% from P 2,689.0 million in 2004 to P 2,850.3 million in 2005 due to efficient collection systems. Current and non-current trade and other receivables increased by more 15% due to higher sales. As of December 31, 2005 and 2004, marketable = = securities, presented at fair values, amounted to P 3,599.6 million and P 4,138.4 million, respectively, representing a 13% decrease. Aggressive selling of various projects resulted in the = decrease in the number of residential and condominium units for sale by 12% from P 4,051.5 = million in 2004 to P 3,552.3 million in 2005 and the reclassification of a subsidiary to investment = property. Property development cost increased by 35% from P 1,193.2 million in 2004 to = 1,606.2 P million in 2005 due to the cost of new projects at Fort Bonifacio and Newport City. Prepayments = and other current assets significantly increased by 64% from P 377.9 million as of December 31, = 2004 to P 619.7 million as of December 31, 2005 due to cost attributable to new projects for development and reclassification of account to property development cost in relation to the purchase of land for development. = Land for future development increased by 15% to P 1,784.0 million as of December 31, 2005 from = P 1,552.9 million as of December 31, 2004 due to the acquisition of land for development. = Deferred tax assets as of December 31, 2005 amounted to P 2.1 million and = 1.2 million as of P December 31, 2004 arising from the timing difference in recognizing depreciation of buildings by their components. Components of the Groups buildings, such as elevators, that have useful lives significantly different from the useful life of the building are identified as separate components and depreciated separately in accordance with PFRS. Under previous Philippine GAAP, the Group did not recognize a timing difference in the depreciation of buildings by their components. The adoption of PFRS resulted in the recognition of additional depreciation expense. Other non-current = = assets as of December 31, 2005 amounted to P 661.5 million compared to P 2,138.3 million as of December 31, 2004, representing an 69% decrease due to a reclassification from non-current to = current. The 18% increase in net investment property from = 4,119.6 million in 2004 to P 4,858.6 P million in 2005 was due to reclassification of accounts from residential condominium units for sale = = of a subsidiary. Net property and equipment amounted to P 785.5 million and P 696.6 million as of December 31, 2005 and 2004, respectively. The 13% increase was due to additional acquisition costs of fixed assets. = = Trade and other payables amounted to P 1,691.3 million and P 1,486.6 million as of December 31, 2005 and 2004, respectively. The increase of 14% was due to additional costs to be paid to contractors and suppliers for new projects. Current customers deposits as of December 31, 2005 = amounted to = 1,791.2 million compared to P 1,224.8 million as of December 31, 2004. The 46% P increase or = 566.8 million was due largely to aggressive marketing and pre-selling of various P projects. The combined effect of current and non-current deferred income on real estate sales decreased by 14% which amounted to = 844.3 million as of December 31, 2005 compared to P = P 983.7 million as of December 31, 2004. Interest-bearing loans and borrowings current and non-current amounted to = 3,096.0 million and P = P 4,589.5 million as of December 31, 2005 and 2004, respectively, representing a 32% decrease. = = Other non-current liabilities amounted to P 941.6 million from P 740.1 million as of December 31, 2005 and 2004, respectively. The increase of 27% was due to an increase in non trade-payables. Total equity (including minority interest) increased to = 17,874.7 million as of December 31, 2005 P = from P 16,770.3 million as of December 31, 2004 due to the Groups continuous profitability.

36

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Considered as the top five key performance indicators of the Group are shown below:
2005 2004

Current Ratio (1) . . . . . . Quick Ratio (2) . . . . . . . Debt to Equity Ratio (3)(6) Return on Assets (4)(6) . . . Return on Equity (5)(6) . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

2.34 : 1 0.45 : 1 0.18 : 1 3.52% 6.73%

3.21 : 1 0.58 : 1 0.29 : 1 2.48% 5.03%

Notes: (1) Current Assets/Current Liabilities (2) Cash and Cash Equivalents/Current Liabilities (3) Bank Loans/Equity (If the ratio excludes the peso loan obtained against proceeds of the dollar loan, the ratio will be = = P 0.07 : 1 in 2005 and P 0.06 : 1 in 2004) (4) Net Income/Total Assets (5) Net Income/Equity (6) computed using figures attributable only to parent company shareholders

With its strong financial position, the Group will continue investing in and pursuing expansion activities as it focuses on identifying new markets, maintaining established markets and tapping business opportunities. Sustaining a high level of development activity, the Group sufficiently met capital requirements for the year in 2005. The Group has sufficient resources from internally generated funds and expects an increase in earnings. Certain accounts of the 2004 and 2003 financial statements were reclassified to conform to the 2005 PFRS financial statements presentation. Material Changes to the Groups Balance Sheet as of December 31, 2005 compared to December 31, 2004 (increase/decrease of 5% or more) = The Groups cash and cash equivalents increased by 6% from P 2,689.0 million as of December 31, = 2004 to P 2,850.3 million as of December 31, 2005 mainly due to more efficient collection systems. = The Groups current and non-current trade and other receivables increased by 15% from P 4,000.8 million as of December 31, 2004 to = 4,620.2 million as of December 31, 2005 primarily due to an P increase in sales. = The Groups marketable securities decreased by 13% from P 4,138.4 million as of December 31, 2004 to = 3,599.6 million as of December 31, 2005 primarily due to maturity of certain P investments. = The Groups residential and condominium units for sale decreased by 12% from P 4,051.5 million = as of December 31, 2004 to P 3,552.3 million as of December 31, 2005 due to aggressive selling of various projects. = The Groups property development costs increased by 35% from P 1,193.2 million as of December 31, 2004 to = 1,606.2 million as of December 31, 2005 mainly due to the cost for new development P projects. = The Groups prepayments and other current assets increased by 64% from P 377.9 million as of = December 31, 2004 to P 619.7 million as of December 31, 2005 due to costs attributable to new development projects and reclassification of account to property development cost in relation to the purchase of land for development. = The Groups land for future development increased by 15% from P 1,552.9 million as of December 31, 2004 to = 1,784.0 million as of December 31, 2005 mainly due to the acquisition of land for P development.

37

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

= The Groups net investment property increased by 18% from P 4,119.6 million as of December 31, = 2004 to P 4,858.6 million as of December 31, 2005 primarily due to the reclassification of accounts from residential units for sales of a subsidiary. = The Groups net property and equipment increased by 13% from P 696.6 million as of December 31, 2004 to = 785.5 million as of December 31, 2005 due to the additional acquisition cost of fixed P assets. = The Groups deferred tax assets increased by 73% from P 1.2 million as of December 31, 2004 to = P 2.1 million as of December 31, 2005 primarily due to net operating loss carried over (NOLCO) by subsidiaries. = The Groups other non-current assets decreased by 69% from P 2,138.3 million as of December 31, 2004 to = 661.5 as of December 31, 2005 largely due to the reclassification of accounts to current P from non-current. The Groups current and non-current interest-bearing loans and borrowings decreased by 32% = = from P 4,589.5 as of December 31, 2004 to P 3,096.0 as of December 31, 2005 due to subsidiaries payments to certain banks. The Groups trade and other payables increased by 14% from = 1,486.6 million as of December 31, P = 2004 to P 1,691.3 million as of December 31, 2005 mainly to additional costs to be paid to contractors and suppliers for new projects. = The Groups current and non-current customers deposits increased by 10% from P 3,837.7 million = as of December 31, 2004 to P 4,240.3 million as of December 31, 2005 mainly due to aggressive marketing and pre-selling of various projects. The Groups current and non-current deferred income on real estate sales decreased by 14% from = P 983.7 million as of December 31, 2004 to = 844.3 million as of December 31, 2005 represents P decrease in unearned revenue. = The Groups other non-current liabilities increased by 27% from P 740.1 million as of December 31, 2004 to = 941.6 million as of December 31, 2005 mainly due to an increase in non tradeP payables. Material Changes to the Groups Income Statement as of December, 2005 compared to December 31, 2004 (increase/decrease of 5% or more) = The Groups net revenue increased by 17% from P 2,379.6 million as of December 31, 2004 to = P 2,793.1 million as of December 31, 2005 largely due to the combined increase in sales, rental, and hotel income. = The Groups rental income increased by 20% from P 454.7 million as of December 31, 2004 to = P 547.8 million as of December 31, 2005 primarily due to the completion of additional rental property. = The Groups hotel income increased by 14% from P 88.7 million as of December 31, 2004 to = 101.1 million as of December 31, 2005 mainly due to high occupancy rates. P = The Groups other revenues decreased by 19% from P 1,251.1 million as of December 31, 2004 to = P 1,012.1 million as of December 31, 2005 due to a decrease in miscellaneous income and foreign exchange gain. = The Groups finance cost increased by 37% from P 205.3 million as of December 31, 2004 to = P 280.8 million as of December 31, 2005 largely due to payment of interest expenses to bank loans in 2005.

38

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

= The Groups equity in net losses of associates decreased by 69% from P 207.10 million as of = December 31, 2004 to P 64.6 million as of December 31, 2005 mainly due to the lower income of an associate. = The Groups income tax expense increased by 44% from P 180.3 million as of December 31, 2004 to = 259.0 million as of December 31, 2005 largely due to higher taxable income. P = The Groups net fair value losses decreased by 60% from P 111.9 million as of December 31, 2004 = to P 44.8 million as of December 31, 2005 largely due to the increase in fair value of the Groups investments classified as fair value through profit and loss. The Groups net earnings applicable to minority interest increased by 340% from a = 5.5 million P = loss as of December 31, 2004 to an income of P 13.1 million as of December 31, 2005 as a result of higher earnings incurred by a subsidiary. There are no other material changes in the Groups financial position (changes of 5% or more) and condition that will warrant a more detailed discussion. Further, there are no material events and uncertainties known to management that would impact or change reported financial information and condition on the Group. There are no known trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in increasing or decreasing the Groups liquidity in any material way The Group does not anticipate having any cash flow or liquidity problems. The Group is not in default or breach of any note, loan, lease or other indebtedness or financing arrangement requiring it to make payments. There are no events that will trigger direct or contingent financial obligation that is material to the Group, including any default or acceleration of an obligation. There are no material off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships of the Group with unconsolidated entities or other persons created during the reporting period. There are no material commitments for capital expenditures, events or uncertainties that have had or that are reasonably expected to have a material impact on the continuing operations of the Group. There were no seasonal aspects that had a material effect on the financial condition or results of operations of the Group. There are no explanatory comments on the seasonality of interim operations. There are no material events subsequent to the end of the interim period that have not been reflected in the financial statements for the interim period. There are no material amounts affecting assets, liabilities, equity, net income or cash flows that are unusual in nature; neither are there changes in estimates of amounts reported in a prior interim period of the current financial year.
Review of 2004 versus 2003

= For the year 2004, the consolidated net income (after minority interest) of the Group was P 807.7 = million which is 220% higher than the previous years net income of P 252.8 million. Total = = revenues in 2004 were P 4,191.2 million compared to P 3,314.8 million in 2003, a 26% increase. = Among product groupings, P 2,396.7 million of generated revenues came from the sale of residential lots, condominium and office units in 2004, representing a 1.0% increase from = P 2,371.8 million in the previous year. The Groups registered sales came from the following

39

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

projects: Grand Eastwood Palazzo, Eastwood Excelsior, Olympic Heights, One Orchard Road and Eastwood CyberOne in Eastwood City; Forbeswood Heights in Fort Bonifacio; and Paseo Parkview, Greenbelt Radissons and Greenbelt Parkplace in Makati City. The other components of consolidated revenues were distributed among leasing and hotel = operations, and other revenue. Rental income for the year 2004 amounted to P 454.7 million compared to = 241.4 million in 2003, or an 88% increase. The Groups hotel operations amounted P = to P 88.7 million in 2004 from = 73.8 million in 2003 or a 20% increase from the previous year. P = Other revenues for 2004 amount to P 1.3 billion or an 99% increase from the previous year due to an increase in interest income, foreign exchange gain and miscellaneous income. Cost of sales as a percentage of real estate sales was 71% in 2004 compared to 70% in 2003, = = = which amounted to P 1,694.9 million and P 1,652.6 million, respectively. Gross profit was P 701.8 = million for the year ended December 31, 2004 and P 719.2 million in 2003 or 29% and 30% of real estate sales, respectively. Realized gross profit as a percentage of real estate sales did not change from the previous years recorded rate of 24%. Realization of gross profit is recognized under the percentage of completion method wherein revenue is recognized by reference to the stage of development of the properties. Realized gross profit from current years sales decreased by 25%. Gross margins may vary depending on product mix. In general, the growth in operating expenses by 20%, from = 728.1 million in 2004 compared to P = P 872.8 million in 2003, was due mainly to the increase in marketing and selling expenses, particularly commission expenses resulting from aggressive marketing activities and other administrative and corporate overhead expenses. Operating expenses as a percentage of real estate sales was 36% and 31% in 2004 and 2003, respectively. Payment of interest expenses on = = bank loans resulted in an increase in finance costs by 151% from P 81.7 million in 2003 to P 205.3 million in 2004. Unrealized loss from the decline in the value of investment by a subsidiary in bonds and other debt instruments decreased by 46.9% in 2004. The 167.9% increase in equity in net losses of associates, from = 77.3 million to = 207.1 million, was due to the higher losses of an P P associate. For the year 2004, there were no seasonal aspects that had a material effect on the financial condition or results of operations of the Group. Neither were there any trends, events or uncertainties that have had or that are reasonably expected to have a material impact on net sales or revenues or income from continuing operations. The Group is not aware of events that will cause material change in the relationship between costs and revenues. There are no significant elements of income or loss that did not arise from the Groups continuing operations.
Financial Condition

The Group maintains a prudent financial strategy due to economic instability and high inflation rates that the country is experiencing. Its balance sheet reflects stable financial growth. Total = assets as of December 31, 2004 were = 32,518.5 million compared to P 31,652.2 million as of P December 31, 2003, registering a 3% increase. = = Cash and cash equivalents increased by 33% from P 2,021.1 million in 2003 to P 2,688.9 million in 2004 due to efficient collection systems. Current and non-current trade and other receivables decreased by 12% and 39%, respectively, due to rigid collection of turned-over balance receivables from various clients of a subsidiary and reclassification of some accounts. The reclassification of accounts from property development cost in projects such as Grand Eastwood Palazzo and Forbeswood Heights and the accelerated completion of projects due for 2005 resulted in an = increase in the residential and condominium units for sale by 11% from P 3,636.1 million in 2003 to = 4,051.5 million in 2004. P The 6% decrease in property development cost from = 1,274.3 million as of December 31, 2003 to P = P 1,193.2 million as of December 31, 2004 was due to reclassification of certain accounts. = = Prepayments and other current assets increased by 67% from P 226.1 million to P 377.9 million due to payment for land purchased for development. Current and non-current trade and other
40

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

receivables decreased by 25% due to rigid collection of turned-over balance receivables from = various clients from P 5,382.2 million to = 4,000.8 million as of December 31, 2003 and December P 31, 2004, respectively. The increase in advances to joint ventures by 12% from = 219.3 million to = 246.0 million as of P P December 31, 2003 and 2004, respectively, was due to the grant of cash advances to be used for pre-development expenses such as relocation of existing occupants. = Land for future development increased by 54% to P 1,552.9 million as of December 31, 2004 from = P 1,010.1 million as of December 31, 2003 due to additional cost of land for development. Other = non-currents assets as of December 31, 2004 amounted to P 2,138.3 million compared to = 1,252.9 P million as of December 31, 2003, representing a 71% increase due to long-term investments. The = decrease in deferred tax assets from P 9.6 million as of December 31, 2003 to = 1.2 million as of P December 31, 2004 was due to the application of net operating loss carried over of subsidiaries. = = The decrease in property and equipment of approximately 12% from P 788.8 million to P 696.6 million was due to gradual reduction of depreciation. = = Trade and other payables amounted to P 1,486.6 million and P 1,251.5 million as of December 31, 2004 and 2003, respectively. The increase of 19% was due to additional cost payable to contractors and suppliers for new projects. = Customers deposits current as of December 31, 2004 amounted to P 1,224.8 million compared to = P 744.3 million as of December 31, 2003. The 65% increase of = 480.5 million was due largely to P aggressive marketing and pre-selling of various projects. The effect of current and non-current deferred income on real estate sales increased by only 8% = amounting to = 983.7 million as of December 31, 2004 as against P 910.0 million as of December P 31, 2003. Furthermore, reserve for current and non-current property development as of December = = 31, 2004 amounted to P 1,871.4 million compared to P 1,483.2 million as of December 31, 2003. = The increase of 26% or P 388.2 million was mainly due to uncompleted portion of cost attributable to various on-going projects. = Current and non-current interest bearing loans and borrowings amounted to P 4,589.5 million from = P 4,739.8 million as of December 31, 2004 and 2003. There was a 3% decrease due to partial settlement of obligation of a subsidiary. Total equity (including minority interest) increased to = 16,770.3 million as of December 31, 2004 P = from P 16,028.9 million as of end of 2003 due to the Groups continuous profitability. Considered as the top five key performance indicators of the Group are shown below:
2004 2003

Current Ratio (1) . . . . . . Quick Ratio (2) . . . . . . . Debt to Equity Ratio (3)(6) Return on Assets (4)(6) . . . Return on Equity (5)(6) . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

3.21 : 1 0.58 : 1 0.29 : 1 2.48% 5.03%

4.03 : 1 0.56 : 1 0.31 : 1 0.80% 1.65%

Notes: (1) Current Assets/Current Liabilities (2) Cash and Cash Equivalents/Current Liabilities (3) Bank Loans/Equity (If the ratio will exclude the peso loan obtained against proceeds of the dollar loan, the ratio will = = be P 0.06 : 1 in 2004 and P 0.07 : 1 in 2003) (4) Net Income/Total Assets (5) Net Income/Equity (6) Computed using figures attributable only to parent company shareholders

41

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

With its strong financial position, the Group will continue investing in and pursuing expansion activities as it focuses on identifying new markets, maintaining established markets and tapping business opportunities. Sustaining a high level of development activity, the Group sufficiently met capital requirements for the whole year of 2004. It has sufficient resources coming from internally generated funds and looks forward to better business prospects and earnings for the coming years. Certain accounts in the 2004 financial statements were reclassified to conform to the 2004 financial statements presentation. Material Changes in the Groups Balance Sheet as of December 31, 2004 compared to December 31, 2003 (increase/decrease of 5% or more) = The Groups cash and cash equivalents increased by 33% from P 2,021.1 million as of December = 31, 2003 and P 2,688.9 million as of December 31, 2004 mainly due to efficient systems. = The Groups current and non-current trade and other receivables decreased by 21% from P 4,000.8 = million as of December 31, 2004 and P 5,058.8 million as of December 31, 2003 primarily due to rigid collection of turned-over balance receivables from various clients of a subsidiary and a reclassification of some accounts. = The Groups residential and condominium units increased 11% from P 4,051.5 million as of = December 31, 2004 and P 3,636.1 million as of December 31, 2003 mainly due to the reclassification of accounts from property development cost. = The Groups property developments costs declined by 6% from P 1,193.2 million as of December 31, 2004 and = 1,274.3 million as of December 31, 2003 primarily due to the reclassification of P some accounts to residential and condominium units for sale. = The Groups prepayments and other current assets increased by 67% from P 377.9 million as of = December 31, 2004 and P 226.1 million as of December 31, 2003 largely due to a payment in relation to the purchase of land for development. = The Groups investment in bonds and other debt instruments decreased by 13% from P 4,138.4 = million as of December 31, 2004 and P 4,753.2 million as of December 31, 2003 mainly due to a = decline in the value of marketable securities of a subsidiary amounting to P 111.86 million and the transfer of some investments to short-term placements. = The Groups advances to joint ventures and landowners increased by 12% from P 246.0 million as = of December 31, 2004 and P 219.3 million as of December 31, 2003 primarily due to granting cash advances for pre-development expenses such as the relocation of existing occupants. = The Groups land for future development increased by 54% from P 1,010.1 million as of December = 31, 2003 to P 1,522.9 million as of December 31, 2004 mainly due to the additional cost of land for development. The Groups net property and equipment declined by 12% to = 696.6 million as of December 31, P = 2004 from P 788.8 million as of December 31, 2003 primarily due to the gradual reduction of depreciation expenses. = The Groups deferred tax assets declined by 87% from P 9,629.0 million as of December 31, 2003 = to P 1.2 million as of December 31, 2004 largely due to the application of net operating loss carried over subsidiaries. = The Groups other non-current assets increased by 71% from P 1,252.9 million as of December 31, = 2003 to P 2,138.3 million as of December 31, 2004 largely due to long-term investments.

42

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Groups trade and other payables increased by 19% from = 1,251.5 million as of December 31, P = 2003 to P 1,486.6 million as of December 31, 2004 mainly due to additional costs to be paid to suppliers for new projects. = The Groups current customers deposits increased by 65% from P 744.3 million as of December = 31, 2003 to P 1,244.8 million as of December 31, 2004 largely due to aggressive marketing and pre-selling of various projects. The Groups income tax payable increased by 49% from = 9.9 million as of December 31, 2003 to P = P 14.7 million as of December 31, 2004 mainly due to additional income tax payable of a subsidiary in 2004. The Groups current and non-current interest bearing loans and borrowings decreased by 3% to = = P 4,589.5 million as of December 31, 2004 from P 4,739.8 million as of December 31, 2003 mainly due to the partial settlement of an obligation of a subsidiary. The Groups current and non-current reserve for property development cost increased by 26% to = = P 1,871.4 million as of December 31, 2004 from P 1,483.2 million as of December 31, 2003 primarily due to the uncompleted portion of costs attributable to various on-going projects. The Groups current and non-current deferred income on real estate sales increased by 8% from = = P 910 million as of December 31, 2003 to P 1,871.4 million as of December 31, 2004 representing an increase in unearned revenue for the current sales. = The Groups advances from associates and other related parties declined by 81% from P 862.4 = million as of December 31, 2003 to P 842.1 million as of December 31, 2004 mainly due to the settlement of an obligation with an associate. Material Changes in the Groups Income Statement as of December 31, 2004 compared to December 31, 2003 (increase/decrease of 5% or more) = The Groups total revenue increased by 26% from P 3,314.8 million as of December 31, 2003 = compared to P 4,191.2 million as of December 31, 2004 mainly due to the combined increase in rental and other revenue. The Groups rental income increased by 88% from = 241.4 million as of December 31, 2003 P compared to = 454.7 million as of December 31, 2004 primarily due to the high occupancy rates of P office spaces and commercial center. = The Groups hotel income increased by 20% from P 73.8 million as of December 31, 2003 compared to = 88.7 million as of December 31, 2004 mainly due to high occupancy rates. P = The Groups other revenues increased by 99% to P 1,251.1 million as of December 31, 2004 compared to = 627.8 million as of December 31, 2003 largely due to higher income and effective P cash management and sound investments. = The Groups operating expenses increased by 20% to P 872.8 million as of December 31, 2004 compared to = 728.1 million as of December 31, 2003 primarily due to increases in marketing and P selling expenses, unrealized foreign exchange losses of a subsidiary as well as other administrative and corporate overhead expenses. = The Groups finance cost increased by 151% to P 205.3 million as of December 31, 2004 compared = to P 81.7 million as of December 31, 2003 largely due to the payment of interest expenses on bank loans in 2004. = The Groups equity in net losses of an associate increased by 168% from P 77.3 million as of = December 31, 2003 compared to P 207.1 million as of December 31, 2004 largely due to an increase in losses incurred by an associate.

43

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Groups unrealized loss from the decline in value of investment in marketable securities decreased by 46.9% primarily due to an increase in the value of marketable securities. = The Groups income tax expense increased by 23% to P 180.3 million as of December 31, 2004 compared to = 147.0 million as of December 31, 2003 mainly due to a higher taxable income. P The Groups net earnings applicable to minority interest declined by 176% to negative = 5.5 P = million as of December 31, 2004 compared to P 7.2 million as of December 31, 2003 largely due to losses incurred by a subsidiary. There are no other material changes in the Groups financial position (changes of 5% or more) and condition that warrant a more detailed discussion. Further, there are no material events and uncertainties known to management that would impact or change reported financial information or the financial condition of the Group. There are no known trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in increasing or decreasing the Groups liquidity in any material way. The Group does not anticipate any cash flow or liquidity problems. The Group is not in default or breach of any note, loan, lease or other indebtedness or financing arrangement requiring it to make payments. There are no events that will trigger direct or contingent financial obligation that is material to the Group, including any default or acceleration of an obligation. There are no material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Group with unconsolidated entities or other persons created during the reporting period. There are no material commitments for capital expenditures, events or uncertainties that have had or that are reasonably expected to have a material impact on the continuing operations of the Group. There were no seasonal aspects that had a material effect on the financial condition or results of operations of the Group. There are no explanatory comments on the seasonality of interim operations. There are no material events subsequent to the end of the interim period that have not been reflected in the financial statements for the interim period. There are no material amounts affecting assets, liabilities, equity, net income or cash flows that are unusual in nature; neither are there changes in estimates of amounts reported in a prior interim period of the current financial year.

44

INDUSTRY
PHILIPPINES OFFICE AND RESIDENTIAL PROPERTY MARKETS The Company commissioned Colliers International Philippines, Inc. (Colliers), an independent property consultant, to prepare a report on the office and residential property markets in the Philippines. The information in this section has been extracted from the Colliers report and has not been independently verified by the Company or the Lead Manager or any of their respective affiliates or advisors. The publications have been prepared based on discussions with the Company and relevant market findings. The information in this section is based upon estimates, assumptions and other information developed from market research and knowledge of the industry. The estimates are subject to variations that may arise as circumstances and future operations materialize. As such, the estimates provided in this section may not be representative of the final result.
Philippines Economic Overview

Over the past six years, from 2000 to 2005, full year GDP growth in the Philippines has averaged 4.6%. This followed the regional economic and currency crisis of 1997 and the effects of an El Nin o-induced drought which caused the agricultural sector (20% of GDP) to contract by 6.3% in 1998. A partial recovery in full year GDP growth of 3.4% in 1999 and 4.0% in 2000 reflected a low base in agriculture, manufacturing and exports. While the resignation of President Estrada temporarily bolstered confidence, the Arroyo administration inherited an economy threatened by a burgeoning budget deficit and accelerating inflation. Indeed, GDP growth softened to 3.6% in 2001. By 2002, the GDP expansion of 4.6% slightly surpassed the Governments target of 4.5%. However, growth was not broad-based with a particular focus on private consumption. Growth in 2003 was still at a low-level equilibrium at 4.5%. By 2004, the domestic economy started strongly in the first half, posting a 6.5% rise. However, soaring global oil prices led to higher local gas prices, power rates, transport fare and production costs. By the end of the year, the economy resisted the price shocks and the 15-year high GDP registered at 6.0%, fueled by the robust performance of the three major sectors including a modest increase in the compensation income of overseas Filipinos remitting income to the Philippines. The Philippine domestic economy grew by 5.1% in 2005 compared to the previous year, which was lower than the 6.0% achieved in 2004 but above analysts consensus. In the last quarter alone, GDP increased by 6.1% compared to 4.5% growth in the previous quarter. It appears that the slowdown in the third quarter of 2005 was due to both political noise, which faded in the fourth quarter, and escalating oil prices in the third quarter, which eased in the last quarter of 2005. While growth was led by the services sector, which increased by 6.3% in 2005 and the industrial sector, which increased at 5.3% in 2005 on the production side, private consumption, which increased at 4.9%, continues to be the core growth driver. The share of private consumption in the domestic economy is significant at approximately 70%. The Government is expecting GDP growth to reach from 5.7% to 6.3% in 2006. The Government is focused on increased revenues from the expanded value-added tax, coupled with a rebound in exports and new investments to offset risks from higher oil prices and inflation.

45

Industry

Historical National Income Accounts (January to November 2005)

The following table sets out the performance of certain of the principal economic indicators for the Philippines.
2000 2001 2002 2003 2004 2005

(growth rates, except where otherwise indicated)

GNP. . . . . . . . . . . . . . . . . . . . . GDP . . . . . . . . . . . . . . . . . . . . . Personal Consumption Expenditure. . Government Expenditure . . . . . . . . Investments . . . . . . . . . . . . . . . . Exports . . . . . . . . . . . . . . . . . . . Imports . . . . . . . . . . . . . . . . . . . Agriculture . . . . . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . Inflation . . . . . . . . . . . . . . . . . . Average Prime Lending Rate (actual) = P :US$ (average) . . . . . . . . . . . . . . Average 91-Day T-Bill Rate (actual) . Budget Deficit (billion) . . . . . . . . .
Source:

. . . . . . . . . . . . . . .

4.5% 4.0% 3.5% 0.2% 2.0% 17.7% 4.0% 3.3% 3.9% 4.4% 4.3% 13.9% = 44.26 P 9.9% = 136 P

4.8% 3.7% 3.6% 1.7% 12.4% (4.0%) 3.8% 4.7% 2.3% 4.3% 6.1% 14.2% = P 50.97 9.7% = 147 P

4.3% 4.3% 4.1% (3.7%) (5.0%) 3.6% 4.7% 3.8% 3.6% 5.1% 3.1% 9.3% = P 51.61 5.5% = P 213

5.6% 4.7% 5.3% 0.5% 0.1% 4.4% 10.2% 3.8% 3.8% 5.9% 2.9% 9.5% = 53.96 P 5.9% = P 199

6.2% 6.0% 5.8% 0.0% 9.5% 14.1% 5.9% 4.9% 5.2% 7.1% 5.5% 10.4% = P 56.04 7.3% = 187 P

5.7% 5.1% 4.9% 2.7% (4.3%) 2.3% 1.8% 2.0% 5.3% 6.3% 7.6% 9.5% = P 55.03 6.0% = P 123

National Statistical Coordination Board, BSP

Philippine Residential Property Market Overview

The Philippine residential property market is segmented into four distinct categories, largely based on pricing.
Philippine Residential Market Segmentation
Characteristics Socialized Low Cost Middle Income High End

Price per Unit . . . .

Not more than = P 225,000 Funding agencies such as HDMF, SSS, GSIS

= P 225,001 to = P 750,000 Funding agencies such as HDMF, SSS, GSIS; Government financial institutions like LBP, DBP, PNB; a few private banks

= P 750,001 to = P 5,000,000 Private financial institutions, particularly banks; in-house financing from developers

Above = 5,000,000 P

Source of Mortgage Financing . . . . .

Private financial institutions, particularly banks; inhouse financing from developers

Mortgage Terms: = Max Loan Amount P 225,000 Mortgage Rate Max Loan Term . Loan: Appraisal Value. . . . . . . . Typical Size and Type of Housing. 9%10% 30 years 100%

= P 675,000 Market rates 30 years 90%

= P 3,500,000 Market rates 15 to 20 years 70%80%

70% of appraised value Market rates 15 to 20 years 60%70%

Row houses; min. lot area of 32 sq.m., min floor area of 18 sq.m.

Duplexes; single detached units; min. lot area of 36 sq.m., min floor area of 22 sq.m.

Lots; single detached units; townhouses; condominiums; ave. floor area of 120 sq.m.

Subdivided lots usually 500 sq.m. and above; luxury condominiums with floor area of over 300 sq.m.

Source:

Colliers International Research

46

Industry

The Government estimates that 3.8 million houses are needed from 2005 to 2010 or 626,012 houses each year. This includes 2.6 million houses to address the growth in households and 1.2 million in backlog and replacement. In Metro Manila, the six-year housing demand is estimated at 496,928 units, of which 350,472 units are from pure household formation. The 2000 census revealed a total of 2,132,989 households in Metro Manila. Since 1995, the number of households in Metro Manila has expanded by 1.6% per annum. From 1996 to 2005, it is estimated that an average of 33,262 households have been created per year. If the residential demand from household formation in Metro Manila is to be segmented by affordability, low cost housing has the highest demand at 57% of new households. This is followed by the mid-income segment at 36%. There is an average of 33,262 households created since 1996. The housing segment that offered the most significant potential is low cost with an average need of 19,034 units per annum, followed by mid-income at 12,092 units per year.
Demand from Overseas Filipinos

A major source of buyers, most importantly for the mid-income residential segment, is overseas foreign workers that hold high-paying jobs and Filipino immigrants abroad. There are an estimated 8.1 million Filipinos abroad. The Government estimates that overseas Filipinos remittances increased by 27% in 2005 to US$10.9 billion from US$8.5 billion in 2004. Including inflows from informal channels, remittances in 2005 are estimated to have reached US$12.3 billion. Discussions with developers revealed that overseas Filipinos remittances have a significant impact on the residential segment. Demand estimates from this segment are set out below:
Distribution of Overseas Filipino Housing Demand in Metro Manila
Metro Manila Demand (units)

Year

Low Cost (10%)

Mid Income (80%)

High End (10%)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source:

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

2,899 4,230 5,035 6,640 6,695 7,685 9,276 10,306 11,971 14,927

290 423 503 664 669 769 928 1,031 1,197 1,493

2,319 3,384 4,028 5,312 5,356 6,148 7,421 8,245 9,577 11,942

290 423 503 664 669 769 928 1,031 1,197 1,493

Colliers International Research

The demand for housing in Metro Manila is derived from adding the pure demand from household formation and those from overseas Filipinos. While the low cost segment still presents the highest demand, the impact of the overseas Filipino is the enhancement in the demand for mid income units. In the last ten years, it is estimated that the average demand has been 18,466 mid income housing units per year.

47

Industry

Annual Demand in Metro Manila from Household Formation and Overseas Filipino-Related Demand
Can not Afford

Year

Households

Socialized

Low Cost

Mid Income

High-End

1996 . . 1997 . . 1998 . . 1999 . . 2000 . . 2001 . . 2002 . . 2003 . . 2004 . . 2005 . . Total . . Average
Source:

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

33,878 35,696 36,995 39,101 39,666 41,174 43,291 44,855 47,062 50,569 412,286 41,229

108 110 112 113 115 117 119 121 123 125 1,163 116

630 640 650 660 670 681 691 702 713 725 6,762 676

18,017 18,429 18,792 19,240 19,537 19,932 20,392 20,800 21,277 21,888 198,304 19,830

13,581 14,824 15,647 17,113 17,342 18,323 19,787 20,805 22,334 24,899 184,656 18,466

1,541 1,694 1,794 1,975 2,001 2,121 2,302 2,426 2,615 2,932 21,402 2,140

National Statistics Office, Colliers International Research

In terms of demand, pure demand from household growth and overseas Filipinos remittances extends to a total of 411,123 housing units in the last ten years. In light of the primary supply from developers (as measured by issued HLURB licenses to sell), there is a deficit of 137,254 units.
Total Demand vs. Total HLURB License to Sell (19962005) (1)
199605 Total Socialized Low Cost Mid Income High End

Demand . . . . . . . . . . . . . . . . . . . . . . HLURB License . . . . . . . . . . . . . . . . . . (Deficit)/Surplus . . . . . . . . . . . . . . . . .

Source: Colliers International Research

411,123 273,869 (137,254)

6,762 43,193 36,431

198,304 23,934 (174,370)

184,656 176,587 (8,069)

21,402 30,155 8,753

Note: (1) excluding housing demand that could not afford socialized housing

The most significant demand is in the low cost segment with 174,370 units of unmet by developers. The mid-income segments unmet demand from the primary market in the last ten years is at 8,069 units. This represents demand from pure household formation and the impact of demand from overseas Filipinos. If the Governments estimates for backlog (to account for replacement and obsolescence) are included, the deficit significantly increases. The Government estimates an annual backlog of 58,412 units in Metro Manila. It is further estimated that the Metro Manila backlog for the middle income is 233,648 units from 1996 to 2005. If this is added to the 184,656 units computed in the table above, the aggregate demand increases to 418,304 units. This is a deficit of 241,717 units compared to the number of HLURB licenses to sell that have been issued.
Philippines Residential Condominium Market

Beginning in the 1990s, residential condominium living in the Philippines has gained ground due to increased market acceptance. Popularity is attributed to: 1) infrastructure constraints in Metro Manila have dictated a preference to be close to employment centers, 2) while landed property remains the preferred format, there is a budgetary constraint coupled with the need to be in proximity to the city center, 3) lower maintenance costs for condominium living and 4) the growing trend of children moving out of their parents homes earlier.

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Residential condominiums used to be exclusive to the financial districts of the Makati Central Business District (CBD) and Ortigas. In fact, it was nearly a monopoly of these locations until the late 1990s. Until the late 1990s, the Makati CBD was the main location for condominium living in Metro Manila with nearly three-quarters of the stock in this location. However, efficiency issues, infrastructure constraints and lack of amenities gave birth to alternative locations such as Rockwell, Fort Bonifacio and Eastwood. As of the end of 2005, the Makati CBD only accounts for approximately 50% of condominium stock. As of end-2005, the number of residential condominium units in the five prominent condominium districts stood at nearly 20,000 units. The stock has grown by a compounded average of about 12% per annum since 1990. On average, 1,076 units have been added annually to the aggregate stock since 1990.
Year-End Residential Condominium Stock

The following table shows the year-end stock of residential condominiums units:
Year Makati CBD Ortigas Fort Bonifacio Rockwell Eastwood City Total

1990 . . . . 1991 . . . . 1992 . . . . 1993 . . . . 1994 . . . . 1995 . . . . 1996 . . . . 1997 . . . . 1998 . . . . 1999 . . . . 2000 . . . . 2001 . . . . 2002 . . . . 2003 . . . . 2004 . . . . 2005 . . . . Percentage
Source:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in 2005 .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

2,562 4,121 4,123 4,119 4,352 4,749 5,891 6,432 7,125 7,844 8,104 8,387 8,669 9,268 9,530 10,354 52%

1,173 1,233 1,474 1,626 1,626 1,998 2,238 2,459 2,459 3,278 4,175 4,175 4,175 4,175 4,175 4,624 23%

236 640 640 744 1,441 1,441 7%

391 797 797 797 797 797 1,440 7%

584 584 1,012 1,348 2,012 10%

3,735 5,354 5,597 5,745 5,978 6,747 8,129 8,891 9,584 11,513 13,312 14,583 14,865 15,996 17,291 19,871 100%

Colliers International Philippines

New Residential Communities in the Philippines

Infrastructure constraints dictate that satellite communities offering an alternative to the CBD and Ortigas are still located at the periphery of the financial districts. Close to the Makati CBD are Rockwell and Fort Bonifacio while Eastwood City, Pioneer and the Greenfield re-development are nearly adjacent to Ortigas. Market acceptance for new locations has been boosted by deficiencies in amenities and the age of residential accommodation in traditional areas. In the Makati CBD, approximately 46% of residential units have been in existence for more than 10 years. In Ortigas, nearly a quarter of the residential units were built before 1995. Among the locations for condominium living in Metro Manila, Eastwood City has exhibited the fastest growth. In the last five years alone, it has grown by a compounded rate of 36% per annum. In fact, its current stock of 2,012 condominium units is comparable to the combined supply in Fort Bonifacio and Rockwell at 2,881 units. It is more interesting if one considers that Eastwood City is only 15 hectares while Fort Bonifacio and Rockwell have developable areas of 214 and 15 hectares, respectively.

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Future Supply of Residential Condominiums

The following table shows the future supply of residential condominiums in units:
Year Makati CBD Ortigas* Fort Bonifacio Rockwell* Eastwood City Total

2006 . . . . 2007 . . . . 2008 . . . . 2009 . . . . 2010 . . . . Total . . . . Percentage

Source: *

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

532 284 845 390 383 2,434 12%

546 450 1,258 3,108 5,362 27%

767 2,244 2,188 838 6,037 30%

1,642 575 2,217 11%

1,344 720 1,060 364 269 3,757 19%

3,189 5,340 5,351 5,275 652 19,807 100%

Colliers International Philippines

includes fringe projects

A total of 19,807 units are slated to be completed from 2006 to 2010. By location, Fort Bonifacio accounts for the majority or 30% of the future supply. This is followed by Ortigas having 5,362 of the units or 27% of total. This development trend is due to: (1) Makati is seen as a mature development with land values at a premium compared to other locations, (2) Fort Bonifacio is seen as relatively cheaper in terms of land value. However, it has proven that it can attract the same market as the Makati CBD due to its proximity, and (3) Rockwell is seen as a niche development.
Shift in Condominium Configurations

There has been a major shift in unit configuration. From 1997 to 2005, the distribution according to configuration has been fairly equal. However, units slated to complete until 2010 exhibit a major shift towards the smaller unit configuration. Studio and one bedroom units account for 72% of the aggregate future stock. Affordability concerns have led to this shift. Developers offered smaller configurations to make the total contract price more affordable. It is interesting to note that while configurations are smaller, developers have managed to increase the selling price per square meter.
Residential Sales Growth

After falling by as much as 45% to its trough after the Asian financial crisis in 1997, lease rates have rebounded. In 2005 alone, rents escalated by as much as 25% compared to 2004 as demand started to strengthen. Until the slowdown in Philippine real estate in 1997, prime residential condominiums had been enjoying high pre-sales performance. Sold ratios for various developments starting the third quarter of 1997 have slackened. We believe that the property market is in a new development cycle. There are niches of opportunities such as the middle income residential condominiums where intense marketing effort has been exerted to result in sales movement. Admirable are projects in Rockwell and Fort Bonifacio, which have adopted creative marketing strategies like the use of well-designed model units to attract interest. New locations are now emerging such as Newport City, San Lazaro, Araneta Center redevelopment, the Bay Area and McKinley Hill. We have identified 39 comparable mid-income residential condominium projects within five pertinent locations. Analyzed by location, Fort Bonifacio accounts for 32% of the comparable units, followed by Ortigas and environs (includes Greenfield re-development and Pioneer area) at 31%, Eastwood (24%), the Makati CBD (10%) and Rockwell (2%).

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Leading Residential Condominium Developers

In terms of market share, Megaworld is the leading developer in the mid-income residential condominium segment with nearly 40% of the units in the sampled comparable projects. This is followed by Robinsons Land with 18% of the comparable units. Ayala Land, the biggest real estate developer in the country, is a relative newcomer in this segment. Megaworld was established in 1989 by founder and major shareholder Andrew Tan. It started as a developer of high-rise residential and commercial properties in Makati and Ortigas. Its current strategy is the creation of community township developments in Eastwood, Fort Bonifacio, Newport City and Araneta Center. Robinsons Land Corporation is the real estate arm of the Gokongwei-controlled JG Summit Holdings Inc. The company is primarily a retail player through its Robinsons chain of malls. Other real estate segments that it is exposed to are high-rise residential/commercial projects and residential subdivision development. Ayala Land is the largest listed property company in the country and was spun off as Ayala Corp.s real estate subsidiary in 1988. Ayala Lands interest consists of land, office and commercial leasing, middle-income housing, resort development, hotel and theater operations. It is a relative newcomer in the middle income high rise segment with its subsidiary Community Innovations.
Developer Market Share in Comparable Developments Sampled
Developer Units Percentage

Megaworld. . . . . . . . . . . . . Robinsons Land . . . . . . . . . Cityland Development . . . . . . Kuok Properties. . . . . . . . . . Meridien Development . . . . . Philippine Township . . . . . . . Ayala Land . . . . . . . . . . . . G&W Architects and Planners. Antel Land Holdings . . . . . . Xcell Property Ventures. . . . .
Source:

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

5,965 2,855 1,264 1,264 1,246 961 958 384 356 302

38% 18% 8% 8% 8% 6% 6% 2% 2% 2%

Colliers International Philippines

Strong Condominium Sales

Addressing the issue of affordability, 77% of the projects being pre-sold are configured as studios and one-bedrooms. Further addressing prohibitive total contract prices, unit sizes are following a module of about 45 square meters per bedroom. This compares to the 50- to 60-square meter per bedroom module before the financial crisis. In fact, there is a development offering a studio unit below 20 square meters. = = The average total contract price of our pre-selling developments is P 3,724,293 per unit or P 70,453 per square meter. We have observed that more than the total contract price, buyers are looking into the payment scheme. As such, developers have devised payments terms that target a monthly amortization of = 15,000 to = 20,000. P P The pre-selling market continues to be strong market given that a total of 11,206 residential units, or 72% of total supply within surveyed projects has been sold to the market. The average take-up per residential condominium in the survey is 21 units per month. While projects in Eastwood City and Fort Bonifacio (particularly Megaworld developments) are registering absorption below 20 units per month, this is due to the near sold-out sales ratio. At the height of its marketing campaign, take-up of approximately 40 units per month was usually achieved. Projects launched in the last quarter of 2005, such as Columns Legaspi, East of Galleria and St. Francis Residences, have exhibited strong market acceptance.
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Sales Performance of Comparable Condominium Projects

Average Monthly Sales

Project

Developer

Total

Percentage Sold

Months Selling

Makati CBD and Environs The Columns Tower 2 . . . . The A. Venue Makati Tower The Columns Tower 3 . . . . Rada Regency . . . . . . . . . .

. 1 . .

. . . .

. . . .

Columns Legaspi Tower 1 . . . . . AVERAGE . . . . . . . . . . . . . . Ortigas and Environs One Gateway Place . . . . . . . Corinthian Executive Regency . Gateway Garden Ridge . . . . . East of Galleria . . . . . . . . . . St Francis Residences . . . . . . Soho Central Tower 1. . . . . . Soho Central Tower 2. . . . . . Gateway Garden Heights . . . . . . . . . . . . . . . . . . . .

Community Innovations Antel Land Holdings, Inc Community Innovations Cityland Development Corp. Community Innovations

284 356 284 312 390 325 450 952 306 632 1,264 504 286 422 602

93% 70% 94% 41% 20% 61% 88% 51% 92% 19% 13% 93% 88% 43% 49% 100% 98% 97% 93% 95% 97% 83% 96% 88% 96% 93% 91% 81% 85% 71% 14% 38% 83% 40% 40% 89% 93% 95% 98% 96% 97% 91% 90% 94% 72%

27 16 26 9 1 16 31 7 15 2 2 21 7 7 12 23 45 45 45 10 22 24 45 45 45 20 20 20 10 8 4 5 26 24 24 53 56 58 46 40 31 16 10 39 24

10 15 10 14 88 27 13 70 19 60 89 22 36 26 42 9 4 4 4 17 10 21 5 3 5 32 17 16 26 31 8 19 14 6 6 8 7 7 15 13 17 21 24 14 21

Robinsons Land Corp. Cityland Development Robinsons Land Corp. Robinsons Land Corp. Kuok Properties Meridien Development Meridien Development Robinsons Land Corporation

AVERAGE . . . . . . . . . . . . . . Fort Bonifacio Kensington Place . . . . . . . . . . . Forbeswood Agoho. . . Forbeswood Bauhinia . Forbeswood Cambridge Hamptons Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G&W Architects and Planners Bonifacio West/Megaworld Bonifacio West/Megaworld Bonifacio West/Megaworld G&W Architects and Planners Meridien Development Philippine Townships Inc. Bonifacio West/Megaworld Bonifacio West/Megaworld Bonifacio West/Megaworld Robinsons Land Corporation Bonifacio West/Megaworld Bonifacio West/Megaworld Xcell Property Ventures Inc. Robinsons Land Corp. Meridien Development Bonifacio West/Megaworld

201 172 197 197 183 228 611 230 161 245 688 364 389 302 357 228 253 294 350 350 448 448 448 720 530 530 344 269 470 399

South of Market Tower 1 Fairways Tower. . . . . . . Forbeswood Dorchester . . Forbeswood Evergreen . . Forbeswood Florida . . . . Fifth Avenue Place . . . . .

The Bellagio 1 . . . . . . . . . . . . The Bellagio 2 . . . . . . . . . . . . The Icon Tower 1 . . . . . . . . . . McKinley Park Residences . . . . . South of Market Tower 2 . . . . . Forbeswood Parklane 1 . . . . . . . AVERAGE . . . . . . . . . . . . . .

Rockwell and Environs Metropolitan Tower . . . . . . . . . Philippine Townships AVERAGE . . . . . . . . . . . . . . Eastwood One Orchard Road 1 . . . . . . . . One Orchard Road 2 . . . . . . . . One Orchard Road 3 . . . . . . . . Grand Eastwood Palazzo 1 & 2 . Eastwood Parkview T1 . . . . . . . Eastwood Parkview T2 . . . . . . . One Central Park . . . . . . . . . . Eastwood Parklane . . . . . . . . . . AVERAGE . . . . . . . . . . . . . . OVERALL. . . . . . . . . . . . . . .
Source: Colliers International Research

Megaworld Megaworld Megaworld Megaworld Megaworld Megaworld Megaworld Megaworld

Corp. Corp. Corp. Corp. Corp. Corp. Corp. Corp.

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Industry

Aside from local buyers, Filipino immigrants are one of the most significant client bases for midincome residential projects. A prominent feature of the current market is the overseas market that is being tapped. Usually marketed in areas where Filipinos have migrated and are holding whitecollar employment, roadshows are done to promote real estate developments. It is not unusual for developers to achieve 30% to 40% of their sales from buyers abroad. Given that our sampled developments have sold an estimated 11,206 units, a penetration rate of 30% of the market abroad would yield an estimated 3,362 units.
Estimated Sales from Abroad
Location Total Units Sales Rate Total Sold Local Sales Sales Abroad*

Makati CBD and Environs . Ortigas and Environs . . . . Fort Bonifacio. . . . . . . . . Rockwell and Environs . . . Eastwood. . . . . . . . . . . . OVERALL AVERAGE . . . . .
Source: *

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

1,626 4,816 5,006 350 3,757 15,555

61% 49% 83% 40% 94% 72%

986 2,360 4,171 140 3,549 11,206

690 1,652 2,920 98 2,484 7,844

296 708 1,251 42 1,065 3,362

Colliers International Research

assuming 30% of total sales

Philippines Office Property Market Overview

The stock of office accommodation in Metro Manila currently extends to approximately four million square meters of leasable space. The Makati Central Business District (CBD) accounts for 60% of current stock, followed by the alternative business district of Ortigas at 24%. The strong recovery in office take-up was recorded beginning in 2002. During this period, the most evident demand characteristics were: . flight to quality as the availability of new Premium quality space affords tenants the opportunity to up-grade. demand from call centers and business process outsourcing units have pushed Premium and Grade A vacancy to the current single-digit levels.

Other office locations have similarly recorded strong absorption. As at the end of 2005, vacancies were recorded at 5.7% in Ortigas, 0% in Fort Bonifacio and 3.5% in Eastwood City. The office segment, together with the mid-income residential condominium segment, are the most active sectors in the market. Demand for office occupation is driven by the requirements of the Business Processing Outsourcing (BPO) industry. Consequently, the residential segment has also benefited from rising tenancy.
Makati CBD Overview

The Makati CBD is considered Metro Manilas traditional office location. Extending to a total area of 200 hectares, most major Philippine corporations are headquartered in Makati. It is also the preferred location for most multinationals. Fort Bonifacio Global City is considered an expansion area for the existing CBD rather than a competitive alternative. The office stock in the CBD comprises 2.647 million square meters. Premium and Grade A quality buildings comprise 31% of all office space in the Makati CBD. The relatively poor quality of office stock in Metro Manila is partly a function of its age. Approximately 65% of the existing office stock is over 10 years old and not of the quality usually demanded by multinational companies.

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During the mid 1990s, companies seeking expansion space had few relocation options and no room for negotiation on the lease terms demanded by landlords. While the landlords market of the mid 1990s did encourage a level of over-development which would have cooled an overheated market, this was compounded by the 1997 downturn which led to a collapse in demand. Take-up in the Makati CBD has recovered since 2002 at an average of approximately 75,000 square meters per year. The vacancy rate at the end of 2005 was recorded at 7% and is projected to decline further to 3% by 2007. Market rents for the better quality buildings in the Makati CBD decreased by approximately 50% to 55% to in mid-2003. Rents have since rebounded by 25% to 35% in better quality buildings in the Makati CBD. By the end of 2005 alone, lease rates have escalated by 15% to 21% year-onyear.
Ortigas CBD Overview

Extending approximately 50 hectares, Ortigas is the alternative to Makati and has been successful in attracting cost-conscious occupants, particularly during periods of low vacancy and rapidly rising accommodation costs. The total supply of office space is currently 941,832 square meters. On average, take-up has recovered since 2002 at an average of approximately 49,000 square meters. per year. Expectations are for vacancies to ease to below the 5% mark by the end of 2006. It appears that demand is coming from: . . call centers wanting redundant operations in Metro Manila. call centers and business process outsourcing units considering Ortigas due to increasing costs in the Makati CBD as lease rates begin to escalate. Ortigas serving its original function to traditional tenants as an alternative business district as the cost of space in the CBD remains at a premium.

Fort Bonifacio Overview

Fort Bonifacio, a former military base, has a total area of 214 hectares. There are only two office developments in Fort Bonifacio with an aggregate net space of 34,843 square meters. Compared to the Makati CBD, Grade A rents in Fort Bonifacio are trading at an 18% premium. A plausible reason could be the newer office buildings (as older buildings in the CBD tend to bring down the Grade A average) and the limited supply of office space (Grade A space in Fort Bonifacio is only 3% of comparable space in the CBD).
Eastwood City Overview

Eastwood City is a 15-hectare project located along the C-5 highway in Libis, Quezon City. After its PEZA approval in mid 1999, Eastwood City Cyberpark has been heavily marketed as a selfcontained area designed to meet the high-tech and environmental requirements of a community of IT companies. The project also the benefits from being the first PEZA-approved IT zone and being able to offer space for immediate occupancy. There are currently seven office developments in existence with an aggregate of 139,844 square meters. Unlike Fort Bonifacio, where offices were not developing as quickly as residential units, Eastwood Citys office component significantly expanded from 1999 to 2003. Within that period, 117,144 square meters were built, which is approximately 36% of what was delivered in the Makati CBD in the same period. This rate becomes more significant considering that Eastwood is less than 10% of Makati CBDs land area.
BPO Workforce Growth Driving Office Demand

The Business Processing Association Philippines estimates that at the end of 2005, there are over 160,000 full-time jobs within the BPO industry. BPO hiring has grown at an average of 20% in the last six years or 17,583 new hires per year.

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Historical BPO Workforce Estimates

BPO Workforce Annual Increase Seats 1 Accommodation (sq.m.) 2 Increase (sq.m.)

Year

% Increase

1999 2000 2001 2002 2003 2004 2005

Source:

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

56,750 60,700 64,900 69,700 91,500 120,000 162,250

7% 7% 7% 31% 31% 35%

25,795 3,950 4,200 4,800 21,800 28,500 42,250

27,591 29,500 31,682 41,591 54,545 73,750

154,773 165,545 177,000 190,091 249,545 327,273 442,500

10,773 11,455 13,091 59,455 77,727 115,227

Business Process Association Philippines, Colliers International Research

Notes: (1) assumes that each seat is occupied by 2.2 employees (2) assumes six square meters per seat

Given the current estimate of 162,250 full-time jobs, in terms of real estate accommodation, this translates to nearly 445,000 square meters being occupied by the industry. The industry associations bullish estimates point to a steady increase of nearly 40% per annum in the next four years after 2006, when it plans to hire an additional 50%. This means that by 2010, the BPO industry estimates that it would have hired 920,000 people to work full-time. This amounts to an additional occupancy of 2,068,675 square meters in the next five years. If one utilizes a more moderate growth rate estimate of 20%, which is the average growth rate since 1999, the space requirement until 2010 is nearly 660,000 square meters.
Projected BPO Real Estate Requirement
Year 15% 20% 25% 30% 35%

2006 . . . 2007 . . . 2008 . . . 2009 . . . 2010 . . . Additional

Source:

. . . . . . . . . . . . . . . . . . . . Space

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

66,375 76,331 87,781 100,948 116,090 447,526

88,500 106,200 127,440 152,928 183,514 658,582

110,625 138,281 172,852 216,064 270,081 907,903

132,750 172,575 224,348 291,652 379,147 1,200,472

154,875 209,081 282,260 381,051 514,418 1,541,685

Colliers International Research

In the next five years, supply is estimated at 541,400 square meters. 272,800 square meters are currently under construction. The remaining 268,600 square meters are planned. Forthcoming supply is significantly less than even the most conservative forecast of BPO real estate requirements.
Key Developers in the BPO Office Market

Megaworld was established in 1989 by founder and major shareholder Andrew Tan. It started as a developer of high-rise residential and commercial properties in Makati and Ortigas. It was the first PEZA-approved IT park in the country. Township developments with a BPO demand component are Eastwood City, McKinley Hill in Fort Bonifacio and Newport City. Based on projects under construction, Megaworld is the leading developer with 28% of BPO-related office supply. Robinsons Land Corporation is the real estate arm of the Gokongwei-controlled JG Summit Holdings Inc. The company is primarily a retail player through its Robinsons chain of malls. Other real estate segments that it is exposed to are high-rise residential/commercial projects and residential subdivision development. Its BPO-related office developments are concentrated in its redevelopment of its Pioneer property in Mandaluyong.

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Industry

Ayala Land is the largest listed property company in the country and was spun off as Ayala Corp.s real estate subsidiary in 1988. Ayala Lands interest consists of land, office and commercial leasing, middle-income housing, resort development, hotel and theater operations. A recent player in the BPO-related office development, it has done built-to-suit premises for Convergys and People Support. Filinvest Land is the residential property arm of the Gotianun-led conglomerate Filinvest Development Corporation. The companys biggest move is his winning bid for the governments 244-hectare Alabang Stock Farm in 1991. FDC has formed a subsidiary, Filinvest Alabang Inc. (FAI), to undertake the masterplanned development dubbed as Filinvest Corporate City. Within this development is Northgate Cyberzone with an aggregate of 91,147 square meters of office space. SM Prime is a retail-focussed developer in the Philippine property market. Its BPO-related office development in the reclamation area serves as a complementary project to its most ambitious retail development, the Mall of Asia.
Developer Market Share in BPO-Related Office Developments Under Construction
Developer Sq.m. Percentage

Megaworld. . . . . . . . . SM Investments . . . . . . 18-2 Property Holdings . Mar-Nol Realty . . . . . . Robinsons Land . . . . . Filinvest Alabang . . . . . Ayala Land . . . . . . . .
Source:

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

70,000 67,000 26,200 24,500 22,000 21,600 18,800

28.8 26.5 10.5 9.8 8.8 8.6 7.5

Colliers International Philippines

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Industry

Future Supply of BPO Office Buildings

The following table lists the future supply of BPO buildings by expected year of handover.
Building Developer Completion Gross Leasable Area (sq.m.)

Makati CBD Ayala Center Office Building 2* . . . . . . . . . . . Dela Rosa eServices Building* . . . . . . . . . . . . . Security Bank Tower* . . . . . . . . . . . . . . . . . . Eastwood City 1800 Eastwood Avenue . . . . . . . . . . . . . . . . . 1880 Eastwood Avenue* . . . . . . . . . . . . . . . . Quezon City UP S&T Park . . . . . . . . . . . . . . . . . . . . . . . Filinvest Corporate City Northgate Plaza A . . . . . . . . . . . . . . . . . . . . Northgate Plaza D . . . . . . . . . . . . . . . . . . . . Northgate Plaza E* . . . . . . . . . . . . . . . . . . . Fort Bonifacio Net Square. . . . . . . . . . . . . Net Cubed* . . . . . . . . . . . . Global City Promenade . . . . . HSBC BPO Building 2 . . . . . Ayala 31st Street* . . . . . . . . 26th Street Office Building . . . McKinley Hill Corporate Plaza Ayala 30th Street* . . . . . . . . SunLife Office Tower* . . . . . British Embassy Complex* . . . Singapore Embassy Complex* .

Ayala Land Ayala Land Security Bank

2008 2008 2010

30,000 30,000 36,000

Megaworld Megaworld Ayala Land

2006 2009 2007

35,000 35,000 10,000

Filinvest Alabang Filinvest Alabang Filinvest Alabang

2006 2007 2007

10,800 10,800 15,000

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

18-2 Prop. Hldgs 18-2 Prop Hldgs Ayala Land Ayala Land Ayala Land Mar-Nol Realty Megaworld Ayala Land Sun Life British Embassy Singaporean Embassy

2006 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008

26,200 28,000 6,500 12,300 12,300 24,500 35,000 27,000 20,000 4,000 4,000

Ortigas EDSA Central IT Building* . . . . . . . . . . . . . . Mandaluyong Robinsons Cybergate 2 . . . . . . . . . . . . . . . . . Bay Area One e-Com Center . . . . . . . . . . . . . . . . . . . . Pasay City Newport Corporate Plaza* . . . . . . . . . . . . . . .
Source: Note: Colliers International Research Asterisk indicates planned

Greenfield Robinsons Land

2007 2007

15,000 22,000

SM Investments

2007

67,000

Megaworld

2008

25,000

Makati and Eastwood, the main areas of interest to BPOs, are virtually full. No office building is being constructed within the CBD, with the next buildings due to be completed by Ayala Land in 2008. Until those two buildings with a total leasable area of 60,000 square meters are completed, large scale expansion in Makati is expected to be at a standstill. There are possibilities for the occupancy of refurbished buildings; however, refurbishments may prove to be costly and capital cost concerns will most likely eliminate this option. The lack of viable supply has resulted in the emergence of alternative sites such as Filinvest Alabang, the Bay Area reclamation, Fort Bonifacio, McKinley Hill and Robinsons Pioneer area.

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Given the tight supply in traditional locations, a significant amount of the space taken was from non-traditional sources warehouses, malls, and purpose-built facilities. As expansion continues into 2010, continued growth in demand for non-traditional space is expected due to: . . The need to find, hire and train an adequate number of employees. The need to stay away from competitors that poach employees, resulting in higher wage levels and duplicative training costs. Traditional areas are running out of space, with traditional developers wary of constructing new, multi-tenanted premises for fear of repeating 1998. Established BPOs are expanding while business center rental levels are increasing continued occupancy of expensive centers.

It is likely that some BPOs may shrink operations in Makati, the most expensive location so far, and expand elsewhere, essentially saving in the long term without the need to increase headcount. Given these however, we expect that BPOs seeking to establish initial operations in the Philippines will likely prefer to be in the original BPO areas of BPO Makati and Eastwood City. There are a handful of developers who presently have the capability to construct a true BPO building. Even fewer are inclined to risk development. To date, the most aggressive developers are Megaworld (1800 and 1880 Eastwood Avenue, McKinley Hill Corporate Plaza and Newport Corporate Plaza), Robinsons Land (Cybergate 1 and 2), 18-2 Realty (Net Square) and Filinvest (Northgate A and D).

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OVERVIEW The Company is one of the leading property developers in the Philippines and is primarily engaged in the development in Metro Manila of large scale mixed-use planned communities, or community townships, that integrate residential, commercial, educational/training, leisure and entertainment components. Founded in 1989, the Company initially established a reputation for building high quality residential condominiums and commercial properties located in convenient urban locations with easy access to offices as well as leisure and entertainment amenities in Metro Manila. Beginning in 1996, in response to demand for the lifestyle convenience of having quality residences in close proximity to office and leisure facilities, the Company began to focus on the development of mixed-use communities, primarily for the middle-income market, by commencing the development of its Eastwood City project. In addition, the Company engages in other propertyrelated activities such as project design, construction oversight and property management. The Companys real estate portfolio includes residential condominium units, subdivision lots and townhouses as well as office projects and retail space. The Company has the following three primary business segments: (i) real estate sales of residential and office developments (ii) leasing of office space, primarily to BPO enterprises and retail space and (iii) management of hotel operations. The Companys total gross revenues for the year ended December 31, 2005 were = = P 4,812.2 million compared to P 4,191.2 million for the year ended December 31, 2004. Real estate sales of residential developments accounted for 66% of the Companys revenues in 2005 and 57% in 2004. Rental income from leasing operations accounted for approximately 11% of the Companys revenues in 2004 and 2005. The Companys net income (after minority interest) for the = = year ended December 31, 2005 was P 1,153.9 million compared to P 807.7 million for the year ended December 31, 2004. Foreign sales contributed approximately 20% to the Companys consolidated sales and revenues for the years 2003, 2004 and 2005. The Companys current portfolio of projects comprises the following: . Eastwood City. Eastwood City is the Companys first community township development. Eastwood City is located on 15 hectares of land in Quezon City, Metro Manila and comprises: Eastwood City Cyberpark, the Philippines first IT-based special economic zone; an IT training center; leisure and entertainment centers; and 17 high-rise residential developments. Eastwood City Cyberpark contains offices that are capable of supporting ITbased operations such as high-speed telecommunications and 24-hour uninterrupted power supply. Complementing the offices are leisure and entertainment hubs which include restaurants and a cinema complex. Development of the community township has occurred in stages. One office tower and a number of high-rise residential towers, including a hotel, are currently under development. Forbes Town Center. The Company is developing Forbes Town Center, a mixed-use development located on five hectares of land in Bonifacio Global City in Taguig, Metro Manila. Forbes Town Center is comprised of residential high-rise towers and retail and entertainment centers. The property is adjacent to the Manila Golf and Country Club, the Philippines most exclusive golf club. The first residential tower was launched in the second quarter of 2003 and construction of this tower is expected to be completed in the fourth quarter of 2006. McKinley Hill. The Company is developing McKinley Hill, a community township located on 50 hectares of land in Fort Bonifacio in Taguig, Metro Manila. The community township is being designed to include the McKinley Hill Cyberpark which will be a PEZA-designated IT special economic zone, a low density residential subdivision for single detached homes, lowrise residential garden villas, a leisure and entertainment area and an institutional area which is expected to include an embassy and educational institutions, including two international schools. This is the Companys first community township incorporating educational

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institutions into the live-work-play concept. The residential lots for single-attached homes were officially launched in the fourth quarter of 2004 and approximately 70% of the lots were sold as of December 31, 2005. The first office building commenced construction in the fourth quarter of 2005 and construction of this phase is expected to be completed in the fourth quarter of 2007. . Newport City. The Company is developing Newport City, a community township located on 25 hectares of land in the Villamor Air Base, Pasay City, across from the newly built NAIA Terminal 3. The community township, which is adjacent to Villamor golf course, is expected to include medium-rise residential towers, a five-star hotel to be managed by an international chain, retail and commercial areas, a business and technology park, and leisure and tourism components. The property is adjacent to the Villamor golf course. The first phase of residential condominiums was launched in the fourth quarter of 2005 and is expected to be completed by the end of 2008. Araneta Center. In 2005, the Company introduced development plans for the Philippines first major mass transit-oriented residential community, with connections to the MRT-3 and LRT-2 mass transit lines and a land transportation hub, providing residents with access to amenities and offices throughout Metro Manila. The development is expected to consist of 17 residential condominium buildings, comprising 6,000 units on a four hectare site at the Araneta Center, a retail, business and entertainment complex in Cubao, Quezon City. The first phase of the project is expected to be launched in the third quarter of 2006.

In aggregate, the Company owns or has development rights to approximately 116 hectares of land primarily in Metro Manila, with its current portfolio of five major projects accounting for approximately 80% of its landbank. Sixty-two hectares of land for which the Company has development rights were acquired through joint development agreements with the land owners while 38 hectares of land were purchased by the Company. The Company leases the balance of 16 hectares on a long-term basis. The Companys objective is to increase its profitability and maintain its leading position as a major property developer in the Philippines by continuing to capitalize on the Megaworld brand name and reputation, develop its key corporate and retail relationships and enhance its rental revenue and diversify its business mix. The Companys common stock was first listed on the PSE on June 15, 1994 and following the offering and the Domestic Block Sale, assuming the Over-Allotment Option and the TAGI Option is not exercised, the Companys principal shareholders, TAGI and New Town Land will hold 27% and 16%, respectively of the Companys share capital. The Company was voted among Asias Best Property Companies by the Euromoney Best Asian Companies Awards for 2003, 2004 and 2005. The Company also received the following awards for excellence from Euromoney: the Philippines Best in Corporate Governance in 2003; among Asias Most Improved Companies in 2005; and among Asian Companies with the Most Convincing and Coherent Strategy in 2005. In 2004, the Company received the Agora Awards for Marketing Company of the Year; was voted among Asias Best Managed Companies and the Philippines Best in Investor Relations by FinanceAsia Best-managed Asian Companies Awards; and was voted the Philippines Best in Investor Relations, Best Website and the Philippines Best in Clearest Corporate Strategy by Asia Money Polls. In addition, the Company was voted among the Philippines Superbrands in the Superbrands Awards 2004/2005. COMPANY HISTORY The Company was founded by Andrew Tan and incorporated under Philippine law on August 24, 1989 under the name of Megaworld Properties & Holdings, Inc. The Company was primarily organized to engage in real estate development, leasing and marketing. In 1994, the Company spun off Empire East Land Holdings, Inc. which focused on the middle income market. On August 19, 1999, the Company changed its name to Megaworld Corporation to coincide with the Companys conversion from a purely real estate company into a holding company, although the Company continues to focus on its core competence in real estate development.

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From 1989 to 1996, the Company garnered a reputation for building high-end residential condominiums and office buildings on a stand alone basis throughout Metro Manila. In 1996, the Company shifted its focus to providing office buildings to support BPO businesses when it began development of the Eastwood City community township. In 1999, Eastwood City Cyberpark became the first IT park in the Philippines to be designated a PEZA special economic zone. From 1996 to 2005, the Company and its affiliates have launched approximately 200 residential buildings, office buildings and a hotel consisting in aggregate of more than 2,000,000 square meters. The following are some of the major residential and office projects completed by the Company:
Residential

The Salcedo Park (Makati City) One Beverly Place (San Juan) One and Two Lafayette Square (Makati City) Paseo Parkview Towers 1 and 2 (Makati City) Wack-Wack Heights (Mandaluyong City) 8 Wack Wack Road (Mandaluyong City) The Manhattan Square (Makati City) Greenbelt Radissons (Makati City) El Jardin del Presidente (Quezon City) Greenbelt Parkplace (Makati City)

Golf Hill Terraces Phase 3 (Quezon City) Golf Hill Terraces Townhouses (Quezon City) Golf Hill Terraces Garden Villas (Quezon City) Marina Square Suites (Manila) Corinthian Hills (Quezon City) Sherwood Heights (Paranaque) Brentwood Heights(Paranaque) Kentwood Heights (Quezon City) Narra Heights (Quezon City) Eastwood Lafayette Square 1, 2, 3 (Quezon City)
Office

Petron Megaplaza (Makati) The World Centre (Makati) Citibank Square (Quezon City) CyberOne (Quezon City)

IBM Plaza (Quezon City) Landbank Plaza (Malate) Richmonde Plaza (Pasig City) Eastwood Corporate Plaza (Quezon City)

COMPETITIVE STRENGTHS The Company believes its competitive strengths consist of the following: . Established track record as a market innovator. The Company believes it has anticipated market trends faster than other companies in the Philippine property development industry. Although the Company initially focused on the high-end residential property market, it was among the first in the Philippines to identify the growing demand for community township developments, particularly for middle-income purchasers, and to introduce flexible design options and payment plans. In 1996, the Company was also the first to develop offices with the infrastructure capable of supporting expanding IT and BPO businesses. As a result, the Company developed the Eastwood City CyberPark and was instrumental in working with the Government to obtain the first PEZA-designated economic zone specifically for technology and BPO-based companies. The Company is currently the largest developer and owner of office buildings targeting BPO enterprises in the Philippines in terms of leased space. In connection with Eastwood City, the Company was the first Philippine company to focus on community township development. In 1996, the Company was the first Philippine property development company to develop an international sales network targeting overseas Filipinos for residential sales. According to Company estimates, in 2005 sales to overseas Filipinos constituted approximately 20% of its residential sales. In 2005, the Company introduced development plans for the first major mass transit-oriented residential community in the Philippines, with inter-connections to two main mass transit systems and a land transportation hub, facilitating convenient access to offices and amenities throughout Metro Manila. The Company believes that its identification of areas of growth in the property market was instrumental to its continued financial success during the Asian financial crisis when most sectors of the property market contracted. The Companys ability to anticipate market trends and understand the needs of real estate consumers continue to assist it in its efforts to accurately predict trends in market demand, levels of supply and to plan and design its property developments accordingly.
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Strategic landbank. The Company either owns or has development rights to approximately 116 hectares of land located primarily in strategic locations in Metro Manila. Where the Company does not own or lease the land, it has entered into joint development agreements with the land owners to develop their land in exchange for a percentage of the revenue from sales or leases of the completed units. Joint development agreements are a cost effective way for the Company to acquire land development rights in desirable areas of Metro Manila at a fixed cost. Although the Company continues to consider strategic landbanking either through additional joint development agreements or property purchases, the Company believes that its current landbank is capable of sustaining the development of its current portfolio of projects for at least the next 15 years. Sound financials with a stable earnings base and low gearing. The Company believes it is currently in sound financial condition with a debt to equity ratio of 0.18 : 1 (after minority interest) as of December 31, 2005, and that its financial strength enhances its ability to invest in new projects while continuing to develop existing projects. The Companys property portfolio includes a balance between income from residential sales and recurring income earned from commercial and office developments. The Companys diverse project portfolio is designed to both limit earnings volatility from potential property market fluctuations and to allow it to enjoy growth upside. The Companys community township portfolio includes a stable revenue base of long term leases from major international BPO tenants as well as retail tenants. With projected growth in the BPO business in the Philippines, the Company expects to benefit from existing long-term BPO lease arrangements while attracting new BPO tenants. The proximity of BPO tenants to retail and entertainment properties within the community township allows the Company to benefit from the complementary revenue stream from its retail and commercial leases. As a result of stable earnings from rental investments in the BPO market and residential sales, the Company has been able to keep its debt to equity ratio low, particularly during the Asian financial crisis, when a number of highly leveraged property development companies went bankrupt. Well-established brand name and reputation. The Company has completed a number of high quality residential condominium projects, townhouse projects, office projects and leisure and commercial developments throughout Metro Manila. As a result, the Company has developed a strong brand name and reputation as one of the Philippines leading property developers with the credibility of delivering high-quality developments. The Company has been named by Superbrands, an independent organization which identifies and recognizes the most-highly acclaimed brands throughout the world, as one of the Philippines top brands. The Company has also received ISO 9001 : 2000 series certification, which covers all aspects of the Companys operations, including its planning, design, project management and customer service operations, for quality control and systems management. As with other property developers in the Philippines, the Company finances a portion of project development costs through pre-sales of units. Since pre-selling is an industry practice, buyers place great importance on the track record and reputation of developers to reduce the completion risk relating to their properties. As a result, the Company believes that its reputation as a reliable property developer is particularly important in the Philippines to both attract and maintain quality buyers, tenants and joint development partners. Strong residential marketing network. The Company maintains an in-house marketing and sales division staffed by a trained group of property consultants who sell residential properties exclusively for the Company. All property consultants undergo intensive training prior to embarking on any sales activity and the Company provides an on-the-job skills enhancement program for its marketing and sales professionals to further develop their skills. In 1997, the Company was the first Philippine property company to create an international marketing and sales division specifically targeted at overseas Filipinos, and sales to this group have increased each succeeding year. The Companys international marketing and sales division is comprised of 23 offices worldwide. The Companys extensive residential marketing network enhances the Companys brand recognition and its ability to pre-sell residential units.

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STRATEGY The Companys objective is to increase its profitability and maintain its leading position as a major property developer in the Philippines, specifically in the middle-income residential condominium market and the market for BPO-related office developments. Megaworld intends to achieve its objective through the following principal strategies: . Maximize earnings through integrated community township developments. The Company believes it is able to maximize earnings by integrating residential, business and retail property components in an integrated master-plan approach. This allows the Company to capitalize on the live-work-play-learn concept to maximize its earnings from each sector. The complementary nature of having retail, business and residential properties within proximity to each other enhances the attractiveness, saleability and lease potential of the residential, office and retail properties in the community township. The Companys leadership position in crafting and delivering community township developments has strengthened over the years and continues to be its key strategy in bringing new projects to the market and in entering into new joint venture developments. Capitalize on brand and reputation. The Company believes that its strong brand name and reputation are key to its continued success. Since pre-selling is an industry practice in the Philippines, buyers place great importance on the track record and reputation of developers to reduce the completion risk relating to their properties. The Company intends to continue using its brand name and reputation to attract purchasers, tenants and joint development partners. The Company continues to enhance its reputation by employing and training a dedicated marketing staff and extensive sales network for its residential sales businesses who market the Megaworld brand. In addition, the Company is strategically involved in the aftersales market for the properties it develops by providing building management and other aftersales services such as interior design services. Maintain a strong financial position. The Company intends to maintain its strong financial position by controlling costs and increasing its gearing ratio only when necessary. The Companys gearing ratio is presently low. The Company is able to control development costs by generating a significant portion of its project financing from pre-sales of residential units. The Company typically does not begin construction of its residential buildings until it has sold approximately 70% of the units. Seventy percent of the Companys residential units are typically pre-sold within one year of project launch and over 90% are typically pre-sold prior to completion of construction. By securing post-dated checks and providing a variety of financing options to buyers, the Company limits its cash outlays prior to obtaining project funds. The Company also controls development costs by entering into joint development agreements with landowners, which is a cost-effective means of obtaining rights to develop land as initial costs are fixed and future payments are a fixed percentage of revenue from sales and leasing activity. Sustain a diversified development portfolio. An important part of the Companys long-term business strategy is to continue to maintain a diversified earnings base. Because the Companys community townships include a mix of BPO offices, retail, middle-income residential, educational/training facilities, leisure and entertainment properties within close proximity to each other, the Company is able to capitalize on the complementary nature of such properties. In addition, the community township developments enable the Company to generate profits from selling residential projects as well as invest in office and retail assets retained by the Company to generate recurring income and long-term capital gains. The Company intends to continue to pursue revenue and property diversification as it develops community townships with the live-work-play-learn concept in various stages throughout Metro Manila. The Company also intends to continue pursuing innovative product lines that may complement its existing developments, while maintaining a well-diversified earnings base.

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PROPERTY DEVELOPMENT PROJECTS The Companys property development projects consist of mixed-use residential and commercial developments located throughout Metro Manila in addition to residential units to be developed at the Araneta Center in Quezon City. The objective of each of the mixed-use developments is to provide an integrated community with high quality live-work-play amenities within close proximity to each other. For each development, the Company intends to lease all commercial and retail properties and sell all residential units. Where the Company is unable to sell all residential units in advance of completion, it intends to lease the residence for rental income. The location of each of the Companys projects is set out in the following map and each project is described in detail below.

Eastwood City

Description

Eastwood City is a mixed-use project in Quezon City, Metro Manila that integrates corporate, residential, education/training, leisure and entertainment components. In response to growing demand for office space with infrastructure capable of supporting IT-based operations such as high-speed telecommunications facilities, 24-hour uninterruptible power supply and computer security, the Company introduced the Eastwood City Cyberpark within Eastwood City, the Philippines first IT park. The Eastwood City Cyberpark includes the headquarters of IBM Philippines and Citibanks credit card and data center operations as anchor tenants. In connection with development of the cyberpark, the Company was instrumental in working with the Government to obtain the first PEZA-designated special economic zone status for IT parks. A PEZA special economic zone designation confers certain tax incentives such as an income tax holiday of four to six years and other tax exemptions upon businesses that are located within the zone. The planning of Eastwood City adopts an integrated approach to urban planning, with an emphasis on the development of the Eastwood City Cyberpark to provide offices with the infrastructure to support BPO and other technology-driven businesses, and to provide education/ training, restaurants, leisure and retail facilities and residences to complement Eastwood City Cyberpark.

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Set out below is a model of the Eastwood City development, which may not necessarily represent the eventual state of the actual property development.

Eastwood City Model The Company purchased a substantial portion of the land from General Textiles Inc. in 1995. The Eastwood City Cyberpark was designated a PEZA special economic zone in 1999. The following shows the mix of residential, office and leisure and entertainment properties that the Company expects when the project is completed.
Aggregate GFA (square meters) %

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leisure and Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes: (1) Saleable floor area. (2) Leasable floor area.

299,346(1) 149,500(2) 49,560 498,396

60 30 10 100

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Residential zone

The residential zone is expected to consist of eight projects with 17 high-rise towers. As of December 31, 2005, eight towers comprising 1,895 units have been completed. Set out below is a photo of the Eastwood City Residential Zone as it is expected to appear upon completion, which may not necessarily represent the eventual state of the actual property development.

Eastwood City Residential Zone Set out below is a photo of Eastwood Excelsior and artistic renditions of some of the towers as they are expected to appear upon completion, which may not necessarily represent the eventual state of the actual property development.

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Set out in the table below are details of each residential project as of December 31, 2005.
No. of floors (1) No. of units Aggregate GFA (2) (sq. meters) Actual/Expected completion date Units sold (%)

Olympic Heights Tower 1 . . . . . . Olympic Heights Tower 2 . . . . . . Olympic Heights Tower 3 . . . . . . Eastwood Lafayette 1 . . . . . . . . . Eastwood Lafayette 2 . . . . . . . . . Eastwood Lafayette 3 . . . . . . . . . Eastwood Excelsior 1 . . . . . . . . . Eastwood Excelsior 2 . . . . . . . . . One Orchard Road Tower1 . . . . . One Orchard Road Tower 2 . . . . . One Orchard Road Tower 3 . . . . . Grand Eastwood Palazzo Tower 1 . Grand Eastwood Palazzo Tower 2 . Eastwood Parkview 1 . . . . . . . . . Eastwood Parkview 2 . . . . . . . . . One Central Park . . . . . . . . . . . Eastwood Park Hotel & Residential Suite . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

30 30 30 16 19 25 30 34 43 38 35 38 38 40 40 37 37

224 224 224 180 180 199 260 404 448 448 448 368 352 530 530 364 269 5,652

17,472 17,094 17,248 6,630 7,886 9,679 10,525 15,810 21,392 21,392 21,392 20,323 14,507 30,461 30,461 21,751 15,323 299,346

3rd 4th 3rd 4th 4th 2nd 3rd 3rd 3rd 3rd 3rd 3rd 3rd 3rd 4th 4th

quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter

2003 2001 2003 2001 2001 2003 2005 2005 2006 2006 2006 2007 2007 2008 2008 2009

96 100 100 100 100 100 100 100 90 93 94 99 98 96 97 91 90

4th quarter 2010

Total . . . . . . . . . . . . . . . . . . . .
Notes: (1) Includes basement. (2) Saleable floor area.

Each tower is designed according to a specific theme and style. Typical building amenities include 24-hour security, high-speed elevators, parking, a pool and other recreational facilities. Each tower contains units that range from studios to two bedrooms. Purchasers may combine units.

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Corporate zone

Below are photos of some of the office properties in the Eastwood City Cyberpark, which may not necessarily represent the eventual state of the actual properties.

The office properties consist of seven Grade A office buildings as of December 31, 2005. Tenants in the cyberpark include major multinational corporations, largely comprised of software developers, data encoding and conversion centers, call centers, system integrations, IT and computer system support. The tenants are entitled to various tax incentives in conjunction with the PEZA special economic zone status conferred upon the Eastwood City Cyberpark. Set out in the table below are details of each corporate development as of December 31, 2005.
Total GFA (1) Aggregate GFA (2) (square meters) Actual/Expected completion date Occupancy rate (%)

Citibank Square . . . . . . . . . . . . . IBM Plaza . . . . . . . . . . . . . . . . . Eastwood Incubation Center . . . . . . TechnoPlaza One . . . . . . . . . . . . . International Centre for Information Technology Education (ICITE) . . . Eastwood Corporate Plaza . . . . . . . CyberOne . . . . . . . . . . . . . . . . . 1800 Eastwood . . . . . . . . . . . . . . 1880 Eastwood . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . .

26,125.00 45,000.00 6,800.00 19,400.00 3,200.00 14,000.00 40,150.00 35,000.00 35,000.00 224,475

5,500 24,000 6,800 15,000 3,200 10,000 15,000 35,000 35,000 149,500

3rd 1st 1st 2nd 2nd 2nd 2nd 4th 2nd

quarter quarter quarter quarter quarter quarter quarter quarter quarter

1999 2000 2001 2001 2001 2002 2004 2006 2009

100 95 100 100 100 100 90 0 0

Note: (1) Includes office space that has been sold. (2) Leasable floor area attributable to rental income.

Each of the buildings listed above is fully equipped with 24-hour IT infrastructure support. Each building comprises office space that typically has a column-free layout to provide flexibility in space planning and access to 24-hour dining facilities. Citibank Square is the headquarters of

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Citibanks credit card and data center operations in the Philippines. IBM Plaza houses IBM Philippines as its anchor tenant. 1800 Eastwood Avenue is currently under construction and a second block, to be identical to the first block and named 1880 Eastwood Avenue, will commence construction immediately thereafter. In addition, the corporate zone contains an IT training center.
Leisure and Entertainment zone

The leisure and entertainment zone consists of Eastwood Citywalk 1, a dining and entertainment hub, and Eastwood Citywalk 2, an amusement center with a state-of-the-art digital complex, a billiard and bowling center, restaurants and speciality shops. This zone also includes Fashion Square, a beauty and lifestyle center and Home Center, a one stop home improvement hub. Eastwood Citywalk I and II, Fashion Square and Home Center are designed to complement the office and residential buildings in the community township. The Company leases the properties in the leisure and entertainment zone to 189 commercial tenants. Set out below are photos of some of the retail properties comprising the leisure and entertainment zone, which may not necessarily represent the condition of the actual properties.

Set out below are the details of each development in the leisure and entertainment zone as of December 31, 2005.
Aggregate GFA (1) (square meters) Actual/Expected completion date Occupancy rate (%)

Citywalk 1 . . . . . . . . . Citywalk 2 . . . . . . . . . Home & Life Center . . Eastwood Fashion . . . . Eastwood Lafayette 1 & Cybermall . . . . . . . . . Eastwood Central Mall .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (commercial) . . . . . . . . . . . . . . . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

9,100 10,560 800 300 400 3,400 25,000 49,560

3rd 1st 2nd 2nd 2nd 2nd 4th

quarter quarter quarter quarter quarter quarter quarter

1999 2000 2004 2002 2001 2004 2008

94 95 100 100 100 92

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note: (1) Leasable floor area.

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BUSINESS Forbes Town Center

Description

The Forbes Town Center project is located on five hectares of land in Bonifacio Global City, Taguig, Metro Manila adjacent to the Manila Golf Club, the Manila Polo Club and the prestigious Forbes Park residential subdivision. Forbes Town Center is expected to consist of residential, retail and entertainment properties when completed. Set out below are models of the Forbes Town Center development, which may not necessarily represent the eventual state of the actual property development.

Forbes Town Center Model

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Forbeswood Heights Model The Company acquired development rights to Forbes Town Center by entering into a joint development agreement with landowner, Bonifacio West Development Corporation (the BWDC) in March 2002. The BWDC is 30% owned by Megaworld, who also has three seats on the BWDCs 11-member board of directors. Under the terms of the joint development agreement with the BWDC, the BWDC provides the Company with land to be developed for mixed-use projects. The Company is responsible for designing, planning and marketing the development as well as paying all expenses. The BWDC must approve the development plans. The first building was required to be, and was, launched by July 2002 and all development must be completed by 2014. In addition, the second building can not be launched until 70% of the first building is sold. The BWDC will share a certain percentage of the developed units and such same percentage from revenues earned from leased property. In the event that the Company fails to meet the conditions set out in the agreement, the BWDC may terminate the agreement and retain its land use rights over the unconstructed portions of the property. Title to the units will be allocated to the parties in accordance with their sharing arrangement. Upon completion and payment, Megaworld and the BWDC transfer the title of their respective units to the purchaser. In respect of title to the land underlying the residential units, title passes in escrow from the BWDC to the condominium association for each building upon completion of construction. The following shows the mix of residential and leisure and entertainment properties that the Company expects when the project is completed.
Aggregate GFA (square meters) %

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leisure and Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

240,000 20,000 260,000

92 8 100

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Residential zone

The residential zone upon completion is expected to consist of 13 towers. Set out in the table below are details of each residential project as of December 31, 2005. Set out below are artistic renditions of some of the towers as they are expected to appear upon completion, which may not necessarily represent the eventual state of the actual property development.

Forbeswood Heights

Forbeswood Parklane

Bellagio 1
No. of floors (1) No. of units

Bellagio 2
Aggregate GFA (2) (sq. meters) Expected completion date Units sold (%)

Forbeswood Heights Agoho . . . Forbeswood Heights Bauhinia . . Forbeswood Heights Cambridge . Forbeswood Heights Dorchester . Forbeswood Heights Evergreen . Forbeswood Heights Florida . . . Bellagio 1 . . . . . . . . . . . . . . . . Bellagio 2 . . . . . . . . . . . . . . . . Forbeswood Parklane North Side . . Forbeswood Parklane South Side . . Bellagio 3, 4, 5 . . . . . . . . . . . . .

. . . . . . . . . . .

19 21 21 21 18 25 41 43 32 39

173 197 197 230 161 245 324 386 253 341 2,507

7,634 8,692 8,692 9,919 7,105 10,808 26,078 27,182 11,247 14,337 131,694

4th 4th 4th 4th 4th 4th 4th 4th 4th 4th

quarter quarter quarter quarter quarter quarter quarter quarter quarter quarter 2009 to

2006 2006 2006 2007 2007 2007 2008 2008 2009 2009 2011

98 97 93 96 88 96 90 81 38 0 0

Total . . . . . . . . . . . . . . . . . . . .
Notes: (1) Includes basement. (2) Saleable floor area. 72

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Leisure and Entertainment zone

The leisure and entertainment zone is expected to consist of 20,000 square meters devoted to bars, restaurants, specialty shops and cinemas, which are designed to complement the office and residential buildings in this development as well as the surrounding office areas in Bonifacio Global City. Set out below is an artists rendition of the view of the leisure and entertainment zone at Forbes Town Center, which may not necessarily represent the eventual state of the actual property development.

View of Forbes Town Center

McKinley Hill

Description

The McKinley Hill project is located in Fort Bonifacio, Taguig, Metro Manila. McKinley Hill is expected to consist of office, residential, retail, educational, entertainment and recreational properties. Set out below is a model map of the proposed McKinley Hill development, which may not necessarily represent the eventual state of the actual property development upon completion.

Model of McKinley Hill Site

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Approximately twenty-five hectares of the land in McKinley Hill are owned by the BCDA, a Government agency organized to arrange for the disposal of Government-owned land occupied by military bases. Through a bidding process, the BCDA entered into a joint venture agreement with Alliance Global Group, Inc. (Alliance) in September 2003 for mixed-use development. The joint venture agreement provides that the BCDA and Alliance share all developed lots/units and rental revenues obtained from the development. Alliance is responsible for advancing = 927.8 million in P cash to the BCDA which has been paid. In addition, Alliance is required to guarantee payment of = approximately P 118.2 million to the BCDA each year for 15 years in case revenues from sales and rentals should fail to meet that minimum amount. The Company acquired development rights to McKinley Hill by entering into a joint development agreement with Alliance in July 2003. The development plans upon which Alliances bid was based are mirrored in the joint development agreement. In addition, Megaworld has posted a surety bond to cover Alliances guaranteed annual payment to the BCDA. As a condition under the joint venture arrangement, Megaworld has also posted a performance bond to secure Alliances compliance with its investment and other contractual commitments. Terms of the joint development agreement include completion of the = development and a minimum investment of P 2,060 million by 2013. Pursuant to the agreement, there is a management and development committee and a monitoring and audit committee, each of which have six members. There are no termination provisions in the joint development agreement between Alliance and Megaworld. The only termination provisions are contained in the joint venture agreement between the BCDA and Alliance which provide for termination in the event that, among other occurrences, the BCDA does not receive its required payments. Title to the land has been transferred in trust by the BCDA to the Company. Title to rental properties passes to the Company upon their completion. Ten hectares of land in McKinley Hill were sold to the Company from BCDA in February 2004. The deed of sale of this land has been completed and delivery is pending. The Company is required to make instalment payments of up to = 394.0 million with payment to be fully paid by January P 2008. In 2004, the Company leased sixteen additional hectares of land in McKinley Hill from the City of Taguig for 25 years with renewal rights. The leased property is zoned for exclusive use by schools, sporting facilities and other institutional uses. A portion of McKinley Hill constituting a 35.06 hectare corporate zone received PEZA special economic zone status on August 12, 2005 subject to receipt of local government approval. The Company is also responsible for, and has completed, horizontal development of McKinley Hill which is the development of raw land into residential lots by constructing roads, underground water supply systems, drainage and sewer lines and related facilities. The following shows the mix of residential, corporate and leisure and entertainment properties that the Company expects when the project is completed.
Aggregate GFA (square meters) %

Residential . Corporate . Leisure and Other . . . .

. . . . . . . . . . . . . . . . . . Entertainment . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

587,000 200,000 78,500 40,000 905,500

65 22 9 4 100

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

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Residential zone

The residential zone is expected to consist of a low density single-detached homes and low rise residential garden villas. Construction began in 2005. The Company has pre-sold 70% of the subdivision lots. The first villa is complete and a second villa is expected to be launched in the third quarter of 2006. Set out below are artistic renditions of the subdivision model homes and the garden villas as they are expected to appear upon completion, which may not necessarily represent the eventual state of the actual properties.

Lisbon-inspired Contemporary Mansion

Seville-style Patrician Casa

South California-style Estate House

Modern Maison in the Lyons tradition

Cadiz-inspired Spanish Mediterranean Casa

Paris-style Neo-classic Chateau

McKinley Hill Village Model Houses

McKinley Hill Garden Villas

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The subdivision is comprised of lots for the development of single-detached houses. The subdivision includes a clubhouse and communal swimming pool for residents. Buyers have the option to purchase an empty lot or to choose among model houses to be built on the lot. The residential zone is also comprised of garden villas. Tenants for two of the villas include the Korean International School, which is also building a campus in the McKinley Hill community township, as well as one other international school. The two schools are expected to use villas for staff housing.
Corporate zone

The office properties in McKinley Hill are expected to consist of Grade A office buildings. Tenants in the cyberpark are expected to include major multinational corporations, largely comprised of software developers, data encoding and conversion centers, call centers, system integrations, IT and computer system support and are entitled to various tax incentives in conjunction with the PEZA special economic zone status conferred upon the McKinley Hill Cyberpark. The total aggregate GFA in the cyberpark is approximately 200,000 square meters. The first office building in the cyberpark is expected to be completed by the end of 2007. Set out below is an artists rendition of a McKinley Hill office building as it is expected to appear upon completion, which may not necessarily represent the eventual state of the actual property development.

McKinley Hill Corporate Plaza

Leisure and Entertainment zone

The leisure and entertainment zone is expected to consist of bars, restaurants, specialty shops, cinemas and sports complex, which are expected to complement the office and residential buildings in the community township. The leisure and entertainment zone is expected to have a total GFA of approximately 78,500 square meters and construction is expected to commence in early 2007.
Other

Two international schools, the Korean International School and Enderun Colleges, have entered into agreements with the Company to build campuses in McKinley Hill. The residential housing for the schools will be constructed pursuant to joint development agreements where the Company contributes land and other parties are responsible for the design and construction of the residences.

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BUSINESS Newport City

Description

Newport City is a 25 hectare mixed-use project in Pasay City, Metro Manila in the Villamor Air Base and across the street from NAIA Terminal 3, integrating corporate, residential, leisure and entertainment components. The property is adjacent to the Villamor golf course. The planning of Newport City adopts a similar integrated approach to urban planning as Eastwood City with the exception that Newport City is targeted towards tenants and buyers where proximity to NAIA Terminal 3 is an advantage. The Company intends to enter into an agreement with a major international hotel management company to operate a five-star hotel on the premises. Newport City is expected to include medium-rise residential buildings and tourist-oriented retail developments. Set out below is a model of the Newport City development, which may not necessarily represent the eventual state of the actual property development.

Model of Newport City The Company acquired development rights to Newport City by entering into a joint development agreement with the BCDA in October 2003 for 17.5 hectares of land and purchased an additional seven hectares from the BCDA. Terms of the joint development agreement include the requirement that the Company organize and pay the costs associated with replicating existing structures to = another location within the base and provide an advance payment of P 62.0 million to the BCDA. = The Company is required to invest a minimum of P 200.0 million and complete the development within 12 years of the completion of clearing the existing structures. The BCDA is entitled to a percentage of the developed lots/units and revenue from leased properties. The joint development agreement may be terminated if the project completion timeline is not met or if the Company does not replicate the original structures. Title to the land subject to the joint development agreement will be held in trust by Megaworld to be transferred to the condominium association for each building upon project completion and receipt of sale proceeds. The Company intends to apply to PEZA for special economic zone status. The following shows the mix of residential, office and leisure and entertainment properties that the Company expects when the project is completed.
Aggregate GFA (square meters) %

Residential . Corporate . Leisure and Hotel . . . .

. . . . . . . . . . . . . . . . . . Entertainment . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

180,000 450,000 47,000 31,500 708,500

25 64 7 4 100

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

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Residential zone

The residential zone upon completion is expected to consist of 16 eight to nine storey medium-rise developments. The first cluster of residential towers were launched in 2005. The Company has sold 20% of the units as of December 31, 2005. Set out below is an illustration of the residential towers, which may not necessary represent their eventual state upon completion.

Phase 1 of the Newport City Residential Resort

Corporate zone

The office properties are currently expected to include Grade A office buildings. Tenants in the cyberpark are expected to include major multinational corporations, largely comprised of BPO businesses, cargo logistics services and airline-related businesses who consider close proximity to the airport to be an advantage. Similar to its other mixed-use communities, the Company expects to establish a PEZA special economic zone cyberpark at Newport City.
Leisure and Entertainment zone

The leisure and entertainment zone is expected to consist of bars, restaurants, retail and touristoriented shops, which are designed to complement the office and residential buildings in the community township. The Company plans to lease the leisure and entertainment zone area.
Hotel zone

The five-star hotel managed by an international company is expected to comprise 350 rooms and approximately eight to nine floors. Construction of the hotel is expected to commence in 2007.
Relocation of original structures

The Villamor Air Base is still partly occupied by its original residents, army barracks, schools and other structures. The Company and the BCDA have agreed to relocate the structures to other areas within the base as determined by the BCDA. The relocation process is ongoing.
Araneta Center

Description

The project at the Araneta Center is a residential development to consist of 17 residential towers, comprising 6,000 condominium units, on a four hectare property at the Araneta Center in Quezon City. The Araneta Center project is based on integrating a residential community with a major transportation hub, including a direct link to two major transport lines, the MRT-3 and the LRT2. All key areas along the transportation lines within Metro Manila will be easily accessible from

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the development. In addition, the Araneta Center includes leisure amenities such as a recently completed mall with a leasable GFA of 80,000, which was designed by US-based architects, RTKL International. The mall hosts a state-of-the-art cineplex with 10 theaters. The Company acquired development rights to four hectares at the Araneta Center by entering into a joint development agreement with its landowner, Araneta Center, Inc. (Araneta), in August 2005. The agreement requires Araneta to provide only the land, and the Company is required to develop a minimum of 274,917 square meters of net residential saleable area. The agreement also provides that the base of the residential towers must contain retail space of at least 20,080 square meters in aggregate, which will belong to Araneta. Development is to occur in four phases and Araneta is required to approve each phase. The development must be completed within 11 years. Araneta and the Company will share in the developed units and parking slots. All titles to land and to the units are deposited in escrow during construction. Title to the units are secured upon substantial completion of each phase of the project. Title to the land passes to a condominium association, which is established upon completion of each phase of the project. Launch of the residences is expected to begin in the third quarter of 2006. CONSTRUCTION ACTIVITIES The Company has its own architectural and engineering teams comprised of approximately 150 personnel and also engages independent groups to carry out the design of its high profile development projects. The Company has a team of project managers who work closely with outside contractors in supervising the construction phase of each project. The Company also has established relationships with a number of architectural firms in the Philippines such as Recio+Casas Architects and W.V. Coscolluella & Associates, and internationally such as Skidmore, Owings & Merrill in New York and Klages, Carter, Vail in California. The Companys top five contractors listed in order of total payments under construction contracts in 2005 were Steel Asia Mfg Corp, Omnico Consortium, Inc., JD Bernardo Engineering & Construction Inc., Universal Steel Melting Co. Inc. and Millenium Erectors Corp. The Companys contracts with its construction companies typically contain warranties for quality and requirements for timely completion of the construction process. In the event of delay or poor quality of work, the relevant contractor or supplier may be required to pay a penalty. In the past, the Company has not had any material disputes with any of its contractors or suppliers. The Companys principal raw materials are steel and cement which are commodities and are readily available in the market from a number of sources. The Company uses a standard form fixed-price contract for both its general and specialty construction contractors. The contracts typically include the following key terms: a downpayment of 10% is required from the contractor and is usually obtained in the form of a performance bond; progressive billing occurs on a monthly basis; and a 10% retention and warranty provision for workmanship is included and is typically covered by a guarantee bond. For the years ended December 31, 2003, 2004 and 2005, payments to the Companys single largest construction contractor accounted for approximately 5%, 6% and 7%, respectively of the Companys total payments under its construction contracts. For the same periods, payments to the Companys five largest construction contractors accounted for approximately 15%, 22% and 23%, respectively of the Companys total payments under its construction contracts. The Company has a broad base of construction contractors and suppliers and is not dependent on any one contractor or supplier. PRE-SALES, SALES AND MARKETING The Company conducts pre-sales of its property units prior to project completion and often, prior to construction. The Companys pre-selling process provides buyers with a variety of payment schemes, with down-payment plans ranging from 50% to no money down. A typical payment scheme includes progressive payments over the period in advance of property construction, including a balloon payment to coincide with buyers expected cash flows. The Company collects post-dated checks and confirms payment with buyers six months prior to project completion at which point the buyer may choose to replace its post-dated check with bank financing. Transfer of
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title to the property occurs only once all payments have been received. The payment structures are designed to appeal to middle class buyers. In each of the last three years, the Company has benefited from pre-sales of an average of 70% of its units a year from launch and an average of 90% unit pre-sales prior to completion. The Company maintains an in-house marketing and sales division for each of its projects which is comprised of 250 full-time sales agents. The marketing and sales division is staffed by a select and trained group of property consultants who exclusively market the Companys projects. All property consultants are trained prior to selling and the Company also provides a skills enhancement program intended to further develop the sales and marketing staff into high-caliber marketing professionals. Property consultants are recruited via newspaper advertising and required to meet the criteria set by the Company. The Company also works with outside agents who compete directly with the Companys in-house personnel. Both internal and external agents work on a commission basis, but in-house personnel also receive a small allowance. The Company also employs a marketing services staff of 25 employees whose job is to provide auxiliary services required by the marketing division for its sales and promotional activities. The group is also responsible for monitoring the latest developments in the economy and the real estate property markets as well as conducting market research studies for the marketing division. In addition, the Company has an international marketing division comprised of 10 employees based in Manila who oversee a global network of 23 sales offices which market the projects of the Company and its affiliates to overseas Filipino professionals and retirees throughout Asia, Europe, North America, the Middle East and Australia. The Company enters into marketing agreements with various brokers based in the different overseas markets, which will then market the Companys projects overseas through their respective marketing networks. PROPERTY MANAGEMENT AND AFTER-SALES SERVICES The Company remains involved in the properties it develops and sells through its property management group which provides property management and after-sales services. Services include building maintenance and interior design services. The property management group is a resource for the Company to obtain feedback from its purchasers and rental tenants in order to provide solutions to their property needs, maintain the property and develop long-term relationships with its tenants and purchasers. The property management group contributes to enhancing the Companys brand and reputation in the after-sales market. TENANTS AND LEASES The Company typically sells all of its residential property developments and maintains ownership of its commercial developments, renting these out to tenants. Where the Company is not able to sell 100% of its residential units upon completion, it rents these units out on a lease-to-own basis or lease with an option to buy. The Companys sells its residential properties primarily directly to end users and is not dependent on any single purchaser or purchasers. The Companys commercial leases are generally for terms of three to five years (with annual rental escalation and review provisions) and typically require three months security deposits and three months advance rent. For land leases and office tenants which require development of a specific building structure, the Company enters into long-term leases of 10 to 15 years. The lease payments the Company receives under its leases with retail tenants are based on a participation in the turnover of the tenants businesses. Rents are typically based upon a turnover component of 3% to 5% of revenues net of taxes and service charges in addition to a minimum rent charge. Kiosk retailers are charged a flat rent fee and theatres are co-owned with the Company. The Companys tenants are generally charged a monthly management fee assessed per square meter, which covers building maintenance expenses. Tenants are also required to pay their utility charges. The Company regularly monitors the performance of the tenants in its retail

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properties. The Company may elect not to renew the leases of retail tenants whose performance is lagging in order to improve its rental income. The Companys lease agreements typically have no pre-termination options. The percentage of revenues attributable to the Companys five largest office tenants combined for the years ended December 31, 2003, 2004 and 2005 were 39%, 31% and 29%, respectively. The Company has a broad tenant base and is not dependent on a single tenant or tenants. COMPETITION The Company competes with other property investment, development, leasing and property holding companies to attract purchasers and well as tenants for its properties in Metro Manila. The principal bases of competition in the real estate development business are location, product, price, financing, execution, completion, brand and service. The Company believes it has several competitive advantages in each of these categories due to the prime locations of its properties, innovative projects, a reputation for high quality designs, affordable pre-sales financing, after-sales service and a consistent track record of completion. With respect to community township developments, the Company considers Ayala Land, Inc. (Ayala) to potentially be its only significant competitor. However, in the majority of locations where the Companys community townships are located, Ayala is not present. With respect to its office and retail leasing business, the Company believes that there are many companies in the industry. Additional land is scheduled to be released by local city governments in Metro Manila and a number of developers have expressed an interest in developing such land in response to growing demands in the BPO market. However, Megaworld has not identified any direct competitor. The Company believes this is largely because its projects differ from those of other companies in the industry in terms of location, the availability of landbank and the concept of community township development to attract purchasers as well as tenants. INTELLECTUAL PROPERTY The Company believes that its operations and the operations of its subsidiaries are not dependent on any patent, trademark, copyright, license, franchise, concession or royalty agreement. INSURANCE The Company believes that its properties are covered by adequate fire, flood, riot, strike, malicious damage, typhoon, property and terrorist insurance provided by reputable companies with commercially reasonable deductibles and limits. The Company maintains earthquake insurance with respect to the buildings and commercial centers that it owns. It is not customary in the Philippines to maintain, and the Company does not maintain, title insurance with respect to its properties. RESEARCH AND DEVELOPMENT The Company incurs minimal amounts for research and development activities which do not amount to a significant percentage of revenues. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries, its associate or joint development partners or any of its or their properties is involved in or the subject of any legal proceedings which would have a material adverse effect on the business or financial position of the Company or any of its subsidiaries, its associate or joint ventures or any of its or their properties.

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EMPLOYEES As of December 31, 2005, the Company and its subsidiaries had 355 employees. 102 of these employees performed clerical functions. 101 employees were involved in operations and 122 performed administrative functions. The Company intends to hire additional employees if the present workforce becomes inadequate to handle the Companys operations. The Company anticipates that it will be hiring approximately 35 employees within the ensuing 12 months. The Company has no collective bargaining agreements with employees and no organized labor organizations in the Company. The Company complies with the minimum compensation and benefits standards pursuant to Philippine law. The Company provides for estimated retirement benefits in accordance Philippine retirement law pursuant to Republic Act 7641. The Company has not experienced any disruptive labor disputes, strikes or threats of strikes and the Company believes that its relationship with its employees in general is satisfactory. The principal properties that the Company owns, their location, condition and limitations on ownership, if any, are listed below:
Project Location Condition Limitations on Ownership

Condominium Units and 8 Wack Wack Road . . Golf Hills Terraces . . . Marina Square Suites . . Corinthian Hills . . . . . Paseo Parkview Suites . . Eastwood Excelsior . . . CyberOne . . . . . . . . . One Orchard Road . . . Greenbelt Radissons . . Greenbelt Parkplace . . Grand Eastwood Palazzo Eastwood Parkview . . . Forbeswood Heights . . . The Bellagio . . . . . . . .

Subdivision Lots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mandaluyong City Quezon City Manila Quezon City Makati City Quezon City Quezon City Quezon City Makati City Makati City Quezon City Quezon City Taguig City Taguig City

Completed Completed Completed Completed Completed Under development Completed Under development Completed Under development Under development Under development Under development Under development

Joint Venture Joint Venture None None Joint Venture None None None None Joint Venture None None Joint Venture Joint Venture

Rental Properties (1) Eastwood City Walk 1 and 2 Paseo Center . . . . . . . . . . Forbes Town Center . . . . . . ICITE . . . . . . . . . . . . . . . Eastwood Incubation Center . CyberOne . . . . . . . . . . . . CyberMall . . . . . . . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

Quezon City Makati City Taguig City Quezon City Quezon City Quezon City Quezon City

Completed Completed Completed Completed Completed Completed Completed

None None Joint Venture None None None None

Hotels (2) Richmonde Hotel . . . . . . . . . . . . . . . .

Pasig City

Completed

None

Footnotes: (1) Lease terms and rental rates vary depending on the property and the lessee. See Tenants and Leases. (2) The Richmonde Hotel is operated by subsidiary of the Company.

The Companys principal corporate headquarters are located on the 20th and 28th floors of The World Centre at Sen. Gil J. Puyat Avenue, Makati City. The Company owns both of the floors that it occupies.

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REGULATORY AND ENVIRONMENTAL MATTERS

Presidential Decree No. 957 as amended, is the principal statute which regulates the development and sale of real property as part of a condominium project or subdivision. Presidential Decree No. 957 covers subdivision projects and all areas included therein for residential, commercial, industrial and recreational purposes, and condominium projects for residential or commercial purposes. The HLURB is the administrative agency of the Government which, together with local government units, enforces this decree and has jurisdiction to regulate the real estate trade and business. All subdivision and condominium plans for residential, commercial, industrial and other development projects are subject to approval by the pertinent local government unit in which the project is situated. The development of subdivision and condominium projects can commence only after the local government unit has issued the development permit. The issuance of a development permit is dependent on, among others (i) compliance with required project standards and technical requirements which may differ depending on the nature of the project, and (ii) issuance of the barangay clearance, the HLURB locational clearance, and DENR permits, as discussed below. A bond equivalent to 10% of the total project cost is required to be posted by the project developer to ensure commencement of the project within one year from the issuance of the development permit. Further, all subdivision plans and condominium project plans are required to be filed with and approved by the HLURB. Approval of such plans is conditional on, among other things, the developers financial, technical and administrative capabilities. Alterations of approved plans which affect significant areas of the project, such as infrastructure and public facilities, also require the prior approval of the relevant local government unit. Owners of or dealers in real estate projects are required to obtain licenses to sell before making sales or other dispositions of lots or real estate projects. Dealers, brokers and salesmen are also required to register with the HLURB. Project permits and licenses to sell may be suspended, cancelled or revoked by the HLURB by itself or upon complaint from an interested party. Subdivision or condominium units may be sold or offered for sale only after a license to sell has been issued by the HLURB. The license to sell may be issued only against a performance bond posted to guarantee the completion of the construction of the subdivision or condominium project and compliance with applicable laws and regulations. There are essentially two different types of residential subdivision developments, which are distinguished by different development standards issued by the HLURB. The first type of subdivision, aimed at low-cost housing, must comply with Batas Pambansa Blg. 220, which allows for a higher density of building and relaxes some construction standards. Other subdivisions must comply with Presidential Decree 957, which set out standards for lower density developments. Both types of development must comply with standards regarding the suitability of the site, road access, necessary community facilities, open spaces, water supply, the sewage disposal system, electrical supply, lot sizes, the length of the housing blocks and house construction. Under current regulations, a developer of a residential subdivision is required to reserve at least 30% of the gross land area of such subdivision for open space for common uses, which include roads and recreational facilities. A developer of a commercial subdivision is required to reserve at least 3.5% of the gross project area for parking and pedestrian malls. Further, Republic Act No. 7279 requires developers of proposed subdivision projects to develop an area for socialized housing equivalent to at least 20% of the total subdivision area or total subdivision project cost, at the option of the developer, within the same city or municipality, whenever feasible, and in accordance with the standards set by the HLURB.

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REGULATORY AND ENVIRONMENTAL MATTERS

ZONING AND LAND USE Under the agrarian reform law currently in effect in the Philippines and the regulations issued thereunder by the Department of Agrarian Reform (DAR), land classified for agricultural purposes as of or after 15 June 1988, cannot be converted to non-agricultural use without the prior approval of DAR. Land use may be also limited by zoning ordinances enacted by local government units. Once enacted, land use may be restricted in accordance with a comprehensive land use plan approved by the relevant local government unit. Lands may be classified under zoning ordinances as commercial, industrial, residential or agricultural. While a procedure for change of allowed land use is available, this process may be lengthy and cumbersome.
Special Economic Zone

PEZA is a Government corporation that operates, administers and manages designated special economic zones (Ecozones) around the country. Ecozones, which are generally created by proclamation of the President of the Philippines, are areas earmarked by the Government for development into balanced agricultural, industrial, commercial, and tourist/recreational regions. An Ecozone may contain any or all of the following: industrial estates, export processing zones, free trade zones, and tourist/recreational centers. PEZA registered enterprises locating in an Ecozone are entitled to fiscal and non-fiscal incentives such as income tax holidays and duty free importation of equipment, machinery and raw materials. IT enterprises offering IT services (such as call centers, and business process outsourcing using electronic commerce) are entitled to fiscal and non-fiscal incentives if they are PEZA-registered locators in a PEZA-registered IT Park, IT Building, or Ecozone. An IT Park is an area which has been developed into a complex capable of providing infrastructures and other support facilities required by IT enterprises, as well as amenities required by professionals and workers involved in IT enterprises, or easy access to such amenities. An IT Building is an edifice, a portion or the whole of which, provides such infrastructure, facilities and amenities. PEZA requirements for the registration of an IT Park or IT Building differ depending on whether it is located in Metro Manila. Metro Manila is the area that covers the 12 cities of Manila, Caloocan, Las Pinas, Makati, Mandaluyong, Marikina, Muntinlupa, Paranaque, Pasay, Pasig, Quezon and Valenzuela and the five municipalities of Malabon, Navotas, Pateros, San Juan and Taguig. These PEZA requirements include clearances or certifications issued by the city or municipal legislative council, the DAR, the National Water Resources Board, and the DENR. The Company routinely secures the required governmental approvals for its projects during the planning and construction and marketing stages of project development. The Company is not aware of any pending legislation or governmental regulation that is expected to materially affect is business. The Company believes that it has obtained the required government approvals relevant for each project at its current state of development. ENVIRONMENTAL LAWS Development projects that are classified by law as environmentally critical or projects within statutorily defined environmentally critical areas are required to obtain an Environmental Compliance Certificate (ECC) prior to commencement. The DENR through its regional offices or through the Environmental Management Bureau (EMB), determines whether a project is environmentally critical or located in an environmentally critical area. As a requisite for the issuance of an ECC, an environmentally critical project is required to submit an Environmental Impact Statement (EIS) to the EMB while a project in an environmentally critical area are generally required to submit an Initial Environmental Examination (IEE) to the proper DENR regional office. In case of an environmentally critical project within an environmentally critical area, an EIS is required. The construction of major roads and bridges are considered environmentally critical projects for which EISs and ECCs are mandated.

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REGULATORY AND ENVIRONMENTAL MATTERS

The EIS refers to both the document and the study of a projects environmental impact, including a discussion of the direct and indirect consequences to human welfare and ecological as well as environmental integrity. The IEE refers to the document and the study describing the environmental impact, including mitigation and enhancement measures, for projects in environmentally critical areas. While the EIS or an IEE may vary from project to project, as a minimum, it contains all relevant information regarding the projects environmental effects. The entire process of organization, administration and assessment of the effects of any project on the quality of the physical, biological and socio-economic environment as well as the design of appropriate preventive, mitigating and enhancement measures is known as the EIS System. The EIS System successfully culminates in the issuance of an ECC. The issuance of an ECC is a Government certification, that the proposed project or undertaking will not cause a significant negative environmental impact; that the proponent has complied with all the requirements of the EIS System and that the proponent is committed to implement its approved Environmental Management Plan in the EIS or, if an IEE was required, that it shall comply with the mitigation measures provided therein. Project proponents that prepare an EIS are required to establish an Environmental Guarantee Fund (EGF) when the ECC is issued to projects determined by the DENR to pose a significant public risk to life, health, property and the environment. The EGF is intended to answer for damages caused by such a project as well as any rehabilitation and restoration measures. Project proponents that prepare an EIS are mandated to include a commitment to establish an Environmental Monitoring Fund (EMF) when an ECC is eventually issued. The EMF shall be used to support the activities of a multi-partite monitoring team which will be organized to monitor compliance with the ECC and applicable laws, rules and regulations. All development projects, installations and activities that discharge liquid waste into and pose a threat to the environment of the Laguna de Bay Region are also required to obtain a discharge permit from the Laguna Lake Development Authority. The Company incurs expenses for the purposes of complying with environmental laws that consist primarily of payments for Government regulatory fees. Such fees are standard in the industry and are minimal. PROPERTY REGISTRATION AND NATIONALITY RESTRICTIONS The Philippines has adopted a system of land registration which conclusively confirms land ownership which is binding on all persons, including the Government. Once registered, title to registered land can no longer be challenged except with respect to claims noted on the certificate of title. Title to registered lands cannot be lost through adverse possession or prescription. Presidential Decree No. 1529, as amended, codified the laws relative to land registration and is based on the generally accepted principles underlying the Torrens System. After proper surveying, application, publication and service of notice and hearing, unregistered land may be brought under the system by virtue of judicial or administrative proceedings. In a judicial proceeding, the Regional Trial Court within whose jurisdiction the land is situated confirms title to the land. Persons opposing the registration may appeal the judgment within 15 days to the Court of Appeals or the Supreme Court. After the lapse of the period of appeal, the Register of Deeds may issue an Original Certificate of Title. The decree of registration may be annulled on the ground of actual fraud within one year from the date of entry of the decree of registration. Similarly, in an administrative proceeding, the land is granted to the applicant by the DENR by issuance of a patent and the patent becomes the basis for issuance of the Original Certificate of Title by the Register of Deeds. All land patents such as homestead, sales and free patents, must be registered with the appropriate registry of deeds since the conveyance of the title to the land covered thereby takes effect only upon such registration.

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Any subsequent transfer of encumbrance of the land must be registered in the system in order to bind third persons. Subsequent registration and a new Transfer Certificate of Title in the name of the transferee will be granted upon presentation of certain documents and payment of fees and taxes. All documents evidencing conveyances of subdivision and condominium units should also be registered with the Register of Deeds. Title to the subdivision or condominium unit must be delivered to the purchaser upon full payment of the purchase price. Any mortgage existing thereon must be released within six months from the delivery of title. To evidence ownership of condominium units, a Condominium Certificate of Title is issued by the Register of Deeds. While the Philippine Constitution prescribes nationality restrictions on land ownership, there is generally no prohibition against foreigners owning building and other permanent structures. However, with respect to condominium developments, the foreign ownership of units in such developments is limited to 40%. PROPERTY TAXATION Real property taxes are payable annually based on the propertys assessed value. The assessed value of property and improvements vary depending on the location; use and the nature of the property. Land is ordinarily assessed at 20% to 50% of its fair market value; buildings may be assessed at up to 80% of their fair market value; and machinery may be assessed at 40% to 80% of its fair market value. Real property taxes may not exceed 2% of the assessed value in municipalities and cities within Metro Manila or in other chartered cities and 1% in all other areas. An additional special education fund tax of 1% of the assessed value of the property is also levied annually.

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SUBSIDIARIES AND AFFILIATES

As of December 31, 2005, the Company holds interests in the following subsidiaries and associates:
Subsidiaries and Associates Date of Incorporation Percentage Ownership

Subsidiaries Megaworld Land, Inc. . . . . . . . . . . . . . . . . . . . Prestige Hotels and Resorts, Inc. . . . . . . . . . . . . Mactan Oceanview Properties and Holdings, Inc. . . Megaworld Cayman Islands, Inc. . . . . . . . . . . . . Richmonde Hotel Group International . . . . . . . . . Eastwood CyberOne Corporation . . . . . . . . . . . . Forbes Town Properties and Holdings, Inc. . . . . . Megaworld Newport Property Holdings, Inc. . . . . Megaworld-Daewoo Corporation . . . . . . . . . . . . Megaworld Central Properties, Inc. . . . . . . . . . . Megaworld Globus Asia, Inc. . . . . . . . . . . . . . . Associates Empire East Land Holdings, Inc. . . . . . . . . . . . . Fairmont Holdings, Inc.. . . . . . . . . . . . . . . . . . Palm Tree Holdings and Development Corporation.

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

May 26, 1994 February 16, 1999 August 16, 1996 August 14, 1997 June 24, 2002 October 21, 1999 February 6, 2002 October 6, 2003 August 26, 1996 September 15, 2005 March 17, 1995 July 15, 1994 January 18,1956 (1) August 15, 2005

100% 100% 100% 100% 100% 100% 100% 100% 60% 60% 50% 45.22% 35.29% 40%

. . . . . . . . .

Note: (1) Fairmont was originally incorporated under the name Ramie Textiles, Inc. It adopted its present name on October 3, 2001.

The Company has, in certain circumstances, spun off certain of its business operations as a requirement of certain financing or statutory requirements to incorporate a separate company for a particular project or business operation. Set out below is a description of each subsidiary or associate company and its main activities. Megaworld Land, Inc. wholly owns Prestige Hotels & Resorts, Inc. It sells, leases and markets office space in the CyberPark to prospective locators. Prestige Hotels & Resorts, Inc. operates the Companys Richmonde Hotel in Ortigas Center. Mactan Oceanview Properties & Holdings, Inc. was organized to develop a resort property in Cebu into a first class, mixed-use residential and commercial condominium facility. Megaworld Cayman Islands, Inc. was incorporated in the Cayman Islands to act as a promoter and entrepreneur, carry on the business as a financier, broker, dealer, agent, and importer and to undertake all kinds of investments, financial, trading and other operations. Richmonde Hotel Group International Ltd. was incorporated in the British Virgin Islands to undertake all kinds of investments and engage in trading, hotel and restaurant and related businesses. The Company started commercial operations on October 30, 2002. Eastwood CyberOne Corporation is the developer of the CyberOne office condominium project located in the Eastwood City Cyberpark, Quezon City. Forbes Town Properties and Holdings, Inc. was organized primarily to act as a principal agent or broker, on commission basis or otherwise, and to acquire by purchase or lease, construct, manage or sell real estate properties. It has not started commercial operations as of December 31, 2005. Megaworld Newport Property Holdings, Inc. has not commenced commercial operations as of December 31, 2005.
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SUBSIDIARIES AND AFFILIATES

Megaworld-Daewoo Corporation has completed the development of Tower 2 of the Olympic Heights project, a 3-tower residential condominium project in Eastwood City, Quezon City. Megaworld Central Properties, Inc. has not commenced commercial operations as of December 31, 2005. Megaworld Globus Asia, Inc. has completed the development of The Salcedo Park, a twin-tower residential condominium project located along Sen. Gil J. Puyat Avenue, Makati City. Empire East Land Holdings, Inc. is engaged in the development and marketing of affordable housing projects either in the form of condominium communities or house-and-lot packages, and to a limited extent, commercial and office space and mixed-use complexes. Fairmont Holdings, Inc. was previously incorporated under the name Ramie Textiles, Inc. on January 18, 1956. It adopted its present name on October 3, 2001. Palm Tree Holdings and Development Corporation has not commenced commercial operations as of December 31, 2005.

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BOARD OF DIRECTORS AND EXECUTIVE OFFICERS The overall management and supervision of Megaworld is undertaken by the Board. Megaworlds executive officers and management team cooperate with Megaworlds Board by preparing appropriate information and documents concerning Megaworlds business operations, financial condition and results of operations for its review. Currently, the Board consists of seven members, of which two are independent directors. All of the directors were elected at the Companys annual stockholders meeting on June 17, 2005 and will hold office until their successors have been duly elected and qualified. The table sets forth each member of Megaworlds Board as of February 28, 2006.
Name Age Citizenship Position

Andrew L. Tan . . . . . George T. Yang . . . . Katherine L. Tan . . . . Cirilo L. Manlangit . . Thomas J. Barrack, Jr. Gerardo C. Garcia . . . Roberto Guevara . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

56 66 54 52 58 64 54

Filipino Filipino Filipino Filipino United States of America Filipino Filipino

Director, Chairman and President Director Director Director Director Independent Director Independent Director

The table below sets forth Megaworlds executive officers in addition to its executive directors listed above as of February 28, 2006.
Name Age Citizenship Position

Kingson Sian . . . . . . . . . Antonio Tan. . . . . . . . . . Lourdes Clemente . . . . . . Francisco Canuto . . . . . . . Enrique Santos L. Sy . . . . Noli Hernandez . . . . . . Ma. Victoria M. Acosta Edwin B. Maquinto . . . Luke T. Tan . . . . . . . . . . . . . . . .

44 44 42 48 56 36 44 44 35

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

Executive Director First Vice President for Operations First Vice President for Finance and Administration Treasurer Vice President for Corporate Communications Vice President for Marketing Managing Director for International Sales Corporate Secretary Assistant Corporate Secretary

Andrew L. Tan is the founder of the Company. He has served as Chairman of the Board and President of the Company since its incorporation in 1989. He concurrently serves as Chairman of the Board of Empire East Land Holdings, Inc. and Vice Chairman of Alliance Global Group, Inc. Mr Tan serves in the boards of subsidiaries, Eastwood CyberOne Corporation, Megaworld Land, Inc. and Megaworld Globus Asia, Inc. He is also Chairman of the Board of Megaworld Foundation, Inc. He also sits in the boards of Gilmore Property Marketing Associates, Inc., The Andresons Group, Inc., Raffles & Co., Consolidated Distillers of the Far East, Inc., Andresons Global Inc. and The Manila Banking Corporation. Mr. Tan graduated Magna Cum Laude from the University of the East with the degree of Bachelor of Science in Business Administration. In recognition of Mr. Tans role in spurring economic and societal development of the City of Taguig through the investments and development projects of the Company, the City of Taguig in April 2005 conferred on him the Forward Taguig Award in the Field of Business an Entrepreneurship. In 2004, the Quezon City government named Mr. Tan Businessman of the Year in recognition of his visionary leadership in transforming Eastwood City into a magnet for investments and the most dynamic growth center in Quezon City. In 2003, he was also named Most Outstanding Alumnus of the University of the East.

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George T. Yang has served as Vice Chairman of the Companys Board of Directors since 1994. Mr. Yang has extensive experience in real estate development, the fast food chain business and marketing of consumer products. He is Chairman of the Board of Alliance Global Group, Inc. and director of Empire East Land Holding, Inc. He is also President and Chairman of the boards of Golden Arches Development Corporation (McDonalds Philippines), HAVI Food Services Philippines, Inc., First Georgetown Ventures, Inc., Fun Characters, Inc., Fun Characters International Pte. Ltd. (Marketing Licensee for Walt Disney Company for Asean countries) and Kristin Management & Development Corporation. He also serves as Chairman of the Board of Ronald McDonald House Charities (Philippines), Trojan Computer Forms, Inc., MC Home Builders Depot, Construction Strategies & Management Corporation and GEC Land Development Corporation. He is also a member of the Board of Directors of Prime Gaming Management Corporation and a Member of the Board of Governors of The Philippine National Red Cross and The Tower Club. Mr. Yang graduated Cum Laude from the De La Salle College, Manila, with the degree of Bachelor of Science in Business Administration and holds a Masters Degree in Business Administration from the Wharton School, University of Pennsylvania, USA. Katherine L. Tan has served as a member of the Companys Board of Directors since 1989. She served as Treasurer of the Company from 1989 to 1994. She is concurrently Director and President of The Andresons Group, Inc., Consolidated Distillers of the Far East, Inc., Andresons Global Inc. and Raffles & Co., Inc. Ms. Tan graduated from St. Scholasticas College with a degree in Nutrition. Cirilo L. Manlangit has served as a member of the Companys Board of Directors since 1994. He is concurrently Executive Vice President of the Company. He also serves in the boards of subsidiaries, Megaworld Land, Inc., Eastwood CyberOne Corporation, Prestige Hotels & Resorts, Inc., Megaworld Daewoo Corporation and Megaworld Globus Asia, Inc. He is President of Megaworld Foundation, Inc. Mr. Manlangit also serves in the boards of Empire East Land Holdings, Inc., Eastwood Property Holdings, Inc., Fairmont Holdings Inc., and Gilmore Property Marketing Associates, Inc. Before joining the Company, he was head of the legal department and served as Corporate Secretary of Gateway Enterprises International Corporation. He was also Legal Officer and Corporate Secretary of Integrated Resources Corporation, Legal Officer of the Marina Properties Corporation and Associate Attorney of Dizon Paculdo Jurado Vitug & Associates Law Offices. Mr. Manlangit graduated from the University of the Philippines among the top ten of his class, with the degree of Bachelor of laws. Thomas J. Barrack, Jr. was elected as a director of the Company on May 19, 2004. He previously served as a member of the Companys Board of Directors from August 1999 until June 2002. Mr. Barrack is the Founder, Chairman and Chief Executive Officer of Colony Capital, LLC, which is one of the more prominent real estate opportunity funds in America having acquired assets in excess of US$13.9 billion. Prior to the formation of Colony, Mr. Barrack was a principal with the Robert M. Bass Group (RMBG), the principal investment vehicle of the Fort Worth, Texas investor Robert M. Bass. Prior to joining RMBG, Mr. Barrack served as President of Oxford Development Ventures, Inc., a $3 billion Canadian-based development company, and as a Senior Vice President of E.F. Hutton & Co. in New York. Mr. Barrack also served in the Reagan Administration as Deputy Undersecretary of the Department of the Interior. In 1976, Mr. Barrack began his real estate development career as President of Dunn International Corporation, where he oversaw the construction, operation and management of over seven million square feet of industrial, office, and multi-family properties in six states. He practiced international finance law until 1976. Mr. Barrack received a B.A. in 1969 from the University of Southern California. He attended Law School at the University of San Diego and the University of Southern California, where he was an editor of the Law Review and received a J.D. in 1972. Mr. Barrack serves on the Board of Directors of such publicly-traded companies as Continental Airlines, Inc. and First Republic Bank. Gerardo C. Garcia is an independent director of the Company. Mr. Garcia has served in the Companys Board of Directors since 1994. He concurrently serves in the boards of Megaworld Land, Inc., and Eastwood Property Holdings, Inc. as independent director. He is also a director of Philippine Tech. & Development Ventures, Inc. Prior to joining the Group, Mr. Garcia served as

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Executive Vice President of UBP Capital Corporation. He holds a bachelors degree in Chemical Engineering and a Masters Degree in Business Administration from the University of the Philippines. Roberto S. Guevara is an independent director of the Company. He has been a member of the Companys Board of Directors since June 20, 2001. Mr. Guevara is Chairman of the Board of Directors of Seed Capital Ventures, Inc., a company engaged in financial, management advisory services. He is also President of Seed Capital Corporation and RFC (HK) Limited. He serves on the board of other companies, such as Export & Industry Bank, G & S Transport Corporation, which is a licensee of Avis Car Rentals, Guevent Industrial Development Corporation and Radiowealth Finance Corporation. Kingson U. Sian joined the Group in September 1995 as Senior Vice President and is currently Executive Director of the Company. Mr. Sian graduated from the University of the Philippines with the degree of Bachelor of Science in Business Economics. He obtained his Masters Degree in Business Administration for Finance and Business Policy from the University of Chicago. He is concurrently Director and President of Prestige Hotels & Resorts, Inc. and President and Chief Operating Officer of Megaworld Land, Inc. Mr. Sian was formerly a Vice President of FPB Asia Ltd/First Pacific Bank in Hong Kong from 1990 to 1995. Prior to that, he was connected with Citicorp Real Estate, Inc. in the United States from 1988 to 1990. Antonio T. Tan joined the Company in July 1994 and is currently the Companys First Vice President for Operations. Mr. Tan graduated with honors from the Mapua Institute of Technology with the degree of Bachelor of Science in Civil Engineering. He topped the Professional Licensure Examinations for Civil Engineering in 1983. He also has a Masters Degree in Civil Engineering from the University of the Philippines. He is concurrently President of First Oceanic Property Management, Inc. and Director of Megaworld Land, Inc., Eastwood CyberOne Corporation, Megaworld Daewoo Corporation and Prestige Hotels & Resorts, Inc. He is a trustee of Megaworld Foundation, Inc. Before joining the Company, he worked as Group Head of Engineering in Consolidated Energy & Power Asia, Ltd., a Hopewell Holdings, Ltd. Company, and Senior Engineering of Basic Technology and Management Corporation in association with Pacific Consultants International of Japan. Lourdes G. Clemente joined the Company in 1990. Ms. Clemente is a Certified Public Accountant and is the Companys First Vice President for Finance and Administration. Ms. Clemente graduated Cum Laude from the Far Eastern University with the degree of Bachelor of Science major in Accounting. She is currently a director of Megaworld Land, Inc., Eastwood CyberOne Corporation, Prestige Hotels & Resorts, Inc. and Fairmont Holdings Inc. Prior to joining the Company, she was Audit Manager of Philippine Aluminum Wheels, Inc. and Senior Auditor in Cabanero Katigbak Clemente & Associates and RubberWorld Philippines. Francisco C. Canuto joined the Company in 1995. Mr. Canuto is a Certified Public Accountant and currently serves as Treasurer of the Company and Senior Assistant to the Chairman. He graduated from the Polytechnic University of the Philippines with the degree of Bachelor of Science in Commerce major in Accounting. Mr. Canuto has a Masters Degree in Business Administration from the Ateneo Graduate School of Business. He is concurrently a director of Eastwood Property Holdings, Inc., Megaworld Daewoo Corporation, Eastwood CyberOne Corporation, Prestige Hotels & Resorts, Inc. and Gilmore Property Marketing Associates, Inc. He is a trustee of Megaworld Foundation, Inc. Before joining the Company, he worked as Audit Manager of SGV & Company and Controller of Federal Express Corporation. In 2004, Mr. Canuto was named Outstanding Alumnus in Financial Management by the Polytechnic University of the Philippines during its centennial year. Enrique Santos L. Sy joined the Company in August 1989. Mr. Sy is Vice President for Corporate Communications. He is concurrently Corporate Secretary of Empire East Land Holdings, Inc. and a member of its Board of Directors. He also serves in the boards of Andresons Global, Inc. and First Oceanic Property Management Inc. Mr. Sy previously worked as Advertising Manager of Consolidated Distillers of the Far East, Inc., Creative Director of AdCentrum Advertising, Inc.,

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Copy Chief of Admakers, Inc. and Peace Advertising Corporation, and Creative Associate of Adformatix, Inc. Mr. Sy graduated with honors from the Ateneo de Manila University with the degree of Bachelor of Arts in Communication Arts. Noli Hernandez began his career with the Company as a property consultant in February 1994 and was appointed Vice President for Marketing on February 20, 2003. Mr. Hernandez rose from the ranks in the Company, starting out as a property consultant then becoming Sales Manager, Assistant Vice President, Senior Assistant Vice President, and finally to Vice President for Marketing. Ma. Victoria M. Acosta is Managing Director for International Sales and has held this position since September 1999. Prior to her appointment, Ms. Acosta had twenty years of marketing experience in real estate and consumer products with other companies. Ms. Acosta was Executive Vice President and Chief Operating Officer of Empire East Land Holdings, Inc. from 1997 to 1998 and was Executive Director for Marketing from 1996 to 1997. Earlier, she also served as Senior Vice President and General Manager of Raffles & Co., Inc. Ms. Acosta graduated from the University of the Philippines with the degree of Bachelor of Science in Business Administration major in Marketing & Finance. Edwin B. Maquinto is the Corporate Secretary of the Company and has held this position since 1997. Mr. Maquinto graduated from the University of the Philippines, with degrees in law and economics. He served as Special Assistant to the Legal and Corporate Manager of the Philippine Coconut Authority, Chief Legal Counsel of the FORZA group of companies, Legal Officer of the Office of Legal Affairs and Hearing Officer of the Garments and Textiles Export Board, both of the Department of Trade and Industry. Luke T. Tan serves as Assistant Corporate Secretary of the Company and has held this position since 1997. Mr. Tan graduated from the University of the Philippines with the degree of Bachelor of Science in Economics. He has a Masters Degree in Business Administration from the Ateneo de Manila University. The members of Megaworlds Board and its executive officers can be reached at the address of the principal office of Megaworld which is at the 28/F The World Centre, 330 Sen. Gil J. Puyat Avenue, Makati City, Philippines 1227. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS OF DIRECTORS AND EXECUTIVE OFFICERS None of the members of Megaworlds Board nor its executive officers are involved in any criminal, bankruptcy or insolvency investigations or proceedings for the past five years and up to the date of this Prospectus. FAMILY RELATIONSHIPS Mr. Andrew L. Tan and Ms. Katherine L. Tan, both directors of the Company, are spouses. COMMITTEES OF THE BOARD Pursuant to Megaworlds corporate governance manual adopted in 2002, its Board created each of the following committees and appointed board members thereto. AUDIT COMMITTEE Megaworlds Audit Committee is responsible for ensuring that all financial reports comply with internal financial management and accounting standards, performing oversight financial management functions, pre-approving all audit plans, scope and frequency and performing direct interface functions with internal and external auditors. Megaworlds Audit Committee has three voting members and two independent directors, one of whom services as the head of the committee.
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BOARD OF DIRECTORS AND SENIOR MANAGEMENT

COMPENSATION AND REMUNERATION COMMITTEE Megaworlds Remuneration and Compensation Committee is responsible for establishing a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of corporate officers and directors, as well as providing oversight over remuneration of senior management and other key personnel ensuring that compensation is consistent with the Companys culture, strategy and control environment. Megaworlds Remuneration and Compensation Committee consists of three voting members, including at least one independent director. NOMINATION COMMITTEE Megaworlds Nomination Committee pre- screens and shortlists all candidates nominated to become a member of the Board in accordance with qualifications prescribed by Philippine law and the Companys manual on corporate governance. Megaworlds Nomination Committee has three voting members, including at least one independent director. EXECUTIVE COMPENSATION
Summary Compensation Table

The following tables identify Megaworlds Chief Executive Officer and the four most highly compensated executive officers and summarize their aggregate compensation in 2003, 2004, 2005 and 2006 :
Annual Compensation Name A. 1. 2. 3. CEO and five most highly compensated executive officers Andrew L. Tan . . . . . . . . . . Cirilo L. Manlangit . . . . . . . Lourdes G. Clemente . . . . . . Position Year Salary Bonus 1,056,850 Others 2,511,345

2006 15,865,285 . . . .

4. 5. 6. B.

. . President . Executive Vice President . First Vice President for Finance and Administration Antonio T. Tan . . . . . . . . . . . . First Vice President for Operations Kingson U. Sian. . . . . . . . . . . . Executive Director Francisco C. Canuto . . . . . . . . . Treasurer All other officers and directors as a group unnamed . . . . . . . . . . . Annual Compensation 20,488,285 1,401,850 2,856,345

Name A. 1. 2. 3. CEO and five most highly compensated executive officers Andrew L. Tan . . . . . . . . . . Cirilo L. Manlangit . . . . . . . Lourdes G. Clemente . . . . . .

Position

Year

Salary

Bonus 919,000

Others 2,183,779

2005 13,795,900 . . . .

4. 5. 6. B.

. . President . Executive Vice President . First Vice President for Finance and Administration Antonio T. Tan . . . . . . . . . . . . First Vice President for Operations Kingson U. Sian. . . . . . . . . . . . Executive Director Francisco C. Canuto . . . . . . . . . Treasurer All other officers and directors as a group unnamed . . . . . . . . . . . 17,815,900 1,219,000 2,483,779

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BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Name A. 1. 2. 3. CEO and five most highly compensated executive officers Andrew L. Tan . . . . . . . . . . Cirilo L. Manlangit . . . . . . . Lourdes G. Clemente . . . . . .

Position 2004 . . . .

Salary 5,931,715

Bonus 750,000

Others 2,050,000

4. 5.

6. B.

. . President . Executive Vice President . First Vice President for Finance and Administration Antonio T. Tan . . . . . . . . . . . . First Vice President for Operations Enrique Santos L. Sy . . . . . . . . Vice President for Corporate Communications Francisco C. Canuto . . . . . . . . . Treasurer All other officers and directors as a group unnamed . . . . . . . . . . . Position CEO and five most highly compensated executive officers Andrew L. Tan . . . . . . . . . . Cirilo L. Manlangit . . . . . . . Lourdes G. Clemente . . . . . . Year 2003 . . . . 6,984,765 1,050,000 2,350,000

Name A. 1. 2. 3.

Salary 5,392,468

Bonus 658,000

Others 1,520,000

4. 5.

6. B.

. . President . Executive Vice President . First Vice President for Finance and Administration Antonio T. Tan . . . . . . . . . . . . First Vice President for Operations Enrique Santos L. Sy . . . . . . . . Vice President for Corporate Communications Francisco C. Canuto . . . . . . . . . Treasurer All other officers and directors as a group unnamed . . . . . . . . . . . 6,349,786 858,000 1,820,000

STANDARD ARRANGEMENTS The members of the Board receive a standard per diem for attendance in Board meetings. In 2004, = the Company paid a total of P 180,000 for directors per diem. For 2005, the Company has allocated = 420,000 for the directors per diem. Other than payment of the per diem, there are no P standard arrangements pursuant to which directors of the Company are compensated, or are to be compensated, directly or indirectly, for any services provided as a director for the years ended December 31, 2004 and 2005. OTHER ARRANGEMENTS There are no arrangements pursuant to which any director of the Company was compensated, or is to be compensated, directly or indirectly, during the years ended December 31, 2004 and 2005, for any service provided as a director. There are no compensatory plans or arrangements with respect to any named executive officer. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-INCONTROL ARRANGEMENT Executive officers are appointed by the Board to their respective offices. The Company does not enter into employment contracts with its executive officers. There is no compensatory plan or arrangement with respect to an executive officer which results or will result from the resignation, retirement or any other termination of such executive officers employment with the Company and its subsidiaries, or from a change-in-control of the Company, or a change in an executive officers responsibilities following a change-in-control of the Company.

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BOARD OF DIRECTORS AND SENIOR MANAGEMENT

WARRANTS AND OPTIONS OUTSTANDING There are no outstanding warrants or options held by the Companys President, the named executive officers, and all officers and directors as a group. DISCLOSURE ON COMPLIANCE WITH LEADING PRACTICES ON CORPORATE GOVERNANCE In 2002, the Company adopted a Manual on Corporate Governance in order to institutionalize the principles of good corporate governance in the entire organization. Among measures undertaken by the Company in order to fully comply with the provisions of the Corporate Governance Manual are periodic monitoring and evaluation of the internal control system for corporate governance. No sanctions have been imposed on any director, officer or employee on account of noncompliance. The Company is committed to good corporate governance and continues to improve and enhance its evaluation system for purposes of determining the level of compliance by the Company with the Manual on Corporate Governance.

95

RELATED PARTY TRANSACTIONS

Transactions with related parties include investments in and advances granted to or obtained from subsidiaries, an associate and other related parties. Other related parties include joint venture partners (see Note 9 to Financial Statements, Advances to Landowners and Joint Ventures) and investees which investments are accounted for at cost and other entities which are owned and managed by investors/owners of the Company (see Note 10 to Financial Statements, Related Party Transactions). Advances granted to joint venture partners are in the nature of cash advances made to landowners under agreements covering the development of parcels of land, which are to be used for pre-development expenses such as relocation of existing occupants. Repayment of these advances shall be made upon completion of the project development either in the form of the developed lots corresponding to the landowners share in saleable lots or in the form of cash to be derived from sales of the landowners share in the saleable lots and residential and condominium units. The commitment for cash advances under the agreements has been fully granted by the Company. In 2003, the Company entered into a Memorandum of Understanding with Alliance Global Group, Inc. for the development of the Lawton Parkway project. Total amount advanced by the Company for the project is recorded as part of the Property Development Costs account in the balance sheets. Advances granted to and obtained from subsidiaries, an associate and other related parties are for purposes of working capital requirements. For more information, see Note 9 to the Financial Statements included with this Prospectus. The Company avails of marketing services of Eastwood Properties and Holdings, Inc. (EPHI), a wholly-owned subsidiary of EELHI, and Megaworld Land, Inc. (MLI), which acts as a manager and leasing agent for the commercial properties of the Company. (See Note 19, Other Related Party Transactions). As consideration for said marketing services, the Company pays commission based on contracted terms. Commission expenses charged by EPHI and MLI are based on prevailing market rates. Certain subsidiaries and related parties enter into real estate transactions with the Company. Amounts due to or from these entities arising from these transactions are shown as part of Trade and Other Receivables (See Note 7 to Financial Statements) and Trade and Other Payables accounts in the balance sheets. In 2002, the Company transferred certain trade receivables, real estate properties and related deferred credits to ECOC, in exchange for additional shares of stock of the subsidiary under a taxfree exchange. The excess of the values assigned to the shares over the cost of the transferred properties was taken up in the parent companys books as unrealized gain on intercompany transfers of properties deducted from the investments account. The Companys remaining advances to ECOC were settled by the subsidiary using part of the proceeds of its new loan (See Note 14 to the Financial Statements) and by the issuance of additional shares of its capital stock. In 2003, the Republic of the Philippines bonds owned by a subsidiary were used as collateral for a loan obtained by the Company from a local bank (See Note 8 and 14 to the Financial Statements). Other than those disclosed in the audited Financial Statements included in this Prospectus, including the notes thereto, the Company has not entered into any other related party transactions.

96

PRINCIPAL AND SELLING SHAREHOLDERS

PRINCIPAL SHAREHOLDERS The following table sets forth the twenty largest shareholders of Megaworld as of December 31, 2005.
Number of Shares Held Percent of Total Outstanding Shares

Name of Shareholder

The Andresons Group, Inc. . . . . . . . . . . . . . . . . . . . New Town Land Partners, Inc. . . . . . . . . . . . . . . . . . PCD Nominee Corporation (Filipino) . . . . . . . . . . . . . PCD Nominee Corporation (Non-Filipino) . . . . . . . . . . Colony-CB Richard Ellis MW, L.P. . . . . . . . . . . . . . . Andrew L. Tan . . . . . . . . . . . . . . . . . . . . . . . . . . . Richmonde Hotel Group International Limited . . . . . . . Gilmore Property Marketing Associates, Incorporated . . . First Centro, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . George T. Yang . . . . . . . . . . . . . . . . . . . . . . . . . . Ramon Eng Chuan Chua . . . . . . . . . . . . . . . . . . . . . Valentin T. Khoe . . . . . . . . . . . . . . . . . . . . . . . . . . Simon Lee Sui Hee. . . . . . . . . . . . . . . . . . . . . . . . . Eagle Equities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . Evangeline Abdullah . . . . . . . . . . . . . . . . . . . . . . . . Jasper Karl Tanchan . . . . . . . . . . . . . . . . . . . . . . . . OCBC Securities Phils., Inc. Fao: Santiago J. Tanchan Jr. Guevent Industrial Dev. Corp. . . . . . . . . . . . . . . . . . Winston Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chua Lee Keng . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

3,372,886,164 2,283,813,000 1,588,655,171 945,503,798 723,166,452 608,735,919 474,000,000 221,547,825 69,636,000 33,617,449 30,000,000 9,156,360 8,845,200 8,550,000 5,400,000 5,370,300 5,265,000 5,220,000 5,180,760 4,206,734

31.6538% 21.4331% 14.9092% 8.8733% 6.7868% 5.7128% 4.4484% 2.0792% 0.6535% 0.3155% 0.2815% 0.0859% 0.0830% 0.0802% 0.0507% 0.0504% 0.0494% 0.0490% 0.0486% 0.0395%

SELLING SHAREHOLDER The table below shows the number of Shares held by the Selling Shareholder before the Offer, the number of Shares to be sold in the Offer, and the number of Shares the Selling Shareholder will own immediately after the Offer and after the Domestic Block Sale to be executed in parallel with the Offer.
Shares to be sold pursuant to Shares to be exercise of Oversold in Offer Allotment Option Shares held after Offer and Domestic Block Sale

Shares before Offer as of December 31, 2005

% of Shares outstanding

723,166,452

6.7%

423,166,000

Colony-CB beneficially owned 723,166,452 Shares, or approximately 6.7% of the Companys outstanding Shares. Colony-CB is represented on the Board of Megaworld through its nominee, Thomas J. Barrack, Jr. While retaining utmost confidence in Megaworlds growth strategy and management team, Colony Investors III, L.P., the managing member of the Selling Shareholders general partner and an affiliate of Colony Capital, LLC which invested in Megaworld in 1998, decided to sell its entire shareholding in Megaworld given that the hold period for this investment is now approaching the time period limitations which are imposed under the applicable limited partnership agreement. The Company, TAGI, New Town Land and Mr. Andrew Tan have each agreed with the Lead Manager that, other than in connection with the Over-Allotment Option or the TAGI Option, for a period of 180 days after the First Closing Date, neither it nor any person acting on its behalf will issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of), directly or indirectly, any Shares or securities convertible or

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PRINCIPAL AND SELLING SHAREHOLDERS

exchangeable into or exercisable for Shares, including equity swaps, forwards, sales or options or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities without, in each case, the prior written consent of the Lead Manager. SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Record and Beneficial Owners of more than 5% of the Companys Shares of Common Stock as of February 28, 2006
Name of beneficial owner and relationship with record owner The Andresons Group, Inc. 2

Title of Class

Name and address of record owner and relationship with the Company

Citizenship Filipino

No. of Shares Held 3,379,036,164

% of Class 31.7114%

Common . . . . . . . . . The Andresons Group, Inc. (TAGI) 1 20/F IBM Plaza, Eastwood City, Quezon City Common . . . . . . . . . New Town Land Partners, Inc. (NTLPI) 3 , 30/F The World Centre, Sen, Gil Puyat, Ave, Makati Common . . . . . . . . . PCD Nominee Corporation (Filipino) 5 , G/F MKSE Bldg., 6767 Ayala Ave., Makati Common . . . . . . . . . PCD Nominee Corporation (nonFilipino) 6 , G/F MKSE Bldg., 6767 Ayala Ave., Makati Common . . . . . . . . . Social Security System (SSS)

New Town Land Partners, Inc. 4

Filipino

2,283,813,000

21.4331%

Participants of the Filipino PCD composed of custodian banks and brokers Participants of the NonPCD composed Filipino of custodian banks and brokers

1,540,357,492

14.4559%

945,503,798

8.8733%

Social Security System (SSS) 7

Filipino

760,928,400

7.1411%

Common . . . . . . . . . Colony-CB Richard Ellis, Colony-CB MW, L.P. Richard Ellis, M.W., L.P. 8 Common . . . . . . . . . Andrew L. Tan Common . . . . . . . . . PCD Nominee Corporation (Filipino), G/F MKSE Building, 6767 Ayala Ave., Makati Andrew L. Tan 9

U.S.A.

723,166,452

6.7868%

Filipino Filipino

604,235,919 4,500,000

5.67061% 0.04233%

Notes: (1) The Chairman of the Board of TAGI, Mr. Andrew L. Tan, is also Chairman of the Board and President of the Company. (2) The Board of Directors of TAGI has voting and investment power over TAGIs shares of stock in the Company. TAGI has in the past designated its Chairman of the Board, Mr. Andrew L. Tan, to vote TAGIs shares of stock in the Company. (3) Mr. Andrew L. Tan who exercises voting and investment power over NTLPIs shares of stock in the Company, is concurrently Chairman of the Board of Directors and President of the Company. (4) Mr. Andrew L. Tan exercises voting and investment power over NTLPIs shares of stock in the Company. (5) The PCD is not related to the Company. (6) The PCD is not related to the Company. 98

PRINCIPAL AND SELLING SHAREHOLDERS

(7) SSS is a participant of the PCD. The 760,928,400 shares beneficially owned by SSS form part of the shares registered in the name of the PCD (Filipino). The Board of Directors of the SSS exercises voting and investment power over the SSS shares of stock in the Company. Colony MW Genpar, LLC, a Delaware limited liability company exercises voting and investment power over ColonyCBs shares of stock in the Company, as the sole member of Colony-CB. Andrew L. Tan is a client of a participant of PCD Nominee Corporation (Non-Filipino)

(8) (9)

Security Ownership of Management as of February 28, 2006

Amount & nature of beneficial ownership Citizenship

Title of Class

Name of Beneficial Owner

% of Class

Directors Common . Common . Common . Common . Common . Common . Common .

. . . . . . .

Andrew L. Tan Gerardo C. Garcia George T. Yang Cirilo L. Manlangit Katherine L. Tan Thomas Barrack, Jr. Roberto S. Guevara

608,735,919 350,774 33,617,449 780,007 1,351,166 1 1

Filipino Filipino Filipino Filipino Filipino U.S.A. Filipino

5.71284822 00329193 31549211 00732019 01268038 0.000 0.000

CEO and Five Most Highly Compensated Executive Officers Common . . Andrew L. Tan Common . . Cirilo L. Manlangit Common . . Lourdes G. Clemente Common . . Antonio T. Tan Common . . Kingson U. Sian Common . . Francisco C. Canuto Other Executive Officers Common . . Enrique Santos L. Sy Common . . Noli Hernandez Common . . Ma. Victoria M. Acosta Common . . Edwin B. Maquinto Common . . Luke T. Tan Common . . All directors and executive officers as a group

608,735,919 780,007 479,924 533,250 350,000 181,800

Filipino Filipino Filipino Filipino Filipino Filipino

5.71284822 00732019 00450398 00500443 00328467 00170615

80,553 0 0 0 107,406 646,568,250 1

Filipino Filipino Filipino Filipino Filipino

00075597 n/a n/a n/a 00100798 6.06789

CHANGES IN CONTROL There has been no change in the control of the Company since it was incorporated in 1989.
Note: 1 No director or executive officer has the right to acquire additional shares of the Company within 30 days from options, warrants, rights, conversion privileges or similar obligations or otherwise.

99

DESCRIPTION OF THE SHARES

HISTORICAL SHARE CAPITAL INFORMATION On October 12, 2005, the Securities and Exchange Commission approved the increase in = authorized capital stock of the Company from P 13,200,000 divided into 9,200,000 common shares = and 4,000,000 preferred shares with par value of = 1.00 per share, to P 20,200,000 divided into P = 16,200,000 common shares and 4,000,000 preferred shares with par value of P 1.00 per share. The increase was approved by majority of the Board of Directors of the Company on May 10, 2005 and ratified by stockholders of the Company owning at least two-thirds of the outstanding capital stock of the Company on June 17, 2005. The number of Megaworlds issued share capital was 10,655,559,106 as of December 31, 2005. Between 1994 when the Shares were listed and December 31, 2005, Megaworld had five stock = dividend declarations. On February 28, 2006, the Board approved its first cash dividend of P 0.02 per Share, payable on April 10, 2006 to shareholders on record as of March 15, 2006. OBJECTS AND PURPOSES The Articles of Incorporation of Megaworld state that its primary purpose and secondary purpose is to engage in the following business activities: . To invest in, purchase, or otherwise acquire and own, hold, use, sell, assign, transfer, mortgage, pledge, hypothecate, exchange, or otherwise dispose of real and personal property of every kind and description, including shares of stock, bonds, debentures, notes, evidence of indebtedness, and other securities or obligations of any corporation or corporations, association or associations, domestic or foreign, for whatever lawful purpose or purposes the same may have been organized and to pay therefore in money or by exchanging therefore stocks, bonds, or other evidence of indebtedness or securities, and while the owner or holder of any such real or personal property, stocks, bonds, debentures, contracts, or obligations, to receive, collect, and dispose of the interest, dividends, and income arising from such property, and to possess and exercise in respect thereof all the rights, powers, and privileges of ownership, including all voting powers of any stock so owned; To acquire by purchase, lease, donation of otherwise and to own, use, improve, develop, subdivided, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, and to construct, improve, manage or otherwise dispose of buildings, condominiums and other structures of whatever kind, together with their appurtenances; and, to perform all and everything necessary and proper for the attainment of or in furtherance of this purpose, either alone or in association with other corporations or individuals; To conduct, maintain, engage in, and carry on the business of acquiring, constructing, developing and/or operating hotels, inns, lodges, motels, resorts, leisure parks, gaming and other tourist-oriented projects; to conduct, maintain, engage in, or carry on the business of acquiring, constructing, developing, and/or operating restaurants, cafes, bars, clubs, gardens, shops, stalls, boutiques, parlors, gyms, and other allied or similar establishments as complimentary or support services therefore; and, to acquire, operate and/or maintain transportation, shuttle, and/or ferry facilities and/or services, either by land, water or air, likewise as complimentary or support services therefore, either alone or in conjunction with others; To engage in the research, development, manufacture, marketing and distribution of technology and all technology-related or derived products and/or services; To carry out a general and commercial business of importing and exporting, manufacturing, processing, buying, acquiring, holding, selling, trading, distributing, or otherwise disposing of and dealing in any and all kinds of industrial, agricultural, engineering, construction,

100

DESCRIPTION OF THE SHARES

transport, kitchenwares, ovenwares, and utensils, household or office goods, materials, supplies, machineries, equipment, appliances, implements, devices, wearing apparel, clothing materials, food or grocery items, food and beverage flavours, essences, industrial oils, aromatics, fragrances, liquors, beverages, ophthalmic instruments and products, cosmetic and dermatological applications, and products of all classes and description which are within the commerce of man, as well as those similar and allied to them, at wholesale, either as principals, distributors, factors, agents or commission merchants, and to do every other thing commonly done by those conducting a similar business; . To promote, establish, operate, manage, own or invest in any and all kinds of business enterprises or assist or participate in the organization, merger or consolidation thereof, and in connection with such activities, to subscribe to, purchase or otherwise acquire shares of stock or other evidence of equity participation in any business enterprise, or purchase or otherwise acquire all or part of assets, franchises, concessions or goodwill of any firm, corporation or establishment as may be allowed by law; and To borrow money, to make and issue notes, and other evidences of indebtedness of all kinds and to secure the same by mortgage, pledge or otherwise, in amounts as the business of the Company may require.

Under Philippine law, a corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors and ratified by the stockholders representing at least two-thirds of the outstanding capital stock, at a stockholders meeting duly called for the purpose; provided, however, that where the investment by the corporation is reasonably necessary to accomplish its primary purpose, the approval of the stockholders shall not be necessary. SHARE CAPITAL A Philippine corporation may issue common or preferred shares, or such other classes of shares with such rights, privileges or restrictions as may be provided for in the articles of incorporation and the by-laws of the corporation. Megaworld has both preferred and common shares. The shares of stock of a corporation may either be with or without a par value. All of Megaworlds shares, both preferred and common, currently issued or authorized to be issued have = a par value of P 1.00 per share. In the case of par value shares, where a corporation issues shares at a price above par, whether for cash or otherwise, the amount by which the subscription price exceeds the par value is credited to an account designated as paid-in surplus. The Philippine SEC ruled in September 2005 that such premium may not be distributed as cash or stock dividends. Subject to approval by the Philippine SEC, a corporation may increase or decrease it authorized capital stock, provided that the change is approved by a majority of the board of directors and by shareholders representing at least two-thirds of the issued and outstanding capital stock of the corporation voting at a shareholders meeting duly called for the purpose. A corporation is empowered to acquire its own shares for a legitimate corporate purpose, provided that the corporation has unrestricted retained earnings or surplus profits sufficient to pay for the shares to be acquired. Examples of instances in which the corporation is allowed to purchase its own shares are: elimination of fractional shares arising out of stock dividends, the purchase of shares of dissenting shareholders exercising their appraisal right as referred to below and the collection or compromise of an indebtedness arising out of an unpaid subscription. When a corporation repurchases its own shares, the shares become treasury shares, which may be resold at a reasonable price fixed by the board of directors. LIMITATIONS OF FOREIGN OWNERSHIP Megaworld owns certain real estate and as such, it is subject to nationality restrictions found under the Philippine Constitution and other laws, limiting land ownership to Philippine Nationals. The term Philippine National as defined under the Republic Act No. 7042, as amended, shall
101

DESCRIPTION OF THE SHARES

mean a citizen of the Philippines, or a domestic partnership or association wholly owned by citizens of the Philippines, or a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines or a corporation organized abroad and registered to do business in the Philippines under the Corporation Code of the Philippines of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine Nationals. Megaworld is thus constrained to keep it foreign equity interest below the 40% threshold and any sale or transfer of shares in excess of this threshold shall not be recorded in the stock and transfer book of the Company. RIGHTS RELATING TO SHARES
Voting Rights

Megaworlds Shares have full voting rights. As a general rule, the holders of preferred shares are not to be voted as directors of the Company nor are they entitled to vote. Philippine law, however, provides for the following instances in which non-voting shares (such as the preferred shares) are given statutory voting rights: . . . Amendment of the articles of incorporation; Adoption and amendment of by-laws; Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the corporation with another corporation; Investment of corporate funds in another corporation or business; and Dissolution of the corporation.

. . . . .

Pre-emptive Rights

The Corporation Code confers pre-emptive rights on shareholders of a Philippine corporation entitling such shareholders to subscribe for all issues or other dispositions of equity related securities by the corporation in proportion to their respective shareholdings, regardless of whether the equity related securities proposed to be issued or otherwise disposed of are identical to the shares held. A Philippine corporation may provide for the denial of these pre-emptive rights in its articles of incorporation. The Articles of Incorporation of Megaworld currently contain such a denial of pre-emptive rights on all classes of shares issued by the Company and therefore further issues of shares (including treasury shares) can be made without offering such shares on a preemptive basis to the existing shareholders.
Derivative Rights

Philippine law recognizes the right of a shareholder to institute proceedings on behalf of the corporation in a derivative action in circumstances where the corporation itself is unable or unwilling to institute the necessary proceedings to redress wrongs committed against the corporation or to vindicate corporate rights as, for example, where the directors themselves are the malefactors.
Appraisal Rights

The Corporation Code grants a shareholder a right of appraisal in certain circumstances where he has dissented and voted against a proposed corporate action, including:

102

DESCRIPTION OF THE SHARES

an amendment of the articles of incorporation which has the effect of adversely affecting the rights attached to his shares or of authorizing preferences in any respect superior to those of outstanding shares of any class or of extending or shortening the term of corporate existence; the sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially all the assets of the corporation; and a merger or consolidation. In these circumstances, the dissenting shareholder may require the corporation to purchase its shares at a fair value, which in default of agreement is determined by three disinterested persons, one of whom shall be named by the shareholder, one by the corporation, and the third by the two thus chosen. The Philippine SEC will, in the event of a dispute, determine any question about whether a dissenting shareholder is entitled to this right of appraisal. The remedy will only be available if the corporation has unrestricted retained earnings sufficient to support the purchase of the shares of the dissenting shareholders. From the time the shareholder makes a demand for payment until the corporation purchases such shares, all rights accruing on the shares, including voting and dividend rights, shall be suspended, except the right of the shareholder to receive the fair value of the share. BOARD OF DIRECTORS Unless otherwise provided by law or the Articles of Incorporation, the corporate powers of the Company are exercised, its business conducted, and its property controlled by the Board. The Company has seven directors, two of which are independent directors within the meaning set forth in Section 38 of the SRC. The election of directors may only be held at a meeting convened for that purpose at which shareholders representing at least a majority of the issued and outstanding capital stock are present, either in person or by proxy. Under Philippine law, representation of foreign ownership on the Board is limited to the proportion of the foreign shareholding. Directors may only act collectively; individual directors have no power as such. Four directors, which is a majority of the total Megaworld directors, constitute a quorum for the transaction of corporate business. Except for certain corporate actions such as the election of officers, which shall require the vote of a majority of all the members of the board of directors, every decision of a majority of the quorum duly assembled as a board is valid as a corporate act. Any matter that may be limited by law or by the board of directors by the majority vote of its members Any vacancy created by the death, resignation or removal of a director prior to expiration of such directors term may be filled by a vote of at least a majority of the remaining members of the Board, if still constituting a quorum, otherwise, the vacancy must be filled by the shareholders at a meeting duly called for the purpose. Any director elected in this manner by the Board shall serve only for the unexpired term of the director whom such director replaces. SHAREHOLDERS MEETINGS
Annual Shareholders Meetings

The Corporation Code requires all Philippine corporations to hold an annual meeting of shareholders for corporate purposes including the election of directors. The Companys by-laws provide for annual meetings on the third Friday of June of each year at the Companys principal office or at some other place in Metro Manila as may be designated in the notice. If the date of the annual meeting falls on a legal holiday, the annual meeting shall be held on the next succeeding business day, which is not a legal holiday, at such hour as may be specified in the notice of said meeting. If the election of directors shall not be held on the day designated for the annual meeting or at any adjournment of such meeting, the board of directors shall cause the election to be held at a special meeting as soon thereafter as the same may conveniently be held. At such special meeting, the shareholders may elect the directors and transact other business as stated in the notice of the

103

DESCRIPTION OF THE SHARES

meeting with the same force and effect as at an annual meeting duly called and held. Note that the board of directors may, by majority vote and for good cause, reset the annual meeting to another date. Except as otherwise provided by law, written or printed notice of all annual meetings of shareholders, stating the date, place and time of the meeting and, if necessary, the general nature of the business to be considered, shall be transmitted by personal delivery, mail, telegraph, facsimile or cable to each shareholder of record entitled to vote thereat at such Shareholders address last known to the Corporate Secretary, at least one week before the date of the meeting. Except where expressly required by Philippine law, no publication of any notice of annual meeting of shareholders shall be required. If any shareholder shall, in person or by proxy, or by telegraph, cable, or facsimile, waive notice of any meeting, whether before or after the holding of such meeting, notice thereof need not be given to the shareholder. The requirement for notice of the meeting shall be deemed waived if the stockholder, in person or proxy, shall be present thereat. Notice of any adjourned meeting of the shareholders shall not be required to be given except when expressly required by law.
Special Shareholders Meeting

Under the Companys by-laws, special meetings of the shareholders may be called by the President, or by the majority of the Board, whenever he or they shall deem it necessary. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date, and time of the meeting, the purpose and purposes for which said meeting is called. Under the Companys by-laws, as amended, notices of shareholders meeting must be sent to all shareholders of record at least one week prior to the date of the meeting. Notwithstanding such notice requirements under the Companys bylaws, the Company is required under the SRC to send to its shareholders of record at least 15 business days prior to the date of the annual or special meeting, an information statement and proxy form (in case of proxy solicitation) relating to such shareholders meeting. Notices of shareholders meeting may be sent by personal delivery, mail, telegraph or cable to a shareholders last known postal address, or by publication in a Philippine newspaper of general circulation. Notices shall be sent by the Secretary by personal delivery, facsimile, telegraph, cable or by mailing the notice to each stockholder of record at his last known address or by publishing the notice in a newspaper of national circulation at least ten days prior to the date of the meeting. If mailed, such notice shall be deemed to be given when deposited in the Philippines mail, postage prepaid, directed to the stockholder of record at his last known postal address. Only matters stated in the notice can be the subject of motion or discussions at the meeting. Notice of special meetings may be waived in writing by any shareholder, in person or by proxy, before or after the meeting. Such notice shall be deemed waived, if such shareholder is present at the special meeting, in person or by proxy. Notice of any adjourned meeting of the stockholders shall not be required to be given, expect when expressly required by law. QUORUM Except in instances where the assent of shareholders representing two-thirds of the outstanding capital stock is required by the Philippine Corporation Code to approve a corporate act (usually involving fundamental corporate changes), a majority of the subscribed and outstanding capital, present in person or represented by proxy, shall be sufficient at a shareholders meeting to constitute a quorum for the election of directors and for the transaction of any business whatsoever. In the absence of a quorum, any officer entitled to preside or act as Secretary of the meeting, shall have the power to adjourn the meeting from time to time, until stockholders holding the requisite number of shares shall be present or represented. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called.

104

DESCRIPTION OF THE SHARES

VOTING At each meeting of the shareholders, every stockholder who has voting power upon the matter in question shall be entitled to vote in person or by proxy, for each share of stock held by such shareholder. The votes for the election of directors, and, except upon demand by any shareholder, the votes upon any question before the meeting, except with respect to procedural questions determined by the Chairman of the meeting, shall be by show of hands. FIXING RECORD DATES The Philippine SEC may, from time to time, promulgate rules for listed companies such as Megaworld relating to the fixing of such record dates. Under existing Philippine SEC rules, cash dividends declared by corporations whose shares are listed on the PSE shall have a record date which shall not be less than 10 nor more than 30 days from the date of declaration. With respect to stock dividends, the record date shall not be less than 10 nor more than 30 days from the date of shareholder approval, provided however, that the record date set shall not be less than 10 trading days from receipt by the PSE of the notice of declaration of stock dividend. In the event that a stock dividend is declared in connection with an increase in authorized capital stock, the corresponding record date shall be fixed by the Philippine SEC. MATTERS PERTAINING TO PROXIES Shareholders may vote at all meetings the number of shares registered in their respective names, either in person or by proxy duly given in writing and duly given in writing and duly presented to and received by the Corporate Secretary for inspection and recording not later than five working days before the time set for the meeting, except such period shall be reduced to one working day for meeting that are adjourned due to lack of the necessary quorum. No proxy bearing the signature that is not legally acknowledged by the Corporate Secretary shall be honored at the meetings. Proxies shall be valid and effective for five years unless the proxy provides for a shorter period and shall be suspended for any meeting wherein the shareholder appears in person. Proxies executed abroad shall be duly authenticated by the Philippine Embassy or Consular Office. No member of the PSE and no broker/dealer shall give any proxy, consent or authorization, in respect of any securities carried for the account of a customer to a person other than the customer, without the express written authorization of such customer. The proxy executed by the broker shall be accompanied by a certification under oath stating that before the proxy was given to the broker, he had duly obtained the written consent of the persons in whose account the shares are held. There shall be a presumption of regularity in the execution of proxies and shall be accepted if they have the appearance of prima facie authenticity in the absence of a timely and valid challenge. In the validation of proxies, a special committee of inspectors shall be designated or appointed by the board of directors which shall be empowered to pass on the validity of proxies. Any dispute that may arise pertaining thereto, shall be resolved by the Philippine SEC upon formal complaint filed by the aggrieved party, or by the Philippine SEC officer supervising the proxy validation process. Proxies should comply with the relevant provisions of the Philippine Corporation Code, the SRC, and Philippine SEC Memorandum Circular No. 5 (series of 1996) issued by the Philippine SEC. DIVIDENDS Under Philippine law, a corporation can only declare dividends to the extent that it has unrestricted retained earnings that representing the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the shareholders as dividends. A corporation may pay dividends in cash, by the distribution of property or by the issuance of shares. Stock dividends may only be declared and
105

DESCRIPTION OF THE SHARES

paid with the approval of shareholders representing at least two-thirds of the issued and outstanding capital stock of the corporation voting at a shareholders meeting duly called for the purpose. The Corporation Code generally requires a Philippine corporation with retained earnings in excess of 100% of its paid-in capital to declare and distribute as dividends the amount of such surplus. Notwithstanding this general requirement, a Philippine corporation may retain all or any portion of such surplus in the following cases: (i) when justified by definite expansion plans approved by the board of directors of the corporation; (ii) when the required consent of any financing institution or creditor to such distribution has not been secured; (iii) when retention is necessary under special circumstances, such as when there is a need for special reserves for probable contingencies; or (iv) when the non-distribution of dividends is consistent with the policy or requirement of a government office. Philippine corporations whose securities are listed on any stock exchange are required to maintain and distribute an equitable balance of cash and stock dividends, consistent with the needs of shareholders and the demands for growth or expansion of the business. TRANSFER OF SHARES AND SHARE REGISTER All transfers of Shares on the PSE shall be effected by means of a book-entry system. Under the book-entry system of trading and settlement, a registered stockholder shall transfer legal title over the Shares to such nominee, but retains beneficial ownership over the Shares. The transfer of legal title is done by surrendering the stock certificate representing the Shares to participants of the PDTC System (i.e., brokers and custodian banks) (PDTC Participant) that, in turn, lodges the same with the PCD Nominee Corporation. A stockholder may request upliftment of the Shares from the PDTC in which case a certificate of stock will be issued to the stockholder and the Shares registered in the stockholders name in the books of the Company. See The Philippine Stock Market. Philippine law does not require transfers of the Companys Shares to be effected on the PSE, but any off-exchange transfers will subject the transferor to a capital gains tax that may be significantly greater than the stock transfer tax applicable to transfers effected on an exchange. See Philippine Taxation. All transfers of Shares on the PSE must be effected through a licensed stock broker in the Philippines. ISSUES OF SHARES Subject to otherwise applicable limitations, the Company may issue additional Shares to any person for consideration deemed fair by the Board, provided that such consideration shall not be less than the par value of the issued Shares. No share certificates shall be issued to a subscriber until the full amount of the subscription together with interest and expenses (in case of delinquent shares) has been paid and proof of payment of the applicable taxes shall have been submitted to the Companys Corporate Secretary. SHARE CERTIFICATES Certificates representing the Shares will be issued in such denominations as shareholders may request, except that certificates will not be issued for fractional shares. Shareholders wishing to split their certificates may do so upon application to the Companys stock transfer agent. Shares may also be lodged and maintained under the book-entry system of the PDTC. See The Philippine Stock Market. MANDATORY TENDER OFFERS Under the SRC which took effect on August 8, 2000 and its implementing rules and regulations, it is mandatory for any person or group of persons acting in concert intending to acquire at least (a) 35% of (i) any class of any equity security of a corporation listed in the Philippines or (ii) any class of any equity security of a Philippine corporation with assets of at least 50 million and having 200 or more shareholders with at least 100 shares each; (b) 35% of such equity over a
106

DESCRIPTION OF THE SHARES

period of 12 months, to make a tender offer to all the shareholders of the target corporation on the same terms; or (c) less than 35% of such equity that would result in ownership of over 51% of the total outstanding equity. In the event that the securities tendered pursuant to such an offer exceed that which the acquiring person or group of persons is willing to take up, the securities shall be purchased from each tendering shareholder on a pro-rata basis. FUNDAMENTAL MATTERS The Corporation Code provides that certain significant acts may only be implemented with shareholders approval. The following require the approval of shareholders representing at least two-thirds of the issued and outstanding capital stock of the corporation in a meeting duly called for the purpose: . . . amendment of the articles of incorporation; removal of directors; sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of the assets of the corporation; investment of corporate funds in any other corporation or business or for any purpose other than the primary purpose for which the corporation was organized; issuance of stock dividends; delegation to the board of directors of the power to amend or repeal by-laws or adopt new by-laws; merger or consolidation; an increase or decrease in capital stock; extension or shortening of the corporate term; creation or increase of bonded indebtedness; and declaration of stock dividends.

. .

. . . . .

ACCOUNTING AND AUDITING REQUIREMENTS Philippine stock corporations are required to file copies of their annual financial statements with the Philippine SEC. Corporations whose shares are listed on the PSE are also required to file quarterly financial statements (for the first three quarters) with the Philippine SEC and the PSE. Shareholders are entitled to request copies of the most recent financial statements of the corporation which include a balance sheet as at the end of the most recent tax year and a profit and loss statement for that year. Shareholders are also entitled to inspect and examine the books and records that the corporation is required by law to maintain. The Board is required to present to shareholders at every annual meeting a financial report of the operations of the Company for the preceding year. This report is required to include audited financial statements.

107

THE PHILIPPINE STOCK MARKET

The information presented in this section has been extracted from publicly available documents which have not been prepared or independently verified by the Company or the Lead Manager or any of their respective affiliates or advisors in connection with sale of the Offer Shares. BRIEF HISTORY The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was self-regulating, governed by its respective Board of Governors elected annually by its members. Several steps initiated by the Government have resulted in the unification of the two bourses into the PSE. The PSE was incorporated in 1992 by officers of both the Makati and the Manila Stock Exchanges. In March 1994, the licenses of the two exchanges were revoked. While the PSE maintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked by an automated trading system which integrates all bid and ask quotations from the bourses. In June 1998, the Philippine SEC granted the PSE a Self-Regulatory Organization (SRO) status, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies. On August 8, 2001, PSE completed its demutualization, converting from a non-stock member-governed institution into a stock corporation in compliance with the requirements of the SRC. The PSE has an authorized capital stock of 36.8 million, of which 15.3 million is subscribed and fully paid-up. Each of the 184 member-brokers was granted 50,000 shares of the new PSE at a = par value of P 1.00 per share. In addition, a trading right evidenced by a Trading Participant Certificate was immediately conferred on each member broker allowing the use of the PSEs trading facilities. As a result of the demutualization, the composition of the PSE Board of Governors was changed, requiring the inclusion of seven brokers and eight non-brokers, one of whom is the President. On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of a series of reforms aimed at strengthening the Philippine securities industry. A listing committee comprised of representatives elected by the board of directors of the PSE deliberates on all applications for listing and, if the listing application is endorsed by the committee, forwards the application to the PSE board of directors for approval. Classified into financial, industrial, holding firms, property, services, mining and oil sectors, companies are listed either on the Exchanges First Board, Second Board or the newly created Small and Medium Enterprises Board. Each index represents the numerical average of the prices of component stocks. The PSE has an index, referred to as the PHISIX, which as at the date hereof reflects the price movements of 34 selected stocks listed on the PSE, based on traded prices of stocks from the various sectors. The PSE will shift from full market capitalization to free float market capitalization effective April 3, 2006 simultaneous with the migration to the free float index and the naming of the PHISIX to PSEI. The new PSEI includes 30 selected stocks listed on the PSE. With the increasing calls for good corporate governance, PSE has adopted an online daily disclosure system to improve the transparency of listed companies and to protect the investing public.

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THE PHILIPPINE STOCK MARKET

The table below sets forth movements in the composite index from 1995 to 2005, and shows the number of listed companies, market capitalization, and value of shares traded for the same period: SELECTED STOCK EXCHANGE DATA
Composite Index at Closing Number of Listed Companies Aggregate Market Capitalization (in billions) Combined Value of Turnover (in billions)

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source:

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

2,594.2 3,170.6 1,869.2 1,968.8 2,142.9 1,494.5 1,168.1 1,018.4 1,442.4 1,822.8 2,096.0

205 216 221 221 226 230 232 234 236 236 237

1,545.7 2,121.1 1,261.3 1,373.7 1,938.6 2,577.6 2,142.6 2,083.2 2,973.8 4,766.2 5,948.4

379.0 668.9 588.0 408.7 713.9 357.6 159.5 159.7 145.4 206.6 383.5

Philippine Stock Exchange, Inc.

TRADING The PSE is a double auction market. Buyers and sellers are each represented by stock brokers. To trade, bids or ask prices are posted on the PSEs electronic trading system. A buy (or sell) order that matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders received by one broker at the same price are crossed at the PSE at the indicated price. Transactions are generally invoiced through a confirmation slip sent to customers on the trade date (or the following trading date). Payment of purchases of listed securities must be made by the buyer on or before the third trading day (the settlement date) after the trade. For Small-Denominated Treasury Bonds, settlement is on the day the trade was made. Trading on the PSE starts at 9 : 30 am and ends at 12 : 00 pm with a 10-minute extension during which transactions may be conducted, provided that they are executed at the last traded price and are only for the purpose of completing unfinished orders. Trading days are Monday to Friday, except legal and special holidays. Minimum trading lots range from 10 to 5,000,000 shares depending on the price range and nature of the security traded. Odd-sized lots are traded by brokers on a board specifically designed for odd-lot trading. To maintain stability in the stock market, daily price swings are monitored and regulated. Under current PSE regulations, when the price of a listed security moves up by 50.0% or down by 40.0% in one day (based on the previous closing price or last posted bid price, whichever is higher), the price of that security is automatically frozen by the PSE, unless there is an official statement from the relevant company or a government agency justifying such price fluctuation, in which case the affected security can still be traded but only at the frozen price. If the issuer fails to submit such explanation, a trading halt is imposed by the PSE on the listed security the following day. Resumption of trading shall be allowed only when the disclosure of the issuer is disseminated, subject again to the trading band. SETTLEMENT The Securities Clearing Corporation of the Philippines, or (SCCP), is the central clearinghouse for all transactions executed on the PSE. The SCCP received its permanent license to operate on January 17, 2002. It is responsible for (i) establishing liabilities between PSE Brokers, (ii)
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THE PHILIPPINE STOCK MARKET

synchronizing the settlement of funds and the transfer of securities, (iii) guaranteeing the settlement of trades in the event of default by a PSE Broker and (iv) administering the appropriate risk management function in order to ensure settlement. SCCP assumes the role of guarantor for transactions by PSE Brokers in the PSE and maintains and administers a trade guarantee fund called the Clearing and Trade Guaranty Fund. All transactions are settled through the SCCP. Brokers must comply with all requirements for the transfer of shares and must deliver the corresponding stock certificates and all requisite documents to the relevant clearing house within three business days from the trade date of the relevant transaction. Settlement occurs on the third business day after the trade date. The SCCP is then required to deliver the stock certificates and documents to the transfer agent of the relevant company in order to effect the transfer in the companys books and to deliver the new certificates back to the clearing house. SCRIPLESS TRADING In 1995, the Philippine Depository & Trust Corporation (formerly the Philippine Central Depository, Inc.), was organized to establish a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional license by the Philippine SEC to act as a central securities depository. All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The depository service of the PDTC provides the infrastructure for lodgment (deposit) and upliftment (withdrawal) of securities, pledge of securities, securities lending and borrowing and corporate actions including shareholders meetings, dividend declarations and rights offerings. The PDTC also provides depository and settlement services for non-PSE trades of listed equity securities. For transactions on the PSE, the security element of the trade will be settled through the book-entry system, while the cash element will be settled through the current settlement banks, Rizal Commercial Banking Corporation and Equitable PCI Bank, Inc. In order to benefit from the book-entry system, securities must be immobilized into the PDTC system through a process called lodgment. Lodgment is the process by which shareholders transfer legal title (but not beneficial title) over their shares of stock in favor of PCD Nominee Corporation (PCD Nominee), a corporation wholly owned by the PDTC whose sole purpose is to act as nominee and legal title holder of all shares of stock lodged into the PDTC. Immobilization is the process by which the warrant or share certificates of lodging holders are canceled by the transfer agent and a new warrant or stock certificate covering all the warrants or shares lodged (Jumbo Certificate) is issued in the name of PCD Nominee. This trust arrangement between the participants and PDTC through PCD Nominee is established by and explained in the PDTC Rules and Operating Procedures approved by the Philippine SEC. No consideration is paid for the transfer of legal title to PCD Nominee. Once lodged, transfers of beneficial title of the securities are accomplished via book-entry settlement. Under the current the PDTC system, only participants (e.g. brokers and custodians) will be recognized by the PDTC as the beneficial owners of the lodged equity securities. Thus, each beneficial owner of shares through his participant, will be the beneficial owner to the extent of the number of shares held by such participant in the records of the PCD Nominee. All lodgments, trades and uplifts on these shares will have to be coursed through a participant. Ownership and transfers of beneficial interests in the shares will be reflected, with respect to the participants aggregate holdings, in the PDTC system, and with respect to each beneficial owners holdings, in the records of the participants. Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the lodged shares, they must rely on their participant-brokers and/or participant-custodians. Any beneficial owner of shares who wishes to trade his interests in the shares must course the trade through a participant. The participant can execute PSE trades and non-PSE trades of lodged equity securities through the PDTC system. All matched transactions in the PSE trading system will be fed through the SCCP, and into the PDTC system. Once it is determined on the settlement date (trading date plus three trading days) that there are adequate securities in the securities settlement account of the participant-seller and adequate cash or an appropriate bank limit in the system cash
110

THE PHILIPPINE STOCK MARKET

account of the participant-buyer, the accordance with the PDTC Rules and of the securities is transferred from physical transfer of stock certificates

PSE trades are automatically settled in the PDTC system, in Operating Procedures. Once settled, the beneficial ownership the participant-seller to the participant-buyer without the covering the traded securities.

If a stockholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the stockholder the legal title to the shares lodged by surrendering the jumbo certificate of PCD Nominee to a transfer agent which then issues a new stock certificate in the name of the shareholder and a new jumbo certificate of PCD Nominee for the balance of the lodged shares. The expenses for upliftment are for the account of the uplifting shareholder. The SCCP expects to launch its Central Clearing and Settlement System (CCSS) in the first half of 2006. Under this system, the current securities infrastructure in the Philippines is composed of a depositary and a registry system wherein listed shares are traded and settled as book-entry shares. The difference between the depositary and the registry would be on the recording of ownership of the shares in the issuing corporations books. In the depository set-up, shares are simply immobilized, wherein customers certificates are canceled and a new jumbo certificate is issued in the name of PCD Nominee Corp. Transfers among/between broker and/or custodian accounts, as the case may be, will only be made within the book-entry system of PDTC. However, as far as the issuing corporation is concerned, the underlying certificates are in the nominees name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing companys transfer agents books or system. Likewise, recording will already be at the beneficiary level (whether it be a client or a registered custodian holding securities for its clients), thereby removing from the broker its current de facto custodianship role. The option of whether a listed security should be housed in the depositary or registry is at the issuers discretion. The migration from the depositary to the registry model aims to eliminate the legal and operational risks brought about by a depositary infrastructure. Likewise, the migration is expected to strengthen measures to protect public investors/shareholders and decrease transaction costs resulting from additional layers in the settlement process. The move will also prepare an infrastructure for a complete name-on registry system. The PSE and the SCCP expect a natural migration to the registry model, with system and cost efficiency as the catalyst, and the market itself initiating the move. Once the CCSS is in place, custodians holding Philippine listed equity securities will have the following options: Stay with the depositary for all its securities, whereby PDTC acts as their implied Custodian. For shares under the PDTC, custodians are direct PDTC account holders, however, with the shares still recorded in the PCD Nominee name as far as the corporation/transfer agent is concerned; for shares under the registry, the custodian appears to be a client under PCD, such that shares are recognized or recorded with PCD as the master/controlling account. Be a system participant of the SCCP wherein the CCSS would offer to the custodians the interface to both the depositary and registry systems. In this option, for shares under the PDTC, custodians will still have the option to maintain their own accounts in the PDTC or have an omnibus account together with the broker accounts in the PDTC as shares are accounted for or segregated per accountholder in the CCSS. This simplifies the custodians interface into only one connectivity for both the depositary and the registry systems; for shares under the registry system, the custodian will have its own master account, having the control over its own account. In the registry scenario, custodians are already recognized as the beneficiary holder of the securities on behalf of its clients. The custodian effectively is given a direct relationship with the issuing company wherein it receives the annual reports, dividends, and other communications and information directly. Prospectively, when the custodian is accredited as an indirect clearing member of the SCCP, straight-through processing of trades or settlement can already be done directly with the custodian or with its client.

111

THE PHILIPPINE STOCK MARKET Issuance of Certificated Shares

On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply to PDTC through his broker or custodian-participant for a withdrawal from the book-entry system and return to the conventional paper-based settlement. If a stockholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the stockholder the legal title to the shares lodged by surrendering the Jumbo Certificate of PCD Nominee to a transfer agent which then issues a new stock certificate in the name of the uplifting shareholder and a new Jumbo Certificate to PCD Nominee for the balance of the lodged shares. The expenses for upliftment are on the account of the uplifting shareholder. Upon the issuance of certificated shares in the name of the person applying for upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement system, and trading on such shares will follow the normal process for settlement of certificated securities. The expenses for upliftment of beneficial ownership in the shares to certificated securities will be charged to the person applying for upliftment. Pending completion of the upliftment process, the beneficial interest in the shares covered by the application for upliftment is frozen and no trading and bookentry settlement will be permitted until certificated shares shall have been issued by the relevant companys transfer agent. Philippine Foreign Exchange Controls.

112

PHILIPPINE FOREIGN EXCHANGE CONTROLS

Under current BSP regulations, an investment in Philippine securities (such as the Shares) must be registered with the BSP if the foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits and earnings derived from such Shares is to be sourced from the Philippine banking system. The application for registration may be done directly with the BSP or through a custodian bank duly designated by the foreign investor. A custodian bank may be a commercial bank or an offshore banking unit registered with the BSP to act as such and appointed by the investor to register the investment, hold shares for the investor, and represent the investor in all necessary actions in connection with his investments in the Philippines. Applications for registration must be accompanied by: (i) purchase invoice, subscription agreement and proof of listing on the PSE (either or both); (ii) credit advice or bank certificate showing the amount of foreign currency inwardly remitted and converted into pesos; and (iii) transfer instructions from the stockbroker or dealer, as the case may be. Upon registration of the investment, proceeds of divestments or dividends of registered investments may be converted into foreign currency sourced from the Philippine banking system and are repatriable or remittable immediately and in full through the Philippine commercial banking system, net of applicable tax, without need of BSP approval. Remittance is permitted upon presentation of the BSP registration document, at the exchange rate applicable on the date of actual remittance. Pending registration or reinvestment, divestment proceeds, as well as dividends of registered investments, may be lodged temporarily in interest-bearing deposit accounts. Interest earned thereon, net of taxes, may also be remitted in full. Remittance of divestment proceeds or dividends of registered investments may be reinvested in the Philippines if the investments are registered with the BSP or the investors custodian bank. The foregoing is subject to the power of BSP, with the approval of the President of the Philippines, to restrict the availability of foreign exchange during an exchange crisis, when an exchange crisis is imminent or in times of national emergency.

113

PHILIPPINE TAXATION
The statements made regarding taxation in the Philippines are based on the laws in force at the date hereof and are subject to any changes in law occurring after such date. The following summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to invest in the Shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities) may be subject to special rates. Prospective purchasers of the Shares are advised to consult their own tax advisers concerning the tax consequences of their investment in the Shares. As used in this section, the term resident alien refers to an individual whose residence is within the Philippines and who is not a citizen thereof; a non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen of the Philippines; a non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a non-resident alien engaged in trade or business in the Philippines; otherwise, such non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year is considered a non-resident alien not engaged in trade or business in the Philippines. A resident foreign corporation is a foreign corporation engaged in trade or business within the Philippines; and a non-resident foreign corporation is a non-Philippine corporation not engaged in trade or business within the Philippines. TAX ON DIVIDENDS Cash and property dividends received from a domestic corporation by individual shareholders who are either citizens or residents of the Philippines are subject to a final withholding tax at the rate of 10.0%. Cash and property dividends received by non-resident alien individuals engaged in trade or business in the Philippines are subject to a 20.0% tax on the gross amount thereof, while cash and property dividends received by non-resident alien individuals not engaged in trade or business in the Philippines are subject to tax at 25.0% of the gross amount, subject, however, to the applicable preferential tax rates under tax treaties executed between the Philippines and the country of residence or domicile of such non-resident foreign individuals. Cash and property dividends received from a domestic corporation by another domestic corporation or by resident foreign corporations are not subject to tax while those received by non-resident foreign corporations are subject to tax at the rate of 35.0%. The 35.0% rate for dividends paid to a non-resident foreign corporation may be reduced to a lower rate. It may be reduced to 15.0% if (i) the country in which the non-resident foreign corporation is domiciled imposes no tax on foreign sourced dividends or (ii) if the country of domicile of the non-resident foreign corporation allows a credit equivalent to 20.0% for taxes deemed to have been paid in the Philippines. Philippine tax authorities have prescribed certain procedures for availment of tax treaty relief. Subject to the approval by Philippine Bureau of Internal Revenue, or BIR, of Megaworlds application for tax treaty relief, Megaworld shall withhold taxes at a reduced rate on dividends to be paid to a non-resident holder, if such non-resident holder provides Megaworld with proof of residence and if applicable, individual or corporate status. Proof of residence for an individual consists of certification from his embassy, consulate, or other equivalent certifications issued by the proper government authority, or any other official document proving residence. If the regular tax rate is withheld by Megaworld instead of the reduced rates applicable under a treaty, the nonresident holder of the shares may file a claim for refund from the BIR. However, because the refund process in the Philippines requires the filing of an administrative claim and the submission of supporting information, and may also involve the filing of a judicial appeal, it may be impractical to pursue such a refund.

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PHILIPPINE TAXATION

Stock dividends distributed pro-rata to any holder of shares of stock are not subject to Philippine income tax. However, the sale, exchange or disposition of shares received as stock dividends by the holder is subject to the capital gains or stock transaction tax.
Tax Treaties

The following table lists some of the countries with which the Philippines has tax treaties and the tax rates currently applicable to non-resident holders who are residents of those countries:
Stock transaction tax on sale or disposition effected through the PSE % Exempt (8) Exempt (8) 0.5 Exempt (8) Exempt (8) Exempt (10) Exempt (8) Capital Gains tax due on disposition of Shares outside the PSE % Exempt (8) Exempt (8) 5/10 (9) Exempt (8) Exempt (8) Exempt (10) Exempt (8)

Dividends % Canada . . . . . . France . . . . . . Germany . . . . . Japan . . . . . . . Singapore. . . . . United Kingdom United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25(1) 25(2) 15(3) 25(4) 25(5) 25(6) 25(7)

Notes: (1) 15% if recipient company controls at least 10% of the voting power of the company paying the dividends. (2) 15% if the recipient company holds directly at least 15% of the voting shares of the company paying the dividends. (3) 10% if the recipient company owns directly at least 25% of the capital of the company paying the dividends. (4) 10% if the recipient company holds directly at least 25% of either the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends. (5) 15% if during the part of the paying companys taxable year which precedes the date of payment of dividends and during the whole of its prior taxable year at least 15% of the outstanding shares of the voting stock of the paying company was owned by the recipient company. (6) 15% if the recipient company is a company which controls directly or indirectly at least 10% of the voting power of the company paying the dividends. (7) 20% if during the part of the paying corporations taxable year which precedes the date of payment of dividends and during the whole of its prior taxable year at least 10% of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. (8) Capital gains are taxable only in the country where the seller is a resident, provided the shares are not those of a corporation, the assets of which consist principally of real property situated in the Philippines, In which case the sale is subject to Philippine taxes. (9) Under the RP-Germany Tax Treaty, capital gains from the alienation of shares of a Philippine corporation may be taxed in the Philippines irrespective of the nature of the assets of the Philippine corporation. Tax rates are 5% on the = net capital gains realized during the taxable year not in excess of P 100,000 and 10% on the net capital gains realized = during the taxable year in excess of P 100,000. (10) Under the RP-UK Tax Treaty, capital gains on the sale of the stock of Philippine corporations are subject to tax only in the country where the seller is a resident, irrespective of the nature of the assets of the Philippine corporation.

SALE, EXCHANGE OR DISPOSITION OF SHARES

Capital Gains Tax, if sale was made outside the PSE

Net capital gains realized by a resident or non-resident other than a dealer in securities during each taxable year from the sale, exchange or disposition of shares of stock outside the facilities of the PSE, unless an applicable treaty exempts such gains from tax or provides for preferential rates, are subject to tax as follows: 5.0% on gains not exceeding = 100,000 and 10.0% on gains over P = P 100,000. An application for tax treaty relief must be filed (and approved) by the Philippine tax authorities in order to obtain an exemption under a tax treaty.
Taxes on Transfer of Shares Listed and Traded at the Philippine Stock Exchange

A sale or other disposition of shares of stock through the facilities of the PSE by a resident or a non-resident holder, other than a dealer in securities, is subject to a stock transaction tax at the rate of 0.5% of the gross selling price or gross value in money of the shares of stock sold or otherwise disposed, unless an applicable treaty exempts such sale from said tax. This tax is required to be collected by and paid to the Philippine Government by the selling stockbroker on

115

PHILIPPINE TAXATION

behalf of his client. The stock transaction tax is classified as a percentage tax in lieu of a capital gains tax. Under certain tax treaties, the exemptions from capital gains tax discussed herein may not be applicable to the stock transaction tax. In addition, a VAT of 12.0% is imposed on the commission earned by the PSE-registered broker, and is generally passed on to the client. DOCUMENTARY STAMP TAX = The original issue of shares of stock is subject to documentary stamp tax of P 1.00 for each = P 200.00 par value or a fraction thereof, of the shares of stock issued. The transfer of shares of = = stock is subject to a documentary stamp tax of P 0.75 for each P 200.00 par value or a fractional part thereof of the share of stock transferred. However, for a period of five years from March 20, 2004, the sale, barter or exchange of shares of stock listed and traded at the PSE shall be exempt from documentary stamp tax. In addition, the borrowing and lending of securities executed under the Securities Borrowing and Lending Program of a registered exchange, or in accordance with regulations prescribed by the appropriate regulatory authority, are likewise exempt from documentary stamp tax. However, the securities borrowing and lending agreement should be duly covered by a master securities borrowing and lending agreement acceptable to the appropriate regulatory authority, and should be duly registered and approved by the BIR. ESTATE AND GIFT TAXES The transfer of shares of stock upon the death of an individual holder to his heirs by way of succession, whether such holder was a citizen of the Philippines or an alien, regardless of residence, is subject to Philippine taxes at progressive rates ranging from 5.0% to 20.0%, if the net = estate is over P 200,000. Individual and corporate holders, whether or not citizens or residents of the Philippines, who transfer shares of stock by way of gift or donation are liable to pay Philippine donors tax on such transfer of shares ranging from 2.0% to 15.0% of the net gifts during the year = exceeding P 100,000. The rate of tax with respect to net gifts made to a stranger (i.e., one who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of relationship) is a flat rate of 30.0%. Estate and donors taxes, however, shall not be collected in respect of intangible personal property, such as shares of stock: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. TAXATION OUTSIDE THE PHILIPPINES Shares of stock in a domestic corporation are considered under Philippine law as situated in the Philippines and the gain derived from their sale is entirely from Philippine sources; hence such gain is subject to Philippine income tax and the transfer of such shares by gift (donation) or succession is subject to the donors or estate taxes stated above. The tax treatment of a non-resident holder of shares of stock in jurisdictions outside the Philippines may vary depending on the tax laws applicable to such holder by reason of domicile or business activities and such holders particular situation. This Prospectus does not discuss the tax considerations on non-resident holders of shares of stock under laws other than those of the Philippines.

116

PHILIPPINE TAXATION

EACH PROSPECTIVE HOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF PURCHASING, OWNING AND DISPOSING OF THE OFFER SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NATIONAL TAX LAWS.

117

PLAN OF DISTRIBUTION
Of the Offer Shares, 3,727,008,000 Offer Shares are being offered by the Company and the Selling Shareholder in the Offer outside of the Philippines and 196,158,000 Offer Shares are being offered by the Selling Shareholder in the Philippines to the PSE Brokers. The allocation of the Offer Shares between the Domestic Offer and the International Offer is subject to adjustment. In the event of an under-application in the International Offer and if there is a corresponding over-application in the Domestic Offer, International Offer Shares may (at the option of the Domestic Underwriter) be reallocated from the International Offer (with the consent of the Lead Manager) to the Domestic Offer. The reallocation shall not apply in the event of over-application in both the Domestic Offer and the International Offer. There is no assurance that such reallocation will be exercised by the Domestic Underwriter or at all. THE DOMESTIC OFFER Domestic Offer Shares shall be offered by the Selling Shareholder exclusively to the PSE Brokers during the Domestic Offer. The PSE shall allocate the Domestic Offer Shares among the PSE Brokers. Each PSE Broker shall initially be allocated 1,486,000 Offer Shares (computed by dividing the Domestic Offer Shares by 132 PSE Brokers), as a maximum, but no less than 1,000 Offer Shares, as a minimum, and subject to reallocation as may be determined by the PSE. Prior to the closing of the Domestic Offer, any allocation of Offer Shares not taken up in full by the PSE Brokers shall be distributed by the Domestic Underwriter to its clients or the general public. To facilitate the Domestic Offer, the Selling Shareholder has appointed BDO Capital to act as the Domestic Underwriter. The Domestic Underwriter shall receive the Commitment to Purchase forms (as defined below) and the corresponding payments of each PSE Broker, and procure the services of a PSE licensed broker (the Crossing Broker) responsible for crossing the number of Domestic Offer Shares specified in the form to the appropriate PSE Broker on the Listing Date, subject to the terms and conditions of the Domestic Offer. The Crossing Broker engaged by BDO Capital shall conduct block trades of the Domestic Offer Shares in settlement of the Domestic Offer. As shall be discussed below, the Domestic Underwriter shall receive from the Selling Shareholder a fee equivalent to the higher of one million pesos, or 3.5% of the total proceeds of the Domestic Offer Shares sold in the Domestic Offer. PSE Brokers who take up Domestic Offer Shares shall be entitled to a selling fee of 1.0% of Domestic Offer Shares taken up and purchased by the relevant PSE Brokers. The selling fee, less the PCD EQ Trade fee, will be paid to the PSE Brokers within 10 Banking Days after the Listing Date. All of the Domestic Offer Shares shall be transferred to the PSE Brokers in scripless form through a block trade executed by the Domestic Underwriter. PSE Brokers may maintain the Domestic Offer Shares in scripless form or opt to have the stock certificates issued to them by requesting an upliftment of the relevant Domestic Offer Shares from PDTCs electronic system after the closing of the Domestic Offer. THE INTERNATIONAL OFFER The Company and the Selling Shareholder, through the Lead Manager, are offering 3,727,008,000 Firm Shares (excluding the Over-Allotment Option described below) in the International Offer outside the Philippines and the United States in reliance on Regulation S under the U.S. Securities Act. The Underwriting Agreement entered into between the Company, the Selling Shareholder and the Lead Manager (the International Underwriting Agreement) is subject to certain conditions and may be subject to termination by the Lead Manager if certain circumstances, including force majeure, occur on or before the Offer Shares are listed on the PSE. Under the terms and conditions of the International Underwriting Agreement, the Lead Manager is committed to purchase or

118

PLAN OF DISTRIBUTION

procure purchasers for all of the Offer Shares to be offered in the International Offer. The closing of the Domestic Offer is conditional on the closing of the International Offer. The closing of the Domestic Offer and the International Offer are expected to occur concurrently. The Lead Manager and its affiliates have engaged in transactions with and performed various investment banking, commercial banking and other services for Megaworld and its subsidiaries and affiliates in the past and may do so from time to time in the future. However, all services provided by the Lead Manager, including in connection with the Offer, have been provided as an independent contractor and not as a fiduciary to the Company or the Selling Shareholder. The Lead Manager does not have any right to designate or nominate a member of the board of directors of the Company. The Lead Manager has no direct relations with the Company in terms of share ownership and other than as Lead Manager for the Offer, it does not have any material relationship with the Company.
The Over-Allotment Option

In connection with the Offer, the Company has granted the Stabilizing Agent an Over-Allotment Option, which is exercisable in whole or in part for 30 days from the commencement of the trading of the Companys Offer Shares on the PSE to purchase up to 15% of the total number of Firm Shares on the same terms and conditions as the Firm Shares as set forth herein. Up to 588,475,000 Optional Shares may be over-allotted and the Stabilizing Agent may effect price stabilization transactions for a period which shall not exceed 30 days from the Listing Date. The Stabilizing Agent may purchase Shares in the open market only if the market price of the Shares falls below the Offer Price. Such activities may stabilize, maintain or otherwise affect the market price of the Shares which may have the effect of preventing a decline in the market price of the Shares and may also cause the price of the Shares to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If the Stabilizing Agent commences any of these transactions, it may discontinue them at any time. Once the Over-Allotment Option has been exercised by the Stabilizing Agent, it will no longer be allowed to purchase Shares in the open market for the conduct of stabilization activities.
Domestic Block Sale

The Selling Shareholder, a non-Philippine National, will sell to TAGI, a Philippine National 300,000,000 Domestic Block Sale Shares on the Listing Date at the Offer Price and on the same terms and conditions as the Firm Shares as set forth herein. The Domestic Block Sale will provide leeway for the ownership of Shares by non-Philippine Nationals. The Share Purchase Agreement entered into between the Selling Shareholder, the Lead Manager and TAGI (the Share Purchase Agreement) is subject to certain conditions and may be subject to termination by TAGI if certain circumstances, including force majeure, occur on or before the Offer Shares are listed on the PSE. Under the terms and conditions of the Share Purchase Agreement, TAGI is committed to purchase all of the Domestic Block Sale Shares. The closings of the Domestic Block Sale and the Offer are conditional upon each other.
Lock-Up

The Company, TAGI, New Town Land and Mr. Andrew Tan have each agreed with the Lead Manager that, for a period of 180 days after the First Closing Date, other than in connection with the Over-Allotment Option or the TAGI Option, neither it nor any person acting on its behalf will, without the prior written consent of the Lead Manager, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for any Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options.

119

PLAN OF DISTRIBUTION Selling Restriction

Philippines

No securities, except of a class exempt under Section 9 of the Philippine Securities Regulation Code or unless sold in any transaction exempt under Section 10 thereof, shall be sold or distributed by any person within the Philippines unless such securities shall have been registered with the Philippine SEC on SEC Form 121 and the registration statement has been declared effective by the said Commission.

120

LEGAL MATTERS
Certain legal matters Philippine law relating to the Offer will be passed upon for the Company by Picazo Buyco Tan Fider & Santos Law Office, Manila, Philippines and for the Lead Manager by Romulo Mabanta Buenaventura Sayoc & de los Angeles, Manila, Philippines. Certain legal matters as to English law and United States federal law will be passed upon for the Lead Manager by Allen & Overy. None of Picazo Buyco Tan Fider & Santos Law Office, Romulo Mabanta Buenaventura Sayoc & de los Angeles or Allen & Overy will receive any direct or indirect interest in the Company or in any securities thereof (including options, warrants or rights thereto) pursuant to, or in connection with the Offer. None of Picazo Buyco Tan Fider & Santos Law Office, Romulo Mabanta Buenaventura Sayoc & de los Angeles or Allen & Overy has acted or will act as promoter, underwriter, voting trustee, officer or employee of the Company.

121

INDEPENDENT PUBLIC ACCOUNTANTS

Punongbayan & Araullo, a member practice of Grant Thornton International, independent certified public accountants, audited Megaworlds financial statements without qualification as of and for the years ended December 31, 2003, 2004 and 2005, included in this Prospectus. The 2003, 2004 and 2005 financial information included in this Prospectus has been prepared under PFRS. Such financial statements are included in this Prospectus based on Punongbayan & Araullos authority as independent public accountants. Punongbayan & Araullo gave its consent to the inclusion of its reports in this Prospectus. Punongbayan & Araullo has acted as the Companys external auditors since 1994. Gregorio S. Navarro is the current audit partner for the Company, has served as such since 2004. The Company has not had any disagreements on accounting and financial disclosures with its current external auditors for the same periods or any subsequent interim period. Punongbayan & Araullo has neither shareholdings in the Company nor any right, whether legally enforceable or not, to nominate persons or to subscribe for the securities in the Company. Punongbayan & Araullo will not receive any direct or indirect interest in the Company or in any securities thereof (including options, warrants or rights thereto) pursuant to or in connection with the Offer. The foregoing is in accordance with the Code of Ethics for Professional Accountants in the Philippines set by the Board of Accountancy and approved by the Professional Regulation Commission.
Audit and Audit-Related Fees

The aggregate fees for professional services rendered by Punongbayan & Araullo, for the audit of the Companys annual financial statements and services normally provided by the external auditor in connection with statutory and regulatory filings or engagements for 2005 and 2004, excluding = out-of-pocket expenses and fees directly related to the Offer, were = 1,150,000 and P 880,000, P respectively. Apart from the foregoing, no other services were rendered or fees billed by the Companys external auditors for 2005.

122

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audited Consolidated Balance Sheets as of December 31, 2005 and 2004 . . . . . . . . . . . . . . . . Audited Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audited Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audited Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Audited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 F-3

F-4

F-5

F-6 F-8

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders Megaworld Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Megaworld Corporation and subsidiaries as of December 31, 2005, 2004 and 2003, and the related statements of income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Megaworld Corporation and subsidiaries as of December 31, 2005, 2004 and 2003, and the results of their operations and their cash flows for the years then ended, in accordance with generally accepted accounting principles in the Philippines.

PUNONGBAYAN & ARAULLO

By:

Gregorio S. Navarro Partner CPA Reg. No. 0033571 TIN 109-228-435 PTR No. 4182116, January 4, 2006, Makati City Partner SEC Accreditation No. 0013-AR-1 BIR AN 08-002511-2-2005 (Dec. 27, 2005 to 2008)

February 27, 2006

F-2

REPORT OF INDEPENDENT AUDITORS

MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005, 2004 AND 2003 (Amounts in Philippine Pesos)
Notes ASSETS CURRENT ASSETS Cash and cash equivalents . . . . . . . Trade and other receivables net . . Marketable securities . . . . . . . . . . Residential and condominium units for sale . . . . . . . . . . . . . . . . . . . . Property development costs . . . . . . Prepayments and other current assets net . . . . . . . . . . . . . . . . . . Total Current Assets. . . . . . . . . . NON-CURRENT ASSETS Trade and other receivables . . . . . . Advances to landowners and joint ventures . . . . . . . . . . . . . . . . . Land for future development . . . . . Investments in and advances to associates and other related parties net . . . . . . . . . . . . . . . . . . Investment property net . . . . . . . Property and equipment net . . . . Deferred tax assets . . . . . . . . . . . . Other non-current assets net . . . . Total Non-current Assets . . . . . . . TOTAL ASSETS . . . . . . . . . . . . . . . . LIABILITIES AND EQUITY CURRENT LIABILITIES Interest-bearing loans and borrowings Trade and other payables. . . . . . . . Customers deposits . . . . . . . . . . . Income tax payable . . . . . . . . . . . Reserve for property development . . Deferred income on real estate sales . Other current liabilities . . . . . . . . . Total Current Liabilities . . . . . . . NON-CURRENT LIABILITIES Interest-bearing loans and borrowings Customers deposit . . . . . . . . . . . . Reserve for property development . . Deferred income on real estate sales . Advances from other related parties . Deferred tax liabilities net . . . . . Other non-current liabilities . . . . . . Total Non-current Liabilities . . . . Total Liabilities . . . . . . . . . . . . . EQUITY Equity attributable to parent companys shareholders . . . . . . . Minority interest . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . TOTAL LIABILITIES AND EQUITY . . . . 14 7 9 2005 2004 2003

6 7 8

= 2,850,312,456 P 2,751,268,212 3,599,631,526 3,552,320,332 1,606,180,565 619,652,920 14,979,366,011 1,868,934,869 240,640,641 1,784,032,410

= 2,688,988,568 P 2,382,098,258 4,138,353,661 4,051,490,108 1,193,231,724 377,939,607 14,832,101,926 1,618,719,128 245,982,837 1,552,858,507

= 2,021,097,635 P 2,708,829,668 4,753,234,744 3,636,126,111 1,274,321,908 226,115,945 14,619,726,011 2,673,404,936 219,277,773 1,010,104,220

10 11 12 18 13

7,602,178,419 4,858,620,655 785,532,005 2,123,480 661,463,325 17,803,525,804 = P 32,782,891,815

7,313,078,629 4,119,613,955 696,618,850 1,226,427 2,138,266,540 17,686,364,873 = 32,518,466,799 P

7,123,537,610 3,954,767,590 788,843,306 9,629,070 1,252,872,454 17,032,436,959 = 31,652,162,970 P

14 15

= P

963,577,614 1,691,285,280 1,791,570,197 2,275,330 641,435,860 556,779,154 748,491,097 6,395,414,532 2,132,386,146 2,448,761,300 1,243,213,018 287,525,097 169,190,310 1,290,056,253 941,643,520 8,512,775,644 14,908,190,176

= P 314,290,947 1,486,567,695 1,224,782,674 14,651,258 592,965,140 200,652,672 784,301,205 4,618,211,591 4,275,221,611 2,612,953,197 1,278,483,516 783,080,617 166,768,253 1,273,374,893 740,061,940 11,129,944,027 15,748,155,618

= P

228,918,669 1,251,473,883 744,328,795 9,865,426 450,962,773 227,987,059 709,932,811 3,623,469,416 4,510,879,093 2,639,638,844 1,032,194,116 682,012,177 862,390,863 1,306,718,777 965,979,437 11,999,813,307 15,623,282,723

19 18

17,141,588,052 733,113,587 17,874,701,639 = P 32,782,891,815

16,065,271,202 705,039,979 16,770,311,181 = 32,518,466,799 P

15,318,363,548 710,516,699 16,028,880,247 = 31,652,162,970 P

See Notes to Financial Statements.

F-3

REPORT OF INDEPENDENT AUDITORS

MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in Philippine Pesos)
Notes REVENUES Realized gross profit from real estate sales: Real estate sales . . . . . . . . . . . . Cost of real estate sales. . . . . . . . Gross profit . . . . . . . . . . . . . . . Deferred gross profit . . . . . . . . . Realized gross profit on current years sales . . . . . . . . . . . . . . Realized gross profit on prior years sales . . . . . . . . . . . . . . . . . . Rental income . . . . . . . . . . . . . . . Hotel income net . . . . . . . . . . . Other revenues . . . . . . . . . . . . . . 2005 2004 2003

= P 3,151,214,282 (2,158,202,768) 993,011,514 (367,358,696) 625,652,818 506,439,183 1,132,092,001 547,822,254 101,057,099 1,012,147,201 2,793,118,555

= P 2,396,727,787 (1,694,917,117) 701,810,670 (381,934,355) 319,876,315 265,279,550 585,155,865 454,653,065 88,720,411 1,251,061,979 2,379,591,320 230,652,378 172,326,852 47,492,684 122,245,504 31,870,665 61,856,416 14,100,264 192,221,998 872,766,761 1,506,824,559 205,271,197 207,138,433 111,857,690 524,267,320 982,557,239 180,343,471 = P = P = P = P 802,213,768 (5,476,720) 807,690,488 802,213,768 0.08

= 2,371,799,323 P (1,652,586,374) 719,212,949 (294,354,651) 424,858,298 153,890,612 578,748,910 241,430,939 73,780,796 627,766,680 1,521,727,325 179,587,717 133,405,182 65,941,854 112,993,341 27,016,732 50,749,908 12,550,628 145,838,676 728,084,038 793,643,287 81,668,979 77,318,475 210,657,087 17,080,062 386,724,603 406,918,684 146,939,403 = P = P = P = P 259,979,281 7,234,274 252,745,007 259,979,281 0.02

16

OPERATING EXPENSES Commissions . . . . . . . . . . . . . . . Depreciation and amortization . . . . Taxes and licenses . . . . . . . . . . . . Employee benefits . . . . . . . . . . . . Advertising and promotions . . . . . . Impairment losses . . . . . . . . . . . . Foreign currency losses . . . . . . . . . Amortization of preoperating expenses and deferred foreign currency losses Other operating expenses . . . . . . . .

17

252,804,538 190,179,814 124,999,535 116,859,836 32,471,639 3,496,464 1,103,304 254,966,482 976,881,612

16

OPERATING PROFIT . . . . . . . . . . . . . OTHER CHARGES Finance costs . . . . . . . . . . . . Equity in net losses of associates Fair value losses net . . . . . . Cumulative effect of a change in accounting policy . . . . . . . . . . . . . . . . . . . . 7, 14 10 8

1,816,236,943 280,835,810 64,638,874 44,785,138 390,259,822

INCOME BEFORE TAX . . . . . . . . . . . TAX EXPENSE. . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . Attributable to: Minority interest . . . . . . . . . . . . . Parent companys shareholders . . . .

18

1,425,977,121 258,993,163 = P 1,166,983,958 = P 13,121,607 1,153,862,351

= P 1,166,983,958 Earnings Per Share . . . . . . . . . . . . . 21 = P 0.11

See Notes to Financial Statements.

F-4

REPORT OF INDEPENDENT AUDITORS

MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in Philippine Pesos)
Notes CAPITAL STOCK . . . . . . . . . . . . . . . ADDITIONAL PAID-IN CAPITAL . . . . . . TREASURY SHARES, representing parent companys common shares held by subsidiaries Balance at beginning of year. . . . . . Disposals during the year. . . . . . . . Balance at end of year 250 million shares in 2005 and 350 million shares in both 2004 and 2003 . . . ACCUMULATED TRANSLATION ADJUSTMENTS Balance at beginning of year As previously reported . . . . . . . . Effects of transition to PFRS, net of taxes . . . . . . . . . . . . . . . . . . As restated . . . . . . . . . . . . . . . . Currency translation differences during the year, net of tax . . . . . . . . . . Balance at end of year . . . . . . . . . RETAINED EARNINGS Balance at beginning of year As previously reported . . . . . . . . . Effects of transition to PFRS, net of taxes . . . . . . . . . . . . . . . . . . As restated . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . Stock dividends . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . MINORITY INTEREST . . . . . . . . . . . . TOTAL EQUITY . . . . . . . . . . . . . . . . Net Gain (Loss) Recognized Directly to Equity . . . . . . . . . . . . . . . . . . . . 20 2005 = P 10,655,559,106 2,227,892,300 2004 = 8,879,632,590 P 2,227,892,295 2003 = 8,879,632,590 P 2,227,892,295

(363,575,945) 68,009,769

(363,575,945)

(42,778,712) (320,797,233)

(295,566,176)

(363,575,945)

(363,575,945)

57,494,655 2 (26,540,291) 30,954,364 (145,555,275) (114,600,911)

91,752,859 (15,660) 91,737,199 (60,782,835) 30,954,364

91,737,199 91,737,199

5,875,583,534 2 (585,215,636) 5,290,367,898 1,153,862,351 (1,775,926,516) 4,668,303,733 733,113,587 = P 17,874,701,639 = P (145,555,275)

5,115,862,622 (633,185,212) 4,482,677,410 807,690,488 5,290,367,898 705,039,979 = 16,770,311,181 P = P (60,782,835)

4,541,647,844 (311,715,442) 4,229,932,402 252,745,007 4,482,677,409 710,516,699 = 16,028,880,247 P = P 91,737,199

20

See Notes to Financial Statements.

F-5

REPORT OF INDEPENDENT AUDITORS

MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in Philippine Pesos)
2005 CASH FLOWS FROM OPERATING ACTIVITIES Income before tax . . . . . . . . . . . . . . . . . . . . . . . . Adjustments for: Depreciation and amortization . . . . . . . . . . . . . . . Cumulative effect of a change in accounting policy . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . Fair value losses on marketable securities. . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of investments . . . . . . . . . . . . . . . . . Probable losses . . . . . . . . . . . . . . . . . . . . . . . . . Equity in net losses of subsidiaries and an associate . . Amortization of pre-operating expenses . . . . . . . . . . Amortization of deferred charges . . . . . . . . . . . . . . Operating income before working capital changes . . . . Decrease (increase) in trade and other receivables . . . Decrease (increase) in residential and condominium units for sale . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in property development costs . . . Increase in prepayments and other current assets . . . . Decrease (increase) in advances to landowners andjoint ventures Increase in trade and other payables . . . . . . . . . . . Increase in customers deposits . . . . . . . . . . . . . . Increase (decrease) in deferred income on real estate sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in other current liabilities . . . . . Increase in reserve for property development. . . . . . Increase (decrease) in other non-current liabilities . . Cash generated from operations. . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for income taxes . . . . . . . . . . . . . . . . . . Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . = P 1,425,977,121 190,179,814 280,835,810 44,785,138 (715,435,491) (28,791,600) (45,163,750) 3,496,464 64,638,874 1,103,304 1,221,625,684 (229,336,178) 499,169,776 (489,758,441) (48,687,520) 2004 = 982,557,239 P 172,326,852 205,271,197 111,857,690 (571,123,393) (27,975,650) 61,856,416 207,138,433 13,960,410 1,155,869,194 845,082,620 (358,904,954) 70,174,819 (267,443,556) 2003 = P 406,918,684 133,405,182 17,080,062 81,668,979 210,657,087 (507,102,154) (32,590,274) 77,318,475 12,550,628 50,749,908 450,656,577 (321,546,677) 615,305,453 (628,034,566) (49,909,434)

5,342,196 61,722,929 402,595,625 (139,429,038) (35,810,108) 13,200,222 201,581,580 1,462,216,727 (280,835,810) (371,094,617) 810,286,300

(26,705,064) 24,053,188 453,768,233 73,734,053 406,418,141 388,291,767 80,091,929 2,844,430,370 (205,591,795) (112,424,844) 2,526,413,731

756,018 268,134,613 1,378,644,052 140,464,298 223,348,766 349,797,528 (72,202,741) 2,355,413,887 (125,220,235) (75,657,699) 2,154,535,953

F-6

REPORT OF INDEPENDENT AUDITORS

MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in Philippine Pesos)
2005 CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Investment property . . . . . . . . . . . . . . . . . . . . . . Land for future development . . . . . . . . . . . . . . . . Property and equipment. . . . . . . . . . . . . . . . . . . . Proceeds from disposals of property and equipment . . . Net increase in investments in and advances to associates and other related parties . . . . . . . . . . . . . . . . . . Net increase in other non-current assets . . . . . . . . . . Disposals (acquisition) of investments during the year . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received . . . . . . . . . . . . . . . . . . . . . . . . Net Cash Used in Investing Activities . . . . . . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term liabilities and other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of shares of parent company by subsidiaries Proceeds from long-term liabilities . . . . . . . . . . . . . . Net Cash From (Used in) Financing Activities . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . 2004 2003

(841,646,195) (42,123,813) (180,262,482) 1,391,857 (613,020,623) (506,389,546) 493,936,997 347,803,636 28,791,600 (1,311,518,569)

(382,473,955) (115,996,375) (9,693,965) 8,631,939 (874,893,731) (1,374,703,467) 461,396,297 565,480,423 27,975,650 (1,694,277,184)

(95,720,433) (296,760,402) (19,168,620) 17,449,178 (1,452,034,186) 496,412,628 (1,986,858,091) 507,102,154 32,590,274 (2,796,987,498)

(450,115,471) 1,112,671,628 662,556,157 161,323,888 2,688,988,568 = P 2,850,312,456

(164,245,614) (164,245,614) 667,890,933 2,021,097,635 = 2,688,988,568 P

(228,918,668) (320,797,233) 950,000,000 400,284,099 (242,167,446) 2,263,265,081 = 2,021,097,635 P

Supplemental Information for Non-cash Investing and Financing Activities: In the normal course of business, the Company enters into non-cash transactions such as exchange or purchase on account of real estate and other assets, transfers property from Land for Future Development Costs to Investment Property as the property goes through its various stages of development. These non-cash activities are not reflected in the cash flows statements (see Notes 9, 11 and 12). See Notes to Financial Statements.

F-7

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

MEGAWORLD CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004 AND 2003 (Amounts In Philippine Pesos) 1. CORPORATE INFORMATION

Megaworld Corporation (the Company or parent company) holds interests in the following subsidiaries and associates:
Explanatory Notes Percentage of Ownership 2005 2004 2003

Subsidiaries/Associates

Subsidiaries: Megaworld Land, Inc. (MLI) . . . . . . . . . . . Prestige Hotels and Resorts, Inc. (PHRI) . . . . Mactan Oceanview Properties and Holdings, Inc. (MOPHI) . . . . . . . . . . . . . . . . . . . . . . Megaworld Cayman Islands, Inc. (MCII) . . . . Richmonde Hotel Group International (RHGI) Eastwood CyberOne Corporation (ECOC) . . . Forbes Town Properties and Holdings, Inc. (FTPHI) . . . . . . . . . . . . . . . . . . . . . . . Megaworld Newport Property Holdings, Inc. (MNPHI) . . . . . . . . . . . . . . . . . . . . . . Megaworld-Daewoo Corporation (MDC) . . . . Megaworld Central Properties, Inc. (MCPI) . . Megaworld Globus Asia, Inc. (MGAI) . . . . . . Associates: Empire East Land Holdings, Inc. (EELHI) . . . Fairmont Holdings, Inc.. . . . . . . . . . . . . . . Palm Tree Holdings and Development Corporation (PTHDC) . . . . . . . . . . . . . .
(a) (b) (c) Wholly owned subsidiary of MLI Subsidiary acquired in 2005

(a)

100% 100% 100% 100% 100% 100% 100%

100% 100% 100% 100% 100% 100% 100% 60% 50% 43% 36.32%

100% 100% 100% 100% 100% 100% 100% 60% 50% 43% 36.32%

(b) (c)

100% 60% 60% 50% 45.22% 35.29%

(c)

40%

Subsidiary incorporated in 2005, not yet in commercial operations as of December 31, 2005

Except for MCII and RHGI, the subsidiaries and associates were incorporated in the Philippines and operate within the country. MCII was incorporated and operates in the Cayman Islands. RHGI was incorporated and operates in the British Virgin Islands. The Company and its subsidiaries (the Group), except for MCPI and PTHDC which are not yet in commercial operations as of December 31, 2005, are presently engaged in the real estate business, hotel operations and marketing services. The registered office of the Company is located at 28th Floor, The World Centre Building, Sen. Gil Puyat Avenue, Makati City. The financial statements of the Group for the year ended December 31, 2005 (including the comparatives for the years ended December 31, 2004 and 2003) were authorized for issue by the Companys Board of Directors on February 27, 2006.

F-8

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

2.

TRANSITIONING TO PHILIPPINE FINANCIAL REPORTING STANDARDS

The Accounting Standards Council (ASC), the accounting standards-setting body in the Philippines, started a program in 1997 to move fully to the International Accounting Standards (IASs) issued by the then International Accounting Standards Committee (IASC). In April 2001, IASC was succeeded by the International Accounting Standards Board (IASB) which since then has issued revised IASs and new International Financial Reporting Standards (IFRSs). To correspond better with the issuances of the IASB, the ASC renamed the Standards it issues as Philippine Financial Reporting Standards or PFRSs (previously referred to as Statements of Financial Accounting Standards or SFASs). PFRSs consist of: a. b. c. PFRSs (corresponding to IFRSs); PASs (corresponding to IASs); and, Interpretations (corresponding to IFRICs and SICs).

In compliance with the pronouncements of ASC and the regulations of Securities and Exchange Commission (SEC), the Group has adopted all the relevant PFRS for the first time in its financial statements for the year ended December 31, 2005 with January 1, 2003 as its transition date. The transition from previous generally accepted accounting principles (GAAP) in the Philippines to PFRS has been made in accordance with PFRS 1, First-time Adoption of Philippine Financial Reporting Standards. Due to the transition to PFRS, the 2004 and 2003 comparatives contained in these financial statements differ from those previously presented in the financial statements for the years ended December 31, 2004 and 2003. The following reconciliations and explanatory notes thereto describe the effects of the transition on the Groups opening PFRS balance sheet as of January 1, 2003 and for the years ended December 31, 2003 and 2004. All explanations should be read in conjunction with the PFRS accounting policies of the Group as disclosed in Note 3. No adjustments to capital stock, additional paid-in capital and treasury stock were necessary in the opening PFRS balance sheet as of January 1, 2003 and the comparatives prepared for the year ended December 31, 2003 and 2004.

F-9

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 2.1 Reconciliations

a.

The reconciliation of the Groups equity reported under previous Philippine GAAP to its equity under PFRS are summarized as follows:
Notes Dec. 31 2004 Dec. 31 2003 Jan. 1 2003

Accumulated Translation adjustments under previous GAAP . . . . . . . . . . . . . . . . . Restatement of foreign subsidiaries financial statements . . . . . . . . . Accumulated Translation adjustments under PFRS . . . . . Retained Earnings under previous GAAP . . . . . . . . . . . . . . . . . Reversal of goodwill amortization . Remeasurement of trade receivables at amortized cost . . . . . . . . . . Remeasurement of security deposits at amortized cost . . . . . . . . . . Fair value adjustment of marketable securities . . . . . . . . . . . . . . . Recognition of transitional liability and defined benefit expense . . . . Depreciation of investment property by component . . . . . . . . . . . . Recognition of equity share in net loss of an associate . . . . . . . . . Deferred tax adjustments . . . . . . . Total adjustment to retained earnings . . . . . . . . . . . . . . . . Retained Earnings under PFRS . . Total adjustments to Equity . . . . . Equity under previous GAAP . . . Equity under PFRS . . . . . . . . . .

P = 2.11

57,494,655 (26,540,291) 30,954,364 5,875,583,534

P =

91,752,859 (15,660) 91,737,199 5,115,862,622 (314,607,193) 29,053,760 (170,661,355) (22,472,830) (42,162,539) (133,047,814) 20,712,759 (633,185,212) 4,482,677,410 (633,200,872) 15,951,564,420

P =

4,541,647,844 (246,740,237) 13,336,569 (12,736,849) (17,030,252) (23,466,719) (38,036,985) 12,959,031 (311,715,442) 4,229,932,402 (311,715,442) 15,606,394,018

2.3 2.4 2.5 2.6 2.7 2.8 2.12 2.10

25,988,101 (237,736,238) 31,485,381 24,404,458 (28,396,613) (62,008,613) (367,926,581) 28,974,469 (585,215,636) 5,290,367,898 (611,755,927) 16,677,027,129 P =16,065,271,202

P =15,318,363,548

P =15,294,678,576

F-10

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

b.

The remeasurements of balance sheet items at the opening PFRS balance sheets as of January 1, 2003 and comparative financial years as of December 31, 2003 and 2004 are summarized as follows:
Notes Previous GAAP Effects of Transition PFRS

January 1, 2003 Changes in assets: Investments in marketable securities . . . . . . . . . . . . . Non-current trade and other receivables . . . . . . . . . . . . Investments in and advances to associates and other related parties . . . . . . . . . . . . . . . Investment property . . . . . . . . Property, plant and equipments .

2.2, 2.6 2.2, 2.4

P =

2,321,990,967

P =

(12,736,849) (246,740,238)

P =

(12,736,849) 2,075,250,729

2.2, 2.12 2.2, 2.8 2.2

7,584,487,598 904,934,259 493,210,842 11,304,623,666

(38,036,984) (171,181,023) 147,714,304 (320,980,790) 17,030,252 (12,959,031) (13,336,569) (9,265,348) P =(311,715,442)

7,546,450,614 733,753,236 640,925,146 10,983,642,876 1,015,648,074 1,060,859,397 747,889,943 2,824,397,414 P =8,159,245,462

Changes in liabilities: Trade and other payables. . . . . Deferred tax liabilities net . . Other non-current liabilities . . .

2.7 2.10 2.5

998,617,822 1,073,818,428 761,226,512 2,833,662,762

Total adjustment to equity . . December 31, 2003 Changes in assets: Current trade and other receivables . . . . . . . . . . . Investments in marketable securities . . . . . . . . . . . . Non-current trade and other receivables . . . . . . . . . . . Investments in and advances to associates and other related parties . . . . . . . . . . . . . . Investment property . . . . . . . Property and equipment net Other non-current assets . . . . Total change in assets . . . . . . Changes in liabilities: Trade and other payables. . . Other current liabilities . . . . Non-current portion of longterm liabilities . . . . . . . . Deferred tax liabilities net Other non-current liabilities . . . . . . . . . . . 2.7 2.2 2.2 2.10 2.2, 2.5

P = 8,470,960,904

. . .

2.2 2.2, 2.6 2.2, 2.4

P 2,376,779,921 = 2,880,987,696 2,682,002,702

P = 332,049,747 1,872,247,048 (8,597,766)

P 2,708,829,668 = 4,753,234,744 2,673,404,936

. . . .

2.2, 2.12 2.2, 2.8

7,261,955,425 4,343,177,352 442,596,083 1,247,502,454 P =21,235,001,633 P = 1,229,001,053 377,883,064 2,467,947,660 1,327,438,905 689,023,772 6,091,294,454

(138,417,815) (388,409,762) 346,247,223 5,370,000 P =2,020,488,675 P = 22,472,830 332,049,747 2,042,931,433 (20,720,128) 276,955,665 2,653,689,547 (15,660)

7,123,537,610 3,954,767,590 788,843,306 1,252,872,454 P =23,255,490,308 P = 1,251,473,883 709,932,811 4,510,879,093 1,306,718,777 965,979,437 8,744,984,001 91,737,199

Translation adjustment . . . . . . . Total adjustment to equity . . .

91,752,859 P =15,051,954,320

P P = (633,185,212) =14,418,769,108

F-11

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

Notes

Previous GAAP

Effects of Transition

PFRS

December 31, 2004 Changes in assets: Current trade and other Receivables . . . . . . . . . . . Investments in marketable securities . . . . . . . . . . . . Non-current trade and other receivables . . . . . . . . . . . Investment in and advances to associates and other related parties . . . . . . . . . . . . . . Investment property . . . . . . . Property and equipment net Other non-current assets . . . .

. . .

2.2 2.2, 2.6 2.2, 2.4

P 1,940,191,753 = 2,110,047,610 1,809,852,101

P = 441,906,505 2,028,306,051 (191,132,973)

P 2,382,098,258 = 4,138,353,661 1,618,719,128

. . . .

2.2, 2.12 2.2, 2.8 2.2 2.3

7,681,005,211 4,481,487,466 396,753,952 2,112,278,439 20,531,616,532

(367,926,582) (361,873,511) 299,864,898 25,988,101 (1,875,132,489) 28,396,612 441,906,505 2,042,931,433 (41,464,017) 15,117,883 2,486,888,416 (26,540,291)

7,313,078,629 4,119,613,955 696,618,850 2,138,266,540 22,406,749,021 1,486,567,694 784,301,205 4,275,221,611 1,273,374,893 740,061,940 8,559,527,343 30,954,364

Changes in liabilities: Trade and other payables. . . Other current liabilities . . . . Non-current portion of longterm liabilities . . . . . . . . Deferred tax liabilities . . . . Other non-current liabilities .

. . . . . . . . . .

2.7 2.10 2.2 2.7 2.2, 2.5

1,458,171,082 342,394,700 2,232,290,178 1,314,838,910 724,944,057 6,072,638,927

Translation Adjustments . . . . . Total adjustment to equity . .

57,494,655 P =14,401,482,950

P P = (585,215,636) =13,816,267,314

F-12

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

c.

Profit and loss reported under previous GAAP for the year ended December 31, 2003 and December 31, 2004 is reconciled to profit and loss under PFRS as follows:
Notes Previous GAAP Effects of Transition PFRS

December 31, 2003 : Realized gross profit on real estate sales . . . . . . . . . . . . . Other revenues . . . . . . . . . . . . . Operating expenses . . . . . . . . . . Operating profit . . . . . . . . . . . Other income (charges) Finance cost . . . . . . . . . . . . Equity share in net earnings . . Cumulative effect of change in accounting policy . . . . . . . Fair value gains (losses). . . . . . . . . . . . . . . . .

2.4 2.4 2.7

P = 761,054,530 755,889,853 1,516,944,383 (703,945,641) 812,998,742

P =(182,305,620) 187,088,562 4,782,942 (24,138,397) (19,355,455) (4,200,125) (95,010,831) (210,657,087) (309,868,043) (329,223,498) 7,753,728 P =(321,469,770)

P = 578,748,910 942,978,415 1,521,727,325 (728,084,038) 793,643,287 (81,668,979) (77,318,475) (17,080,062) (210,657,087) (386,724,603) 406,918,684 (146,939,403) (7,234,274) P = 252,745,007

2.5 2.12

(77,468,854) 17,692,356 (17,080,062) (76,856,560)

2.6

Income before tax and minority interest . . . . . . . . . . . . . . . . Tax expense . . . . . . . . . . . . . . . Net earnings applicable to minority interest. . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . December 31, 2004 : Realized gross profit on real estate sales . . . . . . . . . . . . . Other revenues . . . . . . . . . . . . . Operating expenses . . . . . . . . . . Operating profit . . . . . . . . . . . Other income (charges) Finance cost . . . . . . . . . . . . . . Equity share in net earnings (losses) . . . . . . . . . . . . . . . . Fair value losses . . . . . . . . . . . 2.5 2.12 2.2, 2.6 2.10

736,142,182 (154,693,131) (7,234,274) P =574,214,777

2.4 2.4 2.7, 2.8

P =759,072,979 1,346,470,550 2,105,543,529 (872,985,005) 1,232,558,524 (205,591,795) 27,740,334 (111,857,690) (289,709,151)

P =(173,917,114) 447,964,905 274,047,791 218,244 274,266,035 320,598 (234,878,767) (234,558,169) 39,707,866 8,261,710 P = 47,969,576

P =585,155,865 1,794,435,455 2,379,591,320 (872,766,761) 1,506,824,559 (205,271,197) (207,138,433) (111,857,690) (524,267,320) 982,557,239 (180,343,471) 5,476,720 P = 807,690,488

Income before tax and minority interest . . . . . . . . . . . . . . . . Tax expense . . . . . . . . . . . . . . . Net losses applicable to minority interest. . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . 2.2 2.10

942,849,373 (188,605,181) 5,476,720 P = 759,720,912

Revised Structure of Balance Sheet and Statement of Income

The Company has modified its previous balance sheet and income statement structure on transition to PFRS. The main changes are summarized as follows: a. Under the previous GAAP, trade receivables sold with recourse are derecognized from the carrying amount of trade receivables account. These sold trade receivables did not qualify for derecognition criteria under PFRS since related risks and rewards were not transferred from the Group to the buyer of the receivables. Accordingly, the amounts of trade receivables sold as of January 1, 2003 and December 31, 2003 and 2004 amounting to P 658,198,970, =
F-13

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

P 638,059,173 and P 488,509,770, respectively, were reversed and the related liability was = = recognized for the proceeds received by the Group. This resulted in the increase in the Trade and Other receivables and Other current and non-current liabilities accounts in the opening PFRS balance sheet as of January 1, 2003 and the comparatives as of December 31, 2003 and 2004; b. Investments in bonds and other debt instruments previously presented separately in the face of the balance sheets and classified as long-term are now presented as part of Marketable Securities, which represent financial assets at fair value through profit and loss. Investments in preferred stock classified as part of the Investments in and Advances to Associates and Other Related Parties under previous GAAP are now included in Marketable Securities which represent financial assets at fair value through profit and loss. Investments in shares of stocks wherein the Company has no significant influence measured at cost previously included in Investments in and advances to associates and other related parties under previous GAAP are now presented as part of Other Non-current Assets classified as available for sale financial assets. Real estate held for lease under the previous GAAP is now presented as Investment Property and Property and Equipment.

c.

d.

e.

In addition, some balance sheet items that previously were classified as non-current in accordance with previous GAAP requirements are now presented as current under PFRS. Individual notes to the balance sheet items and the accounting policies provide further details on these changes.
2.3 Cessation of Amortization of Goodwill

Under PFRS, Goodwill, representing the excess of acquisition costs over the equity in underlying net assets of the subsidiaries or associates at date of acquisition, is not amortized. Instead, Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. As required by PFRS 1, Goodwill presented as part of the Other non-current asset recognized under previous GAAP has been tested for impairment at the date of transition to PFRS. Based on the test, no impairment loss was required to be recognized. Also, in accordance with PFRS 1, the unamortized amount as of January 1, 2004 has been considered as the carrying amount of Goodwill in the opening PFRS balance sheet. For the year ended December 31, 2004, Goodwill was not amortized, in accordance with PFRS. As a result, the amortization amounting to P 25,988,101 for 2004 recorded under the previous GAAP = were reversed in the reconciliation from previous GAAP figures to PFRS figures with corresponding reduction in Other operating expenses in that year.
2.4 Remeasurement of Trade Receivables at Amortized Cost

Trade receivables, presented as part of Trade and Other Receivables amount in the Balance Sheets, are non interest-bearing receivables. These were measured under the previous GAAP at realizable value. Under PFRS, the trade receivables are considered as loans and receivable financial assets measured at amortized cost using the effective interest rate method. The discount rate used of 10% was determined by reference to the market interest rate at the time of the recognition of sale. This resulted in the recognition of day-one loss amounting to P 428,853,325 and interest income of = P 182,113,088 in retained earnings as of January 1, 2003. The related day-one loss, adjusted to the = Realized Gross Profit from Real Estate Sales, and interest income, included in Other Revenues, recognized in 2003 and 2004 amounted to P 182,305,620 and P 114,438,664, and = 173,917,114 P = = and P 250,788,069, respectively. This resulted in a net decrease of = 67,866,956 and net increase of P = P 76,870,955 in net income for 2003 and 2004, respectively. The net adjustments resulted in the = decrease of the beginning retained earnings as of December 31, 2003 and 2004 by P 314,607,193 = and P 237,736,238, respectively. =
F-14

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 2.5 Measurement of Security Deposits at Amortized Cost

Security deposits, presented as part of Other non-current liabilities, arising from the lease of investment property were measured under the previous GAAP at the amount of consideration given by the lessees which amounted to P 39.75 million as of January 1, 2003 and P 97.25 million as of = = December 31, 2003. Under PFRS, refundable guarantee deposits are considered as loans and receivable financial assets measured at amortized cost using the effective interest rate method. The discount rate used of 10% was determined by reference to the market interest rate of comparable financial instrument at the date of the inception of the lease. This resulted in the recognition of day-one gain amounting to P 14,149,158 and interest expense of P 812,589 in retained earnings as = = of January 1, 2003. The Group recognized an additional day-one gain pertaining to lease contracts acquired in 2003 and 2004 amounting to P 19,917,317 and P 10,265,067, respectively. Interest = = expense amounting to P 4,200,125 and P 7,833,445 for 2003 and 2004 is recognized representing = = the cost of money paid in advance by the Groups tenants. The net adjustment to the beginning retained earnings as of December 31, 2003 and 2004 amounted to P 29,053,760 and P 31,485,381, = = respectively.
2.6 Fair Value Measurement of Financial Assets

Certain investments in bonds classified as Investments in bonds and other debt securities under the previous GAAP were measured at cost less amortization of discounts and premiums. Under PFRS, these financial assets, which quoted market price, were classified as financial asset at fair value through profit and loss, and presented as Marketable Securities in a separate line item in the balance sheets. This resulted to the recognition of fair value loss of P 12,736,849 as of January 1, = 2003, adjusted to retained earnings as of that date. The Group also recognized fair value loss of P 157,924,506 in 2003 and fair value gain of P 195,065,813 in 2004. The fair value gain or loss is = = recorded in the 2003 and 2004 statements of income of the Group.
2.7 Full Recognition of Defined Benefit Obligation

Under PFRS, the Companys obligation under post-employment defined benefit plan should be actuarially determined using the projected unit credit method. The adoption of the related new standard resulted in the recognition of transitional liability amounting to P 17,030,252 as of = January 1, 2003. This transitional liability was fully recognized retrospectively in the Companys opening PFRS balance sheet. This also resulted in the recognition of additional defined benefit expense in 2003 and 2004 amounting to P 5,442,578 and = 5,923,783, respectively. The total P = adjustments to retained earnings as of December 31, 2003 and December 31, 2004 amounted to P 22,472,830 and = 28,396,613, respectively. P =
2.8 Depreciation of Buildings by Component

Significant component parts of the buildings of the Group, such as elevators, that have useful lives significantly different from the useful life of the building are identified as separate components and are depreciated separately. Under previous GAAP, this requirement is not clearly set out. The adoption of this new standard resulted in the recognition of additional depreciation expense amounting to = 23,466,719 as of January 1, 2003, adjusted as a reduction to the retained earnings P of that date. The additional depreciation expense recognized in 2003 and 2004 amounted to P 18,695,820 and P 19,846,074, respectively which resulted to decrease in consolidated net income = = for that years. The resulting decrease in retained earnings as of December 31, 2003 and 2004 amounted to P 42,162,539 and P 62,008,613, respectively. = =
2.9 Classification and Measurement of Investment Property

Under the previous GAAP, the Groups investment property previously classified as real properties held for lease was measured using the cost model. Under PFRS, investment property should be measured using the cost model or fair value model. The Group elected to measure its investment property using the cost model. When the cost model is used, an additional disclosure shall be made on the assets fair market value as of the comparative balance sheets dates. The Group uses the discounted cash flow valuation model in determining the assets fair market value. Projected annual cash inflow less the projected annual cash outflow specifically attributed to the asset is discounted using the cost of capital of the Group.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 2.10 Deferred Tax Adjustments

The deferred tax expense recognized by the Company which relates to the temporary differences arising from PFRS adjustments amounted to P 12,959,031 in January 31, 2003, P 20,712,759 in = = December 31, 2003, and P 28,974,469 in December 31, 2004. =
2.11 Accumulated Translation Adjustments This represents translation adjustments resulting from the conversion of MCII and RHGIs foreign currency denominated financial statements into the Groups presentation currency using the closing rate at balance sheet date following the provision of PFRS. Restatement of foreign subsidiaries under PFRS resulted to a decrease in Accumulated translation adjustment of = 15,660 and = 26,540,291 as of December 31, 2003 and P P December 31, 2004, respectively. 2.12 Recognition of Equity Share in Net Loss of an Associate

During the year, the Company has gained significant influence in an associate previously accounted for at cost. As such, adjustments were made to take-up the Companys share in net losses of the associate in 2003 and 2004 amounting to P 133,047,814 and = 367,926,581, respectively. P = 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies that have been used in the preparation of these consolidated financial statements are summarized below. The policies have been consistently applied to all years presented, unless otherwise stated.
3.1 Basis of Preparation

The consolidated financial statements of Megaworld Corporation and subsidiaries have been prepared in accordance with generally accepted accounting principles in the Philippines as set forth in PFRSs. The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial assets. The measurement bases are more fully described in the accounting policies below. Accounting estimates and assumptions are used in preparing the financial statements. Although these estimates are based on managements best knowledge of current events and actions, actual results may ultimately differ from those estimates. The consolidated financial statements are presented in Philippine pesos, the Groups functional currency, and all values represent absolute amounts except when otherwise indicated.
3.2 Impact of New and Revised Accounting Standards Effective Subsequent to 2005

There are new and revised accounting standards, amendments and interpretations to existing standards that have been published by IASB and adopted by the ASC which are mandatory for accounting periods beginning on or after January 1, 2006. Of the new ASC pronouncements, the following standards are relevant to the Group, which the Group has not opted to adopt early:
2006 PAS 19 (Amendment): . . . . . . . . . . . . PAS 39 (Amendment): . . . . . . . . . . . . 2007 PAS 1 (Amendment): . . . . . . . . . . . . PFRS 7 : . . . . . . . . . . . . . . . . . . . . Presentation of Financial Statements Financial Instruments: Disclosures Employee Benefits The Fair Value Option

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

The Group will apply the relevant new accounting standards in 2006 and 2007 in accordance with their transitional provisions. It is currently evaluating the impact of those standards on its consolidated financial statements and has initially determined that the following new standards may have significant effects on the financial statements for 2006, as well as for prior and future periods: . PAS 19 (Amended), Employee Benefits. This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It imposes additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will only impact the format and extent of disclosures presented in the accounts. The Group will apply this amendment for annual periods beginning January 1, 2006. PAS 39 (Amended), The Fair Value Option. This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Group believes that this amendment will not have a significant impact on the classification of financial instruments, as the Group would be able to comply with the amended criteria for the designation of financial instruments at fair value through profit and loss. The Group will apply this amendment for annual periods beginning January 1, 2006. PFRS 7, Financial Instruments: Disclosures and complementary amendment to PAS 1. PFRS 7 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, including sensitivity analysis to market risk. It replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. The amendment to PAS 1 introduces disclosures about the level of an entitys capital and how it manages capital. The Group has assessed the impact of PFRS 7 and the amendment to PAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of PAS 1. The Group will apply PFRS 7 and the amendment to PAS 1 for annual periods beginning January 1, 2007.

As for the other new accounting standards, the Group has initially assessed that they will not result in significant changes to the amounts or disclosures in its financial statements.
3.3 Consolidation, Investment in Associates and Interest in Joint Venture

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December 31, 2005, 2004 and 2003 and for the three years in the period ended December 31, 2005. The financial statements of subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The Company accounts for its investments in subsidiaries and associates, and minority interest as follows: . Investments in Subsidiaries. Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Company obtains and exercises control through voting rights. In addition, acquired subsidiaries are subject to application of the purchase method. This involves the revaluation at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On
F-17

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their revalued amounts, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill represents the excess of acquisition cost over the fair value of the Groups share of the identifiable net assets of the acquired subsidiary at the date of acquisition. All intercompany balances and transactions with subsidiaries, including unrealized profits arising from intra-group transactions, have been eliminated in full. Unrealized losses are eliminated unless costs cannot be recovered. . Transactions with Minority Interests. The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the statement of income. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. Investments in Associates. Associates are those entities over which the Group is able to exert significant influence but which are neither subsidiaries nor interests in a joint venture. Investments in associates are initially recognized at cost and subsequently accounted for using the equity method. Acquired investments in associates are also subject to purchase accounting. However, any goodwill or fair value adjustment attributable to the share in the associate is included in the amount recognized as investment in associates. All subsequent changes to the share of interest in the equity of the associate are recognized in the Groups carrying amount of the investment. Changes resulting from the profit or loss generated by the associate are charged against Equity in Net Earnings (Losses) in Groups consolidated statements of income and therefore affect net results of the Group. These changes include subsequent depreciation, amortization or impairment of the fair value adjustments of assets and liabilities. Items that have been directly recognized in the associates equity, for example, resulting from the associates accounting for available-for-sale financial assets, are recognized in consolidated equity of the Group. Any non-income related equity movements of the associate that arise, for example, from the distribution of dividends or other transactions with the associates shareholders, are charged against the proceeds received or granted. No effect on the Groups net result or equity is recognized in the course of these transactions. However, when the Groups share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Groups interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. . Interests in Joint Ventures. For interests in jointly controlled operations, the Group recognized in its financial statements the assets that it controls and the liabilities, the expenses that it incurs and its share in the income from the sale of goods of goods or services by the joint venture. No adjustment or other consolidation procedures are required since the assets, liabilities, income and expenses of the joint venture are recognized in the financial statements of the venturer.
Cash and Cash Equivalents

3.4

Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 3.5 Financial Assets

Financial assets include cash and financial instruments. Financial assets, other than hedging instruments, are classified into the following categories: marketable securities which represent financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting date at which date a choice of classification or accounting treatment is available, subject to compliance with specific provisions of applicable accounting standards. All financial assets are recognized on their trade date. All financial assets that are not classified as at fair value through profit or loss are initially recognized at fair value, plus transaction costs. The Groups financial instruments are currently lodged in the following classifications: . Financial Assets at Fair Value Through Profit or Loss/Marketable Securities. This category includes financial assets that are either classified as held for trading or are designated by the entity to be carried at fair value through profit or loss upon initial recognition. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless such are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date. Subsequent to initial recognition, the financial assets included in this category are measured at fair value with changes in fair value recognized in profit or loss. Financial assets originally designated as financial assets at fair value through profit or loss may not subsequently be reclassified into another category, hence, it must remain in such category until it is disposed of or derecognized. . Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. These are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses. Any change in their value is recognized in profit or loss. Loans and receivables are presented as Trade and Other Receivables in the balance sheets. Trade receivables, which generally have one to five-year terms, are non-interest bearing instruments recognized initially at fair value and subsequently stated at amortized cost using the effective interest method, less accumulated impairment losses, if any. An impairment loss is provided when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the impairment loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the impairment loss is recognized in the profit or loss. This receivable represents buyers unpaid balances arising from sale of real estate properties. The title to the real estate properties remains with the Group until such time that the Group fully collects its receivable from the buyers.

F-19

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

Available-for-sale Financial Assets. This include non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. They are included in non-current assets under the Other Non-current Assets account in the balance sheets unless management intends to dispose of the investment within 12 months of the balance sheet date. All financial assets within this category are subsequently measured at fair value, unless otherwise disclosed, with changes in value recognized in equity, net of any effects arising from income taxes. Gains and losses arising from securities classified as available-for-sale are recognized in the statement of income when they are sold or when the investment is impaired. In the case of impairment, any loss previously recognized in equity is transferred to the income statement. Losses recognized in the statement of income on equity investments are not reversed through the statement of income. Losses recognized in prior period income statements resulting from the impairment of debt instruments are reversed through the statement of income.

For investments that are actively traded in organized financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Non-compounding interest and other cash flows resulting from holding financial assets are recognized in profit or loss when received, regardless of how the related carrying amount of financial assets is measured. Derecognition of financial assets occurs when the rights to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.
3.6 Real Estate Transactions

Acquisition costs of raw land intended for future development, including other costs and expenses incurred to effect the transfer of title of the property to the Group, are charged to the Land for Future Development account. These costs are reclassified to the Property Development Costs account when the development of the property starts. Related property development costs are then accumulated in this account. Borrowing costs on certain loans incurred during the development of the real estate properties are also capitalized by the Group as part of the Property Development Costs account. When portions of the property being developed are sold prior to the completion of the development, the accumulated costs of the project are transferred to the Residential and Condominium Units for Sale account. Cost of real estate property sold before completion of the development is determined based on the actual costs incurred to date plus estimated costs to complete the development of the property. The estimated expenditures for the development of sold real estate property, as determined by the project engineers, are charged to the cost of residential and condominium units sold with a corresponding credit to the Reserve for Property Development account. Residential and condominium units are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Considering the Groups pricing policy for real estate units for sale, cost is considerably lower than the net realizable value. The Group recognizes the effect of revisions in the total project cost estimates in the year in which these changes become known. Any impairment loss from a real estate project is charged to operations during the period in which the loss is determined.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 3.7 Investment Property

Properties held for lease under operating lease agreements, which comprise mainly of land, buildings and condominium units, are classified as Investment Property and carried at cost net of accumulated depreciation and any impairment in value (see Note 3.15). Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 5 to 25 years.
3.8 Property and Equipment

Buildings and improvements, a hotel building, hotel improvements, office furniture, fixtures and other equipment and transportation equipment are carried at acquisition or construction cost less subsequent depreciation and any impairment losses. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to income as incurred. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation and amortization and impairment losses are removed from the accounts and any resulting gain or loss is reflected in income for the period. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. Amortization of leasehold and office improvements is recognized over the estimated useful life of improvements or the term of the lease, whichever is shorter. The depreciation and amortization periods for property and equipment, based on the above policies, are as follows: Condominium units . . . . . . . . . . . . . Office and land improvements. . . . . . . Office furniture, fixtures and equipment Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1025 520 35 5 years years years years

An assets carrying amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount (see Note 3.15). The residual values and estimated useful lives of property and equipment are reviewed, and adjusted if appropriate, at each balance sheet date. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of income in the year the item is derecognized.
3.9 Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Groups share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is presented under Other Non-current Assets. Goodwill on acquisitions of associates is included in the carrying value of investments in associates. Goodwill is tested annually for impairment. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arises.
3.10 Financial Liabilities

Financial liabilities include bank loans and trade and other payables. Financial liabilities are recognized when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognized as an expense in the statements of income under Finance Costs.
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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

Bank loans are raised for support of long-term funding of operations. These are recognized at proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accrual basis using the effective interest method and are added to the carrying amount of the instrument to the extent that these are not settled in the period in which they arise. Trade payables are recognized initially at their nominal value and subsequently measured at amortized cost less settlement payments. Dividend distributions to shareholders are recognized as financial liabilities when the dividends are approved by the shareholders. Financial liabilities are derecognized from the balance sheet only when the obligations are extinguished either through discharge, cancellation or expiration.
3.11 Provisions

Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example, legal disputes or onerous contracts. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date, including the risks and uncertainties associated with the present obligation. Any reimbursement expected to be received in the course of settlement of the present obligation is recognized, if virtually certain as a separate asset, not exceeding the amount of the related provision. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. In addition, long-term provisions are discounted to their present values, where time value of money is material. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Probable inflows of economic benefits that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements.
3.12 Revenue and Cost Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: . Sale of residential and condominium units For financial reporting purposes, revenues from transactions covering sales of residential and condominium units are recognized under the percentage of completion method. Under this method, realization of gross profit is recognized by reference to the stage of development of the properties, i.e., revenue is recognized in the period in which the work is performed. Advances made to contractors and suppliers are treated as actual cost incurred in determining the stage of development of the properties. For tax reporting purposes, a modified basis of computing the taxable income for the year based on collections from sales is used by the Company, MGAI, ECOC and EELHI, while MDC report revenues based on the percentage of completion method. Sale of undeveloped land Revenues on sales of undeveloped land are recognized using the full accrual method. Under the full accrual method, revenue is recognized when the risks and rewards of ownership of the undeveloped land has passed to the buyer and the amount of revenue can be measured reliably.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

Rental and hotel income Revenue is recognized when the performance of contractually agreed tasks has been substantially rendered. Interest Revenue is recognized as the interest accrues (taking into account the effective yield on the asset). Dividends Revenue is recorded when the stockholders right to receive the payment is established.

Costs of residential and condominium units sold before completion of the projects include the acquisition cost of the land, development costs incurred to date and estimated costs to complete the project, determined based on firm construction contracts and on estimates made by the project engineers (see Note 3.6).
3.13 Leases

Group as lessee Leases which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the statement of income on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. Group as lessor Leases which do not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as income in the statement of income on a straight-line basis over the lease term.

3.14 Functional Currency and Foreign Currency Transactions

. Functional and Presentation Currency Except for MCII and RHGI which use the U.S. dollars as its functional currency, the accounting records of the Group are maintained in Philippine pesos. Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in Philippine pesos. . Transaction and Balances Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of income. . Translation of Financial Statements of Foreign Subsidiaries The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: . Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and, All resulting exchange differences are recognized as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. When a foreign operation is sold, such exchange differences are recognized in the consolidated statement of income as part of the gain or loss on sale.
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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

Goodwill arising on the acquisition of a foreign entity are treated as assets of the foreign entity and translated at the closing rate.
3.15 Impairment of Non-financial Assets

The Groups investment in associates, goodwill, investment property, land for future development, and property and equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management controls the related cash flows. Note 3.9 provides further details on initial recognition of goodwill. Individual assets or cash-generating units that include goodwill and other intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the assets or cash-generating units carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognized for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist.
3.16 Employee Benefits

. Retirement Benefit Obligations Pension benefits are provided to employees through a defined benefit plan. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of pension plan remains with the Group, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Groups defined benefit pension plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee. The liability recognized in the balance sheet for defined benefit pension plans is the present value of the defined benefit obligation (DBO) at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated annually by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses are not recognized as an expense unless the total unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees expected average remaining working lives. Actuarial gains and losses within the 10% corridor is disclosed separately. Past-service costs are recognized immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straightline basis over the vesting period.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

. Compensated Absences Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the balance sheet date. They are included in Trade and Other Payables at the undiscounted amount that the Group expects to pay as a result of the unused entitlement.
3.17 Borrowing Costs

For financial reporting purposes, borrowing costs are recognized as expenses in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete. For income tax purposes, interest and other borrowing costs are charged to expense when incurred.
3.18 Income Taxes

Current income tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in the consolidated statement of income. Deferred tax is provided, using the balance sheet liability method on temporary differences at the balance sheet date between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the balance sheet liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deferred income tax asset to be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Deferred 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. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in the consolidated statement of income. Only changes in deferred tax assets or liabilities that relate to a change in value of assets or liabilities that is charged directly to equity are charged or credited directly to equity.
3.19 Equity

Capital stock is determined using the nominal value of shares that have been issued. Additional paid-in capital includes any premiums received on the initial issuing of capital stock. Any transaction costs associated with the issuing of shares are deducted from additional paid-in capital, net of any related income tax benefits. Treasury shares are stated at the cost of re-acquiring such shares. Retained earnings include all current and prior period results as disclosed in the income statement.

F-25

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

4.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgments are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors.
4.1 Critical accounting estimates and assumptions

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: (a) Revenue recognition The Group uses the percentage-of-completion method in accounting for its realized gross profit on sales of real estate. The use of the percentage-of-completion method requires the Group to estimate the portion completed to date as a proportion of the total budgeted cost of the project. Were the proportion of the percentage of completed projects to differ by 10% from managements estimates, the amount of revenue recognized in 2005 would be increased by about P 94,484,932 if the = proportion of the completed projects were increased, or would be decreased by = 104,715,025 if P the proportion of the completed projects were decreased. (b) Principal assumptions for managements estimation of fair value Investment property is measured using the cost model. The fair value disclosed in the financial statements is determined by the Group using discounted cash flows valuation technique since the information on current or recent prices of assumptions underlying the discounted cash flow approach of investment property is not available. The Group uses assumptions that are mainly based on market conditions existing at each balance sheet date. The principal assumptions underlying managements estimation of fair value are those related to: the receipt of contractual rentals; expected future market rentals; void periods; maintenance requirements; and appropriate discount rates. These valuations are regularly compared to actual to market yield data, and actual transactions by the Group and those reported by the market. The expected future market rentals are determined in the basis of current market rentals for similar properties in the same location and condition.
4.2 Critical judgments in applying the Groups accounting policies

(a) Impairment of available-for sale financial assets The Group follows the guidance of PAS 39, Financial Instruments: Recognition and Measurement, on determining when an investment is other-than-temporarily impaired. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. (b) Distinction between investment properties and owner-occupied properties The Group determines whether a property qualifies as investment property. In making its judgment, the Group considers whether the property generates cash flows largely independently of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to property but also to other assets used in the production or supply process. 5. SEGMENT INFORMATION

The Groups operating businesses are organized and managed separately according to the nature of products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. The Group is engaged in the development of residential and office developments including urban centers integrating office, residential and commercial components. The Real Estate Sales segment pertains to the development and sale of residential and office developments. The Rental segment includes leasing of office and commercial
F-26

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

spaces. The Hotel segment relates to the management of hotel business operations. The Corporate and Others segment includes marketing services, general and corporate income and expense items. Segment accounting policies are the same as the policies described in Note 3. The Group generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties at current market prices. The following tables present revenue and profit information regarding industry segments for the years ended December 31, 2005, 2004 and 2003 and certain asset and liability information regarding segments at December 31, 2005, 2004 and 2003.
2005 Real Estate Sales TOTAL REVENUES Sales to external customers. . . . . . . . . Intersegment sales . . . . . Total revenues . . . . . . . RESULTS Segment results . . . . . . . Unallocated expenses . . . Income from operations. Finance costs . . . . . . . Interest income . . . . . . Dividend income . . . . . Equity in net loss of an associate . . . . . . . . Fair value losses net . . . . . . . (280,835,810) 406,010,444 28,791,600 (64,638,874) (44,785,138) Rental Hotel Income Corporate and Others Elimination Consolidated

P 3,151,214,282 = P = 3,151,214,282 P 627,324,724 =

P 547,822,254 = 60,000,000 P 607,822,254 = P 385,291,553 =

P 214,301,100 = P 214,301,100 =

P 572,768,955 = P 572,768,955 =

P =

(60,000,000)

P 4,486,106,591 = P = 4,486,106,591 P = 1,525,190,758 (143,755,859) 1,381,434,899 (280,835,810) 406,010,444 28,791,600 (64,638,874) (44,785,138) 1,425,977,121 (258,993,163) 1,166,983,958 (13,121,607) P 1,153,862,351 =

P (60,000,000) = P = 22,392,385

P (25,015,279) P 515,197,375 = =

Income before tax . . . . . Tax expense . . . . . . . . . Income before minority interest . . . . . . . . . . Minority interest share in net income . . . . . . Net income . . . . . . . . . ASSETS AND LIABILITIES Segment assets . . . . . . . . P 26,016,329,691 = Investment in associate accounted under the equity method . . . . . . . Unallocated assets . . . . . . Total assets . . . . . . . . . . Segment liabilities . . . . . . OTHER SEGMENT INFORMATION Project and capital expenditures . . . . . . . . Depreciation and amortization . . . . . . . . P 13,933,868,833 = P 229,951,083 = P = P 744,370,260 = P = P 17,057,619,766 = P 4,829,388,985 = P 198,742,215 = P 3,930,578,725 =

P =

5,734,232,701 1,032,329,421

5,734,232,701 1,032,329,421 P 32,782,891,813 = P 14,908,190,176 =

P 2,661,088,580 = 6,537,324

P 841,646,195 = 112,059,735

P =

4,375,784 45,100,601

P 119,688,713 = 26,482,154

P =

P = 3,626,799,272 190,179,814

F-27

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

2004 Real Estate Sales TOTAL REVENUES Sales to external customers. . . . . . . . . Intersegment sales . . . . . Total revenues . . . . . . . RESULTS Segment results . . . . . . . Unallocated expenses . . . Income from operations. Finance costs . . . . . . . Interest income . . . . . . Dividend income . . . . . Equity in net income of an associate . . . . . . Fair value losses net . . . . . . . (205,271,197) 379,988,652 27,975,650 (207,138,433) Rental Hotel Income Corporate and Others Elimination Consolidated

P 2,396,727,787 = P = 2,396,727,787 P = 211,146,204

P 454,653,065 = 54,047,619 P 508,700,684 = P 361,661,185 =

P 185,145,120 = P 185,145,120 =

P 665,618,048 = P 665,618,048 =

P = P = P =

(54,047,619) (54,047,619) (99,248)

P 3,702,144,020 = P = 3,702,144,020 P 1,156,303,987 = (57,443,730) 1,098,860,257 (205,271,197) 379,988,652 27,975,650 (207,138,433) (111,857,690) 982,557,239 (180,343,471) 802,213,768 5,476,720 P = 807,690,488

P (11,991,630) P 595,587,476 = =

Income before tax . . . . . Tax expense . . . . . . . . . Income before minority interest . . . . . . . . . . Minority interest share in net losses . . . . . . . Net income . . . . . . . . . ASSETS AND LIABILITIES Segment assets . . . . . . . . Investment in associate accounted under the equity method . . . . . . . Unallocated assets . . . . . . Total assets . . . . . . . . . . Segment liabilities . . . . . . OTHER SEGMENT INFORMATION Project and capital expenditures . . . . . . . . Depreciation and amortization . . . . . . . . P 13,358,976,575 = P 251,215,099 = P = P 2,137,963,944 = P = P 17,642,602,782 = P 4,181,324,640 = P 222,247,530 = P 4,136,297,589 = 5,625,039,491 710,954,767 P =

P 26,182,472,541 = 5,625,039,491 710,954,767 P 32,518,466,799 = P 15,748,155,618 =

P 2,170,715,046 = 23,782,955

P 382,473,955 = 71,175,793

P 896,600 = 20,099,152

P 8,566,422 = 57,268,952

P =

P 2,562,652,023 = 172,326,852

F-28

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

2003 Real Estate Sales TOTAL REVENUES Sales to external customers. . . . . . . . . Intersegment sales . . . . . Total revenues . . . . . . . RESULTS Segment results . . . . . . . Unallocated expenses . . . Income from operations. Finance costs . . . . . . . Interest income . . . . . . Dividend income . . . . . Equity in net income of an associate . . . . . . Fair value losses net . Cumulative effect of change in accounting policy . . . . . . . . . . . . . . . . . (81,668,979) 372,632,757 32,590,274 (77,318,475) Rental Hotel Income Corporate and Others Elimination Consolidated

P 2,371,799,323 = P = 2,371,799,323 P = 314,718,672

P 241,430,939 = 31,904,762 P 273,335,701 = P 152,614,460 =

P 157,378,131 = P 157,378,131 = P (12,257,059) =

P = P =

31,742,899 31,742,899

P =

(31,904,762)

P 2,802,351,292 = P = 2,802,351,292 P = 458,439,023 (70,018,767) 201,141,256 (81,668,979) 372,632,757 32,590,274 (77,318,475) (210,657,087) (17,080,062) 406,918,684 (146,939,403) 259,979,281 (7,234,274) P 252,745,007 =

P (31,904,762) = P 25,379,149 =

P (22,016,199) =

Income before tax . . . . . Tax expense . . . . . . . . . Income before minority interest . . . . . . . . . . Minority interest share in net earnings . . . . . Net income . . . . . . . . . ASSETS AND LIABILITIES Segment assets . . . . . . . . Investment in associate accounted under the equity method . . . . . . . Unallocated assets . . . . . . Total assets . . . . . . . . . . Segment liabilities . . . . . . OTHER SEGMENT INFORMATION Project and capital expenditures . . . . . . . . Depreciation and amortization . . . . . . . . P 13,283,246,608 = P 151,827,700 = P = P 2,188,208,415 = P = P 14,702,995,594 = P 3,918,876,051 = P 240,831,435 = P 6,019,104,274 = 5,916,446,643 853,908,973 P =

P 24,881,807,354 = 5,916,446,643 853,908,973 P 31,652,162,970 = P = 15,623,282,723

P 2,997,103,325 = 24,820,733

P 503,005,226 = 55,936,573

P 5,681,203 = 23,925,443

P 13,487,417 = 28,722,433

P =

P 3,519,277,171 = 133,405,182

6.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include the following components as of December 31 :

2005 2004 2003

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

P = 750,157,939 2,100,154,517 P 2,850,312,456 =

P = 287,598,997 2,401,389,571 P = 2,688,988,568

P = 578,127,086 1,442,970,549 P = 2,021,097,635

Cash accounts with the banks generally earn interest at rates based on daily bank deposit rates. Short-term placements are made for varying periods of between 15 to 30 days and earn effective interest ranging from 4.5% to 8.8% in 2005, 4.2% to 9.4% in 2004, and 3.3% to 8.5% in 2003.

F-29

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

7.

TRADE AND OTHER RECEIVABLES

This account is composed of the following:

Notes Current: Trade receivables Allowance for impairment Advances to contractors and suppliers Others 2005 2004 2003

19

P = 1,804,791,025 (2,609,450) 1,802,181,575 12,922,360 936,164,277 P 2,751,268,212 =

P = 1,627,561,106 (4,430,832) 1,623,130,274 150,171,577 608,796,407 P = 2,382,098,258 P = 1,613,823,412 4,895,716 P = 1,618,719,128

P = 2,267,010,642 (14,095,829) 2,252,914,813 139,330,221 316,584,634 P = 2,708,829,668 P = 2,668,327,247 5,077,689 P = 2,673,404,936

19

Non-current: Trade receivables Others

P = 1,864,533,221 4,401,648 P 1,868,934,869 =

Certain receivables from trade customers are covered by postdated checks. The installment period of sales contracts ranges from one to five years. Trade receivables are non interest bearing and are remeasured at amortized cost using the effective interest rate of 10%. Interest income recognized amounted to P 232,187,418 in 2005, = 250,788,069 in 2004 and = 114,438,664 in 2003 P P = presented as part of Other revenues in the consolidated statement of income. All trade receivables are subject to credit risk exposure. However, the Group does not identify specific concentrations of credit risk with regard to trade and other receivables, as the amounts recognized resemble a large number of receivables from various customers. The fair value of other short-term trade and other receivables is not individually determined as the carrying amount is a reasonable approximation of fair value. The Company partially finances its real estate projects and other business undertakings through discounting of its trade receivables on a with recourse basis with certain local banks. The proceeds of trade receivable discounted are presented as part of other non-current liabilities. Total finance cost attributable to this transaction amounted to P 30,257,518, P 43,287,047 and P 25,597,133 in = = = 2005, 2004 and 2003, respectively, presented as part of Finance cost in the consolidated statement of income. In 2004, certain subsidiary credited P 106 million of its advances to contractors (net of unpaid = billings) against the estimated amount of unbilled work done by the said contractors. Subsequently, Advances to Contractors shown under Trade and Other Receivables was reclassified to Residential and Condominium Units for Sale for the same amount. 8. MARKETABLE SECURITIES

This account represents financial assets at fair value through profit and loss. As of December 31, 2005, 2004 and 2003, investments consist of investments in bonds and other debt instruments, and marketable equity securities which are presented at fair values as of those dates. Investments in bonds and other debt instruments earn interest based on coupon rate ranging from 4.50% to 9.38%. Interest income from bonds amounted to US$5,001,702, US$6,361,534 and US$4,599,227 in 2005, 2004 and 2003, respectively. The outstanding interest receivable amounted to US$1,072,703 in 2005, US$1,173,964 in 2004 and US$1,520,338 in 2003. All amounts presented have been determined directly by reference to published prices quoted in an active market. The changes in fair value of Marketable securities are presented as Fair Value Gains or Losses in the statements of income.

F-30

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

9.

ADVANCES TO LANDOWNERS AND JOINT VENTURES

The Group grants cash advances to a number of landowners and joint ventures under agreements they entered into with landowners covering the development of certain parcels of land. Under the terms of the agreements, the Group, in addition to providing specified portion of total project development costs, also commits to advance mutually agreed-upon amounts to the landowners to be used for pre-development expenses such as relocation of existing occupants. Repayment of these advances shall be made upon completion of the project development either in the form of the developed lots corresponding to the owners share in saleable lots or in the form of cash to be derived from sales of the landowners share in the saleable lots and residential and condominium units. The commitment for cash advances under the joint venture agreements has been fully granted by the Group. The net commitment for construction expenditures amounted to:
2005 2004 2003

Total commitment . . . . . . . . . . . Expenditures incurred . . . . . . . . . Net Commitment . . . . . . . . . . . .

P = 2,354,090,993 (1,023,168,456) P 1,330,922,537 =

P = 1,694,891,460 (466,162,760) P = 1,228,728,700

P = 1,349,237,134 (454,340,751) P = 894,896,383

The Group enters into numerous joint venture agreements for the joint development of various projects. Total amount advances made by the Group for these projects are recorded under Property Development Costs account in the balance sheets. In 2004, the Group signed a joint venture agreement with Bases Conversion Development Authority for the development of Villamor Gateway Center. In 2003, the Company entered into a Memorandum of Understanding (MOU) with Alliance Global Group, Inc., (AGGI) for the joint development of the Lawton Parkway Project (the Project). Total amount advanced by the Company for the Project is recorded as part of Property Development Costs account in the balance sheets.

F-31

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

10. INVESTMENTS IN AND ADVANCES TO ASSOCIATES AND OTHER RELATED PARTIES The details of investments in and advances to associates and other related parties are as follows:
% Interest Held 2005 2004 2003

Investments in associates at equity: Acquisition costs: EELHI . . . . . . . . FHI . . . . . . . . . . PTHDC . . . . . . . .

. . . . . . . . .

45.22% 35.29% 40.00%

P = 3,670,389,344 875,445,000 60,000,000 4,605,834,344

P = 3,619,057,260 812,945,000 4,432,002,260 602,583,179

P = 3,619,057,260 812,945,000 4,432,002,260 602,583,179

Share in additional paid-in capital of an associate . Equity in net earnings: Balance at beginning of year . . . . . . . . . . . Effects of transition to PFRS . . . . . . . . . . . As restated. . . . . . . . . Equity in net losses . . . Balance at end of year .

602,583,719

1,188,854,440 4,182,791 1,193,037,231 (64,638,874) 1,128,398,357 6,336,816,420

1,387,225,627 12,950,037 1,400,175,664 (207,138,433) 1,193,037,231 6,227,622,670 373,660,164 2,768,065 376,428,229 709,027,730 1,085,455,959

1,451,406,699 26,087,440 1,477,494,139 (77,318,475) 1,400,175,664 6,434,761,103 350,625,567 350,625,567 338,150,940 688,776,507

Advances to Associates: EELHI . . . . . . . . . . . . FHI . . . . . . . . . . . . . . Advances to other related parties . . . . . . . . . . .

768,849,618 6,866,489 775,716,107 489,645,892 1,265,361,999

Total Investments in and Advances to associates and other related parties net . . . . . . . . . . . . .

P = 7,602,178,419

P = 7,313,078,629

P = 7,123,537,610

All of the above associates are incorporated in the Philippines. The associates except for PTHDC are listed in the stock exchange. The total fair value of investment in the listed associates amounted to = 2,034,369,941, P 1,713,850,893 and P 1,543,889,795 in 2005, 2004 and 2003, P = = respectively. The Group subscribed an additional 250 million shares of common stock of FHI at par value or a total subscription price of = 250 million. As of December 31, 2005, the Group has paid P 62.5 P = million recorded as subscription deposit included as part of the acquisition cost of associates account above. On August 15, 2005, PTHDC was incorporated. The parent company made an investment in the shares of the investee amounting to = 60,000,000, which represents ownership interest in the P investee of 40%. The balance of the equity in net earnings of P 1,128,398,357, P 1,193,037,231 and P 1,387,037,231 = = = as of December 31, 2005, 2004 and 2003, respectively, which is lodged in the Groups retained earnings as of those dates is not available for declaration as dividends.

F-32

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

The Groups share in the assets and liabilities of the associates are as follows:
Assets Liabilities Revenues

2005 : EELHI . . . . . . . . . . . . . . . . . FHI . . . . . . . . . . . . . . . . . . . PTHD . . . . . . . . . . . . . . . . . .

P = 10,872,946,638 1,034,123,412 38,224,836 P 11,945,294,886 =

P = 4,494,670,633 751,160,605 P = 5,245,831,238

P 672,982,374 = 53,611,646 P 726,594,020 =

2004 : EELHI . . . . . . . . . . . . . . . . . FHI . . . . . . . . . . . . . . . . . . .

P = 9,996,433,757 1,147,816,160 P 11,144,249,917 =

P = 3,281,765,872 787,014,348 P = 4,068,780,220

P 877,419,432 = 46,862,793 P 924,282,225 =

2003 : EELHI . . . . . . . . . . . . . . . . . FHI . . . . . . . . . . . . . . . . . . .

P = 9,787,846,161 1,141,397,533 P 10,929,243,694 =

P = 3,158,844,460 555,695,312 P = 3,714,539,772

P 341,561,125 = 44,731,756 P 386,292,881 =

The Groups equity in losses, net of earnings, of associates amounted to P 64.6 million, P 207.1 = = million and = 77.3 million in 2005, 2004 and 2003, respectively. P

F-33

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

11. INVESTMENT PROPERTY A reconciliation of the carrying amounts at the beginning and end of the periods and the gross carrying amounts and the accumulated depreciation of Investment property are shown below:
Land Building Condominium Units Total

2005 Balance at January 1, 2005, net of Accumulated depreciation. . . . . . . . . . Additions . . . . . . . . . . . . . Depreciation charge for the year . . . . . . . . . . . . . . Balance at December 31, 2005, net of accumulated depreciation. . . . . . . . . . December 31, 2005 Cost . . . . . . . . . . . . . . Accumulated Depreciation Net Carrying Amount . . . . . 2004 Balance at January 1, 2004, net of accumulated depreciation. . . . . . . . . Additions . . . . . . . . . . . . Disposal . . . . . . . . . . . . Depreciation charge for the year . . . . . . . . . . . . .

P = 2,997,103,325

P = 383,339,092 813,452,455 (65,701,514)

P = 739,171,538 28,193,740 (36,937,981)

P = 4,119,613,955 841,646,195 (102,639,495)

P = 2,997,103,325 P = 2,997,103,325 P = 2,997,103,325

P = 1,131,090,033 P = 1,264,142,103 (133,052,070) P = 1,131,090,033

P = 730,427,297 P = 811,037,166 (80,609,869) P = 730,427,297

P = 4,858,620,655 P = 5,072,282,594 (213,661,939) P = 4,858,620,655

. . . .

P = 2,997,103,325

P = 395,228,955 176,251,630 (138,769,038) (49,372,455)

P = 562,435,310 206,222,325 (29,486,097)

P = 3,954,767,590 382,473,955 (138,769,038) (78,858,552)

Balance at December 31, 2004, net of accumulated depreciation. . . . . . . . . . December 31, 2004 Cost . . . . . . . . . . . . . . Accumulated depreciation Net Carrying Amount . . . . . 2003 Balance at January 1, 2003, net of accumulated depreciation . . . . . . . . Additions . . . . . . . . . . . . Reclassifications . . . . . . . Depreciation charge for the year . . . . . . . . . . . . .

P = 2,997,103,325 P = 2,997,103,325 P = 2,997,103,325

P = 383,339,092 P = 450,689,648 (67,350,556) P = 383,339,092

P = 739,171,538 P = 782,843,426 (43,671,888) P = 739,171,538

P = 4,119,613,955 P = 4,230,636,399 (111,022,444) P = 4,119,613,955

. . . .

P =

2,997,103,325

P 133.438,058 = 299,399,500 (37,608,603)

P = 368,511,379 95,720,433 107,885,289 (9,681,791)

P = 501,949,437 95,720,433 3,404,388,114 (47,290,394)

Balance at December 31, 2003, net of accumulated depreciation. . . . . . . . . . Balance at December 31, 2003 Cost . . . . . . . . . . . . . . Accumulated depreciation Net carrying amount . . . . .

P = 2,997,103,325

P = 395,228,955

P = 562,435,310

P = 3,954,767,590

P = 2,997,103,325 P = 2,997,103,325

P = 439,195,155 (43,966,200) P = 395,228,955

P = 576,621,101 (14,185,791) P = 562,435,310

P = 4,012,919,581 (58,151,991) P = 3,954,767,590

F-34

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

In 2005, a certain subsidiary reclassified from Residential and Condominium Units for Sale to Investment property with carrying value of P 911 million. = In 2003, the Company and a certain subsidiary reclassified Land Held for Future Development with carrying values of = 272.0 million and P 2.7 billion, respectively, to Investment property since P = such properties will be leased out to other parties. Certain properties held for lease with net book value of P 2 billion as of December 31, 2005 and = 2004, were used as collateral for ECOCs interest-bearing loan (see Note 14). The fair market values of these properties are P 10.27 billion, P 9.91 billion and P 9.57 billion in = = = 2005, 2004 and 2003, respectively. 12. PROPERTY AND EQUIPMENT A reconciliation of the carrying amounts at the beginning and end of the periods and the gross carrying amounts and the accumulated depreciation of property and equipment are shown below:
Office Furniture, Hotel Building Fixtures and and Equipment Improvements Land and Office Improvements

Condominium Units

Transportation Equipment

Construction in Progress

Total

2005 Balance at January 1, 2005, net of accumulated depreciation . . . . = 260,566,748 P 109,968,779 P = Additions . . . . . . . . 780,806 110,374,462 Disposals . . . . . . . . (1,097,248) (2,478,834) Depreciation charge for the year . . . . (29,903,134) (35,694,396) Balance at December 31, 2005, net of accumulated depreciation . . . . = 230,347,172 P December 31, 2005 Cost . . . . . . . . . . . = 407,820,860 P Accumulated depreciation . . . . (177,473,688) Net carrying amount = 230,347,172 P

P = 195,085,513 4,375,784 (14,979,755)

P = 6,021,802 6,887,024 (232,926) (2,847,764)

P 124,976,008 = 3,768,379 (4,115,270)

P =

54,076,027

P 696,618,850 = 180,262,482 (3,809,008) (87,540,319)

P 182,170,011 = P 321,824,737 = (139,654,726) P 182,170,011 =

P 184,481,542 = P = 351,152,446 (166,670,904) P = 184,481,542

P = 9,828,136 P = 29,626,877 (19,798,741) P = 9,828,136

P 124,629,117 = P 160,605,614 = (35,976,497) P 124,629,117 =

P 54,076,027 = P 54,076,027 = P 54,076,027 =

P = 785,532,005 P = 1,325,106,561 (539,574,556) P = 785,532,005

2004 Balance at January 1, 2004, net of accumulated depreciation . . . . = 300,348,600 P 132,139,321 P = Additions . . . . . . . . 230,943 4,887,061 Disposals . . . . . . . . (8,378,798) (2,000) Depreciation charge for the year . . . . (31,633,997) (27,055,603) Balance at December 31, 2004, net of accumulated depreciation . . . . = 260,566,748 P

P = 221,782,267 896,600 (27,593,354)

P = 8,234,403 630,000 (69,323) (2,773,278)

P 126,338,715 = 3,049,361 (4,412,068)

P =

P = 788,843,306 9,693,965 (8,450,121) (93,468,300)

P 109,968,779 =

P = 195,085,513 P = 346,776,662 (151,691,149) P = 195,085,513

P = 6,021,802 P = 25,605,634 (19,583,832) P = 6,021,802

P 124,976,008 = P 156,837,235 = (31,861,227) P 124,976,008 =

P = P =

P = 696,618,850 P 1,149,915,807 = (453,296,957) P 696,618,850 =

December 31, 2004 Cost . . . . . . . . . . . = 408,137,301 P 212,558,975 P = Accumulated depreciation . . . . (147,570,553) (102,590,196) Net carrying amount = 260,566,748 P P 109,968,779 =

()

P =

F-35

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

Condominium Units

Office Furniture, Hotel Building Fixtures and and Equipment Improvements

Transportation Equipment

Land and Office Improvements

Construction in Progress

Total

2003 Balance at January 1, 2003, net of accumulated depreciation . . . . P 327,268,592 P 145,832,499 = = Additions . . . . . . . . 9,424,482 Disposals . . . . . . . . (2,099,259) (9,492,299) Depreciation charge for the year . . . . (24,820,733) (13,625,361) Balance at December 31, 2003, net of accumulated depreciation . . . . = 300,348,600 P

P 255,824,046 = 5,681,203 (39,722,982)

P = 8,916,984 2,410,908 (3,093,489)

P 129,538,911 = 1,652,027 (4,852,223)

P 14,484,408 = (14,484,408)

P 881,865,440 = 19,168,620 (26,075,966) (86,114,788)

P 132,139,321 =

P 221,782,267 = P 345,880,062 = (124,097,795) P 221,782,267 =

P = 8,234,403 P = 27,060,872 (18,826,469) P = 8,234,403

P 126,338,715 = P 153,787,875 = (27,449,160) P 126,338,715 =

P =

P = 788,843,306 P 1,156,480,129 = (367,636,823) P 788,843,306 =

December 31, 2003 Cost . . . . . . . . . . . P 422,023,797 P 207,727,523 = = Accumulated depreciation . . . . (121,675,197) (75,588,202) Net carrying amount = 300,348,600 P P 132,139,321 =

13. OTHER NON-CURRENT ASSETS NET This account consists of:

2005 2004 2003

Goodwill net . . . . . . . . . . . Guarantee deposits . . . . . . . . . . Available-for-sale financial assets . Others . . . . . . . . . . . . . . . . .

. . . .

P 264,768,344 = 18,594,270 5,370,000 372,730,711 P 661,463,325 =

P = 264,768,344 378,091,702 1,139,104,494 356,302,000 P = 2,138,266,540

P = 264,768,344 446,160,340 5,370,000 536,573,770 P = 1,252,872,454

13.1 Available-for-sale financial assets

Equity security investments where the Group held no significant influence are accounted for at cost. The shares of these companies are not listed in the stock exchange and, hence, the fair market value of their shares cannot be determined reliably. In 2004, the Group acquired equity security investments amounting to = 1,133 million which were sold in full in 2005. P In 2004, the parent company held long-term placements of cash in a local bank used as collateral for the Groups long-term loan with the same bank (see Note 14). 14. INTEREST-BEARING LOANS AND BORROWINGS The aggregate balance of this account as of December 31, 2005, 2004 and 2003 amounting to P 3.1 = billion, = 4.6 billion and = 4.7 billion, respectively, represents the remaining amount payable to P P certain landowners relating to the acquisition of real estate properties and the balance of the Groups long-term loan from a local bank. The liabilities are payable within a period of three to five years and are either collateralized by a real estate mortgage on certain Group properties. The current portion amounted to = 963.6 million, P 314.3 million and P 228.9 million as of December P = = 31, 2005, 2004 and 2003, respectively. In 2003, the Group obtained a long-term loan from a local bank amounting to P 950.0 million. The = loan shall be payable for a term of ten years, inclusive of a three-year grace period on principal payments. Interest is payable every quarter based on 91-day treasury bill plus certain spread. Collateral for the loan consists of the ROP bonds owned by a subsidiary in 2003 and long-term

F-36

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

cash placements in 2004 (see Note 13.1). The Group obtained an additional loan amounting to P 347.0 million and P 40.0 million, in 2005 and 2004, respectively from the same local bank subject = = to the same terms and conditions. In 2002, ECOC was granted a long-term loan facility amounting to US$25 million (approximately P 1.3 billion) by a foreign financial institution. The proceeds of the loan were used in the = construction of several information technology buildings at the Eastwood City Cyber Park. The drawdown from the loan facility amounting to US$20 million (P 1.06 billion) was made on October = 15, 2002. The loan is payable in 10 years, inclusive of a two-and-a-half year grace period on principal payment. Interest is payable every six months at LIBOR rate plus certain spread. Collaterals for the loan consisted of a first ranking mortgage over ECOCs certain investment property with a total carrying value of = 2 billion as of December 31, 2005, 2004 and 2003 (see P Note 11), and a full guarantee from the parent company. ECOC and the parent company are required to comply with certain loan covenants, including maintenance of certain financial ratios at the end of every financial year. Total finance cost attributable to these amounted P 56,071,846 as of 2005, 2004 and 2003, respectively. = 15. TRADE AND OTHER PAYABLES This account consists of:
Note 2005 2004 2003

to

P 250,578,293, =

P 162,304,748 =

and

Trade payables . . . . . . . . . Accrued expenses . . . . . . . . Others . . . . . . . . . . . . . .

19

P 1,579,857,979 = 68,716,744 42,710,557 P 1,691,285,280 =

P = 1,047,479,887 59,863,347 379,224,461 P = 1,486,567,695

P = 954,437,673 81,725,354 215,310,856 P = 1,251,473,883

The fair values of trade and other payables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the balance sheet to be a reasonable approximation of their fair values. 16. OTHER REVENUES AND OPERATING EXPENSES Presented below are the details of these accounts:
2005 2004 2003

Other Revenues: Interest income . Dividend income Foreign currency Miscellaneous . .

. . . . . . gain . . .

. . . . . .

. . . . . . net. . . .

. . . .

. . . .

. . . .

P = 715,435,491 28,791,600 11,636,706 256,283,404 P 1,012,147,201 =

P = 571,123,393 27,975,650 93,692,073 558,270,863 P = 1,251,061,979 P = 21,268,999 10,466,093 18,669,805 17,955,092 10,474,909 49,039,307 64,347,793

P 392,663,490 = 32,590,274 202,512,916 P 627,766,680 = P 10,679,229 = 9,569,732 28,031,026 8,446,905 16,419,981 72,691,803 P 145,838,676 =

Other Operating Expenses: Association dues . . . . . . Transportation and travel Utilities . . . . . . . . . . . . Rental. . . . . . . . . . . . . Repairs and maintenance . Probable losses . . . . . . . Miscellaneous . . . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

P =

41,111,509 22,269,669 19,224,330 12,078,738 10,659,036 149,623,200

P 254,966,482 =

P = 192,221,998

F-37

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 Put Options In 2005 and 2004, RHGI entered into option contracts wherein the subsidiary sold put options on securities. In consideration of these, the subsidiary received premiums which are recognized as part of fair value gains included in the Other Revenues in 2005 and 2004 statements of income. 17. EMPLOYEE BENEFITS

Expenses recognized for employee benefits are presented below:

2005 2004 2003

Salaries and wages . . . . . . . . . . . Retirement defined benefit plan . 13th month and other employee benefits . . . . . . . . . . . . . . . .

P = 77,309,097 5,989,340 33,561,399 P 116,859,836 =

P = 71,464,884 7,313,761 43,466,859 P = 122,245,504

P 71,926,776 = 4,461,221 36,605,344 P 112,993,341 =

The Group maintains a tax-qualified, noncontributory defined benefit retirement plan that is being administered by a trustee covering all regular full-time employees. The Group obtained an updated actuarial valuation as of January 1, 2003 to ascertain its transitional liability as of that date in accordance with PAS 19, Employee Benefits. The Groups transition to PAS 19 is discussed in Note 2. Actuarial valuations are made every two years to update the retirement benefit costs and the amount of contributions. The amounts of retirement benefit obligation presented under Trade and other payables account recognized in the balance sheets are determined as follows:
2005 2004 2003

Present value of the obligation . . . Fair value of plan assets . . . . . . . Unrecognized actuarial gains. . . . . Retirement benefit obligation . . . .

P 41,396,695 = () 41,396,695 (1,061,309) P 40,335,386 =

P = 22,900,388 () 22,900,388 11,445,658 P = 34,346,046

P 27,032,285 = () 27,032,285 P 27,032,285 =

The amounts of retirement benefits recognized in the statements of income are as follows:
2005 2004 2003

Current service costs . . . . . . . . . Interest costs . . . . . . . . . . . . . . Net actuarial losses recognized during the year . . . . . . . . . . . Retirement benefits . . . . . . . . . .

P 2,991,365 = 3,313,686 (315,711) P 5,989,340 =

P = 3,980,680 3,333,081 P = 7,313,761

P = 1,958,148 2,503,073 P = 4,461,221

The movements in the retirement benefit obligation recognized in the books are as follows:
2005 2004 2003

Balance at beginning of year. . . . . Expense recognized . . . . . . . . . . Balance at end of year . . . . . . . .

P 34,346,046 = 5,989,340 P 40,335,386 =

P = 27,032,285 7,313,761 P = 34,346,046

P 22,571,064 = 4,461,221 P 27,032,285 =

F-38

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

For determination of the retirement benefit obligation, the following actuarial assumptions were used:
2005 2004 2003

Discount Expected assets . Expected

rates. . rate of . . . . . rate of

. . . . return . . . . salary

. . . . . . . . on plan . . . . . . . . increases .

12% 0.4% 10%

14% 0.4% 10%

14% 0% 8%

18. TAXES The major components of tax expense for the years ended December 31 are as follows:
18.1 Current and Deferred Taxes
2005 2004 2003

Statements of income: Current tax expense: Regular corporate income tax (RCIT) at 35% and 32% Final tax at 20% and 7.5% . . Minimum Corporate Income Tax (MCIT) at 2% . . . .

P 183,223,585 = 22,498,927 77,202 205,799,714

P = 146,395,917 26,451,239 172,847,156

P 87,676,608 = 14,973,200 102,649,808

Deferred tax expense: Deferred tax relating to origination and reversal of temporary difference . . . . . Deferred tax relating to change in tax rates . . . . . . . . . . .

45,115,743 8,077,706 53,193,449

7,496,315 7,496,315 P = 180,343,471

44,289,595 44,289,595 P 146,939,403 =

Tax expense reported in statements of income . . . . . . . . . . . . . . . Statements of changes in equity: Deferred tax relating to origination and reversal of temporary difference . . . . . . .

P = 258,993,163

P 61,400,131 =

P =

6,051,032

P =

F-39

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

The reconciliation of tax on pretax income computed at the applicable statutory rates to tax expense attributable to continuing operations is as follows:
2005 2004 2003

Tax on pretax income RCIT (at 35% and 32%) . . . . . . Adjustment for income subjected to lower income tax rates . . . . Tax effects of: Non-deductible interest expense . . Increase in deductible temporary differences due to change in tax rate . . . . . . . . . . . . . . . . . . Unrecognized deferred tax assets . Equity earnings in investment in associates . . . . . . . . . . . . . . Non taxable income . . . . . . . Dividend income . . . . . . . . . . . Benefits from previously unrecognized deferred tax liabilities . . . . . . . . . . . . . . Nondeductible expenses . . . . . . . Net loss carry over . . . . . . . . . Unrecognized MCIT for the year . Change in valuation allowance . . Rental income under PEZA . . . . Miscellaneous . . . . . . . . . . . . . Tax expense reported in statements of income . . . . . . . . . . . . . . .

P 532,166,222 = (43,226,441) 14,831,189

P = 351,701,270 (11,581,689) 11,529,648

P 227,811,771 = (5,824,531) 7,719,908

8,077,706 193,048 (142,917,109) (97,324,626) (9,357,270)

(155,782,648) (8,952,208)

(77,318,475) (7,952,365)

(2,978,005) (975,000) (165,711) 669,160 P 258,993,163 =

(1,853,227) 2,631,895 6,592,190 3,913,171 (19,394,570) 1,539,639 P = 180,343,471

2,551,538 12,245,986 (6,382,533) (5,911,896) P 146,939,403 =

F-40

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

The deferred tax assets and liabilities as of December 31 relate to the following:
Balance Sheets 2005 2004 2003

Deferred tax assets: NOLCO . . . . . . . . . . . . . . . . Unamortized preoperating expenses . . . . . . . . . . . . . . . Allowance for doubtful accounts . Total Deferred Tax Assets . . . . . Deferred tax liabilities: Uncollected gross profit . . . . . . . Capitalized interest . . . . . . . . . Difference between the tax reporting base and financial reporting base of leased assets . Difference between the tax reporting base and financial reporting base of depreciation expense . . . . . . . . . . . . . . . Unrealized foreign currency losses Amortization of pre-operating expenses . . . . . . . . . . . . . . . Accrued retirement cost . . . . . . . Translation Adjustment . . . . . . . Net operating loss carry over (NOLCO) . . . . . . . . . . . . . . Provision for probable loss . . . . . Allowance for impairment losses on receivables . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . Net Deferred Tax Liabilities . . . . .

P =

2,123,480

P =

453,165 773,262

P =

6,995,190 1,323,214 1,310,666

P =

2,123,480

P =

1,226,427

P =

9,629,070

P 1,163,608,509 = 142,712,911

P = 1,189,146,399 139,290,585

P = 1,196,769,794 121,988,032

25,875,205

22,139,840

5,066,536

(18,093,473) 668,313 (410,564) (14,117,385) (55,349,099) (54,004) 45,215,840 P 1,290,056,253 =

Statements of Income 2005 2004 2003

19,842,756 (20,671,912) (722,937) (9,131,713) 6,051,032 1,140,046 (18,892,578) (259,922) (54,556,703) P = 1,273,374,893

13,492,012 (16,239,971) (1,070,501) (7,220,746) 26,006,412 (57,739) (3,200,000) (28,815,052) P = 1,306,718,777

Statements of Equity 2005 2004 2003

Deferred tax assets: NOLCO and Depreciation timing difference . . . . . . . Unamortized preoperating expenses. . . . . . . . . . . . . . . Allowance for impairment losses on receivables . . . . . . . . . . . Total Deferred Tax Assets . . . . . Deferred tax liabilities: Uncollected gross profit . . . . . Unrealized foreign currency losses . . . . . . . . . . . . . . Amortization of pre-operating expenses . . . . . . . . . . . . . Capitalized interest . . . . . . . Accrued retirement cost . . . . . Depreciation expense . . . . . . Translation adjustment . . . . . NOLCO . . . . . . . . . . . . . . Provision for probable loss . . . Uncollected rental income . . . Allowance for doubtful accounts . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . Deferred Tax Expense . . . . . . .

P =

54,730

P =

8,402,643

P 5,176,644 = (1,323,214) (54,731) P = 3,798,699

P =

P =

P = P = P = P = F-41

P =

54,730

P 8,402,643 =

P = P =

P = P =

P 2,570,258 = 21,375,615 312,373 3,422,327 (3,126,650) (6,942,562) 37,557,701 (2,030,343) P 53,193,449 =

P P = (7,623,395) = 53,471,719 (4,431,941) (16,319,472) 347,564 17,302,553 (2,468,951) (6,350,744) 1,197,785 (18,892,578) 17,073,301 2,940,078 P 7,496,315 = (521,346) 4,427,411 (1,910,967) (5,982,662) 1,316,547 6,009,666 P = 44,289,595

61,400,131 P 61,400,131 =

6,051,032 P 6,051,032 =

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

No deferred tax liability has been recognized on the accumulated equity in net earnings of subsidiaries. The Group has no liability for tax should the amounts be declared as dividends since dividend income received from domestic corporation is not subject to income tax. The details of MCIT paid by certain subsidiaries, which can be applied as deduction from their respective future regular income tax payable within three years from the year the MCIT was paid, are shown below:
Subsidiary Year incurred Amount Expiration Year

MGAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . MLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PHRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . MOPHI . . . . . . . . . . . . . . . . . . . . . . . . . . .

2004 2003 2004 2003 2003

P = 68,502 66,854 794,040 782,830 812

2007 2006 2007 2006 2006

The details of NOLCO incurred by certain subsidiaries, which can be claimed as deduction from their respective future taxable income within three years from the year the loss was incurred, are shown below:
Subsidiary Year incurred Amount Expiration Year

MGAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . MLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MOPHI . . . . . . . . . . . . . . . . . . . . . . . . . . . FTPHI . . . . . . . . . . . . . . . . . . . . . . . . . . .

2004 2003 2004 2003 2004 2003

P = 7,197,887 14,329,787 408,646 4,234,864 766,387 488,491

2007 2006 2007 2006 2007 2006

The entities in the Group are subject to the minimum corporate income tax (MCIT) which is computed at 2% of gross income, as defined under the tax regulations. No MCIT was reported in 2005 as the regular corporate income tax (RCIT) was higher than MCIT in both years. In 2004, certain subsidiaries paid MCIT (see below). The management of the above subsidiaries believes that the amount of deferred tax assets on the subsidiaries MCIT and NOLCO could not be recovered within the availment period, hence, the deferred tax assets as of December 31, 2003 were derecognized and no deferred tax assets were recognized on MCIT and NOLCO that arose in 2004.
18.1 New Tax Regulation

On May 24, 2005, Republic Act No. 9337 (RA 9337), amending certain sections of the National Internal Revenue Code of 1997, was signed into law and become effective beginning November 1, 2005. The following are the major changes brought about by RA 9337 that are relevant to the Group: a. RCIT rate is increased from 32% to 35% starting November 1, 2005 until December 31, 2008 and will be reduced to 30% beginning January 1, 2009; 10% VAT rate remains unchanged, with the President of the Philippines having a stand-by authority effective January 1, 2006 to increase the VAT rate to 12% under certain conditions (the rate was increased to 12% effective February 1, 2006); 10% VAT rate is now be imposed on certain goods and services that were previously zerorated or subject to percentage tax; Input tax on capital goods shall be claimed on a staggered basis over 60 months or the useful life of the related assets, whichever is shorter; and, Creditable input VAT is capped by a maximum of 70% of output VAT per quarter.

b.

c.

d.

e.

F-42

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

19. RELATED PARTY TRANSACTIONS The parent companys related parties include wholly owned subsidiaries, associates, the Groups key management and others as described below. The following are the transactions with related parties:
19.1 Sale of Real Estate, Services and Rental
Amount of Transactions 2005 Sale of Real Estate: Associates . . . . . . . . Rendering of Services and Rental: Subsidiaries . . . . . . . Associates . . . . . . . . Other related parties . 2004 2003 Outstanding Balances 2005 2004 2003

. .

P 60,000,000 =

P =

P =

P =

P =

P =

. . . . . .

56,161,284 479,107,796 9,199,126 P 604,468,206 =

54,047,619 371,408 8,178,965 P 62,597,992 =

31,904,762 261,800 389,957 P 32,556,519 =

477,747,818 P 477,747,818 =

P =

P =

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

Real estates are sold on the basis of the price lists in force with non-related parties. Services rendered are usually on a cost-plus basis, allowing a margin ranging from 20% to 30%. The outstanding receivables from sales of goods and services from associates are presented as Trade Receivables under the current Trade and Other Receivables account in the balance sheets (see Note 7).
19.2 Purchases of Real Estate, Services and Rental
Amount of Transactions 2005 Purchases of Real Estate: Associates . . . . . . . . Rendering of Services and Rental: Subsidiaries . . . . . . . Associates . . . . . . . . Other related parties . 2004 2003 Outstanding Balances 2005 2004 2003

. .

P 18,363,068 =

P =

P =

P 18,363,068 =

P =

P =

. . . . . .

6,302,123 2,721,683 126,724,525 P 154,111,399 =

2,252,600 7,784,419 98,454,581 P 108,491,600 =

4,212,818 5,317,251 60,045,300 P 69,575,369 =

2,886,131 51,270,977 P 72,520,176 =

67,395,472 P 67,395,472 =

47,974,759 P = 47,974,759

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

Real estates are bought on the basis of the price lists in force with non-related parties. The related outstanding payables for goods purchased in 2005, 2004 and 2003 to associates are presented as Trade Payables under the Trade and Other Payable account in the balance sheets (see Note 15). Services rendered are usually on a cost-plus basis, allowing a margin ranging from 20% to 30%. The related outstanding payables for services obtained from associates in 2005, 2004 and 2003 are presented in the Advances from associates and related parties account in the balance sheets.

F-43

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 19.3 Advances to Related Parties

Entities within the Group obtain advances from the parent company and other entities in the Group and associate for working capital purposes. The outstanding balances of advances to related parties are as follows:
2005 2004 2003

Advances to Associates: EELHI . . . . . . . . . . . . . . . . . FHI . . . . . . . . . . . . . . . . . . . Advances to other related parties . . Total . . . . . . . . . . . . . . . . . . .

P = 768,849,618 6,866,489 775,716,107 489,645,892 P = 1,265,361,999

P = 373,660,164 2,768,065 376,428,229 709,027,730 P = 1,085,455,959

P 350,625,567 = 350,625,567 338,150,940 P 688,776,507 =

In 2005, the Company provided a consultancy services to an associate, EELHI, and recorded the consultancy fee as part of the miscellaneous income.
19.4 Advances from Related Parties

Entities within the Group advance to the parent company and other entities in the Group and associate for working capital purposes. The balance of advances to related parties is as follows:
2005 2004 2003

Advances from other related parties

P = 169,190,310

P = 166,768,253

P 862,390,863 =

19.5 Key Management Personnel Compensation

The groups key management personnel compensation includes the following expenses:
2005 2004 2003

Short-term benefits . . . . . . . . . . . Post-employment benefits . . . . . . .

P = 22,898,679 2,516,410 P 25,415,089 =

P = 15,089,056 1,065,572 P = 16,154,628

P 11,180,927 = 974,093 P 12,155,020 =

20. EQUITY Capital stock consists of:

Shares 2005 Common shares P 1 par = value Authorized . . . . . . . . . Issued and outstanding: Balance at beginning of year . . . . . . . Stock dividends . . . . Balance at end of year 2004 2003 2005 Amount 2004 2003

16,200,000,000

9,200,000,000

9,200,000,000

P 16,200,000,000 =

P 9,200,000,000 =

P 9,200,000,000 =

8,879,632,590 1,775,926,516 10,655,559,106

8,879,632,590 8,879,632,590

8,879,632,590 8,879,632,590

P 8,879,632,590 = 1,775,926,516 P 10,655,559,106 =

P 8,879,632,590 = P 8,879,632,590 =

P 8,879,632,590 = P 8,879,632,590 =

In 2005, the parent company increased its authorized capital stock by P 7 billion divided into 7 = billion common shares with a par value of P 1.00 per share. On May 5, 2005, the Company = declared a 20% stock dividend out of the increase in authorized capital stock. On December 6, 2005, the Company issued 1,775,926,516 common shares as stock dividend paid out from the unrestricted retained earnings of the Company. The parent companys preferred stock, none of which is outstanding, consists of Series A and Series B shares, the authorized number of shares of which is 1.0 billion shares and 3.0 billion shares, respectively. The Series A preferred shares shall be nonparticipating, convertible into

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

common shares and nonvoting. They shall be convertible into common shares at par value. The Series A preferred shares shall not be entitled to dividends and shall have no preemptive right to subscribe or purchase any shares of any class. Surrendered Series A preferred shares upon conversion may again be issued or disposed of by the associate. The Series B preferred shares can be converted within 60 days from the expiration of two years from the date of expiration of the subscription agreement. Conversion price shall be fixed at a discount of 10% of the average price of the closing prices of the common shares of the associate during the last 10 trading days prior to the execution of the subscription agreement. 21. EARNINGS PER SHARE Earnings per share amounts were computed as follows:
2005 2004 2003

Income available to common shares Divided by number of outstanding common shares. . . . . . . . . . . . Earnings per share . . . . . . . . . . .
*

P = 1,153,862,351 10,655,559,106 P = 0.11

P =

807,690,488 10,655,559,106*

P =

252,745,007 10,655,559,106*

P =

0.08

P =

0.02

After retroactive restatement to give effect to the 20% stock dividend declared in 2005 (see Note 20).

There were no outstanding convertible preferred shares and other stock equivalents as of December 31, 2005, 2004 and 2003, hence, no information on diluted earnings per share is presented. 22. COMMITMENTS AND CONTINGENCIES
22.1 Operating Lease Commitments Group as Lessor

The Group is a lessor under several operating leases covering real estate properties for commercial use. The leases have terms ranging from 3 to 20 years, with renewal options, and include annual escalation rates of 5% to 10%. The average annual rental covering these agreements amounts to about P 547.8 million for the consolidated balances. =
2005 2004 2003

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

. . . than . . . . . .

. . five . . . .

P 629,732,065 = 2,652,407,398 1,584,997,462 P 4,867,136,925 =

P = 553,607,877 2,049,328,867 1,529,324,029 P = 4,132,260,773

P = 485,121,239 1,904,639,114 1,248,705,176 P = 3,638,465,529

22.2 Others

There are commitments, guarantees and contingent liabilities that arise in the normal course of the operations of the Group which are not reflected in the accompanying financial statements. The management of the Group is of the opinion that losses, if any, from these items will not have any material effect on their financial statements. 23. RISK MANAGEMENT OBJECTIVES AND POLICIES The Group is exposed to a variety of financial risks which result from both its operating and investing activities. The Groups risk management is coordinated with its parent company, in close cooperation with the Board of Directors, and focuses on actively securing the Groups short to medium term cash flows by minimizing the exposure to financial markets. Long-term financial investments are managed to generate lasting returns.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005

The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Group is exposed to are described below.
23.1 Foreign currency risk

The Group has interest-bearing loans denominated in U.S. dollars. Its exposure in foreign currency fluctuation is brought about by the fluctuation in U.S. dollars denominated investments in debt securities, which is part of financial assets at FVTPL presented as Marketable Securities in the balance sheets.
23.2 Credit risk

Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the face of the consolidated balance sheet (or in the detailed analysis provided in the notes to the consolidated financial statements). Credit risk, therefore, is only disclosed in circumstances where the maximum potential loss differs significantly from the financial assets carrying amount. The Group has no significant concentrations of credit risk. The Groups trade and other receivables are actively monitored to avoid significant concentrations of credit risk. In addition, for a significant proportion of sales, advance payments are received to mitigate credit risk. The Group has adopted a no-business policy with customers lacking an appropriate credit history where credit records are available. Also, it has policies in place to ensure that rental contracts are made with customers with an appropriate credit history.
23.3 Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities. The Group aims to maintain flexibility in funding by keeping committed credit lines available.
23.4 Cash flow and fair value interest rate risk

The Groups interest rate risk arises from short-term and long-term borrowings (Note 14). Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest costs may increase as a result of such changes. They may reduce or create losses in the event that unexpected movements arise. 24. OTHER MATTERS
24.1 Registration with Philippine Economic Zone Authority (PEZA)

ECOC, as operator of the Eastwood City Cyber Park, is registered with PEZA pursuant to Presidential Proclamation No. 191, dated October 6, 1999. As PEZA registered entity, it is entitled to preferential tax rate of 5% on gross income earned from its PEZA registered activities, in lieu of all local and national taxes, and to other tax privileges.
24.2 ISO Certification

The parent company was awarded a Certificate of Registration ISO 9001 : 1994 effective November 26, 1999 by Certification International Philippines, Inc. Effective November 21, 2002, the parent company has upgraded its Certification to ISO 9001 : 2000 series. The scope of the certification covers all areas of the parent companys operations, which include planning, design, project management and customer service for its real estate business. Among others, the parent company is required to undergo surveillance audits every six months.

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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 2003, 2004 AND 2005 24.3 Recent Awards

In November 2004, the Philippine Marketing Association at its 25th Agora Awards rites honoured the Company among others as Marketing Company of the Year. Also in 2004, the Company was cited as one of Asias best-managed companies in Finance Asias 2005 survey. The Company was voted among the best in investor relations. Long-term brand building has led the Company to acquire a Superbrand status in December 2003. At present, the Company joins the line up of individual brands in Asia that have earned Superbrands stamp of approval. The Company has been recognized as the top Philippine company in a corporate governance survey for emerging markets in 2003 as conducted by Euromoney magazine, one of the most authoritative sources of information regarding developments and trends in international banking and capital markets. The Company ranked first among local companies in corporate governance practices, and placed seventh overall in Euromoneys poll of 132 companies from 25 countries. All the companies were rated according to ownership transparency and rights, financial transparency, board structure and process, stakeholder relations and managerial interests. In December 2003, Euromoney magazine again ranked the parent company as one of the bestmanaged companies in Asia. It was ranked high on market strength, profitability, growth potential and quality of management and earnings. Euromoney noted that its standing as the countrys foremost residential developer is built on a strong platform of professional management anchored on innovation, market focus and financial discipline.

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REGISTERED HEAD OFFICE OF THE COMPANY Megaworld Corporation 28th Floor The World Centre 330 Sen. Gil J. Puyat Avenue Makati City Philippines SOLE INTERNATIONAL UNDERWRITER AND SOLE BOOK RUNNER UBS AG, acting through its business group UBS Investment Bank 52/F Two International Finance Centre 8 Finance Street Central Hong Kong SOLE DOMESTIC UNDERWRITER AND SOLE BOOK RUNNER BDO Capital & Investment Corporation 11th Floor, The JMT Corporation Condominim 27 ADB Avenue, Ortigas Center Pasig City, Philippines 1600 LEGAL ADVISERS To the Company as to Philippine law Picazo Buyco Tan Fider & Santos Law Office Liberty Center 104 H.V. de la Costa Street Salcedo Village Makati City Philippines To the Lead Manager as to English law and United States federal law Allen & Overy 9/F, Three Exchange Square Central Hong Kong as to Philippine law Romulo Mabanta Buenaventura Sayoc & de los Angeles 30/F, Citibank Tower 8741 Paseo de Roxas Makati City Philippines

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Centre 66 Ayala Avenue 1200 Makati City Philippines