Alaska Milk Corporation FINANCIAL ANALYSIS

Table of Contents Introduction to Financial Analysis Tools of Financial Analysis : A Discussion Vertical Analysis Horizontal Analysis Trend Analysis Fiscal Fitness Analysis Financial Ratios Management Responsibility Letter : A Discussion Auditors Report : A Discussion Statement of Financial Position : A Discussion Statement of Comprehensive Income : A Discussion

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Statement of Equity : A Discussion Statement of Cash Flows : A Discussion Notes to Financial Statements : A Discussion Scanned Audited Financial Reports Statement of Management Responsibility Letter Auditors Report Statement of Financial Position Statement of Comprehensive Income Statement of Equity Statement of Cash Flow Notes to Financial Statement Results of Analysis Vertical, Trend and Horizontal Analysis Fiscal Fitness Analysis Financial Ratios

Introduction to Financial Analysis : A Discussion Financial Analysis1 is the process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance. One of the most common ways of analyzing financial data is to calculate ratios from the data to compare against those of other companies or against the company's own historical performance. For example, return on assets is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several similar companies and compared as part of a larger analysis.

Financial statement analysis2 is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis. Financial
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statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. There are various advantages of financial statements analysis. The major benefit is that the investors get enough idea to decide about the investments of their funds in the specific company. Secondly, regulatory authorities like International Accounting Standards Board can ensure whether the company is following accounting standards or not. Thirdly, financial statements analysis can help the government agencies to analyze the taxation due to the company. Moreover, company can analyze its own performance over the period of time through financial statements analysis.

Tools of Financial Analysis : A Discussion Vertical Analysis3 is a method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business. For example, suppose XYZ Corp. has three assets: cash and cash equivalents (worth $3 million), inventory (worth $8 million), and property (worth $9 million). If vertical analysis is used, the asset column will look like:

Cash and cash equivalents: 15% Inventory: 40% Property: 45%

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This method of analysis contrasts with horizontal analysis, which uses one year's worth of entries as a baseline while every other year represents differences in terms of changes to that baseline.

Horizontal Analysis4 is a procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration. For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using horizontal analysis. Horizontal analysis can be used on any item in a company's financials (from revenues to earnings per share), and is useful when comparing the performance of various companies.

Trend Analysis5 is an aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short-, intermediate- and long-term. Trend analysis tries to predict a trend like a bull market run and ride that trend until
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data suggests a trend reversal (e.g. bull to bear market). Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor.

The Fiscal Fitness Analysis 6 allows you to take a thorough review of your financial status with the use of 5 financial ratios. Financial ratios allow investors the ability to compare companies against industry standards. This gives insight into company operations such as financing. Certain ratios concentrate on a company's debt load. Ratios such as debt-toequity and debt-to-earnings tell the investor how much debt the company is taking on. Other ratios look at cash flow and interest payments to see how well the company can pay off future debts. The most common formula for predicting bankruptcy insolvency involves the use of several different financial ratios. This formula is referred to as Altman's Z-Score. The Z-score, also known as the Zeta Model or Altman Z-score is a financial formula used for predicting the possibility of bankruptcy for a company. Developed in 1968 by Edward Altman, the formula seeks to express the chances that a public company will go bankrupt within two years. The output number the model produces is known as the companys Z-score and is seen as a reasonably accurate indicator of financial distress and the potential for bankruptcy within that two-year timeframe7.

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Measuring the 'Fiscal-Fitness' of a company: The Altman Z-Score8 In the early 60's Edward Altman, using Multiple Discriminant Analysis combined a set of 5 financial ratios to come up with the Altman Z-Score. This score uses statistical techniques to predict a company's probability of failure using the following 8 variables from a company's financial statements: The ones in Green are from the Income Statement and the ones in Red from the Balance Sheet Use the following Z-Score Insolvency Prediction Calculator to assess a company. 1. Earnings Before Interest & Taxes:EBIT 2. Total Assets 3. Net Sales 4. Market Value of Equity 5. 6. 7. 8. Total Liabilities Current Assets Current Liabilities Retained Earnings 1. 2. 3. 4. 5. 6. 7. 8.

Reset Submit

[Input your figures.The above is a sample.]

The 5 financial ratios in the Altman Z-Score and their respective weight factor is as follows: RATIO A B C D
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WEIGHTAGE x. 3.3 x 0.999 x 0.6 x 1.2 -4 to +8.0 -4 to +8.0 -4 to +8.0 -4 to +8.0

EBIT/Total Assets Net Sales /Total Assets Market Value of Equity / Total Liabilities Working Capital/Total Assets

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Retained Earnings /Total Assets

x1.4

-4 to +8.0

These ratios are multiplied by the weightage as above, and the results are added together. Z-Score = A x 3.3 + B x 0.99 + C x 0.6 + D x 1.2 + E x 1.4 The Interpretation of Z Score: Z-SCORE ABOVE 3.0 -The company is safe based on these financial figures only. Z-SCORE BETWEEN 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution. Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given. Z-SCORE BELOW 1.80- Probability of Financial embarassment is very high.

Generally speaking, the lower the score, the higher the odds of bankruptcy. Companies with Z-Scores above 3 are considered to be healthy and, therefore, unlikely to enter bankruptcy. Scores in between 1.8 and 3 lie in a grey area9. FINANCIAL RATIO ANALYSIS10 The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful financial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of your business. It enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow you to solve your business problems before your business is destroyed by them. Balance Sheet Ratio Analysis Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay its bills as they come due) and leverage (the extent to which the business is dependent on creditors' funding). They include the following ratios: Liquidity Ratios These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working Capital.

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Current Ratios The Current Ratio is one of the best known measures of financial strength. It is figured as shown below: Current Ratio = Total Current Assets / Total Current Liabilities The main question this ratio addresses is: "Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as inventory shrinkage or collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it too close for comfort. If you feel your business's current ratio is too low, you may be able to raise it by: Paying some debts. Increasing your current assets from loans or other borrowings with a maturity of more than one year. Converting non-current assets into current assets. Increasing your current assets from new equity contributions. Putting profits back into the business. Quick Ratios The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below: Quick Ratio = Cash + Government Securities + Receivables / Total Current Liabilities The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales revenues should disappear, could my business meet its current obligations with the readily convertible `quick' funds on hand?" An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets" are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities. Working Capital Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated as shown below: Working Capital = Total Current Assets - Total Current Liabilities Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loans are often tied to minimum working capital requirements. A general observation about these three Liquidity Ratios is that the higher they are the better, especially if you are relying to any significant extent on creditor money to finance assets. Leverage Ratio Page 8 of 23

This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant on debt financing (creditor money versus owner's equity): Debt/Worth Ratio = Total Liabilities / Net Worth Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it correspondingly harder to obtain credit.

Income Statement Ratio Analysis The following important State of Income Ratios measure profitability: Gross Margin Ratio This ratio is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. It measures the percentage of sales dollars remaining (after obtaining or manufacturing the goods sold) available to pay the overhead expenses of the company. Comparison of your business ratios to those of similar businesses will reveal the relative strengths or weaknesses in your business. The Gross Margin Ratio is calculated as follows: Gross Margin Ratio = Gross Profit / Net Sales Reminder: Gross Profit = Net Sales - Cost of Goods Sold Net Profit Margin Ratio This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and all expenses, except income taxes. It provides a good opportunity to compare your company's "return on sales" with the performance of other companies in your industry. It is calculated before income tax because tax rates and tax liabilities vary from company to company for a wide variety of reasons, making comparisons after taxes much more difficult. The Net Profit Margin Ratio is calculated as follows: Net Profit Margin Ratio = Net Profit Before Tax / Net Sales Management Ratios Page 9 of 23

Other important ratios, often referred to as Management Ratios, are also derived from Balance Sheet and Statement of Income information. Inventory Turnover Ratio This ratio reveals how well inventory is being managed. It is important because the more times inventory can be turned in a given operating cycle, the greater the profit. The Inventory Turnover Ratio is calculated as follows: Inventory Turnover Ratio = Net Sales / Average Inventory at Cost Accounts Receivable Turnover Ratio This ratio indicates how well accounts receivable are being collected. If receivables are not collected reasonably in accordance with their terms, management should rethink its collection policy. If receivables are excessively slow in being converted to cash, liquidity could be severely impaired. Getting the Accounts Receivable Turnover Ratio is a two step process and is is calculated as follows: Daily Credit Sales = Net Credit Sales Per Year / 365 (Days) Accounts Receivable Turnover (in days) = Accounts Receivable / Daily Credit Sales

Return on Assets Ratio This measures how efficiently profits are being generated from the assets employed in the business when compared with the ratios of firms in a similar business. A low ratio in comparison with industry averages indicates an inefficient use of business assets. The Return on Assets Ratio is calculated as follows: Return on Assets = Net Profit Before Tax / Total Assets

Return on Investment (ROI) Ratio The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management. The ROI is calculated as follows: Return on Investment = Net Profit before Tax / Net Worth These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends in a business and to compare its progress with the performance of others through data published by various sources. The owner may thus determine the business's relative strengths and weaknesses. Page 10 of 23

Statement of Management Responsibility : A Discussion11 Upon producing an official financial report, the management of an organization often produces a statement of responsibility. The Management's Statement of Responsibility regularly appears as a written letter at the beginning of a financial statement. This statement is usually an annual report. The letter declares that all financial statements within the report are accurate. The statement is signed by the top executive and other higher management people in the organization. For example, at a college or university, the Vice President of Finance will sign the report. In a corporation, the President or CEO will sign the report, along with a treasurer and possibly the chair of the Board of Directors. The statement will also usually claim that an independent auditor has verified the written statements. This provides an added layer of objectivity. While management is still responsible for the financial statements in the report, management shows that it has taken all the appropriate steps to ensure accuracy by hiring an independent auditor.

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Auditors Report : A Discussion

An Auditors Report12 is the summary submission made by auditors of the findings of an audit. An audit report is usually of the financial records and accounts of a company. It normally takes one of the forms approved by the accountancy professional organizations to cover all requirements imposed by law on the auditor. If reports do not support the company's records, they may be termed "qualified." A report is qualified if it contains any indication that the auditor has failed to satisfy himself or herself on any of the points that the law requires. The qualification may, for example, add a rider stating that the appointed auditor has had to rely on secondary information supplied by other auditors under circumstances in which it has been inappropriate to do otherwise. Qualifications may also refer to the inadequacy of information or explanations supplied, or to the fact that the auditor is not satisfied that proper books or other records are being kept. An Auditors Report13 is recorded in the annual report, the auditor's report tests to see that a corporation's financial statements comply with GAAP. This is sometimes referred to as the clean opinion. Most auditors reports consist of three paragraphs; the first states the responsibilities of the auditor and directors; the second is the scope, stating that GAAP was used and finally, the third paragraph gives the auditor's opinion.

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Statement of Financial Position : A Discussion14

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity It's called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity). Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses. The accounting balance sheet is one of the major financial statements used by accountants and business owners. (The other major financial statements are the

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income statement, statement of cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the statement of financial position. The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time. For example, the amounts reported on a balance sheet dated December 31, 2010 reflect that instant when all the transactions through December 31 have been recorded. Because the balance sheet informs the reader of a company's financial position as of one moment in time, it allows someonelike a creditorto see what a company owns as well as what it owes to other parties as of the date indicated in the heading. This is valuable information to the banker who wants to determine whether or not a company qualifies for additional credit or loans. Others who would be interested in the balance sheet include current investors, potential investors, company management, suppliers, some customers, competitors, government agencies, and labor unions.

Statement of Comprehensive Income : A Discussion15 A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. The format of the income statement or the profit and loss statement will vary according to the complexity of the business activities. Also known as the "profit and loss statement" or "statement of revenue and expense". The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections. The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations.

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For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment. The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section. The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out). People pay attention to the profitability of a company for many reasons. For example, if a company was not able to operate profitablythe bottom line of the income statement indicates a net lossa banker/lender/creditor may be hesitant to extend additional credit to the company. On the other hand, a company that has operated profitablythe bottom line of the income statement indicates a net incomedemonstrated its ability to use borrowed and invested funds in a successful manner. A company's ability to operate profitably is important to current lenders and investors, potential lenders and investors, company management, competitors, government agencies, labor unions, and others.

Statement of Equity : A Discussion16 A financial statement that shows all of the changes to the various stockholders' equity accounts during the same period(s) as the income statement and statement of cash flows. It includes the amounts of comprehensive income not reported on the income statement. The statement of changes in owners equity may also be called the statement of changes in retained earnings, or the statement of changes in capital stock. This financial statement has something important in common with the income statement, namely that it focuses on a period of time.

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There are two main elements of the owners equity explained by the statement: paid-in capital and retained earnings. Paid-in capital is the amount that the entitys owners have invested in it. (For a publicly traded company, the owners will be shareholders.) Retained income is the net income that the entity retains for use.

Statement of Cash Flows: A Discussion17 The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.) The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state "For the Three Months Ended December 31, 2010" or "The Fiscal Year Ended September 30, 2010". The cash flow statement organizes and reports the cash generated and used in the following categories:
1 Operating activities . 2 Investing activities . 3 Financing activities . converts the items reported on the income statement from the accrual basis of accounting to cash. reports the purchase and sale of long-term investments and property, plant and equipment. reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends.

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4 Supplemental . information

reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.

Because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement. The following are the ways that the statement of cash flows is being used. 1. The cash from operating activities is compared to the company's net income. If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash. 2. Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value. 3. Some financial models are based upon cash flow.

Notes to Financial Statements : A Discussion18

Notes to the Financial Statements are additional notes and information added to the end of the financial statements to supplement the reader with more information. Notes to Financial Statements help the computation of specific items in the financial statements as well as provide a more comprehensive assessment of a company's financial condition. Notes to Financial Statements can include information on debt, going concern, accounts, contingent liabilities, or contextual information explaining the financial numbers (e.g. to indicate a lawsuit). The information contained within the notes not only supplement financial statement information, but they clarify line-items that are part of the financial statements. For example, if a company lists a loss on a fixed asset impairment in their income statement, Notes to Financial Statements could serve to corroborate the reason for the impairment by providing specific information relative to how the asset became impaired. Notes to the Financial Statements are also used to explain the method of
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accounting used to prepare the financial statements (all publicly traded companies are required to use accrual basis accounting for financial reporting purposes as mandated by the SEC), and they provide valuations for how particular accounts have been represented. In consolidated financial statements, all subsidiaries should be listed as well as the amount of ownership (controlling interest) that the parent company has in the subsidiary companies. Any items within the financial statements that are valued by estimation should be part of the Notes to Financial Statements if a substantial difference exists between the amount of the estimate previously reported and the amount of the actual results. Full disclosure of the effects of the differences between the estimate and the actual results should be in the note.

Scanned Audited Financial Reports Please refer to the .pdf files inside the folder ALASKA CORP AFS with the filenames: 2007 2008 2009

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Results of Analysis Brief Background Alaska Milk Corporation (AMC) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission on 26 September 1994. AMC is primarily involved in the manufacture, distribution and sale of liquid, powdered and ultra-heat treated milk products under the Alaska, Carnation, Liberty, Alpine and Milkmaid brands. VERTICAL ANALYSIS Statement of Financial Position For the three-year period (2007-2009), we can see that Alaska Milk Corporation (AMC) has almost an equivalent distribution of its current and non-current assets ranging from 52.32 54.76% for its currents assets and 47.68 45.24% for its noncurrent assets. However, for the year 2007-2008 the largest investment for AMC is its inventories taking up 37.57% and 30.84%, respectively. For the year 2009, AMC has kept its inventory lower to 15.86% as a result of a employing a better inventory management and declining unit cost of primary raw and packaging materials. Also contributing to the decline is the lower inventory levels of finished goods due to strong consumer demand for Alaska Milk products and AMC has also suffered a casualty loss from the typhoon Ondoy on Sept 2009 which mainly damaged its inventories and entire plant located in San Pedro, Laguna. AMC is considered a capital-intensive company, investing 20.84% of its assets in Property, Plant and Equipment. For the year 2007, AMC entered into a lease agreement with Tetra-Pak Philippines and received its packaging equipment in the year 2008. The interest expense is reflected in the Trade and other payables and related payable under the Obligation under finance lease account. One of the top 4 highest compositions of AMCs balance sheet for 2009 is Shortterm investment taking up 14.37% of the total assets. This accounts for investment in US dollar time deposit with interest rates ranging from 1.25% to 2.40% in 2009. Page 19 of 23

In effect, this contributed to the increase in interest income from P4M in 2008 to P24.6M in 2009. Twenty percent of AMCs balance sheet for 2009 is composed of the Intangible assets which consist of license brands and computer software with finite useful life and trademarks with indefinite useful life. Based on the vertical analysis, we can see that the 2009 balance sheet is concentrated on equity making up 64.33% by which 13% of it is composed of capital stock and 53% from retained earnings. However, 35% of AMCs capital structure is from the liability section, 35% of it is composed of current liabilities led by Trade and other payables and Acceptances payables amounting to P1.8B and P560M, respectively. Overall for the year ending 2009, AMC generally distributes its assets to short-term investments, inventories, property plant and equipment and intangible assets. On the liability side, concentration is on the current assets mainly on Trade and other payables, composed of trade, selling and marketing expenses. Statement of Comprehensive Income AMCs statement of comprehensive income for the years 2007, 2008 and 2009; Cost of Goods Sold (COGS) ate up its Net Sales by 73.71%, 79.29% and 64.47% respectively. COGS is the most important factor in AMCs income generation. COGS mainly consist of Raw materials and inventories used amounting to P5.866M and Personnel expenses amounting to P331M for the year 2009. Gross profit margin, in effect, increased to 35.53% of net sales for the year 2009. On the other hand, AMCs Operating expenses for 2007-2009 resulted to 15.83%; 16.05% and 17.67% of net sales respectively. Operating expenses mainly consists of selling and marketing expenses amounting P911M, P1B and P1.1B for the years 2007 2009, respectively. These are due to higher distribution-related charges on higher sales volume as well as heightened advertising and promotional spending to spur consumer demand for Alaska Milk products. Operating income reflected 19% of the total net sales for the year 2009. AMC incurred a lower income tax of 3% due to the decrease in Income Tax rate from 35% to 30%, the change in the enacted rates was also considered in the computation of deferred income tax. Net Income margin reflected record high of 13.32% for 2009 from 2.92% for the year 2008. With the significant improvement in profitability, combined with lower working capital requirements AMC turned in strong cash inflows during the year 2009 resulting from P1.403M to P2.587B from operations.

TREND AND HORIZONTAL ANALYSIS Statement of Financial Position Page 20 of 23

Total assets for 2009 stood at P7.27 billion, an increase by 15% from the previous year of P6.31 billion. This can be attributed to the increase in cash balance to increase profitability as well as lower the working capital requirements. The first line item of AMCs statement of financial position is composed of cash and cash equivalents which reflected a significant increase of 27.41% and 393.39% for the year 2008 and 2009, respectively. Cash in banks and short term deposits earn interest at the respective bank deposit rates and are of varying period of up to three months depending on the immediate cash requirements of the Company. This ultimately led to the increase on the interest income amounting to P18.4M and P5M in 2009 and 2008, respectively. As mentioned earlier in the Trend Analysis; inventories were lowered by 27% and 40% for 2008 and 2009, respectively. This is due to the decline in unit cost of primary raw and packaging materials from their peak levels and lower inventory levels of finished goods due to strong consumer demand. Increase in the Property, Plant and Equipment amounting to P1.3B and P1.5B for 2008 and 2009, respectively can be attributed to the investments made for the production capacity expansions. For 2009, AMC was able to fund its capital expenditure largely from internally generated cash; these capital expenditures were aimed to boost manufacturing efficiency and productivity to serve the growing needs of the market. From the Statement of Cash Flows, we will see that for the years 2008 and 2009, AMC generated P1.4B and P2.5B cash from its operations; this reflected a major improvement from the 2007 figure of negative cash flow from operations amounting to P388M. With the improvement of AMCs cash position and operating performance, they were able to pay all of its short-term bank loans. Bank loans were significantly decreasing from P800M in 2007 to P175M in 2008 and full payment in 2009. These loans were settled during the first half of 2009; loans bear an interest of 8.25%, the significant decrease resulted to the shrinking of interest expense on bank loans by -95% on the year 2009. Total liabilities went down from P2.81B to P2.59B for the year 2008 and 2009, respectively. Total stockholders equity increased by 33.67% for the year 2009 primarily due to higher net income realized in 2009 from P291M to P1.4B. Income statement movements will be further discussed later. For the year 2008 and 2009, AMC reacquired its common shares under its Share Buy-Back Program amounting to P289M and P352M respectively. What Does Buy-Back Mean?19 The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.
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A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways: 1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. 2. Companies buy back shares on the open market over an extended period of time. Statement of Comprehensive Income Net Sales trend analysis reflected 110% and 117% for 2008 to 2009, respectively. Revenues for the year 2008 and 2009 increased by 9.76% and 6.15% on account of higher sales volume. Notwithstanding the growth in sales volume, cost of sales fell by 13.69% to P6.82B from P7.9B in 2008 largely due to the decline in cost of production inputs, particularly raw and packaging materials. Operating expense for 2009 on the other hand went up by 16.85% to P1.87B due heightened trade spending and marketing efforts in addition to higher advertising and promotional investments to support volume growth and drive consumer demand to Alaska Milk products. On September 2009, AMC was adversely affected by typhoon Ondoy and the entire plant in San Pedro Laguna when the wall of the adjacent factory collapsed. A onetime casualty loss was recognized amounting to P156M. AMC actively hedged part of the US dollar requirement for its import bills, in tandem with its skimmed milk powder and tinplate requirements. With the Philippine peso gaining value against US dollar on the year 2009, AMC incurred foreign exchange losses on its UD dollar currency-denominated assets resulting to 290.92% decrease. On a positive note, due to its improved profitability and higher cash balance, the company was able to invest its resources and earn interests on its cash in bank, short-term deposits and investments increasing interest income from P4.95M to P24.65M for the year 2009. It can be noted that in the Statement of Cash Flows, AMC received a 243% increase on interest received amounting to P20M for the year 2009; while interest payment was reduced from P61.3M to P3.69M. AMC had a three-year lease agreement on its condominium property for the year 2007 but was pre-terminated on March 2008; rent income decreased by 83% and up until the year 2009, AMC has no lease agreements as a lessor. Gain on sale of disposal of property and equipment and investment properties decreased from P9.43M to P766M for the year 2009. Net Income of AMC for the year 2009 increased by 384.16%, marked by the increase in net sales and reduction in major cost drivers. Page 22 of 23

Statement of Cash Flows The Statement of Cash Flows reflected a 629% increase in the cash ending balance of AMC for the year 2009. This can be attributed to several factors; one of which is the 72.13% increase in the cash generated from the operating activities. Interest income increased by 397.68% due to higher cash and short term investments as discussed earlier and interest expense on bank loans decreased by 95.93% due to full payment of bank loans as a result of improved profitability, lesser working capital requirements and higher cash availability. Further, increase in net sales led to increase in trade and other receivables by 512.24%. AMC improved its collection of accounts receivables and implemented a better management of inventory level which led to reduction of costs and led to a stronger balance sheet with improved current ratio from 1.1 to 1.55. Fiscal Fitness Analysis Based on the fiscal fitness analysis by Edward Altman, for the year 2007 AMC Zscore of 2.97 wherein it should exercise caution. It is wiser for AMC to do some due diligence before investing into something. For the year 2008 and 2009, AMC got an improved Z-score of 3.23 and 4.30, respectively wherein the company is safe from bankruptcy based from the figures provided. By some statistical measures, the Z-score model has proven to accurately predict bankruptcy in 95% of the cases one year prior in advance. The measure can be used to guide AMC in their choices and decrease portfolio risk. They may use the results to evaluate the stability of potential customers and the financial health of the company suppliers.

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