(formerly Pancake House, Inc.) 2259 Chino
Transcription
(formerly Pancake House, Inc.) 2259 Chino
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, BUT HAS NOT YET BECOME EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR OFFERS TO BUY THE SAME BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR BE CONSIDERED A SOLICITATION OF AN OFFER TO BUY. (formerly Pancake House, Inc.) 2259 Chino Roces Avenue Extension (Pasong Tamo Extension) Makati City, Metro Manila, Philippines Telephone Number (632) 784 9000 PROSPECTUS relating to the Offer of Up to 300,136,430 Common Shares by way of a Follow On Offering at an Offer Price of Up to P29.50 per Share THE OFFER SHARES ARE TO BE LISTED AND TRADED ON THE MAIN BOARD OF THE PHILIPPINE STOCK EXCHANGE, INC. Bookrunner, Issue Manager and Lead Underwriter PRELIMINARY PROSPECTUS September 10, 2014 THE 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 SECURITIES AND EXCHANGE COMMISSION. i The Company’s mission is TO BUILD LOVED BRANDS. Its vision is TO BE THE MOST LOVED GLOBAL FILIPINO COMPANY. ii MAX’S GROUP, INC. (formerly Pancake House, Inc.) Pancake House Center 2259 Chino Roces Avenue Extension (Pasong Tamo Extension) Makati City, Metro Manila Philippines Telephone Number (632) 784-9000 Website www.maxschicken.com and www.pancakehouse.com.ph This Prospectus relates to the offer and sale by Max’s Group, Inc., a corporation organized under Philippine law (the “Company” or the “Issuer”) of up to (a) 34,106,416 new common shares out of the unissued capital stock of the Company (“New Shares”); (b) 204,638,468 common shares, to be offered and sold by certain wholly-owned subsidiaries of the Company (“Group Shares”); and (c) 61,391,546 common shares, to be offered and sold by certain shareholders of the Company (“Secondary Shares”) in a public offer of shares (the “Offer,” and all of the shares being sold under the Offer being collectively referred to as the “Offer Shares”). The Group Shares will be offered and sold by the following wholly-owned subsidiaries of the Company: The Real American Doughnut Company, Inc., Max’s Bakeshop, Inc., Max’s Kitchen, Inc., No Bia, Inc., Chickens R’ Us, Inc., Square Top, Inc., MGOC Holdings, Inc., Trota Gimenez Realty Corporation, RooM Ventures Corp. and Max’s Express Restaurants, Inc. (the “Selling Subsidiaries”). The Secondary Shares will be offered and sold by the following shareholders of the Company: Trofi Ventures Corp., WERCO Holdings Corp., Ruby Investment Consolidated Holdings, Inc., WR Ventures Asia, Inc., and FSS Realty Corporation (the “Selling Shareholders”). The Secondary Shares include 27,285,130 common shares to be offered by the Selling Shareholders to cover over-allotments (the “Over-Allotment Shares”). Each Offer Share has a par value of P1.00 per share. The New Shares will be listed on the Philippine Stock Exchange, Inc. (the “PSE”). The Group Shares and the Secondary Shares are listed and traded on the PSE. The Offer Shares shall be offered at a price of up P29.50 per Offer Share (the “Offer Price”) in the manner provided in this Prospectus. See “Plan of Distribution.” The Offer Price was determined through a book-building process, as well as discussions between the Company and the Issue Manager and Lead Underwriter. The Company, the Selling Subsidiaries and the Selling Shareholders expect to raise up to an aggregate amount of P4.60 billion from the Offer. Pursuant to its amended articles of incorporation, the Company has an authorized capital stock of P1,400,000,000 consisting of 1,400,000,000 common shares with a par iii value of P1.00 per share, out of which 1,058,913,0241 common shares are issued and outstanding as at the date of this Prospectus. A total of up to 1,093,019,440 common shares will be outstanding after the Offer. The Offer Shares comprise up to 27.46% of the outstanding common shares after the Offer [and up to 33.85% of the outstanding common shares, net of up to 271,253,678 common shares held by the Selling Subsidiaries after the Offer.] [All of the Company’s issued shares are listed on the Main Board of the PSE.] Prior to September 4, 2014, the Company’s shares were traded on the PSE under the trading symbol “PCKH.” On August 22, 2014, the SEC approved the amendment of the articles of incorporation of the Company to change its name to Max’s Group, Inc., and on September 4, 2014, the PSE approved the change in the ticker symbol of the Company to “MAXS.” On Listing Date, the Offer Shares will be traded under the trading symbol “MAXS.” On February 24, 2014, certain Max’s Entities (the Selling Subsidiaries) acquired a total of approximately 89.95% of the outstanding stock of the Company. On June 30, 2014, the Company’s Board of Directors approved the integration of the Max’s Entities into the Company and the MGOC Shareholders conveyed to the Company all of their shares, rights and interests in and to the Max’s Entities in consideration for the issuance by the Company of the Exchange Shares to the MGOC Shareholders (the “Integration”). Pursuant to such transaction, the Max’s Entities became wholly-owned Subsidiaries of the Company. See “Background of the Offer” for further discussion. The Integration creates the country’s leading chained full service restaurant group with an aggregate market share of 28.3%% in terms of value sales for 2013. The Integration also resulted in a much larger combined entity in terms of revenues and store network. On a proforma basis, the Company registered P4.58 billion of consolidated revenues for the six month period ending June 30, 2014, with the Max’s Entities contributing P2.78 billion (gross of intercompany sales of P30.3 million) and the Pancake House Group contributing P1.83 billion. Revenues (on a pro-forma consolidated basis) for the full year ended December 31, 2013 totaled P9.22 billion, of which P5.47 billion was contributed by the Max’s Entities and P3.75 billion was contributed by the Pancake House Group. While the Pancake House Group registered a net loss of P36.6 million for the first half of 2014 primarily due to additional provisions for impairment for past due accounts, EBITDA was positive at P65.9 million, signaling the robustness of operating cash flows. With the Max’s Entities contributing P75.5 million of net income for the six month period ended June 30, 2014, the Company registered a pro-forma consolidated net income of P38.9 million. For the full year ended December 31, 2013, the Company’s pro-forma consolidated net income stood at P260.8 million of which P181.5 million was from the Max’s Entities. (For the avoidance of doubt, references to the “Pancake House Group” shall mean those business units and subsidiaries of the Company prior to the Integration and references to the “Max’s Entities” shall mean the business units and entities conveyed by the MGOC Shareholders to the Company in the Integration.) 1 Inclusive of Exchange Shares to be issued to the MGOC Shareholders on Exchange Date iv Total assets of the Group on a pro-forma consolidated basis was at P9.3 billion as at June 30, 2014 and P8.7 billion as at December 31, 2013. The Selling Subsidiaries, all of which are Max’s Entities, obtained a long-term loan from the Bank of the Philippine Islands to finance their acquisition of the shares in the Company. As at June 30, 2014, the outstanding balance of such loan was at approximately P4.27 billion. The proceeds from the sale of the Group Shares – approximately P3.00 billion – which will accrue to the Selling Subsidiaries are intended to be used for the repayment of such loan. Although proceeds from the Group Shares will accrue to the Selling Subsidiaries, the benefit from such proceeds will redound to the Company since the Selling Subsidiaries are wholly-owned subsidiaries of the Company. In particular, the repayment of the Selling Subsidiaries debt to the extent of the proceeds from the sale of the Group Shares would reduce the Company’s consolidated liabilities by the same amount. The Company’s shareholders’ equity as at June 30, 2014 on a consolidated proforma basis amounted to P1.04 billion. The Offer is expected to increase the Company’s shareholders’ equity by up to P3.5 billion, with the capital infusion coming from the sale of the New Shares and reduction in the consolidated debt of the Company arising from the proceeds from the sale of the Group Shares in the Offer. For a more detailed discussion on the use of proceeds from the Offer, please refer to the discussion under “Capitalization— Max’s Entities and the Selling Subsidiaries” on page [63] of this Prospectus. The total proceeds to be raised from the sale of the Offer Shares will be up to approximately P4,600,000,000, out of which up to P500,000,000 will accrue directly to the Company from the sale of New Shares, and up to P3,000,000,000 will accrue to the Selling Subsidiaries. The amount of up to P1,100,000,000 will accrue directly to the Selling Shareholders. The estimated net proceeds from the sale of the New Shares in the amount of up to P[*] (after deducting estimated fees and expenses of approximately P[*]) will be used by the Company to finance capital expenditures for the expansion of the stores and commissaries, pay working capital and for other general corporate purposes. The proceeds to be received by the Selling Subsidiaries from the sale of the Group Shares shall be used to repay a portion of the debt of the Selling Subsidiaries, as discussed above. The sale of the Group Shares will significantly reduce cross holdings of the Company’s shares insofar as the Group Shares are part of the Exchange Shares issued by the Company when it acquired the Selling Subsidiaries as wholly owned subsidiaries in the Integration. For a more detailed discussion on the use of proceeds from the Offer, please refer to the discussion under “Use of Proceeds” on page [30] of this Prospectus. The Issue Manager, Lead Underwriter and Underwriters to the Offer will receive a transaction fee equal to 250 basis points of the gross proceeds from the sale of the Offer Shares. These are inclusive of the amounts to be paid to the other participating underwriters and selling agents and the amounts to be paid to the PSE Trading Participants, where applicable. For a more detailed discussion on the underwriters’ fees, please refer to the discussion under “Plan of Distribution” on page [32] of this Prospectus. v Each holder of common shares will be entitled to such dividends as may be declared by the Company, including the approval by the stockholders holding at least two-thirds of the Company’s total issued and outstanding capital stock for any stock dividend declared. Batas Pambansa Blg. 68, otherwise known as “The Corporation Code of the Philippines” has defined outstanding capital stock as the total shares of stock issued to subscribers or stockholders, whether such shares are fully paid or not, except for treasury shares. Dividends may be declared only from the Company’s unrestricted retained earnings. The Company has no approved dividend policy. Unless restricted by the terms and conditions of its loan obligations or other covenant, or any amount is determined and approved by its Board of Directors to be appropriated for capital and other working requirements or the undertaking of any major project or transaction, the Company will comply with the requirements for the declaration of dividends under law and regulations. The Board of Directors may adopt or modify a dividend policy depending upon the Company’s plans and/or any terms of its financing facilities entered into to fund its current and future projects and operations. The Company can give no assurance that it will pay any dividends in the future. Please refer to the discussion under “Dividends and Dividend Policy” on page [29] of the Prospectus. Up to 54,570,260 Offer Shares (or 20% of the Offer Shares, net of Over-Allotment Shares) are being offered to all of the PSE Trading Participants. Up to 218,281,040 Offer Shares (or 80% of the Offer Shares, net of the Over-Allotment Shares) are being offered by the Lead Underwriter to Qualified Institutional Buyers and to the general public. Prior to the closing of the Offer, any Offer Shares not taken up by the PSE Trading Participants shall be distributed by the Lead Underwriter to their clients or to the general public. The Lead Underwriter firmly underwrites any shares left unsubscribed after the Offer. For a more detailed discussion of the underwriting commitment of the Lead Underwriter, please refer to the discussion under “Plan of Distribution” on page [32] of the Prospectus. All of the Offer Shares have identical rights and privileges. The Offer Shares may be owned by any person or entity regardless of citizenship or nationality, subject to the nationality limits under Philippine law, if applicable. The Philippine Constitution and related statutes set forth restrictions on foreign ownership for companies engaged in certain activities. The Company currently does not directly own land in the Philippines. However, its Subsidiaries Trota Gimenez Realty Corporation, The Real American Doughnut Company, Inc., Max’s Kitchen, Inc. MGOC Holdings, Inc. and RooM Ventures Corp. currently own land in the Philippines. The ownership of these subsidiaries are accordingly subject to limits of ownership by foreign nationals to 40%. As operator of restaurants in the Philippines, the Company and its subsidiaries are subject to the requirements of ownership under the Retail Trade Liberalization Act and its implementing rules. Please refer to the discussion under “Philippine Foreign Investments, Exchange Controls and Foreign Ownership Controls” on page [117] of the Prospectus. vi Before making an investment decision, investors should carefully consider the risks associated with an investment in the Offer Shares. These risks include: (i) risks relating to the Philippines, consisting of risks relating to the Philippine economy, foreign exchange, political instability, occurrence of natural disasters and occurrence of power outages directly affecting restaurant operations; (ii) risks relating to the Group’s business, consisting of risks relating to competition, raw material sourcing, food quality, credit and paying capacity of franchisees, strategy for domestic and international growth, labor, controlling shareholders, management, joint ventures and partners, and third party leases; (iii) risks relating to integration, particularly the integration of the Max’s Entities with the Company; (iv) risks relating to the Offer and the Offer Shares, consisting of risks relating to suitability of investment, market conditions and dividend declaration; (v) risks relating to the presentation of information in this Prospectus, consisting of risks associate with the pro-forma financial information and information derived from unofficial publications. Please refer to the discussion under “Investment Considerations and Risk Factors” on page [38] 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. No dealer, salesman, or any other person has been authorized to give any information or to make any representation not contained in this Prospectus. If given or made, any such information or representation must not be relied upon as having been authorized by the Company, the Issue Manager or any of the Underwriters. The distribution of this Prospectus and the offer and sale of the Shares may, in certain jurisdictions, be restricted by law. The Company, the Issue Manager and the Underwriters require persons into whose possession this Prospectus comes, to inform themselves of and observe all such restrictions. This Prospectus does not constitute an offer of any securities, or any offer to sell, or a solicitation of any offer to buy any securities of the Company in any jurisdiction, to or from any person to whom it is unlawful to make such offer in such jurisdiction. Unless otherwise stated, the information contained in this Prospectus has been supplied by the Company. To the best of its knowledge and belief, the Company (which has taken all reasonable care to ensure that such is the case) confirms that the information contained in this Prospectus is correct, and that there is no material statement or omission of fact which would make any statement in this Prospectus misleading in any material respect. The Company hereby accepts full and sole responsibility for the accuracy of the information contained in this Prospectus. The Company and the Underwriters have exercised due diligence in ascertaining that all material representations contained in the Prospectus, its amendments and supplements, are true and correct, and that no material information was omitted which was necessary in order to make the statements contained in the aforementioned documents not misleading, but do not make any representation, express or implied, as to the accuracy or completeness of the materials contained herein. The Issue Manager and the Underwriters, having made all reasonable enquiries, confirm that this document contains all information with respect to the Company, the Underwriters, and the Shares which is material in the context of the issue and offering of the Shares, that the information contained herein is true and accurate in all material respects and is not misleading, that the opinions and vii intentions expressed herein are honestly held and have been reached after considering all relevant circumstances and are based on reasonable assumptions, that there are no other facts, the omission of which would, in the context of the issue and offering of the Shares, make this document as a whole or any of such information of such information or the expression of any such opinions or intentions misleading in any material respect and that all reasonable enquiries have been made by the Company to verify the accuracy of such information. The Company accepts responsibility accordingly. Unless otherwise indicated, all information in this [Preliminary] Prospectus is as at [September 10, 2014]. Neither the delivery of this Prospectus nor any sale made pursuant to this Prospectus shall, under any circumstances, create any implication that the information contained herein is correct as at any date subsequent to the date hereof or that there has been no change in the affairs of the Company and its Subsidiaries since such date. Market data and certain industry forecasts used throughout this Prospectus were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified, and none of the Company, the Issue Manager and the Underwriters make any representation as to the accuracy of such information. Each person contemplating an investment in the Shares should make his own investigation and analysis of the creditworthiness of the Company and his own determination of the suitability of any such investment. The risk disclosure herein does not purport to disclose all the risks and other significant aspects of investing in the Shares. A person contemplating an investment in the Shares should seek professional advice if he or she is uncertain of, or has not understood any aspect of the securities to invest in or the nature of risks involved in trading of securities, especially those high-risk securities. Investing in the Shares involves a higher degree of risk compared to debt instruments. For a discussion of certain factors to be considered in respect of an investment in the Shares, please refer to the discussion under “Investment Considerations and Risk Factors” on page [38] of the Prospectus. An application to list the New Shares and Secondary Shares has been filed with the PSE but has not yet been approved. The PSE assumes no responsibility for the correctness of any statements made or opinions expressed in this Prospectus. The PSE makes no representation as to its completeness and expressly disclaims any liability whatsoever for any loss arising from reliance on the entire or any part of this Prospectus. The offering of the Offer Shares is subject to the approval of the Board of Directors of the PSE. Such approval for issuance is permissive only and does not constitute a recommendation or endorsement of the Offer by the PSE. Under the SRC and its amended implementing rules, securities, such as the Shares, are not permitted to be sold or offered for sale or distribution within the Philippines unless a registration statement covering such securities is rendered effective by the SEC, or said securities are exempt from registration under Section 9 of the Securities Regulation Code viii or are sold pursuant to an exempt transaction under Section 10 of the Securities Regulation Code. For this purpose, the Company has filed a registration statement in respect of the Offer Shares with the SEC. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BEEN DECLARED EFFECTIVE. NO OFFER TO BUY THE SECURITIES 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 OF 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 SOLICATION OF AN OFFER TO BUY. MAX’S GROUP, INC. By: ROBERT F. TROTA President and Chief Executive Officer REPUBLIC OF THE PHILIPPINES) CITY OF • ) S.S. Before me, a notary public in and for the city named above, personally appeared ROBERT F. TROTA, with Passport No. ____________ issued at _____________ on _______________, who was identified by me through competent evidence of identity to be the same person who presented the foregoing instrument and signed the instrument in my presence, and who took an oath before me as to such instrument. Witness my hand and seal this ___day of _______ 2014 at Makati City. Doc No. ________: Book No. ________: Page No. ________: Series of 2014 ix TABLE OF CONTENTS FORWARD LOOKING STATEMENTS.................................................................................... 1 GLOSSARY OF TERMS ........................................................................................................... 3 SUMMARY INFORMATION .................................................................................................... 7 THE OFFER ............................................................................................................................ 21 TERMS AND CONDITIONS OF THE OFFER ................................................................................ 21 DESCRIPTION OF SECURITIES ................................................................................................. 26 USE OF PROCEEDS ................................................................................................................. 29 PLAN OF DISTRIBUTION......................................................................................................... 31 DETERMINATION OF OFFER PRICE.......................................................................................... 35 INVESTMENT CONSIDERATIONS AND RISK FACTORS ................................................ 37 THE COMPANY ...................................................................................................................... 49 OVERVIEW OF THE BUSINESS .................................................................................................. 49 COMPETITIVE STRENGTHS ...................................................................................................... 50 STRATEGIES ............................................................................................................................. 62 HISTORY .................................................................................................................................. 70 PRINCIPAL BRANDS AND PRODUCTS ....................................................................................... 73 INTERNATIONAL OPERATIONS................................................................................................. 91 FRANCHISING OPERATIONS..................................................................................................... 94 FUNCTIONAL STRATEGIES ....................................................................................................... 95 NEW VENTURE: MERANTI .................................................................................................... 102 GOVERNANCE ..................................................................................................................... 105 CORPORATE GOVERNANCE & POLICIES ................................................................................ 105 THE BOARD OF DIRECTORS ................................................................................................... 105 MANAGEMENT ....................................................................................................................... 115 SIGNIFICANT EMPLOYEES ..................................................................................................... 115 FAMILY RELATIONS ............................................................................................................... 115 INVOLVEMENT IN LEGAL PROCEEDINGS ............................................................................... 116 COMPENSATION ..................................................................................................................... 117 EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS............................. 118 CAPITALIZATION .............................................................................................................. 120 THE SELLING SHAREHOLDERS ..................................................................................... 122 OWNERSHIP ....................................................................................................................... 123 DILUTION .............................................................................................................................. 124 MANAGEMENT’S DISCUSSION AND ANALYSIS .......................................................... 127 OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ................................. 127 OTHER RELEVANT INFORMATION ................................................................................. 153 REGULATORY MATTERS ........................................................................................................ 153 RELATED PARTY TRANSACTIONS .......................................................................................... 164 LEGAL PROCEEDINGS ............................................................................................................ 164 INDEPENDENT AUDITORS AND COUNSEL .............................................................................. 165 TAXATION .............................................................................................................................. 166 THE PHILIPPINE STOCK MARKET ......................................................................................... 177 FINANCIAL INFORMATION .............................................................................................. 187 Forward Looking Statements This Prospectus 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: Generally, the Group’s and particularly, the Company’s- business and investment strategy; capital expenditure plans; future growth; dividend policy; financial condition and results of operations (including without limitation, future operations and performance, both operational and financial); business prospects and business opportunities; The anticipated availability of bank and other forms of financing; and The industry outlook as a whole. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “plan,” “may,” “will,” “would,” “could” and similar expressions, as they relate to the Company, are intended to identify a number of these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond the control of the Company, the Selling Subsidiaries or the Selling Shareholders. In addition, these forward-looking statements reflect current views of the Company, the Selling Subsidiaries or the Selling Shareholders with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forwardlooking statements as a result of a number of factors, including: General economic, political and other conditions in the Philippines; Actual growth in demand for the brands and products of the Company and its Subsidiaries; Management’s expectations and estimates concerning its future financial performance; Growth and expansion plans; Technological changes which may affect the supply and distribution chains of the Company’s operations; Effects of competition including the introduction or entry of new brands and concepts in the retail and food industry; Future impact of accounting standards; Level of indebtedness of the Company; Other liquidity and capital resources requirements; Size and growth of the Company’s customer base; Inflation in the Philippines and any devaluation of the Peso; Existing and future governmental regulation; and 1 The risk factors discussed in this Prospectus as well as other factors beyond the Company’s control. The forward-looking statements in this Prospectus, whether as a result of new information, future events or otherwise, are not intended to be updated or otherwise revised, unless material within the purview of the Securities Regulation Code and other applicable laws, the mandate of which is to enforce investor protection. Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Prospectus might not occur in the way that the same are expected to occur, or at all. Investors should not place undue reliance on any forward-looking information. 2 Glossary of Terms As used in this Prospectus, the following terms shall have the meanings ascribed to them: Applicant a qualified purchaser of the Offer Shares Application the form of the application to subscribe to Offer Shares to be duly accomplished and executed by the Applicant Aureos Group Southeast Asia Fund, L.L.C and Aureos Malaysia Fund, L.L.C., collectively Banking Day any day of the week other than a Saturday, Sunday or holiday when banks are not required, or are authorized by law, to close for business in Metro Manila BIR the Bureau of Internal Revenue of the Philippines or its successor agency/ies Board or Board of Directors the duly constituted Board of Directors of the Company and its elected directors BSP Bangko Sentral ng Pilipinas or its successor agency/ies Company Max’s Group, Inc. (formerly Pancake House, Inc.) Director a duly elected director of the Company DENR Department of Environment and Natural Resources of the Philippines or its successor agency/ies DTI the Department of Trade and Industry of the Philippines or its successor agency/ies Euromonitor2 Euromonitor International Ltd., a privately owned, London-based market intelligence firm, providing market research, business intelligence reports, and data to industry Exchange Date [*], otherwise being the date on which the Company issued the Exchange Shares to the MGOC Shareholders in consideration for the conveyance by the MGOC Shareholders of all of their respective interests in the Max’s Entities “Information on this Prospectus on the Philippine Food Service market is from independent market research carried out by Euromonitor and should not be relied upon in making, or refraining from making, any investment decision.” 2 3 Exchange Shares 540,491,344 common shares issued to the MGOC Shareholders on Exchange Date Group the Company and its Subsidiaries Group Shares Up to 204,638,468 common shares held by the Selling Subsidiaries which will be sold and form part of the Offer HACCP Hazard Analysis at Critical Control Points (HACCP) or the sciencebased system that identifies, evaluates, and controls hazards for food safety at critical points; good manufacturing practices; and other requirements of regulations Issuer Max’s Group, Inc. Jamba Juice Philippines Fresh Healthy Juice Boosters, Inc. Krispy Kreme Philippines The Real American Doughnut Company, Inc. Listing Date [*] Max’s Entity any of the following: Max’s Kitchen, Inc. Chickens R Us, Inc. Max’s Express Restaurants, Inc. Max’s Makati, Inc. Max’s (Ermita), Inc. Max’s Circle, Inc. Max’s SM Marikina, Inc. Max’s Baclaran, Inc. Max’s Food Services, Inc. Max’s Bakeshop, Inc. Square Top, Inc. No Bia, Inc. Max’s Franchising, Inc. The Real American Doughnut Company, Inc. Fresh Healthy Juice Boosters, Inc. RooM Ventures Corp, Trota Gimenez Realty Corporation MGOC Holdings, Inc. Ad Circles, Inc. Alphamax Group Limited MGOC Shareholders the registered shareholders of the Max’s Entities prior to the Exchange Date as they appear in the records of the Company as disclosed to the SEC and the PSE MPO Rule on Minimum Public Ownership 4 New Shares Up to 34,106,416 common shares to be issued out of the unissued authorized capital stock of the Company which will be sold in the Offer Nielsen a global information and measurement company, that provides market research, insights & data about what people watch, listen to and buy NMIS National Meat Inspection Service Offer Price Up to P29.50 per Offer Share Offer Shares Up to 300,136,430 common shares of the Company, being the sum of the New Shares, the Group Shares and the Secondary Shares Over-Allotment Shares Up to 27,285,130 Offer Shares PCD Nominee PCD Nominee Corporation PDTC Philippine Depository & Trust Corporation PFA Philippine Franchise Association PFRS Philippine Financial Reporting Standards Philippine National has the meaning ascribed to the term under the section “Philippine Foreign Investments, Exchange Controls, and Foreign Ownership” PRA Philippine Retailers’ Association PSE or the Exchange the Philippine Stock Exchange, Inc. PSE Rules the relevant rules of the PSE PSE Trading Participant a trading participant of the PSE Receiving and Paying Agent [*] Registry of Shareholders an electronic register of shareholders of the Company Related Party a party who has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions; parties are also considered to be related if they are subject to common control or common significant influence QIB qualified buyers within the meaning of Section 10.1(1) of the SRC SCCP Securities Clearing Corporation of the Philippines 5 SEC Philippine Securities and Exchange Commission Secondary Shares Up to 61,391,546 shares which are owned and being sold by the Selling Shareholders, including up to 27,285,130 Over-Allotment Shares Securities Regulation Code or SRC Republic Act No. 8799, as amended, and its implementing rules and regulations Selling Agent an active trading participant of the PSE authorized to sell the Offer Shares Selling Shareholder any of the following: Trofi Ventures Corp. WERCO Holdings Corp. Ruby Investment Consolidated Holdings, Inc. WR Ventures Asia, Inc. FSS Realty Corporation Selling Subsidiary any of the following: Max’s Kitchen, Inc. Chickens R Us, Inc. Max’s Express Restaurants, Inc. Max’s Bakeshop, Inc. Square Top, Inc. No Bia, Inc. The Real American Doughnut Company, Inc. RooM Ventures Corp. Trota Gimenez Realty Corporation MGOC Holdings, Inc. Settlement Date [*] Subsidiary a subsidiary of the Company Tax Code National Internal Revenue Code of 1997 and its implementing rules TNS formerly known as Taylon Nelson Sofres and a part of Kantar Group, one of the world’s biggest market research companies doing research for global market information and business analysis and provides market research insight across all industry and business sectors Underwriting Agreement the underwriting agreement entered into by the Company, the Selling Subsidiaries and the Selling Shareholders, BPI Capital and the other Underwriters for the Offer VAT Value added tax in the Philippines 6 SUMMARY INFORMATION The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Because it is a summary, it does not contain all of the information that a prospective purchaser should consider before investing. Prospective investors should read the entire Prospectus carefully, including the section entitled “Risk Factors and Other Considerations” and the consolidated financial statements and the related notes to those statements included in this Prospectus. The Company The Company anchors its history on two well-established and multi-awarded heritage food brands in the Philippines: Max’s and Pancake House. Max’s started its operations in Scout Tuason, Quezon City in 1945 and since then, has been popularly and consistently serving traditional Filipino comfort food using originallydeveloped recipes. Popularly known for its core product, Max’s fried chicken, it has expanded its operations outside the Philippines since 1982 when it opened its first outlet in the USA. Pancake House started its business in 1970 when it opened its first branch in Magallanes, introducing freshly-made pancakes and waffles suited to the Filipino taste. It also entered the international market in 2007 when it first located in Kuala Lumpur, Malaysia. While the Company is also known for offering its other local food brands Yellow Cab, Maple, Dencio’s, Kabisera ng Dencio’s, Teriyaki Boy, Sizzlin’ Steak and Le Coeur de France, it also operates in the Philippines international food brands Krispy Kreme, Jamba Juice and The Chicken Rice Shop under exclusive license arrangements in the Philippines. The Company was listed on the PSE on December 15, 2000. Formerly known as Pancake House, Inc., it was acquired by certain Max’s Entities (the Selling Subsidiaries) on February 24, 2014. It subsequently changed its corporate name to Max’s Group, Inc. on August 22, 2014 following the Integration of the Max’s businesses into the Company on June 30, 2014. The Integration resulted in making the Company the country’s leading group in the chained full service restaurant sector. It is currently controlled and managed by the MGOC Shareholders. As the country’s leader in the chained full service restaurant class, the Company’s brands have been the top-of-mind choice of Filipino consumers when dining out. The Company is the market leader in the Philippine chained full service restaurant dining industry with the aggregated market share of Max’s Restaurant, Pancake House, Teriyaki Boy and Dencio’s of 28.3% in terms of value sales for 2013. In its country report as at November 2013, Euromonitor states that among the chained full service restaurant players, Max’s Restaurant is first in rank with a 14.4% market share and Pancake House has a market share of 8.4%. The Company’s pizza brand, Yellow Cab, enjoys 21.8% market share and ranks second in the chained pizza fast food category as of 2013. Krispy Kreme, an international franchise brand, was successfully introduced and gained nationwide popularity. The reliable and iconic brands 7 of the Company have been afforded by the market a clear “share of mind” which translates to customer loyalty and cements the Company’s leadership position. Competitive Strengths The Company’s extensive network of restaurants and outlets allows it to reach existing and potential customers across the Philippines and in places overseas where there is a large concentration of Filipinos, strengthening the ties the market has to the Company’s various brands. The Company believes that as of June 30, 2014, the Group has the largest network of casual dining outlets in the country, with an aggregate nationwide network of 498 outlets, with 324 outlets located in Metro Manila, 117 outlets in Northern and Southern Luzon, 29 outlets in the Visayas, and 28 outlets in Mindanao. Internationally, the Company has 27 outlets situated in the United States, Middle East, Canada and Malaysia. Max’s Restaurant has opened 3 outlets in the United Arab Emirates since November 2010 and is positioned to open 12 more outlets in the United Arab Emirates, Qatar, Saudi Arabia, Kuwait, Oman, and Bahrain. The Company’s ten-year development schedule for Yellow Cab includes opening a minimum of 15 new outlets in the Kingdom of Saudi Arabia. Yellow Cab and Teriyaki Boy outlets are also plan to be open in Hawaii. Diagram 1 and its accompanying tables on the following page show the concentration and number of stores of the Group in the Philippines and elsewhere. The Company’s stores are situated in strategic locations primarily in urban areas where there is high foot traffic and a steady flow of consumers. These are presented in different store formats such as stand-alone stores, in-line stores, mall outlets, drive-thru stores and kiosks, enabling the Company to capture the diverse needs and preferences of the market. The Company also has the ability to cater to diverse customer preferences, tastes, and market segments with the capability to offer products and services adapted to the Philippines as well as the international markets. Supplementing the Company’s extensive store network are its delivery services, curbside orders facility and online ordering system, which are expected to enhance the Company’s broad market reach and capture a wider consumer base. These services provide customers with added convenience and increased accessibility to the Company’s brands and products. Sales through delivery have increased by 19% from 2012 to 2013 and sales through online orders have increased by 21% from 2012 to 2013. The Company’s online ordering system, which currently services Max’s, Krispy Kreme and Yellow Cab, allows for the receipt of orders within and outside the Philippines for delivery of food and beverage products. The Company expects to provide online ordering for its other brands. The Company’s online ordering system allows it to take advantage of the increasing internet connectivity of consumers and the rising internet penetration rate in the Philippines, leading to a broader market reach and wider consumer base. Maintenance of quality and operational excellence are paramount in and built into the Company’s corporate culture. The Company’s robust quality management system for the front-of-the-house includes constant monitoring through mystery guest shopper checking, direct surveys, review of customer service practices and other inspections. The Company also maintains a process for quality system assessment and internal and third-party audits. 8 With the popularity of social media, the Company receives regular feedback and comments through its social media pages and brand websites that allow the Company to ensure that customer concerns are properly and quickly addressed. 9 Diagram 1. Concentration and Location of Stores of the Group 10 The Company also regularly holds training sessions and seminars for all its employees and franchisees on customer service, food safety and handling, and store management to ensure that the level of operational excellence and quality that the Company is known for continues to be upheld. These practices and consciousness manifest themselves in the various awards, accreditations and certifications received by the various brands. The Table of Awards Received by the Group According to Brand (Table 1) below shows the major awards received by the Group. Table 1. Table of Awards Received by the Group According to Brand Year Award Issuing Agency/ Organization Coverage Recipient/Brand Awardee - Hall of Fame-Outstanding Filipino Franchise- Food Category PFA National Max’s Restaurant - Hall of Fame-Outstanding Filipino Franchise- Food Category PFA National Pancake House 2009 Most Promising Franchisee DTI/PFA National Max’s Restaurant Best Local Franchise DTI/PFA National Max’s Restaurant Fastest Growing Franchise DTI/PFA National Max’s Restaurant Best in Franchising Support DTI/PFA National Max’s Restaurant Best Homegrown Franchise Entrepreneur Magazine National Max’s Restaurant Store Experience Award Krispy Kreme International International Krispy Kreme Relationship Marketing Award Krispy Kreme International International Krispy Kreme Product Innovation Award Krispy Kreme International International Krispy Kreme Marketing Excellence Award Krispy Kreme International International Krispy Kreme Humanitarian Award Krispy Kreme International International Krispy Kreme 2010 11 2011 2012 Franchisee of the Year Krispy Kreme International International Krispy Kreme Merit for Communication Management Division, Social Media Philippine Quill Award National Krispy Kreme Hospitality/Service Excellence Krispy Kreme International International Krispy Kreme Product Innovation Krispy Kreme International International Krispy Kreme Marketing Excellence Krispy Kreme International International Krispy Kreme Development Excellence Krispy Kreme International International Krispy Kreme Store Design Krispy Kreme International International Krispy Kreme Product Excellence Krispy Kreme International International Krispy Kreme Franchisee of the Year Krispy Kreme International International Krispy Kreme Outstanding Filipino Retailers, Foreign Brand Retailer, Food Category DTI/PRA National Krispy Kreme Operations Excellence Krispy Kreme International International Krispy Kreme Relationship Marketing Krispy Kreme International International Krispy Kreme Development Excellence Krispy Kreme International International Krispy Kreme Product Excellence Krispy Kreme International International Krispy Kreme Hospitality/Service Excellence Krispy Kreme International International Krispy Kreme Marketing Excellence Krispy Kreme International International Krispy Kreme International Master Franchisee of the Year (Food: Large Category) DTI/PFA National Krispy Kreme Outstanding Filipino Retailer’s Finalist, Foreign Brand Retailer, Food Retailer, Large Category DTI/PRA National Krispy Kreme 12 Most Trusted Family Restaurant Reader’s Digest Asia National Max’s Restaurant Best Fried Chicken in New Jersey Inside Jersey Magazine International Max’s Restaurant Tastiest Fried Chicken Post City Magazine International Max’s Restaurant 2011-2012 Outstanding Filipino Food Retailer – Food, Large Category DTI/PRA National Max’s Restaurant 2013 Most Trusted Family Restaurant Reader’s Digest Asia National Max’s Restaurant The President’s Award PFA National Level Max’s Restaurant Best Filipino Fried Chicken LA Weekly International Max’s Restaurant 1st Place in Filipino FoodPeople’s Choice Award Star Advertiser Hawaii’s Best International Max’s Restaurant Community Building Krispy Kreme International International Krispy Kreme Relationship Marketing Krispy Kreme International International Krispy Kreme Hospitality/Service Excellence Krispy Kreme International International Krispy Kreme Development Excellence Krispy Kreme International International Krispy Kreme Franchisee of the Year Krispy Kreme International International Krispy Kreme World Barista Champion Krispy Kreme International International Krispy Kreme 2009 – 2013 Best Ethnic Restaurant for 5 consecutive years Honolulu Advertisers’ Ilima Awards International Max’s Restaurant 2010-2013 One of the Best Filipino Restaurants Honolulu Magazine’s Hale Aina Awards International Max’s Restaurant 2013-2014 1st Place in Filipino FoodPeople’s Choice Award Star Advertiser Hawaii’s Best International Max’s Restaurant 2014 Most Promising Retailer Ayala Malls Merchant Awards National Krispy Kreme 13 Operating Subsidiaries The Company generally operates each brand through its Subsidiaries, except for Pancake House, Maple and Dencio’s which the Company directly operates. Diagram 2 below identifies the Company and its Subsidiaries and the brands that they respectively operate. Cognizant of the issues on subsidiarization, the Company continues to review its corporate and organization structures to streamline operations and achieve synergies and maximize operating efficiencies. 14 15 Financial Information On June 30, 2014, the Max’s Entities were integrated into the Company in consideration for its issuance of the Exchange Shares resulting in its ownership of 100% of the Max’s Entities. The pro-forma financial information provides investors with information on the impact of the transaction showing how this transaction might have affected the historical financial statements of the Company if the transaction had been consummated at an earlier time. The following tables present the summary of pro-forma financial information of the Company and should be read in conjunction with the pro-forma financial statements, the annual audited consolidated financial statements and the unaudited interim condensed consolidated financial statements contained in this Prospectus and the section entitled “Management’s Analysis and Discussion of Financial Condition and Results of Operations." The information below is not necessarily indicative of the results of future operations or financial condition of the Company. For the avoidance of doubt, references to the “Pancake House Group” shall mean those business units that had been in the Company prior to the Integration, references to the “Max’s Entities” shall mean the business units conveyed by the MGOC Shareholders to the Company in the Integration. 16 Summary of Pro-forma Consolidated Statements of Income For the six months ended June 30, 2014 In P Mn REVENUES COST OF SALES AND SERVICES GROSS PROFIT GENERAL AND ADMINISTRATIVE EXPENSES PROVISION FOR IMPAIRMENT LOSS OTHER OPERATING INCOME (CHARGES) FINANCE INCOME (COSTS) INCOME (LOSS) BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX NET INCOME (LOSS) NET INCOME (LOSS) ATTRIBUTABLE TO Equity holders of the Parent Company Noncontrolling interest Pancake House Group Share Swap and Eliminating Entries Max’s Entities For the year ended December 31, 2013 Pancake House Group Pro-forma Amounts Share Swap and Eliminating Entries Max’s Entities Pro-forma Amounts 1,832.8 2,777.1 (30.3) 4,579.6 3,751.6 5,468.4 – 9,220.0 (1,545.8) (2,115.2) 30.3 (3,630.7) (3,067.2) (4,185.8) – (7,253.0) 287.0 661.9 – 948.9 684.4 1,282.6 – 1,967.0 (273.7) (507.1) – (780.8) (568.0) (1,022.1) – (1,590.1) (106.5) (0.1) – (106.6) – – – – 45.2 42.9 – 88.1 88.9 43.9 – 132.8 (16.0) (91.0) – (107.0) (62.6) (18.8) – (81.4) (64.0) 106.6 – 42.6 142.7 285.6 – 428.3 (27.4) 31.0 – 3.7 63.3 104.2 – 167.5 (36.6) 75.6 – 38.9 79.3 181.5 – 260.8 (28.7) 75.6 – 46.8 105.6 181.5 – 287.1 (7.9) – – (7.9) (26.3) – – (26.3) (36.6) 75.6 – 38.9 79.3 181.5 – 260.8 17 Summary Pro-forma Consolidated Statements of Financial Position As at June 30, 2014 In ₱ Mn Total Current Assets Total Noncurrent Assets Total Assets Total Current Liabilities Total Noncurrent Liabilities Total Liabilities Capital stock Additional paid-in capital Notes for conversion to equity Retained earnings Other comprehensive income (loss) Shares held by subsidiaries Noncontrolling interests Total Liabilities and Shareholders' Equity Pancake House Group As at December 31, 2013 Max’s Entities Share Swap and Eliminating Entries Pro-forma Amounts Pancake House Group Max’s Entities Share Swap and Eliminating Entries Pro-forma Amounts 894.6 1,146.9 (30.9) 2,010.6 951.1 1,150.6 – 2,101.7 2,103.3 11,062.4 (5,919.2) 7,246.5 2,018.8 1,377.7 3,250.2 6,646.7 2,997.9 12,209.3 (5,950.1) 9,257.1 2,969.9 2,528.3 3,250.2 8,748.4 1,886.1 2,292.5 – 4,178.6 1,821.8 1,415.4 – 3,237.2 112.4 3,931.0 – 4,043.4 122.7 309.4 – 432.1 1,998.5 6,223.5 – 8,222.0 1,944.5 1,724.8 – 3,669.3 259.2 502.5 (232.2) 529.5 237.8 465.9 (195.7) 508.0 287.7 20.5 3,763.0 4,071.2 176.7 20.5 3,763.0 3,960.2 – – – – 120.4 – – 120.4 373.0 142.0 (66.5) 448.5 401.7 345.7 (345.7) 401.7 (13.4) 5,320.8 (5,320.6) (13.2) (12.1) (28.6) 28.6 (12.1) 906.5 5,985.8 (1,856.3) 5,036.0 924.5 803.5 3,250.2 4,978.2 – – (4,093.8) (4,093.8) – – – – 92.9 – – 92.9 100.9 – – 100.9 999.4 5,985.8 (5,950.1) 1,035.1 1025.4 803.5 3,250.2 5,079.1 2,997.9 12,209.3 (5,950.1) 9,257.1 2,969.9 2,528.3 3,250.2 8,748.4 18 Summary Consolidated Cash Flow Statements For the six months ended June 30, 2014 495.4 (107.4) (84.8) 0.4 – For the year ended December 31, 2013 992.0 (82.6) (212.9) 1.2 (69.1) 303.6 628.6 (4,839.7) 4,439.1 (777.9) 222.8 NET INCREASE (DECREASE) IN CASH CASH AT BEGINNING OF PERIOD (97.0) 746.8 73.5 673.3 CASH AT END OF PERIOD 649.8 746.8 CASH FLOWS FROM OPERATING ACTIVITIES Net cash generated from operations Income taxes paid Dividends paid Interest paid Interest received Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities 19 Summary of the Offer The Company is offering for sale to the public up to 34,106,416 New Shares, to be issued out of the unissued capital stock of the Company; up to 204,638,468 Group Shares, to be sold by the Selling Subsidiaries; and up to 61,391,546 Secondary Shares (inclusive of the OverAllotment Shares), to be sold by the Selling Shareholders. Since the Selling Subsidiaries are wholly-owned subsidiaries of the Company, and proceeds from the sale of the Group Shares held by them will be applied to pay debt, the result will be a direct reduction in the debt level of the Company on a consolidated basis. Hence, although the sale of the Group Shares is a sale of issued and outstanding secondary shares, the net effect of the Offer will, insofar as the proceeds of the Group Shares are concerned, effectively be equivalent to a sale by the Company of new primary shares for a reduction in debt inasmuch as its proceeds directly redound in full to the benefit of the Company. Use of Proceeds The net proceeds from the Offer is estimated to be P4,449,300,000 after deducting expenses related to the Offer. Said expenses are as follows: Underwriting and selling fees for the Offer Shares SEC registration, filing and research fees PSE listing and processing fees Taxes Estimated professional fees Marketing, distribution, and other expenses TOTAL Offer Size Total Expenses as a % of Offer Size P P P P P P [115,000,000] [3,400,000] [1,100,000] [1,200,000 ] [10,000,000] [20,000,000] [150,700,000] 4,600,000,000 [3.20%] The net proceeds from the sale of the New Shares will be used to finance capital expenditures relating to the expansion of stores and commissaries, working capital, and other general corporate purposes. The net proceeds from the sale of the Group Shares to be received by the Selling Subsidiaries will be used to repay a portion of the debt incurred by them to fund their acquisition of a controlling interest in the Company. A detailed discussion on the proceeds of the Offer appears on the “Use of Proceeds” of this Prospectus. 20 THE OFFER The following does not purport to be a complete listing of all the rights, obligations, and privileges attaching to or arising from the Offer Shares. Some rights, obligations, or privileges may be further limited or restricted by other documents and subject to final documentation. Prospective investors are enjoined to perform their own independent investigation and analysis of the Company and the Offer Shares. Each prospective investor must rely on its own appraisal of the Company and the Offer Shares and its own independent verification of the information contained herein and any other investigation it may deem appropriate for the purpose of determining whether to invest in the Offer Shares and must not rely solely on any statement or the significance, adequacy, or accuracy of any information contained herein. The information and data contained herein are not a substitute for the prospective investor’s independent evaluation and analysis. Terms and Conditions of the Offer Issue Size Up to P4.60 billion Offer Shares Up to 300,136,430 common shares. The Offer Shares have a par value of P1.00 per share and enjoy equal ranks, preference and priority with the existing issued and outstanding common shares of the Company. New Shares The Company is offering for subscription up to 34,106,416 New Shares to be issued out of the existing authorized capital stock of the Company Group Shares The Company has caused the offer for sale of up to 204,638,468 Group Shares which are currently held by the Selling Subsidiaries. Secondary Shares Offer Price The Selling Shareholders are offering for sale the Secondary Shares consisting of, in the aggregate, up to 61,391,546 common shares out of the issued and outstanding capital stock of the Company, inclusive of up to 27,285,130 issued shares to cover over-allotments The Offer Shares are being offered at a price of up to P29.50 per Offer Share. The Offer Price will be determined based on a book-building process and discussions between the Company and the Issue Manager and Lead Underwriter. 21 Offer Period The Offer Period shall commence at 9:00 a.m. of [*] 2014 and shall end at 12:00 p.m. of [*] 2014. The Company and the Issue Manager reserve the right to extend or terminate the Offer Period at any time subject to prevailing market conditions and the approval by the SEC and the PSE. The duration of the Offer Period shall be [*] Banking Days, unless sooner terminated or extended by the Company and the Issue Managers. Thus, if for any reason, any day of the Offer Period is a non-Banking Day, the Offer Period shall automatically be extended to the next Banking Day. Terms and Manner of Payment The Offer Shares must be paid for in full in Philippine pesos upon submission of the duly completed and signed Application, signature card and the requisite attachments. Payment for the Offer Shares shall be made either by: (i) a personal or corporate check drawn against an account with a BSP authorized bank at any of its branches located in Metro Manila; or (ii) a manager’s or cashier’s check issued by an authorized bank. All checks should be made payable to “[MAX’S OFFER]” crossed “Payee’s Account Only,” and dated the same date as the Application. The Applications and the related payments will be received at any of the offices of the Underwriters and Selling Agents. Eligible Applicant and Restrictions on Ownership The Offer Shares may be subscribed to and/or purchased by any natural person of legal age residing in the Philippines regardless of nationality, or any corporation, association, partnership, trust account, fund or entity residing in and organized under the laws of the Philippines and/or licensed to do business in the Philippines, regardless of nationality, subject to the Company’s right to reject an application or reduce the number of Offer Shares applied for subscription or purchase if the same will cause the Company to be in breach of any Philippine ownership requirements under relevant Philippine laws. However, because certain Subsidiaries of the Company own land in the Philippines, the Philippine Constitution and related statutes limit foreign ownership in said Subsidiaries to a maximum of 40% of its outstanding capital stock entitled to vote, and the Company owns more than 60% of the 22 outstanding capital stock entitled to vote of such Subsidiaries, then the Company must be a Philippine National in order for the Subsidiaries to comply with the restrictions on foreign ownership. Accordingly, the Company cannot allow the issuance or the transfer of Offer 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 ownership. Minimum Subscription The Offer Shares may be subscribed at a minimum of 200 Offer Shares and, thereafter, in multiples of 50 Offer Shares. No application for multiples of any other number of Offer Shares shall be considered. Application The application forms to subscribe to the Offer Shares may be obtained from any Underwriter or Selling Agent. All Applications shall be evidenced by the form prescribed, duly executed in each case by an authorized signatory of the Applicant and accompanied by: (a) One (1) completed signature card; (b) The corresponding payment for the Offer Shares covered by the Application; and (c) Photocopy of 2 valid identification cards for each signatory, one of which should be a government issued identification card. Applications must be received by the [Receiving Bank] not later than 12:00 p.m. of [*] 2014. Applications received thereafter or without the required documents will be rejected Other Documentary Requirements for Corporate Applicants If the Applicant is a corporation, partnership or trust account, the Application must be accompanied by the following documents: (a) A duly executed signature card authenticated by the corporate secretary of the Applicant; (b) A certified true copy of the Applicant’s latest articles of incorporation or articles of partnership and by-laws (due certification of the documents shall be made by the corporate secretary); (c) A certified true copy of the Applicant’s Certificate of Registration as issued by the SEC (due certification of the document shall be made by the 23 corporate secretary); and (d) A certificate issued by the corporate secretary of the Applicant and executed under oath that sets forth: (i) The resolution of the Applicant’s board of directors authorizing the purchase of the Offer Shares subject of the Application and designating signatories for the purpose; and (ii) The specimen signatures of such designated signatories. Requirements for NonResident Individual or Foreign Corporate and Institutional Applicants In addition to the requirements for corporate Applicants, non-resident individuals or foreign corporate and institutional Applicants are required to submit together with the Application, a representation and warranty stating that their investing in the Offer Shares as applied for will not violate the laws and rules in the jurisdiction(s) where they operate and that they are allowed to acquire or invest in the Offer Shares. Right to Accept, Reject and Scale Down Applications The actual number of Offer Shares subject of the Application shall be subject to confirmation by the Issue Manager and the approval of the Company. The Company and the Issue Manager reserve the right to accept, reject or scale down the number and amount of Offer Shares covered by the Application. The Company and the Issue Manager have the right to reallocate available Offer Shares in the event that the Offer Shares are insufficient to satisfy the total applications received. The Offer Shares will be allocated in such manner as the Company and the Issue Manager may, in their sole discretion, deem appropriate, subject to the distribution guidelines of the PSE. Applications received after the expiration of the Offer Period or any extension thereof or Applications with incomplete requirements shall be rejected. Applications where checks are dishonored upon first presentation and Applications that do not comply with the terms of the Offer shall be rejected. Any payment received pursuant to the Application does not mean approval or acceptance by the Company of the Application. Notwithstanding the acceptance of any Application, the actual subscription of the Offer Shares by the Applicant will be effected only upon the Listing of all of the Offer Shares on the PSE. Refunds In the event that the number of Offer Shares to be received by an Applicant, as confirmed by the Issue 24 Manager, is less than the number covered by its Application, or if an Application is rejected by the Company, the Company shall refund, without interest, by way of a check payable to the Applicant (or in case of joint Applicants to the first named Applicant) and crossed “Payee’s Account Only within 5 Banking Days from the end of the Offer Period, all or a portion of the payment corresponding to the number of Offer Shares wholly or partially rejected. Such refund check shall be made available for pick-up at the Receiving Bank’s offices 5 days after the end of the Offer Period. Refund checks that remain unclaimed after 30 days from the date such checks are made available for pick-up shall be mailed at the Applicant’s risk to the address indicated in the Application. Registration and Lodgment of Common Shares with the PDTC All shares are required to be lodged with the PDTC. The Applicant must provide the required information in the space provided in the Application to effect the lodgment. The Offer Shares will be lodged with the PDTC at least 2 trading days prior to the Listing Date. The Applicant may request for the uplifting of their shares and to receive stock certificates evidencing their investment in the Offer Shares through the Applicant’s broker after the Listing Date. Any expense to be incurred by such issuance of certificates shall be borne by the Applicant. Issuance and Transfer Taxes All fees of the Stock Transfer Agent, documentary stamp or other taxes, and other expenses that may be incurred in connection with the sale of the Offer Shares and the lodgment of the shares, shall be for the account of the Company. The stock transaction tax payable on the sale by the Selling Shareholders of the Secondary Shares shall be for the account of the Selling Shareholders. Restriction on the Issuance and Disposal of Shares The Company, the Selling Subsidiaries, and the Selling Shareholders have respectively agreed not to issue (other than the New Shares) or sell shares (other than the Group Shares and the Secondary Shares) in the Company for a period of 180 days from Listing Date. Registration of Foreign Investments 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 banking system. The registration with the BSP of all foreign investments in 25 the Offer Shares will be the responsibility of the foreign investors. See section on “Philippine Foreign Investments, Exchange Controls, Ownership,” on page [117]. and Foreign Listing and Trading All of the Offer Shares will be listed on the Philippine Stock Exchange (the “PSE”) under the symbol “MAXS”. Refer to “Description of Securities” on page [27]. Timetable The schedule of the Offer is as follows: Notice of Final Offer Price to the SEC and the PSE [October 31, 2014] Start of Offer Period [November 4, 2014] Deadline for Submission of Firm Commitment for Trading Participants [November 6, 2014] Deadline for Submission of Applications for Trading Participants, and the General Public [November 10, 2014] End of Offer Period [November 10, 2014] Date of Lodgment of Shares with PDTC [November 12, 2014] Listing Date and Commencement of Trading of New Shares [November 17, 2014] Description of Securities The following general information relating to the Company’s capital stock does not purport to be a complete listing of all the features, rights, obligations, or privileges of the Shares, and is qualified in its entirety by reference to applicable provisions of the Company’s amended articles of incorporation and amended by-laws. Some rights, obligations, or privileges may be further limited or restricted by other documents. 26 Features of the Offer Shares Voting Rights Each common share entitles the holder to one (1) vote, and enjoys full dividend rights. In the event of liquidation or dissolution of the Company, holders are entitled to receive their proportionate share of all assets available for distribution, after the settlement of the Company’s liabilities. At each meeting of the stockholders, every stockholder entitled to vote on a particular question or matter involved shall be entitled to vote for each share of stock standing in his name in the books of the Company at the time of the closing of the stock and transfer books for such meeting. In the election of Directors, each stockholder is entitled to such number of votes as is equivalent to the product of the number of common shares owned by said stockholder multiplied by the number of Directors to be elected. The stockholder may cumulate his votes in favor of one (1) or more nominees as he may see fit. A Director may also be removed by the vote of stockholders representing at least 2/3 of the outstanding voting shares. Pre-emptive Rights Under the Company’s Articles of Incorporation, pre-emptive rights are denied as to all issuances or dispositions of the Company’s common shares. Treasury Shares The Company does not hold any treasury shares. However, pursuant to PFRS, the common shares in the Company held by the Max’s Entities (which include the Selling Subsidiaries), which are wholly-owned subsidiaries of the Company, are, for accounting purposes, classified as treasury shares in the reporting of the consolidated financial statements of the Company. Prior to the Offer, the Max’s Entities (that include the Selling Subsidiaries) collectively own 540,491,344 shares in the Company. After the Selling Subsidiaries sell the Group Shares under the Offer, the Max’s Entities will collectively own [*] shares in the Company. For a more detailed discussion on the use of proceeds from the Offer, please refer to the discussion under “Capitalization—Max’s Entities and the Selling Subsidiaries” on page [63] of this Prospectus. Subject to the authorization of the Company’s Board of Directors, the Company may acquire its own common shares, provided that, it has unrestricted retained earnings to pay for the common shares to be acquired or purchased and only for a legitimate corporate purpose(s). The common shares repurchased by the Company shall become treasury shares that may again be disposed of at a reasonable price as may be fixed by the Board of Directors. These treasury shares have neither voting rights nor dividend rights as long as they remain treasury shares. Dividends 27 The Company is authorized to distribute dividends, subject to the existence of unrestricted retained earnings, in cash, properties of the Company, shares of stock and/or securities of other companies belonging to the Company. Dividends paid in the form of cash are subject to approval of the Company’s Board of Directors. Dividends in the form of property are subject to approval of the Company’s Board of Directors and the SEC. Dividends paid in the form of additional shares are subject to the approval of the Company’s Board of Directors and stockholders owning at least 2/3 of the issued and outstanding capital stock of the Company. Holders of outstanding common shares as at a dividend record date will be entitled to full dividends declared without regard to any subsequent transfer of such shares. The Company has not adopted a specific dividend policy specifying a minimum dividend rate based on its net earnings for any given year. The Company has declared the following dividends for the past 5 years: Payment Date Amount Total Dividends Retained Per Share Earnings as of (in P) (in P) Year Type Date of Declaration Record Date 2014 Stock Jun 10, 2014 Aug 22, 2014 Sept 18, 2014 Dec 31, 2013 2013 Cash Jun 28, 2013 Jul 12, 2013 Jul 31, 2013 Dec 31, 2012 0.1897 45,109,797.81 Cash Feb 22, 2013 Mar 11, 2013 Mar 29, 2013 Jun 30, 2012 0.1007 23,946,002.32 2012 Cash May 31, 2012 Jun 15, 2012 Jun 29, 2012 Dec 31, 2011 0.1469 34,932,152.34 2011 Cash Dec 8, 2011 Dec 23, 2011 Dec 29, 2011 Jun 30, 2011 0.0512 12,175,127.30 Cash May 27, 2011 Jun 15, 2011 Jun 30, 2010 Dec 31, 2010 0.0907 21,568,048.00 259,210,840.00 Other Securities On 20 January 2014, the Company issued 21,415,385 common shares to the Aureos Group based on the underlying convertible bonds issued under the Supplemental Investment Agreement entered into by the Company with the Aureos Group dated 7 October 2009. The shares were issued at a price of P6.50 per share. These shares were part of the shares that were acquired by the Selling Subsidiaries on February 24, 2014. Transfer of Common Shares All transfer of legal title to the common shares must be evidenced by a transfer document in a form acceptable to the Company, and must be registered in the share register of the Company. The law does not require the transfer of the common shares to be effected through the PSE. However, off-exchange sales will subject the transferor to a capital gains tax that is significantly greater than the stock transfer tax applicable to sales effected through the PSE. All sales of common stock on the PSE must be effected through a licensed stockbroker in the Philippines. No share of stock against which the Company holds unpaid claims, like unpaid subscriptions due and payable shall be transferrable in the books of the Company. In case of delinquent shares, no stock certificate, either physical or electronic, shall be issued to 28 a shareholder until the full amount of his/her subscription together with interest and expenses, if any, is due and has been paid. Stock and Transfer Agent The Company’s stock and transfer book is maintained at the principal office of the Company’s stock and transfer agent, Stock Transfer Services, Inc. with office at the 34/F, Unit D, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City. Changes in Control There is no existing provision in the Amended Articles of Incorporation and Amended ByLaws of the Company which may cause any delay, deferment or in any manner prevent a change in control of the Company. Governing Law The Offer Shares will be issued pursuant to the laws of the Philippines. Use of Proceeds The Company intends to use the proceeds it receives from the New Shares and Group Shares as follows: Application of Proceeds Estimated Amounts (P) Estimated Timing By the Company (from New Shares) Capital expenditures for store and commissary expansion 400,000,000 Working capital 100,000,000 By the Selling Subsidiaries (from Group Shares) Repayment of debt incurred in connection with the acquisition of a controlling interest in the Company Offer-related costs Estimated net proceeds Immediate 3,000,000,000 [150,700,000] [3,349,300,000] The proposed use of proceeds described above represents a best estimate of the use of the net proceeds of the Offer based on current plans and expenditures. The actual amount and timing of disbursement of the net proceeds from the Offer for the uses stated above will depend on 29 various factors which include, among others, changing market conditions or new information regarding the cost or feasibility of the plans. Cost estimates, particularly for capital expenditures for store expansion, may change as plans are developed, and actual costs may be different from budgeted costs. To the extent that the net proceeds from the Offer are not immediately applied to the above purposes, the Company will invest the net proceeds in interest-bearing short-term demand deposits and/or money market instruments, and/or repay existing debt. Aside from underwriting and selling fees, the Underwriters will not receive any of the net proceeds from the Offer. Based on the Offer Price of up to P29.50 per Offer Share, the total proceeds from the Offer, the estimated total expenses for the Offer and the estimated net proceeds from the Offer will be: Total Proceeds from the Offer Expenses Underwriting and selling fees for the Offer Shares SEC registration, filing and research fees PSE listing and processing fees Taxes Estimated professional fees Marketing, distribution and other expenses Total Expenses related to the Offer Net Proceeds from the Offer Estimated Amount in P 4,600,000,000 115,000,000 3,400,000 1,100,000 1,200,000 10,000,000 50,000,000 150,700,000 4,449,300,000 In the event of any material deviation or adjustment in the planned use of proceeds, the Company shall inform its shareholders, the SEC and the PSE in writing at least 30 days before such deviation or adjustment is implemented. Any material or substantial adjustments to the use of proceeds, as indicated above, will be approved by the Company’s Board of Directors and disclosed to the SEC and the PSE. In addition, the Company shall submit via the PSE EDGE Disclosure System the following disclosures to ensure transparency in the use of proceeds: (i) any disbursements made in connection with the planned use of proceeds from the Offer; (ii) quarterly progress report on the application of the proceeds from the Offer on or before the first 15 days of the following quarter; the quarterly progress report should be certified by the Company’s Chief Financial Officer or Treasurer and external auditor; (iii) annual summary of the application of the proceeds on or before January 31 of the following year; the annual summary report should be certified by the Company’s Chief Financial Officer or Treasurer and external auditor; (iv) approval by the Company’s Board of Directors of any reallocation on the planned use of proceeds, or of any change in the work program; the disbursement or 30 implementation of such reallocation must be disclosed by the Company at least thirty (30) days prior to the actual disbursement or implementation; and (v) a comprehensive report on the progress of its business plans on or before the first fifteen (15) days of the following quarter. The quarterly and annual reports required in items (ii) and (iii) above must include a detailed explanation of any material variances between the actual disbursements and the planned use of proceeds in the work program or the Prospectus, if any. The detailed explanation must also state that the Company’s Board of Directors has given its approval as required in item (iv) above. The Company shall submit an external auditor’s certification on the accuracy of the information reported by the Company to the PSE in the Company’s quarterly and annual reports as required in items (ii) and (iii) above. Plan of Distribution The Company plans to offer the Shares through the Underwriters. BPI Capital Corporation has been appointed by the Company to act as Bookrunner and Issue Manager for the Offer. The Trading Participants, who are member-brokers of the PSE, shall act as Selling Agents for the Offer, pursuant to the PSE’s rules and regulations. Additional parties may be appointed as co-managers for the Offer. Distribution and Underwriting The Underwriters have agreed to distribute and sell the Offer Shares at the Issue Price, pursuant to an Underwriting Agreement. Subject to the fulfillment of the conditions provided in the Underwriting Agreement, the Underwriters have committed to underwrite the entire Offer on a firm basis. The Underwriting Agreement may be terminated in certain circumstances prior to payment being made to the Company of the net proceeds of the Offer Shares. The underwriting and selling fees to be paid by the Company in relation to the Offer shall be equivalent to []% of the gross proceeds of the Offer. This shall be inclusive of fees to be paid to the Underwriters and sub-underwriters, if any, and commissions to be paid to the Trading Participants of the PSE. The Underwriters are duly licensed by the SEC to engage in the underwriting or distribution of the Offer Shares. The Underwriters may, from time to time, engage in transactions with and perform services in the ordinary course of its business for the Company or any of its subsidiaries. The Underwriters have no direct relations with the Company in terms of ownership by either of their respective major stockholder/s, and have no right to designate or nominate any member of the Board of Directors of the Company. 31 There are no arrangements with any Underwriter to put back to the Company or any Subsidiary or Selling Shareholder any of the Offer Shares. Each of the Underwriters have conducted their respective due diligence review of the Company and have, by the exercise of reasonable care is not aware of an untrue statement of a material fact or omission of a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading. BPI Capital Corporation, the Issue Manager and Lead Underwriter for the Offer, is a whollyowned subsidiary of Bank of the Philippine Islands. BPI Capital Corporation is a licensed investment house authorized to engage in the corporate finance and securities distribution business. It began operations in December 1994. Bank of the Philippine Islands has extended the loan to the Selling Subsidiaries to finance their acquisition of 89.95% of the Company which was completed on February 24, 2014. This loan is to be reduced from payments from the net proceeds of the Offer. (Please see “Use of Proceeds” on page [30] of this Prospectus. The engagement of BPI Capital will be pursuant to an underwriting agreement with other underwriters at arms-length terms. Sale and Distribution Pursuant to the rules of the PSE, the Company will make available up to 54,570,260 Offer Shares comprising 20% of such number of Offer Shares less the Over-Allotment Shares, for distribution to PSE Trading Participants. The total number of Offer Shares allocated to the 135 PSE Trading Participants will be distributed following the procedures indicated in the implementing guidelines for the Offer Shares to be distributed by the PSE. PSE Trading Participants who take up the Offer Shares shall be entitled to a selling fee of [] of the Offer Shares taken up and purchased by the relevant trading participant. The selling fee, less a withholding tax of 10%, will be paid to the PSE Trading Participants within ten (10) banking days after the Listing Date. The PSE Trading Participants may be allowed to subscribe for their dealer accounts provided that, if they opt to sell the Offer Shares to the clients during the Offer Period, it must be at a price not higher than the Offer Price per share. Likewise, the trading participants are prohibited from selling the Offer Shares during the period after the Offer Period and prior to the Listing Date. The balance of the Offer Shares allocated but not taken up by the PSE Trading Participants will be distributed by the Underwriters to their clients or to the general public. Prior to the close of the Offer Period, any Offer Shares not taken up by the Trading Participants shall be distributed by the Underwriters directly to their clients and the general public. All Offer Shares not taken up by the Trading Participants, general public and the [Underwriters’] clients shall be purchased by the Underwriters pursuant to the terms and conditions of the Underwriting Agreement. 32 Term of Appointment The engagement of the Underwriters shall subsist so long as the SEC Permit to Sell remains valid, unless otherwise terminated pursuant to the Underwriting Agreement. Manner of Distribution The Underwriters shall, at their discretion, determine the manner by which proposals for subscriptions to, and issuances of, the Offer Shares shall be solicited, with the sale of the Offer Shares to be effected only through the Underwriters. The Underwriters may appoint other entities, including trading participants, to sell on their behalf. No shares are designated to be sold to specific persons. Offer Period The Offer Period shall commence at 9:00 a.m. on [November 4, 2014] and end at 12:00 p.m. on [November 10, 2014], or such other date as may be mutually agreed between the Company and the Underwriters. Application to Purchase All applications to purchase the Offer Shares shall be evidenced by a duly completed and signed Application, together with two fully executed signature cards authenticated by the Corporate Secretary with respect to corporate and institutional investors, and shall be accompanied by the payment in full of the corresponding purchase price of the Offer Shares applied for, by check or by the appropriate payment instruction, and the required documents which must be submitted to the Underwriters. Corporate and institutional purchasers must also submit a copy of SEC-certified or corporate secretary-certified true copy of the SEC Certificate of Registration, Articles of Incorporation and By-laws, or such other relevant organizational or charter documents, and the original or Corporate Secretary-certified true copy of the duly notarized certificate confirming the resolution of the board of directors and/or committees or bodies authorizing the purchase of the Offer Shares and designating the authorized signatory/ies therefor. Individual Applicants must also submit a photocopy of any one of the following identification cards (“ID”): passport/driver's license, company ID, SSS/GSIS ID and/or Senior Citizen's ID or such other ID and documents as may be required by or acceptable to the Registrar and Depository. The Underwriters shall be responsible for accepting or rejecting any application or scaling down the amount of Offer Shares applied for. The application, once accepted, shall constitute the duly executed purchase agreement covering the amount of Offer Shares so accepted and shall be valid and binding on the Company and the Applicant. 33 Minimum Purchase A minimum purchase of 200 shares shall be considered for acceptance. Purchases in excess of the minimum shall be in multiples of 50 shares. Refunds In the event an application is rejected or the amount of Offer Shares applied for is scaled down, the Underwriters, upon receipt of such rejected and/or scaled down applications, shall notify the Applicant concerned that his application has been rejected or the amount of Offer Shares applied for is scaled down, and refund the amount paid by the Applicant with no interest thereon. With respect to an Applicant whose application was rejected, refund shall be made by the Underwriters by making the [check] payment of the Applicant concerned available for his retrieval. With respect to an Applicant whose application has been scaled down, refund shall be made by the issuance by the concerned Underwriter of its own [check] payable to the order of the Applicant and [crossed “Payees' Account Only”] corresponding to the amount in excess of the accepted application. All [checks] shall be made available for pick up by the Applicants concerned at the office of the Underwriter to whom the rejected or scaled down application was submitted within five Banking Days after the last day of the Offer Period. The Company shall not be liable in any manner to the Applicant for any [check] payment corresponding to any rejected or scaled-down application which is not returned by the relevant Underwriter; in which case, the relevant Underwriter shall be responsible directly to the Applicant for the return of the [check] or otherwise the refund of the payment. Registry of Shareholders The New Shares will be issued in scripless form through the electronic book-entry system of STSI as stock transfer agent for the Offer, and lodged with PDTC as Depository Agent on Listing Date through PSE Trading Participants nominated by the Applicants. Applicants shall indicate in the proper space provided for in the Application Form the name of the PSE Trading Participant under whose name their Offer Shares will be registered. Legal title to the Offer Shares will be shown in the Registry of Shareholders which shall be maintained by the Stock Transfer Agent. See “Philippine Stock Market – Amended Rule on Lodgment of Securities” on page [125]. Expenses All out-of-pocket expenses, including but not limited to, registration fees payable to the SEC, fees payable to the Underwriters for the sale of the Offer Shares, as well as printing, publication, communication and signing expenses incurred by the Underwriters in the negotiation and execution of the transaction will be for the Company's account irrespective of whether the Offer is completed. Such expenses are to be reimbursed upon presentation of a composite statement of account. See “Use of Proceeds” on page [30] for details of expenses. Any stock transaction tax and fees payable to the Underwriters payable on the sale of the Group Shares and the Secondary Shares to be sold by the Selling Subsidiaries and Selling Shareholders shall be for their respective accounts. 34 Selling Restrictions No securities, except of a class exempt under Section 9 of the SRC 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 Form 12-1 and the registration statement has been declared effective by the Philippine SEC. Determination of Offer Price The Offer Price has been set at up to P29.50 per Offer Share. The Offer Price was determined through a book-building process and discussions between the Company and the Underwriters. Investors should not rely on the historical market price of the common shares on the PSE as an indicator of the value of the Offer Shares. The factors considered in determining the Offer Price are, among others, the Company’s ability to generate earnings and cash flow, its short and long-term prospects, the level of demand from institutional investors, overall market conditions at the time of launch and the market price of listed comparable companies. The Offer Price may not have any correlation to the actual book value of the Offer Shares. Background of the Offer Prior to February 24, 2014, the Company had an authorized capital stock of P400,000,000 consisting of 400,000,000 common shares with a par value of P1.00 per share, out of which 259,210,840 shares were issued and outstanding. The Company was then 82.12% owned by the Martin Lorenzo Group and the remaining 17.88% was owned by other stockholders. On February 24, 2014, ten of the twenty Max’s Entities (the Selling Shareholders) acquired 233,160,200 shares or 89.95% of the Company through a private sale of shares held by the former owners of the Company that was completed through a public tender offer. On July 31, 2014, the SEC approved an increase in the authorized capital stock of the company to P1,400,000,000 consisting of 1,400,000,000 common shares with a par value of P1.00 per share. The increase in capital stock was supported by a declaration by the Company of a 100% stock dividend out of its unrestricted retained earnings to all the Company’s stockholders. On August 8, 2014, the SEC approved setting the Record Date for the Company’s 100% stock dividend to August 22, 2014. The Settlement Date for the dividend declaration was on September 18, 2014. As a result of the stock dividend declaration, the shares held by the Selling Shareholders who acquired 233,160,200 shares in the Company on February 24, 2014 increased to 466,320,400 shares. The up to 204,638,468 Group Shares that will be offered and sold under the Offer will come from the 466,320,400 shares held by the 10 Max’s Entities (the Selling Shareholders). 35 On June 30, 2014, the Integration was undertaken whereby the Company and the MGOC Shareholders agreed to a share-for-share swap, pursuant to which the Company agreed to issue the 540,491,344 Exchange Shares to the MGOC Shareholders in exchange for 100% of the MGOC Shareholders’ ownership interests in the Max’s Entities at a notional exchange value of P7.50 per share. On [*], 2014, the SEC approved and confirmed the valuation for the share swap and the issuance of the Exchange Shares. The up to 61,391,546 Secondary Shares that will be offered and sold under the Offer will come from the 540,491,344 shares held by some of the MGOC Shareholders (the Selling Shareholders). 36 INVESTMENT CONSIDERATIONS AND RISK FACTORS An investment in the Offer Shares involves a certain degree of risk. 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 indicative of future performance and there may be a large difference between the buying price and selling price of these securities. Investors deal with a range of investments, each of which may carry different levels of risk. 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. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company adopts what it considers conservative financial and operational controls and policies to manage its business risks. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. See section “Forward- Looking Statements” of this Prospectus. Factors that might cause such differences, thereby making the offering speculative or risky, may be summarized into those that pertain to the business and operations of the Company, in particular, and those that pertain to the over-all political, economic, and business environment, in general. These risk factors and the manner by which these risks shall be managed are presented below. 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 Company's business, financial condition and results of operations could be materially adversely affected by any of these risk factors. The risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. An investor should undertake independent research and study on the trading of securities before commencing any trading activity. An investor should seek professional advice regarding any aspect of the securities to invest in or the nature of risks involved in the trading of securities especially high risk securities. Investors may request information on the securities and Issuer thereof from the SEC which are available to the public. Risks Relating to the Philippines Risks related to the Philippine economy The Company’s business performance is directly linked to the purchasing power of the Filipino consumer. Substantially all of the Company’s operating revenues are derived from its restaurant operations in the Philippines. A downturn in the Philippine economy will reduce the purchasing power of Filipino consumers and their corresponding ability to spend on products and services such as those offered by the Company. Demand for the Company’s products are directly related to the strength of the Philippine economy 37 (including overall growth and remittance levels), the overall levels of business activity in the Philippines, the overall employment levels in the Philippines and the amount of remittances received from overseas Filipino workers. Historically, the Philippines has periodically experienced economic downturns. For example, the general slowdown of the global economy in 2008 and 2009 had a negative effect on the Philippine economy. While the Philippines has recently experienced a period of growth and domestic consumption has increased, there can be no assurance that this can be maintained. With the Philippines expecting a steady growth, and consumption still comprising a steady percentage of the gross domestic product of the Philippines, coupled with the Company’s thrust to expand its international operations to enable it to derive a significant part of revenues offshore, the Company hopes to achieve sustainable growth in its operations and revenues. Risks related to foreign exchange The appreciation of the U.S. dollar to the Peso may materially affect the results of the Group’s operations, particularly for its foreign franchised brands. The cost of imported raw materials required for the production of Krispy Kreme and Jamba Juice products account for approximately 41% of the respective raw material costs of The Real American Doughnut Company, Inc. and Fresh Healthy Juice Boosters, Inc. To mitigate the risks posed by a decline in the value of the Peso against the U.S. dollar (and other relevant currencies) that could lead to an increase in operating costs, the Group has adopted different purchasing strategies consisting of forward purchasing of raw materials and stockpiling to account for seasonality and volatility in cost of raw materials. The Group is also expanding and expects to increase its revenues from international operations. Risks relating to political instability Any political instability or acts of terrorism in the Philippines may adversely affect the Company. The Philippines has from time to time experienced political and military instability and acts of terrorism. In the last few years, there has been political instability in the Philippines, including impeachment proceedings against two former presidents and the chief justice of the Supreme Court of the Philippines, and public and military protests arising from alleged misconduct by previous administrations. A petition for impeachment against President Benigno Simeon Aquino III has recently been initiated by some party-list lawmakers. There is no indication, however, whether such action will succeed. There is also no guarantee that acts of election-related violence will not occur in the future and such events could negatively impact the Philippine economy. As the Group predominantly operates in the Philippines, an unstable political environment could negatively affect the general economic conditions and operating environment in the Philippines, which could have a material adverse effect on the Company’s business, financial 38 condition and results of operations. In any event, the impact of any such political occurrence is usually localized and may affect the Group’s operations in the locality only. Territorial and other disputes with China and a number of Southeast Asian countries may disrupt the Philippine economy and business environment. The Philippines, China and several Southeast Asian nations have been engaged in a series of long standing territorial disputes over certain islands in the West Philippine Sea, also known as the South China Sea. Despite efforts to reach a compromise, a dispute arose between the Philippines and China over a group of small islands and reefs known as the Scarborough Shoal. In April and May 2012, the Philippines and China accused one another of deploying vessels to the shoal in an attempt to take control of the area, and both sides unilaterally imposed fishing bans at the shoal during the late spring and summer of 2012. These actions threatened to disrupt trade and other ties between the two countries, including a temporary ban by China on Philippine banana imports, as well as a temporary suspension of tours to the Philippines by Chinese travel agencies. Since July 2012, Chinese vessels have reportedly turned away Philippine fishing boats attempting to enter the shoal, and the Philippines has continued to protest China’s presence there. In January 2013, the Philippines sent notice to the Chinese embassy in Manila that it intended to seek international arbitration to resolve the dispute under the United Nations Convention on the Law of the Sea. China has rejected and returned the notice sent by the Philippines requesting arbitral proceedings. Chinese vessels have also recently confronted Philippine vessels in the area, and the Chinese government has warned the Philippines against what it calls provocative actions. Recent talks between the Government of the Philippines and the United States of America about increased American military presence in the country, particularly through possible American forays into and use of Philippine military installations, may further increase tensions. In early March 2013, several hundred armed Filipino-Muslim followers of Sultan Jamalul Kiram III, the self-proclaimed Sultan of Sulu from the south of the Philippines, illegally entered Lahad Datu, Sabah, Malaysia in a bid to enforce the Sultan of Sulu’s historical claim on the territory. As a result of the illegal entry, these followers engaged in a three-week standoff with the Malaysian armed forces, resulting in casualties on both sides. Clashes between the Malaysian authorities and followers of the Sultan of Sulu have killed at least 98 Filipino-Muslims and 10 Malaysian policemen army since March 1, 2013. In addition, about 4,000 Filipino-Muslims working in Sabah have reportedly returned to the southern Philippines. On May 9, 2013, a Philippine Coast Guard ship opened fire on a Taiwanese fisherman’s vessel in a disputed exclusive economic zone between Taiwan and the Philippines, killing a 65-year old Taiwanese fisherman. Although the Philippine government maintained that the loss of life was unintended, Taiwan imposed economic sanctions on the Philippines in the aftermath of the incident. Taiwan eventually lifted the sanctions in August 2013 after a formal apology was issued by the Government of the Philippines. However, the incident has raised tensions between the two countries in recent months. Should territorial disputes between the Philippines and other countries in the region continue or escalate further, the Philippines and its economy may be disrupted and the Company’s operations could be adversely affected as a result. In particular, further disputes 39 between the Philippines and other countries may lead to reciprocal trade restrictions on the other’s imports or suspension of visa-free access and/or OF permits. Any impact from these disputes in countries in which the Company has operations could materially and adversely affect the Company’s business, financial condition and results of operations. Risks related to occurrence of natural disasters and fortuitous events that cause a disruption in supplies needed by the Company The Philippines experiences a number of major natural catastrophes in recent years including typhoons, floods, volcanic eruptions, earthquakes, mudslides, and droughts. While these factors are not within the Company’s control, these could potentially have a significant impact on the Company’s restaurants and operations. There can be no assurance that such natural catastrophes will not materially disrupt the Company’s operations, particularly in areas where such occurrences directly affect its restaurants located therein. Such natural catastrophes may disrupt actual restaurant operations during the occurrence of such disaster and even after, its ability to source raw materials and ingredients, deliver its services and impair the economic conditions in the affected areas. There can be no assurance that the Company is fully capable to deal with such natural catastrophes and that the insurance coverage it currently maintains will fully compensate it for all the damages and economic losses resulting from these catastrophes. In November 2013, typhoon Yolanda (international name “Haiyan”) extensively damaged and claimed thousands of lives in Central Philippines. One of the Max’s Restaurants in Tacloban was damaged and operations were affected, resulting in the closure of the store. The branch re-opened on August 21, 2014. In July 16, 2014, typhoon Glenda (international name “Rammasun”) caused damage to chicken farms located in Southern Luzon resulting in the constriction of chicken supply and a 6-7% increase in the price of poultry. The Company did not experience any shortage of chicken supply but there is no assurance that any similar occurrence in the future will have the same negligible effect on the Company’s operations. Typhoons and natural calamities brought about by weather conditions continue to have a significant effect on the economics in the region which has led to, among other things, an increase in inflation, a decrease in the pace of economic growth and/or a reduction in consumer spending, all of which have an adverse effect on the Company’s results of operations, particularly in the affected areas. While the Company obtains insurance to cover certain business risks, it cannot assure prospective investors that the insurance coverage the Company maintains will adequately compensate it for all damages and economic losses resulting from natural catastrophes, including possible business interruptions. Risks relating to occurrence of power outages directly affecting restaurant operations 40 The Philippines has also experienced power outages from generation shortages and transmission problems. These types of events may materially disrupt and adversely affect the Company’s business and operations. The Company, however, is prepared to address any power outages by supplying, or locating in areas where there is supply or provision of, backup power so as not to unduly hamper restaurant operations. Risks Relating to the Group’s Business Risks relating to competition The Group operates in a highly competitive environment where formats and variety of offerings of larger chains and specialized concepts of smaller independent operators, or even convenience stores, may directly impact the demand for the Group’s products. The Group’s multi-brand platform, however, enables the Company to offer more products at various price points, thereby mitigating the effect of any decline in demand. The Company's ability to compete depends on its ability to continue to maintain product quality and consistency, to capitalize on its heritage of institutional brands, continue to improve its existing product offerings, to develop and roll-out new products and product line extensions, to modernize, refresh and refurbish older restaurant facilities, to effectively respond to consumer preferences, to manage the complexity of restaurant operations as well as the impact of competitors’ actions, and to maintain customer’s perception of the quality, consistency and value of its products (particularly where average product pricing is higher than that of the competition). To the extent that the Group’s existing or future competitors offer items that are better priced or more appealing to consumer tastes, increase the number of restaurants they operate in one of the Group’s key markets, re-make their restaurant portfolio to better enhance the restaurant experience or have more effective advertising and marketing programs than the Group does, this product and price competition could adversely affect the Group’s revenues and those of the Group’s franchisees. If the Group is unable to maintain competitive position, it could experience downward pressure on prices, lower demand for its products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share, which would have an adverse effect on the business, results of operations and financial condition of the Company. There are significant barriers to entry to a full service restaurant chain. However, new competitors are emerging more quickly as the Philippine economy and consumption continue to grow. New companies, including operators that are outside the traditional restaurant industry, have started to enter the Company’s key markets and target its customer base. Recently, the deli sections and in-store cafes of a number of major grocery store chains, convenience stores and casual dining outlets have increased competition for prepared food purchases. Such competitors may have, among other things, lower operating costs, better locations, better facilities, better management, better products, more effective marketing and more efficient operations. Although the Philippines has recently experienced periods of economic growth, domestic 41 and international economic conditions may change and adversely affect the casual dining market. Under challenging economic conditions, these competitive advantages resulting from greater financial resources and economies of scale may intensify, thereby permitting the Group’s competitors to gain additional market share. If the Group is unable to maintain its competitive position, it could experience downward pressure on prices, lower demand for its products, reduced margins and revenue from operations and payments from franchises, the inability to take advantage of new business opportunities and the loss of market share, all of which would have an adverse effect on the business, results of operations and financial condition of the Company. Risks relating to raw material sourcing Any supply disruptions, price increases, or quality or safety problems could adversely affect the Group’s operations and profitability. The Company’s business requires a number of raw materials and other ingredients that are sourced from third-party suppliers. Accordingly, shortages in the supply of these raw materials and ingredients in the future may be experienced due to unforeseen events including, but not limited to, global supply and demand conditions, weather and adverse climate conditions, customs and import duties and government regulations. If any supplier is unwilling or unable to provide high quality raw materials or ingredients in prescribed quantities and at acceptable prices, the Company may be unable to find alternative suppliers that will provide the Group with raw materials or ingredients at suitable terms in a timely manner, or at all. This could result in delays in the delivery of raw materials or ingredients to the commissaries and may ultimately lead to product or menu stock-outs in the Group’s restaurants and stores. Furthermore, the Group is vulnerable to increases in the prices of raw materials and ingredients, the prices of which are determined principally by market forces and the Group’s bargaining power against its suppliers. Prices of raw materials and ingredients may fluctuate as a result of inflation or adverse climate conditions in the future. If the prices of raw materials or ingredients increase in the future and the Group cannot pass on such increases to its customers, it may not be able to maintain its current profit margins and this could adversely affect the Company’s profitability. There is also a risk that raw materials or ingredients that have been supplied may be sub-standard or may be contaminated. Should the Group experience any quality or safety problems in relation to the supply of raw materials or ingredients, its product quality may be adversely affected, brand reputations may become tarnished, stores may be compelled to close, or the Group may be subject to liability claims. Even though the Group may bring claims against the relevant supplier for damages in such event, the Company cannot make assurances whether such claims would provide judgment favorable to the Group, which may in turn, materially and adversely affect the Company’s competitive position, reputation, and business results. To hedge against price increases and to guarantee the sufficiency and quality of the raw materials supply, the Group sources its raw materials through and maintains long-term contracts with reputable suppliers with quality certifications. It has also entered into strategic partnerships with select third parties to ensure delivery of materials and 42 supplies within agreed price ranges and quality specifications. These suppliers and strategic partners have consistently shown reliability in terms of quality and supply as the Group’s longtime suppliers. The Group also maintains a list of alternative raw material sources in the event that its current suppliers may not be able to provide the quantity and quality required by the Company. Risks relating to food quality Any failure to maintain effective quality control of the commissaries and the Group’s stores could have a material adverse effect on the Company’s financial condition and results of operation. The quality of the Group’s food and service is critical to the success of the Group’s business. Maintaining consistent food and service quality depends significantly on the Group’s personnel and their adherence to stringent quality control policies and guidelines. Accordingly, the Group requires its franchisees and its franchisees’ personnel to undergo training in food handling and safety. In addition to third-party and in-house inspections of the commissaries and the stores, quality assurance testing is likewise regularly conducted. Risks relating to credit and paying capacity of franchisees As the Group expands its franchise operations, it may face risks of collection from franchisees who do not comply with or timely remit payment for franchise obligations. Any delay in collections may affect the Group’s cash position. The Group has collection and compliance measures in place to monitor and collect receivables from franchisees. It has also established a system that will allow the Company or the relevant Subsidiary to take over operations of franchisees in order to protect its cash flows and preserve brand quality. Risks relating to strategy for domestic and international growth There is no assurance that the expansion plans of the Company for its domestic and international operations could be achieved. The Company’s expansion plans and timelines are dependent on third party actions that can cause delays or restrict the opening of stores and/or completion of plans. These third parties include lessors, contractors, suppliers and regulatory agencies. Risks relating to labor Any change in law and regulations, including the issuance of new wage orders and granting increased benefits to labor, as well as the occurrence of any labor unrest may result in disruptions in operations and financially affect the Group’s operations, revenues and prospects. The Company has historically kept harmonious working relations with its employees and labor groups. The Company has not experienced any work disruption arising from 43 labor issues, and the Group generally considers its labor relations to be good. The Group manages the risks posed by any change in law, regulation or labor dispute by adopting policies that ensure a healthy working environment for its employees that comply with law and regulations. Risks relating to controlling shareholders The Company is effectively controlled by the MGOC Shareholders consisting of the Trota, Fuentebella and Rodgers Families and their interests may differ from the interests of the other shareholders. Members of these families also serve on the board of directors and act as executive officers of the Company. Accordingly, the management, policies and business of the Company are effectively controlled by these three families through their ability to control actions that require majority shareholder approval and through their representatives on the Board. Together, these three families will continue to own, directly and indirectly, a controlling interest in the Company after the Offer. This concentration of voting power may discourage or prevent a change in control or other business combinations. No member of these three families is in the food business other than through the Company. No family member is involved in any ancillary or supply business with the Company. The Company has a Manual of Corporate Governance that provides for the conduct of its business, including related party transactions, on a transparent and an arm’s length basis. Risks related to management The Company’s businesses and operations are substantially dependent on key executives. The Group has relied and continues to rely significantly on the continued individual and collective contributions of its senior management team. If any of the Group’s senior management are unable or unwilling to continue in their present positions, or if they join a competitor or form a competing business, the Company may not be able to replace them easily, and its business, financial condition, results of operations and prospects could be materially and adversely affected. To mitigate the risk of departing key managers, the Company has identified members of management who will be able to assume and take on the role and additional responsibilities arising from such departure. Risks relating to joint ventures and partnerships The Company has entered into joint ventures for the operation of certain stores of Pancake House, Yellow Cab, Teriyaki Boy, Dencio’s and The Chicken Rice Shop, and may enter into similar agreements for the operation of its other brands in the future. Issues may arise among partners and joint ventures entered into by the Company which may result in disruption in the business and operations. Cooperation among the joint venture partners on business decisions is crucial to the sound operation and financial success of these joint venture companies. Although the Company has experienced certain disagreements with its joint venture partners in 44 Teriyaki Boy Group, Inc. under the Company’s previous management, the MGOC Shareholders and the management team believe that the Company’s current relationship with its partner, Mr. Bryan Tiu, has been constructive. Mr. Tiu has been actively participating in the Company’s endeavors to reposition Teriyaki Boy and revive the brand. The Company values good relations with its various joint venture partners. The Company also hopes to mitigate any risk associated with joint ventures by maintaining open lines of communication with its partners. Risks related to third party leases The Group operates most of its branches in areas which are being leased from third parties. Most building leases for spaces in malls and similar developments are not covered by long-term lease contracts. There is no assurance that these leases will be renewed at expiry. In order to maintain possession over the leased premises for continued store operations, the Group maintains good relations with third party lessors and continues to improve its brand roster to allow the Group to avail itself of favorable lease terms. Risks Relating to Integration The Company continues to assess and will adopt the appropriate corporate structure for the Company and its Subsidiaries in accordance and consistent with a plan of integration to achieve operating and cost efficiencies for the Group. The plan of integration includes consolidating certain Subsidiaries. Integration plans as well as centralizing certain support operations such as finance and accounting, human resources, supply chain, marketing, project design and engineering, legal, procurement and information and technology units are already being implemented. However, the Company recognizes that integrating the varying systems and required processes for the operation of different brands and formats targeting different customer demands may not be possible and certain assumed benefits may not materialize. Moreover, there can be no assurances that the Company’s accounting systems, documentation processes and other internal controls that were in place prior to the acquisition by certain Max’s Entities of a controlling interest in the Company were sufficient to ensure accurate general record keeping and substantiate proper financial reporting. Deficiencies in the processes that were in place at the Company prior to such acquisition may result in discrepancies between the accounting treatments of various items in the Company’s financial statements prepared prior to the acquisition as compared to if the same financial statements were prepared using the Company’s systems today or if a different auditor had audited the financial statements prior to the said acquisition. In addition, there may be differences in judgments and estimates between previous and current management with respect to certain items in the financials on the basis of which the Company’s auditors rendered an opinion on the financial statements and there can be no assurance that any differences in such judgments and estimates would not be material, or 45 would not result in material adjustments to Company’s financial information for 2013 or earlier. Risks Relating to the Offer and the Offer Shares Risk on suitability of investment The Offer Shares may not be a suitable investment for all investors. Each prospective investor in the Offer Shares must determine the suitability of that investment in light of its own circumstances. In particular, each prospective investor should: have sufficient knowledge and experience to make a meaningful evaluation of the Company and its businesses, the merits and risks of investing in the Offer Shares and the information contained in this Prospectus; have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Offer Shares and the impact the Offer Shares will have on its overall investment portfolio; have sufficient financial resources and liquidity to bear all the risks of an investment in the Offer Shares, including where the currency for purchasing and receiving dividends on the Offer Shares is different from the potential investor’s currency; understand and be familiar with the behavior of any relevant financial markets; and be able to evaluate (either alone or with the help of a financial advisor) possible scenarios for economic, interest rate and other factors that may affect its investment in the Offer Shares and its ability to bear the applicable risks. Risks relating to market conditions The market price of the Common Shares may be volatile, which could cause the value of investments in the Company to decline. The market price of securities can and does fluctuate, and it is impossible to predict whether the price of the Common Shares will rise or fall or even lose all of its value. The market price of Common Shares could be affected by several factors, including: general market, political and economic conditions; changes in earnings estimates and recommendations by financial analysts; changes in market valuations of listed shares in general and other retail shares in particular; the market value of the assets of the Company; changes to Government policy, legislation or regulations; and general operational and business risks. In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of the Common Shares. 46 In part as a result of the global economic downturn, the global equity markets have experienced price and volume volatility that has affected the share prices of many companies. Share prices for many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. Fluctuations such as these may adversely affect the market price of the Common Shares. Future sales of common shares in the public market could adversely affect the prevailing market price of the common shares and shareholders may experience dilution in their holdings. In order to finance the expansion of the Company’s business and operations, the Board will consider the funding options available to them at the time, which may include the sale of additional Common Shares from the treasury or the issuance of new common shares. If additional funds are raised through the sale or issuance of new equity or equity-linked securities by the Company other than on a pro rata basis to existing shareholders, the percentage ownership of the shareholders may be reduced, shareholders may experience subsequent dilution and/or such securities may have rights, preferences and privileges senior to those of the Offer Shares. Further, the market price of the common shares could decline as a result of future sales of substantial amounts of common shares in the public market or the issuance of new Common 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 common shares or the Company’s ability to raise capital in the future at a time and at a price it deems appropriate. Risks relating to dividend declaration There is no assurance that the Company can or will declare dividends on the Common Shares in the future. Future dividends, if any, will be at the discretion of the Board and will depend upon the Company’s future results of operations and general financial condition, capital requirements, its ability to receive dividends and other distributions and payments from its subsidiaries, foreign exchange rates, legal, regulatory and contractual restrictions, loan obligations and loan covenants, including loan obligations and loan covenants of its subsidiaries, and other factors the Board may deem relevant. Refer to “Dividend Policy” on page [29] for further discussion on the Company’s dividend policy. Risks Relating to the Presentation of Information in This Prospectus Risks associated with pro forma financial information and management accounts The Company has included, examined and reviewed pro forma consolidated financial information elsewhere in this Prospectus because it believes that such information is important to an investor’s understanding of the Company’s expected presentation of its results of operations after the consolidation of the Max’s Entities into the Company. The pro forma consolidated results of operations included herein are necessarily based on certain assumptions, including those identified in the notes to the pro forma consolidated financial statements, and such information is not necessarily indicative of the operating results that would have been achieved had the consolidation been completed prior to such periods, nor is it indicative of future operating results, and should not be relied 47 upon as being so indicative. Certain information presented in this Prospectus is derived from internal statistics or unaudited management accounts that have not been reviewed or audited by external parties. The information from these accounts is also necessarily based on certain assumptions and extrapolation of internally generated data. Such accounts may be subject to revision when audit processes are implemented as part of the Company’s preparation of its financial statements. The Company’s pro forma statements should also be read in conjunction with the historical performance of the Max’s Entities and the Company, as well as information on the Company’s track record, management experience, and market shares – all of which can be found in other parts of this Prospectus. Risks associated with information derived from unofficial publications Certain information in this Prospectus relating to the Philippines and the industry in which the Company competes, including statistics relating to market size, is derived from various Government and private publications. This Prospectus also contains industry information based on publicly available third-party sources. Industry publications generally state that the information 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, including those contained or extracted herein, have not been independently verified by the Company and may not be accurate, complete, up-to-date or consistent with other information compiled within or outside the Philippines. Prospective investors are cautioned accordingly. 48 THE COMPANY Overview of the Business In the year 2014, the Company underwent a change in control and significant expansion of its business and operations. After the completion of a tender offer to acquire the shares of the public shareholders and the disposition by Pancake House Holdings, Inc. and the Aureos Group of their respective interests in the Company on February 24, 2014, the MGOC Shareholders beneficially took control of approximately 89.95% of the Company and subsequently integrated all of their interest in the Max’s Entities into the Company. With the combination of all 14 brands under its portfolio, the Company secured its position as the leader in the casual dining full-service restaurant industry in the Philippines. Since its incorporation in March 2000, the Company’s operating history can be characterized by a successful track record of developing, acquiring, managing and franchising restaurants under numerous well-known brands: ACQUIRED PANCAKE HOUSE LAUNCHED SIZZLIN' STEAK ACQUIRED DENCIO'S LAUNCHED KABISERA NG DENCIO'S ACQUIRED YELLOW CAB INTEGRATION OF MAX'S RESTAURANT, KRISPY KREME, JAMBA JUICE AND MAX'S CORNER BAKERY ACQUIRED SINGKIT Mar‐00 Jun‐04 Oct‐05 May‐06 Jun‐07 Feb‐08 May‐08 Apr‐11 Sep‐11 Dec‐12 Jul‐14 JOINT VENTURE FOR TERIYAKI BOY ACQUIRED LE COEUR DE FRANCE JOINT VENTURE FOR THE CHICKEN RICE SHOP LAUNCHED MAPLE The Company’s leading brands, Max’s Restaurant, Pancake House and Yellow Cab, remain at the forefront of the business. The Company’s operation of global brands Krispy Kreme and Jamba Juice in the Philippines also allowed these brands to gain a strong foothold in the Philippines and even benchmark themselves internationally in terms of product quality and development. Teriyaki Boy and Dencio’s continue to enjoy a high level awareness and specialty brands Maple, Sizzlin’ Steak and Le Coeur De France have gained ground over their years of operation and still exhibit a considerable potential for growth. All together, the 49 brands complement one another and command growing loyalty among their respective niches in the casual dining market. Competitive Strengths Market dominance anchored on strong brand recognition and solid brand equity in the growing casual dining space - Market leadership The Company is the market leader in the Philippine chained full service restaurant dining industry with the aggregated market share of Max’s Restaurant, Pancake House, Teriyaki Boy and Dencio’s of 28.3% in terms of value sales for 2013. In its country report as at November 2013, Euromonitor states that among the chained full service restaurant players, Max’s Restaurant is first in rank with a 14.4% market share and Pancake House has a market share of 8.4%. The Company’s pizza brand, Yellow Cab, enjoys 21.8% market share and ranks second in the chained pizza fast food category as of 2013. Over the course of their long history, the Company’s reliable and iconic brands have captured a substantial portion of the target consumer’s “share of mind” which translates to customer loyalty, further cementing the Company’s leadership position. Nielsen’s Project Food Trips 20133 report showed that Max’s Restaurant registered a brand equity score of 4.9 in 2013, above the Philippine norm of 2.5. The survey measured brand equity based on the favorite brand, recommended brand, willingness to pay a premium and willingness to exert effort to go to a brand’s location. According to the Euromonitor 2013 Report, “Max’s, Inc. is one of the biggest players in fullservice restaurants with its brand Max’s leading other full-service restaurant operators. Meanwhile, international brand Krispy Kreme banks on Filipinos’ sweet tooth, and is among the fastest-growing brands in bakery products fast food.” - Strong brand recognition and solid brand equity The Company’s brands enjoy strong brand recognition and unparalleled brand equity in their respective categories, which puts the Company in a position of clear market dominance. Among its brands, the Company considers Max’s Restaurant, Pancake House, Yellow Cab and Krispy Kreme as its leading brands. The generational appeal of Max’s Restaurant and Pancake House has made each of them institutions in the restaurant industry. Data is based on research conducted by Nielsen from November 14 – December 1, 2013 among 300 males/females aged 16-60 years old from ABCD households who have patronized any food outlet selling ready-to-eat or cooked food for meals or snacks for dine-in, take-out, drive-thru, or delivery in the past 3 months, and are either the purchase decision maker or the payor of purchase. 3 50 Having been in operation for more than seven decades, Max’s Restaurant is a household name that appeals to every age bracket, social class and customer group. Not many local restaurant brands have the longevity of Max’s Restaurant, giving it brand dominance that is difficult to undermine. It also continues to enjoy a strong and continuing customer acceptance, giving the brand a heritage that is both reassuring and familiar. The name Max’s is almost synonymous to fried chicken in the Philippines. Pancake House continues to be the Philippines’ dominant pancake and waffle brand for over four decades. Pancake House has maintained its strong brand recall that translates to the continued steady demand and market share for its products. The brand has been consistently equated with “comfort food” through the enduring appeal of its bestsellers, pancakes, waffles, pan chicken, tacos and spaghetti, which are well complemented by newer favorites that are aligned with its promise of always “Bringing Home Goodness”. The Company continuously makes the brand relevant by introducing new items in the menu which adds to the variety that its customers look forward to, and eventually become their new favorites. Max’s Restaurant and Pancake House have received multiple awards from various industry organizations. Please see table of awards on page [12] of this Prospectus. Yellow Cab quickly rose in popularity as a pizza brand and is a name that is highly relatable for both national and international markets. It remains to be one of the Company’s key brands and has a very strong association with its brand cues--the checkers, the color yellow, Vespa bikes used for delivery and its industrial-look pizza box. It is in a unique position to grow its market share. Krispy Kreme is one of the top foreign food brands in the bakery products fastfood category that has achieved a nationwide appeal. The Krispy Kreme brand has several unique elements that have helped create a special bond with its customers. The doughnuts, the signature product of the brand, which are made from a secret recipe, have a one of a kind taste that generations of loyal customers have grown to love. Jamba Juice is the Company’s answer to a growing health and wellness trend, addressing new consumer preferences and taste. Teriyaki Boy and Dencio’s both continue to possess strong brand recall, having pioneered in the concepts of affordable Japanese dining and Filipino restobars, respectively. - Growing casual dining space The Company’s dominance places it in a prime position to take advantage of the strong economic fundamentals that continue to serve as a solid foundation for growth within the casual dining space. As the industry leader, Max’s Group is well positioned to take advantage of the growing Filipino population and the rising income levels of Filipino households. By 2018, 66% of households will have incomes above USD 5,0004, signaling stronger purchasing power and increased discretionary spending. In 2013, 4.2% of household expenditure was directed to the hotel and restaurant industry; an increase from 4.1% in 2012. Also for the 4 Estimates by the Bank of the Philippine Islands 51 hotel and restaurant industry, first quarter 2014 expenditure was higher by 6.3% compared to the same period in 20135. Remittances from overseas Filipino workers (OFWs) are escalating steadily, with a total of USD 33.0 billion projected to flow into the country in 20186. Domestic consumption will be further driven by the booming business process outsourcing (BPO) industry, which is forecast to be worth around USD 25.0 billion by 20167. The Company’s leadership position in the casual dining industry allows it to anchor its expansion on trends that not only suggest economic progression for the country as a whole, but also signal tremendous opportunities for players in the casual dining space. Breadth of brands, extensive network and varied store formats The Company’s dominant position in the market is owed to its wide portfolio of brands, extensive store network and ability to present itself through varied store formats. The following are the brands held and operated by the Company and its various Subsidiaries: 5 Household expenditure data sourced from the National Statistics Association of the Philippines Estimates by the Bank of the Philippine Islands 7 Estimates by the Business Processing Association of the Philippines 6 52 Brand Operating Entity/ies Max’s Restaurant Max’s Kitchen, Inc. Max’s Makati, Inc. Max’s Baclaran, Inc. Max’s (Ermita), Inc. Chickens R’ Us, Inc. Max’s Express Restaurants, Inc. AD Circles, Inc. Max’s Circles, Inc. Max’s SM Marikina, Inc. Max’s Franchising, Inc. Square Top, Inc. Max’s Corner Bakery Max’s Bakeshop, Inc. Krispy Kreme The Real American Doughnut Company, Inc. Jamba Juice Fresh and Healthy Juice Boosters, Inc. Pancake House Max’s Group, Inc. (formerly Pancake House, Inc.) PCK MTBI, Inc. Always Happy Greenhills, Inc. PCKH-AMC, Inc. PCKH-MB, Inc. Always Happy BGC, Inc. PCK Palawan, Inc. Yellow Cab Yellow Cab Food Corporation YCPI Pizza Ventures, Inc. Teriyaki Boy Teriyaki Boy Group, Inc. TBGI Marilao, Inc. TBGI Trinoma, Inc. TBoy-MS, Inc. PCK Palawan, Inc. Dencio’s Max’s Group, Inc. (formerly Pancake House, Inc.) 53 Kabisera ng Dencio’s Max’s Group, Inc. (formerly Pancake House, Inc.) Le Coeur de France Boulangerie Francaise, Inc. Maple Max’s Group, Inc. (formerly Pancake House, Inc.) Sizzlin’ Steak Teriyaki Boy Group, Inc. Singkit 88 Just Asian, Inc. The Chicken Rice Shop CRP Philippines, Inc. The breadth of the Company’s brand portfolio of food offerings span a diverse range of cuisines from Filipino fare, American staples, pizza and popular Japanese meals, to baked goods, doughnuts, coffee, and healthy smoothies. The Company’s long history of operating and managing outlets and brands in the Philippines has given it in-depth knowledge of the local market and its target consumers. The Company’s current portfolio satisfies a broad range of consumer preferences, tastes, and market segments: Max’s Restaurant for family-oriented Filipino cuisine; Pancake House for all-day dining with American-influenced cuisine; Yellow Cab for New York-style premium pizzas; Dencio’s for Filipino restobar and Kabisera for premium Filipino dining; Teriyaki Boy for Japanese favorites; Sizzlin’ Steak for affordable rice meals; Maple for all-day premium dinein with a western influence; Max’s Corner Bakery for grab and go baked goods and Le Coeur de France for freshly baked breads; and the entry of well-known foreign brands Krispy Kreme, the world famous melt-in-your-mouth doughnut brand, and Jamba Juice for healthy beverages with a California vibe. The Company populates a significant portion of malls and other retail developments. The Company’s brands can be found in majority of shopping malls and commercial areas in the country and as at June 30, 2014, its 283 outlets take up a total of approximately 44,000 square meters of leasable space. The Company believes that its brands are considered as “anchor brands” of leading mall and retail developers in the Philippines. Correspondingly, its portfolio of brands catering to different consumer tastes and market demographics has allowed it to become a preferred tenant of mall and retail developers and generally enjoy priority in site location with the ability to influence consumer traffic in malls and other retail areas. The Company also locates its outlets in high-traffic commercial (non-mall) hubs in key sites all over the country, with approximately 215 outlets occupying approximately 53,000 square meters of operating space. The Company’s stores are generally situated in strategic locations primarily in urban areas where there is high foot traffic and a steady flow of consumers. Its portfolio of brands enables the Group to set up outlets in major metropolitan cities as well as provincial growth cities, tailor-fitted depending on market demand, preferences, and potential, and locate in non-traditional sites like transport terminals, schools and hospitals. The growth in the Company’s store network and revenues is also a testament to the quality of management and operations and the continued relevance of the Company’s brands. 54 As the country experiences a significant increase in retail space available for casual dining in various development projects, the Company intends to continue locating its outlets in various proposed mall developments, as well as expand the presence of the various brands’ outlets in newer commercial retail areas such as BPO developments. The Company has an extensive domestic store network in the Philippines with a foothold in the international market, exhibiting the extent of its market leadership in the local casual dining category. Currently having a total of more than 525 outlets, with 324 outlets located in Metro Manila, 117 outlets in Northern and Southern Luzon, 29 outlets in the Visayas, and 28 outlets in Mindanao, and 27 outlets outside the Philippines, the Company business is in a position to capitalize on its vast reach to existing and potential customers worldwide. The following table shows the number of stores operated under each of the Company’s brands in the Philippines and abroad as at June 30, 2014: Brand Philippines Max’s Restaurant Krispy Kreme Jamba Juice Pancake Maple Yellow Cab Teriyaki Boy Le Coeur De France The Chicken Rice Shop Dencios Sizzlin Steak Total International Total 141 49 11 108 3 104 35 14 2 15 16 15 6 156 49 11 114 3 110 35 14 2 15 16 498 27 525 6 Well-attuned to the market trends and consumer preferences, the Company believes that it has the ability to identify potential cities and locations for eventual expansion within and outside Metro Manila. In 2013 up to June 30, 2014, there are 47 net additions to the Group’s store network, 45 of which are located domestically and 2 in international markets. The Company currently has 27 international outlets in the United States, Middle East, Canada and Malaysia. The Company has successfully established Max’s Restaurant outlets overseas in places where there is a large concentration of Filipinos, strengthening the ties the market has to the Company’s various brands. Two Max’s Restaurant outlets were added to its international 55 store network in Las Vegas in November 2013 and in Alberta, Canada in June 2014. Pancake House has also opened 6 outlets in Malaysia and an outlet is soon to open in Brunei. With Yellow Cab appealing to the mainstream market where the demand for pizza is largest, it has opened 6 outlets in Qatar and its ten-year development schedule includes opening a minimum of 15 new outlets in the Kingdom of Saudi Arabia. Yellow Cab and Teriyaki Boy outlets are plan to be open in Hawaii. The Company has the ability to present its outlets in different store formats such as standalone stores, in-line stores, mall outlets, drive thru, kiosks and 24-hour service outlets, enabling it to capture the diverse needs and preferences of the market. The Company’s flexibility to offer different store formats enables it to address varying market needs and requirements and tap onto demands created by new industry and country trends. For instance, to accommodate the growing business process outsourcing industry in the Philippines, some branches of Yellow Cab are open for 24 hours; a number of Max’s Restaurant branches have function rooms for social gatherings as well as business conferences, and Krispy Kreme outlets vary from stand-alone stores with drive thru, to kiosks in shopping malls The Company has the flexibility to offer various store formats and to adjust its occupancy potential depending on the mall design, capacity and market concept. Its different store formats has allowed the Company to adapt to market demographics, site location, and size of leasable area, with store areas ranging from 50 sq.m. to 300 sq.m. In 2013, the Company opened 36 stores in key retail areas in the country. It has opened 11 stores in 2014, with approximately 39 more outlets planned as net additions to the Company’s store network for the remainder of the year. Such flexibilities have allowed the Company to become a preferred tenant of mall and retail developers, and be granted priority in terms of site selection. The same flexibilities also allow it to be present in non-traditional locations like transport terminals, schools and hospitals. The growth in the Company’s store network and revenues is also a testament to the quality of management and operations and the continued relevance of the Company’s brands. Operational excellence, quality consciousness and innovation Underpinning years of market dominance, the Company prides itself with having a long history of providing quality food and service to the Philippine market, leading its brands to become synonymous with good food, quality service, and a clean and inviting store environment. As the Company considers food quality and consistency essential to its operations, it requires that adequate operating systems and practices are observed from source to store, through the control of commissary operations, regular training of employees and franchisees, and observing robust monitoring systems. 56 Substantially all of the Group’s supply requirements for company-owned and franchised stores are being serviced by Company-owned and controlled commissaries, ensuring the quality and consistency of the Group’s products. Operating these commissaries and warehouses are Subsidiaries No Bia and STI, and both have been awarded various citations and certifications. No Bia and STI primarily supply to the 141 outlets of Max’s Restaurant and 68 combined stores of Teriyaki Boy, Dencio’s, Kabisera, Sizzlin’ Steak and The Chicken Rice Shop located throughout the Philippines. Both commissaries are situated within Metro Manila. The No Bia and STI commissaries are governed by the NMIS with yearly evaluation and accreditation. NMIS is responsible for implementing policies and procedures and rules relative to production of raw materials local and imported, through the various stages of handling, inspection, processing, storage and preservation of meat products. Both commissaries received an “AAA” accreditation as well as passed the “Current Good Manufacturing Practices” audit from the said agency. NMIS inspects the commissaries policies and procedures including layout and infrastructure, and meat handling and processing procedures. To ensure compliance to NMIS standards, the agency’s officers regularly visit in the commissaries to monitor the operations of the commissaries. Aside from the NMIS certification, No Bia and STI are HACCP certified in the production of ready to fry whole chicken while STI is HACCP certified for the processing of Lechon Kawali and Pork Pata. Accreditation is issued by Certification International, Phils. Inc., an affiliate of the British company Certification International U.K. Ltd. HACCP certification is based on the international code of practice and general principles of food hygiene, thus, ensuring the safety and suitability of food for consumption. All accreditations are handled directly by the commissaries. Strong emphasis on quality of food and service benchmarked against international best practices has been echoed throughout the Company over the years. The Company believes that this has translated to a steady growth for the Company. In addition to obtaining requisite local government permits and licenses including sanitary permits, certificates of water potability, fire safety inspection permits, occupancy permits, building permits, locational clearances and business permits, LLDA clearances, import licenses, permits to operate from the DENR and licenses to operate from the DOLE, No Bia and STI have been granted various accreditations, awards and citations. 57 The following are the accreditations, licenses, awards and citations received and/or obtained by the commissaries: Accrediting Agency/ Awarding-Giving Body Accreditations, Licenses, Awards and Citations Received For No Bia: National Meat Inspection Services (NMIS) Good Manufacturing Practices (GMP) Certificate Certificate of Accreditation as Meat Processing Plant – “AAA” Category Hazard Analysis and Critical Control Point Certificate (HACCP) for ready to fry whole chicken Search for the Best Meat Processing Plant 2009 - Regional Winner for “AA” Category Search for the Best Meat Processing Plant 2009 - National Winner for “AA” Category Food and Drug Authority (FDA) License to Operate as a Food Manufacturer for Multi-Products and Exporter Department of Agriculture License Renewal for Minimum Access Volume Quota Halal Development Institute of the Philippines Halal Certificate for Distribution and Warehousing of Max’s Banana Ketchup Halal Certificate for the MIASCOR processing area Bureau of Fisheries and Aquatic Resources Importer of Fresh, Chilled, and Frozen Fish and Fishery/Aquatic Products Bureau of Animal Industry Permit to Transport Fully-Processed Meat Products to FMDfree areas and FMD buffer zones For STI: National Meat Inspection Service (NMIS) Good Manufacturing Practices (GMP) Certificate Certificate of Accreditation as Meat Processing Plant – “AAA” Category HACCP – Processing of Ready to Fry Fresh Chicken Certificate HACCP Certification for processing of Lechon Kawali HACCP Certification for processing of Pork Pata Accreditation as Importer – Meat Processor 58 Food and Drug Administration (FDA) License to operate as Food Manufacturer of Multi Products Certificate of Current Good Manufacturing Practice Bureau of Fisheries and Aquatic Resources Importer of Fresh, Chilled, and Frozen Fish and Fishery/Aquatic Products Bureau of Animal Industry Permit to Transport Fully-Processed Meat Products to FMDfree areas and FMD buffer zones Halal Development Institute of the Philippines Halal Certificate for Distribution and Warehousing of Max’s Banana Ketchup National Meat Inspection Service with the support of the Inter-Agency Committee on Meat Establishment Amenities and Technology of the Department of Health, Department of Environment and Natural Resources and the Department of Interior and Local Government Regional Winner (NCR), Search for the Best Meat Establishment “AA” Meat Processing Plant, 2006 National Winner (NCR), Search for the Best Meat Establishment “AA” Meat Processing Plant, 2006 Regional Winner (NCR), Search for the Best Meat Establishment “AAA” Meat Processing Plant, 2008 National Finalist (NCR), Search for the Best Meat Establishment “AAA” Meat Processing Plant, 2008 Regional Winner (NCR), Search for the Best Meat Establishment “AAA” Meat Processing Plant, 2009 National Finalist (NCR), Search for the Best Meat Establishment “AAA” Meat Processing Plant, 2009 Aside from maintaining quality of its products through excellence in commissary operations, the Company also observes high standards to achieve operational excellence for store service and quality and a consistent front-of-the-house service platform for all brands. Initiated and currently practiced for Max’s Restaurant, quality system assessment and internal and third party audits will be implemented throughout the Group’s brands. These assessment and audit processes are based on strict criteria which include sales improvement, adherence to methods, quality assurance standards, customer engagement, consistency in quality, speed of service, sanitation and hygiene, and condition of the stores. To uphold the level of product and service quality, the Company also has a robust monitoring system based on customer feedback. The Company monitors observance to standards through mystery guest shoppers, direct surveys, customer service forms, and social media such as Facebook and Twitter. The Company likewise monitors its social media pages and brand websites, especially the comments sections and ensures that customer concerns are properly and quickly addressed. Maintenance of quality and operational excellence has been ingrained in the Company’s corporate culture and is practiced by all employees, from servers and store managers, to 59 senior executives and principals. It gives emphasis on training and regularly holds training sessions and seminars for all its employees and franchisees on customer service, food safety and handling, and store management, making certain that its employees and franchisees uphold the level of operational excellence and quality that the Company is known for. Employees are trained, depending on their responsibilities, on customer service, food safety and handling, and store management and operations. The Company’s training programs facilitate the proper observance of Company and industry regulations, adherence to the Company’s quality and service levels, and dissemination of the Company’s vision and growth plans. The Group places much emphasis on training to achieve operational excellence and Krispy Kreme International has consistently recognized the Philippine operations for its excellence in hospitality/service, product quality, marketing, and operations and as such has requested assistance in providing training and support for 7 international markets. The Group’s management has a high degree of consciousness for innovation and improvement and accordingly spearheads various innovative programs in order to improve quality and efficiency of operations and achieve product excellence. Exhibiting management’s conscious thrust for innovation, Krispy Kreme Philippines initiated a strategic alliance with Hershey’s for the development of new flavors and products for the Krispy Kreme brand in the Philippines. It is this local initiative that was taken up by Krispy Kreme International and was promoted globally. Throughout the Group, management continues to launch initiatives including constant updating of methods to maintain and improve on the delivery of product quality and service standards, production efficiencies and processes, brand image and store ambiance. The Company believes it is the thrust to remain relevant that has allowed the Group to seize opportunities, anticipate and overcome challenges, and be able to adapt to changing customer preferences. Ability to achieve economies of scale In addition to maintaining consistent quality for its food products, the Company’s commissaries also allow the Company to procure raw materials for the various outlets to achieve economies of scale. Centralized purchasing across brands allows the Company to exercise additional bargaining power with its suppliers and negotiate for better terms or better quality of raw materials. As to the engagement of third-party logistics providers for the delivery of food ingredients and products to its outlets, the Company is able to leverage its position through negotiations and the execution of long-term contracts with third-party logistics providers to service a set number of the Company’s outlets in a given coverage area. Centralized business functions, directly-owned and operated/controlled commissaries, and long-standing relationships with suppliers and service providers have allowed the Company to successfully manage its business and operate its stores amid a wide and extensive domestic and international network, lower costs and improve working capital cycles through improved supply terms. 60 The Company is also able to leverage on its wide-range of brands and outlets in negotiating and obtaining satisfactory terms for its lease agreements with mall operators and third parties. Strong management with principal shareholder support The business of the Group is characterized by strong support from its principal shareholders who are involved in management and operations, providing the Company with a wealth of experience and high degree of accountability. The Group’s shareholders represent the second and third generations of the founding families who are now continuing the entrepreneurial tradition of managing and growing the Max’s Entities. Their focus on operations and business development has driven continuous growth and expansion of the Max’s Entities and the steady rise in revenues. Complemented by a strong professional management team in functional areas including but not limited to finance, marketing, information technology, human resources, supply chain, quality assurance and business development, the Company is able to pursue and execute its growth strategy. Corporate culture of employee growth and loyalty The Company believes that its corporate culture fosters and encourages human capital development and learning through in-house training programs and succession planning. Employees are encouraged to rise from the ranks and eventually hold key management positions. As at the date of this Prospectus, 51% of the Company’s store managers are homegrown and have been in the Company for 4 years on average. Store managers are also encouraged to guide the career paths of their directly-managed employees, which the Company believes increases employee satisfaction and loyalty. Company-wide training programs are undertaken by employees throughout the organization, resulting to high standards of service and product quality directed towards the growth of the business. The Company strongly believes that employee satisfaction and loyalty eventually translates to excellent service which leads to greater customer loyalty. 61 Proven ability to expand in national and international markets The Company attributes its constant expansion over the years to: the Group’s possessing the requisite systems, processes, structures, management, personnel and culture to meet targets and improve its brand equity; the Group being a direct producer and manufacturer of its products which places it in a position to be fully aware of customer demand and exercise prudence and good sense in undertaking expansions; management’s ability to design brand development criteria for new markets owing to decades of direct operating experience; and possessing a good understanding of the regulatory, social and political environments in which the Group operates and their implications on the growth strategies. The Group has established collaborative alliances with various suppliers, contractors and designers that has allowed it to implement expansion plans within reasonable execution cycles and manage costs. Strategies The Company aspires to be the most-loved, top-of-mind restaurant group in the Philippines, providing a memorable dining experience to Filipinos and other markets domestically and overseas by leveraging its operational and management excellence and high standards of product and service quality. The Company intends to achieve this through the following: Grow existing brands to keep market leadership In view of expected growth in consumer spending in Metro Manila and in other key cities, the Company intends to intensify its efforts to grow the brands and maintain its market leadership. - Focus on leading brands The Company will focus on its leading brands Max’s Restaurant and Pancake House, and increase the dominance of Krispy Kreme and Yellow Cab in their respective categories. By leveraging on the strength of these brands, the objective of the Company is to increase store network of these brands, introduce new formats and expand their product offerings to ensure the brands’ continued relevance and customer acceptance. - Invigorate Dencio’s, Teriyaki Boy and Sizzlin’ Steak Building on the strength of the brands Dencio’s and Teriyaki Boy which continue to enjoy a strong brand recall, and the novelty introduced by Sizzlin’ Steak, the Company plans to 62 reposition these brands and allow them to recapture the market categories which these brands pioneered. - Selectively expand niche brands In order to preserve the loyalty of the customers for niche brands Maple, Jamba Juice, Kabisera and Le Coeur de France, the Company will harness the potential of these brands by selectively expanding in choice locations and markets. - Increase revenues by expanding international operations The Company shall actively pursue new and underserved target markets, expanding the Company’s consumer base, particularly in the global space. Recognizing the immediate potential of the following brands to go global, the Company will be expanding Max’s Restaurant, Pancake House, Yellow Cab and Teriyaki Boy into the international market. As at June 30, 2014, Max’s Restaurants has 12 stores in North America and 3 stores in the Middle East; Pancake House has 6 stores in Malaysia; Yellow Cab currently has 6 stores in Qatar and its ten-year development schedule includes opening a minimum of 15 new outlets in the Kingdom of Saudi Arabia; Yellow Cab and Teriyaki Boy outlets are planned to be opened in Hawaii. The Company sees Asia Pacific (excluding Philippines) and the Middle East as key growth markets with their high concentration of overseas Filipino workers. Complete the Integration and realize operating efficiencies of the larger combined group - Complete the Integration On 24 February 2014, the Max’s Group completed the acquisition of Pancake House and its portfolio of brands. The combination of the Max’s Group and Pancake House Group created the country’s leading chained casual dining group with aggregate revenues of P9.22 billion for the year ended December 31, 2013 and P4.58 billion for the six-month period ended June 30, 2014 (on a pro-forma basis). Having brought together two of the country’s largest and successful heritage brands that share a long history of brand recognition and innovation, customer loyalty, and proven track records for expansion, the combined business knowledge, expertise and best practices observed by the management of the Company and its Subsidiaries will be applied to the entire Group. The Company continues to assess and will adopt the appropriate corporate structure for the Company and its Subsidiaries in accordance and consistent with its plan of Integration to achieve operating and cost efficiencies for the Group. The plan of Integration includes consolidating certain Subsidiaries. Integration plans are currently being implemented. 63 - Realize operating efficiencies of the larger combined group The Company shall continue to apply best market practices to its entire portfolio of brands and take advantage of operational synergies. Given a larger combined entity, the Company is in the process of effectively centralizing its backroom operations and shared service departments, such as finance and accounting, human resources, supply chain, marketing, project design and engineering, legal, procurement and information and technology units, which the Company believes shall result to cost savings and increased efficiency across the entire organization. Furthermore, the Company shall continue consolidating the commissaries for efficiency, standardization, and maintenance of product quality. As at June 30, 2014, the Company has a total of 4 commissaries serving its different brands and plans to consolidate these into 3 commissaries by the end of 2015. Aside from production efficiencies resulting from the commissary consolidation, steps are being undertaken to centralize procurement of raw materials and ingredients across all commissaries. Centralized procurement shall provide the Company with further bargaining power with its suppliers, allowing the Company to negotiate for more favorable commercial terms or better quality of raw materials and ingredients. As an integral component of adopting operational synergies, the Company shall continue to develop its strong unified service culture and leadership team and drive a performance-based management in an aligned organization. 64 Pursue diverse revenue channels - Additional accessibility to the consumer The Company intends to intensify its distribution platform consisting of its delivery service, curbside ordering facility, and online delivery systems for wider reach and to the customer. Augmenting the Company’s physical stores are its delivery services currently being employed by Max’s Restaurant, Pancake House, Teriyaki Boy, Yellow Cab and Krispy Kreme. Yellow Cab, in particular, has a single central number and 24-hour delivery, allowing its customers access to its products any time of the day. Max’s Restaurant’s online ordering system allows for the receipt of orders within and outside the Philippines for delivery of food and beverage products to loved ones in the Philippines. The Company plans to adopt a similar online ordering system for most of its brands by 2015, taking advantage of the increasing internet connectivity of consumers and the rising internet penetration rate in the Philippines, ultimately expanding the Company’s market reach. The Company shall also continue to expand its existing store network through Companyowned outlets and franchises, providing the market with increased accessibility and convenience. - Centers to support dine-in store network Supplementing the Company’s extensive dine-in store network are multiple revenue centers such as delivery services, curbside ordering facility and online ordering system. These services provide customers with added convenience and increased accessibility to the Company’s brands and products. As at June 30, 2014, 5 of the Company’s brands, namely Max’s Restaurant, Pancake House, Yellow Cab, Krispy Kreme and Teriyaki Boy, have embarked on aggressive delivery services, including a 24-hour delivery service for areas near the vicinity of certain Yellow Cab outlets. Combined sales through delivery have increased by 19% from 2012 to 2013. 65 The Company’s online ordering system allows for the receipt of orders within and outside the Philippines for delivery of food and beverage products within the Philippines. This online ordering initiative has been in place for the Max’s Restaurant, Krispy Kreme and Yellow Cab brands. Combined sales through online orders have increased by 21% from 2012 to 2013. The Company’s online ordering system allows it to take advantage of the increasing internet connectivity of consumers and the rising internet penetration rate in the Philippines, leading to a broader market reach and wider consumer base. The following table shows the recorded sales growth from delivery services of these brands from 2012 to 2013: Brand Max’s Restaurant Krispy Kreme Pancake Yellow Cab Teriyaki Boy - Percentage Growth 16% 389% 438% 17% 100% Expanding into new product lines and store formats The Company is planning to strategically develop its current brand offerings by, among others, the introduction of new product lines or new formats. New product lines or formats will enable the Company to cater to different market needs and preferences. Similar to the introduction of my Pancake products, the Company intends to introduce new products in its outlets, especially in its overseas branches, to maintain interest in the Company with its innovative products and to always pique the interests of its target market. The Company also plans to tap other distribution channels for these new products. By offering different store formats, the Company is able to adapt to market preferences and available store location and space. The Company plans to continue to roll-out outlets in different store formats, providing the market with better access to the Company’s stores and products and added convenience. Further, to distinguish itself from other concepts of the same restaurant class, Max’s Restaurant will continue to enhance its systems and operations for its other revenue centers to address the growing demand from bulk-orders, catering and functions and events, as well as provide for additional delivery hubs and take-out counters. - Cater to institutional clients Aside from its branch network, the Company intends to develop itself as a branded concessionaire. Accordingly, it shall aggressively pursue opportunities to cater to institutional clients in addition to its current clientele which include airlines, a hotel and 66 resort operator and other retailers. This will allow the Company to tap new markets for the Company’s products and diversify the Company’s sources of income. The following table shows the amount of institutional sales from 4 of the Company’s brands and the respective contribution to the Group’s total revenues for the periods presented (on a pro-forma basis): For the six months ended June 30, 2014 For the year ended December 31, 2013 Max's Restaurant Max's Corner Bakery Krispy Kreme Le Coeur de France Total 37.2 18.6 47.6 10.6 113.9 30.1 45.6 33.8 21.0 130.5 Max's Restaurant Max's Corner Bakery Krispy Kreme Le Coeur de France 0.8% 0.4% 1.0% 0.2% 0.3% 0.5% 0.4% 0.2% Total 2.5% 1.4% In P Mn - New projects to complement the business The Company’s Subsidiary, RooM Ventures Corp. is currently pursuing the development of Meranti, a hotel project adjacent to the heritage store of Max’s Restaurant in Scout Tuason, Quezon City. The project was initially conceptualized to offer the quality and value that the Max’s brand is known to provide. It is intended to leverage on, as well as complement, the Group’s service capabilities, and hopes to also achieve the status of a brand that delivers on value and offers quality for its price. Given the Company’s expertise in the service industry, the development is aimed to target the same market that the Company’s food market serves. In conceptualizing this hotel, the world-class Filipino architectural firm of Architecture Budji+Royal Design has been commissioned to plan the project and in partnership with Tangible, a Singaporean firm, the hotel’s brand identity and full brand architecture strategy for the hotel was created. The hotel will be targeting the domestic and foreign tourists, business travelers and locals who indulge in “staycations.” The hotel will have a total of approximately 60 rooms and will be equipped with recreational facilities at the start of commercial operations in 2015. 67 Continue to evaluate business expansion opportunities including brand acquisitions and franchise expansion The Company shall continue to evaluate opportunities to enhance its current portfolio and continue to develop its current brand offerings for strategic expansion. Other brands, both foreign and local, may be added to its current portfolio based on market trends, readiness and acceptability of the target market, market potential and forecasted growth, as well as fit of the target brand into the Company’s current offerings and corporate culture. The Company shall likewise evaluate and consider brands targeting the middle to upper market segments, addressing the market’s demand for premium products and in line with the rising incomes of the middle class. Drawing from its experience with Maple, an all-day American inspired premium dining full-service restaurant which opened in 2013 and currently has 4 branches in upscale-market areas such as the San Antonio Plaza Arcade, Shangri-La Mall, Commerce Center at Filinvest Corporate City and Ayala Terraces Cebu. New brands, whether these are local brands that are available for acquisition by the Company, foreign brands that are being offered for franchising, or brands that may be created by the Company, will allow the Company to reach out to new or underserved markets, reinvigorate and reinforce interest and loyalty to the Company, and enable the Company to capture a larger portion of the consumer’s “share of wallet”. By introducing new brands to the market, the Company shall rely on the capabilities and expertise of its management team and key executives. With a now larger network of store outlets and a more diverse set of brands, the Company has more to offer the market in terms of products and dining experiences. The Company plans to take advantage of the breadth of its portfolio by actively expanding into locations with adequate target market size and possess a certain level of readiness and acceptability of the Company’s brands and product offerings. The Company shall track and monitor the growth and development of shopping malls and other commercial retail areas throughout the country and overseas where there is a sizeable market for the Company’s products and plans to open outlets at the same rate as mall growth. With the Company’s extensive and attractive brand portfolio, the Company is optimistic that it can secure key store locations in upcoming mall and retail developments. The Company shall continue to expand its franchise model. Out of the planned outlets in 2014 and 2015, the Company targets approximately 20 and 33 stores, respectively, to be established and managed by franchisees. To ensure that franchisees maintain the same standards of quality of the Company, regular inspections, both announced and unannounced, shall be conducted by the Company’s quality control teams. Trainings and seminars shall be conducted for the employees of these franchises and the franchise holders themselves. The further development of its franchise model allows the Company to expand in a faster pace and in more far-flung areas, increasing the visibility and accessibility of its brands both domestically and overseas. 68 Through the years, the Group has been joining franchise conventions and expos to introduce its brands to potential franchisees. Given the Group’s success in franchising, current franchisees are expanding to other sites. Franchise partners have also successfully referred other franchisees to the network. In the recent PFA Expo held from July 16 – 20, 2014, in which the Company participated, the Company experienced a 300% growth in franchise applications across the brands Max’s Restaurants, Pancake House, Yellow Cab, Teriyaki Boy and Dencio’s, signaling the tremendous appeal of these brands. The Company shall utilize its franchise network, in particular, to boost its presence especially in provincial areas. Continue to attract, develop and retain key talent across all levels The Company, having grown in employee size and job complexity, is formalizing various human resource and personnel systems in the effort to attract, retain, grow and engage its employees. Performance and potential are key factors that will be considered in developing and in moving talents up, along and across the business units. Jobs will be regularly and systematically reviewed and evaluated to ensure equitability and competitiveness of compensation. Rewards systems will continue to be performance-based and aligned with the Company’s philosophy and values. 69 History The Company traces its history to a well-established record of restaurant operations characterized by comfort food and good service. As early as 1945, the first bar and café called Max’s started operations in Scout Tuason, Quezon City to cater to the American soldiers stationed along the nearby South Market Street (later on renamed Alejandro Roces Avenue). It served food familiar to the soldiers, among them steaks and fried chicken, using recipes developed by Ruby S. Trota. In early 1950, the restaurant operations were formally incorporated as and into Q.C. Max’s, Inc., with Mr. and Mrs. Maximo F. Gimenez, Mr. and Mrs. Claro J. Trota, and Mrs. Felipa Sanvictores as founders. Over time, various restaurant outlets located itself within the Philippines, operating under the different Max’s Entities. In 1970, Pancake House opened its first restaurant in Magallanes to introduce freshly made pancakes and waffles in varied flavors to a predominantly rice-based consuming market. In 1974, Sta. Rosa Food Services Corporation (“SRFSC”) was incorporated to handle the management and operation of Pancake House. In 1978, following the successful launch of the first franchised outlet in Greenhills, San Juan, more Pancake House outlets – both company-owned and franchised – opened in strategic sites. Operations expanded steadily, requiring the setting up of a central commissary to support the logistical and operational needs of the growing number of restaurants. In early 2000, all of Pancake House’s operating assets were acquired by the Company, and in December 2000, the Company was listed on the Philippine Stock Exchange. The Company’s restaurants did not limit themselves to the Philippine setting. In 1982, Max’s opened its first outlet outside the Philippines in San Francisco, California, USA. In 1984, Max’s Los Angeles opened. To date, there are a total of 12 Max’s Restaurant outlets in North America. In 2007, Pancake House marked its entry into the international market with its first location in Kuala Lumpur, Malaysia. A second Pancake House outlet was opened in Kota Kinabalu, Malaysia in 2008. The Company grew its stable of brands with its acquisition and development of Dencio’s in 2004 and entered into a joint venture with Mr. Bryan Tiu for the operation of Teriyaki Boy in 2005. It acquired Singkit in 2006. It launched Sizzlin’ Steak in 2007 and acquired Le Coeur de France in February 2008. It entered into a joint venture for the introduction of The Chicken Rice Shop in April 2011. A few months later, or on September 2011, it acquired Yellow Cab. Maple was launched in December 2012. In the year 2014, the Company underwent a change in control and significant expansion of its business and operations. After the completion of a tender offer to acquire the shares of the public shareholders and the disposition by Pancake House Holdings, Inc. and the Aureos Group of their respective interests in the Company on February 24, 2014, the MGOC Shareholders beneficially took control of approximately 89.95% of the Company and subsequently integrated all of their interest in the Max’s Entities into the Company. 70 The combination of the Max’s Group and Pancake House created the country’s leading chained full service restaurant group. It brought together two of the Philippines’ largest and historically successful heritage brands that share a long history of brand recognition and innovation, customer loyalty, and proven track records for expansion. 71 72 Principal Brands and Products The Company, by itself or through its subsidiaries, owns and has the right to operate and market 11 brands, and the license to operate foreign brands Krispy Kreme, Jamba Juice and The Chicken Rice Shop in the Philippines. The Company’s dominant position in the market is owed to its wide portfolio of brands, extensive store network and ability to present itself through varied store formats. The breadth of the Company’s brand portfolio of food offerings span a diverse range of cuisines from Filipino fare, American staples, pizza and popular Japanese meals, to baked goods, doughnuts, coffee, and healthy smoothies. The Company’s current portfolio satisfies a broad range of consumer preferences, tastes, and market segments, with: Its local brands- Max’s Restaurant for family-oriented Filipino cuisine Pancake House for all-day dining with an American-influenced cuisine Yellow Cab for New York-style premium pizzas Dencio’s for Filipino restobar Kabisera ng Dencio’s for premium Filipino dining Teriyaki Boy for affordable Japanese favorites Sizzlin’ Steak for affordable rice meals Maple for all-day premium dine-in with a western influence Max’s Corner Bakery for grab and go baked goods Le Coeur de France for freshly baked breads, and Singkit for Chinese take-out food Its foreign brands- Krispy Kreme for the world famous melt-in-your-mouth doughnuts, Jamba Juice for healthy beverages with a California vibe, and The Chicken Rice Shop. The following discussion shows the profile, growth history and extent of operation, and contribution to revenue of the Company by each of the brands: 73 Max’s Restaurant The House that Fried Chicken Built Max’s Restaurant is the Company’s flagship brand. The rich heritage and trusted brand of Max’s Restaurant comes from a proven track record in delivering world class food with the best quality of customer service. With almost 70 years of experience, the brand’s popularity is evidenced by Max’s Restaurants’ clear dominance of its market segment. Based on Euromonitor’s report, it ranks no. 1 with a market share of 14.4% in the chained full service restaurant category. Max’s is a brand driven by passion and excellence. It is a Filipino tradition passed down from generation to generation, serving excellent food and creating the best customer experience which has enabled it to continue to grow. It is a restaurant that bears witness to the Filipinos’ love of food, family and celebrations. It started as a family-oriented destination but has evolved and adapted to the changing Filipino lifestyle and dining behavior. Max’s Restaurant has different store formats and flexibility of menu which enables it to cater to different customer appetites, preferences and paying capacity. It has consistently sustained its market relevance by keeping its commitment to food quality and service and value-for-money proposition in an ever-changing consumer landscape and remains to be a trusted brand. Max’s core product, the fried chicken, comes from a secret recipe that has been passed on through generations. Its crispy skin and delicious, tender meat allow the diners to consume it all the way to the bone, prompting the adoption of the brand’s official tagline, “Sarap to the bones.” The name Max’s is almost synonymous to fried chicken in the Philippines. In addition, Max’s Restaurant counts among its bestsellers classic Filipino favorites like karekare, crispy pata, pancit canton and lumpia. Max’s Restaurant enjoys an 18 million customer count for 2013. To the Company, this demonstrates brand popularity and customer loyalty. According to Euromonitor, “The long-standing presence of Max’s Restaurant in the Philippines makes it among the most-loved of full-service restaurants in the country. Known for its sarap-to-the-bones fried chicken served with sweet potato fries, the chain has become a family dining tradition to middle-income Filipinos who crave the familiar home-cooked food in its restaurants.” It has grown to 141 branches nationwide, mainly concentrated in Metro Manila and urban centers outside Metro Manila. Max’s Restaurant has had international presence for over 30 years. Its 15 branches overseas, including the 12 in North America (US and Canada) and 3 in the Middle East, continue to serve the discriminating Filipino community abroad in a very competitive casual dining environment. Robust and well-managed, Max’s Restaurant has shown its resilience during the downturn in the global economy. The Company continues to generate interest from international strategic partners for Max’s Restaurant to locate in key markets abroad. 74 The Company plans to grow Max’s Restaurant through a combination of same store sales growth and multi-format expansion, growing at pace with the rapid retail development of growing urban and community areas in major cities and in the provinces. Max’s Restaurant expects its Philippine store count to reach 146 by the end of 2014. The Company will continue to expand its footprint and tap underserved markets domestically. The following table shows how Max’s Restaurant has grown its store network in the last 3 years: No. of outlets As at Jun 30 As at Dec 31 2014 2013 2012 2011 Company-owned (local) 76 74 73 68 Franchised (local) 65 63 61 56 International 15 14 13 11 Total 156 151 147 135 For six months ended June 30, 2014 and the year ended December 31, 2013, Max’s Restaurants contributed ₱2.07 billion and ₱3.99 billion to the Company’s total revenues, or 43.2%, and 42.2%, respectively. The following Subsidiaries of the Company operate Max’s Restaurants in the Philippines— Max’s Kitchen, Inc., Max’s Makati, Inc., Max’s Baclaran, Inc., Max’s (Ermita), Inc., Chickens R’ Us, Inc., Max’s Express Restaurants, Inc., Max’s Circle, Inc., Max’s SM Marikina, Inc., Max’s Food Services, Inc. The local franchising operations are housed in Max’s Franchising, Inc. The Company is evaluating plans to consolidate the entities that operate Max’s Restaurants while continuing to run streamlined operations under common management. Max’s Restaurant, whether through the Max’s Entities operating the stores, or through the franchisees, is also a recipient of various awards from different agencies and award-giving bodies: ISSUING AGENCY/ ORGANIZATION COVERAGE Hall of Fame-Outstanding Filipino Franchise- Food Category PFA National 2013 Most Trusted Family Restaurant Readers’ Digest Asia National 2013 The President’s Award PFA National YEAR AWARD 75 2012 Most Trusted Family Restaurant Readers’ Digest Asia National 20112012 Outstanding Filipino Retailer DTI & PRA National (Food, Large Category) 2010 Best Homegrown Franchise Entrepreneur Magazine, Summit Media, Inc. National 2009 Best Local Franchise Entrepreneur Magazine, Summit Media, Inc. National 2009 Most Promising Franchise Entrepreneur Magazine, Summit Media, Inc. National 2009 Fastest Growing Franchise Entrepreneur Magazine, Summit Media, Inc. National 2009 Best in Franchising Support Entrepreneur Magazine, Summit Media, Inc. National Max’s Restaurant franchisees have also been recipients of various awards and citations issued by Philippine Franchise Association (PFA). ISSUING AGENCY/ ORGANIZATION COVERAGE RECIPIENT Regional Franchisee of the Year (National Capital Region) PFA National Felie Go Regional Franchisee of the Year (South Luzon Region) PFA 2010 Regional Franchisee of the year (National Capital Region) PFA Regional (Food Category) Carmelita Abalos (Franchisee, Max’s Shaw Blvd) 2010 Regional franchisee of the year (South Luzon Region) PFA Regional (Food Category) Felie Go 2009 Franchisee of the Year PFA National Cecille Phua Pee 2009 Regional Franchisee of the Year (North Luzon Region) PFA Regional Cecille Phua Pee YEAR AWARD 2013 2013 (Franchisee, Batangas Group) Regional Felie Go (Franchisee, Batangas Group) (Franchisee, Batangas Group) 76 The following charts show the growth of Max’s Restaurant over the last 3 fiscal years (Amounts in P millions): Max's Restaurant 2013 2012 2011 Systemwide sales 4,844.9 4,579.5 4,200.6 Company owned sales 3,233.2 3,120.7 2,914.4 Max's Restaurant 2013 2012 2011 Net Income 162.6 103.9 131.3 EBITDA 414.2 313.4 340.4 77 Pancake House Bringing Home Goodness The first Pancake House restaurant opened in Magallanes in 1970 and since then, Pancake House established itself as a reputable Philippine food brand by introducing freshly made pancakes and waffles in varied flavors to a predominantly rice-based consuming market. Eight years later, it successful launched its first franchised outlet in Greenhills, San Juan, and thereafter, more Pancake House outlets – both company-owned and franchised – opened in strategic sites. Over the years, Pancake House continued to grow and set up companyowned and franchised restaurants throughout the country. The brand became strongly associated with delicious comfort food, warm personalized service, and a homey atmosphere for diners. The company expanded its operations steadily, requiring the setting up of a central commissary to support the logistical and operational needs of the growing number of restaurants. The brand has been consistently equated with “comfort food” through the enduring appeal of its bestsellers, pancakes, waffles, pan chicken, tacos and spaghetti, which are constantly complemented by newer favorites that are aligned with its promise of always “Bringing Home Goodness”. The Company continuously makes the brand relevant by introducing new items in the menu which adds to the variety that its customers look forward to, and eventually become their new favorites. Based on Company-commissioned research conducted by TNS in 2013 entitled “Understanding the Casual Dining Industry,” Pancake House is considered as “Best in Pancakes.” Commencing in 2014, the Company has initiated programs that will give the brand a new look, update the store design and improve the customer experience. It continues to reinforce its image as a brand that remains fresh and evolving with the continuously changing tastes and preferences of the consumers while capitalizing on the all-day dining appeal of Pancake House. As one of the Group’s flagship brands, Pancake House continues to serve a growing market of loyal customers through its 108 stores strategically located nationwide, and 6 outlets in Malaysia. 78 The following table shows how Pancake House has grown its store network in the last 3 years: No. of outlets As at Jun 30 As at Dec 31 2014 2013 2012 2011 Company-owned (local) 37 36 35 29 Franchised (local) 60 59 52 47 International 6 6 6 Joint Venture 11 11 11 12 114 112 103 88 Total The Company intends to increase the Pancake House store network to 120 outlets by the end of 2014. For the six months ended June 30, 2014 and the year ended December 31, 2013, Pancake House contributed ₱539.1 million, ₱1.07 billion, to the Company’s total revenues, or 11.26% and 11.37% respectively. The Pancake House brand and its store and franchise operations are held directly by the Company. The following charts show the growth of Pancake House over the last 3 fiscal years (Amounts in P millions): Pancake House 2013 2012 2011 Systemwide sales 1,347.6 1,187.1 1,137.3 Company owned sales 751.7 617.1 576.6 79 Pancake House 2013 2012 2011 Net Income 32.7 65.6 67.4 EBITDA 190.4 204.2 184.9 Yellow Cab Great Times. Great Pizza. Yellow Cab is a key brand in the pizza category which the Company believes has the biggest growth opportunity, both domestically and internationally. On account of the brand’s very strong association with its brand cues--the checkers, the color yellow, Vespa bikes used for delivery and its industrial-look pizza box--it is in a unique position to grow its market share. Yellow Cab primarily serves New York-style premium pizza in a fast casual dining setting. Its popular products include New York’s Finest pizza, Dear Darla pizza, Charlie Chan Chicken Pasta, “hot wings,” “baked potato wedges” and ice cream. With its large portion sizes and premium pricing, Yellow Cab mainly targets groups in the mid-market and uppermarkets customer segments. To address the growing need of quick, personal sized meals, Yellow Cab introduced the My Size Folded Pizzas with unique variants. Targeting the millenials, the segment of the population with an increasing purchasing power, the brand continuously innovates premium products to entice and excite customers to frequent Yellow Cab stores. Yellow Cab was first established in 2001 with its first store located in Makati Ave. In 2002, the first local franchise store opened in Tomas Morato and had its first international franchisee in 2007. As at June 30, 2014, Yellow Cab has a total of 110 nationwide and international outlets. 80 The following table shows how Yellow Cab has grown its store network in the last 3 years: No. of outlets As at Jun 30 As at Dec 31 2014 2013 2012 2011 Company-owned (local) 87 85 82 73 Franchised (local) 15 15 17 17 International 6 6 Joint Venture 2 2 2 110 108 101 Total 90 In addition to the Company’s plans to further expand the presence of Yellow Cab in the domestic market, the Company also believes in the universal appeal of the brand and its ability to penetrate the overseas market. Its ten-year development schedule includes the establishment of 15 stores in the Kingdom of Saudi Arabia. Yellow Cab has also established various touch points to increase accessibility of its products for its customers. It employs a single hotline, online and mobile app delivery services, and also offers 24-hour delivery. For the six months ended June 30, 2014 and the year ended December 31, 2013, Yellow Cab contributed ₱924.3 million and ₱1.85 billion to the Company’s total revenues, or 19.30% and 19.55% respectively. 81 The following charts show the growth of Yellow Cab over the last 3 fiscal years (Amounts in P millions): Yellow Cab 2013 2012 2011 Systemwide sales 1,987.4 1,766.6 1,668.4 Company owned sales 1,720.1 1,525.6 502.3 Note: For the year 2011, systemwide sales are for the full-year period while Companyowned sales are for the months after August 2011 when the Company acquired Yellow Cab Yellow Cab 2013 2012 2011 Net Income 122.8 97.7 35.2 EBITDA 262.8 209.5 79.1 Note: For the year 2011, EBITDA and Net Income are for the months after August 2011 when the Company acquired Yellow Cab Krispy Kreme Hot, Melt-In-Your-Mouth Original Glazed® Doughnuts Krispy Kreme Philippines holds the exclusive license to operate Krispy Kreme in the Philippines. Krispy Kreme is an international retailer of premium-quality sweet treats, including its hot melt-in-your-mouth Original Glazed® doughnut. Headquartered in WinstonSalem, North Carolina, USA, the brand has offered the highest-quality doughnuts and greattasting coffee since it was founded in 1937. Today, Krispy Kreme can be found in over 855 shops around the world. Currently, Krispy Kreme can be found in 24 countries, including the United States, Australia, Bahrain, Canada, Dominican Republic, India, Indonesia, Japan, Kuwait, Lebanon, Malaysia, Mexico, the Philippines, Puerto Rico, the Republic of Korea, 82 Russia, Qatar, the Kingdom of Saudi Arabia, Singapore, Taiwan, Thailand, Turkey, the United Arab Emirates, and the United Kingdom. The Group’s association with Krispy Kreme dates back to 2006. The Krispy Kreme brand has several unique elements that have helped create a special bond with its customers. The doughnuts, the signature product of the brand, which are made from a secret recipe, have a one of a kind taste that generations of loyal customers have grown to love. In order to enhance the appeal of the brand across all customer segments and generate continued excitement for the brand’s products, initiatives have been taken by Krispy Kreme Philippines to spearhead growth, including prompting the strategic alliance with Hershey’s for the development of new flavors and products for the Krispy Kreme brand in the Philippines. It is this local initiative that was taken up by Krispy Kreme International and was promoted globally. Krispy Kreme Philippines also claimed a “firsts” for itself when its branch in Greenhills being hailed as the First Drive thru in Asia when it opened in 2007. Krispy Kreme International has consistently recognized the Philippine operations for its excellence in hospitality/service, product quality, marketing, and operations and as such has requested assistance in providing training and support for 7 international markets. Krispy Kreme has achieved a nationwide appeal and has been able to penetrate the market outside Metro Manila to become a nationwide brand. The Company makes a conscious effort to cause Krispy Kreme Philippines to operate the brand and offer products in a manner that will make them become part of a lifestyle. There are currently 52 Krispy Kreme outlets across the Philippines, indicating the popularity of the brand in the country. No. of outlets As at Jun 30 As at Dec 31 2014 2013 2012 2011 Metro Manila 37 32 31 25 Luzon (outside Metro Manila) 4 7 3 2 Visayas 3 3 3 2 Mindanao 5 5 2 Total 49 47 39 29 In July 2014, the 50th Krispy Kreme store was opened in the Ortigas area. Two more stores were opened in August 2014, one in NAIA 3 and the other in the vicinity of the UST Campus. Krispy Kreme Philippines has received several international and local recognitions including 83 the following: Year Award Issuing Agency/Organization Coverage 2010 Store Experience Award Krispy Kreme International International Relationship Marketing Award Krispy Kreme International International Product Innovation Award Krispy Kreme International International Marketing Excellence Award Krispy Kreme International International Humanitarian Award Krispy Kreme International International Franchisee of the Year Krispy Kreme International International Merit for Communication Management Division, Social Media Philippine Quill Award National Hospitality/Service Excellence Krispy Kreme International International Product Innovation Krispy Kreme International International Marketing Excellence Krispy Kreme International International Development Excellence Krispy Kreme International International Store Design Krispy Kreme International International Product Excellence Krispy Kreme International International Franchisee of the Year Krispy Kreme International International Outstanding Filipino Retailers, Foreign Brand Retailer, Food Category Department of Trade & Industry/PRA National Operations Excellence Krispy Kreme International International Relationship Marketing Krispy Kreme International International Development Excellence Krispy Kreme International International Product Excellence Krispy Kreme International International Hospitality/Service Excellence Krispy Kreme International International Marketing Excellence Krispy Kreme International International International Master Franchisee of the Year (Food: Large Category) Department of Trade & Industry/PFA National 2011 2012 84 2013 2014 Outstanding Filipino Retailer’s Finalist, Foreign Brand Retailer, Food Retailer , Large Category Department of Trade & Industry/PRA National Community Building Krispy Kreme International International Relationship Marketing Krispy Kreme International International Hospitality/Service Excellence Krispy Kreme International International Development Excellence Krispy Kreme International International Franchisee of the Year Krispy Kreme International International World Barista Champion Krispy Kreme International International Most Promising Retailer Ayala Malls Merchant Awards National The Global Brand Tracker by Tangible in 2013 accounts Krispy Kreme a healthy net promoter score (NPS) of 42 versus local competition. For the six months ended June 30, 2014 and the year ended December 31, 2013, Krispy Kreme Philippines contributed ₱609.0 million and ₱ 1.18 billion to the Company’s total sales, or 12.72% and 12.50%, respectively. The following charts show the growth of Krispy Kreme over the last 3 fiscal years (Amounts in P millions): Krispy Kreme 2013 2012 2011 Systemwide sales 1,181.8 970.2 749.7 (Note: All Krispy Kreme stores in the Philippines are company-owned stores) 85 Krispy Kreme Net Income 60.6 38.3 17.4 2013 2012 2011 EBITDA 164.9 132.6 90.7 Jamba Juice Better-for-You Fresh Healthy Juice Boosters, Inc. holds the license to operate Jamba Juice in the Philippines. Founded in California, USA, back in the 1990s, Jamba Juice is the leading healthy active lifestyle brand with over 800 stores worldwide. The brand continues to target a growing market that values an active and healthy lifestyle. The Company believes that Jamba Juice is well positioned to capitalize on the growing trend toward health and wellness. Jamba Juice Philippines most popular product is its wide selection of all-natural, whole-fruit “better-for-you” beverages. It offers whole-fruit smoothies, freshly squeezed fruit juices, “fruit-and-veggie” smoothies, steel cut organic oatmeal, fruit parfait and baked goods. Jamba Juice Philippines opened its first store in 2011 and had grown to 11 stores as at June 30, 2014. The table below shows the growth of Jamba Juice’s store network over the last 3 years: No. of outlets As at Jun 30 As at Dec 31 2014 2013 2012 2011 Metro Manila 11 9 6 2 Total 11 9 6 2 For the six months ended June 30, 2014 and the year ended December 31, 2013, Jamba Juice Philippines contributed ₱88.8 million and ₱ 151.7 million to the Company’s total revenues, or 1.85% and 1.60%, respectively. 86 As at August 2014, Jamba Juice has 12 stores and will continue to expand its operations into other key areas using newer formats. These include kiosks and mobile stores called the “Fender Blender,” a 40-foot trailer that produces Jamba Juice smoothies, providing its customers with a unique retail experience. Teriyaki Boy We Bring Japan to Your Dining Experience.TM The Company owns 70% of Teriyaki Boy Group, Inc. (“TBGI”), whose brand Teriyaki Boy remains number one in Japanese casual food service in terms of number of stores. A Usage Attitude Image (UAI) study conducted by an independent research agency reported that Teriyaki Boy’s recall as a Japanese restaurant among the 18-36 ABC Manila segment is at a high of 93%. Teriyaki Boy remains popular for its family-oriented restaurants offering a wide variety of affordable, Japanese food. TBGI is in the process of implementing an aggressive rebranding campaign which aims to bring back the authenticity of an affordable Japanese dining experience. This involves an enhancement of its menu and updating of its logo and interiors, thus communicating the brand’s thrust of keeping pace with its young and discriminating market. Consistent with these efforts, TBGI has also tapped a Japanese chef to create exciting new dishes and maintain high levels of quality in ingredients and cooking procedures. Improved products are also being introduced to increase the brand’s value proposition which is expected to translate to a higher transaction count. In July, 2014, Teriyaki Boy launched its Teriyaki Bowls promo systemwide, and, is being rolled out to all Teriyaki Boy stores in the 2nd half of 2014. Additional promos “Make-Your-Own-Bento” and the “₱99 Ramen” are also being introduced. The original founder, Mr. Bryan Tiu, has been active in working with the Group in helping revitalize the brand and increase its value proposition of affordable Japanese dining. Mr. Tiu also holds 30% of TBGI. Teriyaki Boy stores are targeted toward locations that assure market sustainability, and a periodic assessment of existing store locations is done by the Company. 87 The following table shows how Teriyaki Boy has maintained its store network in the last 3 years: No. of outlets As at Jun 30 As at Dec 31 2014 2013 2012 2011 Company-owned (local) 21 20 18 20 Franchised (local) 10 11 11 9 Joint Venture 4 6 6 5 Total 35 37 35 34 TBGI is expecting total store count to reach 40 by the end of 2014. For the six months ended June 30, 2014 and the year ended December 31, 2013, Teriyaki Boy contributed ₱195.4 million and ₱ 421.4 million to the Company’s total revenues, or 4.08% and 4.46%, respectively. The following table shows the relationship and extent of ownership of TBGI in its several joint venture companies that operate as Teriyaki Boy franchisees: Date Established/ Start of Operations Location Incorporated in 11/06 Started operations in 07/06 Petron Marilao Incorporated in 03/07 Started operations in 05/07 Trinoma Incorporated in 11/07 Started operations in 12/07 Cash & Carry Incorporated in 06/12 Started operations in 07/04 Wilcon, Visayas Ave. Started operations in 07/12 Robinsons Palawan Percentage Ownership Operating Joint Venture Co. 60% 40% TBGI-Marilao, Inc. Teriyaki Boy Group, Inc. IFS Realty Managers, Inc. 60% 40% TBGI-Trinoma, Inc. Teriyaki Boy Group, Inc. Azenith Holdings, Inc. 50% 50% TBOY-MS, Inc. Teriyaki Boy Group, Inc. Makati Supermarket Corp. 60% 40% PCK-Palawan, Inc. Pancake House, Inc. Calanoc & Sons Dev. Corp. 88 Max’s Corner Bakery Made with Love. Always. Max’s Corner Bakery was started by Ruby Trota in the early 1960s in Sucat, Paranaque. Famous for its caramel bars, the bakery started with dinner rolls which were known to perfectly complement Max's Fried Chicken, and provided the occasion cakes for all the special events hosted in Max’s Restaurants, from baptisms to birthdays to graduations and weddings. The brand expanded by offering new products such as ensaymada, food-for-the-gods, and jelly rolls from its own designed bakery counter. From just being a supplier of Max’s Restaurants, it has become its own standalone brand with its own line of retail products with a growing contribution to Group revenues. Today, Max’s Corner Bakery offers “grab-and-go” bread, pastries, and cakes. It is currently located within the Max’s Restaurant outlets. Max’s Corner Bakery also caters to both retail and institutional clients like Philippine Airlines and major food establishments in the country. Plans are underway for Max’s Corner Bakery to locate in supermarkets and other retail establishments. For the six months ended June 30, 2014 and the year ended December 31, 2013, Max’s Corner Bakery contributed ₱162.4million and ₱338.2million to the Company’s total revenues, or 3.39% and 3.58%, respectively. Maple Maple was conceptualized and introduced by the Company to seize new opportunities in a growing affluent dining market. With a wide array of choices that build on flavors found in the coastal towns of America, Maple brings the best of elevated American comfort food to the tables of four branches. These are located in Makati, Alabang, Ortigas and Cebu. Maple is characterized by its warm interiors, big servings and premium food offerings. Sizzlin’ Steak Sizzlin’ Steak is a homegrown brand operated by TBGI. It offers high quality beef, special sauces, and a hot-plate system, served within an environment that puts a premium on product quality and service speed. As at June 30, 2014, Sizzlin’ Steak is operated in 16 outlets in the National Capital Region, two of which are covered by joint venture arrangements with third parties. After piloting a 89 new format for an existing store proved successful, some stores are being reformatted to undertake more of the same type of operations with a new menu design. For the six months ended June 30, 2014 and the year ended December 31, 2013, Sizzlin’ Steak contributed ₱67.9million and ₱134.0 million to the Company’s total revenues, or 1.42% for both periods. Dencio’s Kung Sisig, Dapat Dencio’s The Company acquired Dencio’s in 2004. Having popularized the restobar concept, it has evolved into a Filipino favorite popular among families, balikbayans and professionals alike. Its appeal is based on its signature Filipino dishes like sisig, complemented by a variety of drinks in a relaxed ambiance that distinguish its restaurants as a choice destination. The Company aims to have a Dencio’s restaurant in key cities nationwide, and plans to open 2 to 3 new restaurants every year for the next 5 years. The Company has initiated the revitalization of Dencio’s with the participation of its original founder, Mr. Dennis Nakpil. The Company owns and operates one joint venture company, DFSI-One Nakpil, Inc. to hold its investment in an outlet located at Harbour Square at the Cultural Center of the Philippines Complex, which started operations in April 2005. The other 14 outlets of the Company are franchised. For the six months ended June 30, 2014 and the year ended December 31, 2013, Dencio’s, together with Kabisera ng Dencio’s contributed ₱61.2million and ₱132.8million to the Company’s total revenues, or 1.28% and 1.41%, respectively. Kabisera ng Dencio’s In May 2008, the Company established an upscale arm “Kabisera ng Dencio’s” to build on the Dencio’s brand, offering premium-quality Filipino cuisine to the high-end market. Kabisera has since grown into its own identity as a go-to dining establishment, providing a premium Filipino dining experience, a place where foreigners and young professionals enjoy unwinding over drinks and exceptional Filipino food. Kabisera ng Dencio’s is located in Bonifacio High Street, Bonifacio Global City in the City of Taguig, Metro Manila. Consistent with the aspiration of the shareholders and management, the Company plans to expand the operations of Kabisera ng Dencio’s to showcase the best of authentic Filipino cuisine in an upscale, contemporary format. 90 Le Coeur de France Café. Restaurant. Boulangerie. In February 2008, the Company acquired Boulangerie Francaise, Inc., which owns and operates Le Coeur de France. With a name that means “The Heart of France,” Le Coeur de France is a French-inspired coffee shop, restaurant, and boulangerie that offers assorted artisan breads baked fresh daily. Its menu also consists of soups, pasta, gourmet sandwiches, and pastries. It also supplies baked products to other institutions on a wholesale basis. As at June 30, 2014, Le Coeur de France has 14 stores, all of which are company-owned. Le Coeur de France contributed revenues of ₱52.9million and ₱106.7million, for the six months ended June 30, 2014 and the year ended December 31, 2013 respectively. Institutional sales accounted for ₱10.6million and ₱21.0million of said revenue contributions for the respective periods. The Company’s plans for Le Coeur de France include repositioning the brand and rationalizing its store network to target key strategic communities. The Chicken Rice Shop The Chicken Rice Shop is a chain of HALAL quick service restaurants that originated from Malaysia, with over 50 stores across Malaysia and Singapore. Through CRP Philippines, a joint venture entity, the Company brought the brand to the Philippines in 2011. It introduced specialty Asian chicken cooking styles, including Hainanese, roast, soy, and braised chicken. Starting off with a single outlet in 2011, it introduced its products to the market with the opening of 4 more outlets in 2012. It scaled-down operations in 2013 leaving only 2 outlets open. Due to operating losses, the Company plans to close all outlets within the year. International Operations The Company hopes to continue to grow its operations in the global arena by entering key international markets and capitalizing on its Filipino stronghold. The Company currently has 27 international outlets in the United States, Middle East, Canada and Malaysia. For the six months ended June 30, 2014 and the year ended December 31, 2013, international operations contributed ₱6.22 million and ₱27.8 million or 0.13% and 0.29% to the Company’s total pro-forma revenues respectively. The net income/(loss) contribution of the international operations were (₱0.57)million and ₱4.9million or (1.5%) and 1.9% of total pro-forma net income of the Company for the six months ended June 30, 2014 and the year ended December 31, 2013. The Company has successfully established Max’s Restaurant outlets overseas in places where there is a large concentration of Filipinos, strengthening the ties the market has to the 91 Company’s various brands. Two Max’s Restaurant outlets were added to its international store network. Pancake House has also opened 6 outlets in Malaysia and an outlet is soon to open in Brunei. With Yellow Cab appealing to the mainstream market where the market for pizza is largest, it has opened 6 outlets in Qatar and its ten-year development schedule includes opening a minimum of 15 new outlets in the Kingdom of Saudi Arabia. Yellow Cab and Teriyaki Boy outlets are also plan to be open in Hawaii. The following table shows the number of stores operated under each of the Company’s brands outside of the Philippines as at June 30, 2014: Brand Number of Stores Max’s Restaurant Pancake Yellow Cab 15 6 6 Total 27 Supply Chain Management Commissary Operations The Company owns and operates 4 commissaries and 2 warehouses that service substantially all of the Company’s supply requirements in the Philippines across its brands. No Bia and STI primarily supply to the 141 outlets of Max’s Restaurant and 68 combined branches of Teriyaki Boy, Dencio’s, Kabisera ng Dencio’s, Sizzlin’ Steak and The Chicken Rice Shop located throughout the Philippines. Both commissaries are situated within Metro Manila. The No Bia and STI commissaries are governed by the NMIS with yearly evaluation and accreditation. NMIS is responsible to implement policies and procedures and rules relative to production of raw materials local and imported, through the various stages of handling, inspection, processing, storage and preservation of such products. Both commissaries received an “AAA” accreditation as well as passed the “Current Good Manufacturing Practices” audit from the said agency. NMIS inspects the commissaries policies and procedures including layout and infrastructure and meat handling and processing procedures. To ensure compliance to NMIS standards, the agency’s officers are stationed in the commissaries regularly and monitor the operations of the commissaries. Aside from the NMIS certification, No Bia and STI commissaries also have HACCP certified products (Max’s Chicken and Max’s Crispy Pata). Accreditation is issued by Certification International, Phils. Inc., an affiliate of the British company Certification International U.K. Ltd. HACCP certification is based on the international code of practice and general principles of food 92 hygiene, thus, ensuring the safety and suitability of food for consumption. All accreditations are handled directly by the commissaries. As at the date of this Prospectus, No Bia has a total of 227 regular and contractual employees and STI has a total of 150 regular and contractual employees. Outlets order through a centralized online ordering system which is connected to the commissaries. Supplies are delivered to the outlets using a combination of Company-owned delivery trucks and third party logistics providers. Each commissary has its own procurement office that deals directly with suppliers for delivery of raw materials and ingredients. Contract negotiations are centrally handled by the Company’s corporate procurement department. Aside from supplying the different brands requirements, No Bia also has institutional accounts where desserts, pre-packed meals and pre-cut raw materials are supplied. The No Bia and STI commissaries also supply food to hotel and resort operations. Krispy Kreme’s support commissary is located in Metro Manila and is responsible for the delivery and processing of materials needed by the brand. It uses a similar ordering and logistics system as the other commissaries and has 52 regular and contractual employees. Accreditation is done by the operations manager and contract negotiations are handled by the Company’s corporate procurement department. Lapanday Test Kitchen, on the other hand, supplies to all the branches of Pancake House, Le Coeur de France, and Maple. As at June 30, 2014, it has a total of 85 regular and contractual employees. Lapanday currently holds a license to operate issued by the FDA. Yellow Cab has toll manufacturers supplying its raw and processed materials. Procurement The Company has a centralized corporate procurement department in charge of contract negotiations with existing and potential suppliers. The corporate procurement department covers all of the negotiations and purchasing requirement of the Company’s brands and outlets in the Philippines, with the exception of Krispy Kreme Philippines and Jamba Juice Philippines. The Company’s commissaries deal directly with suppliers for periodic supply and purchase decisions. The Company has been consolidating suppliers for standard products and materials in its outlets realizing synergies from the combination of the Max’s Group and the Pancake House Group. In addition, strategic plans are drawn up with suppliers to support the buying process at the corporate procurement level both at the domestic and international level. Logistics For the delivery of supplies to its nationwide outlets, the Company utilizes Company-owned delivery trucks as well as third party logistics providers. The Company maintains contracts 93 with third party logistics providers and encourages them to coordinate with the Company’s commissaries for efficiencies in the delivery of supplies. For cost savings and delivery efficiency, the Company plans to organize its logistics providers to deliver food items and ingredients to outlets located within a certain vicinity, regardless of restaurant brand. In this way, trips to a particular area are reduced and trucks are fully utilized. Outsourcing Partnerships The Company will continue to focus on outsourcing activities in the value chain where savings on cost and increase efficiency are seen. Some of the services covered are transport, warehousing and inventory control as well as, management of supplier deliveries. The Company shall continue to evaluate its existing commissaries to uncover potential synergies among the different brands, including but not limited to purchasing, delivery, warehousing and operations. Franchising Operations The Company considers its franchisees as business partners integral to the Company’s success and main contributors to the growth of its brands. The Company recognizes the value of local area expertise and taps its franchisees in order to be closer to the customers. Franchising operations of Max’s Restaurants in the Philippines are held in the Company’s subsidiary, Max’s Franchising, Inc. Pancake House franchising operations in the Philippines are held directly in the Company. Teriyaki Boy Group, Inc. holds the domestic franchising operations of Teriyaki Boy. Yellow Cab Food Corporation is the franchisor for Yellow Cab in the Philippines. The table below sets forth the number of franchised stores for each of the Company’s brands as at June 30, 2014 and for the last 3 years: Brand Max’s Restaurants Pancake House Yellow Cab Teriyaki Boy Dencio’s Sizzlin’ Steak As of June 30 2014 65 60 15 10 14 2 2013 As of December 31 2012 2011 63 59 21 11 14 2 61 52 17 11 14 3 56 47 17 9 17 2 94 The Company continues to expand its franchised store network especially in key cities outside Metro Manila, where growth potential is tremendous. The Company does not maintain a specific ratio of franchised stores to company owned stores but makes a determination for each location on a case to case basis. In the recent PFA Expo held from July 16 – 20, 2014, in which the Company participated, the Company experienced a 300% growth in franchise applications across the brands Max’s Restaurants, Pancake House, Yellow Cab, Teriyaki Boy and Dencio’s, signaling the tremendous appeal of these brands. Functional Strategies Finance, Accounting and Shared Services Following the integration of the Max’s Entities with the Company, the Company continues to enhance its systems to centralize its finance and accounting division. While each business unit currently employs its own accounting systems, the central accounting division consolidates the information and processes the financial reports for use of management and regular external reporting requirements. The Company also continues to streamline its finance and accounting processes as it moves towards full integration of its business units. Research and Development The Company relies on research and development for continuous product and process innovation which the Company considers a priority in order to stay relevant in the fast changing industry landscape. The table below sets forth the amounts that the Company has allocated and spent on research and development as at June 30, 2014 and for the last 3 years: As at June 30 2014 As at December 31 2013 2012 2011 4.052 0.09% 9.026 0.10% 13.027 0.22% 9.797 0.12% In P millions % of revenues (Figures indicated for all periods are combined amounts for the Pancake House Group and the Max’s Entities) The Company envisions synergies in its research and development processes as it moves towards full integration of its business units. 95 Advertising and Marketing The Company communicates to its customers through advertising and marketing efforts. In addition to regular marketing activities, the Company launches special marketing campaigns to introduce new products and sustain customer interest in mainstay offerings. As a bigger organization, the Company has begun to experience the benefits of the corporate integration of the Company with the Max’s Entities. The Company is able to negotiate better terms for print, radio and TV advertising with its third party service providers and also expects to better implement bundling strategies, using the stronger brands to promote the emerging brands. The table below sets forth the amounts that the Company has spent for sales and marketing as at June 30, 2014 and for the last 3 years: As at June 30 2014 As at December 31 2013 2012 2011 161.08 3.48% 400.46 4.34% 147.72 2.46% 289.73 3.51% In P millions % to revenue (Figures indicated for all periods are combined amounts for the Pancake House Group and the Max’s Entities) Store Operations The Company believes operations to be a crucial function and the foundation of the Company’s staying power. Store operations are varied across the brands but are all founded on the principle of excellence, efficiency, and customer-centricity. Company-owned and franchised stores adhere to high standards of quality and are periodically reviewed for compliance. Delivery System The Company utilizes delivery as a key customer touch point and as a means of promoting increased accessibility for all its brands. Business Development At the forefront of the Company’s growth strategy is business development. The Company continues to evaluate strategic acquisitions of other brands to add to its portfolio while aggressively expanding the footprint and rationalizing its current portfolio of brands. The Company is able to leverage on its assortment of brands to secure highly coveted sites and is able to gain priority in very competitive areas. With long standing relationships with residential and commercial real estate developers, the Company is able to locate in prime spots in malls and residential communities. 96 The Company’s business development team constantly scans the domestic and international landscape to take advantage of emerging opportunities. Understanding its target market, the Company is able to address different market needs through its wide brand selection and various store formats. The Company believes in right-sizing its stores to the size of the market and intimate knowledge of the domestic and international terrain allows the Company to implement its targeted strategy. The Company also undertakes business development efforts in bringing international brands to the Philippines, as in the case of Jamba Juice, Krispy Kreme and The Chicken Rice Shop. With its proven and outstanding track record of operational excellence, the Company hopes to continue to be a preferred partner of international brand operators. The Company constantly evaluates the balance between developing brands organically and acquiring additional names for the portfolio. The Company considers the brands from a holistic perspective and evaluates how each complements the overall group strategy. The table below sets forth the amounts that the Company has spent for business development as at June 30, 2014 and for the last 3 years: As at June 30 2014 As at December 31 2013 2012 2011 4.793 0.10% 8.021 0.09% 6.346 0.11% 6.321 0.08% In P millions % to revenue (Figures indicated for all periods are combined amounts for the Pancake House Group and the Max’s Entities) Human Resources As at June 30, 2014, the Group employs a total of 5,491 personnel, of which 81% are storebased. Permanent employees generally include senior management, administrative and corporate office staff and store staff. The Company also hires temporary staff, including staff on short-term contracts as well as those on part-time and hourly-rated employment, particularly during peak periods. Majority of the stores operate an average of 14 hours a day and seven days a week, for which the Company has, on the average, two shifts of staff at each store and shift managers/supervisors. Shift managers are selected from a pool of promising and talented store employees. The following table sets forth the total employees of the Group by function as at June 30, 2014: 97 Consolidated Headcount as at June 30, 2014 Operations Function Head Office Executive and Managerial Officers and Supervisors Rank and File Subtotal 135 63 240 438 Stores Executive and Managerial Officers and Supervisors Rank and File Subtotal 50 818 3,569 4,437 Commissaries Executive and Managerial Officers and Supervisors Rank and File Subtotal 17 30 370 417 Others Executive and Managerial Officers and Supervisors Rank and File Subtotal 34 42 123 199 Total % of Store Based Personnel No. of Employees 5,491 81% The Company anticipates hiring additional employees within the next 12 months in line with the expansion plans, and subject to the changing needs of the business. Some of the rank and file employees are members of unions. As at June 30, 2014, there are three unions, namely Max’s Makati, Inc. Labor Union with 169 members, Max’s Kitchen, Inc. Labor Union with 122 members, and Square Top, Inc. Labor Union with 29 members. The unions have separate Collective Bargaining Agreements (CBA) with duration of 5 years. The current CBAs are effective for the period up to December 31, 2017. The Company has not experienced any labor dispute with the unions. The Company has maintained a healthy relationship with the union groups and continues to experience industrial peace. The Company believes that it is in compliance, in all material respects, with all minimum compensation and benefit standards as well as applicable labor and employment regulations. Staff recruitment and training Recruitment is done through the Human Resources Department at the corporate offices. In 2013, the Company began regionalized hiring, bringing down the hiring process up to 98 contract signing to several sites (Makati, Quezon City, Cavite, Taytay, Ortigas) to expedite onboarding of local talent. The Company continuously explores and utilizes other staffing sourcing options to expand the talent pool. These options are mostly in partnership with local universities, the Department of Labor and Employment (DOLE) and Technical Education and Skills Development Authority (TESDA). In 2012, the Company started active participation in DOLE’s Special Program for Employment of Students (SPES), a program mandated under Republic Act No. 9547 otherwise known as "An Act To Help Poor But Deserving Students Pursue Their Education By Encouraging Their Employment During Summer and/or Christmas Vacations.” Also in 2012, the Company partnered with DOLE for its Apprentice Program (also called KasH or Kasanayan at Hanapbuhay Program) which aims to provide a bridging mechanism for new entrants to the labor force by helping them acquire basic skills and work experience required by employers when hiring new employees. The Group was able to provide more than 250 apprenticeships for the first semester of 2014 alone. Meanwhile, its active partnership with 40 universities support more than 500 practicum students annually through on-the-job training programs. The Company believes that employee training and development is a critical factor in ensuring management and technical personnel meet its growth plans. Employees receive basic training upon hiring and are subsequently given opportunities to attend further training programs, such as managerial and leadership, sales, system and technical trainings programs. Training programs are conducted both through classroom sessions and online channels (eLearning). Resources are particularly put into the training of the store operations teams and store personnel to increase skill levels, ensuring the consistent application of the Company’s internal policies and procedures to maintain brand integrity and instill key corporate values. Krispy Kreme Philippines has been continuously training managers of international stores on production, processing shift and retail management. Krispy Kreme team members are being sent to international stores as trainers and opening team members. The most recent was for the opening of India and Singapore stores. Previously, Krispy Kreme Philippines conducted training for Singapore, Malaysia, Indonesia, and Thailand stores. Jamba Juice has two internationally certified training stores- Alabang Town Center and SM North The Block. Just recently, Jamba Juice Philippines hosted trainees from the Middle East in preparation for their store opening. Employee Compensation and Benefits The Company believes its compensation policy is competitive with industry standards in the Philippines. Salaries and benefits are reviewed periodically and adjusted to retain current employees and attract new employees. Performance is reviewed at least once a year and employees are rewarded based on the attainment of defined objectives. It provides medical and insurance benefits to its employees. The Group maintains a number of retirement plans. 99 Information Technology The Company maintains an Information Technology (IT) Department to service operations and supports the business strategy through development, implementation and management of its technological resources. The department is supporting two Enterprise Resource Planning systems used to manage internal and external resources of the organization. These include the physical assets, financial resources and materials. Standard disaster recovery systems and procedures are in place and applications and systems are properly backed up. In order to facilitate the web ordering system being implemented by the Group to enable the stores with a user-friendly interface to capture orders for Commissary and External suppliers, the Company has invested in systems. The table below sets forth the amounts that the Company has spent for information technology-related matters as at June 30, 2014 and for the last 3 years: As at June 30 2014 As at December 31 2013 2012 2011 20.69 0.45% 36.71 0.40% 22.97 0.38% 28.87 0.35% In P millions % to revenues (Figures indicated for all periods are combined amounts for the Pancake House Group and the Max’s Entities) 100 Properties Certain Subsidiaries own real property. Trota Gimenez Realty Corporation owns two parcels of land which are used for the operations of Max’s Restaurant outlets in Baclaran and Ermita: Location Lot Area Branch Name (in sqm) Orosa St., Ermita, Manila 868.00 Max's Ermita Orosa Baclaran, Paranaque City 990.20 Max's Baclaran The Real American Doughnut Company, Inc. owns 4 parcels of land with a total area of 894 square meters in Barrio Kapitolyo, Pasig City. Max’s Kitchen, Inc. also owns a 2,555 square meter parcel of land at Nuvali, Sta. Rosa, Laguna. MGOC Holdings, Inc. also owns a piece of land with an area of 1,086 square meters in Bonifacio Global City, Taguig. These parcels of land are being held for future use. RooM Ventures Corp. owns a 675 square meter parcel of land in Roces Avenue, Quezon City on which Meranti, the Company’s specialty hotel project, is being developed. Aside from those described above, the Company conducts substantially all of its operations on land and/or buildings that are leased from third parties. 101 New Venture: Meranti The Company’s Subsidiary, RooM Ventures Corp., is currently pursuing the development of Meranti, a hotel project adjacent to the heritage store of Max’s Restaurant in Scout Tuason, Quezon City. The project was conceptualized to offer the quality and value that the Max’s brand is known to provide. It is intended to leverage on as well as complement the Group’s service capabilities. The Company aims to establish Meranti as a brand that delivers quality experience and excellent service. This first hotel project is currently being constructed on the 675 sq.m. parcel of land owned by RooM Ventures Corp. and is located adjacent to the heritage store of Max’s Restaurant in Scout Tuason, Quezon City. In conceptualizing this hotel, the well-known Filipino architectural firm Architecture Budji+Royal Design has been commissioned to plan the project and in partnership with Tangible, a Singaporean firm, the hotel’s brand identity and full brand architecture strategy for the hotel was created. The hotel will be targeting the domestic and foreign tourists, business travelers and locals who indulge in “staycations.” The hotel will have a total of approximately 60 rooms and will be equipped with recreational facilities. It expects to start commercial operations in 2015. Meranti is a registered trademark of RooM Ventures Corp. 102 Competition The restaurant industry in the Philippines and other areas where the Group has international operations is intensely competitive. The Group competes mainly with other well-established local and international casual dining restaurants as well as chains such as the Bistro Group which operates Friday's and Italianni's (including Fish & Co., Flapjacks, Bulgogi Brothers, Watami, Modern Shanghai and others); Global Restaurant Concepts, Inc. which operates California Pizza Kitchen, P.F. Chang’s, IHOP, Gyu-Kaku; the LJC Group which operates Abe's and others; Conti’s; Aristocrat; Savory; Sumo Sam; Gerry’s Grill; Tokyo Tokyo; Pepper Lunch and Kenny Rogers Roasters which are principal direct competitors. The Group also competes in certain market segments with local and international brands (such as Jollibee, McDonald’s and KFC). In the pizza category, Yellow Cab also competes with Greenwich, Shakey's Pizza and Pizza Hut. In the specialty food category Jamba Juice competes with Big Chill. In the bakery products fastfood category, Krispy Kreme competes with Starbucks and J. Co Donuts & Coffee while Le Coeur de France competes with The French Baker and Café France. The Group competes with both regional and local casual dining and fast casual service restaurants on the basis of product choice, quality, affordability, service, and location and the nature and condition of the restaurant facility. The Group operates in Metro Manila and various other cities in Luzon, Visayas and Mindanao. In addition, the Group operates twelve restaurants in North America (USA and Canada), nine restaurants in the Middle East (UAE and Qatar) and six restaurants in Malaysia. For the Group’s store locations, please see Diagram 1 on page [9] of this Prospectus. According to Euromonitor, “The vibrant economic performance in the Philippines has brought a dose of optimism, and facilitated the establishment of shopping centres, which have provided high potential sites for Max’s and Krispy Kreme outlet expansions.” The recent improvements in the Philippine economy as well as the growth of businesses such as business process outsourcing, a younger and growing consumer sector have created consumer trends that have increasingly favored dining out on a more frequent basis. With the affinity of the Filipino for featuring food in family and other group celebrations, the Company believes that it is well placed to benefit from these developments. The Company believes that both its historical successes, its strong brands and its operational strategies allow it to compete effectively and maintain its leadership in the casual dining market. The Company also believes that the following factors support it ability to compete: its extensive network of 525 restaurants, diverse revenue channels, operational excellence, quality consciousness and innovation, ability to achieve economies of scale, strong principal shareholder involvement in management, corporate culture of employee growth and loyalty and proven ability to expand. In addition to competing for customers, the Group also competes for franchisees, management personnel and employees. Competitors may be able to offer greater resources to their franchisees (for example, in terms of training and franchise support), as well as better salaries, compensation and benefits to their management personnel and employees, all of which may enable them to attract and retain franchisees and employees better than the Company can. The market for retail real estate is also highly competitive. The Company 103 believes that, based on its size advantage and their greater financial resources, it has a relatively better ability to negotiate more favorable ground lease terms than its competitors particularly for desirable locations. As a result, the Company believes that it will be able to obtain new leases for new restaurants or renew existing leases on comparatively favorable terms. 104 GOVERNANCE Corporate Governance & Policies The Company recognizes the importance of corporate governance in enhancing the stakeholders’ interests and maintaining relationships for the Group. Accordingly, the Board of Directors and management have committed themselves to the principles of good corporate governance. The principles for corporate governance of the Group are contained in the Company’s articles of incorporation and by-laws, as amended to date, and its Manual of Corporate Governance in compliance with SEC Memorandum Circular No. 6, Series of 2009, a copy of which was submitted to the SEC in the same year. In compliance with SEC Memorandum Circular No. 09, Series of 2014, the Company submitted its amended Manual of Corporate Governance to the SEC on June 10, 2014. The Board of Directors The Company’s Board of Directors consists of nine (9) directors, of which two (2) are independent directors. The present Board was elected on February 24, 2014 following the completion of the acquisition by the Max’s Entities of a controlling interest in the Company and was re-elected on June 10, 2014 at the Annual Stockholders Meeting of the Company. The directors will hold office until their successors have been duly elected and qualified. On May 12, 2014, at a meeting of the Board, the directors also elected Ms. Erlinda T. Fuentebella as Chairman Emeritus to serve as senior advisor to the Company. The Board is responsible for the overall management and supervision of the Company. The Board establishes the overall goals, strategies and policies of the Company in particular and of the Group in general. The Board strives to regularly monitor the effectiveness of management’s decisions and the execution of the Company’s strategies. There is a mix of executive, non-executive and independent directors on the Board. Senior management executives attend Board meetings on a regular basis even though they are not members of the Board. The table and discussion below sets forth the particulars on the Company’s Board of Directors and its executive officers: 105 Name Age Nationality Position Sharon T. Fuentebella 48 Filipino Chairperson Robert F. Trota 47 Filipino President and Chief Executive Officer Carolyn T. Salud 50 Filipino Director Dave T. Fuentebella 47 Filipino Director & Chief Finance Officer Cristina T. Garcia 49 Filipino Director, Treasurer Jim T. Fuentebella 46 Filipino Director William E. Rodgers 52 American Director Antonio Jose U. Periquet 53 Filipino Independent Director Christopher P. Tanco 51 American Independent Director Gemma M. Santos 52 Filipino Corporate Secretary Rebecca R. Arago 42 Filipino Compliance Officer SHARON T. FUENTEBELLA, Chairperson Sharon T, Fuentebella, age 48, Filipino, currently sits as President of The Real American Doughnut Company, Inc., Fresh Healthy Juice Boosters, Inc., MGOC Holdings Corp. and Trota, Gimenez Realty Corp. She holds the Directorship and acts as Chairperson to most of Max’s corporations and its affiliates namely: Max’s Ermita, Inc., Chicken’s R Us, Inc., Max’s Food Services, Inc., Max’s Baclaran, Inc., Max’s Makati, Inc., Max’s Kitchen, Inc., Max’s Circle, Inc., Max’s SM Marikina, Inc. and other affiliates such as, Ad Circles, Inc., No Bia, Inc., Square Top, Inc., Room Ventures, Corp., Max’s Express Restaurants, Inc., and Max’s Bakeshop, Inc. Ms. Fuentebella holds a Bachelor of Science degree in Business Management from the De La Salle University and has completed training seminars/programs for managing family-owned companies conducted by the Asian Institute of Management (AIM) and managing growing companies from Stanford University. ROBERT F. TROTA, President and Chief Executive Officer Robert F. Trota, age 47, Filipino, currently serves as President of No Bia, Inc. He is also on the Board of Directors for most of the Max’s Entities. He is currently the Vice Consul for the Consulate General of Ireland. Moreover, Mr. Trota served as Chairman of the PFA from June 2009 to 2013. Mr. Trota holds a Bachelor of Science degree in Business Management from the De La Salle University and has completed training seminars/programs for effective 106 management and family-owned company governance and management conducted by the Asian Institute of Management (AIM). DAVE T. FUENTEBELLA, Director and Chief Finance Officer Dave T. Fuentebella, age 47, Filipino, is a banking professional, having held various positions in BPI Capital, Citibank, Standard Chartered Bank, and Credit Agricole since 2001. He has been the Director and Head of Global Transaction Banking in Deutsche Bank since 2012. He previously served as Director in Max’s Makati, Inc., Max’s Kitchen, Inc., Max’s Sta. Mesa, Inc. and Square Top, Inc. Mr. Fuentebella holds a Bachelor of Arts degree in Economics and Political Science from the University of California, Berkeley and completed his Master’s Degree in Business in the Asian Institute of Management (AIM). CRISTINA T. GARCIA, Director and Treasurer Cristina T. Garcia, age 49, Filipino, is currently the Resident Agent and Director for Finance of Global Max Services Ltd. – ROHQ. She likewise holds the Directorship and Treasurer positions in various companies namely: Max’s Ermita, Inc., Max’s Food Services, Inc., Chicken’s R Us, Inc., Max’s Baclaran, Inc., Max’s Circle, Inc., Max’s Express Restaurants, Inc., No Bia, Inc., Trofi Ventures Corp., Trofi Holdings Corp., Trofi Boosters Corp., Max’s SM Marikina, Inc., Room Ventures Corp., Max’s Bakeshop, Inc., Max’s Franchising, Inc., Max’s Makati, Inc., Max’s Kitchen, Inc., The Real American Doughnut Company, Inc., Fresh Healthy Juice Boosters, Inc., MGOC Holdings, Inc., Ad Circles, Inc., Square Top, Inc. and Trota, Gimenez Realty Corp. Ms. Garcia holds a Bachelor of Science degree in Business Management from the Ateneo de Manila University (1986). CAROLYN T. SALUD, Director Carolyn T. Salud, age 50, Filipino, holds the Directorship and President position of Max’s corporations namely: Max’s Ermita, Inc., Chicken’s R Us, Inc., Max’s Food Services, Inc., Max’s Baclaran, Inc., Max’s Makati, Inc., Max’s Kitchen, Inc., Max’s Circle, Inc., Max’s SM Marikina, Inc. and other affiliates such as, Ad Circles, Inc., No Bia, Inc., Square Top, Inc., Room Ventures, Corp., Max’s Express Restaurants, Inc., and Max’s Bakeshop, Inc. She likewise serves as Chairperson of Fresh Healthy Juice Boosters, Inc., The Real American Doughnut Company, Inc., Trofi Boosters Corp., Trofi Holdings, Corp., Trofi Ventures, Corp., Trota, Gimenez Realty Corp. and MGOC Holdings, Corp. Ms. Salud holds a Bachelor of Science degree in Business Administration from Assumption College. JIM T. FUENTEBELLA, Director Jim T. Fuentebella, age 46, Filipino, is currently a Director and the Vice President for Marketing of Max’s Group of Companies, The Real American Doughnut Company, Inc., Fresh Healthy Juice Boosters, Inc., MGOC Holdings, Inc., Trota, Gimenez Realty Corp , Ad Circles, Inc., Square Top, Inc. NO Bia, Inc. and Room Ventures, Corp. Mr. Fuentebella holds a Bachelor of Arts degree in Graphic Design with a minor in Business Administration from the Academy of Art, University of San Francisco and has completed training seminars/programs for effective management and family-owned company governance and management conducted by the Asian Institute of Management (AIM). 107 WILLIAM E. RODGERS, Director William E. Rodgers, age 52, American, is the President of MG Rodgers Phil. Inc. He is a Director for eMax’s LLC, Alpha Max Group LTD, Ad Circles, Inc., Max’s Franchising, Inc., Room Ventures Corp., and Trota Gimenez Realty Corp. Mr. Rodgers holds a Master’s Degree in Economic Development from Columbia University and has completed training seminars/programs for family-owned company governance and management conducted by the Asian Institute of Management (AIM). ANTONIO JOSE U. PERIQUET, JR., Independent Director Antonio Jose U. Periquet, Jr. age 53, Filipino, served as the Managing Director and Head of Research and Country Strategist at Deutsche Bank AG, Research Division. Mr. Periquet served with Deutsche Morgan Grenfell, Asia Equity (UK) Limited, Peregrine Securities (UK) Ltd., San Miguel Corporation and Center for Research and Communication. He has been the Chairman of Pacific Main Holdings Inc. since 1999, Campden Hill Group since 2012 and Regis Financial Advisers since 2012. He served as the Chairman of Deutsche Regis Partners from 1999 to August 2010. He has been an Independent Director of DMCI Holdings, Inc. since August 24, 2010 and Ayala Corp. since September 2010. He serves as a Trustee of Lyceum of the Philippines University. He has been an Independent Director of BPI Capital Corporation since 2010, Philippine Seven Corp. since 2010 and BPI Family Bank since 2012. He serves as an Independent Director of Philippine Coastal Storage & Pipeline Corp., and Clark Pipeline & Depot Co, Inc. He serves as a Director of Capstone Technologies Inc., and The Straits Wine Company Inc. He has been an Independent Director at Bank of the Philippine Islands since April 19, 2012. Mr. Periquet serves as Independent Director of ABS-CBN Holdings Corporation. He has been a Member of Advisory Board at ABS-CBN Corporation since June 16, 2011 and also has been its Member of Advisory Board since June 16, 2011. He is a Member of the Global Advisory Council, Darden School of Business, and University of Virginia. He served as an Independent Director of Active Alliance, Incorporated until April 2008. He served as a Director of Bloomberry Resorts Corporation until April 2008 and Development Bank of the Philippines from 2010 to April 25, 2012. He is an accomplished Fund Manager. The Fund Managers Association of the Philippines recognized him as the Best Strategist for seven consecutive years, from 2003 to 2010, and Best Analyst in 2009 and 2010. He was also adjudged the Best Analyst in 2004 by Asiamoney. Mr. Periquet has a Bachelor of Arts degree in Economics from Ateneo de Manila University in 1982, M Sc in Development Economics degree from the Oxford University in 1988 and MBA degree from the University of Virginia in 1990. CHRISTOPHER P. TANCO, Independent Director Christopher P. Tanco, age 51, American, has been Head of International and Executive Vice President at 7-Eleven, Inc. since March 2012. Mr. Tanco served as the Senior Vice President of International at 7-Eleven, Inc. from November 2009 to February 2012. Mr. Tanco leads the international team and oversees international licensing and global expansion for 7-Eleven. Previously, he served as the Chief Franchise Officer of Yum! Brands from February 2007 to November 2009. With nearly 20 years of experience, he served in various International, Operations and Franchising leadership roles. He began his career as an Area Manager and later, a Regional Vice President for Pizza Hut. In 1998, Mr. Tanco was promoted to General 108 Manager of the Franchise Development team for South America and later promoted to Vice President of Global Restaurant Excellence for Yum!.Brands. Mr. Tanco holds a Bachelor’s Degree from Ateneo de Manila University and a Master’s Degree in Business from the University of Virginia Darden School of Business. GEMMA M. SANTOS, Corporate Secretary Gemma M. Santos, age 52, Filipino, has been Corporate Secretary of the Company since February 24, 2014. Ms. Santos is a director of the Philippine Associated Smelting & Refining Corporation (PASAR) and also serves as Corporate Secretary of various Philippine corporations, including publicly-listed corporations Vista Land & Lifescapes, Inc. and Roxas Holdings, Inc. She is a practicing corporate lawyer and a Senior Partner in Picazo Buyco Tan Fider & Santos Law Offices. She was admitted to the Philippine Bar in 1986. She graduated from the University of the Philippines with the degree of Bachelor of Laws in 1985, and with the degree of Bachelor of Arts, major in History, in 1981. REBECCA R. ARAGO, Chief Compliance Officer and Corporate Information Officer Rebecca R. Arago, age 42, Filipino, serves as the Chief Finance Officer of the Max's Group of Companies (MGOC), a position she has held since 2008. Prior to joining MGOC, Ms. Arago served as Assistant Vice-President for Finance of Ubix Corporation, Comptroller of Philippine Seven Corporation, Accounting Manager of Shoemart Inc., Chief Accountant of Puerto Azul Beach & Country Club, and Senior Auditor of SyCip, Gorres, Velayo & Co. She was elected President of the Association of CPAs in Commerce and Industry (ACPACI), the primary sectoral organization of certified public accountants in the commerce and industry sector of the Philippine Institute of Certified Public Accountants (PICPA), in 2012. Ms. Arago obtained her Bachelor of Accountancy from the Polytechnic University of the Philippines and is a Certified Public Accountant. Other than their interests as shareholders, the directors are free from any relationship that may interfere with their judgment as directors. Criteria for Independence for Independent Directors The Board assesses the independence of each director and of each individual nominated for election to the Board as an independent director. As part of this analysis, the Board must review and conclude whether each nominee for independent director satisfies the requirements of the rules of the SEC, the by-laws and the Manual of Corporate Governance. Under the Manual of Corporate Governance, independent directors (i) are not directors or officers or substantial stockholders of the Company or its related companies or any of its substantial shareholders (other than as independent directors of any of the foregoing); (ii) are not relatives of any director, officer or substantial shareholder of the Company, or any of its related companies or any of its substantial shareholders; (iii) are not acting as nominees or representatives of a substantial shareholder of the Company, or any of its related companies or any of its substantial shareholders; (iv) have not been employed in any executive capacity by the Company, or any of its related companies or by any of its substantial shareholders within the last 2 years; (v) are not retained as professional advisers by the Company, any of its related companies or any of its substantial shareholders within the last 2 years, either 109 personally or through their firms; (vi) have not engaged and do not engage in any transaction with the Company or with any of its related companies or with any of its substantial shareholders, whether by themselves or with other persons or through a firm of which they are partners or companies of which they are directors or substantial shareholders, other than transactions which are conducted at arms-length and are immaterial; and (vii) do not own more than 2% of the shares of the Company and/or its related companies or any of its substantial shareholders. Mr. Periquet and Mr. Tanco do not possess any of the disqualifications enumerated under Section II (5) of the Code of Corporate Governance and Section II (D) of SEC Memorandum Circular No. 16, Series of 2002. Board Performance The Board regularly meets to review the performance of the Company and its subsidiaries, approve any pertinent plans, budgets, and financial statements, set guidelines for management, and discuss any various matters requiring Board attention and approval. Any member of the Board may ask management to give special reports and analysis on certain issues. From February 24, 2014 to July 31, 2014, the Board had a total of 8 meetings. The following table summarizes the attendance of the directors at the meetings held by the Board for said period: Position Name Total No. of Board Meetings No. of Meetings Attended Percentage of Attendance Attendance at Annual Stockolders’ Meeting Chairperson Sharon T. Fuentebella 8 8 100 Y President & Chief Executive Officer Robert F. Trota 8 8 100 Y Director and Chief Finance Officer Dave T. Fuentebella 8 8 100 Y Director and Treasurer Cristina T. Garcia 8 8 100 Y Director Carolyn T. Salud 8 8 100 Y Director Jim T. Fuentebella 8 7 88 Y Director William E. Rodgers 8 8 100 Y Independent Director Antonio Jose U. Periquet 8 6 75 Y Independent Director Christopher P. Tanco 8 6 75 Y 110 Compensation of Directors Each director receives a per diem amounting to P75,000 for every regular board meeting attended. There are no other arrangements for remuneration either by way of payments for committee participation or consulting contracts with the directors. Board Committees Board committees have been established to address any issues requiring the specialized attention and study of the Board. Executive Committee An Executive Committee has been constituted by the Board consisting of five (5) directors who are authorized to act on any matter requiring the attention and approval by the Board in between meetings of the Board. The following directors are the members of the Executive Committee: Sharon T. Fuentebella Chairperson Robert F. Trota Member Antonio Jose U. Periquet Member Cristina T. Garcia Member Jim T. Fuentebella Member Audit and Risk Committee The Audit and Risk Committee reviews the financial reports and risks, examines internal control systems, oversees the audit process as well as the company’s compliance with laws, and evaluates the company’s business conduct. The committee also oversees the formulation and establishment of an enterprise-wide risk management system, including the review, analysis and recommendation of policies, frameworks, strategies and systems to be used by the company to manage risks, threats and liabilities. The following directors are the members of the Audit and Risk Committee: Antonio Jose U. Periquet Chairperson Cristina T. Garcia Member Dave T. Fuentebella Member Carolyn T. Salud Alternate Member 111 Compensation Committee The Compensation Committee reviews any recommendations on incentive schemes and compensations of management and employees. The following directors are the members of the Compensation Committee: Antonio Jose U. Periquet Chairperson Carolyn T. Salud Member Sharon T. Fuentebella Member Nominations Committee The Nominations Committee reviews and evaluates the qualifications of all persons nominated to the Board and other appointments that require Board approval, and assess the effectiveness of the Board’s processes and procedures in the election or replacement of directors. The following directors are the members of the Nominations Committee: William E. Rodgers Chairperson Jim T. Fuentebella Member Christopher P. Tanco Member Proxy Validation Committee A Proxy Validation is constituted by the Board prior to the conduct of any meeting of stockholders to ensure the validation of proxies and authorities issued for the conduct of business at such meeting. Audit Matters Internal Audit The Internal Audit Division is responsible for providing independent and objective assurance and consulting services to the Group in general and the Company in particular through the Audit Committee. The main function of the division is to evaluate the adequacy, effectiveness, and efficiency of the Group’s internal control system and to recommend necessary control measures for its improvement. It likewise establishes an effective followup system to monitor the implementation of recommended controls. The division is composed of people with varied specializations, majority of which are certified public accountants. It also has internal auditors. 112 The division conducts regular audits of the Group based on an annual audit plan. Special audit projects are also undertaken as the need arises. The Internal Audit Division also works closely with the Investor Relations and Corporate Planning Group in preparing responses to the Corporate Governance Scorecard for publicly listed companies from 2008 to 2012. Beginning 2012, the division also works closely with the Group’s Risk Management Officer. Audit Committee Report for 2013 The Audit Committee, in fulfillment of its oversight responsibilities, represents and assists the Board by looking at the: Reasonableness of the Company’s financial statements and efficiency of the financial reporting process; Proper management of business risks and reliability of the internal control environment; Independence and on of internal audit functions and processes; Qualifications, independence, and fees of the Company’s external auditors with regard to the annual review of the Company’s financial statements; and Max’s Group’s compliance with legal and regulatory requirements. The roles and responsibilities of the Audit Committee are embodied in an Audit Committee Charter that is approved by the Board of Directors. To comply with the Audit Committee Charter, the Audit Committee confirms that: The Chairman of the Audit Committee is an independent director; Quarterly meetings held and attended by the Chairman and members of the Committee; The Committee reviewed and approved the internal audit scope and plans, as well as the manpower resources and competencies necessary to carry out the audit plan; The Committee reviewed and discussed the reports of the internal auditors, including the necessary corrective actions, with concerned management and internal auditors; The Committee reviewed and discussed the audited annual financial statements of the Max’s Group and its Subsidiaries with the management, internal auditors, and external auditors taking into consideration that: o Management is responsible for the Max’s Group’s financial statements and the related statements of financial condition and results of operations, and; o SGV & Co., the Company’s independent auditors as at December 31, 2013, was responsible for expressing an opinion on the conformity of the Company’s audited consolidated financial statements with the Philippine Financial Reporting Standards and International Financial Reporting Standards as appropriate. Compliance Officer The Company has appointed a Compliance Officer who is tasked to ensure the Group’s observance of corporate governance best practices and provide recommendations to the Board for continuous improvement towards full compliance and adoption of global best practices. 113 The Compliance Officer also issues an annual certification on the compliance of the Board with the Company’s Corporate Governance Manual. The Company submitted to the SEC a certification of the Board’s compliance with the Company’s Corporate Governance Manual last January 22, 2013. Risk Management The Board of Directors and management are mindful of the potential impact of various risks to the Group’s ability to deliver quality content across multiple platforms and consequently, as a result of its operations, value to shareholders. The Company’s corporate strategy formulation and business decision-making processes always take into account potential risks and the steps and costs necessary to minimize, if not eliminate, such risks. As part of its stewardship responsibility and commitment to deliver optimum value to its stakeholders, the Company ensures that it has the proper control systems in place, and to the extent possible, adopted global best practices, to identify, assess, analyze and mitigate market, operating, financial, regulatory, community, reputational, and other risks. Disclosures and Financial Reporting The Company’s financial statements and those of its Subsidiaries comply with Philippine Financial Reporting Standards. The annual consolidated financial statements provide information on the financial condition and results of operations of the businesses of the Company and its Subsidiaries. These financial statements include detailed information on the total assets, total liabilities and shareholders’ equity, revenues, costs and expenses, income before tax, net income attributable to shareholders of the Company and minority interest and earnings per share. Business segment information is likewise provided for major business categories and includes information such as revenues, net income, assets and liabilities, capital expenditures and depreciation and amortization expenses, and EBITDA. Dealings in Securities The Company requires all members of the Board of Directors and principal officers to report any purchase, sale or change in their shareholdings of the Company common shares within five trading days, in compliance with the PSE’s requirement for such disclosure. Shareholder and Investor Relations The Company fully respects shareholder rights and complies with regulatory and legal requirements that enforce and ensure that such rights are respected. These requirements include due and proper notification for general meetings and provision of adequate, transparent and timely information due shareholders. As a publicly listed corporation, the Company is subject to reporting requirements prescribed by regulatory authorities, including the SEC and the PSE, among others. The Company is 114 compliant in submitting timely structured and non-structured reports and disclosure filing required by the SEC and the PSE. To complement these disclosures, the Investor Relations Group also holds regular analyst and press briefings coincident with its quarterly and annual report submissions that further explain, elaborate on and contextualize the Company’s operating performance and financial condition and results. The Chief Finance Officer, Treasurer, and Compliance Officer are always present at these investor, analyst and press briefings to address any questions that may be raised concerning the Company’s operating and financial results. In addition, the Chief Finance Officer, Treasurer and Compliance Officer attend various conferences throughout the year for more intimate and detailed discussions about the Group’s businesses, operating and financial results, business prospects and long-term plans. Inquiries from institutional and individual investors received by regular or electronic mail are also duly acknowledged and addressed in a timely and transparent manner. The Company maintains an investor relations website that contains information on the history and businesses of the company, its Board of Directors and senior management executives, financial information and reports and disclosures filed with the SEC and the PSE, share price performance and dividend history, and investor relations contact information, which website may accessed on [http://www.pancakehouse.com.ph/investor/index.html.] Management The Company’s executive officers and management team cooperate with its Board by preparing appropriate information and documents concerning the Company’s business operations, financial condition and results of operations for its review. Significant Employees No single person is expected to contribute more significantly than others do to the business since the Company considers the collective efforts of all its employees as instrumental to the overall success of the Company’s performance. Other than standard employment contracts, there are no arrangements with non-executive employees that will assure the continued stay of these employees with the Company. Family Relations Mr. Robert F. Trota, Ms. Cristina T. Garcia and Ms. Carolyn T. Salud are siblings. Ms. Sharon T. Fuentebella, Mr. Dave T. Fuentebella and Mr. Jim T. Fuentebella are siblings and children of Ms. Erlinda T. Fuentebella. The Trota siblings and the Fuentebella siblings are cousins. Mr. William Rodgers is the cousin of Ms. Erlinda Fuentebella. There are no other family relationships known to the Company other than the ones disclosed. 115 Involvement in Legal Proceedings To the best of the Company’s knowledge, there has been no occurrence during the past 5 years up to the date of filing of this Prospectus of any of the following events that are material to an evaluation of the ability or integrity of any director, any nominee or election as director, executive officer, underwriter or controlling person of the Company: Any bankruptcy petition filed by or against any business of which such person was an executive officer either at the time of the bankruptcy or within two years (2) prior to that time; Any conviction by final judgment, including the nature of the offense, in a criminal proceeding, domestic or foreign, or being subject to a pending criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses; Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; and Being found by a domestic or foreign court of competent jurisdiction (in a civil action), the Commission or comparable foreign body, or a domestic or foreign Exchange or other organized trading market or self-regulatory organization, to have violated a securities or commodities law or regulation, and the judgment has not been reversed, suspended, or vacated. 116 Compensation The following table summarizes the compensation of the President and key management personnel of the Company and its Subsidiaries for the six-month period ended June 30, 2014, and for the years ended December 31, 2013, 2012 and 2011: Name and Principal Position Period Aggregate Compensation (PhP) Other Annual Bonus Compe nsation Executive Officers 6 mos ended Sharon T. Fuentebella, Chairperson June 30, Robert F. Trota, President and CEO 2014 Cristina T. Garcia, Treasurer Carolyn T Salud, Director Dave T. Fuentebella, Director Jim T. Fuentebella, Director William E. Rodgers, Director Rebecca R. Arago, Compliance Officer Bernadette M. Lee, Chief Operating Officer, Pancake House Roy Marvin E. Quejada, Chief Operating Officer, Yellow Cab Maila Joy D. Mangubat, Chief Operating Officer, Teriyaki Boy Clara R. Sumajit, Human Resources & Devt. Director Maria Margarita S. Pablo, Supply Chain Director Victoria C. Alejandrino, Commissary Head Rowena B. Caingat, Projects & Maintenance, Director Ruby R. Bautista, Marketing Director NA N A Martin P. Lorenzo, Chairman & CEO* Cecile D. Macaalay, Chief Finance Officer** All Executive Officers as a Group Executive Officers Martin P. Lorenzo, Chairman & CEO Cecile D. Macaalay, Chief Finance Officer Bernadette M. Lee, Chief Operating Officer, Pancake House Roy Marvin E. Quejada, Chief Operating Officer, Yellow Cab Maila Joy D. Mangubat, Chief Operating Officer, Teriyaki Boy Clara R. Sumajit, Human Resources & Devt. Director Maria Margarita S. Pablo, Supply Chain Director Victoria C. Alejandrino, Commissary Head Rowena B. Caingat, Projects & Maintenance, Director Ruby R. Bautista, Marketing Director All Executive Officers as a Group ₱20,643,080 12 mos ended Dec 31, 2013 NA N A ₱18,809,270 117 Name and Principal Position Executive Officers Martin P. Lorenzo, Chairman & CEO Cecile D. Macaalay, Chief Finance Officer Bernadette M. Lee, Chief Operating Officer, Pancake House Roy Marvin E. Quejada, Chief Operating Officer, Yellow Cab Clara R. Sumajit, Human Resources &Devt. Director Olivia J. Vega – Head, Materials Management-Non-Food Judy E. Gabriel, Head, Materials Management-Food Victoria C. Alejandrino, Commissary Head Rowena B. Caingat, Projects & Maintenance, Director Ruby R. Bautista, Marketing Director Period Aggregate Compensation (PhP) 12 mos ended Dec 31, 2012 All Executive Officers as a Group Executive Officers Martin P. Lorenzo, Chairman & CEO Cecile D. Macaalay, Chief Finance Officer Bernadette M. Lee, Chief Operating Officer, Pancake House Roy Marvin E. Quejada, Chief Operating Officer, Yellow Cab Clara R. Sumajit, Human Resources &Devt. Director Olivia J. Vega – Head, Materials Management-Non-Food Judy E. Gabriel, Head, Materials Management-Food Victoria C. Alejandrino, Commissary Head Other Annual Bonus Compe nsation NA N A ₱13,157,637 12 mos ended Dec 31, 2011 All Executive Officers as a Group NA N A ₱11,147,750 *- resigned effective February 24, 2014 **- resigned effective April 15, 2014 Standard and Other Arrangements As at the date of this Prospectus, the Company has no existing arrangements with members of the Board of Directors, executive officers and employees. Employment Contracts and Change in Control Arrangements There are no special employment contracts between the Company and its executive officers. Furthermore, there are no special retirement plans for executives. There is also no arrangement for compensation to be received from the Company. 118 Warrants and Options Outstanding There are no outstanding warrants or option held by directors and officers nor are there any adjustments in the exercise price of said warrants or options. 119 CAPITALIZATION Capital Stock As at the date of this Prospectus, the Company has an authorized capital stock of P1,400,000,000 consisting of 1,400,000,000 common shares, each with a par value of P1.00 per share. As at the date of this Prospectus, 518,421,680 common shares are issued and outstanding. This does not include the 540,491,344 Exchange Shares that will be issued to the MGOC Shareholders in exchange and payment for the acquisition by the Company of all of the shares, rights and interest of the MGOC Shareholders in and to the Max’s Entities. Pursuant to such transaction, the Max’s Entities became Subsidiaries of the Company. [The Company has applied with the SEC for the confirmation of the valuation of the consideration for the issuance of the Exchange Shares to the MGOC Shareholders. The application is currently pending.] A total of 466,320,384 common shares of the issued and outstanding capital stock of the Company are held by the following Max’s Entities: Max’s Kitchen, Inc., Chicken’s R Us, Inc., Max’s Express Restaurants, Inc., Square Top, Inc., No Bia, Inc., Max’s Bakeshop, Inc., The Real American Doughnut Company, Inc., Room Ventures Corp., Trota Gimenez Realty Corp. and MGOC Holdings, Inc., all of which are currently already Subsidiaries of the Company. Max’s Entities and the Selling Subsidiaries The number of shares held by the Max’s Entities (including the Selling Subsidiaries), the number of Group Shares being offered for sale by the Selling Subsidiaries pursuant to the Offer, and the number of shares held by the Max’s Entities (including the Selling Subsidiaries) after the Offer are as follows: Max’s Entity Shares Held Prior to the Offer Group Shares Offered Shares Held After the Offer Max’s Kitchen, Inc. Chicken’s R Us, Inc. Max’s Express Restaurants, Inc. Square Top, Inc. No Bia, Inc. Max’s Bakeshop, Inc. The Real American Doughnut Company, Inc. Room Ventures Corp. Trota Gimenez Realty Corp. MGOC Holdings, Inc. 120 The following table sets out the Company’s capitalization as at June 30, 2014, and as adjusted to reflect (i) any material changes to the Company’s capitalization since end of the reported period and (ii) the sale of up to 238,744,884 New Shares and Group Shares, comprising of 34,106,416 New Shares and 204,638,468 Group Shares at the Offer Price of up to P29.50 per share. In P Mn Indebtedness Current Liabilities Noncurrent Liabilities Total Liabilities Capital Stock/Paid-in surplus Retained Earnings Accumulated other comprehensive income (loss) Shares held by Subsidiaries Noncontrolling interests Total Equity Pro-forma as at June 30, 2014 Effect of the Offer Pro-forma Post-Offer 4,178.6 4,043.4 8,222.0 [●] [●] [●] [●] [●] [●] 4,600.7 448.5 [●] [●] [●] [●] (13.2) (4,093.8) 92.9 1,035.1 [●] [●] [●] [●] [●] [●] [●] [●] 121 THE SELLING SHAREHOLDERS The Selling Shareholders, the number of Secondary Shares being offered for sale by them in the Offer, and the number of shares they will hold after the Offer are as follows: Selling Shareholder Trofi Ventures Corp. Common Shares to be sold Secondary % of Secondary pursuant to the OverShares held outstanding Shares to allotment before the before the be sold in Option Offer Offer the Offer [●] [●] [●] [●] No exercise of Overallotment Option Full exercise of Overallotment Option Common Shares held after % the Offer [●] [●] Common Shares held after the % Offer [●] [●] WERCO Holdings, Corp. [●] [●] [●] [●] [●] [●] [●] [●] Ruby Investment Consolidated Holdings, Inc. [●] [●] [●] [●] [●] [●] [●] [●] WR Ventures Asia, Inc. [●] [●] [●] [●] [●] [●] [●] [●] FSS Realty Corporation [●] [●] [●] [●] [●] [●] [●] [●] 122 OWNERSHIP Except as stated herein, the Company has not knowledge of any person who, as of record date, was indirectly or directly the beneficial owner of more than 5% of the Company’s outstanding shares of common shares or who has voting power or investment power with respect to shares comprising more than 5% of the outstanding common shares. There are no persons holding more than 5% of the Company’s common shares that are under any voting trust or similar agreement. Security Ownership of Certain Record and Beneficial Stockholders The following are the top 20 stockholders of the Company as at June 30, 2014: Shareholder Name Nationality Shares held % to Total The Real American Doughnut Company, Inc. Filipino 66,701,391 25.73% Max's Bakeshop, Inc. Filipino 51,854,500 20.00% Max's Kitchen, Inc. Filipino 35,059,400 13.53% No Bia, Inc. Filipino 28,134,000 10.85% Chickens R' Us, Inc. Filipino 23,009,800 8.88% PCD Nominee Corp. (Filipino) Filipino 22,631,890 8.73% Square Top, Inc. Filipino 13,156,400 5.08% MGOC Holdings, Inc. Filipino 7,389,300 2.85% Trota Gimenez Realty Corporation Filipino 6,933,500 2.67% RooM Ventures Corp. Filipino 679,700 0.26% Joanne Que Lim Filipino 500,000 0.19% Walter Que Lim Filipino 500,000 0.19% Wilson Lim and/or Judy Que Lim Filipino 500,000 0.19% Winston Que Lim Filipino 500,000 0.19% Wilson Jessee Q/. Lim Jr. Filipino 500,000 0.19% Jacqueline Q. Lim Ong Filipino 500,000 0.19% Max's Express Restaurants, Inc. Filipino 241,700 0.09% PCD Nominee Corp. (Non-Filipino) Foreign 77,001 0.03% Consuelo Tan Filipino 30,000 0.01% Mel Macaraig Filipino 30,000 0.01% 123 Security Ownership of Directors and Management The following table shows the security ownership of directors and management in the common shares of the Company as at June 30, 2014. Name Amount and Nature of Beneficial Ownership Citizenship No. of Shares % Ownership Direct Indirect Robert F. Trota 1 26,620,196 Filipino 26,620,197 10.27% Carolyn T.Salud 1 26,306,710 Filipino 26,306,711 10.15% Cristina T. Garcia 1 26,306,710 Filipino 26,306,711 10.15% Jim T. Fuentebella 1 3,176,864 Filipino 3,176,865 1.23% Dave T. Fuentebella 1 9,178,079 Filipino 9,178,080 3.54% Sharon T. Fuentebella 1 14,764,221 Filipino 14,764,222 5.70% William E. Rodgers 1 2,760,929 2,760,930 1.06% Antonio U. Periquet 1 - Filipino 1 0.00% Christopher P. Tanco 1 - American 1 0.00% American Dilution The net book value attributable to the holders of the Company’s common shares, based on the Company’s pro forma financial statements as at [] 2014, was [], or [] per common share. The book value attributable to the Company’s common shareholders represents the amount of the Company’s total equity attributable to equity holders of the Company. The Company’s book value per share is computed by dividing the book value attributable to the Company’s common shareholders by the equivalent number of common shares outstanding. Without taking into account any other changes in such book value after [] 2014 other than the sale of [] Offer Shares at the Offer Price of P[] per Offer Share and after deduction of the underwriting discounts and commissions and estimated offering expenses of the Offer payable by the Company, the Company’s net book value as at listing would [increase] to [], or [] per common share. This represents an immediate [increase] in net book value of [] per common share to existing shareholders, and an immediate dilution of [] per common share to purchasers of Offer Shares at the Offer Price of P[] per Offer Share. Dilution in pro forma book value per share to investors of the Offer Shares represents the difference between the Offer Price and the pro forma book value per share immediately following the completion of the Offer. The pro forma book value per share immediately following the completion of the Offer represents the book value per share as at [] 2014, after giving effect to the Offer. 124 The following table illustrates dilution on a per share basis based on an Offer of [] Offer Shares at an Offer Price of up to P[] per Offer Share: Offer Price per Offer Share .................................................................................................. Book value per common share as at [] 2014 ...................................................................... Difference in Offer Price per Offer Share and book value per Offer Share as at [] 2014 .... Pro forma book value per common share immediately following completion of the Offer..... Dilution in pro forma book value per common share to investors of the Offer Shares ............... [] [] [] [] [] The following table sets forth the shareholdings and percentage of common shares outstanding of existing and new shareholders of the Company immediately after completion of an Offer of [] Offer Shares: 125 Existing shareholders ......................................................................................................... New investors ......................................................................................................... Total ......................................................................................................... Common Shares Number [] % [%] [] [%] [] 100.0% Investors may incur immediate and substantial dilution in value as a result of purchasing Offer Shares. The issue price of the common shares in the Offer may be substantially higher than the net tangible book value of net assets per share of the Company’s outstanding Common Shares. Therefore, purchasers of Offer Shares may experience immediate and substantial dilution and the Company’s existing shareholders may experience a material increase in the net tangible book value of net assets per share of the Common Shares they own. Matters Affecting Liquidity and Capital Expenditure As regards internal and external sources of liquidity, funding will be sourced from internally generated cash flows, and also from borrowings or available credit facilities from other local and international commercial banks. There is no material commitment for capital expenditures other than those performed in the ordinary course of trade or business. There is no significant element of income not arising from continuing operations. There have not been any seasonal aspects that had a material effect on the financial condition or results of the Company’s operations. 126 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview On February 24, 2014, certain Max’s Entities (the Selling Subsidiaries) acquired a total of approximately 89.95% of the outstanding stock of the Company. On June 30, 2014, the Company’s Board of Directors approved the integration of the Max’s Entities into the Company and the MGOC Shareholders conveyed to the Company all of their shares, rights and interests in and to the Max’s Entities in consideration for the issuance by the Company of the Exchange Shares to the MGOC Shareholders (the “Integration”). Pursuant to such transaction, the Max’s Entities became Subsidiaries of the Company. For the avoidance of doubt, references to the “Pancake House Group” shall mean those business units that had been in the Company prior to the Integration and references to the “Max’s Entities” shall mean the business units conveyed by the MGOC Shareholders to the Company in the Integration. The financial information hereinafter presented comprise of the following (i) the pro-forma combined financial information of the Pancake House Group and the Max’s Entities as at and for the periods ended December 31, 2013 and June 30, 2014 illustrating the impact of the Integration had such Integration occurred as at the beginning of the periods presented, (ii) financial information on the Pancake House Group as at and for the periods ended December 31, 2013, 2012 and 2011 and June 30, 2014 and June 30, 2013 without taking into the account the impact of the Integration, and (iii) the pro-forma financial information of the Max’s Entities presented as a group and taking into account the combined balances of each of the Max’s Entities as at and for the periods ended December 31, 2013 and June 30, 2014. PRO-FORMA CONSOLIDATED FINANCIAL INFORMATION The following tables present the combined balances of the Pancake House Group and the Max’s Entities as at the periods presented, taking into account the appropriate eliminating entries. The following information is meant to be read in conjunction with the pro-forma consolidated financial statements of the Company that form part of Financial Information on page [130] of this Prospectus. 127 Pro-forma Consolidated Income Statements In ₱Mn REVENUES COST OF SALES AND SERVICES GROSS PROFIT GENERAL AND ADMINISTRATIVE EXPENSES PROVISION FOR IMPAIRMENT LOSS OTHER OPERATING INCOME (CHARGES) FINANCE INCOME (COSTS) INCOME (LOSS) BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX NET INCOME (LOSS) NET INCOME (LOSS) ATTRIBUTABLE TO Equity holders of the Parent Company Noncontrolling interest For the six months ended June 30, 2014 For the year ended December 31, 2013 Pancak e House Group Pancake House Group Share Swap and Eliminating Entries Max’s Entities Proforma Amounts Share Swap and Eliminating Entries Max’s Entities Pro-forma Amounts 1,832.8 (1,545. 8) 2,777.1 (30.3) 4,579.6 3,751.6 5,468.4 – 9,220.0 (2,115.2) 30.3 (3,630.7) (3,067.2) (4,185.8) – (7,253.0) 287.0 661.9 – 948.9 684.4 1,282.6 – 1,967.0 (273.7) (507.1) – (780.8) (568.0) (1,022.1) – (1,590.1) (106.5) (0.1) – (106.6) – – – – 45.2 42.9 – 88.1 88.9 43.9 – 132.8 (16.0) (91.0) – (107.0) (62.6) (18.8) – (81.4) (64.0) 106.6 – 42.6 142.5 285.7 – 428.3 (27.4) 31.0 – 3.7 63.3 104.2 – 167.5 (36.6) 75.5 – 38.9 79.3 181.5 – 260.8 (28.7) 75.5 – 46.8 105.6 181.5 – 287.1 (7.9) – – (7.9) (26.3) – – (26.3) (36.6) 75.5 – 38.9 79.3 181.5 – 260.8 128 Pro-forma Consolidated Statements of Financial Position As at June 30, 2014 In ₱Mn Total Current Assets Total Noncurrent Assets Total Assets Total Current Liabilities Total Noncurrent Liabilities Total Liabilities Capital stock Additional paidin capital Notes for conversion to equity Retained earnings Other comprehensive income (loss) Shares held by subsidiaries Noncontrolling interests Total Liabilities and Shareholders' Equity Pancake House Group Max’s Entities As at December 31, 2013 Share Swap and Eliminating Entries Proforma Amounts Pancake House Group Max’s Entities Share Swap and Eliminating Entries Proforma Amounts 894.6 1,146.9 (30.9) 2,010.6 951.1 1,150.6 – 2,101.7 2,103.3 11,062.4 (5,919.2) 7,246.5 2,018.8 1,377.7 3,250.2 6,646.7 2,997.9 12,209.3 (5,950.1) 9,257.1 2,969.9 2,528.3 3,250.2 8,748.4 1,886.1 2,292.5 – 4,178.6 1,821.8 1,415.4 – 3,237.2 112.4 3,931.0 – 4,043.4 122.7 309.4 – 432.1 1,998.5 6,223.5 – 8,222.0 1,944.5 1,724.8 – 3,669.3 259.2 502.5 (232.2) 529.5 237.8 465.9 (195.7) 508.0 287.7 20.5 3,763.0 4,071.2 176.7 20.5 3,763.0 3,960.2 – – – – 120.4 – – 120.4 373.0 142.0 (66.5) 448.5 401.7 345.7 (345.7) 401.7 (13.4) 5,320.8 (5,320.6) (13.2) (12.1) (28.6) 28.6 (12.1) 906.5 5,985.8 (1,856.3) 5,036.0 924.5 803.5 3,250.2 4,978.2 – – (4,093.8) (4,093.8) – – – – 92.9 – – 92.9 100.9 – – 100.9 999.4 5,985.8 (5,950.1) 1,035.1 1025.4 803.5 3,250.2 5,079.1 2,997.9 12,209.3 (5,950.1) 9,257.1 2,969.9 2,528.3 3,250.2 8,748.4 129 Pro-forma Consolidated Cash Flow Statements In ₱Mn For the six months ended June 30, 2014 495.4 (107.4) (84.8) 0.4 For the year ended December 31, 2013 992.0 (82.6) (212.9) 1.2 – (69.1) 303.6 628.6 (4,839.7) (777.9) Net cash provided by financing activities 4,439.1 222.8 NET INCREASE (DECREASE) IN CASH (97.0) 73.5 CASH AT BEGINNING OF PERIOD 746.8 673.3 CASH AT END OF PERIOD 649.8 746.8 CASH FLOWS FROM OPERATING ACTIVITIES Net cash generated from operations Income taxes paid Dividends paid Interest paid Interest received Net cash provided by operating activities Net cash used in investing activities 130 DESCRIPTION OF KEY ITEMS For the Pancake House Group and the Max’s Entities Systemwide Sales Systemwide Sales pertains to sales from company-owned, joint venture and franchised stores. Revenues Revenues consist of sales from company-owned and joint venture stores (Store Sales), commissary sales to franchisees and third-parties (Commissary Sales), and Franchise Income. Store Sales refers to items bought in the restaurant including delivery and are recognized when the related orders are served. Commissary Sales pertains to goods sold to franchisees and external parties and are recognized upon delivery of orders. Franchise Income is derived from fees charged for the use of continuing rights granted in accordance with the franchise agreement, or other services provided during the period of the franchise agreement. Cost of Sales Cost of Sales pertains to cost of materials, direct labor and overhead directly attributable to the generation of sales. General and Administrative Expenses General and administrative expenses are generally recognized when the services are used or the expenses arise. Sales and Marketing Expenses Sales and marketing expenses, which represent advertising and other selling costs, are generally expensed as incurred. Finance Costs Finance costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds and are generally expensed in the period they are incurred. Certain finance costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. 131 Other Income Dividend Income is recognized when the right to receive payment is established. Service Income are recognized when the related services are rendered. Rental Income is recognized on a straight-line basis. Interest Income is recognized as the interest accrues using the effective interest rate method. Others include delivery income, income from sale of marketing collaterals to franchisees, gains on sale of assets and all other income not directly related to the normal course of business. Provision for Income Tax Provision for income tax for the current period and prior periods are measured at the amount expected to be paid to taxation authorities. The income tax rates and income tax laws used to compute the amount are those that have been enacted at the balance sheet date. 132 THE PANCAKE HOUSE GROUP The Pancake House Group operates the trade names “Pancake House”, “Maple”, “Yellow Cab”, “Dencio’s”, “Kabisera ng Dencio’s”, ”Teriyaki Boy”, “Sizzlin’ Steak”, “Singkit”, “Le Coeur de France”, and “The Chicken Rice Shop.” The following table sets out the systemwide sales, store sales, commissary sales, franchise income, gross profit, and number of stores for 9 of the 10 brands in the Pancake House Group for the periods indicated. As at June 30, 2014, there are no stores for the “Singkit” brand. The amounts presented exclude eliminations of intercompany transactions. As at and for the year ended December 31, In ₱ Mn except for Number of stores As at and for the six months ended June 30, 2013 2012 2011 2014 2013 Pancake House (including Maple) Systemwide sales 1,347.6 Store sales 751.7 Commissary Sales 251.3 Franchise income 64.5 Gross profit 254.9 Number of stores 115 1,187.1 617.1 216.3 69.0 235.8 104 1,137.3 576.6 209.4 60.1 217.8 88 694.8 378.2 122.1 29.7 110.7 117 664.6 372.4 100.5 32.4 134.0 113 Yellow Cab Systemwide sales Store sales Commissary Sales Franchise income Gross profit Number of stores 1,766.6 1,525.6 82.6 14.1 281.0 101 1,668.4 502.3 33.7 4.8 85.0 90 1,007.3 859.4 56.3 8.5 145.0 110 897.7 833.4 56.4 11.2 155.4 105 1,987.4 1,720.1 107.7 19.4 345.9 108 133 Dencio's and Kabisera ng Dencio’s Systemwide sales 276.4 Store sales 42.0 Commissary Sales 73.2 Franchise income 24.9 Gross profit 31.7 Number of stores 15 311.3 46.6 92.6 23.5 37.4 15 367.8 72.7 87.4 23.1 43.2 18 141.2 17.5 34.1 9.5 17.1 15 149.9 21.6 34.1 9.7 15.1 14 507.7 349.0 69.9 17.8 65.3 533.0 363.9 83.1 25.4 87.2 559.3 392.6 74.8 19.8 104.3 233.3 165.2 40.3 7.4 6.5 257.4 175.8 33.1 8.8 37.8 37 35 34 35 34 146.1 118.7 2.8 16 156.8 131.6 11.8 18 166.4 152.8 (3.3) 18 66.4 54.2 12.1 16 75.2 60.9 8.0 17 Teriyaki Boy Systemwide sales Store sales Commissary Sales Franchise income Gross profit Number of stores Sizzlin' Steak Systemwide sales Store sales Commissary Sales Franchise income Gross profit Number of stores 134 Le Coeur de France Systemwide sales Store sales Commissary Sales Franchise income Gross profit Number of stores 85.7 85.7 103.3 103.3 127.3 127.3 52.9 52.9 41.5 41.5 - - - - - (7.2) (6.3) 7.2 0.2 (0.3) 13 11 13 14 11 36.0 43.5 13.7 7.7 19.6 36.0 43.5 13.7 7.7 19.6 - - - - - (27.0) (15.3) (3.0) (5.2) (8.1) 2 5 1 2 4 The Chicken Rice Shop Systemwide sales Store sales Commissary Sales Franchise income Gross profit Number of stores 135 The following table summarizes the Pancake House Group’s total systemwide sales, revenues and number of stores for the periods ended and as at December 31, 2013, December 2012 and December 2011 as well as for the interim periods ended June 30, 2014 and 2013. As at and for the six months ended June 30, As at and for the year ended December 31, In ₱ Mn except for Number of stores 2013 2012 2011 2014 2013 Systemwide sales 4,387 4,102 4,040 2,204 2,106 Total Revenues 3,752 3,431 2,342 1,833 1,815 Store sales 3,103 2,832 1,841 1,547 1,525 Commissary Sales 504 467 395 230 226 Franchise income 145 132 106 56 64 Number of stores 306 289 262 309 292 136 RESULTS OF OPERATIONS The following table sets forth summary results of operations for the Pancake House Group for the periods indicated. In ₱ Mn 2013 REVENUES Store Sales Commissary Sales Franchise Income Total Revenues COSTS AND EXPENSES Cost of Sales*9 Cost of Labor* Operating Exp.* Sales & Marketing Exp.**10 Administrative Exp.** Total Costs and Expenses INCOME (LOSS) FROM OPERATIONS OTHER INCOME (CHARGES) INCOME (LOSS) BEF. INCOME TAX BENEFIT FROM (PROV. FOR) INCOME TAX NET INCOME(LOSS) ATTRIBUTABLE TO: Equity Holders of Parent Minority Interest Total EBITDA ATTRIBUTABLE TO: Equity Holders of Parent Minority Interest TOTAL EBITDA For the year ended December 31, % 2012 % 2011 % For the six months ended June 30, 20148 % 2013 % 3,103.2 503.5 144.9 3,751.6 82.7% 13.4% 3.9% 100.0% 2,831.6 467.1 132.0 3,430.7 82.5% 13.6% 3.8% 100.0% 1,840.5 394.7 106.5 2,341.7 78.6% 16.9% 4.5% 100.0% 1,547.3 229.7 55.8 1,832.8 84.4% 12.6% 3.0% 100.0% 1,525.2 225.5 64.2 1,815.0 84.0% 12.4% 3.5% 100.0% 1,381.3 527.7 1,158.3 131.4 436.8 3,635.5 116.1 26.3 142.5 38.3% 14.6% 32.1% 3.5% 11.6% 96.9% 3.1% 0.7% 3.8% 1,223.1 493.9 1,082.7 62.9 399.3 3,261.9 168.8 41.7 210.5 37.1% 15.0% 32.8% 1.8% 11.6% 95.1% 4.9% 1.2% 6.1% 852.8 351.3 689.1 28.2 255.4 2,176.8 164.9 (17.6) 147.3 38.2% 15.7% 30.8% 1.2% 10.9% 93.0% 7.0% -0.8% 6.3% 675.3 267.4 603.2 66.4 313.8 1,926.1 (93.3) 29.3 (64.0) 38.0% 15.0% 33.9% 3.6% 17.1% 105.1% -5.1% 1.6% -3.5% 661.9 257.3 552.3 51.7 198.5 1,721.7 93.4 16.0 109.2 37.8% 14.7% 31.5% 2.8% 10.9% 94.9% 5.1% 0.9% 6.0% (63.3) 79.3 -1.7% 2.1% (60.9) 149.6 -1.8% 4.4% (46.8) 100.5 -2.0% 4.3% 27.4 (36.6) 1.5% -2.0% (27.3) 81.9 -1.5% 4.5% 105.7 (26.4) 79.3 2.8% (0.7%) 2.1% 151.4 (1.8) 149.6 4.4% (0.1%) 4.4% 91.2 9.3 100.5 3.9% 0.4% 4.3% (28.7) (7.9) (36.6) (1.6%) (0.4%) (2.0%) 82.1 (0.2) 81.9 4.5% 0.0% 4.5% 436.4 12.7 11.6% 0.3% 444.4 21.8 13.0% 0.6% 300.9 39.0 12.8% 1.7% 65.9 (3.5) 3.6% (0.2%) 243.1 7.0 13.4% 0.4% 449.1 12.0% 466.2 13.6% 340.0 14.5% 62.4 3.4% 250.1 13.8% 8 Re-stated * Cost of Sales, Cost of Labor and Operating Expenses Ratios are computed as a % of Store Sales and Commissary Sales 10 ** Sales and Marketing Expenses and Administrative Expenses Ratios are computed as a % of Total Revenues 9 137 Six months ended June 30, 2014 and June 30, 2013 Revenues Pancake House Group’s consolidated revenues reached P1.83 billion, 1.0% higher compared to the P1.82 billion posted in the first half of 2013. Store sales increased 1.0% to P1.55 billion as at June 30, 2014 from P1.53 billion as at June 30, 2013 owing to a wider store network and a larger customer base. Commissary sales rose 2.0% to P229.7 million mainly driven by higher revenues of franchisees. Franchise income declined 13.0% to P55.8 million attributable to less franchise store openings in the first half of 2014. Yellow Cab and Pancake House anchored the Pancake House Group’s revenue momentum, with total revenues of these brands improving by 3% and 5.0% to P924.3 million and P583.6 million, respectively. This momentum is expected to be sustained as most of the new store openings across all the brands in the Pancake House Group are planned in the second half of 2014. Cost of Sales Combined store and commissary cost of sales for first half 2014 rose by 2.0% to P675.3 million, versus P661.9 million in the same period of the previous year. This is attributed to higher cost of raw materials, labor and packaging. Cost of labor for the six months ended June 30, 2014 amounted to P267.4 million, 4% higher than the P257.3 million reported for the six months ended June 30, 2013. The increase is primarily attributed to new stores opened in the second half of 2013. Operating Expenses General and administrative expenses increased 58% to P313.8 million for the first six months of 2014 against P198.5 million for the same period in the previous year on the back of additional provisions for impairment of P106.5 million for past due accounts. Selling and marketing expenses grew 28% to P 66.4 million in June 30, 2014 as opposed to P51.7 million in the same period of the previous year, due to intensified advertising activities aimed at broadening product awareness in the market. Other Income (Charges) Net other income, amounting to P29.2 million, came in 86% higher for the first half of 2014 compared to P15.7 million in first half of 2013. The increase in net other income is due to an increase in delivery income coupled with lower interest expense in the first half of 2014. Provision for Income Tax For the period ended June 30, 2014, income tax benefit amounted to P27.4 million while the first half of 2013 had income tax expense of P27.3 million. 138 Net Income The Pancake House Group reported a consolidated net loss of P36.6 million for the period ended June 30, 2014 compared to consolidated net income of P81.9 million for the same period in 2013. The reduction in net income can be largely attributed to the increased provisions for impairment recorded in the first half of 2014 related to past due accounts. EBITDA Consolidated EBITDA declined to P65.9 million for the six months of 2014, from P250.1 million in the same period last year. The decline is largely due to the increased provisions for impairment recorded in the first half of 2014 related to past due accounts. Twelve months ended December 31, 2013 vs December 31, 2012 Revenues Pancake House Group’s consolidated revenues increased by 9.4% to P3.75 billion during the year ended December 31, 2013 versus P3.43 billion in 2012. Store Sales increased by 9.6% to P3.10 billion in 2013 from P2.83 billion in 2012. Commissary sales increased by 7.8% to P503.5 million in 2013 from P467.1 million in 2012. Franchise income (continuing royalty and franchise fees) rose by 9.7%, to P144.9 million in 2013 as compared to P132.0 million in 2012. The strong topline growth was largely attributed to its two flagship brands namely, Pancake House and Yellow Cab. Pancake House’s revenues reached P1.20 billion in 2013 resulting in a double digit growth of 13.4% as compared to 2012 revenue of P1.06 billion. On the other hand, Yellow Cab continued to be a dominant player in the chained pizza fastfood category with revenues of P1.85 billion or a 14.0% growth in 2013 versus 2012 revenue of P1.62 billion as a result of robust operations. Cost of Sales The ratio of cost of sales to combined restaurant and commissary sales increased from 37.1% in 2012 to 38.3% in 2013. The higher ratio is due to increased prices of raw materials, paper costs and other packaging materials. The ratio of cost of labor to combined restaurant and commissary sales improved to 14.6% in 2013 from 15.0% in 2012. The improvement is due to the impact of the rationalization of commissary operations. Operating Expenses Operating expenses, as a percentage of combined restaurant and commissary sales, improved to 32.1% in 2013 vs 32.8% in 2012 as management continues to implement programs to streamline costs. Consolidated sales and marketing expenses significantly increased to P131.4 million in 2013 from P62.9 million in 2012 due to numerous brand revitalization programs to continuously 139 defend the brands from aggressive competitors especially for Teriyaki Boy and Sizzlin’ Steak. Marketing and ad campaigns for the other brands included loyalty programs, billboard communication and other forms of advertising. Administrative expenses came in at P436.8 million in 2013 versus P399.3 million in 2012, maintaining a ratio of 11.6% to total revenues. Other Income (Charges) Net other income of P26.3 million in 2013 is lower compared to net other income of P41.7 million in 2012. The decrease was attributable to the decline in the service income related to the culinary school operations. Provision for Income Tax For the twelve months ended December 31, 2013, provision for income tax was P63.3 million, an increase of 3.9% compared to P60.9 million reported in 2012. Net Income and EBITDA Pancake House Group’s profitability declined as it posted a net income ratio of 2.1% or P79.3 million in 2013 compared to P149.6 million or 4.4% in 2012 EBITDA declined to P449.1 million in 2013 or 12.0% of total revenues compared to P466.2 million or 13.6% of total revenues in 2012. The decline was attributable mainly to the intensified marketing campaigns and brand revitalization programs, both of which are expected to benefit the group in the succeeding years. Twelve months ended December 31, 2012 vs December 31, 2011 Revenues Pancake House Group’s revenues significantly increased by 46.5% to P3.43 billion in 2012 from P2.34 billion in 2011. Store Sales increased by 53.8% to P2.83 billion in 2012 from P1.84 billion in 2011. Commissary sales increased by 18.3% to P467.1 million in 2012 from P394.7 million in 2011. Franchise income rose by 23.9%to P132.0 million in 2012 as compared to P106.5million in 2011. The increase in the group’s revenues is mainly due to the full year consolidation of the Yellow Cab business which the Company acquired in August 2011. Cost of Sales The ratio of cost of sales to combined restaurant and commissary sales improved to 37.1% in 2012 from 38.2% in 2011. The cost improvement is due to enhanced supply chain efficiency and economies of scale across all raw material requirements of the stores. 140 The ratio of cost of labor to combined restaurant and commissary sales improved to 15.0% in 2012 from 15.7% in 2011. Operating Expenses Operating expenses, as a percentage of combined restaurant and commissary sales, went up to 32.8% in 2012 from 30.8% in 2011. Sales and marketing expenses in 2012 amounted to P62.9 million, significantly higher than 2011’s P28.2 million due to full consolidation of Yellow Cab’s costs and more active marketing campaigns in 2012. The ratio of administrative expenses to total revenues increased from 10.9% in 2011 to 11.6% in 2012 due to increasing costs of occupancy and utilities. Other Income (Charges) Net other income in 2012 amounted to P41.7 million while 2011 posted net other charges of P17.6 million. Net other income in 2012 included the recognition of service income related to the culinary school operations. Provision for Income Tax For the periods ended December 31, 2012 and December 31, 2011, provision for income tax was at P60.9 million and P46.8 million, respectively. Net Income and EBITDA Pancake House Group’s profitability ratio improved to 4.4% in 2012 with net income of P149.6 million from 4.3% in 2011 with net income of P100.5 million. EBITDA remained strong in 2012 at P466.2 million with a margin of 13.6%. 141 SELECT BALANCE SHEET ITEMS The table below sets forth the outstanding amounts of select balance sheet items of the Pancake House Group as at the dates presented: In P Mn Current Assets Total Assets Current Liabilities Total Liabilities Total Equity Current Ratio Solvency Ratio Debt-to-Equity Ratio As at June 30, 2014 894.6 2,997.9 1,884.5 1,998.5 999.4 0.47 1.50 2.00 As at December 31, 2013 2012 951.1 2,969.9 1,821.8 1,944.5 1,025.4 0.52 1.53 1.90 955.4 2,889.5 946.0 1,864.2 1,025.3 1.01 1.55 1.81 2011 931.3 2,688.6 884.7 1,777.0 911.6 1.05 1.51 1.91 Current Assets Current assets consist of cash, trade and other receivables, inventories, prepaid expenses and other current assets. Noncurrent Assets Noncurrent assets consist mainly of goodwill related to the Company’s acquisition of Yellow Cab, trademarks and other intellectual property rights, property and equipment, security deposits on lease contracts and other noncurrent assets. Current Liabilities Current Liabilities consist mainly of trade payables and short-term loans payable used to finance working capital requirements. Noncurrent Liabilities Noncurrent Liabilities consist mainly of retirement benefit obligations related to the Pancake House Group’s employees. Liquidity and Solvency In 2013, the Pancake House Group re-classified certain long term liabilities to current status as these obligations were subsequently settled in March 2014 and refinanced by a short-term loan for working capital purposes. The re-classification of these liabilities caused current ratio to go down in 2013 while solvency ratios remain healthy. 142 LIQUIDITY AND CAPITAL RESOURCES The Pancake House Group’s primary sources of liquidity are cash generated from operations and financing activities. The table below sets forth the Pancake House Group’s cash flow information for the periods indicated: In ₱ Mn For the six months ended June 30, 2014 For the year ended December 31, 2013 For the year ended December 31, 2012 157.1 356.2 393.3 (222.8) (299.8) (367.8) 35.0 (87.2) (60.8) (30.6) (30.8) (35.3) 341.7 372.5 407.8 311.1 341.7 372.5 Cash from operating activities Cash used in investing activities Cash from (used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents as at beginning of period Cash and cash equivalents as at end of period CAPITAL EXPENDITURES Below is a table showing of Pancake House Group’s programmed spending for the periods ended June 30, 2014, December 31, 2013 and December 31, 2012 For the six months ended June 30, 2014 For the year ended December 31, 2013 For the year ended December 31, 2012 Leasehold Improvements 37.5 119.3 98.5 Store and Kitchen Equipment 24.7 90.0 89.9 Furniture and Fixtures 5.9 26.0 34.4 Transportation Equipment 2.0 15.3 14.3 - 8.7 2.6 70.1 259.3 239.7 In ₱ Mn Construction in Progress Total 143 DEBT OBLIGATIONS AND COMMITMENTS The following table shows Pancake House Group’s principal debt obligations and commitments as at the indicated periods: In ₱ Mn Loans payable Trade and other payables Income tax payable Retirement benefit obligations Total As at June 30, 2014 As at December 31, 2013 As at December 31, 2012 1,129.5 737.2 14.0 76.0 1,956.7 1,090.4 695.4 28.1 63.0 1,876.9 1,093.8 610.4 26.4 61.0 1,791.6 OFF-BALANCE SHEET ARRANGEMENTS For periods as at December 31, 2011, December 31, 2012, December 31, 2013 and June 30, 2014, the Pancake House Group did not have any off-balance sheet arrangements. KEY FINANCIAL AND OPERATING INDICATORS The following are the key financial and operating indicators used by Pancake House Group for the periods indicated: Current Ratio Debt-to Equity Ratio EBITDA Margin Profitability Ratio As at June 30, 2014 As at December 31, 2013 As at December 31, 2012 0.47 2.00 2.0% (2.0%) 0.52 1.90 12.0% 2.1% 1.01 1.80 13.0% 4.4% 144 THE MAX’S ENTITIES The Max’s Entities operate the trade names “Max’s Restaurant”, “Krispy Kreme”, “Jamba Juice” and “Max’s Corner Bakery”. Max’s started its operations in Scout Tuason, Quezon City in 1945 and since then, has been popularly and consistently serving traditional Filipino comfort food using originallydeveloped recipes. Popularly known for its core product, Max’s fried chicken, it has expanded its operations outside the Philippines since 1982 when it opened its first outlet in South San Francisco, California, USA. It also operates in the Philippines international food brands Krispy Kreme and Jamba Juice under exclusive license arrangements. Max’s Restaurant is operated by several Max’s Entities all of which are Subsidiaries. The financial information presented for Max’s Restaurants are pro-forma combined information of all such Subsidiaries. Krispy Kreme is operated by The Real American Doughnut Company, Inc, a Subsidiary. Jamba Juice is operated by Fresh Healthy Juice Boosters, Inc., a Subsidiary. Max’s Corner Bakery is operated by Max’s Bakeshop, Inc., a Subsidiary. The following table sets out the systemwide sales, revenues, store sales, franchise income, EBITDA, EBITDA margin and number of stores for the 4 brands of the Max’s Entities as at and for the years ended December 31, 2013 and as at and for the six months ended June 30, 2014: As at and for the six months ended As at and for the year ended June 30, 2014 December 31, 2013 In ₱ Mn Max's Restaurant (Pro-forma) Systemwide sales Revenues Store Sales Commissary Sales Franchise Income Advertising income EBITDA EBITDA Margin Number of stores Krispy Kreme Revenues EBITDA EBITDA Margin Number of stores 2,527.9 2,068.8 1,700.0 260.1 69.3 39.4 275.8 13.3% 156 4,844.9 3,987.7 3,283.6 460.3 139.3 104.5 414.2 10.4% 151 609.0 60.2 9.9% 49 1,181.8 164.9 13.9% 47 As at and for the six months ended June 30, 2014 As at and for the year ended December 31, 2013 Jamba Juice Revenues EBITDA EBITDA Margin Number of stores 88.8 (3.6) (4.0%) 11 151.7 (31.1) (20.5%) 9 Max's Corner Bakery Revenues EBITDA EBITDA Margin 162.4 5.4 3.4% 338.2 19.5 5.8% The following table sets forth the breakdown of the Max’s Entities total revenues from its key strategic business units for the periods ended and as at December 31, 2013 and interim financial statements for the period ended and as at June 30, 2014: The figures presented below exclude adjustments for intercompany transactions. In ₱ Mn Max’s Restaurant Krispy Kreme Jamba Juice Max’s Corner Bakery Others Total Revenues For the six months ended June 30, % to total 2014 2,068.8 609.0 88.8 162.4 10.6 2,939.5 70.4% 20.7% 3.0% 5.5% 0.4% 100.0% For the year ended December 31, % to total 2013 3,987.7 1,181.8 151.6 338.2 19.1 5,678.4 70.2% 20.8% 2.7% 6.0% 0.3% 100.0% 146 RESULTS OF OPERATIONS The figures presented are pro-forma combined information of all Max’s Entities. In ₱ Mn REVENUES COST OF SALES AND SERVICES GROSS PROFIT GENERAL AND ADMINISTRATIVE EXPENSES OTHER OPERATING INCOME (CHARGES) FINANCE INCOME (COSTS) INCOME BEFORE INCOME TAX For the six months ended For the year ended June 30, 2014 December 31, 2013 2,777.1 (2,115.2) 661.9 5,468.4 (4,185.8) 1,282.6 (507.2) (1,021.8) 42.9 (91.0) 106.6 43.7 (18.8) 285.7 PROVISION FOR INCOME TAX 31.0 104.2 NET INCOME 75.5 181.5 NET INCOME ATTRIBUTABLE TO Equity holders of the Parent Company Noncontrolling interest 75.5 – 181.5 – 75.5 181.5 For the twelve months ended December 31, 2013 and six months ended June 30, 2014 Revenues Revenues of the Max’s Entities (gross of adjustments for intercompany transactions) totaled P5.7 billion and P2.9 billion for the periods ended December 31, 2013 and June 30, 2014. Topline growth was primarily anchored on the strength of Max’s Entities key business units, notably Max’s Restaurants and Krispy Kreme. Other developmental brands include international healthy food and drink stop Jamba Juice as well as Max’s Corner Bakery. With an expanding global store footprint, Max’s Entities now operates 216 outlets as at June 30, 2014. Max’s Restaurant was the largest revenue contributor, posting P3.99 billion and P2.07 billion, accounting for 70.2% and 70.4% of total revenues for the respective periods. As at June 30, 2014, Max’s Restaurants operates locally and overseas with a store network of 156 branches. Krispy Kreme reasserts its brand leadership in the local doughnut and coffee space, posting revenues of P1.2 billion in 2013 and P609.0 million for the first half of 2014, equivalent to 20.8% and 20.7% of total revenues respectively. As at June 30, 2014, Krispy Kreme had 49 branches situated in key growth areas nationwide. 147 Jamba Juice recorded revenues of P151.6 million in 2013 and P88.8 million for the first half of 2014, constituting 2.7% and 3.0% of total revenues for the respective periods. Jamba Juice started operations in the Philippines in 2011 and has grown into a favorite destination for better-for-you food and beverages. As at June 30, 2014, Jamba Juice has rolled out 11 stores situated in strategic locations in the country. Max’s Corner Bakery registered revenues of P338.2 million in 2013 and P162.4 million for the first half of 2014, corresponding to 6.0% and 5.5% of total revenues for the respective periods. As at June 30, 2014, Max’s Corner Bakery is present in Max’s Restaurant stores. Cost of Sales Cost of sales was at P4.19 billion in 2013 and P2.12 billion in the first half of 2014, translating to a cost to sales ratio of 76.5% and 76.2% for the respective periods. In the first half of 2014, Krispy Kreme wrote-off certain spoiled inventory items arising from delayed store openings. Max’s Entities continue to implement cost management initiatives through operational efficiencies to mitigate effects of price escalations. General and Administrative Expenses General and administrative expenses hit P1.02 billion in 2013 and P507.2 million for the first half of 2014, resulting to a GAE ratio of 18.7% and 18.3% in the respective periods. Other Income (Charges) Net other income amounted to P24.9 million as at December 31, 2013 while net other charges were at P48.1 million as at June 30, 2014. The increase in other charges is attributable to interest expenses related to the term loan secured by certain Max’s Entities (the Selling Subsidiaries) to finance the acquisition of 89.95% of the Company in February 2014. As at June 30, 2014, the interest expenses related to the term loan amounted to P74.9 million. Provision for Income Tax For the periods ended December 31, 2013 and June 30, 2014, provision for income tax was at P104.2 million and P31.0 million, respectively. EBITDA and Net Income The Max’s Entities reported a pro-forma combined net income of P181.5 million and P75.5 million as at December 31, 2013 and June 30, 2014, translating to net income margins of 3.3% and 2.7% for the respective periods. The decline in net income margin is attributable to interest costs related to the acquisition loan. Pro-forma EBITDA of the Max’s Entities stood at P577.6 million, translating to an EBITDA margin of 10.6% for the full year 2013. For the period ended June 30, 2014, pro-forma EBITDA came in at P345.0 million, corresponding to an EBITDA margin of 12.4%. The improvement in EBITDA margin is driven largely by the strong performance of Max’s 148 Restaurants and Jamba Juice Stores. Description of Selected Balance Sheet Items In ₱ Mn ASSETS Current Assets Cash Trade and other receivables Inventories Due from related parties Prepayments and other current assets June 30, 2014 December 31, 2013 338.7 261.8 219.2 200.3 127.0 405.2 256.6 296.3 61.2 131.4 1,147.0 1,150.7 24.4 1,115.4 2.2 79.6 180.9 9,444.9 – 215.0 23.3 1,003.7 78.6 72.7 3.1 4.4 1.3 190.6 Total Noncurrent Assets 11,062.4 1,377.7 Total Assets 12,209.4 2,528.4 880.2 1,248.4 164.0 826.6 555.0 33.9 Total Current Liabilities Noncurrent Liabilities Loans payable - net of current portion Net retirement liability Other noncurrent liabilities 2,292.6 1,415.5 3,893.0 26.6 11.4 155.3 137.5 16.6 Total Noncurrent Liabilities 3,931.0 309.4 Total Liabilities 6,223.6 1,724.9 Total Current Assets Noncurrent Assets Intangible assets Property and equipment Investment properties Net deferred tax assets Net retirement assets AFS investment HTM investments Other noncurrent assets LIABILITIES AND EQUITY Current Liabilities Trade and other payables Borrowings Income tax payable 149 In ₱ Mn Equity Capital stock Additional paid-in capital Notes for conversion to equity Retained earnings Other comprehensive income (loss) Shares held by subsidiaries Noncontrolling interests Total Liabilities and Shareholders' Equity June 30, 2014 December 31, 2013 502.5 20.5 – 142.0 5,320.8 465.9 20.5 – 345.7 (28.6) 5,985.8 – – 803.5 – – 5,985.8 803.5 12,209.4 2,528.4 Current Assets Current assets consist of cash, trade and other receivables, inventories and other current assets. Total current assets as at December 31, 2013 and June 30, 2014 amounted to P1.15 billion and P1.18 billion, respectively. Noncurrent Assets As at June 30, 2014, total noncurrent assets amounted to P11.0 billion which is comprised mainly of the shares in the Company held by certain Max’s Entities (the Selling Subsidiaries) recorded at market value of P9.44 billion. Total Liabilities Total liabilities consist of trade and other payables, income taxes payable, mortgage payables, bank debt and others. As at December 31, 2013 and June 30, 2014, total liabilities totaled P1.72 billion and P6.22 billion, respectively. Loans payable includes the acquisition loan obtained by certain Max’s Entities (the Selling Subsidiaries) in the amount of P4.27 billion. Retained Earnings As at December 31, 2013, retained earnings was at P345.7 million. In the first half of 2014, Max’s Entities declared dividends amounting to P280.5 million, bringing retained earnings to P135.0 million as at June 30, 2014. 150 CAPITAL EXPENDITURES Below is a table showing the Max’s Entities’ programmed spending on capital expenditures for the periods ended December 31, 2013 and June 30, 2014: In ₱ Mn Max’s Restaurant Store Expansion Commissary Equipment Total For the six months ended June 30, 2014 90.3 9.9 100.2 For the year ended December 31, 2013 132.8 21.7 154.5 In ₱ Mn For the six months ended June 30, 2014 52.7 18.0 1.9 72.6 For the year ended December 31, 2013 109.4 34.3 3.6 147.3 Krispy Kreme Jamba Juice Max’s Corner Bakery Total Capital expenditure outlays are primarily for store network expansion and investments in commissary equipment. These also include costs related to store renovations and maintenance of existing outlets. DEBT OBLIGATIONS AND COMMITMENTS The following table shows the Max’s Entities principal debt obligations and commitments as at the indicated periods: In ₱ Mn Loans payable Trade and other payables Income tax payable Retirement liabilities Total As at June 30, 2014 5,141.4 880.2 13.1 26.6 6,061.3 As at December 31, 2013 710.3 826.6 33.9 137.5 1,708.3 Loans payable includes the acquisition loan obtained by certain Max’s Entities (the Selling Subsidiaries) in the amount of P4.27 billion. Other components of loans payable are working capital facilities obtained by each of the Max’s Entities. OFF-BALANCE SHEET ARRANGEMENTS As at December 31, 2013 and June 30, 2014, the Max’s Entities did not have any offbalance sheet arrangements. 151 KEY FINANCIAL INDICATORS The following are the key financial measures used by Max’s Entities for the periods indicated: In ₱ Mn Current Ratio Debt-to Equity Ratio Profitability Ratio EBITDA Margin As at June 30, 2014 0.55 9.78* 2.7% 12.4% As at December 31, 2013 0.81 2.15 3.3% 10.6% *excludes the mark to market gain on the remeasurement of the shares in the Company held by the Selling Subsidiaries 152 OTHER RELEVANT INFORMATION Regulatory Matters Various laws and regulations in the Philippines impact the business of the Company. The Consumer Act The Consumer Act (R.A. No. 7394) establishes quality and safety standards with respect to the composition, contents, packaging and advertisement of food products. Furthermore, it regulates the following: (1) consumer product quality and safety; (2) the production, sale, distribution and advertisement of food, drugs, cosmetics and devices as well as substances hazardous to the consumer’s health and safety; (3) fair, honest consumer transactions and consumer protection against deceptive, unfair and unconscionable sales acts or practices; (4) practices relative to the use of weights and measures; (5) consumer product and safety warranties; (6) compulsory labeling and fair packaging; (7) liabilities for defective products and services; (8) consumer protection against misleading advertisements and fraudulent promotion practices; and (9) consumer credit transactions. Under the Consumer Act, the manufacture, importation, exportation, sale, offering for sale, distribution, and transfer of food products that do not conform to applicable consumer product quality or safety standards is prohibited. The implementing agencies tasked to enforce the Act are the Department of Health, the Department of Agriculture, and the DTI. The Department of Health, in particular, regulates the production, sale, distribution, and advertisement of food to protect the health of consumers. Violation of the Consumer Act shall warrant administrative penalties and/or imprisonment of not less than one year but not more than five years, or a fine of not less than P5,000.00 but not more than P10,000.00 or both, at the discretion of the court. Should the offense be committed by a juridical person, the chairman of the board of directors, the president, general manager, or the partners and/or the persons directly responsible therefor shall be penalized. The Company is compliant with the Consumer Act, and it has no pending case in relation to the Consumer Act. The Food Safety Act The Food Safety Act (R.A. No. 10611) seeks to strengthen the food safety regulatory system in the country by principally delineating the mandates and responsibilities of the government agencies. The National Dairy Authority, National Meat Inspection Service, and Bureau of Fisheries and Aquatic Resources under the Department of Agriculture (DA) are the government agencies responsible for the development and enforcement of food safety standards and regulations in the primary production and post-harvest stages for milk, meats, and fish, respectively, while the FDA under the DOH is responsible for the safety of processed and pre-packaged foods. The Food Safety Act created the Food Safety Regulation 153 Coordinating Board to monitor and coordinate the performance and implementation of the mandates of the government agencies under the law. Under the Food Safety Act, food business operators or those who undertake to carry out any of the stages of the food supply chain are held principally responsible in ensuring that their products satisfy the requirements of the law and that control systems are in place to prevent, eliminate, or reduce risks to consumers. For the enforcement of the Food Safety Act, the food safety regulatory agencies are authorized to perform regular inspection of food business operators taking into consideration the compliance with mandatory safety standards; implementation of the Hazard Analysis at Critical Control Points (HACCP) or the science-based system that identifies, evaluates, and controls hazards for food safety at critical points; good manufacturing practices; and other requirements of regulations. It is prohibited to refuse access to pertinent records or entry of inspection officers of the food safety regulatory agencies. It is likewise prohibited, among others, to produce, handle, or manufacture for sale, offer for sale, distribute in commerce, or import any food or food product, which is banned or is not in conformity with applicable quality or safety standard is also prohibited. The commission of any of the prohibited acts under the Food Safety Act can result in imprisonment and/or a fine. Environmental Laws Philippine Environmental Impact Statement System It has been declared as the policy of the State to attain and maintain a rational and orderly balance between socio-economic growth and environmental protection. Hence, the Philippine Environmental Impact Statement System has been established. 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. Through its regional offices or through the Environmental Management Bureau (“EMB”), the DENR determines whether a project is environmentally critical or located in an environmentally critical area. As a prerequisite 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 is generally required to submit an Initial Environmental Examination (“IEE”) to the proper DENR regional office, without prejudice to the power of the DENR to require a more detailed EIS. The EIS refers to both the document and the environmental impact assessment of a project, including a discussion of direct and indirect consequences to human welfare and ecology 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 terms and conditions of an EIS or an IEE may vary from project to project, at a minimum, they contain all relevant information regarding the environmental effects of a project. 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 154 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 ECC is a government certification that (i) the proposed project or undertaking will not cause a significant negative environmental impact; (ii) that the proponent has complied with all the requirements of the EIS system and; (iii) that the proponent is committed to implement its approved environmental management plan in the EIS or, if an IEE was required, that it will comply with the mitigation measures suggested therein. The ECC contains specific measures and conditions that the project proponent must undertake before and during the operation of a project, and in some cases, during the abandonment phase of the project to mitigate identified environmental impact. 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 significant public risks to life, health, property and the environment. The EGF is intended to answer for damages caused by such projects 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 activities of a multi-partite monitoring team that will be organized to monitor compliance with the ECC and applicable laws, rules and regulations. In certain instances, the EMB may determine and issue a certification that a certain project is not covered by the EIS System and an ECC is not required. Consequently, a Certificate of Non-Coverage (“CNC”) may be issued in lieu of an ECC. The Ecological Solid Waste Management Act of 2000 Republic Act No. 9003 provides for the proper management of solid waste which includes discarded commercial waste and non-hazardous institutional and industrial waste. The said law prohibits, among others, the transporting and dumping of collected solid wastes in areas other than prescribed centers and facilities. The National Solid Waste Management Commission, together with other government agencies and the different local government units, are responsible for the implementation and enforcement of the said law. The Code on Sanitation of the Philippines Presidential Decree No. 856 provides for sanitary and structural requirements in connection with the operation of certain establishments such as food establishments which include such places where food or drinks are manufactured, processed, stored, sold or served. Under P.D. 856, which is implemented by the DOH, food establishments are required to secure sanitary permits prior to operation which shall be renewable on a yearly basis. DENR Rules on Disposition of Hazardous Waste A DENR identification number is required to dispose of hazardous waste. In the absence of an identification number, a fine ranging from P600.00 to P4,000.00 may be assessed. The 155 DENR identification number is a one-time permit unless there is a change in the hazardous wastes produced. Authority to Construct and Permit to Operate a Stationary Source of Air Pollution All stationary sources of air pollution that have the potential to emit 100 tons per year or more of any regulated pollutant, or when required under the ECC, must secure an authority to construct and permit to operate from the EMB prior to commencement of construction or operation. The authority to construct is a one-time permit while the permit to operate must be renewed yearly. Laguna Lake Development Authority Clearance R.A. No. 4850, as amended, created the Laguna Lake Development Authority (“LLDA”) in order to promote and accelerate the balanced growth of the Laguna de Bay Region, with due regard for environmental management and control, preservation and preservation of the quality of human life and ecological systems, and the prevention of undue ecological disturbances, deterioration and pollution. The LLDA is an attached agency of the DENR mandated to manage and protect the environmentally critical Laguna de Bay Region. It is empowered to pass upon and approve or disapprove all plans, programs, and projects proposed by local government offices or agencies within the region, public corporations, and private persons or enterprises where such plans, programs, and projects are related to the development of the region. The LLDA issues a clearance (an “LLDA Clearance”) upon submission of an application and the supporting financial documents. An administrative fine is imposed on establishments operating, developing, or constructing within the Laguna de Bay Region without the necessary LLDA Clearance. Any proposed, ongoing, or completed expansion inconsistent with a previously issued LLDA Clearance must be covered by a new LLDA Clearance. Discharge Permit LLDA Board Resolution No. 33, series of 1996 requires all development projects, installations, and activities that discharge liquid waste or regulated effluents into and pose a threat to the environment of the Laguna de Bay Region, to obtain a Discharge Permit from the LLDA. The Discharge Permit authorizes the owner or operator to discharge wastewater, provided the permit specifies the quantity and quality of effluent that the facility is allowed to discharge into a particular body of water in compliance with schedule and monitoring requirements. The following activities, projects, or installations are exempt from securing the Discharge Permit: 156 a. Single residential buildings and similar human occupancy structures that have twelve cubic meters per day or less in total domestic sewage generation; b. Dry industrial establishment that generates twelve cubic meters or less of total domestic sewage per day or with maximum of 212 workers and with septic tanks; and c. Industrial or commercial establishment interconnected to central wastewater or sewage treatment plant or facility. If the LLDA finds upon inspection that an activity, project, or installation is exempt from securing a Discharge Permit, it issues a letter acknowledging the exemption with a proviso that the exemption is without prejudice to subjecting the activity to regular monitoring. The Company is reviewing the requirements for full compliance and is coordinating with the relevant regulatory authorities therefor. The Labor Code and Related Laws The Philippine Labor Code and other statutory enactments provide the minimum benefits that employers must grant to their employees, which include certain social security benefits, such as benefits mandated by the Social Security Act of 1997 (R.A. No. 8282), the National Health Insurance Act of 1995 (R.A. No. 7875), as amended, and the Home Development Fund Law of 2009 (R.A. No. 9679). Under the Social Security Act of 1997, social security coverage is compulsory for all employees under 60 years of age. An employer is obligated to deduct and withhold from each employee's monthly salary, wage, compensation or earnings, the employee's contribution, and the employer, for its part, makes a counterpart contribution for the employee, and remits both amounts to the Social Security System (“SSS”). This enables the employees to claim their pension, death benefits, permanent disability benefits, funeral benefits, sickness benefits and maternity-leave benefits. The Social Security Act of 1997imposes penal sanctions if an employer fails to remit the contributions to the SSS. For corporate employers, the penalty is imposed on its president and members of the board of directors. The National Health Insurance Act, created the National Health Insurance Program (“NHIP”) to provide health insurance coverage and ensure affordable and accessible health care services to all Filipino citizens. Under the law, all members of the SSS are automatically members of the NHIP. The Philippine Health Insurance Corporation (“PhilHealth”) administers the NHIP, and an employer is required to deduct and withhold the contributions from the employee’s salary, wage or earnings, make a counterpart contribution for the employee, and remit both amounts to PhilHealth. The NHIP will then subsidize personal health services required by the employee subject to certain terms and conditions under the law. The National Health Insurance Act likewise imposes penal sanctions if an employer does not remit the contributions to PhilHealth. For corporate employers, the penalty is imposed on its president and members of the board of directors. The Home Development Fund Law (R.A. No. 9679) or the Pag-IBIG Fund Law, created the Home Development Mutual Fund ("HDMF"), a national savings program as well as a fund to provide for affordable shelter financing to Filipino workers. Coverage under the HDMF is 157 compulsory for all SSS members and their employers. Under the law, an employer must deduct and withhold 2% of the employee's monthly compensation, up to a maximum of P5,000.00, and likewise make a counterpart contribution of 2% of the employee's monthly compensation, and remit the contributions to the HDMF. The Pag-IBIG Fund Law also imposes penal sanctions if the employer does not remit the contributions to the HDMF. The Philippine Labor Code provides that, in the absence of a retirement plan provided by their employers, private-sector employees who have reached 60 years of age or more, but not beyond 65 years of age, the compulsory retirement age for private-sector employees without a retirement plan, and who have rendered at least five years of service in an establishment, may retire and receive a minimum retirement pay equivalent to one-half month's salary for every year of service, with a fraction of at least six months being considered as one whole year. For the purpose of computing the retirement pay, "one-half month's salary" shall include all of the following: fifteen days salary based on the latest salary rate; in addition, one-twelfth of the thirteenth month pay and the cash equivalent of five days of service incentive leave pay. Other benefits may be included in the computation of the retirement pay upon agreement of the employer and the employee or if provided in a collective bargaining agreement. The Company believes it is in compliance in all material respects with the various rules and regulations governing workers’ compensation, workplace safety, labor standards, labor relations and social security, Intellectual Property Code Under the Intellectual Property Code of the Philippines, the rights to a trademark are acquired through the registration with the Bureau of Trademarks of the Intellectual Property Office, which is the principal government agency involved in the registration of brand names, trademarks, patents and other registrable intellectual property materials. Upon registration, the Intellectual Property Office shall issue a certificate of registration to the owner of the mark, which shall confer the right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the mark is registered. The said certificate of registration shall also serve as prima facie evidence of the validity of registration and the registrant’s ownership of the mark. A certificate of registration shall remain in force for an initial period of ten (10) years, and may be renewed for periods of ten (10) years at its expiration. 158 Trademark Country Registration /Application No. Registration /Application Date Class Status Max’s Restaurant & Logo Phils. 48593 July 18, 1990 43 Registered The Bakeshop-Max’s Phils. 4-2008-002547 November 24, 2008 30, 43 Registered Max’s Express Phils. 4-2009001429 April 27, 2009 29, 43 Registered Max’s Spring Chicken Phils. 4-2009-001430 April 27, 2009 29, 43 Registered Sarap to the Bones Phils. 4-2009-001431 April 27, 2009 29, 43 Registered Max’s Masarap Phils. 4-2009-001432 April 27, 2009 29, 43 Registered The House that Fried Chicken Built Phils. 4-2009-001370 July 9, 2009 29, 43 Registered Maximo’s Phils. 4-2009-001368 July 9, 2009 29, 43 Registered Caramel Bar-Max’s Phils. 4-2009-001372 September 17, 2009 30, 35 Registered Max’s Corner Bakery Phils. 4-2009-001369 September 17, 2009 30, 35 Registered Max’s Fried Chicken Phils. 4-2009-001373 November 26, 2009 29 Registered Caramel Bar Phils. 4-2009-007823 November 4, 2010 30, 35 Registered Combonations Phils. 4-2011-008979 November 10, 2011 43 Registered Max’s Banana Sauce Label Phils. 4-2011-000943 July 14, 2011 30 Registered Max’s Banana Sauce Phils. 4-2011-000946 May 19, 2011 30 Registered Max’s Banana Ketchup Label Phils. 4-2011-000944 July 14, 2011 30 Registered Max’s Banana Ketchup Phils. 4-2011-000945 May 19, 2011 30 Registered Curbside Phils. 4-2012-005015 August 2, 2012 43 Registered 4Sharing Phils. 4-2012-005016 August 2, 2012 43 Registered 4SharingMeals Phils. 4-201200005017 February 28, 2013 43 Registered FourSharing Phils. 4-201200005019 February 7, 2013 43 Registered Max’s 4 Sharing Meals Logo Phils. 4-201200005018 February 28, 2013 43 Registered FourSharing Meals Phils. 4-201200005020 February 28, 2013 43 Registered 159 Made with Love, Always Phils. 4-201200013522 June 27, 2013 43 Registered Max’s Express Phils. 4-201300000053 August 1, 2013 43 Registered Meranti Phils. 4-201300010104 December 19, 2013 43 Room Ventures Corp. 4-201300010105 November 14, 2013 43 Room Ventures Corp. Meranti Hotel Pancake House Orange Philippines 4-2010-501543 Gurts Frozen Yogurt and Device Philippines 4-2010-000044 Pancake House International & Device Philippines 4-2009-500700 Pancake House International & Device Philippines Pancake House International & Device June 30, 2011 43 Registered 30 Registered June 11, 2010 43 Registered 4-2009-500701 June 11, 2010 43 Registered Malaysia 07008978 May 12, 2007 43 Pending Pancake House International & Device Malaysia 07008979 May 12, 2007 43 Pending Pancake House International & Device Singapore T07/11494D May 24, 2007 43 Registered Pancake House International & Device China 6089053 June 4, 2007 43 Pending Pancake House International & Device China 6089054 June 4, 2007 43 Pending Pancake House International & Device Thailand Bor. 39144 August 9, 2007 43 Registered Pancake House International & Device Thailand Bor. 39145 August 9, 2007 43 Registered Pan Chicken Philippines 4-2001-001913 May 26, 2006 29 Registered “We’re more than just great pancakes” Philippines 4-2003-004128 July 23, 2005 43 Registered Pancake House Since Philippines 4-2000-015012 August 28, 2004 42 Registered June 11, 2010 160 1974 and Device Pancake House and Device Philippines 4-1996-114538 August 28, 2004 42 Registered STATE 88 Philippines 4-2013-004751 August 01, 2013 43 Registered STATE 88 Wings Wedges More Philippines 4-2013-501572 June 26, 2013 43 Pending DE LUCA Philippines 4-2013-004752 April 24, 2013 43 Pending CroPops Philippines 4-2013-503602 December 05, 2013 30 Pending Pancake House International & Device India 2467367 January 28, 2013 43 Pending Pancake House International & Device UAE 188355 March 13, 2013 43 Pending Pancake House International & Device Brunei TM No. 43,811 January 23, 2013 Pancake House International & Device Kuwait 137252 February 10 2013 43 Pending Pugad Dencio’s Logo Philippines 4-2008-009599 March 2, 2009 43 closed Kabisera ng Dencio’s and Logo Philippines 4-2008-500187 November 3, 2008 43 Registered Dencio’s Logo Philippines 4-2004-001829 January 8, 2007 42 Registered Teriyaki Boy & Design USA 85353197 June 22, 2011 43 closed Teriyaki Boy & Device (Colour) Philippines 4-2008-008223 April 13, 2009 43 Registered Teriyaki Boy & Device (Square) Vietnam 128777 July 17, 2007 43 Registered Teriyaki Boy & Device (Rectangle) Vietnam 128778 July 17, 2007 43 Registered Japanese Characters Philippines 4-2006-500020 May 28, 2007 43 Registered Teriyaki Boy Tabemashou Let’s Eat (Graphic Logo) Philippines 4-2006-500018 March 26, 2007 43 Registered Japanese Characters (Fat Boy) Philippines 4-2006-500016 February 26, 2007 43 Registered Pending Dencio’s Teriyaki Boy 161 Teriyaki Boy Tabemashou Let’s Eat (Text Logo) Philippines 4-2006-500017 February 26, 2007 43 Registered Teriyaki Boy Logo Philippines 4-2006-500021 February 26, 2007 43 Registered Teriyaki Boy Logo Philippines 4-2006-500022 February 26, 2007 43 Registered Teriyaki Boy and Device with Chinese & Japanese Characters Philippines 4-2001-006508 November 10, 2005 43 Registered Teriyaki Boy Logo Philippines 4-2001-006509 November 10, 2005 43 Registered Teriyaki Boy & Device Philippines 4-2001-006510 November 10, 2005 43 Registered Teriyaki Bouzu USA 85672747 July 10, 2012 43 closed The Sizzlin’ Pepper Steak & Device Philippines 4-2010-501069 July 23, 2010 43 closed The Sizzlin’ Pepper Steak & Japanese Character within a Rectangular Device Philippines 4-2008-000194 December 24, 2009 43 Registered Cow’s Head Device Philippines 4-2008-000195 February 9, 2009 43 Registered Philippines 4-2008-012108 May 25, 2009 43,30,& Registered 29 Le Coeur de France Boulangerie Restaurant Logo Philippines 4-2008-012109 April 13, 2009 43,30,& Registered 29 Le Coeur de France & Device Philippines 4-2008-002323 May 19, 2008 29 & 30 Registered The Great New York Take Out Philippines 4-2006-500347 July 21,2008 29 Registered The Great New York Take Out Philippines 4-2006-500348 May 19, 2008 43 Registered Singkit Philippines 4-2006-500343 November 5, 2007 29 Registered Sizzlin’ Pepper Steak Le Coeur de France Le Coeur de France Boulangerie Restaurant Logo Singkit 162 Singkit Philippines 4-2006-500344 November 5, 2007 43 closed Singkit Device Philippines 4-2006-500345 November 5, 2007 29 Registered Singkit Device Philippines 4-2006-500346 November 5, 2007 29 closed Chinito Philippines 4-2006-500349 November 5, 2007 29 closed Chinito Philippines 4-2006-500350 November 5, 2007 43 closed Chinito Device Philippines 4-2006-500351 November 5, 2007 29 closed Chinito Device Philippines 4-2006-500352 November 5, 2007 43 closed Chinito Size Philippines 4-2006-500353 November 5, 2007 29 closed Chinito Size Philippines 4-2006-500354 November 5, 2007 43 closed Singkit& Device Philippines 4-1991-077555 March 20, 2005 42 My Size Philippines 4-2011-500031 6-Jun-11 29,30 Dear Darla Pizza Philippines 2011-500031 13-Jan-11 30 Registered Yellow Cab Pizza Co. & Device Kuwait 87190 14-Jun-10 43 Registered Yellow Cab Pizza Co. & Device Qatar 37159 11-Aug-09 42 Registered New York's Finest Philippines 2007-500336 13-Apr-09 30 Registered Yellow Cab Pizza Co. & Device Thailand SM37729 31-Mar-08 43 Registered Tribeca Mushroom Philippines 2007-500337 26-Apr-07 30 Registered Corona Chicken Salsa Philippines 2007-500338 26-Apr-07 30 Registered Charlie Chan Chicken Pasta Philippines 2007-500339 26-Apr-07 30 Registered Yellow Cab Pizza Co. & Device Malaysia 06-023499 21-Dec-06 43 Registered Yellow Cab Pizza Co. & Device Philippines 2001-007301 21-May-04 42 Registered Yellow Cab Pizza Co. & Device Singapore T0526899E 29-Dec-05 43 Registered Yellow Cab Pizza Co. & Device Bahrain 45454 12-Sep-05 43 Registered Yellow Cab Pizza Co. & Device Hong Kong 300471294 8-May-05 43 Registered Registered Yellow Cab Pending 163 Yellow Cab Pizza Co. & Device USA 2990872 06-Sep-05 43 Registered Yellow Cab Pizza Co. & Device China 50314 14-July-2009 43 Registered Yellow Cab Pizza Co. & Device India 14562 30-May-2006 42 Registered Yellow Cab Pizza Co. & Device Indonesia IDM000169155 15-July-2008 43 Registered Yellow Cab Pizza Co. & Device Canada TMA809,934 24-Oct-2011 43 Registered Yellow Cab Pizza Co. & Device Saudi Arabia 1386/29 20-Nov-2012 43 Registered Yellow Cab Pizza Co. & Device UAE 17837 23-Aug-2012 43 Pending Yellow Cab Pizza Co & Device Vietnam 4-2013-03389 23-Feb-2013 43 Pending Yellow Cab Pizza Co & Device Turkey 2013/13247 13-Feb-2013 43 Pending Yellow Cab Pizza Co. & Device Brunei 43,809 23-Jan-2013 42 Pending Yellow Cab Pizza Co. & Device Thailand SM37729 31-Mar-2008 43 Registered Maple & Device Philippines 42012500719 October 25, 2012 43 Registered Maple Philippines 42012502438 September 18, 2012 43 Registered Maple Related Party Transactions WERCO Holdings, Corp. is a lessor of the properties where the Max’s Restaurant outlet in Sucat, Paranaque and the STI commissary operate. Rental and other lease terms are at market rates and are negotiated and agreed upon by the parties at arm’s length. Legal Proceedings In 2009 certain members and officers of the Group became parties to a proceeding filed by K2 Asia Ventures, Ben C. Broocks, and James G. J. Crow ("Plaintiffs") before the courts of North Carolina involving the Development Agreement between the Max's Group and the Krispy Kreme Doughnut Corp. of North Carolina. The Plaintiffs claim that the Max's Group wrongfully excluded them from the exclusive Development Agreement for the Philippines and demand payment of damages, lost profits, and lost opportunities. On August 20, 2014, the Company received advice that Plaintiffs' claim had 164 been dismissed by both the trial and appellate courts (by unanimous vote of the appellate judges) on the ground that the courts of North Carolina have no personal jurisdiction over the defendants. While there can be no assurance that the above dismissal will not be reconsidered and the cases will be ultimately resolved in the Group's favor or in an expeditious manner, the Company believes that none of the above cases, individually or collectively, would have any adverse effect on the Company's financial performance to a material extent. Tax Assessments The Company and members of the Group are in receipt of certain assessments and Letters of Authority ("LOA") from the Bureau of Internal Revenue ("BIR") and certain Local Government Units ("LGU"), pursuant to which the BIR and/or LGU have sought to investigate certain tax periods and/or asserted certain tax liabilities against the Company or a Group entity or have sought to examine certain books, records, and accounts that relate to transactions in the ordinary course of business. Pursuant to its policies of addressing such actions, the Company has engaged tax advisors and counsel in relation to these matters. The Company believes that its liability under such assessments will be reduced upon the submission of requisite documents to the tax authorities in the course of resolving these assessments. However, there can be no assurance that the Company or any member of the Group will be successful in resolving any final assessments issued against it in an expeditious and favorable manner. In any event, the Company believes that these assessments, individually or collectively, should not adversely affect the Company's financial performance to a material extent. Apart from the foregoing, there are no other legal proceedings involving the Company or any Subsidiaries that the Company considers material to its business, finances or prospects. Independent Auditors and Counsel Legal Matters All legal opinion/matters in connection with the issuance of the Offer Shares which are subject of this Offer shall be passed upon by Romulo Mabanta Sayoc & Delos Angeles (“Romulo”) for the Issue Manager, the Lead Underwriter and the Underwriters, and Picazo Buyco Tan Fider & Santos (“Picazo”) for the Company. Romulo and Picazo do not have any direct or indirect interest in the Company. Romulo may, from time to time be engaged by the Company to advise in its transactions and perform legal services on the same basis that Romulo provides such services to its other clients. Independent Auditors The financial statements of the Company as at and for the years ended December 31, 2013, 2012 and 2011 appearing in this Prospectus have been audited by SyCip Gorres Velayo & 165 Co., independent auditors, as set forth in their report thereon appearing elsewhere herein. The pro-forma combined financial statements of the Company as at and for the six-month period ended June 30, 2014 and as at and for the year ended December 31, 2013 appearing in this Prospectus have been reviewed by Reyes Tacandong & Co, independent auditors, as set forth in their report appearing elsewhere herein. The aggregate fees billed by the independent auditors is shown below (with comparative figures for 2013): SyCip Gorres Velayo & Co. Reyes Tacandong & Co. (for the review of the proforma combined financial statements) 2011 2012 2013 2.6Mn 2.7Mn 2.6Mn - - - 2014 4.0Mn Change in Independent Auditors As a result of the change in control of the Company pursuant to the acquisition by certain of the Max’s Entities of approximately 89.95% of the Company in a tender offer of shares that was completed in February 24, 2014, the stockholders of the Company elected Reyes Tacandong & Co. as the Company’s independent auditor at the annual stockholders meeting held on June 10, 2014. There has been no disagreement with SyCip Gorres Velayo & Co., former independent auditor of the Company on any matter of accounting principles. Taxation The following is a general description of certain Philippine tax aspects of the investment in the Shares. This discussion is based upon laws, regulations, rulings, income tax treaties, administrative practices, and judicial decisions in effect at the date of this Prospectus and is subject to any changes occurring after such date. Subsequent legislative, judicial, or administrative changes or interpretations may be retroactive and could affect the tax consequences to the prospective investor. The tax treatment of a prospective investor may vary depending on such investor’s particular situation and certain investors may be subject to special rules not discussed below. This summary does not purport to be a comprehensive description of all 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 taxes. 166 This discussion does not provide information regarding the tax aspects of acquiring, owning, holding, or disposing of the Shares under applicable tax laws of other applicable jurisdictions and the specific Philippine tax consequence in light of particular situations of acquiring, owning, holding, and disposing of the Shares in such other jurisdictions. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF LOCAL AND NATIONAL TAX LAWS. As used in this section, the term “resident alien” refers to an individual whose residence is within the Philippines and who is not a citizen of the Philippines; 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 doing business in the Philippines.” A 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 doing business in the Philippines.” A “resident foreign corporation” is a non-Philippine 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. The term “dividends” under this section refers to cash or property dividends. “Tax Code” means the Philippine National Internal Revenue of 1997, as amended. Taxes on Dividends on the Shares Individual Philippine citizens and resident aliens are subject to a final tax on dividends derived from the common shares at the rate of 10%, which tax shall be withheld by the Company. Non-resident alien individuals engaged in trade or business in the Philippines are subject to a final withholding tax on dividends derived from the common shares at the rate of 20% on the gross amount thereof, subject to applicable preferential tax rates under tax treaties in force between the Philippines and the country of domicile or residence of such nonresident alien individual. A non-resident alien individual not engaged in trade or business in the Philippines is subject to a final withholding tax on dividends derived from the common shares at the rate of 25% of the gross amount, subject to applicable preferential tax rates under tax treaties in force between the Philippines and the country of domicile or residence of such non-resident alien individual. The term “non-resident holder” means a holder of the common shares: • who is an individual who is neither a citizen nor a resident of the Philippines or an entity which is a foreign corporation not engaged in trade or business in the Philippines; and • should a tax treaty be applicable, whose ownership of the common shares is not effectively connected with a fixed base or a permanent establishment in the 167 Philippines. Dividends derived by domestic corporations (i.e. corporations created or organized in the Philippines or under its laws) and resident foreign corporations from the common shares shall not be subject to tax. Dividends received from a domestic corporation by a non-resident foreign corporation are generally subject to final withholding tax at the rate of 30%, subject to applicable preferential tax rates under tax treaties in force between the Philippines and the country of domicile of such non-resident foreign corporation. The 30% rate for dividends paid to nonresident foreign corporations with countries of domicile having no tax treaty with the Philippines may be reduced to a special 15% rate if: • the country in which the non-resident foreign corporation is domiciled imposes no taxes on foreign sourced dividends; or • the country in which the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-resident foreign corporation for taxes deemed to have been paid in the Philippines equivalent to 15%. The BIR has prescribed, through an administrative issuance, procedures for the availment of tax treaty relief. The application for tax treaty relief has to be filed with the BIR by the non-resident holder of the common shares (or its duly authorized representative) prior to the first taxable event, or prior to the first and only time the income tax payor is required to withhold the tax thereon or should have withheld taxes thereon had the transaction been subject to tax. The “first taxable event” has been construed by the BIR as “payment of the dividend.” Failure to file the application for tax treaty relief with the BIR prior to the first taxable event may disqualify the said application. A corporation may withhold taxes at a reduced rate on dividends paid to a non-resident holder of the common shares if such nonresident holder submits to the domestic corporation proof of the filing of the tax treaty relief application with the BIR prior to the payment of dividends. However, on August 9, 2013, the Philippine Supreme Court in Deutsche Bank AG Manila Branch v. CIR, G.R. No. 188550, ruled that the period of application for the availment of tax treaty relief should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. At most, the application for a tax treaty relief to be filed with the BIR should merely operate to confirm the entitlement of the taxpayer to such relief. The requirements for a tax treaty relief application in respect of dividends are set out in the applicable tax treaty and BIR Form No. 0901-D. These include proof of tax residence in the country that is a party to the tax treaty. Proof of residence consists of a consularized certification from the tax authority of the country of residence of the non-resident holder of Common Shares which states that the non-resident holder is a tax resident of such country under the applicable tax treaty. If the non-resident holder of common shares is a juridical entity, authenticated certified true copies of its articles of incorporation or association issued by the proper government authority should also be submitted to the BIR in addition to the certification of its residence from the tax authority of its country of residence. 168 If tax at the regular rate is withheld by the Company instead of the reduced rates applicable under a treaty, the non-resident holder of the common 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 obtaining such a refund. Moreover, in view of the requirement of the BIR that an application for tax treaty relief be filed prior to the first taxable event as previously stated, the non-resident holder of common shares may not be able to successfully pursue a claim for refund if such an application is not filed before such deadline. Stock dividends distributed pro rata to any holder of shares are not subject to Philippine income tax. However, the sale, exchange or disposition of shares received as share dividends by the holder is subject to either capital gains tax and documentary stamp tax 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: Country Canada France Germany Japan Singapore United Kingdom United States Dividends 2511 1512 1513 1514 2515 2516 2517 Capital Gains Tax Due on Disposition of Common Shares Outside the PSE Exempt8 Exempt8 5/109 Exempt8 Exempt8 Exempt10 Exempt8 In order for an exemption under a tax treaty to be recognized, an application for tax treaty relief on capital gains tax on the sale of shares must be filed by the income recipient before 15% if the recipient company controls at least 10% of the voting power of the company paying the dividends. 10% if the recipient company (excluding a partnership) holds directly at least 10% of the voting shares of the company paying the dividends. 13 10% if the recipient company (excluding a partnership) owns directly at least 25% of the capital of the company paying the dividends. 14 10% if the recipient company holds directly at least 10% of either the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends. 15 15% if during the part of the paying company’s 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 shares of the paying company were owned by the recipient company. 16 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. 17 20% if during the part of the paying corporation’s 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 shares of the paying corporation were owned by the recipient corporation. Notwithstanding the rates provided under the Republic of the Philippines-United States Treaty, residents of the United States may avail of the 15% withholding tax rate under the tax-sparing clause of the Tax Code provided certain conditions are met. 11 12 169 the deadline for the filing of the documentary stamp tax return, which is the fifth day from the end of the month when the document transferring ownership was executed. The requirements for a tax treaty relief application in respect of capital gains tax on the sale of shares are set out in the applicable tax treaty and BIR Form No. 0901-C. These include proof of residence in the country that is a party to the tax treaty. Proof of residence consists of a consularized certification from the tax authority of the country of residence of the seller of shares which provides that the seller is a resident of such country under the applicable tax treaty. If the seller is a juridical entity, authenticated certified true copies of its articles of incorporation or association issued by the proper government authority should also be submitted to the BIR in addition to the certification of its residence from the tax authority of its country of residence. 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 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 P100,000 and 10.0% on gains over P100,000. An application for tax treaty relief must be filed (and approved) by the Philippine tax authorities to obtain an exemption under a tax treaty. The transfer of shares shall not be recorded in the books of the Company unless the BIR certifies that the capital gains and documentary stamp taxes relating to the sale or transfer have been paid or, where applicable, tax treaty relief has been confirmed by the International Tax Affairs Division of the BIR in respect of the capital gains tax or other conditions have been met. Taxes on transfer of shares listed and traded at the PSE A sale or other disposition of shares through the facilities of the PSE by a resident or a nonresident 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 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 Government by the selling stockbroker on 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 stock transaction tax. In addition, value added tax of 12.0% is imposed 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 tax treaty between the Philippines and Germany, 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 =P100,000 and 10% on the net capital gains realized during the taxable year in excess of =P100,000. 10 Under the tax treaty between the Philippines and the United Kingdom, capital gains on the sale of the shares 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. 170 on the commission earned by the PSE-registered broker, and is generally passed on to the client. On November 7, 2012, the BIR issued Revenue Regulations No. 16-2012 which provides that the sale, barter, transfer, and/or assignment of shares of listed companies that fail to meet the MPO requirement after December 31, 2012 will be subject to capital gains tax and documentary stamp tax. It also requires publicly listed companies to submit public ownership reports to the BIR within 15 days after the end of each quarter. On December 31, 2012, the PSE started to impose a trading suspension for a period of not more than six months, on shares of a listed company who has not complied with the Rule on MPO which requires listed companies to maintain a minimum percentage of listed securities held by the public at ten percent of the listed companies’ issued and outstanding shares at all times. Companies, which do not comply with the MPO after the lapse of the trading suspension, shall be automatically delisted. The sale of such listed company’s shares during the trading suspension may be effected only outside the trading system of the PSE and shall be subject to capital gains tax and documentary stamp tax. Furthermore, if the fair market value of the shares of stock sold is greater than the consideration or the selling price, the amount by which the fair market value of the shares exceeds the selling price shall be deemed a gift that is subject to donor’s tax under Section 100 of the Tax Code. Documentary Stamp Taxes on Shares The original issue of shares is subject to documentary stamp tax of P1.00 on each P200 par value, or fraction thereof, of the shares issued. On the other hand, the transfer of shares is subject to a documentary stamp tax at a rate of P0.75 on each P200, or fractional part thereof, of the par value of the common shares. The documentary stamp tax is imposed on the person making, signing, issuing, accepting or transferring the document and is thus payable either by the vendor or the purchaser of the common shares. However, the sale, barter or exchange of common shares listed and traded through the PSE are exempt from documentary stamp tax. Estate and Gift Taxes The transfer of the common shares upon the death of a registered holder to his heirs by way of succession, whether such an individual was a citizen of the Philippines or an alien, regardless of residence, will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if the net estate is over P200,000. The transfer of shares by gift or donation to a stranger (i.e. a person who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of relationship) will be subject to a donor ’s tax at a flat rate of 30.0%. Gifts or donations to non-strangers, however, will be subject to progressive rates ranging from 2.0% to 15.0%, if the net gifts during the calendar year exceed P100,000.00; otherwise, such transfer will not be subject to donor ’s tax. Corporate registered holders are also liable for Philippine donor ’s tax on such transfers, but the rate of tax with respect to net gifts made by corporate registered holders is always at a flat rate of 30.0%. 171 Estate and gift taxes will not be collected in respect of intangible personal property, such as shares, (1) if the deceased at the time of death, or the donor at the time of 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 (2) if the laws of the foreign country of which the deceased or the donor was a citizen and resident at the time of his death or donation allow 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. Corporate Income Tax As a general rule, a domestic corporation is subject to corporate income tax of 30.0% on its taxable income (refers to the pertinent items of gross income specified in the National Internal Revenue Code of 1997, as amended (the “Tax Code”) less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws) from all sources within or without the Philippines. The exception, among others, would be (i) gross interest income from Philippine currency bank deposits and yields from deposit substitutes, trust funds and similar arrangements, and royalties, which are subject to a final withholding tax rate of 20.0% of the gross amount of such income; (ii) interest income from a depository bank under the expanded foreign currency deposit system which is subject to a final 7.5% tax on the gross amount of such income. Further, in computing the corporate income tax, effective July 6, 2008, companies are given a choice to claim itemized deductions or the optional standard deduction (“OSD”), with the former being presumed unless specific election of OSD is signified in the tax return. The OSD election is irrevocable for the taxable year for which the tax return is made. The OSD is equivalent to an amount not exceeding 40.0% of the company’s gross income. For this purpose, “Gross Income” means all income derived from whatever source, including, but not limited to, compensation for service, gross income derived from the conduct of trade or business or exercise of profession, gains derived from dealings in property, interests, rent, royalties, dividends, annuities, prizes and winnings. A minimum corporate income tax (“MCIT”) of 2.0% of gross income would likewise be applicable to the Issuer, beginning on the fourth taxable year from commencement of business operations, whenever the MCIT is greater that the ordinary corporate income tax. For this purpose, “Gross Income” means gross sales less sales returns, discounts and allowances and cost of goods sold. Passive income, such as interest on bank deposits and royalties subject to final withholding tax, shall not form part of gross income for purposes of MCIT. Nevertheless, any excess of the MCIT over the ordinary corporate income tax may be carried forward and credited against the latter for the three immediately succeeding taxable years. Further, subject to certain conditions, the MCIT may be suspended with respect to a corporation which suffers losses on account of a prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. 172 173 Philippine Foreign Investments, Exchange Controls, and Foreign Ownership The Retail Trade Liberalization Act Republic Act No. 1180, or the Retail Trade Nationalization Law, prohibits any person who is not a citizen of the Philippines, and associations, partnerships or corporations not wholly owned by citizens of the Philippines, from engaging directly or indirectly in the retail trade business. Under this law, a corporation needs to be 100% owned by citizens of the Philippines in order to engage in retail business in the Philippines. Republic Act No. 1180 was subsequently superseded by Republic Act No. 8762, or the Retail Trade Liberalization Act, which defined retail trade as any act, occupation or calling of habitually selling directly to the general public any merchandise, commodity or good for consumption. Under the Retail Trade Liberalization Act, foreign-owned partnerships, associations or corporations formed and organized under the laws of the Philippines may, upon registration with the Philippine SEC and the DTI (“DTI”), or in the case of foreign-owned single proprietorships, with the DTI, engage or invest in the retail trade business, under the following categories: Category A Enterprises with paid-up capital that is less than the equivalent of US$2,500,000 in Pesos shall be reserved exclusively for Filipino citizens and corporations wholly-owned by Filipino citizens. Category B Enterprises with a minimum paid-up capital that is equivalent to US$2,500,000 in Pesos, but is less than US$7,500,000, may be whollyowned by foreigners except for the first two years after the effectively of the Retail Trade Liberalization Act (wherein foreign participation was limited to not more than 60% of total equity). Category C Enterprises with a paid-up capital that is equivalent to or more than US$7,500,000 in Pesos may be wholly owned by foreigners, provided that in no case shall the investments for establishing a store in Categories B and C be less than the equivalent of US$830,000 in Pesos. Category D Enterprises specializing in high-end or luxury products with a paid-up capital that is equivalent to US$250,000 in Pesos per store may be wholly owned by foreigners. Any foreign investor may be allowed to invest in existing retail stores. However, the investment must comply with the paid-up capitalization requirements enumerated above. Furthermore, foreign investors whom are also retailers and invest in existing retail stores are required to be pre-qualified with the Board of Investments before they can buy shares. No foreign retailer is allowed to engage in retail trade in the Philippines unless all the following qualifications are met: 174 (1) A minimum of US$200 million net worth in its parent corporation for Categories B and C, and US$50 million net worth in its parent corporation for Category D; (2) Five retail branches or franchises in operation anywhere around the world unless such retailers has at least one store capitalized at a minimum of US$25 million; (3) Five-year track record in retailing; and (4) Only nationals from, or judicial entities formed or incorporated in, countries which allow the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines. The implementing rules of Republic Act No. 8762 define a foreign retailer as an individual who is not a Filipino citizen, or a corporation, partnership, association, or entity that is not wholly-owned by Filipinos, engaged in retail trade. The DTI is authorized to pre-qualify all foreign retailers before they are allowed to conduct business in the Philippines. Foreign Investments Act of 1991 Republic Act No. 7042, or the Foreign Investments Act of 1991 (“FIA”) liberalized the entry of foreign investment into the Philippines. Under the FIA, in domestic market enterprises, foreigners may own as much as 100% equity except in areas specified in the Foreign Investment Negative List. The Foreign Investment Negative List enumerates industries and activities which have foreign ownership limitations under the FIA and other existing laws. For the purpose of complying with nationality laws, the term “Philippine National” is defined under the FIA as any of the following: (1) A citizen of the Philippines; (2) A domestic partnership or association wholly-owned by citizens of the Philippines; (3) 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; (4) A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos; or (5) 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. 175 For as long as the percentage of Filipino ownership of the capital stock of the corporation is at least 60% of the total shares outstanding and voting, the corporation shall be considered as a 100% Filipino-owned corporation. A corporation with more than 40% foreign equity may be allowed to lease land for a period of 25 years, renewable for another 25 years. In connection with the ownership of private land, however, the Philippine Constitution states that no private land shall be transferred or conveyed except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. BSP Regulations Under current BSP regulations, an investment in listed Philippine securities must be registered with the BSP if the foreign exchange needed to service capital repatriation and dividend or interest remittance will be purchased from the Philippine banking system. The application for registration may be made directly with the BSP or through an investor’s designated custodian bank. 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 such investor’s investments in the Philippines. Under relevant BSP regulations, 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 remitted and its conversion to Pesos; and (iii) transfer instructions from the stock broker 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 banking system, net of applicable tax, without need of BSP approval. Capital repatriation of investments in listed securities is permitted upon presentation of the BSP registration document and the broker’s sales invoice, at the exchange rate prevailing at the time of purchase of the foreign exchange from the banking system. Remittance of dividends is permitted upon presentation of: (i) the BSP registration document; (ii) the cash dividends notice from the PSE and the Philippine Central Depository printout of cash dividend payment or computation of interest earned; (iii) copy of secretary’s sworn statement on the board resolution covering the dividend declaration; and (iv) detailed computation of the amount applied for in the format prescribed by the BSP. Pending reinvestment or repatriation, 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 investor’s custodian bank. The foregoing is subject to the power of the BSP, through the Monetary Board, with the approval of the President of the Philippines, to suspend temporarily or restrict the availability of foreign exchange, require licensing of foreign exchange transactions or require delivery of foreign exchange to the BSP or its designee during an exchange crisis, when an exchange crisis is imminent, or in times of national emergency. The registration with the BSP of all foreign investments in any Shares received in exchange for Offer Shares shall be the responsibility of the foreign investor. 176 The Philippine Stock Market The information presented in this section has been extracted from publicly available document which have not been prepared or independently verified by the Company, the Underwriters or any of their respective subsidiaries, affiliates or advisors in connection with re-issuance 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 bids, and ask quotations from the bourses. In June 1998, the Philippine SEC granted the “Self-Regulatory Organization” status to the PSE, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies. On August 8, 2001, the PSE completed its demutualization, converting from a non-stock member- governed institution into a stock corporation in compliance with the requirements of the Philippine Securities Regulation Code. The PSE has an authorized capital stock of 97.8 million shares, of which, of which 30.7 million shares are subscribed and fully paid up. Each of the 184 member-brokers was granted 50,000 common shares of the new PSE at a par value of P1.00 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 PSE’s 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 nonbrokers, one of whom is the President. On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of a series of reforms aimed at strengthening the Philippine securities industry. Classified into financial, industrial, holding firms, property, services, and mining and oil sectors, companies are listed either on the PSE‘s Main Board or the Small, Medium and Emerging Board. Previously, the PSE allowed listing on the First Board, Second Board or the Small, Medium and Enterprises Board. As a result of the issuance by the PSE of Memorandum No. CN-No. 2013-0023 dated June 6, 2013, revisions to the PSE Listing Rules were made. Among such changes are the removal of the Second Board listing and the requirement that lock-up rules be embodied in the articles of the incorporation of the issuer. Each index represents the numerical average of the prices of component shares. The PSE has an index, referred to as the PHISIX, which as at the date thereof reflects the price movements 177 of selected shares listed on the PSE, based on traded prices of shares from the various sectors. The PSE shifted from full market capitalization to free float market capitalization effective April 3, 2006, simultaneous with the migration to the free float index and the renaming of the PHISIX to PSEi. The PSEi is composed of shares of 30 selected companies listed on the PSE. With the increasing calls for good corporate governance, the PSE has adopted an online daily disclosure system to improve the transparency of listed companies and to protect the investing public. The table below sets out movements in the composite index as at the last business day of each calendar year from 1995 to 2013, and the most recent month end in 2014, and shows the number of listed companies, market capitalization, and value of shares traded for the same period: 1995 2,594.2 Aggregate Market Combined Value Capitalization of Turnover (in Pbillions) (in Pbillions) 205 1,545.7 379.0 1996 3,170.6 216 2,121.1 668.8 1997 1,869.2 221 1,251.3 586.2 1998 1,968.8 222 1,373.7 408.7 1999 2,142.9 225 1,936.5 781.0 2000 1,494.5 229 2,576.5 357.7 2001 1,168.1 231 2,141.4 159.6 2002 1,018.4 234 2,083.2 159.7 2003 1,442.4 236 2,973.8 145.4 2004 1,822.8 235 4,766.3 206.6 2005 2,096.0 237 5,948.4 383.5 2006 2,982.5 239 7,173.2, 572.6 2007 3,621.6 244 7,977.6 1,338.3 2008 1,872.9 246 4,069.2 763.9 2009 3,052.7 248 6,029.1 994.2 2010 4,201.1 253 8,866.1 1,207.4 2011 4,372.0 253 8,697.0 1,422.6 2012 5,812.7 268 10,850.0 1,420.0 2013 5,889.8 257 11,931.3 2,456.2 Year Composite Index Number of Listed at Closing Companies Source: PSE 178 Trading The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To trade, bid or ask prices are posted on the PSE’s 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 day). 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. Wholesale trading on the PSE starts at 9:30 a.m. and ends at 3:30 p.m., with trading recess from 12:00 nn to 1:30 p.m. There is also a provision for ten-minute extensions 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. The PSE may effect changes to the hours and schedule of a trading day, as the circumstance warrants. Trading days are Monday to Friday, except legal and special holidays, days when the BSP is closed for various reasons, and such other days as may otherwise be declared by the SEC or the PSE, through its President or other duly authorized representative, to be a non-trading day. Minimum trading lots range from five (5) to 1,000,000 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 50.00% or down by 50.00% in one day (based on the previous closing price or last posted bid price, whichever is higher), the price of that security is automatically frozen by the PSE, unless there is an official statement from the company or a government agency justifying such price fluctuation, in which case the affected security can still be traded but only at the frozen price. If 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 company is disseminated, subject again to the trading ban. Non-Resident Transactions When the purchase/sale of Philippine shares of stock involves a non-resident, whether the transaction is effected in the domestic or foreign market, it shall be the responsibility of the securities dealer/broker to register the transaction with the BSP. The local securities dealer/broker shall file with the BSP, within three business days from the transaction date, an application in the prescribed registration form. After compliance with other required undertakings, the BSP shall issue a Certificate of Registration. Under BSP rules, all registered foreign investments in Philippine securities including profits and dividends, net of taxes and charges, may be repatriated. 179 Scripless Trading In 1995, the PDTC (formerly the Philippine Central Depository, Inc.), was organized to establish a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional license by the 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. In order to benefit from the book-entry system, securities must be immobilized into the PDTC system through a process called lodgment. Lodgment is the process by which shareholders transfer legal title (but not beneficial title) over their shares of stock in favor of the PCD Nominee 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 in the PDTC. “Immobilization” is the process by which the warrant or share certificates of lodging holders are canceled by the transfer agent and the corresponding transfer of beneficial ownership of the immobilized shares in the account of the PCD Nominee through the PDTC participant will be recorded in the issuing corporation’s registry. This trust arrangement between the participants and PDTC through the PCD Nominee is established by and explained in the PDTC Rules and Operating Procedures approved by the Philippine SEC. No consideration is paid for the transfer of legal title to the PCD Nominee. Once lodged, transfers of beneficial title of the securities are accomplished via book-entry settlement. Under the current PDTC system, only participants (e.g. brokers and custodians) will be recognized by the PDTC as the beneficial owners of the lodged equity securities. 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 participant’s aggregate holdings, in the PDTC system, and with respect to each beneficial owner’s 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 (T+3) that there are adequate securities in the securities settlement account of the participant-seller and adequate cleared funds in the settlement bank account of the participant-buyer, the PSE trades are automatically settled 180 in the SCCP Central Clearing and Central Settlement system, in accordance with the SCCP and PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the securities is transferred from the participant-seller to the participant-buyer without the physical transfer of stock certificates covering the traded securities. If a shareholder wishes to withdraw his stockholdings from the PDTC system, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the shareholder the legal title to the shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedures of the PDTC for the upliftment of the shares lodged under the name of the PCD Nominee. The transfer agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares lodged under the PCD Nominee. The expenses for upliftment are for the account of the uplifting shareholder. The difference between the depository 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 confirmation advice is issued in the name of PCD Nominee to confirm new balances of the shares lodged with the PDTC. Transfers among/between broker and/or custodian accounts, as the case may be, will only be made within the book-entry system of the PDTC. However, as far as the issuing corporation is concerned, the underlying certificates are in the PCD Nominee’s name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing company’s 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 if whether a listed security should be “housed” in the depository or registry is at the issuer‘s discretion. The migration from the depository to the registry model aims to eliminate the legal and operational risk brought about by a depository 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. At present, the depository model is the most widely used and recognized system, being utilized by nearly all jurisdictions around the world. In light of the CCCS, custodians holding Philippine listed equity securities now have the following options: a. Stay with the depositary for all its securities, whereby the PDTC acts as their implied “Custodian”. For shares under the PDTC, custodians are direct PDTC account holders with the shares still recorded in the PCD Nominee‘s 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; or b. Be a system participant of the SCCP wherein the CCCS 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 181 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 CCCS. This simplifies the custodian‘s interface into a single connectivity for both the depositary and the registry systems. For shares under the registry system, the custodian will have its own master account, having control over its own account. In the registry scenario, the custodian is already recognized as the beneficial 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, the 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. Amended Rule on Lodgement On June 24, 2009, the PSE apprised all listed companies and market participants through Memorandum No. 2009-0320 that, beginning July 1, 2009, as a condition for the listing and trading of the securities of an applicant company, the applicant company shall electronically lodge its registered securities with the PDTC or any other entity duly authorized by the SEC, without any jumbo or mother certificate in compliance with the requirements of Section 43 of the Securities Regulation Code. In compliance with the foregoing requirement, actual listing and trading of securities on the scheduled listing date shall take effect only after submission by the applicant company of the documentary requirements stated in Article III Part A of the Revised Listing Rules. Further, the PSE apprised all listed companies and market participants on May 21, 2010, through Memorandum No. 2010-0246, that the Amended Rule on Lodgment of Securities under Section 16 of Article III, Part A of the Revised Listing Rules of the Exchange shall apply to all securities that are lodged with the PDTC or any other entity duly authorized by the SEC. For listing applications, the amended rule on lodgment of securities is applicable to: a. The offer shares/securities of the applicant company in the case of an initial public offering; b. The shares/securities that are lodged with the PDTC, or any other entity duly authorized by the Commission in the case of a listing by way of introduction; c. New securities to be offered and applied for listing by an existing listed company; and d. Additional listing of securities of an existing listed company. Pursuant to the said amendment, the PDTC issued an implementing procedure in support thereof to wit: For new companies to be listed at the PSE as at July 1, 2009 the usual procedure will be observed but the Transfer Agent on the companies shall no longer issue a certificate to 182 PCD Nominee Corp but shall issue a Registry Confirmation Advice, which shall be the basis for the PDTC to credit the holdings of the Depository Participants on listing date. On the other hand, for existing listed companies, the PDTC shall wait for the advice of the Transfer Agents that it is ready to accept surrender of PCNC jumbo certificates and upon such advice the PDTC shall surrender all PCNC jumbo certificates to the Transfer Agents for cancellation. The Transfer Agents shall issue a Registry Confirmation Advice to PCNC evidencing the total number of shares registered in the name of PCNC in the Issuer‘s registry as at confirmation date. Settlement The Securities Clearing Corporation of the Philippines (“SCCP”) is a wholly owned subsidiary of the PSE, and was organized primarily as a clearance and settlement agency for SCCP-eligible trades executed through the facilities of the PSE. SCCP received its permanent license to operate on January 17, 2002. It is responsible for: Synchronizing the settlement of funds and the transfer of securities through Delivery versus Payment clearing and settlement of transactions of Clearing Members, who are also Trading Participants of the PSE; Guaranteeing the settlement of trades in the event of a Trading Participant’s default through the implementation of its Fails Management System and administration of the Clearing and trade Guaranty Fund; and Performance of Risk Management and Monitoring to ensure final and irrevocable settlement. SCCP settles PSE trades on a 3-day rolling settlement environment, which means that settlement of trades takes place three (3) Business Days after transaction date (T+3). The deadline for settlement of trades is 12:00 noon of T+3. Securities sold should be in scripless form and lodged under the PDTCs book entry system. Each Trading Participant maintains a Cash Settlement Account with one of the four existing Settlement Banks of SCCP which are BDO Unibank, Inc., Rizal Commercial Banking Corporation, Metropolitan Bank & Trust Company and Deutsche Bank AG (Manila Branch). Payment for securities bought should be in good, cleared funds and should be final and irrevocable. Settlement is presently on a broker level. SCCP implemented the CCCS last May 29, 2006. CCCS employs multilateral netting whereby the system automatically offsets “buy” and “sell” transactions on a per issue and a per flag basis to arrive at a net receipt or a net delivery security position for each Clearing Member. All cash debits and credits are also netted into a single net cash position for each Clearing Member. Notation of the original PSE trade contracts occurs, and SCCP stands between the original trading parties and becomes the Central Counterparty to each PSE-Eligible trade cleared through it. Issuance of Certificated Shares On or after the listing or re-issuance of the shares on the PSE, any beneficial owner of the shares may apply to the PDTC through his broker or custodian-participant for a withdrawal 183 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. The uplifting shareholder shall follow the Rules and Operating Procedures of the PDTC for the upliftment of shares lodged under the name of PCD Nominee. The transfer agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares lodged under PCD Nominee. The expenses for upliftment are for the account of the uplifting shareholder. Upon the issuance of certificated shares in the name of the person applying for upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement system. Such shares cannot be traded on the PSE without lodging them once again in the depository, in accordance with existing PSE and PDTC rules that were approved by the SEC. Pending completion of the upliftment process, the beneficial interest in the shares covered by the application for upliftment is frozen and no trading and book-entry settlement will be permitted until certificated shares shall have been issued by the relevant company‘s transfer agent. 184 PARTIES TO THE OFFER The Company Max’s Group, Inc. Pancake House Center 2259 Chino Roces Avenue Extension (Pasong Tamo Extension) Makati City, Metro Manila, Philippines Telephone Number (632) 784 9000 The Selling Subsidiaries The Real American Doughnut Co., Inc. Max’s Bakeshop, Inc. Max’s Kitchen, Inc. No Bia, Inc. Chickens R’ Us, Inc. Square Top, Inc. MGOC Holdings, Inc. Trota Gimenez Realty Corp. Room Ventures, Corp. Max’s Express Restaurants, Inc. The Selling Shareholders Trofi Ventures Corp. WERCO Holdings Corp. Ruby Investment Consolidated Holdings, Inc. WR Ventures Asia, Inc. FSS Realty Corporation Bookrunner, Issue Manager and Lead Underwriter BPI Capital Corporation Underwriters [*] Stock Transfer Agent Stock Transfer Services, Inc. 8/F BPI Building Ayala Avenue corner Paseo de Roxas Makati City 34/F, Unit D Rufino Pacific Tower 6784, Ayala Avenue Makati City Depository Bank [*] Counsel to the Issuer Picazo Buyco Tan Fider & Santos 185 18/F Liberty Center 104 H.V. Dela Costa Street Salcedo Village Makati City Counsel to the Underwriters Romulo Mabanta Buenaventura Sayoc & delos Angeles 21/F PhilamLife Tower 8767 Paseo de Roxas Makati City 186 FINANCIAL INFORMATION Please refer to the attached: Audited Consolidated Financial Statements as at and for the years ended December 31, 2013, 2012 and 2011 Unaudited Consolidated Financial Statements as at June 30, 2014 and for the six months ended June 30, 2014 and 2013 Pro-forma Consolidated Financial Information as at and for the periods ended June 30, 2014 and December 31, 2013 187