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SEC Number: A2000-03008 File Number

PANCAKE HOUSE, INC. _________________________________________________

(Company’s Full Name)

Pancake House Center 2259 Pasong Tamo Extension

Makati City ______________________________________

(Company’s Address)

(632) 893-4822 ______________________________________

(Telephone Number)

December 31 ______________________________________

(Calendar Year Ending) (month and day)

Form 17-A Annual Report ______________________________________

Form Type

______________________________________ Amendment Designation (If applicable)

December 31, 2008 ______________________________________

Period Ended Date

______________________________________ (Secondary License Type and File Number)

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A ANNUAL REPORT PURSUANT TO SECTION 17

OF THE SECURITIES REGULATION CODE AND SECTION 141 OF CORPORATION CODE OF THE PHILIPPINES

1. For the year ended December 31, 2008

2. SEC Identification Number A2000-03008 3. BIR Tax Identification No. 205-357-210-000

4. Exact name of registrant as specified in its charter PANCAKE HOUSE, INC.

5. Manila, Philippines 6. (SEC Use Only) Province, Country or other jurisdiction of Industry Classification Code: incorporation or organization

7. Pancake House Center, 2259 Pasong Tamo Extension, Makati City 1231

Address of principal office Postal Code

8. (632) 893-4822 Registrant's telephone number including area

code

9. 2nd Floor Lapanday Centre, 2263 Pasong Tamo Ext, Makati City Former name, former address, and former fiscal year, if changed since last

report 10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA

Number of Shares of Common Stock Title of Each Class Outstanding and Amount of Debt Outstanding Pancake House Inc. Common stock 192,636,364 shares

11. Are any or all of these securities listed on the Philippine Stock Exchange.

Yes [ x ] No [ ]

If yes, state the name of such stock exchange and the classes of securities listed therein: Philippine Stock Exchange Pancake House Common shares

12. Check whether the issuer:

(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17

thereunder or Section 11 of the RSA and RSA Rule 11 (a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding 12 months (or for such shorter period that the registrant was required to file such reports);

Yes [ X ] No [ ]

(b) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ]

13. State the aggregate market value of the voting stock held by non-affiliates of the

registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within sixty (60) days prior to the date of filing. If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided the assumptions are set forth in this Form. (See definition of “affiliate” in “Annex B”) P=538,065,639.00 (as of December 31, 2008)

APPLICABLE ONLY TO ISSUERS INVOLVED IN INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS

DURING THE PRECEDING FIVE YEARS.

14. Check whether the issuer has filed all documents and reports required to be filed by Section 17 of the Code subsequent to the distribution of securities under a plan confirmed by a court or the Commission. Yes [ X ] No [ ]

DOCUMENTS INCORPORATED BY REFERENCE

15. If any of the following documents are incorporated by reference, briefly describe them and identify the part of SEC Form 17-A into which the document is incorporated:(Not Applicable)

(a) Any annual report to security holders;

(b) Any proxy or information statement filed pursuant to SRC Rule 8.1-1.

(c) Any prospectus filed pursuant to SRC Rule 8.1-1.

PANCAKE HOUSE, INC. TABLE OF CONTENTS

SEC FORM 17-A

Page

PART I - BUSINESS AND GENERAL INFORMATION Item 1. Business 1-14 Item 2 Properties 15-19 Item 3 Legal Proceedings 20 Item 4 Submission of Matters to a Vote of Security Holders 20

PART II - OPERATIONAL AND FINANCIAL INFORMATION Item 5 Market for Issuer’s Common Equity and Related Stockholder

Matters 20-22

Item 6 Management’s Discussion and Analysis or Plan of Operation 22-36 Item 7 Financial Statements 36 Item 8 Changes in and Disagreements With Accountants on Accounting

and Financial Disclosure

36

PART III - CONTROL AND COMPENSATION INFORMATION Item 9 Directors and Executive Officers of the Issuer 36-39 Item 10 Executive Compensation 39-40 Item 11 Security Ownership of Certain Beneficial Owners and

Management

41 Item 12 Certain Relationships and Related Transactions 41-42

PART IV - EXHIBITS AND SCHEDULES Item 13 a. Exhibits 42 b. Reports on SEC Form 17-C (Current Report) 42-43

SIGNATURES 44

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES 45

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PART I - BUSINESS AND GENERAL INFORMATION Item 1. Business Nature of Business and Brief Historical Background The Company Pancake House, Inc. (“PHI” or the “Company”) is a publicly listed company in the Philippine Stock Exchange (“PSE”). It is a Filipino-owned corporation, principally engaged in the development, operation and franchising of a casual dining chain of restaurants under the trade name “Pancake House”. The consumer brand name has traditionally been associated with specialty pancakes and waffles and has likewise expanded to offer an array of popular international dishes such as spaghetti, tacos and chicken. The Company also owns and operates various restaurant brands directly or through its subsidiaries. These brands include “Dencio’s”, “Ka bisera”, “Teriyaki Boy”, “Singkit”, “Sizzlin’ Pepper Steak” and “Le Coeur De France” (collectively, the “Group”). Total system-wide sales of the Group (total restaurant sales from company-owned, joint venture and franchised stores) reached PHP 2.3 billion, translating to a compounded annual growth rate of 30% over a 3-year period. The Group opened 24 stores in 2008, including the group’s second outlet in Malaysia. The original Pancake House was established in 1970 by Milagros Basa, Leticia Zamora and Carmen Zaragosa. In 1974, Sta. Rosa Food Services Corporation (“SRFSC”) and in 1978, Extrovert Corporation (“Extrovert”), were incorporated to hold ownership in succeeding Pancake House outlets. It successfully opened its first franchised outlet in Greenhills, San Juan in 1978.

On February 15, 2000, a new investor group led by Mr. Martin P. Lorenzo entered into an Asset Purchase Agreement with SRFSC and Extrovert for the acquisition of the “Pancake House” trade name and purchase of all of the latter’s operating assets. Pending the final purchase, a new team of management and employees was organized to take over the company-owned outlets of SRFSC and Extrovert. On March 1, 2000, the new investor group incorporated Pancake House, Inc. as the acquisition vehicle of the investor group, finalized the purchase of the operating assets. On December 15, 2000, Pancake House, Inc. was listed in the Philippine Stock Exchange.

Joint Venture Companies Established to Operate Pancake House Franchises

Name of Joint Venture

Company/Partner %

Ownership

JV Outlet Date Established/Start of Commercial Operations

Happy Partners, Inc. - Pancake House, Inc. 51% - Malakas St., Q.C. Incorporated on 2/09/04 - Happy Frens, Inc. 49% - Market!Market! Taguig Started operations in 9/04 PCK-MTB, Inc. - Pancake House, Inc. 60% - Harborview, CCP Incorporated on 1/20/05 - MTB Culinary, Inc. 40% Started operations in 4/05 PCK Bel-Air, Inc. - Pancake House, Inc. 51% - Rockwell, Bel-Air Incorporated on 2/24/05 - IFS Realty Managers & Agents, Inc 49% Started operations in 4/05 Always Happy Greenhills, Inc. - Pancake House, Inc. 60% - Greenhills Crossroads, Incorporated on 2/08/06 - Happy Smiles, Inc. (“HSI”) 40% San Juan Started operations in 3/06 PCK MSC, Inc. - Pancake House, Inc. 50% - Cash & Carry Incorporated on 11/6/07 - Makati Supermarket, Inc. 50% Started operations in 11/07

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The total numbers of outlets of Pancake House as of the end of years 2000 up to 2008 are as follows:

Outlets 2000 2001 2002 2003 2004 2005 2006 2007 2008

Company-owned 12 17 20 20 19 21 21 25 32

Joint venture 0 0 0 0 2 4 5 6 7

Franchised 12 18 24 27 33 33 39 42 41

Total 24 35 44 47 54 58 65 73 80

Acquisitions and Brand Development Since its incorporation, the Company has acquired and developed several brands in the market. The table below summarizes the details of the Company’s acquisitions, as well as the number of outlets of each restaurant chain:

Acquisitions

Date of

Acquisition No. of Outlets at

Acquisition/Inception Current number of

Outlets (as of December 2008)

Pancake House March 2000 22 80

Dencio’s June 2004 18 25 Teriyaki Boy October 2005 11 38

Singkit May 2006 0 4

Sizzlin’ Pepper Steak June 2007 0 5 Le Coeur de France February 2008 13 11

Total 64 163

Acquisition of Dencio’s Bar and Grill On June 23, 2004, the Company acquired 100% of the issued and outstanding capital stock of Dencio’s Foods Specialists, Inc. (“DFSI”), a wholly owned corporation established by Dencio’s Foods Corporation (“DFC”) to own identified portions of DFC’s business and assets relating to the Dencio’s Bar and Grill chain of restaurant (“Dencio’s”), including intellectual property rights, free and clear of liens and encumbrances. At the time of the acquisition, DFSI had 3 company-owned and 15 franchised outlets. On July 26, 2007, the Securities and Exchange Commission approved the merger between PHI and its wholly-owned subsidiary, Dencio’s Food Specialists, Inc. DFSI was subsequently merged into PHI and DFSI’s corporate existence ceased by operation of law upon the effective Date of Merger on August 1, 2007 with PHI as the surviving company. In 2008, the company developed another brand “Kabisera ng Dencios” which caters to the upscale market seeking gourmet Filipino cuisine. It opened its first outlet in May 2008. Joint Venture/Subsidiary Companies Established to Operate Dencio’s Franchises


Company/Partner %

Ownership

JV Outlet Date Established/

Start of Operations

DFSI-One Nakpil Inc.

- Dencio’s Foods Specialists, Inc. 60% - Harbourview, CCP Incorporated on 1/28/05 - One Nakpil Global Ventures, Inc. 40% Started operations in 4/05

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Name of Joint Venture Company/Partner

% Ownership

JV Outlet

Date Established/ Start of Operations

DFSI-BBI, Inc.

- DFSI-One Nakpil, Inc. 51% - Brittany Bay, Incorporated on 10/18/04 - Business and Beyond, Inc. 49% Muntinlupa City Started operations in 11/05

DFSI-Subic, Inc. - Dencio’s Foods Specialists, Inc. 100% - SBMA, Subic Incorporated on 3/18/05

Started operations in 11/05 Ceased operations in 3/07

DFSI-MTB, Inc. - Dencio’s Foods Specialists, Inc. - MTB Culinary, Inc.

60% 40%

- Greenhills Crossroads, San Juan

Incorporated on 01/26/06 Started operations in 04/06

The numbers of outlets of Dencio’s as of end of years 2004 to 2008 are as follows:

Outlets 2004 2005 2006 2007 2008

Company-owned 5 7 8 8 9 Joint venture 1 2 3 3 3 Franchised 14 12 14 14 13

Total 20 21 25 25 25

Acquisition of Teriyaki Boy On October 28 of 2005, PHI bought 70% of the issued and outstanding capital stock of Teriyaki Boy Group, Inc. (“TBGI”). At the time of the merger, Teriyaki Boy had 10 company-owned and 1 franchised outlet. The acquisition was financed by the issuance of five-year convertible notes (Notes) issued to several Investors denominated in pesos at the prevailing exchange rate at the time of issue (P=55.12) or the Peso equivalent of US$4 million. The Notes are entitled to interest from the year of funding equivalent to (a) fifty percent (50%) of the consolidated audited net profit after tax of PHI for the current fisca l year multiplied by the equity interest of the Investors, or (b) the dividend which would have been due to the Investors if they already held Conversion Shares instead of the Notes as of the dividend record date, whichever is higher. Interest is payable semi-annually, on or before June 30 and December 31 of each year. The Investors, at their option, may convert their Notes, at any time after the issue date. The Notes shall be mandatorily converted into common shares as of the last day of the 5-year term. In 2007, Investors exercised their right to convert part of their Notes to common shares. Joint Venture/Subsidiary Companies Established to Operate Teriyaki Boy Franchises:


Company/Partner %

Ownership

JV Outlet Date Established/

Start of Operations TBGI-Marilao, Inc. - Petron Marilao Incorporated on 11/10/06 - Teriyaki Boy Group, Inc. 51% Started operations in 07/06 - IFS Realty Managers & Agents, Inc 49% TBGI-Tagaytay, Inc. - Tagaytay Incorporated on 07/26/06 - Teriyaki Boy Group, Inc. 40% Started operations in 11/06 - Analyn Tolentino 40% - Ian Henry Cang 20% TBGI-Trinoma, Inc. - Trinoma Incorporated on 03/20/07 - Teriyaki Boy Group, Inc. 60% Started operations in 05/07 - Azenith Holdings, Inc. 40%

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Name of Joint Venture Company/Partner

% Ownership

JV Outlet

Date Established/ Start of Operations

TBOY-MS, Inc - Cash & Carry Incorporated on 11/06/07 - Teriyaki Boy Group, Inc. 50% Started operations in 12/07 - Makati Supermarket Corp. 50%

The total number of outlets of Teriyaki Boy as of the end of the year 2008 are as follows:

Outlets 2005 2006 2007 2008

Company-Owned 10 20 20 22 Joint venture 1 4 4 Franchised 1 5 10 12

Total 11 26 34 38

Singkit On May 2006, 88 Just Asian, Inc. (“88 JAI”) was established to relaunch and operate the first Singkit outlet which offers dine-in, take out, and delivery services. 88 Just Asian is owned 80% by PHI and 20% by Singkit Deliveries, Inc. Management is currently in the process of enhancing its service architecture and product quality and expanding its menu.

Le Coeur de France On February 8, 2008, the Company acquired 100% of the outstanding and issued capital stock of Boulagerie Francaise, Inc. (“BFI”), the exclusive franchisee of the “Le Coeur de France” brand name and system-wide restaurant operations in the Philippines. Inclusive in PHI’s acquisition is BFI’s operating assets, including 13 company-owned outlets and 1 commissary. On the same date, Pancake House International, Inc., a wholly owned subsidiary of the Company established as the vehicle for its international franchising business, purchased the trademark “Le Coeur de France” and all of its related intellectual property rights from the trademark owner, Baratow Limited, a British Virgin Island company. In 2008, the company concentrated on opening three (3) new outlets to replace non-performing locations as part of its strategies to accelerate profitability.

The total number of outlets of Le Coeur de France as of the end of the year 2008 is 11. Sizzlin’ Pepper Steak On June 2007, TBGI launched a revolutionary concept in the Japanese steak dining experience under the home-grown brand “Sizzlin’ Pepper Steak”. This is to augment and offer diversity to the usual Japanese cuisine served under Teriyaki Boy. The total number of outlets of Sizzlin’ Pepper Steak as of the end of the year 2008 are as follows:

Outlets 2007 2008

Company-Owned 1 5 Revenue Sources The Company and its operating subsidiaries generate revenues from three (3) sources: (i) Restaurant sales from company-owned stores (includes dine-in, take-out & delivery and catering services); ii) Commissary sales to franchised stores and iii) Fees from franchisees consisting of one-time franchise fees and continuing licensing fees.

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Revenue contributions (as of year 2008) by revenue source of the companies holding all brands are as follows:

PHI TBGI 88 JAI BFI Restaurant 65% 82% 98% 100 % Commissary 29% 15% NA NA Franchising 6% 3% 6% NA

Restaurant Sales Revenues from restaurant operations for the past 3 years are as follows:

(in Millions) 2008 2007 2006 Pancake House 464 393 344 Dencio’s 257 249 221 Teriyaki Boy 521 515 403 Sizzlin’ Pepper Steak 11 NA Singkit 12 17 7

Commissary Sales The commissaries or central kitchens of Pancake House, Dencio’s, Teriyaki Boy and Le Coeur de France supply food and non-food items to all outlets (company and franchised-owned). The Pancake House Commissary was built within the first quarter of year 2002. Its production facility can service the requirements of up to 60 Pancake House outlets on a single work shift basis. Currently, the Pancake House commissary has 2-3 shifts/day. It houses efficient and sanitary production facilities and has established efficient production schedules and institutionalized its supply chain processes. Dencio’s and Teriyaki Boy’s commissary facilities are located in Brgy Oranbo, Pasig City. The facility has been enhanced in 2007 to accommodate increased production and efficiency to service additional outlets. The Le Coeur de France commissary is located in Kalawaan, Pasig City. Since its take-over from its previous owners, the Company invested in upgrading the facility and equipment to enhance productivity and efficiency. Revenue from commissary operations for the past 3 years are as follows:

(in Millions) 2008 2007 2006 Pancake House 197 191 171 Dencio’s 125 75 91 Teriyaki Boy 93 73 60 Sizzlin’ Pepper Steak NA NA NA Singkit NA NA NA

Franchise Income Pancake House, Dencio’s, Teriyaki Boy and Singkit are also engaged in franchising, from which one-time franchise fees and continuing licensing are generated. Summarized below are the principal terms of the franchise agreement between PHI, PHI-Dencios TBGI, 88 Just Asian, Inc. and their franchisees.

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Pancake House Continuing License Fee • 9% first year

• 10% second year onwards, based on net sales Franchise Fee (exclusive of VAT)

• 80 – 120 sqm store - PHP1,000,000.00 • 121 – 200 sqm store - PHP1,500,000.00

Franchise Term 10 years Renewal Term 5 years

Dencio’s

Continuing License Fee • 8% first year • 9% second year onwards, based on net sales

Franchise Fee (exclusive of VAT)

• First 200 sqm - Php1,500,000.00 • Each succeeding 200 sqm - Php500,000.00 (additional)


Teriyaki Boy

Continuing License Fee 10%, based on net sales Franchise Fee (exclusive of VAT)

• First 200 sqm - Php1,500,000.00 • Each succeeding 200 sqm - Php500,000.00


Singkit

Continuing License Fee 7% based on net sales Franchise Fee (exclusive of VAT)

• 80 – 120 sqm store - Php1,000,000.00 • 121 – 200 sqm store - Php1,500,000.00


Revenue from franchising for the past 3 years are as follows:

(in Millions) 2008 2007 2006 Pancake House 51 53 47 Dencio’s 18 18 19 Teriyaki Boy 22 19 19 Sizzlin’ Pepper Steak NA NA NA Singkit .30 1 NA

Principal Products Pancake House: Pancakes & Waffles, Pan Chicken, Spaghetti, Tacos, and Pasta. Combined, these dishes comprise 29% of all food units sold. PHI continues to innovate its menu selection with healthier meal options and more rice and viand combination meals. Dencio’s: Specializes in Filipino grilled menu items. The brand is well known for its “Sisig” which accounts for 11% of the product mix. It likewise offers Filipino dishes such as “Krispy Pata”, “Kare-Kare”, “Pinakbet”, and “Bulalo”. All the five (5) lead products account for 15% of the total product mix. Its appeal pre-dominantly caters to group sharing where menu items are served family-style. Teriyaki Boy: Serves Japanese cuisine catering to the Filipino taste. Its top product “Chicken Teriyaki” accounts for 14% of the product mix. Other top sellers include “California Maki” and “Tempura” which account for 8%. Singkit: Chinese delectable dishes include Lechon Macao, Beef Broccoli, Chicken with Quail Eggs, and Shanghai Spring Rolls. These signature dishes, including the sellable Sweet & Sour Fish, makes up 25% of the entire product mix.

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Sizzlin’ Pepper Steak: Specializing in dishes cooked in hot plates, SPS most in demand dishes are their “Pepper Rice” line. These include the “Beef Pepper Rice”, “Seafood Pepper Rice”, Teriyaki Beef Pepper Rice”, and “Pork Pepper Rice” which constitute 36%. Their house specialty also includes the Tori Karaage and Ribeye. Le Coeur de France: Bakery café that offers authentic French baked goods. Among their sellable items are croissants, feuilletes (turnover), chausson, and baguettes. But not limited to French breads, one of the fast moving items is their pandesal, baked to suit the Filipino palate. Distribution Methods Ingredients, supplies, and operating equipment are kept on stock at the Commissary, and are dispatched to the stores based on their orders via delivery vans (Company-owned units and third party truckers) for outlets in Luzon and sea and/or air freight for outlets in Vizayas and Mindanao. Deliveries are done twice to thrice weekly, depending on the volume of sales and distance of the outlet from the Commissary. Operations Commissary and Purchasing The Company operates three (3) central commissaries for all the brands under its wing. It allows the consolidation of common production processes for efficiency and product consistency. Furthermore, the centralized purchasing process likewise enhances the supply chain efficiency since it utilizes economics of scale across all raw material and processed items required by all restaurants. Research & Development The Company employs the Research and Development Team under the commissary which revisits existing menus, production processes and audits quality of products against standards. These activities contribute to the improvement of food and production casts. Furthermore, it develops new product offerings to replace non-performing products that embraces profitability of both the commissary and outlets. Marketing and Advertising Programs The main objective of constantly revitalizing the brands is to increase brand awareness and trials from untapped markets. Marketing strategies include the use of lasting but more cost efficient materials such as billboard placements all over Metro Manila and selected provincial locations to allow all-year round program. Special features using print media and cable television have likewise been utilized to introduce new menu items and concepts to the market. In 2008, Pancake House featured the ‘Welcome Home” Campaign to reinforce the positioning of the brand as into the international/broad spectrum comfort food restaurant in an ambience that is designed for family and friends. It launched the new menu design, table mats and kids menu and introduced new menu items such as Salmon Fillet, Jackfruit Parfait, Stewed Lengua and Shrimp Mango Salad, to name a few. Teriyaki Boy, in the meantime, underwent major brand revitalization as part of its strategy to continuously uphold its market leadership in the Japanese casual dining segment. Most outlets are extensively being refurbished to carry the new logo and concept “A new way to look at an old favorite”. Furthermore, menu items had been enhanced offering newer varieties such as salads and desserts. Dencio’s on the other hand, implemented the “Pugad Dencio’s” campaign to further stimulate the interest of its target market. It engaged the well-known Filipino band “Sugarfree” to render the Dencio’s musical jingle which was played in radio stations and music video played in selected cable channels. The campaign’s objective was to nurture the family gatherings in a homey venue offered by Dencios outlets.

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International Expansion The brand “Pancake House” continued to expand its international presence by opening its 2nd outlet in Malaysia. Furthermore, the Company is in the process of selling the Master Franchise to a prospective franchisee in Kuala Lumpur. It is currently processing the Company’s registration of the franchise with the Perbadanana Nasional Berhad (PNS) in Malaysia. Furthermore, the brand “Le Coeur de France” and “Teriyaki Boy” are being explored to enter the international market within a year or two. These brands will complement not only the market heritage but their reception to foreign brands as well. Trademarks The Company has pending applications for its trademarks filed with the Intellectual Property Office “(IPO”) of the Department of Trade and Industry of the Philippines, United States Patent and Trademark Office (“USPTO”) and Malaysia Intellectual Property Office (MyIPO). The Company believes that its service marks and trademarks have significant value and are important to its marketing efforts and will pursue registration of its marks whenever possible to mitigate any infringement to its marks. Key Business Strategies Consistent with its thrust to grow the business in the casual dining industry, PHI invests in brands that are equally reputable as the “Pancake House” brand. Its latest acquisition, “Le Coeur de France”, has established solid reputation in providing quality food and service to address the constantly changing demographic preferences and tastes. The Company believes that it can continue to further penetrate into its market base by offering food concept diversification. The Group now covers a wide range of food offerings, from International, Filipino, Japanese, Chinese, and now French cuisine. These brands specifically identified the products and service that cater to the target markets. The target market is defined by age demographics as illustrated in the chart below:

AB& C

2-13 years old AB& C

14-21 years old AB& C

22-35 years old AB&C

36 and Above Pancake House

Dencio’s

Kabisera

Teriyaki Boy

Singkit

Sizzlin’ Peppersteak

Le Coeur de France

Furthermore, the Company has identified these brands to be well received by the international market. These are currently being prepared for the implementation of the international expansion strategy of the Company. Pancake House Pancake House is known for serving food in a wholesome and homey environment. It continues to attract the AB and broad C markets that prefer single serve comfort food in their comfort zones. The

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Company is active in securing locations, not only in Metro Manila where 80% of the outlets are located, but also in other key cities and provinces in the country like Bulacan, Baguio, Subic, Tagaytay, Laguna, Cagayan de Oro, Cebu and Davao. From the 80 outlets as of year-end 2008, Pancake House is committed to expand to 89 by end of 2009. Pancake House also continuously revitalizes the image of the brand by renovating existing outlets, for both kitchen and dining space. Most outlets, both Company-owned and franchised now carry the new Pancake House concept. Management evaluates each outlet’s profitability performance and relocates or right sizes these, as necessary, to optimize return on investment. Dencio’s Since its acquisition, Dencio’s has continued to evolve into a more inviting restaurant for wholesome family gatherings and place for unwinding and cool down. It offers a unique Filipino dining experience especially with the future launching of a new concept “Kabisera”, a higher-end, Filipino casual-dining concept to serve the more discriminating market. Dencio’s plans to grow the business by expanding its restaurant operations (company-owned and franchised) from the present 26 outlets to 35 within the next two years. Major locations will be owned by the Company, either 100% or as joint venture with selected partners. Teriyaki Boy Teriyaki Boy, being the current leading Japanese brand in the casual dining industry, remains very strong in the market particularly in the 13-35 year old bracket. The Company will expand its restaurant operations to bring the brand closer to its market. From 10 at the time of acquisition in late 2005, the number of outlets has increased to 38 as of end 2008 and will further increase to 42 stores by end of 2009. Competitors Several brands compete in the casual dining segment of the food industry. For Pancake House, the specific competitors include Max’s restaurant, Barrio Fiesta, Dulcinea and Heaven and Eggs. Pancake House Inc. is a publicly listed casual dining restaurant in the Philippines. It manages seven (7) brands under the group namely, Pancake House, Teriyaki Boy, Dencio’s, Kabisera, Café Le Coeur de France, Sizzlin’ Pepper Steak and Singkit. Pancake House was initially recognized as a pancake and waffle breakfast place but it has diversified its menu to include food items such as spaghetti, sandwiches, salad, and steaks among others. Max’s restaurant has been in existence for more than 60 years. It has over 100 branches all around the Philippines and in the United States. Aside from its well known fried chicken, it serves a wide variety of Filipino dishes such as kare-kare, sinigang, crispy pata, and lechon kawali. It also offers combo meals and snacks. Max’s also provides catering and function services for wedding and other occasions. La Dulcinea Restaurant was first established in 1963 in Ermita Manila. It offers Spanish food specifically targeting the AB market. The restaurant popularized the Spanish snack Churros con Chocolate. Dulcinea has now 10 outlets around Metro Manila. Heaven and Eggs started its operation in May 2005. It offers international dishes. It presently has 5 branches in Metro Manila located in Tomas Morato, Eastwood City, Fort Bonifacio Global City, and Glorietta 4, and Trinoma. E-Commerce Development The Group uses Point-of-Sale (POS) systems in all its outlets. The systems provide daily sales information that helps determine demand forecasts and aid in the timely purchases of supplies. Computerized purchasing, inventory management and delivery & billing systems for the Commissaries

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and ordering system for the stores (both Company-owned and franchised) have also been installed and continuously reviewed for further enhancements. Sources and Availability of Raw Materials The Group sources most of its ingredients and supplies from major local suppliers including San Miguel-Purefoods Corp, Unilever, Nestle Philippines, CDO-Foodsphere Inc., Coca-Cola Bottlers Phils. Inc. and Swift Foods Inc. Restaurant & kitchen supplies and operating equipment are bought from local and foreign sources (through their authorized distributors in the Philippines). The Group maintains a number of suppliers for each type of item and is not dependent on a limited number of suppliers for its requirements. Trademarks The following are the details of pending applications for trademarks filed with the Intellectual Property Office “(IPO”) of the Department of Trade and Industry of the Philippines, United States Patent and Trademark Office (“USPTO”) and Malaysia Intellectual Property Office (“MyIPO”).

Pancake House

1. TM Pancake House & Device

Registered No.: 4-1996-114538 Registered: August 28, 2004 Status: Issuance of Certificate of Registration

2. TM Pancake House Since 1974 & Device Registered No.: 4-2000-015012 Registration: August 28, 2004 Status: Issuance of Certificate of Registration

3. TM Pancake House Since 1974 & Device Application No: 4-1998-01688 Filed: 03 October 1998 File No.: 10P601

Filed with the IPO: 14 March 2000 in favor of PHI by SRFSC (original term- 15 years) Status: No longer being used thus no Declaration of Actual Use was filed

4. TM PAN CHICKEN Application No: 4-2001-0001913 Filed: 16 March 2001, File No.: 10P-616 Filed with the IPO: 29 May 2002 Declaration of Actual Use Filed: 15 March 2004 Status: Issuance of Certificate of Registration

5. TM WE’RE MORE THAN JUST GREAT PANCAKES Application No: 4-2003-0004128 Filed: 08 May 2003 File No.: 10P-823 Declaration of Actual Use Filed: 8 May 2003 Status: Issuance of Certificate of Registration

Dencio’s

1. TM DENCIO’S BAR & GRILL & DEVICE Registered No. 4-2000-006478 Registered: 15 December 2003

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2. TM DENCIO’S LOGO Application No: 4-2004-011829 Filed: 14 December 2004 File No.: 116-D-001 Status: Application still being examined by the IPO

3. TM DENCIO’S - US TM Application Serial/Reference No: 78/560276 Filed: 03 February 2005 File No.: 116-D-002 Status: Application closed

4. TM Kabisera ng Dencios and Logo Registration No.: 4-2008-500187 Registration Date.: 03 November 2008 Term: Ten Years (until November 03, 2018)

Teriyaki Boy

1. TM WE BRING JAPAN TO YOUR DINING EXPERIENCE

Registered No.: 4-2004-002486 Registration Date: 10 November 2005

2. TM TERIYAKI BOY AND DEVICE WITH CHINESE & JAPANESE CARACTERS

Application No.: 4-2001-006508 Application Date: 31 August 2001 Status: Published for Opposition in the IPO E-Gazette which was released on October 10, 2005

3. TM LOGO

Application No.: 4-2001-006509 Application Date: 31 August 31, 2001 Status: Published for Opposition in the IPO E-Gazette which was released on October 10, 2005

4. TM TBOY TOWN & DEVICE

Application No.: 4-2001-006510 Application Date: 31 August 2001 Status: Published for Opposition in the IPO E-Gazette which was released on October 10, 2005

5. TM TBOY TOWN & DEVICE

Application No.: 4-2006-500015 Application Date: 16 March 2006 Status: Issuance of Certificate of Registration

6. TM JAPANESE CHARACTERS (FAT BOY)

Application No.: 4-2006-500016 Application Date: 16 March 2006 Status: Issuance of Certificate of Registration Term: Ten (10) years (until February 26, 2017)

7. TM TERIYAKI BOY TABEMASHOU LET’S EAT (TEXT LOGO)


8. TM TERIYAKI BOY TABEMASHOU LET’S EAT (GRAPHIC LOGO)


12

9. TM “BRINGING JAPAN TO YOUR DINING EXPERIENCE”

Application No.: 4-2006-500019 Application Date: 16 March 2006 Status: Certificate of Registration Issued Term: Ten (10) years (until February 26, 2017)

10. TM JAPANESE CHARACTERS (TABEMASHOU LETS EAT)


11. TM TERIYAKI BOY LOGO


12. TM TERIYAKI BOY LOGO

Application No.: 4-2006-500022 Application Date: 16 March 2006 Status: Certificate of Registration Issued Term: Ten (10) years (until February 26, 2017)

14. TM TERIYAKI BOY AND DEVICE (COLOUR) Application No.: 4-2008-008223 Application Date: 10 July 2008 Status : Published for Opposition in the IPO E-Gazette which was released on March 13, 2009 Singkit

1. TM Singkit & Device Registration No.: 56280 Date Registered: 6 October 1993 Status: Assignment of Registration of Trademark 2. TM Singkit & Device Registration No.: 4-1991-077555 Date Registered: 20 March 2005 3. TM SINGKIT MARK CLASS 29

Application No.: 4-2006-500343 Application Date: 03 October 2006 Status: Published for Opposition in the IPO E-Gazette which was released on October 5, 2007

4. TM SINGKIT MARK CLASS 43


5. TM SINGKIT DEVICE CLASS 29


6. TM SINGKIT DEVICE CLASS 43


13

7. TM THE GREAT NEW YORK TAKE-OUT CLASS 29

Application No.: 4-2006-500347 Application Date: 03 October 2006 Status: Application still being examined by the IPO

8. TM THE GREAT NEW YORK TAKE-OUT CLASS 43

Application No.: 4-2006-500348 Application Date: 03 October 2006 Status: Application still being examined by the IPO

9. TM CHINITO MARK CLASS 29


10. TM CHINITO MARK CLASS 43


11. TM CHINITO DEVICE CLASS 29


12. TM CHINITO DEVICE CLASS 43


13. TM CHINITO SIZE MARK CLASS 29


14. TM CHINITO SIZE MARK CLASS 43


Sizzlin’ Pepper Steak 1. TM BEEF PEPPER RICE

Application No.: 4-2007-500750 Application Date: 08 November 2007 Status: Application still being examined by the IPO

2. TM THE SIZZLIN’ PEPPER STEAK, STEAK & MORE AND DEVICE

Application No.: 4-2006-004060 Application Date: 18 April 2006 Status: Certificate of Registration Issued Term: Ten (10) years (until December 18, 2016)

14

3. TM THE SIZZLIN’ PEPPER STEAK MARK CLASS 43 Application No.: 4-2008-000194 Application Date: 07 January 2008 Status : Issuance of Certificate of Registration

Le Coeur de France 1. TM LE COEUR DE FRANCE LOGO

Application No.: 4-2008-012108 Application Date: 03 October 2008 Status : Issuance of Certificate of Registration

2. TM LE COEUR DE FRANCE LOGO Application No.: 4-2008-012109 Application Date: 03 October 2008

Status : Published for Opposition in the IPO E-Gazette which was released on March 13, 2009

Pancake House International 1. SINGAPORE

TM Pancake House International & Device (Class 43) Application No.: T07/11494D Application Date: 24 May 2007

Status: Application published in Singapore Trade Marks Journal No. 009-2208 2. MALAYSIA

TM Pancake House International & Device (Class 43) Application Nos.: 07008978 and 07008979 Application Date: 17 May 2007 Status: Statutory Declarations filed

3. CHINA

TM Pancake House International & Device (Class 43) Application Nos.: 6089053 and 6089054 Application Date: 17 May 2007

Status: Application still being examined by the IPO 4. VIETNAM

TM Pancake House International & Device (Class 43) Application Nos.: 4-2007-13425 and 4-2007-13426 Application Date: 17 July 2007 Status: Published in Industrial Property Gazette

5. THAILAND

TM Pancake House International & Device (Class 43) Application Nos.: 669786 and 669787 Application Date: 09 August 2007 Status: Application made to register the mark

6. INDONESIA

TM Pancake House International & Device (Class 43) Application Nos.: J00-2007-02-7010 and J00-2007-02-7011 Application Date: 15 August 2007 Status: Application still being examined by the IPO

15

Approval of the above trademarks will protect brand equity but the operations and sales of PHI (Pancake and Dencio’s), TBGI and 88 JAI are not affected in any way while awaiting such approval by IPO, USPTO and MyIPO.

Manpower and Management The Group had in its employ 2,098 employees as of December 31, 2008, broken down as follows:

Pancake

Dencio’s Teriyaki

Boy

SPS

BFI

Singkit

TOTAL By Rank Officers 7 0 0 0 0 0 7 Consultants 3 0 0 0 0 0 3 Managerial & supervisory 106 41 50 2 25 1 225 Rank and file 754 324 559 77 128 21 1,863

Total 870 365 609 79 153 22 2,098

By Employment Status Permanent 276 107 142 10 112 3 650 Probationary 40 13 26 8 10 2 99 Contractual 554 245 441 61 31 17 1,349

Total 870 365 609 79 153 22 2,098

The employees of the Group do not have any labor union or affiliation with any group that intends to represent the labor force to either Management or any group. However, the Group has established an Employees’ Consultative Council to encourage employees' involvement in policies, programs and projects related to their employment with the company. The Group also put in place a system where employees can communicate any concern with the companies through a text messaging facility.

Item 2. Properties The principal office of the Group is located at the Pancake House Center on Pasong Tamo Extension, Makati City. Pancake House leases its commissary site located in Pasong Tamo Ext., Makati and covering 588 sq.m. lot area from Surfield Development Corporation. Dencio’s and Teriayki Boy’s commissary are located in Oranbo, Pasig City. The property, covering 1,130 sq.m. is being leased from Mr. Mariano Tiu. The Le Coeur de France commissary is located in Kalawaan, Pasig City. The Group also leases its restaurant sites from third parties. The following is a schedule showing the information regarding the lease contracts that the Group has entered into. Pancake House

Location of Property Area Lessor Period Covered

From To Term 1 Greenbelt, Makati City 118.87 Ayala Land, Inc. 04/01/09 03/31/10 1 yr *

2 Magallanes Village

Makati City

217.43 MJ Realty Holdings, Inc.

12/01/02

11/30/12

10 yrs

3 Robinson's Place Ermita, Manila

109.00 Robinson's Land Corp

04/01/08

03/31/10

2 yrs

4 Plaza Luisita

Tarlac

200.00

Luisita Realty Corp.

05/30/00

05/29/10

10 yrs

5 Technopark

Sta Rosa, Laguna

97.00 Greenfield

Development Corp.

01/16/06

01/15/09

3 yrs

6 Katipunan Ave.

Quezon City

162.00

Eloisa Miranda

11/01/04

10/31/09

5 yrs

16


From To Term

7 Quezon Ave. Quezon City

160.00

Maxmor Enterprises

11/01/05

10/31/10

5 yrs

8 130 Valero St., Salcedo

Vill, Makati City

121.30

Hira Holdings, Inc.

03/01/06

02/27/11

5 yrs

9 SM Southmall, Las Piñas

City

114.81 SM Prime Holdings, Inc.

08/01/07

07/31/09

2 yrs

10 SM Centerpoint Araneta

Ave, Q. City

96.32 SM Prime Holdings, Inc.

08/01/08

07/31/09

1 yr

11

Robinson’s Place –Pasig

45.36

Robinson's Land Corp

10/01/07

09/30/09

2 yrs

12 Ayala Center Cebu Cebu

City

87.35

Cebu Holdings, Inc.

07/07/08

10/31/10

3mos.

13 Petron-Marilao

Marilao, Bulacan

96.00

Petron Corporation

07/01/07

06/30/12

5 yrs

14 Pearl Plaza, Pearl Drive Ortigas Center, Pasig

73.90

Leonardo De Silva Umale

03/01/07

02/28/12

5 yrs

15 King’s Court – Pasong Tamo St., Makati City

90.83

King’s Development, Inc.

10/15/08

10/14/11

5 yrs

16 Caltex – South Luzon

Tollway

120.00 Caltex (Philippines),

Inc.

07/15/04

07/14/19

15 yrs

17 Malakas St., Quezon City

306.60

Happy Frens, Inc.

02/16/04

02/15/12

8 yrs

18 Market! Market, Taguig

City

110.70 Station Square East

Commercial

10/01/08

09/30/09

1 yr

19 Harborview, CCP Complex, Manila

114.84

Meedson Properties Corp.

05/15/05

05/14/10

5 yrs

20 Rockwell Center, Makati

City

102.00

Rockwell Land Corp

1/21/07

1/21/12

5 yrs

21 Gateway Center, Cubao,

Quezon City

99.50

Araneta Center, Inc.

05/01/05

04/30/10

5 yrs

22

South Supermarket, Filinvest Corp. City,

Alabang

90.00

Grand Union

Supermarket, Inc.

12/02/05

12/01/15

10 yrs

23 Missouri Cor. Connecticut,

Greenhills, San Juan

92.20

Ortigas & Co., Ltd

Partnership

09/16/05

09/15/10

5 yrs

24 Dela Rosa Carpark,

Dela Rosa St., Makati City 84

Ayala Property Management Corporation 05/01/06 04/30/09 3 yrs.

25 Petron Bel-Aire, Petron

Makati Ave. 102 Petron Corporation 03/01/06 02/28/11 5 yrs.

26 Medical City, Ortigas

Center Pasig City 160 Professional Services,

Inc. 10/01/06 09/30/11 5 yrs.

27 Pavillon Mall, Laguna 80 Lagoon Development

Corporation 11/11/06 11/11/09 3 yrs.

28 Trinoma, North EDSa

Quezon City 123.78 North Triangle Depot Commercial Center 01/19/07 04/30/09

2 yrs. & 3 mos.

29 Bonifacio High Street,

Taguig City 150 Wumaco, Inc. 09/01/07 08/31/12 5 yrs.

30

#847 Banawe, Brgy. St. Peter Sta. Mesa Heights,

Quezon City 100 Melsons Innovations

Corporation 10/01/07 09/30/12 5 yrs.

31 Cash and Carry Mall,

Makati City 63.65 Adebe Realty Company,

Inc. 11/16/07 11/15/12 5 yrs.

17


From To Term

32 Sunway Pyramid, Malaysia 1,427 Sunway Pyramid Sdn

Bhd 3 yrs.

33 Pavilion Mall, Malaysia 971 Urusharta Cemerlang

Sdn, Bhd. 05/30/08 06/1/10 3 Yr.

33 The Link-Ayala Site A 116 Ayala Land, Inc. 08/18/07 11/30/09 2 yrs.

34 Capitol Hills 122 Fivesome Holdings Inc. 08/16/08 08/16/13 5 yrs. *As per policy of the Lessor, these lease agreements are limited to one (1) year periods and provide for the renewal of the lease subject to mutual agreement of the parties.

Dencio’s


From To Term 1 Glorietta IV, Ayala Center

Makati City 26.69 Ayala Land, Inc.

07/01/08

06/30/09

1 yr* 2 Sct. Albano, Quezon City 709.50 Ana Maria Que-Tan

07/01/05

06/30/10

5 yrs 3

Metrowalk, Pasig City

335.00

Metrowalk Commercial Complex

12/15/04

12/14/12

4 yrs

4 Eastwood, Libis, Quezon City

272.00

Eastwood Cyber One Corporation

12/01/04

12/01/09

5 yrs

5 Rockwell Center, Makati City

312.80 Rockwell Land Corp. 01/01/09 06/30/09 5 mos

6 Brittany Bay Muntinlupa City

520.00 Brittany Corporation 11/03/04 11/02/09 5 yrs

7 Harborview, CCP Complex, Manila

483.00 One Nakpil Global Ventures, Inc.

07/01/05 06/30/10 5 yrs

8 Plaza Luisita, Tarlac 300.00 Luisita Realty Corp. 05/30/00 05/29/10 10 yrs

9 Trinoma 190 North Triangle Depot Commercial Corp.

10/01/06 10/01/09 3 yrs.

10 Banawe 300 Rosendo T. Uy 6/15/08 06/14/09 1 yr.

11 Kabisera, Bonifacio High Street, Taguig

200 Wumaco, Inc. 09/01/07 08/31/12 5 yrs.

*As per policy of the Lessor, this lease agreement is limited to one (1) year periods and provide for the renewal of the lease subject to mutual agreement of the parties.

Teriyaki Boy


From To Term

1 6 Roosevelt St., West

Greenhills, San Juan, M.M

131.35 Dualstar Trading and Development Corp.

6/01/2006

5/31/11

5 yrs

2 Tomas Morato Ave.,

Quezon City

314.00 Wellcorp Incorporated

02/15/07

02/14/12

5 yrs

3 Glorietta 3, Ayala Center

Makati City

195.51

Ayala Land, Inc.

12/01/04

12/01/09

5 yrs.

4 Festival Supermall,

Alabang, Muntinlupa City

280.52

Festival Supermall, Inc.

11/15/03

10/31/08

5 yrs

18


From To Term

5

SM City, Baguio

196.21 SM Primeholdings, Inc.

11/1/06

10/31/09

3 yrs

6

SM Megamall, Ortigas

198.82 First Asia Realty Dev’t.

Corp

10/23/08

10/31/11

3 yrs

7 Market! Market, Taguig

City 154.86 Station Square East

Commercial 10/01/08 09/30/09 1 yr *

8 Eastwood, Libis, Quezon

City

476.30 Eastwood Cyberzone

Corp.

03/01/05

02/28/10

5 yrs

9 Gateway Center, Cubao,

Quezon City

164.00

Araneta Center, Inc.

05/01/05

04/30/10

5 yrs

10 Petron Makati Ave.,

Makati City 241.00 Petron Marketing Corp. 11/01/05 10/31/10 5 yrs

11 SM North EDSA, Quezon

City

159.84

SM Primeholdings, Inc.

7/29/06

10/31/09

3 yrs. & 3

mos.

12 Katipunan, Quezon City

140.00

Palodoma, Inc.

6/15/06

4/14/14

7 yrs. & 10 mos.

13 Robinsons Galleria,

Quezon City

223.75 Robinsons Land

Corporation

10/15/08

10/14/10

2 yrs.

14

Greenbelt, Makati City

157.8

Ayala Land, Inc.

04/01/08

3/31/09

1 yr

15 Robinson’s Ermita, Manila

119.93 Robinsons Land

Corporation

9/13/08

9/12/10

2 yrs.

16 Petron, Marilao Bulacan 140.00 Petron Corporation 6/1/06 5/31/11 5 yrs.

17

Dela Rosa Carpark

130.00 Ayala Property Mgt.

Corporation

5/1/06

4/30/10

4 yrs.

18

Harbour View, CCP

138.25 Meedson Properties

Corporation

3/1/06

2/28/11

5 yrs.

19

Paseo Center

134.00 Megaworld Corporation

3/15/06

3/31/09

3 yrs.

20

South Supermarket

168.59 Grand Union

Supermarket, Inc.

12/2/05

12/1/15

10 yrs.

21 Tagaytay City 250.00 Miguel Barreto 6/15/06 9/01/16 10 yrs

22 Trinoma, North Edsa

Quezon City 175.87 North Triangle Depot

Commercial Corp. 10/01/06 03/31/09 3 yrs.

23 Santana Grove, Sucat

Road, Parañaque 180 Suparana Holdings, Inc. 04/01/07 03/01/12 5 yrs.

24 Cash & Carry Mall, Makati

City 192.64 Adebe Realty Company,

Inc. 11/16/07 11/15/12 5 yrs. 25

223 Oranbo Drive, Brgy Oranbo, Pasig City

1,130.00

Mariano C. Tiu

11/01/05

10/31/10

5 yrs

26 Ayala Cebu, Cebu City 130.16 Cebu Holdings Inc. 10/31/09 10/31/10 1 Yr

*As per policy of the Lessor, this lease agreement is limited to one (1) year periods and provide for the renewal of the lease subject to mutual agreement of the parties.

19

Sizzlin Pepper Steak


From To Term 1 Trinoma, North Edsa

Quezon City North Triangle Depot

Commercial Corp 08/30/07 04/30/09 2 yrs

2

Promenade, Greenhills 31.185 Music Museum, Inc. 11/15/07 11/15/12 5 Yrs

3 Katipunan, Quezon City 72.63 K173 Properties, Inc 07/1/08 06/30/13 5 Yrs.

4 Ayala Cebu, Cebu City 65.40 Cebu Holdings, Inc 10/31/09 11/01/10 1 Yr

Le Coeur de France


From To Term 1

Shangri-La Plaza, Mandaluyong City

120 Shangri-La Plaza Corporation

08/01/07 07/31/09 2 Yrs.

2

Sta. Lucia East, Cainta Rizal

40.71 Sta. Lucia Realty Corporation

01/01/07 12/31/09 3 Yrs.

3 UN Times Plaza, Ermita Manila

47.79 RHL Properties & development Corp.

06/01/04 05/31/09 5 Yrs.

4 SM Megamall 63.24 First Asia Realty Dev’t Corporation

08/01/08 07/31/09 1 Yr.

5 Robinsons Manila 88.72 Robinsons Land Corporation

03/16/09 04/30/09 1 mon

6 V-Mall, Greenhills 56.51 Ortigas & Co. Ltd. Partnership

05/01/06 04/30/09 3 Yrs.

7 SM Southmall, Las Piñas 68.32 SM Prime Holdings, Inc. 05/01/07 04/30/09 2 Yrs.

8 San Antonio Plaza 31.60 Ayala Land Inc.

9 Shopwise Alabang 35.18 Rustan Supercenters, Inc.

10 Robinsons Galleria, Ortigas

40.00 Robinsons Land, Inc 08/18/08 08/14/10 2 Yrs.

11 Waltermart, Makati 60.00 Willimson, Inc 02/08/05 02/07/10 5 Yrs.

12 Gateway, Cubao Quezon City

35.5 Araneta Center, Inc 11/18/08 09/30/11 3 Yrs.

Total lease payments of the Group for the years ended December 31, 2008 and 2007 amounted to 177.1 million and P=133.6 million, respectively, consisting of the fixed rental and rentals based on a certain percentage of actual sales or minimum monthly gross sales, whichever is higher. The fixed rental rates are subject to annual increases ranging from 5% to 10%. The Group has no plans of acquiring any property as of just yet within the next two years. Its focus is on the existing locations for development, all of which are being leased.

20

Item 3. Legal Proceeding

To the best of the knowledge of Management, the Company is not aware of: (a) any bankruptcy petition filed by or against any business of which they are incumbent directors or

senior officers, was a general partner or executive officer either at the time of bankruptcy or within two (2) years prior to that time;

(b) any conviction by final judgment in criminal proceeding, domestic or foreign, pending against any

of the incumbent directors or officers; (c) any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court

competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting the involvement of any of the incumbent directors or executive officers in any type of business, securities, commodities or banking activities; and,

(d) any finding by or domestic or foreign court competent jurisdiction (in civil action), the SEC or

comparable foreign body, or domestic or foreign exchange or electronic marketplace or said regulatory organization, that any of the incumbent directors or executive officers has violated a securities or commodities law, and the judgment has not been reversed, suspended or vacated which may have a material effect in the operation and deter, bar or impede the fulfillment of his/her duties as a director or executive of the Company.

The Company, PH Ventures, Inc. (“PHVI”) and Mr. Martin P. Lorenzo, in his capacity as President of the two companies, were named defendants in a civil case filed in October 2002 by Kenmor Corporation (Kenmor) and Emmanuel B. Moran, Jr. (the joint venture partner of PHVI in Kenmor) for the collection of sum of money and damages in the aggregate amount of PHP 9,820,701.82. The plaintiffs alleged, among others, that PHVI did not put in its required capital contribution in Kenmor. The Pancake House – Libis outlet, which is owned and operated by Kenmor, closed down in June 2002 due to its lack of financial performance. On January 31, 2008, a complaint was filed by FILSCAP (Filipino Society of Composers, Authors and Publishers, Inc.) against Dencio’s Food Specialist, Inc. for failure to pay music royalties amounting to PHP485,140 for the Year 2007 and 2008. The case was turned over to PECABAR Law Offices for due process. Management and its legal counsel believe that no provision needs to be made in the accounts since the case above are projected to be ruled in favor of the Company and its materiality is not yet determinable and it is impracticable to make a reliable estimate.

Item 4. Submission of Matters to a Vote of Security Holders (not applicable)

PART II – OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Issuer's Common Equity and Related Stockholder Matters

Market Information The Pancake House, Inc. Common Shares were listed in the Philippine Stock Exchange on December 15, 2000. Currently, it is being traded under the ticker “PCKH”. The trading record of the Company since it listed is as follows:

21

Market Information (per quarter)

Quarter/Period High Low Volume January – March 2006 3.69 3.65 3,889,000 April – June 2006 4.54 4.38 4,967,000 July – September 2006 4.63 4.62 2,723,000 October – December 2006 5.72 5.71 335,000 January – March 2007 6.40 6.34 102,000 April – June 2007 6.99 6.99 971,000 July – September 2007 7.37 7.18 17,616,750 October – December 2007 8.96 8.55 9,142,000 January – March 2008 10.00 10.00 418,000 April – June 2008 10.00 10.00 214,000 July – September 2008 10.00 10.00 24,000 October – December 2008 9.82 7.58 71,000 January – March 2009 9.00 9.00 6,000

Market Information (last trading date)

Date: March 4, 2009 Open: P9.00 High: P9.00 Low: P9.00 Close: P9.00 Volume: 6,000 % Change: 0%

Top 20 Shareholders on Record as of December 31, 2008

Name Citizenship No. of Shares %

Pancake House Holdings, Inc. Filipino 93,453,289 48.51 PCD Nominee Corp. Filipino 54,387,570 28.23 PCD Nominee Corp. Foreign 17,932,000 9.31 Gabriel R. Singson, Jr. Filipino 12,450,000 6.46 Alicia P. Lorenzo Filipino 7,000,000 3.63 James O. de Jesus or Maria Margarita de Jesus

Filipino 1,650,000 0.86

Lourdes Beatrice L. Benitez Filipino 1,000,000 0.52 Cecile D. Macaalay Filipino 793,000 0.41 Joanne Que Lim Filipno 500,000 0.26 Walter Que Lim Filipino 500,000 0.26 Wilson &/or Jusy Que Lim Filipino 500,000 0.26 Winston Que Lim Filipino 500,000 0.26 Wilson Jesse Q. Lim, Jr. Filipino 500,000 0.26 Jacqueline Q. Lim Ong Filipino 500,000 0.26 Pablo L. Lobregat Filipino 338,000 0.18 Pablo L. Lorenzo III Filipino 70,000 0.04 Matilde Cupido Filipino 32,000 0.02 Mel Macaraig Filipino 30,000 0.02 Consuelo Tan Filipino 30,000 0.02 Amelito Obispo Filipino 20,000 0.01 Total top 20 Shareholders 192,185,859 99.76* Total Outstanding Shares 192,636,364

* Slight discrepancy due to rounding off.

22

There are approximately 126 shareholders as of December 31, 2008.

Dividends

Pancake House, Inc. has declared and paid the following dividends since its incorporation in Year 2000:

Date Declared

Record Date

Date Paid

Amount Per Share

Total Dividends

03/07/03 03/21/03 04/21/03 P0.060 P 11,318,181.84 05/28/04 06/15/04 06/30/04 P0.160 P 30,181,818.24 05/27/05 06/15/05 06/30/05 P0.065 P 12,261,363.66 06/02/06 06/15/06 6/30/06 P.060 P 11,318,181.84 12/01/06 12/15/06 12/29/06 P.040 P 7,545,454.56 3/26/07 4/15/07 4/30/07 P.050 P 9,431,818.20 10/31/07 11/15/07 11/30/07 P.0622 P11,981,981.84 6/30/08 07/15/08 07/31/08 P.0802 P15,458,996.46

Recent Sales of Unregistered Securities The Company has not sold nor traded any unregistered securities.

23

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION EXECUTIVE SUMMARY Pancake House, Inc. focuses on reliability and stability for the year 2008. With the expected decrease in consumer spending coupled with challenging business climate as a result of the current worldwide economic slowdown, the Company successfully upheld the continuous increase in EBITDA and Consolidated Revenues. Despite the contraction in business activity, PHI continued to sustain the upward trend of its EBITDA with an increase of 8.5% to P290.7 million (P252.4 million attributable to equity holders of the Parent) from P267.9 million (P234.2 million attributable to equity holders of the Parent) in 2007. Consolidated revenues increased by 15.2% to P1,855.8 million this year from P1,610.9 million last year. Restaurant sales of P1,356.2 million increased by 14.4% from last year’s P1,185.4 million. The increase in revenues was a result of the Company’s disciplined expansion program through the opening of new company-owned outlets and purchase of performing franchised–owned locations. Furthermore, the outlets from the recently acquired subsidiary Boulangerie Francaise, Inc., operating the “Le Coeur de France” brand contributed to the revenue upswing. Meanwhile, commissary sales rose by 22.2% to P409 million from P334.8 million in 2007; while franchise income remained the same at P91 million for both the years 2008 and 2007. On the other hand, while cost saving measures had been challenging in an ever rising operating cost environment, the Company managed to maintain its Cost of Sales at 40.6% this year with a slight increase of only 0.4% from last year’s 39.6% of revenues. Furthermore, Labor efficiency increased resulting to a lower Cost of Labor at 13.8% from last year’s 16.2% of revenues. The Company maintained a healthy Income from Operations which remained the same for the last 2 years at 6% of revenues. The Group’s consolidated net income for the year 2008 at P50.2 million (P45.7 million attributable to equity holders of the Parent) decreased by 20.8% from P63.39 million (P63.4 million attributable to equity holders of the Parent) due to the interest from short-term loans incurred to acquire the ‘Le Coeur de France” brand. Although the Company initially planned to raise equity or secure a long term facility to finance the acquisition, the economic condition in 2008 delayed such fund raising activity. Furthermore, the Company’s compliance with the current tax rates and laws caused the reversals of Deferred Tax Assets resulted to non-cash accounting entries which affected the bottom line financial performance.

24

Developments in 2008 Going global. Included in the continuing strategies of the Pancake House Group is to bring its brands to the mainstream international market. The Group identified Malaysia as its gateway into the Asian consumer market to initially introduce the brand “Pancake House International”. Through its international affiliate, Pancake House, International Malaysia Sdn Bhd (a wholly-owned subsidiary of Pancake House International, Inc.), it now currently operates 2 outlets in Malaysia serving menu items that cater specifically to the Malaysian taste profile while upholding the brand’s vision of quality product and service that guarantees a distinct gratifying and delightful dining experience. Acquisition of Le Coeur de France. On February 8, 2008, the Company acquired 100% of the outstanding and issued capital stock of Boulangerie Francaise, Inc. (“BFI”), the exclusive franchisee of the Le Coeur de France brand name and system-wide restaurant operations in the Philippines. Inclusive in PHI’s acquisition is BFI’s operating assets, including 13 company-owned outlets and one commissary. On the same date, Pancake House International, Inc., a wholly owned subsidiary of the Company established as the vehicle for its international franchising business, purchased the trademark “Le Coeur de France” and all of its related intellectual property rights from the trademark owner, Baratow Limited, a British Virgin Island company. Innovation. The Pancake House Group recently developed an upscale Filipino brand “Kabisera” to address the market’s need for higher-end Filipino restaurants. This is to further complement the popular bar and grill concept under the group called “Dencio’s” as an alternative despite both brands catering to the same market segment. The restaurant features new menu items developed by popular and well established chefs and such dishes consequently carry the chef’s identities. Merger between PHI and DFSI On July 26, 2007, the Securities and Exchange Commission approved the merger between Pancake House, Inc. (PHI) and its wholly-owned subsidiary, Dencios Food Specialists, Inc. (DFSI). Under the Plan of Merger, DFSI shall be merged into PHI, and DFSI’s corporate existence shall cease by operation of law upon the effective Date of Merger which shall be August 1, 2007 with PHI as the surviving company. The merger was accounted for similar to a pooling of interests and accordingly, all financial data of PHI for the periods prior to the merger have been restated to include the results of DFSI. Also, the results of operations for the period ended September 30, 2008 are reported as though PHI and DFSI had been combined as of the beginning of the period. On March 28, 2008, the Bureau of Internal Revenue (BIR) approved the application for a “tax free merger” within the meaning of Sections 40(C)(2)(a) and (b) and 40(6)(b) of the 1997 Tax Code, as amended. Consequently, no gain or loss was recognized by DFSI, as the transferor, on the transfer of all its assets and liabilities to the Company pursuant to the Plan of Merger. Likewise, no gain or loss was recognized by PHI, as the transferee, on its receipt of the assets and liabilities of DFSI without issuing stocks in exchange therefore. Steady Growth. The Group had a total of 163 outlets as of December 31, 2008 and 138 outlets as of December 31, 2007, broken down as follows:

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Table 1 - Number of Outlets, December 31, 2008 and 2007

Brand Co-ownedJoint

Venture Franchised Total

Pancake House 32 7 41 80 Dencios 9 3 13 25 Teriyaki Boy 22 4 12 38 Singkit 3 1 4 Sizzlin' Pepper Steak 5 5 Le Coeur de France 11 11

82 14 67 163

As of December 31, 2008

Brand Co-ownedJoint

Venture Franchised Total

Pancake 25 6 42 73 Dencios 8 3 15 26 Teriyaki 22 4 10 36 Singkit 2 1 3

57 13 68 138

As of December 31, 2007

Financial Statements The consolidated financial statements of Pancake House, Inc (PHI) and its subsidiaries as of December 31, 2008 and 2007 and for the year ended December 31, 2008, 2007 and 2006 include the consolidated accounts of the Company and the following subsidiaries:

Table 2 – Ownership Structure

% Ownership

Remarks PANCAKE HOUSE, INC. (PHI) Pancake House Operations: Happy Partners, Inc. 51% Established in 2004; started commercial operations in

September 2004 PCK-MTB, Inc. 60% Established in January 2005; started commercial operations

in May 2005 PCK Bel-Air, Inc. 51% Established in February 2005; started commercial

operations in May 2005 Always Happy Greenhills, Inc. 60% Established in February 2006; started commercial

operations in March 2006 Pancake House Int’l, Inc. 100% Established in February 2007 PCK MS, Inc. 50% Established in November 2007; started commercial

operations in November 2007 PH Ventures, Inc. 100%

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% Ownership Remarks

Pancake House Products, Inc.

100%

Dencio’s Operations: DFSI-One Nakpil, Inc. 60% Established in January 2005; started commercial operations

immediately thereafter DFSI Subic, Inc. 100% Established in March 2005 by DFSI; started commercial

operations in November 2005 DFSI-MTB, Inc 60% Established in January 2006; started commercial operations

in April 2006 Teriyaki Boy Operations:

TERIYAKI BOY GROUP, INC. (TBGI) 70% Acquired by PHI on October 28, 2005

TBGI Tagaytay, Inc. 40%

Established in May 2005; started commercial operations on November 10, 2006

TBGI Marilao, Inc. 51% Established in November 2006; started commercial operations on January 1, 2007

TBGI Trinoma, Inc. 60% Established in March 2007; started commercial operations in May 16, 2007

Tboy MS, Inc. 50% Established in November 2007; started commercial operations in December 2007

Singkit Operations: 88 JUST ASIAN, INC.

80%

Established in March 2006; started commercial operations on May 21, 2006

Le Coeur de France Operations: BOULANGERIE FRANCAISE, INC.

100%

Acquired by PHI on February 8, 2008

The analysis of the Group’s results of operations and financial condition shall be broken down into its four operating companies namely PANCAKE HOUSE, INC. (PHI), TERIYAKI BOY GROUP, INC. (TBGI), 88 JUST ASIAN, INC. (88 JAI), and BOULANGERIE FRANCAISE, INC. (BFI). Previously, the financial statements and other reports were presented to show the performance of four business units/brands: Pancake House, Dencio’s, Teriyaki Boy and Singkit. However, as a result of the merger between PHI and Dencios Food Specialists, Inc. (DFSI), wherein PHI was the surviving entity, the operations of Dencio’s were integrated under PHI as a division. Whenever applicable, details or breakdown of performance for Pancake House and Dencio’s divisions will be provided. There are no significant elements of income or loss that did not arise from the Group’s continuing operations during the year. Except as discussed in the Notes to Financial Statements, there have been no changes in estimates of amounts previously reported with respect to these financial statements. There are also no material events subsequent to December 31, 2008 that have not been reflected in the financial statements. Table 3 shows the consolidated operating results as well as by business group for the years ended December 31, 2008 and 2007:

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Table 3 – Comparative Income Statement, Consolidated & By Business Group (MMP) For the Years Ended December 31,2008 and 2007

2008 % 2007 % 2008 % 2007 % 2008 % 2007 % 2008 % 2007 % 2008 % 2007 %

Restaurant Sales 720.88 64.9% 642.37 65.6% 521.49 81.9% 526.41 85.0% 12.17 97.7% 16.63 93.5% 101.66 100.0% - 1,356.20 73.1% 1,185.41 73.6%Commissary Sales 321.16 28.9% 266.88 27.2% 93.17 14.6% 73.40 11.9% - 0.0% 0.00 0.0% - 0.0% - 409.01 22.0% 334.76 20.8%Franchise Income 68.48 6.2% 70.27 7.2% 21.85 3.4% 19.31 3.1% 0.28 2.3% 1.15 6.5% - 0.0% - 90.61 4.9% 90.73 5.6%Total Revenues 1,110.53 100.0% 979.52 100.0% 636.51 100.0% 619.12 100.0% 12.45 100.0% 17.78 100.0% 101.66 100.0% - 1,855.83 100.0% 1,610.91 100.0%

Cost of Sales* 465.85 44.7% 379.51 41.7% 219.46 35.7% 218.10 36.4% 4.67 38.4% 8.64 52.0% 30.52 30.0% - 716.35 40.6% 601.87 39.6%Cost of Labor* 139.48 13.4% 135.51 14.9% 90.14 14.7% 107.11 17.9% 3.67 30.1% 3.10 18.6% 12.39 12.2% - 244.07 13.8% 245.72 16.2%Operating Exp.* 286.92 27.5% 244.51 26.9% 209.29 34.0% 188.41 31.4% 9.44 77.5% 7.35 44.2% 35.59 35.0% - 540.05 30.6% 439.14 28.9%Sales & Marketing Exp.** 27.31 2.5% 32.69 3.3% 12.21 1.9% 15.32 2.5% 0.12 1.0% 0.79 4.4% 0.31 0.3% - 39.95 2.2% 48.80 3.0%Administrative Exp.** 137.70 12.4% 125.74 12.8% 82.13 12.9% 74.63 12.1% 1.43 11.5% 1.18 6.6% 26.50 26.1% - 215.07 11.6% 178.78 11.1%Total Costs and Expenses 1,057.26 95.2% 917.96 93.7% 613.23 96.3% 603.57 97.5% 19.32 155.2% 21.06 118.4% 105.31 103.6% - 1,755.50 94.6% 1,514.30 94.0%

53.27 4.8% 61.56 6.3% 23.27 3.7% 15.55 2.5% (6.87) -55.2% (3.27) -18.4% (3.64) -3.6% - 100.33 5.4% 96.60 6.0% 20.29 1.8% 14.77 1.5% 3.88 0.6% 1.04 0.2% 0.02 0.2% 0.04 0.2% (0.09) -0.1% - (15.04) -0.8% (13.92) -0.9% 73.57 6.6% 76.33 7.8% 27.15 4.3% 16.59 2.7% (6.85) -55.0% (3.24) -18.2% (3.73) -3.7% - 85.30 4.6% 82.68 5.1%

(28.86) -2.6% (17.64) -1.8% (5.20) -0.8% (2.95) -0.5% 1.71 13.7% 1.30 7.3% (0.61) -0.6% - (35.13) -1.9% (19.29) -1.2% 44.71 4.0% 58.69 6.0% 21.95 3.4% 13.64 2.2% (5.14) -41.3% (1.94) -10.9% (4.35) -4.3% - 50.17 2.7% 63.39 3.9%

Equity Holders of Parent 45.75 4.1% 60.04 6.1% 15.42 2.4% 11.91 1.9% (4.11) -33.1% (1.55) -8.7% (4.35) -4.3% - 45.70 2.5% 63.40 3.9%Minority Interest (1.04) -0.1% (1.35) -0.1% 6.53 1.0% 1.73 0.3% (1.03) -8.3% (0.39) -2.2% - 0.0% - 4.46 0.2% (0.01) 0.0%Total 44.71 4.0% 58.69 6.0% 21.95 3.4% 13.64 2.2% (5.14) -41.3% (1.94) -10.9% (4.35) -4.3% 50.17 2.7% 63.39 3.9%

Equity Holders of Parent 184.95 16.7% 177.33 18.1% 67.60 10.6% 57.70 9.3% (3.08) -24.7% (0.83) -4.7% 2.92 2.9% - 252.39 13.6% 234.20 14.5%Minority Interest 8.14 0.7% 7.01 0.7% 30.96 4.9% 26.97 4.4% (0.77) -6.2% (0.21) -1.2% - 0.0% - 38.34 2.1% 33.77 2.1%

193.09 17.4% 184.34 18.8% 98.56 15.5% 84.67 13.7% (3.85) -30.9% (1.04) -5.8% 2.92 2.9% - 290.73 15.7% 267.98 16.6%

* Cost of sales, Cost of labor and Operating expenses are computed as a percentage of combined restaurant & commissary sales. ** Sales & marketing expenses and Administrative expenses are computed as a percentage of Total revenues

NET INCOME(LOSS)ATTRIBUTABLE TO:

EBITDA:ATTRIBUTABLE TO:

TOTAL EBITDA

REVENUES

COSTS AND EXPENSES

INCOME (LOSS) FROM OPERATIONSOTHER INCOME (CHARGES)INCOME BEF. INCOME TAXBENEFIT FROM (PROV. FOR) INCOME TAX

PANCAKE HOUSE, INC. TERIYAKI BOY GROUP, INC. 88 JUST ASIAN, INC. BOULANGERIE FRANCAISE, INC. CONSOLIDATED

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Results of Operations Consolidated revenues increased by P255 million or 15.2% from P1.61 billion last year to P1.86 billion in the current year. Combined restaurant and commissary sales grew by 16.75% while franchise revenues remained the same at P90 million.

Table 4 – Revenues by Business Group By Type of Operation (MMP) For the Years Ended December 31, 2008 and 2007

2008 % 2007 % Inc(Dec) %

Pancake House*Restaurant sales 720.88 64.9 642.37 60.6 78.51 12.2 Commissary sales 321.16 28.9 266.88 30.8 54.28 20.3 Franchise Income 68.48 6.2 70.27 8.7 (1.79) (2.5)Total 1110.53 100.0 979.52 100.0 131.01 13.4 Teriyaki BoyRestaurant sales 521.49 81.9 526.41 87.4 (4.92) (0.9)Commissary sales 93.17 14.6 73.40 9.7 19.77 26.9 Franchise income 21.85 3.4 19.31 3.0 2.54 13.2 Total 636.51 100.0 619.12 100.0 17.39 2.8 SingkitRestaurant sales 12.17 97.7 16.63 100.0 (4.47) (26.8)Commissary sales - - - - - Franchise income 0.28 2.3 1.15 - (0.87) (75.5)Total 12.45 100.0 17.78 100.0 (5.33) (30.0)Le Couer de FranceRestaurant sales 101.66 100.0 - - 101.66 Commissary sales - - - - - - Franchise income - - - - - - Total 101.66 100.0 - 100.0 101.66 - CONSOLIDATEDRestaurant sales 1,356.20 73.1 1,185.41 70.4 170.79 14.4 Commissary sales 409.01 22.0 334.76 23.1 74.25 22.2 Franchise income 90.61 4.9 90.73 6.5 (0.11) (0.13)TOTAL 1,855.83 100.0 1,610.91 100.0 244.92 15.2

*Breakdown of Revenues for PHI by Division Pancake House Division 710.92 64.0% 637.17 65.0% 73.75 11.6 Dencio's Division 399.61 36.0% 342.35 35.0% 57.26 16.7

1,110.53 100.0% 979.52 100.0% 131.01 13.4

o Total revenues from Pancake House operations during the current year amounted to P1.1 billion, up by P131 million from P980 million last year. The growth was brought about mainly by new outlets opened during the year.

o Teriyaki Boy generated year-to-date revenues of P637 million in the current year, posting a slight increase of 2.8% from last year’s P619 million. The increase resulted from increase in commissary sales.

o Singkit’s revenues significantly decreased by 30% compared to last year. o Le Coeur de France contributed to the year-to date group revenues of P101.66 million from the

date it was acquired in February 2008.

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The Group continues to monitor closely its costs structures given the increasing costs of raw materials and supplies, rental and utility rates, and government-mandated wage hikes. Management continues to implement programs that optimize the use of the Group’s resources as well as generate savings. These include expanded synergies among the seven brands, strategic purchasing, and more efficient manning. These programs are supported by regular quality assurance and financial audits to check strict adherence to established costs and product and service quality standards.

o Combined restaurant and commissary costs of sales ratio for Pancake House operations increased to 44.7% this year from 41.7% last year, brought about by higher costs of raw materials in the current year. Meanwhile, due to better yields, the commissary’s cost of sales ratio increased only slightly despite increases in purchase costs of raw materials. Combined restaurant and commissary cost ratio of Teriyaki Boy operations slightly went down from 36.4% in 2007 to 35.7% this year. Continuous improvements in production yields have translated into lower cost ratios during the current year.

o Cost of labor slightly decreased during the year due to more efficient manning. Teriyaki Boy’s cost of labor ratio improved significantly to 14.7% this year from 17.9% last year to while Singkit’s ratio went up to 30.1% this year from 18.6% last year due to lower sales.

o Consolidated operating expenses for the year went up from P439 million to P540 million as a

result of the group’s expansion plans and opening of new outlets during the year.

o Consolidated sales and marketing expenses amounted to P40 million, 19% lower than last year’s P49 million.

o Consolidated administrative expenses for the current year were at 11.6% of gross revenues, slightly higher than the previous year’s level of 11.1%.

Consolidated other charges exceeded other income for the current year, resulting in a net Other Charges of P15 million, significantly higher than the P14 million net Other Charges recorded during the previous year. The increase is attributed to lower miscellaneous income and increase in interest expense on bank loans, net of increase in interest expense on the debt component of the convertible notes. Consolidated EBITDA (amount attributable to equity holders of the Parent) significantly improved by 8% from P234 million in 2007 to P253 million for the current year from P234 million in 2007. The Group’s performance during the year posted a net income of P45.7 million (amount attributable to equity holders of the Parent), down by 28% from last year’s P63 million.

o EBITDA improved by 4% to P185 million this year from P177 million last year. Net income for the year from combined Pancake House and Dencio’s divisions went down by 24% from P60 million last year to P46 million this year.

o Teriyaki Boy EBITDA increased by 17% to P68 million this year from P58 million last year. Meanwhile, net income is significantly higher at P15.4 million than last year’s P11.9 million.

o Singkit EBITDA went down from -P0.83 million last year to -P3.08 million this year. It incurred a net loss of P4.11 million, a significant decline compared to last year’s loss of P1.6 million.

o Le Coeur de France posted an EBITDA of P2.92 million however it incurred a net loss of P4.35 million

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Table 5 – Profitability Ratios For the Years Ended December 31, 2008, 2007 and 2006

Pancake House

Teriyaki Boy Singkit

Le Couer de France Consolidated

12/31/2008

Net Income Ratio 4.03% 3.45% -41.32% -4.27% 2.70% Return on Assets 3.86% 4.25% -29.11% -8.88% 3.53% Return on Equity 8.19% 5.60% 58.94% -18.16% 7.28%

12/31/2007

Net Income Ratio 5.99% 2.20% -10.92% 3.94% Return on Assets 5.82% 2.59% -12.96% 4.93% Return on Equity 11.22% 3.61% 54.19% 9.55%

12/31/2006

Net Income Ratio 2.90% 4.33% -39.36% 3.20% Return on Assets 2.82% 4.27% -18.87% 3.77% Return on Equity 5.26% 5.81% 165.09% 7.16%

Financial Condition, Liquidity and Capital Resources The following table shows the assets, liabilities and stockholders’ equity of the various companies within the Group as of December 31, 2008, 2007 and 2006.

Table 6 – Consolidated Balance Sheet Accounts, By Business Group (MMP) As of December 31, 2008, 2007, and 2006

Pancake

HouseTeriyaki

Boy SingkitLe Coeur de

France Consolidated(In Millions of Pesos)12/31/2008Current Assets 273.70 124.90 2.70 21.34 372.41 Total Assets 1,158.44 516.84 17.67 48.94 1,421.71 Current Liabilities 586.67 119.31 12.59 21.07 699.60 Total Liabilities 612.35 124.75 26.40 25.00 733.00 Total Equity 546.09 392.09 (8.73) 23.94 688.71

12/31/2007Current Assets 236.17 117.12 3.10 327.80 Total Assets 1,009.01 526.80 14.98 1,286.11 Current Liabilities 310.67 139.69 5.05 437.02 Total Liabilities 486.08 149.14 18.56 622.30 Total Equity 522.92 377.66 (3.58) 663.82

12/31/2006Current Assets 182.18 85.66 1.95 265.65 Total Assets 919.77 489.20 14.00 1,169.73 Current Liabilities 299.41 122.10 4.20 417.52 Total Liabilities 427.29 129.80 15.60 553.28 Total Equity 492.47 359.40 (1.60) 616.45

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Table 7 - Consolidated Liquidity and Solvency Ratios (x : 1.00) As of December 31,2008,2007, and 2006

Pancake

HouseTeriyaki

Boy SingkitLe Coeur de

France Consolidated

12/31/2008Liquidity Current Ratio 0.47:1.00 1.05:1.00 0.21:1.00 1.01:1.00 0.53:1.00Solvency Debt-to-asset ratio 0.53:1.00 0.24:1.00 1.49:1.00 0.51:1.00 0.52:1.00 Debt-to-equity ratio 1.12:1.00 0.32:1.00 -3.02:1.00 1.04:1.00 1.06:1.00

12/31/2007Liquidity Current Ratio 0.76:1.00 0.84:1.00 0.61:1.00 0.75:1.00Solvency Debt-to-asset ratio 0.48:1.00 0.28:1.00 1.24:1.00 0.48:1.00 Debt-to-equity ratio 0.93:1.00 0.39:1.00 -5.18:1.00 0.94:1.00

12/31/2006Liquidity Current Ratio 0.61:1.00 0.70:1.00 0.46:1.00 0.64:1.00Solvency Debt-to-asset ratio 0.46:1.00 0.27:1.00 1.11:1.00 0.47:1.00 Debt-to-equity ratio 0.87:1.00 0.36:1.00 -9.75:1.00 0.90:1.00

Financial Condition As of December 31, 2008, consolidated assets amounted to P1.42 billion, up from P1.29 billion as of December 31, 2007. Consolidated liabilities also increased from P622.3 million as of December 31, 2007 to P731.2 million as of December 3, 2008. Total stockholders’ equity stood at P691.96 million as of December 31, 2008 up from P663.82 million as of December 31, 2007. The increase in consolidated assets and liabilities was brought about mainly by the acquisition of Le Coeur de France and its trademark and recognition of goodwill on the purchase of 100% of BFI’s shares as well as setting up of new company-owned and joint-venture outlets, which were partly financed by borrowings, while the increase in stockholder’s equity arose from earnings during the current year and additional capital contribution of minority interest in joint venture companies, reduced by the cash dividend paid during the year. Liquidity Position As of December 31, 2008, the Group had cash and cash equivalents totaling P147.2 million, increased from the December 31, 2007 balance of P113.59 million. The Group’s current ratio decreased from 0.75:1.00 as of December 31, 2007 to 0.53:1.00 as of December 31, 2008. Total debt to asset ratio and total debt to equity ratio went up from 0.48:1.00 and 0.94:1.00, respectively, as of December 31, 2007 to 0.51:1.00 and 1.06:1.00, respectively, as of December 31, 2008. The Group’s liquidity position improved considerably starting the fourth quarter of 2008 when company-owned outlets that were opened within the year started to bring in cash flows.

31

In order to further improve the liquidity position of the Group, PHI obtained from Metrobank-Trust Banking Group on March 30, 2007, a new three-year term loan amounting to P150 million and terminated the existing loan with a remaining balance of P105 million. The new loan, which bears a fixed interest rate of 7.25% per annum, carries a bullet principal payment at the end of the term. The other loans, which are short-term, are currently being paid out of internally generated funds and are projected to be fully paid within the next nine months. The Group’s current ratio deteriorated due to the reclassification of the above-mentioned long term loan availed to current as well as additional availment of short-term loan to finance the acquisition of Le Coeur de France and its trademark. The Company was unable to meet its required current ratio of at least 1:1. On January 20, 2009, the Company was able to secure a waiver from the bank, waiving the said covenant and granting the Company until September 30, 2009 to comply with the requirements. The Group projects that future net cash flows (from the operations of new and existing outlets and the four Commissaries) will be sufficient to finance further restaurant and commissary expansions and to meet principal amortization and interest payments on its loans. It is also projected that some amounts may be made available for yearly dividend declaration. RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR 2007 Results of Operations Consolidated revenues increased by P230 million or 16.7% from P1.38 billion last year to P1.61 billion in the current year. Combined restaurant and commissary sales grew by 17.4% while franchise revenues (continuing royalty and franchise fees) increased by 5.8%.

o Total revenues from Pancake House operations during the current year amounted to P980 million, up by P86 million from P893 million last year. The growth was brought about mainly by new outlets opened during the year.

o Teriyaki Boy generated year-to-date revenues of P619 million in the current year, posting a significant increase of 28% from last year’s P482 million. The significant increase resulted from the opening of new outlets during the year.

o Singkit’s revenues significantly increased by 165% compared to last year due to increased store sales of company owned outlets and franchise income received from its first franchisee.

The Group continues to monitor closely its costs structures given the increasing costs of raw materials and supplies, rental and utility rates, and government-mandated wage hikes. Management continues to implement programs that optimize the use of the Group’s resources as well as generate savings. These include expanded synergies among the five brands, strategic purchasing, and more efficient manning. These programs are supported by regular quality assurance and financial audits to check strict adherence to established costs and product and service quality standards.

o Combined restaurant and commissary costs of sales ratio for Pancake House operations went down to 41.7% this year from 43.7% last year, brought about by better cost of sales ratio of restaurant operations. Meanwhile, due to better yields, the commissary’s cost of sales ratio increased only slightly despite increases in purchase costs of raw materials. Combined restaurant and commissary cost ratio of Teriyaki Boy operations improved to 36.4% this year from 39.9% in 2006. Continuous improvements in production yields have translated into lower cost ratios during the current year.

o Cost of labor slightly increased during the year as a result of government-mandated wage increases implemented during the year and opening of new outlets during the year.

o Consolidated operating expenses for the year went increased to P439 million from P363 million

in 2006 as a result of the group’s expansion plans or opening of new outlets during the year.

32

o Consolidated sales and marketing expenses amounted to P49 million, 9% higher than last year’s

P45 million.

o Consolidated administrative expenses for the current year were at 11.1% of gross revenues, slightly higher than the previous year’s level of 10.2%, mainly due to increase in salaries and benefits and depreciation and amortization pertaining to new outlets that opened during the year.

Consolidated other charges exceeded other income for the current year, resulting in a net Other Charges of P14 million, lower than the P29 million net Other Charges recorded during the previous year. The decrease can be attributed to higher miscellaneous income and decrease in interest expense on bank loans, net of increase in interest expense on the debt component of the convertible notes. The Group posted an impressive performance during the year with a net income of P63 million (amount attributable to equity holders of the Parent), up 58% from last year’s P40 million. Consolidated EBITDA (amount attributable to equity holders of the Parent) significantly improved by 24.7% from P188 million in 2006 to P234 million for the current year.

o Net income for the year from combined Pancake House and Dencio’s divisions increased to P60 million this year from 27.3 million last year. EBITDA improved by 27% to P177 million this year from P140 million in 2006.

o Teriyaki Boy contributed a net income of P11.9 million, lower than last year’s P15 million. EBITDA increased by 13.8% to P58 million in 2007 from P51 million in 2006.

o Singkit incurred a net loss of P1.6 million only, a significant improvement compared to last

year’s loss of P2.1 million. EBITDA improved by 68% compared to last year.

Financial Condition, Liquidity and Capital Resources Financial Condition As of December 31, 2007, consolidated assets amounted to P1.29 billion, up from P1.17 billion as of December 31, 2006. Consolidated liabilities also increased to 622.3 million as of December 31, 2007 from P553.28 million as of December 31, 2006. Total stockholders’ equity stood at P663.8 million as of December 31, 2007 up from P616.5 million as of December 31, 2006. The increase in consolidated assets and liabilities was brought about mainly by the setting up of new company-owned and joint-venture outlets, which were partly financed by borrowings, while the increase in stockholder’s equity arose from earnings during the current year and additional capital contribution of minority interest in joint venture companies, reduced by the cash dividend paid during the year. Liquidity Position As of December 31, 2007, the Group had cash and cash equivalents totaling P113.59 million, down from the December 31, 2006 balance of P117.37 million. The Group’s current ratio increased 0.75:1.00 as of December 31, 2007 from 0.64:1.00 as of December 31, 2006. Total debt to asset ratio and total debt to equity ratio went up to 0.48:1.00 and 0.94:1.00, respectively, as of December 31, 2007 from 0.47:1.00 and 0.90:1.00, respectively, as of December 31, 2006. The Group’s liquidity position improved considerably starting the fourth quarter of 2006 when company-owned outlets that were opened within the year started to bring in cash flows.

33

ACCOUNTS WITH MORE THAN 5% CHANGE IN BALANCES (Against December 31, 2007 Balances) Cash and Cash Equivalents Cash and cash equivalents increased to P147.2 million as of December 31, 2008 from P113.59 million as of December 31, 2007 mainly due to cash inflows brought by new and existing outlets and improved cash management. Trade and Other Receivable Accounts receivable increased to P112.4 million as of December 31, 2008 from P97.8 million as of December 31, 2007. Significant changes were in the following:

Trade receivable - Went up to P75 million as of December 31, 2008 from P63 million as of December 31, 2007 due to the increase in the number of franchisees of the Group.

Royalties - Increased by P5 million due to increase in the number of franchisees of the Group.

Advances to Officers and Employees

- Increased by P.86 million, representing advances for operating, outlet opening expenses, and company event-related activities , subject to liquidation

Others

- Decreased by P3.9 million, mainly net of increase in receivable from credit card companies and decrease in miscellaneous receivable.

Inventories Inventories increased by 25.67% to P62 million this year from P49 million last year mainly due to acquisition of Boulangerie Francaise, Inc. Prepaid Expenses and Other Current Assets The decrease in prepaid expenses from P67.07 million as of December 31, 2007 to P50.8 million as of December 31, 2008 mainly due to decrease in advances to suppliers and amortization of prepaid expenses last year. Trademarks and Goodwill The increase in trademarks and goodwill can be attributed to the purchase of the trademark of the Le Coeur de France brand by PHI International, Inc. from the trademark owner, Baratow Limited, a British Virgin Island company as well as recognition of goodwill arising from the purchase of PHI of 100% of the outstanding and issued capital stock of Boulangerie Francaise, Inc. Property and Equipment Property and Equipment increased by 30% mainly due to additional acquisitions for new outlets and appraisal of Boulangerie Francaise, Inc.

34

Other Non-current Assets The increase in other non-current assets to P113 million as of December 31, 2008 from P93 million as of December 31, 2007 is accounted for mainly by the following:

Notes Receivable - Increased by P6.2 million arising from assignment of leasehold improvements of DFSI-Subic, Inc.

Refundable Deposits - Increased by P8.2 million due to additional outlets and annual escalation.

Input tax – Capital expenditures

- Decreased by P3.8 million to P12.4 million as of December 31, 2008 from P16.3 million as of December 31, 2007. Input tax on capital expenditure is amortized over a maximum period of 5 years in compliance with the expanded VAT law.

Others - Increased by 3.9 million mainly due to additional prepaid expenses

Trade and Other Payables Trade and other payables decreased to P282 million as of December 31, 2008 compared to P292 million as of December 31, 2007. Items with significant movements follow:

Trade Payables - Decreased by P22 million due to improved and timely disposition/payment to suppliers

Deposits from Franchisees

- Decreased by P23 million due to improved settlement of received advance payments and minimal increase in number of franchisees during the year

Accrued Expenses - Increased by 52% from last year’s accrual of P47.4 million to this year’s balance of P72.3 million mainly due to unprocessed billings due to early and long vacation in December

Value-Added Tax - Increased by P1.8 million due to higher sales during the last month of the year

Service Charge Payable

- Increased by P1.4 million due to higher sales during the last month of the year

Contract Retention Payable

- Decreased by P.34 million due to payments made during the year

Interest on Convertible Notes

- Decreased by P2 million

Loans Payable The Group availed itself of additional short-term loans with interest rates ranging from 6.25% to 7%, to finance the setting up of new company-owned outlets during the period. These loans are projected to be liquidated out of earnings from the outlet operations. Income Tax Payable Income tax payable increased by P.8 million, representing mostly the income tax liabilities of TBGI, PCK – MTB, PCK - MSC and DFSI- One Nakpil for the twelve months ended December 31, 2008. Other companies within the Group are at zero taxable position since a bigger portion of their income is already subject to final tax at lower rates or as a result of utilization of NOLCO.

35

Long-term Debt The Parent Company obtained peso denominated long-term loan from Metropolitan Bank & Trust Company (Metrobank) to finance the acquisition of DFSI. The loan, which bears interest at the MART1 as of the date of availment (15.01%) due quarterly, is payable as follows: P45, 000,000 each July 23, 2006 and 2007; and P60, 000,000 on July 23, 2008. Due to the lower interest rates prevailing in 2006, PHI negotiated with Metrobank for a conversion of the interest from fixed to a floating rate. Starting June 23, 2006, the interest rate was converted to a floating rate, subject to quarterly re-pricing. As of December 31, 2006, the interest rate was at 10% per annum. On March 30, 2007, the Company availed of a 150 million peso-denominated three year term loan from Metrobank. Proceeds were used to repay the existing long term loan with Metrobank. The loan, which bears a fixed interest rate of 7.25% per annum, carries a bullet principal payment at the end of the term. The agreement provides for a pre-termination without penalty at the end of the second year and a mandatory prepayment if Martin I.P. Lorenzo is replaced as Chairman, President or Chief Executive Officer of the Company and either he ceases to own and control at least 51% of the outstanding capital stock of PHHI or PHHI ceases to directly or indirectly own and control at least 50% of the outstanding capital stock of the Company. The loan is collateralized by a chattel mortgage of owned assets of DFSI and a pledge of all present and future stocks of DFSI. Under the loan agreement, the Company is required, among others, to:

o Maintain a current ratio of at least 1:1 on the second year that the loan is outstanding o Maintain a debt to equity ratio not greater than 2:1 o Promptly give written notice to the bank of any change in the composition of its Board of

Directors, in so far as it arises out of a change in its ownership; and o Promptly inform the bank of any exercise of options granted to third persons over pledged

shares. The loan agreement also contains a number of negative covenants that, among others, subject to certain exceptions and qualifications, restrict the Company’s ability to take certain actions without the bank’s approval, including changing the nature of its business, permitting any material change in the ownership or control of its capital stock, declaring or paying dividends to its stockholders, if payment of any sum due the bank hereunder is in arrears, granting loans or advances to any of its directors, officers, and/or stockholders, which in the aggregate would exceed about P12.0 million a year, creating any debt or availment of additional loan(s) with final maturity exceeding one year. The Company was unable to maintain a current ratio of at least 1:1 in 2008. On January 20, 2009, the Company was able to secure a waiver from the bank, waiving the said covenant and granting the Company until September 30, 2009 to comply with the requirements. Mortgage Payable Mortgage payable decreased by P2.01 million due to payments made during the year ended December 31, 2008. Convertible Notes The convertible notes issued to Aureos Southeast Asia Managers Limited and Planters Bank Venture Capital Corporation has both a debt component and an equity component. The debt component is the present value of the future cash flows of interest payments as determined in reference to the

36

consolidated forecasted net income from issuance date up to the time that the notes are mandatorily converted into equity. (See Notes to Financial Statements) The difference between the issue price of the notes and the liability component was recognized as the equity component of the note. Accrued Retirement Liability Increase in accrued retirement liability of P1.9 million represents additional provision for retirement benefits for Group employees for the year ended December 31, 2008. As of December 31, 2008, only PHI and TBGI had a funded retirement fund. Accrued Rentals Accrued rentals represent accrued rent pertaining to non-cancelable lease on new and additional outlets. Minority Interest Minority interest represents the equity contribution and long-term advances made by the minority partners in TBGI and the partners in the joint venture companies established by PHI and TBGI. Cash Dividends The following dividends were declared out of PHI’s retained earnings in 2006, 2007 and 2008:

Date Retained Amount

Declared Record Paid Earnings as of

Per Share

Total Dividends

6/2/2006 6/15/2006 6/30/2006 12/31/05 P 0.0600 P 11,318,181.84

12/1/2006 12/15/2006 12/29/2006 06/30/06 P 0.0400 P 7,545,454.56

3/26/2007 4/15/2007 4/30/2007 12/31/06 P 0.0500 P 9,431,818.20

10/31/2007 11/15/2007 11/30/2007 6/30/07 P 0.0622 P11,981,981.84

6/30/2008 07/15/2008 07/31/08 12/31/07 P0.0802 P15,458,996.46

Equity Securities There were no issuances, repurchases and repayments of debt and equity securities during the period. Off Balance Sheet Transactions, Arrangement, Obligation And Other Relationships There are no off-balance sheet transactions, arrangements, obligation (including contingent obligations), and other relationships of the company with unconsolidated entities or other persons created during the reporting period. Item 7. Financial Statements Attached is an index for the Company’s audited consolidated financial statements and supplementary schedules as of and for the years ended December 31, 2008 and 2007 and 2006. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in and disagreements with the certifying accountants, SyCip Gorres Velayo & Co. on any accounting and financial disclosure involving PHI’s consolidated financial statements.

37

PART III - CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers of the Issuer Directors and Officers Martin P. Lorenzo, age 43, is the Chairman and Chief Executive Officer of the Company since March 2000 and was appointed President on February 1, 2002. He is also the Chairman and President of TBGI, Vice Chairman, President and CEO of Macondray & Co., Inc. He is also Chairman of the Board of St. Tropez Holdings Corporation. He graduated from the Ateneo de Manila University with a Bachelor of Science degree in Management Engineering and obtained his Masters degree in Business Administration from the Wharton School, University of Pennsylvania. Milagros Basa, age 81, is a Director of the Company since March 2000. She is currently the Chairperson and President of Nisa Management, Inc. and Chairperson of Caresma Realty Corporation. She was formerly Chairperson of Sta. Rosa Food Services Corporation and Pancake Connection, Inc. She was also, previously connected with Philippine Airlines as Officer in Charge of In-Flight Catering Services, Passenger Service Manager and Chief Flight Attendant. Ms. Basa has a Bachelor of Science Degree in Arts and Science from Columbia College, Chicago, USA. Cecile D. Macaalay, age 41, is a Director of the Company since March 2000. She was appointed as Director for Corporate Planning on April 2002 and subsequently Treasurer in August 2007. She is likewise a Director and Treasurer of Pancake House Holdings, Inc., and all subsidiaries of Pancake House, Inc. She once held the position of Associate for Corporate Planning of Macondray & Co., Inc. and held directorship in several of its subsidiaries. Ms. Macaalay obtained her Bachelor of Science degree in Business Administration and Accountancy from the University of the Philippines. She is a certified public accountant. Zenaida A. Mercado, age 48, is a Director of the Company and is concurrently the Finance Director since March 2000. Ms. Mercado is also a consultant of Macondray & Co., Inc. She was formerly the Chief Audit Officer of Macondray & Co., Inc. and was previously connected with Pacific Internet-Philippines and the Segoro Mulyo Group of Companies in Surabaya, Indonesia. She was also senior auditor in charge at SyCip Gorres Velayo & Co. Ms. Mercado has a Bachelor degree in Accountancy from the Divine Word College of Laoag. She is a certified public accountant. Fernan V. Lukban, age 49, is a Director of the Company since 2002. He is currently the Director of the Entrepreneurial Management Program and concurrently the Business Manager, Chief Finance Officer and Head of Business Economics Program of Arts & Sciences of the University of Asia and the Pacific (UA&P). He obtained his Bachelor of Science degree in Industrial Mechanical Engineering from De La Salle University and completed his Masters degree in Business Administration from IESE (Spain) and Industrial Economics from UA&P (formerly CRC). Danny P. Lizares, age 45, is a Director of PHI since October 2005 and is currently a Director of Aureos Philippine Advisers, Inc. a European private equity fund manager. He is also a member of the board of directors of Cirtek Holdings Inc. Prior to fund management; Mr. Lizares has well over 10 years of investment banking experience. He has advised on a number of fund raising exercises for F&B companies such as Macondray Holdings, Inc. and Dominos Pizza. He was previously Head of Corporate Finance of BNP Paribas Peregrine Inc. He was also the Chief Representative of Prime East Securities (HK) Ltd. Upon completion of his post graduate degree, he was hired as Manager of Bear Stearns State Asia. He completed his undergraduate degree at the University of the Philippines. He holds an M.Sc. in Industrial Economics at the Center for Research and Communication and an M.A. in International Relations from Boston University. Janette L. Peña, age 49, is the Corporate Secretary of the Company. Atty Peña is Director of Surfield Development Corporation and Corporate Secretary for Macondray & Co., Inc., Macondray Packaging Corporation, Macondray Agro-Industrial Corporation, Macondray Industries, Inc., Macondray Insurance Brokerage Corporation, Macondray Plastics, Inc., Jaka Investments Corporation, and Royal Match Inc.,

38

among others. Atty Peña graduated from the University of the Philippines with a Bachelor of Science degree in Business Economics (Cum la ude). She received her Bachelor of Laws from the University of the Philippines College of Law (Cum laude) and completed her Master of Laws in Harvard Law School. Family Relationships There are no related parties among the Company’s Directors. Legal Proceedings The Company, PH Ventures, Inc. (PHVI) and Mr. Martin P. Lorenzo, in his capacity as President of the two companies, were named defendants in a civil case filed in October 2002 by Kenmor Corporation (Kenmor) and Emmanuel B. Moran, Jr. (the joint venture partner of PHVI in Kenmor) for the collection of sum of money and damages in the aggregate amount of P9,820,701.82. The plaintiffs alleged, among others, that PHVI did not put in its required capital contribution in Kenmor. The Pancake House – Libis outlet, which is owned and operated by Kenmor, closed down in June 2002 due to deteriorating market conditions within the area. Management and its legal counsel believe that no provision needs to be made in the accounts since the case is only at the early stage of the proceedings, thus, outcome is not yet determinable and it is impracticable to make a reliable estimate. Key Personnel The Company engages the services of the following key personnel: Martin P. Lorenzo, age 43, is the Chairman and Chief Executive Officer of the Company since March 2000 and was appointed President on February 1, 2002. He is also the Chairman and President of TBGI, Vice Chairman, President and CEO of Macondray & Co., Inc. He is also Chairman of the Board of St. Tropez Holdings. He graduated from the Ateneo de Manila University with a Bachelor of Science degree in Management Engineering and obtained his Masters degree in Business Administration from the Wharton School, University of Pennsylvania. Zenaida A. Mercado, age 48, is a Director of the Company and is concurrently the Finance Director since March 2000 and up to May 2007. Ms. Mercado is also a consultant of Macondray & Co., Inc. She was formerly the Chief Audit Officer of Macondray & Co., Inc. and was previously connected with Pacific Internet-Philippines and the Segoro Mulyo Group of Companies in Surabaya, Indonesia. She was also senior auditor in charge at SyCip Gorres Velayo & Co. Ms. Mercado has a Bachelor degree in Accountancy from the Divine Word College of Laoag. She is a certified public accountant. Cecile D. Macaalay, age 41, is a Director of the Company since March 2000. She was appointed as Director for Corporate Planning on April 2002 and subsequently Treasurer in August 2007. She is likewise a Director and Treasurer of Pancake House Holdings, Inc., and all subsidiaries of Pancake House, Inc.. She once held the position of Associate for Corporate Planning of Macondray & Co., Inc. and held directorship in several of its subsidiaries. Ms. Macaalay obtained her Bachelor of Science degree in Business Administration and Accountancy from the University of the Philippines. She is a certified public accountant. Bernadette M. Lee, age 42, is the Brand Group Managing Director for the Pancake House, Teriyaki Boy, Singkit and Le Coeur de France Brands and Operations. She was formerly the Director for Sales and Marketing of the Group before her current appointment. She was previously the Director of Sales and Marketing of the Mercure Philippine Village Hotel and the Director of Sales of the Grand Boulevard Hotel. Ms. Lee obtained her Bachelor of Science degree in Hotel and Restaurant Administration from the University of the Philippines.

39

Germin Espino, age 41, is the Managing Director for Dencio’s and Kabisera. He was formerly the General Manager of Teriyaki Boy, Inc., I-Foods, Inc. and the Managing Director of North American Franchise Corp. He was likewise the General Manager of PizzaVest Transnational Corp., the Master Franchisor of Domino’s Pizza-Philippines and held numerous positions in the same company prior to his promotion. He held positions in Jollibee Foods Corporation and once the Operations Manager for Jolllibee Vietnam. He obtained his Bachelor of Arts in A.B. Politica l Science from the Lyceum of the Philippines. Clara R. Sumajit, age 46, was appointed the Human Resources Director of the Group in February 2004. Prior to her appointment, she served as the Human Resources Senior Manager since February 2003. She was a freelance HRD Consultant for various companies such as Sogo Hotels, BCUT, Inc., King’s Development, Inc., Kamagong and Halina Drive-In Hotel. She obtained her Bachelor of Science in Zoology degree from the University of Sto. Tomas. Olivia J. Vega, age 47, is the Head of Materials Management (Non Food) of Pancake House Group. She used to work for Lapanday Foods Corporation as Purchasing Manager and with Macondray Plastics Inc. as Market Consultant. She was formerly an Economic Researcher of Center for Research and Communication. She finished postgraduate studies in Agricultural Business at University of Adelaide, Australia. Jean Paul I. Gines, age 36, is the Group Comptroller since July 2007. He was formerly the Senior Accounting Manager and Head of Sales Administration for the Hamilo Coast Project of SM Investments Corporation before his current appointment. He served as Comptroller for Liquigaz Philippines Corporation, Digital Media Exchange, Inc, Cellstar Philippines, Inc., U-Bix Group of Companies and Carmelray Group of Companies. Mr. Gines was also senior auditor in charge at SGV & Co. Mr. Gines obtained his Bachelor of Science in Commerce Major in Accounting from University of Santo Tomas. He is a certified public accountant. Judy E. Gabriel, age 43, is currently the Purchasing Head for Food. She was formerly the Director for Dencio’s prior to her current appointment and the Director Operations of PHI before that. She served as the Operations Manager of Value Point, Inc. and McGeorge Food Ind., Inc. She was likewise a freelance Business, Franchise and Operations Consultant for the same group. She obtained her Bachelor of Science in Commerce Major in Accounting degree from St. Paul’s College of Manila. Victoria C. Alejandrino, age 58, is engaged as the Quality Assurance consultant of the Group and Head of the Pancake House Commissary since 2001 and Head of the Dencio’s Commissary since June 2004. She held various executive positions in the Manila Hilton International, Holiday Inn, Pathfinder Group (Cebu Plaza Hotel, Alegre Beach Resort, Park Place) and Mandarin Oriental. Ms. Alejandrino obtained her Bachelor of Science degree in Hotel and Restaurant Administration from the University of the Philippines and Diploma in Tourism and Hotel Management in Klessheim, Salzburg, Austria. Family Relationships Ms. Bernadette M. Lee and Ms. Cecile D. Macaalay are siblings.

40

Item 10. Executive Compensation The following table summarizes the compensation of key management personnel of the Company for the years ended December 31, 2008, 2007 and 2006.

Name and Principal Position

Period Aggregate

Compensation (PhP)

Bonus

Other Annual

Compensation Executive Officers Martin P. Lorenzo, President Zenaida A. Mercado, Finance Director Cecile D. Macaalay, Corporate Planning Director Clara R. Sumajit, Human Resources & Dev Director Jennifer L. Chua, Head – Materials Management Head Olivia J. Vega – Head, Purchasing-Non-Food Remedios V. Baclig – Head – Quality Assurance Bernadette M. Lee, Managing Director – Pancake House Judy E. Gabriel, Managing Director – Dencio’s Germin G. Espino, Managing Director – Teriyaki Boy Victoria C. Alejandrino, Commissary Head – Pancake House May Ann Shelina Nadal, Commissary Head – Dencio’s and Teriyaki Boy

12 mos ended

Dec. 31, 2006

All Executive Officers as a Group P10,409,297 Executive Officers Martin P. Lorenzo, President Zenaida A. Mercado, Finance Director Cecile D. Macaalay, Corporate Planning Director Clara R. Sumajit, Human Resources & Dev Director Bernadette M. Lee, Managing Director – Pancake House Germin G. Espino, Managing Director – Teriyaki Boy Jean Paul I. Gines, Group Comptroller Olivia J. Vega – Head, Purchasing-Non-Food Judy E. Gabriel, Head, Purchasing-Food Victoria C. Alejandrino, Commissary Head – Pancake Group

12 mos ended

Dec 31, 2007

All Executive Officers as a Group P13,753,565 Executive Officers Martin P. Lorenzo, President Cecile D. Macaalay, Corporate Planning Director Clara R. Sumajit, Human Resources & Dev Director Bernadette M . Lee, Managing Director – Pancake House Germin G. Espino, Managing Director – Teriyaki Boy Jean Paul I. Gines, Group Comptroller Olivia J. Vega – Head, Purchasing-Non-Food Judy E. Gabriel, Head, Purchasing-Food Victoria C. Alejandrino, Commissary Head – Pancake Group

12 mos ended

Dec 31, 2008

All Executive Officers as a Group P13,204,183 The members of the Board of Directors of Pancake House, Inc. each received fees of Pesos: Ten Thousand (P10,000.00) – net of tax, for every board meeting attended starting Year 2003. Management Incentive Plans The Company has established a performance-based Management Incentive Plan (“MIP”) to provide key executives and management employees with a long-term incentive program designed to promote a sense of ownership, loyalty, and focus on both short-term and long-term income. The MIP utilizes a cash bonus system. The MIP shall grant incentive bonuses to executives and managers of specified salary grade levels provided that the relevant financial targets are met. Employee Stock Option Plan

41

The Company’s stockholders, in their meeting on June 26, 2001, approved the establishment of an Executive Stock Option Plan ("ESOP") to provide key executives and management employees with a long-term incentive program designed to promote a sense of ownership, loyalty, and focus on both short-term and long-term income. The officers and employees, only upon the satisfaction of certain conditions under the Plan, become entitled to exercise an option to subscribe to the shares of the stock of the Company at a Committee-determined and approved Subscription Price. The Company has not effected the plan nor submitted the same to the Securities and Exchange Commission for approval. Item 11. Security Ownership of Certain Record and Beneficial Owners and Management Security Ownership of Certain Record and Beneficial Owners – as of March 31, 2009

Title of Class

Name and Address

Amount and Nature of Ownership

Percent of Class

Common Shares Pancake House Holdings, Inc. (“PHHI”)

93,453,289 – on Record 38,565 – Beneficial thru PCD

80.68

Common Shares Martin P. Lorenzo 2259 Pasong Tamo Ext. Makati City

132,018,289 – Beneficial thru PHHI 68.53

Common Shares Cecile D. Macaalay 2263 Pasong Tamo Ext. Makati City

793,000 – on Record

0.42

Security Ownership of Directors and Management – as of March 31, 2009

Title of Class

Name and Address

Amount and Nature of Ownership

Percent of Class

Common Shares Martin P. Lorenzo 2259 Pasong Tamo Ext. Makati City

132,018,289 – Beneficial thru PHHI

68.53

Common Shares Eric Manalang 50 Polaris St., Bel Air

20,000 – on Record nil

Common Shares Cecile D. Macaalay 2259 Pasong Tamo Ext. Makati City

793,000 – on Record

0.42

Common Shares Zenaida A. Mercado 2259 Pasong Tamo Ext. Makati City

1 – on Record

nil

Common Shares Fernan Lukban UA&P, Pearl Drive Ortigas Center, Pasig

1 – on Record nil

Common Shares Danny P. Lizares 5 Bauhinia Road, Forbes Park, Makati City

1 – on Record nil

Common Shares Bernadette M. Lee 2259 Pasong Tamo, Makati

20,000 – on Record nil

Item 12. Certain Relationships and Related Transactions Family Relationships Ms. Cecile D. Macaalay and Ms. Bernadette M. Lee are siblings.

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Transactions with Related Parties Surfield Development Corporation The Company leases its principal office space covering 495.8 sq. m. from Surfield Development Corporation (SDC), a wholly-owned subsidiary of LHC, for a period of three (3) years until July 31, 2007. PHI also leases equivalent to 588 sq. m. of Commissary space from SDC for a period of 10 years until October 1, 2011. The Company and SDC have certain common stockholders and members of the board of directors. Macondray Agro-Industrial Corporation and Macondray Plastics, Inc. The Company purchases certain raw materials from Macondray Agro-Industrial Corporation (“MAIC”) and Macondray Plastic, Inc (MPI). The Company and MAIC/MPI have certain common stockholders and members of the board of directors. PART IV - EXHIBITS AND SCHEDULES Item 13. Exhibits and Reports on SEC Form 17-C Reports filed for period January 01, 2008 to March 31, 2009

Requirement on Corporate Governance Seminar 3 Jan 2008

SEC Form 17-C Amended Manual on Corporate Governance 11 Jan 2008

Computation of Public O wnership - 31 Dec 2007 21 Jan 2008

Certificate of Attendance of Directors 26 Jan 2008

SEC Form MCG-2002 Certificate on Corporate Governance 29 Jan 2008

Revision on Corporate Manual 5 Feb 2008

SEC Form 17-C Purchase of Boulangerie Francaise, Inc. (“BFI”) and Le Coeur de France (“LCDF”) brand

11 Feb 2008

SEC Form 17-C Additional Info on the Purchase of BFI 13 Feb 2008

Report on No. of Shareholders & Foreign Ownership 7 March 2008

Resignation/Election of Directors 31 March 2008

Change in Independent Director Board Lot & Foreign Ownership Reports Public Ownership Computation – 31 March 2008

3 April 2008

2007 Annual Report 14 April 2008

Top 100 Stockholders as of March 31, 2008 16 April 2008

Report on. No. of Stockholders & Foreign Ownership 30 April 2008

Notice of Inability to File All or Portion of SEC Form 17-Q for period ended March 31, 2008

13 May 2008

Annual Stockholders’ Meeting on June 30, 2008 12 May 2008

SEC-20IS SEC 20 IS-Preliminary 21 May 2008

Board Lot & Foreign Ownership Report-May 2008 04 June 2008

Disclosure on Stockholders’ Meeting 19 June 2008

Results of Meeting: Election of Directors, Officers and Committee Members, Cash Dividend Declaration

30 June 2008

Clarification of News Article: “Pancake House allots P70M for new Stores”

01 July 2008

Report of Number of Shareholders as of June 30, 2008 04 July 2008

Computation of Public Ownership as of June 30, 2008 07 July 2008

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Top 100 Stockholders and PCD-June 2008 14 July 2008

Board Lot & Foreign Ownership Report-June 2008 14 July 2008

Reply to Showcase Re: Section 7 16 July 2008

Report on Number of Shareholders as of July 31, 2008 06 August 2008

Board Lot and Foreign Ownership Report – July 2008 08 August 2008

Quarterly Report for period ended June 30, 2008 14 August 2008

Board Lot & Foreign Ownership Report – August 2008 10 Sept 2008

Top 100 Stockholders as of September 30, 2008 10 October 2008

Board Lot & Foreign Ownership Report – September 2008 13 October 2008

Accreditation of Stock Transfer Agents 07 November 2008

Board Lot & Foreign Ownership Report-October 2008 10 November 2008

2008 Corporate Governance Scorecard 10 November 2008

Board Lot & Foreign Ownership Report_December 2008 07 January 2009

Certification on Compliance with Manual on Corporate Governance

22 January 2009

Certificate of Attendance of Directors for 2008 26 January 2009

SEC 17-C Declaration of Cash Dividends 30 January 2009

Board Lot & Foreign Ownership for the-January 2009 13 February 2009

Report on Number of Shareholders as of February 28, 2009 09 March 2009

Computation of Public Ownership as of December 31, 2008 24 March 2009

PANCAKE HOUSE, INC. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES

Form 17-A, Item 7

Page No.

FINANCIAL STATEMENTS

Statement of Management’s Responsibility for Financial Statements IFS1

Report of Independent Public Accountants IFS2

Consolidated Balance Sheets as of December 31, 2007 and 2006 IFS3

Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2005

IFS4

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005

IFS5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005

IFS6

Notes to Consolidated Financial Statements IFS7

SUPPLEMENTARY SCHEDULES

Report of Independent Public Accountants on Supplementary Schedules IFS8

A. Marketable Securities – (Current Marketable Equity Securities and other Short-Term Cash Investments

*

B. Amount Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Affiliates)

IFS9

C. Non-Current Marketable Equity Securities, Other Long-Term Investments in Stock and Other Investments

*

D. Indebtedness of Unconsolidated Subsidiaries and Affiliates *

E. Property, Plant and Equipment IFS10

F. Accumulated Depreciation IFS11

G. Intangible Assets – Other Assets IFS12

H. Long term Debt IFS13

I. Indebtedness to Affiliates and Related Parties (Long-Term Loans from Related Companies

*

J. Guarantees of Securities of Other Issuers *

K. Capital Stock IFS14

*These schedules, which are required by Part IV(e) of RSA Rule 48, have been omitted because they are either not required, not applicable or the information required to be presented is included in the Company’s financial statements or the notes to financial statements.

45

Pancake House, Inc. and Subsidiaries

Consolidated Financial Statements December 31, 2008 and 2007 And for the Three Years Ended December 31, 2008, 2007 and 2006 and Independent Auditors’ Report SyCip Gorres Velayo & Co.

*SGVMC401862*

A 2 0 0 0 - 0 3 0 0 8

SEC Registration Number

P A N C A K E H O U S E , I N C . A N D

S U B S I D I A R I E S

(Company’s Full Name)

P a n c a k e H o u s e C e n t e r , 2 2 5 9 P a s o n g

T a m o E x t e n s i o n , M a k a t i C i t y y

(Business Address: No. Street City/Town/Province)

Mr. Jean Paul I. Gines (632) 894 - 2000 (Contact Person) (Company Telephone Number)

1 2 3 1 1 7 - A Month Day (Form Type) Month Day

(Calendar Year)

(Annual Meeting)

Not Applicable (Secondary License Type, If Applicable)

Not Applicable Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

P=414 million Not ApplicableTotal No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S Remarks: Please use BLACK ink for scanning purposes.

COVER SHEET

*SGVMC401862*

INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors Pancake House, Inc. We have audited the accompanying financial statements of Pancake House, Inc. and Subsidiaries (the Group), which comprise the consolidated balance sheets as of December 31, 2008 and 2007, and the consolidated statements of income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2008, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

SyCip Gorres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

A member firm of Ernst & Young Global Limited

http://www.sgv.com.ph

*SGVMC401862*

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Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2008 and 2007, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2008 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Jaime F. del Rosario Partner CPA Certificate No. 56915 SEC Accreditation No. 0076-AR-1 Tax Identification No. 102-096-009 PTR No. 1566422, January 5, 2009, Makati City March 30, 2009

*SGVMC401862*

PANCAKE HOUSE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 2008 2007

ASSETS

Current Assets Cash P=147,223,451 P=113,589,597 Trade and other receivables - net (Note 5) 112,413,952 97,826,835 Inventories - at cost (Note 6) 61,966,441 49,307,209 Other current assets (Note 7) 50,801,745 67,073,350 Total Current Assets 372,405,589 327,796,991

Noncurrent Assets Property and equipment - net (Note 8) 372,234,857 343,838,464 Trademarks and goodwill - net (Note 10) 520,000,463 472,866,003 Deferred income tax assets (Note 21) 44,027,921 48,939,263 Other noncurrent assets (Note 11) 113,041,825 92,671,506 Total Noncurrent Assets 1,049,305,066 958,315,236

TOTAL ASSETS P=1,421,710,655 P=1,286,112,227

LIABILITIES AND EQUITY

Current Liabilities Trade and other payables (Note 12) P=282,198,897 P=292,129,685 Loans payable (Note 13) 263,999,592 141,000,000 Current portion of: Long-term debt (Note 14) 150,000,000 – Mortgage payable 789,598 2,048,170 Income tax payable 2,612,994 1,846,498 Total Current Liabilities 699,601,081 437,024,353

Noncurrent Liabilities Long-term debt - net of current portion (Note 14) – 150,000,000 Mortgage payable - net of current portion (Note 14) 90,676 913,356 Debt component of convertible notes (Note 15) 6,328,687 9,720,403 Accrued retirement liability - net (Note 20) 11,311,184 9,326,600 Accrued rentals 15,671,170 15,311,744 Total Noncurrent Liabilities 33,401,717 185,272,103 Total Liabilities 733,002,798 622,296,456

Equity Attributable to the Equity Holders of the Parent Capital stock - P=1 par value per share Authorized - 400,000,000 shares Issued - 192,636,364 shares 192,636,364 192,636,364 Additional paid-in capital (Note 15) 36,627,950 36,627,950 Notes for conversion to equity (Note 15) 185,337,428 185,337,428 Accumulated translation adjustment (4,717,301) (646,947) Retained earnings (Note 16) 132,853,924 102,600,035 542,738,365 516,554,830 Minority interests 145,969,492 147,260,941 Total Equity 688,707,857 663,815,771

TOTAL LIABILITIES AND EQUITY P=1,421,710,655 P=1,286,112,227 See accompanying Notes to Consolidated Financial Statements.

*SGVMC401862*

PANCAKE HOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31 2008 2007 2006

REVENUES Restaurant sales P=1,356,202,550 P=1,185,414,087 P=974,118,566 Commissary sales 409,013,738 334,763,299 320,913,608 Franchise and royalty fees (Note 23) 90,614,854 90,728,907 85,778,394 1,855,831,142 1,610,906,293 1,380,810,568

COSTS OF SALES (Note 18) 1,500,475,148 1,286,730,442 1,107,655,686

GROSS PROFIT 355,355,994 324,175,851 273,154,882

OPERATING EXPENSES General and administrative (Note 19) 215,069,887 178,778,157 141,231,860 Sales and marketing 39,951,993 48,795,060 44,676,715 255,021,880 227,573,217 185,908,575

OTHER INCOME (CHARGES) Interest expense on loans (Notes 13 and 14) (29,653,477) (20,610,841) (30,294,606) Gain on disposal of property and equipment 2,602,393 529,560 – Interest expense on the debt component of convertible notes (Note 15) (1,515,769) (4,348,290) (3,118,868) Interest income 860,361 1,900,829 1,089,778 Miscellaneous income - net 12,667,421 8,608,256 3,647,628 (15,039,071) (13,920,486) (28,676,068)

INCOME BEFORE INCOME TAX 85,295,043 82,682,148 58,570,239

PROVISION FOR INCOME TAX (Note 21) 35,127,784 19,291,119 14,417,878

NET INCOME P=50,167,259 P=63,391,029 P=44,152,361 ATTRIBUTABLE TO: Equity holders of the parent P=45,704,400 P=63,401,605 P=40,152,791 Minority interests 4,462,859 (10,576) 3,999,570 P=50,167,259 P=63,391,029 P=44,152,361 EARNINGS PER SHARE - For income for the year

attributable to the ordinary equity holders of the parent (Note 22)

Basic P=0.26 P=0.33 P=0.21 Diluted P=0.20 P=0.28 P=0.18 See accompanying Notes to Consolidated Financial Statements.

*SGVMC401862*

PANCAKE HOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 Attributable to equity holders of the parent Notes for Additional Conversion Accumulated Retained Capital Paid-in to Equity Translation Earnings Minority Total Stock Capital (Note 15) Adjustment (Note 16) Total Interests Equity

Balances at December 31, 2005 P=188,636,364 P=22,687,830 P=203,277,548 P=– P=39,322,577 P=453,924,319 P=131,692,184 P=585,616,503

Net income – – – – 40,152,791 40,152,791 3,999,570 44,152,361

Investments of minority interests (Note 9) – – – – – – 5,544,867 5,544,867

Cash dividends paid - P=0.06 per share in June and P=0.04 per share in December (Note 16) – – – – (18,863,638) (18,863,638) – (18,863,638)

Balances at December 31, 2006 188,636,364 22,687,830 203,277,548 – 60,611,730 475,213,472 141,236,621 616,450,093

Net income – – – – 63,401,605 63,401,605 (10,576) 63,391,029

Investments of minority interests (Note 9) – – – – – – 10,634,896 10,634,896

Conversion of notes to equity (Note 15) 4,000,000 13,940,120 (17,940,120) – – – – –

Cash dividends paid - P=0.05 per share in April and P=0.06 in November (Note 16) – – – – (21,413,300) (21,413,300) (4,600,000) (26,013,300)

Change in translation adjustment – – – (646,947) – (646,947) – (646,947)

Balances at December 31, 2007 192,636,364 36,627,950 185,337,428 (646,947) 102,600,035 516,554,830 147,260,941 663,815,771

Net income – – – – 45,704,400 45,704,400 4,462,859 50,167,259

Investment in minority interests (Note 9) – – – – – – (214,799) (214,799)

Cash dividends paid - P=0.08 per share in June (Note 16) – – – – (15,450,511) (15,450,511) (5,539,509) (20,990,020)

Change in translation adjustment – – – (4,070,354) – (4,070,354) – (4,070,354)

Balances at December 31, 2008 P=192,636,364 P=36,627,950 P=185,337,428 (P=4,717,301) P=132,853,924 P=542,738,365 P=145,969,492 P=688,707,857

See accompanying Notes to Consolidated Financial Statements.

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PANCAKE HOUSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2008 2007 2006

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=85,295,047 P=82,682,148 P=58,570,239 Adjustments for: Depreciation and amortization (Note 8) 158,431,094 122,511,908 99,808,924 Interest expense (Notes 13, 14, 15 and 22) 31,169,246 24,959,131 33,413,474 Amortization of trademarks (Note 10) 28,236,063 25,655,745 25,655,746 Gain on disposal of property and equipment (2,602,393) (529,560) – Provision for impairment losses on property and equipment 1,385,344 – – Interest income (860,361) (1,900,829) (1,089,778) Operating income before working capital changes 301,054,040 253,378,543 216,358,605 Decrease (increase) in: Trade and other receivables (7,437,420) (28,480,433) 4,376,103 Inventories (7,748,498) 12,874,445 (26,720,323) Other current assets 19,812,583 (50,577,691) (1,647,488) Increase (decrease) in trade and other payables (31,389,586) 78,882,625 51,310,861 Net cash generated from operations 274,291,119 266,077,489 243,677,758 Interest paid (29,677,645) (26,498,975) (26,394,079) Income taxes paid (29,449,946) (33,160,904) (25,531,104) Interest received 860,361 1,900,829 1,089,778 Net cash from operating activities 216,023,889 208,318,439 192,842,353

CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Property and equipment (Note 8) (160,563,544) (180,889,009) (182,639,763) Subsidiary, net of cash acquired (57,611,448) – – Trademark and goodwill (54,759,461) – – Proceeds from disposals of property and equipment 7,336,705 9,128,026 4,447,966 Increase in other noncurrent assets (14,181,299) (21,453,128) (26,805,452) Increase (decrease) in: Accrued retirement liability 1,984,584 3,286,700 1,307,300 Accrued rentals 359,426 3,557,508 6,419,673 Net cash used in investing activities (277,435,037) (186,369,903) (197,270,276)

CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from availment (payments of): Loans payable 118,116,275 (11,500,000) 79,000,000 Mortgage payable (2,081,252) 1,151,089 (1,019,088) Long-term debt – 45,000,000 (45,000,000) Additional investments from minority shareholders – 10,634,896 5,544,867 Notes payable – (45,000,000) 45,000,000 Cash dividends paid (Note 16) (20,990,020) (26,013,300) (18,863,638) Net cash from (used in) financing activities 95,045,003 (25,727,315) 64,662,141

NET INCREASE (DECREASE) IN CASH

33,633,855

(3,778,779)

60,234,218 CASH AT BEGINNING OF YEAR 113,589,597 117,368,376 57,134,058 CASH AT END OF YEAR P=147,223,452 P=113,589,597 P=117,368,376 See accompanying Notes to Consolidated Financial Statements.

*SGVMC401862*

PANCAKE HOUSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information

Pancake House, Inc. (the Company) was incorporated and is domiciled in the Republic of the Philippines whose shares are publicly traded. The Company and its subsidiaries (collectively referred to as the “Group”) are primarily engaged in the business of catering foods and establishing, operating and maintaining restaurants, coffee shops, refreshments parlors and cocktail lounges. The registered office address of the Company is Pancake House Center, 2259 Pasong Tamo Extension, Makati City. The ultimate parent of the Group is Pancake House Holdings, Inc.

On July 26, 2007, the Philippine Securities and Exchange Commission (SEC) approved the merger of Dencio’s Foods Specialists, Inc. (DFSI) and the Company, with the latter as the surviving entity, effective August 1, 2007. DFSI is a wholly-owned subsidiary of the Company. Consequently, by operation of law, the separate corporate existence of DFSI ceased as provided under the Corporation Code. Thus, upon implementation of the merger, all outstanding shares of capital stock of DFSI were cancelled. On March 28, 2007, the Bureau of Internal Revenue (BIR) approved the application for a “tax free merger” within the meaning of Sections 40(C)(2)(a) and (b) and 40(6)(b) of the 1997 Tax Code, as amended. Consequently, no gain or loss was recognized by DFSI, as the transferor, on the transfer of all its assets and liabilities to the Company pursuant to the Plan of Merger. Likewise, no gain or loss was recognized by the Company, as the transferee, on its receipt of the assets and liabilities of DFSI without issuing stocks in exchange therefore.

The consolidated financial statements of the Group as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008, were authorized for issue in accordance with a resolution by the Board of Directors (BOD) on March 30, 2009.

2. Basis of Preparation and Consolidation, Statement of Compliance and Summary of

Significant Accounting Policies

Basis of Preparation The consolidated financial statements of the Group have been prepared under the historical cost basis. The consolidated financial statements are presented in Philippine peso, which is the Group’s functional and presentation currency under the Philippine Financial Reporting Standards (PFRS). All values are rounded to the nearest peso, except when otherwise indicated. Basis of Consolidation The consolidated financial statements comprise the financial statements of the Group as of December 31 of each year. The consolidated financial statements of the subsidiaries are prepared for the same reporting year as the Group, using uniform accounting policies.

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*SGVMC401862*

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from its activities and generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date of acquisition, being the date on which control is transferred to the Group and continue to be consolidated until the date that such control ceases. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognized in assets, are eliminated in full. Minority interests represent the portion of net results and net assets of PHI not held by the Group. They are presented in the consolidated balance sheet within equity, apart from equity attributable to equity holders of the parent and are separately disclosed in the consolidated statement of income. Minority interests consist of the amount of those interests at the date of original business combination and the minority interests’ share on changes in equity since the date of the business combination. Losses applicable to the minority in excess of the minority’s interest in PHI’s equity are allocated against the interests of the Group, except to the extent that the minority has a binding obligation and is able to make an additional investment to cover its share of those losses. Acquisitions of minority interests are accounted for using the parent-entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognized as goodwill. The excess of the Group’s interest in the net fair value of the identifiable net assets over cost of acquisition is credited to the consolidated statement of income in the period of the acquisition. Statement of Compliance The consolidated financial statements, which are prepared for submission to the Philippine SEC have been prepared in compliance with PFRS as adopted by the Philippine SEC. PFRS includes statements named Philippine Accounting Standards (PAS) and interpretations issued by the Philippine Accounting Standards Council. Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following Philippine Interpretations, which became effective on January 1, 2008, and amendments to an existing standard, which became effective on July 1, 2008. Adoption of these changes in PFRS did not have any significant effect to the Group:

• Philippine Interpretation IFRIC 11, PFRS 2 - Group and Treasury Share Transactions • Philippine Interpretation IFRIC 12, Service Concession Arrangements • Philippine Interpretation IFRIC 14, PAS 19, The Limit on a Defined Benefit Asset,

Minimum Funding Requirement and their Interaction • Amendments to PAS 39, Financial Instruments: Recognition and Measurement and

PFRS 7, Financial Instruments: Disclosures - Reclassification of Financial Assets

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*SGVMC401862*

New Accounting Standards, Interpretations, and Amendments to Existing Standards Effective Subsequent to December 31, 2008 The Group will adopt the following standards and interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on the consolidated financial statements. The relevant disclosures will be included in the notes to the consolidated financial statements when these become effective. Effective in 2009

Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate The amended PFRS 1 allows an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening PFRS financial statements) as one of the following amounts: a) cost determined in accordance with PAS 27; b) at the fair value of the investment at the date of transition to PFRS, determined in accordance with PAS 39; or c) previous carrying amount (as determined under generally accepted accounting principles) of the investment at the date of transition to PFRS. PFRS 2, Share-based Payment - Vesting Condition and Cancellations The standard has been revised to clarify the definition of a vesting condition and prescribes the treatment for an award that is effectively cancelled. It defines a vesting condition as a condition that includes an explicit or implicit requirement to provide services. It further requires non-vesting conditions to be treated in a similar fashion to market conditions. Failure to satisfy a non-vesting condition that is within the control of either the entity or the counterparty is accounted for as cancellation. However, failure to satisfy a non-vesting condition that is beyond the control of either party does not give rise to a cancellation. PFRS 8, Operating Segments PFRS 8 will replace PAS 14, Segment Reporting, and adopts a full management approach to identifying, measuring and disclosing the results of an entity’s operating segments. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such information may be different from that reported in the consolidated balance sheet and consolidated statement of income and the Group will provide explanations and reconciliations of the differences. This standard is only applicable to an entity that has debt or equity instruments that are traded in a public market or that files (or is in the process of filing) its financial statements with a securities commission or similar party. The Group will assess the impact of this standard to their current manner of reporting segment information. Amendments to PAS 1, Presentation of Financial Statements These amendments introduce a new statement of comprehensive income that combines all items of income and expenses recognized in the profit or loss together with ‘other comprehensive income. Entities may choose to present all items in one statement, or to present two linked statements, a separate statement of income and a statement of comprehensive income. These amendments also prescribe additional requirements in the presentation of the consolidated balance sheet and consolidated owner’s equity as well as additional disclosures to be included in the consolidated financial statements.

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Amendments to PAS 23, Borrowing Costs The standard has been revised to require capitalization of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalized on qualifying assets with a commencement date after January 1, 2009. No changes will be made for borrowing costs incurred to this date that have been expensed. Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate These amendments prescribe changes in respect of the holding companies’ separate financial statements including (a) the deletion of ‘cost method’, making the distinction between pre- and post-acquisition profits no longer required; and (b) in cases of reorganizations where a new parent is inserted above an existing parent of the group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. All dividends will be recognized in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment. The Group expects significant changes in their accounting policies when they adopt the foregoing accounting changes effective January 1, 2009. Amendments to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation These amendments specify, among others, that puttable financial instruments will be classified as equity if they have all of the following specified features: (a) The instrument entitles the holder to require the entity to repurchase or redeem the instrument (either on an ongoing basis or on liquidation) for a pro rata share of the entity’s net assets; (b) The instrument is in the most subordinate class of instruments, with no priority over other claims to the assets of the entity on liquidation; (c) All instruments in the subordinate class have identical features; (d) The instrument does not include any contractual obligation to pay cash or financial assets other than the holder’s right to a pro rata share of the entity’s net assets; and (e) The total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, a change in recognized net assets, or a change in the fair value of the recognized and unrecognized net assets of the entity over the life of the instrument. Philippine Interpretation IFRIC 13, Customer Loyalty Programmes This Interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and realized in income over the period that the award credits are redeemed or expire. Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation This Interpretation provides guidance on identifying foreign currency risks that qualify for hedge accounting in the hedge of net investment; where within the group the hedging instrument can be held in the hedge of a net investment; and how an entity should determine the amount of foreign currency gains or losses, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment.

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*SGVMC401862*

Improvements to PFRSs In May 2008, the International Accounting Standards Board issued its first omnibus of amendments to certain standards, primarily with a view to removing inconsistencies and clarifying wording. These are separate transitional provisions for each standard. PFRS 5, Non-current Assets Held for Sale and Discontinued Operations When a subsidiary is held for sale, all of its assets and liabilities will be classified as held for sale under PFRS 5, even when the entity retains a non-controlling interest in the subsidiary after the sale. PAS 1, Presentation of Financial Statements Assets and liabilities classified as held for trading are not automatically classified as current in the consolidated balance sheet. PAS 16, Property, Plant and Equipment - Recoverable amount The amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’, to be consistent with PFRS 5, Non-current Assets Held for Sale and Discontinued Operations and PAS 36, Impairment of Asset.

- Sale of assets held for rental Items of property, plant and equipment held for rental that are routinely sold in the ordinary course of business after rental, are transferred to inventory when rental ceases and they are held for sale. Proceeds of such sales are subsequently shown as revenue. Cash payments on initial recognition of such items, the cash receipts from rents and subsequent sales are all shown as cash flows from operating activities. PAS 19, Employee Benefits - Curtailments and negative past service costs Revises the definition of ‘past service costs’ to include reductions in benefits related to past services (‘negative past service costs’) and to exclude reductions in benefits related to future services that arise from plan amendments. Amendments to plans that result in a reduction in benefits related to future services are accounted for as a curtailment. - Plan administration costs Revises the definition of ‘return on plan assets’ to exclude plan administration costs if they have already been included in the actuarial assumptions used to measure the defined benefit obligation. - Replacement of term “Fall due” Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus on the point in time at which the liability is due to be settled.

- Guidance on contingent liabilities Deletes the reference to the recognition of contingent liabilities to ensure consistency with PAS 37, Provisions, Contingent Liabilities and Contingent Assets.

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PAS 20, Accounting for Government Grants and Disclosures of Government Assistance - Government loans with no interest in a below-market interest rate Loans granted with no or low interest rates will not be exempt from the requirement to impute interest. The difference between the amount received and the discounted amount is accounted for as a government grant.

PAS 23, Borrowing Costs - Components of borrowing costs Revises the definition of borrowing costs to consolidate the types of items that are considered components of ‘borrowing costs’, i.e., components of the interest expense calculated using the effective interest rate method. PAS 27, Consolidated and Separate Financial Statements Measurement of a subsidiary held for sale in a separate financial statement. When a parent entity accounts for a subsidiary as fair value in its financial statements, this treatment continues when the subsidiary is subsequently classified as held for sale. PAS 28, Investment in Associates - Required disclosures when investment in associates are accounted for at fair value through profit and loss (FVPL) If an associate is accounted for at fair value in accordance with PAS 39, only the requirement of PAS 28 to disclose the nature and extent of any significant restrictions on the ability of the associate to transfer funds to the entity in the form of cash or repayment of loans will apply. - Impairment of investment in associates An investment in an associate is a single asset for the purpose of conducting the impairment test. Therefore, any impairment test is not separately allocated to the goodwill included in the investment balance. PAS 29, Financial Reporting in Hyperinflationary Economies - Description of measurement basis in financial statements Revises the reference to the exception that assets and liabilities should be measured at historical cost, such that it notes property, plant and equipment as being an example, rather than implying that it is a definitive list. PAS 31, Interest in Joint ventures - Required disclosure when investment in jointly controlled entities are accounted for at FVPL If a joint venture is accounted for at fair value, in accordance with PAS 39, only the requirements of PAS 31 to disclose the commitments of the venturer and the joint venture, as well as summary financial information about the assets, liabilities, income and expense will apply. PAS 36, Impairment of Assets - Disclosure of estimates used to determine recoverable amount When discounted cash flows are used to estimate ‘fair value less cost to sell’, additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate ‘value in use’.

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PAS 38, Intangible Assets - Advertising and promotional activities Expenditure on advertising and promotional activities is recognized as an expense when the Group either has the right to access the goods or has received the services. Advertising and promotional activities now specifically include mail order catalogues. - Units of production method of amortization Deletes references to there being rarely, if ever, persuasive evidence to support an amortization method for finite life intangible assets that results in a lower amount of accumulated amortization than under the straight-line method, thereby effectively allowing the use of the unit of production method.

PAS 39, Financial Instruments: Recognition and Measurement - Reclassification of derivatives into or out of the classification of at FVPL Changes in circumstances relating to derivatives - specifically derivatives designated or de-designated as hedging instruments after initial recognition - are not reclassifications. When financial assets are reclassified as a result of an insurance company changing its accounting policy in accordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a change in circumstance, not a reclassification. - Designation and documentation of hedges at the segment level Removes the reference to a ‘segment’ when determining whether an instrument qualifies as a hedge. - Applicable effective interest rate on cessation of fair value hedge accounting Requires use of the revised effective interest rate (rather than the original effective interest rate) when re-measuring a debt instrument on the cessation of fair value hedge accounting. PAS 40, Investment Properties - Property under construction or development for future use as an investment property Revises the scope (and the scope of PAS 16, Property, Plant and Equipment) to include property that is being constructed or developed for future use as an investment property. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time as fair value can be determined or construction is complete. PAS 41, Agriculture - Discount rate on fair value calculations Removes the reference to the use of a pre-tax discount rate to determine fair value, thereby allowing use of either a pre-tax or post-tax discount rate depending on the valuation methodology used. - Additional biological transformation Removes the prohibition to take into account cash flows resulting from any additional transformations when estimating fair value. Instead, cash flows that are expected to be generated in the ‘most relevant market’ are taken into account.

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Effective in 2010 Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial Statements The revised PFRS 3 introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs, and future reported results. The revised PAS 27 requires, among others, that (a) change in ownership interests of a subsidiary (that do not result in loss of control) will be accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling and non-controlling interests (previously referred to as ‘minority interests’); even if the losses exceed the non-controlling equity investment in the subsidiary; and (c) on loss of control of a subsidiary, any retained interest will be remeasured to fair value and this will impact the gain or loss recognized on disposal. The changes introduced by the revised PFRS 3 and PAS 27 must be applied prospectively and will affect future acquisitions and transactions with non-controlling interests. Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners This Interpretation covers accounting for all non-reciprocal distribution of non-cash assets to owners. It provides guidance on when to recognize a liability, how to measure it and the associated assets, and when to derecognize the asset and liability and the consequences of doing so. Philippine Interpretation IFRIC 18, Transfers of Assets from Customers This Interpretation applies to the accounting for transfers of items of property, plant and equipment by an entity that receive such transfers from its customer, wherein the entity must then use such transferred asset either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both. Amendment to PAS 39, Financial Instruments: Recognition and Measurement - Eligible Hedged Items Amendment to PAS 39 will be effective on July 1, 2009, which addresses only the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. Effective in 2012 Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate This Interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis, will also be accounted for based on stage of completion.

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*SGVMC401862*

Summary of Significant Accounting Policies Business Combinations and Goodwill Business combinations are accounted for using the purchase method. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities but excluding future restructuring) of the acquired business at fair value. Goodwill is initially measured at cost being the excess of the cost of the business combination over the Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the initial accounting for a business combination is determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognize any adjustments to those provisional values as a result of completing the initial accounting within twelve months of the acquisition date as follows: (i) the carrying amount of the identifiable asset, liability or contingent liability that is recognized or adjusted as a result of completing the initial accounting shall be calculated as if its fair value at the acquisition date had been recognized from that date; (ii) goodwill or any gain recognized shall be adjusted by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognized or adjusted; and (iii) comparative information presented for the periods before the initial accounting for the combination is complete shall be presented as if the initial accounting has been completed from the acquisition date. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of the business combination is recognized immediately in the consolidated statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. When the Group acquires a business, embedded derivatives separated from the host contract by the acquiree are not reassessed on acquisition unless the business combination results in a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and goodwill is recognized in the consolidated statements of income.

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Financial Instruments - Initial Recognition and Subsequent Measurement Date of recognition The Group recognizes a financial asset or a financial liability in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable is done using settlement date accounting. Initial recognition Financial assets and liabilities are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction cost.

The Group classifies its financial assets into the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, available-for-sale (AFS) investments, and loans and receivables. The Group classifies its financial liabilities into financial liabilities at FVPL and other financial liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity net of any related income tax benefits. The Group has no financial assets and liabilities at FVPL, HTM investments and AFS investments as of December 31, 2008 and 2007. Determination of fair value The fair values of financial instruments that are actively traded in organized financial markets is determined by reference to quoted market bid or ask prices at the close of business on the balance sheet date, without any deductions for transaction costs. When current bid and asking prices are not available, the price of the most recent transactions provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For investments and all other financial instruments where there is no active market, fair value is determined using valuation techniques. Such techniques include using arm’s length market transactions; reference to the current market value of another instrument, which are substantially the same; discounted cash flow analysis and other valuation models. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as financial assets held for trading, designated as AFS investments or designated at FVPL. This accounting policy relates to the consolidated balance sheet caption “Trade and other receivables,” which arise primarily from sale of goods and services.

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Trade and other receivables are recognized initially at fair value, which normally pertains to the billable amount. After initial measurement, trade and other receivables are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment losses. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization, if any, is reported as interest income. The losses arising from impairment of trade and other receivables are reported as provision for impairment losses. The level of allowance for impairment losses is evaluated by management on the basis of factors that affect the collectibility of accounts. Other financial liabilities Issued financial instruments or their components, which are not designated at FVPL are classified as other financial liabilities, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, other financial liabilities are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the effective interest rate. Any effects of restatement of foreign currency-denominated liabilities are recognized in the consolidated statement of income. This accounting policy applies primarily to the Group’s trade and other payables, loans payable, long-term debt, debt component of convertible and mortgage payable. “Day 1” profit or loss Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a “Day 1” profit or loss) in the statement of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data that is not observable, the difference between the transaction price and model value is recognized in the consolidated statement of income only when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the “Day 1” profit or loss amount. Embedded derivatives An embedded derivative is separated from the host contract and accounted for as derivative if all the following conditions are met:

§ the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristic of the host contract;

§ a separate instrument with the same terms as the embedded derivative would meet the definition of the derivative; and

§ the hybrid or combined instrument is not recognized at FVPL.

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Separated embedded derivatives are classified as financial assets or financial liabilities at FVPL unless they are designated as effective hedging instruments. Derivative instruments are initially recognized at fair value on the date in which a derivative transaction is entered into or bifurcated, and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Consequently, gains and losses from changes in fair value of these derivatives are recognized immediately in the consolidated statement of income. The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes party to the contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. As of December 31, 2008 and 2007, the Group has no bifurcated embedded derivatives. Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: § the rights to receive cash flows from the asset have expired; § the Group retains the rights to receive cash flows from the asset, but has assumed an

obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

§ the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liability A financial liability is derecognized when the obligation under the liability is discharged, or cancelled or has expired.

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Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income. Impairment of Financial Assets Carried at Amortized Cost The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. If there is objective evidence that an impairment loss on financial assets carried at amortized cost (e.g., receivables) has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Time value is generally not considered when the effect of discounting is not material. The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss shall be recognized in the consolidated statement of income. The Group first assesses whether there is objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. The factors in determining whether objective evidence of impairment exists include, but are not limited to, the length of the Group’s relationship with debtors, their payment behavior and known market factors. Evidence of impairment may also include indications that the borrowers are experiencing significant difficulty, default and delinquency in payments, the probability that they will enter bankruptcy, or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

With respect to receivables, the Group maintains an allowance for doubtful accounts at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. A review of the age and status of receivables, designed to identify accounts to be provided with allowance, is performed regularly. The financial assets, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized.

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Convertible Notes The component of the convertible notes that exhibits characteristics of a liability is recognized as a liability in the consolidated balance sheet, net of transaction costs. On issuance of the convertible notes, the fair value of the liability component is determined using a market rate for an equivalent nonconvertible bond; and this amount is carried as a liability at amortized cost. The remainder of the proceeds is allocated to the conversion option that is recognized and included in equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years.

Transaction costs are apportioned between the liability and equity components of the convertible notes based on the allocation of proceeds to the liability and equity components when the instruments are first recognized. Offsetting of Financial Instruments Financial assets and liabilities are only offset and the net amount reported in the consolidated balance sheet when there is a legally enforceable right to set off the recognized amounts and the Group intends to either settle on a net basis, or to realize the asset and the liability simultaneously. Cash Cash consists of cash on hand and with banks. Inventories Inventories are stated at the lower of cost, determined using the weighted average method, and net realizable value. Net realizable value (NRV) of food and beverage is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. NRV of store and kitchen supplies and operating equipment for sales is the current replacement cost. Property and Equipment Property and equipment are carried at cost, excluding the cost of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Such cost includes the cost of replacing part of such property and equipment when that cost is incurred if the recognition criteria are met. The initial cost of property and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. When each major inspection is performed, its cost is recognized in the carrying amount of the item of property and equipment as a replacement if the recognition criteria are satisfied.

Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

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*SGVMC401862*

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or term of the lease, whichever is shorter. The estimated useful lives of the assets follow:

Number of Category Years Store equipment 3-8 Office furniture, fixtures and equipment 3-5 Transportation equipment 3-5 Kitchen equipment 3-5

The estimated useful lives and depreciation and amortization methods are reviewed periodically to ensure that the periods and methods of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment.

Initial stocks of operating equipment consisting of chinaware, glassware, silverware and utensils

are amortized up to a period of one (1) year. Subsequent purchases are charged to operations as acquired.

An item of property and equipment is derecognized upon disposal or when no future economic

benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognized.

Construction in-progress, included in property and equipment, is stated at cost. This includes cost of construction and other direct costs. Construction in-progress is not depreciated until such time as the relevant assets are completed and put into operational use. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities in the acquired entities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, any goodwill acquired in a business combination is allocated to each of the cash-generating units expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when

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determining the gain or loss on disposal of the operation. Goodwill disposed of in such circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. Trademarks Trademarks are measured on initial recognition at cost. The cost of trademarks acquired in business combinations is the fair value as of the date of acquisition. Following initial recognition, trademarks are carried at cost less any accumulated amortization and any accumulated impairment losses. The Group assessed that trademarks have 20 years useful lives. The amortization period commences from the start of the Group’s operations. These assets are being amortized using the straight-line method. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statement of income in the expense category consistent with the function of the intangible asset. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of income when the asset is derecognized. Intangible assets created within the business are not capitalized and expenditure is charged against profits in the year in which the expenditure is incurred. Impairment of Non-Financial Assets Property and Equipment At each balance sheet date, the Group assesses whether there is any indication that its non-financial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). An impairment loss is charged to operations in the year in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset.

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*SGVMC401862*

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of income unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation and amortization expense is adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining life.

Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of income, net of any reimbursement.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. These are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. Capital Stock Common shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from proceeds. The excess of proceeds from issuance of share over par value of share are credited to share premium. Where the Group purchases its own shares (treasury shares), the consideration paid including any directly attributable incremental costs is deducted from equity until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity.

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Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

Restaurant sales Revenue is recognized when orders are served. Commissary sales Revenue is recognized upon delivery of goods. Franchise and royalty fees Revenue is recognized under the accrual basis in accordance with the terms of the franchise agreements (see Note 23). Fees charged for the use of continuing rights granted by the agreement, or other services provided during the period of the agreement, are recognized as revenue as the services are provided or as the rights are used. Interest income Revenue is recognized as the interest accrues using the effective interest rate method. Retirement Benefit Costs Retirement benefit costs are actuarially determined using the projected unit credit method. This method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Retirement costs include current service cost plus amortization of past service cost, experience adjustments and changes in actuarial assumptions. Past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan. The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

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*SGVMC401862*

Leases Determination of whether an arrangement contains a lease The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: (a) There is a change in contractual terms, other than a renewal or extension of the arrangement; (b) A renewal option is exercised or extension granted, unless that term of the renewal or

extension was initially included in the lease term; (c) There is a change in the determination of whether fulfillment is dependent on a specified

asset; or (d) There is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). Operating leases Operating leases represent those leases under which substantially all risks and rewards of ownership of the leased assets remain with the lessors. Noncancellable operating lease payments are recognized as expense in the consolidated statement of income on a straight-line basis. Borrowing Costs Borrowing costs are charged to expense as incurred. Income Taxes Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The income tax rates and income tax laws used to compute the amount are those that are enacted or substantively enacted as of the balance sheet date. Deferred income tax Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused net operating loss carryover (NOLCO) to the extent that it is probable that sufficient future taxable profits will be available against which the deductible temporary differences and carryforward of unused tax credits and unused NOLCO can be utilized.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and

reduced to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that sufficient future taxable profits will allow the deferred income tax asset to be recovered.

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Deferred income tax assets and liabilities are measured at the tax rate that is expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Segment Reporting The Group’s operating businesses are organized and managed separately according to the nature of the product and services provided, with each segment representing a strategic business unit that offers different products and serves difference markets (see Note 28). Earnings Per Share (EPS) Basic EPS is calculated by dividing the net income attributable to the common equity holder of the parent by the weighted average number of common shares outstanding during the period after giving retroactive effect to any stock dividends declared. Diluted EPS amounts are calculated by dividing the net profit attributable to common equity holders of the parent (after considering interest on the convertible notes) by the weighted average number of common shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential common shares into common shares. Events After the Balance Sheet Date Post year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.

3. Significant Accounting Judgments, Estimates and Assumptions The preparation of the accompanying consolidated financial statements in compliance with PFRS requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The judgments, estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates. The effects of any change in estimates are reflected in the consolidated financial statements as they become reasonably determinable.

Judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcome can differ from these estimates.

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Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements. Determination of functional currency Based on the economic substance of the underlying circumstances relevant to the Group, the functional currency of the Group has been determined to be the Philippine peso. The Philippine peso is the currency of the primary economic environment in which the Group operates. It is the currency that mainly influences the revenues and expenses of the Group. Classification of financial instruments The Group exercises judgments in classifying a financial instrument, or its component parts, on initial recognition either as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated balance sheet. In addition, the Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination on whether the quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arm’s length basis (see Note 27). Operating lease commitments - the Group as lessee The Group has entered into commercial property leases on its outlets and administrative office location. The Group has determined that these are operating leases since it does not bear substantially all the significant risks and rewards of ownership of these properties. Consolidation of entities The Company has determined that it has control with the companies stated in Note 9 to the consolidated financial statements eventhough the Company owns, directly and indirectly, less than 50% of the voting power of these companies because the Company has the ability to govern the financial and operating policies of these entities. Accordingly, these companies are consolidated to the Company. Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the consolidated balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Allowance for impairment losses on receivables The Group maintains allowances for impairment losses on trade and other receivables at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by the Group on the basis of factors that affect the collectibility of the accounts. The Group ages its receivables, determines which specific accounts are outstanding for more than 60 days (credit term, 30 days, plus a grace period of another 30 days), verifies whether these accounts are valid through determining whether the Group still has open communication with the debtor, preparing a schedule of outstanding receivables that are scheduled for payment at some future

- 22 -

*SGVMC401862*

date, preparing a summary of post-dated checks issued for the outstanding receivables and tracing the outstanding receivables to its source document, such as official receipts. If the Group has determined that the receivables are uncollectible since there is no communication with the debtor, a full allowance shall be provided for the said account. For those accounts which the Group has still open communications, a demand shall be made for the payment. No allowance for these accounts shall be made unless the debtor has financial difficulty, ascertaining to the Group that it can no longer settle its obligations. These reserves are evaluated and adjusted as additional information becomes available. An increase in the Group’s allowance for impairment losses on receivables would increase the Group’s recorded expenses and decrease current assets. As of December 31, 2008 and 2007, the Group has trade and other receivables amounting to P=112.4 million and P=97.8 million, net of allowance for impairment losses of P=3.1 million and P=3.5 million, respectively (see Note 5). Allowance for inventory losses The Group estimates the allowance for inventory losses related to store and kitchen supplies and operating equipment for sale whenever the utility of these inventories becomes lower than cost due to damage, physical deterioration or obsolescence. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different estimates. Due to the nature of the food and beverage inventories, the Group conducts monthly inventory count and any resulting difference is charged to expenses. The carrying value of the inventories amounted to P=62.0 million and P=49.3 million as of December 31, 2008 and 2007, respectively (see Note 6). Useful lives of property and equipment The Group reviews annually the estimated useful lives of the property and equipment based on expected asset utilization as anchored on business plans and strategies that also consider expected future technological developments and market behavior. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property and equipment would increase the recorded depreciation and amortization expense and decrease noncurrent assets. The carrying value of property and equipment, net of accumulated depreciation and amortization, amounted to P=372.2 million and P=343.8 million as of December 31, 2008 and 2007, respectively (see Note 8). Impairment of property and equipment PFRS requires that an impairment review be performed when certain impairment indicators are present. Determining the fair value of property and equipment, which require the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the Group to make estimates and assumptions that can materially affect the consolidated financial statements. Any resulting impairment loss could have a material adverse impact on the Group’s financial condition and results of operations. In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets, the Group is required to make estimates and assumptions that can materially affect the consolidated financial statements.

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*SGVMC401862*

The preparation of the estimated future cash flows involves significant judgment and estimations. While the Group believes that the assumptions are appropriate and reasonable, significant changes in the assumptions may materially affect the assessment of recoverable values and may lead to future additional impairment charges under PFRS. The aggregate net book values of property and equipment amounted to P=372.2 million and P=343.8 million as of December 31, 2008 and 2007, respectively (see Note 8). Useful life and impairment of trademarks The Group determines that its trademarks are intangible assets with finite lives. Intangible assets with finite lives are amortized over the useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates.

Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. However, due to the stiff competition in the industry where the Group operates and the uncertainty in the business environment, the Group decided to subject the assets to annual impairment testing to assess reasonableness of the assigned useful life. Assessment for impairment requires an estimation of the value in use of the cash-generating units to which the trademarks are allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Based on projections made by management on cash flows arising from the investees where the trademarks relates, there were no indications that the carrying amount of trademarks had been impaired as of December 31, 2008 and 2007. The carrying value of trademarks as of December 31, 2008 and 2007 amounted to P=438.7 million and P=413.9 million, respectively (see Note 10). Fair value of trademarks The cost of trademarks acquired in business combinations is the fair value as of the date of acquisition. The fair value is based on the valuation by an independent appraiser firm, which management believes, holds a recognized and relevant professional qualification and has experience in the category of the asset being valued. The appraiser firm used the cost approach in determining the fair value of the trademark. Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

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*SGVMC401862*

Based on projections made by management on cash flows arising from the investees where the goodwill relates, there were no indications that the carrying amount of goodwill had been impaired as of December 31, 2008 and 2007. The carrying amount of goodwill as of December 31, 2008 and 2007 amounted to P=82.6 million and P=59.0 million, respectively (see Note 10). Determination of the debt component of the convertible notes The determination of the debt component of the convertible notes is based on the discounted amount of future cash flows of the interest payments since the notes are mandatorily convertible into a fixed number of common shares after the lapse of the term. Interest payment is the higher of consolidated net income or the dividends that the holder of the Note would have been entitled to as discussed in Note 15. Effectively, the dividends on common shares would serve as the minimum interest on the note. However, it is difficult to estimate these future dividends since there are no committed dividends on PHI’s common shares. A pattern or trend could not also be determined based on dividend payments in the past. Consequently, the liability component was calculated based on the consolidated forecasted net income. As of December 31, 2008 and 2007, convertible notes, presented as part of noncurrent liabilities, amounted to P=6.3 million and P=9.7 million, respectively, while the accrued interest on debt component of convertible notes, presented as part of trade and other payables account, amounted to P=4.9 million and P=7.0 million, respectively (see Notes 12 and 15). Retirement benefit costs The determination of the Group’s obligation and cost for retirement is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates, expected rate of returns on plan assets and salary increase rates (see Note 20). Actual results that differ from the Group’s assumptions, subject to the 10% corridor test, are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligations in such future periods. While management believes that its assumptions are reasonable and appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect the Group’s retirement and other post-employment obligations. The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as of balance sheet dates. The expected return on plan assets assumption is determined on a uniform basis, taking into consideration the historical returns and the future estimates of investment returns. As of December 31, 2008 and 2007, accrued retirement liability amounted to P=11.3 million and P=9.3 million, respectively. Fair value of the plan assets amounted to P=34.7 million and P=26.4 million as of December 31, 2008 and 2007, respectively (see Note 20). Income taxes There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for expected taxes to be paid in the future based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred income tax provisions in the period in which such determination is made. The carrying amount of the Group’s income tax payable is P=2.6 million and P=1.8 million as of December 31, 2008 and 2007, respectively (see Note 21).

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*SGVMC401862*

Assessing realizability of deferred income tax assets The Group reviews the carrying amounts of deferred income tax assets at each balance sheet date and reduces the amounts to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Significant judgment is required to determine the amount of deferred income tax assets that can be recognized based upon the likely timing and level of future taxable profits together with future planning strategies. The Group has temporary differences amounting to P=8.8 million and P=1.6 million as of December 31, 2008 and 2007, respectively, for which no deferred income tax assets were recognized. The carrying value of the recognized deferred income tax assets amounted to P=44.0 million and P=48.9 million as of December 31, 2008 and 2007, respectively (see Note 21). Contingencies The Company and PHVI are currently involved in a legal proceeding. The estimate of the probable costs for the resolution of this claim has been developed in consultation with outside counsel handling the Companies’ defense in this matter and is based upon an analysis of potential results. The Company and PHVI currently do not believe that this proceeding will have a material adverse effect on the consolidated financial position, thus, no accrual were made in the books. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to this proceeding (see Note 24). Fair values of financial assets and liabilities The Group carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgments. While significant components of fair value measurement were determined using verifiable objective evidence (i.e., quoted prices, interest rates, foreign exchange rates, volatility), the amount of changes in fair value would differ if the Group utilized a different valuation methodology. Any changes in fair value of these financial assets and liabilities would affect income and loss. Where the fair value of certain financial assets and financial liabilities recorded in the consolidated balance sheet cannot be derived from active markets, they are determined using internal valuation techniques using generally accepted market valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. The judgments include considerations of liquidity and model inputs such as correlation and volatility for longer dated derivatives. The fair values of the Group’s financial instruments are presented to the consolidated financial statements. The carrying amount of the Group’s financial assets amounted to P=260.0 million and P=212.1 million as of December 31, 2008 and 2007, respectively. The carrying amount of liabilities amounted to P=702.5 million and P=592.9 million, respectively (see Note 27).

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*SGVMC401862*

4. Business Combination and Goodwill

On February 8, 2008, the Company acquired 100% of the outstanding and issued capital stock of Boulangerie Francaise, Inc. (BFI), engaged in café business operating under the business style and standards of “Le Coeur de France”. The purchase price allocation has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available. The following is a summary of the provisional fair values of the assets acquired and liabilities assumed as of the date of acquisition:

Fair value recognized on

acquisition Previous carrying value Cash P=1,901,959 P=1,901,959 Trade and other receivables 7,149,698 7,149,698 Inventories 4,910,734 4,910,734 Prepayments and other current assets 3,540,978 3,540,978 Property and equipment 32,383,600 17,212,741 Other noncurrent assets 6,189,020 7,855,641 56,075,989 42,571,751 Trade and other payables 14,289,009 14,289,009 Deferred tax liability 2,884,636 – 17,173,645 14,289,009

Net assets 38,902,344 P=28,282,742

Goodwill arising from acquisition 20,611,062

Total consideration P=59,513,406 On the same date, Pancake House International, Inc. (PHII), a subsidiary, separately purchased the trademark and all of its related intellectual property rights of “Le Couer de France” from the trademark owner, Baratow Ltd. for P=53.1 million. The total cost related to the acquisition follows:

Identifiable net assets P=59,513,406 Trademark (see Note 10) 53,078,320 Total consideration P=112,591,726

From the date of the acquisition, BFI has contributed a net loss of P=4.3 million to the net profit of the Group.

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*SGVMC401862*

5. Trade and Other Receivables

2008 2007 Trade P=74,967,273 P=62,960,376 Royalties (see Note 23) 16,272,595 11,231,192 Officers and employees 4,684,661 3,822,165 Credit card receivable 2,772,547 4,885,579 Others 16,793,069 18,396,950 115,490,145 101,296,262 Less allowance for impairment losses 3,076,193 3,469,427 P=112,413,952 P=97,826,835

Terms and conditions of the above financial assets: • Trade receivables are non-interest bearing and are normally settled on 15-30 days’ terms. • Other receivables are non-interest bearing and have an average term of 1-2 months. Trade receivables pertain to commissary sales billed to franchisees which are secured and interest free. The franchisees provide deposits, which is equivalent to an estimate of 15-day purchases, as guarantee on their payables to the Company. As of December 31, 2008 and 2007 the value of deposits which is recorded under “Trade and other payables” account amounts to P=20.3 million and P=39.1 million, respectively. The deposits are applied against the overdue purchases of the franchisees. Other receivables primarily pertain to reimbursable costs incidental to the operations of the franchise stores. Movement of allowance for impairment losses is as follows:

2008 2007 Balances at beginning of year P=3,469,427 P=492,327 Provision during the year 15,244 2,977,100 Recovery (408,478) – Balances at end of year P=3,076,193 P=3,469,427

6. Inventories

2008 2007 Food and beverage P=44,018,808 P=29,939,668 Store and kitchen supplies 11,201,719 6,779,760 Operating equipment for sale 6,745,914 12,587,781 P=61,966,441 P=49,307,209

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*SGVMC401862*

7. Other Current Assets

2008 2007 Prepayments P=23,625,463 P=11,155,660 Advances to suppliers 17,447,919 43,978,212 Creditable withholding taxes 6,215,850 3,001,293 Others 3,512,513 8,938,185 P=50,801,745 P=67,073,350

8. Property and Equipment

2008 Office Furniture, Leasehold Store Fixtures and Transportation Kitchen Operating Construction Improvements Equipment Equipment Equipment Equipment Equipment in Progress Total Cost: Beginning balances P=346,833,942 P=207,750,801 P=53,018,796 P=23,955,970 P=21,845,010 P= 30,700,193 P=833,532 P=684,938,244 Acquisition of a subsiidiary

26,308,641

6,597,671

6,521,229

694,908

10,259,151

2,962,344

–

53,343,944

Acquisitions 79,506,876 51,182,041 6,894,525 2,279,608 6,386,631 14,026,863 287,000 160,563,544 Disposals/

Adjustments

9,479,463

(494,997)

(76,607)

–

–

(18,206)

–

8,889,653 Reclassifications – – – – 699,603 – (699,603) – Ending balances 462,128,922 265,035,516 66,357,943 26,930,486 39,190,395 47,671,194 420,929 907,735,385 Accumulated Depreciation and amortization: Beginning balances 143,683,567 119,580,570 24,033,345 12,524,487 15,958,718 25,319,093 – 341,099,780 Depreciation and amortization 70,956,078 52,307,133 15,522,254 4,746,940 4,128,820 10,769,868 – 158,431,093 Acquisition of a subsidiary

9,450,572

9,607,179

5,141,000

490,642

13,800,018

1,877,518

–

40,366,929

Disposals/ Adjustments

(5,467,851)

(280,318)

(30,643)

–

–

(3,806)

–

(5,782,618)

Ending balances 218,622,366 181,214,564 44,665,956 17,762,069 33,887,556 37,962,673 – 534,115,184 Allowance for impairment losses

–

1,385,344

–

–

–

–

–

1,385,344

Net book values P=224,099,975 P=82,435,608 P=30,741,576 P=9,614,621 P=7,285,713 P=17,636,430 P=420,929 P=372,234,857

2007 Office Furniture, Leasehold Store Fixtures and Transportation Kitchen Operating Construction Improvements Equipment Equipment Equipment Equipment Equipment in-Progress Total Cost: Beginning balances P=237,345,436 P=168,312,422 P=33,299,404 P=22,267,986 P=17,627,341 P=22,493,948 P=24,896,981 P=526,243,518 Acquisitions 92,805,966 48,190,922 19,719,392 5,599,841 4,217,669 9,062,129 1,293,090 180,889,009 Disposals (8,673,999) (8,752,543) – (3,911,857) – (855,884) – (22,194,283) Reclassifications 25,356,539 – – – – – (25,356,539) – Ending balances 346,833,942 207,750,801 53,018,796 23,955,970 21,845,010 30,700,193 833,532 684,938,244 Accumulated depreciation and amortization: Beginning balances 94,123,506 79,618,929 14,983,756 12,078,283 13,975,843 17,391,183 – 232,171,500 Depreciation and amortization 54,136,497 43,139,712 10,030,677 5,008,950 1,979,508 8,216,564 – 122,511,908 Disposals (4,578,813) (3,178,071) (983,306) (4,562,746) – (292,881) – (13,595,817) Translation adjustments 2,377 – 2,218 – 3,367 4,227 – 12,189 Ending Balances 143,683,567 119,580,570 24,033,345 12,524,487 15,958,718 25,319,093 – 341,099,780 Net book values P=203,150,375 P=88,170,231 P=28,985,451 P=11,431,483 P=5,886,292 P=5,381,100 P=833,532 P=343,838,464

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*SGVMC401862*

9. Investments in Subsidiaries The consolidated financial statements include the financial statements of the Company and the subsidiaries listed in the following table:

Percentage of Ownership Name of Companies Nature of Business 2008 2007 88 Just Asian, Inc. Restaurant 80 80 Always Happy Greenhills, Inc. Restaurant 60 60 Boulangerie Francaise, Inc. (BFI) Restaurant 100 – DFSI-MTB, Inc. Restaurant 60 60 DFSI-One Nakpil, Inc. and Subsidiary Restaurant 60 60 DFSI Subic, Inc. Restaurant 100 100 Golden B.E.R.R.D. Grill, Inc. (GBGI)* Restaurant 100 100 Happy Partners, Inc. Restaurant 51 51 PHII and Subsidiary Holdings 100 100 Pancake House Products, Inc. (PHPI)* Manufacturing 100 100 PCK-AMC, Inc. Restaurant 60 60 PCK-Bel Air, Inc. Restaurant 51 51 PCK - MSC, Inc. Restaurant 50 50 PCK-MTB, Inc. Restaurant 60 60 PH Ventures, Inc. (PHVI)* Holdings 100 100 Teriyaki Boy Group, Inc. (TBGI) and

Subsidiaries

Restaurant 70 70

* Dormant Companies

All of the companies in the Group, except for PHVI, PHPI and PHII, are engaged in the restaurant business. a. On February 8, 2008, the Company acquired 100% of the outstanding and issued capital stock

of BFI. BFI was incorporated and registered with the SEC on June 6, 1994, primarily to engage in café business operating under the business style and standards of “Le Coeur de France”. Inclusive in the acquisition is BFI’s operating assets, including 13 company-owned outlets and one commissary.

b. On April 23, 2008, the PCK Bel-Air entered into an Asset Purchase Agreement with

Cambridge Best Food Corporation, owner of the Pancake House franchise in Tagaytay (the PHI-Tagaytay) for all identified assets of PHI-Tagaytay for a total consideration of P=8,000,000. Payment of total consideration was advanced by the Company’s stockholders.

c. On July 1, 2008, TBGI entered into a deed of assignment of subscription rights to an

individual, wherein the former agreed to assigns, transfers and conveys all rights, title and interest of 2,000 common shares of stock with a par value of P=100. This comprises 20% of the entire outstanding shares of the Company which decreased the ownership of TBGI to 40%.

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*SGVMC401862*

d. PHII was incorporated in British Virgin Island on February 6, 2008 as a holding Company for the international operations of the Pancake House brand and is a wholly owned subsidiary of PHI.

10. Trademarks and Goodwill

2008 Trademarks Goodwill Total Cost: Beginning balances P=503,424,537 P=58,973,599 P=562,398,136 Additions (see Notes 4 and 9) 53,078,320 22,292,203 75,370,523 Ending balances 556,502,857 82,563,031 637,768,659 Accumulated amortization: Beginning balances 89,532,133 – 89,532,133 Amortization 28,236,063 – 28,236,063 Ending balances 117,768,196 – 117,768,196 Net book values P=438,734,661 P=82,563,031 P=520,000,463

2007 Trademarks Goodwill Total Cost: Beginning and ending balances P=503,424,537 P=58,973,599 P=562,398,136 Accumulated amortization: Beginning balances 63,876,388 – 63,876,388 Amortization 25,655,745 – 25,655,745 Ending balances 89,532,133 – 89,532,133 Net book values P=413,892,404 P=58,973,599 P=472,866,003 The goodwill of P=82.6 million and P=59.0 million as of December 31, 2008 and 2007, respectively, comprises the fair value of expected synergies arising from the acquisition which is not separately recognized.

Goodwill acquired through business combinations and trademarks have been attributed to each investee as a single cash-generating unit to where the specific asset is related.

Based on projections made by management on cash flows arising from the investees where the goodwill and trademarks relates, there were no indications that the carrying amount of goodwill and trademarks had been impaired as of December 31, 2008 and 2007.

The recoverable amounts of the investments have been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The discount rate applied to cash flow projections range from 13% to 15% both in 2008 and 2007, and cash flows beyond the 5-year period are extrapolated using a zero percent growth rate.

The calculations of value in use of goodwill are most sensitive to the following assumptions:

Discount rates - Discount rates reflect management’s estimate of the risks specific to each unit. This is the benchmark used by the management to assess operating performance and to evaluate future investment proposals. In determining appropriate discount rates for each unit, regard has been given to the yield on a twenty-year government bond at the beginning of the budgeted year.

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*SGVMC401862*

Growth rate estimates - The long-term rate used to extrapolate the budget for the investee companies excludes expansions and possible acquisitions in the future. Management also recognizes the possibility of new entrants, which may have significant impact on growth rate assumptions. Management however, believes that new entrants will not have significant adverse impact on the forecast included in the budget.

11. Other Noncurrent Assets

2008 2007 Deposits on lease contracts (see Note 23) P=65,911,789 P=59,901,580 Utilities and other deposits 19,076,832 10,871,228 Input tax on capital expenditures 12,406,471 16,274,967 Noncurrent receivables 6,952,216 718,302 Others 8,694,517 4,905,429 113,041,825 P=92,671,506

12. Trade and Other Payables

2008 2007 Trade P=79,716,048 P=101,712,361 Accrued expenses 72,262,594 47,446,065 Nontrade 65,501,414 62,202,243 Deposits (see Note 5) 20,309,437 39,083,269 Value-Added Tax (VAT) 13,147,744 11,336,714 Accrued interest on debt component of the convertible notes (see Note 15) 4,907,485 7,001,808 Contract retention 6,118,403 6,456,236 Service charges 4,695,712 3,261,560 Advertising and marketing fund 1,849,384 – Others 13,690,676 13,629,429 P=282,198,897 P=292,129,685

13. Loans Payable The Company and TBGI obtained peso denominated short-term loans from several banks and from stockholders of the Company amounting to P=264 million and nil, respectively, in 2008 and P=120.5 million and P=20.5 million, respectively, in 2007, to finance working capital requirements. The short-term loans from the banks bear interest rates ranging from 6.3% to 8.0% per annum in 2008, 6.3% to 6.5% in 2007, and 8.3% to 11.0% in 2006 and will mature the following year. The short-term loans from stockholders bear an interest rate ranging from 6.25% to 6.5% per annum in 2008, 2007 and 2006 and are payable on demand (see Note 17). Interest expense on loans payable amounted to P=18.7 million, P=8.4 million and P=14.6 million in 2008, 2007 and 2006, respectively.

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*SGVMC401862*

14. Long-term Debt

On June 23, 2004, the Company obtained a peso denominated long-term loan from Metropolitan Bank and Trust Company (the Bank). The loan, which bears interest quarterly at the MART1 rate (13.01% per annum) as of the date of availment plus 2%, is payable as follows: a) P=45 million each on July 23, 2007 and 2008 and b) P=60 million on July 23, 2008. Due to the lower interest rates prevailing in 2007, PHI negotiated with the Bank for a conversion of the interest from fixed to a floating rate. Starting June 23, 2007, the interest rate was converted to a floating rate, subject to quarterly re-pricing based on MART1 rate plus 2%. On March 30, 2007, the Company availed of a 150 million peso-denominated three year term loan from the Bank. Proceeds were used partly to settle an existing loan obtained in June 2004, which was availed to finance the acquisition of DFSI. The loan, which bears a fixed interest rate of 7.25% per annum carries a bullet principal payment at the end of the term.

The Company was unable to maintain a current ratio of at least 1:1 in 2008, which is the second year that the loan is outstanding. As a consequence, the principal loan became due and demandable without presentment, demand, protest, or further notice of any kind and classified it as part of current liabilities in the consolidated balance sheets. As of December 31, 2008, the Company has not yet received written notice for full payment of the loan and interests from the Bank. On January 20, 2009 though, the Company was able to secure a waiver from the bank, waving the said covenant and granting the Company until September 30, 2009 to comply with the requirements.

Interest on long-term debt amounted to P=10.9 million, P=12.2 million and P=15.6 million in 2008, 2007 and 2006, respectively.

These agreements provide for a pre-termination without penalty at the end of the second year and a mandatory prepayment if Martin I.P. Lorenzo is replaced as Chairman, President or Chief Executive Officer of the Company and either he ceases to own and control at least 51% of the outstanding capital stock of PHHI or PHHI ceases to directly or indirectly own and control at least 50% of the outstanding capital stock of the Company.

The loan is collateralized by a chattel mortgage of owned assets of DFSI and a pledge of all present and future shares of stock of DFSI. Under the loan agreement, the Company is required, among others, to maintain at all times certain ratios; promptly give written notice to the bank of any change in the composition of its BOD, in so far as it arises out of a change in its ownership; and promptly inform the bank of any exercise of options granted to third persons over pledged shares.

The loan agreement also contains a number of negative covenants that, among others, subject to certain exceptions and qualifications, restrict the Company’s ability to take certain actions without the Bank’s approval, including changing the nature of its business, permitting any material change in the ownership or control of its capital stock, declaring or paying dividends to its stockholders if payment of any sum due the Bank hereunder is in arrears, granting loans or advances to any of its directors, officers, and/or stockholders, which in the aggregate would exceed about P=12.0 million a year, creating any debt or availment of additional loan(s) with final maturity exceeding one year.

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*SGVMC401862*

15. Convertible Notes

On October 21, 2006, the Company entered into an investment agreement with the Investors for the acquisition of TBGI, as contemplated under the Memorandum of Agreement dated September 20, 2006 between the Company and TBI/TTI. Through this investment agreement, the Company will issue a five-year convertible notes to the Investors, denominated in peso at the prevailing exchange rate at the time of issue (P=55.12) or the Peso equivalent of US$4 million. The Notes shall be entitled to interest commencing from the year of funding (2006) equivalent to (a) fifty percent (50%) of the consolidated audited net profit after tax of PHI for the current fiscal year multiplied by the equity interest of the Investors, or (b) the dividend which would have been due to the Investors if they already held Conversion Shares instead of the Notes as of the dividend record date, whichever is higher. Interest shall be payable in arrears semi-annually, on or before June 30 and December 31 of each year. The Investors, at their option, will have the right to convert their Notes, at any time after the issue date, into the number of fully paid, non-assessable common shares determined as follows: Issue price of the Notes for the conversion divided by the conversion price (P=4.56 per common stock) or adjusted conversion price. The conversion shares shall account for no less than an equity interest in the Company of 20.6728% or 49,158,950 common shares. In view of the five-year term of the Notes, unless the Notes are converted before the lapse of the term, the Notes shall be mandatorily converted into common shares as of the last day of the term.

On the same day, the Company bifurcated the debt component of the convertible notes and the excess was treated as notes for conversion to equity, which is presented as part of the equity section of the consolidated balance sheet. The debt component as discussed in Note 2 is the present value of the future cash flows of the interest payments as determined in reference to the consolidated forecasted net income. Subsequently, the debt component is accreted to its maturity value using the effective interest rate method. The effective interest used for the note was 13.13%. Accretion for 2008, 2007 and 2006 amounted to P=1.5 million, P=4.3 million and 3.1 million, respectively, and were presented as “Interest expense on the debt component of convertible notes” in the consolidated statement of income. In June 2007, Investors converted P=17,940,120 worth of convertible note into 4,000,000 shares at a conversion price of P=4.48503. The total par value of the shares amounting to P=4,000,000 was added to capital stock while the excess of total conversion price over the total par value amounting to P=13,940,120 was credited to additional paid in capital in the consolidated balance sheet.

16. Retained Earnings The details of the Company’s declaration of cash dividends follow:

Date of Declaration Date of Record Amount Cash Dividend

per Share

Date Paid June 30, 2008 July 15, 2008 P=15.5 million P=0.08 July 30, 2008 October 31, 2007 November 15, 2007 12.0 million 0.06 November 30, 2007 March 26, 2007 April 15, 2007 9.4 million 0.05 April 30, 2007 December 1, 2006 December 15, 2006 7.6 million 0.04 December 29, 2006 June 2, 2006 June 15, 2006 11.3 million 0.06 June 30, 2006

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17. Related Party Disclosures The Group has significant transactions with related parties as follows: a. Lease from Surfield Development Corporation (SDC) of the Group’s principal office space for

a period of three (3) years until July 31, 2007 at a monthly rental of P=165,541 plus 12% VAT subject to a 5% escalation per annum. Lease of its commissary space for ten years at a monthly rental of P=109,956 plus 12% VAT, subject to an escalation of 5% in 2003, 8% in 2004 and 2006. Escalation rate beyond 2006 is still subject to negotiation. Rental payments amounted to P=2.4 million and P=5.2 million in 2007 and 2006, respectively and none for 2008. The Company and SDC have certain common stockholders and members of the board of directors.

b. Lease from First Lucky Property Corporation (FLPC) of Group’s new principal office for a

period of one year subject for renewal every year at a monthly rental of P=0.8 million for the first two months and P=1.2 million for the remaining term plus 12% VAT beginning July 31, 2007. Rental payments amounted to P=14.7 million in 2008 and P=5.6 million in 2007. The Group and FLPC have certain common stockholders and members of the board of directors.

c. In 2008 and 2007, PHI has a short-term loan payable to a stockholder of the Company

amounting to P=11.0 million and P=20.5 million, respectively. d. Purchases from Macondray Agro-Industrial Corporation (MAIC) amounting to P=2.8 million,

P=2.9 million, P=3.8 million in 2008, 2007 and 2006, respectively. The Company and MAIC have certain common stockholders and members of the BOD.

e. Purchases from Macondray Plastic, Inc. (MPI) amounting to P=4.0 million and P=3.7 million for

the year ended December 31, 2008 and 2007, respectively. The Company and MPI have certain common stockholders and members of the BOD.

g. Compensation of key management personnel are as follows:

2008 2007 2006 Salaries and other employee benefits P=16,096,910 P=13,753,565 P=10,409,297 Post employment benefits (see Note 20) 1,593,137 1,678,380 1,066,034

P=17,690,047 P=15,431,945 P=11,475,331

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18. Cost of Sales

2008 2007 2006 Food and beverage (see Note 17) P=683,874,583 P=565,522,758 P=492,230,551 Salaries and wages 187,676,277 186,924,291 147,151,761 Rentals (see Notes 17 and 23) 161,430,194 125,156,503 105,939,556 Depreciation and amortization

(see Note 8) 132,095,804 106,141,588 90,801,097 Light and water 81,353,768 69,258,213 60,510,548 Employees’ benefits 56,390,609 58,796,488 46,022,241 Fuel and oil 36,719,007 29,778,303 23,518,055 Supplies and equipment sold 32,478,933 36,351,643 54,942,707 Supplies used 20,931,794 30,236,742 29,073,338 Taxes and licenses 20,858,682 15,886,304 9,112,433 Repairs and maintenance 15,445,482 12,072,794 8,100,479 Dues and subscriptions 13,863,014 10,590,088 8,774,149 Transportation and travel 11,005,375 7,386,084 4,945,227 Service fees 9,343,888 1,424,408 – Security services 7,056,959 7,382,468 5,095,385 Communications 4,817,430 4,465,290 3,875,480 Professional fees 3,273,367 2,392,274 4,841,309 Insurance 1,605,063 2,345,822 2,088,937 Others 20,254,919 14,618,381 10,632,433 P=1,500,475,148 P=1,286,730,442 P=1,107,655,686

19. General and Administrative Expenses

2008 2007 2006 Salaries and wages P=56,285,358 P=46,000,978 P=39,899,296 Amortization of trademarks

(see Note 10) 28,236,063 25,655,745 25,655,746 Depreciation and amortization

(see Note 8) 26,335,290 16,382,509 9,007,827 Employees’ benefits (see Note 20) 22,679,448 21,946,490 16,840,645 Rentals (see Notes 17 and 23) 14,488,678 8,450,144 5,317,381 Credit card charges 9,807,364 10,198,357 7,565,119 Professional fees 8,606,186 9,045,972 6,489,408 Transportation and travel 7,534,218 4,909,838 3,747,473 Light and water 6,560,851 2,732,786 1,699,338 Taxes and licenses 4,548,907 3,113,270 1,980,836 Communications 4,008,615 4,142,567 2,862,489 Supplies 3,397,326 3,516,272 3,599,972 Entertainment 2,089,956 976,898 949,971 Insurance 1,096,204 496,948 362,698 Provision for impairment losses

(see Notes 5 and 8) 1,400,588 2,977,100 383,630 Others 17,994,835 18,232,283 14,870,031 P=215,069,887 P=178,778,157 P=141,231,860

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20. Retirement Benefit Costs

The Group has funded defined benefit pension plans covering substantially all of its employees, which require contributions to be made to separately administered fund.

The following tables summarize the net retirement benefit cost recognized in the consolidated statements of income and the funded status and the amounts recognized in the consolidated balance sheets and other information about the plans.

Components of retirement benefit costs recognized in the consolidated statements of income are as follows:

2008 2007 2006 Current service costs P=5,698,500 P=10,155,600 P=5,767,700 Interest costs 1,978,200 2,756,300 1,849,800 Expected return on plan assets (2,369,800) (1,665,600) (1,110,400) Actuarial net loss (gain) (1,197,800) 223,700 7,500 P=4,109,100 P=11,470,000 P=6,514,600

Components of accrued retirement liability recognized in the consolidated balance sheets are as follows:

2008 2007 Fair value of plan assets P=34,702,000 P=26,370,500) Present value of obligation (8,840,900) (22,469,400) Funded status 25,861,100 3,901,100 Unrecognized actuarial gain (14,549,916) 13,227,700 P=11,311,184 P=9,326,600

Changes in the present value of the defined benefit obligation are as follows:

2008 2007 Balances at beginning of year P=22,469,400 P=33,248,300 Current service costs 5,698,500 10,155,600 Interest costs 1,978,200 2,756,300 Benefits paid (726,700) (1,110,700) Actuarial loss (20,578,500) (22,580,100) Balances at end of year P=8,840,900 P=22,469,400

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

2008 2007 Balances at beginning of year P=26,370,500 P=18,289,600 Expected return on plan assets 2,369,800 1,665,600 Contributions 7,398,000 8,183,300 Benefits paid (726,700) (1,110,700) Actuarial loss (709,600) (657,300) Balances at end of year P=34,702,000 P=26,370,500

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The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2008 2007 Investment securities 84.8% 70.1% Time deposits 13.7% 29.2% Receivables 1.5% 0.7% 100.0% 100.0%

The actual return on plan assets as of December 31, 2008 and 2007 amounted to P=1.7 million and P=1.0 million, respectively.

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled. The principal assumptions used in determining the pension obligations for the Group’s plan beginning January 1 are shown below:

2008 2007 Discount rate 16.9% -17.6% 8.0% Investment yield 6.0% - 8.0% 9.0% Salary increase rate 6.0% - 8.0% 9.0 %

The Group does not expect to contribute to the retirement fund in 2009 since the total fund asset exceeds the total actuarial retirement liability.

21. Income Taxes

The Group’s net deferred income tax assets account in the consolidated balance sheets follow:

2008 2007 Deferred income tax assets:

NOLCO P=29,638,100 P=33,261,298 Excess MCIT 8,909,186 5,251,728 Accrued rentals 4,701,351 5,200,627 Accrued retirement liability 3,393,355 3,264,310 Allowance for impairment loss 1,338,461 1,214,299 Unamortized past service costs 598,726 747,001

48,579,179 48,939,263 Deferred income tax liability:

Fair value adjustments on acquisition (see Note 4) (4,551,258) –

P=44,027,921 P=48,939,263

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The Group has temporary differences and unused NOLCO for which no deferred income tax assets were recognized as it is not probable that sufficient taxable profit will be available against which the benefits of the deferred income tax assets can be utilized. These are as follows:

2008 2007 NOLCO P=8,303,037 P=1,300,000 MCIT 468,270 – Allowance for impairment loss on receivable 11,950 – Preoperating expenses – 259,291 P=8,783,257 P=1,559,291

As of December 31, 2008, the Group’s NOLCO that can be claimed as deduction from future taxable income and MCIT that can be claimed as tax credits against the regular income tax follow:

Year incurred Available until NOLCO MCIT 2006 2008 P=29,983,150 P=2,123,224 2007 2009 32,571,914 3,128,504 2008 2010 44,541,639 3,657,458

P=107,096,703 P=8,909,186 The following are the movements in NOLCO:

2008 2007 Balance at beginning of year P=95,487,279 P=92,821,393 Additions 44,541,639 32,571,914 Application (4,462,935) (29,344,464) Expiration (28,469,280) (561,564) Balance at end of year P=107,096,703 P=95,487,279

The following are the movements in MCIT:

2008 2007 Balance at beginning of year P=5,251,728 P=2,123,224 Additions 3,657,458 3,128,504 Balance at end of year P=8,909,186 P=5,251,728

Provision for (benefit from) income tax consists of:

2008 2007 2006 Final P=22,886,604 P=22,381,527 P=19,913,965 Current 7,329,838 5,665,086 10,971,048 Deferred 4,911,342 (8,755,494) (16,467,135) P=35,127,784 P=19,291,119 P=14,417,878

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The reconciliation of provision for income tax computed at the statutory income tax rate to the provision for income tax as shown in the consolidated statements of income follows:

2008 2007 2006 Income tax at statutory tax rate P=28,260,326 P=28,938,751 P=20,499,585

Additions to (reductions in) income tax resulting from: Amortization of trademarks 2,224,511 2,224,511 2,224,511 Nondeductible interest expense and others 751,604 1,588,667 962,413 Change in unrecognized deferred

tax assets (781,547) (87,472) 3,285,302 Interest income, royalty income

and franchise fees subjected to final tax at a lower rate (13,721,282) (13,805,616) (12,969,357)

Dividend income subject to final tax (3,790,713) – –

Expired NOLCO 9,964,248 196,547 – P=30,576,526 P=19,291,119 P=14,417,878

Republic Act (RA) No. 9337 was enacted into law effective November 1, 2005 amending various provisions in the existing 1997 National Internal Revenue Code. Among the reforms introduced by the said RA is the change in regular corporate income tax rate from 35% to 30% beginning January 1, 2009 and thereafter, and change in the non-deductible interest expense rate from 42% to 33% of interest income subject to final tax beginning January 1, 2009 and thereafter.

22. Earnings Per Share

The following reflects the income and share data used in the basic and diluted EPS computations:

2008 2007 2006 Net income attributable to common

equity holders of the parent

P=45,704,400

P=63,401,605 P=40,152,791 Interest on convertible notes 1,515,769 4,348,290 3,118,868 Net income attributable to common

equity holders of the parent adjusted for the effect of convertible notes P=47,220,169 P=67,749,895 P=43,271,659

Weighted average number of common shares for basic earnings per share 192,636,364 192,636,364 188,636,364

Effect of dilution from convertible notes 45,158,950 45,158,950 49,158,950 Weighted average number of common

shares adjusted for the effect of dilution

237,795,314

237,795,314 237,795,314 Basic EPS P=0.26 P=0.33 P=0.21 Diluted EPS P=0.20 P=0.28 P=0.18

There have been no other transactions involving common shares or potential common shares between the reporting date and the date of completion of these consolidated financial statements.

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23. Contracts and Agreements

Franchise Agreements The Company has granted franchisees the right to adopt and use the Pancake House Restaurant System in restaurant operations for a period and under the terms and conditions specified in the franchise agreements. The agreements provide for an initial franchise fee payable upon execution of the agreement and monthly royalty fees payable at rates ranging from 8% to 10% of the net sales of the franchised store outlets. Franchise and royalty fees from franchisees amounted to P=45.4 million, P=52.6 million and P=54.6 million for the years ended December 31, 2008, 2007 and 2006, respectively. DFSI has granted franchisees the right to adopt and use the Dencio’s Restaurant System in restaurant operations for a certain period and under the terms and conditions specified in the franchise agreements. The agreements provide for an initial franchise fee payable upon execution of the agreement and monthly royalty fees payable at rates ranging from 3% to 5% of the net sales of the franchised store outlets. Franchise and royalty fees from franchisees amounted to P=23.1 million, P=17.6 million and P=21.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. TBGI has granted franchisees the right to adopt and use the Teriyaki Boy Restaurant System in restaurant operations for a certain period and under the terms and conditions specified in the franchise agreements. The agreements provide for an initial franchise fee payable upon execution of the agreement and monthly royalty fees payable at rates ranging from 9% to 10% of the net sales of the franchised store outlets. Franchise and royalty fees from franchisees amounted to P=27.8 million, P=19.3 million and P=10.1 million for the years ended December 31, 2008 and 2007, respectively. Singkit has granted a franchisee the right to adopt and use the Singkit Restaurant System in restaurant operations for a certain period and under the terms and conditions specified in the franchise agreement. The agreement provides for an initial franchise fee payable upon execution of the agreement and monthly royalty fee payable of 7% of the net sales of the franchised store outlet. Royalty and franchise fees from franchisee amounted to P=0.3 million and P=1.2 million for the years ended December 31, 2008 and 2007, respectively. Operating Lease Contracts The Group leases the restaurant and commissary premises and offices it occupies for periods ranging from 1 to 12 years, renewable upon mutual agreement between the Group and its lessors. The lease agreements provide for a fixed rental and/or a monthly rental based on a certain percentage of actual sales or minimum monthly gross sales. Deposits on lease contracts equivalent to one to three (1-3) months rental is included in the “Other Noncurrent Assets” account in the consolidated balance sheet. Rental expense charged to operations amounted to P=177.1 million, P=133.6 million and P=111.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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Future minimum rentals payable under operating leases follow:

2008 2007 2006 Within one year P=102,156,531 P=77,670,289 P=79,155,322 After one year but not more than five years 183,105,936 172,196,564 190,955,430 More than five years 9,275,575 16,164,740 36,949,604 P=294,538,042 P=266,031,593 P=307,060,356

24. Contingencies

The Company and PHVI were named defendants in a civil case filed in October 2002 by Kenmor for the collection of a sum of money and damages. As of March 30, 2009, management and its legal counsel believe that no provision needs to be made in the accounts since the case is only at the early stage of the proceedings, thus, the outcome is not yet determinable and it is impracticable to make a reliable estimate.

25. Financial Risk Management Objectives and Policies and Financial Instruments The BOD is mainly responsible for the overall risk management approach and for the approval of risk strategies and principles of the Group. It has also the overall responsibility for the development of risk strategies, principles, frameworks, policies and limits. It establishes a forum of discussion of the Group’s approach to risk issues in order to make relevant decisions. The Group’s principal financial instruments consist of loans payable, long-term debt and convertible notes. The main purpose of these financial instruments is to raise funds for the Group’s operations. The Group has various financial instruments such as cash, trade and other receivables, deposits on lease contracts and trade and other payables, which arise directly from its operations. The main risks arising from the use of financial instruments are liquidity risk, credit risk, interest rate risk and foreign currency risk. The Company’s BOD reviews and approves the policies for managing each of these risk and they are summarized below.

Liquidity Risk Liquidity risk arises from the possibility that the Group may encounter difficulties in raising funds to meet commitments from financial instruments The Group seeks to manage its liquid funds through cash planning on a weekly basis. The Group uses historical figures and experiences and forecasts from its collection and disbursement. As part of its liquidity risk management, the Group regularly evaluates its projected and actual cash flows. It also continuously assesses conditions in the financial markets for opportunities to pursue fund raising activities.

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The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans, loans from related parties and other long-term debts. The Group considers its available funds and its liquidity in managing its long-term financial requirements. It matches its projected cash flows to the projected amortization of long-term borrowings. For its short-term funding, the Group’s policy is to ensure that there are sufficient operating inflows to match repayments of short-term debt. The table below summarizes the maturity profile of the Group’s financial liabilities as of December 31, 2008 and 2007 based on contractual undiscounted payments. 2008 On demand

Less than 3 months

3 to 12 months 1 to 5 years Total

Trade and other payables P=59,643,217 P=42,136,955 P=168,903,451 P=– P=270,683,623 Loans payable – – 259,999,592 – 259,999,592 Long-term debts 150,000,000 – – – 150,000,000 Mortgage payable – – 789,598 90,676 880,274 Debt component of convertible notes – – – 11,894,698 11,894,698 P=209,643,217 P=42,136,955 P=429,692,641 P=11,985,374 P=693,458,187

2007 On demand Less than 3 months 3 to 12 months 1 to 5 years Total Trade and other payables P=106,573,241 P=159,643,098 P=114,790,366 P=– P=381,006,705 Loans payable – – 259,999,592 – 259,999,592 Long-term debts 150,000,000 – – – 150,000,000 Mortgage payable – 450,965 – – 450,965 Debt component of convertible notes – – – 9,720,403 9,720,403 P=256,573,241 P=160,094,063 P=374,789,958 P=9,720,403 P=801,177,665

Credit Risk Credit risk refers to the potential loss arising from any failure by counterparties to fulfill their obligations, as and when they fall due. Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Company’s performance to developments affecting a particular industry. The Group has no significant concentration of credit risk with any single counterparty or group of counterparties having similar characteristics. Since the Group trades only with recognized third parties, there is no requirement for collateral. The Group trades only with recognized, creditworthy third party. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures In addition, receivable balances are monitored on an ongoing basis with the result that Group’s exposure to bad debts is not significant. With respect to credit risk arising from the other financial assets, which comprise cash and deposits on lease contracts, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

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The table below shows the maximum exposure to credit risk:

2008 2007 Cash with banks P=143,578,615 P=107,033,462 Receivables Trade 75,470,731 62,466,391 Royalties 18,190,457 11,231,192 Officers and employees 4,334,631 3,609,307 Long-term receivables – 1,436,602 Others 15,206,307 19,801,645 Total credit risk exposure P=256,780,741 P=205,578,599

The tables below summarize the aging analysis of the Group’s financial assets:

2008 Past due but not impaired

Total

Neither past due nor

impaired < 30 days 30 - 60 days 60 - 90 days Over 90 days

Impaired Financial

Assets Cash with banks P=143,578,615 P=143,578,615 P=– P=– P=– P=– P=– Trade receivables 76,362,827 52,829,511 7,924,427 10,188,549 4,528,244 892,096 Royalties 18,190,457 12,733,320 1,909,998 2,455,712 1,091,427 – Officers and

employees 4,334,631 2,797,375 419,606 539,494 239,775 338,381 Others 17,052,023 10,114,809 2,057,055 1,733,967 910,333 390,143 1,845,716 P=259,518,553 P=222,053,630 P=12,311,086 P=14,917,722 P=6,769,779 P=390,143 P=3,076,193

2007 Past due but not impaired

Total

Neither past due nor

impaired < 30 days 30 - 60 days 60 - 90 days Over 90 days

Impaired Financial

Assets Trade receivables P=62,960,376 P=36,597,670 P=15,372,583 P=4,234,375 P=6,261,763 P=– P=493,985 Royalties 11,231,192 9,483,096 732,346 580,285 435,465 – – Officers and

employees 3,822,165 2,547,215 159,037 52,395 850,660 – 212,858 Long-term

receivables 1,436,602 1,436,602 – – – – – Others 22,564,229 10,900,996 915,773 1,728,973 4,379,506 1,876,397 2,762,584 P=102,014,564 P=60,965,579 P=17,179,739 P=6,596,028 P=11,927,394 P=1,876,397 P=3,469,427

The tables below show the credit quality by class of the financial assets based on the Group’s rating: 2008 Neither Past Due Nor Impaired

High Grade Standard

Grade Past due but not impaired

Impaired Total Cash in banks P=143,578,615 P=– P=– P=– P=143,578,615 Receivables:

Trade 52,829,511 – 22,641,219 892,096 76,362,826 Royalties 12,733,320 – 5,457,137 – 18,190,457 Officers and employees 2,797,375 – 1,198,875 338,381 4,334,631 Long-term receivables – – – – – Others – 10,114,809 5,091,498 1,845,716 17,052,023

P=211,938,821 P=10,114,809 P=34,388,729 P=3,076,193 P=259,518,552

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2007 Neither Past Due Nor Impaired

High Grade Standard

Grade Past due but not impaired

Impaired Total Cash in banks P=107,033,462 P=– P=– P=– P=107,033,462 Receivables

Trade 36,597,670 – 25,868,721 493,985 62,960,376 Royalties 9,483,096 – 1,748,096 – 11,231,192 Officers and employees 2,547,215 – 1,062,092 212,858 3,822,165 Long-term receivables 1,436,602 – – – 1,436,602 Others – 10,900,996 8,900,649 2,762,584 22,564,229

Total credit risk exposure 157,098,045 P=10,900,996 P=37,579,558 P=3,469,427 P=209,048,026 Accordingly, the Group has assessed the credit quality of the following financial assets: • Cash with banks are deposited in reputable banks duly approved by the BOD, which have a

low probability of insolvency. • Trade and royalty receivables assessed as high grade are amounts settled on due date based on

historical experience. • Advances to officers and employees are either collected through salary deduction or secured

by cash bond. • Notes receivables are collected through receipt of postdated checks for the five year monthly

amortization of principal. Past collection experience shows that there were no defaults on the clearance of the postdated checks.

• Other receivables assessed as standard grade are amounts settled several days after due date. • Based on past experience, deposits are applied against rentals. Foreign currency risk The Group’s policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Group believes that its profile of foreign currency exposure on its assets and liabilities is within conservative limits for a financial institution engaged in the type of business in which the Group is engaged. The Group’s exposure to foreign currency exchange risk as of December 31, 2008 pertains to the financial statements of PHII and PHIM which were presented in US$ and Malaysian Ringgit (MYR), respectively. Prior to including it in the consolidation, the balances were first translated using the closing exchange rates with respect to the consolidated balance sheet and the average exchange rates for the years with respect to the consolidated statements of income. The Group has US$ dollar denominated and Malaysian Ringgit denominated receivables from affiliates amounting to US$300,047 and MYR 553,539, respectively, as of December 31, 2007 and nil for 2008. As of December 31, 2007, the exchange rates of the Philippine peso to the US$ is P=41.28 to US$ 1.00, respectively. Exchange rates of the Philippine peso to MYR as of December 31, 2007 are P=12.43 to MYR 1.0, respectively.

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The following table sets forth, for the period indicated, the impact of the range of reasonably possible changes in the US$:P= and MYR:P= exchange rate on the Company’s pre-tax income:

Change in foreign exchange rate

Sensitivity of pretax income

2007 USD +1% P=123,859 -1% (123,859) MYR +0.39% P=26,824 -0.39% (26,824)

The impact on the Group's equity already excludes the impact on transactions affecting the profit and loss.

26. Capital management

The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes as of December 31, 2008 and 2007. The Group monitors capital using the debt to equity ratio, which is total liabilities divided by the total equity. The Company’s policy is to keep the debt to equity ratio at not greater than 2:1. The Group determines total liabilities as the sum of trade and other payables, loans payable, other current liabilities, long-term debt, notes payable, debt component of convertible notes, accrued rentals and mortgage payable. Debt to equity ratios of the Company as of December 31, 2008 and 2007 are as follows:

2008 2007 Trade and other payables P=282,198,897 P=292,129,685 Loans payable 263,999,592 141,000,000 Long-term debt 150,000,000 150,000,000 Debt component of convertible notes 6,328,687 9,720,403 Accrued rentals 15,671,170 15,311,744 Mortgage payable 880,274 2,961,526 Accrued retirement liability 11,311,184 9,326,600 Income tax payable 2,612,994 1,846,498 Total liabilities (a) 733,002,798 622,296,456 Total equity (b) 688,707,587 663,815,771 Debt to equity ratio (a/b) 1.06:1 0.94:1

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*SGVMC401862*

27. Financial Instruments Fair Value Information and Categories of Financial Instruments The carrying values and fair values of the Company’s financial assets and liabilities as of December 31, 2008 and 2007 are as follows: Carrying Value Fair Value 2008 2007 2008 2007 Financial Assets: Loans and receivables Cash and cash equivalents P=147,223,451 P=113,589,597 P=147,223,451 P=113,589,597 Trade and other receivables - net 112,413,952 97,826,835 112,413,952 97,826,835 Long-term receivables – 718,302 – 718,302 P=259,637,403 P=212,134,734 P=259,637,403 P=212,134,734 Financial Liabilities: Other financial liabilities Trade and other payables P=282,198,897 P=292,129,685 P=282,198,897 P=292,129,685 Loans payable 263,999,592 141,000,000 263,999,592 141,000,000 Long-term debt 150,000,000 150,000,000 150,000,000 150,000,000 Debt component of convertible notes 6,328,687 9,720,403 6,328,687 9,720,403 P=702,527,176 P=592,850,088 P=702,527,176 P=592,850,088

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value: Cash The carrying amount of cash approximates the fair value due to the short-term maturity of these financial instruments. Trade and Other Receivables, Advances to Related Parties, Trade and Other Payables, Advances from Stockholders and Other Current Liabilities The historical costs of trade and other receivables, advances to related parties, trade and other payables, advances from stockholders and other current liabilities, which are all subject to normal trade credit terms, approximate their fair values. Loans Payable and Mortgage Payable The carrying values of the fixed rate-interest bearing loans payable approximate fair value due to their short-term nature. Long-term Debt, Notes Payable and Debt Component of Convertible Notes The fair values of the fixed rate interest bearing notes payable and debt component of convertible notes are based on the discounted value of future cash flows using the applicable rates ranging from 6.2% to 7.7%.

28. Segment Information

As mentioned in Notes 2 and 3, the Company and its subsidiaries are primarily engaged in the business of catering of food and establishing, operating, and maintaining restaurants, coffee shops, refreshments parlors and cocktail lounges. Accordingly the Group operates mainly in one reportable business segment which is the food segment and one reportable geographical segment which is the Philippines.

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*SGVMC401862*

INDEPENDENT AUDITORS’ REPORT ON SUPPLEMENTARY SCHEDULES The Stockholders and the Board of Directors Pancake House, Inc. Pancake House Center 2259 Pasong Tamo Extension Makati City We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of Pancake House, Inc. and Subsidiaries included in this Form 17-A and have issued our report thereon dated March 30, 2009. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Supplementary Schedules are the responsibility of the parent company’s management. These schedules are presented for purposes of complying with Securities Regulation Code Rule 68.1 and SEC Memorandum Circular No. 11, Series of 2008 and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respect the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. SYCIP GORRES VELAYO & CO. Jaime F. del Rosario Partner CPA Certificate No. 56915 SEC Accreditation No. 0076-AR-1 Tax Identification No. 102-096-009 PTR No. 1566422, January 5, 2009, Makati City March 30, 2009

SyCip Gorres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

A member firm of Ernst & Young Global Limited

http://www.sgv.com.ph

PANCAKE HOUSE, INC.Schedule BAmounts Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Affiliates)For the Year Ended December 31, 2008

Name and Designation of Debtor

BeginningBalance Additions

AmountCollected

AmountWritten-off Current

Non-Current

Ending Balance

Various employees - cash advances forbusiness expenses subject to liquidation 3,822,165 3,889,005 (3,026,509) 3,889,005 795,656 4,684,661

3,822,165 3,889,005 (3,026,509) - 3,889,005 795,656 4,684,661

Deductions

P A N C A K E H O U S E , I N C .S C H E D U L E GIntangible Assets - Other AssetsFor the Year Ended December 31,2008

Charged to Costs and Expenses

Charged to Other Accounts

Pancake House, Inc.Trademark 68,184,641 1,681,143 (6,355,746) 63,510,038 Recipes and Other Intangibles 9,143,596 9,143,596 Goodwill (on acquisition of DFSI) 27,514,744 27,514,744 Goodwill (merger with DFSI) - (5,575,000) (5,575,000) Goodwill (acquisition of BFI) 16,059,804 16,059,804

- - Dencio's Foods Special ists, Inc. - -

Trademark 91,801,667 91,801,667 Goodwill 20,614,033 20,614,033 Goodwill (on acquisition of GBGI) 10,844,822 10,844,822

- - Teriyaki Boy Group, Inc. - -

Trademark 244,762,500 (13,725,000) 231,037,500 -

Pancake House International, Inc. - - Trademark 56,297,847 (2,580,318) 53,717,529

472,866,003 74,038,794 (28,236,064) - - 518,668,734

Description

Deductions Other Changes- Additions

(Deductions)

Ending Ba lance

Beginning Ba lance

Additions

PANCAKE HOUSE, INC.SCHEDULE HLONG TERM DEBTFor the Year Ended December 31, 2008

Name of Issuer andType of Obligation

Amount Authorized

By IndentureAmount Shown

as CurrentAmount Shownas Long-term Remarks

UCPB Savings Bank- Car Financing Loan 789,598 90,676

Aureos Southeast Asia Managers, Limit& Planters Venture Capital Corp.- Debt component of convertible Notes 6,328,687

PANCAKE HOUSE, INC.SCHEDULE KCapital StockFor the Year Ended December 31,2008

AffiliatesDirectors,

Officers, and Employees

Others

Common Stock 400,000,000 192,636,364 138,518,289 13,357,005 40,761,070

Number of Shares Held By

Title of Issue Authorized Shares

Issued and Outstanding

Shares

Shares Reserved for Options, Warrants, Conversions, and Other

Rights

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