Foodrich Philippines Inc.

(FPI)

Atty. Lemuel Esmero, Chairman then President, sat down with his management team, which
includes Mr. Lorenzo Nayve, new President, to review the current situation and map our their strategies.
Esmero felt that he is already too old to manage and worried about of the company the remaining years
to realize the vision of FPI; hence, he personally recruited Nayve to lead the Foodrich Philippines Inc.
because of his hands-on experience about the needs and wants of the market. Nayve was the Chief
Officer of Fidisco Biscuits and turned the company from near bankruptcy into one of the most profitable
companies in the Philippines.

Nayve found the opportunity attractive for a number of reasons.

First, with an improving economy, Filipinos have more money to buy the food they want and
where they get them, if offered with more choices. The increasing level of disposable income and
changing lifestyles of most Filipinos have been the main reason for their steady integration of dinning
out way of life. As reported in the papers, food is the Filipino family’s main expense comprising of
50.45% and 54.56% of the total family expenditures in 2003 and 2006, respectively.

Second, the new market segment – higher number of sickly people due to high intake of sugar
and cholesterol – means that there is a substantial market for health conscious individuals. This segment
has not yet been tapped to any considerable degree.

Third, Esmero is willing to extend capital outlay even reaching the point of selling some of his
prime properties located in Cebu, Baguio, Tagaytay, Bukidnon and Davao.\

Fourth, the consolidated net sales when compared to last year hit P2.5 billion, representing a
growth of almost 48 percent. The strong sales growth could be attributed to upsurge orders from Japan,
Thailand and South Korea. Net profit margin for 2006 stood at 5.5 percent, a little higher than the
previous year’s level of 5.2 percent. However, felt that there are still more works to be done and he
wondered how to deal with Esmero’s desire to realize value so soon.

The FPI was organized in 1997 and is the umbrella organization of seafood supplier and
restaurant. It intends to branch out to pig raising business. Its vision is to be the principal food provider in
Asia in the next 30 years.

Seafood Supplier

Searich Fishing Corp (SFC) is one of the companies owned by FPI that provides ready-to-cook
Tuna, Blue Marlin, Crabs, Lobsters, Shrimps and other seafood. The company is successfully supplying
seafoods in most restaurant in Metro Manila. As such, international expansion began in 2005, realizing
the greater demand in Japan, Thailand and South Korea for the seafoods.

Reeling off from the seafood glut in 2001, it seemed like the company and the rest of the
industry was on its way out of the doldrums. Measures initiated in the last quarter of 2000 to mitigate
the effects of the glut on higher ingredients cost were taken by the company, which included cutbacks in
production, downsizing of personnel, and sale of non-performing assets.

During the first six months of 2001, with supply and demand almost in equilibrium, seafood
prices began to improve. Profitability was further boosted by lower direct costs and restored efficiency in
operations. By the end of the 1st semester of 2007, SFC was able to realize a net profit of P500 million,
from the year-go deficit of P100 million.

Restaurant Business

The first Tita Maris Seafood (TMS) restaurant opened in September 2002 along Roxas Boulevard
in Malate, Manila. Its tag line: “Fresh from the Sea.” The company’s mottos are: 1) Treat our guests the
way we want to be treated, and 2) Guests are the most important persons in our business.

The company enjoys a favorable market position because of its reliance on old established
customers. Some customers are being contacted thru phone and pick-up their orders with their own
transport. Hence, less sales force is necessary and TMS is afforded a cost advantage. More outlets were
opened in the 2004 at various strategic places such as Dampa in Macapagal Hi-way and Sucat, Paranaque
; and Tiendesitas in Ortigas, Mandaluyong.

In 2005, the restaurant’s sales reached P950 million. Louie Rigayen, VP Marketing of said
restaurant reasoned out that they were able to capitalize on the opportunities created by population
growth coupled with increased mobility. TMS now holds the top 10 spot in the seafood restaurant
industry. However, the TMS’s 2006 performance reports show a marked variance between the forecasted
sales and the actual sales of the month. Poor sales forecasting can lead to lost sales due to being out of
stock, overly large inventories and costly price markdowns. Stock outs of the most saleable items results
in permanent loss of sales. Poor inventory control and sales forecasting systems disappoint customer
expectations with regards to delivery and service and risk the cost of locking up in merchandise, which
might spoil, become obsolete or otherwise deteriorate.

Acquisition of Betarich Piggery Farm

As fruition to the vision, Esmero is contemplating of acquiring the Betarich piggery farm of
Cecille Capul through equity swap. Cecille offered her company because she lost her self-esteem in
managing the business after the production of pig meat in 2002 to 2004 significantly decreased due to
foot and mouth disease, high production cost and calamities. Further, the buyer dictated prices of
market hogs especially if there was an oversupply.

For Esmero, the pig raising is generally promising in the Philippines since it registered almost 10
million of pig population as of 2006. He intends to sell live pigs and fresh pork in wholesale and retail
bases. Discounts shall be offered to attract and encourage customers to patronize the products. Esmero
believes that the returns of pig production will come very quickly as it does not require expensive
housing, equipment and labor requirements as compared to dairy and poultry production. The
acquisition would cushion a possible market decline for seafood products.

During their planning, the following items were noted:

 Changes in Market Conditions

o Market size. Philippine population posted a growth rate of 14% from 2000 to 2007. In
the face of this reality, FPI has not expanded its product lines and has not changed its
distribution policy to cash in on the opportunities presented by an expanding market.
o Entry of competition. Due to its favorable market position, the entry of new players
might not present immediate threat to FPI. However, the market leader in seafood
industry is nor selling to more than 15 countries worldwide, almost 5 times bigger than
FPI. Market intelligence revealed that a competitor has been proactive in searching for
new markets in Asia, Europe, and Middle East. This has helped them expand their
marketing reach and eventually higher sales.
o Rising prices of goods would increase the cost of production and logistics affecting the
company’s profits and tighten cash flows because of the need to purchase store
equipment. Construction materials for the outlets and transportation vehicle.
o Rising costs of real estate and property development could hamper the expansion.
Apparently, the lease payments for some branches will go up thus, increasing the
operational expenses.

 Despite 10 years of food business operations, its main product line has remained the same and
chose to limit its advertisement in radios and through flyers.

 Nayve pondered the importance and heavy reliance of cash sales transactions in food businesses
since this is the life-blood of its existence. He thought that the FPI is not properly monitoring the
cash flow, which may lead to inefficient cash flow management, and eventually bankruptcy. The
cash of TMS is at times being used in the purchase of seafood products to supply in other
seafood restaurants in Metro Manila and Cebu.

 For Nayve, the most challenging assignment is reshaping the culture of FPI. Employees are
neither highly motivated nor well-rewarded taking into consideration the following aspects:

o Management style is highly informal that old employees feel superior over the new
ones.
o Lack of effective communication system because most of the concerns are being raised
directly to the President without observing protocol.
 o Performance evaluation system for all the companies is ineffective since targets/tasks,
quotas, procedures, and process are not alike.
o Rewards and recognition system are not in place.

Esmero was explaining his organization arrangements to the new management team of Nayve
(organization chart is shown in the attachment). When asked by Nayve whether he thought he
had too many people reporting to him, Esmero replied:

“I do not believe in the tradition principle of span of control that managers should have
only four or five people reporting to them. This results in waste and red tape. Because all my
subordinated are good people and know what they are doing, all can reach me readily with their
problems. All feel close to the top because they are close to the top. I treat them like my family
members resulting in a sense of belonging especially to the employees who have rendered long
years of service. Moreover, I want to know firsthand how every person is doing and detect any
weakness or errors as soon as possible. Furthermore, if a store manager at Tita Maris can have
30 to 35 persons reporting to him, I ought to be able to handle 24. In addition, too few reporting
to a manager doesn’t give him enough to do, and I assume that you hired me to give the
company my full time.”

Financial Resources

To catch up with the competition, the FPI need at least P10 billion to finance the
acquisition of Betarich Piggery and business expansion for seafood products in Asia. Angat and
Lumpia Shanghai Banks are willing to extend loan facilities only up to the extent of the referred
collaterals. However, 60% valuation of the personal properties by San Jose Appraisers on June
30, 2007 of P4.2B is not enough.

Type of Assets Appraised Value (in millions) 60% Loan Value (in millions)
Land 3,500.00 2,100.00
Buildings 900.00 540.00
Other Land Improvements 600.00 360.00
Machinery & Equipment 2,000.00 1,200.00
Total 7,000.00 4,200.00

Future Outlook
 There is a consensus among industry players that 2010 will be difficult for business due to
political and economic instability. It is anticipated that high raw material prices and tight financial and
supplier’s credit will continue to put pressure on supply, while consumer behavior will reflect the
reduced buying power of the middle and lower classes.

Thrusts towards further liberalization and stiffer competition push food businesses to adopt
latest technological advancements creating new products and services. With more information made
available to the public, clients have become sophisticated and discerning in the way they spend their
money.

Reports said that by 2030 if unable to seriously address the situation and sedimentation of the
water ecosystem due to deforestation, mining and other human activities, the country’s fishery resource
will be depleted. Besides bringing in poisonous and toxic substances into the water. Silts and sediments
will lead to the shallowing of the riverbeds killing phytoplanktons and other aquatic organisms, which
are responsible for photosynthetic activities. Photosynthesis, aside from making up the food chain
process, supplies the oxygen requirement of fish as well as the rest of living organisms in the ecosystem.

It is also reported that by 2070 the world shall face food and water crisis due to global warming.
This is already happening from the unusual chunks of melting ice caps and rising ocean levels. Farmers
near the equator will likely suffer from falling crop yields and also declining marine products even with
minimal rise of temperature.

A confluence of these factors, together with problems brought about by several typhoons, rising
oil products due to the war in Iraq and Lebanon will underscore survival as the primary goal of most
companies in the food business.