Republic of the Philippines COMMISSION ON AUDIT

Commonwealth Ave., Quezon City

ANNUAL AUDIT REPORT

on the

NORTHERN FOODS CORPORATION Sarrat, Ilocos Norte

For the Fiscal Year Ended May 31, 2015

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EXECUTIVE SUMMARY A. INTRODUCTION Northern Foods Corporation (NFC) was originally a private corporation registered with the Securities and Exchange Commission on March 16, 1984 under SEC Registration No. 119668. NFC became a subsidiary of Livelihood Corporation (LIVECOR), in view of the capital infused by LIVECOR unto NFC in the amount of Php83.528 between April 1984 and January 1985 which was treated as subscription to preferred stocks. Moreover, in 1986, the private stockholders of NFC turned-over the ownership of their common shares of stock to LIVECOR. By virtue of Executive Order (E.O.) No. 233 dated April 26, 2000, LIVECOR and all its subsidiaries, to include NFC, were attached, for supervision, control and policy/program coordination, to the Department of Agriculture. In late part of 2007, however, LIVECOR and National Livelihood Support Fund (NLSF) were merged into a body corporate known as “LIVECOR,” by virtue of E.O. No. 681 dated November 22, 2007. Such E.O. was further amended by E.O. No. 681-A dated February 1, 2008 to state the name of the merged NLSF and LIVECOR as the “National Livelihood Development Corporation (NLDC)”. With this development, NLDC is now attached for supervision to the Land Bank of the Philippines, therefore being the mother company of NFC, it follows that NFC is now under the supervision of LBP. The audit was conducted on a test basis covering the accounts and operations of NFC for the fiscal year 2015. The examination includes the review of operating procedures, interview with concerned officials and employees, verification/confirmation, reconciliation and analysis of accounts, and such other procedures considered necessary. The audit also aimed to: (a) verify the level of assurance that may be placed on management assertions on the financial statements; (b) recommend agency improvement opportunities; and (c) determine extent of implementation of prior years’ audit recommendations. B. OPERATIONAL HIGHLIGHTS The agency derives its income mainly from sale of tomato paste. In addition, NFC sells tomato seeds at a higher price to farmers who are not contract growers. Moreover, sale of unrefurbishable drums and pallets are also sources of income too.

Hereunder are the plans and targets vis-à-vis accomplishments of NFC for the Fiscal Year 2015, which were validated by the Audit Team:

Accomplishment Activities

Performance Indicator

Target Quantity %

1. Land Campaign Production Area 730 hectares 704 96%

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Accomplishment Activities

Performance Indicator

Target Quantity %

2. Fruit Production Fruit Volume 26,280 tons 25,804 98% 3.Tomato Paste

Production Tomato Paste Volume

4,000 tons 3,830 96%

4. Sales Volume 3,944 tons 4,077 103% C. FINANCIAL HIGHLIGHTS The agency’s assets, liabilities and capital deficiency as of May 31, 2015 were Php251,388,404.46, Php754,509,385.11, and Php503,120,980.65, respectively showing a tremendous decrease in all aspects . Comparison of Financial Position is summarized in the table below:

Particulars 2015

(In Peso) 2014

(In Peso) Increase

(Decrease) Assets 251,388,404.46 254,603,276.94 (3,214,872.48)Liabilities/Deferred Credits 754,509,385.11 1,103,015,993.05 (348,506,607.94)Equity(Capital Deficiency) (503,120,980.65) (848,412,716.11) (351,721,480.42)

NFC is funded from the following sources for FY 2015 with comparative figures for FY 2014. The total gross income showed an increase by Php23,764,416.44.

Income/Sources of Funds 2015

(In Peso) 2014

(In Peso) Increase

(Decrease)

Sales, net of Sales Returns 201,278,098.69

177,782,838.50 23,495,260.19Interest Income 65,492.74 21,382.90 44,109.84Miscellaneous Income 1,064,756.94 839,710.53 225,046.41

TOTAL 202,408,348.37 178,643,931.93 23,764,416.44 Similarly, following the trend of income, however, total expenses for FY 2015 likewise increased by Php1,746,314.73. A comparative figure of expenses for FY 2014 is shown below:

Expense Classification 2015

(In Peso) 2014

(In Peso) Increase

(Decrease) Personal Services 12,469,567.95 12,194,502.28 275,065.67

Operating 11,226,272.59 10,922,801.99 303,470.60 Selling 1,243,295.36 1,271,700.29 (28,404.93)

MOOE 15,941,332.26 14,821,098.58 1,120,233.68 Operating 9,957,326.50 9,261,458.45 695,868.05 Selling 5,984,005.76 5,559,640.13 424,365.63

Non-Financial Expenses 251,991.56 199,434.99 52,556.57Financial Expenses 38,389,513.71 38,091,054.90 298,458.81TOTAL EXPENSES 67,052,405.48 (65,306,090.75) 1,746,314.73

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For FY 2015 the agency appropriated and utilized the following amounts for each expenditure class. A comparison also of FY 2014 appropriation and utilization is presented below:

Personal Services

MOOE

Capital Expenditures

Financing Charges

Corporate Operating

Budget ( I n t h o u s a n d P e s o s ) 2015

Budget 28,253 190,810 18,959 0.00Utilization 23,617 182,593 11,755 0.00Disbursement 23,617 182,593 11,755 0.00Variance 4,635 8,217 7,204 0.00

2014 Budget 25,701 178,145 7,008 3,191Utilization 24,535 170,192 3,244 3,190Disbursement 24,535 170,192 3,244 3,190Variance 1,166 7,953 3,764 1

D. INDEPENDENT AUDITOR’S REPORT The Auditor rendered a qualified audit opinion on the fairness of presentation of financial statements because Management classified the Loans Receivable from 1996 until part of 2010 with an aggregate sum of Php5.6 Million as non-current assets. Consequently, Impairment Loss on Loans Receivable account was not recognized in books contrary to PAS 39 par. 58.

In addition to the above-cited reason, other grounds for rendering a qualified opinion are stated in the Independent Auditor’s Report. E. SUMMARY OF SIGNIFICANT OBSERVATIONS & RECOMMENDATIONS

1. For the above-mentioned audit observation on Loans Receivable, we recommended

management to: a) Require the Accountant to consider the proposed adjusting journal entries for fair

presentation of the Loans Receivable in the Financial Statements; and b) Assess whether there are existing evidence that the loans receivable from farmers

for the period 1986 to 2012 could no longer be collected and thereafter. In the presence of the foregoing, management should determine the amount of any impairment loss, and then direct the Accountant to recognize in the books such loss by debiting the account Impairment Loss on Loans Receivable and credit to Current Assets-Loans Receivable.

Aside from the aforecited observation, hereunder are some of the significant audit observations and recommendations:

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2. The Other Supplies Inventory account with an aggregate sum of Php43,518,404.78 as

of May 31, 2015 as recorded in the books did not tally with the balances obtained in audit of Php16,390,864.37 or a difference of Php24,430,024.83, casting doubt on management assertions on completeness of accounts balance.

We have recommended management to:

a) Reconcile the book balance of Other Supplies Inventory accounts with that of the

Inventory Report and prepare the necessary adjustments in the books of the agency, where appropriate;

b) Require the Property Supply Officer to prepare the necessary Inventory and Inspection Report of Obsolete Inventories relative to the various obsolete stickers and to drop the same in the Inventory Report. On the basis of such report, direct the Accountant to make the necessary adjustments in the books of the agency to that effect; and

c) Conduct an onsite inventory of drums and pallets with the customers in order to establish the correct valuation of drums inventory in the books.

3. Cost of sales is understated by Php1,888,267.66 as at year-end due to inconsistency in

the application of Allowance Method of accounting for inventory writedown to net realizable value, thereby affecting the fair presentation of the financial statements. We have recommended management to: a) Direct the Accountant to prepare the necessary adjusting journal entry to correct

the balances of inventory losses and other related accounts at year-end financial statements; and

b) Strictly comply with the policy on Allowance Method of accounting for inventory writedown to net realizable value and apply the same consistently throughout the accounting period.

4. Miscellaneous Income account was overstated by Php309,769.50 due to outright

recognition of the sale of unrefurbishable drums/pallets contrary to Phil. Accounting Standards (PAS) No.18, thereby overstating the Other Supplies Expense account by Php2,191,316.36. Consequently, the difference between the cash received and book value of inventories of Php1,881,546.86 was not recognized as Loss on Sale of Inventories.

We recommended management to direct the Accountant to prepare the necessary adjusting journal entry to correct the affected account balances as of year-end financial statements.

5. Cash and Cash Equivalents were incorrectly presented in the financial statements due

to the following:

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a) Unreleased checks of Php100,290.19 as of Balance Sheet date were not reverted to Cash in Bank account contrary to Manual on New Government Accounting System, thereby understating said account by the same amount;

b) 10 checks issued in 2011 until late 2014 with an aggregate sum of Php15,696.37 were still included in the list of outstanding checks as of May 31, 2015 when these are considered stale checks and should have been cancelled pursuant to the Manual on New Government Accounting System, thereby understating the Cash in Bank account by the same amount; and

c) Management assertion on transactions cut-off was not observed in recording the various expenses incurred as of May 31, 2015 under the Petty Cash Fund resulting in overstatement of said fund by Php18,332.11 and equally understating the related expense accounts by the same amount.

Viewed from the foregoing observations, we have recommended management to:

a) Require the Accountant to revert to Cash in Bank all unreleased checks as of year-

end Balance Sheet date so as to restore the cash balance and to revert the same at the beginning of the ensuing year;

b) Direct the Accountant to prepare Journal Entry Voucher to cancel the noted stale checks and to strictly comply with the provisions of NGAS relative to the cancellation of stale checks; and

c) Instruct further the Accountant to prepare the necessary adjusting journal entry to recognize the related expenses chargeable against Petty Cash Fund in order to present the actual value of such fund in the year-end financial statements consistent with management assertion that transactions have been recorded in the correct accounting period.

6. Machinery and Laboratory Equipment without cost, which were received by NFC

sometime in June 2003 and August 2004, remained unrecorded in the books of the agency due to absence of duly signed Contract of Loan Commodatum. Likewise, the bulk of this equipment is already unserviceable and management could not dispose the same due to question of ownership. We have recommended management to: a. Secure from the National Livelihood Development Corporation (NLDC)

(formerly Livecor) a copy of the perfected Contract of Loan Commodatum in 2003;

b. Negotiate with NLDC management through the Board of Directors, for the NFC to dispose thru public auction those subject unserviceable properties and to come up with an agreement as to the disposition of proceeds from sale of such properties, in the event the consummated Contract of Loan Commodatum is no longer available;

c. Require the Accountant to record in the books the subject property in accordance with the terms and conditions stipulated in the contract, in the event that Management will be able to secure the signed Contract of Loan Commodatum;

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d. Direct the Property Officer to prepare an Inventory and Inspection Report of Unserviceable Properties once authority from NLDC or the duly signed contract becomes available and submit the same to COA for appraisal; and

e. Dispose the subject property, if it warrants.

F. Total Suspensions, Disallowances and Charges

The agency’s disbursements were audited using the Test Audit Months Sampling Scheme. As of May 31, 2015, the status of audit suspensions, disallowances and charges issued is as follows:

Audit Action Beginning Balance

June 1, 2014 Issued

Settled / Matured into Disallowance

Ending Balance

May 31, 2015 Notice of Suspension 0.00 0.00 0.00Notice of Disallowance 2,407,285.33 42,500.00 0.00 2,449,785.33Notice of Charge 0.00 0.00 0.00 0.00

TOTAL 2,407,285.33 42,500.00 0.00 2,449,785.33

Management filed an Appeal Memorandum at COA RO 1 on July 2, 2013 docketed as RO 1 Case No. 2013-056 relative to the disallowed Mid-Year Economic Assistance for the months of May and July and Year-End Financial Assistance for the month of December, all for the year 2011, amounting to Php948,138.33 and Php1,408,667.00, respectively or a total of Php2,356,805.33. In addition, management filed another Appeal Memorandum at COA RO I on December 19, 2014 docketed as RO 1 Case No. 2014-102. The subject of appeal pertains to the payment of Acceptance Fee/Retainer for the Legal Services of Atty. Rosario S. Nicanor amounting to Php42,500.00 Details of the Notices of Disallowance are presented under Part II of this report. G. STATUS OF PRIOR YEARS’ UNIMPLEMENTED AUDIT

RECOMMENDATIONS

Out of the 20 audit recommendations contained in prior years’ (4 in 2014; 2 in 2013; 4 in 2012; 6 in 2011; 2 in 2010 and 2 in 2009) Annual Audit Reports, three were fully implemented, 13 were partially implemented, and the remaining 4 are still subject for implementation as detailed under Part III of this report.

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Republic of the Philippines COMMISSION ON AUDIT Commonwealth Ave., Quezon City

INDEPENDENT AUDITOR’S REPORT TheBoard of Directors NORTHERN FOODS CORPORATION Brgy. 1 San Joaquin, Sarrat, Ilocos Norte Report on the Financial Statements We have audited the accompanying financial statements of Northern Foods Corporation (NFC), which comprise the statement of financial position as at May31, 2015 and the statement of financial performance, statement of changes in equity and statement of cash flows for the year then ended, 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, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 auditors’ 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 entity’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 entity’s internal control. An audit also includes evaluating the appropriateness of

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accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating 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 qualified audit opinion. Bases for the Qualified Opinion As discussed in Observation No. 1, fair presentation of Loans Receivable in the financial statements is affected due to the following circumstances: a) Loans Receivables dating back in 1996 until part of 2010 with an aggregate sum of

Php5.6 Million are classified as non-current assets contrary to PAS 1 par. 66; b) Current and Non-Current Assets-Loans Receivable per Financial Statements (FS)

amounting to Php6.4 Million and Php5.6 Million, respectively do not tally with the composition per crop year against the Financial Statements;

c) Part of Other Receivables-Others account is the amount of Php215,628.71, which should have been classified under Loans Receivables; and

d) Impairment Loss on Loans Receivable is not recognized contrary to PAS 39 par. 58, thereby overstating the Loans Receivable account by an amount deemed impaired and equally understating the related expense account.

In addition, as mentioned in Observation No. 2, the Other Supplies Inventory account with an aggregate sum of Php43.5 Million as of May 31, 2015 as recorded in the books did not tally with the balances obtained in audit of Php16.4 Million or a difference of Php27.1 Million, casting doubt on management assertions on completeness of accounts balance. Further, Observation No. 3 pointed out that Cost of sales is understated by Php1.9Million as at year-end due to inconsistency in the application of Allowance Method of accounting for inventory writedown to net realizable value. Qualified Opinion In our opinion, except for the effects of the matter described in the Bases for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of Northern Foods Corporation as at May 31, 2015, itsstatement of financial performance and its cash flows for the year then ended in accordance with the state accounting principles.

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Emphasis of Matter The accompanying financial statements have been prepared assuming that the corporation will continue as a going concern. We draw attention to the Statements of Financial Performance, which indicate that NFC incurred a net loss of Php31.6 Million during the fiscal year, ended May 31, 2015 and, as of that date, the agency’s current liabilities already exceeded its total assets by Php503.1 Million, which is also equal to its capitaldeficiency. These conditions indicate the existence of material uncertainty, which may cast significant doubt about the agency’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified in respect of this matter. Report on the Supplementary Information Required Under Revenue Regulation No. 15-2010 Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on taxes, duties and license fees in Note 25the financial statements is presented for purposes of filing with theBureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of management. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. COMMISSION ON AUDIT By: MARIA CRISTINA N. POSERIO Supervising Auditor

September 9, 2015

NORTHERN FOODS CORPORATIONStatement of Financial Position

As of May 31, 2015(With Comparative Figures for CY 2014)

Note 2015 2014

ASSETS

Current Assets Cash and Cash Equivalents 3 4,594,785.42 9,988,044.57 Accounts Receivable 4 17,298,608.97 12,970,458.12 Other Receivables 4 13,339,582.44 18,689,208.40 Inventories 5 177,881,419.47 185,535,448.40 Prepaid Expenses 6 1,241,748.75 1,220,705.28 Other-Current Assets 7 569,746.85 544,746.85 Total Current Assets 214,925,891.90 228,948,611.62

Non-Current Assets Property, Plant and Equipment - Net 8 14,777,089.56 11,038,423.16 Other Receivables 9 13,475,923.80 12,674,400.35 Other Non-Current Assets 9 8,209,499.20 1,941,841.81 Total Non-Current Assets 36,462,512.56 25,654,665.32

251,388,404.46 254,603,276.94

Current Liabilities Payables 10 57,779,997.89 63,675,545.65 Inter-Agency Payables 10 2,269,520.66 1,687,582.45 Other Liabilities 11 694,459,866.56 1,037,652,864.95 Total Current Liabilities 754,509,385.11 1,103,015,993.05

Non-current Liabilities Long Term Liabilities - - Total Non-Current Liabilities - -

Stockholder's Equity Capital Stock: 12 1,017,000.00 1,017,000.00 Deposits on Subscriptions 13 103,528,000.00 103,528,000.00 Retained Earnings (607,665,980.65) (952,957,716.11) Capital Deficiency (503,120,980.65) (848,412,716.11)

251,388,404.46 254,603,276.94

See accompanying Notes to Financial Statements.

LIABILITIES AND STOCKHOLDER'S EQUITY

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NORTHERN FOODS CORPORATIONStatement of Financial PerformanceFor the Twelve -Months Ended May 31, 2015(With Comparative Figures for CY 2014)

Note 2015 2014

Average Selling price 49.37 46.53 Sales Volume (MT) 4,077.24 3,821.05

Gross Sales 201,318,727.34 177,804,804.19 Sales Returns 2 (40,628.65) (21,965.69) Net Sales 201,278,098.69 177,782,838.50

Cost Of Sales (Schedule 1) (164,757,726.27) (144,511,191.31)

Gross Profit 36,520,372.42 33,271,647.19

Operating Expenses (Schedule 2) (21,184,099.09) (20,184,260.44) Selling Expenses (Schedule 3) (7,227,301.12) (6,831,340.42)

8,108,972.21 6,256,046.33

Other Income (Charges) Miscellaneous Income 1,064,756.94 839,710.53 Interest Income 65,492.74 21,382.90 Loss On Sale Of Disposable Assets (391.45) (43,238.22) Cost Of Inventory Losses (2,191,316.36) - Depreciation Expenses (251,991.56) (199,434.99) Financial Expenses (38,389,513.71) (38,091,054.90)

Total (39,702,963.40) (37,472,634.68) NET INCOME (LOSS) (31,593,991.19) (31,216,588.35) See accompanying Notes to Financial Statements.

Earnings Before Interest, Taxes,Depreciation & Amortization (EBITDA)

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NORTHERN FOODS CORPORATIONStatement of Changes in EquityAs of May 31, 2015(With Comparative Figures for CY 2014)

Note 2015 2014Deficit:Balance at Begninning of the Year (952,957,716.11) (927,759,145.30) Correction of fundamental Error 376,885,726.65 1,018,017.54 Net Income (Loss) (31,593,991.19) (31,216,588.35) Income from Grant and Donation 15 - 5,000,000.00 Balance at End of the Year (607,665,980.65) (952,957,716.11)

Preferred Stock 13 17,000.00 17,000.00

Common Stock 13 1,000,000.00 1,000,000.00

Deposit on Subscription 14 103,528,000.00 103,528,000.00

TOTAL (503,120,980.65) (848,412,716.11)

See accompanying Notes to Financial Statements.

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Note 2015 2014Cashflows From Operating ActivitiesCash Inflows:

Collection of Receivables 217,941,602.38 200,161,125.69 Cash Collecting Officer 1,621,843.56 1,516,261.34 Collection of Income (Savings & Current Bank Accounts) 45,547.54 21,382.90 Collection on Inputs Financing 19,807,605.68 18,536,177.04 Sale of Disposable Assets 148,248.50 187,590.50 Receipt of Bid/Performance Bond 597,428.90 812,617.51 Collection of Non Trade-Receivables 581,779.20 906,778.19

Total Cash Inflows 240,744,055.76 222,141,933.17 Cash Outflows:

Tomato Fruit Payment 2014-2015 67,525,232.81 - Tomato Fruit Payment 2013-2014 47,161,943.23 48,147,897.74 Tomato Fruit Payment 2012-2013 35,627,934.80 Input Financing 14,673,181.22 14,274,802.69 Hauling Cost 336,564.67 308,845.01 Field Extension 5,199,717.99 4,875,472.86 Processing Cost 41,055,370.65 38,727,700.18 Administrative & Selling Expenses 27,736,626.11 25,760,961.82 Deferred Expenses 3,412,131.00 3,867,847.78 Return of Performance Bond 740,556.74 756,233.51 Payment of Prior Years Payables 14,604,002.07 16,925,649.24 Remittance of SSS/Pag-ibig/Witholding taxes/VAT 18,923,159.08 25,274,645.59

Total Cash Outflows 241,368,485.57 214,547,991.22 Total Cash Provided / Used by Operating Activities (624,429.81) 7,593,941.95 Cash Flows from Investing Activities Cash Inflows:

Income from Grant and Donation - 5,000,000.00 Total Cash Inflows - 5,000,000.00 Cash Outflows:

IT/ Office Equipment 3,130,221.24 782,418.39 Drums & Pallets 663,863.48 1,715,393.13 Purchase of Plant Machinery Parts and Equipment 974,744.62 482,133.93

Total Cash Outflows 4,768,829.34 2,979,945.45 Total Cash Provided / Used by Investing Activities (4,768,829.34) 2,020,054.55 Cash Flows from Financing Activities:Cash Inflows:Cash Outflows:

Cash Payment of Interest on Loans and other Financial - 890,083.74 Payment of Loan Principal - 4,632,365.11

Total Cash Provided / Used by Financing Activities - (5,522,448.85) (5,393,259.15) 4,091,547.65

Add: Cash and Cash Equivalents-Beginning 9,988,044.57 5,896,496.92 Cash and Cash Equivalents, Ending 3 4,594,785.42 9,988,044.57

See accompanying Notes to Financial Statements.8

NORTHERN FOODS CORPORATIONStatement of CashflowsFor the Twelve Months Ended May 31, 2015(With Comparative Figures for FY 2014)

Cash Provided / Used by Operating, Investing & Financing

Schedule 1

NORTHERN FOODS CORPORATIONCOST OF SALESFor the Twelve -Months Ended May 31, 2015

(With Comparative Figures for CY 2014)

2015 2014

Beginning Inventory P 134,067,131.03 135,259,836.11 Deductions:

Spoiled Tomato Paste On Yard (1,877,159.11) (26,240.66) Cost Of Reprocessed Tomato Paste (674,693.52) (1,355,523.75) Customer Samples & Giveaways (1,505.78) (6,683.94) Total (2,553,358.41) (1,388,448.35)

Beginning Inventory, net 131,513,772.62 133,871,387.76 Add: Production

Raw Materials Fruit Cost 99,014,998.68 94,704,979.24 Hauling Cost 249,617.39 237,472.92 Field Extension Overhead 4,091,808.06 5,706,851.83 Reprocessed Paste 674,693.52 1,355,523.75

Total Raw Materials 104,031,117.65 102,004,827.74 Direct Labor Processing 6,828,213.82 6,680,655.22 Processing Overhead

Packaging Materials 9,858,182.77 7,985,531.34 Bunker 22,225,454.24 22,301,419.87 Electricity 4,639,685.64 4,871,015.64 Genset 100,651.48 1,253.00 Factory Supplies 775,861.46 780,604.39 Repairs & Maintenance 4,939,117.70 4,030,931.51 Others 162,880.30 158,815.61 Total 42,701,833.59 40,129,571.36

Plant Depreciation 2,289,909.07 1,905,333.26 Total Cost to Produce 155,851,074.13 150,720,387.58 Add (Deduct) Growing Crops - - Net Cost to Produce 155,851,074.13 150,720,387.58 Total Goods Available for Sale 287,364,846.75 284,591,775.34

Reversal of Inventory writedown (944,133.81) (6,013,453.00) Less: Ending Inventory (121,662,986.67) (134,067,131.03) Total Cost of Sales P 164,757,726.27 144,511,191.31

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NORTHERN FOODS CORPORATIONOPERATING EXPENSES Schedule 2

For the Twelve -Months Ended May 31, 2015(With Comparative Figures for CY 2014)

EXPENSE DESCRIPTION 2015 2014Salaries And Wages-Regular 6,658,634.07 6,311,917.64 Salaries And Wages-Contractual 380,750.06 731,690.17 Representation Allowance 570,000.00 569,000.00 Transportation Allowance 370,625.00 191,750.00 Clothing Allowance 148,000.00 - Other Bonuses And Allowances-Regular 160,500.00 223,000.00 Longevity Pay 74,930.00 66,346.00 Overtime & Night Pay-Regular 104,642.23 64,395.42 Overtime & Night Pay-Contractual 43,375.94 69,760.05 Cash Gift 164,500.00 150,000.00 Year End Bonus-Regular 561,229.05 533,020.90 Year End Bonus-Contractual 31,329.28 60,941.18 Pag-Ibig Contributions 41,098.74 44,526.01 Philhealth Contributions-Regular 73,387.50 69,600.00 Philhealth Contributions-Contractual 7,575.00 13,950.00 ECC Contributions-Regular 6,660.00 6,230.00 ECC Contributions-Contractual 730.00 1,390.00 SSS Contributions-Regular 342,151.00 307,308.40 SSS Contributions-Contractual 31,013.80 58,374.50 Terminal Leave Benefits 276,376.56 236,607.31 Provident Fund Benefits 797,177.84 786,841.91 Other Personnel Benefits-Regular 378,377.11 418,728.41 Other Personnel Benefits-Contractual 3,209.41 7,424.09 Sub Total - Personal Services 11,226,272.59 10,922,801.99

Travelling Expenses-Local 1,021,102.16 699,503.65 Training Expenses 132,320.25 44,642.05 Office Supplies Expenses 182,644.91 221,731.12 Accountable Form Expenses 31,850.00 80,175.90 Medical,Dental And Laboratory Supplies Expenses 185,258.26 27,040.00 Gasoline,Oil & Lubricants Expenses 663,507.38 19,060.16 Agricultural Supplies Expenses 4,681.40 805,464.53 Other Supplies Expenses 1,000.00 9,974.31 Water Expenses 19,947.99 14,248.42 Electricity Expenses 760,915.93 790,916.25 Communication Expenses 356,304.35 329,381.98 Membership Dues And Contributions To Org. 62,000.00 82,634.00 Advertising Expenses 14,250.00 13,632.15

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EXPENSE DESCRIPTION 2015 2014Rent Expenses 740,268.24 933,388.76 Representation Expenses 749,713.84 443,188.28 Transportation & Delivery Expenses 5,284.80 9,355.95 Subscription Expenses 5,082.00 7,782.00 Legal/Consultancy/Security & Other Services 1,554,670.37 1,186,280.94 Repairs And Maintenance-PPE 592,081.76 353,340.03 Grants And Donations 565,423.29 519,947.10 Miscellaneous Expenses 71,540.94 55,194.19 Taxes,Duties & Licenses 961,147.66 1,321,462.70 Insurance Expenses 939,277.28 891,337.98 Bad Debt Expenses 231,681.49 306,894.10 Other Maintenance And Operating Expenses 105,872.20 94,881.90 Sub Total - MOOE 9,959,841.50 9,263,472.45 Total 21,186,114.09 20,186,274.44

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NORTHERN FOODS CORPORATIONSELLING EXPENSES Schedule 3For the Twelve -Months Ended May 31, 2015(With Comparative Figures for CY 2014)

EXPENSE DESCRIPTION 2015 2014

Salaries And Wages-Regular 785,407.01 782,058.96 Salaries And Wages-Contractual 7,728.00 32,193.45 Other Bonuses And Allowances-Regular 25,000.00 45,000.00 Overtime & Night Pay-Regular 90,826.34 62,241.11 Overtime & Night Pay-Contractual 1,732.50 3,837.04 Cash Gift 25,000.00 25,000.00 Year End Bonus-Regular 67,447.02 71,294.72 Year End Bonus-Contractual 644.00 2,682.79 Pag-Ibig Contributions 6,154.56 6,583.89 Philhealth Contributions-Regular 10,675.00 10,412.50 Philhealth Contributions-Contractual 200.00 612.50 ECC Contributions-Regular 1,320.00 1,120.00 ECC Contributions-Contractual 20.00 60.00 SSS Contributions-Regular 63,758.80 61,319.10 SSS Contributions-Contractual 699.80 2,586.70 Terminal Leave Benefits 27,002.43 26,283.60 Provident Fund Benefits 86,780.63 85,320.22 Other Personnel Benefits-Regular 42,899.27 53,093.71 Sub Total - Personal Services 1,243,295.36 1,271,700.29

Travelling Expense - Local 122,824.10 49,024.96 Office Supplies Expense - 600.00 Gasoline,Oil & Lubricants Expenses 144,665.43 16,570.91 Agricultural Supplies Expenses - 200,304.93 Other Supplies Expenses 8,284.41 378.00 Water Expenses 6,553.03 6,443.14 Electricity Expenses 18,923.94 12,399.98 Advertising Expenses 397.89 20,582.12 Rent Expense 764,880.44 639,130.44 Representation Expenses 26,600.00 9,869.90 Transportation And Delivery Expenses 4,318,507.95 4,209,780.41 Repairs And Maintenance-Office Buildings 819.40 - Repairs And Maintenance-Other Structures 375.00 - Repairs And Maintenance-Motor Vehicles 446,002.38 299,625.83 Repairs And Maintenance-Other Transpo 46,852.68 26,324.45 Repairs And Maintenance-Other PPE 38,055.59 31,386.10 Miscellaneous Expenses 21,679.02 3,995.16 Other Maintenance And Operating Expenses 18,584.50 27,847.80 Contract Labor - 5,376.00 Sub Total - MOOE 5,984,005.76 5,559,640.13 Total 7,227,301.12 6,831,340.42

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NORTHERN FOODS CORPORATION NOTES TO FINANCIAL STATEMENTS

1. Agency Background

Northern Foods Corporation (NFC) was established and registered with the Securities and Exchange Commission on March 16, 1984. NFC is a subsidiary of Livelihood Corporation (LIVECOR), merged with the National Livelihood Support Fund (NLSF), now National Livelihood Development Corporation (NLDC) by virtue of Executive Order No.681 dated November 22, 2007 and Executive Order No. 681A dated February 1, 2008.

NFC was established purposely to process tomato paste and subsequently processes other agri-based products; to produce alternative livelihood to Ilocano farmers; to conduct agricultural research to improve production technology and enhance productivity; and to conduct research on other tomato-based products. It also dreams of a model, profitable, Filipino-owned company engaged in production of quality foods, related to products and services.

As part of continually providing quality products through quality processes, NFC received its Certificate of Registration No. CIP4292/1004/706 from the Certification International Philippines Inc. (CIPI) initially on May 21, 2010 for operating a Quality Management System assessed as conforming to ISO 9001:2008 for the scope of activities “Manufacture of Tomato Paste". This certification is valid for another three (3) years until 20 May 2016, subject to satisfactory results of semi-annual surveillance audits. It is also certified with "HALAL" tomato paste product, having been issued "HALAL Certification" by the Islamic Da'wah Council of the Philippines, Inc. IDCP).

NFC’s has its Metro Manila Office at Mandaluyong City which houses the Executive and Marketing Departments under the leadership of Mr. Felix Jose S. Montes as President and Chief Operating Officer effective October 1, 2011. NFC main office and plant site are located in Brgy. #1 San Joaquin, Sarrat, Ilocos Norte which occupies a lot owned by the Provincial Government of Ilocos Norte. It is supervised by NFC's Vice President for Operations, Mr. Norberto D. Mendoza, with the assistance of four (4) Department Managers. The Agency is complemented by sixty seven (67) regular employees, ten (10) based at Mandaluyong Office while fifty seven (57) work at the plant site. It also employs one hundred twenty one (121) contractuals and three (3) probationary for the Fiscal Year (FY) 2014- 2015 and engages the services of three (3) consultants.

2. Summary of Significant Accounting Policies

The accounting policies applied in the preparation of these Financial Statements are summarized below:

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Basis of preparation The Financial Statements have been prepared in accordance with generally accepted state accounting principles accepted in the Philippines. NFC has adopted since Year 2013 some of the applicable Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. The Financial Statements comprises the Balance Statement, Statement of Income (Loss) and Expenses, Statement of Changes in Equity, Statement of Cashflows and the notes. The Financial Statements are presented in Philippine Pesos, the Company's functional currency and all values represent absolute amounts except when otherwise indicated. PAS 2 - Inventories. This standard prescribes the accounting treatment for inventories. It provides guidance for determining the cost of inventories and subsequently recognizing an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories referred to in this standard include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process),and materials and supplies that are consumed in production (raw materials).

Management is observant of this standard; however, strict compliance is not observed. PAS 16 - Property, Plant and Equipment. This standard prescribes the accounting treatmentfor property, plant and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation to them.

Items of property, plant and equipment should be recognized as assets when it is probable that; there is probable future economic benefits associated with the asset that will flow to the entity; and the cost of the assets can be measured reliably. PAS 18 - Sale of Goods - Sales Revenue from sales of tomato paste is recognized upon delivery, when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be reliably measured. Revenue is measured at fair market value of the consideration received, excluding discounts, returns and output/sales taxes.

a. Accounting System - Partial Implementation of the National Government Accounting System (NGAS) due to the unavailability of equivalent accounts

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in the NGAS Chart of Accounts to completely match with the accounts of the Agency.

b. Accounts Receivable – An allowance for Doubtful Accounts is provided to estimate losses which may be incurred for non-collection of sales accounts. The estimated losses are based on a percentage per specific account identification and the age of the said receivables.

c. Inventory Valuation – Materials and supplies are valued at moving average cost. At year-end, the paste inventory is valued at cost or net realizable value, whichever is lower. During the interim financial reports, however, the pastes produced are valued at standard cost.

d. Amortization and Depreciation – Property, Plant and Equipment (PPE) are depreciated using the straight line method. Since fiscal year 2004, the depreciation is computed by considering the depreciable value (net of 10% residual value) over the estimated useful lives of the assets.

e. Sales Returns Policy - All products returned by customers undergo appropriate inspection and / or analysis, specifically on the tomato paste’s physical, chemical, microbiological and sensorial condition. The Quality Assurance (QA) Department determines the validity of the complaint of customers relative to product returns based on the inspection/analysis made.

3. Cash and Cash Equivalents

This account consists of:

2015 2014 Cash on Hand

Cash Collecting Officer 1,336,919.30 1,516,261.34 Cash Disbursing Officers 8,299.20 Petty Cash Fund 50,000.00 45,000.00

Cash in Bank - Local Currency Depository Bank Land Bank of the Phils.-Laoag Branch 1,462,576.76 811,841.41 Land Bank of the Phils.-Mandaluyong Branch 1,304,958.66 4,930,713.10 United Coconut Planters Bank-Makati Branch 274,301.89 631,817.73 3,041,837.31 6,374,372.24

Cash in Bank-Local Currency, Time Deposit Land Bank of the Phils.-Laoag Branch - -

Trust Fund United Coconut Planters Bank-Laoag Branch 157,729.61 2,052,410.99 3,199,566.92 8,426,783.23 Total 4,594,785.42 9,988,044.57

Petty Cash Fund pertains to the Cash Fund being maintained under the imprest system for non-recurring, emergency and petty cash expenses of the company with amounts of Php15,000.00; Php 30,000.00 and Php5,000 for Sarrat Office,

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Mandaluyong Office and Warehouse at Philippine Economic Zone, Pampanga respectively. Cash in Bank earns interest at the prevailing bank deposit rates. The company maintains various Bank Accounts in Mandaluyong, Makati and in Ilocos Norte for use in regular operations and for special program purposes. Time Deposit pertains to the short term placement made last December 2014 which earns interest at the prevailing bank rates and terminated last April 10 and 24, 2015 for payment of payables. Trust Fund pertains to the separate account of the Five Million Pesos (Php5,000,000.00) fund transferred by the Department of Agriculture-Regional Field Unit No.1 (DA-RFU 1) to NFC to exclusively fund the project "Crop Production Support: Financing of Tomato Growers of Ilocos Norte and Ilocos Sur"and to be used for the same project in subsequent cropping seasons.

4. Accounts Receivable and Other Receivables

This account consists of:

2015 2014 Accounts Receivable Accounts Receivable 22,840,980.39 18,281,148.05 Less: Allowance for Doubtful Accounts (5,542,371.42) (5,310,689.93) Total 17,298,608.97 12,970,458.12 Other Receivables Due from Officers and Employees 1,589.63 3,341.10 Loans Receivable 6,412,288.75 6,412,288.75 Due from NGAs - 5,482,908.62 Other Receivables-COA Disallowances 3,982,935.39 4,022,235.39 Other Receivables-Others 2,942,768.67 2,768,434.54 Total 13,339,582.44 18,689,208.40

Accounts Receivable represents the value of tomato paste sold to customers on account. An Allowance for Doubtful Accounts is provided for uncollectible accounts based on age. Loans Receivable are farm inputs (fertilizers, pesticides and tomato seeds) given to farmers for preparation and maintenance of tomato farms. Other Receivables– COA Disallowances represents the disallowance of the Board of Directors pertaining to compensation, perdiems, RATA andExcom allowances per COA Decision No. 2006-001, dated January 5, 2006 as affirmed by the Supreme Court under GR# 174683 dated December 5, 2006 amounting to Php1,490,150.00.

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It includes other disallowances of NFC Board of Directors pertaining to Discretionary Fund, Fuel and Oil, RATA, Financial Assistance and perdiem with a balance of Php2,492,785.39.

Other Receivables – Others account represents the freight charges to be paid by the customers from Manila to Laguna or outside Luzon area.

5. Inventories

This account consists of:

2015 2014 Merchandise Inventory-Tomato Paste 121,662,986.670 134,067,131.0300 Allowance for Inventory Writedown (259,898.580) (1,204,032.3900) Sub total 121,403,088.090 132,863,098.6400

Merchandise Inventory - Tomato Paste represents value of stocks for production years as follows:

Production Period 2015 2014 Crop 2015 121,400,527.0400 - Crop 2014 10,244.1900 131,679,810.79 Crop 2013 252,215.4400 1,577,717.13 Crop 2012 - 456,501.96 Crop 2011 - 353,101.15

Total 121,662,986.6700 134,067,131.03

An Allowance for Inventory Writedown is provided to represent the net realizable value of inventory tomato paste to conform with Philippine Accounting Standard (PAS) No. 2.

Relative to the Php75M loan from the Agricultural Credit Policy Council (ACPC), NFC assigned 1,361.87 metric tons of tomato paste inventory which are carried as stocks-in-trade in the pursuit of the business or their value and/or such other stocks-in-trade subsequently acquired, as security of the loan under a "Continuing Deed of Assignment of Stocks-in-Trade".

Supplies Inventory 2015 2014 Office Supplies Inventory 58,299.020 63,074.4000 Medical, Dental & Laboratory Supplies 450,696.610 349,811.8200 Gasoline, Oil and Lubricants Inventory 727,091.680 152,162.0600 Agricultural Supplies Inventory 2,357,599.070 1,489,689.0400 Other Supplies Inventory* 43,518,404.780 41,392,354.8100 Spareparts Inventory 3,450,255.700 4,202,322.5000 Construction Materials Inventory 1,839,639.610 1,701,108.2000 Items in Transit 1,360,988.440 - Tomato Seed Production 2,715,356.470 3,321,826.9300 Sub total 56,478,331.380 52,672,349.7600 Total Inventories 177,881,419.470 185,535,448.4000

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*Other Supplies Inventory consists of the following:

2015 2014 Paste Packaging Materials 3,758,589.91 241,420.73 Miscellaneous Supplies 481,005.38 228,160.60 Consumables 48,852.08 56,247.13 Industrial Gases & Paints 71,651.73 78,995.48 Electrical Supplies 1,307,707.29 252,473.05 Drums 31,436,339.42 33,960,488.51 Pallets 6,414,258.97 6,574,569.31 43,518,404.78 41,392,354.81

Spareparts Inventory represents imported parts for use in the repair of the Plant. To date however, a total amount of Php2,075,358.34 is non-moving which mostly came from the remaining spare stocks at the time the Plant was put up in 1984.

6. Prepaid Expenses This account represents office rental, and other expenses paid in advance needed in the processing season.

7. Other Current Assets This account represents Guaranty Deposits for import duties on Letter of Credits imposed on materials and equipment parts purchased abroad; deposits made for equipment installed in the agency like telephone lines, electric connection; and performance bond that are refundable upon termination of contract.

8. Plant, Property and Equipment This account consists of:

2015 2015 2014

Account Acquisition

Cost Net Book

Value Net Book

Value Electrification, Power & Energy Sources 10,696,081.67 20,958.70 20,958.70 Leasehold Improvements 4,108,789.54 15,581.23 17,628.31 Office Buildings 25,992,486.07 1,003,616.98 634,857.18 Office Equipment 772,146.80 179,134.17 212,720.56 Furnitures and Fixtures 12,250.00 1,148.50 1,148.50 IT Equipment 1,198,894.00 300,279.72 200,956.86 Machineries 116,873,358.32 10,441,143.32 9,205,814.75

Communication Equipment 581,723.14 27,849.65 34,520.67 Medical, Dental & Laboratory Equipment 2,207,518.47 129,780.66 125,082.63

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Other Machineries and Equipment 573,273.57 31,139.52 38,371.56 Motor Vehicles 10,749,499.82 2,187,171.53 40,140.31 Other Property, Plant and Equipment 6,995,942.30 439,285.58 506,223.13 Total 180,761,963.70 14,777,089.56 11,038,423.16

9. Non-Current Assets

This account consists of:

2015 2014 a. Other Receivables Loans Receivable 5,627,419.80 4,743,695.76 Other Receivable-Others 3,861,537.24 3,861,537.24 Due from NGAs 3,986,966.76 4,069,167.35 Total 13,475,923.80 12,674,400.35

Loans Receivable account pertains to tomato crop production loans of various farmer groups for land preparation and farm maintenance, cost of fertilizers, pesticides, and tomato seeds which remained outstanding. Other Receivables- Othersconsist of the following:

Names Particulars Amount a. Agriman Consultant, Inc.

Expenses relative to the Management services it provided NFC from May 1984 to July 31, 1987.

2,443,761.69

b. Contract Growers

Cost of fertilizers and pesticides given to farmers during cropping seasons 1986-1989.

215,628.71

c. Various Payees Freight charges from Manila to Laguna or outside Luzon area, cost of drums etc.

1,202,146.84

Total 3,861,537.24 Due From NGAS- This account pertains to Php3,980,246.76 overpayment of 1988 VAT in consideration of tax incentives as a BOI registered corporation. b. Other Non-Current Assets Deferred Charges - represents deferred accounts on the following:

Particulars Amount a) Freight cost of tomato paste which are transferred from Sarrat, Ilocos Norte to ALCWarehouse, Pampanga which are to be charged to customers uponsale/delivery;

125,977.50

b) NFC Privatization cost 265,395.15 c) Minimum Corporate Income Tax (MCIT) is composed of CY 1,511,210.08

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2011-2012 Php381,318.93, CY 2012-2013 Php448,101.10 and CY 2013-2014 Php681,790.05. d) Expanded withholding taxes withheld by customers relative to the sale of tomato paste to be applied as creditable taxes on income tax.

6,306,916.47

Total Deferred Charges 8,209,499.20

10. Payables This account consists of:

2015 2014 Accounts Payable Accounts Payable

31,649,327.04 47,215,585.02

Other Payable and Accrued Expenses Performance/Bidders/Bail Bonds Payable 270,815.55 484,798.09

Other Payables 24,469,727.54 14,592,945.99 Due to Officers and Employees 1,390,127.76 1,382,216.55

Sub-total 26,130,670.85 16,459,960.63 Total 57,779,997.89 63,675,545.65

Accounts Payable represents accounts due to contract growers on tomato fruit purchases and truck rental of haulers for the delivery of tomato paste to ALC Warehouse located in Angeles, Pampanga. Other Payables-Othersrepresents accounts due to suppliers of drum container, pallets, machinery and equipments, fuel and other materials needed in the operations. Due to Officers and Employees represents the salaries, wages, benefits and reimbursements. Inter-Agency Payables

2015 2014 Due to BIR 1,902,731.66 1,311,509.03 Due to SSS 143,341.42 129,013.85 Due to Pag-ibig 2,922.71 26,284.70 Due to Philhealth 33,257.35 33,507.35 Due to Other GOCC's 187,267.52 187,267.52 Total 2,269,520.66 1,687,582.45

Due to BIR represents the amount of tax withheld from suppliers and employees' compensation which is due on the 10th day of the ensuing month and Value Added Tax from sales of tomato paste is due 20th day of the ensuing month and 25th day of the ensuing quarter.

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Due to SSSrepresents the amount of employees' and employer's contributions and loans which is due on the 24th day and 30th day of the ensuing month for Mandaluyong and Sarrat respectively. Due to Pag-ibigalso known as Home Development Mutual Fund (HDMF) represents the amount of employees'and employer’s contributions and loans which is due on 15th day and 24th day of the ensuing month for Sarrat and Mandaluyong respectively. Due to Philhealthrepresents the amount of employees' and employer's contributions which is due on 10th day of the ensuing month. Due to Others GOCC represents the amount payable to LIVECOR now NLDC for the rental of warehouse at Metro Mart Complex from April 2004 to January 2005 and share in janitorial services at Makati office for March 2007 to April 2008.

11. Other Liabilities This account consists of:

Account 2015 2014 Loans Payable - Current : a. National Livelihood Development Corp. 62,781,074.04 172,781,074.04 b. Human Settlements Development Corp 53,523,420.00 53,523,420.00 c. Quedan and Rural Credit Guarantee Corp. 19,888,134.00 19,888,134.00 d. Agricultural Credit Policy Council 72,174,000.04 73,424,000.04 Agricultural Credit Policy Council - 4,659,130.78

Sub-Total 208,366,628.08 324,275,758.86

Accrued Interest - Current a. National Livelihood Development Corp. 61,362,511.44 315,605,523.67 b. Human Settlements Development Corp 235,771,747.70 209,415,000.18 c. Quedan and Rural Credit Guarantee Corp. 178,393,520.62 171,006,029.66 d. Agricultural Credit Policy Council 10,463,266.28 7,883,776.01 Agricultural Credit Policy Council - 9,265,309.35 e. Others 102,192.44 201,467.22

Sub-Total 486,093,238.48 713,377,106.09 Total 694,459,866.56 1,037,652,864.95

The Loans Payable and Accrued Interest Payable-Current in 2011 were restated to include those classified under the Long Term Liabilities account to conform to PAS 1 under the Presentation in the Financial Statements. Details of Loans Payable and Accrued Interest-Current are presented below.

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a. National Livelihood Development Corporation

Date Released

Due Date Interest

Rate

Original Amount of

Loan

Principal Balance

Accrued Interest Payable

09-09-87* 05-31-90 4 % 5,882,103 5,882,102.68 10,105,757.25 09-09-87* 05-31-90 4 % 5,809,414 5,809,413.89 9,980,873.38 09-09-87* 05-31-90 4 % 1,161,883 1,161,882.78 1,996,175.00 09-09-87* 05-31-90 4 % 10,013,128 10,013,127.73 17,203,071.51 09-09-87* 05-31-90 4 % 4,927,227 4,927,227.32 8,465,206.29 02-15-88* 05-31-90 4 % 3,664,806 2,206,245.60 3,790,443.52 02-15-88* 05-31-90 4 % 14,315,623 10,000,000.00 17,401,624.58 Less: Various payments and sale of 3units Motorcycle at Net Book Value to Livecor. (75,806.70)01-25-88* 05-31-90 4 % 20,000,000 20,000,000.00 34,817,116.40 01-16-90* 05-31-90 18 % 15,000,000 15,000,000.00 44,652,359.09 02-27-90* 08-31-90 18 % 15,000,000 15,000,000.00 44,197,859.02 04-18-90* 05-18-90 24 % 4,000,000 4,000,000.00 13,340,049.54 04-25-90* 05-25-90 24 % 6,000,000 6,000,000.00 20,122,846.75 06-15-90* 08-19-90 18 % 5,000,000 5,000,000.00 14,126,067.60 06-20-90* 08-19-90 18 % 5,000,000 5,000,000.00 14,119,369.00 Total 110,000,000.00 254,243,012.23 Adjustment (110,000,000.00) (254,243,012.23) Balance - - 12-18-86** 12-31-96 12% 30,000,000 30,000,000.00 56,037,089.06 From KKK- CRPC & PFI*** 32,781,074 32,781,074.04 5,325,422.38

TOTAL 178,555,257 62,781,074.04 61,362,511.44 *These loans were originally granted by the Livelihood Corporation (LIVECOR), which was recently merged with the National Livelihood Support Fund (NLSF), formerly KKK-NS to create the National Livelihood Development Corporation (NLDC) per EO No. 681 and 681 A dated November 22, 2007. The accrual of interest and penalty of LIVECOR loans granted in September 1987 was already stopped since May 31, 2002. These loans were subsequently adjusted to conform with the confirmation letter received last February 2, 2015 from National Livelihood Development Corporation (NLDC) stating that the loans granted by former Livelihood Corporation (LIVECOR) with principal balance of Php110Million were already closed to LIVECOR Retained Earnings as losses even before the merger of NLSF and Livecor. **The Php30,000,000.00 loan received from the National Livelihood Support Fund (NLSF) was granted on December 18, 1986 and was secured with a mortgage of plant facilities valued at Php42,915,333.00 in favor of the Land Bank of the Phils. The accrual of interest and penalty was already stopped since June 30, 1994.

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***The amount of Php32,781,074.04 is consist of the following:

Php9,107,715.27 loans released by KKK-CRPC (Currimao) for NFC AgriInput advances; and

Php23,673,358.77 was released by the Primary Foods Inc. (PFI) under a bail out arrangement for NFC operations during the 1987-88 season.

Both loans are classified as loans payable to LIVECOR. b. Human Settlements Development Corporation (HSDC)

Date Released

Due Date Interest

Rate Original Amount

of Loan Principal Balance

Accrued Interest Payable

04-24-03 06-30-04 12% 46,000,000.00 21,979,873.85 156,459,181.67 07-31-02* 08-01-03 0 20,360,000.00 20,360,000.00 - 05-51-03 ** 11-12-04 12% 21,139,360.59 11,183,546.15 79,312,566.03

TOTAL 87,499,360.59 53,523,420.00 235,771,747.70

*The amount of Php20.36M from HSDC/SIDCOR represents additional deposit on subscription made on July 31, 2002, with consideration that NFC shall complete the process for the increase in its capital stock within a period of one (1) year from receipt of the aforementioned deposit, with the provision that if for any reason such increase is not completed within said one (1) year, this deposit on subscription shall be converted into non-interest bearing loan and the terms and conditions of which shall be then mutually determined and agreed upon by NFC and HSDC. **This was originally a loan from Quedancor and transferred in 2003 to HSDC on a loan take-out scheme.

c. Quedan and Rural Credit Guarantee Corp. Date

Released Due Date

Interest Rate

Original Amount of Loan

Accrued Interest Payable

08-13-87 12-31-96 12 % 8,500,000.00 69,728,915.81 08-13-87 12-31-90 14 % 5,500,000.00 53,197,575.52 08-13-87 12-31-90 14 % 5,888,134.00 55,467,029.29 Sub Total 19,888,134.00 178,393,520.62

Above-mentioned loans were originally obtained from the Phil. Commercial and Industrial Bank (PCIB) and the Ministry of Agriculture and Foods (MAF). In 1987, said loan was restructured with the following terms:

a) 8.5 M payable in ten (10) years at 12 % annually b) 5.5 M payable in five (5) years at 14 % annually c) 5.8 M payable to be paid December 31, 1990 at 14 % annually

No payments have been made since the loan was granted. The accrual of interest and penalties for the above loan was stopped since December 31, 1994.

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d. Agricultural Credit Policy Council

Date Released Due Date Interest

Rate Original Amt.

of Loan Principal Balance

Accrued Interest Payable

11-10 to 17-08 17-Nov-11 4% 40,000,000 12,000,000.000 1,392,022.08 02-11 to 27-09 26-Feb-12 4% 23,000,000 7,667,000.040 863,305.63 04-01 to 07-09 7-Apr-12 4% 12,000,000 6,000,000.000 712,386.02

Sub-Total 75,000,000 25,667,000.040 2,967,713.73 Re-availment 06-18 to 22-09 18-Jun-12 4% 8,750,000 4,375,000.000 536,693.24 08-01-09 1-Aug-12 4% 3,833,000 1,916,500.000 235,523.02 05-13 to 20-10 20-May-13 4% 15,500,000 12,916,666.670 1,851,054.69 09-28-10* 14-Oct-13 4% 12,860,000 11,498,833.330 1,637,902.31 11-19-10* 7-Dec-13 4% 6,600,000 6,600,000.000 1,357,651.14 12-23-10* 23-Dec-13 4% 4,200,000 4,200,000.000 859,415.52 03-23-11 24-Mar-14 4% 5,000,000 5,000,000.000 1,017,312.63

Sub-Total 56,743,000 46,507,000.000 7,495,552.55 Total 131,743,000 72,174,000.040 10,463,266.28

d .1. Agricultural Credit Policy Council QUEDANCOR Transferred this balance to ACPC per letter dated November 9, 2009 signed by Mr. Federico Espiritu. JV 01-65-2010 4,659,130.78 9,803,405.55 The loan was adjusted to conform with the confirmation letter received last February 10, 2015 from Agricultural Credit Policy Council (ACPC) stating that the loans with QuedanCor under the Working Capital Line (WCL) loan has been fully paid. (4,659,130.78) (9,803,405.55)Total - -

*The principal balance of these loans includes the current portion of Long-Term Liability, which is due and demandable in FY2014. No payments were made to ACPC since June 2011 due to the tight cash flow situation of NFC. Initial discussions for a possible 5-year restructuring were done on March 8, 2012 subject to certain conditions such as remittance of a down payment and capitalization of unpaid interest. NFC will submit a proposal for restructuring.

12. Capital Stock The details of the Corporation's Capital Stock are as follows:

Common Stock Preferred Stock Authorized Shares 100 17.00 Par Value per share 1,000.00

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No par value (Face value) per share 10,000 Common Stock Preferred Stock Class A-Common shares

Roberto R. Reverente 10,000 Myrna M. Centeno 10,000 Gerardo I. Ledesma Jr. 10,000

KKK-PCA now LIVECOR 320,000 Livelihood Corporation (LIVECOR) 340,000

Class B-Common shares Livelihood Corporation (LIVECOR) 60,000 Class C-Common shares

Livelihood Corporation (LIVECOR) 240,000 Ferdinand R. Marcos Jr. c/o PGIN 10,000

Preferred Share Livelihood Corporation (LIVECOR) 17,000.00

Total 1,000,000 17,000.00

13. Deposits on Subscriptions Relative to the proposed increase in authorized capital stock of the company, the following entities made deposits on subscription of preferred shares:

2015 2014 KKK-PCA - (now LIVECOR) 83,528,000.00 83,528,000.00 Human Settlements Development Corporation (HSDC/ SIDCOR) 20,000,000.00 20,000,000.00 TOTAL 103,528,000.00 103,528,000.00

To date however, the proposed increase has not materialized and the above has remained as Deposits on Subscription in the books.

14. Property Lease Update On July 23, 1984, the NFC and the Provincial Government of Ilocos Norte (PGIN) signed an agreement for the lease of 4.3 hectares of land where the NFC Plant is located. The lease is for a period of 25 years which ended on July 24, 2009. The renewal of the Contract of Lease between PGIN and NFC was signed on October 23, 2012 for a term of fifteen (15) years commencing from August 2009. Annual lease rental is Php325,000.00 to be paid within the first fifteen days of January each year and monthly rental shall increase by 5% every three years starting January 2015.

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15. Provident Fund

The Provident Fund of NFC was created with the main objective of providing members and/or their beneficiaries a measure of security against the loss of income due to normal retirement/separation from the service and against financial loss due to premature termination of service and disability. All regular/permanent employees occupying plantilla position as of June 1, 1989 and all regular/permanent employees thereafter shall automatically be eligible for membership in the Fund. Membership in the Fund shall continue until the member ceased employment with NFC or has been separated for a cause. Employees' share contribution to the Fund depends upon the rate as the Board may approve at some future time. NFC shall pay to the Fund a counterpart monthly contribution equivalent to five percent (5%) of each member’s salary and was subsequently increased to seven percent (7%) of each member’s salary effective January 1998 and then further increased to 17% for regular employees who were on board as of June 2007.

16. Cost of Sales This pertains to the inventory cost of tomato paste sold based on a per crop production period.

17. Gain/Loss on Sales of Disposed Assets This account pertains to the gain or loss on sale of disposed old and unserviceable equipment.

18. Allocation of Costs and Expenses Cost and expenses are determined by department. Whenever possible, all expenses incurred by the company are identified based on the output or participation of the department in the production of tomato paste. The expenses of Quality Assurance Department, APEx Department and Production and maintenance Sections of Manufacturing Department, including the salaries, wages and allowances of the permanent employees are considered part of the production cost. Accrual Method of accounting has been used in recognizing expenses.

19. Personal Services This account includes the following:

Account Description Production

Cost

Operating / Selling Expense

Deferred Cost

Amount

Salaries & Wages 7,176,557 6,783,676 736,385 14,696,617.55 Other Compensation 1,844,459 2,484,927 130,128 4,459,513.82

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Personnel Benefit Contribution 798,264 607,960 74,107 1,480,331.01 Other Personnel Benefits 1,242,460 1,613,683 128,595 2,984,738.71 Total 11,061,740 11,490,246 1,069,216 23,621,201.09

20. Maintenance and Other Operating Expenses This account pertains to the following:

Account Description Production Cost

Operating / Selling

Expense

Deferred Cost

AMOUNT

Travelling Expenses-Local - 1,143,926 - 1,143,926.26 Training Expenses - 132,320 - 132,320.25 Office Supplies Expenses - 182,645 85 182,729.91 Other Supplies Expense 10,178,753 2,200,601 - 12,379,354.05 Accountable Forms Expenses - 31,850 - 31,850.00 Medical, Dental & Laboratory Supplies Exp 438,060 185,258 - 623,318.69 Gasoline, Oil and Lubricants Exp 22,329,020 1,553,094 65,603 23,947,716.64 Agricultural Supplies Expenses 99,689,692 4,681 257,444 99,951,818.02 Water Expenses - 26,501 - 26,501.02 Electricity Expenses 4,670,130 779,840 2,601 5,452,571.04 Postage and Deliveries - 18,027 105 18,131.57 Telephone Expenses-Landline - 63,206 - 63,205.62 Telephone Expenses-Mobile - 275,065 - 275,064.56 Internet Expenses - 61,008 - 61,007.98 Cable, Satellite,Telegraph & Radio - 9,837 - 9,837.00 Advertising Expenses - 14,648 - 14,647.89 Rent Expenses 217,789 1,505,149 60,601 1,783,539.07 Representation Expenses - 776,314 2,373 778,686.84 Transportation and Delivery - 4,323,793 - 4,323,792.75 Subscription Expenses - 5,082 600 5,682.00 Consultancy Services 5,660 451,167 - 456,826.60 Security Services - 543,740 - 543,739.77 Other Professional Services - 499,764 15,150 514,914.00 Repairs and Maintenance 4,938,450 1,287,751 24,410 6,250,611.06 Donations - 565,423 - 565,423.29 Miscellaneous Expenses 27,711 93,220 3,133 124,064.72 Taxes, Duties and Licenses - 961,148 - 961,147.66 Insurance Expenses - 939,277 - 939,277.28 Contract Labor - - 2,319,815 2,319,814.75 Other Maintenance and 4,158 124,457 - 128,614.74

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Operating Expense Bad Debt Expenses - 231,681 - 231,681.49 Sub total 142,499,425 19,112,471 2,751,920 164,363,816.52 Add: Depreciation 2,289,909 251,992 - 2,541,900.63 Sub total 2,289,909 251,992 - 2,541,900.63 Total 144,789,334 19,364,463 2,751,920 166,905,717.15 GRAND TOTAL 155,851,074 30,854,708 3,821,136 190,526,918.24

21. Compliance with the Procurement Law Common-Use Supplies needed by NFC in its day-to-day operations for the CY 2014-2015 amounting to Php113,006.91 were procured from the Procurement Service, Department of Budget and Management (PS-DBM), Region I, in compliance with Section 53.5 of the Revised Implementing Rules and Regulations of RA No. 9184, otherwise known as the "Government Procurement Reform Act."

22. Gender and Development (GAD) Gender and Development (GAD) is a development perspective that recognizes the unequal status and situation of women and men in society. Women and Men have different development and interests as a result of inequality which is institutional and perpetuated by cultural, social, economic and political norms, systems and structures. For FY 2015, the Corporation in compliance with and pursuance of the following GAD-related Mandates to wit: Section 14 Article II of the Constitution of the Philippines

- The State recognizes the role of women in nation building and shall ensure the fundamental equality before the law of women and men.

Republic Act (R.A) No. 7192, otherwise known as the "Women in Development and Nation Building Act" - An act promoting the integration of women as full and equal partners of men

in development and for other purposes. - The State is responsible for providing women rights and opportunities equal

to men. R.A. No. 9170, otherwise known as the "Magna Carta of Women"

Empowering Women and Gender Equality. Executive Order No. 273 - Approving and Adopting the Philippine Plan for

Gender-Responsive Development (PPGD) 1995-2025 General Appropriations Act (GAA) - All Gov't. Offices to formulate their GPB

within the context of their mandates to mainstream gender perspective to their policies program and projects. The cost of implementation shall be at least 5% of their total Budget.

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The Medium Term Expenditure Framework - Agencies to formulate and link their Major Final Output (MFC) to their GAD Activities, Programs, Activities and projects (PAPs)

Executive Order No. 43 - An Act pursuing the social contract with the Filipino peoplewhich mandates the strengthening of the capacity of a government institution in all its endeavor including the promotion of equal gender opportunities, preparedits GAD Plan. GAD planned activities were accomplished in coordination with other government agencies involving the amount of Php113,042.78. Details on Agency's GAD accomplishments for CY 2014 were the following:

ACTIVITY AMOUNT Updates on SSS, Philhealth, Pag-ibig benefits and other related matters

28,939.35

Attendance to Women's Month Celebration /Parade 2,332.39 Emergency Preparedness & Response Training (Lecture and Drill) 16,972.92 Attendance to the 1st Friday quarterly mass 8,293.39 Training Seminar on Labor Relations, Human Relations and Productivity

33,496.75

Celebration on NFC's 31st anniversary 23,007.98 Total 113,042.78

23. Disclosures

The GOVERNANCE COMMISSION FOR GOCCS (GCG) constituted under Republic Act No. 10149 (RA No. 10149), otherwise known as the “GOCC Governance Act of 2011” was created to act as a “central advisory, monitoring, and oversight body with authority to formulate, implement and coordinate policies”governing government-owned and controlled corporations (GOCCs), government financial institutions (GFIS), government instrumentalities with corporate powers (GICP) and government corporate entities (GCE) collectively referred to as GOCCS. The Northern Foods Corporation(NFC) is among the GOCCs listed under the GCG classified under the Food Sector. The company has not been very viable but has continued to operate for 30 years providing livelihood to 3,000 Ilocos farmers and their families subsisting on its sales and borrowings from the government. Per GCG press release dated March 3, 2014, NFC is now part of GCG’s regular sector-wide evaluation of GOCCs based on financial viability and relevance to current national development plans. Pending final decision, NFC is planning for another season's operation.

24. Prior Years’ Adjustment Prior years’ adjustment / corrections of fundamental errors are as follows:

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Particulars 2015 2014

Adjustment on expired portion of MCIT - May 2011 669,745.32 -Adjustment on accrual of Fire Insurance - (216,269.93)Reverted accrual old payable - (837,424.79)Adjustment on cost of spoiled/damaged paste 1,859,023.86 Adjustment to take up expense account pertaining to previous year 2,956.53 35,677.18Adjustment on accrual of interest on loans from ACPC (1,250,000.00) Adjustment on loans principal received from NLDC/LIVECOR (110,000,000.00) Adjustment on accrual of interest on loans from NLDC/LIVECOR (54,275,102.30) Adjustment on accrual of penalty on loans from NLDC/LIVECOR (199,967,909.93) Adjustment on loans principal received from ACPC-Quedancor (4,659,130.78) Adjustment on accrual of interest on loans from ACPC-Quedancor (9,265,309.35) Total (376,885,726.65) (1,018,017.54)

25. Compliance with Tax Laws

In compliance with the requirement set forth by RR No. 15-2010, hereunder are the information on taxes, duties and license fees paid and accrued during the year.

Nature Total

Amount Remitted in

FY 2014-2015 Remitted in June 2015

To be remitted until Dec. 31, 2015

Tax on Compensation 1,519,273.22 1,408,280.62 110,992.60 (0.00)Creditable withholding taxes:

a)Suppliers

848,560.27

553,982.48

51,056.93

243,520.86

b) BODs’ per diem 38,100.00 36,100.00 2,000.00

- Withholding VAT from Suppliers

2,586,841.08 1,846,356.24 207,054.00

533,430.84 Sub Total 4,992,774.57 3,844,719.34 371,103.53 776,951.70 VALUE ADDED TAX Vat Payable 17,238,513.12 16,483,836.69 866,457.04 (111,780.61)GRAND TOTAL 22,231,287.69 20,328,556.03 1,237,560.57 665,171.09