SALVADOR FREIGHT CORPORATION

MacArthur Highway, Sitio Estrella

San Rafael 2300 Tarlac City, Tarlac

AUDIT REPORT
December 31, 2009

Pascual, Feliciano, Santos, Bernardo & Co.

Certified Public Accountants
ADP Business Center, Gov. A. Lugay Avenue
Mangga Dos, Matatalaib 2300 Tarlac City, Tarlac
The Board of Directors
Salvador Freight Corporation
MacArthur Highway, Sitio Estrella
San Rafael
2300 Tarlac City, Tarlac

Gentlemen:

In compliance with your request, we submit this informative report in connection with our audit of the Financial
Statements of Salvador Freight Corporation for the year ended December 31, 2009. We understand that this
report will be submitted to the Securities and Exchange Commission (SEC) in supplement of the Corporation’s
application for increase in Authorized Capital Stock.

Attached are the Statements of Financial Position as of December 31, 2009 & 2008, Statements of Income for
the years ended December 31, 2009 & 2008, Statements of Changes in Equity for the years ended December
31, 2009 & 2008, Statements of Cash Flows for the years ended December 31, 2009 & 2008, and Analysis of
Undivided Earnings for the Years 2005 to 2009, together with our report thereon.

The following are the supplementary information on the aforementioned Financial Statements for the year
ending December 31, 2009 and our comments on the principal auditing procedures we performed.

CONTROL TESTING

We took to perform statistical sampling for attribute sampling to test the Company's internal control. Where the
results of controls testing indicated that internal control of the Company is strong, we reduced our substantive
testing levels.

We have calculated the deviation rates on the chosen sample size of the major controls of the Company and
have determined that these deviations are only result of errors , therefore unintentional. Likewise, the upper
occurrence limit is less than the set tolerable rate.The sample size and selection were statistically generated
using a desired confidence level of 90 percent, expected error rate of 5 percent, and a desired precision of 5
percent. Statistical sampling was used to infer the conclusions of test work performed on a sample to the
population from which it was drawn and to obtain estimates of sampling error involved. When appropriate,
judgmental sampling was used to improve the overall efficiency of the audit

To achieve the audit’s objectives, reliance was placed on the controls of the Company. Internal controls were
deemed to be reliable.

SUBSTANTIVE TESTING

The nature, extent and timing of substantive tests performed considered both the assessment of the
Company's internal control and our professional judgment.
 STATEMENT OF FINANCIAL POSITION ACCOUNTS

Current Assets – P4,405,873.92

This account consists of liquid assets which is composed of cash, accounts receivables, inventories
and other current assets.

Cash – P920,238.68

This account is represented by the amount of cash in bank and cash on hand in the form of currency
notes and coins in the custody of the cashier, as follows:

Cash on hand P 10,000.00

Cash in bank 910,238.68
Total cash P 920,238.68

We have reviewed the financial statements to verify proper classification of cash and determined that
it is in conformity with PFRS. Cash on hand includes petty cash fund where we reconcile the fund with the
vouchers and found no discrepancy.

We have reviewed the Corporation’s Bank Reconciliation statements and compared the amounts
with the general ledger and bank statement balance and found no discrepancies.

We conducted a surprise cash count on cash on hand and found no discrepancy.

We accounted for some sequence of cancelled checks that made out to “CASH” or “BEARER” and
found no irregularities on these checks.

Accounts receivable – P2,379,411.51

This account consists of accounts receivables – trade, as follows:

Accounts receivable P 2,425,081.28

Less: Allowance for doubtful accounts 45,669.77
Net realizable value P 2,379,411.51

We have determined that there was an appropriate classification of account balances and we traced
the amount of the trial balance to general ledger control and subsidiary ledger totals and there was a
mathematical accuracy on the balance.

To test for valuation, We accounted that the accounts are in small amounts and not old and we
therefore conform account balances by using negative confirmation requests. We have examined collections
in the subsequent period cash receipts journal.

To test the proper valuation of doubtful accounts, we have examined the aging schedules and
adequacy of the allowance for doubtful accounts and the method of computing doubtful accounts. We were
able to make certain that the Company's estimation is justified. The said allowance for doubtful accounts was
found to be sufficient to cover any possible losses due to non-collections of trade receivables.

We also examined the collections in the subsequent period cash receipts journal, verified the clerical
accuracy and pricing of sales invoice, footed daily sales summaries and traced to journals.
 To test for existence, we vouched entries in the T-account back through the system to see if there is
adequate support. We re-added accounts receivable master file and compared it to the general ledger
account. We also verified that aged accounts receivable trial balance is added correctly and individual
amounts agree with master file.

Based on the above data, the allowance for doubtful accounts to cover possible losses due to non-
collection of receivables is more or less 1%. Due to consistency in collections of receivable during the year,
the company retained the allowance as provided. The allowance for doubtful accounts is found to be sufficient
to cover any possible losses due to non-collections of receivables.

Inventories – P965,930.34

This account consists of inventories of tires and other equipment parts and supplies intended not for
sale.

In addition to the testing of mathematical accuracy of the inventory general ledger accounts, we
attended physical inventory counts. No inventories are held by a third party at outside location. Inventories are
all accounted for after reviewing the appropriateness of the costing method which agrees with the details of
supporting documentation.

We have ascertained that inventories physically exist and the Corporation has appropriate title to the
inventories and these are properly valued and completely recorded in the books.

Also, due to the nature of the business, i.e. equipment parts and supplies are demandable for use, it
is determined that it is correct not to provide allowance for obsolescence, or any impairment.

Other current assets – P140,293.39

This account consists of the following:

Prepaid insurance P 105,514.81

Prepaid input tax on capital asset 34,778.58
Total other current assets P 140,293.39

We have reviewed the financial statements to verify proper classification of accounts comprising the
other current assets and found them in accordance with PFRS:

Aside from testing the mathematical accuracy of these accounts, we have obtained detailed records
supporting the prepaid expenses and reconciled details to the general ledger.

We have conformed the existence of the equipment related to the prepaid input tax and tested the
computation method of amortizing input tax.

Non-current assets – P12,214,831.76

This account consists of property and equipment, deferred tax and other current assets, as follows:

Property and equipment P 11,964,759.86

Deferred tax asset 15,984.42
Other non-current assets 234,087.48
Total non-current assets P 12,214,831.76
 Property and equipment – P11,964,759.86

Property and equipment:

Building P 2,000,000.00
Furniture and fixtures 674,429.39
Machineries and equipment 2,447,050.56
Delivery equipment 12,209,207.14
Total cost P 17,330,687.09
Less: Accumulated depreciation and impairment losses 5,365,927.23
Carrying amount P 11,964,759.86

We have reviewed the financial statement presentation and found proper disclosure for property and
equipment and accumulated depreciation charges.

We conducted physical inspection of major acquisition of the accounts and prepared summary of
analysis of the accumulated depreciation during the year and reconciled this with the ledger. With this, we are
able to determine that the property and equipment included in the Company's statement of financial position
physically exist.

We vouched additions to property and equipment during the year and with this, we have verified that
the Company has proper accounting in capitalizing cost to assets.

Deferred tax assets – P15,984.42

The component of deferred tax assets are as follows:

Deferred tax – allowance for doubtful accounts P 15,984.42

Aside from testing the mathematical accuracy of these accounts, we have obtained detailed records
supporting the account and reconciled details to the general ledger.

Other non-current assets – P234,087.48

Due from officers and employees P 109,464.25

Prepaid input tax on capital assets – net of current portion 124,623.23
Total other non-current assets P 234,087.48

We have obtained and examined the detailed records supporting the other non-current assets. No
discrepancy has been noted and the accounts where correctly calculated in accordance with the nature and
terms of the transaction.

Current liabilities – P1,242,308.75

This account consists of the short-term liabilities of the Corporation which are as follows:

Trade and other payables P 566,722.17

Loan payable – current portion 500,000.00
Income tax payable 175,586.58
Total current liabilities P 1,242,308.75
 Trade and other payables – P566,722.17

This account consists of accounts payable – trade, Value-Added Tax (VAT) payable, withholding tax
payable, SSS, PHIC & HDMF contributions payable and accrued expenses, with balances as follows:

Accounts payable – trade P 179,533.05

Value-Added Tax (VAT) payable 29,678.60
Withholding tax payable 29,491.30
SSS, PHIC & HDMF contributions payable 31,289.75
Accrued expenses 296,729.47
Total trade and other payables P 566,722.17

Accounts payable – trade – P179,533.05

This account represents purchases from regular suppliers that are unpaid at the end of the year. We
have obtained accounts payable listing and perform tracing total from the detailed accounts payable listing to
the total summary. We have traced selected reconciling items to supporting documentation and we were able
to determine the following:

- Payments processed were valid and properly authorized

- No duplicate payment were processed
- Payments were issued to valid vendors/suppliers

Other accounts such as VAT and withholding tax which are payable on January 2010 were also
examined. We conducted a random examination of payrolls and check disbursement vouchers, as well as
supporting invoices of the supplier of goods and services, and have established that these were withheld on
December 2009 and were subsequently remitted to the Bureau of Internal Revenue on January 2010.

SSS, Philhealth & Pag-ibig- (HDMF ) contributions deducted from employees are due for remittance
on January 2010. We have examined payrolls at random and tested the accuracy of the computations based
on the contribution schedule of SSS, PHIC and Pag-ibig, and found that these are in order. The same were
accordingly remitted on January 2010.

Accrued expenses includes, among others, light, heat and power, salaries and communication which
were accrued during the month of December 2009 and remain unpaid at the end of the year. These were
accordingly paid on January 2010.

Loans payable – P2,846,500.00

This account consists of:

Loan payable – current portion P 500,000.00

Loan payable – long-term portion 2,346,500.00
Total loans payable P 2,846,500.00

This account represents the outstanding principal balance as of December 31, 2009 of the term loan
obtained by the Company from Metropolitan Bank & Trust Company (MBTC). We obtained detailed records of
the loan, including the current and long-term period end balances and confirmed directly with lenders details of
the loan outstanding balances, including collaterals and other borrowing characteristics. We have checked the
validity and the purpose of the loan by reviewing the minutes of the Board of Directors approving the
borrowings and we found that these borrowings are authorized by the majority of the members of the Board of
Directors.
 Income tax payable – P175,568.58

This account refers to the income tax payable of the Corporation at the end of the year, computed as
follows:

Profit before income tax P 2,499,100.10

Add: Non-deductible expenses
Penalties and surcharges 16,916.15
Miscellaneous tax expense 324,221.44
Unallowable interest expense 1,002.10
Less: Non-taxable income subject to final tax
Interest expense not deductible for income tax 2,385.95
Accounting income subject to income tax P 2,838,853.84
Provision for income tax (30%) 851,656.15
Adjustment for deferred tax on provisions for probable losses -
Income tax expense P 851,656.15

Income tax expense P 851,656.15

Payments for the first three (3) quarters of the year (213,168.38)
Creditable withholding taxes (462,901.19)
Income tax payable P 175,586.58

We have checked the accuracy of the computation of the income tax payable of the Corporation at
the end of the year and found it to be in compliant with the rules and regulation of the Bureau of Internal
Revenue.

Due to shareholders – P1,190,323.92

We have determined that this account were made through an inter-office memo and is payable more
than 12 months from end of the reporting period. We obtained sufficient records like inter-office memo,
minutes of meetings and board resolution and made confirmations to the current shareholders' list and found
no suspected discrepancy.

Equity – P11,841,573.01

As of December 31, 2009, the Corporation’s equity consists of the following:

Authorized capital stock P 2,000,000.00

Subscribed capital stock P 1,000,000.00
Share (paid-up) capital P 1,000,000.00
Deposit for subscription 3,000,000.00
Cumulative earnings – unappropriated 841,573.01
Cumulative earnings - appropriated 7,000,000.00
Total equity P 11,841,573.01
 Authorized, subscribed and share (paid-up) capital stock

As of December 31, 2009, the Corporation’s authorized, subscribed and share (paid-up) capital stock
consists of the following:

Authorized capital stock (20,000 common shares @ P100.00

par value per share) P 2,000,000
Subscribed capital stock P 1,000,000
Share (paid-up) capital P 1,000,000

We checked the records of the Corporation from its Corporate Secretary regarding the details of the
stockholdings and noted that these are in agreement with the accounting records. We have established that
common stocks are based on the number of shares authorized, issued and outstanding.

Deposit for subscription – P3,000,000.00

This account represents cash advances made by the stockholders for the acquisition of shares of
stock. We have examined the deposit transaction made on the cash payment made and found out that these
were deposited in the account of the Corporation.

It was agreed upon by the members of the Board of Directors that shares will be issued in favor of
the stockholders or buyers of the shares of stock after securing the requisite approval of the Securities and
Exchange Commission on the Corporation’s application for increase in authorized capital stock.

Retained/cumulative earnings – P841,573.01 (Net of P7,000,000.00 appropriations)

This account consists of cumulative net income earned by the Corporation. Retained/cumulative
earnings for the last five (5) years is as follows:

Retained/cumulative earnings as of 12-31-2004 P 1,119,597.22

Net income for the year 2005 732,569.86
Retained/cumulative earnings as of 12-31-2005 P 1,852,167.08
Net income for the year 2006 958,710.22
Appropriations for 2006 (1,000,000.00)
Retained/cumulative earnings unappropriated as of 12-31-2006 P 1,810,877.30
Net income for the year 2007 1,590,229.97
Appropriations for 2007 (2,500,000.00)
Retained/cumulative earnings unappropriated as of 12-31-2007 P 901,107.27
Net income for the year 2008 1,793,021.80
Appropriations for 2008 (2,000,000.00)
Retained/cumulative earnings unappropriated as of 12-31-2008 P 694,129.07
Net income for the year 2009 1,647,443.95
Appropriations for 2009 (1,500,000.00)
Retained/cumulative earnings unappropriated as of 12-31-2009 P 841,573.02

We have traced the net income or loss to income statement and verify the appropriateness of the
appropriations by looking at the minutes of the Board and the corresponding board resolutions.

We obtained an analysis of equity and retained/cumulative earnings movements for the entire period
together with a listing of the period end balance. We established the correctness of the balances.
 STATEMENT OF INCOME ACCOUNTS

The Corporation uses the accrual method of accounting, wherein income is recognized in the books
when significant act of the medical services has been rendered, or goods have been passed to the patient or
buyer. Accordingly, costs and expenses are recognized as incurred. These were applied consistently
throughout the year and with the preceding years.

Revenue – P23,145,059.55

This account consists of income from services, as follows:

Local receipts P 12,765,789.85

Zero-rated receipts 10,379,269.70
Total accounts and other payables P 23,145,059.55

We performed a thorough review of original source documents including: invoices, shipping

documents, cash receipts, and written correspondence between the client and customer. We have analyzed
all large or unusual sales made in the last month prior to the end of the period and was able to confirm directly
with the customer and found no irregularities.

We reviewed bank records and found all receipts were accounted for and no exception was noted.

We then have ascertained that the Company's revenues represent amount from the performance of
services and revenue transactions are correctly calculated and completely recorded. Through tracing, we have
found all sales to be valid.

Cost of services – P12,734,328.54

This account consists of cost of services, as follows:

Direct charges – employees compensation P 4,235,739.40

Direct charges – materials, supplies and facilities 2,494,718.91
Direct charges – gas, fuel and oil 5,437,437.30
Direct charges – depreciation 566432.93
Total cost of services P 12,734,328.54

We evaluated the appropriateness of the costing method and perform revenue transaction cut-off
testing, ensuring that the related cost of services and cost of goods sold are recorded in the proper period.

We have established that costs were incurred and properly related to services that have been
rendered and these are completely recorded and supported.
 Distribution costs and General and administrative expenses – P7,672,064.36

This account consists of costs incurred not directly related to the services rendered in the business
operations of the Corporation, as follows:

Distribution costs:
Salaries and employees’ benefits P 121,868.11
Directors per diem 1,450.00
Security services 1,300.05
Total P 124,618.16

General and administrative expenses:

Employees compensation and other benefits P 1,846,757.30
Professional fees 39285.71
Protection and security measures 180145.24
Security services 17,600.00
Garage supplies 339,969.17
Office supplies 386,161.37
Repairs and maintenance 231,794.49
Insurance expense 168,788.41
Representation and entertainment 220,709.19
Communication, lights and water 519,505.25
Transportation and travel 51,389.78
Dues and subscriptions 41,179.70
Taxes and licenses 210,614.81
Loss on accidents and deliveries 34,905.44
Depreciation 105,807.03
Postage and toll fees 2,628,685.83
Charitable contributions 172,200.00
Miscellaneous tax expense 324,221.44
Penalties and surcharges 16,916.15
Miscellaneous 10,309.89
Total P 7,547,446.20

TOTAL P 7,672,064.36

We have compared the balance of each significant expense account with the comparable balance for
the preceding period and with the budgeted balance for the current period and investigate. No significant or
unusual fluctuations have been found or noted.

We have examined the details of the expenses above if these are in agreement with the invoices and
to the receiving documents or other evidences and review the appropriateness of the account. We have also
made a random test of the mathematical accuracy of the invoices and found no discrepancies.

For employees compensation, we have computed and compared the salary rates for the current
period with the preceding period and found no significant or unusual fluctuations. We also selected a sample
of employees from the payroll and inspected their time cards, personnel files and test the calculation of net
pay and found no irregularities.

We have scanned supporting documents relating to significant expenditures like repairs and
maintenance, professional fees, representation and entertainment and found out that they are all properly
recorded and supported.
 For the non-cash expenses like depreciation, we have obtained a detailed records of the property
and equipment to determine the correctness of the depreciation charges for the period since the acquisition
date. We have established that depreciation relates to property and equipment which exists; correctly
calculated using acceptable depreciation methods and useful lives.

We have established that these expenses were incurred, properly authorized, documented,
completely recorded, and properly accumulated at the end of the year.

We conducted a review of goods or services received but not yet invoiced, unpaid invoices relating to
goods or services rendered prior to the end of the period, payments subsequent to the end of the period and
differences on period end supplier statements. No unexpected or unusual relationships between current
period and prior period for expenses has been noted.

Other Income – P2,385.95

This account consists of:

Interest on bank deposits P 2,385.95

This income is earned from bank deposits and presented at net of final tax. We have examined
deposit passbooks and statements. No discrepancy was noted.

Other Expense – P2,385.95

This account consists of:

Interest expense on loans P 241,952.50

This account refers to the interest expense accrued and paid by the Company during the year.

We have obtained detailed records of the Corporation’s borrowings and tested the balances to
borrowings agreement to determine the interest due for the period. We found out that the interest expense
incurred and recorded during the year are the same.

Thank you very much. We trust that you will find the foregoing sufficient and in order. Should you
require clarification and/or additional information, we shall be glad to be of further service to you.

ALEXANDER D. PASCUAL
Senior Partner
TIN 106-058-953-000
CPA Certificate No. 059638
PTR No. 0449838
January 5, 2010 Tarlac City

December 15, 2010

Tarlac City, Tarlac