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    VMC CaseStudy PDF

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    Chapter 21: Roising Capital through the Securities Market 737 CASE NO.36 VICTORIAS MILLING CORPORATION (A)! [A Venerabie industry Leader's Fal ror IPO fo Bankruptcy in Three Years) Analysis of Prospectus’ Financial Statements and Ownership The Board wanted fo understand the reasons for the crisis os it faced the SEC- approved ManCom In formulating o rehabilsation pian. In early March, 1997. Victorias Miling Company [VMC), the largest sugar miller and refinery in Asia, obtained from its 32 financial institutions creditors a 90-day moretorium on principal payments for its loans. Its move Came os a surprise becouse only three years earlier in September 1993. i went public with a successful P525 milion initici public offering (IPO). VMC sought the debt moratorium because it could no longer meet payments ‘on maturing obligations from about P66 bilion of debts. Aside from this total exosure, banks aio granted “off-balance sheet" facilities where retal investors provided financing and the papers issued through thelr trust departments or subsidiaries. The debt moratorium defemed payment of principal but not interest, which ran for P50 milion per month. The debt principal moratorium was apparently not sufficient to give the breathing space that VMC needed. On June 1997, the VMC Board replaced Gerardo B. Jovellona with Manuel Mafiaiac as VMC president. ‘On July 4, 1997, YMC filed a petition to the SEC for suspension of payments to its creditors Under PD 192-A. The petition called for the appointment of .@ Management Committee (Mancom] to run the affairs of the compony ond formulotion of ¢ rehabilitation plan that wil be approved by the SEC, VC submitted a rehabilitation plan, SEC appointed Isidro Alcantara, Jr, PC iBank executive vice-president, as chairman of the Mancom to oversee implementation of the rehabitation pian upon its approval by SEC. The Board wanted to understand the reasons tor the crisis asit formulated ifs rehabilitction plan and submitted if to SEC for approval. Investors asked how the largest company in the sugar industry could get into near bankruptcy barely two years offer a highly successful initial putsic offering. The proposed rehabilitation pion called for investment of new capital, reduction of debt, manpower retrenchment cnd salle of assets. The plan entailed a debt-equity conversion and Issuance of common sheres equivalent fo 51 percent stake in the company through public bidding and entry of @ strategic partner, For tne planned P2-bilion capital infusion, P1.5 billion was to be allocated for debi reduction. Creditors called for “fransporent and open bid” to raise the needed equity funds, A company wide retrenchment of employees was aimed to generate P293.4 millon in annual sovings. The divestment picn called for the scale of nen-profitable business units and non-straiegic assefs and subsidiaries. In the end, the plan involved the restructuring of the company’s remcining debts, estimated Gt PA. bilion over 15 yeers. In summary, the rehabilitation pion meant pain for shareholders, creditors, employees and everyone around YMC. it was time for the Board, nd investors clike to find out what — or who ~ caused it. ‘Thrace was wien by 0. cesar 6. Saldafa, Pho. of PSR Consulting Inc, as 3 bass fer cass dseuslon, Ehser are not inenad to lustrate eorrat or Incorrer handing of 2 management stuaton. Nat 70 ‘reproduced or shotocopied or ured without the permission ofthe author. CoByrght 2020, THE fork oe D-II SALIINA, FNINCIAL Mane ome nT | } | i i | | : | 738 Part Vi: Raising Funds in the Philippine Setting Company Background On May 7, 1919, Don Miguel J. Ossorio established VMC in the town of Victorias, Negros Occidental. Prior fo this, in 1917, Ossorio also set up North Negros Sugar Company. @ 300 TCD sugar centrifugal mill in Menapia, Negros Occidental where the sugar planters at Victorias milled, VMC with, @ bigger miling capacity of 1,500 TCD started operating in 1921. The frst Victorias mill was a plant similar to those used successfully by the Dutch in Java, indonesia, equipped with 9 roller miling machinery capable of crushing 60 10 70 tons per hour. Cornelius Huge Penning. a Dutch engineer and acknowledged master builder of modem centrifugal sugar mils and manager of the Manila division of Honolulu Ikon Works, designed the VMC foctoy. After World War Il, North Negros Sugar Compeny merged with VMC. Management dismantled the sugar Central in Manapia and used fis machinery and equipment fo rehabilitate ihe heavly damaged VMC sugar central. A sugar refinery was put up in VMC with an initia! production copacity of about 0.91 million Ibs. of refined sugar per year. VMC started fo diversity ts operation when in sequence, itset up a Foundry Division in 1964, the Agriousiness Divsion in 1976, the Management and Technical Services Group in 1977 and the Food Processing Division in 1979. These divisions. became the forerunners of VMC's later thrusts for diversiied operations YMC expanded into food. packaging and engineering services, Victorias Food Corporation manufactured sardines and meat products. Victorias Qvaity Packaging Corporation packed sugar products.” Victorias Engineering Division took on projects, the most prominent of which was Robinson's Place in Bacolod City. YMC buit ond developed Victorias Golf and Country Club and owned 81% of its shores. it was a 72-hole golf course and couniry club located in 0 6S-hectare property clongside VMC's sugar mil It was surrounded by thousands more of hectares of farm lands, all owned by VMC. The company also ventured into cutfower, aquaculture, cattle raising and siggery. It had other facilifies and institutions like farms, a 180-km relway system. a school, a shipping company and Saint Joseph Hospital which f00k care of medical needs of employees of VMC. Menegement intended fo generale more revenues from these non- sugar businesses to avoid the deep cycles experienced in the sugar industry, Aside from dominating the landscape and business activities of that Port of Negros Islond, VMC exercised poltical and social intuence. The economic and financial contributions made by VMG made the municipality grow into a city. While large enough to be considered ¢ city, Victorias remained a single company town “the city that sugar bull”, History and Management Don Miguel J. Ossoro, a businessman of Spanish descent bom in Manila, was 28 years old when he founded VMC. His wife, Dofia Paz Yangco. Qssorio, his brother, and other businessmen like Shiras M. Jones and Claudio R. de Luzuriaga, $r. joined as his original partners in maneging the company. The company was registered at SEC in May 1919. In 1921, Don Miguel invited another prominent businessman, Don Carios Locsin, chemist from Silay City, 10 join VMC. Don Miguel Ossorio wos president ond chairmen of YMC from founding unfil 1967 when the Board appointed his third son, Jose Maria. an engineer and a lawyer by profession, to the Boord of Directoss, Jose Maria became Chairman and president from 1967 to 1976, After these nine years of service, Jose Maria become Chairman Chapter 21: Raising Capital through the Securities Market Emeritus from 1977 until he retired in August 1989. Claudio Luzurriage. Jr., the son of Claudio Luzumiaga, Sr. became President and Chairman in 1976. Ciouaio Luzurriaga was born in Madrid, Spain in 1931 and studied in Ateneo de Manic. He had ¢ Ph.D. in Business Administration and a Business Management degree from De La Salle University and University of Negros Occidental, respectively. Aside from being Chairman of VMC, he also occupied various positions and was director in WMC's other affiliates ‘and subsidiaries, Altogether, the Ossorlo, de Luzumiaga and Locsin clans managed VMC for 72 years Until a professional, non-member of the founding families of VMC, Gerardo 8, Javellana, rose from the ranks to assume the position of President in September, 1991, Javeliana had a Master's degree in Business Management from Asian Institute of Management and a Bachelor of Arts degree from Ateneo de Mania. Prior to his appointment os Presicent of tne company in 1971, he held the position ot Executive Vice President from 1986, Assistant Treasurer from 1979 and head of the Financial Planning Divison from 1978. He also held various positions and directorships in the other affiliates and subsidiaries of VMC prior to his appointment as President, Ownership The lorgest shareholder group of VMC was the Miguel J. Ossorio Pension Foundation, inc. (MJOPFl) with 43 percent of outstanding shares. A list of the largest shareholders of the company shortly after the IPO in 1993 and a5 of Sepiember 1999 is shown in Exhibit 1. MJOPFI maintained a funded, non-contributory pension plan providing retirement benefits to its VMC empoyee-members. it was governed by a Board of Trustees and assisted by Retirement Committee, members af whom were also involved in VC. In 1957, Don Miguel donated his share of profits as initial funds to set up a. centilbutory pension pian (i.e.. members contriputed to their pension fund) for officers and employees of the company. In May 1964, the pension plan was converted Info a foundation, MJOPFI. Subsequently, the pension fund Invested most of ifs funds info shares of VMC. In November 1964, VMC made ol officers and employees members of the feundation and mede the pension plan non-contributory for all VMC employees who were foundation members. Thereciter, VMC. with the approval of its Board of Directors, regularly set aside o portion of the company’s annual profits to meet the costs of benefits under the provisions of the pension plan. I meant that pension plans were funded by earnings of VMC and at the same time, MJOPF still heid the shares of VMC as its lorgest shareholder. The VMC Group of Companies Fromits modest beginnings, VMC grew into one of the largest integrated raw and refined sugar manufacturer in the world. VMC was the 17th sugar mill estoblshed in the country and curentty supplied about half of the country's total requirement for refined sugar. VMC diversified into other fields of businesses such os real estate development, engineering projects and services, fiberglass manufacturing, food processing, organic fertilizer procuction, prawn culture and cut flowers. figure 1 shows a schemati diegam of ihe various business interests of the company at about the time of its SEC fing for debt moratarium. The next section discusses the ‘operations of VMC's sugarseisted businesses. Activities that are not directly related to sugor are ciscussed in Annex |. MC's ownership shores, in percentage, among its subsidiories are 29 | | | 740 Part Vk: Raising Funds in the Philippine Setting shown in Table 1. Data on assets and revenues came from VMC's IPO Prospectus in 1993, North Negros Marketing Corporation (Nonemarco}, was a marketing subsidiary that exclusively handled all of VMC's sugar sales. Nonemerco sold refined suger *o inslitutionall users including the major soft drink and beverage companies and other food processing companies as well as to traders, Operations of the Company Milling Operations MC's sugar milling operations were located in the municipalities of Vicloios, Manopia and Cadiz, Negros Occidental {the names of the towns coincide with VMC). VMC supplied about 50 percent of the country’s requifoments for refined sugar. VMC's sugar operations Gonssted of a three-mil tandem calied A-, 8 and C-mils, These mils had @ combined ¢rincing capacity of 10,000 metic tons daily and refinery ond were copable of producing 25,000 to 27,000 50-klogram begs daily oF about 8 to 8.5 million 50-kg bogs of refined sugar per year. The A-and B-mils, being the oldest, had smaller grinding capacities of 2,000 and 2,500 TCD, respectively while the C-mil had a 5,500 TCD capacity. When VC became ¢ publicly-lsted company in 1993 through an initial pubic offering, a portion of the proceeds from the IPO was used to replace the A-mill with a new mill capable of ringing 10,000 TCD fo bring the total combined grinding capacity to 18,000 TCD. The new mil improved VC's cost-efficiency through lower production cost and more efficient extraction rate, Walkers Limited of Queensiond Australia Installed the machinery and equioment for the new A-mil project. It started operations in 1864 and had on established track record in the supply and engineering of miling equipment in the Philippine and in other Countries. The construction of the new A-mill increcsed the milling capacity for row suger, reducing YMC's dependence on more expensive extemally sourced raw sugar, Production cosis come down due to improved crushing efficiency and lower maintenance cost. The Increased extraction rofe of raw sugar moont higher quality bagasse and fue! savings for the mil. The larger rrils reduced the queuing time for cane delivery trucks, potentiolly saving costs of sugar planters in terms of iruck rentals, labor costs and loss of Cane quailty. Reliable and larger mill capacity served to encourage cane planters to deiiver their products to VMC, thus improving sugarcane supply fo VMC during the miling season Sugarcane Plantations VIMC, through ifs subsidiary, Victorias Agricultural Lend Corporation, planted sugorcane in a 514-hectore land ares. Aside from planting for Its own sugarcane ming requiement, VMC purchased sugarcane fom ‘other planters ond in the spot sugarcane market. VMC operated within @ miling district encompassing an area of some 35,000 hectares out of which 27,000 hectares were planted to sugarcane. Sugarcane planters tucked their sugarcanes to the VMC ttansioacing stations nearest their form from where trains with baggage cars transported them to the VMC plant, VMC negotiated miling contracts directly with sugar planters @ssociations. YMC dealt with 11 associations from Negros and toll that had membership of about 6,600 sugarcane planters as shown in Table 2 VMC serviced and maintained lcrge areos planted with sugarcane by Chapter 22: Raising Copital through the Securities Market Figure 1. Victorias Milling y; Ine. and Subsidiaries Affliates 744 (TRE Gone f wm 1 r ‘ancoioe = 1 | a a ‘atte Soeeiemmeememec™ AE co | ee Ecuaete, — eemercie | = Seeiecemtt, Reeser | a. a Le re, | Rion Sete eaten i VVeoras goer Lars Conor Poon Seve | (oxar= 1 Nort Negros Marketing Corporation 2. Veto Food Corporation 200 13. Canela Sugar Corporation 5 4, Veto Insurance Factors Cop. 300 5, Vetorat Agr. Management Corp. 100 6, Vetora Agr Lard Cerparatan 4300 1. Vezras Cualty PackairCo. ne. 55 8. Ganetown Development Corparation 2 522 8, Nore Legaspi Land Dev UCorp 200 795 10. MEMO werational 200 NA 1 VCMICO FartizerCorgcration 200 NA extending support to private planters. To ensure high productivity. VMC invested ina complete agrieuitural R&D centers that promoted modem forming methods and techniques and sugar cone verily improvement programs. buit o 357-kiomeler roway system to transport district fares! Sugercones fo the mils and invested in complete roll. trucking, sea fransoor and werehousing faciities. VMC maintained © coms of wel trained ond experienced professionals and stoff working on sugarcane propagation, anclysis of sol, fertilzer and chemicals, crop management, Dionting and differant aspects of agricultural engineering, Within the YMC miling district, sugarcane planters could avail of expert assistance frm sugarcane propagation all ihe way to miling and refining According fo the practice in the sugar industy. sugar millers collected milling fees from planters by withholding o percentage from the row sugar output of the milling process. Sugar planters delivering canes to sugar mills Toceived a certain percentage of the ew sugar output wilh the balance retcined By as the miler. VM hod @ 69.5 10 30.5 sharing ratio, for cistrict lantors and 65:38 sharing ratio for non-district planters. Since the miller’s Share was insufficient to feed the sugar refinory with rew sugor inputs, YMC needed +o purchose aciattional raw sugar from former's associations ane traders. Mozt suger mil in the country had @ rriling season of five to seven months. VC's mills end refinery operated year round. VMC's miling operations peaked during the months of December to April when SMERThpees rd Bevarnet Cop, Poreeya Stanan Ine pan | | | | | 742 Part Vi: Raising Funds fn the Phillppine Setting sugarcanes produced were of higher quality. At the stort of miling season, planters delivered sugarcanes that were slightly below correct maturity (sugar content} of canes. Consequently, sugar mils Incurred finencial losses in the first few months of the crop year ond posted profits for the rest Of the milling season. Molasses were byproducts that comprised between 310 4 percent of total sugarcane input. It was normally Used for feeds but could be processed further into cicohol in cistllery operations, The rate and collection arrongements with sugar planters for miling fee for cistling Gleohol fram molasses were the identical to those for raw sugar. Financial Performance Exhibit 2 summarizes the financial salements of VMC from 1983 to 1996. In the course of discussion in the mecia about VMC, severcl comments have been offered about the dismal performance of VMC since it went public in 1993. For example, a Business World article dated March 10, 1997, quoted VMC Chairman and UA&P President Bernardo Villegas as attributing a large part of VMC's problem to the sugar crisis, Large imports of sugar from nearby countries due to declining world prices of sugar "pulled down domestic raw sugar prices to P4B0 frorn P800-P900 per 50-kg bag ot the start of 1996". The arlicle cited others that "attributed it (VMC's woes) to 6 combinction of ‘bad speculation’ ond financial mismanagement", with "sources in VMC saying that management decided to hold on to thelr inventory, betting that the price of sugar in the world market wil ge up. ‘Some benks detected serious liquidity problems as early os March 1996 and phased out their exposure fo the YMC Group in that year. Other banks stayed on, relying on VMC's reputation as Asia's largest sugar milling and refinery and on decades of credit relations. Some creditors had interlocking interest in companies in the group. On the aspect of intetlocking interest, the arlicle noted that cmong the crediiars of VMC that also had equity holdings in VMC were Bank of the Philippine islands fen ofiginal investor in VMC's founding and curently its largest creditor) with 0.71% of outstanding sheres, Goverment Service Insurance System with 4% share (3rd largest shareholder of VMC} and Hong Kong Bank with 3.07% share. VMC hela 6% share of Urban Bank, one of its largest creditors. thot It sold early in 1997 to reise cash. Former YMC Chairman Claudio de Luzurriaga wes stil a member of Urban Bank's board in 197. PNB, which had the 4th largest credit exposure in YMC had one of ifs boord member and comporate secretary, Mr. Waldo Flares, also siting in the Board of vc. Views of VMC's Governance Environment and Management Policies Several reports presented views on VMC's management ond board governance systerns. A Special Report of the Business World, profiled then President Javelicna, focusing on his understanding of the VMC tradition and the changes in policies that he was initiating after the company went public. He said that ¥MC was a patemaiistic company that provided for all ‘TABLE 2: PROFILE GF vnic’s SOURCES OF SUGARCANE i ee ost) Dist 3 1590 Non Distr: Baye (lo) 3 a0 ‘Spor Cane Purchasos (Negros) 3 a6 Tost B 6623 Chapter 21: Ralsing Copleal through the Securities Market — 743 amenities of Victories town, transtormingitinto “practically awelfare tote" He thought that Vic and “gone a litle Bit 100 fox" in delivering “cracile to ‘benefis to ts employees. He recognized that his fask was to address fole-out" mentalty by “developing o culture of excellence” ond merit-based performance evaluation sysiem. A year offer it went public, MC celebrated iis 75th enniversary in'1994 with the theme: "More than Gn industy, a family". On this count, Mr, Javeliane made the comment that "i we tak about taking this company into the fulure (in terms of cost efficiency and bigger market share], just being a farnilys not going to do it". In the same article, the Head of VC's corporate communications and socialresponsibilty division, Ms, Plior Menclezona (daughter of former YMC prescient Claudio de Luzzuriagal, acknowledged that the company was trying fo "unleam social responsibilty" because while employees remain flercely joyal, they had become overly dependent and complacentin the work place. She gave os an exemple VMC's development of land forlow= Gost housing and seling them to workers on instoliment in ordier to counter thelr present Weltare-state mentality. She scid that VMC Is reorienting its comorate values "by adopting ¢ corporate mission that will reduce the worker's over-dependence on the corporation” Business World, In & three-part serles on VMC, reported an interview with Mr. Manuel Lacson, former president of VMC Farmers Association. Mr Lacson reported that ind meeting with VMC's lop management in 1992, they pinied out specific chorges like the underdeclaration of miling ‘and production fo give advantage fo “favored planters", unreasonable Cash advonces 10 “favored truckers and haulers", delayed payments fo suppiets by os much as 6 months and the “overpricing of materials to the extent that there was a time the inventory of spare paris in the warehouse amounted to P140 milion” Farmers’ associations In VMC's mmiling district ao cicimed that VMC management gave priotty to the Tnlling of sugarcanes brought in by some of the trucking fms owned by officers and Nonemarco, to the clsadvantage of planters in the district. They said that Nonemarce hauled from as far south of Negros Occidental to hove them miled at VMC and to eam more income. VMC management responded by saying was that these allegations were “the same rumors that have been circulating in the area for several years back and have yet to be proven". A VMC officer scid in response: {fhe problem fs that these are just allegation, Show Us, prove to Us graf ‘and coruption"? A letter fo the editor by Mr. Aliredo Bustamante il of Negros Business Forum in Business World on Apri 28, 1997 presented an Outsider's view from a Negros resident, a waiter for the SunStar Negros, of YMC's govemance and management system. He said that @ factor in the default of VMC along with excestive imporiations of sugar may be long-umored “coruption in VMC procurement practices os their civil ‘engineering department constructs onother sugar mil and ... extra large Tesidences in Ayala Alabang, Cane Town and U.S. addresses of VMC executives...” He said that another factor was the decline in sugarcane SUBPIY from 2.7 to 2.2 milion kg from 1993-94 10 1994-95 just when the new mil went inte service. Mt. Bustamante noted onether factor being imports by @ VMC subsidiary of raw sugar stocks amounting to at leost P1.5 billion in 1998 was tantamount fe speculation by management in sugar stocks using money borrowed from its Banks, Mr. Bustamante claimed that VMC had eLmonopaly in_gigar refining until 1994 when meny suger millers added Porn 150 ie eee at 744 part vi: Rolsing Funds in the Philippine Setting their own refinery facilities, He sald that the VMC monopoly made “traders revolt" against VMC ond iis trading subsidiary, Nonemarco, because "they cotnered their refining business and became more aggressive in sugar trading". He supported this claim by noting that most of VMC's debts ware short-term and used fo finance sugar-trading inventary. ‘A publication reported the events at that time: "By early 1997, It was rumored that top officials of VMCI may yet be charged with embezzlement for allegealy misoppropriating compony funds for personal use... coruption in the company took many forms, and crept rom top-level management down fo the lowest echelon, Such corrupt practices took the form of ‘anomalies in the release of trucking aliowances or the amount oid in transporting sugarcane from the plantation to the mils, ‘ond the acquisition of averpriced equioment that did not go through bidding procedures and emergency purchases that did not require biciding as part of VMCI's aggressive expansion ventures since it went public.” Questions FoR Discussion 1. Give a general background of the social and economic consitons in Negros and the sugar industry, How might these conditions offect the management of YMC? 2. Who is the controling shareholder of MC? How con this controling shareholder enjoy the fruits of its success in the normal capitalist way, Le., vie dividends and capital appreciation? Examine how the foundation become the largest shareholder of YMC. From whom diel the founciation buy the shores? How could the foundation finance its reflrement commitments via the VMC shares but without selling them? How can management "unlock" the cash flows of the foundation and YMC? Is this capitalism? Who owns VMC? Who controls the owners of vce 3. Comment on the diversification of VMC's businesses in Figure 1 and Table 1. Are they sill reloted fo sugar Industry? Did management have competitive advantoge in these new businesses? What criteria hos management apparently used in thelr diversiication away from sugor® Based on the resulis of operationsin 1995-96, isthe diversification strategy working out well of not, le.. generating sales cnd profi for the parent company? 4, Review the IPO cycle. At what point in the cycle might @ decision been made fo "window dress" the financial statements? What cid the underwriter, SEC, VMC's independent cucitors, lawyers, short= ‘and long-term bank lenclers and PSE should have known dy the lime the Prospectus for VMC's IPO came out to the public or earier® Was tasuccessful FOr ‘REFERENCES Business World, “Victorios’ obligations 1e banks over P6.68 (90-day moratorium en principals gronted)." March 10. 1997 Business World, *.-Resvits of decades-old ties, interdocking interests", March 10, 1997 ‘T vise Porta (oois HIS), The Power to Govern, cited by Gregorio Mavaro, PRA Foundation, 2007 Chapter 24: Rolsing Copital through the Securities Morket Business Word, "Focus: Victorias ailing Co. ine. (Destine of an institution)" March 19,1997 Business Word. "Focus: Victorias Miling Co., Inc. {Identifying the culpri)" March 20, 1997 Business World, "Another view of Vietorios mess from ringside.” Apri 28, Bunness World, “Visiorias creditors Balk ct P&15M worth of calcteral 1997 Business Wr, “Victories valuation to drop further" September 29. 1997 Business Word, “Trading of Victorias shares halted indefinitely by SEC” Oct. 10-11, 1997 fictorios breaks hei-apparent system." Apri 21 Bushess Work 1995, Prospectus for the Initial Public Offering, "Victorias Millngs Corporation.” PSE flle The Power to Govern, Eaitec by Gregorio Navara, PAA Foundation, 2007 Special Report." ei Mac oui creenicna tet) Cas ‘OCTOBER 1993 (Post PO} September 27, 1995 Shores haf Shaves Shareotder aa (vitice) Outstending (ion) ‘LwOscra Pension Foundation, Inc. —«S19-«=«=««3OS%_ I. MJCsorioPensionFoundation,Inc "520 2Homerecrt Quist Phils, Venture BA 32.8% 2. GovernmentServceinsurance 6a ire System 43.Ascan Strstgie Capital sa 32% 3.CTE8 Trust Account as ‘4 Asie Pale Ventures. 26 4.5% 4. North Nogres Markating Co, Ine 35 5 Asian Finance Investment a9 LIK. 5. Fistintegrtes Capea, 32 6a ne 25 109% 6.JFPRBpIne Fund, ne by FEBTC 28 (ruses) 7. erty Trading anal Navigation Co. 1s Bs Ine a6 9. Horne Development Vitus! Fund rr 30.CTSC forverous wus accounts) 1a 745, 21% 21% 16% 29% 29% oem 28% 746 Part Vi: Raising Funds in the Philippine Setting ery Roan uti reat) Pehla eu petpcrt te tea erie Sty Cees) ASSETS curren ssots Cash and short zr investments 3a 590 aos Rocohabes 6s 4283 3553 Ievertries 554 1780 3086 Propacitems and othercurrantasets 105 266 207 ‘otal Curent Assets maa 3522 5iQ Investrnente es 268 ‘20 ‘ue from afiltedtcomponles net of current portion 7 NA NA. Property sant and equipment 2268 3622 saot tne asters aa 353 a3 ‘otal sets 4778 1962 33208 LABIITIES AND STOCKHOLDERS’ EQUITY caren uabites Bank ioans er 388 23.930 4486 ‘ezount payable andcerved expences 283 302 ea 98 Income axpayable 36 36 6 a ‘Curren: porton oflong term debt a aR 324 m0 Total Curent ables 203 i672 Bon. 5ass Long orm Debt, Netof Curren Portion +2098 1025 asa 237 Minot ncarest - - 339 120 Stoctholden’Equty Capital sock sos nes 782 are Bevguanon ieremnentin property 70 70 0 ow. Retained earning wa NA 26 68) ‘Appropiated for part expansion and ater projets 40 Unaporoarsted a2 aaa —_ ates Tota Stockholders Equity aso os 2068 7a ‘etal ables and Stockholder Eauy 3852 478 7962 azo Franca Cndton Ratios Cunent Ratio sua 103 030 097 “al Dott to Bauity Ratio 1s. 130 278 295 Chapter 21: Raising Copitel through the Securities Market 747 pony Mac oe idee eee eet (Cea ‘Asof August 32 Porent Company Only Consolidated vic cress 1993 1988 1998 1996 Revenues 2583 3.138 5525 4955 Costand Expenses 2262 285, Bat a Operating Income 233 93 35 ae Other income Facing Cost en) (208) (a5) 34) Eultyn net income of invested comanios 6 s : 87 Gann sale of properties «o : Miscelanesus —4 25 54 ea (60) (4s) Ineomebefore income tax 385 28 (259) Prouslon frlcome tx ‘curent 5 4“ aa 4 Defered e a 8 as) 8 aes 2 —a) afte TaxInccrne 40 ct 13 (eae) ‘Minority interest Share fa Net Income (oss of Subsitiaros NA NA 28 i Net income loss) 340 awa ios iea2 LUnaparoprised retained earings atbeginningof year 2e7 157 ie 26 Reversal of appropriation for plant expansion and other projets a0 Casr dividends 0) co (oa) eo) Steckdvdends (200) (23) Lsappropsiated retained earings atend of year 157 162 216 60) aming per shore 12 a7 02 13} ine Ratios: “Tumovereffrwentory (Sles/Turnover] 20 40 27 15 “Jumaver af Accounts Rasivae (SS04/AR) 36 5a 45 32 Turnover of Total asses (ales/Tos Assets) o7 o7 07 oa Operating Margin Operating ncome/Sales) 158% 15.7% 115% 4m Nt Proft Margin (net incorneySsles) 52% sas 22% 50% etm on Equly 37% 32% 53% 2% | | 748 part Vi: Raising Funds in the Philippine Setting CASENO.37 Mantigucak poanee Conceat rovcie! anaiyss Techeique. Decson Context VICTORIAS MILLING CORPORATION (8)" IVMC and Nenemarea: Ancfomy of @ Pure Contict of interest} Agency Prablem Ares when Owners Delegate to Management Anoiysis of Corporate Structures with Related Parties The SEC-appoinied Management Committee was trying 1o determine whether the comorate structure of VMC and Nenemarce was a key factor in the company's financial collapse. It was September Ist 1997 and it was Day 1 of work for the SEC. appointed Management Commitiee. As c leading item in their agenda, the ManCom was contemplating the corporate structure of VMC and Nonemarco and whether it could have been a factor in the company's financial collapse. ManCom wanted to ensure that accountabilities were established and mistakes wil! not be repeated under Its watch History and Ownership of North Negros Marketing Company? Nenemarce opened for businessin October 1969 as asmall convenience store engaged in sugar trading. When the Marces govemment placed sugar ‘raging under control by the Philopine Sugar Commission and National Sugor Tracing Administration, Nonemarco's business faltered, During that time, the sugar industry was in a slump. In response, VMC's top monagement encouraged company officers to engage in other businesses fo ticle them over. A number of officers went info trucking ond received service contracts rom VMC. Nonemarco went into truckng and barging, acquiring trucks and barges and building warehoutes. Nonemarco wes an inclependent {ie., nota VMC subsidiary) entity thos was hired by VMC to market lis suger and other products. However, Nonemerco was c Related Party of VMC because its shareholders include officers and directors of VMC. mony YMC officers owned shores in Nonemarco in their personal copocities. No less than the Chairmen of VMC, Don Claudio, was & lerge sherehoider of Nonemarco. The presence of VMC officers in the management of Nonemarco raised questions of possible confict of inferest, fo the detriment of VMC shareholders. in 1993 Nonemarco “allowed” VMC to take & 51% majority control, according to Nenemarco, “io remove the cloud of dou! on questions of seltinterest". This was in response to VMC: shareholders who always questioned in the post dealings of VMC with Nonemarco as its solo Gistributor. Conflicts of interest abound, For example, Mr. Pail once held @ dual post of Nenemarco General Manager and WMC Vice-President for Sales uniil questions were raised and he resigned from his VMC post in 1996. Figure 1 shows the ownership structure of Nonemarco. Shorty before the IPO, MC held 51% of Nonemarco's fotal shares. Minority shareholders constituted 49% of Nonemarco shares and, as previously noted, included the former Chaiiman of the VMC Board of Directors, Den Claudio de This cise was writen by br. cesar. salésta, Pho. of PSR Consul, ine. 3&2 bal for cas dscusson Cases are nae intended to iustate corre or Incorrect handling of © anageimect Huston hot 1 feproduced of shotocosied or used withovt the permission ofthe author Cooyrght 2010. 2 The sources of information tor ths suction incuding a direct quoter 3re "Foc: Vitories Ming Co Ins daring the Cope 2nd ofthese parts, by Cie Paras, Sun Eator, Susiness World, March 20, 1597 rd quotations trom VIC Pare 1 The Power to Govern, Eated by Gragorio 5 Navarra F & A Foundotion Chapter 24: Ravsing Capital through the Securities Market 749. twzuriaga, Jr. Don Claucio resigned os Chairman during the annual general stockholders meeting thet was held on February 4. 1997 “amicist insinuations of widespread anomaly" He was replaced as Chairman of the Board of Directors by Dr. Bernardo Villegos of the University of Asia and the Pacific. MC's Monopoly in Refinery and Reaction from Traders Even before Nonemarce became a subsidiary of VMC, VMC enjoyed ‘a monopoly in sugar refinery. The participation ef YMC in sugar trading through Nonemarce, whether as a subsidiary or as a separate private entity owned by VMC officers, was not acceptable for the traders and other raw sugar millers. Nonemarco even purchased raw sugar from other mils and hed them refined in VMC. Because of the close relationship with VIC, Nonemarco had a near “manepoly" advantage in terms of + fovorabie cliocation of the refining capacity of VMC. Once, VMC even gave Nonemarco ¢ Giscount on the foling fee at a time when refining capacity was scarce. These conditions eventually encouraged Chinese suger traders who were clients of VMC to set up their own suger refining faciities. A majority Of raw sugar mils Buill their own white sugar refining copacities. Once they had the refining capacities, they became aggressive competitors in the sugar trading business. Consequently, VMC's shore in the sugar refining industry steeply declined from more than 50% prior to 1993 to a Iie over 30% by 1995, The 1995-1996 annual financial statement of VMC noted that Nonemarco's equipment were 110 trailers, 56 movers ond 3 eranes for the ‘ransport of cane fo the big mil and frucks for camying raw suger purchased by Nonemarco to the VMC refinery. It noted’ that the exoanded mill needed regular cane supply while the refinery needed sufficiont raw sugar feed for continuous operation, With the sieep decine in demand for refining, the plant became undervilized and cosis steadily rose. Creditors’ Meeting All of those information concemed the past. The reality for VMC was the fastyising debt obligations of VMC and Nonemarce that the Board of Directors of the two companies must deal with. On March 10, 1997, credilors met with YMC management and agreed “in principle not to resort fo. any legal action fo resolve their claims". In jum, VMC agreed “not Yo resort to suspension of poyments and declaration of bankruptcy", At that fime, YMC had cebis of P4.4 billion while its subsidiary with the largest ‘Myo? Foundation | | Public Investors | ie as VICTORIAS WILLING eae tran | [ otcas ore lane ug ee ee [noah Negros: L_nanieting Gore (Sol sugar fading (Related businessos ‘Sosy or vce nd res venares “FIGURE L Gwnershin structure of IMC and Monemarca 750 Part Vi: Raising Funds in the Philippine Setting debt, Nonemarco, owed P2.1 bition. Shortly after the announcement’ of that agreement, Nonemarco's Board of Directors declared ¢ cash dividend. Questions For Discussion 1. Describe on exemple of a transaction between VMC and Nonemareo that constitutes o conflict of interest. “Follow the money" and show how it gels transferred to those whose interest is conflicted with VMC. is the transaction ilegal? 2. _Itseems that shareholders’ questions about confict of interestsurfaced only asthe IPO was being arranged. Why? Look at the owners of YME and Nonemarco. Are they likely to allow a conflict of interest fo occur in their sugar marketing operations? Is @ special marketing company beneficict fo shareholeiers? Explain, Management offered fo cure the conflict of interest by “allowing YMC to hold majority ownership" before the IPO. Did this cure the Confici@ If not, what is the recl cure that should have been a pre- fequisite to the IPO? Chapter 21: Raising Capital through the Securities Market 754 VICTORIAS MILLING CORPORATION (C)! [The Swae! Sogo of the Sugeriess SBCs) Loans are Secured fo Protect Creditors Anolysis of Creciitor's Cicims during liquidation How should the Board of YMC act on the demand by banks holding RSDOs that YMC ossume ful responsibly for the acts of its officers, Inereby making them exsient? secured crecitors even if the sugar stocks supporting RSDOs were no! It was June 17, 1997 and the Board of Dreciors of VMC was meeting ‘gain in response to a demand by crecifor banks that VMC honor the obligations made by VMC offices: in support of the loans made by Nonemerco. YMC claimed that those RSD0s were issued as illegal acts oF VMC officers. The banks wanted VMC to take responsibilty over the ects of itsofficers, thereby making them secured creaitors even if the sugar stocks supporting RSDOs were non-existeni.the creditor banks wamed that they could aways move for dissolution of the company if they could not get creditor's cpproval of the Moa needed to iaunch the rehabiltation plan, The Position of the Banks Regarding RSDOs The position of he greater number of banks was tha! the RSDOs and the transactions involving them were valid and that VMC should treat them thus. All creditors threatened to file for legal liquidation if VMC refused to acknowledge those obligations. They pointed out that VMC officers were Involved in those irequiarities. The five banks that refused fo sign the MoA were BPI, Metrobank, Landbank, Deo Heng Bank. and Asicm Bank They said that the RSOOs were issued to them by VMC (officers) and so, Valid on its face. The defect was in its not being backed! up by physiccl stocks. VMC claimed that those panks holding RSOs have recourse to the officers, in their personal capacity. Because those RSDOs were issued inegulary ond outside their authority, the company should nat be liable to the § banks for the missing RSDOs. Questions About the RSDOs and Auditors | all Come fo the surface on March 10, 1997, when the large creditors of Victorias Miling Corporation met? The first Question discussed was the number of creditors, estimated to be around 800 but dominated by 32 banks and institutional creditors. Among the banks were those that held quecians, refined sugar delivery orders (RSDO) and refined sugar delivery receipis (RSDR). The sugar industry practiced the quedan system. Quedans were negotiable warehouse receipts sued by a sugar mill that served to coriify the holder as legal owner of specific sugar stocks. The certified quantity fook Info account the production sharing system between the mil and ‘the sugor planter. Quecans could be used for bath raw and refined sugar, it was VMC's policy, however, to allow withdrawals of sugar only in refined form {for which it charged milling fees). Quedans were in the form of ellher stocks of raw or refined sugar. When there was already on institutioncl buyer of VMC's own refined sugar, these stocks were covered by refined sugar_delivery orders (RSDOs). VMC, through its marketing subsidiary, 4 This case was writen by De Cesar G. Sldaie, P.O. of PSR Consuting, Ine. 28 Sa or ease cussing Cases are not intended

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