Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A

ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended: August 31, 2012

2. SEC Identification Number: PW-364 3. BIR Tax Identification No.: 000-270-220-000

4. Exact name of Issuer as specified in its charter: VICTORIAS MILLING COMPANY, INC.

5. Plant site: Victorias City, Negros Occidental2020 6. (SEC Use Only) 07 Province, Country or other jurisdiction of Industry Classification Code: incorporation or organization 7. VICMICO Compound Victorias City, Negros Occidental 6119 Address of office Postal Code

8. (034) 399-33-78; (034) 399-35-88 Issuer's telephone number, including area code

9. Not Applicable a Former name, former address, and former fiscal year, if changed since last report.

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

Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding

(a) Common Stock (Par Value of P1.00 per share)

Authorized Capital Stock 2,563,035,708 shares Subscribed and Paid-up 2,024,616,452 shares Amount of Debt Outstanding as of August 31, 2012: 4,826,907,367

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

Yes [ X ] No [ ]

If yes, state the name of such stock exchange and the classes of securities listed therein:

Philippine Stock Exchange, - Common Stocks

Inc. 12. Check whether the issuer:

(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17 thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports);

Yes [ X ] No [ ]

(b) has been subject to such filing requirements for the past ninety (90) days.

Yes [ X ] No [ ]

13. Aggregate market value of the voting stock held by non-affiliates: P2,018,792,134 (at P1.00 par value)

APPLICABLE ONLY TO ISSUERS INVOLVED IN INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

14. Check whether the issuer has filed all documents and reports required to be filed by Section 17 of the Code subsequent to the distribution of securities under a plan confirmed by a court or the Commission.

Yes [ X ] No [ ]

DOCUMENTS INCORPORATED BY REFERENCE

15. Briefly describe the documents incorporated by reference and identify the part of the SEC Form 17-A into which the document is incorporated:

2011-2012 Consolidated Financial Statements (Incorporated as reference for Item 7 of SEC Form 17- A)

TABLE OF CONTENTS

PART I - BUSINESS AND GENERAL INFORMATION Page Item 1. Business 4 Item 2. Property 12 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14

PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Registrant's Common Equity and Related 14 Stockholder Matters Item 6. Management's Discussion and Analysis or Plan of 15 Operation. Item 7. Financial Statements 24 Item 8. Changes in and Disagreements With Accountants on 24 Accounting and Financial Disclosure

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Issuer 25 Item 10. Executive Compensation 29 Item 11. Security Ownership of Certain Beneficial Owners and 30 Management Item 12. Certain Relationships and Related Transactions 30

PART IV- EXHIBITS AND SCHEDULES

(a) Exhibits 30 (b) Reports on SEC Form 17-C 30

PART I- BUSINESS AND GENERAL INFORMATION

ITEM 1 - BUSINESS

DESCRIPTION OF BUSINESS

Victorias Milling Company, Inc. (VMC) is a domestic corporation located in Victorias City, Negros Occidental. Since its incorporation on May 7, 1919, VMC has engaged in integrated raw and refined sugar manufacturing. It also operates an engineering services and the following subsidiaries:

DATE OF REGISTRATION % Ownership Description of Business Victorias Foods Corporation February 24, 1993 100% produces and sells canned sardines, hot (VFC) bangus, mackerel, luncheon meat, lechon paksiw, ham, bacon and other meat products Canetown Development February 9, 1979 88% develops and sells real estate properties; Corporation (CDC) develops, operates and sells memorial lots Victorias Quality Packaging July 4, 1990 55% sells special packaging products such as Corporation (VQPC) polyethylene and polyprophelene bags Victorias Golf and Country May 5, 1994 81% operates a golf club Club, Inc. (VGCCI) Victorias Agricultural Land June 30, 1987 100% acquires and owns agricultural lands and Corporation (VALCO) properties

BUSINESS DEVELOPMENT DURING THE PAST THREE (3) YEARS

VMC is serious in its efforts to further improve its efficiency as well as product quality and the same is manifested in its zeal to engage in major expansion programs for the past three (3) years. Its unprecedented expansion programs resulted to high milling efficiency rates for Crop Years 2009-2010 and 2010-2011 by milling 2,552,299 MT and 3,115,914 MT, respectively. For Crop Year 2011-2012 VMC was able to mill 3,100,509 tonnes cane, producing 6,400,064 lkg. raw sugar. For Crop Year 2011-2012, VMC milled 3,100,509 MT, slightly lower by 15,405 tonnes cane from last crop year’s 3,115,914 tonnes cane, lower by 99,491 tonnes cane or three 3% percent from the projection of 3.2 million tonnes cane. Although this production is lower than the previous crop year, VMC still retained its leadership when it comes to tons cane milled in the province with 25.82% share.

CURRENT STATUS OF REHABILITATION PROGRAM

In 1997, VMC filed with the Securities and Exchange Commission (SEC) a Petition for the Declaration of Suspension of Payments, and for the Approval of a Rehabilitation Plan. VMC’s total principal obligations and interest at that time stood at P7.9 Billion.

Part of the rehabilitation plan was the restructuring of P4.4 Billion of debt over a period of fifteen (15) years, beginning on September 1, 2003.

Over the years, VMC has continued to pay its creditors in accordance with the scheduled amortization payments of its restructured debts. In fiscal year 2012, VMC paid a total of P359 Million for principal, and P239 Million for the interest of its restructured loans. As of Fiscal Year ended August 31, 2012, it has serviced its creditors a total of P2.17 Billion in principal and P3.18 Billion in interest.

Another component of the rehabilitation plan was the conversion of P2.4 Billion of debt into convertible notes in accordance with the conversion schedules as provided for in the Debt Restructuring Agreement (DRA).

As of FY 2012, VMC has converted a total of P428 Million convertible notes into 428 million of its common shares. P118 Million worth of debts was converted in 2012, while P310 Million convertible notes were converted to 310 million common shares during the previous year.

The conversion of the notes into equity contributed significantly to the reversal of the previous negative Net Worth to a positive equity position. As of August 31, 2012, VMC’s Net Worth stood at P1.6 Billion.

Aside from bank creditors, VMC also had trade creditors who were to be paid over a three (3) year period. As of August 31, 2012, VMC has paid a total of about P300 Million to its trade creditors.

VMC’s shares of stock (“VMC”) are listed in the Philippine Stock Exchange (PSE) but the trading thereof was suspended in 1997. VMC has since filed several petitions for the lifting of the trading suspension while simultaneously providing information to support the same. In May 2012, the suspension was finally lifted and VMC’s stocks are again traded in the Exchange.

MILL PERFORMANCE

For Crop Year 2011-2012 which lasted 37 operating weeks, VMC has milled a total of 3,100,509 tonnes of cane. Although this production is lower than the previous crop year, VMC still retained its leadership when it comes to tons cane milled in the province with 25.82% share. VMC emerged on top with 2.12% increase in province share compared last crop year. Total tons cane milled accumulated by ten (10) sugar cane mills including San Carlos Bio-energy Inc. is 12,010,140, which is much lower than last crop year’s 13,147,041, but this did not stop Negros Occidental from being the major contributor of cane milled in the country.

VMC continues to lead with a production of 6,400,064 Lkg raw sugar or 28.16% share of the total production in Negros Occidental, hitting the projected raw sugar projection of 6,400,000 Lkg., with sugar cane yield at 2.06 Lkg/TC, significantly higher than last years’ 1.83 Lkg/TC by 12.57%, thus resulting to a higher production.

Although there was a 12.10% increase in raw sugar production from the previous crop year, the total production of the province decreased by 3.67%. Factory efficiency, Mills reduced extraction and reduced boiling house recovery all hit their respective targets resulting to a higher SDF, low molasses purity and high raw sugar production.

Refinery operations also proved to be satisfactory as actual production of 6,031,809 Lkg exceeds last crop year’s projection of 5.5M Lkg. Average production per week improved, noting the record breaking daily and weekly production of 32,953 Lkg and 206,546 Lkg, respectively last February of 2012. The crop years’ refining yield increased to 0.9330, the second highest refining yield in the factory for the last ten (10) years, all owing to the effectiveness of new projects and relevant decrease in total stoppages.

On energy consumption, a total of 1,732,495 tons of steam was generated by the eight (8) boilers which is lower than last crop year’s steam generation of 2,041,467 tons. This crop year’s steam generation was noted to be the lowest for the last eight years. Ratio of tons steam generated against tons cane milled was reduced from 0.655 last crop year to 0.558 this year. Refinery steam consumption also registered a reduction from 1.8072 tons steam per ton refined last year to 1.5124 tons steam per ton refined this year.

The total in plant power generation by four (4) steam driven turbo generators is 83,336,277 kw-hr an increase of 8.91% compared to last year’s 76,515,616 kw-hr. This in turn significantly reduced the purchased power to 7,497,420 kw-hr from 10,989,446 kw-hr last year as in-plant generation directly affects purchased power. The considerable decrease in purchased power is attributed to the minimal breakdowns of the steam turbine generators and consistent volume of cane supply based on mill capacity throughout the milling operation.

The total cash cost of raw sugar per Lkg-mill share amounted to P1,188.79 which decreased by 7.6% against budgeted costs. The reduction is attributable to the lower cost of sugar cane due to lower cost of cane hauling. Cost of milling per Lkg-mill share is P343.15 that dropped by 3% against budget is caused by reduced labor and energy costs. Refining cost decreased to P120.42/Lkg against last crop years’ P172.18/Lkg due to Refinery’s efficiencies due to upgrading of process equipment.

Certain projects were implemented that improved factory performance - the Refinery’s addition of three (3) filter equipment in First Filter station, addition of two (2) filter equipment in Second Filter Station, and conversion of double effect evaporation to triple effect evaporation. Syrup Clarification and Clarified Juice plate Heaters were installed in the Boiling House to improve raw sugar quality and increase the evaporation capacity. The 8 MW Shin Nippon Turbo Generator, which was acquired to ensure unswerving supply of power in the factory, was commissioned late June of 2012.

VMC invested P264 million last crop year in order to improve company efficiency and quality production. For Crop Year 2012-2013, a total of P509 million Capital Expenditures (CAPEX) budget was approved by the VMC Board of Directors. This amount includes major projects worth P240.00 million for the first phase of Raw Sugar upgrading and modernization, P116.12 million for environmental compliance projects and P152.43 million for the regular projects under Manufacturing Area.

Crop Year 2011-2012 was a fruitful year for VMC. Targets had been achieved and even surpassed. VMC has proven, time and again, that through continuous efforts of improvement and modernization without compromising the safety of environment and people, the Company can remain as the benchmark in the sugar industry.

RISKS

The risks of the company can be classified into four general categories: (1) Operational risks; (ii) financial risks; (iii) strategic risks, and (iv) hazard risks.

One of the major elements in the operation risks of the company is its raw materials supply chain. VMC currently gets its cane supply from district and non-district planters all over the Negros province. The yearly exercise has proven to be tests of skills in enticing planters to deliver canes to VMC through various incentives and programs as well as providing superior services and factory efficiencies. But this is not without stiff competition from other sugar mills and refineries. In 2012, VMC had a 26% market share of the total sugarcane milled in Negros Occidental. It has been able to maintain around this level for the past years.

Another key element in the company’s operational risks is its compliance to environmental regulatory requirements. One of the longest running environmental issues is the Cease and Desist order issued to VMC in 1989 due to air pollution concerns. This was exacerbated with VMC being under rehabilitation, having financial constraints to invest on anti-pollution equipment. To date however, VMC has installed five (5) scrubbers on its smoke stacks and expects to be fully compliant with the air emission standards of the DENR.

VMC continues to have financial risks with the fluctuations of sugar prices both locally and globally. Being under rehabilitation until 2018 and debt-ridden, its break-even costs are expectedly higher. Additional loans are not allowed. As such, factory expansion must be funded from internally-generated funds. It constraints fund usage and competes with the debt servicing to creditors.

Another imminent risk that the industry as a whole is facing is the gradual tariff reduction on imported sugar which, by 2015, will go down to only 5%. This exposes the sugar industry as a whole to global competition that if not prepared for, will drastically change the financial viability of the company, in particular.

Competition and industry changes form part of the strategic risks to which VMC is exposed. The sugar industry has been threatened by the ethanol industry which uses the same sugarcane as raw material. Fortunately, the ethanol business has yet to stabilize as a new industry under threats from world oil prices. Change in customer demand is something that VMC should also be concerned of to ensure that its product specifications suit the dynamics of its customers.

VMC is also fully exposed to the risks of the extreme weather conditions. Since its business is agriculturally-based, weather is a very critical factor for a successful crop year. Low farm inputs from planters will translate to low production that will trigger stiff cane competition among sugar millers in the region and will affect the price following supply and demand forces.

The numerous legal cases are likewise a source of risk for the company. Collection cases versus the company are currently under suspension, with VMC being under corporate rehabilitation. The potential impact of these cases on the company once the suspension is lifted is continually being assessed.

The major risks involved in the Company’s subsidiaries are as follows:

1. Risk of uncertainty of members to meet their obligations and pay their dues. 2. Risk on profitability because of low production due to scarcity of materials. 3. Risk that obligations may not be settled when they fall due or liquidity risk and going concern issues. 4. Risk on profitability because of volatility of sugar prices and risk that customers will not pay their contractual obligations. 5. Risk of inability to pay the future tax liability and risk those customers will not pay their contractual obligations.

COMPETITION

Crop Year 2009-2010 was VMC’s lowest production within a ten-year period. Cane productivity was generally poor as affected by the low price of sugar and rising costs of farm inputs, especially chemical fertilizers. Better sugar prices and good weather condition in Crop Year 2010-2011 resulted to a better farm productivity in terms of tonnage thus, the increase in volume of canes milled. Canes produced were however of lower quality having the lowest average LKG/TC (1.83) within the ten-year period. Cane and sugar production continued to improve in Crop Year 2011-2012 however sugar price was declining. VMC’s leadership in factory sugar recovery or efficiency continues to dominate as shown by our increasing share in the market.

GOVERNMENT LICENSES REQUIRED

The following are the permits/licenses secured by the Company with the different government agencies/entities, which are needed in its operations:

NAME OF LICENSE DESCRIPTION DATE SECURED EXPIRY DATE

1. MILLING LICENSE To operate a sugar mill and to have the centrifugal sugar Sept. 7, 2011 Aug. 31, 2012 stored in its millsite/subsidiary warehouses. The withdrawal of sugar from the millsite/subsidiary warehouses should be in accordance with SRA Sugar Order No. 8, dated 23 July 1992 and related rules and regulations issued by this Office.

2. REFINING LICENSE To operate a sugar refinery and to have the refined sugar manufactured stored in its warehouse. Sept. 7, 2011 Aug. 31, 2012 Non-observance or violation of any SRA rules and regulations, sugar order, circular letter, memorandum, etc., pertinent to the manufacture and withdrawal of refined

sugar, understatement of production, non-quedanning of refined sugar or non-payment of monitoring fees shall be a cause for the suspension or cancellation/revocation of the license.

3. SUGAR TRADER Authority to operate as a Domestic Sugar Trader and CERTIFICATE OF withdraw purchased sugar from the warehouse of any sugar Sept. 6, 2011 Aug. 31, 2012 REGISTRATION mill or refinery. VMC should submit a continuous monthly report of its trading activities and for failure to submit the same shall be subject to par. 7, SRA Sugar Order No. 2 dated 16 July 1986.

4. MOLASSES TRADER Authority to withdraw purchased molasses from the storage CERTIFICATE OF tanks of any sugar mill or refinery. Sept. 6, 2011 Aug. 31, 2012 REGISTRATION VMC should submit a continuous monthly report of its trading activities and for failure to submit the same shall be subject to par. 7, SRA Sugar Order No. 2 dated 16 July 1987.

5. BUSINESS PERMIT VMC-Raw Sugar Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

6. BUSINESS PERMIT Sale of Refined Sugar & Refined Sugar – Tolled Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

7. BUSINESS PERMIT VMC – Molasses Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

8. BUSINESS PERMIT Foundry Shop Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

9. BUSINESS PERMIT Machine Shop Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

10. BUSINESS PERMIT General Engineering Services Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

11. BUSINESS PERMIT Fiberglass Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

12. BUSINESS PERMIT Clinic Pharmacy Jan. 9, 2012 Dec. 31, 2012 May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

13. FIRE SAFETY Certificate of Safety and Protection of VMC’s Business Mar. 27, 2012 Dec. 31, 2012 INSPECTION Establishment. CERTIFICATE May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

14. CERTIFICATE OF Registration of Business Name of Sept. 10, 2008 Sept. 10, 2013

BUSINESS NAME Victorias Milling Co., Inc. issued by the Department REGISTRATION Of Trade and Industry. Subject to continuing compliance with Act 3883 as amended by Act 4147 and R.A. No. 863, and in compliance with the applicable rules and regulations prescribed by the Department of Trade and Industry.

15. LICENSE TO OPERATE License to Operate as a Food Manufacturer of Sugar issued by Mar. 21, 2012 Apr. 24, 2012 the Department of Health Bureau of Food and Drugs Pursuant to Section 4\(e) Chapter III of Republic Act No. 3720, otherwise known as the Foods, Drugs and Devices and Cosmetics Act.

16. CERTIFICATE OF Certificate of Eligibility issued by the Department of Oct. 4, 2012 Oct. 4, 2013 ELIGIBILITY Agriculture Certifies that VMC is an agriculture enterprise company engaged in Sugarcane Milling and therefore eligible for tariff- exempt importation of agricultural inputs, machinery and equipment listed under Annex “B” as provided in Executive Order |No. 376 to implement Section 1 of Republic Act No. 9281, “Reinstating the Effectivity of Tax Incentives for Section 109 of R. A. 8435 – the Agriculture and Fisheries Modernization Act of 1997.

17. REGISTERED MARK Registered Mark Nos. 4-2008-500038 and 4-2008-500039 Sept. 22, 2008 Sept. 22, 2018 -for sugar, refined sugar in class 30.

Registered Mark No. 4-2008-012796 -for meat, fish, poultry and game; preserved, dried and May 25, 2009 May 25, 2019 cooked fruits and vegetables; preserves and pickles; edible oils and fats, squid in Class 29 -for sugar, vinegar, salt, pepper, mustard, sauces, spices in Class 30

Registered Mark No. 4-2007-500803 Oct. 23, 2009 Oct. 23, 2019 - in Class 29 and Class 30

18. ICARE CERTIFICATE Certificate of Accreditation as Importer issued by the Bureau of Aug. 12, 2011 Aug. 12, 2012 OF ACCREDITATION Customs Certifies that VMC is an accredited importer in accordance with Customs Memorandum Order No. 47-2010 subject however to suspension or cancellation prior to the expiration thereof pursuant to applicable laws, customs, rules and regulations.

19. CERTIFICATE OF Certificate of Registration issued by the Bureau of Customs Aug. 25, 2011 Aug. 25, 2012 REGISTRATION (BOC) Certifies that VMC is duly registered with BOC subject to Compliance to CMO subsequent issuance governing Client Registration Application Processing, non-repudiation of any declaration filed through the Value Added Service Providers (VASPs) and recognition of TWM system information duly certified by its Administrator as valid and/or correct.

20. NATIONAL WATER Permit to use water from various water source pursuant to May 2011 May 2012 RESOURCES BOARD Resolution No. 74-4 of the National Water Resources Council, (NWRB) PERMIT promulgated by authority of the Presidential Decree No. 424 Dated March 28, 1974.

All obligations of VMC pertinent to the abovementioned licenses and permits are religiously followed by the Company.

CANE SUPPLY ASPECT

For Crop Year 2011-2012, VMC was able to mill 3,100,509 tonnes cane, producing 6,400,064 lkg raw sugar. This year’s cane supply volume is slightly lower by 15,405 tonnes cane from last crop year’s 3,115,914 tonnes cane, short by 99,491 tonnes cane or three (3%) percent lower from the projection of 3.2 million tonnes cane. A very slight increase in sugar production was attained as against the target of 6.4 M lkg, but is much ahead with last year’s 5,703,506, by 696,557 lkg or 12% higher.

Sugar rendement as expressed in LKG/TC dramatically improved this crop year from last year’s 1.83 to 2.06 LKG/TC, a significant increase of 23 cates or 13%. This is attributed to the Moderate La Niña weather that favored cane growth and maturity of the crop. The improvement in LKG/TC, coupled with good factory efficiency is a major factor for the increase in sugar production this year.

Planters in nearby areas (0-50 kms.) brought in 2,094,017 tonnes, comprising 68% of the total cane supply during the year, an increase of two (2) percentage points compared to last year’s 66%. Higher LKG/TC of canes milled made VMC more competitive with its neighboring mills attracting more planters to deliver with it.

The volume of canes from medium distance (50-100 kms.) areas comprised 18% of the total cane supply or 556,455 tonnes, a slight drop by one (1) percentage points from the previous year’s 19% or 594,109 tonnes cane. Those from far distance (100 kms. and beyond) had delivered 450,037 tonnes comprising 14% of VMC’s total volume. Also, a slight drop of one (1) percentage points from last year’s 15%. This slight drop in cane deliveries from both cane sources is primarily due to VMC’s return to its normal Trucking Allowance (TA) rates, which has increased out-of-pocket payments absorbed by planters in bringing the canes to VMC mill site.

With regard to the province, VMC shared 26.52% on total cane of 11,689,675 million tonnes, an increase of 2.82 percentage points from 23.70% for the same period last year. The increase in VMC’s share in the province is attributed to its good milling efficiency and sugar recovery advantage.

SERVICES TO PLANTERS

To encourage planters to avail of VMC’s dominance in efficiency and sugar recovery advantage, VMC returned to its normal All-In TA rates from the start of Crop Year 2011-2012. It was on the latter part of the 3rd quarter that VMC implemented the following programs:

a) Fuel Subsidy Incentive (FSI) - Starting April 9, 2012, a Special Incentive of P20.00/Net Tonne Cane was given in order to direct to mill site, cane deliveries of planters that passed VMC’s cane acceptance standards. This was intended to minimize the high out-of-pocket expenses borne by planters for delivering their canes with VMC brought about by rising fuel prices.

b) Drivers’ Incentive (DI) - At the same time, Transloading deliveries were also given Drivers’ Incentive of P100/Trip. This was given to improve competitiveness of VMC’s affiliated transloading stations by matching what VMC’s competitor mills offered. Those with below five (5) tons load, where however, exempted from this incentive;

c) Farm Road Repair and Maintenance - This crop year, thirty two thousand four hundred fifty seven (32,457 cu.m.) cubic meter volume of aggregates for Victorias, E. B. Magalona, Manapla and Cadiz City were given as assistance for the repair of fifty-two (52) kilometers, more or less, of hacienda roadways. Likewise, seven hundred sixty (760) pieces of various sizes of Reinforced Concrete Pipes were also released for repair of hacienda roadways including overflow bridges.

VMC’S ENGINEERING SERVICES

The Maintenance and Engineering Services Division (MESD) attends to the engineering requirements of VMC’s mill and refinery. There are six (6) Departments under the MESD, namely: (a) General Engineering; (b) Civil Engineering; (c) Foundry and Machine Shop; (d) Motor Pool; (e) Mills and Boilers Maintenance; and (f) Planning, Design and QC.

For Crop Year 2011-2012, the Division undertook the following major projects through its respective Departments: (1) Installation of steam and exhaust pipelines, turbine and generator of 8MW Shin Nippon Steam Turbine; (2) Construction of Electrostatic Precipitator Ash Handling; (3) Fabrication and installation of tie-beams and installation of mill cheek, feed rollers, top and bottom rollers, pipelines and Donnelly chutes for the upgrading of C-Mill No. 6; (4) Installation of Refinery Johnson Mud Filter and construction of its staging; (5) Fabrication and installation of Yoshimine Boiler No. 2 IDF Rotor No. 2; (6) Transfer of old Refinery Lime Tank from existing location to New Lime Bodega; (7) Cement concrete construction for Bagasse Shed flooring; (8) Installation of roofing at JTA No. 1 using UPCV long span corrugated roofing sheets; (9) Cement concrete construction from Engineering gate going to Malihao bridge; (10) Rehabilitation of Potable Waterline Network within VMC compound Phase 1; (11) Re-shelling of sixteen (16) mill rollers for factory; and (12) Upgrading of C- Mill.

SALE OF SUGAR AND BY-PRODUCTS

The Company’s major source of cash is from sales of raw sugar millshare, tolling fees from refinery operations, and sales of by-products like molasses. The major buyers of VMC’s sugar products (sugar & molasses) are the sugar traders.

Raw sugar mill share refers to the Company’s share (30.5%) of raw sugar produced from canes supplied by the planters. The Company conducts a weekly sugar and molasses bidding in Bacolod City. As a service to its planters, VMC likewise includes the planters’ share in raw sugar and molasses in the bidding. Single price auction for both mill’s and planters’ share of the sugar is practiced by VMC, that is, the highest bid price will cover all sugar sold during the day. For Crop Year 2011-2012, VMC raw sugar volume was at 2,381,547.02 LKG with an average price of P1,284.35 totalling to P3.058B sales.

Refined Sugar is also called the “white sugar” while the raw sugar is commonly called as the “brown sugar.” The raw sugar goes through a process of refining and the result is the refined sugar. VMC produces two different types of refined sugar – premium and standard. These varieties differ mainly in color, moisture content, ash content, and final use. The premium type, for example, is mainly for industrial users such as beverage manufacturers. The standard type is both for industrial and household consumption.

Molasses is the by-product of both raw sugar and refined sugar operations. The amount of molasses received by the Company at its raw sugar operations follows the same production sharing formula of raw sugar, i.e. 30.5% to VMC and the balance, to planters. The major buyers of VMC’s molasses are Asian Alcohol, Distilleria de Bago, International Pharmaceutical Inc. and Balayan Distillers. For Crop Year 2011-2012, VMC Molasses volume was at 40,833.93 with an average price of P3,133.67 totalling to 127.96M sales.

VMC’s Breakdown of Revenues (Amounts in Thousand Pesos) August 31, 2012 August 31, 2011 August 31, 2010 To Date To Date To Date

REVENUES Raw Sugar 3,057,389 3,069,440 1,925,950 Tolling Fee 1,371,477 818,057 971,684 Refined Sugar Sale - 5,380 716,521

Molasses 127,960 257,070 264,774 Alcohol Sales 59,411 - - Engineering 12,259 27,759 30,241 Others 35,511 39,911 38,516 4,664,007 4,217,617 3,947,686

Aging of Accounts Receivable

As of August 31, 2012, below is the aging of accounts receivables for trade and other receivables:

AGE AMOUNTS PERCENTAGE Current 118,723,338.70 0.783 0-30 Days 3,587,445.52 0.024 31-60 Days 120,596.86 0.001 61-90 Days 139,940.13 0.001 Over 90 Days 29,011,906.52 0.191 151,583,227.73 1.000

EFFECTS OF EXISTING ENVIRONMENTAL LAWS & REGULATIONS AND THE COSTS AND EFFECTS OF COMPLIANCE WITH THE SAID ENVIRONMENTAL LAWS & REGULATIONS

Aware of its corporate social responsibility to protect the environment, VMC had successfully installed its anti- pollution control equipment notwithstanding its dismal financial situation, not to mention being under Corporate Rehabilitation. VMC had already spent more than Two Hundred Million Pesos for its Anti-Pollution Control Equipments (APCE), plus Ten Million Pesos for their yearly maintenance.

Thus, while it is paramount for VMC to religiously undertake its rehabilitation endeavors by dedicating the biggest bulk of its resources to paying its creditors pursuant to the schedules mandated by its Approved Rehabilitation Plan, it also humbly acknowledges the importance of a healthy environment in the community.

VMC MANPOWER

As of August 31, 2012, VMC has three (3) executive officers and one (1) creditor-appointed controller, with 2,326 workers who are being deployed by service providers or contractors.

ITEM 2 – PROPERTY

The VMC main office, mill operations, and related facilities constitute the “heart” of the Company where the industrial complex in producing sugar and the residential community co-exist in a relatively harmonious environment. The total landholdings of the Company aggregate to 7,824,892 square meters. The main plant is situated in a 3,502,432 square meters of land within Victorias City. The Company landholdings include a 3,639,679 square meters land in Manapla, Negros Occidental, 664,520 square meters in Cadiz City, 1,000 square meters in Bacolod City, 159 square meters in Talisay City, 4,089 square meters in Iloilo and 13,013 square meters property in Antipolo, Rizal.

However, practically all of the land holdings, including some plant and equipments of the Company are under a Mortgage Trust Indenture (MTI) with a fair market value of almost P2.0 Billion, as collateral to VMC loans in the past.

The following are the major operational machineries and equipment owned by VMC and located within its compound in Victorias City, Negros Occidental: a) A & C Mills; b) Various Boilers; c) Boiling House equipment; d) Refinery; e) Powerhouse; and f) other Engineering equipment and machineries.

These properties were mortgaged to VMC’s creditor banks. They are fully owned by VMC.

The following are the VMC Subsidiaries’ respective principal properties, machineries and equipment:

1) VICTORIAS GOLF & COUNTRY CLUB, INC. (VGCCI) - Clubhouse, 18 hole Golf Course, Office Room, Locker & Shower Room, Canteen & Kitchen, Pavillon, Basement, Green Mowers 22”, Five Gang Fairway Mower.

2) VICTORIAS FOODS CORPORATION (VFC) - Cold Storage 2 compressor 9 cooling PL-EVAP with motor, Seamer Vacuum Automatic Shin-1 for can size 211 x 300, Fish Processing Plant Building, Coldroom/Cold Storage, Blast Freezer, Refrigeration Equipment System, Boiler House, Tank & equipment, Waste Water Treatment Plant.

3) VICTORIAS QUALITY PACKAGING CORPORATION (VQPC) - Warehouse, Canteen, Guardhouse, Extruder Machines (2 units), Circular Weaving Machines (28 units), Film Blowing Machines (2 units), High Sewing Machines (10 units), Bagging & Sealing Machines (3 units), Pelletizing Machine. 4) CANETOWN DEVELOPMENT CORPORATION (CDC) - Subdivision lots at Manapla and Vicotiras, Memorial Garden, Agricultural Land, VMC Engineering Complex Land Area.

5) VICTORIAS AGRICULTURAL LAND CORPORATION (VALCO) - Total of 3,058,178 square meters landholdings.

Other VMC Properties:

1. 202.02 hectares of cane field located in Manapla and Cadiz City, Negros Occidental, which is being cultivated by MIGAN Corporation for five (5) crop years starting from September 1, 2011 up to August 31, 2016. MIGAN Corporation guarantees and pay to VMC, 20 Lkg. per hectare per year as the latter’s share for the cultivation at first picul milled basis in sugar quedan(s).

2. 113.5015 hectares of cane field located in Victorias City, Negros Occidental which is being cultivated by Migan Corporation for five (5) crop years or from CY 2009-2010 up to CY 2013-2014 as duly approved by VMC’s Executive Committee during its meeting on October 10, 2008. Migan guaranteed to pay VMC 26 Lkg. per hectare for one year, as the latter’s share for the arrangement, at first picul milled in sugar quedan.

3. A parcel of land located at Bacolod City, Negros Occidental covered by TCT No. 183131 (Lot No. 26-B) and TCT No. 183132 (Lot No. 26-A) is being utilized by Enting’s Restaurant for two years commencing from May 1, 2011 up to May 1, 2013.

4. 3.537 hectares of land located in Manapla, Negros Occidental is being utilized by VMC for its distillery. Principal properties located therein are its distillery plant, distillation machineries and equipments, and powerhouse. The distillery is currently on its testing operation that started on November 2011. Full operation is targeted to start on March 2013.

5. A part of a parcel of land located at Brgy. XVIII, Hda. Florencia, Vicmico Compound, Victorias City, Negros Occidental covered by TCT No. RT-105-75 is being utilized by Globe Telecom under the Contract for ten (10) years from January 16, 2006 up to January 16, 2016 at Php 15, 000.00 as monthly rental exclusive of VAT but inclusive of withholding tax. Further, another portion of the same parcel of land is also being utilized by KEYLARGO Commodity Trading under the Contract for three (3) years from February 1, 2012 up to January 31, 2015 at P100,000 as monthly rental inclusive of VAT.

ITEM 3 – LEGAL PROCEEDINGS

Cases filed for and against VMC are being handled by the Company’s In-house Counsels and by its External Counsels.

The External Counsels are Hilado Hagad & Hilado Law Offices, Gabionza De Santos & Partners, Mirano Mirano Mirano & Mirano Law Offices, Hechanova Bugay & Vilchez, Quiason Makalintal Barot Torres Ibarra & Sison and Zambrano & Gruba Law Offices.

ITEM 4 – SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

Except for the matters taken up during the Annual Stockholders’ Meeting, there was no other matter submitted to a vote of security holders during the period covered by this report.

PART II – OPERATION AND FINANCIAL INFORMATION

ITEM 5 – MARKET FOR ISSUER’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Trading of VMC’s shares with the Philippine Stock Exchange (PSE) resumed on May 21, 2012 pursuant to the Order of the Securities and Exchange Commission (SEC) dated March 2, 2012 lifting the Order of Suspension of Trading of the shares of VMC.

The number of Stockholders on record and common shares outstanding as of August 31, 2012 stood at 5,588 and 2,024,616,452, respectively.

VMC has neither declared cash nor stock dividend for the three most recent crop years.

Top 20 Stockholders as of August 31, 2012

Top Name Citizenship No. of Shares Percentage (%) 1 PCD Nominee Corporation Filipino/Other Alien 1,074,109,044 53.0524% 2 Tanduay Holdings, Inc. Filipino 170,133,159 8.4032% 3 Philippine National Bank Filipino 161,978,995 8.0004% 4 Australia and New Zealand Banking Group Australian 68,201,941 3.3686% Limited 5 Global Business Bank, Inc. Filipino 67,458,871 3.3319% 6 Development Bank of the Philippines Filipino 63,156,612 3.1194% 7 Metropolitan Bank and Trust Company Filipino 56,925,724 2.8116% 8 Philippine Savings Bank Filipino 43,821,503 2.1644% 9 FEBTC TA #401-00012 Filipino 27,360,373 1.3513% 10 China Banking Corporation Filipino 19,392,096 0.9578% 11 Philippine Veterans Bank Filipino 18,268,442 0.9023% 12 Terence Son Keng Po Filipino 14,500,344 0.7162% 13 Asiatrust Development Bank Filipino 12,735,166 0.6290% 14 AB Capital & Invest. Corp.-Trust & Invest Div. Filipino 11,712,681 0.5785% 15 North Negros Marketing Co., Inc. Filipino 10,173,459 0.5024% 16 Asset Pool A (SPV-AMC), Inc. Other Alien 7,619,377 0.3763% 17 Bank of the Philippine Islands Filipino 5,658,157 0.2794% 18 Bank of Commerce Filipino 5,219,555 0.2578% 19 FEBTC A/C #341-0048 Filipino 5,133,112 0.2535% 20 Liberty Trading/Navigation Co. Filipino 4,772,380 0.2357%

ITEM 6 – MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF ACTION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

FINANCIAL CONDITION as of August 31, 2012 in comparison with August 31, 2011

1. Cash and cash equivalent. The increase by P163 million (18%) is mainly due to cash provided by operating activities of P1.721 billion, decreased by net cash used in investing activities of P960 million and net cash used in financing activities of P597 million.

2. Trade and other current receivable decreased by P10 Million (7%) mainly due to decrease in receivables coming from trade by P2.4 million (2%) and other current receivables by P12.9 million (62%). Advances to suppliers and to planters’ association increased by P2.8 million (60%) and P2.6 million (100%), respectively.

3. Inventories decreased by P607 million (63%) mainly due to reduction in raw sugar inventory by P558 million (90%) attributed to the increase in volume sold this year coupled with the decrease in raw sugar average production cost per LKG this year. Also, unbilled tolling cost decreased by P72 million (50%) due to higher withdrawal of refined sugar this year compared to last year.

4. Other Current Assets decreased by P35 million (47%) mainly attributable to decrease in input value added taxes by P36 million (53%).

5. Property Plant and Equipment increase is due to acquisition of machineries and equipment amounting to P155 million and the increase in project under construction by P286 million of the Parent Company due to various upgrading and replacement of machinery and equipment in Sugar Manufacturing area and at Manapla Distillery plant.

6. Investment Properties decreased by P7.9 (1%) million because of the transfer of certain land and building that were formerly leased to a third party from investment properties to property, plant and equipment.

7. Other Noncurrent Assets increased by P497 million (38%) mainly because surplus cash generated from operations are earmarked as reserve for debt repayment during the year.

8. Trade and other current payables decreased by P126 million (25%) mainly due to reduction in liabilities to trade suppliers by P114 million (38%) and customers’ deposits by P37 million (53%).

9. Income tax payable moved down to P89 million from P101 million primarily due to higher income tax payment for the first 3 quarters compared to last year.

10. Long-term debts - net of current portion decreased by P537 million mainly due to principal payments on peso restructured loans and FCDU loans amounting to P359 Million and this year’s conversion of convertible notes amounting to P118 Million that also resulted in the reversal of accrued interest expense amounting to P62 Million this year.

11. Deferred Tax Liabilities - net went down to P534 million (by P46 million, 8%) mainly due to the 30% tax effect of depreciation on appraisal increase and the amortization of provision on sugar liabilities.

12. Retirement benefit obligation reduced to P89 million (by P7 million, 8%) representing actual payment of pensions to retired employees.

13. Total Stockholder’s Equity has now a balance of P1.818 billion, the increase amounting to P870 million (92%) is mainly due to the current year’s net income of P556 million, the transfer of P133 million convertible notes awaiting conversion to equity and the conversion of convertible notes to equity amounting to P118 million which also resulted from the recognition of “Additional Paid-In Capital amounting to P62 million related from accrued interest payable that was extinguished as part of the conversion.

RESULTS OF OPERATION

2012 vs. 2011

 Revenues in 2012 reached P4.6 Billion, surpassing previous year’s revenues by 11%. The core business, comprising of the raw and refined sugar operations, accounts for 98% of the total revenues. Breakdown of revenues is summarized as follows:

1. Raw sugar revenues slightly decreased by P12.9 million (0.42%) even though there is an increase in volume sold by 48% or 772,699 LKG this year. Average selling price decreased by 33% from P 1,908.90 last year to P1,284.35 per LKG this year. Higher volume sold this year is attributed to available raw sugar inventory for sale coming from the ending inventory of the previous crop year.

2. Tolling revenues, increased by P553.2 million (68%) mainly due to the increase in volume tolled/sold by 2,561,045 LKG this year. The increase is due to higher refined sugar withdrawal this year by 68%.

3. Molasses revenues decreased by P129.1 million (50%) mainly due to the decrease in average selling price from P6,106.63 last year to only P3,133.67 per metric ton this year and the decrease in volume sold from 42,097 m.t. to 40,834 m.t. this year.

4. Distillery operation’s revenues is at P59.41 million representing 1,600,000 liters of denatured alcohol sold. The distillery started operations only this year.

5. Engineering Revenues from outside jobs this year registered a decrease by 56% considering that the Company ceased to accept outside engineering jobs to concentrate on engineering repairs for its sugar factory operations. The revenues posted this year represented the remaining jobs contracted from last year that were completed and delivered in the first quarter of this crop year.

OTHER INCOME

Other income decreased by P156 million (63%) mainly due to the gain on early extinguishments of liabilities recognized last year for P138 million (none this year). Also, foreign exchange gain – net recognized during the year decreased by P23 million (94%).

COST OF GOODS SOLD AND MANUFACTURED

Total Cost of Goods Sold and Manufactured this year amounted to P3.225 billion is higher by 2% compared to last year’s P3.160 billion. The increase is due to the following reasons:

1. Sugar Operations is slightly higher by P5.50 million only (0.20%) mainly due to higher raw sugar volume sold and higher sugar tolled and withdrawn this year. Average raw sugar production cost per

LKG decreased by 34% due to the decrease in cost of cane hauling this year. Last year, the management granted higher Temporary Volume Incentives in an effort to drive up the cane supply.

Average refining cost per LKG decreased by 27% due to the increase in production by 68% and the decrease in energy consumption expenses attributed to improved process efficiencies and lesser power breakdown this year.

2. Engineering total cost and operating expenses is lower by 51% compared to last year. The decrease is mainly attributed to management’s decision this year of no longer accepting outside jobs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

1. Selling and Marketing expenses is lower by P 20.8 million (28%) compared to last year mainly due to lower contracted services for the storage and handling of sugar, lower taxes and licenses and lower materials and supplies.

2. General and administrative expenses are higher by P 5.3 million (2%) compared to last year mainly due to increase in professional fees.

OTHER EXPENSES Other expenses decreased by P15 million (5%) mainly due to the decrease in other account by P23 million (80%) compared to last year.

NET INCOME

Year-to-date Net Income as of August 31, 2012 is higher by P156 million (39%) this year from P399 million to P556 million mainly due to increase in income from sugar operation.

Operating Performance

Years Ended August 31 (in Millions) Major Production Parameters 2012 2011 2010 Tons Cane Milled 3.100 M 3.116 M 2.552 M Raw Sugar Production (LKg) 6.400 M 5.709 M 5.677 M LKG Refined Sugar Production (LKg) 6.032 M 4.382 M 5.153 M LKG Milling Recovery 2.06 1.83 2.22 (LKG/TC)

The slight reduction on milling tonnage this year by 0.5% against the previous year did not adversely affect raw sugar production volume because of the improvement in sugar recovery (LKG/TC) at 2.06 as compared with previous year’s low LKG/TC at 1.83. Good weather condition, favorable to cane productivity and quality, resulted in higher output as well as good quality and matured canes.

There is a significant increase in refined sugar production this year by 37% compared to last year because major upgrading were undertaken on Refinery’s machineries to improve process performance and efficiencies.

PLANS, COMMITMENTS, AND EVENTS THAT HAVE MATERIAL IMPACT ON THE ISSUER’S LIQUIDITY

There are no:  Known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company’s material liquidity problem;  Known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations;  Significant elements of income or loss that arose from continuing operations; and  Seasonal aspects that had material effect on the financial condition or results of operations.

COMMITMENTS FOR CAPITAL EXPENDITURES THAT WOULD ADDRESS PAST PROBLEMS AND HAVE AN IMPACT ON FUTURE OPERATIONS:

The Company has allocated a total capital expenditure budget of P 288 Million for this year’s replacement of defective machineries and equipment and for the upgrading of facilities to improve operational performance and efficiencies. Among the major component of this year’s capital expenditure budget is the upgrading of C-Mill no. 6 for better cane extraction and lower bagasse moisture, acquisition of four (4) mill roller shafts for A-Mill to replace defective shafts, and installation of one unit Scrubber for Riley no. 3 boiler to address air pollution concerns.

The rehabilitation of the Distillery Plant in intended to further improve the quality output of alcohol production. The rehabilitation of the Distillery Plant started in April 2011 and was commissioned in November 2011 but upgrading of its facilities is still on-going up to this time. The operation of the Distillery Plant is intended to boost the Company’s revenues using its by-product molasses for the production and sale of alcohol.

Sources of funds for the aforementioned expenditures would be coming from the funds generated from operations.

VICTORIAS MILLING CO., INC. SUBSIDIARIES

VICTORIAS FOODS CORPORATION (a wholly-owned subsidiary VMC)

Sales for 2012 were registered at 9% lower than 2011 amounting to P30,958,735 and P33,859,217 for 2012 and 2011, respectively. The decline in sales is attributed to lower sales on canned fish and refined sugar as compared with last year. Canned fish sold for 2012 and 2011 is 618,816 and 709,872 cans, respectively and refined sugar sold for 2012 and 2011 is 18,660 and 35,673 kilos for 2012 and 2011, respectively.

VICTORIAS AGRICULTURAL LAND CORPORATION (a wholly-owned subsidiary of VMC)

Sales for 2012 were registered at 33% lower than 2011 amounting to P990,619 and P1,487,462 for 2012 and 2011, respectively. The decline in sales is attributed to the lower sugar price as rental income received by the Company is based on the production produced by LKG multiplied by sugar price.

CANETOWN DEVELOPMENT CORPORATION (a wholly-owned subsidiary of VMC)

Sales for 2012 were registered at 1% lower than 2011 amounting to P4,032,120 and P4,054,191 for 2012 and 2011, respectively. The decline in sales is attributed to the decrease in revenue on sale of

real estate held for sale with effect offset by an increase in rental income.

VICTORIAS GOLF AND COUNTRY CLUB, INC.

Sales were composed of membership fees and service fees. Sales for 2012 were registered at 50% higher than 2011 amounting to P7,942,582 and P5,292,812 for 2012 and 2011, respectively. The growth in sales is attributed to the service fees received from golf course availed in bulk by various non-members or walk-in customers.

VICTORIAS QUALITY PACKAGING CORPORATION

Sales for 2012 were registered at 28% lower than 2011 amounting to P63,233,214 and P87,755,404 for 2012 and 2011, respectively. The decline in sales is attributed to lower sales and production of sacks sold to VMC.

In July 16, 2012, Victorias Quality Packaging Company, Inc. ceased its operations due to serious business losses.

Below are the last two (2) crop years’ analyses of financial condition and results of operation.

CY 2010-2011

PRODUCTION PERFORMANCE

Total canes milled for CY 2010-2011 reached 3,115,914 M tons, 4% higher than the projected volume for the year at 3.0 Million tons cane and 22% higher versus the previous year’s volume of 2,552,299 MT. The extremely wet weather (La Niña) in C. Y. 2010-2011 favored cane growth that resulted in high tonnage milled per hectare. Expansion in area planted to sugarcane also contributed to surplus in cane tonnage. Additional incentives were also given to planters during the period of high sugar prices in order to be competitive with other sugar mills and maximize VMC’s market share.

The La Niña weather condition however, had an adverse effect on the sugar recovery or LKG/TC, which affected the whole province. The extremely high soil moisture resulted in low quality canes, which pulled down the LKG/TC from 2.21 of the previous year to 1.83 this year.

This year’s raw sugar production volume of 5.709 M Lkg is slightly higher by 1% versus the previous year’s volume owing to the increase in volume of canes milled brought by better farm productivity thereby yielding more tonnage per hectare.

Refined sugar production for this year of 4.382 M LKG significantly dropped by 15% compared to previous year because of the delayed start-up of Refinery’s operation by seven (7) weeks considering the lower level of raw sugar supply for cut-in and slowdown of output during the second half of the crop year with the high refined sugar inventory level.

FINANCIALS

Total revenues for CY 2010-2011 of P 4.217 Billion improved by 7% versus previous year's revenues of P3.947 Billion, which is mainly attributed to higher raw and refined sugar prices this year.

Total cost of goods sold for this year at P3.160 Billion increased by 30% as compared to P2.427 Billion of the previous year mainly due to higher cane tonnage milled and additional incentives given to Planters to

maximize VMC’s share of the available cane supply volume in the province amidst very stiff competition with other sugar mills.

Net Income this year at P399 Million increased by 29% from the previous year’s P 310 Million generally because of higher revenues and reduction General and Administrative cost.

The Company has continued to comply with its financial obligations on the Rehabilitation Plan in spite of various setbacks encountered. For this year, the Company paid its creditors the interest payment on restructured loans amounting to P265.0 M and P360.0 M for the principal repayment.

CY 2009-2010

PRODUCTION PERFORMANCE

For CY 2009-2010, total tons cane milled of 2,552,299 MT has dropped by 7% against the previous year’s volume of 2,742,338 MT due to long period of El Niño weather condition experienced during the year, which affected the low productivity of cane farms in the province. On the other hand, milling recovery during the year rose to 2.21 LKG/TC from 2.11 LKG/TC of the previous year because the weather condition during the year was favorable to cane quality and continuous inputs of high yielding varieties were undertaken by the planters.

With the low cane supply tonnage, even at higher milling recovery, total raw sugar production for the year of 5,652,429 LKG reduced by 2.5% against previous year's production. Refined sugar production for this year of 5,153,446 LKG is also behind by 2% compared to previous year due to insufficient steam supply brought about by low supply of substitute fuel, especially mill-run and purchased bagasse.

FINANCIALS

In spite of lower production volume on raw and refined sugar, total revenues for CY 2009-2010 of P 3.947 Billion increased by 27% versus previous year's revenues of P3.107 Billion. The higher raw and refined sugar prices this year mainly contributed in the increase in revenues.

CY 2009-2010 total cost of goods sold of P2.427 B is slightly lower by 1% against P2.450 Billion of the previous year, which is mainly attributed to the drop in production volume.

The Company's net income for this year of P 310 million has increased substantially, from P 59.9 million of previous year.

The Company also spent P 495.4 Million during this crop year with the implementation of the Voluntary Attrition Program for its rank and file employees.

Top five (5) key performance indicators for Subsidiaries:

1. Sales growth – measures the percentage change in sales over a designated period of time. Performance is measured both in terms of amount and volume, where applicable.

2. Net income growth – measures the percentage change in net income over a designated period of time.

3. Net income rate – computed as percentage of net income to revenues - measures the operating efficiency and success of maintaining satisfactory control of costs

4. Return on investment – the ratio of net income to total assets - measures the degree of efficiency in the use of resources to generate net income

5. Current ratio – computed as current assets divided by current liabilities – measures the ability of the business to meet its current obligations. To measure immediate liquidity, quick assets [cash, marketable securities, accounts receivables are divided by current liabilities.

VICTORIAS GOLF & COUNTRY CLUB, INC. (VGCCI)

1. Sales Growth – 50% for 2012 and (9%) for 2011

Sales were composed of membership fees and golf service fees. Sales for 2012 were registered at 50% higher than 2011 amounting to P7,942,582 and P5,292,812 for 2012 and 2011, respectively. The growth in sales is attributed to the service fees received from golf course availed in bulk by various non-members or walk-in customers.

2. Net income growth – 154% for 2012 and (55%) for 2011

Net income for this year amounting to P3,555,201 reflects an increase of 154% compared with last year amounting to P1,397,791. The growth in net income is primarily due to net effect of significant factors particularly with sales growth of 50% as reduced somehow by increase of total expense of 1% and decrease in other income of 26%. The increase of total expense is due to increase in representation expense incurred and nonrecurring charges for settlement payment of labor case. Moreover, the decrease in other income is attributed primarily to the decline in sports and recreation income.

3. Net income rate – 45% for 2012 and 26% for 2011

For this year, total sales of P7,942,582 generates a net income amounting to P3,555,201 compared to previous year total sales of P5,292,812 which generates a net income amounting to P1,397,791. Total expenses for this year is P5,677,434 (P5,646,339 for 2011) and total other income is P1,290,053 for 2012(P1,751,318 for 2011).

4. Return on Investment – 3% for 2012 and 1% for 2011

Total assets for the year 2012 amounting to P114,681,821 yield a net income of P3,555,201 while for the year 2011 total assets for the year is P111,759,356 yield a net income of P1,397,791.

5. Current Ratio – 0.31:1 for 2012 and 0.19:1 for 2011

Current assets for the year is P9,125,638 and current liabilities is P29,688,639. Last year’s current assets is P5,878,610 and current liabilities is P30,321,375.

VICTORIAS FOODS CORPORATION (VFC)

1. Sales Growth – (9%) for 2012 and 7% for 2011

Sales for 2012 were registered at 9% lower than 2011 amounting to P30,958,735 and P33,859,217 for 2012 and 2011, respectively. The drop in sales was attributed to lesser revenue on canned fish and refined sugar with last year. Canned fish sold for 2012 and 2011 is 618,816 and 709,872 cans, respectively and refined sugar sold for 2012 and 2011 is 18,660 and 35,673 kilos for 2012 and 2011, respectively.

2. Net income growth – 35% for 2012 and (27%) for 2011

Net loss reported for this year amounting to (P4,395,984) shows an improvement of 35% compared with previous year net loss amounting to (P6,730,322). The improvement on operations of VFC is primarily due to net effect of significant factors particularly with cost savings measures adopted by VFC that reduced selling expenses for 24% and reduced administrative expense of 2%. The cutback of total selling expenses is due to reduction of salaries and wages for marketing staff (two employees were involuntarily separated from the Company due to death) and lower provision for depreciation on transportation equipment used for selling. The cutback in general and administrative expense is primarily attributed for the reduction in transportation expense and office supplies incurred. Notwithstanding that, sales went down by 9% correspondingly the cost of goods manufactured and sold went down by 12% resulting to a gross margin improvement of 46%. Other income also went down by 32% merely due to discontinuance of lease for the storage and the Company received lower slaughtering fee and fewer scrap sales this year.

3. Net income rate – (14%) for 2012 and (20%) for 2011

For this year, total sales of P30,958,735 generates a net loss amounting to (P4,395,984) compared to previous year total sales of P33,859,217 which generates a net loss amounting to (P6,730,321). Total expenses for this year is P39,275,715 (P44,927,936 for 2011) and total other income is P1,925,095 for 2012 (P2,815,535 for 2011). .

4. Return on Investment – (6%) for 2012 and (8%) for 2011

Total assets for the year 2012 amounting to P76,323,552 incurred a net loss of (P4,395,984) while for the year 2011 total assets for the year is P82,711,642 incurred a net loss of (P6,730,321).

5. Current Ratio – 20.14:1 for 2012 and 18.83:1 for 2011

Current assets for the year is P49,404,491 and current liabilities is P2,452,629. Last year’s current assets is P49,306,527 and current liabilities is P2,617,927.

VICTORIAS QUALITY PACKAGING CORPORATION (VQPC)

1. Sales Growth – (28%) for 2012 and (7%) for 2011

2. Net income growth – (893%) for 2012 and 12% for 2011

For 2012, net loss incurred by VQPC amounting to (P7,038,921) shows very significant decline compared with last year net income amounting to P887,848. The Company is under the process of liquidation. This leads the Company to incur net loss as sales declined by 28% for ceasing the operation. Despite the cost of goods sold were reduced by 25%, the Company shows negative gross margin primarily due to financial assistance given to laborers charged in production. Selling expenses which composed of freight and handling expenses increased by 55%. Moreover, general and administrative expense increased by 12% due to financial assistance paid for administrative staff and recognition of impairment of receivables. Other income decrease by 1% as the operation of the Company ceases during the year.

3. Net income rate – (11%) for 2012 and 1% for 2011

For this year, total sales of P63,233,214 generates a net loss amounting to (P7,038,921) compared to previous year total sales of P87,755,404 which generates a net income amounting to P887,848. Total expenses for this year is P78,426,913 (P93,895,081 for 2011) and total other income is P7,324,253 for 2012 (P7,405,245 for 2011).

4. Return on Investment – (123%) for 2012 and 6% for 2011

Total assets for the year 2012 amounting to P5,737,589 incurred a net loss of (P7,038,921) while for the year 2011 total assets for the year is P16,099,544 yields a net income of P887,848.

5. Current Ratio – 0.27:1 for 2012 and 0.26:1 for 2011

Current assets for the year is P5,737,589 and current liabilities is P21,083,562. Last year’s current assets is P5,331,615 and current liabilities is P20,303,147.

CANETOWN DEVELOPMENT CORPORATION (CDC)

1. Sales Growth – (1%) for 2012 and (6%) for 2011

Sales for 2012 were registered at 1% lower than 2011 amounting to P4,032,120 and P4,054,191 for 2012 and 2011, respectively. The decline in sales is attributed to falloff on sale of real estate held for sale (most of which were sale of memorial lot) offset by an increase in proceeds received from land rental.

2. Net income growth – (87%) for 2012 and 826% for 2011

Net income for this year amounting to P216,004 shows significant decline of 87% compared with last year net income amounting to P1,705,312. The decline on operations of CDC is primarily due to net effect of significant factors particularly with increase in costs and expenses of 7% and decrease of other income by 48%. The increase of costs and expenses is due to increase in contracted services, taxes and licenses and security services. The decrease in other income is particularly due to nonrecurring gain of extinguishment of liabilities for the previous year.

3. Net income rate – 5% for 2012 and 42% for 2011

For this year, total sales of P4,032,120 generates a net income amounting to P216,004 compared to previous year total sales of P4,054,191 which generates a net income amounting to P1,705,312. Total expenses for this year is P5,558,075 (P5,288,835 for 2011) and total other income is P1,848,338 for 2012 (P3,520,799 for 2011).

4. Return on Investment – 0.11% for 2012 and 42% for 2011

Total assets for the year 2012 amounting to P203,998,345 yields a net income of P216,004 while for the year 2011 total assets for the year is P204,498,617 yields a net income of P1,705,312.

5. Current Ratio – 0.68:1 for 2012 and 2011

Current assets for the year is P39,607,679 and current liabilities is P58,417,644. Last year’s current assets is P39,957,701 and current liabilities is P59,133,920.

VICTORIAS AGRICULTURAL LAND CORPORATION (VALCO)

1. Sales Growth – (33%) for 2012 and 20% for 2011

2. Net income growth – 48% for 2012 and (49%) for 2011

Net income for this year amounting to P509,145 reflects an increase of 48% compared with last year amounting to P343,409. Although sales were registered lower than previous year, the growth in net income is primarily due to net effect of significant factors particularly with lower provision for depreciation and decrease in payment of taxes and licenses, professional fees, transportation and representation expense. As an addition, interest income from bank deposit increased by 15%.

3. Net income rate – 51% for 2012 and 23% for 2011

For this year, total sales of P990,619 generates a net income amounting to P509,145 compared to previous year total sales of P1,487,462 which generates a net income amounting to P343,409. Total expenses for this year is P919,403 (P1,536,316 for 2011) and total other income is P459,526 for 2012(P400,595 for 2011).

4. Return on Investment – 0.43% for 2012 and 0.29% for 2011

Total assets for the year 2012 amounting to P118,001,210 yield a net income of P509,145 while for the year 2011 total assets for the year is P117,482,332 yield a net income of P343,409.

5. Current Ratio – 14.44:1 for 2012 and 13.93:1 for 2011

Current assets for the year is P27,047,315 and current liabilities is P1,873,077. Last year’s current assets is P25,948,964 and current liabilities is P1,863,344.

ITEM 7 – FINANCIAL STATEMENTS

(Please see attached duly signed Company’s Consolidated Financial Statements as of August 31, 2012, together with the notarized Statement of Management’s Responsibility, which was prepared by Manabat Sanagustin & Co. (KPMG), the Company’s external auditor for crop year 2011-2012, as Exhibit “A“.

ITEM 8 – CHANGES IN & DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There has been no disagreement with the external auditor on accounting, financial concerns, and disclosures in the Financial Statements, which is attached hereto as Exhibit “A”.

INFORMATION ON INDEPENDENT ACCOUNTANT

For Crop Year 2011-2012, the services of the accounting firm Manabat Sanagustin & Co. (KPMG), with office address at 9th Floor, KPMG Center, Ayala Avenue, Makati City, 6787, Philippines, was engaged to be the Company’s External Auditors, in compliance with the Company’s Code of Corporate Governance that provides that the Company’s External Auditor shall be rotated or the handling partner shall be changed every five (5) years or earlier.

EXTERNAL AUDIT FEES

Audit and Audit-Related Fees

The aggregate fees billed for each of the last two (2) fiscal years for professional services rendered by the external auditor for the audit of the Company’s annual financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagement for those fiscal years were:

CY 10-11 - P1,650,000.00 - net of VAT CY 11-12 – P1,870,000.00 - net of VAT

Tax Fees

There has been no fee billed for the last two (2) fiscal years for professional services rendered by the external auditor for tax accounting, compliance, advice, planning and any other form of tax services.

Audit Committee’s Approval Policies and Procedures for the Above Services

The Audit Committee’s approval policies and procedures for the above services are as follows:

1. The Audit committee invites bidders for the external audit engagement for preliminary evaluation. 2. The Committee then presents to the bidders, the corporate profiles of the companies to be covered by the audit. 3. The Committee likewise presents its expectations on the deadline for the completion of the Audit and filing of the audited financial statement. 4. The bidders are required to make its corporate profiles, list of experiences, and proposed audit engagement fee. 5. The Committee evaluates the proposals and makes a choice. 6. The choice is announced during the Stockholder’s meeting.

PART III – CONTROL AND COMPENSATION INFORMATION

ITEM 9 – DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER

VMC BOARD OF DIRECTORS

During VMC’s Annual Stockholder’s Meeting held on February 7, 2012, the following were elected as members of the VMC Board of Directors to serve as such from February 7, 2012 and until their successors shall have been duly elected and qualified-

1. Wilson T. Young, age 55, Filipino, is currently the Chairman of the Board of Directors of VMC, the Managing Director and Deputy Chief Executive Officer of Tanduay Holdings, Inc. and Chief Operating Officer of Tanduay Distillers, Inc. He likewise serves as a Director of the following: Absolut Chemicals, Inc., Asian Alcohol Corporation, Total Bulk Corporation, Flor De Caña Shipping, Inc., PAL Holdings, Inc.

(Baguio Gold Holdings, Inc.), Air Philippines Corporation, B.K. Titans, Inc., Perf Restaurants, Inc., Norfil Foundation Incorporated and Eton Properties Phil., Inc. Currently, he is also the Chairman of Total Credit Cooperative, Vice Chairman of the UE Ramon Magsaysay Memorial Medical Center, a Trustee of the University of the East, PAL Foundation, Inc. and Mithiing Pangarap Foundation, Inc. and the Project Officer of Tan Yan Kee Foundation, Inc.

2. Jose M. Chan, Jr., age 55, Filipino, is the Vice Chair of VMC’s Board of Directors. He is likewise currently the Senior Vice President – Deputy Head of Metropolitan Bank and Trust Company (Metrobank), which position he has maintained since 2002.

3. Abelardo E. Bugay, age 78, Filipino, is a professional Mechanical Engineer and a Director of the following: Victorias Foods Corporation, and Victorias Agricultural Land Corporation. He was formerly the Chairman of Victorias Gas Corporation and Directors of Victorias Quality Packaging Corporation and Canetown Development Corporation. In the last five (5) years, he had been a President of Victorias Golf and Country Club, Inc. and the Miguel J. Ossorio Pension Foundation, Inc. and a Director of Canetown Development Corporation. He was VMC’s President until 31 August 2009 and has been connected with VMC for a total of thirty four (34) years now.

4. Hubert D. Tubio, age 57, Filipino, is the incumbent President and Chief Executive Officer of VMC effective 01 August 2009. In the past five (5) years, he became Chairman of the following: Canetown Development Corporation, Victorias Foods Corporation, Victorias Agricultural Land Corporation and Victorias Quality Packaging Corporation. He was likewise a Managing Director of CbyT Consultants and previously the President and Managing Director of Consultancy by Technicus Corporation (CbyT), a subsidiary of Deutsche Telekom A.G. He was also formerly connected with the following corporations, namely: Visay Tech Corporation, Globe Telecom, Inc., Islacom and Bogo-Medellin Milling Corporation. Prior to sitting in the Board of Directors of VMC, he was a Member of the Board of Directors of Globe Telecom, Inc. and Visay Tech Corporation.

5. Cecilia C. Borromeo, age 53, Filipino, is the incumbent Treasurer of VMC. She is the Executive Vice President of the Agricultural & Development Lending Sector of the Land Bank of the Philippines and the current Chairman of the Land Bank’s Credit Committee. She serves as a management representative to the Board of the Land Bank and a member of the following Committees in Land Bank’s Board: Investment and Loan Executive Committee, Management Committee, Asset and Liability Committee, Organizational Review Executive Committee, Information Technology Committee and Enterprise Risk Management Steering Committee. She is also a member of the Board of Directors of LBP Leasing Corp. and LBP Foundation, Inc. For the past five (5) years, Ms. Borromeo has been Land Bank’s Executive Vice Present of the Institutional Banking & Subsidiaries Sector, Senior Vice President of the Institutional Banking & Subsidiaries Sector, Account Management Group and Global Banking Department.

6. Norberto B. Capay, age 65, Filipino, currently chairs the Audit Committee of VMC. Moreover, he is the President of the Victorias Agricultural Land Corporation (VALCO), Victorias Quality Packaging Corporation. He is likewise currently a Director of Victorias Golf & Country Club, Inc. and from 2011 until October of 2012, he was the President of Victorias Foods Corporation.

7. Enrique T. Chua, age 66, Filipino, and connected with Fortune Tobacco Corporation since 1969. He is currently a member of the Board of Directors of A Plus Credit Corp. and Creditline Financing Company. In

the past five (5) years, he was a Director of Tanduay Holdings, Inc. from 2006 until 2010 and served as a Board Member of the Federation of Filipino Chinese Chamber of Commerce and Industries, Inc. and the adviser of the University of Asia and the Pacific.

8. Brian Keith F. Hosaka, age 41, Filipino, age 41, is one of the founding partners of Paner Hosaka & Ypil Attorneys-at-Law. For the past five (5) years, he was connected with Nota Bene, Quezon Coconut Producers’ Bank, Xbot and TechBox International Inc.

9. Anna Rosario V. Paner, age 40, is VMC’s Chair of the Legal Committee. She has been a private law practitioner since 1996 and is one of the founding partners of Paner Hosaka & Ypil Attorneys-at-Law. She currently chairs Victorias Foods Corporation and, for the past five (5) years, she has been connected with Philippine Opportunities for Growth, Income (SPV-AMC), Inc., Techbox International Inc. and Nota Bene as their Director.

10. Armando O. Samia, age 60, Filipino, is the Chair of VMC’s Nominations, Corporate Governance and Compliance Committee. For the past five (5) years, he was with the Development Bank of the Philippines as its Senior Executive Vice-President and Al-Amanah Islamic Investment Bank of the Philippines as the Chairman and Chief Executive Officer. In addition thereto, he was the Executive Vice President and Head of Corporate Banking (Head Office) Sector of DBP.

11. Michael G. Tan, age 46, is presently the Chief Operating Officer of Asia Brewery, Inc. and the President and Chief Operating Officer of LT Group, Inc. For the past five (5) years, he served as a Director of the following corporations: Abacus Distribution Systems Philippines, Inc., Allied Banking Corporation, Eton Properties, Inc., Philippine National Bank and PMFTC.

Corporate Officers

In the subsequent organizational meeting of the Board of Directors, the following corporate officers were appointed –

1. Wilson T. Young, Chairman of the Board of Directors

2. Jose M. Chan, Jr., Vice Chairman of the Board of Directors

3. Hubert D. Tubio, President and Chief Executive Officer

4. Cecilia C. Borromeo, Treasurer

5. Santiago T. Gabionza, Jr., age 54, Filipino, is one of the Founding Partners of the Law Firm of Gabionza De Santos & Partners and is presently VMC’s rehabilitation legal counsel. He is the Corporate Secretary of various corporations. He has been legal counsel and Rehabilitation Receiver in several rehabilitation cases. He was elected as VMC’s Corporate Secretary.

6. Eva A. Vicencio-Rodriguez, age 44, Filipino, a Master in Business Administration degree holder, is VMC’s duly elected Assistant Corporate Secretary and appointed Compliance and Information Officer. She is likewise the Head Consultant of VMC’s Legal and Administrative Services Department and the Corporate

Secretary of the following: Victorias Foods Corporation, Victorias Quality Packaging Corporation and Canetown Development Corporation, where she likewise serves as a Director.

Executive Officers of VMC

1. Hubert D. Tubio, age 57, is the President and Chief Executive Officer of VMC. He is a professional Certified Public Accountant and has been with VMC for six (6) years now.

2. Arcadio S. Lozada, Jr., age 58, Filipino, is currently occupying the position of Vice President for Manufacturing and is a member of the Board of Directors of Victorias Quality Packaging Co. A licensed mechanical engineer with a wide background in sugar manufacturing and management, he started his career with VMC in 1977 and, thereafter, occupied various positions in companies, particularly Ramu Sugar Ltd in Papua New Guinea as its Shift Engineer, ARCAM and Co. as the latter’s Chief Engineer, Central Azucarera de Tarlac as the Engineering Manager and Bronzeoak Philippines, Inc. as its Technical Manager. He is now back in VMC since August of 2010.

4. Teresita V. Ilagan, age 53, Filipino, is the Creditor-Appointed-Controller of VMC. She is concurrently Director and Treasurer of various VMC subsidiaries, particularly Canetown Development Corporation and Victorias Agricultural Land Corporation. She is likewise serving Victorias Food Corporation as its Director/Treasurer/Chief Finance Officer; Victorias Golf & Country Club Inc. as the latter’s Managing Director/Treasurer and the Liquidator of Victorias Quality Packaging Corporation. She is a Certified Public Accountant and an MBA degree holder.

5. Atty. Jerry T. Opinion, age 59, Filipino, a Certified Public Accountant, is the Chief Financial Officer of VMC and is currently a member of the Board of Directors of the following: Victorias Golf & Country Club, Inc., Canetown Development Corporation, Victorias Agricultural Corporation and OK Bank, Inc. He has been connected with the Southeast Asian Fisheries Development Center as the Head for Administration and Finance, Panay Electric Company as the Vice President for Finance, Commission on Audit (Philsucom-Nasutra) as Auditor V.

To the knowledge and/or information of the Corporation, the above elected members of the Board of Directors or Corporate Officers are not, presently or during the last (5) years, involved or have been involved in any legal proceedings affecting/involving themselves and/or their property before any court of law or administrative body in the Philippines or elsewhere and have not been convicted by final judgment of any offense. The said persons mentioned above are not related to each other in any way.

There is no person who is not a corporate officer of the Company who is expected to make a significant contribution to the business. The Company, however, engages the services of consultants. As of August 31, 2012, the Company had 47 consultants and 1 under special contract.

There were no transactions during the last two years or any proposed transactions, to which the Company was or is to be a party, in which any director or officers, any nominee for election as a director, any security holder or any member of the immediate family of any of the person mentioned had or is to have a direct or indirect material interest.

COMPLIANCE WITH LEADING PRACTICES ON CORPORATE GOVERNANCE VMC substantially adopted all the provisions of the Manual on Corporate Governance, as prescribed by SEC Memorandum No. 2, Series of 2002. Further, VMC is committed and is trying its best to comply with the provisions of the Corporation’s Manual on Good Corporate Governance.

Adherence thereof as well as to the other corporate principles and best practices is strongly advised all throughout VMC in all its activities and undertakings.

Deviation

There is no deviation from the provisions of the Manual on the election of independent directors, considering that the composition of the Company’s Board of Directors is determined under its rehabilitation plan.

ITEM 10 – EXECUTIVE COMPENSATION

The top officers of the Company are its President and CEO, Mr. Hubert D. Tubio, Chief Finance Officer, Atty. Jerry T. Opinion, Vice-President for Manufacturing, Mr. Arcadio S. Lozada, Jr., and Creditor-Appointed- Controller, Ms. Teresita V. Ilagan.

The total annual compensation paid to all executive officers was all paid in cash. The total annual compensation, which includes the basic salary, bonus and other compensation, for the past year amounts to NINETEEN MILLION EIGHTY-FIVE THOUSAND SEVEN HUNDRED SIX (P19,085,706).

Annual Salary Bonus and Other Compensation Compensation Year 2013 2012 2011 2013 2012 2011 (projected) (projected) Executive Officers’ Compensation 19,440,000 16,458,206 14,820,742 2,940,000 2,627,500 3,346,875 All other officers as a group unnamed There are no other executive officers apart from the President and CEO, the Chief Finance Officer, the Vice-President for Manufacturing and the Creditor-Appointed- Controller.

Compensation of VMC Board of Directors

There is no compensatory plan or arrangement including payments to be received from the registrant with respect to a named executive officer.

Employment Contracts

The Company entered into a Consultancy Contract with its President and Chief Executive Officer, Mr. Hubert D. Tubio, effective September 1, 2009. Mr. Tubio was engaged by VMC to exercise general supervision and management of VMC and to ensure financial health and attainment of financial targets. Atty. Jerry T. Opinion was hired to be the Company’s Chief Finance Officer (CFO) effective November 1, 2009. The CFO’s over-all responsibility in the Company, are as follows: planning and budgeting, business control and performance reviews, financial accounting & recording. Mr. Arcadio S. Lozada, Jr. was appointed as Vice-President for Manufacturing on August 1, 2010 to oversee the manufacturing operations and to ensure efficiency of the same.

Change in Control

After the conversion into equity of P1,528,674,469 worth of debt of VMC to creditor banks pursuant to the Approved Rehabilitation Plan, which resulted in a change in control effective October 9, 2002, whereby the creditor banks acquired 69% of the ownership of VMC while the ownership of the existing stockholders prior to the conversion was reduced to 31%, no significant change in control has so far occurred.

ITEM 11 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Record and Beneficial Owners and Management

The following are known to VMC to be directly or indirectly the record or beneficial owner of more than five (5) percent of registrant’s voting securities (VMC has only one class of voting security, i.e. common shares) as of August 31, 2012:

TITLE of CLASS Name & Address of Record Owner and Relationship Citizenship Number of Percentage with Issuer Shares Held (%) Common PCD Nominee Corporation – Stockholders (The Filipino/Other 1,074,109,044 53.0524% Hongkong and Shanghai Banking Corporation owns Alien 487,590,278 shares or 24.08% of the issuer’s total outstanding capital stock as of August 31, 2012) Common Tanduay Holdings, Inc. –Stockholder Filipino 170,133,159 8.4032% Common Philippine National Bank Makati Business Center, Filipino 161,978,995 8.0004% Grd. Flr. Manila Bank Bldg., 6772 Ayala Ave., Makati City – Creditor

Security Ownership of Management as of August 31, 2012

TITLE of Class Name Citizenship No. of Shares Percentage (%) Common Hubert D. Tubio - President and CEO Filipino 1,626 0.000% Common Arcadio S. Lozada, Jr. - VP for Filipino 2,182 0.000% Manufacturing

ITEM 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No members of the VMC Board of Directors and Executive officers are related to each other up to the fourth civil degrees by consanguinity or affinity.

ITEM 13 – EXHIBITS

1. EXHIBIT “A” – Consolidated Audited Financial Statement as of August 31, 2012 2. EXHIBIT “B” – Reports on SEC Form 17-C

ITEM 14 – REPORTS ON SEC FORM 17-C (EXHIBIT”B”)

1. Reported on June 29, 2012, relative to VMC’s proposed amendments to its Alternative Rehabilitation Plan and Debt Restructuring Agreement, a meeting with the VMC creditors was held on Jun. 29, 2012.

2. Reported on May 23, 2012, the Certificate of Filing of VMC’s Amended Articles of Incorporation dated May 16, 2012 issued by the SEC.

3. Reported on May 4, 2012, the VMC Board of Directors during its regular meeting on May 4, 2012 approved the proposed amendments to the Alternative Rehabilitation Plan and Debt Restructuring Agreement (DRA) of VMC.

4. Reported on March 16, 2012, the Order of the Securities and Exchange Commission (SEC) dated March 2, 2012 granting the lifting of Suspension of Trading of VMC Shares.

5. Reported on February 24, 2012, the additional information on the identity of the noteholders as well as the nature of the transaction relative to the conversion of notes to equity pursuant to the Debt Restructuring Agreement of VMC.

6. Reported on February 7, 2012, the disclosure on the events that transpired during the Annual Stockholder’s Meeting of VMC which was held on even date such as the results of the election of the members of the Board of Directors as well as of the officers, the appointment of VMC’s External Auditor, the approval of the proposed amendments of VMC’s Second Articles of Incorporation and the organization of committees.

7. Reported on January 16, 2012, VMC’s Outstanding Shares as of January 16, 2012 is 2,024,616,452.

8. Reported on December 5, 2011, disclosure on the agenda and record date of the Annual Stockholder’s Meeting of VMC on February 7, 2012.

9. Reported on December 6, 2011, disclosure on matters taken up during the regular meeting of the Board of Directors on November 18, 2011 relative to the approval and/or ratification of the stockholders representing at least 2/3 of the outstanding capital stock during the Annual Stockholders’ Meeting on February 7, 2012.

10. Reported on December 16, 2011, the Board of Directors during its regular meeting on even date approved the conversion of convertible notes of Narra Capital Investment Corp., pursuant to the DRA of VMC.

11. Reported on October 7, 2011, pursuant to the DRA, the Convertible Notes amounting to P310,046,219 have already been converted into equity amounting to 310,046,219 shares.

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except When Otherwise Stated)

1. Reporting Entity and Status of Operations

Reporting Entity Victorias Milling Company, Inc. (herein referred to as the “Parent Company” or “VMC”) was organized and registered originally on May 7, 1919 with the Philippine Securities and Exchange Commission (SEC) with an original corporate life of 50 years or until May 7, 1969. The corporate life was extended for an additional period of 50 years or until May 7, 2019. The primary purpose of the Parent Company is to operate mill and refinery facilities for sugar and allied products, as well as engineering services. In November 2011, VMC started the production of distilled and denatured alcohol using molasses, a by-product from its sugar milling operations.

The Parent Company and following subsidiaries and associate (collectively herein referred to as the “Group”) were incorporated in the Philippines.

Percentage of Effective Nature of Ownership Business Direct Indirect Victorias Foods Corporation (VFC) Food Processing and Canning 100 - Victorias Agricultural Land Agricultural Corporation (VALCO) Land Leasing and Cultivation 100 - Canetown Development Real Estate Corporation (CDC) Development and Selling 88 12 Victorias Golf and Country Club, Non-profit Golf Inc. (VGCCI) Facilities 81 - Victorias Quality Packaging Manufacture of Company, Inc. (VQPC) Bags and Packaging Materials 55 - Victorias Industrial Gases Corporation (VIGASCO) Gas Dealership 30 -

In June 2012, the Board of Directors (BOD) of VQPC approved to cease VQPC‟s operations effective July 2012. The Parent Company‟s percentages of ownership for the above subsidiaries and associate are the same for 2012, 2011 and 2010.

The VMC‟s shares of stock are listed in the Philippine Stock Exchange (PSE) but the trading of its shares is temporarily suspended in 1997 on the ground of alleged fraudulent misrepresentation of material information in the Parent Company‟s financial statements as well as in the continuing disclosure of VMC. Currently, VMC is under SEC receivership. In 2012, the SEC and the PSE have lifted its order of suspension of the trading of VMC‟s shares. Consequently, on May 21, 2012, the trading resumed.

The corporate office of VMC, its manufacturing plant and head office are in VICMICO Compound, Victorias City, Negros Occidental.

VFC VFC was registered and incorporated with the SEC on February 24, 1983 primarily to operate factories and other manufacturing facilities for the processing, preservation and packaging food products and selling the same at wholesale and retail. The corporate office and production plant of VFC is located at VICMICO Compound, Victorias City, Negros Occidental.

VALCO VALCO was incorporated and registered with the SEC on June 30, 1987 primarily to acquire and own agricultural and other real estate properties, by purchase, lease or otherwise to improve and develop the same, and to plant thereon all kinds of farm products. The registered address of VALCO is at VICMICO Compound, Victorias City, Negros Occidental.

CDC CDC was incorporated and registered with the SEC on February 19, 1974 primarily to purchase, develop, lease, exchange and sell real estate. CDC is effectively a wholly- owned subsidiary of the Parent Company through the 88% direct ownership and the 12% indirect ownership through VALCO. The registered address of CDC is at VICMICO Compound, Victorias City, Negros Occidental.

VGCCI VGCCI is a non-profit corporation registered with the SEC on October 8, 1992 primarily to engage exclusively in social, recreational and athletic activities on a non-profit basis among its stockholders, the core of which will be the acquisition and maintenance of a golf course and tennis courts, residential and other similar facilities.

The financial statements of VGCCI are currently undergoing audit and have not been finalized. VGCCI‟s unaudited total assets and revenues are less than two percent (2%) of the consolidated total assets and consolidated total revenues. Due to its immateriality, it is not included in the consolidation pending the finalization of the audit of its financial statements. Accordingly, the investment is carried in the consolidated financial statements at cost and presented in the consolidated statements of financial position as part of “Investments in Unconsolidated Subsidiary and in Associate” account (see Note 10).

The registered office of VGCCI is located in VICMICO Compound, Victorias City, Negros Occidental.

VQPC VQPC was incorporated and registered with the SEC on May 14, 1990 primarily to engage in the manufacture and sale of polyethylene bags, boxes, packages and special packaging products. The registered address and production plant of VQPC is at VICMICO Compound, Victorias City, Negros Occidental.

In June 2012, the BOD of VQPC approved to cease VQPC‟s operations effective July 2012.

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VQPC has accumulated deficit of P48.18 million, P44.86 million and P48.26 million and has capital deficiency of P15.35 million, P8.31 million, and P9.19 million as of August 31, 2012, 2011 and 2010, respectively. Due to this, the non-controlling interest was already insufficient to absorb the share in the accumulated losses. Accordingly, all the accumulated losses in the prior years were charged to the retained earnings attributable to the equity holders of the Parent Company.

All subsequent profits generated by VQPC, if any, will be credited to the retained earnings of the equity holders of the Parent Company until the non-controlling interest‟s share of losses previously absorbed by the former has been recovered.

VIGASCO VIGASCO, a 30%-owned associate, was incorporated and registered with the SEC on November 19, 1992 primarily to engage in importing, exporting, buying and selling, at wholesale or at retail, of gases, particularly oxygen, acetylene, hydrogen, liquefied pertroleum gas and any types of gases.

Due to the capital deficiency of VIGASCO resulting from operating losses, the investment is fully provided with allowance for impairment (see Note 10).

Going Concern Issue, Management‟s Assessment and Plan to Address The consolidated financial statements of the Group have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. As disclosed in Note 2 and 16, the Group is still under rehabilitation and debt restructuring programs. The Group has net income of P556 million in 2012, P400 million in 2011 and P310 million in 2010.

Due to the positive results of operations generated for 2012, 2011 and 2010 and for the past four years and the conversion to equity of certain convertible notes by the Parent Company, the Group has equity of P1.8 billion, net of deficit amounting to P968.3 million, as of August 31, 2012. Although the Group has been in compliance with the debt restructuring program, its continued compliance is ultimately dependent on the sustainability of the Group‟s profitable operations.

The consolidated financial statements do not include any adjustment relating to the recoverability and classification of assets and the settlement of liabilities that may be necessary should the Group be unable to continue under a going concern basis.

In its efforts to achieve continuing successful operations and effective implementation of the provisions of the rehabilitation plan, the Parent Company has continuously focused its corporate objectives, goals, strategies, and measures to attain sustainable financial stability through, among others: (a) synchronization of the refined sugar and raw sugar operations; (b) expansion of the boiling house to balance capacity with that of the A and C mills; (c) enhancement of mill efficiency; (d) increase profitability by addressing cost efficiency (which includes, among others, trimming down of corporate overtime expenses, minimizing contracted labor/services, and sourcing out and maximizing use of cheaper fuel substitutes instead of bunker fuel) and improving tolling fees; and (e) ongoing program of rightsizing manpower.

Moreover, the Parent Company‟s management has undertaken the following action plans to improve its financial position and its corporate governance structure:

1. Recapitalization and quasi-reorganization to reduce the deficit through reduction in capital stock and application of appraisal increment as discussed in Note 17.

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2. Conversion of debt into equity as discussed in Note 16.

3. Conversion of debt into convertible notes and ultimately, conversion of certain convertible notes to equity as disclosed in Note 16.

4. Improvement of cash flows.

As provided for in Section 13 of the Debt Restructuring Agreement (DRA), in the event that VMC‟s net cash flows at the end of a crop year exceeds the projected net cash flows for that particular crop year, VMC shall prepay in inverse order the restructured loans without penalty equal to 75% of the incremental net cash flows (defined as net income after tax plus depreciation and other non-cash charges), as provided for in the Alternative Rehabilitation Plan (ARP).

5. Composition of the Board of Directors (BOD) and appointment of MANCOM by SEC.

Effective December 16, 2002, the new BOD (which replaced the MANCOM) consists of the following: three representatives from the existing stockholders, one representative from the secured creditors, six representatives from the unsecured creditors, and one strategic partner. Presently, the slot for the strategic partner is occupied by the elected president. Further, the SEC issued an Order dated January 27, 2003 appointing Atty. Luis Ma. G. Uranza as the Rehabilitation Receiver to monitor, together with the new Board elected every year, the implementation of the ARP.

Every year thereafter, new sets of Board of Directors and members of the different Committees were elected and appointed, respectively, in accordance with the provisions of the ARP and DRA.

2. Rehabilitation and Debt Restructuring Programs

Discussed below are the series of events leading to the finalization of the rehabilitation and debt restructuring programs.

Application for Suspension of Payment to Creditors

On July 4, 1997, VMC filed with the SEC a Petition for the (a) Declaration of Suspension of Payment to Creditors, (b) Approval of a Rehabilitation Plan, and (c) Appointment of a MANCOM which was tasked to submit a feasible and viable rehabilitation plan for VMC.

Rehabilitation plans and amendments thereto:

1. Rehabilitation Plan as of September 25, 1998, subject to the terms of the First Addendum to the Rehabilitation Plan dated February 5, 1999 and of the Second Addendum to the Rehabilitation Plan dated July 22, 1999, as approved by the SEC in its orders dated August 17 and 19, 1999, respectively, (herein collectively referred to as the “Original Rehabilitation Plan” or “ORP”).

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The salient features of the ORP follow:

i. Reduction in the authorized capital stock of VMC from P2.7 billion consisting of 270 million shares of common stock at P10 par value per share to P495.958 million consisting of 170,432,189 shares of common stock at P2.91 par value per share (see Note 17c.1);

ii. Fresh capital infusion of around P567 million through a public bidding which was declared a failure for the reason that the deadline of submission of bids had expired without any bid having been submitted;

iii. The stockholders shall have no pre-emptive right to the increase of P1.5 billion shares of common stock or any shares to be issued to accommodate the conversion of any interests earned on the convertible notes to common shares;

iv. VMC shall honor its contractual obligations to the MJ Ossorio Pension Fund retirees;

v. Implementation of a business strategy for operating improvements, which include manpower reduction, upgrading of certain mills and other equipment, and divestment of non-profitable business units;

vi. Sale of non-strategic assets and subsidiaries;

vii. Restructuring of loans from banks; and

viii. Debt-to-equity conversion.

2. Alternative Rehabilitation Plan (ARP) as of May 11, 2000, as approved by the SEC in its Order dated November 29, 2000.

In view of the failure of the public bidding to raise fresh capital of around P567 million, the MANCOM, as mandated by ORP, submitted an ARP on May 11, 2000 which was approved by the SEC on November 29, 2000.

The basic features of the ARP follow:

i. Increase in the authorized capital stock from P495.958 million consisting of 495.958 million shares of common stock at P1 par value per share to P4.605 billion consisting of 4.605 billion shares of common stock at P1 par value per share (see Note 17c.3). The new capital stock of P4.605 billion will be allocated among the initial paid-in capital of P1.596 billion, conversion of a portion of unsecured loan into convertible notes of VMC in the amount of P2.4 billion, and contingent Refined Sugar Invoice/Delivery Orders (RSDOs) of P609 million representing the principal amounts of alleged loans obtained;

ii. Conversion into equity of all unpaid interest and part of the principal of the unsecured loan amounting to P1.1 billion;

iii. Conversion of a portion of unsecured loan into convertible notes amounting to P2.4 billion;

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iv. Restructuring of the secured and unsecured loans amounting to P4.4 billion over a period of fifteen years, including a 3-year grace period as to the principal, at 10% annual interest for peso loans and 6% for dollar loans; and,

v. Call for an acceptable joint venture partner to provide additional cash of approximately P300 million, payable in three years with annual interest of 1.5% and an option to manage VMC during the three-year life of the loan.

All other terms and conditions of the ORP which have been previously approved by the SEC remain. The 15-year DRA took effect on September 1, 2003 (see Note 16).

As of August 31, 2012, no further updates or revisions were made on the ORP, ARP and DRA.

Actions by Former Management and Others

VMC‟s former management, in its comments and replies filed with the SEC, manifests its strong opposition to the ARP. Also, three creditor banks, on various dates, filed their opposition to the ARP.

In the Order dated February 28, 2001, the SEC denied the appeal of VMC‟s former management and accordingly, the MANCOM, through its appointed Chief Operating Officer, took over the management of VMC on March 7, 2001.

On August 23, 2001, the SEC came out with an Omnibus Order affirming, among others, the SEC Orders dated November 29, 2000 and February 28, 2001 and directed the MANCOM to continue with the implementation of the MANCOM‟s ARP. The SEC Orders were affirmed by the Court of Appeals (CA) on February 11, 2002. On July 3, 2002, VMC‟s former management filed a petition for review of the said decision of the CA with the Supreme Court where it is presently pending resolution.

On May 5, 2004, VMC filed a manifestation informing the Supreme Court that VMC‟s former management participated and voted their shares in the election of the members of the VMC‟s Board of Directors for the year 2004 during VMC‟s Annual Stockholders‟ Meeting on April 30, 2004, which election was in accordance with the ARP, the same ARP which has been assailed by VMC‟s former management. On May 31, 2004, the Supreme Court noted the said manifestation of VMC.

In a Resolution dated April 27, 2005, the Supreme Court duly noted the Manifestation dated April 11, 2005 filed by VMC informing the Court that at the Annual Stockholders‟ Meeting of VMC held on April 1, 2005, the members of the Board of Directors of VMC for 2005 were duly elected pursuant to the ARP as approved by the SEC.

Moreover, in the Manifestation filed by VMC on July 26, 2005, it informed the Supreme Court that one of the bank creditors has already withdrawn its opposition to VMC‟s ARP and has signed the DRA as well as other documents relative thereto.

In its separate Manifestations dated January 25, 2006 and May 15, 2006, VMC informed the Supreme Court of unsecured creditors‟ participation in the ARP as well as their execution of the DRA and other documents relative thereto.

In the Resolution dated June 5, 2006, the Supreme Court noted the foregoing manifestations by VMC.

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In its Resolution dated May 28, 2010, the Supreme Court denied the petition filed by Mr. Mañalac, et al. for failure to show any reversible error in the challenged decision and resolution as to warrant the exercise of its discretionary appellate jurisdiction. With the denial of the petition, there is no more legal impediment in the continued implementation of the ARP as approved by the SEC.

3. Basis of Preparation

Statement of Compliance The consolidated financial statements of the Group as at and for the years ended August 31, 2012, 2011 and 2010 have been prepared in accordance with Philippine Financial Reporting Standards (PFRSs).

The consolidated financial statements of the Parent Company as at and for the year ended August 31, 2012 were approved and authorized for issue by the Board of Directors (BOD) on December 14, 2012.

Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis except for property, plant and equipment which are carried at revalued amounts and investment properties which are carried at fair values.

Functional and Presentation Currency These consolidated financial statements are presented in Philippine peso, which is the Group‟s functional currency. All financial information in Philippine peso has been rounded off to the nearest thousands, except when otherwise stated.

Use of Estimates and Judgments The preparation of the consolidated financial statements in conformity with PFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised or in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the consolidated financial statements is discussed in Note 5.

4. Summary of Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

Adoption of New or Revised Standards, Amendments and Improvements to Standards and Interpretations The Financial Reporting Standards Council approved the adoption of revised standards, amendments and improvements to standards, and interpretations as part of PFRSs.

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Accordingly, the Group changed its accounting policies in the following areas:

Adopted as of September 1, 2011

. Revised PAS 24, Related Party Disclosures (2009), amends the definition of a related party and modifies certain related party disclosure requirements for government-related entities. The revised standard is effective for annual periods beginning on or after January 1, 2011. The adoption of the above revised standard did not have any material impact on the consolidated financial statements.

. Prepayments of a Minimum Funding Requirement (Amendments to Philippine Interpretation IFRIC - 14: PAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). These amendments remove unintended consequences arising from the treatment of prepayments where there is a minimum funding requirement and result in prepayments of contributions in certain circumstances being recognized as an asset rather than an expense. The amendments are effective for annual periods beginning on or after January 1, 2011.

The adoption of the above amendment did not have any material impact on the consolidated financial statements.

. Improvements to PFRSs 2010 contain 11 amendments to six standards and to one interpretation. The amendments are generally effective for annual periods beginning on or after January 1, 2011. The following are the said improvements or amendments to PFRSs, none of which has a significant effect on the consolidated financial statements of the Group:

 PAS 27, Consolidated and Separate Financial Statements. The amendments clarify that the consequential amendments to PAS 21 The Effects of Changes in Foreign Exchange Rates, PAS 28 Investments in Associates and PAS 31 Interests in Joint Ventures resulting from PAS 27 (2008) should be applied prospectively, with the exception of amendments resulting from renumbering. The amendments are effective for annual periods beginning on or after July 1, 2010.

 PFRS 7, Financial Instruments: Disclosures. The amendments add an explicit statement that qualitative disclosure should be made in the context of the quantitative disclosures to better enable users to evaluate an entity‟s exposure to risks arising from financial instruments. In addition, the International Accounting Standards Board (IASB) amended and removed existing disclosure requirements. The amendments are effective for annual periods beginning on or after January 1, 2011.

 PAS 1, Presentation of Financial Statements. The amendments clarify that disaggregation of changes in each component of equity arising from transactions recognized in other comprehensive income is also required to be presented, but may be presented either in the statement of changes in equity or in the notes. The amendments are effective for annual periods beginning on or after January 1, 2011.

 PAS 34, Interim Financial Reporting. The amendments add examples to the list of events or transactions that require disclosure under PAS 34 and remove references to materiality in PAS 34 that describes other minimum disclosures. The amendments are effective for annual periods beginning on or after January 1, 2011.

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New Standards, Amendments and Improvements to Standard and Interpretation Not Yet Adopted A number of new standards, amendments and improvements to standards and interpretations are effective for annual periods beginning after January 1, 2011, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except for PFRS 9, Financial Instruments, which becomes mandatory for the Group‟s 2015 consolidated financial statements and could change the classification and measurement of financial assets. The Group does not plan to adopt this standard early and the extent of the impact has not been determined.

The Group will adopt the following new standards, amendments and improvements to standards and interpretations in the respective effective dates:

To be Adopted on September 1, 2012

. Disclosures - Transfers of Financial Assets (Amendments to PFRS 7), require additional disclosures about transfers of financial assets. The amendments require disclosure of information that enables users of financial statements to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities; and to evaluate the nature of, and risks associated with, the entity‟s continuing involvement in derecognized financial assets. Entities are required to apply the amendments for annual periods beginning on or after July 1, 2011. Earlier application is permitted. Entities are not required to provide the disclosures for any period that begins prior to July 1, 2011.

. Deferred Tax: Recovery of Underlying Assets (Amendments to PAS 12) introduces an exception to the current measurement principles of deferred tax assets and liabilities arising from investment property measured using the fair value model in accordance with PAS 40, Investment Property. The exception also applies to investment properties acquired in a business combination accounted for in accordance with PFRS 3, Business Combinations provided the acquirer subsequently measure these assets applying the fair value model. The amendments integrated the guidance of Philippine Interpretation SIC-21, Income Taxes - Recovery of Revalued Non-Depreciable Assets into PAS 12, Income Taxes, and as a result Philippine Interpretation SIC-21 has been withdrawn. The effective date of the amendments is for periods beginning on or after January 1, 2012 and is applied retrospectively. Early application is permitted.

To be Adopted on September 1, 2013

. Presentation of Items of Other Comprehensive Income (Amendments to PAS 1). The amendments:

 require that an entity present separately the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss;

 do not change the existing option to present profit or loss and other comprehensive income in two statements; and

 change the title of the statement of comprehensive income to the statement of profit or loss and other comprehensive income. However, an entity is still allowed to use other titles.

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The amendments do not address which items are presented in other comprehensive income or which items need to be reclassified. The requirements of other PFRSs continue to apply in this regard.

. PFRS 10, Consolidated Financial Statements

PFRS 10 introduces a new approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees.

An investor controls an investee when:

 it is exposed or has rights to variable returns from its involvement with that investee;  it has the ability to affect those returns through its power over that investee; and  there is a link between power and returns.

Control is re-assessed as facts and circumstances change.

PFRS 10 supersedes PAS 27 (2008) and Philippine Interpretation SIC-12 Consolidation - Special Purpose Entities.

. PFRS 12, Disclosure of Interests in Other Entities

PFRS 12 contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and/or unconsolidated structured entities, aiming to provide information to enable users to evaluate:

 the nature of, and risks associated with, an entity‟s interests in other entities; and the effects of those interests on the entity‟s financial position, financial performance and cash flows.

. PFRS 13, Fair Value Measurement

PFRS 13 replaces the fair value measurement guidance contained in individual PFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other PFRSs. It does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards.

. PAS 19, Employee Benefits (Amended 2011)

The amended PAS 19 includes the following requirements:

 actuarial gains and losses are recognized immediately in other comprehensive income; this change will remove the corridor method and eliminate the ability for entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss, which is currently allowed under PAS 19; and  expected return on plan assets recognized in profit or loss is calculated based on the rate used to discount the defined benefit obligation.

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. PAS 27, Separate Financial Statements (2011)

PAS 27 (2011) supersedes PAS 27 (2008). PAS 27 (2011) carries forward the existing accounting and disclosure requirements for separate financial statements, with some minor clarifications.

To be Adopted on September 1, 2015

. PFRS 9, Financial Instruments

Standard Issued in November 2009 [PFRS 9 (2009)] PFRS 9 (2009) is the first standard issued as part of a wider project to replace PAS 39. PFRS 9 (2009) retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity‟s business model and the contractual cash flow characteristics of the financial asset. The guidance in PAS 39 on impairment of financial assets and hedge accounting continues to apply.

Standard Issued in October 2010 [PFRS 9 (2010)] PFRS 9 (2010) adds the requirements related to the classification and measurement of financial liabilities, and derecognition of financial assets and liabilities to the version issued in November 2009.

It also includes those paragraphs of PAS 39 dealing with how to measure fair value and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives.

Further deferral of the local implementation of Philippine Interpretation IFRIC 15 Agreements for the Construction of Real Estate

. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. It provides guidance on the recognition of revenue among real estate developers for sales of units, such as apartments or houses, „off plan‟; i.e., before construction is completed. It also provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of PAS 11, Construction Contracts, or PAS 18, Revenue, and the timing of revenue recognition.

Under the prevailing circumstances, the adoption of the above new standards, amendments and improvements to standards and interpretations is not expected to have any material effect on the Group‟s consolidated financial statements.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

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Principles of Consolidation The consolidated financial statements include the accounts of the Parent Company, as well as those of its subsidiaries enumerated in Note 1 to the consolidated financial statements.

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is presumed to exist when a parent company owns, directly or indirectly through its subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.

The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

Investments in Subsidiaries and Associate A subsidiary is an entity that is controlled by a company while an associate is an entity in which a company has significant influence, but no control, over the financial and operating policies.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. It is presumed to exist when another entity holds between 20 to 50 percent of the voting power of an entity.

Investments in subsidiaries and in associate are recognized at cost in the Group‟s consolidated financial statements, less any impairment loss. If there is objective evidence that the investments in subsidiaries will not be recovered, an impairment loss is provided. Impairment loss is measured as the difference between the carrying amount of the investment and the present value of the estimated cash flows discounted at the current market rate of return for similar financial assets. The amount of the impairment loss is recognized in the profit or loss.

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Non-controlling Interests Non-controlling interest represents the portion of profit or loss and the net assets not held by the Group and are presented separately in the consolidated statements of comprehensive income and within equity in the consolidated statements of financial position, separately from Parent Company‟s equity, if positive. However, if losses applicable to the non-controlling interests exceeded the non-controlling interest in the subsidiary‟s equity, the excess, and any further losses applicable to the non-controlling interests, are allocated against the majority interest, except to the extent that the non- controlling interest has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary subsequently reports profits, such profits are allocated to the majority interest until the non-controlling interest‟s share of losses previously absorbed by the majority has been recovered.

VQPC, the only partially owned subsidiary that is included in the consolidation, has accumulated deficit of P48.18 million, P44.86 million, and P48.26 million and has capital deficiency of P15.35 million, P8.31 million, and P9.19 million as of August 31, 2012, 2011 and 2010, respectively. Due to this, the non-controlling interest was already insufficient to absorb the share in the accumulated losses. Accordingly, all the accumulated losses in the prior years were charged to the retained earnings attributable to the equity holders of the Parent Company. All subsequent profits generated by VQPC, if any, will be credited to the retained earnings of the equity holders of the Parent Company until the non-controlling interest‟s share of losses previously absorbed by the former has been recovered.

Segment Reporting Operating segments provide services that are subject to risks and returns that are different from those of other operating segments. The Group‟s businesses are operated and organized according to the nature of business provided, with each segment representing a strategic business unit.

Operating results of the Group‟s operating segments are reviewed by the BOD, the chief operating decision maker (CODM) of the Group, to make decisions about resources to be allocated to each segment and assess its performance, and for which discrete financial information is available. The business units and their corresponding principal activities are as follows:

Sugar Milling Revenue from sugar milling comes from sales of raw sugar and molasses (mill share), sale of refined sugar, and tolling fees. For its raw sugar and molasses operations, VMC operates a raw sugar mill with a daily capacity of 15,000 metric tons. Cane supply is sourced from both district and non-district planters who have milling contracts with VMC. The production sharing agreement is 69.5% for planters and 30.5% for VMC.

VMC also operates a refinery plant with a daily capacity of 25,000 Lkg (1 Lkg = 50 kilograms). To ensure maximum utilization of the refinery, VMC also provides toll refinery services to traders and planters for their raw sugar milled by other sugar centrals.

Food Processing This segment is involved primarily in processing canned sardines and bangus in different variants such as tomato-based and chili-based, among others. In December 2002 and January 2003, this segment introduced the luncheon meat and lechon paksiw product lines, respectively. Moreover, in May 2003, this segment re-operated its slaughterhouse operations which had been closed for years.

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Real Estate This segment is involved in the development and sale of subdivision and memorial lots. Among its projects are Phases I to III of Canetown Subdivision and the St. Joseph Memorial Garden which are both located in Victorias City. These projects were initially intended to provide for the housing and personal needs of the officers and employees of the Group. In recent years, however, certain lots had also been made available to the general public.

Leasing This segment derives income from the lease of certain parcels of land to planters.

Engineering Operations The engineering services are divided into two business units, namely construction and engineering works. The construction division handles construction projects, road improvements, and structural works for VMC plant operations, fabrication, and production of concrete product; and manages the operations of trucks and heavy equipment, among others. Since crop year 1997-1998, the construction division has limited its activities to servicing only the requirements of the VMC‟s sugar operations. On the other hand, the engineering works division operates two engineering shops: (a) foundry shop, which produces metal castings; and (b) machine shop, which handles mechanical works / machining jobs.

Distillery Operations The division operates an alcohol production with an actual daily capacity of 25,000 liters and with molasses as the primary raw material. Molasses is sourced from sugar operations which produces it as a by-product. As of end of reporting date, the division has still one customer which is an ethyl alcohol manufacturer.

The Group‟s only reportable geographical segment is the Philippines.

Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, net of trade discounts and volume rebates, and represents amounts receivable for goods and services provided in the normal course of business. The following specific recognition criteria must also be met before revenue is recognized:

. Sales of Raw and Refined Sugar, Molasses and Alcohol Revenue is recognized upon invoicing which coincides with endorsement and transfer of quedans and molasses warehouse receipts, respectively, when the customer has accepted the products, and collectibility of the related receivables is reasonably assured.

. Tolling Revenues Revenue is recognized when the tolling services have been rendered based on the tolling agreement.

. Sale of Alcohol Revenue is recognized upon invoicing which coincides with the delivery of the alcohol.

. Engineering Contracts Revenue is recognized based on the agreed progress billings, which normally correspond to the progress of the work, or upon completion of the work.

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. Interest Income Interest is recognized as interest accrues, taking into account the effective yield of the asset.

. Rental Income Rental income is recognized on a straight-line basis over the lease term for non- cancellable leases and the terms of the lease for cancellable leases. . Other Income Other income such as income from scrap sales, gains from disposal, among others, is recorded when earned.

Cost and Expense Recognition Costs and expenses are recognized in profit or loss upon utilization of the service or at the date they are incurred. Borrowing costs not capitalized are charged to income in the period in which they are incurred using the effective interest rate method.

Financial Assets The Group recognizes a financial asset in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. The Group‟s financial assets are categorized under loans and receivables.

Loans and Receivables Loans and receivable are financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale or are not classified as held for trading, held-to-maturity (HTM) investments, available-for-sale (AFS) financial assets or financial assets at fair value through profit or loss (FVPL). These are initially recognized at fair value and subsequently carried at amortized cost using the effective interest rate method, less allowance for impairment loss. These are included as current assets if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Group‟s financial assets categorized under loans and receivables include cash and cash equivalents and receivables [presented in the consolidated statements of financial position as “Trade and other current receivables” (excluding advances to suppliers) and “Advances to an unconsolidated subsidiary” accounts, and as part of “Other noncurrent assets” account representing the cash and cash equivalents reserve for debts repayment].

Cash and Cash Equivalents Cash and cash equivalents include cash on hand and in banks and other short-term highly liquid investments with original maturities of three months or less, which are subject to insignificant risk of change in value and are used by the Group in management of its short-term commitments.

Receivables Receivables are non-derivative financial assets with fixed or determinable payments and are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. These are included in current assets if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

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Receivables are initially recognized at fair value, representing the original invoice amount. Receivables are subsequently measured at amortized cost using the effective interest rate method, less impairment losses, if any. Any change in their value is recognized in profit or loss. Impairment loss is provided when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the impairment loss is determined as the difference between the assets‟ carrying amount and the present value of estimated cash flows.

Impairment of Financial Assets The Group assesses at each reporting date whether there is objective evidence that a financial asset maybe impaired. A financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset that can be reliably estimated.

Financial Assets at Amortized Cost If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset‟s carrying amount and present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset‟s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in profit or loss.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and the group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If, in a business period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

Financial Assets Carried at Cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

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Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:

. the rights to receive cash flows from the asset have expired; . the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass- through” arrangement; or . the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group‟s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of the consideration that the Group could be required to repay.

Financial Liabilities These are recognized when the Group becomes a party to the contractual agreements of the instrument, normally in the period in which the related money, goods or services are received or when a legally enforceable claim against the Group is established. The Group‟s financial liabilities are categorized as other financial liabilities.

Other Financial Liabilities These include non-derivative liabilities that are not carried at fair value through profit or loss (FVPL) and are recognized initially at fair value and carried at amortized cost with amortization determined using the effective interest rate method.

The Group‟s financial liabilities categorized under other financial liabilities include long- term debts and other financial liabilities (presented in the consolidated statements of financial position as “Trade and other current payables” and “Due to a stockholder” accounts).

Long-term debts Long-term debts include interest-bearing bank loans and convertible notes which are initially recognized at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, these are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are in profit or loss when the liabilities are derecognized as well as through the amortization process.

Derecognition A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability and the difference in the respective carrying amounts is recognized in profit or loss.

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Offsetting Financial Assets and Liabilities Financial assets and financial liabilities are offset and reported at net amount in the consolidated statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is intention to settle on a net basis, or realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements and the related assets and liabilities are presented at gross in the consolidated statements of financial position.

Inventories Inventories are valued at the lower of cost and net realizable value (NRV).

Costs incurred in bringing each product to its present location or condition, are accounted for as follows:

Sugar Inventory, Alcohol Inventory and Manufactured and Fabricated Products - determined using weighted average method; cost includes direct materials, labor and a proportion of manufacturing overhead costs based on normal operating capacity.

Unbilled Tolling Cost - consists mainly of direct labor and overhead components based on normal operating capacity, and are determined on weighted average method.

Real Estate Held for Sale - determined using specific identification method; cost includes purchase price of subdivision and memorial park lots plus development cost.

Jobs in Progress - determined using the specific identification method; cost includes direct materials, labor and a proportion of manufacturing overhead costs based on normal operating capacity.

Materials and Supplies - cost includes purchase and other directly attributable costs determined based on their original purchase price.

For sugar inventory, alcohol inventory and manufactured and fabricated products, unbilled tolling costs, jobs in progress, and real estate held for sale, NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. For materials and supplies, the NRV is the current replacement cost.

The Group considers any deterioration, damage, breakage, age and technological changes in estimating the NRV.

Property, Plant and Equipment Property, plant and equipment, except for projects under construction (which are carried at cost less accumulated impairment losses), are carried at revalued amounts less accumulated depreciation and impairment losses, if any. The revalued amount is the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent impairment losses. Revaluation is performed by an independent firm of appraisers with sufficient regularity to ensure that the carrying amount of the asset does not differ materially from that which would be determined using fair values at the reporting date. The net appraisal increase resulting from the revaluation is credited to “Revaluation increment on property, plant and equipment” account (net of corresponding deferred tax liability) in the consolidated statements of financial position and consolidated statements of changes in equity. The amount of revaluation increment absorbed through depreciation and revaluation increment approved by the SEC for quasi- reorganization are transferred directly to deficit.

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Initially, an item of property, plant and equipment is measured at its cost, which comprises its purchase price and any directly attributable costs of bringing the asset to the location and condition for its intended use. Subsequent costs that can be measured reliably are added to the carrying amount of the asset when it is probable that future economic benefits associated with the asset will flow to the Group. The costs of day-to- day servicing of an asset are recognized as an expense in the period in which they are incurred. All costs that were directly and clearly associated with the construction of certain property, plant and equipment, including borrowing costs, were capitalized.

Projects under construction, included in property, plant and equipment, represent structures under construction and are stated at cost. These include cost of construction and other direct costs. Projects under construction are not depreciated until such time as the relevant assets are completed and put into operational use.

Major spare parts and stand-by equipment qualify as property, plant and equipment when the Group expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment.

Estimated future dismantlement costs of items of property, plant and equipment arising from legal or constructive obligations are recognized as part of property, plant and equipment and are measured at present value at the time when the obligation was incurred.

Depreciation is computed using the straight-line method over the assets‟ estimated useful lives. The estimated useful lives are as follows:

Number of Years Land improvements 12.5 Buildings and structures 20 Community buildings and equipment 20 Machinery and equipment 3 - 20

The estimated useful lives, as well as the depreciation method, are reviewed at each reporting date to ensure that the period and method of depreciation are consistent with the expected pattern of economic benefits from those assets.

Stand-by equipment should be depreciated from the date it is made available for use over the shorter of the life of the stand-by equipment or the life of the asset the stand-by equipment is part of, while major spare parts should be depreciated over the period starting when it is brought into service, continuing over the lesser of its useful life and the remaining expected useful life of the asset to which it relates.

Fully depreciated assets are retained in the accounts until they are no longer in use and no further charge for depreciation is made in respect of those assets.

When an asset is disposed of, or is permanently withdrawn from use and no future economic benefits are expected from its disposal, the cost and related accumulated depreciation and impairment losses, if any, are removed from the accounts and any resulting gain or loss arising from the retirement or disposal is recognized in profit or loss.

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The carrying amount of the Group‟s property, plant and equipment is written down immediately to its recoverable amount if the asset‟s carrying amount is greater than its recoverable amount. The recoverable amount of the Group‟s property, plant and equipment is the higher between their fair values less cost to sell and value in use.

If the carrying amount of the Group‟s asset is decreased as a result of revaluation, this decrease is recognized as other comprehensive loss to the extent of any credit balance existing in the revaluation increment in respect of that asset. The excess of such decrease over the existing balance in the revaluation increment is recognized in the consolidated statements of comprehensive income.

An increase in the carrying amount of the Group‟s property, plant and equipment is recognized in the consolidated statements of comprehensive income to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

Investment Properties Investment properties composed of land and building, which are properties held by the Group either to earn rentals or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment properties are initially measured at cost. Subsequently, investment properties are measured at fair value with any change therein recognized in the consolidated statements of comprehensive income following the fair value model. Gains or losses arising from changes in the fair value of investment properties are included in profit or loss for the period in which they arise.

Investment property is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statements of comprehensive income in the year of retirement or disposal.

Transfers are made to investment property only when there is a change in use evidenced by ending of owner-occupation or commencement of an operating lease to another party.

When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.

Transfers from investment property carried at fair value to owner-occupied property or inventories, the property‟s deemed cost for subsequent accounting in accordance with PAS 16, Property, plant, and equipment, or PAS 2, Inventories, shall be its fair value at the date of change in use.

Impairment of Nonfinancial Assets The carrying amount of the Group‟s nonfinancial assets which include property, plant and equipment are reviewed for at each reporting date to determine whether there is any indication of impairment. If such indication exists, the asset‟s recoverable amount is estimated.

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The recoverable amount of an asset or cash-generating unit is the greater of the asset‟s fair value less costs to sell and value in use. Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in an arm‟s length transaction between knowledgeable, willing parties, less the costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognized whenever the carrying amount of an asset or its cash- generating unit exceeds its recoverable amount. An impairment loss of a revalued asset is recognized in the same way as a revaluation decrease. All other impairment losses are recognized in profit or loss.

All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss.

An impairment loss is reversed only to the extent that the asset‟s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. A reversal of an impairment loss in respect of a revalued asset is recognized in the same way as a revaluation increase. All other reversals of impairment are recognized in profit or loss.

Equity Instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Capital stock is classified as equity and is determined using the nominal value of shares that have been issued. Additional paid-in capital (APIC) includes any premiums received on the initial issuance of capital stock. Any transaction costs associated with the issuing of shares are deducted from additional paid-in capital, net of any related income tax benefits.

When capital stocks are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are classified as treasury stock and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings, after considering any remaining APIC related to treasury stock, if any.

Compound financial instruments issued by the Group comprise convertible notes that can be converted to capital stock at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

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Earnings per Share (EPS) The Group presents both basic and diluted EPS. Basic EPS is computed by dividing the consolidated net income applicable to common shareholders by the weighted average number of common shares outstanding during the year, adjusted for treasury stock, and with retroactive adjustments for stock splits. Diluted EPS is computed in the same manner as basic EPS except that the net income attributable to common shareholders and the weighted average number of shares outstanding are adjusted for the effects of all dilutive potential common shares. The Group‟s potential common shares comprise of convertible notes.

Borrowing Costs Borrowing costs are generally recognized as expense in the period in which these costs are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of a qualifying asset which necessarily takes a substantial period of time to prepare for its intended use or sale.

Leases - Operating Lease Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases.

Group as a Lessor Lease income under operating leases is recognized as income in the consolidated statements of comprehensive income on a straight-line basis over the lease term.

Group as a Lessee Operating lease payments are recognized in profit or loss on a straight-line basis over the lease term.

The Group determines whether an arrangement is, or contains a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Retirement Benefit The Group has an unfunded, non-contributory retirement plan covering all qualified permanent employees. The plan defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The defined benefit obligation is calculated by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity which approximate the terms of the related retirement liability.

Actuarial gains and losses are recognized as income or expenses when the net cumulative unrecognized actuarial gains and losses exceed 10% of the higher of the present value of defined benefit obligation and the fair value of plan assets at the end of the previous reporting year. These gains and losses are recognized over the expected average remaining working lives of the employees covered.

The liability recognized in the consolidated statements of financial position in respect of defined pension plan is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, if any, together with adjustments for unrecognized actuarial gains or losses and past service cost, if any.

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Termination Benefits Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

Short-term Employee Benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognized for the amount expected to be paid such as those for salaries and wages, social security contributions, short-term compensated absences, bonuses and non- monetary benefits.

Foreign Currency Transactions and Translation Transactions in foreign currencies are translated into Philippine peso using the exchange rates prevailing at the time of such transactions. Monetary assets and liabilities denominated in foreign currencies are translated using exchange rates prevailing at reporting date. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statements of comprehensive income.

Income Tax Income tax expense comprises of current and deferred income taxes. Current income tax and deferred income tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current income tax is the expected tax payable or receivable on the taxable income or loss for the year using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current income tax payable also includes any tax liability arising from the declaration of dividends.

Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is not recognized for:

. temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

. temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

. taxable temporary differences arising on the initial recognition of goodwill.

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Deferred income tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Related Parties A related party relationship exists when one party has the ability, directly or indirectly, to control, directly or indirectly through one or more intermediaries, the other party or exercise significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprise and its key management personnel, directors, or its stockholders. Related parties may be individuals or corporate entities. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

Transactions between related parties are based on terms similar to those offered to non- related parties in an economically comparable market, except for the non-interest bearing advances to its wholly owned subsidiary with no definite repayment terms.

Events After the Reporting Date The Group identifies post year-end events as events that occurred after the reporting date but before the date when the consolidated financial statements were authorized for issue. Any post year-end events that provide additional information about the Group‟s consolidated statements of financial position at the reporting date (adjusting events) are recognized in the consolidated financial statements. Events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

Provisions and Contingencies A provision is a liability of uncertain timing or amount. It is recognized when the Group has a legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.

When it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

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A contingent asset is an asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. This is not recognized in the consolidated financial statements but disclosed when an inflow of economic benefit is probable.

5. Accounting Estimates and Judgments

The consolidated financial statements prepared in accordance with PFRSs requires management to make judgments, estimates and assumptions that affect amounts reported in the consolidated financial statements and related disclosures. In preparing these consolidated financial statements, the management made its best judgments and estimates of certain amounts, giving due consideration to materiality. The Group believes that the following represents a summary of these significant estimates and judgments and related impact and associated risks in the consolidated financial statements.

Determining Functional Currency Based on the economic substance of the underlying circumstances relevant to the Group, the functional currency of the Group has been determined to be the Philippine peso. The Philippine peso is the currency of the primary economic environment in which the Group operates. It is the currency that mainly influences the sale of goods and services and the cost of these goods and services.

Operating Lease Commitments The Group has leased out certain investment properties to a related party and to third parties under the operating lease arrangements. The Group has determined that all significant risks and rewards of ownership of these spaces remain with the Group (see Notes 12 and 28).

Estimating Impairment Losses on Receivables The Group maintains an allowance for impairment losses on receivables consisting of trade and other current receivables, and advances to subsidiaries at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by the Group on the basis of factors that affect the collectability of the accounts. These factors include, but are not limited to, the length of the Group‟s relationship with its customers, their payment behavior and known market factors. The Group reviews the age and status of receivables and identifies accounts that are to be provided with allowance on continuous basis. The amount and timing of recorded expenses for any period would differ if the Group made different judgment or utilized different estimates.

As of August 31, 2012, 2011 and 2010, the carrying amount of the Group‟s trade and other current receivables amounted to P133.19 million, P143.56 million, and P11.71 million, respectively (see Note 7).

Determining the NRV of Inventories In determining the NRV of inventories, management takes into account the most reliable evidence available at the time the estimates are made. The Group‟s business is subject to changes which may cause inventory obsolescence and the nature of the Group‟s inventories is susceptible to physical deterioration, damage, breakage and technological changes. Moreover, future realization of the carrying amounts of inventories is affected by price changes in the market. These aspects are considered key sources of estimation uncertainty and may cause significant adjustments to the Group‟s inventories within the next financial year.

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The carrying amount of inventories as of August 31, 2012, 2011 and 2010 amounted to P349.19 million, P956.22 million, and P234.47 million, respectively (see Note 8).

Estimating Useful Lives of Property, Plant and Equipment The Group estimates useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The Group reviews regularly the estimated useful lives of property, plant and equipment based on factors that include asset utilization, internal technical evaluation, technological changes, environmental and anticipated use of the assets tempered by related industry benchmark information.

It is possible that future results of operation could be materially affected by changes in these estimates brought about by changes in factors mentioned. A reduction in the estimated useful lives of property, plant and equipment would increase depreciation and decrease noncurrent assets.

As of August 31, 2012, 2011 and 2010, the aggregate carrying amount of the Group‟s property, plant and equipment amounted to P3.83 billion, P3.65 billion, and P3.74 billion, respectively (see Note 11).

Determination of the Appraised Value and Fair Value The appraised value of the Group‟s property, plant and equipment and the fair value of the Group‟s investment properties are determined from market-based evidence by appraisal that was undertaken by an independent firm of appraisers in calculating such amounts. While management believes that the assumptions and market-based evidences used are reasonable and appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the valuation of the Group‟s property, plant and equipment and investment properties. However, management believes that the carrying amounts of property, plant and equipment and investment properties as of August 31, 2012, 2011 and 2010 do not differ materially from that which would be determined using appraised value and fair value at reporting date.

The aggregate carrying amount of the Group‟s investment properties amounted to P1.01 billion, P1.02 billion, and P1.02 billion as of August 31, 2012, 2011 and 2010, respectively, (see Note 12).

Realizability of Deferred Tax Assets The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and level of future taxable profits together with future tax planning strategies. However, there is no assurance that the Group will utilize all or part of the deferred tax assets. Any deferred tax asset will be re-measured if it might result to derecognition in cases where the expected tax law to be enacted will impose a possible risk on its realization.

As of August 31, 2012, 2011 and 2010, the Group‟s recognized deferred tax assets amounted to P202.21 million, P187.28 million, and P146.82 million, respectively (see Note 25).

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Retirement Benefit The determination of the Group‟s obligation and cost of retirement benefits is dependent on the Group‟s selection of certain assumptions used by an actuary in calculating such amounts. In accordance with PAS 19, Employee Benefits, actual results that differ from the Group‟s assumptions are accumulated and amortized over the future periods and therefore, generally affect the Group‟s recognized expense and recognized obligation in such future periods. While management believes that its assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the Group‟s retirement benefit obligation.

The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as of reporting dates. Other key assumptions are based in part on current market conditions. Details of the assumptions used in the calculation are described in Note 26 to the consolidated financial statements.

Net retirement benefit cost (income) amounted to P15.28 million, P8.00 million, and (P138.75 million) in 2012, 2011 and 2010, respectively. Retirement benefits obligation amounted to P88.78 million, P95.99 million, and P101.56 million as of August 31, 2012, 2011 and 2010, respectively (see Note 26).

Revenue Recognition The Group‟s revenue recognition policies require the use of estimates and assumptions that may affect the reported amounts of revenues and receivables. Differences between the amounts initially recognized and actual settlements are taken up in the accounts upon reconciliation. However, there is no assurance that such use of estimates may not result to material adjustments in future periods.

Impairment of Nonfinancial Assets The Group assesses at each reporting date whether there is an indication that the carrying amount of an asset may be impaired. If such indication exists, the Group makes an estimate of the assets‟ recoverable amount. At the reporting date, the Group assesses whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased.

The Group assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following:

. significant underperformance relative to the expected historical or projected future operating results; . significant changes in the manner of use of the acquired assets or the strategy for overall business; and . significant negative industry or economic trends.

As of August 31, 2012, 2011 and 2010, the carrying amounts of property, plant and equipment amounted to P3.83 billion, P3.65 billion, and P3.74 billion, respectively, (see Note 11).

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Provisions and Contingencies The Group is currently involved in various legal proceedings and has received assessments from the government regulatory bodies which are still pending resolution. Estimates of probable costs for the resolution of these claims have been developed in consultation with outside counsel handling the defense in these matters and are based upon an analysis of potential results.

Except for the cases related to the claims of creditors related to refined sugar delivery orders (RSDOs) for which the Group recognized provisions, the Group‟s management and legal counsel have made judgment that the position of the Group is sustainable and, accordingly, believe that the Group does not have a present obligation (legal or constructive) with respect to its assessments and claims (see Note 29).

The Group discounts its provisions over the period such provisions are expected to be settled. The discount rate used by the Group is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the provisions at the time these provisions have been determined and recognized. Specifically, this discount rate represents a risk-free rate plus a risk premium. The risk-free rate is derived from Philippine treasury bill rate and the risk premium is calculated by making reference to the volatility of market lending rates published by the Bangko Sentral ng Pilipinas (BSP).

Provisions recognized as of the years ended August 31, 2012, 2011 and 2010 amounted to P554.34 million, P509.73 million, and P468.72 million, respectively, (see Note 15).

The Group estimated that the total liability (including imputed finance cost) to be incurred at the end of the rehabilitation program on the claims on RSDOs is P917 million (see Note 15).

It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the Group‟s strategies relating to the foregoing proceedings.

6. Cash and Cash Equivalents

Details of this account at August 31 follow (in thousands):

2012 2011 2010 Cash on hand and in banks P279,963 P368,017 P330,735 Cash equivalents 806,529 555,015 479,238 P1,086,492 P923,032 P809,973

Cash in banks earns interest at the respective bank deposit rates.

Cash equivalents are composed of short-term placements with maturities ranging from 30 to 90 days, and bear annual interest rates of 1.3% to 4.1875% in 2012, 2.0% to 4.6875% in 2011 and 2.4% to 4.0625% in 2010. Cash in bank and short-term placements earmarked principally as reserves for debt repayment are presented as part of “Other noncurrent assets” account (see Note 13).

Total interest income on cash and cash equivalents, including those earmarked principally as reserves for debt repayment, amounted to P76.23 million, P70.35 million, and P104.56 million in 2012, 2011 and 2010, respectively, (see Notes 13 and 22).

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7. Trade and Other Current Receivables

Details of this account at August 31 follow (in thousands):

2012 2011 2010 Trade P133,060 P135,434 P25,630 Advances to suppliers 7,447 4,641 - Advances to planter‟s association 2,551 - - Advances to officers and employees 647 1,127 1,787 Other current receivables 7,878 20,733 3,643 151,583 161,935 31,060 Allowance for impairment losses 18,389 18,374 19,349 P133,194 P143,561 P11,711

The average credit period taken on sale of goods and services is from 60 to 90 days. No interest is being charged on receivables even if they exceed the normal credit period.

Others consist of receivables from a financial institution, receivable from installment contract and loaned lots to buyers of one subsidiary and accrued interest receivables, cash in a closed bank and other non-trade receivables from other companies. The cash in a closed bank amounting to P500 thousand is expected to be recovered from the Philippine Deposit Insurance Corporation (PDIC) and is presented net of amount not recoverable (see Notes 13 and 23).

Movements in the allowance for impairment losses on receivables follow (in thousands):

Note 2012 2011 2010 Balance, beginning of year P18,374 P19,349 P46,333 Amounts written-off as uncollectible - (1,049) (44,968) Impairment losses for the year 23 15 74 17,984 P18,389 P18,374 P19,349

8. Inventories

Details of this account at August 31 follow (in thousands):

2012 2011 2010 Materials and supplies P176,662 P163,816 P153,955 Unbilled tolling cost 72,066 143,879 40,339 Sugar 59,973 618,146 - Alcohol 24,726 - - Real estate held for sale 20,180 20,551 21,222 Manufactured and fabricated products 4,279 13,000 23,019 Jobs in progress 803 5,218 3,795 358,689 964,610 242,330 Allowance to reduce materials and supplies to NRV 9,499 8,394 7,856 P349,190 P956,216 P234,474

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The movement in the allowance to reduce materials and supplies to NRV follows (in thousands):

2012 2011 2010 Balance at beginning of year P8,394 P7,856 P11,903 Provision during the year 3,711 - - Written-off (recovery) during the year (2,606) 538 (4,047) P9,499 P8,394 P7,856

The cost of inventories recognized as an expense is presented as “Cost of goods sold and services” account and includes decrease in inventories of P605.42 million in 2012 and increase in inventories of P727.75 million and P12.79 million in 2011 and 2010, respectively (see Note 21).

Materials and supplies were stated at NRV which were lower than their corresponding costs. Management believes that the recorded allowance to reduce materials and supplies to NRV is adequate.

9. Prepayments and Other Current Assets

Details of this account at August 31 follow (in thousands):

2012 2011 2010 Input value-added tax (VAT) P31,953 P67,646 P49,666 Creditable withholding tax 796 468 1,699 Other prepayments 7,598 7,541 3,745 P40,347 P75,655 P55,110

Prepayments consist of advance payments for insurance, real property tax, and other supplies.

10. Investments in Unconsolidated Subsidiary and in Associate

The Group‟s investments in unconsolidated subsidiary and in associate are as follows (in thousands):

Note 2012 2011 2010 Subsidiary: VGCCI 1 P15,680 P15,680 P15,680 Associate: VIGASCO 1 5,727 5,727 5,727 21,407 21,407 21,407 Allowance for impairment loss on investment in VIGASCO 5,727 5,727 5,727 P15,680 P15,680 P15,680

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VGCCI VGCCI, an 81%-owned subsidiary, is a non-profit corporation registered with the SEC on October 8, 1992 primarily to engage exclusively in social, recreational and athletic activities on a non-profit basis among its stockholders, the core of which will be the acquisition and maintenance of a golf field course and tennis courts, residential and other similar facilities.

Due to the capital deficiency of VIGASCO resulting from operating losses, the investment is fully provided with allowance for impairment.

In 2010, an additional allowance was recognized on the investment in shares of VIGASCO amounting to P2.45 million. Moreover, investment amounting to P9.26 million was written-off in 2010. The additional allowance and write-off were presented as part of “Impairment losses on investments in unconsolidated subsidiaries”, under “General and administrative” account (see Note 23).

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11. Property, Plant and Equipment

Movements in this account are as follows (in thousands):

Community Land and Buildings Buildings Machinery Projects Land and and and Under Improvements Structures Equipment Equipment Construction Total Cost Balance, August 31, 2009 P105,831 P647,924 P27,916 P3,890,930 P61,648 P4,734,249 Additions - 295 701 456 145,574 147,026 Retirements/disposals (24) (13,567) (2,946) (36,359) - (52,896) Completed projects 1,382 2,717 2,535 118,882 (125,516) - Adjustments - - - (21) - (21) Balance, August 31, 2010 107,189 637,369 28,206 3,973,888 81,706 4,828,358 Additions - 28 - 10,431 184,252 194,711 Retirements/disposals (178) (2,008) - (51,857) - (54,043) Completed projects 1,448 624 - 47,649 (49,721) - Balance, August 31, 2011 108,459 636,013 28,206 3,980,111 216,237 4,969,026 Additions - - - 28 454,347 454,375 Retirements/disposals - - - (898) - (898) Impairment losses - (1,902) - (8,310) - (10,212) Transfer from investment properties 146 658 - - - 804 Completed projects - 12,855 - 154,953 (167,808) - Balance, August 31, 2012 108,605 647,624 28,206 4,125,884 502,776 5,413,095 Accumulated depreciation and impairment losses - cost Balance, August 31, 2009 66,496 395,251 21,756 2,036,451 - 2,519,954 Depreciation 5,170 35,226 606 176,491 - 217,493 Retirements/disposals (24) (13,567) (2,099) (36,115) - (51,805) Adjustments - - - 10 - 10 Balance, August 31, 2010 71,642 416,910 20,263 2,176,837 - 2,685,652 Depreciation 5,570 33,998 882 179,285 - 219,735 Retirements/disposals (178) (1,313) - (51,468) - (52,959) Balance, August 31, 2011 77,034 449,595 21,145 2,304,654 - 2,852,428 Depreciation 4,972 21,512 550 169,370 196,404 Retirement/disposal (698) (698) Impairment losses (849) (578) (1,427) Adjustments (203) (7,803) (8,006) Balance, August 31, 2012 82,006 470,055 21,695 2,464,945 3,038,701 Appraisal increase Balance, August 31, 2009 424,792 426,783 44,242 1,798,494 - 2,694,311 Increase (decrease) during the year 86,289 (315) 89,572 167,301 - 342,847 Impairment losses (9,808) (393,461) - - - (403,269) Retirements/disposals - (5,341) (2,836) (23,448) - (31,625) Balance, August 31, 2010 and 2011 501,273 27,666 130,978 1,942,347 - 2,602,264 Impairment losses (1,897) (1,897) Transfer from investment properties 7,112 7,112 Balance, August 31, 2012 508,385 27,666 130,978 1,940,450 2,607,479 Accumulated depreciation and impairment losses - appraisal increase Balance, August 31, 2009 98,045 424,238 41,802 569,554 - 1,133,639 Depreciation 1,824 305 144 73,310 - 75,583 Appraisal Increase - - 76,720 66,661 - 143,381 Impairment losses (7,743) (313,023) - - - (320,766) Retirements/disposals - (5,341) (2,678) (23,448) - (31,467) Reclassifications 24 - (140) 116 - - Balance, August 31, 2010 92,150 106,179 115,848 686,193 - 1,000,370 Depreciation 1,069 307 752 70,355 - 72,483 Balance, August 31, 2011 93,219 106,486 116,600 756,548 - 1,072,853 Depreciation 1,221 307 764 76,161 78,453 Impairment (626) (626) Balance, August 31, 2012 94,440 106,793 117,364 832,083 - 1,150,680

Carrying Amount At August 31, 2010 P444,670 P141,946 P23,073 P3,053,205 P81,706 P3,744,600

Carrying Amount At August 31, 2011 P439,479 P107,598 P21,439 P2,861,256 P216,237 P3,646,009

Carrying Amount At August 31, 2012 P440,544 P98,442 P20,125 P2,769,306 P502,776 P 3,831,193

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Certain land and building of VMC that were formerly leased by a third party are now being utilized by VMC for its distillery operations which started in November 2011. Accordingly, these assets which have carrying values of P7.92 million were transferred to property, plant equipment from investment properties (see Note 12).

The Group‟s property, plant and equipment were appraised by an independent appraiser. The latest appraisal was conducted on August 12, 2010.

The carrying values of the Group‟s property, plant and equipment approximate their fair value. Fair value is determined by reference to market based evidence, which is the amount for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm‟s length transaction as at the valuation date.

The carrying value of property, plant and equipment is net of allowance for impairment losses amounting to P414.28 million which relates to the following (in thousands):

Machinery and Land and Land Building and Note Equipment Improvements Structures Total Balance, September 1, 2009 P331,774 P - P - P331,774 Impairment loss recognized in 2010 23 - 2,065 80,438 82,503 Balance, August 31, 2011 and 2012 P331,774 P2,065 P80,438 P414,277

The carrying amounts of the Group‟s property, plant and equipment had these been carried at cost less accumulated depreciation and impairment losses, follow (in thousands):

Community Land and Buildings Buildings Machinery Projects Land and and and Under Improvements Structures Equipment Equipment Construction Total At August 31, 2010 P35,547 P220,459 P7,943 P1,797,051 P81,706 P2,142,706

At August 31, 2011 P31,425 P186,418 P7,061 P1,675,457 P216,237 P2,116,598

At August 31, 2012 P31,425 P186,418 P7,061 P1,675,457 P216,237 P2,116,598

A summary of depreciation on cost and on appraisal increase and the distribution follows (in thousands):

Note 2012 2011 2010 Depreciation on: Cost P196,404 P219,735 P217,493 Appraisal increase 78,453 72,483 75,583 P274,857 P292,218 P293,076 Depreciation charged to: Cost of goods sold and services 21 P255,839 P270,773 P279,932 Selling expenses 23 2,672 3,018 2,274 General and administrative expenses 23 16,346 18,427 10,870 P274,857 P292,218 P293,076

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The amount of the Parent Company‟s commitment for acquisition or construction and installation of certain air and water pollution control devices to comply with the order of the Department of Environment and Natural Resources (DENR) amounted to P30 million as of August 31, 2012, 2011, and 2010 (see Note 29b).

Substantially all of the Parent Company‟s property, plant and equipment are used as mortgage for their loans under the Mortgage Trust Indenture (MTI) (see Note 16b2i).

12. Investment Properties

The details of this account as of August 31 follow (in thousands):

2012 2011 2010 Land P945,935 P953,193 P953,193 Building 63,696 64,354 64,354 P1,009,631 P1,017,547 P1,017,547

Movements in investment properties as of August 31 follow (in thousands):

Note Land Building Total Balance, August 31, 2009 P913,895 P91,349 P1,005,244 Fair value gain (loss) 22 39,298 (26,995) 12,303 Balance, August 31, 2010 and 2011 953,193 64,354 1,017,547 Transfer to property, plant and equipment (Note 11) (7,258) (658) (7,916) Balance, August 31, 2012 P945,935 P63,696 P1,009,631

Certain land and building of VMC that were formerly leased by a third party are now being utilized by VMC for its distillery operations which started in November 2011. Accordingly, these assets which have carrying values of P7.92 million were transferred to property, plant and equipment from investment properties (see Note 11).

The Group‟s investment properties were appraised by an independent appraiser. The latest appraisal was conducted on August 12, 2010.

The carrying values of the Group‟s investment properties approximate their fair value. Fair value is determined by reference to market based evidence, which is the amount for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm‟s length transaction as at the valuation date.

The cost of the investment properties amounted to P65.48 in 2012 and P66.28 million in 2011 and 2010.

Of the total investment properties, P895.03 million has been leased out under several short-term and cancellable operating leases to third parties and related parties and the P122.52 million is deemed held for capital appreciation. The total rental income earned from the investment properties for the years ended August 31, 2012, 2011 and 2010 amounted to P15.99 million, P16.80 million and P13.92 million, respectively (see Note 22).

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No direct expenses were incurred for the Group‟s investment properties in 2012, 2011 and 2010.

13. Other Noncurrent Assets

Details of this account at August 31 follow (in thousands):

2012 2011 2010 Cash and cash equivalents reserve for debt repayment P1,770,892 P1,267,625 P2,069,452 Cash surety bonds 33,982 31,871 31,552 1,804,874 1,299,496 2,101,004 Less allowance for impairment loss 7,893 - - P1,796,981 P1,299,496 P2,101,004

Cash and cash equivalents reserved for debt repayment consist of cash in bank and short- term placements earmarked for payment to creditors as disclosed in Note 16d. Total interest income on cash and cash equivalents, including those earmarked principally as reserves for debt repayment, amounted to P76.23 million, P70.35 million and P104.56 million in 2012, 2011 and 2010, respectively, (see Notes 6 and 22).

Cash surety bonds pertain to cash collateral for the labor cases against the Parent Company (see Note 29g). It includes cash in a closed bank totaling P8.39 million of which P500 thousand is expected to be recovered from the PDIC and is presented as part of “Trade and other current receivables” account (see Note 7). The balance of P7.89 million was fully provided with allowance for impairment (see Note 23).

14. Trade and Other Current Payables

This account is composed of the following (in thousands):

Note 2012 2011 2010 Trade suppliers P184,130 P298,120 P275,187 Accrued: Interest on bank loans 16b3 54,978 63,514 73,452 Litigation losses 29f 32,862 - - Real property taxes 14,582 - - Other accrued expenses 2,156 18,190 13,283 Customers‟ deposits 32,472 69,239 19,843 Social amelioration fund 25,091 - - VAT, withholding and other taxes 15,275 23,684 33,350 Retention payable 6,005 - - Others 4,151 25,085 18,607 P371,702 P497,832 P433,722

Others consist of liens payable, association dues, and other current liabilities. Management considers that the carrying amount of trade and other current payables approximates fair value due to their short-term maturities.

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15. Provisions

Movements in this account are as follows (in thousands):

Note 2012 2011 2010 Balance at beginning of year P509,734 P468,718 P431,002 Amortization of discount 24 44,606 41,016 37,716 Ending balance P554,340 P509,734 P468,718

This refers to the probable liability on the allegedly issued RSDOs by the Parent Company which was used by North Negros Marketing Co., Inc. (NONEMARCO) to avail of bank loans totaling to about P630 million as disclosed in Notes 16b5 and Note 29a.

The undiscounted amount and the related unamortized discount as at August 31 follow (in thousands):

2012 2011 2010 Undiscounted amount P917,000 P917,000 P917,000 Unamortized discount (362,660) (407,266) (448,282) P554,340 P509,734 P468,718

16. Long-term Debts

a. Composition of Parent Company’s Long-term Debts

As to currency denomination (in thousands):

Note 2012 2011 2010 Bank loans Foreign currency denominated P331,514 P384,252 P462,583 Philippine peso denominated 2,000,910 2,308,742 2,616,574 2,332,424 2,692,994 3,079,157 Convertible notes 16b2 1,520,878 1,727,486 2,408,954 Accrued interest on convertible notes 16b2 1,202,171 1,189,647 1,349,014 5,055,473 5,610,127 6,837,125 Less unamortized interest and discounts 16b2 228,566 246,120 277,595 4,826,907 5,364,007 6,559,530 Less current portion 358,834 359,066 362,254 P4,468,073 P5,004,941 P6,197,276

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As to security (in thousands)

2012 2011 2010 Secured P1,006,811 P1,161,704 P1,316,598 Unsecured 4,048,662 4,448,423 5,520,527 P5,055,473 P5,610,127 P6,837,125 b. Debt Restructuring Agreement

As discussed in Note 2, a key element of the ARP is the restructuring of the above loans from banks and financial institutions. Consequently, VMC and the secured and unsecured creditors executed a DRA dated April 29, 2002 which took effect on September 1, 2003 and which provides, among others, for the following:

1. Conversion of P1.1 billion loans into equity.

On October 9, 2002, loans from unsecured creditors of P1.1 billion were converted into common shares of VMC at a ratio of P1 of debt to P1 of common shares with a par value of P1.

2. Conversion of P2.4 billion loans into convertible notes.

i. Features of the convertible notes

September 1, 2003, the unsecured creditors proportionately converted, on a mandatory basis, P2.4 billion of their principal loans into convertible notes. The convertible notes bear an annual interest of 8% which is cumulative and payable only in respect of those convertible notes which have not been actually converted into common stock of the Parent Company. The conversion resulted to the recognition of an equity component of the convertible feature (presented in the consolidated statements of financial position as “Conversion feature on convertible notes” account). This will be reclassified to “Additional paid-in capital” upon conversion of the related convertible notes.

Starting August 31, 2004, annual interest of 8% has been accrued in respect of all outstanding convertible notes. The convertible notes provide for a term of payment of 15 years from the effectivity date of the DRA (herein referred to as the “restructuring date”). These unsecured creditors shall have second mortgage on the Parent Company‟s fixed assets (excluding identified non- core assets for disposal), under the secondary MTI pursuant to the terms and conditions of the DRA. The secured creditors would still maintain their first mortgage on the Parent Company‟s fixed assets (excluding identified non- core assets for disposal) under the MTI, pursuant to the terms and conditions of the DRA.

The convertible notes shall be converted at the option of the holders thereof into common shares of the Parent Company at the ratio of one (1) convertible note to one (1) common share of the Parent Company. The aggregate amount of convertible notes that may be converted into common shares of the Parent Company shall not exceed 20% of the original issue amount of the convertible notes for each year covering the conversion beginning the third year to the sixth year from the issue date of the convertible notes. For the period beginning the eight year to the fourteenth year, the annual aggregate

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amount of convertible notes that may be converted into common shares of the Parent Company shall not exceed 13% of the outstanding unconverted notes. The Parent Company may redeem the convertible notes at any time at issue price plus accrued interest beginning at the end of the third year from issue date and ending on redemption date which is at the end of the fifteen years from issue date. Also, under the DRA, the buyer of the convertible note from the original holder shall convert the notes into common shares of the Parent Company in accordance with the schedule of the convertibility feature of Section 16 (h) of the DRA. Section 16 (g) of the DRA further provides that interest is payable only at the final redemption date and in respect only to those convertible note which have not been actually converted to common shares of the Parent Company. ii. Actual transfers and conversions to common shares

The Parent Company has made actual conversions to common shares of certain convertible notes amounting to P118.63 million in 2012 and amounting to P310.05 million in 2011 (see Note 17b) in accordance with the schedule of the convertibility feature of Section 16 (h) of the DRA. The conversion in 2012 resulted to the recognition as “Additional paid-in capital” the P62.01 million related accrued interest payable.

Moreover, certain convertible notes and the related accrued interest payable with the total amount of P313.75 million and P525.08 million as of August 31, 2012 and 2011, respectively, were recognized as equity as they are considered mandatorily convertible notes in accordance with provision of Section 16 (K) of the DRA which requires that all transferred/sold convertible notes are to be converted to commons shares in accordance with the schedule of the convertibility feature of Section 16 (h) of the DRA. These are presented in the consolidated statements of financial position as “Convertible notes awaiting conversion” account.

The breakdown of this account as of August 31, 2012, 2011 and 2010 follows (in thousands):

2012 2011 2010 Principal amount of convertible notes transferred to another noteholder P459,401 P371,421 P - Accrued interest payable 198,782 153,654 - P658,183 P525,075 P -

These convertible notes and related accrued interest payable are no longer recognized as financial liability as the Group has ceased to have a present obligation as the DRA provides for mandatory conversion upon transfer/sale of convertible notes. These will be converted to common shares as soon as the schedule of the convertibility feature of Section 16 (h) of the DRA permits the conversion.

The outstanding balance of the convertible notes is carried at present value using effective interest of 5.397%. Total finance costs accrued on convertible notes amounted to P137.22 million in 2012, P163.66 million in 2011 and P178.22 million in 2010. As of August 31, 2012, 2011 and 2010, the balance of the accrued interest on the convertible notes amounted to P1.20 billion, P1.19 billion and P1.35 billion, respectively.

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3. Restructuring of the remaining balance of the loans (herein referred to as “Restructured loans”).

On April 29, 2002, the unsecured and secured creditors restructured the remaining balance of their loans (after the debt-to-equity conversion and the debt conversion to convertible notes), with annual interest of 10% for Philippine peso- denominated loans and 6% for the U.S. dollar-denominated loans payable quarterly in arrears. The restructuring provides for a term of payment of 15 years from September 1, 2003, the restructuring date, with a 3-year grace period from the restructuring date.

Details of finance cost as follow (in thousands):

2012 2011 2010 Interest on bank loans P230,258 P265,556 P302,927 Interest on convertible notes 137,218 163,660 178,217 P367,476 P429,216 P481,144

The outstanding balance of the accrued interest on bank loans amounted to P54.98 million, P63.51 million and P73.45 million as of August 31, 2012, 2011 and 2010, respectively, (see Note 14).

4. Secured creditors and/or unsecured creditors who are actually and physically holding legitimate and valid VMC sugar quedans as a form of security as of restructuring date shall be considered as other secured creditors to the extent of the valid sugar quedans they are physically and legitimately holding.

The outstanding principal loans, including interest, held by these creditors holding sugar quedans as collateral shall have the same terms and conditions as that of the restructured loans of the unsecured creditors under the DRA, including a restructuring period of 15 years.

5. Restructuring of the Refined Sugar Delivery Orders Claims, arising from Refined Sugar Delivery Orders (RSDOs) purportedly issued by VMC which was used by NONEMARCO, Inc. and pending litigation before the SEC, under the same terms and conditions as that of the unsecured creditors once VMC is found liable by final judgment. The carrying value of the provision as of August 31, 2012, 2011 and 2010 amounted to P554.34 million, P509.73 million and P468.72 million, respectively, (see Note 15).

6. Restructuring of the trade liabilities as follows: 25% during the first year of rehabilitation, 37.5% during the second year of rehabilitation, and 37.5% during the third year of rehabilitation.

The DRA became effective on September 1, 2003 (also known as the restructuring date) upon the occurrence of the following conditions as per Section 36 of the DRA, among others:

1. Conversion of P1.1 billion loans into equity; 2. Conversion of P2.4 billion loans into convertible notes; 3. Generation of the required minimum cash capital infusion of P300 million; 4. Election of a new Board of Directors; and 5. Receipt of certain documents by the creditors as provided for in the DRA (i.e. promissory notes, etc.).

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c. Cash Infusion by a Strategic Investor

As part of the provision of the rehabilitation program, the Company obtained a P300 million loan from a strategic investor, Tanduay Holdings, Inc. The loan was fully paid in 2008 in accordance with the terms of the loan.

d. Compliance with the DRA

As of August 31, 2012, 2011 and 2010, VMC is in compliance with the provisions of the DRA. No further updates or revisions were made on the ORP, ARP and DRA as of reporting date.

17. Capital Management

The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximizing the return on the investments of stockholders. The Parent Company is governed by its ARP as submitted and approved by SEC. The details of these plans or programs are disclosed in Note 2.

The capital structure of the Group consists of equity attributable to the stockholders comprising of the capital stock and deficit while debt is defined as long and short-term borrowings, as disclosed in Note 16.

a. Debt to Total Asset Ratio The debt to total assets ratio of the Group as of August 31, which has been within the Group‟s acceptable range as set by the BOD, is calculated as follows:

2012 2011 2010 (In Thousands Except Ratio Information) Debt P4,826,907 P5,364,007 P6,559,530 Total assets 8,288,430 8,103,394 7,990,099 0.58:1 0.66:1 0.82:1

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b. Capital Stock

Details of the capital stock of the Parent Company follow (in thousands):

2012 2011 2010 Authorized: Common shares - P1 par value 2,563,035,708 shares P2,563,036 P2,563,036 P2,563,036 Issued and outstanding: Balance at beginning of year - 1,905,998,732 shares in 2012 and 1,595,952,513 in 2011 and 2010 P1,905,999 P1,595,953 P1,595,953 Conversion of convertible notes (Note 16b2ii): Mandatory conversion to 310,046,219 common shares at P1 per share by certain transferee- holders in 2011 - 310,046 - Conversion to 118,628,250 shares at P1 per share by certain secondary note holders in 2012 118,628 - - P2,024,627 P1,905,999 P1,595,953

Except for the conversion of certain convertible notes to common shares as disclosed above, there was no other movement on capital stock for the years ended August 31, 2012, 2011 and 2010. The conversion of certain convertible notes to common stock is provided for in the DRA.

On November 15, 1993, the shares of stock of the Parent Company were listed in the Philippine Stock Exchange. However, the trading was suspended on October 9, 1997. In 2012, the SEC and the PSE have lifted its order of suspension of the trading of the Parent Company‟s shares. Consequently, on May 21, 2012, the trading resumed. c. Recapitalization and Quasi-reorganization

The SEC approved the following recapitalization programs:

1. The authorized capital stock was reduced initially from P2.7 billion consisting of 270 million shares with par value of P10 per share to P495,957,670 consisting of 170,432,189 shares with par value of P2.91 per share (see Note 2.1.i).

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2. The reduction in par value likewise resulted in the reduction of the subscribed capital stock from P1,704,321,890 consisting of 170,432,189 shares with a par value of P10 per share to P495,957,670 consisting of 170,432,189 shares with a par value of P2.91 per share. The par value of the capital stock was then further reduced from P2.91 to P1, simultaneous thereto, the subscribed capital stock was increased from P170,432,189 consisting of 170,432,189 shares at par value of P2.91 per share to P495,957,670 consisting of 495,957,670 shares at par value of P1 per share through a stock split. The resulting reduction surplus of P1,208,364,220 (P1,704,321,890 less P495,957,670) was used to partially wipe out the deficit of the Parent Company.

3. SEC issued a certificate of filing of certificate of increase in capital stock dated October 2, 2002 approving the Parent Company‟s increase in the authorized capital stock from P495,957,670 consisting of 495,957,670 common shares at par value of P1 per share to P2,563,035,708 consisting of 2,563,035,708 shares of common stock at par value of P1 per share. The increase in the authorized capital stock was a partial implementation by the Parent Company of the ARP‟s provision on the increase in authorized capital stock as approved by the SEC on November 29, 2000 (see Note 2.2.i). However, the approval by the SEC on the increase in authorized capital stock was subject to condition that the Parent Company shall submit to the SEC all duly executed deeds of assignment evidencing the creditors‟ assignment of a portion of their unpaid loans as payment for the subscription of the increase in the Parent Company‟s authorized capital stock. On June 17, 2009, which was within the extended period requested for submission of all the duly executed deeds of assignment, the Parent Company submitted the required documents to the SEC.

In an order dated March 26, 2009, the SEC‟s Company Registration and Monitoring Department (CRMD) revoked the Parent Company‟s certificate of filing of certificate of increase in capital stock dated October 2, 2002 due to alleged non-compliance with the conditions provided in the grant of the same. However, it is a matter of record that all conditions have been duly complied with by the Parent Company within the period of extensions provided. The supposed order of revocation was not officially received by the Parent Company, having been sent to its old address despite notice of change of address. The Parent Company is now seeking a reconsideration/lifting of such revocation which is now pending before the SEC. d. Application of Revaluation Increment Against Deficit

On September 2, 2002, the SEC approved the quasi-reorganization of the Parent Company through the application of revaluation increment of P3,195,367,390 to partially wipe out the deficit of P7,823,474,147 as of August 31, 2002.

For purpose of dividend declaration, any retained earnings of the Parent Company shall be restricted to the extent of deficit wiped out by the revaluation increment. e. Conversion of Debt into Equity

As discussed in Note 16, the unsecured creditors converted proportionately P1.1 billion of their loans into common stock of the Parent Company at a ratio of P1 of debt to P1 of common stock. The said conversion resulted in a change in management control of the Parent Company effective October 9, 2002, whereby the creditor controls 69% of the ownership of the Parent Company while the existing stockholders prior to the conversion was reduced to 31%.

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f. Treasury Stock

The Parent Company had an Employees Stock Ownership Plan (ESOP) which was administered by a Board of Administrators appointed by the former Board of Directors of the Group. The ESOP allocated approximately 18 million shares from the Group‟s authorized and unissued shares of capital stock. This ESOP gave permanent and regular employees the right to subscribe to a minimum of 100 shares and to a maximum of 5,000 shares at a discounted prevailing market value price. Since August 19, 1998, the implementation of the ESOP has been permanently suspended.

The treasury shares as of August 31, 2012, 2011 and 2010 represented the ESOP shares withdrawn, decrease in treasury shares due to recapitalization, and investments of the consolidated subsidiaries in the Group, as follows:

2012 2011 2010 (In Thousands) ESOP shares withdrawn P54 P54 P54 Decrease in shares held in treasury due to retirement (4) (4) (4) Decrease in treasury shares due to recapitalization (39) (39) (39) P11 P11 P11

The Group‟s overall capital management strategy remains unchanged from 2009. The Group is not subject to externally-imposed capital requirements.

18. Earnings Per Share

a. Basic Earnings Per Share (EPS)

Note 2012 2011 2010 (In Thousands, Except Per Share Data) Net income for the year P556,180 P399,676 P310,281 Beginning shares of stock outstanding 1,905,999 1,595,953 1,595,953 Weighted average number of shares resulting from the conversion of convertible notes 79,085 206,697 - Deduct Treasury stock 17f (11) (11) (11) Total weighted average number of shares of stock outstanding after conversion of convertible notes 1,985,073 1,802,639 1,595,942 Basic EPS P0.28 P0.22 P0.19

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b. Diluted EPS

Note 2012 2011 2010 (In Thousands, Except Per Share Data) Net income for the year P556,180 P399,676 P310,281 Add back interest expense on convertible notes 16b2 137,218 163,660 178,217 Net income after adjustment 693,398 563,336 488,498 Total weighted average number of shares of stock outstanding after conversion of convertible notes 1,985,073 1,802,639 1,595,942 Add: Assumed issued common shares through conversion of convertible notes 2,019,822 2,202,256 2,408,954 Total weighted average number of shares actually issued and assumed issued through conversion of remaining convertible notes 4,004,895 4,004,895 4,004,896 Diluted EPS P0.17 P0.14 P0.12

The convertible notes of P2.0 billion at August 31, 2012, P2.2 billion at August 31, 2011 and P2.4 billion at August 31, 2010 have been recorded in the books of account in accordance with the terms of the DRA as discussed in Note 16b2.

19. Operating Segment Data

Operating Segments The Group is organized into the following operating units - sugar milling, food processing, real estate, leasing, engineering, and distillery operations. A detailed description of each segment is set below:

Sugar Milling Revenues from sugar milling consist of the following:

a. sale of raw sugar and molasses (mill share) b. sale of refined sugar c. tolling fees For its raw sugar and molasses operations, the Parent Company operates a raw sugar mill with a daily capacity of 15,000 metric tons. Cane supply is sourced from both district and non-district planters who have milling contracts with VMC. The production sharing agreement is 69.5% for planters and 30.5% for VMC.

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The Parent Company also operates a refinery plant with a daily capacity of 25,000 Lkg. (1 Lkg = 50 kilograms). To ensure maximum utilization of the refinery, VMC also provides toll refinery services to traders and planters for their raw sugar milled by other sugar centrals.

Total sales to two external customers to whom the Parent Company made sales equal to or more than 10% of the total reported revenues amounted to P2.5 billion, P2.9 billion and P2.2 billion in 2012, 2011 and 2010, respectively.

Leasing This segment derives income from the lease of certain parcels of land to planters.

Engineering Operations The Parent Company has engineering and manufacturing divisions which are not reported consolidated in the schedules above because majority of their revenues are not from external customers.

The engineering operations are divided into two business units, namely construction and engineering works. The construction division handles construction projects, road improvements, and structural works for the Parent Company plant operations, fabrication, and production of concrete product; and manages the operations of trucks and heavy equipment, among others. Since crop-year 1997-1998, the construction division has limited its activities to servicing only the requirements of the Parent Company‟s sugar operations. On the other hand, the engineering works division operates two engineering shops: (a) foundry shop which produces metal castings and (b) machine shop which handles mechanical works/machining jobs.

Distillery Operations The Parent Company has an alcohol distillery division which started its testing operations on November 2011. Full operation is targeted to start March 2013. As of the May 31, 2012, revenues from distillery operations pertains to sale of specially denatured alcohol.

For its operations, the division operates an alcohol production with an actual daily capacity of 25,000 liters and with molasses as the primary raw material. Molasses is sourced from sugar operations which produces it as a by-product. As of end of reporting date, the division has still one customer which is an ethyl alcohol manufacturer.

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Segment Revenue and Expense The sugar operations production output is limited to servicing the needs of the domestic market. Its customers consist of sugar traders, sugar centrals, distributors, among others, which are generally situated in various parts of the Philippines, particularly the provinces of Negros Occidental, Iloilo and Metro Manila.

Joint revenues and expenses are allocated to the various business segments. All other segment revenues and expenses are directly attributable to the segments.

Segment Assets and Liabilities Segment assets include all operating assets used by a segment and consist principally of operating cash, receivables, inventories, prepayments, and property, plant and equipment, net of related allowance and depreciation. The carrying amount of certain assets used jointly by the various segments is allocated to the segments on a reasonable basis. Segment liabilities include all operating liabilities and consist principally of trade payables, accruals, value added tax and other taxes, and customers‟ deposits.

Segment assets and liabilities do not include deferred income taxes.

Inter-segment Transfers Segment revenues, expenses and results include transfers between business segments. Such transfers are accounted for at competitive market prices for similar goods, except for inter-departmental services being performed by the engineering division which are charged at cost. These transfers are eliminated in the consolidation of the accounts.

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2012 2011 2010 (In Millions) Sugar Food Real Engineering Elimination Distillery Milling Processing Estate Leasing Operations Operation Items Total REVENUE Sales P4,558 P31 P4 P1 P12 P59 P - P4,665 P4,218 P3,949 Inter-segment sales - 63 - - - - (63) - - - Total P4,558 P94 P4 P1 P12 59 (P63) P4,665 P4,218 P3,949 RESULT Segment result P1,386 P - P - P - P - P - P - P1,386 P983 P1,481 Unallocated corporate expenses (228) ------(228) (222) (856) Operating profit 1,158 ------1,158 761 625 Interest expense (367) ------(367) (429) (481) Interest income 76 ------76 70 105 Net curtailment gain ------139 Net foreign exchange gains 2 ------2 25 39 Net loss on sale or retirement of property, plant and equipment ------(1) (1) Gain n revaluation of investment properties ------12 Income tax expense (283) ------(283) (123) (106) Miscellaneous (30) ------(30) 97 (22) Net income (loss) for the year (P556) P - P - P - P - P - P - (P556) P400 P310

OTHER INFORMATION Segment assets P5,124 P - P - P - P - P - P - P5,124 P4,921 P1,724 Unallocated corporate assets 3,164 ------3,164 3,182 6,266 Consolidated total assets P8,288 P - P - P - P - P - P - P8,288 P8,103 P7,990

Segment liabilities P5,381 P - P - P - P - P - P - P5,381 P5,969 P7,028 Unallocated corporate liabilities 1,089 ------1,089 1,186 1,249 Consolidated total liabilities P6,470 P - P - P - P - P - P - P6,470 P7,155 P8,277

Segment depreciation P247 P - P - P - P - P - P - P247 P271 P279 Unallocated corporate depreciation 28 ------28 21 14 Depreciation P275 P - P - P - P - P - P - P275 P292 P293

Capital expenditures P454 P - P - P - P - P - P - P454 P195 P147

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20. Revenue from Operations

This account consists of (in thousands):

2012 2011 2010 Raw sugar sales P3,057,389 P3,069,440 P1,925,950 Tolling revenues 1,371,477 818,057 971,684 Molasses 127,960 257,070 264,774 Alcohol sales 59,411 - - Engineering contracts 12,259 27,759 30,241 Refined sugar sales - 5,380 716,521 Others 35,511 39,911 38,516 P4,664,007 P4,217,617 P3,947,686

Most, if not all, of the Parent Company‟s sales of sugar in 2011 are in the form of raw sugar as the Parent Company marketed its sugar raw rather than sell it as refined.

21. Cost of Goods Sold and Services

This account consists of (in thousands):

Note 2012 2011 2010 Cost of hauling P781,763 P1,427,853 P691,050 Repairs and maintenance 472,873 469,837 431,867 Materials and supplies 331,788 221,816 243,027 Professional fees and contracted services 293,026 270,328 183,932 Depreciation 11 255,839 270,773 279,932 Fuel and transportation 229,245 204,260 215,435 Input tax allocable to exempt sales 79,522 - - Light and water 72,244 76,563 50,647 Taxes and licenses 52,573 48,446 41,666 Direct labor 26 26,324 22,679 160,858 Rental 28e 5,418 4,442 4,434 Raw sugar purchased - 794,730 77,036 Others 19,533 76,334 60,362 Total cost of goods manufactured 2,620,148 3,888,061 2,440,246 Decrease (increase )in inventories 605,421 (727,753) (12,793) P3,225,569 P3,160,308 P2,427,453

Cost of hauling pertains to cane trucking, hauling allowances and other incentives to encourage planters to mill with the Parent Company.

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22. Other Income

This account consists of (in thousands):

Note 2012 2011 2010 Interest income 6, 13 P76,225 P70,346 P104,562 Rental income 12 15,990 16,799 13,921 Gain on extinguishment of liabilities 16b2 6,331 137,896 - Foreign exchange gain 1,540 24,811 39,310 Gain on sale of property, plant and equipment 11 - 65 203 Retirement benefit income 26.b - - 138,746 Fair value gain on investment properties 12 - - 12,303 Others 3,163 11,694 2,763 P103,249 P261,611 P311,808

“Gain on the extinguishment of liabilities” account in 2011 consists of reversal of accrued interest related to certain convertible notes due to condonation (see Note 16b2ii), while in 2010, it mainly consists of the gain on the extinguishment of VMC‟s liability to MJO foundation and output VAT written-off covered by a tax amnesty.

23. Operating Expenses

This account consists of the following (in thousands):

Selling Expenses

Note 2012 2011 2010 Contracted services P12,915 P15,804 P1,049 Taxes and licenses 11,198 23,271 4,148 Rental 28e 7,300 5,598 5,563 Freight and handling 6,473 4,140 1,369 Materials and supplies 4,552 11,617 7,603 Repairs and maintenance 2,826 2,623 2,226 Depreciation 11 2,672 3,018 2,274 Salaries and other employee benefits 26 1,840 2,087 13,585 Others 2,944 5,513 932 P52,720 P73,671 P38,749

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General and Administrative Expenses

Note 2012 2011 2010 Professional fees and contracted services P103,608 P95,235 P129,359 Travel and transportation 22,366 19,143 14,634 Depreciation 11 16,346 18,427 10,870 Taxes and licenses 15,008 17,833 31,182 Salaries and other employee benefits 26 13,375 14,438 32,467 Repairs and maintenance 9,614 20,287 5,177 Impairment on noncurrent assets 13 7,893 - - Representation and entertainment 7,748 10,270 6,378 Retirement benefit 26 7,648 7,144 - Impairment on inventories 8 1,700 - - Impairment loss on receivables 7 15 74 17,984 Retrenchment cost 26 - - 495,447 Impairment loss on property, plant and equipment 11 - - 82,503 Impairment losses on investments in unconsolidated subsidiaries 10 - - 11,705 Others 22,189 19,273 15,942 P227,510 P222,124 P853,648

24. Other Expenses

This account consists of (in thousands):

Note 2012 2011 2010 Amortization of discount on provisions 15 P44,606 P41,016 P37,716 Impairment loss of nonfinancial assets 4,873 - - Loss on retirement and disposal of property, plant and equipment 11 93 1,085 1,249 Foreign exchange loss 64 141 148 Others 5,604 28,691 2,809 P55,240 P70,933 P41,922

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25. Income Taxes

The breakdown of income tax expense (benefit) follows (in thousands):

2012 2011 2010 Recognized in profit or loss Current P328,889 P180,554 P149,355 Deferred (46,328) (57,254) (43,140) P282,561 P123,300 P106,215 Recognized in other comprehensive income Deferred P - P - (P59,841)

The reconciliation of income tax expense computed at the applicable statutory rates to the tax expense is as follows (in thousands):

2012 2011 2010 Income before income tax P838,741 P522,976 P416,496 Tax expense at 30% P251,622 P156,893 P124,949 Effect of non-deductible and non- taxable items: Non-deductible interest expense 50,527 57,755 66,788 Other non-deductible expenses 6,121 241 66 Non-taxable income from extinguishment of liabilities and net curtailment loss due to retrenchment - (41,094) (41,711) Recognition of previously unrecognized deferred taxes – net (2,447) (24,927) - Actual payment of retirement benefits - (4,069) (12,112) Interest income subject to final tax (23,262) (21,499) (31,765) P282,561 P123,300 P106,215

The composition of “Deferred tax liabilities - net” account as reported in the consolidated statements of financial position follows (in thousands):

2012 2011 2010 Deferred tax liabilities P735,893 P767,287 P784,084 Deferred tax assets (202,210) (187,276) (146,822) Net deferred tax liabilities P533,683 P580,011 P637,262

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The following are the composition of deferred tax liabilities (in thousands):

2012 2011 2010 Net appraisal increase on property, plant and equipment P437,040 P458,825 P480,138 Unrealized fair value gain on investment properties 274,915 281,362 281,362 Unrealized gain on foreign exchange 23,938 27,100 22,584 P735,893 P767,287 P784,084

The following are the composition of the recognized deferred tax assets of the Group (in thousands):

2012 2011 2010 Provisions for RSDO claims P166,302 P152,920 P140,615 Allowance for impairment losses on receivables, allowance for impairment of other noncurrent assets, and allowance to reduce materials and supplies to NRV and impairment losses on investments 6,813 3,980 4,228 Retirement benefit obligation 26,633 28,795 1,082 NOLCO 2,285 1,303 593 MCIT 177 278 304 P202,210 P187,276 P146,822

In 2011, a subsidiary incurred NOLCO amounting to P4.34 million which can be deductible from future taxable income subject to RCIT until 2014.

The details of the outstanding MCIT of a subsidiary follow (in thousands):

Year Expiry At September 1, At August 31, incurred Date 2011 Addition Expiration 2012 2008 2011 P67 P - (P67) P - 2009 2012 149 - - 149 2010 2013 88 - - 88 2011 2014 - 41 - 41 P304 P41 (P67) P278

The Group expects that it will have sufficient taxable profits for which it can use the subsequent benefits of the deferred tax assets related to the provision for RSDO claims, retirement benefit obligation and allowances for impairment losses on receivables, allowance to reduce materials and supplies to NRV and impairment losses on investments, which are expected to reverse in the foreseeable future.

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The unrecognized deferred tax assets as at August 31 are attributable to the following deductible temporary differences (in thousands):

Note 2012 2011 2010 Interest on convertible notes P973,605 P830,581 P1,071,420 Allowance for impairment losses on receivables, allowance to reduce materials and supplies to NRV and impairment losses on investments 27,480 19,247 18,858 Retirement benefit obligation 26 - - 97,950 P1,001,085 P849,828 P1,188,228

In 2010 and prior years, the comparative balances of “Deferred tax liabilities - net” account were restated to reflect the adjustment on deferred tax liability on unrealized foreign exchange gain which was inadvertently recognized as deferred tax asset in 2010 and prior years.

A summary of the effects of the adjustment to the consolidated statements of financial position as at September 1, 2010 and 2009 and to the consolidated statements of comprehensive income for the year ended August 31, 2010 follow (in thousands, except EPS data):

As Previously Effect of Reported Adjustment As Restated Consolidated Statements of Financial Position as of September 1, 2010: Deferred tax liabilities - net P592,525 P44,737 P637,262 Deficit 1,986,000 44,737 2,030,737 Consolidated Statements of Financial Position as of September 1, 2009: Deferred tax liabilities - net 588,306 32,066 620,372 Deficit 2,311,353 32,066 2,343,419 Consolidated Statements of Comprehensive Income for the Year Ended August 31, 2010: Income tax expense 93,544 12,671 106,215 Net income 322,952 (12,671) 310,281 Basic EPS 0.20 (0.01) 0.19 Diluted EPS 0.13 (0.01) 0.12

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26. Personnel Costs and Expenses

a. Composition of Personnel Costs and Expenses

The following are the details of the personnel costs and expenses and the distribution (in thousands):

Note 2012 2011 2010 Cost of goods sold and services: Direct labor 21 P26,324 P22,679 P160,858 Selling expense: Salaries and other benefits 23 1,840 17,891 14,634 General and administrative expense: 23 Salaries and other employee benefits 13,375 14,438 32,467 Retirement benefit 7,648 7,144 - Retrenchment cost - - 495,447 P49,187 P62,152 P703,406

b. Voluntary Attrition Program

In 2010, the Parent Company implemented a voluntary attrition program (VAP) affecting all of its employees. Due to the program, the Parent Company paid retrenchment cost amounting to P495.447 million (see Note 23). This VAP resulted also to the recognition of net actuarial gain amounting to P138.746 million which is presented as part of “Other income” account (see Note 22).

Furthermore, as a result of the VAP, the Parent Company outsources its production, finance and administration. However, some key personnel were hired by the Parent Company as regular employees.

c. Retirement Benefit

The Parent Company and certain subsidiaries have their unfunded, non-contributory, defined benefit plan covering substantially all of its permanent employees and in accordance with the provisions of the Miguel J. Ossorio Pension Foundation, Inc. and the provisions of the supplementary retirement plan. The most recent actuarial valuation of the present value of the defined benefit obligation of the Parent Company was carried out at August 31, 2010 by a qualified independent actuary. The present values of the defined benefit obligation, the related current service cost and past service cost of the Group were measured using the projected unit credit method.

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The reconciliation of the retirement benefit obligation shown in the consolidated statements of financial position is as follows (in thousands):

2012 2011 2010 Present value of defined benefit obligations, end P120,796 P98,283 P103,177 Unrecognized actuarial gains (losses) (32,015) (2,295) (1,622) Retirement benefits liability at end of year P88,781 P95,988 P101,555

Movements in the present value of defined benefit obligation are as follows (in thousands):

2012 2011 2010 Present value of defined benefit obligation at beginning of year P98,283 P103,177 P240,934 Interest cost 6,800 7,541 12,676 Actuarial loss 31,364 757 74,767 Current service cost 195 371 7,113 Curtailment 6,642 - (191,814) Benefits paid (22,488) (13,563) (40,499) Present value defined benefit obligation at end of year P120,796 P98,283 P103,177

The remaining retirement benefit obligation pertains to the retirement payable to retired employees who did not opt for the lump sum payment of retirement benefit at the time of their retirement.

The amounts recognized as net of retirement benefit cost in consolidated statements of comprehensive income in respect of this defined benefit plan are as follows (in thousands):

2012 2011 2010 Interest cost P6,800 P7,541 P12,676 Current service cost 195 371 7,113 Actuarial loss (gain) recognized 1,644 85 74,850 Effect of curtailment 6,642 - (233,385) P15,281 P7,997 (P138,746)

As previously disclosed, the VAP in 2010 resulted to the recognition of net actuarial gain amounting to P138.746 million which is presented as part of “Other income” account (see Note 22).

The key assumptions used in determining the Group‟s retirement benefit expense and liability follow:

Valuation at 2012 2011 2010 Discount rate 6.92% 7.31% 5.26% Expected rate of salary increases 3.00% 3.00% 3.00%

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The historical information on actuarial losses (gains) due to changes in actuarial assumptions and experience adjustments and the present value of defined benefit obligation is as follows (in thousands):

2012 2011 2010 2009 2008 Present value of defined benefit obligation P120,796 P98,283 P103,177 P240,934 P263,417 Experience adjustments on plan liabilities 6,482 - 68,131 (20,363) (1,138) Changes in actuarial assumptions 24,436 - 6,636 (13,697) 942

27. Related Party Transactions

Identity of Related Parties The Parent Company‟s related parties include an unconsolidated subsidiary and key management personnel.

Significant Transactions with Related Parties

a. Purchases of goods/production supplies/services (in thousands):

2012 2011 2010 Purchase of goods from: VGCCI P - P - P -

b. Year-end balances arising from sales/purchases of goods/production supplies during the year follow (in thousands):

2012 2011 2010 Advances to: VGCCI P25,722 P26,198 P -

The Parent Company‟s advances to an unconsolidated subsidiary do not have definite maturities.

In 2011, the Parent Company recognized income from recovery of previously written-off advances to VGCCI amounting to P26.17 million.

c. Details of the Parent Company‟s advances from an unconsolidated subsidiary as at August 31 follow (in thousands):

2012 2011 2010 VGCCI P - P - (P1,003)

The Parent Company‟s advances from its unconsolidated subsidiaries are paid within the latter‟s normal credit terms ranging from 30 to 60 days.

The advances from unconsolidated subsidiary do not have definite maturities and are expected to be settled within one year from reporting date.

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Management believes that the carrying amounts of advances to and from subsidiaries approximate their respective fair values as they represent the expected cash flow should they be settled or realized at the reporting date.

d. Remuneration of Key Management Personnel

The remuneration of key management personnel of the Group is set out below in aggregate for each of the categories specified in PAS 24, Related Party Disclosures (in thousands).

2012 2011 2010 Short-term employee benefits P14,788 P15,172 P18,106 Post-employment benefits - 315 362 P14,788 P15,487 P18,468

e. Due to a Stockholder

Due to a stockholder amounting to P6.0 million as of August 31, 2012, 2011 and 2010, pertains to VQPC advances from its non-controlling stockholder. This is unsecured and will be settled in cash and has no definite payment terms. No guarantee has been given or received.

The Management of the Group considers that the carrying amount of the “Due to a stockholder” account approximates its fair value as it represents the expected cash flow should it be settled at the reporting date.

28. Agreements and Commitments

The significant agreements at August 31, 2012, 2011 and 2010 were as follows:

a. Milling contracts with various planters provide for a 69.5% share to the planters (including related parties) and 30.5% share to the Parent Company of sugar and molasses produced from sugar canes milled. The milling contracts are renewed annually.

b. As of August 31, 2012, 2011 and 2010, the Parent Company had in its custody sugar owned by several quedan holders and sugar traders of approximately 0.60 million Lkg, 0.24 million Lkg, and 0.37 million Lkg, respectively. The estimated market values of these sugar inventories amounted to P1.31 billion, P0.44 billion and P0.84 billion, respectively. These sugar inventories are not reflected in the consolidated statements of financial position since these are not assets of the Parent Company. The Parent Company is accountable to both quedan holders and sugar traders for the value of these trusteed sugar or their sales proceeds.

c. In 2005, the Parent Company has entered into a deed of assignment and exchange of shares of stock with VGCCI for the latter to issue shares of stock with a total par value of P224 thousand in exchange for the Parent Company‟s land with an appraised value of P13,205,970, the difference of P12,981,970 to be accounted for as additional paid-in capital of the Parent Company to VGCCI.

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As provided for in the agreement, VGCCI is in possession of the above-mentioned land without any consideration yet until such time that the assignment of the aforementioned land is completed. As at August 31, 2010, the certificate of title has not yet been transferred in the name of VGCCI since the land to be transferred is covered by the mortgage trust indenture of the Parent Company with various creditor banks as disclosed in Note 16. Hence, the transaction is on hold until the subject land will be released as collateral.

d. In an Order dated May 21, 2010, DOLE approved and adopted the Joint Motion to Approve Compromise Agreement of VMC and VIWA as the final disposition of all labor controversies pending before the Office and the DOLE Regional Office No. VI.

The Order further states, that all cases pending before the Office of the Secretary and the DOLE Regional Office No. VI be terminated and dropped from their respective business calendars.

e. The Group leases certain machineries and equipment from third parties for terms of one year, subject to yearly renewal. Total rent expense is charged to the following (in thousands):

Note 2012 2011 2010 Cost of goods sold and services 21 P5,418 P4,442 P4,434 Operating expenses 23 7,300 5,598 5,563 P12,718 P10,040 P9,997

Future minimum lease payments within 1 year amounted to P10 million as of August 31, 2012, 2011 and 2010, respectively.

29. Provisions and Contingencies

a. North Negros Marketing Co., Inc. (NONEMARCO) used refined sugar invoice/delivery orders (RSDOs) allegedly issued by VMC to avail of bank loans totaling to about P630 million. Several creditor banks filed collection cases against NONEMARCO aggregating to P1.19 billion. Further, these creditor banks have asked VMC to either make a delivery of the sugar covered by the RSDOs or absorb the debts of NONEMARCO.

VMC denied liability as these RSDOs were not backed up with actual sugar and that the officers who issued them acted fraudulently; hence, VMC took the position that these accounts should be paid by NONEMARCO. The proceedings of the case are still pending with the SEC.

VMC estimated that the total liability (including imputed finance cost) to be incurred at the end of the rehabilitation program on the claims on RSDOs is P917 million. The amortized cost of this liability which is presented as “Provisions” account in the consolidated statements of financial position amounted to P554.34 million, P509.73 million, and P468.72 million as of August 31, 2012, 2011 and 2010, respectively (see Note 15).

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b. On September 22, 2003, VMC received an order issued by the Pollution Adjudication Board (PAB) directing the former to permanently seal the opening of the underground canal leading to Malihao river; provide protective lining in the pond immediately; and, show cause within five (5) days from receipt of order why a cease and desists order should not be imposed on VMC by the Department of Environment and Natural Resources (DENR) for non-compliance with both water and air standards. On September 26, 2003, VMC has filed a manifestation and compliance certification in response to the September 22, 2003 order.

The Management of VMC has placed the handling of pollution problems on its priority list and is now addressing it in a manner which is within the financial resources of VMC. VMC is expected to address air pollution problems to comply with the Clean Air Act.

Moreover, VMC is now in compliance with the water pollution standards of the DENR after the upgraded waste water treatment plant has been successfully commissioned in February 2003. Two samples of wastewater effluent taken by the Environmental Management Bureau - Region VI on February 27, 2003 and March 23, 2003 were analyzed to contain Biochemical Oxygen Demand at 7.0 ppm and 10.0 ppm, respectively, which were way below the standard of 50 ppm.

In the last hearing of PAB, it was ordered that the computation of fines due to past non-compliance to effluent standard be made. As of August 31, 2006, the Company received the computation of fines from the PAB. The Company has not obtained yet the permanent lifting order with respect to water pollution. Management believes that said fine will have no significant impact on the Group‟s consolidated financial statements.

On February 8, 2005, VMC received a copy of the resolution/order from PAB dated December 21, 2004, concerning the pending case of VMC on air pollution. The order was addressed to VMC to comply with the following requirements: (i) a surety bond equivalent to 25% of the total cost of the proposed Air Pollution Control Device (APCD); (ii) board resolution approving the construction of the proposed APCD; (iii) certificate of availability of funds for the construction of the APCD; and (iv) a notarized undertaking to comply with the conditions set forth in the order.

On February 18 and 21, 2005, VMC filed very urgent motions for reconsideration of the order. On a hearing conducted by PAB on these motions filed by VMC, PAB directed VMC to submit appropriate pleading with the SEC for the inclusion of the APCD cost as part of the rehabilitation plan which VMC filed before SEC a motion for leave to allow inclusion of the cost of compliance with the order as part of rehabilitation plan on April 14, 2005.

In response, SEC issued on August 11, 2005 an order deferring resolution on the motions of VMC and directing VMC to submit an itemized cost to be incurred for the: (i) acquisition, fabrication, installation and maintenance of APCD; (ii) statutory/ regulatory fines imposed upon VMC and the amounts thereof as computed by PAB; (iii) expenses needed to comply with the December 21, 2004 order; and (iv) financial presentation which clearly show the source of funds and VMC‟s ability to service its indebtedness under the terms of the DRA.

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On January 27, 2009, VMC filed an urgent motion/application for an extension of the Temporary Lifting Order (TLO) that was previously issued by DENR. This urgent motion was received by PAB secretariat on April 29, 2009. On January 30, 2009, the PAB had resolved to issue a three (3) months TLO instead of the original eighteen (18) months TLO that VMC had originally requested. However, on August 13, 2009, VMC filed another motion/application for extension of the said TLO for a period of one year from September 4, 2009 to September 4, 2010.

Incidentally, in order to minimize the pollution problems that VMC‟s management had encountered, it had allotted approximately P30 million for the installation of wet gas scrubbers for the two boilers (JTA and Yoshimine), which are already operational as of August 31, 2009.

In addition, as part of VMC‟s regular pollution control program, VMC had also met with foreign consultants who are willing to look at VMC‟s pollution concerns in relation to its carbon credits program and activities in the country. Initial visits by representatives of a foreign company to the millsite have been made but no further developments have resulted yet.

On June 21, 2010, PAB directed VMC to show cause within 10 days from receipt of the Order why no Cease and Desist Order shall be issued against it for its alleged violation of law and DENR rules. On July 29, 2010, VMC filed its position paper.

On October 22, 2010, PAB issued an Order directing VMC to “SHOW CAUSE” why no Cease and Desist Order shall be issued for its violators under P.D. 984, R.A. 9275, R.A. 8749 and its implementing Rules and Regulations. On November 19, 2010, VMC filed its Position Paper, praying that VMC be granted an extension of the Temporary Lifting Order.

On July 5, 2011, the technical conference was held where VMC directed to submit commitment letter. VMC submitted the required commitment letter.

On January 11, 2012, VMC received PAB‟s order dated July 5, 2011, granting VMC‟s motion for extension of TLO but only for three (3) months or from January 11, 2012 to April 11, 2012. Likewise, VMC was required to submit management-approved program of work concerning the installation of additional control device for the five (5) remaining boilers. Regional office may issue a “permit to operate”, co-terminus with the effectivity of TLO.

On April 3, 2012, VMC filed compliance and urgent motion for extension of temporary lifting order of PAB dated July 5, 2011. VMC prayed that its compliance be duly noted by PAB and an order be issued, granting VMC an extension of the TLO for a period of one (1) year or from April 11, 2012 to April 12, 2013. c. In August 1999, SGS Yarsley International Certification Services issued an ISO 9002 certification to VMC. As of November 25, 2003, VMC has upgraded its ISO certification to ISO 9001:2000 version. On October 21-23, 2009 SGS Philippines conducted the stage 2 of the on-site audit and concluded that VMC has established and maintained its management system in line with the requirements of the standard and demonstrated the ability of the system to systematically achieve agreed requirements for products or services within the scope and the organization's policy and objectives. VMC is recommended for recertification and upgrading from ISO 9001:2000 to ISO 9001:2008 version.

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d. In a letter to the SEC dated October 8, 1997, the predecessor auditors withdrew their reports on the 1996 and prior years‟ financial statements of VMC and those of its subsidiaries as a consequence of matters the predecessor auditors described in their aforementioned letter. In several letters to the SEC, VMC and its then MANCOM objected to the predecessor auditors‟ withdrawal of audit reports and requested the SEC not to allow it. On September 7, 1998, the SEC ruled that all reports/filings officially submitted to the SEC form an integral part of the corporate records of VMC and cannot be detached, modified or amended except through subsequent filings.

e. The agricultural land of VALCO, with carrying amount of P90.8 million, is subject to the Comprehensive Agrarian Reform Law which requires, among others, the redistribution of land that exceeds the retention limit. As of reporting date, VALCO has not received a Notice of Coverage of CARP.

f. Judgments against the Parent Company were rendered on certain cases ordering the Parent Company to pay/deliver certain bags of sugar to the plaintiff. The Parent Company recorded accruals related to these liabilities (see Note 14).

g. There are various lawsuits and claims such as labor cases, collection disputes and assessments filed by third parties against VMC which are either pending decision by the proper judicial bodies or under negotiation, the outcome of which are presently undeterminable. Relative to this, VMC is required to put up cash surety bonds (see Note 13).

Except for the claims of the several creditors involving the collection cases against NONEMARCO as discussed in letter a above which is properly and sufficiently accrued as provision, in the opinion of the management of the Group and in consultation with legal counsels, the ultimate disposition of these cases, disputes and assessments will not have a material adverse effect on the financial position or financial performance of the Group.

30. Financial and Capital Risk Management

The Group‟s financial instruments comprise of cash and cash equivalents, trade and other current receivables, advances to and from an unconsolidated subsidiary, other noncurrent assets, trade and other current payables, long-term debts and due to a stockholder. The main purpose of these financial instruments is to raise finances for the Group‟s operations.

The Group has exposure to the following risks from its use of financial instruments:

. Credit Risk . Liquidity Risk . Market Risk

The Board of Directors of the Parent Company has overall responsibility for the establishment and oversight of the Group‟s risk management framework. Moreover, market and credit risk management is carried out by the Group‟s Treasury Group. The objective is to minimize potential adverse effects on its financial performance due to unpredictability of financial markets.

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Credit Risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.

The Group trades only with recognized and creditworthy third parties. It is the Group‟s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. The amounts presented in the consolidated statements of financial position are net of allowances for impairment losses on receivables, estimated by the Group‟s management based on prior experience and their assessment of the prevailing economic environment at any given time.

As of August 31, 2012, 2011 and 2010, the aging profile of the Group‟s financial assets is as follows (in thousands):

Neither Past Past Due but not Impaired Past Due Due nor and August 31, 2012 Total Impaired < 30 Days 31-60 Days 61-90 Days > 90 Days Impaired Trade and other current receivables* P144,140 P116,594 P3,363 P121 P140 P4,094 P18,828 Advances to unconsolidate d subsidiary 25,722 25,722 - - - - - Other noncurrent assets 1,804,874 1,796,981 - - - - 7,893 P1,974,736 P1,939,297 P3,363 P121 P140 P4,094 P18,828 *Excluding advances to suppliers

Neither Past Past Due but not Impaired Past Due Due nor and August 31, 2011 Total Impaired < 30 Days 31-60 Days 61-90 Days > 90 Days Impaired Trade and other current receivables* P161,935 P14,627 P91,396 P14,416 P617 P13,193 P27,686 Advances to unconsolidated subsidiary 26,198 - - - - 26,198 - Other noncurrent assets 1,299,496 1,299,496 - - - - - P1,487,629 P1,314,123 P91,396 P14,416 P617 P39,391 P27,686 *Excluding advances to suppliers

Neither Past Past Due but not Impaired Past Due Due nor and August 31, 2010 Total Impaired < 30 Days 31-60 Days 61-90 Days > 90 Days Impaired Trade and other current receivables* P31,060 P7,183 P2,078 P801 P313 P1,336 P19,349 Other noncurrent assets 2,101,004 2,101,004 - - - - - P2,132,064 P2,108,187 P2,078 P801 P313 P1,336 P19,349 *Excluding advances to suppliers

At the reporting date, there were no significant concentrations of credit risk as the Group‟s receivables are actively monitored.

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As of August 31, 2012, 2011 and 2010, the Group‟s maximum credit exposure is equal to the carrying value of the following financial assets (in thousands):

Note 2012 2011 2010 Cash and cash equivalents* 6 P1,086,492 P923,032 P809,973 Trade and other current receivables - net** 7 133,194 143,561 11,711 Advances to unconsolidated subsidiaries 27.b 25,722 26,198 - Cash and cash equivalents reserve for debt repayment - net*** 13 1,796,981 1,299,496 2,101,004 P3,042,389 P2,392,287 P2,922,688

* Excluding cash on hand ** Excluding advances to suppliers and net of impairment loss *** Net of impairment loss

Liquidity Risk Liquidity risk is the risk of not meeting obligations as they become due because of an inability to liquidate assets or obtain adequate funding.

The Group monitors and maintains a level of cash deemed adequate by the management to finance the Parent Company‟s operations and mitigate the effects of fluctuations in cash flows. Additional short-term funding is obtained from related party advances.

The following tables summarize the maturity profile of the Group‟s financial liabilities as of August 31, 2012, 2011 and 2010 based on contractual undiscounted payments (in thousands):

Total Carrying Contractual Undiscounted Payments August 31, 2012 Value Total On Demand < 1 Year 1 to 5 Years > 5 Years Trade and other current payables* P341,916 P341,916 P227,013 P114,903 P - P - Long-term debts 4,826,907 4,826,907 - 358,834 1,435,336 3,032,737 Due to a stockholder 6,000 6,000 6,000 - - - P5,174,823 P5,174,823 P233,013 P473,737 P1,435,336 P3,032,737

* Excluding payables to government

Total Carrying Contractual Undiscounted Payments August 31, 2011 Value Total On Demand < 1 Year 1 to 5 Years > 5 Years Trade and other current payables* P460,746 P460,746 P389,581 P66,373 P4,792 P - Long-term debts 5,889,082 6,135,202 - 359,066 1,436,264 4,339,872 Due to a stockholder 6,000 6,000 - - 6,000 - P6,355,828 P6,601,948 P389,581 P425,439 P1,447,056 P4,339,872

* Excluding payables to government

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Total Carrying Contractual Undiscounted Payments August 31, 2010 Value Total On Demand < 1 Year 1 to 5 Years > 5 Years Trade and other current payables* P395,201 P395,201 P315,754 P79,447 P - P - Long-term debts 6,559,530 6,837,125 - 362,254 1,449,016 5,025,855 Due to a stockholder 6,000 6,000 - - 6,000 - Advances from an unconsolidated subsidiary 1,003 1,003 1,003 - - - P6,961,734 P7,239,329 P316,757 P441,701 P1,455,016 P5,025,855

* Excluding payables to government

Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group‟s income or the value of its holdings of financial instruments. The Group‟s market risk exposures and its risk management strategies as of August 31, 2012, 2011 and 2010 are as follows: a. Interest Rate Risk

Interest rate risk is the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Group‟s exposure to the risk changes in market interest rates relates primarily to the Group‟s interest-bearing bank loans and interest-bearing short-term placements.

The Group minimizes its spread exposure by ensuring that surplus cash is available to either offset debt or by matching maturity dates of assets and liabilities. By these management approaches, possible market rate fluctuations would have no significant impact on the Group‟s net income.

The Group, however, has no significant interest rate risk considering that the Group has no significant financial instruments that bear variable interest rate. b. Price Risk

The Group is exposed to commodity price risk with respect to sugar produced. To manage this risk, the Parent Company monitors prices with the Sugar Regulatory Administration (SRA) to plan its transactions. As of August 31, 2012, 2011 and 2010, management assessed that the Group‟s exposures to commodity price risk were insignificant.

Sensitivity Analysis The following table demonstrates the sensitivity of the results of operations and the reported equity in regards to the Parent Company‟s sugar inventory and SRA‟s sugar prices. It assumes a 15%, 24% and 42% increase as of August 31, 2012, 2011 and 2010, respectively and 8%, 29% and 42% decrease as of August 31, 2012, 2011 and 2010, respectively, of the SRA sugar prices per year.. These percentages have been determined based on average market volatility in sugar prices in the previous months for the 12 month periods ended August 31, 2012, 2011 and 2010, respectively.

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The sensitivity analysis includes only sugar inventory denominated monetary items (in thousands) and adjusts their translation at the period end for the following % change in sugar prices.

August 31, 2012 +15% -8% Net income P8,996 (P4,798) Equity 8,996 (4,798)

August 31, 2011 +24% -29% Net income P148,355 (P179,262) Equity 148,255 (179,262)

August 31, 2010 +42% -42% Net income P16,942 (P16,942) Equity 16,942 (16,942) c. Foreign Currency Risk

The Group‟s currency risk occurs because of its US Dollar (USD) denominated loans and bank deposits. The financial assets and liabilities of the Group that are foreign currency denominated are a portion of the Group‟s cash and cash equivalents and portion of its bank loans.

The Group's exposures to foreign currency risk based on notional amounts are as follows (in thousands):

August 31, 2012 In USD In PHP Financial Assets Cash in bank $4 P162

Financial Liability Bank loans (7,834) (331,514) Net Foreign Currency Exposure ($7,830) (P331,352)

August 31, 2011 In USD In PHP Financial Assets Cash in bank $49 P2,083 49 2,083 Financial Liability Bank loans (10,245) (435,515) Net Foreign Currency Exposure ($10,196) (P433,432)

August 31, 2010 In USD In PHP Financial Assets Cash in bank $4 P193 4 193 Financial Liability Bank loans (10,245) (462,583) Net Foreign Currency Exposure ($10,241) (P462,390)

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The Group recognized a net unrealized gain of P1.48 million, P15.05 million and P18.23 million for the years ended August 31, 2012, 2011 and 2010, respectively, arising from the re-measurement of these foreign currency-denominated financial instruments. The following exchange rates were applied during the period:

August 31, 2012 Reporting Date Average Rate Spot Rate Philippine peso to 1 US $ P42.90 P42.32

August 31, 2011 Reporting Date Average Rate Spot Rate Philippine peso to 1 US $ P43.45 P42.51

August 31, 2010 Reporting Date Average Rate Spot Rate Philippine peso to 1 US $ P46.21 P45.18

Sensitivity Analysis The following table demonstrates the sensitivity of the results of operations for the periods and the reported equity in regards to the Group‟s financial assets and financial liabilities and the US dollar-Philippine peso exchange rate. It assumes a 1.83%, 1.83% and 4.17% strengthening as of August 31, 2012, 2011 and 2010, respectively and 2.36%, 2.36% and 3.43% weakening as of August 31, 2012, 2011 and 2010, respectively, of the Philippine peso against the US dollar exchange rate. These percentages have been determined based on average market volatility in exchange rates in the previous months for the 12 month periods ended August 31, 2012, 2011 and 2010, respectively.

The sensitivity analysis includes only outstanding foreign currency denominated monetary items (in thousands) and adjusts their translation at the period end for the following % change in foreign currency rates.

August 31, 2012 +1.83% -2.36% Net income P5,772 (P7,692) Equity 5,772 (7,692)

August 31, 2011 +1.83% -2.36% Net income P5,552 (P7,160) Equity 5,552 (7,160)

August 31, 2010 +4.17% -3.43% Net income P19,011 (P16,158) Equity 19,011 (16,158)

Exposures to foreign exchange rates vary during the year depending on the volume of foreign currency-denominated transactions. Nonetheless, the analysis above is considered to be representative of the Group‟s currency risk.

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Fair Value of Financial Assets and Liabilities The carrying values of cash and cash equivalents, trade and other current receivables and trade and other current payables approximate their fair values due to the short-term maturity of these instruments.

The carrying value of long-term debts approximates its fair value and is calculated by discounting the expected future cash outflows at prevailing effective interest rate. The carrying values of advances to and from an unconsolidated subsidiary and due to stockholder approximate their fair values because they represent the expected cash flow should they be settled or realized at the reporting date.

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VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULE REQUIRED UNDER SRC RULE 68, AS AMENDED (2011) Schedule of Philippine Financial Reporting Standards (PFRSs) As at August 31, 2012

Standards “Adopted”, “Not adopted” or “Not applicable” Philippine Financial Reporting Standards (PFRSs) PFRS 1 First-time Adoption of Philippine Not applicable Financial Reporting Standards PFRS 2 Share-based Payment Not applicable PFRS 3 Business Combinations Not applicable PFRS 4 Insurance Contracts Not applicable PFRS 5 Non-current Assets Held for Sale and Not applicable Discontinued Operations PFRS 6 Exploration for and Evaluation of Not applicable Mineral Resources PFRS 7 Financial Instruments: Disclosures Adopted PFRS 8 Operating Segments Adopted

Philippine Accounting Standards (PASs) PAS 1 Presentation of Financial Statements Adopted PAS 2 Inventories Adopted PAS 7 Statement of Cash Flows Adopted PAS 8 Accounting Policies, Changes in Adopted Accounting Estimates and Errors PAS 10 Events after the Reporting Period Adopted PAS 11 Construction Contracts Not applicable PAS 12 Income Taxes Adopted PAS 16 Property, Plant and Equipment Adopted PAS 17 Leases Adopted PAS 18 Revenue Adopted PAS 19 Employee Benefits Adopted PAS 20 Accounting for Government Grants and Not applicable Disclosure of Government Assistance PAS 21 The Effects of Changes in Foreign Adopted Exchange Rates PAS 23 Borrowing Costs Not applicable PAS 24 Related Party Disclosures Adopted PAS 26 Accounting and Reporting by Not applicable Retirement Benefit Plans PAS 27 Consolidated and Separate Financial Adopted Statements PAS 28 Investments in Associates Adopted PAS 29 Financial Reporting in Hyperinflationary Not applicable Economies PAS 31 Interests in Joint Venture Not applicable PAS 32 Financial Instruments: Presentation Adopted PAS 33 Earnings per Share Adopted PAS 34 Interim Financial Reporting Not applicable PAS 36 Impairment of Assets Adopted PAS 37 Provisions, Contingent Liabilities and Adopted Contingent Assets Forward

ANNEX A Victorias Milling Company, Inc. and Subsidiaries Schedule of PFRSs

Standards “Adopted”, “Not adopted” or “Not applicable” PAS 38 Intangible Assets Not applicable PAS 39 Financial Instruments: Recognition and Adopted Measurement PAS 40 Investment Property Adopted PAS 41 Agriculture Not applicable

ANNEX B

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULE REQUIRED UNDER SRC RULE 68, AS AMENDED Map of Conglomerate

LEGEND: VMC - Victorias Milling Company, Inc. VFC - Victorias Foods Corporation VALCO - Victorias Agricultural Land Corporation VGCCI - Victorias Golf and Country Club, Inc. VQPC - Victorias Quality and Packaging Company, Inc. CDC - Canetown Development Corporation VIGASCO - Victorias Industrial Gases Corporation ANNEX C Page 1 of 9

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Supplementary Schedules of Annex 68-E Required by the Securities and Exchange Commission As of August 31, 2012 and for the Year then Ended

Page

A. Financial Assets (e.g., Loans and Receivables, Fair Value Through Profit or Loss, Held to Maturity Investments and Available for Sale Securities) 2

B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Related Parties). 3

C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial Statements 4

D. Intangible Assets - Other Assets 5

E. Long Term Debt 6

F. Indebtedness to Related Parties 7

G. Guarantees of Securities of Other Issuers(1) NA

H. Capital Stock (1) 9

NA : Not applicable

ANNEX C Page 2 of 9

SEC/PSE ANNUAL FILING REQUIREMENT CHECKLIST PUBLIC COMPANIES FORM AND CONTENT OF SCHEDULES

Schedule A. Financial Assets (e.g., Loans and Receivables, Fair Value Through Profit or Loss, Held to Maturity Investments and Available for Sale Securities)

Name of Issuing entity Number of shares or Amount shown in the Valued based on Income and association of each principal amount of balance sheet (2) market quotation at received and issue (1) bonds and notes balance sheet date (3) accrued

LOANS AND RECEIVABLES (Amount in thousands)

Various Banks P1,086,492 P1,086,492 P76,225

Various Customers 132,547 132,547 -

Due from Victorias Golf and Country Club, Inc. 25,722 25,722 -

______

(1) Each issue shall be stated separately, except that reasonable grouping, without enumeration may be made of (a) securities issued or guaranteed by the Philippine Government or its agencies and (b) securities issued by others for which the amounts in the aggregate are not more than two percent of total assets.

(2) State the basis of determining the amounts shown in the column. This column shall be totaled to correspond to the respective balance sheet caption or captions.

(3) This column may be omitted if all amounts that would be shown are the same as those in the immediately preceding column.

ANNEX C Page 3 of 9

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

Name and Balance at Additions Amounts Amou Current Not Current Balance at end of Designation of beginning of collected (2) nts period debtor (1) period writte n off (3)

Officers and employees P1,127 4,301 4,781 - P647 - P647

______

(1) Show separately accounts receivables and notes receivable. In case of notes receivable, indicate pertinent information such as the due date, interest rate, terms of repayment and collateral, if any. (2) If collection was other than in cash, explain. (3) Give reasons for write off. ANNEX C Page 4 of 9

Schedule C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial Statements (in thousands).

Name and Balance at Additions Amounts Amounts Current Not Current Balance at end Designation of beginning of collected (1) written off (2) of period debtor period

Victorias Foods Corporation (VFC) P563 (P91) P563 - (P91) - (P91)

Victorias Agricultural Land Corporation (VALCO) (12,821) (1,084) 13,018 - (887) - (887)

Canetown Development Corporation (CDC) 48,402 414 1,260 - 47,556 - 47,556

Victorias Quality Packaging Company, Inc. (VQPC) 2,437 11,394 (2,437) - 11,394 11,394

______

(1) If collection was other than in cash explain

(2) Give reasons for write off.

ANNEX C Page 5 of 9

Schedule D. Intangible Assets – Other Assets

Description (1) Beginning Additions at cost (2) Charged to Charged to Other charges, Ending balance cost and other additions Balance expenses accounts (deductions) (3)

Not applicable

______

(1) The information required shall be grouped into (a) intangibles shown under the caption intangible assets and (b) deferrals shown under the caption Others Assets in the related balance sheet. Show by major classifications.

(2) For each change representing anything other than an acquisition, clearly state the nature of the change and the other accounts affected. Describe cost of additions representing other than cash expenditures.

(3) If provision for amortization of intangible assets is credited in the books directly to the intangible asset account, the amounts shall be stated with explanations, including the accounts charged. Clearly state the nature of deductions if these represent anything other than regular amortization.

ANNEX C Page 6 of 9

Schedule E. Long Term Debt

Title of Issue and type of Amount authorized by Amount shown under Amount shown under caption obligation(1) indenture caption "Current portion of "Long-Term Debt" in related long-term debt" in related balance sheet (3) balance sheet (2)

Various Banks P4,826,907 P358,834 P4,468,073

Refer also to Note 16 of the consolidated financial statements

______

(1) Include in this column each type of obligation authorized.

(2) This column is to be totaled to correspond to the related balance sheet caption.

(3) Include in this column details as to interest rates, amounts or number of periodic installments, and maturity dates.

ANNEX C Page 7 of 9

Schedule F. Indebtedness to Affiliates and Related Parties (Long-Term Loans from Related Companies)

Name of affiliate (1) Balance at beginning of period Balance at end of period (2)

Not applicable

______

(1) The related parties named shall be grouped as in Schedule D. The information called for shall be stated separately for any persons whose investments were shown separately in such related schedule.

(2) For each affiliate named in the first column, explain in a note hereto the nature and purpose of any material increase during the period that is in excess of 10 percent of the related balance at either the beginning or end of the period.

ANNEX C Page 8 of 9

Schedule G. Guarantees of Securities of Other Issuers (1)

Name of issuing entity of Title of issue of Total amount Amount owned by Nature of securities guaranteed by the each class of guaranteed and person for which guarantee (3) company for which this securities outstanding (2) statement is filed statement is filed guaranteed

Not applicable

______

(1) Indicate in a note any significant changes since the date of the last balance sheet filed. If this schedule is filed in support of consolidated financial statements, there shall be set forth guarantees by any person included in the consolidation except such guarantees of securities which are included in the consolidated balance sheet.

(2) There need be made only a brief statement of the nature of the guarantee, such as "Guarantee of principal and interest", "Guarantee of Interest", or "Guarantee of dividends". If the guarantee is of interest, dividends, or both, state the annual aggregate amount of interest or dividends so guaranteed.

ANNEX C Page 9 of 9

Schedule K. Capital Stock (1)

Title of Number of Shares Number of shares Number of Number of shares Directors, Others Issue (2) authorized issued and shares held by affiliates (3) officers and outstanding at reserved for employees shown under options, related balance warrants, sheet caption conversion and other rights

Common stock 2,563,035,708 2,024,626,982 - 5,824,318 852,595 2,017,950,069

Refer also to Notes 16 and 17 of the consolidated financial statements

______

(1) Indicate in a note any significant changes since the date of the last balance sheet filed.

(2) Include in this column each type of issue authorized.

(3) Affiliates referred to include affiliates for which separate financial statements are filed and those included in consolidated financial statements, other than the issuer of the particular security.

ANNEX D

VICTORIAS MILLING COMPANY, INC. VICMICO Compound, Victorias City Negros Occidental

SCHEDULE OF RECONCILIATION OF DEFICIT AS OF AUGUST 31, 2012

DEFICIT, BEGINNING P1,753,290,464 Add: Revaluation increment closed to retained earnings in accordance with a quasi-reorganization approved in 2002 3,195,367,390 Accumulated fair value adjustment of investment properties resulting to gain, net of deferred tax effect of P204,469,005 477,094,345 Unamortized discount on provisions carried at present value in accordance with PAS 37 as of August 31, 2011, net of deferred tax effect of P122,179,717 285,086,006 Unamortized interest expense on convertible notes measured using effective interest method in accordance with PAS 39 as of August 31, 2011, net of deferred tax effect of P73,836,087 172,284,202 Accumulated unrealized foreign exchange gains in prior years, net of deferred tax effect of P 27,100,184 63,233,763 Treasury stock 10,530 DEFICIT AS ADJUSTED, BEGINNING 5,946,366,700 Add (Less): Net income for the year closed to retained earnings (539,607,565) Depreciation on appraisal increase, net of deferred tax of P21,226,419 (49,528,311) Amortization of discount on provisions, net of deferred tax effect of P13,381,654 (31,223,859) Amortization of the unamortized interest expense on convertible notes, net of deferred tax effect of P5,266,281 (12,287,990) Unrealized foreign exchange loss, net of deferred tax effect of P3,162,788 (7,379,839) DEFICIT AS ADJUSTED, ENDING P5,306,339,136 Figures based on functional currency audited separate financial statements

Note

There is no amount available for divided declaration as the adjusted amount is a deficit.