SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-Q
QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER
1. For the quarterly period ended May 31, 2006
2. Commission identification number 364 3. BIR Tax Identification No 076-000-270-220 4. Exact name of issuer as specified in its charter
VICTORIAS MILLING COMPANY, INC.
5. Province, country or other jurisdiction of incorporation or organization
Plant site: Victorias City, Negros Occidental
6. Industry Classification Code: (SEC Use Only)
7. Address of registrants principal office Postal Code
9126 Sultana Street corner Honradez Street Barangay Olympia, Makati City
8. Registrant’s telephone number, including area code
(02) 896-0381 (02) 899-0485 Fax# (02) 895-4150
9. Former name, former address and former fiscal year, if changed since last report
Not Applicable
10. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA
Common stock Par value of 1.00 each Authorized 2,563,035,708 shares Subscribed and paid up 1,595,941,983 shares
11. Are any or all of the securities listed on a Stock Exchange?
Yes [ x ] No [ ]
If yes, state the name of such Stock Exchange and the class/es of securities listed therein:
______
12. Indicate by check mark whether the registrant:
(a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 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 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 [ ]
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Financial Statements and, if applicable, Pro Forma Financial Statements meeting the requirements of SRC Rule 68, Form and Content of Financial Statements, shall be furnished as specified therein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Furnish the information required by Part III, Paragraph (A)(2)(b) of “Annex C”.
PART II—OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Regulation Code, the issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VICTORIAS MILLING COMPANY, INC.
Date: July 14, 2006
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
BALANCE SHEETS AS OF MAY 31, 2006 AND AUGUST 31, 2005
(In Thousand Pesos) PARENT CONSOLIDATED May 31 August 31 May 31 August 31 2006 2005 2006 2005 ASSETS
CURRENT ASSETS Cash and cash equivalents - note 4 424,261 785,241 473,613 813,306 Receivables, net - note 5 57,328 91,146 91,706 113,232 Inventories, net - note 6 391,642 325,787 444,950 383,188 Prepayments and other current assets - note 7 248,214 168,019 255,881 174,979 Total current assets 1,121,446 1,370,193 1,266,151 1,484,705
INVESTMENTS IN SHARES OF STOCK AND ADVANCES, net - note 8 Subsidiaries 248,884 243,726 Others, at cost 54,588 55,754 54,588 55,754
DEFERRED TAX ASSETS 1,538 893
PROPERTY, PLANT AND EQUIPMENT, net - note 9 5,164,762 5,398,026 5,309,691 5,546,362
OTHER ASSETS, net - note 10 1,771,060 90,214 1,772,984 98,233 TOTAL ASSETS 8,360,739 7,157,914 8,404,951 7,185,947
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Accounts payable and accrued expenses 1,760,638 1,536,886 1,841,049 1,585,562 Current portion of long term debts - note 12 185,648 189,772 4,124 Total current liabilities 1,946,286 1,536,886 2,030,821 LONG TERM DEBTS, net of current portion - note 12 6,978,857 7,215,261 6,985,036 7,228,656 DEFERRED TAX LIABILITY 162,649 162,649 162,649 162,649 CONTINGENT LIABILITY 600,000 600,000
DUE TO UNCONSOLIDATED AFFILIATED COMPANIES 9,758 9,758 13,543 15,876 ACCUMULATED LOSSES IN EXCESS OF INVESTMENT COST - note 18 33,881 33,881
MINORITY INTEREST (16,404) (10,397) CAPITAL DEFICIENCY (1,370,693) (1,800,522) (1,370,693) (1,800,523) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,360,739 7,157,914 8,404,951 7,185,947 See accompanying notes to financial statements
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATION FOR THE PERIOD ENDED MAY 31, 2006 AND 2005
(In Thousand Pesos) PARENT CONSOLIDATED 2006 2005 2006 2005 REVENUES FROM OPERATIONS 3,215,071 2,307,955 3,356,075 2,387,129
COST OF SALES 1,616,540 1,583,041 1,737,941 1,640,979 GROSS PROFIT 1,598,531 724,914 1,618,134 746,150 OTHER INCOME 143,650 58,917 145,766 61,373 1,742,180 783,831 1,763,900 807,523 SELLING EXPENSES 31,266 25,737 33,834 25,737
ADMINISTRATIVE EXPENSES 143,736 142,423 153,721 156,753
OTHER OPERATING EXPENSES 651,198 40,640 651,198 40,640
INCOME FROM OPERATIONS 915,981 575,031 925,149 584,393
FINANCING COST 492,160 468,691 494,475 471,702 EQUITY IN NET INCOME (SHARE IN LOSSES) OF INVESTEE COMPANIES 6,008 4,947 PROVISION FOR INCOME TAX 845 1,404 NET INCOME FOR THE PERIOD 429,829 111,287 429,829 111,287 EARNINGS PER SHARE 0.27 0.07 0.27 0.07 See accompanying notes to financial statements
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATION FOR THE QUARTER ENDED MAY 31, 2006 AND 2005
(In Thousand Pesos) PARENT CONSOLIDATED 2006 2005 2006 2005 REVENUES FROM OPERATIONS 1,177,504 851,226 1,221,194 863,839
COST OF SALES 542,117 569,489 580,252 574,877 GROSS PROFIT 635,386 281,737 640,942 288,962 OTHER INCOME 53,302 21,768 55,091 22,576 688,688 303,505 696,033 311,538 SELLING EXPENSES 13,488 11,790 14,569 11,790
ADMINISTRATIVE EXPENSES 30,866 58,136 34,304 62,549
OTHER OPERATING EXPENSES 539,167 1,313 539,167 1,313 INCOME FROM OPERATIONS 105,230 232,266 107,993 235,886
FINANCING COST 182,873 155,805 183,658 156,842 EQUITY IN NET INCOME (SHARE IN LOSSES) OF INVESTEE COMPANIES 1,839 2,083 PROVISION FOR INCOME TAX 139 500 NET INCOME FOR THE PERIOD (75,804) 78,544 (75,804) 78,544 EARNINGS PER SHARE (0.04) 0.05 (0.04) 0.05 See accompanying notes to financial statements
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED MAY 31, 2006 AND 2005
PARENT CONSOLIDATED 2006 2005 2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES: Net income for the period 429,829 111,287 429,829 111,287 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 331,441 286,817 333,046 289,485 Foreign currency differences (50,756) (50,756) Provision for contingent liability 600,000 600,000 (Increase) decrease in receivables 33,818 37,748 21,526 38,498 (Increase) decrease in inventories (65,855) (120,501) (61,762) (133,533) (Increase) decrease in prepayments and other current assets (80,195) 110,180 (81,547) 110,260 Increase in accounts payable and accrued expenses 223,753 198,187 248,271 205,124 Net cash provided by operating activities 1,422,035 623,718 1,438,607 621,121
CASH FLOWS FROM INVESTING ACTIVITIES: Increase in property, plant and equipment, net (98,177) (201,229) (96,375) (200,458) (Increase) decrease in other assets (1,680,846) 1,842 (1,674,751) 3,360 Net cash used in investing activities (1,779,023) (199,387) (1,771,126) (197,098)
CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in long term debts - (26,802) - (29,894) (Increase) decrease in investments in and advances
to affiliated companies and others - net (3,992) (1,590) (7,174) 147
Net cash used in financing activities (3,992) (28,392) (7,174) (29,747) NET INCREASE IN CASH AND CASH EQUIVALENTS (360,980) 395,939 (339,693) 394,276 CASH AND CASH EQUIVALENTS Beginning of period 785,241 629,090 813,306 658,388 End of period 424,261 1,025,029 473,613 1,052,664
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD ENDED MAY 31, 2006 AND 2005
(In thousand pesos) PARENT CONSOLIDATED May 31 May 31 2006 2005 2006 2005 CAPITAL STOCK Authorized - 2,563,035,708 shares at P1 par value each Issued - 1,595,957,670 shares 1,595,957 1,595,957 1,595,957 1,595,957
Less - shares held in treasury (15) (15) (15) (15) Issued and outstanding 1,595,942 1,595,942 1,595,942 1,595,942
REVALUATION INCREMENT IN PROPERTY, PLANT AND EQUIPMENT Beginning of year, net of depreciation charged to operations 302,063 617,619 302,063 617,619 Share in revaluation increment in property, plant and equipment of subsidiaries - - Decrease in revaluation increment due to rail line and rolling stock items written off - - Increase in revaluation increment due to appraisal - - Application of revaluation increment against deficit - - 302,063 617,619 302,063 617,619
DEFICIT Beginning of the year (3,698,527) (3,574,164) (3,698,527) (3,574,164) Priod period adjustments Share in prior period adjustments of a subsidiary
Net Income (loss) for the period 429,829 111,287 429,829 111,287
End of the year (3,268,698) (3,462,877) (3,268,698) (3,462,877) CAPITAL DEFICIENCY (1,370,693) (1,249,315) (1,370,693) (1,249,315) See accompanying notes to financial statements
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
COST OF GOODS MANUFACTURED AND SOLD FOR THE PERIOD ENDED MAY 31, 2006 AND 2005
PARENT CONSOLIDATED 2006 2005 2006 2005 Direct labor 274,465 131,249 287,400 144,716
Repairs and maintenance 351,259 502,343 351,959 502,985
Materials and supplies 221,492 228,683 314,645 271,681
Energy cost 149,217 173,039 155,586 179,254
Contracted services and planters' incentives 525,300 465,329 525,520 46 7,689
Others 223,940 311,876 229,995 314,467
Changes in beginning and ending inventories (129,134) (229,478) (127,163) (239,813)
Cost of goods manufactured and sold 1,616,540 1,583,041 1,737,941 1,640,979
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES
SCHEDULE OF SELLING EXPENSES FOR THE PERIOD ENDED MAY 31, 2006 AND 2005
(In Thousand Pesos) PARENT CONSOLIDATED 2006 2005 2006 2005 Salaries and wages 16,130 15,657 16,130 15,657 Repairs and maintenance 7,073 3,110 7,073 3,110 Materials and supplies 1,336 4,051 1,336 4,051 Energy cost 1,734 1,240 1,734 1,240 Contracted services 26,988 22,703 26,988 22,703 Others (21,995) (21,024) (19,426) (21,024) Total 31,266 25,737 33,834 25,737
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES FOR THE PERIOD ENDED MAY 31, 2006 AND 2005
(In Thousand Pesos) PARENT CONSOLIDATED 2006 2005 2006 2005 Salaries and wages 46,618 76,085 51,104 81,995 Repairs and maintenance 2,027 2,320 2,131 2,336 Materials and supplies 4,200 3,356 4,627 3,484 Energy cost 1,541 2,056 1,993 2,096 Contracted services 25,210 24,420 26,986 24,894 Others 64,139 34,186 66,880 41,948 Total 143,736 142,423 153,721 156,753
VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION Victorias Milling Company, Inc. (herein referred to as “VMC” or the “Parent Company”) was organized and registered originally on May 7, 1919 with the Philippines Securities and Exchange Commission (SEC) with a corporate life of until May 7, 1969, which was extended for an additional period of fifty (50) years. The primary purpose of VMC is to operate a mill and refinery facilities for sugar and allied products. The corporate office of VMC is located at No. 9126 Sultana Street corner Honradez Street, Barangay Olympia, Makati City while its manufacturing plant and head office are in VICMICO, Victorias City, Negros Occidental. As of May 31, 2006 and August 31, 2005 , VMC has 1,236 and 1,319 regular employees, respectively, while VMC and its subsidiaries (collectively referred to as the VMC Group) have 1,334 and 1,417 regular employees, respectively.
2. STATUS OF OPERATIONS (a) Going Concern Issues The accompanying financial statements of VMC and its subsidiaries (VMC 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. VMC has incurred significant losses from operations and has an accumulated deficit of P3.26 billion and P3.7 billion as of May 31, 2006 and August 31, 2005, respectively, and capital deficiency of P1.37 billion and P1.8 billion as of May 31, 2006 and August 31, 2005, respectively, which adversely affected its financial condition and cash flow position. Consequently, VMC defaulted on payments of its maturing liabilities to creditors which are currently under a debt restructuring program (Note 12). Except for Victorias Foods Corporation (VFC), VMC’s other consolidated subsidiaries namely, Canetown Development Corporation (CDC), Victorias Quality Packaging Company, Inc. (VQPC), and Victorias Agricultural Land Corporation (VALCO), have incurred significant losses from operations, and have accumulated deficits and capital deficiencies, which have adversely affected their financial condition and cash flow position. Moreover, the other related companies namely, North Negros Marketing Co., Inc., has declared bankruptcy, while Caneland Sugar Corporation has ceased milling operations in April 1997 (See Notes 3, 26 and 27(b)).
(b) 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 Management Committee. On July 8, 1997, the SEC issued an Order suspending all actions or claims against VMC pending before any court, tribunal, office, board, body and/or the SEC. On August 8, 1997, the SEC created a Management Committee (herein referred to as MANCOM) which was tasked to submit a feasible and viable rehabilitation plan for VMC.
(c) 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 Amendment to the Rehabilitation Plan dated July 22, 1999, as approved by the SEC in its Order dated August 17 and 19, 1999 (herein collectively referred to as the “Original Rehabilitation Plan” or “ORP”) 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 P2,563,035,708 consisting of 2,563,035,708 shares of common stock at P1 par value per share; ii. Fresh capital infusion of around P567 million through a public bidding which was declared a failure for the reason that the deadline for the submission of bids had expired without any bid having been submitted; iii. The stockholders shall have no pre-emptive right to the increase of 1.5 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 Foundation, Inc.; 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. Rehabilitation Plan as of May 11, 2000, as approved by the SEC in its Order dated November 29, 2000 (herein referred to as the “Alternative Rehabilitation Plan” or “ARP”) 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 P2.7 billion consisting of 270 million shares of common stock at P10 par value per share to P4,605,086,296 consisting of 4,605,086,296 shares of common stock at P1 par value per share. The new capital stock of P4,605,086,296 will be allocated among the initial paid- in capital of P1,595,957,670, conversion of convertible notes into common shares of VMC in the amount of P2.4 billion, and contingent Refined Sugar Invoice/Delivery Orders (RSDOs) of P609,128,626; 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;
iv. Restructuring of the secured and unsecured loans into a 15-year loan, including a 3-year grace period as to principal, at 10% annual interest; 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 3-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 debt restructuring agreement took effect on September 1, 2003. (d) Actions by Former Management and Others VMC’s former management, in comments and replies filed with the SEC, manifests its strong opposition to the MANCOM’s ARP. Also, three creditor banks, on various dates, filed their opposition to the MANCOM’s 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 the Annual Stockholders’ Meeting on April 30, 2004, which election was in accordance with the ARP, and in which ARP has been assailed by VMC’s former management. On May 31, 2004, the Supreme Court noted the said manifestation of VMC. (e) Management Plans to Address the Going Concern Issue The above factors raise substantial doubt about the ability of the VMC Group to continue as a going concern for a reasonable period of time. In its continuing efforts to achieve successful operations and effective implementation of the rehabilitation plan, VMC has focused their 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 mill; (c) enhancement of mill efficiency; (d) increase profitability by addressing cost efficiency (which include, 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, MANCOM has undertaken the following action plans to improve VMC’s 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 (Note 13) 2. Conversion of debt into equity (Note 12) 3. Conversion of debt into convertible notes (Note 12) 4. Improvement of cash flows
As provided for in Section 13 of the Debt Restructuring Agreement (DRA), in the event VMC’s net cash flow at the end of a crop year exceeds the projected net cash flow for that particular crop year as provided for in the ARP, VMC shall prepay in inverse order the restructured loans without penalty equal to 75% of the incremental net cash flow (defined as net income after tax plus depreciation and other non-cash charges). As of August 31, 2005, the actual net cash flows did not exceed the projected net cash flow for the year as provided for in the ARP.
Election of a New Board of Directors On December 16, 2002, a special stockholders meeting was held and a new set of Board of Directors (the Board) was constituted to replace the MANCOM. The new Board 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. 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, the implementation of the ARP. In the April 30, 2004 annual stockholders’ meeting, a new set of Board was elected to replace the previous Board elected on December 16, 2002. In the April 1, 2005 annual stockholders’ meeting, a new set of Board was elected to replace the previous Board elected on April 30, 2004. (f) Management’s Assessment of the Going Concern Issue The VMC Group’s continuation as a going concern is dependent upon their ability to achieve the action plans and programs of the ARP and, consequently attain profitability. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and the amounts and classification of liabilities that may be necessary should the VMC Group be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation The consolidated financial statements of VMC and its subsidiaries (collectively referred to as the VMC Group) and the financial statements of VMC have been prepared in accordance with generally accepted accounting principles in the Philippines on the historical cost basis, except for the accounting policy on property, plant and equipment, as discussed below.
Adoption of New Accounting Standards The VMC Group adopted the following SFAS/IAS, which became effective on January 1, 2004: a. SFAS 12/IAS 12 - Income Taxes b. SFAS 17/IAS 17 - Leases
These new standards prescribe new accounting measurement and disclosure practices applicable to the Company. The major effects of these new standards on the Company’s accounting policies and on the amounts disclosed in the financial statements are summarized as follows:
SFAS 12/IAS 12, “Income Taxes”, prescribes the accounting treatment for income taxes. The following are the changes in adopting the new standard: a. The method used is a balance sheet liability method instead of income statement liability method; b. The balance sheet liability method focuses on temporary differences which are differences between the tax base of an asset or liability and its carrying amount in the balance sheet, while income statement liability method focuses on timing differences which are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods; c. Under the new standard, the carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of these assets to be recovered while under the old standard, a valuation allowance is provided when the deferred tax asset will not be realized in the future. The adoption of SFAS 12/IAS 12 resulted in the restatement of comparative financial statements for 2003 and 2004 and additional disclosures as discussed in Notes 22 and 28.
SFAS 17/IAS 17, “Leases”, prescribes for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases. It provides specific criteria for the recognition of finance leases and operating leases. Finance leases are those that transfer substantially all risks and rewards of ownership to the lessee. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than on the form of the contract. The adoption of SFAS 17/IAS 17 resulted principally in additional disclosures.
Basis of Consolidation The consolidated financial statements include the accounts of VMC, parent company, and the following significant subsidiaries:
Name of Subsidiary Percentage of Ownership Victorias Foods Corporation (VFC) 100 Victorias Agricultural Land Corporation (VALCO) 100 Canetown Development Corporation (CDC) 88 Victorias Quality Packaging Company, Inc. (VQPC) 55
Subsidiaries are consolidated from the date on which VMC assumed control of the subsidiaries and cease to be consolidated from the date on which VMC loses control of the subsidiaries. Consolidated financial statements are prepared using consistent accounting policies for like transactions and other events in similar circumstances. Significant intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated. These accounts and transactions usually arise from normal operating activities, such as sales/purchases of goods, production supplies and services, and advances for certain operating expenses, among others.
Unconsolidated Entities
The application of the equity method for investments in Caneland Sugar Corporation (CSC), Victorias Agricultural Management Corporation (VAMCO) and North Negros Marketing Co., Inc. (NONEMARCO), owned 85%, 100% and 51% by VMC, respectively, has been suspended since August 31, 2000 because VMC has either lost control or has been restricted access from the economic benefits from these entities due to the following: 1) VMC has lost control over CSC due to foreclosure of its major assets by Land Bank of the Philippines (LBP). Further, VMC has formally declared that its liability for CSC extends only up to its investment; 2) VAMCO remains a dormant company and has no loans or significant third party liabilities; and, 3) NONEMARCO has declared bankruptcy. As a consequence, these entities remain to be unconsolidated. The investment in VAMCO is shown as part of the “Trade and other payables” account in the balance sheets of VMC since August 31, 2000 because the share in losses of VMC in VAMCO have exceeded the cost of investment. The investment and advances in NONEMARCO have been reclassified from “Trade and other payables” account to “Investments and advances” account of VMC since these are fully provided with an allowance for decline in value of investments and doubtful accounts. The investment in CSC has been zeroed out in 2001 due to the foreclosure of the major assets of CSC by LBP. The application of the equity method for investments in wholly-owned entities namely, Victorias Insurance Factors Corporation (Victorias Insurance) and VICMICO International, Inc. (VICMICO) has been suspended since August 31, 1997 because these entities are dormant and have no loans or significant third party liabilities. As a consequence, these entities remain to be unconsolidated. The investments in and advances to Victorias Insurance have been reclassified from “Trade and other payables” account to “Investments and advances” account of VMC since these are fully provided with allowance for decline in value of investments and doubtful accounts. The investment in VICMICO have been reclassified from “Accumulated losses in excess of investment cost in other unconsolidated entities” account to “Due to unconsolidated related companies” account since VICMICO has suspended its operations and VMC has obligations to VICMICO.
Revenue Recognition The VMC Group recognizes revenue when it is probable that the economic benefits associated with the transaction will flow to the VMC Group and the amount of revenue can be measured reliably. The VMC Group reports revenue upon shipment or delivery of goods and customer acceptance. Services are recorded when earned; cost of sales and operating expenses are recognized as incurred. A subsidiary takes up gross profit on installment sales of residential and memorial lots in the year the corresponding installments are collected. The gross profit corresponding to uncollected installment sales is deferred and shown as part of “Trade and other payables” in the consolidated balance sheets. Interest income from installment contracts receivable and from loans to lot buyers are recorded when earned while interest income on past due accounts is recognized only upon collection.
The estimated future expenditures for development are charged proportionately to the cost of residential and memorial lots sold and to the remaining subdivided lots. The cost to complete the development of residential and memorial lots is shown as part of “Trade and Other payables” account in the consolidated balance sheets. Interest income on deposits with banks and short-term placements are accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Rental income on leased properties is recognized as earned based on the terms of the operating lease contract.
Leases Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating lease. To date, the leases entered into by the VMC Group are operating leases. The total payments made under operating leases are charged to the statements of operations on a straight-line basis over the period of lease.
Investments In the Parent Company financial statements, investments in subsidiaries are accounted for under the equity method of accounting. The investments of VMC in its subsidiaries are carried at cost plus post-acquisition changes in its share of net assets of the subsidiaries. The statements of operations of VMC include its share in the results of operations of the subsidiaries, except for those subsidiaries where VMC has suspended the application of the equity method of accounting for investments.
Other Investments Other investments, where the ownership is less than 20% or where control is likely to be temporary, are stated at cost. The investment in Victorias Golf and Country Club, Inc. (VGCCI), where VMC has an 81% interest, is stated at cost since such investment is in proprietary shares that do not earn dividends, that is, no profit inure to the stockholders.
Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amount of cash with original maturities of three months or less from the dates of acquisition and subject to an insignificant risk of change in value.
Receivables Receivables are carried at original invoice amount less allowance for doubtful accounts, which is maintained at a level considered adequate to provide for potentially uncollectible receivables. The level of allowance is based on past collection experience and other factors that may affect the collectibility of the receivables. The allowance is established by charges to income in the form of provision for doubtful accounts.
Inventories Sugar inventory is valued at the lower of cost and net realizable value, cost being determined using the weighted average method. Jobs in progress are stated at the lower of cost and net realizable value, cost being determined using the specific identification method.
VFC finished goods and work in process are stated at the lower of average production cost and net realizable value while raw materials and supplies are stated at lower of cost and net realizable value, cost being determined using the moving average method. VQPC finished goods and work in process inventories are stated at the lower of standard costs (which approximates actual costs) and net realizable value, while raw materials, factory supplies and other inventories are stated at lower of cost and net realizable value, cost being determined using the first-in, first-out method. Cost comprises all costs of purchase, costs of conversion, handling costs and other costs incurred in bringing the inventories to their present location and condition. Net realizable value represents the estimated selling price in the ordinary course of business less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. The VMC Group provides allowance for inventory obsolescence due to deterioration, damage, breakage, age and technological changes. Provision for inventory obsolescence is determined using specific identification at the time of physical count, which is taken at least once a year.
Real Estate Held for Development and Sale Real estate held for development and sale is stated at actual cost plus estimated development cost which are not in excess of market. A reserve for development cost is provided based on the estimates of a land developer; actual expenditures incurred for development are charged against this reserve account.
Property, Plant and Equipment Property, plant and equipment are generally carried at appraised values, as determined by an independent firm of appraisers, less any subsequent accumulated depreciation and impairment losses, if any. The accumulated excess of sound values over net book values is shown as Revaluation increment in property, plant and equipment in the statement of changes in equity. Acquisitions of property, plant and equipment after the appraisal dates are recorded at cost. The cost of an asset consists of its purchase price and costs directly attributable to bringing the asset to its working condition for its intended use. Subsequent expenditures relating to an item of property, plant and equipment that have already been recognized are added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the VMC Group. All other subsequent expenditures are recognized as expense in the period in which those are incurred. Depreciation on cost and appraisal increase is computed on the straight-line method based on the estimated useful lives of the assets as follows: Land improvements 10 years Buildings and structures 5 to 45 years Community buildings and equipment 10 to 20 years Machinery and equipment 5 years Railroad and rolling stock 5 years
A portion of the revaluation increment equivalent to the amount of depreciation on appraisal increase charged to operations during the year is transferred to deficit. When assets are sold, retired or otherwise disposed of, the cost and the related accumulated depreciation and impairment losses are removed from the accounts. Land improvements are amortized over the shorter of the life of the asset or the term of the
lease. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in income. Project under construction consists of properties under construction and is stated at cost less accumulated impairment losses, if any. Cost includes cost of construction, equipment and other direct costs. Project under construction is not depreciated until such time that the relevant asset is completed and put into operations.
Impairment of Assets At each balance sheet date, the VMC Group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the VMC Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately, unless the relevant asset is land or buildings, other than investment property, carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Payables and Provisions Payables are stated at their nominal value. The VMC Group recognizes a provision if a present obligation has arisen as a result of a past event, payment is probable and the amount can be measured reliably. The amount recognized is the best estimate of the expenditure required to settle the present obligation at balance sheet date, that is, the amount the VMC Group would rationally pay to settle the obligation to a third party.
Income Taxes Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the statement of income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using 32%. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at 32%. Deferred tax is charged or credited in the statement of income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Business Segment Business segment data includes products or services that are subject to risks and returns that are different from those of other business segments.
Foreign Currency Transactions Foreign currency transactions are converted to Philippine peso using the exchange rate prevailing at the date of transaction. Foreign exchange gains and losses resulting from such conversions, the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognized in the statements of operations.
Finance Costs Finance costs, including borrowing costs, are charged to income in the period in which they are incurred.
Retirement Benefit Cost Retirement benefit cost of VMC is computed based on the Projected unit credit method where the current service cost is the present value of benefits accruing in the next twelve months, while past service cost is the present value of any units of future benefit credited to employees for service in periods prior to the commencement or subsequent amendment of the retirement benefit plan.
Related Parties Parties are considered related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Individuals, associates or companies that directly or indirectly control or are controlled by or are under common control with the Company are also considered related parties.
Accounting Estimates In the process of preparing its financial statements, the VMC Group estimates the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. Actual amounts could differ from those estimates.
Earnings Per Share (EPS) Basic EPS is computed by dividing income applicable to common stock by the weighted average number of common shares outstanding during the year with retroactive adjustments for stock splits. Diluted EPS is computed in the same manner as basic EPS, however, net income attributable to common shares and the weighted average number of shares outstanding are adjusted for the effects of all dilutive potential common shares. The basic and diluted EPS of VMC are presented after giving effect to stock splits and convertible notes which are considered to be dilutive potential common shares.
New Accounting Standards Effective Subsequent to August 31, 2005 The ASC approved the issuance of new and revised accounting standards which are based on revised IAS and new International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The new standards are effective for annual periods beginning on or after January 1, 2005. The ASC has renamed the standards that it issues to correspond better with the issuances of the IASB. Philippine Accounting Standards (PAS) correspond to adopt IAS while Philippine Financial Reporting Standards (PFRS) correspond to adopt IFRS. Previously, standards issued by the ASC were designated as SFAS. The Company will adopt the following standards beginning September 1, 2005:
PAS 1 (Revised 2003), “Presentation of Financial Statements”, which provides a framework within which an entity assesses how to present fairly the effects of transactions and other events. It provides the criteria for classifying liabilities as current or noncurrent, prohibits the presentation of items of income and expense as extraordinary items, specifies disclosures about the judgments made by management in applying accounting policies, and the key sources of estimation uncertainty at the balance sheet date that have significant risks. The Company does not expect to have significant changes resulting from the adoption of PAS 1.
PAS 8 (Revised 2003), “Accounting Policies, Changes in Accounting Estimates and Errors”, which eliminates the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. The standard defines material omissions and misstatements and describes how to apply the concept of materiality when applying accounting policies and correcting errors. The Company does not expect to have significant changes resulting from the adoption of PAS 8.
PAS 10 (Revised 2003), “Events After Balance Sheet Date”, which clarifies that dividends declared after balance sheet date are not to be recognized as a liability at the balance sheet date. The Company does not expect to have significant changes resulting from the adoption of PAS 10.
PAS 16 (Revised 2003), “Property, Plant and Equipment”, which prescribes the accounting treatment for property, plant and equipment and related disclosure requirements. The standard contains a limited revision to provide additional guidance and clarification on recognition and measurement of items of property, plant and equipment. It provides guidance on initial and subsequent recognition as well as measurement after recognition. It requires depreciation for each significant part of an item of property, plant and equipment. The standard also provides guidance on the determination of the carrying amount of the assets, the residual value, depreciation period and derecognition principles to be observed. Upon the adoption of PAS 16 in 2006, management will review annually the useful life, residual values, depreciation method, capitalization policy and accounting policy of the Company’s property and equipment.
PAS 17 (Revised 2003), “Leases”, which provides limited revision to clarify the classification of a lease of land and buildings and prohibits expensing of initial direct costs in the financial statements of lessors. The Company does not expect to have significant changes resulting from the adoption of PAS 17.
PAS 19, “Employee Benefits”, which applies to all employee benefits offered by an employer to employees and their dependents and beneficiaries. This standard applies to employee benefits under: (i) formal plans and agreements between an enterprise and its employees, (ii) national, local, industry or multi-employer plans; and (iii) informal practices giving rise to a constructive obligation. This standard also identifies the following categories of employee benefits such as short-term employee benefits, post employment benefits, other long-term employee benefits, termination benefits and equity compensation benefits. Upon the adoption of PAS 19 in 2006, management will review accruals for employee benefits. This might result in additional recognition of liabilities and additional disclosures.
PAS 21, “The Effects of Changes in Foreign Exchange Rates”, which prescribes the accounting treatment for foreign currency transactions and provides guidance on the translation method and on determining the functional and presentation currencies of a reporting entity. The standard removes the limited option in the previous version of SFAS 21/IAS 21 to capitalize exchange differences resulting from a severe devaluation or depreciation of a currency against which there is no means of hedging. Under the standard, such exchange differences are now recognized in profit or loss since capitalization of such exchange differences is no longer permitted in any circumstances. The effect of future adoption of PAS 21 is not material and will result principally in additional disclosures.
PAS 24 (Revised 2003), “Related Party Disclosures”, which provides additional guidance and clarity in the scope of the standard, the definitions and the disclosures for related parties. It requires disclosure of the compensation of key management personnel. The future adoption of PAS 24 will result principally in additional disclosures.
PAS 28 (Revised 2003), “Investments in Associates”, which provides exemptions from application of the equity method similar to those provided for certain parents not to prepare consolidated financial statements. The standard requires an entity to consider the existence and effect of potential voting rights currently exercisable when assessing if it has the power to participate in the financial and operating policy decisions of the investee. The standard clarifies that investments in associates over which the investor has significant influence must be accounted for using the equity method whether or not the investor has investments in subsidiaries and prepares consolidated financial statements. The standard prescribes the exemptions from applying the equity method and the elimination of unrealized profits and losses on transactions with associates. It requires adjustments to the associate’s financial statements to conform to the investor’s accounting policies for like transactions. An investor is required to consider the carrying amount of its investment in the equity of the associate and its other long term interests in the associate when recognizing its share of losses of the associate. The Company will review its accounting for investment in associates to conform to the requisites of the standard.
PAS 32, “Financial Instruments: Disclosures and Presentation”, which prescribes the requirements for the presentation of financial instruments and identifies the information that should be disclosed about them. The presentation requirements apply to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. The standard requires disclosure of information about factors that affect the amount, timing and certainty of an entity’s future cash flows relating to financial instruments and the accounting policies applied to those instruments. This standard also requires disclosure of information about the nature and extent of an entity’s use of financial instruments, the business purposes they serve, the risks associated with them, and management policies for controlling those risks. The adoption of PAS 32 will result in the application of the presentation requirements prescribed for financial assets, financial liabilities and equity instruments as well as additional disclosures.
PAS 39, “Financial Instruments: Recognition and Measurement”, which prescribes the principles for recognizing, measuring, and disclosing information about financial assets and financial liabilities. PAS 39 supplements the disclosure provision of PAS 32, Financial Instruments: Disclosures and Presentation. Upon the adoption of PAS 32 and PAS 39 in 2006, management will review all financial instruments. This might result in a change in the valuation of financial assets and financial liabilities and additional disclosures.
PAS 36 (Revised 2004), “Impairment of Assets”, which prescribes the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described to be impaired and the standard requires the entity to recognize an impairment loss. The standard also specifies when an entity should reverse an impairment loss previously recognized. The revised standard clarifies the elements that should be reflected in the calculation of an asset’s value in use. Management will continue to ensure that its assets are carried at no more than their recoverable amount and will conduct regular impairment tests as prescribed by PAS 36.
PFRS 1, “First Time Adoption of PFRS”, which sets out the procedures that an entity must follow when it adopts PFRS for the first time as the basis for preparing its general purpose financial statements. It provides guidance on the accounting policies, reporting periods, recognition, derecognition, reclassification and measurement of assets and liabilities. The standard sets out optional and mandatory exemptions from the general restatement and measurement principles of assets and liabilities. Management is yet to determine the financial impact of these standards on the Company’s financial position and results of operations upon its adoption in 2005.
4. CASH AND CASH EQUIVALENTS
Parent Company Consolidated May 31, August May 31, August (In Thousand Pesos) 2006 31, 2005 2006 31, 2005 Cash on hand and in banks P255,328 P269,717 P277,742 P284,483 Short-term placements 168,933 515,524 195,871 528,823 P424,261 P785,241 P473,613 P813,306
Cash in banks earn interest at the respective bank deposits rates. Short-term placements have maturities ranging from 30 to 105 days (2004 – 5 to 90 days), and bear annual interests ranging from 3.125% to 8% (2004 – 2.5% to 9%). Short-term placements having maturity of more than 90 days have been reclassified to short- term investments.
5. RECEIVABLES - net
Parent Company Consolidated (In Thousand Pesos) May 31, August May 31, August 2006 31, 20 05 2006 31, 2005 Trade (Note 25) P189,658 P288,586 P226,513 P319,364 Planters and haulers 139,332 158,297 139,332 158,297 Advances to officers and employees 66,355 127,186 122,204 129,007 Other receivables 121,168 116,004 70,055 129,422 516,612 690,073 558,104 736,090 Less: Allowance for doubtful accounts 459,284 598,927 466,398 622,858 P 57,328 P91,146 P91,706 P113,232
Receivables from planters and haulers pertain to advances extended by VMC for various incentives (e.g. trucking and cane hauling allowances, among others). These are collected or liquidated from the sales proceeds of the planters’ share. Other receivables consist of dividends receivable from an affiliate, receivable from a financial institution and other non-trade receivables from other companies which were fully provided by an allowance for doubtful accounts.
6. INVENTORIES - net
Parent Company Consolidated (In Thousand Pesos) May 31, August May 31, August 2006 31, 2005 2006 31, 2005 Sugar P255,274 P139,685 P255,274 P139,685 Manufactured and fabricated products 29,575 33,412 29,575 44,016 Real estate held for development and 32,555 Sale - - 32,659 Jobs in progress 12,784 7,216 28,837 12,709 Materials and supplies 105,379 169,662 113,818 179,046 Others 12,817 - 12,818 415,830 349,975 472,877 408,115 Less: Allowance for inventory Obsolescence 24,188 24,188 24,927 24,927 P391,642 P325,787 P447,950 P383,188
On May 31, 2006, the cost of inventories is lower than its net realizable value. Based on an independent appraiser’s report dated August 2004 and July 1998 for the 2005 and 2004 financial statements, respectively, the market values of and increments in CDC’s real estate held for development and sale as of August 31, 2005 follow:
(In Thousand Pesos) August 31, 2005 Market value Subdivision and memorial park lots of sale P131,653 Land held for sale/development 162,399 294,052 Cost Subdivision and memorial park lost for sale 24,003 Land held for sale/development 8,656 32,659 Excess of market value over cost P261,393
7. PREPAYMENTS AND OTHER CURRENT ASSETS – net
Parent Company Consolidated (In Thousand Pesos) May 31, August May 31, August 2006 31, 2005 2006 31, 2005 Creditable withholding tax P203,423 P141,368 P207,018 P144,826 Value added input tax 33,306 18,075 37,219 21,107 Deferred charges 251 568 Minimum corporate income tax (MCIT) (Note 21) - - 172 Other prepayments 11,485 8,325 11,644 8,306 P248,214 P168,019 P255,881 P174,979
Deferred charges in 2004 consist of costs incurred during the period to prepare the VMC’s Mill for the next milling season. These were expensed in the 2005 (Note 17).
Others consist of prepayments for insurance, rentals, advertising, custom and import duties, brokerage and other supplies.
8. INVESTMENTS IN SHARES OF STOCK AND ADVANCES - net
August 31, 2005 Accumulated Equity in Net Earnings Percentage (share in Carrying of Cost of losses for the Value of Ownership Investment year) Others Investment Advances Total At Equity Victorias Foods Corporation 100 P 49,693 (P18,133) P48,656 (i) P80,216 P13,388 P 93,604 Victorias Agricultural Land Corporation 100 42,424 (5,753) 79,062 (i) 115,733 (12,759) 102,974 Canetown Development Corporation 88 23,393 (26,834) 3,441 (ii) - 40,135 40,135 Victorias Quality Packaging Company, Inc. 55 16,500 (46,940) 30,440 (ii) - 7,013 7,013 P132,010 (P97,660) P161,599 P195,949 P47,777 P243,726
At Cost Victorias Golf and Country Club, Inc. 81 P15,680 P - P - P32,574 P48,254 P15,680 (iii) Urban Corp. Investments, Inc. ------(iv) Victorias Gas Corporation 5,727 - - 5,727 - 5,727 Sta. Elena Golf and Country Club 1,500 - - 1,500 - 1,500 Manapla Foods Corporation ------(v) Others 318 - (45) 273 - 273 Advances to MJ Ossorio Pension Foundation, Inc. ------(vi) P23,225 P - (P45) P 23,180 P 32,574 P55,754
(i) share in revaluation increment in property, plant and equipment for VALCO and prior period adjustments for VFC (ii) accumulated losses in excess of investment cost (iii) net of allowance for decline in value of investment of P5,197 (iv) net of allowance for decline in value of investment of P11,430 (v) net of allowance for decline in value of investment and doubtful accounts of P5,035 and P324, respectively (vi) net of allowance for doubtful accounts of P113,924 The movements in the accumulated equity in net earnings (share in losses) of the subsidiaries of VMC are as follows:
August 31, 2005 Equity in Net Earnings (Share in Beginning losses) for Ending (In Thousand Pesos) Balance the year Others Balance Victorias Foods Corporation (P20,371) P2,238 - (P18,133) Victorias Agricultural Land Corporation (4,703) (1,050) - (5,753) Canetown Development Corporation (25,290) (1,486) (58) (26,834) Victorias Quality Packaging Company, Inc. (47,191) 251 - (46,940) (P97,555) (P 47) (P58) (P97,660)
Others pertain to prior period adjustments and direct adjustments to retained earnings (deficit) of the subsidiaries which have effects in the equity in net earnings (share in losses) of
the subsidiaries (Note 28).
Summarized audited financial information for aggregate unconsolidated subsidiaries were not presented as such groups did not constitute a significant subsidiary (See Note 3).
Victorias Foods Corporation (VFC) VFC was incorporated and registered with the SEC on February 24, 1983 primarily to operate factories and other manufacturing facilities for the processing, preservation and packaging of food products and to sell the same at wholesale. The corporate office of VFC is located at No. 9126 Sultana St., Barangay Olympia, Makati City while VFC’s production plant is located at Victorias City, Negros Occidental.
Victorias Agricultural Land Corporation (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.
Canetown Development Corporation (CDC) CDC was incorporated and registered with the SEC on February 19, 1974 primarily to purchase, develop, lease, exchange and sell real estate. The registered address of CDC is at VICMICO Compound, Victorias City, Negros Occidental.
Victorias Quality Packaging Company, Inc. (VQPC) VQPC was incorporated and registered with the SEC on June 4, 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 located at Barangay Purisima, Manapla, Negros Occidental.
9. PROPERTY, PLANT AND EQUIPMENT – net
PARENT CONSOLIDATED May 31, August 31, May 31, August 31, 2006 2005 2005 2005 Land and improvements 124,283 124,283 224,389 135,384 Buildings and structures 708,996 679,334 758,196 739,467 Machinery and equipment 3,559,397 3,156,477 3,583,950 3,260,596 Community buildings and equipment 70,560 70,596 70,560 70,596 Projects under construction 96,634 443,685 96,634 443,687 Total cost 4,559,870 4,474,377 4,734,029 4,649,730 Accumulated depreciation 2,281,091 2,092,245 2,398,640 2,207,580 2,278,779 2,382,132 2,335,389 2,442,150 Appraisal increment 5,017,481 5,017,481 5,105,800 5,105,800 Accumulated depreciation 2,131,498 2,001,588 2,131,498 2,001,588 2,885,983 3,015,893 2,974,302 3,104,212 Carrying Amount 5,164,762 5,398,026 5,309,691 5,546,362
The depreciation on appraisal increment is P43.303 million (August 2005 – 173.214 million), of which P3.728 million (August 2005 – P158.300 million) was charged to cost of sales. One of the operating improvement measures of VMC included in the SEC approved ARP was to phase out its cane transport division. As a consequence thereof, retired rail line and rolling stock items were reclassified to Other Noncurrent Assets at net realizable value of P0.179 million and P2.072 million as of May 31, 2006 and August 31, 2005, respectively (Note 10).
In 2005, VMC management has concluded that, after a careful review of the economic performance of its property, plant and equipment, there is no possible indication of impairment to bring down the value of these assets to their estimated recoverable amount at May 31, 2006, which is the value in use. The discount rate used in computing the value in use is 10%.
The property, plant and equipment of VMC was appraised by an independent firm of appraisers on August 16, 2004 resulting to a net appraisal increment of P3.078 billion or an increase of P37.547 million from the previous appraisal dated June 2001. However, the Company recognized an impairment loss on community buildings amounting to P68.903 million. The land of VALCO was also appraised on August 16, 2004 resulting to an appraisal increment of P43.212 million. The VMC Group’s property, plant and equipment, except for the projects under construction and certain landholdings, are mortgaged with certain creditors to secure their various loans (Note 12). A portion of VMC’s land, about 19.2 hectares, to be transferred to VALCO was subjected to Comprehensive Agrarian Reform Program (CARP). A Deed of Sale was executed for the land in exchange of shares of stocks to be issued by VALCO. The transfer was recorded in the books of accounts of both VMC and VALCO pending the submission of proof of transfer of the certificate of title to the land thereto in the name of VALCO. Pending submission of said requirement, the corresponding shares of stock to be issued shall be held in escrow by the SEC and the said capital infusion by VMC is shown as Deposit for future capital stock subscription. In August 1995, VMC sold a parcel of land including a building and structures which is situated in Iloilo City to NONEMARCO which was covered by a Deed of Sale, at a gain of P16 million. The transfer was recorded in the books of accounts of VMC and NONEMARCO pending the submission of proof of transfer of the certificate of title to the land thereto in the name of NONEMARCO. In December 2004, the certificates of land title for VALCO and NONEMARCO sale of land transactions remain in the name of VMC, the Board decided to rescind the Deeds of Sale previously executed pending to the conformity of the Board of transferee corporations. In January 2005, VALCO Board conformed to the rescission of the contract. VMC consequently withdrew its pending subscription in the shares of VALCO. NONEMARCO conformed to the rescission of sale of Iloilo properties in a letter to VMC dated November 14, 2005. As a result of the rescission, VMC reimbursed the payments made by NONEMARCO amounting to P9.8 million by issuing a credit memo and applied it against its outstanding obligations to VMC. On the other hand, NONEMARCO issued a credit note to VMC amounting to P4.8 million as a remittance of the rentals collected from the lease of the properties to an outside party.
The beginning balances of land and its corresponding appraisal increment, buildings and structures and its accumulated depreciation have been restated from the amounts previously reported as a result of the rescission of the deed of sale with VALCO and NONEMARCO. This resulted to an adjustment to the cost of the land returned to VMC amounting to P9,395,576 and its corresponding appraisal increment of P110,869,866 and P431,442 to the cost of the building and structure and its accumulated depreciation. This was treated as a correction of fundamental errors in the financial statements (Note 28).
10. OTHER NONCURRENT ASSETS - net
Parent Company Consolidated (In Thousand Pesos) May 31, August May 31, August 2006 31, 2005 2006 31, 2005 Surety bonds P26,273 P26,798 P26,273 P26,798 Retired rail lines and rolling stock items (Note 9) 179 2,072 179 2,072 Installment contract receivable and loans to lot buyers - - 1,021 7,019 Advances to unconsolidated entities - - 100 Miscellaneous 1,774,608 61,344 1,745,511 62,244 P1,771,060 P90,214 P1,772,984 P98,233
Miscellaneous other assets consist substantially of cash in bank earmarked principally for Mortgage Trust Indenture creditors (Note 12).
11. TRADE AND OTHER PAYABLES
Parent Company Consolidated (In Thousand Pesos) May 31, August 31, May 31, August 2006 2005 2006 31, 2005 Trade suppliers and accrued expenses P 1,243,716 P 1,205,346 P1,289,665 P1,226,605 Accrued retirement liability (Note 23) 274,778 268,781 274,778 272,839 VAT, withholding and other taxes 73,448 28,719 90,123 44,458 Customers’ deposits 34,870 5,732 35,580 7,958 Accumulated losses in excess of cost of investment in other unconsolidated entities 6,940 6,940 7,636 7,636 Others 126,886 21,368 143,267 26,065
P1,760,638 P1,536,886 P1,841,049 P1,585,561
12. LONG-TERM DEBTS a. As to currency denomination
Parent Company Consolidated (In Thousand Pesos) May 31, August May 31, August 2006 31, 2005 2006 31, 2005 Bank loans Foreign currency denominated P 761,564 P 812,272 P 761,564 P 812,273 Philippine peso denominated Parent Company 3,693,988 3,693,988 3,693,988 3,693,988 VQPC 10,302 17,519 Convertible notes 2,408,954 2,408,954 2,408,954 2,408,954 Cash infusion 300,000 300,000 300,000 300,000 7,164,506 7,215,215 7,174,808 7,232,734 Liabilities to planters, traders and trade suppliers 47 47 7,164,506 7,215,261 7,174,808 7,232,781 Less: Current portion 185,648 - 189,772 4,124 P6,978,857 P7,215,261 P6,985,036 P7,228,657
b. As to security
Parent Company Consolidated May 31, August 31, May 31, August 31, (In Thousand Pesos) 2006 2005 2006 2005 Secured P1,859,595 P1,859,595 P1,869,897 P1,877,114 Unsecured 5,304,911 5,355,620 5,304,911 5,355,620 P7,164,506 P7,215,215 P7,174,808 P7,232,734
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 Debt Restructuring Agreement (DRA) dated April 29, 2002 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 stock of VMC at a ratio of P1 of debt to P1 of common stock. 2) Conversion of P2.4 billion loans into convertible notes On 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 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 VMC. As of 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 VMC’s fixed assets (excluding identified non-core assets for disposal), in addition to their second mortgage under the secondary Mortgage Trust Indenture (MTI) pursuant to the terms and conditions of the DRA. The secured creditors would still maintain their first mortgage on VMC’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 VMC at the ratio of one (1) convertible note to one (1) common share of VMC. The aggregate amount of convertible notes that may be converted into common shares of VMC 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 amount of convertible notes that may be converted into common shares of VMC shall not exceed 13% of the outstanding unconverted notes. VMC 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. 3) Restructuring of the remaining balance of the loans (herein referred to as “restructured loans”). On September 1, 2003, 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 the restructuring date, with a 3-year grace period from the restructuring date. 4) The outstanding loans of secured and unsecured 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 (RSDOs), purportedly issued 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. 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.).
Cash Infusion by a Strategic Investor The P300 million-loan agreement with Tanduay Holdings, Inc. (THI) provides for, among others, the following: • Annual interest of 1.5% payable semi-annually in arrears for a period of five years; • Balloon payment of P300 million at the end of the fifth year, unless earlier converted at the end of the third year from April 8, 2003 into common shares of VMC at the conversion rate of 1 common share for each P1 of the principal based on the par value of P1 per share; • The availment of the conversion option shall be subject to and conditioned upon the approval of the SEC. Upon availment of the conversion option, VMC shall be discharged of its obligations for any payment of the loan amount and any further interest thereon; and, • THI shall be entitled to one seat in the VMC Board of Directors.
As of May 31, 2006, VMC is in compliance with the provisions of the DRA.
The loans of VQPC from Equitable PCI Bank (EPCIBank) and Metropolitan Bank and Trust Company (Metrobank) have matured on various dates up to August 1997 which were restructured subsequently on October 24, 1997. VQPC entered into a Debt Settlement Agreement (DSA) with Metrobank and EPCIBank on October 29, 1999 and December 28, 1999, respectively. The DSA provides for, among others, (a) past due interest of P6.84 million to be capitalized as part of the P27.18 million initial principal; (b) the new principal of P34.02 million shall be payable in thirty three (33) consecutive and equal or nearly equal quarterly installments commencing on October 22, 2001 for Metrobank and January 29, 2002 for EPCIBank, with annual interest of 10% for the first to fifth year and 12% for the sixth to tenth year; and (c) the 65% of VQPC’s excess cash flows shall be applied to the payment of the restructured loans and the remaining 35% to be applied to the payment of trade advances; once the trade advances are fully paid, all excess cash flows shall be applied to the payment of the loans. These loans are secured by VQPC’s buildings, machinery and equipment and other land improvements, with an aggregate sound value of P38.848 million as per the appraisal report by an independent firm of appraisers in August 2004. In January 2002, VMC MANCOM signified its consent to the Joint Real Estate Mortgage on the improvements owned by VQPC on the parcel of land owned by VMC. VQPC has been in compliance with the provisions of the DSA. As of August 31, 2005, VQPC has made quarterly installment payments aggregating to P4.12 million (August 31, 2005 – P4.12 million). Interest expense paid for these obligations amounted to P2.43 million and P2.43 million for the period ended May 31, 2006 and year ended August 31, 2005, respectively.
13. CAPITAL STOCK (a) Recapitalization and quasi-reorganization On October 2, 2002, the SEC approved the following recapitalization of VMC which were effected in the books of account at August 31, 2005, 2004 and 2003: 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. 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 P1 per share to P495,957,670 consisting of 495,957,670 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 VMC. 3) Thereafter, the authorized capital stock was increased from P495,957,670 consisting of 495,957,670 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. (b) Application of appraisal increment against deficit On September 2, 2002, the SEC approved the quasi-reorganization of VMC through the application of appraisal 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 VMC shall be restricted to the extent of deficit wiped out by the appraisal increment. (c) Conversion of debt into equity As discussed in Note 12, the unsecured creditors converted proportionately P1.1 billion of their loans into common stock of VMC at a ratio of P1 of debt to P1 of common stock. The said conversion resulted in a change in management control of VMC effective October 9, 2002, whereby the creditor banks now control 69% of the ownership of VMC while the existing stockholders prior to the conversion was reduced to 31%. (d) Treasury stock VMC had an Employees Stock Ownership Plan (ESOP) which was administered by a Board of Administrators appointed by the former Board of Directors of VMC. The ESOP was allocated approximately 18 million shares from the VMC’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 shares held in treasury as of August 31, 2005 and 2004 represented the ESOP shares withdrawn, decrease in treasury shares due to recapitalization, and investments of the consolidated subsidiaries in the Parent Company, as follows:
Parent Company Consolidated May 31, August May 31, August (In Thousand Pesos) 2006 31, 2005 2006 31, 2005 VALCO P - P - P7,968 P7,968 CDC - - 1,200 1,200 VFC ------9,168 9,168 Allowance for decline in value of investments - - 9,168 9,168 - - ESOP shares withdrawn 54 54 54 54 Decrease in shares held in treasury due To recapitalization (39) (39) (39) (39) P15 P 15 P 15 P 15
On November 15, 1993, the shares of stock of VMC were listed in the Philippine Stock Exchange, however the trading was suspended on October 9, 1997.
15. EARNINGS (LOSS) PER SHARE a) Basic
(In Thousand Pesos, Except Per Parent Company Consolidated May 31, August May 31, August Share Amount) 2006 31, 2005 2006 31, 2005 Net income (loss) for the year P429,829 (P236,402) P429,829 (P236,402) Weighted average number of shares of stock outstanding 1,595,957 1,595,957 1,595,957 1,595,957 Add (Deduct): Stock split - - - - Additional issuances - - - - Treasury shares (15) (15) (15) (15) Weighted average number of shares , of stock outstanding after adjustments 1,595,942 1,595,942 1,595,942 1,595,942
Basic earnings (loss) per share P 0.27 P 0.11 P 0.27 P 0.11
b) Diluted
(In Thousand Pesos, Except Per Parent Company Consolidated May 31, August May 31, August Share Amount) 2005 31, 2005 2005 31, 2005 Net income (loss) for the year P429,829 (P236,402) P429,829 (P236,402) Weighted average number of shares of stock outstanding after 1,595,942 1,595,942 1,595,942 1,595,942 Adjustment Add : Assumed issued common shares through conversion of convertible notes 2,408,954 2,408,954 2,408,954 2,408,954 Total common shares 4,004,896 4,004,896 4,004,896 4,004,896
Diluted earnings (loss) per share P 0.11 (P 0.06) P 0.11 (P 0.06)
embodied in the amendment to VMC’s Articles of Incorporation, which was approved by the SEC on October 2, 2002. VMC’s authorized capital stock was reduced from P2.7 billion divided into 270 million shares with a par value of P10 per share to P495,957,670 divided into 170,432,189 shares with par value of P2.91 per share. The P2.91 par value was further reduced to P1 per share while simultaneously increasing the number of subscribed shares from 170,432,189 to 495,957,670 through a stock split which resulted in the receipt by each existing stockholder of 2.91 shares for every one share, with fractional shares being rounded off to the nearest whole number so that a fraction of at least 0.51 shall be considered as additional one share. VMC has convertible notes amounting to P2.4 billion which is considered as dilutive potential common shares so their conversion to common shares would decrease earnings per share from continuing ordinary operations. The convertible notes of P2.4 billion have been recorded in the books of account at August 31, 2005 in accordance with the terms of the DRA (Note 12).
16. BUSINESS SEGMENT DATA
Business Segments The VMC Group is organized into six operating units – sugar milling, food processing, real estate, leasing, engineering services and manufacturing. 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, 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. 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 the processing of 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 as previously closed down for years.
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 VMC Group. Although in recent years, certain lots were also made available to the general public.
Leasing This segment derives income from the lease of certain parcels of land to a planter.
Other Operations VMC has engineering and manufacturing divisions which are not reported separately in the schedules because majority of their revenues are not from external customers. The engineering services are divided into two business units, namely construction and engineering works. The construction division handles construction projects, road improvements, 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 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. A manufacturing subsidiary is engaged in the manufacture of polyethylene and polypropylene woven bags, boxes, packages and special packaging products. The factory and sales office of this subsidiary are located at Manapla, Negros Occidental, while those of the other segments are located at VICMICO Compound, Victorias City, Negros Occidental.
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.
REVENUE FROM OPERATIONS
Parent Company Consolidated (In Thousand Pesos) 2006 2005 2006 2005 Raw sugar sales P1,745,187 P1,214,480 P1,745,187 P1,214,480 Tolling revenues 1,166,153 942,925 1,166,153 942,925 Refined sugar sales 68,134 4,193 68,134 4,193 Molasses 148,313 111,593 143,313 111,593 Engineering contracts 84,940 34,764 84,940 34,764 Others 2,344 - 224,429 79,174 P3,215,071 P2,307,955 P3,432,156 P2,387,129
18. COST OF GOODS MANUFACTURED AND SOLD
Details of this account are enumerated in a separate schedule accompanying the financial statements. Planters’ incentives refer to cane trucking, hauling allowances and other incentives to encourage planters to mill with VMC.
19. OTHER OPERATING INCOME
This account consists of interest income earned from deposits and money placements, foreign exchange gain and other miscellaneous income.
20. OPERATING EXPENSES Details of selling expenses for the period ended May 31, 2006 and 2005 are enumerated in a separate schedule accompanying the financial statements.
Details of general and administrative expenses for the period ended May 31, 2006 and 2005 are also in a separate schedule accompanying the financial statements.
21. OTHER OPERATING EXPENSES
This account consists of foreign exchange loss and other miscellaneous expenses. Provision for contingent liability recognized during the period ended May 31, 2006 amounted to 600M.
Details of NOLCO are as follows:
2004 2005 Year of Incurrence Year of Expiry Additions Applied Expired Balance Balance Consolidated 2002 2005 P2,983 P - P - P2,983 P - 2003 2006 2,718 - - - 2,718 2004 2007 3,319 - - - 3,319 2005 2008 - 1,937 - - 1,937 P9,020 P1,937 P - P2,983 P7,974
Details of MCIT are as follows:
2004 2005 Year of Incurrence Year of Expiry Additions Applied Expired Balance Balance Parent Company 2002 2005 P10,376 P - P10,376 P - P - 2003 2006 16,756 - 16,756 - - 2004 2007 17,310 - 17,310 - - 2005 2008 - - - - - P44,442 P - P44,442 P - P - Consolidated 2002 2005 P10,434 P - P10,376 P58 P - 2003 2006 16,793 - 16,756 - 37 2004 2007 17,562 - 17,310 - 252 2005 2008 - P58 - - 58 P44,789 P58 P44,442 P58 P347
22. DEFERRED INCOME TAX The analysis of deferred tax for financial reporting follows:
Parent Company Consolidated May 31, August 31, May 31, August 31, 2006 2005 2006 2005 Deferred tax assets P602 P893 Deferred tax liability 162,649 162,649 162,649 162,649
The following are the composition of deferred income taxes recognized by the Group:
Parent Company Consolidated Balance Charge To Balance Balance Charge To Balance Beginning Income For Ending Beginning Income For Ending (In Thousand Pesos) Aug 31, 2005 The Period May 31,2006 Aug 31, 2005 The Period May 31,2006 Deferred tax assets: Allowance for doubtful accounts P - P - P - P512 P512 Advance rental - - - 291 (291) Provision for litigation loss - - - 90 90 - - - 893 (291) 602 Deferred tax liability: Revaluation increment P162,649 P162,649 P162,649 P162,649
23. RETIREMENT BENEFIT PLAN VMC has a non-contributory, defined benefit plan (Plan) covering all regular employees. Under the Plan, the normal retirement age is 60 with at least 10 years of service. Normal retirement benefit may be given in partial or lump sum amount equivalent to the sum of certain percentages of the fund earnings of the participant, net of 1/70 of the participant’s social security pension benefit per year of credited service. In addition to the above Plan, VMC has a supplementary retirement benefit plan which provides, among others, retirement benefit equivalent to 75% of the member’s final monthly salary for every year of credited service effective November 1, 1994. However, VMC reserves the right to discontinue, suspend or change the rate and amount of its contributions to the supplementary retirement benefit plan at any time for any reason whatsoever.
The normal and supplementary retirement benefit plans (Plans) used the Projected Unit Credit method in accounting for retirement benefit cost. The latest actuarial valuation dated September 30, 2003 showed actuarially computed normal retirement and supplementary retirement liabilities of P171 million and P104 million, respectively. The actual retirement benefit cost charged to operations and paid by VMC at May 31, 2006 and 2005 was P27.8 million and P23.8 million, respectively. The accrued pension cost as per books of account at May 31, 2006 and August 31, 2005 amounted to P268.781 million. The actuarial present value of the retirement benefits obligation under the Plans is measured in terms of actuarial assumptions for discount rate, rate of increase in salaries and expected long-term rate of return on plan assets. VMC has been implementing a manpower reduction program since 1997, as such there were significant changes in the circumstances of the Plans and certain assumptions have been modified. Hence, as of August 31, 2004, the retirement cost charged to operations of P24 million pertains to actual retirement benefits paid to qualified VMC employees. The retirement plan asset pertains to the shares of stock of VMC of 170,133,158 at a par value of P1 per share. The normal retirement plan used to be trusteed and funded, however due to manpower reduction program under the ARP (Note 2), the trust fund has been exhausted. The mandated retirement benefits at the retirement date of qualified employees shall be borne by VMC.
24. RELATED PARTY TRANSACTIONS In the Parent Company financial statements, the significant transactions of VMC with related parties during the year follow: (a) Sales of goods/services
(In Thousand Pesos) 2005 2004 2003 Sale of sugar: VFC P3,614 P2,207 P3,520 Revenue from services: VQPC P 240 240 P 240 VFC (Tolling fees and others) 859 727 884 P 258 P1,099 P 1,124
Sale of sugar is at cost plus a certain mark-up. Revenue from services to VQPC pertains to the lease of land and transformers owned by VMC for a period of 25 years until June 20, 2015. The leased assets are located at Manapla, Negros Occidental. Future minimum annual lease commitments arising from operating leases are as follows: Years Amount 2005-2006 240,000 2006-2007 240,000 2007-2008 240,000 2009-2010 240,000 2010-2011 240,000
(b) Purchases of goods/production supplies/services
(In Thousand Pesos) 2005 2004 2003
Purchase of polyethylene bags from: VQPC P90,437 79,803 P69,424 Purchase of goods from:
VFC 977 2,147 1,169 VGCCI 629 1,185 944 1,606 3,332 P2,113 Purchase of services from: VALCO 184 920 981 CDC 1,536 1,462 1,606 P2,587 P2,382 P2,587
The selling price of polyethylene bags by VQPC to VMC is at cost plus a certain mark-up. Purchase of services from VALCO pertains to the use by VMC of VALCO’s land and Massey Ferguson tractors. VMC has been granted the right to occupy and use a portion of CDC’s land for its
engineering complex, for a period of twenty (20) years until August 31, 2019, with an annual lease of P40,040. VMC is also leasing 110.76 hectares of agricultural land from CDC for a period of five crop years starting on crop year 1997 which was renewed for a period until 2005, with an annual lease equivalent to fifteen piculs of sugar per hectare. CDC is using for free a certain portion of land and a building owned by VMC where the CDC’s facilities are maintained. (c) Year-end balances arising from sales/purchases of goods/production supplies during the year:
(In Thousand Pesos) 2005 2004 2003 Receivable from: VFC 162 100 P - Payable to: VQPC 2,389 1,335 2,680 VFC 12 2,147 903 VGCCI 247 215 2,239 3,729 P2,401
(d) Advances to/from subsidiaries/related company in the form of payments of expenses during the year
(In Thousand Pesos) 2005 2004 2003 Advances to: VQPC - P 174 P 328 CDC 164 286 359 VFC 1,039 405 929 VGCCI 512 828 763 1,715 P1,693 P2,379 Advances from: VALCO 1,660 P719 P965
(e) Year-end balances of VMC’s advances to/from subsidiaries and other related parties are shown in Note 8. Except for CDC, advances to/from related parties have no definite repayment dates and are interest-free. Advances to CDC, which bear a fixed annual interest of 10% and have no definite repayment dates, were obtained primarily to finance the development of residential and memorial park lots.
(f) Board of Directors’ remuneration Total remuneration of the Board of Directors and the SEC Receiver for the period amounted to P1.002 million (August 31, 2005 – P4.274million). (g) VMC has temporarily used the P2,792,478 capital of VICMICO Fertilizer Corporation (Fertilizer), and shall return the same when the Fertilizer’s operation is activated or shall be applied as a return of capital, should the latter be liquidated.
(h) The capital infusion of VMC to VAMCO amounting to P34.4 million was reclassified as advances and shown as part of the latter’s payable to VMC in the balance sheets since the plan of VMC to increase the capitalization of VAMCO was no longer pursued. Other transactions with related companies consist of sharing of common expenses.
25. AGREEMENTS AND COMMITMENTS The significant agreements at August 31, 2005 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 VMC of sugar and molasses produced from sugar canes milled. The milling contracts are renewed annually. (b) As of August 31, 2005, VMC has in its custody sugar owned by several quedan holders and sugar traders of approximately 807,454 Lkg. (August 31, 2005 – 807,454 Lkg) with estimated market value of P750.9 million (August 31, 2005 – P750.9 million). These sugar inventories are not reflected in the balance sheets since these are not assets of VMC. VMC is accountable to both quedan holders and sugar traders for the value of these trusteed sugar or their sales proceeds. (c) VMC has entered into a deed of assignment and exchange of shares of stock with VGCCI for VGCCI to issue shares of stock with a total par value of P224 thousand in exchange for VMC’s land with an appraised value P13,205,970, the difference of P12,981,970 to be accounted for as additional paid-in capital of VMC to VGCI. As provided for in the agreement, VGCCI is in possession of the abovementioned land without any consideration yet until such time that the assignment of the aforementioned land is completed. As at August 31, 2005, 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 VMC with various creditor banks (Note 12). (d) On November 15, 2002, VALCO entered into a memorandum of agreement with another outside party for a period of four crop years starting crop year 2003-2004, renewable only at the option of VALCO. This agreement provides, among others, for VALCO to: • Provide cane field areas totaling 148.53 hectares for the purpose of cultivation and planting of sugarcane which shall be exclusively milled by VMC; • Receive its share in the income for each crop year equivalent to more or less 2,877.72 Lkg which is paid in advance at the beginning of each crop year using the composite price of P850/Lkg. The composite price is to be adjusted not later than June 30 of each crop year based on the average VMC composite price of sugar per Lkg taken from SRA’s quedan sharing from the start to the end of milling season; and • Pay for all related real estate taxes. On May 24, 2005, the VALCO entered into an agreement with Migan Corporation for a period of four (4) crop years starting crop year 2005 to 2009, renewable for another two (2) crop years, subject to the parties’ agreement. The agreement provides, among others, • Provide cane field areas totaling 38.9813 hectares to be cultivated and planted by Migan Corporation with sugarcane which shall be exclusively milled by VMC;
• Receive its share in the income for each crop year twenty six (26) Lkg per hectare as the cultivation of the parcels of land at a first picul milled basis in sugar quedan(s); and, • Pay for all related real estate taxes.
(e) On November 15, 2002, CDC entered into a memorandum of agreement with an outside party for a period of four crop years starting crop year 2003-2004, renewable only at the option of CDC. The agreement provides, among others, for CDC to: • Provide cane field areas totaling 15.38 hectares for the purpose of cultivation and planting of sugarcane by the outside party which shall be exclusively milled by VMC; • Receive as compensation 20 Lkg of sugar per hectare per crop year provided that in case the other party will be able to produce 126.50 Lkg and above per hectare on the aforementioned lots, the share of CDC shall only be 19 Lkg per hectare per crop year.
• As provided further in the agreement, the outside party is obliged to make an advance payment of P248,387 for each crop year payble in a manner provided for in the agreement. On May 24, 2005, CDC entered into a Memorandum of Agreement (the Agreement) with Mr. Miguel Hinojales (Lessee) for a period of four (4) crop years starting 2003 to 2004, renewable at the option of CDC. The operating lease agreement provides, among others, for CDC to provide cane field areas totaling 15.38 hectares for planting sugar cane which shall be milled exclusively with VMC. As compensation, CDC will receive more or less 20 Lkg of sugar per hectare per crop year provided that in case the lessee will be able to produce 126.50 Lkg per hectare and above on the aforementioned lots, the share of CDC shall only be 19 Lkg per hectare per crop year. As provided further in the agreement, the lessee is obliged to make an advance rental payment for each crop year payable in the manner provided for in the agreement. As of August 31, 2005 and 2004, the lessee has paid the Company the lease payment due and is shown as rental income of P207,012 and P248,387, respectively in the statement of operations. On May 24, 2005, CDC entered into a Memorandum of Agreement with Migan Corporation (Lessee) for a period of four (4) crop years covering the period starting from crop year 2005 to crop year 2009, renewable for another two (2) years, subject to the parties’ agreement. The operating lease agreement provides, among others, for CDC to provide 62.58 hectares for planting sugar cane which shall be milled exclusively with VMC. The lessee guaranteed to pay the CDC for each crop year twenty six (26) Lkg per hectare as the cultivation of the parcels of land at a first picul milled by VMC. As provided further in the agreement, the lessee is obliged to pay an advance rental payment twenty for crop year 2005-2006 of twenty three (23) Lkg per hectare per crop year. As of August 31, 2005, the lessee has made advance rental payment of P909,091. (f) VMC has entered into a memorandum of agreement with IJ Agri-Industrial and Development Corporation (IJADC) whereby the latter leases the agricultural projects
of VMC, including the related facilities and real property on where the projects are located, as follows: swine and cattle, organic fertilizer, cutflower, sugar farm and agri- engineering. The agreement covers a period of seven years and seven months effective on February 1, 1998 and provides, among others, for a 70% - 30% sharing of net profits before income tax between VMC and IJADC, respectively. Further, in case of loss in operations, IJADC is no longer liable to pay VMC the lease rental. On August 31, 2005, as the agreement expired, IJADC turned-over the management of the agricultural projects to VMC. (g) On February 20, 2003, the management of VMC signed a Collective Bargaining Agreement (CBA) with members of VICMICO Industrial Worker’s Association (VIWA) and VICMICO Supervisors’ Union (VSU) which provides for VMC to pay a set rate annual salary increases ranging from 3% to 7% to covered employees effective February 1, 2003 to January 31, 2006 for VSU members and effective October 1, 2001 to September 30, 2004, for VIWA members, respectively. Except for the signing bonus, LPG allowance, medical allowance and rice subsidy, all other benefits remain the same.
On June 14, 2005, A Supplemental Agreement was signed by VMC and VIWA effective October 1, 2004 to September 30, 2006 to extend the period of the CBA that has expired on September 30, 2004. Both parties agreed for a status quo with the salary rates and all benefits of VIWA members from the period covered by the agreement. However, VIWA members were entitled to a tax-free signing bonus equivalent to 75% of their basic pay.
26. CONTINGENCIES North Negros Marketing Co., Inc. (NONEMARCO), a 51.74% - owned entity of VMC, used refined sugar invoice/delivery orders (RSDOs) allegedly issued by VMC to avail of bank loans totaling to about P62 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. In the event VMC is held liable to pay such debts, VMC will restructure these debts under the same terms and conditions of the restructuring program for VMC’s unsecured creditors (Note 12). 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. In the opinion of VMC’s management, the ultimate disposition of these cases, disputes and assessments will not have a material adverse effect on the financial position or results of operations of VMC.
VQPC, a 55%-owned subsidiary of VMC, has a pending assessment from the Social Security System (SSS) aggregating to P5.5 million, including penalty charges, for unpaid premium contributions covering the periods July 1996 to March 1997 and August 1997 to December 1999. This assessment has been contested for lack of concrete basis. As of August 31, 2005, VQPC’s management believes that a provision of P2 million is adequate to cover the
obligations arising from the said settlement. VQPC has a pending labor case with the National Labor Relations Commissions (NLRC), 4th Division, Cebu City. As at November 25, 2004, this legal matter is pending final resolution with the NLRC. Management believes that the provision of P257,231 is adequate to cover any obligation arising from this case. The ultimate outcome of the aforementioned issues cannot be presently determined; accordingly, no provision for losses has been made in the books of accounts since VMC Group believes that these contingencies have no significant impact on their consolidated financial statements at February 28, 2006 and August 31, 2005.
27. OTHER MATTERS (a) 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. VMC management has placed pollution problems on its priority list and is now addressing it in a manner which is within the financial resources of VMC. Management has allotted at least P30 million for the year for the installation of wet gas scrubbers for the two boilers (JTA and Yoshimine). The design for this project is being finalized and is expected to be operational in crop year 2006. 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 fines due to past non-compliance to effluent standard be made. As of August 31, 2005, VMC received the computation of fines from the PAB. VMC has not obtained yet the permanent lifting order with respect to water pollution. Management believes that said fine will have no significant impact on VMC’s 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 (APCE); (ii) board resolution approving the construction of the proposed APCE; (iii) certificate of availability of funds for the construction of the APCE; 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 APCE 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 APCE; (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 the Company’s ability to service its indebtedness under the terms of the DRA. As of February 28, 2006, VMC has yet to receive a computation of fines from PAB and is still in the process of completing the data to come up with the required cost projection on the APCE. (b) Caneland Sugar Corporation (CSC), an 85%-owned entity of VMC, has ceased milling operations in April 1997 due to financial difficulties. On June 11, 1999, the Regional Trial Court (RTC) of Silay City issued a notice of the extra-judicial sale of the mortgaged land and improvements and the mill facilities of CSC. On May 5, 2000, the RTC issued a final notice of extra-judicial sale and the public auction was held on June 21, 2000 with the Land Bank of the Philippines (LBP), mortgagee, declared as the winning bidder. A petition to annul the extra-judicial sale on the grounds of invalidity of the auction sale was filed by CSC with the RTC of Silay on June 28, 2000. CSC contended that for the extra-judicial sale to be valid, there should be bidders other than LBP, the mortgagee, which was not the case for the only other bidder has merely offered to bid and did not make any cash bid to validate its offer. On August 22, 2000, the RTC of Silay City issued an Order holding in abeyance the resolution of the said petition pending resolution by the Supreme Court of CSC’s petition for Certiorari (grave abuse of discretion on the part of the RTC of Silay City and Court of Appeals), the ultimate outcome of which cannot be presently determined. The CSC’s management signified its intention to operate the mill for crop year 2000-2001 in its letter to LBP dated June 29, 2000, which was subsequently denied by the latter. Furthermore, CSC failed to exercise its option to redeem the foreclosed properties within the one-year redemption period from July 10, 2000, the date of registration of the Certificate of Sale with the Register of Deeds. Consequently, CSC has also been barred by LBP from entering the plant premises and has been unable to renew any existing lease contract on the sugar mill. Following the contested extra-judicial foreclosure of the mortgaged property, the mortgaged property and corresponding liabilities to the bank remain in the accounts of CSC. In another development, the SEC, in its Order dated June 26, 2000, disapproved the rehabilitation plan of CSC and dismissed the petition for suspension of payments filed by CSC on October 13, 1999. These factors raise substantial doubt about the ability of CSC to continue as a going concern. CSC’s management could not make any plans to address the going concern issue until its contention on the extra-judicial foreclosure is acted upon by the Court. (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. (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 predecessors 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, 100%-owned entity of VMC, is subject to the Comprehensive Agrarian Reform Law which requires, among others, the redistribution of land that exceeds the retention limit.
28. RESTATEMENT OF PRIOR YEARS’ FINANCIAL STATEMENTS
a.) Correction of fundamental errors The beginning balance of deficit as of February 28, 2006 and August 31, 2005 has been restated from the amounts previously reported to correct the following errors: • Share in the correction of fundamental errors of VFC which have effects on the VMC’s equity in the net earnings (losses) of subsidiaries with a net adjustment of P1,983,407. This net amount pertains to accrued expenses in 2003 which was not reversed in 2004, P568,486; unrecognized direct material meat purchases for 2003, P2,513,956; incorrect recording of tax penalty and surcharges in 2004, P28,484; and incorrect recording of employee benefit expense in 2004, P9,453. • Share in the correction of fundamental error of CDC which has an effect on the VMC’s equity in net earnings (losses) of subsidiaries amounting to P998,901. The error pertains to the application of gross profit rate on CDC’s collections from 1999-2004 and on double take up on realized gross profit from collections on memorial lot sales. • Sale of land made to NONEMERCO with a cost of P138,426 in 1995 was reversed in the current year due to the failed transfer of certificate of title from VMC to NONEMERCO. Consequently, an appraisal increment and deferred tax liabilities were recognized amounting to P13,199,273 and P7,107,301, respectively. • Transfer of land to VALCO with a cost of P9,257,150 in exchanged for subscription VALCO shares of stocks was reversed in the current year due to the failed transfer of certificate of title from VMC to VALCO. Consequently, a reclassification from Investment in Subsidiaries account to Property, Plant and Equipment account was made pertaining to the cost of land and its related appraisal increase amounting to P9,257,150 and P90,563,292, respectively. • Difference in the recognized equity in net earnings (losses) from VFC in 2004 amounting P2,351,369. The adjustments in the deficit of years prior to 2003 are carried forward to the deficits of 2004 and 2005 for comparative presentation purposes only and were accounted for in accordance with SFAS 13 (revised 2000) – “Net Income or Loss for the Period, Fundamental Errors and Changes in Accounting Policies”.
The beginning balance of deficit as of August 31, 2004 and 2003 has been restated from the amounts previously reported to correct the following accounting errors: • Expenses in 1993 of P30,424,515 which were transferred to VFC by VMC. These expenses were incurred by VMC when VFC was still a division of VMC and before VFC was spun off as a separate company in 1995. • Various assets which were transferred to VFC when it was spun off as a separate company in 1995 amounting to:
Receivables P 18,276,212 Input VAT 1,938,769
Total P 20,214,981 • Provision for retirement costs of VQPC amounting to P3,758,734. The adjustments in the deficit of years prior to 2002 are carried forward to the deficits of 2003 and 2004 for comparative presentation purposes only and were accounted for in accordance with SFAS 13 (revised 2000) – “Net Income or Loss for the Period, Fundamental Errors and Changes in Accounting Policies”. b.) Recognition of deferred income taxes The adoption of SFAS 12/IAS 12 was treated as a change in accounting policy and was accounted for retroactively using the benchmark treatment in accordance with SFAS 13 (revised 2000), “Net Income or Loss for the Period, Fundamental Errors and Changes in Accounting Policies”. The comparative financial statements for 2004 and 2003 have been restated to conform to the changed policy as described in Note 8. The effects of the adoption in the Parent Company are as follows:
Decrease in Revaluation Increment on Property, Decrease (Increase) Plant and Equipment in Net Loss (In Thousand Pesos) 2004 2003 2004 2003 Parent Company (P223,274) (P207,328) (P51,123) (P3,502)
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSESSMENT FOR THIRD QUARTER (MAR. – MAY 2006)
Third quarter’s cane supply volume posted a 30.3% positive variance or 236,640 MT higher versus the targeted cane supply and also higher by 7.2% against same quarter last year. The increase in cane supply volume was mainly due to the second cropping of planters in consideration of higher price of sugar. Furthermore, during this period, other mills have experienced major factory breakdowns thus, some canes supposedly to be milled in other sugar centrals were diverted to VMC. The average LKG/TC for the quarter is 1.99, higher than the targeted figure of 1.95 but lower vs. last year’s LKG/TC of the same period of 2.10. Last year’s LKG/TC for the same quarter had been higher because of better weather conditions during the period.
Raw sugar production increased by 28.7% or 453,569 LKG versus the targeted volume due to higher tonnes cane milled and LKG/TC. Compared to last year’s production volume, this quarter’s production is lower which is mainly attributed to lower LKG/TC. Refined sugar production volume for this quarter is higher by 1.8% or 36,749 LKG than the targeted volume and also higher by 2.3% vs. same quarter last year.
VMC’s raw sugar mill share prices for this quarter averaged at P1,045.87/LKG, higher by 36.3% against the period’s targeted average price of P849.84/LKG. Last year’s third quarter average price was P767.22/LKG.
PRODUCTION PERFORMANCE FOR CROP YEAR 2004-2005
Last crop year’s total cane supply volume of 2.894 million tonnes was lower by 3.52% compared to the targeted volume and also lower by 2.62% against the previous year. The decrease were due to the following: reduction in ton cane per hectare, strategies implemented by other mills to attract canes, Factory operation breakdowns and stoppages, and the double crop that was projected was not realized due to the El Niño phenomenon.
Generally good weather conditions and an improvement in cane varieties for CY 2004-05 resulted in LKG/TC of 2.11, higher by 0.48% against the target, and 7.65% increase from the previous year’s figure.
Because of lower cane supply, raw sugar production volume decreased by 3.27% to 6.094 million LKG versus the targeted volume but higher by 4.51% against the previous year’s volume due to higher LKG/TC.
Refined sugar production for the year of 6.227 million LKG decreased by 8.42% against target and 4.26% against last year. The lower refined sugar production was
caused by the various breakdowns in Refinery and particularly on the mechanical problem attributed to the runner band.
VMC’s average raw sugar price last crop year at P784.68 increased compared to the budgeted selling price of P718.48 and also higher against the previous year’s price of P745.92.
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VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES AGING OF ACCOUNTS RECEIVABLE MAY 31, 2006
CURRENT TO 1 7MONTHS TO 1 ITEMS ON ACCOUNT DESCRIPTION TOTAL MONTH 2-3MONTHS 4-6MONTHS YEAR 1-2 YEARS 3-5YEARS 5 YEARS ABOVE LITIGATION TRADE 61,880,808 26,854,796 35,026,012 Accrued A/R - Engineering 98,639,720 3,337,370 2,807,251 1,180,047 2,782,848 (539,112) 1,522,590 87,548,726 Accrued A/R - Corporate - Accrued A/R - Manufacturing - - Accrued A/R - Agriculture 28,869,561 28,869,561 Philippine Sugar Research Institute 267,544 267,544 Victorias Foods customers - Outsiders 1,841,476 306,463 95,576 9,469 383,704 604,673 441,589 Victorias Foods disributors 3,735,838 1,722,645 654,956 1,890 510,448 62,625 99 3,722 VQPC customers 18,913,894 11,785,300 3,300,000 750 3,434,344 Others 11,280,978 2,029,107 1,055,242 620,668 390,634 672,59 8 1,435,311 4,439,794 TOTAL 225,429,819 46,303,225 7,913,026 1,812,824 7,501,979 800,785 4,393,213 151,444,299 4,439,794
PLANTERS AND HAULERS Planters - mill district 10,182,215 10,182,215 Planters - Bay - Ang 2,465,393 2,465,393 Planters - Supervised input 45,100,445 45,100,445 10,342,912 United Consolidated Planters Assn. 4,658,729 4,658,729 United south VMC Assn. 1,683,252 1,683,252 Consolidated Farmers Assn. 9,205,490 9,205,490 Murcia Cane Handlers 15,366,683 15,366,683 United Frmers Group 3,273,622 3,273,622 Integrated Planters Assn. 179,231 179,231 RPA Ass'n dues 59,843 59,843 Victorias Manapla Cadiz Assn. 49,436 49,436 Sugar Productivity Program 47,152,751 47,084,803 Victorias Agricultural Multi Purpose Coop. 82,439 82,439 Total 139,459,529 - 59,843 - - - - 139,331,737 10,342,912
CURRENT TO 1 7MONTHS TO 1 ITEMS ON ACCOUNT DESCRIPTION TOTAL MONTH 2-3MONTHS 4-6MONTHS YEAR 1-2 YEARS 3-5YEARS 5 YEARS ABOVE LITIGATION
ADVANCES TO OFFICERS / EMPLOYEES ADVANCES TO EMPLOYEES 38,010,536 1,106,089 471,518 99,780 136,911 36,193,238 A/R EMPLOYEES MAKATI 1,683,354 215,000 2,880 14,219 10,977 1,440,277 ADVANCES PRIVATE LEDGER 80,694,002 80,694,002 120,387,892 1,321,089 471,518 99,780 2,880 14,219 147,888 118,327,517 -
NON TRADE Due from Don Bosco 700,853 700,853 Due from SMMS 2,818,011 722,796 2,095,215 Due from La Salle - A/R - NON TRADE 37,868,868 - 344,214 126,875 98,700 1,246,159 253,794 35,799,125 AR- Urban Bank 13,137,954 13,137,954 NIDCOR 5,486,680 5,486,680 New VMC Integrated Farms 6,342,237 - 1,346 76,649 1,279 1,675 710,461 5,550,827 Others 517 Total 66,355,119 1,423,649 345,560 203,524 99,979 1,247,834 964,255 62,069,801
OTHERS Due from Corporate Area Due from Manufacturing Dividend Receivable 8 82,142 882,142 Others 5,589,886 166,663 282,903 503,604 614,215 226,995 609,515 3,185,991 TOTAL 6,472,028 166,663 282,903 503,604 614,215 226,995 609,515 4,068,133 -
GRAND TOTAL 558,104,387 49,214,627 9,072,850 2,619,733 8,219,053 2,289,833 6,114,871 475,241,487 14,782,706 Less: Allow. For Doubtful Accts. 466,398,221
NET RECEIVABLE 91,706,166