Jamie Muñoz

BSAcT4
Victorias Milling Company, Inc.
A Bittersweet Struggle (Part 1 of 3)

Problem:
How will the company implement the approved rehabilitation plan to successfully meet
its future operations and expansion along with paying on time its maturing obligations?

Areas of Consideration:
 News of Cash flow problems and undetermined extent of liabilities reached
the creditor banks of VMCI.
 32 banks and financial institutions that actively participate and the number of
creditors could total around 800.
 VMCI milling facilities had undergone annual maintenance and repairs
costing more than P150 million but it would be a miracle to find another
source of funding immediately.
 VMCI’s auditing firm, SGV, is the top auditing firm in the country and auditor
for the last 50 years but the VMCI’s board effectively severed its relationship
with SGV when it engaged the auditing services of Joaquin Cunanan & Co.
and Jardine Davies, to find out the real financial status of VMCI.
 The sooner the real financial status of VMCI was determined, the faster a
workable restructuring plan could be mapped out.
 Asian financial crisis and the falling prices of sugar due to the influx of cheap
imported sugar.
 Even at the height of the sugar crisis in the mid-80s, VMCI did not shut down
during traditional “tiempos muertos” or dead season when there is no work in
the mills or plantations. It had survived droughts, off-season or dead seasons,
World War II and even Martial Law.
 VMCI is the largest sugar mill operator in the Philippines and one of the
largest in Southeast Asia. It produces 30% of the Philippines’ daily
requirement of refined sugar.
 Other businesses of VMCI includes a foundry, a machine shop, a fabrication
shop, organic fertilizer plant, ventures in cutflower, agriculture, cattle and
piggery; VMCI has also expanded into the packaging, food and engineering
industry; VMCI also organized Victorias Food Corporation which makes
sardines, luncheon meat, bacon and ham; Victorias engineering division takes
on construction projects; VMCI developed Victorias Golf and Country Club.
 North Negros Marketing Co., Inc (Nonemarco) is an independent entity hired
by VMCI to market its sugar and other products. VMCI monopolized the
sugar refining business up until 1994, when a majority of raw sugar mills built
their own white sugar facilities, as a result of the monopoly all the traders
revolt against VMCI and Nonemarco. These new sugar refining mills
enhanced their refining capacities and became aggressive in sugar trading.
 VMCI indefinitely shutdown its milling operations for the very first time in its
78 years of existence.
  Several groups, such as the Gokongweis, San Miguel Corporation, Jadine
Davies and Lucio Tan were reportedly interested in bailing VMCI out of its
financial woes.

Guide Questions:
1. The Board of Directors of VMCI did not meet certain responsibilities as defined in
OECD principle number six on the responsibilities of the board. The board members did
not act on good faith and with due diligence and care for the best interest of the company
and the shareholders. VMCI had padded its financial records to hide its losses. The board
appointed key officers of the bank with questionable integrity. To correct these problems
they hired the services of Joaquin Cunanan & Co. independent auditing firm to conduct
due diligence and disclose the true financial position of VMCI. They selected and hired
new key officers with proven integrity. VMCI should implement strict internal control
measures for both parent company and its subsidiaries particularly regarding regularly
issued refined sugar delivery orders (RSDOs), there should be a check and balance of in
the issuance of RSDOs. The board members do not have access to accurate, relevant and
timely information. Seemingly key officers of VMCI connived with SGV’s auditors in
coming out inaccurate financial statements, SGV audit disclosed that net asset value as of
first quarter of 1997 was P2.95 billion as against only P538 million as actual net asset
value per due diligence conducted by Joaquin Cunanan & Co. This has been addressed by
the board of VMCI with the selection of Joaquin Cunanan & Co. as their new external
auditor and hiring of new key officers of VMCI. They should form a working committee
from among themselves to determine the exact extent of VMCI’s liabilities.

2. The OECD principle number three discussed the equitable treatment of stakeholders
that corporate governance should ensure the equal treatment of shareholders including
minority and foreign shareholders. According to SEC official the approved VMCI
Management Committee rehabilitation plan was fair and reasonable to serve the best
interest of shareholders and creditors, this OECD’s principle was applied with regard to
VMCI’s creditors. The Management Committee rehabilitation plan missed the OECD’s
principle of ensuring equitable treatment of shareholders because they prohibited the
rights of the shareholders from exercising their preemptive rights to buy newly issued
VMCI’s shares.

3. No, the minor players of VMCI particularly the workers were not taken into serious
consideration by the major players of VMCI working out its rehabilitation. In the
rehabilitation plan the first major action to take was to reduce manpower by 51% from
4,343 to 2,148. They should think this over because VMCI’s operation is labor intensive,
thus, needing more workforce. Removing this great number of employees would also
involve very large amount of separation pay in compliance with labor laws that can add
to the already financially distressed VMCI. VMCI must also consider the families of
would-be displaced workers.

4. The conflicts that were brought into focus in the formulation of the rehabilitation plan
are issue over RSDOs issued by Nonemarco must be settled first and issue on prohibition
of board members and shareholders from exercising their preemptive rights to buy newly
issued VMCI’s shares. These conflicts are legitimate. The creditors agreed to have an
escrow or a sinking fund of P640 million which should be used to settle the claims of the
RSDO holders. Prohibiting existing shareholders to exercise their preemptive rights when
it came to the new shares to be issued would attract potential strategic investors to bid.

5. Yes, the rehabilitation plan promises the possibility of putting VMCI back on tract.
According to SEC official the approved VMCI Management Committee rehabilitation
plan was fair and reasonable to serve the best interest of shareholders and creditors. The
rehabilitation plan should focus on attracting potential strategic investors to infuse
substantial equity into VMCI to support its approved rehabilitation plan particularly its
future operations or expansions.