VICTORIAS MILLING COMPANY, INC.

VICMICO Compound, Victorias City, Negros Occidental Tel. No. (034) 399-3380; Fax No. (034) 399-3675

January 30, 2013 THE DISCLOSURE DEPARTMENT Philippine Stock Exchange, Inc. 3F Philippine Stock Exchange Plaza Ayala Triangle, Ayala Ave., Makati City Attention: MS. JANET A. ENCARNACION Head, Disclosure Department Gentlemen: Please find attached hereto Victorias Milling Company, Inc.’s Amended Annual Report (SEC Form 17-A) for fiscal year ended August 31, 2012, which has been submitted with the SEC today, January 30, 2013.

Thank you. Very truly yours,

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SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A (AMENDED)

ANNUAL REPORT PURSUANT TO SECTION 17

OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended: August 31, 2012 2. SEC Identification Number: PW-364 3. BIR Tax Identification No.: 000-270-220-000 4. Exact name of Issuer as specified in its charter: VICTORIAS MILLING COMPANY, INC. 5. Plant site: Victorias City, Negros Occidental 6. (SEC Use Only)

7. VICMICO Compound Victorias City, Negros Occidental 6119

Province, Country or other jurisdiction of incorporation or organization

Industry Classification Code:

Address of office Postal Code 8. (034) 399-33-78; (034) 399-35-88 Issuer's telephone number, including area code 9. Not Applicable a Former name, former address, and former fiscal year, if changed since last report. 10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA Title of Each Class Number of Shares of Common Stock

Outstanding and Amount of Debt Outstanding

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

Authorized Capital Stock 2,563,035,708 shares Subscribed and Paid-up 2,024,616,452 shares Amount of Debt Outstanding as of August 31, 2012: 4,826,907,367 11. Are any or all of these securities listed on a Stock Exchange. Yes [ X ] No [ ] If yes, state the name of such stock exchange and the classes of securities listed therein: - Common Stocks Philippine Stock Exchange, 12. Check whether the issuer:

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

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Yes [ X ] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days. Yes [ X ] No [ ] 13. Aggregate market value of the voting stock held by non-affiliates: P2,018,792,134

(at P1.00 par value)

APPLICABLE ONLY TO ISSUERS INVOLVED IN INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:

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

Yes [ X ] No [ ]

DOCUMENTS INCORPORATED BY REFERENCE 15. Briefly describe the documents incorporated by reference and identify the part of the SEC Form 17-A into

which the document is incorporated: 2011-2012 Consolidated Financial Statements (Incorporated as reference for Item 7 of SEC Form 17- A)

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TABLE OF CONTENTS PART I - BUSINESS AND GENERAL INFORMATION Page Item 1. Business 4 Item 2. Property 12 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II - OPERATIONAL AND FINANCIAL INFORMATION Item 5. Market for Registrant's Common Equity and Related

Stockholder Matters 14

Item 6. Management's Discussion and Analysis or Plan of Operation.

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Item 7. Financial Statements 25 Item 8. Changes in and Disagreements With Accountants on

Accounting and Financial Disclosure 25

PART III - CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers of the Issuer 26 Item 10. Executive Compensation 30 Item 11. Security Ownership of Certain Beneficial Owners and

Management 31

Item 12. Certain Relationships and Related Transactions 31 PART IV- EXHIBITS AND SCHEDULES

33 (a) Exhibits (b) Reports on SEC Form 17-C 33

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PART I- BUSINESS AND GENERAL INFORMATION

ITEM 1 - BUSINESS DESCRIPTION OF BUSINESS Victorias Milling Company, Inc. (VMC) is a domestic corporation located in Victorias City, Negros Occidental. Since its incorporation on May 7, 1919, VMC has engaged in integrated raw and refined sugar manufacturing. It also operates an engineering services and the following subsidiaries:

DATE OF REGISTRATION

% Ownership

Description of Business

Victorias Foods Corporation (VFC)

February 24, 1993 100% produces and sells canned sardines, hot bangus, mackerel, luncheon meat, lechon paksiw, ham, bacon and other meat products

Canetown Development Corporation (CDC)

February 9, 1979 88% develops and sells real estate properties; develops, operates and sells memorial lots

Victorias Quality Packaging Corporation (VQPC)

July 4, 1990 55% sells special packaging products such as polyethylene and polyprophelene bags

Victorias Golf and Country Club, Inc. (VGCCI)

May 5, 1994 81% operates a golf club

Victorias Agricultural Land Corporation (VALCO)

June 30, 1987 100% acquires and owns agricultural lands and properties

BUSINESS DEVELOPMENT DURING THE PAST THREE (3) YEARS

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

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

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

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

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

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As of FY 2012, VMC has converted a total of P428 Million convertible notes into 428 million of its

common shares. P118 Million worth of debts was converted in 2012, while P310 Million convertible notes were converted to 310 million common shares during the previous year.

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

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

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

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

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

Although there was a 12.10% increase in raw sugar production from the previous crop year, the total

production of the province decreased by 3.67%. Factory efficiency, Mills reduced extraction and reduced boiling house recovery all hit their respective targets resulting to a higher SDF, low molasses purity and high raw sugar production.

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

On energy consumption, a total of 1,732,495 tons of steam was generated by the eight (8) boilers which is

lower than last crop year’s steam generation of 2,041,467 tons. This crop year’s steam generation was noted to be the lowest for the last eight years. Ratio of tons steam generated against tons cane milled was reduced from 0.655 last crop year to 0.558 this year. Refinery steam consumption also registered a reduction from 1.8072 tons steam per ton refined last year to 1.5124 tons steam per ton refined this year.

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

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The total cash cost of raw sugar per Lkg-mill share amounted to P1,188.79 which decreased by 7.6%

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

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

VMC invested P264 million last crop year in order to improve company efficiency and quality production. For Crop Year 2012-2013, a total of P509 million Capital Expenditures (CAPEX) budget was approved by the VMC Board of Directors. This amount includes major projects worth P240.00 million for the first phase of Raw Sugar upgrading and modernization, P116.12 million for environmental compliance projects and P152.43 million for the regular projects under Manufacturing Area. Crop Year 2011-2012 was a fruitful year for VMC. Targets had been achieved and even surpassed. VMC has proven, time and again, that through continuous efforts of improvement and modernization without compromising the safety of environment and people, the Company can remain as the benchmark in the sugar industry. RISKS

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

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

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

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

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

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Competition and industry changes form part of the strategic risks to which VMC is exposed. The sugar

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

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

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

The major risks involved in the Company’s subsidiaries are as follows: 1. Risk of uncertainty of members to meet their obligations and pay their dues. 2. Risk on profitability because of low production due to scarcity of materials. 3. Risk that obligations may not be settled when they fall due or liquidity risk and going concern

issues. 4. Risk on profitability because of volatility of sugar prices and risk that customers will not pay their

contractual obligations. 5. Risk of inability to pay the future tax liability and risk those customers will not pay their contractual

obligations. COMPETITION

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

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

NAME OF LICENSE DESCRIPTION DATE SECURED EXPIRY DATE

1. MILLING LICENSE

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

Sept. 7, 2011

Aug. 31, 2012

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

Sept. 7, 2011

Aug. 31, 2012

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

3. SUGAR TRADER CERTIFICATE OF REGISTRATION

Authority to operate as a Domestic Sugar Trader and withdraw purchased sugar from the warehouse of any sugar mill or refinery. VMC should submit a continuous monthly report of its trading activities and for failure to submit the same shall be subject to par. 7, SRA Sugar Order No. 2 dated 16 July 1986.

Sept. 6, 2011

Aug. 31, 2012

4. MOLASSES TRADER CERTIFICATE OF REGISTRATION

Authority to withdraw purchased molasses from the storage tanks of any sugar mill or refinery. VMC should submit a continuous monthly report of its trading activities and for failure to submit the same shall be subject to par. 7, SRA Sugar Order No. 2 dated 16 July 1987.

Sept. 6, 2011

Aug. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

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

Jan. 9, 2012 Dec. 31, 2012

13. FIRE SAFETY INSPECTION CERTIFICATE

Certificate of Safety and Protection of VMC’s Business Establishment. May be revoked or cancelled on ground of public health, sanitation, safety, welfare, misrepresentation of the nature of the permit applied for or for cause as provided for by law.

Mar. 27, 2012 Dec. 31, 2012

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14. CERTIFICATE OF BUSINESS NAME REGISTRATION

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

Sept. 10, 2008 Sept. 10, 2013

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

Mar. 21, 2012 Apr. 24, 2012

16. CERTIFICATE OF ELIGIBILITY

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

Oct. 4, 2012 Oct. 4, 2013

17. REGISTERED MARK Registered Mark Nos. 4-2008-500038 and 4-2008-500039 -for sugar, refined sugar in class 30. Registered Mark No. 4-2008-012796 -for meat, fish, poultry and game; preserved, dried and cooked fruits and vegetables; preserves and pickles; edible oils and fats, squid in Class 29 -for sugar, vinegar, salt, pepper, mustard, sauces, spices in Class 30 Registered Mark No. 4-2007-500803 - in Class 29 and Class 30

Sept. 22, 2008

May 25, 2009

Oct. 23, 2009

Sept. 22, 2018

May 25, 2019

Oct. 23, 2019

18. ICARE CERTIFICATE Certificate of Accreditation as Importer issued by the Bureau of Aug. 12, 2011 Aug. 12, 2012 OF ACCREDITATION Customs Certifies that VMC is an accredited importer in accordance with Customs Memorandum Order No. 47-2010 subject however to suspension or cancellation prior to the expiration thereof pursuant to applicable laws, customs, rules and regulations. 19. CERTIFICATE OF Certificate of Registration issued by the Bureau of Customs Aug. 25, 2011 Aug. 25, 2012 REGISTRATION (BOC) Certifies that VMC is duly registered with BOC subject to Compliance to CMO subsequent issuance governing Client Registration Application Processing, non-repudiation of any declaration filed through the Value Added Service Providers (VASPs) and recognition of TWM system information duly certified by its Administrator as valid and/or correct. 20. NATIONAL WATER Permit to use water from various water source pursuant to May 2011 May 2012 RESOURCES BOARD Resolution No. 74-4 of the National Water Resources Council, (NWRB) PERMIT promulgated by authority of the Presidential Decree No. 424 Dated March 28, 1974.

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

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CANE SUPPLY ASPECT

For Crop Year 2011-2012, VMC was able to mill 3,100,509 tonnes cane, producing 6,400,064 lkg raw sugar. This year’s cane supply volume is slightly lower by 15,405 tonnes cane from last crop year’s 3,115,914 tonnes cane, short by 99,491 tonnes cane or three (3%) percent lower from the projection of 3.2 million tonnes cane. A very slight increase in sugar production was attained as against the target of 6.4 M lkg, but is much ahead with last year’s 5,703,506, by 696,557 lkg or 12% higher. Sugar rendement as expressed in LKG/TC dramatically improved this crop year from last year’s 1.83 to 2.06 LKG/TC, a significant increase of 23 cates or 13%. This is attributed to the Moderate La Niña weather that favored cane growth and maturity of the crop. The improvement in LKG/TC, coupled with good factory efficiency is a major factor for the increase in sugar production this year. Planters in nearby areas (0-50 kms.) brought in 2,094,017 tonnes, comprising 68% of the total cane supply during the year, an increase of two (2) percentage points compared to last year’s 66%. Higher LKG/TC of canes milled made VMC more competitive with its neighboring mills attracting more planters to deliver with it. The volume of canes from medium distance (50-100 kms.) areas comprised 18% of the total cane supply or 556,455 tonnes, a slight drop by one (1) percentage points from the previous year’s 19% or 594,109 tonnes cane. Those from far distance (100 kms. and beyond) had delivered 450,037 tonnes comprising 14% of VMC’s total volume. Also, a slight drop of one (1) percentage points from last year’s 15%. This slight drop in cane deliveries from both cane sources is primarily due to VMC’s return to its normal Trucking Allowance (TA) rates, which has increased out-of-pocket payments absorbed by planters in bringing the canes to VMC mill site. With regard to the province, VMC shared 26.52% on total cane of 11,689,675 million tonnes, an increase of 2.82 percentage points from 23.70% for the same period last year. The increase in VMC’s share in the province is attributed to its good milling efficiency and sugar recovery advantage. SERVICES TO PLANTERS

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

a) Fuel Subsidy Incentive (FSI) - Starting April 9, 2012, a Special Incentive of P20.00/Net Tonne Cane

was given in order to direct to mill site, cane deliveries of planters that passed VMC’s cane acceptance standards. This was intended to minimize the high out-of-pocket expenses borne by planters for delivering their canes with VMC brought about by rising fuel prices.

b) Drivers’ Incentive (DI) - At the same time, Transloading deliveries were also given Drivers’ Incentive

of P100/Trip. This was given to improve competitiveness of VMC’s affiliated transloading stations by matching what VMC’s competitor mills offered. Those with below five (5) tons load, where however, exempted from this incentive;

c) Farm Road Repair and Maintenance - This crop year, thirty two thousand four hundred fifty seven

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

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VMC’S ENGINEERING SERVICES

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

For Crop Year 2011-2012, the Division undertook the following major projects through its respective Departments: (1) Installation of steam and exhaust pipelines, turbine and generator of 8MW Shin Nippon Steam Turbine; (2) Construction of Electrostatic Precipitator Ash Handling; (3) Fabrication and installation of tie-beams and installation of mill cheek, feed rollers, top and bottom rollers, pipelines and Donnelly chutes for the upgrading of C-Mill No. 6; (4) Installation of Refinery Johnson Mud Filter and construction of its staging; (5) Fabrication and installation of Yoshimine Boiler No. 2 IDF Rotor No. 2; (6) Transfer of old Refinery Lime Tank from existing location to New Lime Bodega; (7) Cement concrete construction for Bagasse Shed flooring; (8) Installation of roofing at JTA No. 1 using UPCV long span corrugated roofing sheets; (9) Cement concrete construction from Engineering gate going to Malihao bridge; (10) Rehabilitation of Potable Waterline Network within VMC compound Phase 1; (11) Re-shelling of sixteen (16) mill rollers for factory; and (12) Upgrading of C-Mill. SALE OF SUGAR AND BY-PRODUCTS The Company’s major source of cash is from sales of raw sugar millshare, tolling fees from refinery operations, and sales of by-products like molasses. The major buyers of VMC’s sugar products (sugar & molasses) are the sugar traders. Raw sugar mill share refers to the Company’s share (30.5%) of raw sugar produced from canes supplied by the planters. The Company conducts a weekly sugar and molasses bidding in Bacolod City. As a service to its planters, VMC likewise includes the planters’ share in raw sugar and molasses in the bidding. Single price auction for both mill’s and planters’ share of the sugar is practiced by VMC, that is, the highest bid price will cover all sugar sold during the day. For Crop Year 2011-2012, VMC raw sugar volume was at 2,381,547.02 LKG with an average price of P1,284.35 totalling to P3.058B sales. Refined Sugar is also called the “white sugar” while the raw sugar is commonly called as the “brown sugar.” The raw sugar goes through a process of refining and the result is the refined sugar. VMC produces two different types of refined sugar – premium and standard. These varieties differ mainly in color, moisture content, ash content, and final use. The premium type, for example, is mainly for industrial users such as beverage manufacturers. The standard type is both for industrial and household consumption.

Molasses is the by-product of both raw sugar and refined sugar operations. The amount of molasses received by the Company at its raw sugar operations follows the same production sharing formula of raw sugar, i.e. 30.5% to VMC and the balance, to planters. The major buyers of VMC’s molasses are Asian Alcohol, Distilleria de Bago, International Pharmaceutical Inc. and Balayan Distillers. For Crop Year 2011-2012, VMC Molasses volume was at 40,833.93 with an average price of P3,133.67 totalling to 127.96M sales. VMC’s Breakdown of Revenues (Amounts in Thousand Pesos) August 31, 2012 August 31, 2011 August 31, 2010

To Date To Date To Date

REVENUES

Raw Sugar 3,057,389 3,069,440 1,925,950

Tolling Fee 1,371,477 818,057 971,684

Refined Sugar Sale - 5,380 716,521

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Molasses 127,960 257,070 264,774

Alcohol Sales 59,411 - -

Engineering 12,259 27,759 30,241

Others 35,511 39,911 38,516

4,664,007 4,217,617 3,947,686 Aging of Accounts Receivable As of August 31, 2012, below is the aging of accounts receivables for trade and other receivables:

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

EFFECTS OF EXISTING ENVIRONMENTAL LAWS & REGULATIONS AND THE COSTS AND EFFECTS OF COMPLIANCE WITH THE SAID ENVIRONMENTAL LAWS & REGULATIONS Aware of its corporate social responsibility to protect the environment, VMC had successfully installed its anti-pollution control equipment notwithstanding its dismal financial situation, not to mention being under Corporate Rehabilitation. VMC had already spent more than Two Hundred Million Pesos for its Anti-Pollution Control Equipments (APCE), plus Ten Million Pesos for their yearly maintenance. Thus, while it is paramount for VMC to religiously undertake its rehabilitation endeavors by dedicating the biggest bulk of its resources to paying its creditors pursuant to the schedules mandated by its Approved Rehabilitation Plan, it also humbly acknowledges the importance of a healthy environment in the community. VMC MANPOWER As of August 31, 2012, VMC has three (3) executive officers and one (1) creditor-appointed controller, with 2,326 workers who are being deployed by service providers or contractors.

ITEM 2 – PROPERTY The VMC main office, mill operations, and related facilities constitute the “heart” of the Company where the industrial complex in producing sugar and the residential community co-exist in a relatively harmonious environment. The total landholdings of the Company aggregate to 7,824,892 square meters. The main plant is situated in a 3,502,432 square meters of land within Victorias City. The Company landholdings include a 3,639,679 square meters land in Manapla, Negros Occidental, 664,520 square meters in Cadiz City, 1,000 square meters in Bacolod City, 159 square meters in Talisay City, 4,089 square meters in Iloilo and 13,013 square meters property in Antipolo, Rizal. However, practically all of the land holdings, including some plant and equipments of the Company are under a Mortgage Trust Indenture (MTI) with a fair market value of almost P2.0 Billion, as collateral to VMC loans in the past.

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The following are the major operational machineries and equipment owned by VMC and located within its compound in Victorias City, Negros Occidental: a) A & C Mills; b) Various Boilers; c) Boiling House equipment; d) Refinery; e) Powerhouse; and f) other Engineering equipment and machineries. These properties were mortgaged to VMC’s creditor banks. They are fully owned by VMC. The following are the VMC Subsidiaries’ respective principal properties, machineries and equipment: 1) VICTORIAS GOLF & COUNTRY CLUB, INC. (VGCCI) - Clubhouse, 18 hole Golf Course, Office Room, Locker & Shower Room, Canteen & Kitchen, Pavillon, Basement, Green Mowers 22”, Five Gang Fairway Mower. 2) VICTORIAS FOODS CORPORATION (VFC) - Cold Storage 2 compressor 9 cooling PL-EVAP with motor, Seamer Vacuum Automatic Shin-1 for can size 211 x 300, Fish Processing Plant Building, Coldroom/Cold Storage, Blast Freezer, Refrigeration Equipment System, Boiler House, Tank & equipment, Waste Water Treatment Plant. 3) VICTORIAS QUALITY PACKAGING CORPORATION (VQPC) - Warehouse, Canteen, Guardhouse, Extruder Machines (2 units), Circular Weaving Machines (28 units), Film Blowing Machines (2 units), High Sewing Machines (10 units), Bagging & Sealing Machines (3 units), Pelletizing Machine. 4) CANETOWN DEVELOPMENT CORPORATION (CDC) - Subdivision lots at Manapla and Vicotiras, Memorial Garden, Agricultural Land, VMC Engineering Complex Land Area. 5) VICTORIAS AGRICULTURAL LAND CORPORATION (VALCO) - Total of 3,058,178 square meters landholdings. Other VMC Properties: 1. 202.02 hectares of cane field located in Manapla and Cadiz City, Negros Occidental, which is being cultivated by MIGAN Corporation for five (5) crop years starting from September 1, 2011 up to August 31, 2016. MIGAN Corporation guarantees and pay to VMC, 20 Lkg. per hectare per year as the latter’s share for the cultivation at first picul milled basis in sugar quedan(s). 2. 113.5015 hectares of cane field located in Victorias City, Negros Occidental which is being cultivated by Migan Corporation for five (5) crop years or from CY 2009-2010 up to CY 2013-2014 as duly approved by VMC’s Executive Committee during its meeting on October 10, 2008. Migan guaranteed to pay VMC 26 Lkg. per hectare for one year, as the latter’s share for the arrangement, at first picul milled in sugar quedan. 3. A parcel of land located at Bacolod City, Negros Occidental covered by TCT No. 183131 (Lot No. 26-B) and TCT No. 183132 (Lot No. 26-A) is being utilized by Enting’s Restaurant for two years commencing from May 1, 2011 up to May 1, 2013. 4. 3.537 hectares of land located in Manapla, Negros Occidental is being utilized by VMC for its distillery. Principal properties located therein are its distillery plant, distillation machineries and equipments, and powerhouse. The distillery is currently on its testing operation that started on November 2011. Full operation is targeted to start on March 2013. 5. A part of a parcel of land located at Brgy. XVIII, Hda. Florencia, Vicmico Compound, Victorias City, Negros Occidental covered by TCT No. RT-105-75 is being utilized by Globe Telecom under the Contract for ten (10) years from January 16, 2006 up to January 16, 2016 at Php 15, 000.00 as monthly rental exclusive of VAT but inclusive of withholding tax. Further, another portion of the same parcel of land is also being utilized by KEYLARGO Commodity Trading under the Contract for three (3) years from February 1, 2012 up to January 31, 2015 at P100,000 as monthly rental inclusive of VAT.

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ITEM 3 – LEGAL PROCEEDINGS Cases filed for and against VMC are being handled by the Company’s In-house Counsels and by its External Counsels. The External Counsels are Hilado Hagad & Hilado Law Offices, Gabionza De Santos & Partners, Mirano Mirano Mirano & Mirano Law Offices, Hechanova Bugay & Vilchez, Quiason Makalintal Barot Torres Ibarra & Sison and Zambrano & Gruba Law Offices. ITEM 4 – SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Except for the matters taken up during the Annual Stockholders’ Meeting, there was no other matter submitted to a vote of security holders during the period covered by this report.

PART II – OPERATION AND FINANCIAL INFORMATION

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

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

The Company’s common shares are presently being traded at the Philippine Stock Exchange, Inc. (PSE)

after the PSE has lifted the 15-year trading suspension on May 21, 2012. The high and low sales prices for the shares of the Company for each quarter since it resumed trading are as follows:

2012 High Low 3rd Quarter - as of May 31, 2012 1.65 1.05 4th Quarter – as of Aug. 31, 2012 1.38 1.35

As of August 31, 2012, the last trading day of the Company’s shares for the fourth (4th) quarter of crop

year 2011-2012, the Company’s closing price is P 1.38 per share. The number of Stockholders on record and common shares outstanding as of August 31, 2012 stood at

5,588 and 2,024,616,452, respectively.

VMC has neither declared cash nor stock dividend for the three most recent crop years. Top 20 Stockholders as of August 31, 2012 Top Name Citizenship No. of Shares Percentage (%)

1 PCD Nominee Corporation Filipino/Other Alien 1,074,109,044 53.0524% 2 Tanduay Holdings, Inc. Filipino 170,133,159 8.4032% 3 Philippine National Bank Filipino 161,978,995 8.0004% 4 Australia and New Zealand Banking Group

Limited Australian 68,201,941 3.3686%

5 Global Business Bank, Inc. Filipino 67,458,871 3.3319% 6 Development Bank of the Philippines Filipino 63,156,612 3.1194% 7 Metropolitan Bank and Trust Company Filipino 56,925,724 2.8116% 8 Philippine Savings Bank Filipino 43,821,503 2.1644% 9 FEBTC TA #401-00012 Filipino 27,360,373 1.3513% 10 China Banking Corporation Filipino 19,392,096 0.9578% 11 Philippine Veterans Bank Filipino 18,268,442 0.9023%

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12 Terence Son Keng Po Filipino 14,500,344 0.7162% 13 Asiatrust Development Bank Filipino 12,735,166 0.6290% 14 AB Capital & Invest. Corp.-Trust & Invest Div. Filipino 11,712,681 0.5785% 15 North Negros Marketing Co., Inc. Filipino 10,173,459 0.5024% 16 Asset Pool A (SPV-AMC), Inc. Other Alien 7,619,377 0.3763% 17 Bank of the Philippine Islands Filipino 5,658,157 0.2794% 18 Bank of Commerce Filipino 5,219,555 0.2578% 19 FEBTC A/C #341-0048 Filipino 5,133,112 0.2535% 20 Liberty Trading/Navigation Co. Filipino 4,772,380 0.2357%

ITEM 6 – MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF ACTION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FINANCIAL CONDITION as of August 31, 2012 in comparison with August 31, 2011

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

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

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

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

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

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

7. Other Noncurrent Assets increased by P497 million (38%) mainly because surplus cash generated from

operations are earmarked as reserve for debt repayment during the year.

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

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9. Income tax payable moved down to P89 million from P101 million primarily due to higher income tax

payment for the first 3 quarters compared to last year.

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

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

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

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

RESULTS OF OPERATION 2012 vs. 2011 Revenues in 2012 reached P4.6 Billion, surpassing previous year’s revenues by 11%. The core business,

comprising of the raw and refined sugar operations, accounts for 98% of the total revenues. Breakdown of revenues is summarized as follows:

1. Raw sugar revenues slightly decreased by P12.9 million (0.42%) even though there is an increase in

volume sold by 48% or 772,699 LKG this year. Average selling price decreased by 33% from P 1,908.90 last year to P1,284.35 per LKG this year. Higher volume sold this year is attributed to available raw sugar inventory for sale coming from the ending inventory of the previous crop year.

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

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

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

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

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OTHER INCOME

Other income decreased by P156 million (63%) mainly due to the gain on early extinguishments of

liabilities recognized last year for P138 million (none this year). Also, foreign exchange gain – net recognized during the year decreased by P23 million (94%). COST OF GOODS SOLD AND MANUFACTURED

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

1. Sugar Operations is slightly higher by P5.50 million only (0.20%) mainly due to higher raw sugar volume sold and higher sugar tolled and withdrawn this year. Average raw sugar production cost per LKG decreased by 34% due to the decrease in cost of cane hauling this year. Last year, the management granted higher Temporary Volume Incentives in an effort to drive up the cane supply. Average refining cost per LKG decreased by 27% due to the increase in production by 68% and the decrease in energy consumption expenses attributed to improved process efficiencies and lesser power breakdown this year.

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

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

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

million (80%) compared to last year. NET INCOME

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

Operating Performance

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

2.06 1.83 2.22

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The slight reduction on milling tonnage this year by 0.5% against the previous year did not adversely

affect raw sugar production volume because of the improvement in sugar recovery (LKG/TC) at 2.06 as compared with previous year’s low LKG/TC at 1.83. Good weather condition, favorable to cane productivity and quality, resulted in higher output as well as good quality and matured canes.

There is a significant increase in refined sugar production this year by 37% compared to last year because major upgrading were undertaken on Refinery’s machineries to improve process performance and efficiencies. PLANS, COMMITMENTS, AND EVENTS THAT HAVE MATERIAL IMPACT ON THE ISSUER’S LIQUIDITY There are no: • Known trends or any known demands, commitments, events or uncertainties that will result in or that are

reasonably likely to result in the Company’s material liquidity problem; • Known trends, events or uncertainties that have had or that are reasonably expected to have a material

favorable or unfavorable impact on net sales or revenues or income from continuing operations; • Significant elements of income or loss that arose from continuing operations; and • Seasonal aspects that had material effect on the financial condition or results of operations.

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

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

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

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

operations. VICTORIAS MILLING CO., INC. SUBSIDIARIES VICTORIAS FOODS CORPORATION (a wholly-owned subsidiary VMC)

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

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

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

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

Sales for 2012 were registered at 1% lower than 2011 amounting to P4,032,120 and P4,054,191 for 2012 and 2011, respectively. The decline in sales is attributed to the decrease in revenue on sale of real estate held for sale with effect offset by an increase in rental income.

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

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

In July 16, 2012, Victorias Quality Packaging Company, Inc. ceased its operations due to serious business losses. Below are the last two (2) crop years’ analyses of financial condition and results of operation. CY 2010-2011 PRODUCTION PERFORMANCE

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

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

This year’s raw sugar production volume of 5.709 M Lkg is slightly higher by 1% versus the previous

year’s volume owing to the increase in volume of canes milled brought by better farm productivity thereby yielding more tonnage per hectare.

Refined sugar production for this year of 4.382 M LKG significantly dropped by 15% compared to previous year because of the delayed start-up of Refinery’s operation by seven (7) weeks considering the lower

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level of raw sugar supply for cut-in and slowdown of output during the second half of the crop year with the high refined sugar inventory level. FINANCIALS

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

Total cost of goods sold for this year at P3.160 Billion increased by 30% as compared to P2.427 Billion of the previous year mainly due to higher cane tonnage milled and additional incentives given to Planters to maximize VMC’s share of the available cane supply volume in the province amidst very stiff competition with other sugar mills.

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

The Company has continued to comply with its financial obligations on the Rehabilitation Plan in spite of various setbacks encountered. For this year, the Company paid its creditors the interest payment on restructured loans amounting to P265.0 M and P360.0 M for the principal repayment. CY 2009-2010 PRODUCTION PERFORMANCE

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

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

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

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

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

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

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TOP FIVE (5) KEY PERFORMANCE INDICATORS

Discussion of the Company’s and its majority owned subsidiaries’ key performance indicators: Top five (5) key performance indicators for the Parent Company.

Ratio August 31, 2012 August 31, 2011

Current Ratio 1.88 2.13

Debt Equity Ratio 3.95 9.27

Return on Equity (%) 33.42% 53%

Equity Ratio 0.20 0.10

Return on Assets (%) 6.83% 5.21%

Current Ratio: Total current assets divided by total current liabilities. This ratio is a rough indication of a company's ability to service its current obligations. Generally, the higher the current ratio is, the greater the "cushion" between current obligations and a company's ability to pay them.

Debt Equity Ratio: Total liabilities divided by total stockholders’ equity. This ratio expresses the

relationship between capital contributed by creditors and that contributed by owners. It expresses the degree of protection provided by the owners for the creditors. The higher the ratio, the greater the risk being assumed by creditors. A lower ratio generally indicates greater long-term financial safety.

Return on Equity: Net income divided by total stockholders’ equity. This ratio reveals how much profit a company earned in comparison to the total amount of shareholders equity found on the balance sheet. A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company’s return on equity compared to its industry, the better.

Equity Ratio: Total stockholder’s equity divided by total assets.

Return on Assets: Net income divided by average total assets (assets beginning of the year plus assets end of the year divided by two). Top five (5) key performance indicators for Subsidiaries: 1. Sales growth – measures the percentage change in sales over a designated period of time. Performance is

measured both in terms of amount and volume, where applicable. 2. Net income growth – measures the percentage change in net income over a designated period of time. 3. Net income rate – computed as percentage of net income to revenues - measures the operating efficiency

and success of maintaining satisfactory control of costs 4. Return on investment – the ratio of net income to total assets - measures the degree of efficiency in the use

of resources to generate net income 5. Current ratio – computed as current assets divided by current liabilities – measures the ability of the

business to meet its current obligations. To measure immediate liquidity, quick assets [cash, marketable securities, accounts receivables are divided by current liabilities.

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VICTORIAS GOLF & COUNTRY CLUB, INC. (VGCCI) 1. Sales Growth – 50% for 2012 and (9%) for 2011

Sales were composed of membership fees and golf service fees. Sales for 2012 were registered at 50% higher than 2011 amounting to P7,942,582 and P5,292,812 for 2012 and 2011, respectively. The growth in sales is attributed to the service fees received from golf course availed in bulk by various non-members or walk-in customers. 2. Net income growth – 154% for 2012 and (55%) for 2011

Net income for this year amounting to P3,555,201 reflects an increase of 154% compared with last year

amounting to P1,397,791. The growth in net income is primarily due to net effect of significant factors particularly with sales growth of 50% as reduced somehow by increase of total expense of 1% and decrease in other income of 26%. The increase of total expense is due to increase in representation expense incurred and nonrecurring charges for settlement payment of labor case. Moreover, the decrease in other income is attributed primarily to the decline in sports and recreation income. 3. Net income rate – 45% for 2012 and 26% for 2011

For this year, total sales of P7,942,582 generates a net income amounting to P3,555,201 compared to

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

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

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

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

Current assets for the year is P9,125,638 and current liabilities is P29,688,639. Last year’s current assets is

P5,878,610 and current liabilities is P30,321,375.

VICTORIAS FOODS CORPORATION (VFC) 1. Sales Growth – (9%) for 2012 and 7% for 2011

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

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

Net loss reported for this year amounting to (P4,395,984) shows an improvement of 35% compared with

previous year net loss amounting to (P6,730,322). The improvement on operations of VFC is primarily due to net effect of significant factors particularly with cost savings measures adopted by VFC that reduced selling expenses for 24% and reduced administrative expense of 2%. The cutback of total selling expenses is due to reduction of salaries and wages for marketing staff (two employees were involuntarily separated from the Company due to death) and lower provision for depreciation on transportation equipment used for selling. The cutback in general and administrative expense is primarily attributed for the reduction in transportation

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expense and office supplies incurred. Notwithstanding that, sales went down by 9% correspondingly the cost of goods manufactured and sold went down by 12% resulting to a gross margin improvement of 46%. Other income also went down by 32% merely due to discontinuance of lease for the storage and the Company received lower slaughtering fee and fewer scrap sales this year.

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

For this year, total sales of P30,958,735 generates a net loss amounting to (P4,395,984) compared to

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

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

Total assets for the year 2012 amounting to P76,323,552 incurred a net loss of (P4,395,984) while for the

year 2011 total assets for the year is P82,711,642 incurred a net loss of (P6,730,321).

5. Current Ratio – 20.14:1 for 2012 and 18.83:1 for 2011 Current assets for the year is P49,404,491 and current liabilities is P2,452,629. Last year’s current assets is

P49,306,527 and current liabilities is P2,617,927.

VICTORIAS QUALITY PACKAGING CORPORATION (VQPC) 1. Sales Growth – (28%) for 2012 and (7%) for 2011

Sales for 2012 were registered at 28% lower than 2011 amounting to P63,233,214 and P87,755,404 for

2012 and 2011, respectively. The decline in sales is attributed to lower sales and production of sacks sold to VMC.

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

For 2012, net loss incurred by VQPC amounting to (P7,038,921) shows very significant decline compared

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

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

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

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

Total assets for the year 2012 amounting to P5,737,589 incurred a net loss of (P7,038,921) while for the

year 2011 total assets for the year is P16,099,544 yields a net income of P887,848.

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

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

P5,331,615 and current liabilities is P20,303,147.

CANETOWN DEVELOPMENT CORPORATION (CDC) 1. Sales Growth – (1%) for 2012 and (6%) for 2011

Sales for 2012 were registered at 1% lower than 2011 amounting to P4,032,120 and P4,054,191 for 2012 and 2011, respectively. The decline in sales is attributed to falloff on sale of real estate held for sale (most of which were sale of memorial lot) offset by an increase in proceeds received from land rental. 2. Net income growth – (87%) for 2012 and 826% for 2011

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

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

For this year, total sales of P4,032,120 generates a net income amounting to P216,004 compared to

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

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

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

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

Current assets for the year is P39,607,679 and current liabilities is P58,417,644. Last year’s current assets is P39,957,701 and current liabilities is P59,133,920. VICTORIAS AGRICULTURAL LAND CORPORATION (VALCO) 1. Sales Growth – (33%) for 2012 and 20% for 2011

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

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

Net income for this year amounting to P509,145 reflects an increase of 48% compared with last year

amounting to P343,409. Although sales were registered lower than previous year, the growth in net income is primarily due to net effect of significant factors particularly with lower provision for depreciation and decrease

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in payment of taxes and licenses, professional fees, transportation and representation expense. As an addition, interest income from bank deposit increased by 15%.

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

For this year, total sales of P990,619 generates a net income amounting to P509,145 compared to

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

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

Total assets for the year 2012 amounting to P118,001,210 yield a net income of P509,145 while for the

year 2011 total assets for the year is P117,482,332 yield a net income of P343,409.

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

Current assets for the year is P27,047,315 and current liabilities is P1,873,077. Last year’s current assets is P25,948,964 and current liabilities is P1,863,344. ITEM 7 – FINANCIAL STATEMENTS

(Please see attached duly signed Company’s Consolidated Financial Statements as of August 31, 2012, together with the notarized Statement of Management’s Responsibility, which was prepared by Manabat Sanagustin & Co. (KPMG), the Company’s external auditor for crop year 2011-2012, as Exhibit “A“. ITEM 8 – CHANGES IN & DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There has been no disagreement with the external auditor on accounting, financial concerns, and

disclosures in the Financial Statements, which is attached hereto as Exhibit “A”. INFORMATION ON INDEPENDENT ACCOUNTANT

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

The aggregate fees billed for each of the last two (2) fiscal years for professional services rendered by the external auditor for the audit of the Company’s annual financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagement for those fiscal years were: CY 10-11 - P1,650,000.00 - net of VAT CY 11-12 – P1,870,000.00 - net of VAT

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Tax Fees

There has been no fee billed for the last two (2) fiscal years for professional services rendered by the external auditor for tax accounting, compliance, advice, planning and any other form of tax services. Audit Committee’s Approval Policies and Procedures for the Above Services

The Audit Committee’s approval policies and procedures for the above services are as follows: 1. The Audit committee invites bidders for the external audit engagement for preliminary evaluation. 2. The Committee then presents to the bidders, the corporate profiles of the companies to be covered by

the audit. 3. The Committee likewise presents its expectations on the deadline for the completion of the Audit and

filing of the audited financial statement. 4. The bidders are required to make its corporate profiles, list of experiences, and proposed audit

engagement fee. 5. The Committee evaluates the proposals and makes a choice. 6. The choice is announced during the Stockholder’s meeting.

PART III – CONTROL AND COMPENSATION INFORMATION

ITEM 9 – DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER

VMC BOARD OF DIRECTORS

During VMC’s Annual Stockholder’s Meeting held on February 7, 2012, the following were elected as members of the VMC Board of Directors to serve as such from February 7, 2012 and until their successors shall have been duly elected and qualified- 1. Wilson T. Young, age 55, Filipino, is currently the Chairman of the Board of Directors, Chairman of the

Executive Committee and a member of the Legal Committee of VMC, the Managing Director and Deputy Chief Executive Officer of Tanduay Holdings, Inc. and Chief Operating Officer of Tanduay Distillers, Inc. He likewise serves as a Director of the following: Absolut Chemicals, Inc., Asian Alcohol Corporation, Total Bulk Corporation, Flor De Caña Shipping, Inc., PAL Holdings, Inc. (Baguio Gold Holdings, Inc.), Air Philippines Corporation, B.K. Titans, Inc., Perf Restaurants, Inc., Norfil Foundation Incorporated and Eton Properties Phil., Inc. Currently, he is also the Chairman of Total Credit Cooperative, Vice Chairman of the UE Ramon Magsaysay Memorial Medical Center, a Trustee of the University of the East, PAL Foundation, Inc. and Mithiing Pangarap Foundation, Inc. and the Project Officer of Tan Yan Kee Foundation, Inc.

2. Jose M. Chan, Jr., age 55, Filipino, is the Vice Chair of VMC’s Board of Directors and a member of the following VMC Board Committees: Executive Committee, Nomination, Corporate Governance and Compliance Committee, Legal Committee and Budget, Finance, Risk Management, Remuneration and Compensation Committee. He is likewise currently the Senior Vice President – Deputy Head of Metropolitan Bank and Trust Company (Metrobank), which position he has maintained since 2002.

3. Abelardo E. Bugay, age 78, Filipino, is a professional Mechanical Engineer and a Director of the following: Victorias Foods Corporation, and Victorias Agricultural Land Corporation. He is also a current member of VMC’s Audit Committee. He was formerly the Chairman of Victorias Gas Corporation and Directors of Victorias Quality Packaging Corporation and Canetown Development Corporation. In the last five (5) years, he had been a President of Victorias Golf and Country Club, Inc. and the Miguel J. Ossorio

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Pension Foundation, Inc. and a Director of Canetown Development Corporation. He was VMC’s President until 31 August 2009 and has been connected with VMC for a total of thirty four (34) years now.

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

5. Cecilia C. Borromeo, age 53, Filipino, is the incumbent Treasurer of VMC. She is also the current

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

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

7. Enrique T. Chua, age 66, Filipino, a current member of VMC’s Audit Committee. He is connected with Fortune Tobacco Corporation since 1969. He is currently a member of the Board of Directors of A Plus Credit Corp. and Creditline Financing Company. In the past five (5) years, he was a Director of Tanduay Holdings, Inc. from 2006 until 2010 and served as a Board Member of the Federation of Filipino Chinese Chamber of Commerce and Industries, Inc. and the adviser of the University of Asia and the Pacific.

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

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9. Anna Rosario V. Paner, age 40, is VMC’s Chair of the Legal Committee. She is also a current member of

the following VMC Board Committees: Executive Committee, Nomination, Corporate Governance and Compliance Committee and Budget, Finance, Risk Management, Remuneration and Compensation Committee. She has been a private law practitioner since 1996 and is one of the founding partners of Paner Hosaka & Ypil Attorneys-at-Law. She currently chairs Victorias Foods Corporation and, for the past five (5) years, she has been connected with Philippine Opportunities for Growth, Income (SPV-AMC), Inc., Techbox International Inc. and Nota Bene as their Director.

10. Armando O. Samia, age 60, Filipino, is the Chair of VMC’s Nominations, Corporate Governance and Compliance Committee. He is also a current member of the following VMC Board Committees: Executive Committee, Legal Committee and Budget, Finance, Risk Management, Remuneration and Compensation Committee. For the past five (5) years, he was with the Development Bank of the Philippines as its Senior Executive Vice-President and Al-Amanah Islamic Investment Bank of the Philippines as the Chairman and Chief Executive Officer. In addition thereto, he was the Executive Vice President and Head of Corporate Banking (Head Office) Sector of DBP.

11. Michael G. Tan, age 46, is a current member of the following VMC Board Committees: Executive Committee and Budget, Finance, Risk Management, Remuneration and Compensation Committee. He is presently the Chief Operating Officer of Asia Brewery, Inc. and the President and Chief Operating Officer of LT Group, Inc. For the past five (5) years, he served as a Director of the following corporations: Abacus Distribution Systems Philippines, Inc., Allied Banking Corporation, Eton Properties, Inc., Philippine National Bank and PMFTC.

Corporate Officers

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

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

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

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

4. Cecilia C. Borromeo, Treasurer

5. Santiago T. Gabionza, Jr., age 54, Filipino, is a current member of the following VMC Board Committees: Executive Committee, Nomination, Corporate Governance and Compliance Committee and Legal Committee. He is one of the Founding Partners of the Law Firm of Gabionza De Santos & Partners and is presently VMC’s rehabilitation legal counsel. He is the Corporate Secretary of various corporations. He has been legal counsel and Rehabilitation Receiver in several rehabilitation cases. He was elected as VMC’s Corporate Secretary.

6. Eva A. Vicencio-Rodriguez, age 44, Filipino, a Master in Business Administration degree holder, is VMC’s duly elected Assistant Corporate Secretary and appointed Compliance and Information Officer. She is likewise the Head Consultant of VMC’s Legal and Administrative Services Department and the Corporate Secretary of the following: Victorias Foods Corporation, Victorias Quality Packaging Corporation and Canetown Development Corporation, where she likewise serves as a Director.

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Executive Officers of VMC

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

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

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

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

To the knowledge and/or information of the Corporation, the above elected members of the Board of Directors or Corporate Officers are not, presently or during the last (5) years, involved or have been involved in any legal proceedings affecting/involving themselves and/or their property before any court of law or administrative body in the Philippines or elsewhere and have not been convicted by final judgment of any offense. The said persons mentioned above are not related to each other in any way. There is no person who is not a corporate officer of the Company who is expected to make a significant contribution to the business. The Company, however, engages the services of consultants. As of August 31, 2012, the Company had 47 consultants and 1 under special contract. There were no transactions during the last two years or any proposed transactions, to which the Company was or is to be a party, in which any director or officers, any nominee for election as a director, any security holder or any member of the immediate family of any of the person mentioned had or is to have a direct or indirect material interest. COMPLIANCE WITH LEADING PRACTICES ON CORPORATE GOVERNANCE

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

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

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Deviation There is no deviation from the provisions of the Manual on the election of independent directors, considering that the composition of the Company’s Board of Directors is determined under its rehabilitation plan. ITEM 10 – EXECUTIVE COMPENSATION

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

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

Annual Compensation

Salary Bonus and Other Compensation

Year 2013 (projected)

2012 2011 2013 (projected)

2012 2011

Executive Officers’ Compensation 19,440,000 16,458,206 14,820,742 2,940,000 2,627,500 3,346,875 All other officers as a group unnamed There are no other executive officers apart from the President and CEO, the Chief

Finance Officer, the Vice-President for Manufacturing and the Creditor-Appointed-Controller.

Compensation of VMC Board of Directors

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

The Company entered into a Consultancy Contract with its President and Chief Executive Officer, Mr. Hubert D. Tubio, effective September 1, 2009. Mr. Tubio was engaged by VMC to exercise general supervision and management of VMC and to ensure financial health and attainment of financial targets.

Atty. Jerry T. Opinion was hired to be the Company’s Chief Finance Officer (CFO) effective November 1, 2009. The CFO’s over-all responsibility in the Company, are as follows: planning and budgeting, business control and performance reviews, financial accounting & recording.

Mr. Arcadio S. Lozada, Jr. was appointed as Vice-President for Manufacturing on August 1, 2010 to oversee the manufacturing operations and to ensure efficiency of the same.

Change in Control

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

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ITEM 11 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Record and Beneficial Owners and Management

The following are known to VMC to be directly or indirectly the record or beneficial owner of more than

five (5) percent of registrant’s voting securities (VMC has only one class of voting security, i.e. common shares) as of August 31, 2012:

TITLE of CLASS Name & Address of Record Owner and Relationship with Issuer

Citizenship Number of Shares Held

Percentage (%)

Common PCD Nominee Corporation – Stockholders (The Hongkong and Shanghai Banking Corporation owns 487,590,278 shares or 24.08% of the issuer’s total outstanding capital stock as of August 31, 2012)

Filipino/Other Alien

1,074,109,044 53.0524%

Common Tanduay Holdings, Inc. –Stockholder Filipino 170,133,159 8.4032% Common Philippine National Bank Makati Business Center,

Grd. Flr. Manila Bank Bldg., 6772 Ayala Ave., Makati City – Creditor

Filipino 161,978,995 8.0004%

Security Ownership of Management as of August 31, 2012

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

Manufacturing Filipino 2,182 0.000%

ITEM 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(1) Related Party Disclosures

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

Transactions between related parties are based on terms similar to those offered to non-related parties in

an economically comparable market, except for the non-interest bearing advances to its wholly owned subsidiary with no definite repayment terms.

Operating Lease Commitments The Group has leased out certain investment properties to a related party and to third parties under the

operating lease arrangements. The Group has determined that all significant risks and rewards of ownership of these spaces remain with the Group.

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Related Party Transactions

Identity of Related Parties The Parent Company’s related parties include an unconsolidated subsidiary and key management personnel. Significant Transactions with Related Parties a. Purchases of goods/production supplies/services (in thousands):

2012 2011 2010

Purchase of goods from:

VGCCI P - P - P -

 

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

2012 2011 2010 Advances to:

VGCCI P25,722 P26,198 P -

 

The Parent Company’s advances to an unconsolidated subsidiary do not have definite maturities. In 2011, the Parent Company recognized income from recovery of previously written-off advances to VGCCI amounting to P26.17 million.

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

 

2012 2011 2010 VGCCI

P - P - (P1,003)

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

The advances from unconsolidated subsidiary do not have definite maturities and are expected to be settled within one year from reporting date. Management believes that the carrying amounts of advances to and from subsidiaries approximate their respective fair values as they represent the expected cash flow should they be settled or

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realized at the reporting date.

d. Remuneration of Key Management Personnel

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

 

2012 2011 2010 Short-term employee benefits P14,788 P18,106 P10,161 Post-employment benefits - 315 362 P14,788 P15,487 P18,468

 e. Due to a Stockholder

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

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

(2) Information about parties that fall outside the definition of “related parties” under SFAs/IAS No. 24, but with whom the registrant or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may not be available from other, more clearly independent parties at an arm’s length basis.

No members of the VMC Board of Directors and Executive officers are related to each other up to the

fourth civil degrees by consanguinity or affinity. ITEM 13 – EXHIBITS

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

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

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

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

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3. Reported on May 4, 2012, the VMC Board of Directors during its regular meeting on May 4, 2012

approved the proposed amendments to the Alternative Rehabilitation Plan and Debt Restructuring Agreement (DRA) of VMC.

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

5. Reported on February 24, 2012, the additional information on the identity of the noteholders as well

as the nature of the transaction relative to the conversion of notes to equity pursuant to the Debt Restructuring Agreement of VMC.

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

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

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

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

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

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

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VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except When Otherwise Stated)

1. Reporting Entity and Status of Operations

Reporting Entity

Victorias Milling Company, Inc. (herein referred to as the “Parent Company” or “VMC”)

was organized and registered originally on May 7, 1919 with the Philippine Securities

and Exchange Commission (SEC) with an original corporate life of 50 years or until

May 7, 1969. The corporate life was extended for an additional period of 50 years or until

May 7, 2019. The primary purpose of the Parent Company is to operate mill and refinery

facilities for sugar and allied products, as well as engineering services. In November

2011, VMC started the production of distilled and denatured alcohol using molasses, a

by-product from its sugar milling operations.

The Parent Company and following subsidiaries and associate (collectively herein

referred to as the “Group”) were incorporated in the Philippines.

Nature of

Business

Percentage of Effective

Ownership

Direct Indirect

Victorias Foods Corporation (VFC) Food

Processing and

Canning 100 -

Victorias Agricultural Land

Corporation (VALCO)

Agricultural

Land Leasing

and Cultivation 100 -

Canetown Development

Corporation (CDC)

Real Estate

Development

and Selling 88 12

Victorias Golf and Country Club,

Inc. (VGCCI)

Non-profit Golf

Facilities 81 -

Victorias Quality Packaging

Company, Inc. (VQPC)

Manufacture of

Bags and

Packaging

Materials 55 -

Victorias Industrial Gases

Corporation (VIGASCO) Gas Dealership 30 -

In June 2012, the Board of Directors (BOD) of VQPC approved to cease VQPC‟s

operations effective July 2012. The Parent Company‟s percentages of ownership for the

above subsidiaries and associate are the same for 2012, 2011 and 2010.

The VMC‟s shares of stock are listed in the Philippine Stock Exchange (PSE) but the

trading of its shares is temporarily suspended in 1997 on the ground of alleged fraudulent

misrepresentation of material information in the Parent Company‟s financial statements

as well as in the continuing disclosure of VMC. Currently, VMC is under SEC

receivership. In 2012, the SEC and the PSE have lifted its order of suspension of the

trading of VMC‟s shares. Consequently, on May 21, 2012, the trading resumed.

- 2 -

The corporate office of VMC, its manufacturing plant and head office are in VICMICO

Compound, Victorias City, Negros Occidental.

VFC

VFC was registered and incorporated with the SEC on February 24, 1983 primarily to

operate factories and other manufacturing facilities for the processing, preservation and

packaging food products and selling the same at wholesale and retail. The corporate

office and production plant of VFC is located at VICMICO Compound, Victorias City,

Negros Occidental.

VALCO

VALCO was incorporated and registered with the SEC on June 30, 1987 primarily to

acquire and own agricultural and other real estate properties, by purchase, lease or

otherwise to improve and develop the same, and to plant thereon all kinds of farm

products. The registered address of VALCO is at VICMICO Compound, Victorias City,

Negros Occidental.

CDC

CDC was incorporated and registered with the SEC on February 19, 1974 primarily to

purchase, develop, lease, exchange and sell real estate. CDC is effectively a wholly-

owned subsidiary of the Parent Company through the 88% direct ownership and the 12%

indirect ownership through VALCO. The registered address of CDC is at VICMICO

Compound, Victorias City, Negros Occidental.

VGCCI

VGCCI is a non-profit corporation registered with the SEC on October 8, 1992 primarily

to engage exclusively in social, recreational and athletic activities on a non-profit basis

among its stockholders, the core of which will be the acquisition and maintenance of a

golf course and tennis courts, residential and other similar facilities.

The financial statements of VGCCI are currently undergoing audit and have not been

finalized. VGCCI‟s unaudited total assets and revenues are less than two percent (2%) of

the consolidated total assets and consolidated total revenues. Due to its immateriality, it

is not included in the consolidation pending the finalization of the audit of its financial

statements. Accordingly, the investment is carried in the consolidated financial

statements at cost and presented in the consolidated statements of financial position as

part of “Investments in Unconsolidated Subsidiary and in Associate” account (see Note

10).

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

Negros Occidental.

VQPC

VQPC was incorporated and registered with the SEC on May 14, 1990 primarily to

engage in the manufacture and sale of polyethylene bags, boxes, packages and special

packaging products. The registered address and production plant of VQPC is at

VICMICO Compound, Victorias City, Negros Occidental.

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

2012.

- 3 -

VQPC has accumulated deficit of P48.18 million, P44.86 million and P48.26 million and

has capital deficiency of P15.35 million, P8.31 million, and P9.19 million as of

August 31, 2012, 2011 and 2010, respectively. Due to this, the non-controlling interest

was already insufficient to absorb the share in the accumulated losses. Accordingly, all

the accumulated losses in the prior years were charged to the retained earnings

attributable to the equity holders of the Parent Company.

All subsequent profits generated by VQPC, if any, will be credited to the retained

earnings of the equity holders of the Parent Company until the non-controlling interest‟s

share of losses previously absorbed by the former has been recovered.

VIGASCO

VIGASCO, a 30%-owned associate, was incorporated and registered with the SEC on

November 19, 1992 primarily to engage in importing, exporting, buying and selling, at

wholesale or at retail, of gases, particularly oxygen, acetylene, hydrogen, liquefied

pertroleum gas and any types of gases.

Due to the capital deficiency of VIGASCO resulting from operating losses, the

investment is fully provided with allowance for impairment (see Note 10).

Going Concern Issue, Management‟s Assessment and Plan to Address

The consolidated financial statements of the Group have been prepared on a going

concern basis, which contemplates the realization of assets and the settlement of

liabilities in the normal course of business. As disclosed in Note 2 and 16, the Group is

still under rehabilitation and debt restructuring programs. The Group has net income of

P556 million in 2012, P400 million in 2011 and P310 million in 2010.

Due to the positive results of operations generated for 2012, 2011 and 2010 and for the

past four years and the conversion to equity of certain convertible notes by the Parent

Company, the Group has equity of P1.8 billion, net of deficit amounting to P968.3

million, as of August 31, 2012. Although the Group has been in compliance with the debt

restructuring program, its continued compliance is ultimately dependent on the

sustainability of the Group‟s profitable operations.

The consolidated financial statements do not include any adjustment relating to the

recoverability and classification of assets and the settlement of liabilities that may be

necessary should the Group be unable to continue under a going concern basis.

In its efforts to achieve continuing successful operations and effective implementation of

the provisions of the rehabilitation plan, the Parent Company has continuously focused

its corporate objectives, goals, strategies, and measures to attain sustainable financial

stability through, among others: (a) synchronization of the refined sugar and raw sugar

operations; (b) expansion of the boiling house to balance capacity with that of the A and

C mills; (c) enhancement of mill efficiency; (d) increase profitability by addressing cost

efficiency (which includes, among others, trimming down of corporate overtime

expenses, minimizing contracted labor/services, and sourcing out and maximizing use of

cheaper fuel substitutes instead of bunker fuel) and improving tolling fees; and

(e) ongoing program of rightsizing manpower.

Moreover, the Parent Company‟s management has undertaken the following action plans

to improve its financial position and its corporate governance structure:

1. Recapitalization and quasi-reorganization to reduce the deficit through reduction in

capital stock and application of appraisal increment as discussed in Note 17.

- 4 -

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

3. Conversion of debt into convertible notes and ultimately, conversion of certain

convertible notes to equity as disclosed in Note 16.

4. Improvement of cash flows.

As provided for in Section 13 of the Debt Restructuring Agreement (DRA), in the

event that VMC‟s net cash flows at the end of a crop year exceeds the projected net

cash flows for that particular crop year, VMC shall prepay in inverse order the

restructured loans without penalty equal to 75% of the incremental net cash flows

(defined as net income after tax plus depreciation and other non-cash charges), as

provided for in the Alternative Rehabilitation Plan (ARP).

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

SEC.

Effective December 16, 2002, the new BOD (which replaced the MANCOM)

consists of the following: three representatives from the existing stockholders, one

representative from the secured creditors, six representatives from the unsecured

creditors, and one strategic partner. Presently, the slot for the strategic partner is

occupied by the elected president. Further, the SEC issued an Order dated

January 27, 2003 appointing Atty. Luis Ma. G. Uranza as the Rehabilitation Receiver

to monitor, together with the new Board elected every year, the implementation of

the ARP.

Every year thereafter, new sets of Board of Directors and members of the different

Committees were elected and appointed, respectively, in accordance with the

provisions of the ARP and DRA.

2. Rehabilitation and Debt Restructuring Programs

Discussed below are the series of events leading to the finalization of the rehabilitation

and debt restructuring programs.

Application for Suspension of Payment to Creditors

On July 4, 1997, VMC filed with the SEC a Petition for the (a) Declaration of

Suspension of Payment to Creditors, (b) Approval of a Rehabilitation Plan, and

(c) Appointment of a MANCOM which was tasked to submit a feasible and viable

rehabilitation plan for VMC.

Rehabilitation plans and amendments thereto:

1. Rehabilitation Plan as of September 25, 1998, subject to the terms of the First

Addendum to the Rehabilitation Plan dated February 5, 1999 and of the Second

Addendum to the Rehabilitation Plan dated July 22, 1999, as approved by the SEC in

its orders dated August 17 and 19, 1999, respectively, (herein collectively referred to

as the “Original Rehabilitation Plan” or “ORP”).

- 5 -

The salient features of the ORP follow:

i. Reduction in the authorized capital stock of VMC from P2.7 billion consisting of

270 million shares of common stock at P10 par value per share to P495.958

million consisting of 170,432,189 shares of common stock at P2.91 par value per

share (see Note 17c.1);

ii. Fresh capital infusion of around P567 million through a public bidding which

was declared a failure for the reason that the deadline of submission of bids had

expired without any bid having been submitted;

iii. The stockholders shall have no pre-emptive right to the increase of P1.5 billion

shares of common stock or any shares to be issued to accommodate the

conversion of any interests earned on the convertible notes to common shares;

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

retirees;

v. Implementation of a business strategy for operating improvements, which

include manpower reduction, upgrading of certain mills and other equipment,

and divestment of non-profitable business units;

vi. Sale of non-strategic assets and subsidiaries;

vii. Restructuring of loans from banks; and

viii. Debt-to-equity conversion.

2. Alternative Rehabilitation Plan (ARP) as of May 11, 2000, as approved by the SEC

in its Order dated November 29, 2000.

In view of the failure of the public bidding to raise fresh capital of around P567

million, the MANCOM, as mandated by ORP, submitted an ARP on May 11, 2000

which was approved by the SEC on November 29, 2000.

The basic features of the ARP follow:

i. Increase in the authorized capital stock from P495.958 million consisting of

495.958 million shares of common stock at P1 par value per share to P4.605

billion consisting of 4.605 billion shares of common stock at P1 par value

per share (see Note 17c.3). The new capital stock of P4.605 billion will be

allocated among the initial paid-in capital of P1.596 billion, conversion of a

portion of unsecured loan into convertible notes of VMC in the amount of

P2.4 billion, and contingent Refined Sugar Invoice/Delivery Orders

(RSDOs) of P609 million representing the principal amounts of alleged loans

obtained;

ii. Conversion into equity of all unpaid interest and part of the principal of the

unsecured loan amounting to P1.1 billion;

iii. Conversion of a portion of unsecured loan into convertible notes amounting

to P2.4 billion;

- 6 -

iv. Restructuring of the secured and unsecured loans amounting to P4.4 billion

over a period of fifteen years, including a 3-year grace period as to the

principal, at 10% annual interest for peso loans and 6% for dollar loans; and,

v. Call for an acceptable joint venture partner to provide additional cash of

approximately P300 million, payable in three years with annual interest of

1.5% and an option to manage VMC during the three-year life of the loan.

All other terms and conditions of the ORP which have been previously approved by

the SEC remain. The 15-year DRA took effect on September 1, 2003 (see Note 16).

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

and DRA.

Actions by Former Management and Others

VMC‟s former management, in its comments and replies filed with the SEC, manifests

its strong opposition to the ARP. Also, three creditor banks, on various dates, filed their

opposition to the ARP.

In the Order dated February 28, 2001, the SEC denied the appeal of VMC‟s former

management and accordingly, the MANCOM, through its appointed Chief Operating

Officer, took over the management of VMC on March 7, 2001.

On August 23, 2001, the SEC came out with an Omnibus Order affirming, among others,

the SEC Orders dated November 29, 2000 and February 28, 2001 and directed the

MANCOM to continue with the implementation of the MANCOM‟s ARP. The SEC

Orders were affirmed by the Court of Appeals (CA) on February 11, 2002. On July 3,

2002, VMC‟s former management filed a petition for review of the said decision of the

CA with the Supreme Court where it is presently pending resolution.

On May 5, 2004, VMC filed a manifestation informing the Supreme Court that VMC‟s

former management participated and voted their shares in the election of the members of

the VMC‟s Board of Directors for the year 2004 during VMC‟s Annual Stockholders‟

Meeting on April 30, 2004, which election was in accordance with the ARP, the same

ARP which has been assailed by VMC‟s former management. On May 31, 2004, the

Supreme Court noted the said manifestation of VMC.

In a Resolution dated April 27, 2005, the Supreme Court duly noted the Manifestation

dated April 11, 2005 filed by VMC informing the Court that at the Annual Stockholders‟

Meeting of VMC held on April 1, 2005, the members of the Board of Directors of VMC

for 2005 were duly elected pursuant to the ARP as approved by the SEC.

Moreover, in the Manifestation filed by VMC on July 26, 2005, it informed the Supreme

Court that one of the bank creditors has already withdrawn its opposition to VMC‟s ARP

and has signed the DRA as well as other documents relative thereto.

In its separate Manifestations dated January 25, 2006 and May 15, 2006, VMC informed

the Supreme Court of unsecured creditors‟ participation in the ARP as well as their

execution of the DRA and other documents relative thereto.

In the Resolution dated June 5, 2006, the Supreme Court noted the foregoing

manifestations by VMC.

- 7 -

In its Resolution dated May 28, 2010, the Supreme Court denied the petition filed by Mr.

Mañalac, et al. for failure to show any reversible error in the challenged decision and

resolution as to warrant the exercise of its discretionary appellate jurisdiction. With the

denial of the petition, there is no more legal impediment in the continued implementation

of the ARP as approved by the SEC.

3. Basis of Preparation

Statement of Compliance

The consolidated financial statements of the Group as at and for the years ended

August 31, 2012, 2011 and 2010 have been prepared in accordance with Philippine

Financial Reporting Standards (PFRSs).

The consolidated financial statements of the Parent Company as at and for the year ended

August 31, 2012 were approved and authorized for issue by the Board of Directors

(BOD) on December 14, 2012.

Basis of Measurement

The consolidated financial statements have been prepared on the historical cost basis

except for property, plant and equipment which are carried at revalued amounts and

investment properties which are carried at fair values.

Functional and Presentation Currency

These consolidated financial statements are presented in Philippine peso, which is the

Group‟s functional currency. All financial information in Philippine peso has been

rounded off to the nearest thousands, except when otherwise stated.

Use of Estimates and Judgments

The preparation of the consolidated financial statements in conformity with PFRSs

requires management to make judgments, estimates and assumptions that affect the

application of policies and reported amounts of assets, liabilities, income and expenses.

Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to

accounting estimates are recognized in the period in which the estimate is revised or in

any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical

judgments in applying accounting policies that have the most significant effect on the

amount recognized in the consolidated financial statements is discussed in Note 5.

4. Summary of Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periods

presented in these consolidated financial statements.

Adoption of New or Revised Standards, Amendments and Improvements to Standards

and Interpretations

The Financial Reporting Standards Council approved the adoption of revised standards,

amendments and improvements to standards, and interpretations as part of PFRSs.

- 8 -

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

Adopted as of September 1, 2011

Revised PAS 24, Related Party Disclosures (2009), amends the definition of a

related party and modifies certain related party disclosure requirements for

government-related entities. The revised standard is effective for annual periods

beginning on or after January 1, 2011.

The adoption of the above revised standard did not have any material impact on the

consolidated financial statements.

Prepayments of a Minimum Funding Requirement (Amendments to Philippine

Interpretation IFRIC - 14: PAS 19 - The Limit on a Defined Benefit Asset, Minimum

Funding Requirements and their Interaction). These amendments remove unintended

consequences arising from the treatment of prepayments where there is a minimum

funding requirement and result in prepayments of contributions in certain

circumstances being recognized as an asset rather than an expense. The amendments

are effective for annual periods beginning on or after January 1, 2011.

The adoption of the above amendment did not have any material impact on the

consolidated financial statements.

Improvements to PFRSs 2010 contain 11 amendments to six standards and to one

interpretation. The amendments are generally effective for annual periods beginning

on or after January 1, 2011. The following are the said improvements or amendments

to PFRSs, none of which has a significant effect on the consolidated financial

statements of the Group:

PAS 27, Consolidated and Separate Financial Statements. The amendments

clarify that the consequential amendments to PAS 21 The Effects of Changes in

Foreign Exchange Rates, PAS 28 Investments in Associates and PAS 31 Interests

in Joint Ventures resulting from PAS 27 (2008) should be applied prospectively,

with the exception of amendments resulting from renumbering. The amendments

are effective for annual periods beginning on or after July 1, 2010.

PFRS 7, Financial Instruments: Disclosures. The amendments add an explicit

statement that qualitative disclosure should be made in the context of the

quantitative disclosures to better enable users to evaluate an entity‟s exposure to

risks arising from financial instruments. In addition, the International Accounting

Standards Board (IASB) amended and removed existing disclosure requirements.

The amendments are effective for annual periods beginning on or after January 1,

2011.

PAS 1, Presentation of Financial Statements. The amendments clarify that

disaggregation of changes in each component of equity arising from transactions

recognized in other comprehensive income is also required to be presented, but

may be presented either in the statement of changes in equity or in the notes.

The amendments are effective for annual periods beginning on or after January 1,

2011.

PAS 34, Interim Financial Reporting. The amendments add examples to the list

of events or transactions that require disclosure under PAS 34 and remove

references to materiality in PAS 34 that describes other minimum disclosures.

The amendments are effective for annual periods beginning on or after January 1,

2011.

- 9 -

New Standards, Amendments and Improvements to Standard and Interpretation Not Yet

Adopted

A number of new standards, amendments and improvements to standards and

interpretations are effective for annual periods beginning after January 1, 2011, and have

not been applied in preparing these consolidated financial statements. None of these is

expected to have a significant effect on the consolidated financial statements of the

Group, except for PFRS 9, Financial Instruments, which becomes mandatory for the

Group‟s 2015 consolidated financial statements and could change the classification and

measurement of financial assets. The Group does not plan to adopt this standard early

and the extent of the impact has not been determined.

The Group will adopt the following new standards, amendments and improvements to

standards and interpretations in the respective effective dates:

To be Adopted on September 1, 2012

Disclosures - Transfers of Financial Assets (Amendments to PFRS 7), require

additional disclosures about transfers of financial assets. The amendments require

disclosure of information that enables users of financial statements to understand the

relationship between transferred financial assets that are not derecognized in their

entirety and the associated liabilities; and to evaluate the nature of, and risks

associated with, the entity‟s continuing involvement in derecognized financial assets.

Entities are required to apply the amendments for annual periods beginning on or

after July 1, 2011. Earlier application is permitted. Entities are not required to

provide the disclosures for any period that begins prior to July 1, 2011.

Deferred Tax: Recovery of Underlying Assets (Amendments to PAS 12) introduces

an exception to the current measurement principles of deferred tax assets and

liabilities arising from investment property measured using the fair value model in

accordance with PAS 40, Investment Property. The exception also applies to

investment properties acquired in a business combination accounted for in

accordance with PFRS 3, Business Combinations provided the acquirer subsequently

measure these assets applying the fair value model. The amendments integrated the

guidance of Philippine Interpretation SIC-21, Income Taxes - Recovery of Revalued

Non-Depreciable Assets into PAS 12, Income Taxes, and as a result Philippine

Interpretation SIC-21 has been withdrawn. The effective date of the amendments is

for periods beginning on or after January 1, 2012 and is applied retrospectively. Early

application is permitted.

To be Adopted on September 1, 2013

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

amendments:

require that an entity present separately the items of other comprehensive income

that would be reclassified to profit or loss in the future if certain conditions are

met from those that would never be reclassified to profit or loss;

do not change the existing option to present profit or loss and other

comprehensive income in two statements; and

change the title of the statement of comprehensive income to the statement of

profit or loss and other comprehensive income. However, an entity is still

allowed to use other titles.

- 10 -

The amendments do not address which items are presented in other comprehensive

income or which items need to be reclassified. The requirements of other PFRSs

continue to apply in this regard.

PFRS 10, Consolidated Financial Statements

PFRS 10 introduces a new approach to determining which investees should be

consolidated and provides a single model to be applied in the control analysis for all

investees.

An investor controls an investee when:

it is exposed or has rights to variable returns from its involvement with that

investee;

it has the ability to affect those returns through its power over that investee; and

there is a link between power and returns.

Control is re-assessed as facts and circumstances change.

PFRS 10 supersedes PAS 27 (2008) and Philippine Interpretation SIC-12

Consolidation - Special Purpose Entities.

PFRS 12, Disclosure of Interests in Other Entities

PFRS 12 contains the disclosure requirements for entities that have interests in

subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates

and/or unconsolidated structured entities, aiming to provide information to enable

users to evaluate:

the nature of, and risks associated with, an entity‟s interests in other entities; and

the effects of those interests on the entity‟s financial position, financial

performance and cash flows.

PFRS 13, Fair Value Measurement

PFRS 13 replaces the fair value measurement guidance contained in individual

PFRSs with a single source of fair value measurement guidance. It defines fair value,

establishes a framework for measuring fair value and sets out disclosure requirements

for fair value measurements. It explains how to measure fair value when it is required

or permitted by other PFRSs. It does not introduce new requirements to measure

assets or liabilities at fair value, nor does it eliminate the practicability exceptions to

fair value measurements that currently exist in certain standards.

PAS 19, Employee Benefits (Amended 2011)

The amended PAS 19 includes the following requirements:

actuarial gains and losses are recognized immediately in other comprehensive

income; this change will remove the corridor method and eliminate the ability for

entities to recognize all changes in the defined benefit obligation and in plan

assets in profit or loss, which is currently allowed under PAS 19; and

expected return on plan assets recognized in profit or loss is calculated based on

the rate used to discount the defined benefit obligation.

- 11 -

PAS 27, Separate Financial Statements (2011)

PAS 27 (2011) supersedes PAS 27 (2008). PAS 27 (2011) carries forward the

existing accounting and disclosure requirements for separate financial statements,

with some minor clarifications.

To be Adopted on September 1, 2015

PFRS 9, Financial Instruments

Standard Issued in November 2009 [PFRS 9 (2009)]

PFRS 9 (2009) is the first standard issued as part of a wider project to replace

PAS 39. PFRS 9 (2009) retains but simplifies the mixed measurement model and

establishes two primary measurement categories for financial assets: amortized cost

and fair value. The basis of classification depends on the entity‟s business model and

the contractual cash flow characteristics of the financial asset. The guidance in

PAS 39 on impairment of financial assets and hedge accounting continues to apply.

Standard Issued in October 2010 [PFRS 9 (2010)]

PFRS 9 (2010) adds the requirements related to the classification and measurement

of financial liabilities, and derecognition of financial assets and liabilities to the

version issued in November 2009.

It also includes those paragraphs of PAS 39 dealing with how to measure fair value

and accounting for derivatives embedded in a contract that contains a host that is not

a financial asset, as well as the requirements of Philippine Interpretation IFRIC 9,

Reassessment of Embedded Derivatives.

Further deferral of the local implementation of Philippine Interpretation IFRIC 15

Agreements for the Construction of Real Estate

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate,

applies to the accounting for revenue and associated expenses by entities that

undertake the construction of real estate directly or through subcontractors. It

provides guidance on the recognition of revenue among real estate developers for

sales of units, such as apartments or houses, „off plan‟; i.e., before construction is

completed. It also provides guidance on how to determine whether an agreement for

the construction of real estate is within the scope of PAS 11, Construction Contracts,

or PAS 18, Revenue, and the timing of revenue recognition.

Under the prevailing circumstances, the adoption of the above new standards,

amendments and improvements to standards and interpretations is not expected to have

any material effect on the Group‟s consolidated financial statements.

The accounting policies set out below have been applied consistently to all periods

presented in these consolidated financial statements.

- 12 -

Principles of Consolidation

The consolidated financial statements include the accounts of the Parent Company, as

well as those of its subsidiaries enumerated in Note 1 to the consolidated financial

statements.

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries

are included in the consolidated financial statements from the date that control

commences until the date that control ceases. The accounting policies of subsidiaries

have been changed when necessary to align them with the policies adopted by the Group.

All significant intercompany balances and transactions have been eliminated in the

consolidated financial statements.

Control is the power to govern the financial and operating policies of an entity so as to

obtain benefits from its activities. Control is presumed to exist when a parent company

owns, directly or indirectly through its subsidiaries, more than half of the voting power of

an entity unless, in exceptional circumstances, it can be clearly demonstrated that such

ownership does not constitute control.

The consolidated financial statements are prepared using uniform accounting policies for

like transactions and other events in similar circumstances.

Investments in Subsidiaries and Associate

A subsidiary is an entity that is controlled by a company while an associate is an entity in

which a company has significant influence, but no control, over the financial and

operating policies.

Control is the power to govern the financial and operating policies of an entity so as to

obtain benefits from its activities. Control is presumed to exist when a parent company

owns, directly or indirectly through its subsidiaries, more than half of the voting power of

an entity unless, in exceptional circumstances, it can be clearly demonstrated that such

ownership does not constitute control.

Significant influence is the power to participate in the financial and operating policy

decisions of the investee but is not control or joint control over those policies. It is

presumed to exist when another entity holds between 20 to 50 percent of the voting

power of an entity.

Investments in subsidiaries and in associate are recognized at cost in the Group‟s

consolidated financial statements, less any impairment loss. If there is objective evidence

that the investments in subsidiaries will not be recovered, an impairment loss is provided.

Impairment loss is measured as the difference between the carrying amount of the

investment and the present value of the estimated cash flows discounted at the current

market rate of return for similar financial assets. The amount of the impairment loss is

recognized in the profit or loss.

- 13 -

Non-controlling Interests

Non-controlling interest represents the portion of profit or loss and the net assets not held

by the Group and are presented separately in the consolidated statements of

comprehensive income and within equity in the consolidated statements of financial

position, separately from Parent Company‟s equity, if positive. However, if losses

applicable to the non-controlling interests exceeded the non-controlling interest in the

subsidiary‟s equity, the excess, and any further losses applicable to the non-controlling

interests, are allocated against the majority interest, except to the extent that the non-

controlling interest has a binding obligation and is able to make an additional investment

to cover the losses. If the subsidiary subsequently reports profits, such profits are

allocated to the majority interest until the non-controlling interest‟s share of losses

previously absorbed by the majority has been recovered.

VQPC, the only partially owned subsidiary that is included in the consolidation, has

accumulated deficit of P48.18 million, P44.86 million, and P48.26 million and has capital

deficiency of P15.35 million, P8.31 million, and P9.19 million as of

August 31, 2012, 2011 and 2010, respectively. Due to this, the non-controlling interest

was already insufficient to absorb the share in the accumulated losses. Accordingly, all

the accumulated losses in the prior years were charged to the retained earnings

attributable to the equity holders of the Parent Company. All subsequent profits

generated by VQPC, if any, will be credited to the retained earnings of the equity holders

of the Parent Company until the non-controlling interest‟s share of losses previously

absorbed by the former has been recovered.

Segment Reporting

Operating segments provide services that are subject to risks and returns that are different

from those of other operating segments. The Group‟s businesses are operated and

organized according to the nature of business provided, with each segment representing a

strategic business unit.

Operating results of the Group‟s operating segments are reviewed by the BOD, the chief

operating decision maker (CODM) of the Group, to make decisions about resources to be

allocated to each segment and assess its performance, and for which discrete financial

information is available. The business units and their corresponding principal activities

are as follows:

Sugar Milling

Revenue from sugar milling comes from sales of raw sugar and molasses (mill share),

sale of refined sugar, and tolling fees. For its raw sugar and molasses operations, VMC

operates a raw sugar mill with a daily capacity of 15,000 metric tons. Cane supply is

sourced from both district and non-district planters who have milling contracts with

VMC. The production sharing agreement is 69.5% for planters and 30.5% for VMC.

VMC also operates a refinery plant with a daily capacity of 25,000 Lkg (1 Lkg = 50

kilograms). To ensure maximum utilization of the refinery, VMC also provides toll

refinery services to traders and planters for their raw sugar milled by other sugar centrals.

Food Processing

This segment is involved primarily in processing canned sardines and bangus in different

variants such as tomato-based and chili-based, among others. In December 2002 and

January 2003, this segment introduced the luncheon meat and lechon paksiw product

lines, respectively. Moreover, in May 2003, this segment re-operated its slaughterhouse

operations which had been closed for years.

- 14 -

Real Estate

This segment is involved in the development and sale of subdivision and memorial lots.

Among its projects are Phases I to III of Canetown Subdivision and the St. Joseph

Memorial Garden which are both located in Victorias City. These projects were initially

intended to provide for the housing and personal needs of the officers and employees of

the Group. In recent years, however, certain lots had also been made available to the

general public.

Leasing

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

Engineering Operations

The engineering services are divided into two business units, namely construction and

engineering works. The construction division handles construction projects, road

improvements, and structural works for VMC plant operations, fabrication, and

production of concrete product; and manages the operations of trucks and heavy

equipment, among others. Since crop year 1997-1998, the construction division has

limited its activities to servicing only the requirements of the VMC‟s sugar operations.

On the other hand, the engineering works division operates two engineering shops:

(a) foundry shop, which produces metal castings; and (b) machine shop, which handles

mechanical works / machining jobs.

Distillery Operations

The division operates an alcohol production with an actual daily capacity of 25,000 liters

and with molasses as the primary raw material. Molasses is sourced from sugar

operations which produces it as a by-product. As of end of reporting date, the division

has still one customer which is an ethyl alcohol manufacturer.

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

Revenue Recognition

Revenue is recognized to the extent that it is probable that economic benefits will flow to

the Group and the revenue can be reliably measured. Revenue is measured at the fair

value of the consideration received or receivable, net of trade discounts and volume

rebates, and represents amounts receivable for goods and services provided in the normal

course of business. The following specific recognition criteria must also be met before

revenue is recognized:

Sales of Raw and Refined Sugar, Molasses and Alcohol

Revenue is recognized upon invoicing which coincides with endorsement and

transfer of quedans and molasses warehouse receipts, respectively, when the

customer has accepted the products, and collectibility of the related receivables is

reasonably assured.

Tolling Revenues

Revenue is recognized when the tolling services have been rendered based on the

tolling agreement.

Sale of Alcohol

Revenue is recognized upon invoicing which coincides with the delivery of the

alcohol.

Engineering Contracts

Revenue is recognized based on the agreed progress billings, which normally

correspond to the progress of the work, or upon completion of the work.

- 15 -

Interest Income

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

asset.

Rental Income

Rental income is recognized on a straight-line basis over the lease term for non-

cancellable leases and the terms of the lease for cancellable leases.

Other Income

Other income such as income from scrap sales, gains from disposal, among others, is

recorded when earned.

Cost and Expense Recognition

Costs and expenses are recognized in profit or loss upon utilization of the service or at

the date they are incurred. Borrowing costs not capitalized are charged to income in the

period in which they are incurred using the effective interest rate method.

Financial Assets

The Group recognizes a financial asset in the consolidated statements of financial

position when it becomes a party to the contractual provisions of the instrument. The

Group‟s financial assets are categorized under loans and receivables.

Loans and Receivables

Loans and receivable are financial assets with fixed or determinable payments that are

not quoted in an active market. They are not entered into with the intention of immediate

or short-term resale or are not classified as held for trading, held-to-maturity (HTM)

investments, available-for-sale (AFS) financial assets or financial assets at fair value

through profit or loss (FVPL). These are initially recognized at fair value and

subsequently carried at amortized cost using the effective interest rate method, less

allowance for impairment loss. These are included as current assets if maturity is within

12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Group‟s financial assets categorized under loans and receivables include cash and

cash equivalents and receivables [presented in the consolidated statements of financial

position as “Trade and other current receivables” (excluding advances to suppliers) and

“Advances to an unconsolidated subsidiary” accounts, and as part of “Other noncurrent

assets” account representing the cash and cash equivalents reserve for debts repayment].

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and other short-term highly

liquid investments with original maturities of three months or less, which are subject to

insignificant risk of change in value and are used by the Group in management of its

short-term commitments.

Receivables

Receivables are non-derivative financial assets with fixed or determinable payments and

are not quoted in an active market. They arise when the Group provides money, goods or

services directly to a debtor with no intention of trading the receivables. These are

included in current assets if maturity is within 12 months from the reporting date.

Otherwise, these are classified as noncurrent assets.

- 16 -

Receivables are initially recognized at fair value, representing the original invoice

amount. Receivables are subsequently measured at amortized cost using the effective

interest rate method, less impairment losses, if any. Any change in their value is

recognized in profit or loss. Impairment loss is provided when there is objective

evidence that the Group will not be able to collect all amounts due to it in accordance

with the original terms of the receivables. The amount of the impairment loss is

determined as the difference between the assets‟ carrying amount and the present value

of estimated cash flows.

Impairment of Financial Assets

The Group assesses at each reporting date whether there is objective evidence that a

financial asset maybe impaired. A financial assets is deemed to be impaired if there is

objective evidence of impairment as a result of one or more events that has occurred after

the initial recognition of the asset and that loss event has an impact on the estimated

future cash flows of the financial asset that can be reliably estimated.

Financial Assets at Amortized Cost

If there is objective evidence that an impairment loss on loans and receivables carried at

amortized cost has been incurred, the amount of the loss is measured as the difference

between the asset‟s carrying amount and present value of estimated future cash flows

(excluding future credit losses that have not been incurred) discounted at the financial

asset‟s original effective interest rate (i.e. the effective interest rate computed at initial

recognition). The carrying amount of the asset shall be reduced either directly or through

use of an allowance account. The amount of the loss shall be recognized in profit or loss.

The Group first assesses whether objective evidence of impairment exists individually for

financial assets that are individually significant, and individually or collectively for

financial assets that are not individually significant. If it is determined that no objective

evidence of impairment exists for an individually assessed financial asset, whether

significant or not, the asset is included in a group of financial assets with similar credit

risk characteristics and the group of financial assets is collectively assessed for

impairment. Assets that are individually assessed for impairment and for which an

impairment loss is or continues to be recognized are not included in a collective

assessment of impairment.

If, in a business period, the amount of the impairment loss decreases and the decrease can

be related objectively to an event occurring after the impairment was recognized, the

previously recognized impairment loss is reversed. Any subsequent reversal of an

impairment loss is recognized in profit or loss, to the extent that the carrying value of the

asset does not exceed its amortized cost at the reversal date.

Financial Assets Carried at Cost

If there is objective evidence that an impairment loss on an unquoted equity instrument

that is not carried at fair value because its fair value cannot be reliably measured, or on a

derivative asset that is linked to and must be settled by delivery of such an unquoted

equity instrument has been incurred, the amount of the loss is measured as the difference

between the asset‟s carrying amount and the present value of estimated future cash flows

discounted at the current market rate of return for a similar financial asset.

- 17 -

Derecognition

A financial asset (or, where applicable a part of a financial asset or part of a group of

similar financial assets) is derecognized when:

the rights to receive cash flows from the asset have expired;

the Group retains the right to receive cash flows from the asset, but has assumed an

obligation to pay them in full without material delay to a third party under a “pass-

through” arrangement; or

the Group has transferred its rights to receive cash flows from the asset and either

(a) has transferred substantially all the risks and rewards of the asset, or (b) has

neither transferred nor retained substantially all the risks and rewards of the asset,

but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has

neither transferred nor retained substantially all the risks and rewards of the asset nor

transferred control of the asset, the asset is recognized to the extent of the Group‟s

continuing involvement in the asset. Continuing involvement that takes the form of a

guarantee over the transferred asset is measured at the lower of the original carrying

amount of the asset and the maximum amount of the consideration that the Group could

be required to repay.

Financial Liabilities

These are recognized when the Group becomes a party to the contractual agreements of

the instrument, normally in the period in which the related money, goods or services are

received or when a legally enforceable claim against the Group is established. The

Group‟s financial liabilities are categorized as other financial liabilities.

Other Financial Liabilities

These include non-derivative liabilities that are not carried at fair value through profit or

loss (FVPL) and are recognized initially at fair value and carried at amortized cost with

amortization determined using the effective interest rate method.

The Group‟s financial liabilities categorized under other financial liabilities include long-

term debts and other financial liabilities (presented in the consolidated statements of

financial position as “Trade and other current payables” and “Due to a stockholder”

accounts).

Long-term debts

Long-term debts include interest-bearing bank loans and convertible notes which are

initially recognized at the fair value of the consideration received less directly attributable

transaction costs. After initial recognition, these are subsequently measured at amortized

cost using the effective interest rate method. Gains and losses are in profit or loss when

the liabilities are derecognized as well as through the amortization process.

Derecognition

A financial liability is derecognized when the obligation under the liability is discharged,

cancelled or has expired.

Where an existing financial liability is replaced by another from the same lender on

substantially different terms, or terms of an existing liability are substantially modified,

such an exchange or modification is treated as a derecognition of the original liability and

the recognition of a new liability and the difference in the respective carrying amounts is

recognized in profit or loss.

- 18 -

Offsetting Financial Assets and Liabilities

Financial assets and financial liabilities are offset and reported at net amount in the

consolidated statements of financial position if, and only if, there is a currently

enforceable legal right to offset the recognized amounts and there is intention to settle on

a net basis, or realize the asset and settle the liability simultaneously. This is not

generally the case with master netting agreements and the related assets and liabilities are

presented at gross in the consolidated statements of financial position.

Inventories

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

Costs incurred in bringing each product to its present location or condition, are accounted

for as follows:

Sugar Inventory, Alcohol Inventory and Manufactured and Fabricated Products -

determined using weighted average method; cost includes direct materials, labor and

a proportion of manufacturing overhead costs based on normal operating capacity.

Unbilled Tolling Cost - consists mainly of direct labor and overhead components

based on normal operating capacity, and are determined on weighted average

method.

Real Estate Held for Sale - determined using specific identification method; cost

includes purchase price of subdivision and memorial park lots plus development cost.

Jobs in Progress - determined using the specific identification method; cost includes

direct materials, labor and a proportion of manufacturing overhead costs based on

normal operating capacity.

Materials and Supplies - cost includes purchase and other directly attributable costs

determined based on their original purchase price.

For sugar inventory, alcohol inventory and manufactured and fabricated products,

unbilled tolling costs, jobs in progress, and real estate held for sale, NRV is the estimated

selling price in the ordinary course of business, less estimated costs of completion and

the estimated costs necessary to make the sale. For materials and supplies, the NRV is

the current replacement cost.

The Group considers any deterioration, damage, breakage, age and technological changes

in estimating the NRV.

Property, Plant and Equipment

Property, plant and equipment, except for projects under construction (which are carried

at cost less accumulated impairment losses), are carried at revalued amounts less

accumulated depreciation and impairment losses, if any. The revalued amount is the fair

value at the date of revaluation less any subsequent accumulated depreciation and

subsequent impairment losses. Revaluation is performed by an independent firm of

appraisers with sufficient regularity to ensure that the carrying amount of the asset does

not differ materially from that which would be determined using fair values at the

reporting date. The net appraisal increase resulting from the revaluation is credited to

“Revaluation increment on property, plant and equipment” account (net of corresponding

deferred tax liability) in the consolidated statements of financial position and

consolidated statements of changes in equity. The amount of revaluation increment

absorbed through depreciation and revaluation increment approved by the SEC for quasi-

reorganization are transferred directly to deficit.

- 19 -

Initially, an item of property, plant and equipment is measured at its cost, which

comprises its purchase price and any directly attributable costs of bringing the asset to the

location and condition for its intended use. Subsequent costs that can be measured

reliably are added to the carrying amount of the asset when it is probable that future

economic benefits associated with the asset will flow to the Group. The costs of day-to-

day servicing of an asset are recognized as an expense in the period in which they are

incurred.

All costs that were directly and clearly associated with the construction of certain

property, plant and equipment, including borrowing costs, were capitalized.

Projects under construction, included in property, plant and equipment, represent

structures under construction and are stated at cost. These include cost of construction

and other direct costs. Projects under construction are not depreciated until such time as

the relevant assets are completed and put into operational use.

Major spare parts and stand-by equipment qualify as property, plant and equipment when

the Group expects to use them during more than one period. Similarly, if the spare parts

and servicing equipment can be used only in connection with an item of property, plant

and equipment, they are accounted for as property, plant and equipment.

Estimated future dismantlement costs of items of property, plant and equipment arising

from legal or constructive obligations are recognized as part of property, plant and

equipment and are measured at present value at the time when the obligation was

incurred.

Depreciation is computed using the straight-line method over the assets‟ estimated useful

lives. The estimated useful lives are as follows:

Number of Years

Land improvements 12.5

Buildings and structures 20

Community buildings and equipment 20

Machinery and equipment 3 - 20

The estimated useful lives, as well as the depreciation method, are reviewed at each

reporting date to ensure that the period and method of depreciation are consistent with the

expected pattern of economic benefits from those assets.

Stand-by equipment should be depreciated from the date it is made available for use over

the shorter of the life of the stand-by equipment or the life of the asset the stand-by

equipment is part of, while major spare parts should be depreciated over the period

starting when it is brought into service, continuing over the lesser of its useful life and the

remaining expected useful life of the asset to which it relates.

Fully depreciated assets are retained in the accounts until they are no longer in use and no

further charge for depreciation is made in respect of those assets.

When an asset is disposed of, or is permanently withdrawn from use and no future

economic benefits are expected from its disposal, the cost and related accumulated

depreciation and impairment losses, if any, are removed from the accounts and any

resulting gain or loss arising from the retirement or disposal is recognized in profit or

loss.

- 20 -

The carrying amount of the Group‟s property, plant and equipment is written down

immediately to its recoverable amount if the asset‟s carrying amount is greater than its

recoverable amount. The recoverable amount of the Group‟s property, plant and

equipment is the higher between their fair values less cost to sell and value in use.

If the carrying amount of the Group‟s asset is decreased as a result of revaluation, this

decrease is recognized as other comprehensive loss to the extent of any credit balance

existing in the revaluation increment in respect of that asset. The excess of such decrease

over the existing balance in the revaluation increment is recognized in the consolidated

statements of comprehensive income.

An increase in the carrying amount of the Group‟s property, plant and equipment is

recognized in the consolidated statements of comprehensive income to the extent that it

reverses a revaluation decrease of the same asset previously recognized in profit or loss.

Investment Properties

Investment properties composed of land and building, which are properties held by the

Group either to earn rentals or for capital appreciation or for both, but not for sale in the

ordinary course of business, use in the production or supply of goods or services or for

administrative purposes. Investment properties are initially measured at cost.

Subsequently, investment properties are measured at fair value with any change therein

recognized in the consolidated statements of comprehensive income following the fair

value model. Gains or losses arising from changes in the fair value of investment

properties are included in profit or loss for the period in which they arise.

Investment property is derecognized when either it has been disposed of or when it is

permanently withdrawn from use and no future economic benefit is expected from its

disposal. Any gains or losses on the retirement or disposal of an investment property are

recognized in the consolidated statements of comprehensive income in the year of

retirement or disposal.

Transfers are made to investment property only when there is a change in use evidenced

by ending of owner-occupation or commencement of an operating lease to another party.

When the use of a property changes such that it is reclassified as property, plant and

equipment, its fair value at the date of reclassification becomes its cost for subsequent

accounting.

Transfers from investment property carried at fair value to owner-occupied property or

inventories, the property‟s deemed cost for subsequent accounting in accordance with

PAS 16, Property, plant, and equipment, or PAS 2, Inventories, shall be its fair value at

the date of change in use.

Impairment of Nonfinancial Assets

The carrying amount of the Group‟s nonfinancial assets which include property, plant

and equipment are reviewed for at each reporting date to determine whether there is any

indication of impairment. If such indication exists, the asset‟s recoverable amount is

estimated.

- 21 -

The recoverable amount of an asset or cash-generating unit is the greater of the asset‟s

fair value less costs to sell and value in use. Fair value less costs to sell is the amount

obtainable from the sale of an asset or cash-generating unit in an arm‟s length transaction

between knowledgeable, willing parties, less the costs of disposal. In assessing value in

use, the estimated future cash flows are discounted to their present value using a pre-tax

discount rate that reflects current market assessments of the time value of money and the

risks specific to the asset. For an asset that does not generate cash inflows largely

independent of those from other assets, the recoverable amount is determined for the

cash-generating unit to which the asset belongs.

An impairment loss is recognized whenever the carrying amount of an asset or its cash-

generating unit exceeds its recoverable amount. An impairment loss of a revalued asset

is recognized in the same way as a revaluation decrease. All other impairment losses are

recognized in profit or loss.

All assets are subsequently reassessed for indications that an impairment loss previously

recognized may no longer exist and the carrying amount of the asset is adjusted to the

recoverable amount resulting in the reversal of the impairment loss.

An impairment loss is reversed only to the extent that the asset‟s carrying amount does

not exceed the carrying amount that would have been determined, net of depreciation, if

no impairment loss had been recognized. A reversal of an impairment loss in respect of a

revalued asset is recognized in the same way as a revaluation increase. All other

reversals of impairment are recognized in profit or loss.

Equity Instruments

An equity instrument is any contract that evidences a residual interest in the assets of the

Group after deducting all of its liabilities.

Capital stock is classified as equity and is determined using the nominal value of shares

that have been issued. Additional paid-in capital (APIC) includes any premiums received

on the initial issuance of capital stock. Any transaction costs associated with the issuing

of shares are deducted from additional paid-in capital, net of any related income tax

benefits.

When capital stocks are repurchased, the amount of the consideration paid, which

includes directly attributable costs, net of any tax effects, is recognized as a deduction

from equity. Repurchased shares are classified as treasury stock and are presented as a

deduction from total equity. When treasury shares are sold or reissued subsequently, the

amount received is recognized as an increase in equity, and the resulting surplus or

deficit on the transaction is transferred to/from retained earnings, after considering any

remaining APIC related to treasury stock, if any.

Compound financial instruments issued by the Group comprise convertible notes that can

be converted to capital stock at the option of the holder, and the number of shares to be

issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognized initially at the

fair value of a similar liability that does not have an equity conversion option. The equity

component is recognized initially at the difference between the fair value of the

compound financial instrument as a whole and the fair value of the liability component.

Any directly attributable transaction costs are allocated to the liability and equity

components in proportion to their initial carrying amounts.

- 22 -

Earnings per Share (EPS)

The Group presents both basic and diluted EPS. Basic EPS is computed by dividing the

consolidated net income applicable to common shareholders by the weighted average

number of common shares outstanding during the year, adjusted for treasury stock, and

with retroactive adjustments for stock splits. Diluted EPS is computed in the same

manner as basic EPS except that the net income attributable to common shareholders and

the weighted average number of shares outstanding are adjusted for the effects of all

dilutive potential common shares. The Group‟s potential common shares comprise of

convertible notes.

Borrowing Costs

Borrowing costs are generally recognized as expense in the period in which these costs

are incurred, except to the extent that they are capitalized as being directly attributable to

the acquisition, construction or production of a qualifying asset which necessarily takes a

substantial period of time to prepare for its intended use or sale.

Leases - Operating Lease

Leases which do not transfer to the lessee substantially all the risks and benefits of

ownership of the asset are classified as operating leases.

Group as a Lessor

Lease income under operating leases is recognized as income in the consolidated

statements of comprehensive income on a straight-line basis over the lease term.

Group as a Lessee

Operating lease payments are recognized in profit or loss on a straight-line basis over the

lease term.

The Group determines whether an arrangement is, or contains a lease based on the

substance of the arrangement. It makes an assessment of whether the fulfillment of the

arrangement is dependent on the use of a specific asset or assets and the arrangement

conveys a right to use the asset.

Retirement Benefit

The Group has an unfunded, non-contributory retirement plan covering all qualified

permanent employees. The plan defines an amount of pension benefit that an employee

will receive on retirement, usually dependent on one or more factors such as age, years of

service and compensation. The defined benefit obligation is calculated by an independent

actuary using the projected unit credit method. The present value of the defined benefit

obligation is determined by discounting the estimated future cash outflows using the

interest rates of high-quality corporate bonds that are denominated in the currency in

which the benefits will be paid, and that have terms to maturity which approximate the

terms of the related retirement liability.

Actuarial gains and losses are recognized as income or expenses when the net cumulative

unrecognized actuarial gains and losses exceed 10% of the higher of the present value of

defined benefit obligation and the fair value of plan assets at the end of the previous

reporting year. These gains and losses are recognized over the expected average

remaining working lives of the employees covered.

The liability recognized in the consolidated statements of financial position in respect of

defined pension plan is the present value of the defined benefit obligation at the reporting

date less the fair value of plan assets, if any, together with adjustments for unrecognized

actuarial gains or losses and past service cost, if any.

- 23 -

Termination Benefits

Termination benefits are recognized as an expense when the Group is committed

demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to

either terminate employment before the normal retirement date, or to provide termination

benefits as a result of an offer made to encourage voluntary redundancy. Termination

benefits for voluntary redundancies are recognized as an expense if the Group has made

an offer of voluntary redundancy, it is probable that the offer will be accepted, and the

number of acceptances can be estimated reliably. If benefits are payable more than 12

months after the reporting period, then they are discounted to their present value.

Short-term Employee Benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are

expensed as the related service is provided.

A liability is recognized for the amount expected to be paid such as those for salaries and

wages, social security contributions, short-term compensated absences, bonuses and non-

monetary benefits.

Foreign Currency Transactions and Translation

Transactions in foreign currencies are translated into Philippine peso using the exchange

rates prevailing at the time of such transactions. Monetary assets and liabilities

denominated in foreign currencies are translated using exchange rates prevailing at

reporting date. Foreign exchange gains or losses resulting from the settlement of such

transactions and from the translation of monetary assets and liabilities denominated in

foreign currencies are recognized in the consolidated statements of comprehensive

income.

Income Tax

Income tax expense comprises of current and deferred income taxes. Current income tax

and deferred income tax are recognized in profit or loss except to the extent that it relates

to a business combination, or items recognized directly in equity or in other

comprehensive income.

Current income tax is the expected tax payable or receivable on the taxable income or

loss for the year using tax rates enacted or substantively enacted at the reporting date, and

any adjustment to tax payable in respect of previous years. Current income tax payable

also includes any tax liability arising from the declaration of dividends.

Deferred income tax is recognized in respect of temporary differences between the

carrying amounts of assets and liabilities for financial reporting purposes and the

amounts used for taxation purposes. Deferred income tax is not recognized for:

temporary differences on the initial recognition of assets or liabilities in a

transaction that is not a business combination and that affects neither accounting

nor taxable profit or loss;

temporary differences related to investments in subsidiaries and jointly

controlled entities to the extent that it is probable that they will not reverse in the

foreseeable future; and

taxable temporary differences arising on the initial recognition of goodwill.

- 24 -

Deferred income tax is measured at the tax rates that are expected to be applied to

temporary differences when they reverse, based on the laws that have been enacted or

substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset

current tax liabilities and assets, and they relate to income taxes levied by the same tax

authority on the same taxable entity, or on different tax entities, but they intend to settle

current tax liabilities and assets on a net basis or their tax assets and liabilities will be

realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible

temporary differences, to the extent that it is probable that future taxable profits will be

available against which they can be utilized. Deferred tax assets are reviewed at each

reporting date and are reduced to the extent that it is no longer probable that the related

tax benefit will be realized.

Related Parties

A related party relationship exists when one party has the ability, directly or indirectly, to

control, directly or indirectly through one or more intermediaries, the other party or

exercise significant influence over the other party in making financial and operating

decisions. Such relationships also exist between and/or among entities which are under

common control with the reporting enterprise, or between, and/or among the reporting

enterprise and its key management personnel, directors, or its stockholders. Related

parties may be individuals or corporate entities. In considering each possible related

party relationship, attention is directed to the substance of the relationship, and not

merely the legal form.

Transactions between related parties are based on terms similar to those offered to non-

related parties in an economically comparable market, except for the non-interest bearing

advances to its wholly owned subsidiary with no definite repayment terms.

Events After the Reporting Date

The Group identifies post year-end events as events that occurred after the reporting date

but before the date when the consolidated financial statements were authorized for issue.

Any post year-end events that provide additional information about the Group‟s

consolidated statements of financial position at the reporting date (adjusting events) are

recognized in the consolidated financial statements. Events that are not adjusting events

are disclosed in the notes to the consolidated financial statements when material.

Provisions and Contingencies

A provision is a liability of uncertain timing or amount. It is recognized when the Group

has a legal or constructive obligation as a result of a past event, it is probable that an

outflow of economic benefits will be required to settle the obligation and a reliable

estimate can be made.

When it is not probable that an outflow of economic benefits will be required, or the

amount cannot be estimated reliably, the obligation is disclosed as a contingent liability,

unless the probability of outflow of economic benefits is remote. Possible obligations,

whose existence will only be confirmed by the occurrence or non-occurrence of one or

more future events are also disclosed as contingent liabilities unless the probability of

outflow of economic benefits is remote.

- 25 -

A contingent asset is an asset that arises from past events and whose existence will be

confirmed only by the occurrence or non-occurrence of one or more uncertain future

events not wholly within the control of the entity. This is not recognized in the

consolidated financial statements but disclosed when an inflow of economic benefit is

probable.

5. Accounting Estimates and Judgments

The consolidated financial statements prepared in accordance with PFRSs requires

management to make judgments, estimates and assumptions that affect amounts reported

in the consolidated financial statements and related disclosures. In preparing these

consolidated financial statements, the management made its best judgments and estimates

of certain amounts, giving due consideration to materiality. The Group believes that the

following represents a summary of these significant estimates and judgments and related

impact and associated risks in the consolidated financial statements.

Determining Functional Currency

Based on the economic substance of the underlying circumstances relevant to the Group,

the functional currency of the Group has been determined to be the Philippine peso. The

Philippine peso is the currency of the primary economic environment in which the Group

operates. It is the currency that mainly influences the sale of goods and services and the

cost of these goods and services.

Operating Lease Commitments

The Group has leased out certain investment properties to a related party and to third

parties under the operating lease arrangements. The Group has determined that all

significant risks and rewards of ownership of these spaces remain with the Group

(see Notes 12 and 28).

Estimating Impairment Losses on Receivables

The Group maintains an allowance for impairment losses on receivables consisting of

trade and other current receivables, and advances to subsidiaries at a level considered

adequate to provide for potential uncollectible receivables. The level of this allowance is

evaluated by the Group on the basis of factors that affect the collectability of the

accounts. These factors include, but are not limited to, the length of the Group‟s

relationship with its customers, their payment behavior and known market factors. The

Group reviews the age and status of receivables and identifies accounts that are to be

provided with allowance on continuous basis. The amount and timing of recorded

expenses for any period would differ if the Group made different judgment or utilized

different estimates.

As of August 31, 2012, 2011 and 2010, the carrying amount of the Group‟s trade and

other current receivables amounted to P133.19 million, P143.56 million, and P11.71

million, respectively (see Note 7).

Determining the NRV of Inventories

In determining the NRV of inventories, management takes into account the most reliable

evidence available at the time the estimates are made. The Group‟s business is subject to

changes which may cause inventory obsolescence and the nature of the Group‟s

inventories is susceptible to physical deterioration, damage, breakage and technological

changes. Moreover, future realization of the carrying amounts of inventories is affected

by price changes in the market. These aspects are considered key sources of estimation

uncertainty and may cause significant adjustments to the Group‟s inventories within the

next financial year.

- 26 -

The carrying amount of inventories as of August 31, 2012, 2011 and 2010 amounted to

P349.19 million, P956.22 million, and P234.47 million, respectively (see Note 8).

Estimating Useful Lives of Property, Plant and Equipment

The Group estimates useful lives of property, plant and equipment based on the period

over which the assets are expected to be available for use. The Group reviews regularly

the estimated useful lives of property, plant and equipment based on factors that include

asset utilization, internal technical evaluation, technological changes, environmental and

anticipated use of the assets tempered by related industry benchmark information.

It is possible that future results of operation could be materially affected by changes in

these estimates brought about by changes in factors mentioned. A reduction in the

estimated useful lives of property, plant and equipment would increase depreciation and

decrease noncurrent assets.

As of August 31, 2012, 2011 and 2010, the aggregate carrying amount of the Group‟s

property, plant and equipment amounted to P3.83 billion, P3.65 billion, and P3.74

billion, respectively (see Note 11).

Determination of the Appraised Value and Fair Value

The appraised value of the Group‟s property, plant and equipment and the fair value of

the Group‟s investment properties are determined from market-based evidence by

appraisal that was undertaken by an independent firm of appraisers in calculating such

amounts. While management believes that the assumptions and market-based evidences

used are reasonable and appropriate, significant differences in actual experience or

significant changes in the assumptions may materially affect the valuation of the Group‟s

property, plant and equipment and investment properties. However, management

believes that the carrying amounts of property, plant and equipment and investment

properties as of August 31, 2012, 2011 and 2010 do not differ materially from that which

would be determined using appraised value and fair value at reporting date.

As of August 31, 2012, 2011 and 2010, the aggregate carrying amount of the Group‟s

property, plant and equipment amounted to P3.83 billion, P3.65 billion, and P3.74

billion, respectively, (see Note 11).

The aggregate carrying amount of the Group‟s investment properties amounted to P1.01

billion, P1.02 billion, and P1.02 billion as of August 31, 2012, 2011 and 2010,

respectively, (see Note 12).

Realizability of Deferred Tax Assets

The Group reviews its deferred tax assets at each reporting date and reduces the carrying

amount to the extent that it is no longer probable that sufficient taxable profit will be

available to allow all or part of the deferred tax asset to be utilized. Significant

management judgment is required to determine the amount of deferred tax assets that can

be recognized, based on the likely timing and level of future taxable profits together with

future tax planning strategies. However, there is no assurance that the Group will utilize

all or part of the deferred tax assets. Any deferred tax asset will be re-measured if it

might result to derecognition in cases where the expected tax law to be enacted will

impose a possible risk on its realization.

As of August 31, 2012, 2011 and 2010, the Group‟s recognized deferred tax assets

amounted to P202.21 million, P187.28 million, and P146.82 million, respectively

(see Note 25).

- 27 -

Retirement Benefit

The determination of the Group‟s obligation and cost of retirement benefits is dependent

on the Group‟s selection of certain assumptions used by an actuary in calculating such

amounts. In accordance with PAS 19, Employee Benefits, actual results that differ from

the Group‟s assumptions are accumulated and amortized over the future periods and

therefore, generally affect the Group‟s recognized expense and recognized obligation in

such future periods. While management believes that its assumptions are reasonable and

appropriate, significant differences in actual experience or significant changes in the

assumptions may materially affect the Group‟s retirement benefit obligation.

The assumed discount rates were determined using the market yields on Philippine

government bonds with terms consistent with the expected employee benefit payout as of

reporting dates. Other key assumptions are based in part on current market conditions.

Details of the assumptions used in the calculation are described in Note 26 to the

consolidated financial statements.

Net retirement benefit cost (income) amounted to P15.28 million, P8.00 million, and

(P138.75 million) in 2012, 2011 and 2010, respectively. Retirement benefits obligation

amounted to P88.78 million, P95.99 million, and P101.56 million as of August 31, 2012,

2011 and 2010, respectively (see Note 26).

Revenue Recognition

The Group‟s revenue recognition policies require the use of estimates and assumptions

that may affect the reported amounts of revenues and receivables. Differences between

the amounts initially recognized and actual settlements are taken up in the accounts upon

reconciliation. However, there is no assurance that such use of estimates may not result

to material adjustments in future periods.

Impairment of Nonfinancial Assets

The Group assesses at each reporting date whether there is an indication that the carrying

amount of an asset may be impaired. If such indication exists, the Group makes an

estimate of the assets‟ recoverable amount. At the reporting date, the Group assesses

whether there is any indication that previously recognized impairment losses may no

longer exist or may have decreased.

The Group assesses impairment on assets whenever events or changes in circumstances

indicate that the carrying amount of an asset may not be recoverable. The factors that the

Group considers important which could trigger an impairment review include the

following:

significant underperformance relative to the expected historical or projected

future operating results;

significant changes in the manner of use of the acquired assets or the strategy for

overall business; and

significant negative industry or economic trends.

As of August 31, 2012, 2011 and 2010, the carrying amounts of property, plant and

equipment amounted to P3.83 billion, P3.65 billion, and P3.74 billion, respectively, (see

Note 11).

- 28 -

Provisions and Contingencies

The Group is currently involved in various legal proceedings and has received

assessments from the government regulatory bodies which are still pending resolution.

Estimates of probable costs for the resolution of these claims have been developed in

consultation with outside counsel handling the defense in these matters and are based

upon an analysis of potential results.

Except for the cases related to the claims of creditors related to refined sugar delivery

orders (RSDOs) for which the Group recognized provisions, the Group‟s management

and legal counsel have made judgment that the position of the Group is sustainable and,

accordingly, believe that the Group does not have a present obligation (legal or

constructive) with respect to its assessments and claims (see Note 29).

The Group discounts its provisions over the period such provisions are expected to be

settled. The discount rate used by the Group is a pre-tax rate that reflects current market

assessments of the time value of money and the risks specific to the provisions at the

time these provisions have been determined and recognized. Specifically, this discount

rate represents a risk-free rate plus a risk premium. The risk-free rate is derived from

Philippine treasury bill rate and the risk premium is calculated by making reference to the

volatility of market lending rates published by the Bangko Sentral ng Pilipinas (BSP).

Provisions recognized as of the years ended August 31, 2012, 2011 and 2010 amounted

to P554.34 million, P509.73 million, and P468.72 million, respectively, (see Note 15).

The Group estimated that the total liability (including imputed finance cost) to be

incurred at the end of the rehabilitation program on the claims on RSDOs is P917 million

(see Note 15).

It is possible, however, that future results of operations could be materially affected by

changes in the estimates or in the effectiveness of the Group‟s strategies relating to the

foregoing proceedings.

6. Cash and Cash Equivalents

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

2012 2011 2010

Cash on hand and in banks P279,963 P368,017 P330,735

Cash equivalents 806,529 555,015 479,238

P1,086,492 P923,032 P809,973

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

Cash equivalents are composed of short-term placements with maturities ranging from 30

to 90 days, and bear annual interest rates of 1.3% to 4.1875% in 2012, 2.0% to 4.6875%

in 2011 and 2.4% to 4.0625% in 2010. Cash in bank and short-term placements

earmarked principally as reserves for debt repayment are presented as part of “Other

noncurrent assets” account (see Note 13).

Total interest income on cash and cash equivalents, including those earmarked

principally as reserves for debt repayment, amounted to P76.23 million, P70.35 million,

and P104.56 million in 2012, 2011 and 2010, respectively, (see Notes 13 and 22).

- 29 -

7. Trade and Other Current Receivables

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

2012 2011 2010

Trade P133,060 P135,434 P25,630

Advances to suppliers 7,447 4,641 -

Advances to planter‟s association 2,551 - -

Advances to officers and employees 647 1,127 1,787

Other current receivables 7,878 20,733 3,643

151,583 161,935 31,060

Allowance for impairment losses 18,389 18,374 19,349

P133,194 P143,561 P11,711

The average credit period taken on sale of goods and services is from 60 to 90 days. No

interest is being charged on receivables even if they exceed the normal credit period.

Others consist of receivables from a financial institution, receivable from installment

contract and loaned lots to buyers of one subsidiary and accrued interest receivables, cash

in a closed bank and other non-trade receivables from other companies. The cash in a

closed bank amounting to P500 thousand is expected to be recovered from the Philippine

Deposit Insurance Corporation (PDIC) and is presented net of amount not recoverable

(see Notes 13 and 23).

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

Note 2012 2011 2010

Balance, beginning of year P18,374 P19,349 P46,333

Amounts written-off as

uncollectible - (1,049) (44,968)

Impairment losses for the year 23 15 74 17,984

P18,389 P18,374 P19,349

8. Inventories

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

2012 2011 2010

Materials and supplies P176,662 P163,816 P153,955

Unbilled tolling cost 72,066 143,879 40,339

Sugar 59,973 618,146 -

Alcohol 24,726 - -

Real estate held for sale 20,180 20,551 21,222

Manufactured and fabricated products 4,279 13,000 23,019

Jobs in progress 803 5,218 3,795

358,689 964,610 242,330

Allowance to reduce materials and

supplies to NRV 9,499 8,394 7,856

P349,190 P956,216 P234,474

- 30 -

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

thousands):

2012 2011 2010

Balance at beginning of year P8,394 P7,856 P11,903

Provision during the year 3,711 - -

Written-off (recovery) during the year (2,606) 538 (4,047)

P9,499 P8,394 P7,856

The cost of inventories recognized as an expense is presented as “Cost of goods sold and

services” account and includes decrease in inventories of P605.42 million in 2012 and

increase in inventories of P727.75 million and P12.79 million in 2011 and 2010,

respectively (see Note 21).

Materials and supplies were stated at NRV which were lower than their corresponding

costs. Management believes that the recorded allowance to reduce materials and supplies

to NRV is adequate.

9. Prepayments and Other Current Assets

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

2012 2011 2010

Input value-added tax (VAT) P31,953 P67,646 P49,666

Creditable withholding tax 796 468 1,699

Other prepayments 7,598 7,541 3,745

P40,347 P75,655 P55,110

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

supplies.

10. Investments in Unconsolidated Subsidiary and in Associate

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

thousands):

Note 2012 2011 2010

Subsidiary:

VGCCI 1 P15,680 P15,680 P15,680

Associate:

VIGASCO 1 5,727 5,727 5,727

21,407 21,407 21,407

Allowance for impairment

loss on investment in

VIGASCO 5,727 5,727 5,727

P15,680 P15,680 P15,680

- 31 -

VGCCI

VGCCI, an 81%-owned subsidiary, is a non-profit corporation registered with the SEC

on October 8, 1992 primarily to engage exclusively in social, recreational and athletic

activities on a non-profit basis among its stockholders, the core of which will be the

acquisition and maintenance of a golf field course and tennis courts, residential and other

similar facilities.

The financial statements of VGCCI are currently undergoing audit and have not been

finalized. VGCCI‟s unaudited total assets and revenues are less than two percent (2%) of

the consolidated total assets and consolidated total revenues. Due to its immateriality, it

is not included in the consolidation pending the finalization of the audit of its financial

statements.

VIGASCO

VIGASCO, a 30%-owned associate, was incorporated and registered with the SEC on

November 19, 1992 primarily to engage in importing, exporting, buying and selling, at

wholesale or at retail, of gases, particularly oxygen, acetylene, hydrogen, liquefied

pertroleum gas and any types of gases.

Due to the capital deficiency of VIGASCO resulting from operating losses, the

investment is fully provided with allowance for impairment.

In 2010, an additional allowance was recognized on the investment in shares of

VIGASCO amounting to P2.45 million. Moreover, investment amounting to P9.26

million was written-off in 2010. The additional allowance and write-off were presented

as part of “Impairment losses on investments in unconsolidated subsidiaries”, under

“General and administrative” account (see Note 23).

- 32 -

11. Property, Plant and Equipment

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

Land and

Land

Improvements

Buildings

and

Structures

Community

Buildings

and

Equipment

Machinery

and

Equipment

Projects

Under

Construction Total

Cost

Balance, August 31, 2009 P105,831 P647,924 P27,916 P3,890,930 P61,648 P4,734,249

Additions - 295 701 456 145,574 147,026

Retirements/disposals (24) (13,567) (2,946) (36,359) - (52,896)

Completed projects 1,382 2,717 2,535 118,882 (125,516) -

Adjustments - - - (21) - (21)

Balance, August 31, 2010 107,189 637,369 28,206 3,973,888 81,706 4,828,358

Additions - 28 - 10,431 184,252 194,711

Retirements/disposals (178) (2,008) - (51,857) - (54,043)

Completed projects 1,448 624 - 47,649 (49,721) -

Balance, August 31, 2011 108,459 636,013 28,206 3,980,111 216,237 4,969,026

Additions - - - 28 454,347 454,375

Retirements/disposals - - - (898) - (898)

Impairment losses - (1,902) - (8,310) - (10,212)

Transfer from investment

properties 146 658 - - - 804

Completed projects - 12,855 - 154,953 (167,808) -

Balance, August 31, 2012 108,605 647,624 28,206 4,125,884 502,776 5,413,095

Accumulated depreciation and

impairment losses - cost

Balance, August 31, 2009 66,496 395,251 21,756 2,036,451 - 2,519,954

Depreciation 5,170 35,226 606 176,491 - 217,493

Retirements/disposals (24) (13,567) (2,099) (36,115) - (51,805)

Adjustments - - - 10 - 10

Balance, August 31, 2010 71,642 416,910 20,263 2,176,837 - 2,685,652

Depreciation 5,570 33,998 882 179,285 - 219,735

Retirements/disposals (178) (1,313) - (51,468) - (52,959)

Balance, August 31, 2011 77,034 449,595 21,145 2,304,654 - 2,852,428

Depreciation 4,972 21,512 550 169,370 196,404

Retirement/disposal (698) (698)

Impairment losses (849) (578) (1,427)

Adjustments (203) (7,803) (8,006)

Balance, August 31, 2012 82,006 470,055 21,695 2,464,945 3,038,701

Appraisal increase

Balance, August 31, 2009 424,792 426,783 44,242 1,798,494 - 2,694,311

Increase (decrease) during the

year 86,289 (315) 89,572 167,301 - 342,847

Impairment losses (9,808) (393,461) - - - (403,269)

Retirements/disposals - (5,341) (2,836) (23,448) - (31,625)

Balance, August 31, 2010 and

2011 501,273 27,666 130,978 1,942,347 - 2,602,264

Impairment losses (1,897) (1,897)

Transfer from investment

properties 7,112 7,112

Balance, August 31, 2012 508,385 27,666 130,978 1,940,450 2,607,479

Accumulated depreciation and

impairment losses -

appraisal increase

Balance, August 31, 2009 98,045 424,238 41,802 569,554 - 1,133,639

Depreciation 1,824 305 144 73,310 - 75,583

Appraisal Increase - - 76,720 66,661 - 143,381

Impairment losses (7,743) (313,023) - - - (320,766)

Retirements/disposals - (5,341) (2,678) (23,448) - (31,467)

Reclassifications 24 - (140) 116 - -

Balance, August 31, 2010 92,150 106,179 115,848 686,193 - 1,000,370

Depreciation 1,069 307 752 70,355 - 72,483

Balance, August 31, 2011 93,219 106,486 116,600 756,548 - 1,072,853

Depreciation 1,221 307 764 76,161 78,453

Impairment (626) (626)

Balance, August 31, 2012 94,440 106,793 117,364 832,083 - 1,150,680

Carrying Amount

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

Carrying Amount

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

Carrying Amount

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

- 33 -

Certain land and building of VMC that were formerly leased by a third party are now

being utilized by VMC for its distillery operations which started in November 2011.

Accordingly, these assets which have carrying values of P7.92 million were transferred to

property, plant equipment from investment properties (see Note 12).

The Group‟s property, plant and equipment were appraised by an independent appraiser.

The latest appraisal was conducted on August 12, 2010.

The carrying values of the Group‟s property, plant and equipment approximate their fair

value. Fair value is determined by reference to market based evidence, which is the

amount for which the assets could be exchanged between a knowledgeable willing buyer

and a knowledgeable willing seller in an arm‟s length transaction as at the valuation date.

The carrying value of property, plant and equipment is net of allowance for impairment

losses amounting to P414.28 million which relates to the following (in thousands):

Note

Machinery and Equipment

Land and Land Improvements

Building and Structures Total

Balance, September 1, 2009 P331,774 P - P - P331,774

Impairment loss recognized in 2010 23 - 2,065 80,438 82,503

Balance, August 31, 2011 and

2012 P331,774 P2,065 P80,438 P414,277

The carrying amounts of the Group‟s property, plant and equipment had these been

carried at cost less accumulated depreciation and impairment losses, follow (in

thousands):

Land and

Land

Improvements

Buildings

and

Structures

Community

Buildings

and

Equipment

Machinery

and

Equipment

Projects

Under

Construction Total

At August 31, 2010 P35,547 P220,459 P7,943 P1,797,051 P81,706 P2,142,706

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

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

A summary of depreciation on cost and on appraisal increase and the distribution follows

(in thousands):

Note 2012 2011 2010

Depreciation on:

Cost P196,404 P219,735 P217,493

Appraisal increase 78,453 72,483 75,583

P274,857 P292,218 P293,076

Depreciation charged to:

Cost of goods sold and

services 21 P255,839 P270,773 P279,932

Selling expenses 23 2,672 3,018 2,274

General and administrative

expenses 23 16,346 18,427 10,870

P274,857 P292,218 P293,076

- 34 -

The amount of the Parent Company‟s commitment for acquisition or construction and

installation of certain air and water pollution control devices to comply with the order of

the Department of Environment and Natural Resources (DENR) amounted to P30

million as of August 31, 2012, 2011, and 2010 (see Note 29b).

Substantially all of the Parent Company‟s property, plant and equipment are used as

mortgage for their loans under the Mortgage Trust Indenture (MTI) (see Note 16b2i).

12. Investment Properties

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

2012 2011 2010

Land P945,935 P953,193 P953,193

Building 63,696 64,354 64,354

P1,009,631 P1,017,547 P1,017,547

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

Note Land Building Total

Balance, August 31, 2009 P913,895 P91,349 P1,005,244

Fair value gain (loss) 22 39,298 (26,995) 12,303

Balance, August 31, 2010

and 2011 953,193 64,354 1,017,547

Transfer to property, plant

and equipment (Note 11) (7,258) (658) (7,916)

Balance, August 31, 2012 P945,935 P63,696 P1,009,631

Certain land and building of VMC that were formerly leased by a third party are now

being utilized by VMC for its distillery operations which started in November 2011.

Accordingly, these assets which have carrying values of P7.92 million were transferred to

property, plant and equipment from investment properties (see Note 11).

The Group‟s investment properties were appraised by an independent appraiser. The

latest appraisal was conducted on August 12, 2010.

The carrying values of the Group‟s investment properties approximate their fair value.

Fair value is determined by reference to market based evidence, which is the amount for

which the assets could be exchanged between a knowledgeable willing buyer and a

knowledgeable willing seller in an arm‟s length transaction as at the valuation date.

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

2011 and 2010.

Of the total investment properties, P895.03 million has been leased out under several

short-term and cancellable operating leases to third parties and related parties and the

P122.52 million is deemed held for capital appreciation. The total rental income earned

from the investment properties for the years ended August 31, 2012, 2011 and 2010

amounted to P15.99 million, P16.80 million and P13.92 million, respectively (see

Note 22).

- 35 -

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

and 2010.

13. Other Noncurrent Assets

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

2012 2011 2010

Cash and cash equivalents reserve for

debt repayment P1,770,892 P1,267,625 P2,069,452

Cash surety bonds 33,982 31,871 31,552

1,804,874 1,299,496 2,101,004

Less allowance for impairment loss 7,893 - -

P1,796,981 P1,299,496 P2,101,004

Cash and cash equivalents reserved for debt repayment consist of cash in bank and short-

term placements earmarked for payment to creditors as disclosed in Note 16d. Total

interest income on cash and cash equivalents, including those earmarked principally as

reserves for debt repayment, amounted to P76.23 million, P70.35 million and P104.56

million in 2012, 2011 and 2010, respectively, (see Notes 6 and 22).

Cash surety bonds pertain to cash collateral for the labor cases against the Parent

Company (see Note 29g). It includes cash in a closed bank totaling P8.39 million of

which P500 thousand is expected to be recovered from the PDIC and is presented as part

of “Trade and other current receivables” account (see Note 7). The balance of P7.89

million was fully provided with allowance for impairment (see Note 23).

14. Trade and Other Current Payables

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

Note 2012 2011 2010

Trade suppliers P184,130 P298,120 P275,187

Accrued:

Interest on bank loans 16b3 54,978 63,514 73,452

Litigation losses 29f 32,862 - -

Real property taxes 14,582 - -

Other accrued expenses 2,156 18,190 13,283

Customers‟ deposits 32,472 69,239 19,843

Social amelioration fund 25,091 - -

VAT, withholding and other

taxes 15,275 23,684 33,350

Retention payable 6,005 - -

Others 4,151 25,085 18,607

P371,702 P497,832 P433,722

Others consist of liens payable, association dues, and other current liabilities.

Management considers that the carrying amount of trade and other current payables

approximates fair value due to their short-term maturities.

- 36 -

15. Provisions

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

Note 2012 2011 2010

Balance at beginning of year P509,734 P468,718 P431,002

Amortization of discount 24 44,606 41,016 37,716

Ending balance P554,340 P509,734 P468,718

This refers to the probable liability on the allegedly issued RSDOs by the Parent

Company which was used by North Negros Marketing Co., Inc. (NONEMARCO) to

avail of bank loans totaling to about P630 million as disclosed in Notes 16b5 and

Note 29a.

The undiscounted amount and the related unamortized discount as at August 31 follow

(in thousands):

2012 2011 2010

Undiscounted amount P917,000 P917,000 P917,000

Unamortized discount (362,660) (407,266) (448,282)

P554,340 P509,734 P468,718

16. Long-term Debts

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

As to currency denomination (in thousands):

Note 2012 2011 2010

Bank loans

Foreign currency

denominated P331,514 P384,252 P462,583

Philippine peso

denominated 2,000,910 2,308,742 2,616,574

2,332,424 2,692,994 3,079,157

Convertible notes 16b2 1,520,878 1,727,486 2,408,954

Accrued interest on

convertible notes 16b2 1,202,171 1,189,647 1,349,014

5,055,473 5,610,127 6,837,125

Less unamortized interest

and discounts 16b2 228,566 246,120 277,595

4,826,907 5,364,007 6,559,530

Less current portion 358,834 359,066 362,254

P4,468,073 P5,004,941 P6,197,276

- 37 -

As to security (in thousands)

2012 2011 2010

Secured P1,006,811 P1,161,704 P1,316,598

Unsecured 4,048,662 4,448,423 5,520,527

P5,055,473 P5,610,127 P6,837,125

b. Debt Restructuring Agreement

As discussed in Note 2, a key element of the ARP is the restructuring of the above

loans from banks and financial institutions. Consequently, VMC and the secured and

unsecured creditors executed a DRA dated April 29, 2002 which took effect on

September 1, 2003 and which provides, among others, for the following:

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

On October 9, 2002, loans from unsecured creditors of P1.1 billion were

converted into common shares of VMC at a ratio of P1 of debt to P1 of common

shares with a par value of P1.

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

i. Features of the convertible notes

September 1, 2003, the unsecured creditors proportionately converted, on a

mandatory basis, P2.4 billion of their principal loans into convertible notes.

The convertible notes bear an annual interest of 8% which is cumulative and

payable only in respect of those convertible notes which have not been

actually converted into common stock of the Parent Company. The

conversion resulted to the recognition of an equity component of the

convertible feature (presented in the consolidated statements of financial

position as “Conversion feature on convertible notes” account). This will be

reclassified to “Additional paid-in capital” upon conversion of the related

convertible notes.

Starting August 31, 2004, annual interest of 8% has been accrued in respect

of all outstanding convertible notes. The convertible notes provide for a term

of payment of 15 years from the effectivity date of the DRA (herein referred

to as the “restructuring date”). These unsecured creditors shall have second

mortgage on the Parent Company‟s fixed assets (excluding identified non-

core assets for disposal), under the secondary MTI pursuant to the terms and

conditions of the DRA. The secured creditors would still maintain their first

mortgage on the Parent Company‟s fixed assets (excluding identified non-

core assets for disposal) under the MTI, pursuant to the terms and conditions

of the DRA.

The convertible notes shall be converted at the option of the holders thereof

into common shares of the Parent Company at the ratio of one (1) convertible

note to one (1) common share of the Parent Company. The aggregate

amount of convertible notes that may be converted into common shares of

the Parent Company shall not exceed 20% of the original issue amount of the

convertible notes for each year covering the conversion beginning the third

year to the sixth year from the issue date of the convertible notes. For the

period beginning the eight year to the fourteenth year, the annual aggregate

- 38 -

amount of convertible notes that may be converted into common shares of

the Parent Company shall not exceed 13% of the outstanding unconverted

notes. The Parent Company may redeem the convertible notes at any time at

issue price plus accrued interest beginning at the end of the third year from

issue date and ending on redemption date which is at the end of the fifteen

years from issue date. Also, under the DRA, the buyer of the convertible

note from the original holder shall convert the notes into common shares of

the Parent Company in accordance with the schedule of the convertibility

feature of Section 16 (h) of the DRA. Section 16 (g) of the DRA further

provides that interest is payable only at the final redemption date and in

respect only to those convertible note which have not been actually

converted to common shares of the Parent Company.

ii. Actual transfers and conversions to common shares

The Parent Company has made actual conversions to common shares of

certain convertible notes amounting to P118.63 million in 2012 and

amounting to P310.05 million in 2011 (see Note 17b) in accordance with the

schedule of the convertibility feature of Section 16 (h) of the DRA. The

conversion in 2012 resulted to the recognition as “Additional paid-in capital”

the P62.01 million related accrued interest payable.

Moreover, certain convertible notes and the related accrued interest payable

with the total amount of P313.75 million and P525.08 million as of August

31, 2012 and 2011, respectively, were recognized as equity as they are

considered mandatorily convertible notes in accordance with provision of

Section 16 (K) of the DRA which requires that all transferred/sold

convertible notes are to be converted to commons shares in accordance with

the schedule of the convertibility feature of Section 16 (h) of the DRA.

These are presented in the consolidated statements of financial position as

“Convertible notes awaiting conversion” account.

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

thousands):

2012 2011 2010

Principal amount of convertible notes

transferred to another noteholder P459,401 P371,421 P -

Accrued interest payable 198,782 153,654 -

P658,183 P525,075 P -

These convertible notes and related accrued interest payable are no longer

recognized as financial liability as the Group has ceased to have a present

obligation as the DRA provides for mandatory conversion upon transfer/sale of

convertible notes. These will be converted to common shares as soon as the

schedule of the convertibility feature of Section 16 (h) of the DRA permits the

conversion.

The outstanding balance of the convertible notes is carried at present value using

effective interest of 5.397%. Total finance costs accrued on convertible notes

amounted to P137.22 million in 2012, P163.66 million in 2011 and P178.22

million in 2010. As of August 31, 2012, 2011 and 2010, the balance of the

accrued interest on the convertible notes amounted to P1.20 billion, P1.19 billion

and P1.35 billion, respectively.

- 39 -

3. Restructuring of the remaining balance of the loans (herein referred to as

“Restructured loans”).

On April 29, 2002, the unsecured and secured creditors restructured the

remaining balance of their loans (after the debt-to-equity conversion and the debt

conversion to convertible notes), with annual interest of 10% for Philippine peso-

denominated loans and 6% for the U.S. dollar-denominated loans payable

quarterly in arrears. The restructuring provides for a term of payment of 15 years

from September 1, 2003, the restructuring date, with a 3-year grace period from

the restructuring date.

Details of finance cost as follow (in thousands):

2012 2011 2010

Interest on bank loans P230,258 P265,556 P302,927

Interest on convertible notes 137,218 163,660 178,217

P367,476 P429,216 P481,144

The outstanding balance of the accrued interest on bank loans amounted to

P54.98 million, P63.51 million and P73.45 million as of August 31, 2012, 2011

and 2010, respectively, (see Note 14).

4. Secured creditors and/or unsecured creditors who are actually and physically

holding legitimate and valid VMC sugar quedans as a form of security as of

restructuring date shall be considered as other secured creditors to the extent of

the valid sugar quedans they are physically and legitimately holding.

The outstanding principal loans, including interest, held by these creditors

holding sugar quedans as collateral shall have the same terms and conditions as

that of the restructured loans of the unsecured creditors under the DRA,

including a restructuring period of 15 years.

5. Restructuring of the Refined Sugar Delivery Orders Claims, arising from Refined

Sugar Delivery Orders (RSDOs) purportedly issued by VMC which was used by

NONEMARCO, Inc. and pending litigation before the SEC, under the same

terms and conditions as that of the unsecured creditors once VMC is found liable

by final judgment. The carrying value of the provision as of August 31, 2012,

2011 and 2010 amounted to P554.34 million, P509.73 million and P468.72

million, respectively, (see Note 15).

6. Restructuring of the trade liabilities as follows: 25% during the first year of

rehabilitation, 37.5% during the second year of rehabilitation, and 37.5% during

the third year of rehabilitation.

The DRA became effective on September 1, 2003 (also known as the restructuring

date) upon the occurrence of the following conditions as per Section 36 of the DRA,

among others:

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

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

3. Generation of the required minimum cash capital infusion of P300 million;

4. Election of a new Board of Directors; and

5. Receipt of certain documents by the creditors as provided for in the DRA

(i.e. promissory notes, etc.).

- 40 -

c. Cash Infusion by a Strategic Investor

As part of the provision of the rehabilitation program, the Company obtained a P300

million loan from a strategic investor, Tanduay Holdings, Inc. The loan was fully

paid in 2008 in accordance with the terms of the loan.

d. Compliance with the DRA

As of August 31, 2012, 2011 and 2010, VMC is in compliance with the provisions of

the DRA. No further updates or revisions were made on the ORP, ARP and DRA as

of reporting date.

17. Capital Management

The Group manages its capital to ensure that the Group will be able to continue as a

going concern while maximizing the return on the investments of stockholders. The

Parent Company is governed by its ARP as submitted and approved by SEC. The details

of these plans or programs are disclosed in Note 2.

The capital structure of the Group consists of equity attributable to the stockholders

comprising of the capital stock and deficit while debt is defined as long and short-term

borrowings, as disclosed in Note 16.

a. Debt to Total Asset Ratio

The debt to total assets ratio of the Group as of August 31, which has been within the

Group‟s acceptable range as set by the BOD, is calculated as follows:

2012 2011 2010

(In Thousands Except Ratio Information)

Debt P4,826,907 P5,364,007 P6,559,530

Total assets 8,288,430 8,103,394 7,990,099

0.58:1 0.66:1 0.82:1

- 41 -

b. Capital Stock

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

2012 2011 2010

Authorized:

Common shares - P1 par value

2,563,035,708 shares P2,563,036 P2,563,036 P2,563,036

Issued and outstanding:

Balance at beginning of year

- 1,905,998,732 shares in

2012 and 1,595,952,513 in

2011 and 2010 P1,905,999 P1,595,953 P1,595,953

Conversion of convertible

notes (Note 16b2ii):

Mandatory conversion to

310,046,219 common

shares at P1 per share

by certain transferee-

holders in 2011 - 310,046 -

Conversion to

118,628,250 shares at

P1 per share by certain

secondary note holders

in 2012 118,628 - -

P2,024,627 P1,905,999 P1,595,953

Except for the conversion of certain convertible notes to common shares as disclosed

above, there was no other movement on capital stock for the years ended August 31,

2012, 2011 and 2010. The conversion of certain convertible notes to common stock

is provided for in the DRA.

On November 15, 1993, the shares of stock of the Parent Company were listed in the

Philippine Stock Exchange. However, the trading was suspended on October 9,

1997. In 2012, the SEC and the PSE have lifted its order of suspension of the trading

of the Parent Company‟s shares. Consequently, on May 21, 2012, the trading

resumed.

c. Recapitalization and Quasi-reorganization

The SEC approved the following recapitalization programs:

1. The authorized capital stock was reduced initially from P2.7 billion consisting of

270 million shares with par value of P10 per share to P495,957,670 consisting of

170,432,189 shares with par value of P2.91 per share (see Note 2.1.i).

- 42 -

2. The reduction in par value likewise resulted in the reduction of the subscribed

capital stock from P1,704,321,890 consisting of 170,432,189 shares with a par

value of P10 per share to P495,957,670 consisting of 170,432,189 shares with a

par value of P2.91 per share. The par value of the capital stock was then further

reduced from P2.91 to P1, simultaneous thereto, the subscribed capital stock was

increased from P170,432,189 consisting of 170,432,189 shares at par value of

P2.91 per share to P495,957,670 consisting of 495,957,670 shares at par value of

P1 per share through a stock split. The resulting reduction surplus of

P1,208,364,220 (P1,704,321,890 less P495,957,670) was used to partially wipe

out the deficit of the Parent Company.

3. SEC issued a certificate of filing of certificate of increase in capital stock dated

October 2, 2002 approving the Parent Company‟s increase in the authorized

capital stock from P495,957,670 consisting of 495,957,670 common shares at

par value of P1 per share to P2,563,035,708 consisting of 2,563,035,708 shares

of common stock at par value of P1 per share. The increase in the authorized

capital stock was a partial implementation by the Parent Company of the ARP‟s

provision on the increase in authorized capital stock as approved by the SEC on

November 29, 2000 (see Note 2.2.i). However, the approval by the SEC on the

increase in authorized capital stock was subject to condition that the Parent

Company shall submit to the SEC all duly executed deeds of assignment

evidencing the creditors‟ assignment of a portion of their unpaid loans as

payment for the subscription of the increase in the Parent Company‟s authorized

capital stock. On June 17, 2009, which was within the extended period requested

for submission of all the duly executed deeds of assignment, the Parent Company

submitted the required documents to the SEC.

In an order dated March 26, 2009, the SEC‟s Company Registration and

Monitoring Department (CRMD) revoked the Parent Company‟s certificate of

filing of certificate of increase in capital stock dated October 2, 2002 due to

alleged non-compliance with the conditions provided in the grant of the same.

However, it is a matter of record that all conditions have been duly complied

with by the Parent Company within the period of extensions provided. The

supposed order of revocation was not officially received by the Parent Company,

having been sent to its old address despite notice of change of address. The

Parent Company is now seeking a reconsideration/lifting of such revocation

which is now pending before the SEC.

d. Application of Revaluation Increment Against Deficit

On September 2, 2002, the SEC approved the quasi-reorganization of the Parent

Company through the application of revaluation increment of P3,195,367,390 to

partially wipe out the deficit of P7,823,474,147 as of August 31, 2002.

For purpose of dividend declaration, any retained earnings of the Parent Company

shall be restricted to the extent of deficit wiped out by the revaluation increment.

e. Conversion of Debt into Equity

As discussed in Note 16, the unsecured creditors converted proportionately P1.1

billion of their loans into common stock of the Parent Company at a ratio of P1 of

debt to P1 of common stock. The said conversion resulted in a change in

management control of the Parent Company effective October 9, 2002, whereby the

creditor controls 69% of the ownership of the Parent Company while the existing

stockholders prior to the conversion was reduced to 31%.

- 43 -

f. Treasury Stock

The Parent Company had an Employees Stock Ownership Plan (ESOP) which was

administered by a Board of Administrators appointed by the former Board of

Directors of the Group. The ESOP allocated approximately 18 million shares from

the Group‟s authorized and unissued shares of capital stock. This ESOP gave

permanent and regular employees the right to subscribe to a minimum of 100 shares

and to a maximum of 5,000 shares at a discounted prevailing market value price.

Since August 19, 1998, the implementation of the ESOP has been permanently

suspended.

The treasury shares as of August 31, 2012, 2011 and 2010 represented the ESOP

shares withdrawn, decrease in treasury shares due to recapitalization, and

investments of the consolidated subsidiaries in the Group, as follows:

2012 2011 2010

(In Thousands)

ESOP shares withdrawn P54 P54 P54

Decrease in shares held in treasury

due to retirement (4) (4) (4)

Decrease in treasury shares due to

recapitalization (39) (39) (39)

P11 P11 P11

The Group‟s overall capital management strategy remains unchanged from 2009. The

Group is not subject to externally-imposed capital requirements.

18. Earnings Per Share

a. Basic Earnings Per Share (EPS)

Note 2012 2011 2010

(In Thousands, Except Per Share Data)

Net income for the year P556,180 P399,676 P310,281

Beginning shares of

stock outstanding 1,905,999 1,595,953 1,595,953

Weighted average

number of shares

resulting from the

conversion of

convertible notes 79,085 206,697 -

Deduct

Treasury stock 17f (11) (11) (11)

Total weighted average

number of shares of

stock outstanding after

conversion of

convertible notes 1,985,073 1,802,639 1,595,942

Basic EPS P0.28 P0.22 P0.19

- 44 -

b. Diluted EPS

Note 2012 2011 2010

(In Thousands, Except Per Share Data)

Net income for the year P556,180 P399,676 P310,281

Add back interest

expense on convertible

notes 16b2 137,218 163,660 178,217

Net income after adjustment 693,398 563,336 488,498

Total weighted average

number of shares of stock

outstanding after

conversion of convertible

notes 1,985,073 1,802,639 1,595,942

Add: Assumed issued

common shares through

conversion of convertible

notes 2,019,822 2,202,256 2,408,954

Total weighted average

number of shares

actually issued and

assumed issued through

conversion of

remaining convertible

notes 4,004,895 4,004,895 4,004,896

Diluted EPS P0.17 P0.14 P0.12

The convertible notes of P2.0 billion at August 31, 2012, P2.2 billion at August 31,

2011 and P2.4 billion at August 31, 2010 have been recorded in the books of account

in accordance with the terms of the DRA as discussed in Note 16b2.

19. Operating Segment Data

Operating Segments

The Group is organized into the following operating units - sugar milling, food

processing, real estate, leasing, engineering, and distillery operations. A detailed

description of each segment is set below:

Sugar Milling

Revenues from sugar milling consist of the following:

a. sale of raw sugar and molasses (mill share)

b. sale of refined sugar

c. tolling fees

For its raw sugar and molasses operations, the Parent Company operates a raw sugar mill

with a daily capacity of 15,000 metric tons. Cane supply is sourced from both district

and non-district planters who have milling contracts with VMC. The production sharing

agreement is 69.5% for planters and 30.5% for VMC.

- 45 -

The Parent Company also operates a refinery plant with a daily capacity of 25,000 Lkg.

(1 Lkg = 50 kilograms). To ensure maximum utilization of the refinery, VMC also

provides toll refinery services to traders and planters for their raw sugar milled by other

sugar centrals.

Total sales to two external customers to whom the Parent Company made sales equal to

or more than 10% of the total reported revenues amounted to P2.5 billion, P2.9 billion

and P2.2 billion in 2012, 2011 and 2010, respectively.

Food Processing

This segment is involved primarily in processing canned sardines and bangus in different

variants such as tomato-based and chili-based, among others. In December 2002 and

January 2003, this segment introduced the luncheon meat and lechon paksiw product

lines, respectively. Moreover, in May 2003, this segment re-operated its slaughterhouse

operations which had been closed for years.

Real Estate

This segment is involved in the development and sale of subdivision and memorial lots.

Among its projects are Phases I to III of Canetown Subdivision and the St. Joseph

Memorial Garden which are both located in Victorias City. These projects were initially

intended to provide for the housing and personal needs of the officers and employees of

the Group. In recent years, however, certain lots had also been made available to the

general public.

Leasing

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

Engineering Operations

The Parent Company has engineering and manufacturing divisions which are not

reported consolidated in the schedules above because majority of their revenues are not

from external customers.

The engineering operations are divided into two business units, namely construction and

engineering works. The construction division handles construction projects, road

improvements, and structural works for the Parent Company plant operations,

fabrication, and production of concrete product; and manages the operations of trucks

and heavy equipment, among others. Since crop-year 1997-1998, the construction

division has limited its activities to servicing only the requirements of the Parent

Company‟s sugar operations. On the other hand, the engineering works division operates

two engineering shops: (a) foundry shop which produces metal castings and (b) machine

shop which handles mechanical works/machining jobs.

Distillery Operations

The Parent Company has an alcohol distillery division which started its testing operations

on November 2011. Full operation is targeted to start March 2013. As of the May 31,

2012, revenues from distillery operations pertains to sale of specially denatured alcohol.

For its operations, the division operates an alcohol production with an actual daily

capacity of 25,000 liters and with molasses as the primary raw material. Molasses is

sourced from sugar operations which produces it as a by-product. As of end of reporting

date, the division has still one customer which is an ethyl alcohol manufacturer.

- 46 -

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.

- 47 -

2012 2011 2010

(In Millions)

Sugar Food Real Engineering Elimination

Milling Processing Estate Leasing Operations

Distillery

Operation Items Total

REVENUE

Sales P4,558 P31 P4 P1 P12 P59 P - P4,665 P4,218 P3,949

Inter-segment sales - 63 - - - - (63) - - -

Total P4,558 P94 P4 P1 P12 59 (P63) P4,665 P4,218 P3,949

RESULT Segment result P1,386 P - P - P - P - P - P - P1,386 P983 P1,481

Unallocated corporate expenses (228) - - - - - - (228) (222) (856)

Operating profit 1,158 - - - - - - 1,158 761 625 Interest expense (367) - - - - - - (367) (429) (481)

Interest income 76 - - - - - - 76 70 105

Net curtailment gain - - - - - - - - - 139

Net foreign exchange gains 2 - - - - - - 2 25 39

Net loss on sale or retirement of

property, plant and equipment - - - - - - - - (1) (1) Gain n revaluation of investment

properties - - - - - - - - - 12

Income tax expense (283) - - - - - - (283) (123) (106) Miscellaneous (30) - - - - - - (30) 97 (22)

Net income (loss) for the year (P556) P - P - P - P - P - P - (P556) P400 P310

OTHER INFORMATION

Segment assets P5,124 P - P - P - P - P - P - P5,124 P4,921 P1,724

Unallocated corporate assets 3,164 - - - - - - 3,164 3,182 6,266

Consolidated total assets P8,288 P - P - P - P - P - P - P8,288 P8,103 P7,990

Segment liabilities P5,381 P - P - P - P - P - P - P5,381 P5,969 P7,028 Unallocated corporate liabilities 1,089 - - - - - - 1,089 1,186 1,249

Consolidated total liabilities P6,470 P - P - P - P - P - P - P6,470 P7,155 P8,277

Segment depreciation P247 P - P - P - P - P - P - P247 P271 P279

Unallocated corporate

depreciation 28 - - - - - - 28 21 14

Depreciation P275 P - P - P - P - P - P - P275 P292 P293

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

- 48 -

20. Revenue from Operations

This account consists of (in thousands):

2012 2011 2010

Raw sugar sales P3,057,389 P3,069,440 P1,925,950

Tolling revenues 1,371,477 818,057 971,684

Molasses 127,960 257,070 264,774

Alcohol sales 59,411 - -

Engineering contracts 12,259 27,759 30,241

Refined sugar sales - 5,380 716,521

Others 35,511 39,911 38,516

P4,664,007 P4,217,617 P3,947,686

Most, if not all, of the Parent Company‟s sales of sugar in 2011 are in the form of raw

sugar as the Parent Company marketed its sugar raw rather than sell it as refined.

21. Cost of Goods Sold and Services

This account consists of (in thousands):

Note 2012 2011 2010

Cost of hauling P781,763 P1,427,853 P691,050

Repairs and maintenance 472,873 469,837 431,867

Materials and supplies 331,788 221,816 243,027

Professional fees and

contracted services 293,026 270,328 183,932

Depreciation 11 255,839 270,773 279,932

Fuel and transportation 229,245 204,260 215,435

Input tax allocable to

exempt sales 79,522 - -

Light and water 72,244 76,563 50,647

Taxes and licenses 52,573 48,446 41,666

Direct labor 26 26,324 22,679 160,858

Rental 28e 5,418 4,442 4,434

Raw sugar purchased - 794,730 77,036

Others 19,533 76,334 60,362

Total cost of goods

manufactured 2,620,148 3,888,061 2,440,246

Decrease (increase )in

inventories 605,421 (727,753) (12,793)

P3,225,569 P3,160,308 P2,427,453

Cost of hauling pertains to cane trucking, hauling allowances and other incentives to

encourage planters to mill with the Parent Company.

- 49 -

22. Other Income

This account consists of (in thousands):

Note 2012 2011 2010

Interest income 6, 13 P76,225 P70,346 P104,562

Rental income 12 15,990 16,799 13,921

Gain on extinguishment of

liabilities 16b2 6,331 137,896 -

Foreign exchange gain 1,540 24,811 39,310

Gain on sale of property,

plant and equipment 11 - 65 203

Retirement benefit income 26.b - - 138,746

Fair value gain on investment

properties 12 - - 12,303

Others 3,163 11,694 2,763

P103,249 P261,611 P311,808

“Gain on the extinguishment of liabilities” account in 2011 consists of reversal of

accrued interest related to certain convertible notes due to condonation (see Note 16b2ii),

while in 2010, it mainly consists of the gain on the extinguishment of VMC‟s liability to

MJO foundation and output VAT written-off covered by a tax amnesty.

23. Operating Expenses

This account consists of the following (in thousands):

Selling Expenses

Note 2012 2011 2010

Contracted services P12,915 P15,804 P1,049

Taxes and licenses 11,198 23,271 4,148

Rental 28e 7,300 5,598 5,563

Freight and handling 6,473 4,140 1,369

Materials and supplies 4,552 11,617 7,603

Repairs and maintenance 2,826 2,623 2,226

Depreciation 11 2,672 3,018 2,274

Salaries and other employee

benefits 26 1,840 2,087 13,585

Others 2,944 5,513 932

P52,720 P73,671 P38,749

- 50 -

General and Administrative Expenses

Note 2012 2011 2010

Professional fees and

contracted services P103,608 P95,235 P129,359

Travel and transportation 22,366 19,143 14,634

Depreciation 11 16,346 18,427 10,870

Taxes and licenses 15,008 17,833 31,182

Salaries and other employee

benefits 26 13,375 14,438 32,467

Repairs and maintenance 9,614 20,287 5,177

Impairment on noncurrent

assets 13 7,893 - -

Representation and

entertainment 7,748 10,270 6,378

Retirement benefit 26 7,648 7,144 -

Impairment on inventories 8 1,700 - -

Impairment loss on

receivables 7 15 74 17,984

Retrenchment cost 26 - - 495,447

Impairment loss on property,

plant and equipment 11 - - 82,503

Impairment losses on

investments in

unconsolidated subsidiaries 10 - - 11,705

Others 22,189 19,273 15,942

P227,510 P222,124 P853,648

24. Other Expenses

This account consists of (in thousands):

Note 2012 2011 2010

Amortization of discount on

provisions 15 P44,606 P41,016 P37,716

Impairment loss of

nonfinancial assets 4,873 - -

Loss on retirement and

disposal of property, plant

and equipment 11 93 1,085 1,249

Foreign exchange loss 64 141 148

Others 5,604 28,691 2,809

P55,240 P70,933 P41,922

- 51 -

25. Income Taxes

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

2012 2011 2010

Recognized in profit or loss

Current P328,889 P180,554 P149,355

Deferred (46,328) (57,254) (43,140)

P282,561 P123,300 P106,215

Recognized in other

comprehensive income

Deferred P - P - (P59,841)

The reconciliation of income tax expense computed at the applicable statutory rates to the

tax expense is as follows (in thousands):

2012 2011 2010

Income before income tax P838,741 P522,976 P416,496

Tax expense at 30% P251,622 P156,893 P124,949

Effect of non-deductible and non-

taxable items:

Non-deductible interest expense 50,527 57,755 66,788

Other non-deductible expenses 6,121 241 66

Non-taxable income from

extinguishment of liabilities and

net curtailment loss due to

retrenchment - (41,094) (41,711)

Recognition of previously

unrecognized deferred taxes – net (2,447) (24,927) -

Actual payment of retirement

benefits - (4,069) (12,112)

Interest income subject to final tax (23,262) (21,499) (31,765)

P282,561 P123,300 P106,215

The composition of “Deferred tax liabilities - net” account as reported in the consolidated

statements of financial position follows (in thousands):

2012 2011 2010

Deferred tax liabilities P735,893 P767,287 P784,084

Deferred tax assets (202,210) (187,276) (146,822)

Net deferred tax liabilities P533,683 P580,011 P637,262

- 52 -

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

2012 2011 2010

Net appraisal increase on

property, plant and

equipment P437,040 P458,825 P480,138

Unrealized fair value gain on

investment properties 274,915 281,362 281,362

Unrealized gain on foreign

exchange 23,938 27,100 22,584

P735,893 P767,287 P784,084

The following are the composition of the recognized deferred tax assets of the Group

(in thousands):

2012 2011 2010

Provisions for RSDO claims P166,302 P152,920 P140,615

Allowance for impairment

losses on receivables,

allowance for impairment

of other noncurrent assets,

and allowance to reduce

materials and supplies to

NRV and impairment

losses on investments 6,813 3,980 4,228

Retirement benefit obligation 26,633 28,795 1,082

NOLCO 2,285 1,303 593

MCIT 177 278 304

P202,210 P187,276 P146,822

In 2011, a subsidiary incurred NOLCO amounting to P4.34 million which can be

deductible from future taxable income subject to RCIT until 2014.

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

Year

incurred

Expiry

Date

At September 1,

2011 Addition

Expiration

At August 31,

2012

2008 2011 P67 P - (P67) P -

2009 2012 149 - - 149

2010 2013 88 - - 88

2011 2014 - 41 - 41

P304 P41 (P67) P278

The Group expects that it will have sufficient taxable profits for which it can use the

subsequent benefits of the deferred tax assets related to the provision for RSDO claims,

retirement benefit obligation and allowances for impairment losses on receivables,

allowance to reduce materials and supplies to NRV and impairment losses on

investments, which are expected to reverse in the foreseeable future.

- 53 -

The unrecognized deferred tax assets as at August 31 are attributable to the following

deductible temporary differences (in thousands):

Note 2012 2011 2010

Interest on convertible notes P973,605 P830,581 P1,071,420

Allowance for impairment

losses on receivables,

allowance to reduce

materials and supplies to

NRV and impairment

losses on investments 27,480 19,247 18,858

Retirement benefit obligation 26 - - 97,950

P1,001,085 P849,828 P1,188,228

In 2010 and prior years, the comparative balances of “Deferred tax liabilities - net”

account were restated to reflect the adjustment on deferred tax liability on unrealized

foreign exchange gain which was inadvertently recognized as deferred tax asset in 2010

and prior years.

A summary of the effects of the adjustment to the consolidated statements of financial

position as at September 1, 2010 and 2009 and to the consolidated statements of

comprehensive income for the year ended August 31, 2010 follow (in thousands, except

EPS data):

As

Previously

Reported

Effect of

Adjustment As Restated

Consolidated Statements of

Financial Position as of

September 1, 2010:

Deferred tax liabilities - net P592,525 P44,737 P637,262

Deficit 1,986,000 44,737 2,030,737

Consolidated Statements of

Financial Position as of

September 1, 2009:

Deferred tax liabilities - net 588,306 32,066 620,372

Deficit 2,311,353 32,066 2,343,419

Consolidated Statements of

Comprehensive Income for the

Year Ended August 31, 2010:

Income tax expense 93,544 12,671 106,215

Net income 322,952 (12,671) 310,281

Basic EPS 0.20 (0.01) 0.19

Diluted EPS 0.13 (0.01) 0.12

- 54 -

26. Personnel Costs and Expenses

a. Composition of Personnel Costs and Expenses

The following are the details of the personnel costs and expenses and the distribution

(in thousands):

Note 2012 2011 2010

Cost of goods sold and

services:

Direct labor 21 P26,324 P22,679 P160,858

Selling expense:

Salaries and other benefits 23 1,840 17,891 14,634

General and administrative

expense: 23

Salaries and other

employee benefits 13,375 14,438 32,467

Retirement benefit 7,648 7,144 -

Retrenchment cost - - 495,447

P49,187 P62,152 P703,406

b. Voluntary Attrition Program

In 2010, the Parent Company implemented a voluntary attrition program (VAP)

affecting all of its employees. Due to the program, the Parent Company paid

retrenchment cost amounting to P495.447 million (see Note 23). This VAP resulted

also to the recognition of net actuarial gain amounting to P138.746 million which is

presented as part of “Other income” account (see Note 22).

Furthermore, as a result of the VAP, the Parent Company outsources its production,

finance and administration. However, some key personnel were hired by the Parent

Company as regular employees.

c. Retirement Benefit

The Parent Company and certain subsidiaries have their unfunded, non-contributory,

defined benefit plan covering substantially all of its permanent employees and in

accordance with the provisions of the Miguel J. Ossorio Pension Foundation, Inc. and

the provisions of the supplementary retirement plan. The most recent actuarial

valuation of the present value of the defined benefit obligation of the Parent

Company was carried out at August 31, 2010 by a qualified independent actuary. The

present values of the defined benefit obligation, the related current service cost and

past service cost of the Group were measured using the projected unit credit method.

- 55 -

The reconciliation of the retirement benefit obligation shown in the consolidated

statements of financial position is as follows (in thousands):

2012 2011 2010

Present value of defined benefit

obligations, end P120,796 P98,283 P103,177

Unrecognized actuarial gains (losses) (32,015) (2,295) (1,622)

Retirement benefits liability at end of

year P88,781 P95,988 P101,555

Movements in the present value of defined benefit obligation are as follows

(in thousands):

2012 2011 2010

Present value of defined benefit

obligation at beginning of year P98,283 P103,177 P240,934

Interest cost 6,800 7,541 12,676

Actuarial loss 31,364 757 74,767

Current service cost 195 371 7,113

Curtailment 6,642 - (191,814)

Benefits paid (22,488) (13,563) (40,499)

Present value defined benefit

obligation at end of year P120,796 P98,283 P103,177

The remaining retirement benefit obligation pertains to the retirement payable to retired

employees who did not opt for the lump sum payment of retirement benefit at the time of

their retirement.

The amounts recognized as net of retirement benefit cost in consolidated statements of

comprehensive income in respect of this defined benefit plan are as follows (in

thousands):

2012 2011 2010

Interest cost P6,800 P7,541 P12,676

Current service cost 195 371 7,113

Actuarial loss (gain) recognized 1,644 85 74,850

Effect of curtailment 6,642 - (233,385)

P15,281 P7,997 (P138,746)

As previously disclosed, the VAP in 2010 resulted to the recognition of net actuarial gain

amounting to P138.746 million which is presented as part of “Other income” account

(see Note 22).

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

liability follow:

Valuation at

2012 2011 2010

Discount rate 6.92% 7.31% 5.26%

Expected rate of salary increases 3.00% 3.00% 3.00%

- 56 -

The historical information on actuarial losses (gains) due to changes in actuarial

assumptions and experience adjustments and the present value of defined benefit

obligation is as follows (in thousands):

2012 2011 2010 2009 2008

Present value of defined

benefit obligation P120,796 P98,283 P103,177 P240,934 P263,417

Experience adjustments on

plan liabilities 6,482 - 68,131 (20,363) (1,138)

Changes in actuarial

assumptions 24,436 - 6,636 (13,697) 942

27. Related Party Transactions

Identity of Related Parties

The Parent Company‟s related parties include an unconsolidated subsidiary and key

management personnel.

Significant Transactions with Related Parties

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

2012 2011 2010

Purchase of goods from:

VGCCI P - P - P -

b. Year-end balances arising from sales/purchases of goods/production supplies during

the year follow (in thousands):

2012 2011 2010

Advances to:

VGCCI P25,722 P26,198 P -

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

maturities.

In 2011, the Parent Company recognized income from recovery of previously

written-off advances to VGCCI amounting to P26.17 million.

c. Details of the Parent Company‟s advances from an unconsolidated subsidiary as at

August 31 follow (in thousands):

2012 2011 2010

VGCCI P - P - (P1,003)

The Parent Company‟s advances from its unconsolidated subsidiaries are paid within

the latter‟s normal credit terms ranging from 30 to 60 days.

The advances from unconsolidated subsidiary do not have definite maturities and are

expected to be settled within one year from reporting date.

- 57 -

Management believes that the carrying amounts of advances to and from subsidiaries

approximate their respective fair values as they represent the expected cash flow

should they be settled or realized at the reporting date.

d. Remuneration of Key Management Personnel

The remuneration of key management personnel of the Group is set out below in

aggregate for each of the categories specified in PAS 24, Related Party Disclosures

(in thousands).

2012 2011 2010

Short-term employee benefits P14,788 P15,172 P18,106

Post-employment benefits - 315 362

P14,788 P15,487 P18,468

e. Due to a Stockholder

Due to a stockholder amounting to P6.0 million as of August 31, 2012, 2011 and

2010, pertains to VQPC advances from its non-controlling stockholder. This is

unsecured and will be settled in cash and has no definite payment terms. No

guarantee has been given or received.

The Management of the Group considers that the carrying amount of the “Due to a

stockholder” account approximates its fair value as it represents the expected cash

flow should it be settled at the reporting date.

28. Agreements and Commitments

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

a. Milling contracts with various planters provide for a 69.5% share to the planters

(including related parties) and 30.5% share to the Parent Company of sugar and

molasses produced from sugar canes milled. The milling contracts are renewed

annually.

b. As of August 31, 2012, 2011 and 2010, the Parent Company had in its custody sugar

owned by several quedan holders and sugar traders of approximately 0.60 million

Lkg, 0.24 million Lkg, and 0.37 million Lkg, respectively. The estimated market

values of these sugar inventories amounted to P1.31 billion, P0.44 billion and P0.84

billion, respectively. These sugar inventories are not reflected in the consolidated

statements of financial position since these are not assets of the Parent Company.

The Parent Company is accountable to both quedan holders and sugar traders for the

value of these trusteed sugar or their sales proceeds.

c. In 2005, the Parent Company has entered into a deed of assignment and exchange of

shares of stock with VGCCI for the latter to issue shares of stock with a total par

value of P224 thousand in exchange for the Parent Company‟s land with an appraised

value of P13,205,970, the difference of P12,981,970 to be accounted for as additional

paid-in capital of the Parent Company to VGCCI.

- 58 -

As provided for in the agreement, VGCCI is in possession of the above-mentioned

land without any consideration yet until such time that the assignment of the

aforementioned land is completed. As at August 31, 2010, the certificate of title has

not yet been transferred in the name of VGCCI since the land to be transferred is

covered by the mortgage trust indenture of the Parent Company with various creditor

banks as disclosed in Note 16. Hence, the transaction is on hold until the subject land

will be released as collateral.

d. In an Order dated May 21, 2010, DOLE approved and adopted the Joint Motion to

Approve Compromise Agreement of VMC and VIWA as the final disposition of all

labor controversies pending before the Office and the DOLE Regional Office No. VI.

The Order further states, that all cases pending before the Office of the Secretary and

the DOLE Regional Office No. VI be terminated and dropped from their respective

business calendars.

e. The Group leases certain machineries and equipment from third parties for terms of

one year, subject to yearly renewal. Total rent expense is charged to the following (in

thousands):

Note 2012 2011 2010

Cost of goods sold and

services 21 P5,418 P4,442 P4,434

Operating expenses 23 7,300 5,598 5,563

P12,718 P10,040 P9,997

Future minimum lease payments within 1 year amounted to P10 million as of

August 31, 2012, 2011 and 2010, respectively.

29. Provisions and Contingencies

a. North Negros Marketing Co., Inc. (NONEMARCO) used refined sugar

invoice/delivery orders (RSDOs) allegedly issued by VMC to avail of bank loans

totaling to about P630 million. Several creditor banks filed collection cases against

NONEMARCO aggregating to P1.19 billion. Further, these creditor banks have

asked VMC to either make a delivery of the sugar covered by the RSDOs or absorb

the debts of NONEMARCO.

VMC denied liability as these RSDOs were not backed up with actual sugar and that

the officers who issued them acted fraudulently; hence, VMC took the position that

these accounts should be paid by NONEMARCO. The proceedings of the case are

still pending with the SEC.

VMC estimated that the total liability (including imputed finance cost) to be incurred

at the end of the rehabilitation program on the claims on RSDOs is P917 million.

The amortized cost of this liability which is presented as “Provisions” account in the

consolidated statements of financial position amounted to P554.34 million, P509.73

million, and P468.72 million as of August 31, 2012, 2011 and 2010, respectively

(see Note 15).

- 59 -

b. On September 22, 2003, VMC received an order issued by the Pollution

Adjudication Board (PAB) directing the former to permanently seal the opening of

the underground canal leading to Malihao river; provide protective lining in the pond

immediately; and, show cause within five (5) days from receipt of order why a cease

and desists order should not be imposed on VMC by the Department of Environment

and Natural Resources (DENR) for non-compliance with both water and air

standards. On September 26, 2003, VMC has filed a manifestation and compliance

certification in response to the September 22, 2003 order.

The Management of VMC has placed the handling of pollution problems on its

priority list and is now addressing it in a manner which is within the financial

resources of VMC. VMC is expected to address air pollution problems to comply

with the Clean Air Act.

Moreover, VMC is now in compliance with the water pollution standards of the

DENR after the upgraded waste water treatment plant has been successfully

commissioned in February 2003. Two samples of wastewater effluent taken by the

Environmental Management Bureau - Region VI on February 27, 2003 and

March 23, 2003 were analyzed to contain Biochemical Oxygen Demand at 7.0 ppm

and 10.0 ppm, respectively, which were way below the standard of 50 ppm.

In the last hearing of PAB, it was ordered that the computation of fines due to past

non-compliance to effluent standard be made. As of August 31, 2006, the Company

received the computation of fines from the PAB. The Company has not obtained yet

the permanent lifting order with respect to water pollution. Management believes

that said fine will have no significant impact on the Group‟s consolidated financial

statements.

On February 8, 2005, VMC received a copy of the resolution/order from PAB dated

December 21, 2004, concerning the pending case of VMC on air pollution. The order

was addressed to VMC to comply with the following requirements: (i) a surety bond

equivalent to 25% of the total cost of the proposed Air Pollution Control Device

(APCD); (ii) board resolution approving the construction of the proposed APCD;

(iii) certificate of availability of funds for the construction of the APCD; and (iv) a

notarized undertaking to comply with the conditions set forth in the order.

On February 18 and 21, 2005, VMC filed very urgent motions for reconsideration of

the order. On a hearing conducted by PAB on these motions filed by VMC, PAB

directed VMC to submit appropriate pleading with the SEC for the inclusion of the

APCD cost as part of the rehabilitation plan which VMC filed before SEC a motion

for leave to allow inclusion of the cost of compliance with the order as part of

rehabilitation plan on April 14, 2005.

In response, SEC issued on August 11, 2005 an order deferring resolution on the

motions of VMC and directing VMC to submit an itemized cost to be incurred for

the: (i) acquisition, fabrication, installation and maintenance of APCD; (ii) statutory/

regulatory fines imposed upon VMC and the amounts thereof as computed by PAB;

(iii) expenses needed to comply with the December 21, 2004 order; and (iv) financial

presentation which clearly show the source of funds and VMC‟s ability to service its

indebtedness under the terms of the DRA.

- 60 -

On January 27, 2009, VMC filed an urgent motion/application for an extension of the

Temporary Lifting Order (TLO) that was previously issued by DENR. This urgent

motion was received by PAB secretariat on April 29, 2009. On January 30, 2009, the

PAB had resolved to issue a three (3) months TLO instead of the original eighteen

(18) months TLO that VMC had originally requested. However, on August 13, 2009,

VMC filed another motion/application for extension of the said TLO for a period of

one year from September 4, 2009 to September 4, 2010.

Incidentally, in order to minimize the pollution problems that VMC‟s management

had encountered, it had allotted approximately P30 million for the installation of wet

gas scrubbers for the two boilers (JTA and Yoshimine), which are already

operational as of August 31, 2009.

In addition, as part of VMC‟s regular pollution control program, VMC had also met

with foreign consultants who are willing to look at VMC‟s pollution concerns in

relation to its carbon credits program and activities in the country. Initial visits by

representatives of a foreign company to the millsite have been made but no further

developments have resulted yet.

On June 21, 2010, PAB directed VMC to show cause within 10 days from receipt of

the Order why no Cease and Desist Order shall be issued against it for its alleged

violation of law and DENR rules. On July 29, 2010, VMC filed its position paper.

On October 22, 2010, PAB issued an Order directing VMC to “SHOW CAUSE”

why no Cease and Desist Order shall be issued for its violators under P.D. 984, R.A.

9275, R.A. 8749 and its implementing Rules and Regulations. On November 19,

2010, VMC filed its Position Paper, praying that VMC be granted an extension of the

Temporary Lifting Order.

On July 5, 2011, the technical conference was held where VMC directed to submit

commitment letter. VMC submitted the required commitment letter.

On January 11, 2012, VMC received PAB‟s order dated July 5, 2011, granting

VMC‟s motion for extension of TLO but only for three (3) months or from

January 11, 2012 to April 11, 2012. Likewise, VMC was required to submit

management-approved program of work concerning the installation of additional

control device for the five (5) remaining boilers. Regional office may issue a “permit

to operate”, co-terminus with the effectivity of TLO.

On April 3, 2012, VMC filed compliance and urgent motion for extension of

temporary lifting order of PAB dated July 5, 2011. VMC prayed that its compliance

be duly noted by PAB and an order be issued, granting VMC an extension of the

TLO for a period of one (1) year or from April 11, 2012 to April 12, 2013.

c. In August 1999, SGS Yarsley International Certification Services issued an ISO 9002

certification to VMC. As of November 25, 2003, VMC has upgraded its ISO

certification to ISO 9001:2000 version. On October 21-23, 2009 SGS Philippines

conducted the stage 2 of the on-site audit and concluded that VMC has established

and maintained its management system in line with the requirements of the standard

and demonstrated the ability of the system to systematically achieve agreed

requirements for products or services within the scope and the organization's policy

and objectives. VMC is recommended for recertification and upgrading from

ISO 9001:2000 to ISO 9001:2008 version.

- 61 -

d. In a letter to the SEC dated October 8, 1997, the predecessor auditors withdrew their

reports on the 1996 and prior years‟ financial statements of VMC and those of its

subsidiaries as a consequence of matters the predecessor auditors described in their

aforementioned letter. In several letters to the SEC, VMC and its then MANCOM

objected to the predecessor auditors‟ withdrawal of audit reports and requested the

SEC not to allow it. On September 7, 1998, the SEC ruled that all reports/filings

officially submitted to the SEC form an integral part of the corporate records of

VMC and cannot be detached, modified or amended except through subsequent

filings.

e. The agricultural land of VALCO, with carrying amount of P90.8 million, is subject

to the Comprehensive Agrarian Reform Law which requires, among others, the

redistribution of land that exceeds the retention limit. As of reporting date, VALCO

has not received a Notice of Coverage of CARP.

f. Judgments against the Parent Company were rendered on certain cases ordering the

Parent Company to pay/deliver certain bags of sugar to the plaintiff. The Parent

Company recorded accruals related to these liabilities (see Note 14).

g. There are various lawsuits and claims such as labor cases, collection disputes and

assessments filed by third parties against VMC which are either pending decision by

the proper judicial bodies or under negotiation, the outcome of which are presently

undeterminable. Relative to this, VMC is required to put up cash surety bonds (see

Note 13).

Except for the claims of the several creditors involving the collection cases against

NONEMARCO as discussed in letter a above which is properly and sufficiently accrued

as provision, in the opinion of the management of the Group and in consultation with

legal counsels, the ultimate disposition of these cases, disputes and assessments will not

have a material adverse effect on the financial position or financial performance of the

Group.

30. Financial and Capital Risk Management

The Group‟s financial instruments comprise of cash and cash equivalents, trade and other

current receivables, advances to and from an unconsolidated subsidiary, other noncurrent

assets, trade and other current payables, long-term debts and due to a stockholder. The

main purpose of these financial instruments is to raise finances for the Group‟s

operations.

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

Credit Risk

Liquidity Risk

Market Risk

The Board of Directors of the Parent Company has overall responsibility for the

establishment and oversight of the Group‟s risk management framework. Moreover,

market and credit risk management is carried out by the Group‟s Treasury Group. The

objective is to minimize potential adverse effects on its financial performance due to

unpredictability of financial markets.

- 62 -

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations

resulting in financial loss to the Group.

The Group trades only with recognized and creditworthy third parties. It is the Group‟s

policy that all customers who wish to trade on credit terms are subject to credit

verification procedures. In addition, receivable balances are monitored on an ongoing

basis. The amounts presented in the consolidated statements of financial position are net

of allowances for impairment losses on receivables, estimated by the Group‟s

management based on prior experience and their assessment of the prevailing economic

environment at any given time.

As of August 31, 2012, 2011 and 2010, the aging profile of the Group‟s financial assets

is as follows (in thousands):

Neither Past Past Due but not Impaired Past Due

August 31, 2012 Total

Due nor

Impaired < 30 Days 31-60 Days 61-90 Days > 90 Days

and

Impaired

Trade and other

current

receivables* P144,140 P116,594 P3,363 P121 P140 P4,094 P18,828

Advances to

unconsolidate

d subsidiary 25,722 25,722 - - - - -

Other

noncurrent

assets 1,804,874 1,796,981 - - - - 7,893

P1,974,736 P1,939,297 P3,363 P121 P140 P4,094 P18,828

*Excluding advances to suppliers

Neither Past Past Due but not Impaired Past Due

August 31, 2011 Total Due nor

Impaired < 30 Days 31-60 Days 61-90 Days > 90 Days and

Impaired

Trade and other

current receivables* P161,935 P14,627 P91,396 P14,416 P617 P13,193 P27,686

Advances to

unconsolidated subsidiary 26,198 - - - - 26,198 -

Other noncurrent

assets 1,299,496 1,299,496 - - - - -

P1,487,629 P1,314,123 P91,396 P14,416 P617 P39,391 P27,686

*Excluding advances to suppliers

Neither Past Past Due but not Impaired Past Due

August 31, 2010 Total Due nor

Impaired < 30 Days 31-60 Days 61-90 Days > 90 Days and

Impaired

Trade and other

current receivables* P31,060 P7,183 P2,078 P801 P313 P1,336 P19,349

Other noncurrent

assets 2,101,004 2,101,004 - - - - -

P2,132,064 P2,108,187 P2,078 P801 P313 P1,336 P19,349

*Excluding advances to suppliers

At the reporting date, there were no significant concentrations of credit risk as the

Group‟s receivables are actively monitored.

- 63 -

As of August 31, 2012, 2011 and 2010, the Group‟s maximum credit exposure is equal to

the carrying value of the following financial assets (in thousands):

Note 2012 2011 2010

Cash and cash equivalents* 6 P1,086,492 P923,032 P809,973

Trade and other current

receivables - net** 7 133,194 143,561 11,711

Advances to unconsolidated

subsidiaries 27.b 25,722 26,198 -

Cash and cash equivalents

reserve for debt repayment -

net*** 13 1,796,981 1,299,496 2,101,004

P3,042,389 P2,392,287 P2,922,688

* Excluding cash on hand

** Excluding advances to suppliers and net of impairment loss

*** Net of impairment loss

Liquidity Risk

Liquidity risk is the risk of not meeting obligations as they become due because of an

inability to liquidate assets or obtain adequate funding.

The Group monitors and maintains a level of cash deemed adequate by the management

to finance the Parent Company‟s operations and mitigate the effects of fluctuations in

cash flows. Additional short-term funding is obtained from related party advances.

The following tables summarize the maturity profile of the Group‟s financial liabilities as

of August 31, 2012, 2011 and 2010 based on contractual undiscounted payments (in

thousands):

Total

Carrying Contractual Undiscounted Payments

August 31, 2012 Value Total On Demand < 1 Year 1 to 5 Years > 5 Years

Trade and other

current

payables* P341,916 P341,916 P227,013 P114,903 P - P -

Long-term debts 4,826,907 4,826,907 - 358,834 1,435,336 3,032,737

Due to a

stockholder 6,000 6,000 6,000 - - -

P5,174,823 P5,174,823 P233,013 P473,737 P1,435,336 P3,032,737

* Excluding payables to government

Total

Carrying Contractual Undiscounted Payments

August 31, 2011 Value Total On Demand < 1 Year 1 to 5 Years > 5 Years

Trade and other

current

payables* P460,746 P460,746 P389,581 P66,373 P4,792 P -

Long-term debts 5,889,082 6,135,202 - 359,066 1,436,264 4,339,872

Due to a

stockholder 6,000 6,000 - - 6,000 -

P6,355,828 P6,601,948 P389,581 P425,439 P1,447,056 P4,339,872

* Excluding payables to government

- 64 -

Total

Carrying Contractual Undiscounted Payments

August 31, 2010 Value Total On Demand < 1 Year 1 to 5 Years > 5 Years

Trade and other

current

payables* P395,201 P395,201 P315,754 P79,447 P - P -

Long-term debts 6,559,530 6,837,125 - 362,254 1,449,016 5,025,855

Due to a

stockholder 6,000 6,000 - - 6,000 -

Advances from an

unconsolidated

subsidiary 1,003 1,003 1,003 - - -

P6,961,734 P7,239,329 P316,757 P441,701 P1,455,016 P5,025,855

* Excluding payables to government

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates,

interest rates and equity prices will affect the Group‟s income or the value of its holdings

of financial instruments. The Group‟s market risk exposures and its risk management

strategies as of August 31, 2012, 2011 and 2010 are as follows:

a. Interest Rate Risk

Interest rate risk is the possibility that changes in interest rates will affect future cash

flows or the fair values of financial instruments. The Group‟s exposure to the risk

changes in market interest rates relates primarily to the Group‟s interest-bearing bank

loans and interest-bearing short-term placements.

The Group minimizes its spread exposure by ensuring that surplus cash is available

to either offset debt or by matching maturity dates of assets and liabilities. By these

management approaches, possible market rate fluctuations would have no significant

impact on the Group‟s net income.

The Group, however, has no significant interest rate risk considering that the Group

has no significant financial instruments that bear variable interest rate.

b. Price Risk

The Group is exposed to commodity price risk with respect to sugar produced. To

manage this risk, the Parent Company monitors prices with the Sugar Regulatory

Administration (SRA) to plan its transactions. As of August 31, 2012, 2011 and

2010, management assessed that the Group‟s exposures to commodity price risk were

insignificant.

Sensitivity Analysis

The following table demonstrates the sensitivity of the results of operations and the

reported equity in regards to the Parent Company‟s sugar inventory and SRA‟s sugar

prices. It assumes a 15%, 24% and 42% increase as of August 31, 2012, 2011 and

2010, respectively and 8%, 29% and 42% decrease as of August 31, 2012, 2011 and

2010, respectively, of the SRA sugar prices per year.. These percentages have been

determined based on average market volatility in sugar prices in the previous months

for the 12 month periods ended August 31, 2012, 2011 and 2010, respectively.

- 65 -

The sensitivity analysis includes only sugar inventory denominated monetary items

(in thousands) and adjusts their translation at the period end for the following %

change in sugar prices.

August 31, 2012 +15% -8%

Net income P8,996 (P4,798)

Equity 8,996 (4,798)

August 31, 2011 +24% -29%

Net income P148,355 (P179,262)

Equity 148,255 (179,262)

August 31, 2010 +42% -42%

Net income P16,942 (P16,942)

Equity 16,942 (16,942)

c. Foreign Currency Risk

The Group‟s currency risk occurs because of its US Dollar (USD) denominated loans

and bank deposits. The financial assets and liabilities of the Group that are foreign

currency denominated are a portion of the Group‟s cash and cash equivalents and

portion of its bank loans.

The Group's exposures to foreign currency risk based on notional amounts are as

follows (in thousands):

August 31, 2012 In USD In PHP

Financial Assets

Cash in bank $4 P162

Financial Liability

Bank loans (7,834) (331,514)

Net Foreign Currency Exposure ($7,830) (P331,352)

August 31, 2011 In USD In PHP

Financial Assets

Cash in bank $49 P2,083

49 2,083

Financial Liability

Bank loans (10,245) (435,515)

Net Foreign Currency Exposure ($10,196) (P433,432)

August 31, 2010 In USD In PHP

Financial Assets

Cash in bank $4 P193

4 193

Financial Liability

Bank loans (10,245) (462,583)

Net Foreign Currency Exposure ($10,241) (P462,390)

- 66 -

The Group recognized a net unrealized gain of P1.48 million, P15.05 million and

P18.23 million for the years ended August 31, 2012, 2011 and 2010, respectively,

arising from the re-measurement of these foreign currency-denominated financial

instruments.

The following exchange rates were applied during the period:

August 31, 2012

Average Rate

Reporting Date

Spot Rate

Philippine peso to 1 US $ P42.90 P42.32

August 31, 2011

Average Rate

Reporting Date

Spot Rate

Philippine peso to 1 US $ P43.45 P42.51

August 31, 2010

Average Rate

Reporting Date

Spot Rate

Philippine peso to 1 US $ P46.21 P45.18

Sensitivity Analysis

The following table demonstrates the sensitivity of the results of operations for the

periods and the reported equity in regards to the Group‟s financial assets and financial

liabilities and the US dollar-Philippine peso exchange rate. It assumes a 1.83%, 1.83%

and 4.17% strengthening as of August 31, 2012, 2011 and 2010, respectively and 2.36%,

2.36% and 3.43% weakening as of August 31, 2012, 2011 and 2010, respectively, of the

Philippine peso against the US dollar exchange rate. These percentages have been

determined based on average market volatility in exchange rates in the previous months

for the 12 month periods ended August 31, 2012, 2011 and 2010, respectively.

The sensitivity analysis includes only outstanding foreign currency denominated

monetary items (in thousands) and adjusts their translation at the period end for the

following % change in foreign currency rates.

August 31, 2012 +1.83% -2.36%

Net income P5,772 (P7,692)

Equity 5,772 (7,692)

August 31, 2011 +1.83% -2.36%

Net income P5,552 (P7,160)

Equity 5,552 (7,160)

August 31, 2010 +4.17% -3.43%

Net income P19,011 (P16,158)

Equity 19,011 (16,158)

Exposures to foreign exchange rates vary during the year depending on the volume of

foreign currency-denominated transactions. Nonetheless, the analysis above is considered

to be representative of the Group‟s currency risk.

- 67 -

Fair Value of Financial Assets and Liabilities

The carrying values of cash and cash equivalents, trade and other current receivables and

trade and other current payables approximate their fair values due to the short-term

maturity of these instruments.

The carrying value of long-term debts approximates its fair value and is calculated by

discounting the expected future cash outflows at prevailing effective interest rate. The

carrying values of advances to and from an unconsolidated subsidiary and due to

stockholder approximate their fair values because they represent the expected cash flow

should they be settled or realized at the reporting date.

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES

SUPPLEMENTARY SCHEDULE REQUIRED UNDER SRC RULE 68,

AS AMENDED (2011)

Schedule of Philippine Financial Reporting Standards (PFRSs)

As at August 31, 2012

Standards “Adopted”, “Not adopted” or “Not applicable”

Philippine Financial Reporting Standards (PFRSs)

PFRS 1 First-time Adoption of Philippine Financial Reporting Standards

Not applicable

PFRS 2 Share-based Payment Not applicable

PFRS 3 Business Combinations Not applicable

PFRS 4 Insurance Contracts Not applicable

PFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Not applicable

PFRS 6 Exploration for and Evaluation of Mineral Resources

Not applicable

PFRS 7 Financial Instruments: Disclosures Adopted

PFRS 8 Operating Segments Adopted

Philippine Accounting Standards (PASs)

PAS 1 Presentation of Financial Statements Adopted

PAS 2 Inventories Adopted

PAS 7 Statement of Cash Flows Adopted

PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Adopted

PAS 10 Events after the Reporting Period Adopted

PAS 11 Construction Contracts Not applicable

PAS 12 Income Taxes Adopted

PAS 16 Property, Plant and Equipment Adopted

PAS 17 Leases Adopted

PAS 18 Revenue Adopted

PAS 19 Employee Benefits Adopted

PAS 20 Accounting for Government Grants and Disclosure of Government Assistance

Not applicable

PAS 21 The Effects of Changes in Foreign Exchange Rates

Adopted

PAS 23 Borrowing Costs Not applicable

PAS 24 Related Party Disclosures Adopted

PAS 26 Accounting and Reporting by Retirement Benefit Plans

Not applicable

PAS 27 Consolidated and Separate Financial Statements

Adopted

PAS 28 Investments in Associates Adopted

PAS 29 Financial Reporting in Hyperinflationary Economies

Not applicable

PAS 31 Interests in Joint Venture Not applicable

PAS 32 Financial Instruments: Presentation Adopted

PAS 33 Earnings per Share Adopted

PAS 34 Interim Financial Reporting Not applicable

PAS 36 Impairment of Assets Adopted

PAS 37 Provisions, Contingent Liabilities and Contingent Assets

Adopted

Forward

ANNEX A

Victorias Milling Company, Inc. and Subsidiaries Schedule of PFRSs

ii

Standards “Adopted”, “Not adopted” or “Not applicable”

PAS 38 Intangible Assets Not applicable

PAS 39 Financial Instruments: Recognition and Measurement

Adopted

PAS 40 Investment Property Adopted

PAS 41 Agriculture Not applicable

ANNEX B

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES

SUPPLEMENTARY SCHEDULE REQUIRED UNDER SRC RULE 68, AS AMENDED

Map of Conglomerate

LEGEND:

VMC - Victorias Milling Company, Inc.

VFC - Victorias Foods Corporation

VALCO - Victorias Agricultural Land Corporation

VGCCI - Victorias Golf and Country Club, Inc.

VQPC - Victorias Quality and Packaging Company, Inc.

CDC - Canetown Development Corporation

VIGASCO - Victorias Industrial Gases Corporation

ANNEX C

Page 1 of 9

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Supplementary Schedules of Annex 68-E Required by the Securities and Exchange Commission

As of August 31, 2012 and for the Year then Ended

Page

A. Financial Assets (e.g., Loans and Receivables, Fair Value Through Profit or Loss, Held to

Maturity Investments and Available for Sale Securities) 2

B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal

Stockholders (Other than Related Parties). 3

C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial Statements 4

D. Intangible Assets - Other Assets 5

E. Long Term Debt 6

F. Indebtedness to Related Parties 7

G. Guarantees of Securities of Other Issuers(1) NA

H. Capital Stock (1) 9

NA : Not applicable

ANNEX C

Page 2 of 9

SEC/PSE ANNUAL FILING REQUIREMENT CHECKLIST

PUBLIC COMPANIES FORM AND CONTENT OF SCHEDULES

Schedule A. Financial Assets (e.g., Loans and Receivables, Fair Value Through Profit or Loss, Held to Maturity

Investments and Available for Sale Securities)

Name of Issuing entity and association of each

issue (1)

Number of shares or principal amount of bonds and notes

Amount shown in the balance sheet (2)

Valued based on market quotation at

balance sheet date (3)

Income received and

accrued

LOANS AND RECEIVABLES (Amount in thousands)

Various Banks P1,086,492 P1,086,492 P76,225

Various Customers 132,547 132,547 -

Due from Victorias Golf and Country Club, Inc.

25,722 25,722 -

___________________________ (1) Each issue shall be stated separately, except that reasonable grouping, without enumeration may be made of (a) securities

issued or guaranteed by the Philippine Government or its agencies and (b) securities issued by others for which the amounts in the aggregate are not more than two percent of total assets.

(2) State the basis of determining the amounts shown in the column. This column shall be totaled to correspond to the

respective balance sheet caption or captions. (3) This column may be omitted if all amounts that would be shown are the same as those in the immediately preceding column.

ANNEX C

Page 3 of 9

Schedule B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Affiliates)

Name and Designation of debtor (1)

Balance at beginning of period

Additions Amounts collected (2)

Amounts

written off (3)

Current Not Current Balance at end of period

Officers and employees

P1,127 4,301 4,781 - P647 -

P647

_________________________ (1) Show separately accounts receivables and notes receivable. In case of notes receivable, indicate pertinent information such

as the due date, interest rate, terms of repayment and collateral, if any. (2) If collection was other than in cash, explain. (3) Give reasons for write off.

ANNEX C

Page 4 of 9

Schedule C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial Statements (in

thousands).

Name and Designation of

debtor

Balance at beginning of

period

Additions Amounts collected (1)

Amounts written off (2)

Current Not Current Balance at end of period

Victorias Foods Corporation (VFC) P563 (P91) P563 - (P91) - (P91)

Victorias Agricultural Land Corporation (VALCO) (12,821) (1,084) 13,018 - (887) - (887)

Canetown Development Corporation (CDC) 48,402 414 1,260 - 47,556 - 47,556

Victorias Quality Packaging Company, Inc. (VQPC) 2,437 11,394 (2,437) - 11,394 11,394

___________________________ (1) If collection was other than in cash explain (2) Give reasons for write off.

ANNEX C

Page 5 of 9

Schedule D. Intangible Assets – Other Assets

Description (1) Beginning balance

Additions at cost (2) Charged to cost and expenses

Charged to other

accounts

Other charges, additions

(deductions) (3)

Ending Balance

___________________________ (1) The information required shall be grouped into (a) intangibles shown under the caption intangible assets and (b) deferrals

shown under the caption Others Assets in the related balance sheet. Show by major classifications. (2) For each change representing anything other than an acquisition, clearly state the nature of the change and the other accounts affected.

Describe cost of additions representing other than cash expenditures.

(3) If provision for amortization of intangible assets is credited in the books directly to the intangible asset account, the amounts shall be stated

with explanations, including the accounts charged. Clearly state the nature of deductions if these represent anything other than regular

amortization.

Not applicable

ANNEX C

Page 6 of 9

Schedule E. Long Term Debt

Title of Issue and type of obligation(1)

Amount authorized by indenture

Amount shown under caption "Current portion of long-term debt" in related

balance sheet (2)

Amount shown under caption "Long-Term Debt" in related

balance sheet (3)

Various Banks P4,826,907 P358,834 P4,468,073

___________________________ (1) Include in this column each type of obligation authorized. (2) This column is to be totaled to correspond to the related balance sheet caption. (3) Include in this column details as to interest rates, amounts or number of periodic installments, and maturity dates.

Refer also to Note 16 of the consolidated financial statements

ANNEX C

Page 7 of 9

Schedule F. Indebtedness to Affiliates and Related Parties (Long-Term Loans from

Related Companies)

Name of affiliate (1) Balance at beginning of period Balance at end of period (2)

___________________________ (1) The related parties named shall be grouped as in Schedule D. The information called for shall be stated separately for

any persons whose investments were shown separately in such related schedule. (2) For each affiliate named in the first column, explain in a note hereto the nature and purpose of any material increase

during the period that is in excess of 10 percent of the related balance at either the beginning or end of the period.

Not applicable

ANNEX C

Page 8 of 9

Schedule G. Guarantees of Securities of Other Issuers (1)

Name of issuing entity of securities guaranteed by the company for which this statement is filed

Title of issue of each class of securities guaranteed

Total amount guaranteed and outstanding (2)

Amount owned by person for which statement is filed

Nature of guarantee (3)

___________________________ (1) Indicate in a note any significant changes since the date of the last balance sheet filed. If this schedule is filed in support

of consolidated financial statements, there shall be set forth guarantees by any person included in the consolidation except such guarantees of securities which are included in the consolidated balance sheet.

(2) There need be made only a brief statement of the nature of the guarantee, such as "Guarantee of principal and interest",

"Guarantee of Interest", or "Guarantee of dividends". If the guarantee is of interest, dividends, or both, state the annual aggregate amount of interest or dividends so guaranteed.

Not applicable

ANNEX C

Page 9 of 9

Schedule K. Capital Stock (1)

Title of Issue (2)

Number of Shares authorized

Number of shares issued and

outstanding at shown under

related balance sheet caption

Number of shares

reserved for options,

warrants, conversion and other

rights

Number of shares held by affiliates (3)

Directors, officers and employees

Others

Common stock 2,563,035,708 2,024,626,982 - 5,824,318 852,595 2,017,950,069

___________________________ (1) Indicate in a note any significant changes since the date of the last balance sheet filed. (2) Include in this column each type of issue authorized. (3) Affiliates referred to include affiliates for which separate financial statements are filed and those included in consolidated

financial statements, other than the issuer of the particular security.

Refer also to Notes 16 and 17 of the consolidated financial statements

ANNEX D

VICTORIAS MILLING COMPANY, INC.

VICMICO Compound, Victorias City

Negros Occidental

SCHEDULE OF RECONCILIATION OF DEFICIT

AS OF AUGUST 31, 2012

DEFICIT, BEGINNING P1,753,290,464

Add:

Revaluation increment closed to retained earnings in accordance

with a quasi-reorganization approved in 2002 3,195,367,390

Accumulated fair value adjustment of investment properties

resulting to gain, net of deferred tax effect of P204,469,005 477,094,345

Unamortized discount on provisions carried at present value in

accordance with PAS 37 as of August 31, 2011, net of deferred

tax effect of P122,179,717 285,086,006

Unamortized interest expense on convertible notes measured using

effective interest method in accordance with PAS 39 as of

August 31, 2011, net of deferred tax effect of P73,836,087 172,284,202

Accumulated unrealized foreign exchange gains in prior years, net

of deferred tax effect of P 27,100,184 63,233,763

Treasury stock 10,530

DEFICIT AS ADJUSTED, BEGINNING 5,946,366,700

Add (Less):

Net income for the year closed to retained earnings (539,607,565)

Depreciation on appraisal increase, net of deferred tax of

P21,226,419 (49,528,311)

Amortization of discount on provisions, net of deferred tax effect

of P13,381,654 (31,223,859)

Amortization of the unamortized interest expense on convertible

notes, net of deferred tax effect of P5,266,281 (12,287,990)

Unrealized foreign exchange loss, net of deferred tax effect of

P3,162,788 (7,379,839)

DEFICIT AS ADJUSTED, ENDING P5,306,339,136 Figures based on functional currency audited separate financial statements

Note

There is no amount available for divided declaration as the adjusted amount is a deficit.

SEC Form 17-A – Amended Annual Report ---------- Forwarded message ---------- From: <no-reply@pse.com.ph> Date: Thu, Jan 31, 2013 at 12:14 AM Subject: ODiSy - Disclosure Status To: disclosure@pse.com.ph Dear Sir/Madam: We would like to inform you that as of JAN 30, 2013 04:14:56 PM today, Reference Number: WLIST__2013000022052 Company Name: Victorias Milling Company, Inc. Disclosure Subject: Amended Annual Report for fiscal year ended August 31, 2012 Status: APPROVED Should you need further assistance, please e-mail us at odisy@pse.com.ph.