Cagayan De Oro Oil Company, Inc.

I. Background: A. The CIIF OMG Companies

• The balance of the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Industry Development Fund (CIDF), or roughly P2.572 Billion was used to acquire, purchase or establish certain companies engaged in the business of coconut oil milling and refining. This balance is what was later designated or commonly referred to as the Coconut Industry Investment Fund (CIIF).

• From 1977 to 1979, various oil mills were acquired using the CIIF. These oil mill companies are collectively known as the CIIF Oil Mills Group, to wit:

• The major stockholders of the CIIF OMG Companies and their percentage equity holding in the companies are, as follows:

i. The CIIF Fund (represented by the fund’s administrator, the United Coconut Planters Bank [UCPB]) – 64.38% ii. UCPB itself – 11.0% iii. The United Coconut Planters Life Assurance Corporation (“Cocolife”) – 11.0%

• The CIIF OMG Companies are principally engaged in the business of milling copra and producing crude and refined coconut oil and other bi-products. On the average, eighty percent (80%) of the group’s produce are exported abroad while the balance is sold to the domestic market.

• MINOLA edible oil, the premier coconut cooking oil in the country today, and other MINOLA products such as margarine and shortening, are being produced by the group. These are being sold in consumer packs or on a wholesale basis, and are being marketed and distributed through accredited national and regional distributors. Major supermarkets and retailers throughout the country carry and sell all MINOLA consumer products.

• To minimize operating costs by having a lean organization and to implement synergies within the group, the CIIF OMG Companies have been overseen and managed by a common management team.
• In 1986, the government through the Presidential Commission on Good Government (“PCGG”, for brevity) sequestered the CIIF OMG Companies. Consequently, the government instituted a suit with the Sandiganbayan asserting ownership over the CIIF OMG Companies.

• As a result of the sequestration, the government through PCGG is effectively in control of the CIIF OMG companies as government causes from time to time the election of its nominees in the boards of directors of all the CIIF OMG Companies, and their subsidiaries including the appointment of the group’s President/Chief Executive Officer.

• See Appendix A for the Consolidated Income Statements of the CIIF OMG.

B. The 14 Holding Companies (Anglo Ventures Corp, AP Holdings Inc, ASC Investors Inc, ARC Investors Inc, Fernandez Holdings, Inc, First Meridian Development, Inc, Randy Allied Ventures, Inc, Rock Steel Resources, Inc, Roxas Shares, Inc, San Miguel Officers Corps, Inc, Te Deum Resources Inc, Toda Holdings Inc, Soriano Shares Inc, Valhalla Properties, Inc)

• The CIIF OMG Companies collectively own the 14 Holding Companies in the following proportions:

Stockholders Percentage Ownership CAGOIL - 18% GRANEX - 19 ILICOCO - 15 LEGOIL - 18
SOLCOM - 11 SPMC - 19

• The 14 Holding Companies were created to acquire common shares in San Miguel Corporation (SMC).

• It must be stressed that the 14 Holding Companies are wholly-owned by the CIIF OMG Companies, at the time these were organized and even at the present. In other words, all of the shares of stocks of the 14 holding companies are registered in the names of one or more CIIF OMG Company. • The 14 Holding Companies are overseen by common set of five (5) directors and a common management team, who are all caused to be nominated, elected and/or appointed by the government through the PCGG.

C. The CIIF Block of SMC Shares

• In 1983, about 33 million common shares in San Miguel Corporation (SMC) was acquired by the 14 holding companies for the total sum of P1.656 Billion (the “CIIF Block of SMC Shares”).

• Funding for this purchase was made via:

i. P247 Million in paid-up capital infused by the CIIF OMG Companies in the 14 Holding Companies;

ii. 729 Million in stockholder advances made by the CIIF OMG Companies to the 14 Holding Companies; and

iii. P684 in loans obtained by the 14 Holding Companies from UCPB. These loans have been fully paid by the 14 Holding companies to UCPB in 2002.

• At the time of acquisition or purchase, the CIIF Block of Shares represented thirty-one percent (31%) of SMC’s total outstanding capital stock.

• Due to a compromise agreement between SMC and UCPB in 1990, the shares were reissued and registered as follows:

• As of today, this percentage equity holding decreased to twenty-four percent (24%) due to the failure of government not to exercise its right of first refusal (apparently due to lack of funds to subscribed to additional capital) as a result of the increase in SMC’s capitalization.

• In 2009, the Supreme Court approved the conversion of the CIIF Block of SMC Shares from common to preferred shares. Among others, the high court ruled that CIIF Block of SMC Shares as converted shall continue to be: a) registered in the names of the 14 Holding Companies, b) subject to PCGG sequestration, and c) under custodia legis.

• The Supreme Court cited the following main reasons in approving the conversion of the CIIF Block of SMC Shares from common to preferred shares:

a. The Proposed Conversion is Advantageous to the Government (or the party who will eventually be adjudged as the true owner of the Subject Shares) “The respondent Republic has satisfactorily demonstrated that the conversion will redound to the clear advantage and material benefit of the eventual owner of the CIIF SMC shares in question.

xxx

“Moreover, the conversion may be viewed as a sound business strategy to preserve and conserve the value of the government’s interests in CIIF SMC shares. Preservation is attained by fixing the value today at a significant premium over the market price and ensuring that such value is not going to decline despite negative market conditions. Conservation is realized thru an improvement in the earnings value via the 8% per annum dividends versus the uncertain and most likely lower dividends on common shares.

“A fixed dividend rate of 8% per annum translates to PhP 6 per preferred share or a guaranteed yearly dividend of PhP 4,523,308,987.20 for the entire sequestered CIIF SMC shares. The figures jibe with the estimate made by intervenors Salonga, et al. Compare this amount to the dividends declared for common shares for the recent past years which are in the vicinity of PhP 1.40 per unit share or a total amount of PhP 1,055,387,636.80 per annum. The whopping difference is around PhP 3.5 billion annually or PhP 10.5 billion in three (3) years. On a year-to-year basis, the difference reflects an estimated increase of 77% in dividend earnings. With the bold investments of SMC in various lines of business, there is no assurance of substantial earnings in the coming years. There may even be no earnings. The modest dividends that accrue to the common shares in the recent years may be a thing of the past and may even be obliterated by poor or unstable performance in the initial years of operation of newly-acquired ventures.”

b. The Conversion (of the common shares) will not result to loss of control by the government in SMC

“The mere presence of four (4) PCGG nominated directors in the SMC Board does not mean it can prevent board actions that are viewed to fritter away the company assets. Even under the status quo, PCGG has no controlling sway in the SMC Board, let alone a veto power at 24% of the stockholdings. In relinquishing the voting rights, the government, through PCGG, is not in reality ceding control.”

c. PCGG did not abuse its discretion when it approved the proposed conversion “A circumspect review of the pleadings and evidence extant on record shows that the PCGG approved the conversion only after it conducted an in-depth inquiry, thorough study, and judicious evaluation of the pros and cons of the proposed conversion. PCGG took into consideration the following:

“(1) Resolution of the UCPB Board of Directors approved during its July 20, 2009 special meeting, where it categorically decided and concluded that it is financially beneficial to convert the CIIF SMC shares as offered by the SMC.

“(2) Resolution No. 365-2009 of the UCPB Board of Directors issued on August 28, 2009 reiterating its position that the proposed conversion is financially beneficial. “(3) The Department of Finance, through Secretary Margarito B. Teves, upon the recommendation of the Development Bank of the Philippines, confirmed that the CIIF SMC shares conversion is financially and economically advantageous and that it shall work for the best interest of the farmers who are the ultimate and beneficial owners of said shares. “(4) The letter of the OSG dated July 30, 2009 opined that the proposed conversion is legally allowable as long as PCGG approval is obtained.”(Underscoring supplied; see 17 September 2009 Resolution of the Supreme Court, G.R. Nos. 177857-58)

• The SC’s resolution also ordered that the: a) proceeds of the redemption price on the CIIF Block of SMC Shares (upon redemption by SMC); and b) cash dividends paid prior to redemption, be deposited with either the Land Bank of the Philippines (LBP) or Development Bank of the Philippines (DBP) but in an escrow account.

• On 22 September 2009, PCGG through an en banc resolution directed the 14 Holding Companies to implement the Supreme Court’s 19 September 2009 resolution. On 05 October 2009, the CIIF Block of SMC shares were converted into preferred shares.

• On 11 February 2010, the Supreme Court granted UCPB’s motion to be one of the depository banks for the escrow deposit. The PCGG through Resolution No. 2010-018-795 dated 28 May 2010: - a) approved the opening of an escrow account with the UCPB where all the cash dividends/redemption proceeds will be deposited, and b) directed SMC to remit to this escrow account the cash dividends and the redemption price. Subsequently, an escrow account in the name of the Republic of the Philippines represented by the PCGG ITF the 14 CIIF Holding companies was established with UCPB Trust Banking Group.

• On 24 January 2012, the Supreme Court declared the government the owner of the CIIF OMG companies, the 14 Holding Companies and the so-called CIIF Block of SMC Shares consisting of 753,848,312 preferred shares in San Miguel Corporation (SMC).

• Subsequently, the Supreme Court in a resolution dated 04 September 2012 denied the motion for reconsideration filed by the Philippine Coconut Producers Federation, Inc. (“Cocofed”).

However, this decision is not yet final and executory as the government had petitioned the tribunal last 12 October 2012 to amend the decision to include certain treasury shares in SMC that are part and parcel of the original shares purchased by the 14 Holding Companies from SMC.

• On 05 October 2012, about P56.5 Billion representing the proceeds of the redemption price paid by SMC for the CIIF Block of SMC Shares was remitted to the Bureau of the Treasury (BTr) under instructions from the Presidential Commission on Good Government (PCGG). An escrow account was then opened in the name of the PCGG in-trust-for (ITF) the 14 Holding Companies as the Supreme Court’s decision declaring the government the owner of the CIIF OMG, 14 Holding Companies and the CIIF Block of SMC Shares is not yet final and executory.

On the other hand, the cash dividends on said block (after the same were converted from common to preferred) are deposited in escrow with the United Coconut Planters Bank (UCPB). As of 31 December 2012, this amounted to P13.695 Billion inclusive of interest/yield thereon.

D. Subsidiaries
• On 30 June 1986, the CIIF OMG was placed under the control of the Presidential Commission on Good Government (PCGG). Some companies were on the verge of bankruptcy while others had excess liquidity. • To remedy the situation, the new management initiated a drastic financial restructuring. Available resources were consolidated and redeployed for more efficient utilization. Under-utilized funds of over PhP1.0B were moved from one unit to the other oil mill companies enabling the latter to operate smoothly and to service their bank obligations on time. • The following are the existing subsidiaries of CIIF OMG, to wit:
• MANILA REFINING CORPORATION (Formerly: Minola Refining Corporation)

Incorporated in 24 February 1998, MRC is 75% owned by San Pablo Manufacturing Corporation (SPMC), 15% Cocochem and 10% UCPI.

The company is engaged in the business of refining, milling, manufacturing, conserving, packaging, preserving, storing of, and the buying, selling on wholesale basis only, importing and exporting of, coconut oil, palm oil, palm kernel oil, corn oil, crude coconut oil, other vegetable oil, coconut and palm oil products and by-products. • MINOLA CORPORATION (MC)

Incorporated in 2 March 1990, MC is 100% owned by San Pablo Manufacturing Corporation (SPMC). MC was formed to optimize the use of CIIF OMG strategically located copra buying stations by making them outlets for various goods, commodities, wares and merchandise needed in various areas. • ILIGAN BAY MANUFACTURING CORPORATION (IBEC) Formerly: Iligan Bay Export Corporation

Incorporated in 25 April 1979, IBEC is 96.83% owned by UCPB (as administrator of CIIF), 2.65% by Legaspi Oil Co., Inc. (LEGOIL) and 0.53% by Granexport Manufacturing Corporation (GRANEX).

IBEC operates inter-island vessels primarily for transporting copra from the CIIF OMG’s buying stations to plant sites and refineries. This arrangement assures the oil mill plants sufficient stocks to keep the manufacturing operations dynamic. A number of Copra Buying Stations (CBS) are in place nationwide to gather and buy the copra harvest from the coconut farmers.

Last 2012, GRANEX sold three of its vessels for cost efficiency. IBEC continues to manage the operation of the remaining vessels.

• LEGASPI OIL COCOFIBERS CORPORATION (COCOFIBER)

Incorporated in 06 April 1995, COCOFIBER is 75% owned by LEGOIL while the remaining 25% is owned by Francisco Soriano, a champion in the coir industry using coconut husk in processing coir and other by-products and in the aspect of marketing the finished value-added products.

COCOFIBER was formed to engage in the business of importing, exporting, buying and selling of coconut fiber, coconut coir and other coconut-based products.

• CIIF COCONUT FARM DEVELOPMENT PROGRAM, INC. Formerly: Niyog Trading Center, Inc.

Incorporated in 5 February 2004, the Company is equally owned by LEGOIL, GRANEX, SPMC, CAGOIL, SOLCOM and ILICOCO.

Originally, the Company is engaged in the business of trading coconut and its by-products, and to stimulate, catalyze, promote, commission and undertake scientific and market research recommendations on agricultural and industrial aspects of the coconut and other palm oil and complementary crop, intercropping projects and livestock farming systems to ensure the development of all sectors particularly the coconut farmers.

The Company also instituted socio-economic programs for the upliftment, development and advancement of the farmers, workers and members of the coconut industry, maximize productivity, community development, equitable distribution of wealth and economic values, application of technology to increase the value of coconut products.

• CIIF AGRO-INDUSTRIAL PARK, INC. (CAIP)

Incorporated in 06 June 2004, CAIP is owned by the CIIF OMG in the following manner: 25% LEGOIL, 25% GRANEX, 20%SPMC, 25%CAGOIL, 0.03%SOLCOM and 0.03% ILICOCO

To promote a globally competitive business entity and avail of incentives, the CIIF OMG, as an export-oriented manufacturing group of companies, applied for PEZA accreditation. CAIP stands as developer/operator of economic zones owned by CIIF OMG.

The following have been declared PEZA ecozones, and are all being developed/ operated by CAIP.

Complex Cert. of Registration Locator Cert. of Registration Iligan 17 Jan 2006 Granex 17 Jan 2006 Davao 25 June 2010 Legoil 25 June 2010 Legazpi 15 Feb 2012 Legoil Pending CDO 21 Feb 2013 Cagoil Pending

• CIIF CENTER FOR RESEARCH AND DEVELOPMENT FOUNDATION, INC. (CCRDF)

Incorporated on 1 June 2004, CCRDF is owned by the CIIF OMG as follows: 30% LEGOIL, 30% GRANEX, 20% CAGOIL, 9.2% SPMC, 9.2% SOLCOM and 1.6% Others

A non-stock, non-profit organization, CCRDF was formed to focus on undertaking scientific based coconut related products and by-products, other oil palms, complementary crops and livestock farming systems for the benefit of the coconut farmers. It also commits to undertake research and development through grants, scholarships and other related incentives.

• CIIF MANAGEMENT COMPANY, INC. (CIIF Management)

Incorporated in 29 December 1986, CIIF Management is equally owned by LEGOIL, GRANEX, SPMC, CAGOIL and SOLCOM.

CIIF Management was formed to coordinate the operations of the companies belonging to the CIIF Group. A common board of directors formulates policy and a common management implements strategy to ensure consistency and coordination.

• GRANEXPORT CORPORATION, USA (GUSA)

Incorporated in 25 July 1972, GUSA is a wholly owned subsidiary of Granexport Manufacturing Corporation. GUSA serves as the trading and marketing arm of CIIF OMG for coconut oil, oleochemicals and shortenings for the US market.

• SILAHIS MARKETING CORPORATION (SILMARCOR)

SILMACOR was incorporated on September 8, 1966 with 100% Filipino Capitalization of employees of then Theo H. Davies and Co. Far East Ltd., an English firm operating in the Philippines together with some of its business & professional associates. It was organized by managers and officers of said firm as an exclusive channel for the distribution of its product due to the effect of Philippine Retail Trade Law in its strict implementation. Corporate changes of Theo H. Davies transpired in 1970 and the new owner, Jardine Davies, Inc. modified the distributorship agreement which enabled SILMACOR run its operations independently. Since then, its business development has progressed so much that the original capitalization of PhP75,000 has gradually grown through “plow back” of earnings up to the current paid up of PhP35,000,000 without contribution from stockholders. SILMACOR started its operation with a humble beginning housed in a rented apartment with four-man workforce. Now, SILMACOR maintains a Head Office in Makati City and branches in Bacolod, Iloilo, Cebu, Cagayan de Oro, Iligan and Davao. The Company is primarily engaged in trading of industrial maintenance chemicals and supplies, refractory, anti-pollution supplies & equipment, consumer products, thermal insulations, coatings, construction chemicals & supplies, and a wide range of traded items of mill supplies, including but not limited to medical equipment and supplies, industrial tools, machineries and equipments. Its principal market covers the industries of sugar, cement, coconut, mining, shipping and shipbuilding, manufacturing/processing, fishing & canning, food & beverages, as well as institutional accounts as hotels, restaurants, hospitals, schools, office buildings and the likes. Recently, the market have been expanded that included the power generation, oil & petroleum as well as the construction industries and have developed mill supply lines for the coconut mills, including San Miguel Corporation and its subsidiaries.

• 10 Copra Trading (Mt. Boribing Agricultural Commodities, Inc, Mt. Bulusan Agricultural Commodities, Inc, Lamitan Peak Agricultural Commodities, Inc, Lamon Bay Agricultural Commodities, Inc, Mactan Agricultural Commodities, Inc, Malipayon Agricultural Commodities, Inc, Mt. Mandalangan Agricultural Commodities, Inc, Maopay Agricultural Commodities, Inc, Sharp Peak Agricultural Commodities, Inc, Mt. Tuayan Agricultural Commodities, Inc.)

Incorporated in 1985, the 10 Copra Trading Companies’ primary purpose is to purchase, sell and trade coconut, copra, plam oil and other coconut by-products. Although these companies had no trading operations since 1988, they were sequestered and included as subject matter in Sandiganbayan Civil Case No. 0033-D.

II. ASSISTANCE TO THE COCONUT FARMERS/GROUPS

Assistance by the CIIF OMG Companies to various coconut farmer groups/organizations may be summarized as follows:

A. Coconut Farm Development Program/Coconut Farmers Agro-business Program (CFDP/CADP)

a. Summary

Total CIIF OMG + PCA 815,717,387.84 Add: Obligated 40,461,247.00 Total CIIF + PCA + Obligated P 856,178,634.84 Funds Balance as of 31 Dec 2012 193,821,365.06 Total P1,050,000,000.00

b. CIIF-OMG Initiated Projects

i. Planting and replanting - establishment of 194 village level nursery sites with more than 18.8M seedlings to be planted in roughly 186,738 hectares.

ii. Farm intercropping - grant of assistance for the propagation of other crops, such as banana, abaca and other livestock to 44 farmer cooperatives for a total area of 2,540 hectares. iii. Value-adding

1. Kukum Dryers - establishment of 19 copra processing facilities and 3 modified drum carbonizers in partnership with the NEDA-EU-TRATA.

2. Decorticating Machines - deployment of 104 units of coconut husk decorticating machines mostly through the Diocesan Social Action Centers (DSACs) through coconut farmer cooperatives.

iv. Agri-business centers - deployment of initial infrastructure for data base and coconut trading information kiosks for 52 coconut farmers’ networks.

v. These projects were implemented through 373 program/project partners (58 LGUs; 225 CFOs; 12 SUCs; and 78 DSACs).

Type of Project Location Accomplishment Amount Invested in Peso Planning/ Replanting 201 municipalities/ 50 provinces/ 13 regions 18,678,609 seedlings 368,485,116.10 Inter-cropping 40 municipalities/ 25 provinces/ 11 regions 2,540 hectares 18,150,00.00 Value-Adding: Copra Quality Processing 18 municipalities/ 17 provinces/ 11 regions 19 kukum driers 6,840 hectares 4,158,868.00 Value-Adding: Husk & Shell Processing 86 municipalities/ 63 provinces/ 15 regions 104 units 36,720 hectares 19,560,088.49 CocoFarmers Agri-business Centers 21 municipalities/ 19 provinces/ 10 regions 52 agri-business centers 37,394,800.00 447,748,872.59

c. PCA-Initiated Projects

i. Participatory Coconut Planting Program - funded assistance to individual farmers who have planted an estimated 6.5M trees or 65,000 hectares nationwide.

ii. Coconut-Corn Intercropping - funded PCA’s coconut-corn intercropping project that included distribution of at least 100,000 bags of corn and inoculants to typhoon devastated areas.

iii. Coconut Pest Management - funded PCA’s Brontispa Eradication Project involving the treatment of 2,364,639 infected trees in 32 provinces.

iv. Coconut Farm Fertilization 1 - funded PCA’s Salt Fertilization Program involving the procurement and distribution of 477,372 bags of sodium chloride for application to at least 111,843 hectares.

v. Coconut Farm Fertilization 2 - funded PCA’s Salt Fertilization Program involving the procurement and distribution of 151,515 bags of sodium chloride for application to at least 36,000.

Type of Project Location Beneficiaries Amount invested in Peso Participatory Coco Planting and replanting 931 municipalities & cities /73 provinces/ 16 regions 28,383 farmers 81,579,413.00 Salt Fertilization Project 1,006 municipalities and cities/72 provinces/16 regions 142,259 farmers 188,143,738.76 Coconut Inter--cropping Project 281 municipalities and cities/24 provinces/8 regions 60,799 farmers 81,651,673.56 Pest Management 254 municipalities and cities/61 provinces/14 regions

• 16,593.689.93 351,374,825.32

B. Coconut Farmers Insurance Claims

a. Background

i. Presidential Decree No. 1468 otherwise known as the Revised Coconut Industry Code provides that the Coconut Consumers Stabilization Fund shall be utilized, among others, to fund life and accident insurance coverage of the farmers.

ii. In 1978, following the mandate of PD No. 1468, UCPB, Cocolife and Philippine Coconut Producers Federation (Cocofed) entered into a contract for the set-up of an insurance fund from the Coconut Consumer Stabilization Fund (CCSF). The Insurance Fund which was managed by UCPB became the source of premium for the insurance coverage (Program 1-Whole Life Plan for sum insured of P10,000 per coconut farmer).

iii. In 1985, with the depletion of the Insurance Fund, the face amount was reduced to P5,000, whole life plan was converted to group term life and the cash value of the whole life plan was used to fund the program.

iv. In 1996, UCPB, Cocolife and CIIF OMG (collectively called “CIIF Companies”) and PCA entered into a Memorandum of Agreement (MOA) extending the insurance program to coconut farmers who are not yet insured under Program 1 (Program 2 – additional 485,000 farmers not covered under program 1). Based on the MOA, these companies agreed to set aside or allocate an amount equal to such percentage of their audited net profits in the preceeding calendar year as are consistent with the requirement of their business operations and contribute said amount to the Insurance Fund.

v. The Insurance Fund was never set up and only CIIF OMG contributed premium payment in the amount of P20Million.

vi. In 2002, the parties in Program 2 entered into another MOA (Program 3) increasing the insurance coverage from P5,000 to P10,000 per coconut farmer and to a total of 3,500,000 coconut farmers and farm workers throughout the country.

vii. On 19 December 2003, the parties amended the MOA (2002) to state that the Insurance Fund shall be financed by the Coconut Industry Investment fund (CIIF) and that advances paid by the CIIF OMG as initial insurance premiums shall be considered as the latter’ contribution to the Insurance Fund and any excess of their paid advances taking into consideration the share of other CIIF Companies to the Insurance Fund, shall be refunded by CIIF.

viii. Due to substantial financial requirement, only the objective of upgrading the insurance coverage from P5,000 to P10,000 was implemented.

ix. In 2008, the CIIF Management Co., Inc. (with representatives from CIIF Companies and Cocochem) approved in principle a sharing of obligation among the CIIF-UCPB Group. It likewise directed the 14 Holding Companies to declare cash dividends in favor of the CIIF OMG which shall in turn make cash advances to the CIIF.

b. Advances

x. As of 2010, CIIF OMG advanced a total of P909,400,091.51 to CIIF for the payment of coconut farmers insurance claims.

xi. No advances were made thereafter since the CIIF Block of SMC Shares were converted from common to preferred and the Supreme Court required that all SMC dividends thereon shall be deposited to an escrow account.

C. Financial Assistance to PCA, UP Alumni for Coconut Scale Insect

• On September 2012, the CIIF OMG, through the 14 Holding Companies, provided financial assistance in the amount of P2Million in support of PCA’s stop-gap measure program to control the coconut scale infestation in Batangas Province.

D. Contribution to UCPB-CIIF Foundation, Inc. (Cocofoundation)

• CIIF OMG from time to time grants financial contributions to the UCPB-CIIF Foundation, Inc. (“Cocofoundation”) to enable the latter to sustain its scholarship programs for deserving children of coconut farmers. Summary of contributions is as follows:

E. Other Assistance

a. CIIF-OMG accommodates coconut-farmers/cooperatives’ request to “toll crush” their produce with the CIIF OMG; this scheme allows them to be the owner of the resulting products and in the process earn additional revenues. This is vertical integration at work.

b. CIIF OMG provides training to coconut farmer cooperatives that desire to engage in the copra buying business, and for their stocks to be eventually purchased by the CIIF OMG Companies.

III. SIGNIFICANT ISSUES

A. Supreme Court’s Decision Declaring the Government as Owner of the CIIF OMG Companies, 14 Holding Companies and the CIIF Block of SMC Shares

• On 24 January 2012, the Supreme Court declared the government the owner of the CIIF OMG companies, the 14 Holding Companies and the so-called CIIF Block of SMC Shares consisting of 753,848,312 preferred shares in San Miguel Corporation (SMC).

The Supreme Court basically affirmed in full the Sandiganbayan’s Partial Summary Judgment dated 7 May 2004 (as amended by the Sandiganbayan’s Resolution dated 11 May 2007) with significant modification in the dispositive portion from the phrase “owned by the government in trust for all coconut farmers” to “owned by the government to be used only for the benefit of all coconut farmers and for the development of the coconut industry.”

• On 14 February 2012, the Philippine Coconut Producers Federation, Inc. (“Cocofed”) filed a Motion for Reconsideration of said decision.

• The Supreme Court in a resolution dated 04 September 2012 denied the motion for reconsideration filed by Cocofed.

• However, this decision is not yet final and executory as the government had petitioned the Supreme Court last 12 October 2012 to amend the decision to include certain treasury shares in SMC that are part and parcel of the original shares purchased by the 14 Holding Companies from SMC.

• On 05 October 2012, about P56.5 Billion representing the proceeds of the redemption price paid by SMC for the CIIF Block of SMC Shares was remitted to the Bureau of the Treasury (BTr) under instructions from PCGG. An escrow account was then opened in the name of the PCGG in-trust-for (ITF) the 14 Holding Companies as the Supreme Court’s decision declaring the government the owner of the CIIF OMG, 14 Holding Companies and the CIIF Block of SMC Shares is not yet final and executory.

On the other hand, the cash dividends on said block (after the same were converted from common to preferred) are deposited in escrow with UCPB. As of 31 December 2012, this amounted to P13.695 Billion inclusive of interest/yield thereon.

• On 28 December 2012, both UCPB and Cocolife filed its respective Petition for Declaratory Relief against CIIF OMG Companies, 14 Holding Companies and PCGG with the Regional Trial Court of Makati City.

• In said petitions, UCPB and Cocolife sought an authoritative declaration from the court as to their rights and duties as stockholders of the CIIF OMG Companies and as to their respective 11% indirect ownership of the 14 Holding Companies and the CIIF Block of SMC Shares.

• On 11 July 2013, farmer-leaders and members of the Kilusang Magbubukid ng Bondoc Peninsula filed a Motion for Leave to Intervene and Answer-in Intervention seeking that the courts deny the petitions filed by UCPB and Cocolife.

B. Utilization of cash dividends from CIIF Block of SMC Shares

a. Dividends/Proceeds

*cash dividends received from SMC is net of transfer costs incurred relative to the conversion from common to preferred shares amounting to P326M

b. Applications (as of 30 June 2013)

C. Financial Review

• The down spin in the performance of the CIIF OMG started in 2004. From 2005 to 2007, CIIF OMG suffered total loss of P1.4Billion from operations due to the following:

1. Negative crushing margins due to higher domestic prices of copra than equivalent export prices basis Rotterdam index, thus resulting in huge losses from export shipments;

2. Foreign exchange losses due to currency fluctuations that moved towards steep appreciation on the peso versus the dollar;

3. Increased plant shutdowns due to low volume of copra purchased as result of declining production and stiff competition from millers with low carrying costs;

4. Higher interest costs on export and short term credit facilities, mostly from commercial banks, needed for increased fund requirements to cope with abnormal surges in copra prices;

5. Erosion in market share, revenues and income for domestic edible oil due to recalcitrant distribution contractor and aggressive entry of palm oil; and

6. Extraordinary expenses, such as non-operations related commitment, added to cost burdens assumed by the CIIF OMG. • Aside from the foregoing, the following factors had also contributed to the loss:

7. Lack of executive oversight. From 2006 to 2009, former CIIF OMG President, Danilo M. Coronacion, travelled abroad 27 times equivalent to 162 days which cost roughly P10.8Million.

8. Wrong trading position. Management did an aggressive forward short selling due to anticipated improvement in copra supply and expected softening of CNO prices during the annual peak harvest season.

In 2005, recovery was not sustained due to congestions of copra warehouses and oil storage that slowed down copra purchases. There was also an increase in carrying costs that tied up working capital in the aftermath of Hurricane Katrina.

In 2006, copra supply was lower than expected due to damages caused by 2 super typhoons in Bicol region, Southern Tagalog area, Masbate, Samar and Leyte.

By 2007, due to insufficient working capital, CIIF OMG had difficulty in executing its decision to trade from a long position. CIIF OMG needed to generate forward contracts to secure export packing credits and other lines in order to raise sufficient funds for copra inventory buildup and oil milling operations.

3. Long term freight contracts. In 2004, management entered into a contract of affreightment with Stolt-Nielsen Transportation Group (Stolt) for a guaranteed minimum volume of 60,000 mt annually with a minimum of 5,000mt per shipment per port for New York/New Orleans. In February 2006, management again contracted with Stolt for a guaranteed minimum load of 50,000mt covering the period from March to December 2006 or a minimum of 5,000mt per month for US market (New York/New Orleans/Quincy/Savannah).

However, in contrast to the previous arrangement allowing discharge of cargo in any safe berth in New York/New Orleans, at the shipper’s option, the provision for discharge was changed to “owner’s berth” meaning discharge could only be done at Stolt’s terminal in New York/New Orleans.

Because of the refusal of some US buyers to rent or use tanks at Stolt’s terminal, it became difficult for CIIF OMG to sell its contracted requirements. CIIF OMG suffered penalties for having vessels shifted to another terminal where end buyers had rented tanks, thus not only resulting in inability to sustain the US market but also contributed to escalating costs of insurance and freight.

4. Onerous copra buying scheme. While CIIF OMG had been dealing with Mr. Eduardo Uyfang for copra supply since 2001, the exclusive copra buying scheme was formally initiated in 2004. “Exclusive” meaning Mr. Uyfang sold 100% of his copra to CIIF OMG. The scheme involved payment of premium for volume deliveries and sharing of warehouse facilities for efficient handling of inventories.

The scheme turned out to be disadvantageous to CIIF OMG considering that Mr. Uyfang was able to buy from traditional CIIF OMG territories, paying higher prices than CIIF OMG, allegedly because he speculates, thereby keeping the copra from going to competition (and from CIIF OMG). Invariably, Mr. Uyfang turned around and sold the same volume to CIIF OMG at a higher price than what he paid.

The foregoing was made possible because Trading Department allowed 11 of Uyfang’s copra buying station (CBS) to co-exist with that of CIIF OMG. Records showed that out of total deliveries from January to July 2006, about 23,167 mt of copra or 63.67% were Uyfang’s deliveries in CBS where he co-exists with CIIF OMG and only 13,217mt or 36.33% came from Uyfang’s supposed CBS.

D. Proposed Bills and Executive Orders a. Proposed Bills

i. In 2011, two (2) bills were filed to establish a trust fund for the purpose of developing the coconut industry and implementation of programs for the benefit of the coconut farmers. These bills were:

a) House Bill No. 5070, introduced by Representative Lorenzo R. Tañada III

AN ACT PROVIDING FOR THE DISPOSITION OF THE COCONUT LEVY ASSETS BY THE PRIVATIZATION AND MANAGEMENT OFFICE, CREATING THE COCONUT INDUSTRY FUND COMMITTEE, AND PROVIDING FOR THE MANAGEMENT, INVESTMENT, AND USE OF PROCEEDS OF SUCH ASSETS FOR AND IN BEHALF OF THE COCONUT FARMERS AND FOR OTHER PURPOSES

b) Senate Bill No. 2378, introduced by Senator Juan Ponce Enrile

AN ACT DECLARING THE COCONUT LEVY FUNDS AS PUBLIC FUNDS, AUTHORIZING THE PRIVATIZATION AND MANAGEMENT OFFICE TO DISPOSE THE COCONUT LEVY ASSETS, ESTABLISHING THE COCONUT FARMERS AND INDUSTRY FUND, PROVIDING FOR ITS MANAGEMENT AND UTILIZATION, AND FOR OTHER PURPOSES

ii. Both bills required that any and all proceeds for the redemption or sale of the CIIF Block of SMC Shares and all dividends accruing or have accrued thereto shall form part of the initial capital of the trust fund. The trust fund shall thereafter be augmented with all proceeds of privatization/disposition of the Coconut Levy Assets.

b. Executive Orders

i. In 10 April 2012, the Supreme Court declared unconstitutional the Executive Order (EO) Nos. 312 and 313 issued by former President Joseph Estrada on the basis that the coco levy funds are public funds and should not be outside the audit jurisdiction of the Commission on Audit. EO No. 313 was also declared violative of the constitutional provision which directs that all money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. Assisting other agriculturally-related programs is way off the coco-fund’s objective of promoting the general interests of the coconut industry and its farmers.

ii. Executive Order No. 312 was issued to establish a Sagip Niyugan Program which sought to provide immediate income supplement to coconut farmers and encourage the creation of a sustainable local market demand for coconut oil and other coconut products. The Executive Order sought to establish a P1-billion fund by disposing of assets acquired using coco-levy funds or assets of entities supported by those funds.

iii. On the other hand, Executive Order No. 313 was issued to create an irrevocable trust fund known as the Coconut Trust Fund (the Trust Fund). This aimed to provide financial assistance to coconut farmers, to the coconut industry, and to other agri-related programs. The CIIF Block of SMC Shares was to serve as the Trust Fund’s initial capital.

E. CIIF OMG’s Claims for Reimbursement of Advances made in favor of 14 Holding Companies
a. Summary

The summary of advances/payments made by the CIIF OMG is as follows:

1. Reimbursement of the Carrying Cost of Loans Obtained to Fund the Acquisition of the CIIF Block of SMC Share’s – P1.604 Billion

2. Reimbursement of Payments by the CIIF OMG on the Redemption Price for the Redeemable Shares issued by the CIIF OMG in favor of the CIIF (as a fund) – P700.0 Million

3. Reimbursement of Advances to Fund Important Capital Expenditures (CAPEX) Pending Release of Declared Cash Dividends by the 14 Holding Companies in favor of the CIIF OMG to fund CAPEX requirements of the CIIF OMG-P54 Million.

b. Background & Discussion

1. Carrying Cost of the Loans Obtained to Fund the Acquisition of the CIIF Block of SMC Shares.

a. In 1983, the 14 Holding Companies purchased and acquired the CIIF Block of SMC Shares, i.e., about 33 million common shares in SMC at an aggregate purchase price of PhP 1.656 Billion.

b. Funding for the purchase came from: - i) the equity of the 14 Holding Companies (that was infused by the CIIF OMG Companies) and ii) advances made by the CIIF OMG Companies to the 14 Holding Companies amounting to PhP 247 Million and PhP 729 Million, respectively, as well as loans amounting to PhP 680 Million that were obtained by the 14 Holding Companies from UCPB.

c. Being the borrowers of said loans obtained from UCPB, the 14 Holding Companies are the obligors for said loans and should fully pay and settle the same.

d. Being holding companies, the only source of income of the 14 Holding Companies is the cash dividends that would accrue and be paid on the CIIF Block of SMC Shares. Unfortunately, the cash dividends that have been, from time to time, declared and remitted by SMC in favor of the 14 Holding Companies, could not fully cover the amortizations on the aforementioned loans.

e. To prevent the 14 Holding Companies from defaulting on its loans to UCPB, the CIIF OMG Companies had to advance and pay the amortizations (or portions thereof) due on these loans. Please note that these payments made to UCPB by the CIIF OMG Companies have been validated by UCPB itself in a letter dated October 25, 2007 addressed to then Finance Secretary Margarito B. Teves.

f. During the hearings of the Sandiganbayan in Civil Case No. 033, former CIIF OMG President Oscar Torralba had testified on these advances made by the CIIF OMG Companies, which testimony is part of records of the case.

2. Balance of Previously Declared But Unreleased Cash Dividends by the 14 Holding Companies in favor of the CIIF OMG Companies to fund: - i) the expanded CADP/CFDP, and ii) CAPEX Requirements of the CIIF OMG Companies.

a. On 24 March 2010, the 14 Holding Companies, through a resolution, approved the declaration of cash dividends amounting to PhP 1,098 Million to fund the following:

Particulars Amount (PhP)

Expanded CADP/CFDP PhP 700.0 Million (includes PCA’s Salt Fertilization Project - PhP 463.77 M) Capex Requirements of the CIIF OMG 398.0 Million Total PhP1,098.0 Million

b. Of the total sum of PhP 1,098 Million (declared as cash dividends by the 14 Holdings Companies in favor of the CIIF OMG), only 100.0 Million was actually released, leaving a balance of PhP 998 Million payable to the CIIF OMG Companies. In turn, of the sum of PhP 100.0 Million , PhP 50.0 Million was released to PCA to fund its coconut fertilization program while the other PhP 50.0 Million was released to cover certain capex requirements of the CIIF OMG.

c. No further subsequent releases were made by the 14 Holding Companies as the cash dividends on the CIIF Block of SMC Shares that were intended to fund the aforementioned programs, were placed in escrow.

3. Reimbursement of Payments Made by the CIIF OMG Companies on the Redemption Price for the Redeemable Shares issued in favor of the CIIF (as a fund).

a. On September 1986, the CIIF (the “Fund”, which was then being administered by UCPB) subscribed and acquired a total of 373,013,387 redeemable shares in three (3) of the CIIF OMG Companies, namely: San Pablo Mfg. Corporation (SPMC), Granexport Mfg. Corporation (“Granex”) and Cagayan de Oro Oil Co., Inc. (“CagOil”) at PhP 1.00 par value or an aggregate value of PhP 373,013,387.00. b. Based on the Articles of Incorporation (“AOI”) of SPMC, Granex and CagOil (prior to the 2008 and 2009 amendments), the basis for computing the redemption price is as follows: A. PRIOR TO SEPTEMBER 2006 (before the 20th year maturity of the shares) HIGHER of the two values -

Fair Market Value (FMV) or Par Value (PV)

• 10% of the HIGHER of the FMV or PV for every year in excess of 10 years

B. ON OR AFTER SEPTEMBER 2006 (upon expiration of 20 years from issuance of shares)

HIGHER of the two values –

2x Fair Market Value (FMV) or 2x Par Value (PV)

c. On 17 January 2003, SPMC, Granex and CagOil remitted to the Fund a total of PhP 700 Million as full or partial redemption on the redeemable shares, subject to an agreement on the valuation of said shares. d. On 20 April 2008, the UCPB (as administrator of the Fund) approved the:

• Extension of the redemption period of the redeemable shares in SPMC, GRANEX, and CAGOIL owned by the Fund for not more than 20 years from the original redemption date of September 2006; and

• Conversion by SPMC, Granex and CagOil at par value of the redeemable shares into common shares in such companies prior to the expiration of the extended redemption period. e. Subsequently, SPMC, Granex and CagOil caused the amendment of their respective AOIs by extending the redemption period of the redeemable shares. Consequently, SPMC, Granex and CagOil reclassified in their respective books the redeemable shares from a liability account to an equity account, specifically: “Redeemable shares for conversion to equity”. f. On 25 February 2009, the Securities & Exchange Commission (SEC) approved the amendment of the terms of the redeemable shares, as follows:

• Upon expiration of 40 years from and after the issuance of the shares (in 1986 and 1992), SPMC, Granex and CagOil shall redeem all such shares remaining outstanding at 2x their FMV on the last day of the 40th year or 2x the PV, whichever is higher; and

• SPMC, Granex and CagOil shall have the option to convert the redeemable shares at PhP 1.00 par value per share into common shares at PhP 1.00 par value per share any time prior to the expiration of the foregoing redemption period. g. On 26 February 2010, the SEC approved the amendment of the AOI of SPMC, Granex and CagOil to change the authorized capital stock of the companies from 300 million divided into common shares and preferred shares both at PhP 1.00 par value, to 300 million common shares at PhP 1.00 par value. h. On 26 February 2010, SPMC, Granex and CagOil opted to convert the redeemable shares into common shares. The conversion of the redeemable shares was thus recorded as common shares in the name of the Fund, as follows: Particulars From Redeemable shares for conversion to equity To Common Stock and Additional Paid-in Capital SPMC 100,000,000.00 50,000,000.00 50,000,000.00 Granex 370,000,000.00 185,000,000.00 185,000,000.00 CagOil 273,631,387.00 138,013,387.00 135,618,000.00 Total 743,631,387.00 373,013,387.00 370,618,000.00

i. With the conversion of the redeemable shares into common shares, the payments earlier remitted to the Fund totaling PhP 700 Million (originally intended to be full or partial payments on the redemption price for the redeemable shares) should be refunded to SPMC, Granex and CagOil. This liability on the part of the Fund is recognized by UCPB, and is recorded both in the books of UCPB and the said companies.

To practice sound and ethical business principles so that CIIF Oil Mills Group could positively contribute in the development of the coconut industry as well as support the country’s coconut farmers, and at the same time generate consistent profits and maximize the enterprise value of the organization.

To establish and maintain a sound business platform that will contribute to the development of the coconut industry in the Philippines by providing quality products and services to local and international customers, and to provide a sustainable and recurring source of revenue for the support of coconut farmers nationwide.

To aim for global leadership in the production of coconut oil and other coconut-based products by the year 2030.

Accountability • We do the right thing • We take responsibility for our actions

Professionalism • We do things right • We practice disciplined execution

Integrity • We are honest and forthright in our dealings • We do business fairly and openly

SERVICE PLEDGE:

We Commit: • To continuously provide premium goods and services to customers and help advance the interest of our coconut farmers; • To implement clear and ethical management; • To maximize/improve the interest of all six companies comprising the CIIF while being mindful of the role of the CIIF Oil Mills Group in social development.