In The Matter of The Petition for Suspension of Payments

[SEC-SICD * CASE NO. 2316. May 25, 1989.] IN THE MATTER OF THE PETITION FOR SUSPENSION OF PAYMENTS FLORO ENTERPRISES, INC. , petitioner . D E C I S I O N Filed before this Commission is a verified petition for suspension of payments to creditors with a rehabilitation plan, dated March 22, 1982, and a supplemental petition, dated August 24, 1982, by Floro Enterprises, Inc. (to be referred to herein as FLORO) a corporation duly organized and existing under the laws of the Philippines with principal office located at No. 500 Carlos Palanca Street, Quiapo, Manila, alleging, among others, that the petitioner corporation possesses assets and properties, with a consolidated value of P85,387,541.00 but had incurred debts and liabilities totalling P134,573,458.49 and that due to economic factors beyond the control, it foresees the impossibility of meeting them when they respectively fall due in view of its severe liquidity problems; that it proposes that payments of its obligations to its creditors be made in accordance with the proposed financial rehabilitation plan. On September 5, 1982, the Commission directed the petitioner to publish its Order in a newspaper of general circulation, which among others, set the hearing on the application for the creation of a management committee on the 4th of October, 1982, and further directed the petitioner to serve copy of said Order, the verified petition, the supplemental petition and including the annexes thereto to the creditors named and listed in the petition. During the creditors meeting, the petitioner corporation, thru counsel, explained its plan to rehabilitate the corporation and its viability to survive its financial crisis as shown by its continuous operation although hampered by liquidity problems. In said meeting, creditors opposing the plan were allowed to speak out/or file their written opposition. On December 8, 1982, the Commission, having been convinced by the support and cooperation of the minority of the creditors to afford the petitioner a chance to be rehabilitated, created a Management Committee to control the operations of the petitioner corporation and to, among others, determine whether or not the continuance in business of the corporation is feasible or would work to the best interest of the stockholders, creditors and the general public as well, and to make the corresponding recommendations to the Commission. Relative thereto, the Management Committee undertook the validation of Floro's rehabilitation and marketing plans. It is to be noted that the original rehabilitation plan included a proposal to avail of Ten (10) Million Pesos to be used as working capital from either the Development Bank of the Philippines (DBP) or the Human Settlements Development Corporation (HSDC) but the same did not materialize for the reason that DBP, being a government financial institution, had a mandate to allocate its funds to developmental projects instead of rehabilitating financially distressed firms, and HSDC, also a government financial agency, shifted its lending policy to financing of housing components and manufacturing projects. In the absence of externally funded working capital. Floro had to rely purely on its own internal resources to finance its operations and to sustain its rehabilitation program. One of the more important strategies that the company had adopted was the concentration on the use of local raw materials so that its operations would not be hampered by foreign exchange restrictions. And secondly, the company maximized utilization of existing facilities and technologies which would not require additional capital expenditures specifically in 1984-1985, when restrictions on importation caused a shortage of supply of computer forms produced from imported bond paper. Floro's computer forms using local newsprint gained acceptance in the domestic market. They were offered primarily to creditors on an offsetting arrangement with the creditor banks becoming the major consumers of these forms. This offsetting arrangement gradually reduced Floro's obligations and in effect, accelerated payments as embodied in the debt servicing program of the corporation. Furthermore, Floro undertook different courses of action to streamline its operations by the dropping of unprofitable product and service lines; cutting down on operating expenses; reduction of personnel from 1,500 to 400; and closure of its two (2) plants and relocating and consolidating their facilities at the Echague (C. Palanca) main office. The strategies and streamlining activities undertaken by the corporation and the suspension of payments to creditors helped the corporation in conserving its resources and brought about the gradual turnaround of Floro. Revenues from sales (around P30 million in 1984, without infusion of working capital from external sources) were used as internally-generated working capital to fund the operations of the corporation. The Management Committee, thru a technical committee, reviewed/updated and validated SGV's report on Floro's marketing prospects, production capacity and financial plan. SGV's report was originally prepared as a requirement of the loan application with DBP. LLjur On July 24, 1984, the Management Committee validated the technical committee's findings relative to Floro's Rehabilitation Plan including a financial restructuring program which was later presented to Floro's creditors in a general creditors' meeting held on August 6, 1984 and likewise on October 12, 1984 wherein a draft on the Memorandum of Agreement was presented for the first time to the creditors for review and evaluation. Thru the Management Committee's efforts, various creditors were met either individually or in groups to convince them to join Floro's Rehabilitation Plan. Among the convincing features being provided and contained in the Memorandum of Agreement was the provision wherein Floro acknowledges its outstanding obligations to its creditors and the creditors' agreement to restructure those obligations in accordance with the agreed debt service program. It also provided for the organization of the creditors' consortium whose members are to act jointly and collectively with Floro and all the parties concerned with respect to Floro's obligations. It likewise provided for the creation of the creditors' committee by the consortium which will represent the consortium in negotiating and dealing with Floro, particularly, to monitor and control the operations, movement, usage and disposal of the assets of Floro. The Memorandum of Agreement further provided for the creditors' committee's participation in the management of Floro through representation in the Board of Directors and Executive Committee. A significant feature of this MOA is a proviso for a debt service program wherein Floro's obligations (principal plus interest) will be paid in 15 years as follows: 1. All outstanding obligations of Floro, shall be restructured over fifteen (15) years payable semi-annually with a grace period of three (3) years on principal payments. 2. On the first three years during the grace period, the interest shall be at 16% p.a. payment of interest will be up to the extent of operating income; balance of unpaid interest will be paid over the remaining term. 3. Interest rates for the succeeding years shall be negotiated between Floro and the consortium at the start of each year, with the following indication rates: Year 3 6 18% 7 10 20% 11 15 22% Provided the maximum fluctuation by which applicable interest rate can increase/decrease is five (5) percent. 4. The principal shall be paid as follows: Year 1 ) 2 ) Grace Period 3 ) 4 2.5 % 5 3 6 3.5 7 4 8 5 9 6 10 8 11 10 12 12 13 14 14 16 14 16 _____ 100% ===== 5. In the event Floro's operating profits exceed projections, there shall be payments in addition to those herein scheduled up to the extent of the excess as may be determined by the Board of Directors. 6. In the event that purchases are made by any member of the consortium of any products/services of Floro, such purchases shall include a 20% offset against Floro's obligation which shall be considered as additional payment to the purchasing member of the consortium. cdll 7. Sales to be made by any member of the Consortium to Floro shall include a 10% increment in payment by Floro to the member Creditor as an additional payment. 8. Penalty charges, interest charges on interest and other assessments will be waived. On June 27, 1985, the creditors of Floro signed the Memorandum of Agreement and formed themselves into a consortium to deal with Floro. On October 24, 1985, the signed Memorandum of Agreement was submitted to the Commission but due to the economic upheaval and change of administration brought by the EDSA Revolution, the Management Committee and the creditors' committee decided to amend some provisions in the Memorandum of Agreement to make Floro's forecast and marketing program more realistic. On July 15, 1988, the Management Committee and the creditors' committee convened and drafted the amended Memorandum of Agreement which was unanimously approved on July 23, 1988 by the creditors consortium representing a total of 93% of the major creditors of Floro (or 81% of total creditors). The amendments provided, among others, for the firm commitment of the following Floro's affiliates: 1. Floro Blue Printing, Inc. 2. Engineering Reproductions, Inc. 3. Florofoto Corporation 4. Microfilm Corporation of the Philippines to infuse fresh capital to finance the capital requirements of Floro under the rehabilitation plan as follows: (In Millions of Pesos) 1988 P5,454.00 1996 P23,153.00 89 7,235.00 97 26,396.00 90 9,104.00 98 28,446.00 91 10,971.00 99 30,984.00 92 12,984.00 2000 33,647.00 93 15,236.00 01 36,446.00 94 17,660.00 02 39,543.00 95 20,445.00 _________ Grand Total P317,704 ======== It was also provided that the liabilities of the Floro affiliates shall be limited to the amount of their commitments as indicated and appearing in Annex "C" of the Amendment to the Memorandum of Agreement. Provided, however, that in the event that the other affiliates default in remitting each or their committed capital infusion to the said schedule of commitments, the said corresponding amount of which has not been remitted shall automatically be pro-rate shared by the other non-defaulting Floro affiliates and accordingly remitted to Floro. In resolving the petition, the undersigned Hearing Officers are mindful of the primary goal of the Commission and the policy of the present administration of the government to encourage investments and job generation to more actively participate in the affairs of private corporations with the end desire of accelerating the economic development of the country. In the case at bar, petitioner corporation, thru its Management Committee, has sufficiently shown that the sales forecast of the corporation's products and services is attainable to sustain the cash flow requirements. These, including the committed cash investments of Floro's subsidiaries and affiliates during the rehabilitation period, are indicative of the viability of the rehabilitation of the corporation and that its debt servicing program is attainable until all the outstanding obligations are fully met. We, therefore, believe and so hold that the recommendation of the Management Committee to rehabilitate Floro is well taken and justified and we are now compelled by the extreme sense of urgency to authorize and pursue the rehabilitation of petitioner pursuant to PD 902-A and the implementation of the rehabilitation plan will lead to the settlement of Floro's obligations and will work to the best interest of the corporation, stockholders and to the creditors as well. WHEREFORE, the Commission hereby approves the Rehabilitation Plan of FLORO as contained in its Memorandum of Agreement, dated June 27, 1985 (attached herewith as Annex "A"), the Amendments to the Memorandum of Agreement, dated December 16, 1988 (Annex "B") and the Rehabilitation Plan Review (Annex "C"), all of which shall form part of this decision, and accordingly judgment is hereby rendered declaring the FLORO ENTERPRISES, INC. to be in a state of suspension of payment. The petitioner, FLORO, as well as all its present creditors are enjoined to comply with the terms and conditions of the approved Rehabilitation Plan. Likewise, the petitioner is directed to furnish all its creditors with a copy of this decision and to submit to the Commission the corresponding proof of service within thirty (30) days from receipt hereof. Accordingly, the Management Committee is hereby DISSOLVED. SO ORDERED. (SGD.) ANTONIO M. ESTEVES (SGD.) ENRIQUE L. FLORES, JR. Hearing Officer Hearing Officer