WHEN public investors find their investment idled by the trading suspension imposed on their stocks, they either hold on to them until the suspension is lifted or sell.
Making the choice, however, is easier said than done. What if the trading suspension on a listed company were to last longer than expected? And what if the timing of the lifting becomes unpredictable, or – to exaggerate the hopelessness – takes forever? This happens when a company accumulates losses that are summed up as deficits at the end of an annual audit year.
To illustrate the implications of deficits, here is an example of a losing company that caught public stockholders unawares that they were holding either useless trading receipts or worthless certificates of stocks.
Primetown Property Group Inc. was last traded on March 4, 2003 when, according to the company’s own posting, the stock closed at P0.47, down 53 centavos from its P1 par value. For lack of a comparative previous-day close, the price is compared with the stock’s initial price when the company was registered with the Securities and Exchange Commission.
Primetown’s historical stock market performance showed it traded even less throughout the session on that March day at P0.37. This means it also closed at P0.37—not at P0.47—at a value turnover of P92,500.
As expected, Primetown had nothing to show on the website of the Philippine Stock
Exchange (PSE) that would please public investors. Instead of stockholders’ equity, it had capital deficiency for an entry in an annual financial filing. This means the company not only had a string of losses that had piled up into a huge deficit of P2.528 billion; it also showed a capital deficit that had ballooned to P737.49 million as of Dec. 31, 2012, which was the last annual report it filed with the SEC and the PSE.
A capital deficit is worse than accumulated deficit because that means the latter has eaten up a company’s entire equity. In the case of Primetown, the company’s P865.824 million capital, computed at P1 par value, had vanished entirely, together with P908.798 million in additional paid-in capital (APIC); P16.408 million in revaluation reserve, net of tax. It even had P249,000 inside a pair of parentheses under capital deficiency, which represents net change in par value of available financial assets for sale, net of tax. This, when added to P2,528,271,000 of accumulated deficit equals P2,528,520,000.
Deducting from that total amount the detailed entries under capital deficiency, such as P865.824 million, P908.798 million and P16.408 million, would be equal to a total capital deficiency of P737.49 million.
By selling shares to the public at a premium, Primetown not only raised P1.3 billion but also contributed much more to its equity in the form of additional paid-in capital (APIC). In a footnote to its 2012 annual financial statement, the company reported having grossed P1.3 billion from the sale of 25 percent of its capital stock. If said percentage was taken from authorized capital stock of 1 billion shares, this would be equivalent to 250 million shares, which were sold at P5.20 per share. In buying Primetown shares at the IPO price, public investors lost P4.83 per share. The computation involves a simple deduction such as P5.20 minus the closing price of P0.37 equals P4.83.
If, indeed, Primetown sold 25 percent of 1 billion authorized capital stock through an initial public offering in 1995, public investors owned only 250 million shares, or 28.874 percent of the resulting 865.824 million outstanding shares, while the company’s majority owners led by the Yaps controlled 615.824 million, or 71.126 percent.
Over the years, such ownership profile has drastically changed in what could be a “reversal of fortune.” As of Dec. 31, 2009, Primetown insiders held a total of 320.481 million shares, or 37.015 percent while “others,” referring to the public, increased their holdings to 545.343 million shares, or 62.985 percent, from 250 million.