IP-CONVERGE DATA CENTER, INC. (A Corporation Organized under Philippine Laws)
Prospectus relating to the Initial Public Offering of 45,466,667 Common Shares of the capital stock of IP Converge Data Center, Inc. with a par value of Php1.00 per share at an Offer Price of Php 4.20 per share to be listed and traded on the Second Board of The Philippine Stock Exchange, Inc.
Issue Manager and Lead Underwriter BDO CAPITAL & INVESTMENT CORPORATION
Co-Lead Underwriter and Financial Advisor UNICAPITAL, INCORPORATED
Selling Agents Trading Participants of The Philippine Stock Exchange, Inc.
This Prospectus is dated November 24, 2010
TABLE OF CONTENTS GLOSSARY OF TERMS ............................................................................................................................ 1 GLOSSARY OF TECHNICAL TERMS ................................................................................................... 4 PARTIES TO THE OFFER .......................................................................................................................14 SUMMARY INFORMATION ...................................................................................................................15 THE OFFER ...................................................................................................................................................15 BRIEF DESCRIPTION OF THE BUSINESS ........................................................................................................15 COMPETITIVE STRENGTHS...........................................................................................................................15 RISKS OF INVESTING.....................................................................................................................................16 SELECTED FINANCIAL DATA ........................................................................................................................17 KEY PERFORMANCE INDICATORS................................................................................................................20 KEY PERFORMANCE INDICATORS................................................................................................................20 CAPITALIZATION ....................................................................................................................................21 TERMS AND CONDITIONS OF THE OFFER ......................................................................................22 RISK FACTORS .........................................................................................................................................26 RISKS RELATING TO COMPANY’S BUSINESS .................................................................................26 RISK RELATING TO COMPANY’S OFFER SHARES .........................................................................28 GENERAL RISKS ......................................................................................................................................29 USE OF PROCEEDS ..................................................................................................................................33 DATA CENTER AND NETWORK EXPANSION .................................................................................................34 DETERMINATION OF OFFER PRICE ..................................................................................................36 DILUTION ...................................................................................................................................................37 PLAN OF DISTRIBUTION .......................................................................................................................38 UNDERWRITING AGREEMENT ......................................................................................................................38 QUALIFIED INSTITUTIONAL BUYERS ...........................................................................................................40 GENERAL PUBLIC .........................................................................................................................................40 LOCAL SMALL INVESTORS ...........................................................................................................................40 SELLING SECURITY HOLDERS ...........................................................................................................41 MARKET INFORMATION, DIVIDENDS AND RELATED STOCKHOLDER MATTERS ..........42 MARKET INFORMATION ...............................................................................................................................42 DIVIDENDS ....................................................................................................................................................42 RECENT SALES OF UNREGISTERED OR EXEMPT SECURITIES, INCLUDING RECENT ISSUANCE OF SECURITIES CONSTITUTING AN EXEMPT TRANSACTION ............................................................................43 RESTRICTION ON DISPOSAL AND ISSUANCE OF SHARE CAPITAL ...............................................................44 DESCRIPTION OF SECURITIES TO BE REGISTERED ....................................................................45 SHARE CAPITAL ............................................................................................................................................45 SHARE ISSUANCE ..........................................................................................................................................45 PRE-EMPTION RIGHTS ..................................................................................................................................46 OWNERSHIP LIMITATIONS ...........................................................................................................................46 STOCKHOLDER ACTIONS..............................................................................................................................46 DIVIDENDS ....................................................................................................................................................48 OTHER RIGHTS OF STOCKHOLDERS ............................................................................................................48
MANAGEMENT ..............................................................................................................................................49 DISTRIBUTION OF ASSETS ON A WINDING-UP..............................................................................................52 FOREIGN OWNERSHIP RESTRICTIONS .........................................................................................................52 ACCOUNTING AND AUDITING .......................................................................................................................52 SHARE REGISTER..........................................................................................................................................53 OTHER SECURITIES ......................................................................................................................................53 PROVISIONS IN THE ARTICLES OF INCORPORATION AND BY-LAWS THAT WOULD DELAY, DETER OR PREVENT CHANGE IN CONTROL ..................................................................................................................53 INTERESTS OF NAMED EXPERTS AND COUNSEL .........................................................................54 COMPANY HISTORY ...............................................................................................................................55 PARENTS, SUBSIDIARIES, AND AFFILIATES ..................................................................................................57 ORGANIZATION .......................................................................................................................................61 BUSINESS ....................................................................................................................................................66 PRINCIPAL PRODUCTS AND SERVICES .........................................................................................................66 STATUS OF NEW PRODUCT OR SERVICE ......................................................................................................78 IMPLEMENTATION METHODOLOGY ............................................................................................................78 BREAKDOWN OF REVENUE BASED ON PRODUCTS .......................................................................................79 BREAKDOWN OF REVENUE CONTRIBUTED BY FOREIGN SALES ................................................................80 PRINCIPAL SUPPLIERS ..................................................................................................................................80 DEPENDENCE ON A FEW OR SINGLE CUSTOMER ..........................................................................................81 TRANSACTIONS WITH AND/OR DEPENDENCE ON RELATED PARTIES ...........................................................82 EFFECTS OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS.........................84 MATERIAL CONTRACTS ...............................................................................................................................85 PATENTS, TRADEMARKS, COPYRIGHTS .......................................................................................................86 EMPLOYEES ..................................................................................................................................................88 DESCRIPTION OF PROPERTIES ..........................................................................................................89 LITIGATIONS AND LEGAL PROCEEDINGS......................................................................................91 PLANS AND PROSPECTS ........................................................................................................................93 DATA CENTER AND NETWORK EXPANSION .................................................................................................93 MANAGEMENT’S DISCUSSION AND ANALYSIS .............................................................................99 KEY PERFORMANCE INDICATORS..............................................................................................................100 SELECTED FINANCIAL DATA ......................................................................................................................101 SIX MONTHS ENDED JUNE 30, 2010 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2009...................104 YEAR ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008 ......................108 YEAR ENDED DECEMBER 31, 2008 COMPARED WITH YEAR ENDED DECEMBER 31, 2007 ......................112 DEBT............................................................................................................................................................115 CAPITAL EXPENDITURES ............................................................................................................................116 TRENDS, EVENTS, UNCERTAINTIES AND SEASONAL ASPECTS THAT HAVE MATERIAL EFFECT ON THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS................................................................................116 INDEPENDENT ACCOUNTANTS ........................................................................................................117 EXTERNAL AUDIT FEES ..............................................................................................................................117 INDUSTRY OVERVIEW .........................................................................................................................118 MANAGEMENT AND CERTAIN SECURITY HOLDERS ................................................................128 DIRECTORS AND EXECUTIVE OFFICERS ....................................................................................................128 SIGNIFICANT EMPLOYEE ............................................................................................................................131 FAMILY RELATIONSHIPS ............................................................................................................................131
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS ...................................................................................131 DIRECTOR AND EXECUTIVE COMPENSATION............................................................................................132 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS .........................................................................................................................................133 WARRANTS AND OPTIONS OUTSTANDING .................................................................................................133 SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS AND MANAGEMENT .......................................................................................................................................134 SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS ..............................................134 SECURITY OWNERSHIP OF MANAGEMENT ................................................................................................134 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................................................................135 CORPORATE GOVERNANCE ..............................................................................................................136 PHILIPPINE FOREIGN INVESTMENT, FOREIGN OWNERSHIP AND EXCHANGE CONTROLS...............................................................................................................................................137 FOREIGN INVESTMENT AND EXCHANGE CONTROLS.................................................................................137 FOREIGN EQUITY LIMITATIONS ................................................................................................................137 THE PHILIPPINE STOCK MARKET...................................................................................................139 BRIEF HISTORY...........................................................................................................................................139 TRADING .....................................................................................................................................................140 SETTLEMENT ..............................................................................................................................................140 SCRIPLESS TRADING ...................................................................................................................................141 AMENDED RULE ON LODGMENT OF SECURITIES ......................................................................142 TAXATION ...............................................................................................................................................143 CORPORATE INCOME TAX .........................................................................................................................144 TAX ON DIVIDENDS .....................................................................................................................................144 SALE, EXCHANGE OR DISPOSITION OF SHARES.........................................................................................145 ESTATE AND GIFT TAXES ...........................................................................................................................146 FINANCIAL INFORMATION ................................................................................................................147 1. AUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 .....................................................................................................................................................147 2. AUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2008 .....................................................................................................................................................147 3. AUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2006 .....................................................................................................................................................147 4. REVIEWED FINANCIAL STATEMENTS OF THE COMPANY FOR THE FIRST SIX MONTHS ENDED JUNE 30, 2009 AND 2010 ............................................................................................................................................147
GLOSSARY OF TERMS ―Application‖
The application to list the Company‘s Common Shares by way of Initial Public Offering.
―BIR‖
The Philippine Bureau of Internal Revenue.
―BOI‖
The Philippine Board of Investments.
―BPO‖
Business Process Outsourcing
―BSP‖
The Bangko Sentral ng Pilipinas or the central banking authority of the Republic of the Philippines.
―Banking Day‖
A day on which banks and financial institutions are open for business in Metro Manila.
―CCCS‖
Central Clearing and Central Settlement
―CLOUD‖
The stock symbol of IP-Converge Data Center, Inc.
―Co-Lead Underwriter‖
Unicapital, Inc., a corporation organized and existing under Philippine law.
―Company‖, ―IP-Converge‖ or ―IPC‖ IP-Converge Data Center, Inc., a corporation organized and existing under Philippine law. ―Constitution‖
The Constitution of the Philippines.
―Corporation Code‖
Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines.
―FCCDCI‖
Fist Cagayan Converge Data Center, Inc.
―FCLRC‖
First Cagayan Leisure & Resort Corporation
―Government‖
The government of the Republic of the Philippines.
―IDC‖
Internet Data Center
―IP‖
Internet Protocol
―IPCCO‖
IP Contact Center Outsourcing Inc.
―IPEV‖ or ―E-Game‖
IP E-Game Ventures, Inc., a company listed at the PSE under the trading symbol EG.
―IPO‖
Initial Public Offering, the offer for sale of the Offer Shares to be 1
made in the Philippines, and subject to the terms and conditions stated herein.
―IPVG‖ or ―IPVG Corp.‖
IPVG Corp., a company listed at the PSE under the trading symbol IP.
―ISP‖
Internet Service Provider
―Issue Manager and Lead Underwriter‖
BDO Capital & Investment Corp., a corporation organized and existing under Philippine law.
―IT&T‖
Information Technology and Telecommunications
―KPMG‖
KPMG Manabat San Agustin & Co.
―Listing‖
The listing of the Company‘s common shares on the PSE.
―NTC‖
National Telecommunications Commission
―Offer‖
See ―IPO‖.
―PDTC‖
Philippine Depository & Trust Corporation (formerly Philippine Central Depository, Inc.)
―PCCW‖
PCCW Global (Singapore) Pte. Ltd.
―PFRS‖
Philippine Financial Reporting Standards
―PSA‖
Philippine Standards on Auditing
―PSE‖ or ―Stock Exchange‖
The Philippine Stock Exchange, Inc.
―PHP‖, ―Pesos‖ or ―P‖
Philippine Pesos
―Philippines‖
The Republic of the Philippines.
―Prospectus‖
This document together with all its annexes and attachments.
‗Receiving Agent/Bank‖
Banco De Oro Unibank, Inc. Trust and Investments Group
―SCCP‖
The Securities Clearing Corporation of the Philippines.
―SEC‖
The Securities and Exchange Commission of the Philippines.
―Selling Agents‖
PSE Trading Participants or PSE Brokers.
―SRC‖
Securities Regulation Code
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―Shares‖
The shares of the Company representing its authorized capital stock, or when the context requires, the Company‘s subscribed and/or outstanding capital stock.
―Shareholders‖ or ―Stockholders‖
The holders of the Shares.
―Stock Transfer Agent‖
Securities Transfer Services, Inc., a duly authorized corporation organized and existing under the laws of the Republic of the Philippines.
―Tax Code‖
The National Internal Revenue Code of the Philippines, as amended.
―TIDCORP‖
Trade and Investment Development Corporation of the Philippines.
―Trading Day‖
A day when the PSE is open for business.
―PSE Trading Participants‖ or ―PSE Duly licensed securities brokers who are trading participants of Brokers‖ the PSE. ―Treasury Shares‖
Shares of stock which have been issued and fully paid for, but subsequently acquired by the Company by purchase, redemption, donation or through some other lawful means. These shares may again be disposed of for a reasonable price to be fixed by the board of directors.
―USD‖
United States Dollar.
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GLOSSARY OF TECHNICAL TERMS "Co-location"
A type of service offered by a data center, where multiple customers locate network, server and storage gear and interconnect to a variety of telecommunications and other network service provider(s) with a minimum of cost and complexity. Customers typically pay for the use of space, power, and other services offered by data centers
"50 Gigabit flood"
A type of DDoS attack that overwhelms or ―floods‖ a target network of 50 gigabits of network traffic (or on average, 500x normal size traffic)
―Automatic Call Distributor‖ or "ACD"
A device or system that distributes incoming calls to a specific group of terminals that agents use. Routing incoming calls is the task of the ACD system. ACD systems are often found in offices that handle large volumes of incoming phone calls from callers who have no need to talk to a specific person but who require assistance from any of multiple persons (e.g., customer service representatives) at the earliest opportunity.
"BC"
Business Continuity
"BCC"
Business Continuity Center
"Biometric access control"
A security system that requires persons entering a secured room to have a part of their anatomy scanned – usually a fingerprint, palm print, or retina – as long as it is unique to that person. If the person is allowed access, the electromagnetic lock will disengage to allow a door to be opened, the lock will engage again once the door is closed
"Bogus traffic "
During a DDoS attack, perpetrators usually overwhelm a target network with traffic that is deemed unusable or garbage by the network, this is bogus traffic
"Bot-net"
A virtual network of computers over the internet that are unknowingly infected with rogue programs that allow a hacker to gain control over these computers – usually to launch a DDoS attack, involving the computers in the bot-net sending bogus or malicious traffic to a target network.
"Carrier-neutral internet data center"
A type of data center that allows multiple carriers or telecommunications providers to set up PoPs or points of presence inside its data center, allowing customers the option to use any or all services of these providers in conjunction with the services they acquired from the data center.
"CBD"
Central Business District
―Closed circuit television‖ or "CCTV"
A system that is composed of cameras and recording mechanisms to allow remote monitoring of movement and events in remote locations
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"Ceefrom"
An international standard from the International Electrotechnical Commission for "plugs, socket-outlets and couplers for industrial purposes.
"Central connectivity hub"
A central location where all communication lines of an organization is connected to
"Clean bandwidth"
Network traffic that is free from bogus or DDoS traffic
"Cloud-computing model"
A model of computing that is Internet-based computing, whereby shared resources, software and information are provided to computers and other devices on-demand, like a public utility.
"Cold aisle"
A region or row between computer racks in a data center where cold air coming from the CRAC units are concentrated on.
"Commercial IP port" or ―Commercial Transit‖
A type of service provided by communications providers and internet service providers wherein their customers connect to the providers‘ Point of Presence to gain access to the Internet
"Connectivity services"
Services typically offered by telecommunications and data center companies that provides point to point data connections between customer locations for the purpose of enabling data and / or voice communications
―Computer Room Air Conditioner‖ or "CRAC"
A special type of cooling device that is made to be used to cool computing equipment inside a data center.
―Customer Relationship Management solutions‖ or "CRM solutions "
Software and services aimed at nurturing a company‘s interactions with clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and technical support. The overall goals are to find, attract, and win new clients, nurture and retain those the company already has, entice former clients back into the fold, and reduce the costs of marketing and client service
"Cross connect fee"
A monthly fee paid for by data center customers to facilitate physical connections between their communications equipment with the same equipment from other customers
"Data migration"
Process or a series of steps to transfer data from one source to a destination
"DDoS Mitigation service"
A service provided by Prolexic Technolgies that lessens or eliminates the negative effects of DDoS attacks to its customer‘s networks and IT infrastructure. Prolexic does this by filtering the incoming internet traffic of the customer, filtering out the DDoS traffic and only letting legitimate traffic through to the customers‘ networks.
―Distributed Denial of Service‖ or "DDoS"
Done by hackers to attempt to make a computer resource or network unavailable to its intended users, it generally consists of the concerted efforts of a person or people to prevent an Internet site or service from functioning efficiently or at all, temporarily or
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indefinitely "Dial-up"
A method of data communication, whereby a computer equipped with a device called a modem is connected to a PSTN and dials into a server to get access to another network or the Internet
"Disaster Recovery and Business Continuity services"
Disaster recovery refers to a process that is triggered in order for an organization to continue to operate in the event of a man-made or natural disaster, usually involves recovering from data or information loss. Business Continuity is the activity performed by an organization to ensure that critical business functions will be available to customers, suppliers, regulators, and other entities that must have access to those functions. These activities include many daily chores such as project management, system backups, change control, and help desk. Business Continuity is not something implemented at the time of a disaster; Business Continuity refers to those activities performed daily to maintain service, consistency, and recoverability. Providers that offer services to aid organizations in Disaster Recovery and Business Continuity are called ―Disaster Recovery and Business Continuity Services‖
―Domain Name System‖ or "DNS"
A hierarchical naming system for computers, services, or any resource connected to the Internet or a private network. It associates various information with domain names assigned to each of the participants. Most importantly, it translates domain names meaningful to humans into the numerical (binary) identifiers associated with networking equipment for the purpose of locating and addressing these devices worldwide. An often-used analogy to explain the Domain Name System is that it serves as the "phone book" for the Internet by translating human-friendly computer hostnames into IP addresses. For example, www.example.com translates to 192.0.32.10.
"Dot com burst"
A speculative bubble covering roughly 1995–2000 (with a climax on March 10, 2000 with the NASDAQ peaking at 5,132.52) during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields. The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms. Companies were seeing their stock prices shoot up if they simply added an "e-" prefix to their name and/or a ".com" to the end. A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics such as P/E ratio in favor of confidence in technological advancements.
"DR"
Disaster Recovery
―Digital subscriber line‖ or "DSL"
A family of technologies that provides digital data transmission over the wires of a local telephone network
"Ecosystem management"
A variant of Neustar‘s Webmetrics service that allows one to monitor the performance of a series of connected websites or
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―ecosystems‖ ―Environmental Protection Agency‖ or "EPA"
A US government agency that safeguards the environment and creates legislation or standards for the preservation of the environment
"Exchange traffic"
Internet traffic that occurs within or to an Internet Exchange
"FCCDCI"
First Cagayan Converge Data Center Incorporated
"FCLRC"
First Cagayan Leisure Resorts Corporation
"Firewalls"
A part of a computer system or network that is designed to block unauthorized access while permitting authorized communications. It is a device or set of devices which is configured to permit or deny computer based application upon a set of rules and other criteria.
"FM200"
A colourless odourless gaseous halocarbon. It is commonly used as a gaseous fire suppression agent.
"Google Apps, Google AdWords"
―Google Apps‖ is a service from Google for using custom domain names with several Google products. It features several Web applications with similar functionality to traditional office suites, including: Gmail, Google Calendar, Talk, Docs and Sites. ―Google AdWords‖ is Google‘s flagship advertising product and main source of revenue. AdWords offers pay-per-click (PPC) advertising, and site-targeted advertising for both text and banner ads.
―General Packet Radio Service‖ or "GPRS"
A data service that works with GSM that allows data transmission to and from GPRS enabled cellular or mobile phones.
―Global Positioning System‖ or "GPS"
A space-based global navigation satellite system. It provides reliable positioning, navigation, and timing services to worldwide users on a continuous basis in all weather, day and night, anywhere on or near the Earth which has an unobstructed view of four or more GPS satellites.
―Global System for Mobile Communications‖ or "GSM"
The most popular standard for mobile telephone systems in the world. It is estimated that 80% of the global mobile market uses the standard. GSM is used by over 3 billion people across more than 212 countries and territories
"GUI"
Graphical User Interface
―Hong Kong Internet Exchange‖ or "HKIX"
An internet exchange initiated and coordinated by the Information Technology Services Centre (ITSC) of the Chinese University of Hong Kong (CUHK), its main goal is to interconnect the Internet Access Providers (IAPs) in Hong Kong so that they can exchange intra-Hong Kong traffic locally without routing through US. However, HKIX can also be used for routing of Internet traffic between the networks in Hong Kong and the peer or downstream networks of HKIX participants in other countries.
"Hot aisle"
A region or row between computer racks in a data center where hot air exhaust from computers and equipment are blown into, used in 7
conjunction with cold-aisles, convection dictates that the hot air will rise to the ceiling and be circulated back to the CRAC units to be reprocessed as cold air, which is then blown from the bottom of the raised floor to the cold aisle ―ICT‖
Information and Communication Technology, is a term often used synonymously with Information Technology or IT, but is a more general term that stresses the role of communications (telephone lines and wireless signals) in modern information technology.
"Interactive intelligence"
A US based technology company that develops Internet Protocol (IP)-based business communications software and services. The company‘s products address three primary markets – IP contact center, enterprise telephony, and business process automation.
"Internet exchange ports"
Physical network connection ports where participants of an Internet Exchange physically connects to.
"Internet exchanges" or ―IX‖
A physical infrastructure through which Internet service providers (ISPs) exchange Internet traffic between their networks. IXs reduce the portion of an ISP's traffic which must be delivered via their commercial transit providers, thereby reducing the average per-bit delivery cost of their service. Furthermore, the increased number of paths learned through the IXP improves routing efficiency and faulttolerance. The primary purpose of an IX is to allow networks to interconnect directly, via the exchange, rather than through one or more 3rd party networks. The advantages of the direct interconnection are numerous, but the primary reasons are cost, latency, and bandwidth. Traffic passing through an exchange is typically not billed by any party, whereas traffic to an ISP's upstream provider is
"Internet service Provider‖ or ―ISP"
A type of provider that offers its customers access to the Internet. The ISP connects to its customers using a data transmission technology appropriate for delivering Internet Protocol datagrams, such as dial-up, DSL, cable modem, wireless or dedicated highspeed interconnects.
"In-the-cloud service"
A software service that is offered by cloud services - Internet-based computing, whereby shared resources, software and information are provided to computers and other devices on-demand, like a public utility.
―IP address‖
A number or ID that uniquely identifies a computer or similar device within a network using the TCP/IP protocol. As in the case of the Internet, all computers connected to the Internet have a unique IP address (e.g. 192.0.32.10)
"ISP"
Internet Service Provider
―Information Technology Infrastructure Library‖ or ―ITIL‖
A set of concepts and practices for managing Information Technology (IT) services (ITSM), IT development and IT operations. ITIL gives detailed descriptions of a number of important IT practices and provides comprehensive checklists, tasks and
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procedures that any IT organization can tailor to its needs. ―IT service management‖ ―ITSM‖
(ITSM) is a discipline for managing information technology (IT) systems, philosophically centered on the customer's perspective of IT's contribution to the business.
―Interactive Voice Response‖ or "IVR"
A technology that allows a computer to detect voice and dual-tone multi-frequency signaling (DTMF) keypad inputs. IVR allows customers to access a company‘s database via a telephone keypad or by speech recognition, after which they can service their own inquiries by following the instructions. IVR systems can respond with pre-recorded or dynamically generated audio to further direct users on how to proceed. EIC (p.24) – Enterprise Interaction Center, the flagship product of Interactive Intelligence, an all-in-one system that includes IP-PBX, ACD, CTI, IVRS, and other functionality
―Kilovolt Ampere‖ or "KVA"
A unit of electrical power
"LANs"
Local Area Network
"Latency"
In communications terms, is the measure of time delay between the receipt of different pieces data that form a data conversation
"Layer-7 low –and-slow attack"
Type of DDoS attack that does not overwhelm a target network, but rather sends bogus traffic to a target device in the network (usually a router) in an effort to render the target device in operable. The amount of traffic is low, and rate of traffic flow is slow, thus ―low and slow‖
"LEED"
The Leadership in Energy and Environmental Design (LEED) Green Building Rating System, developed by the U.S. Green Building Council (USGBC), provides a suite of standards for the environmentally sustainable design, construction and operation of buildings and neighborhoods
"Legitimate traffic"
Network traffic that is acceptable to a network, examples are normal user ―requests‖ for a webpage, and the actual webpage transmitted back to the user.
"Local loop"
Common term used to describe a private, dedicated data communications line between 2 locations.
"Mbps"
Megabits per second, or 1 million bits per second, a standard of measure for network speed
"Mesh configuration"
A network configuration connecting multiple locations wherein 1 location is connected to every other location, making the network highly resilient and fault tolerant
"Microsoft SQL Server, Access or Excel "
Products of Microsoft Corporation: SQL Server is a large scale database management system, Access is a small to medium scale database management system, and Excel is the spreadsheet application
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"Milliseconds"
One thousandths of a second
"Mission-critical applications"
Software applications that enhance or help in the operations of a business that is considered as highly important and should not halt
―Massively multiplayer online roleplaying ― or ―MMORPG‖
A genre of computer role-playing games in which a very large number of players interact with one another within a virtual game world. As in all role playing games (RPG), players assume the role of a fictional character (often in a fantasy world), and take control over many of that character's actions. MMORPGs are distinguished from single-player or small multi-player RPGs by the number of players, and by the game's persistent world, usually hosted by the game's publisher, which continues to exist and evolve while the player is away from the game.
"MP3"
A patented digital audio encoding format that allows audio files to be stored on computers or digital music players, or other similar devices
"Multichannel campaigns"
A type of marketing campaign that uses multiple ways or channels to reach out to its target audience, but maintaining the same marketing message or theme
"Multi-tenanted"
Term used to describe a computing platform that can replicate itself multiple times over to service different customers.
―Mega Volt Ampere‖ or ―MVA‖
A unit of electrical power
"Network traffic"
Data flow across a data communications network
"Neustar"
A US based company that primarily offers directory and clearinghouse services to both large and small telecommunications service providers. Neustar operates the directories that manage virtually all telephone area codes and numbers, and enables the routing of calls among thousands of competing communication service providers in the United States and Canada. Neustar‘s customers use the databases that Neustar maintains to obtain the data required to successfully route telephone calls in the United States and Canada, to exchange information with other communication service providers, and to manage technological changes in their own networks. Neustar administers the U.S. Common Short Codes directory, which provides special numbers for SMS, and offers mobile messaging solutions to wireless carriers. Neustar also provides DNS services and manages the .us and .biz top level Internet domain. Neustar also provides web monitoring services
―Network Operations Center‖ or ―NOC‖
A facility within data centers or telecommunications centers that operate 24 x 7, whose main purpose is to monitor the operations of a company‘s or customers‘ communications networks and IT infrastructure
―National Telecommunications Commission‖ or ―NTC‖
A branch of government under the Department of Transportation and Communications that regulate the telecommunications and similar industries
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"OS"
Operating System
"PACUs"
see ―CRAC‖
"Parallel redundancy (N+1)"
A backup configuration where the number of main systems (―N‖) is backed up only by 1 other similar system
―Private Branch Exchange‖ or ―PBX / IP-PBX‖
A telephone exchange that serves a particular business or office, as opposed to one that a common carrier or telephone company operates for many businesses or for the general public. PBXs make connections among the internal telephones of a private organization — usually a business — and also connects them to the public switched telephone network (PSTN) via trunk lines. Because they incorporate telephones, fax machines, modems, and more, the general term "extension" is used to refer to any end point on the branch. An IP-PBX is a kind of PBX that utilizes the TCP/IP protocol for transmission of voice (VoIP) and communicates with its own components over a LAN.
"PCCW"
A Hong Kong based telecommunications conglomerate
―Power distribution unit‖ or ―PDUs‖
Usually in the form of a power strip that distributes electrical power to computers and equipment inside a data center rack
―Philippine Economic Zone Authority‖ or ―PEZA‖
Attached to the Department of Trade and Industry - is the Philippine government agency tasked to promote investments, extend assistance, register, grant incentives to and facilitate the business operations of investors in export-oriented manufacturing and service facilities inside selected areas throughout the country proclaimed by the President of the Philippines as PEZA Special Economic Zones.
―Project Management Institute‖ or ―PMI‖
A non-profit professional organization for the project management profession with the purpose of advancing project management
―Point of presence‖ or ―PoP‖
An oft used term in the communications industry, and it means a physical location where a communications provider has a physical node that contains running communications equipment and communications lines connected to other ―PoPs‖. Providers deploy multiple ―PoPs‖ to extend the reach of their networks and therefore service more customers.
"Prolexic Technologies"
Company based in Hollywood, Florida, in the USA – who provides DDoS detection and mitigation services
"Proximity card"
A security system that requires persons entering a secured room to flash a special card in front of a card reader, if the card is allowed access, the electromagnetic lock will disengage to allow a door to be opened, the lock will engage again once the door is closed
―Public Switched Telephone Network‖ or ―PSTN‖
The network of the world's public circuit-switched telephone networks.
―Power usage effectiveness‖ or ―PUE‖
A measure of how efficient a computer data center uses its power; specifically, how much of the power is actually used by the computing equipment (in contrast to cooling and other overhead).
11
PUE is the ratio of total amount of power used by a computer data center facility to the power delivered to computing equipment "Routers"
Is purposely customized computer used to forward data among computer networks beyond directly connected devices or beyond within a Local Area Network, .
―Software as a service‖ or ―Saas model‖
Where a customer would pay for the use of software like a utility, instead of paying to acquire the software.
"Salesforce.com"
An online ―software as a service‖ (or ―SaaS‖) company distributing business software in which access to business software is purchased on a subscription basis and hosted offsite. It is best known for its Customer Relationship Management (CRM) products, which it delivers to businesses over the internet using the SaaS model.
―Service Level Agreement‖ or ―SLA‖
A part of a service provider‘s contract with a customer that binds the provider to provide services at certain committed levels, such as minimum or maximum response times.
"SME"
Small and Medium Enterprises
―Short Messaging System‖ or ―SMS‖
A communication service component of the GSM mobile communication system, using standardized communications protocols that allow the exchange of short text messages between mobile phone devices
―Synchronous Transport Module‖ or ―STM‖
A fiber optic transmission standard
"Telco-grade"
A term that describes data centers as being designed and built, as well as operated at a level that is suitable to run telecommunications environments
"Telco-neutral"
A type of data center that allows multiple carriers or telecommunications providers to set up PoPs or points of presence inside its data center, allowing customers the option to use any or all services of these providers in conjunction with the services they acquired from the data center.
"Thermal walls"
A specially constructed wall that insulates the room from high temperatures from the outside, in an effort to keep room temperature low
"TR"
A unit of measure for cooling systems
"UltraDNS"
A commercial DNS service offered by Neustar.
"UPS"
Uninterruptible Power System
―Uniform Resource Locator‖ or ―URLs‖
A standard that defines a naming convention for resources in the internet, such as websites (e.g. http:// www.somewebsite.com)
"Value-Added Services (VAS)"
Services typically offered by telecommunications providers on top of
12
basic services such as connectivity services "Virtual servers"
A software implementation of a machine (i.e. a computer) that executes programs like a physical machine.
"Virtualization"
A set of technologies that makes it possible for multiple ―virtual servers‖ to run on a single physical server. The aim of virtualization is to maximize the computing resources of a physical server, as they are most of the time idle during normal operations. Users would then use these multiple ―virtual servers‖ or ―virtual machines‖ as if they are actual physical servers.
"Voice over internet protocol", "VOIP"
A general term for a family of transmission technologies which makes it possible to deliver voice communications over IP Networks such as Local Area Networks or the Internet, as opposed to traditional phone networks.
―Virtual Private Network‖ or ―VPN‖
A method of data connectivity that utilizes electronic security measures such as encryption, to allow 2 remote points to communicate privately across a public network like the Internet.
"WANs"
Wide Area Network
"Webmetrics"
A commercial service offered by Neustar whereby it monitors public websites and applications from multiple locations around the world, to measure how they perform and alerts their owners if their websites are inaccessible or down.
13
PA RT I E S TO T H E O F FE R The Issuer
:
IP-Converge Data Center, Inc. 34th Floor, Tower II, RCBC Plaza, Ayala Avenue, cor. Gil Puyat Avenue, 1200 Makati City www.ip-converge.com
Issue Manager and Lead Underwriter
:
BDO Capital & Investment Corporation 20th Floor, South Tower, BDO Corporate Center, 7899 Makati Avenue, Makati City 0726
Co-Lead Underwriter and Financial Advisor:
Unicapital, Inc. 3/F Majalco Building, Benavidez cor. Trasierra Streets, Legaspi Village, 1229 Makati City
Selling Agents
:
Trading Participants of the Philippine Stock Exchange, Inc.
Legal Counsel to the Issuer
:
Legal Department IPVG Corp. 34th Floor, Tower II, RCBC Plaza Ayala Avenue, cor. Gil Puyat Avenue 1200 Makati City
Independent Legal Counsel
:
Uy Law Firm Suite 1006 Annapolis Wilshire Plaza, No. 11 Annapolis St., Greenhills, San Juan City
Legal Counsel to the Issue Manager and Underwriters
:
Villaraza Cruz Marcelo & Angangco (CVCLaw) 118 Perea St., Legaspi Village, 1229 Makati City
Auditors
:
KPMG Manabat Sanagustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Philippines
Stock Transfer Agent
:
Securities Transfer Services, Inc. 4th Floor, Benpres Building, Exchange Road corner Meralco Avenue, Pasig City, Philippines
Receiving Bank
:
Banco De Oro Unibank, Inc. Trust and Investments Group 15th Floor, South Tower BDO Corporate Center 7899 Makati Avenue, Makati City
14
SUMMARY INFORMATION The following summary is qualified in its entirety by the more detailed information including the Company‘s consolidated financial statements contained in this document. THE OFFER The Company is offering for subscription an aggregate of 45,466,667 Offer Shares at an Offer Price of P4.20 per share through the Issue Manager and the Underwriters and participating PSE Trading Participants. The Offer Shares will represent 9.88% of the Company‘s authorized capital stock of 460,000,000 shares. Before the Offer, the Company had an outstanding capital stock of 136,400,002 Common shares. The Offer shares will represent 9.88% of the Company's authorized capital stock of 460,000,000 shares, and 25% of the total issued and subscribed shares of the Company after the Offer. BRIEF DESCRIPTION OF THE BUSINESS IP-Converge is an information technology and communications services provider in the Philippines. Its core product and service is a ―Managed Data Services‖ suite which provides customers with co-location, connectivity services, DDoS (―Distributed Denial of Service‖) attack protection, CRM (―Customer Relationship Management‖) solutions, Financial Solutions, Disaster Recovery and Business Continuity services, unified communications and messaging solutions, and other ancillary products and services. Incorporated in 2005, the Company continues to maintain a focused go-to-market strategy, zeroing in on several niche markets, selling in-demand products and services with a distinct market edge over competition, while conscious of maintaining its competitive cost structure, and thus maintaining relatively high profitability. Since then, the Company underwent unprecedented growth in revenue and size, and is now considered to be a frontrunner in the markets it operates in. The cCompany has a healthy mix of customers from different industries and verticals, from pure Internet based businesses to medium to large sized enterprises, both based locally and abroad. The Company currently has 78 full time employees and is managed by a team of IT and Communications industry veterans with experience and skills across multiple industries. IP-Converge operates in several key IT and communications markets that are perceived to be growth areas. Currently, the Company is contemplating to undertake an aggressive expansion plan to further enhance its capabilities in order to serve more customers and greater markets. The Company's financial performance is solid as exhibited by continuous profitability for the past three (3) years. With high customer retention and a growing target market, IP-Converge is confident of its growth prospects moving forward as the Company stands to benefit from Information and Communication Technology (―ICT‖) growth. The Company plans to expand its services by putting up two (2) new data centers in Fort Bonifacio, Metro Manila in 2010 and in Cebu City, Cebu in 2011, which is envisioned to cater to the growing demand of its current customers and also address the demand for quality data center space and services from the Southern Region of the Philippines, while strongly considering the environmental impact of data centers. It also has plans to expand its service offerings in the area of full outsourced infrastructure hosting and professional services. COMPETITIVE STRENGTHS
Carrier-neutral, redundant network infrastructure and data center facilities IPC being the only carrier neutral telco-grade data center in the Philippines makes it a formidable but lowcost alternative for customers to tap for their managed data and business service solutions. IP-Converge is 15
able to work hand in hand with all domestic telecommunications providers and ISPs. Customers are not forced to use the connectivity services of the telco that owns the data center where customers are co-located in. In addition, IP-Converge maintains points of presence in Hong Kong and Singapore, and has access to multiple gigabit capacity on the IAC (Intra-Asia Cable) Network, enabling it to provide fiber connectivity from Singapore to Tokyo, Japan. Lastly, IP-Converge is also, to this date, the only provider in the Philippines with direct connectivity to the HKIX (Hong Kong Internet Exchange).
Strategic partnerships IPC leverages on its core competencies by stretching its service capabilities further down the value chain through strategic tie-ups and partnerships with renowned resource and capabilities providers in the industry. Through strategic local and international partnerships with the world‘s IT/Telco hardware and software leaders, IP-Converge is able to offer integrated communications solutions to Philippine businesses with a global market, and in parallel, give foreign enterprises the ability to extend the availability of their services and products to the bustling Philippine market.
Organizational competence IP-Converge is competently managed by a team of professionals who have long histories with and technical experiences in the IT&T business. The Company‘s fully trained professional staff implement best practices to ensure quality customer service and support. The Company's management team has over a 100 manyears of experience in the IT and Telecommunications industry.
“Boutique” services The Company focus is in packaging products and services for selected lines of business, targeting "niche" markets where the Company can add definite value to the customer and the customers' customer. The Goto-Market Strategy leverages the Company's assets by providing both traditional "off-the-shelf" and boutique services to penetrate niche markets, giving customers unique solutions and value. IP-Converge‘s clients are acquired through traditional means i.e. marketing programs, seminars and a high degree of existing client-referrals. The senior managers regularly interact with their customers directly to understand their needs and tailor fit solutions for them and provide the appropriate special packages and pricing models. RISKS OF INVESTING Prior to making an investment decision, investors are advised to carefully consider the risks associated with an investment in the Offer Shares. These risks include: Risks relating to the Company’s business Risks on any power supply interruption Risks on any disruption on the internet access of the Company Bandwidth pricing & fluctuation Rising fuel cost Risks on the Company‘s reliance on software and service providers of the Company‘s Value added products such as Prolexic, Neustar and Credence Analytics Risk of piracy of personnel New substitute products Decline in ICT industry which comprises substantial share of IDC customers Risk on the Company‘s reliance on major clients Risk relating to the Company’s Offer Shares Potential market volatility and limited liquidity
16
General risks Political or social instability in the Philippines Slow growth rates and economic instability in the Philippines Foreign exchange risk Occurrence of natural catastrophes or blackouts Please refer to section ―Risk Factors‖ on pages 26 to 28 of this Prospectus for a more detailed discussion. SELECTED FINANCIAL DATA The following tables present summary financial information for the Company and should be read in conjunction with the auditors‘ report and with IPC‘s consolidated financial statements and notes thereto contained in this Prospectus and the section entitled ―Management‘s Discussion And Analysis‖ on page 99. The tables below summarize financial data for IP-Converge for the six months ended June 30, 2009 and 2010, and for the years ended December 31, 2007, 2008 and 2009. The summary financial data as of and for the six months ended June 30, 2009, and 2010 and for the years ended December 31, 2009 and 2008 were derived from IPC's audited financial statements, prepared in accordance with PFRS and reviewed by KPMG Manabat Sanagustin & Co., in accordance with PSA, including the notes thereto, which are found elsewhere in this Prospectus. The summary financial information as of and for the year ended December 31, 2007 were derived from IPC's audited financial statements prepared in accordance with PFRS and reviewed by Punongbayan & Araullo, a member firm within Grant Thornton International Ltd., in accordance with PSA, including the notes thereto, which are found elsewhere in this Prospectus. The following information is not necessarily indicative of the results of future operations. For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data) SERVICE REVENUES - Net COST OF SERVICES GROSS PROFIT ADMINISTRATIVE EXPENSES Salaries and other employee benefits Management fee Depreciation and amortization Rent Transportation and travel Communication, light and water Professional fees Impairment losses on receivables Outside services Fees and subscriptions Representation and entertainment Miscellaneous OPERATING INCOME OTHER INCOME (EXPENSES) Foreign exchange gain (loss) - net Finance costs Finance income Others INCOME BEFORE INCOME TAX INCOME TAX EXPENSE NET INCOME/TOTAL COMPREHENSIVE INCOME
2009
For the year ended December 31, 2008 2007
Audited Php247,821 177,876 69,945
Audited Php256,179 179,251 76,929
Audited Php516,311 365,303 151,008
Audited Php527,818 398,873 128,944
Audited Php411,426 250,288 161,138
20,608 3,360 2,977 2,864 1,352 1,311 1,114 949 805 624 331 2,629 38,924 31,021
21,597 3,360 2,822 3,017 1,633 1,517 3,410 1,525 1,407 955 470 3,441 45,154 31,775
41,167 6,720 6,175 5,741 2,445 3,076 3,214 3,051 2,909 3,818 914 5,265 84,494 66,514
37,959 6,720 5,246 9,979 7,753 6,703 3,159 11,187 3,099 2,775 3,322 7,130 105,030 23,914
27,757 6,720 5,468 1,335 6,398 4,101 6,021 574 4,032 3,133 1,977 5,045 72,562 88,576
-1,988 -4,133 66 -521 -6,575 24,446 3,497
-7,364 -377 114 -271 -7,898 23,877 2,899
-25,448 1,922 365 -730 -23,891 42,623 7,490
-18,480 -2,908 6,011 -708 -16,085 7,828 6,476
-5,026 6,451 10,293 -989 10,728 99,305 13,746
20,949
20,978
35,132
1,352
85,559
17
For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data)
ASSETS Current Assets Cash Receivables - net Due from related parties Prepaid expenses and other current assets Total Current Assets Noncurrent Assets Investments in subsidiaries and jointlycontrolled entity Property and equipment - net Other noncurrent assets Total Noncurrent Assets Total Assets
Audited
Audited
2009
For the year ended December 31, 2008 2007
Audited
Audited
Audited
Php16,523 147,591 73,485 23,222 260,821
Php7,666 123,846 137,584 17,166 286,262
Php9,713 123,630 72,070 16,171 221,584
Php12,281 116,367 125,390 16,662 270,700
Php5,624 77,706 85,407 131,403 300,140
107,865 189,509 297,373 558,195
110,421 302,653 413,074 699,336
116,130 190,838 306,968 528,552
108,859 300,854 409,713 680,413
79,982 197,039 277,022 577,162
202,301 25,362
241,100 64,594
153,537 32,399
190,011 62,615
126,988 4,659
3,157 1,651 28,256 37,354 298,081
509 962 129,424 44,269 480,859
3,032 3,171 68,280 37,037 297,455
467 3,500 196,715 26,447 479,754
285 4,083 191,179 43,235 370,428
1,739
8,879
5,198
12,466
18,635
1,961 4,063 7,762 305,843
1,284 2,689 776 13,629 494,488
3,559 3,338 0 12,095 309,550
1,506 2,040 776 16,789 496,543
883 1,181 1,431 22,130 392,558
136,400
124,000
124,000
124,000
115,952 252,352
80,848 204,848
95,003 219,003
59,870 183,870
34,000 90,000 60,604 184,604
558,195
699,336
528,552
680,413
577,162
LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Loans payable - current portion Obligations under finance lease - current portion Income tax payable Due to a related party Other current liabilities Total Current Liabilities Noncurrent Liabilities Loans payable - net of current portion Obligations under finance lease - net of current portion Accrued retirement liability Other noncurrent liabilities Total Noncurrent Liabilities Total Liabilities Equity Capital stock Deposits for future stock subscriptions Retained earnings Total Equity Total Liabilities and Stockholders' Equity
18
For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data) CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization Finance costs Impairment losses on receivables Unrealized foreign exchange gain - net Retirement benefits Interest income Operating income before working capital changes Increase in: Receivables Due from related parties Prepaid expenses and other current assets Increase in other noncurrent assets Increase in: Accounts payable and accrued expenses Other current liabilities Other noncurrent liabilities Cash generated from operations Income taxes paid Interest received Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment Procceeds from sale of investments in subsidiaries and jointly controlled entities Increase in other noncurrent assets Acquisitions of intangible assets Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in due to a related party Proceeds from issuance of shares Net proceeds from (repayments of) loans payable Finance costs paid Increase (payments) of obligations under finance lease Proceeds from deposit on future stock subscription Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH NET INCREASE IN CASH CASH AT BEGINNING OF PERIOD CASH AT END OF PERIOD
Audited
Audited
2009
For the year ended December 31, 2008 2007
Audited
Audited
Audited
24,446
23,877
42,623
7,828
99,305
11,276 1,988 949 -843 724 -10
9,969 7,364 1,525 0 649 -114
21,126 25,448 3,051 -1,922 1,298 -40
17,773 18,480 11,187 2,467 860 -77
23,417 4,879 574 0 0 -201
38,531
43,270
91,585
58,517
127,974
-24,911 -1,415 -7,051 0
-9,975 -12,194 -504 0
-10,313 53,320 491 0
-27,730 -55,294 -21,273 0
-41,425 -53,393 -6,390 -136,014
48,765 5,136 0 59,055 -5,017 10 54,049
51,090 17,822 0 89,509 -5,436 114 84,186
-40,937 10,590 -776 103,959 -7,819 40 96,179
37,559 13,513 205 5,497 -7,167 77 -1,592
89,364 -1,211 -21,096 -5,421 0 -26,517
-1,518
-11,531
-25,181
-30,181
-66,655
-164
-829
-1,681
-12,360
175,372 -66,083 -2,491 81,618
-4,303 -1,758 -36,242
-175,372 201 -2,095 -243,922
-40,024 12,400
-67,291 0
-128,435
26,729
189,671
-10,496 -6,807
-1,607 -180
-37,484 -20,985
20,223 -3,332
-4,965 -3,082
-1,473
-7,364
4,617
805
-46,400
-76,442
-182,286
44,426
90,000 271,624
843 6,810 9,713 16,523
0 -4,615 12,281 7,666
1,922 -2,568 12,281 9,713
65 6,657 5,624 12,281
0 1,185 4,439 5,624
19
KEY PERFORMANCE INDICATORS For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data) Audited Audited
For the year ended December 31, 2009 2008 2007 Audited Audited Audited
1
EBITDA
33,998
34,597
72,689 ##
2
Core Net Income
25,082
21,355
33,211
4,261
79,108
3
Gross Margin
29,160 ##
94,044
28.20%
30.03%
29.20%
24.40%
39.20%
4
13.70% 0.15 0.18
13.51% 0.17 0.17
14.10% 0.28 0.27
5.50% 0.01 0.03
22.90% 2.52 2.33
5
0.88 1.21
0.74 1.41
0.56 2.70
0.81 2.13
EBITDA Margin Earnings Per Share Core Earnings Per Share Current Ratio Debt/Equity Ratio
0.60 2.41
1
EBITDA is derived as earnings excluding depreciation and amortization of furnitures and fixtures, software and licenses, and office equipment, financing costs, interest income, foreign exchange gains (losses), provision for (benefit from) income other nonrecurring gains (losses). 2 Core Income is measured as a net income attributable to stockholders, excluding foreign exchange gains (losses), impairment non-current assets, net of tax effect of aforementioned adjustments, as applicable. 3 Gross Margin is gross profit as a percentage of net revenues. 4 EBITDA margin is derived as a percentage of net revenues. 5 Current ratio is derived as ratio of current assets over current
20
CAPITALIZATION The following table sets forth the Company‘s unaudited consolidated short-term and long-term debt and capitalization as of June 30, 2010 and as adjusted to reflect the sale of the Offer shares. This table should be read in conjunction with the notes thereto located elsewhere in this Prospectus. For the purposes of arriving at the effect of the Offer on capitalization, it is estimated that the Offer will generate net proceeds of P171.69 million from the sale of 45,466,667 Offer Shares in the Offer after deducting an estimated aggregate amount of underwriting commissions, discounts and fees and certain other estimated expenses we expect to incur in connection with the Offer. This estimate is based on an Offer Price of P4.20. The actual underwriting commission, discounts, fees and other Offer-related expenses may vary from the estimated amounts. The Offer Price and the estimated amounts used to determine the estimated net proceeds are presented in this Prospectus for convenience only. (In Pesos)
As of June 30, 2010 Audited
After giving effect to the Offer
25,361,668 3,156,522 28,518,190
25,361,668 3,156,522 28,518,190
1,738,875 1,960,839 3,699,714
1,738,875 1,960,839 3,699,714
32,217,904
32,217,904
Equity Common Stock - P1.00 par value Authorized - 460,000,000 shares Issued and outstanding - 136,400,000 shares Capital in excess of par value Retained Earnings Total Equity
136,400,000 115,951,605 252,351,605
181,866,669 126,226,307 115,951,605 424,044,581
Total Capitalization
284,569,509
456,262,485
Short Term Debt Loans payable - current portion Obligations under finance lease - current portion Total Short Term Debt Long Term Debt Loans payable - net of current portion Obligations under finance lease - net of current portion Total Long Term Debt Total Debt
21
TERMS AND CONDITIONS OF THE OFFER The Offer The Company is offering for subscription 45,466,667 primary Offer Shares. The Shares have a par value of P1.00 per share. After the completion of the Offer, the Offer Shares will comprise 9.88% of the Company‘s authorized capital stock of 460,000,000 shares, and 25% of the Company‘s outstanding stock after the completion of the Offer. Offer Price The Offer Price is P4.20 per share. Prior to the Offer, there has been no public trading market for the Shares. Among the factors considered in determining the Offer Price were the prevailing market conditions, the Company‘s historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company‘s management, and the relationship of the above factors to the market valuation of companies currently listed in the PSE. A price-earnings multiple approach was employed. The Company, in consultation with the Underwriters, applied a P/E multiple range to the estimated 2010 earnings after tax would be appropriate to price the Offer Shares. Dividing the resulting 2010 market capitalization by the existing outstanding shares, or 136,400,002, results in a price of P4.20. See ―Determination of Offer Price‖ on page 36. Offer Period The Offer Period shall begin at 9:00 a.m. on November 25, 2010 and end on December 2, 2010 at 12:00 noon, Manila time, or on such other dates as the Company and the Issue Manager and the Underwriters may agree to in writing. Duly accomplished ―Application to Subscribe‖ forms and signature cards together with the corresponding payments must be received by the Selling Agents or by the Issue Manager and the Underwriters not later than 12:00 noon Manila time, on December 2, 2010. If for any reason the aforementioned date for the end of the Offer Period should fall on a day when Philippine banks are closed, then the Offer Period will expire on the banking day immediately succeeding the said date. Listing and Trading of the Shares The Company has filed an application with the PSE for the listing of the Shares on the Second Board. Acceptance of all Applications is conditioned on the listing of the Offer Shares with the PSE. It is expected that the Shares will be listed on December 9, 2010 and trading of the Offer Shares is expected to commence on the same date. In the event the Shares are not listed on the PSE for any reason, the Company will return within ten (10) Banking Days from the end of the Offer Period the payments made under Applications, without any interest, to the respective Applicants. Eligible Applicants The Offer Shares may be subscribed by any individual of legal age, or any corporation, association, partnership or trust, regardless of citizenship or nationality. As a general rule, companies engaged in the information technology business are not subject to any foreign nationality restriction. In IPC‘s case, however, since the Company possesses a Value-Added Service license or permit issued by the NTC, the Company is, by mandate of NTC, subject to a foreign nationality restriction of being at least 60.0% 22
Filipino-owned with an allowable maximum foreign ownership of 40.0%. See the discussion on ―Dividends‖ in the section ―Market Information, Dividends and Related Stockholder Matters on page 42. Minimum Subscription Applications shall be for a minimum of 1,000 Offer Shares. Applications in excess of this minimum shall be in multiples of 1,000 shares. No subscription for multiples of any other number shall be considered. Procedure for Application Application forms and signature cards may be obtained from the Issue Manager and the Underwriters or from any participating Trading Participants of the PSE. Applicants shall fill up the application form, indicating all pertinent information such as the applicant‘s name, address, taxpayer‘s identification number, citizenship and all other information as may be required in the application form. Applicants shall undertake to sign all documents and to do all necessary acts to enable them to be registered as holders of the Offer Shares applied for or any portion thereof. Failure to completely fill up the application form may result in the rejection of the said application. Restriction on Disposal of Shares The PSE rules require an applicant company to cause its existing shareholders owning at least 10 per cent. of the outstanding shares of our Company not to sell, assign or in any manner dispose of their shares for a period of 365 days after the listing of the shares. To implement this lock-up requirement, the PSE requires the applicant company to lodge the shares with the PDTC through a PCD Participant for the electronic lock-up of the shares or to enter into an escrow agreement with the trust department or custodian unit of an independent and reputable financial institution. IPVG Corp. is covered by this lock-up requirement. In addition to the lock-up obligations required by the PSE, IPC has agreed with the Underwriters that, other than in connection with the issuance of stock dividends, for a period of One Hundred Eighty (180) days after the Listing Date, neither the Company nor any person acting on its behalf will, without the prior written consent of the Lead Manager, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options. Existing stockholders have agreed not to offer, sell or otherwise dispose of the Shares acquired or subscribed prior to the listing of the Shares in the Stock Exchange according to the formula contained in the Listing Rules and Regulations of the Stock Exchange applicable to companies applying for listing on the Second Board. The Company shall cause its existing stockholders who own an equivalent of at least 10% of the issued and outstanding shares of stock of the Company to enter into an agreement with the Exchange not to sell, assign or in any manner dispose of their shares or securities for a period of Three Hundred Sixty Five (365) days after the listing of the said shares. The Revised Listing Rules of the PSE also require that if there is any issuance of shares or securities (i.e., private placements, asset for shares swap or a similar transaction) or instruments which lead to issuance of shares or securities (i.e., convertible bonds, warrants or a similar instrument) done and fully paid for within One Hundred Eighty (180) days prior to the start of the offering period, and the transaction is lower than that of the offer price in the Initial Public Offering, all shares or securities availed of shall be subject to a lock-up period of at least three hundred sixty five (365) days from full payment of the aforesaid shares or securities.
23
The Company shall likewise be prohibited from offering additional securities, except offerings for stock dividend and employee stock option plans (ESOPs) within One Hundred Eighty (180) calendar days from the date of listing. Payment Terms The purchase price must be paid in full in Pesos upon the submission of the duly accomplished and signed application form and signature card together with the requisite attachments. Payment for the Offer Shares shall be made either by: (i) a personal or corporate check/s drawn against an account with a BSP authorized bank at any of its branches located in Metro Manila; or (ii) a manager‘s or cashier‘s check issued by such authorized bank. All checks should be made payable to ―IP Converge IPO,‖ crossed ―Payee‘s Account Only,‖ and dated the same date as the Application. The Applications and the related payments will be received at any of the offices of the Issue Manager and the Underwriters or the Selling Agents. Requirements for Applications If the Applicant is an individual, the Application form must be accomplished in quadruplicate and accompanied by the following documents: (i) corresponding check payments; and (ii) a fully executed signature card. If the Applicant is a corporation, partnership, or trust account, the Application must be accompanied by the following documents: (a) Certified true copy of the applicant‘s Articles of Incorporation or other constitutive document and By-Laws, as amended; (b) Certified true copy of the applicant‘s SEC Certificate of Registration or equivalent document in case of a foreign corporation; and (c) Duly notarized secretary‘s certificate: (i) setting forth the resolutions of the applicant‘s board of directors or equivalent body authorizing the subscription to the Offer Shares and designating signatories for the purpose; (ii) specifying the percentage holdings of Filipinos in the corporation; and, (iii) containing specimen signatures of the signatories. Representation and Warranty of Foreign Investors Foreign investors, both corporate and individual, shall represent and warrant that their purchase of the Offer Shares will not violate the laws of their jurisdiction, and that they have the capacity and authority to acquire, purchase, and hold the Offer Shares. Registration of Foreign Investments Registration of foreign investments with the proper Government authorities shall be the responsibility of the foreign investor. While registration of foreign investments with the BSP is not required, it will be necessary in order to source the foreign exchange needed to service the repatriation of the proceeds of sale of the investments and remittance of dividends and other distributions from the Philippine banking system. Acceptance or Rejection of Application to Subscribe and Reduction of Allotment of Offer Shares ―Application to Subscribe‖ forms are subject to confirmation by the Issue Manager and the Underwriters and the final approval of the Company. The Company, the Issue Manager and the Underwriters reserve the right to accept, reject or scale down the number and amount of shares covered by any application. The Company, the Issue Manager and the Underwriters have the right to reallocate available Offer Shares in the event that the Offer Shares are insufficient to satisfy the total applications received. The Offer Shares will be allotted in such a manner as the Company, the Issue Manager and the Underwriters may, in their sole discretion, deem to be appropriate, subject to the distribution guidelines of the Exchange. Applications with 24
checks dishonored upon first presentation and ―Application to Subscribe‖ forms which do not comply with terms of the Offer will be automatically rejected. Notwithstanding the acceptance of any ―Application to Subscribe‖ forms, the actual subscription of the Offer Shares by the applicant will be effective only upon the listing of the Shares at the PSE. Refunds Refunds of payments for any Application not accepted in whole or in part shall be made without interest within five (5) banking days after the end of the Offer Period. In the event that the conditions of the underwriting agreement between the Company, the Issue Manager, the Underwriters and the Selling Agents are not fulfilled and are not waived, refunds will be made without interest within five (5) banking days from the said date. Each refund check shall be made in favor of the respective applicant, crossed ―Payee‘s Account Only,‖ and mailed by registered mail or delivered, at the applicant‘s risk, to the address specified by the applicant. Documentary Stamp Taxes All documentary stamp taxes on the issuance of the Offer Shares and any other taxes on the Offer shall be for the account of the Company. PDTC Lodgment or Issuance The Offer Shares will be issued in scripless form through the electronic book-entry system of Securities Transfer Services, Inc. as Stock Transfer Agent for the Offer, and lodged with PDTC as Depository Agent on Listing Date through PSE Trading Participants nominated by the Applicants. Applicants shall indicate in the proper space provided for in the Application Form the name of the PSE Trading Participant under whose name their Shares will be registered. Legal title to the Shares will be shown in an electronic register of shareholders (the ―Registry of Shareholders”) which shall be maintained by the Stock Transfer Agent. The Stock Transfer Agent shall send a transaction confirmation advice confirming every receipt or transfer of the Offer Shares that is effected in the Registry of Shareholders (at the cost of the requesting Shareholder). The Stock Transfer Agent shall send (at the cost of the Company) at least once every quarter a Statement of Account to all Shareholders named in the Registry of Shareholders, except certificated Shareholders and Depository Participants, confirming the number of Shares held by each Shareholder on record in the Registry of Shareholders. Such Statement of Account shall serve as evidence of ownership of the relevant Shareholder as of a given date thereof. Any request by Shareholders for certifications, reports or other documents from the Stock Transfer Agent, except as provided herein, shall be for the account of the requesting Shareholder. Timetable The tentative timetable for the Offer is as follows:
Start of the Offer
9:00 a.m. on Nov. 25, 2010
End of the Offer
12:00 noon on Dec. 2, 2010
Lodgment of Shares with the PDTC
December 6, 2010
Expected Listing Date
December 9, 2010
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R I S K FA C TO R S Prospective investors should carefully consider the risks described below, in addition to the other information contained in this Prospectus, including the Company’s consolidated financial statements and notes relating thereto included herein, before making any investment decision relating to the Offer Shares. However, this section does not purport to disclose all the risks and other significant aspects of investing in the Offer Shares. The Company’s past performance is not an indication of its future performance. Investors deal in a range of investments, each of which may carry a different level of risk. The occurrence of any of the events discussed below and any additional risks and uncertainties not presently known to the Company or that are currently considered immaterial could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects and cause the market price of the Offer Shares to fall significantly and investors may lose all or part of their investment. The following are the risks related to the investment, listed by the order of importance.
General Risk Warning The price of securities can and does fluctuate and any individual security may experience upward or downward movement and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. There is an extra risk of losing money when securities are bought from smaller companies. There may be a big difference between the buying price and the selling price of these securities. An investor deals in a range of investments each of which may carry a different level of risk.
Prudence Required The risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. An investor should undertake his or her own research and study on the trading of securities before commencing any trading activities. He/She may request information on the securities and the issuer thereof from the Commission when available to the public.
Professional Advice An investor should seek professional advice if he or she is uncertain of or has not understood any aspect of the securities to invest in or the nature of risks involved in trading of securities specially those high-risk securities. RISKS RELATING TO COMPANY‘S BUSINESS The risk factors associated with this industry and the Company are as follows:
Risks on any power supply interruption The two most basic requirements for the Company‘s uninterrupted operations is the availability of power and internet access. Any power supply interruptions may have a negative impact on the Company‘s operations and reputation. To mitigate this risk, the IP-Converge RCBC data center is equipped with seven (7) uninterrupted power supply units (―UPS‖) capable of providing for the RCBC data center‘s power requirements. Furthermore, the RCBC Plaza is also equipped seven Mitsubishi – diesel generators that provides standby power to the
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building. The generator sets take into effect within approximately seven (7) seconds from the moment power goes out. The UPS units are designed to provide power for the time between power is interrupted and the generators start providing the back-up power supply.
Risks on any disruption on the internet access of the Company As previously mentioned, internet connectivity is a vital component to the Company‘s data center operations. Any disruption in the ability of the Company to provide internet access to its customers will have a negative impact on the Company‘s operations. The Company has several connectivity providers, namely: PLDT, Globe, Eastern Telecom, Bayantel, eMeralco Ventures, ComClark, FiberCity, PCCW and Digitel. In addition, to further mitigate any potential risk from the disruption of the Company‘s internet access, IPC has secured a Service Level Agreement with each provider the terms of which are consistent with IPC Service Level Agreements with its customers.
Bandwidth Pricing & Fluctuation Bandwidth pricing, like any commodity, fluctuates as a result of changes in the demand/supply equilibrium. Unlike hard commodities, however, bandwidth fluctuations are prone to more severe changes due to the massive capital investments required and long gestation period involved in infrastructure building which is required for expansion of supply. The business relies on revenues from co-location, bandwidth and managed services. Overall, the gross margins are generally steady averaging roughly 29% of revenues. However, margins on bandwidth may range from 7% to 30% while on co-location, anywhere from 20% to 60%. IP-Converge sells bundled services such as bandwidth, co-location and managed services, to further mitigate margin risk. The Company‘s fixed costs are low compared to its competition. These fixed costs consist of lease charges, depreciation of the fixed assets and financing costs of the assets or equipment. IPC‘s assets were acquired at a relatively low price point. This immediately gives the business a cost advantage over its competitors, and the potential to absorb pricing pressure.
Rising Fuel Cost A major cost contributor for an Internet Data Center (―IDC‖) is power consumption (air-conditioning & electricity). The Philippines continues to exhibit rising fuel costs which may create an inflationary effect on the utility expenses of IPC. The Company implements a number of methods to ensure that this risk is mitigated, such as implementing mechanisms to meter the power consumption of some major power consuming data center customers, for them to pay for power they use. The Company also ensures that contract prices are adjusted at least on a yearly basis (upon renewal), so new prices take into account the increases in power costs from the utility.
Risks on the Company’s reliance on software and service providers of the Company’s Value added products such as Prolexic, Neustar and Credence Analytics As the Company resells third-party products and services, IPC has limited control over its ability to provide and maintain the said products. To this extent, the Company is dependent on third-party organizations which are outside of its control. As these products represent additional value added revenue streams for the Company, the loss of these may negatively impact the Company‘s operations and financial performance. To mitigate potential risks from the Company‘s reliance on third-party software and service providers, the Company signed Service Level Agreements with these suppliers to assure the level of commitment in providing the services.
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Risk of piracy of personnel Prior to the implementation of the mitigation procedures as discussed below, the Company has experienced the piracy of some of its senior engineers. As a service provider, piracy of its personnel is a risk that the Company faces. As part of its product and service offerings, IPC may at times provide in-house or thirdparty training to some of its employees. The sudden loss of these employees may adversely affect the Company‘s operations and financial performance. IPC addresses this risk by asking employees who receive training to sign a Service Training Agreement, by which the said employees are locked-in with the Company for one to two years depending on the value of the training provided. Employees who are provided with training are also asked to sign a separate noncompete agreement.
New Substitute Products The ICT industry is prone to innovation cycles which often disrupt existing and entrenched operators. There is a likelihood that new substitute products may enter the market which would duplicate the functions and services provided by an IDC. Nevertheless, IPC‘s standard contracts have a fixed term of 1 year. Most of the existing customers however have been with the data center for between two and three years, as costs associated with switching to another location are very high, in both financial and business disruption terms. Customer mission critical equipment is located in the IDC, and it is therefore quite easy for the Company to terminate service to clients who do not pay on time. Further for those clients who default, equipment in the data center can be sequestered.
Decline in the Information and Communications Technology industry which comprises substantial share of IDC customers The Information and Communications Technology (―ICT‖) industry has historically shown periods of growth and decline, as it is normally linked to economic cycles. Economic slow-downs normally lead to softening of demand for the IDC business as corporate clients either forgo or postpone plans to utilize or procure IDC services and other supplications. Hence, these down-trend periods may result in the diminution or loss of business for the IDC. To mitigate this risk, the Company actively pursues the diversification of its products and client base so as to minimize its dependence on the ICT industry.
Risks on the Company’s reliance on major clients As of the date of this prospectus, IP-Converge does not have any single client which contributes 20% or more of its revenues. The highest revenue contribution reached by any single client in the first half ended June 30, 2010 was 5.6%. Nevertheless, the Company actively seeks to mitigate this risk by continuously offering its new and existing products to new or untapped clients and markets. RISK RELATING TO COMPANY‘S OFFER SHARES
Potential Market Volatility and Limited Liquidity The Shares will be listed and traded on the PSE and, in general, transfers of Shares will be made solely through the PSE. The securities market in the Philippines is smaller and less liquid than the securities markets in the United States and in certain European and Asian countries. Philippine securities may experience significant price fluctuations and no assurance may be made regarding the liquidity of the
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market for Philippine securities in general. Although the Shares will be listed on the PSE, it is not a guarantee that a shareholder will be able to dispose of the Shares in a timely manner. While the Company does not have any guarantee on the share prices and its liquidity, it will follow transparent corporate practices to ensure that material information is available and delivered in a timely matter to all the relevant parties. GENERAL RISKS
Political and Economic Factors The general political and economic situation in the Philippines may influence the growth and profitability of the Company. Political or social instability could have a negative effect on the financial results and business of the Company. The Philippines has from time to time experienced political, social, economic and military instability. In February 1986, a peaceful civilian and military uprising ended the 21-year rule of President Ferdinand Marcos and installed Corazon Aquino as President of the Philippines. Between 1986 and 1989, there were a number of coup attempts against the Aquino administration, none of which was successful. Political conditions in the Philippines were generally stable during the mid- to late 1990s following the election of Fidel Ramos as President in 1992. However, during 2000, his successor, Joseph Estrada, was subject to allegations of corruption, culminating in impeachment proceedings, mass public protests in Manila, withdrawal of support of the military and his eventual resignation from office. The then Vice President, Gloria Macapagal-Arroyo, was sworn in as President on January 20, 2001. Although Estrada questioned the legitimacy of the Arroyo administration, on March 2, 2001 the Supreme Court rendered a unanimous decision confirming the legitimacy of President Arroyo‘s assumption of office. In May 2001, violent clashes between Government forces and Estrada loyalists occurred when former President Estrada was imprisoned to face charges of corruption. President Estrada was subsequently tried for and convicted of plunder. On July 27, 2003, a group of officers and 200 soldiers from the Philippine Army, Navy and Air Force attempted a coup d‘etat against the Arroyo administration. The group accused the Arroyo administration of selling ammunition to rebel groups in the Philippines, masterminding the airport and wharf bombings in Davao, and planning to declare martial law. After negotiating with the Government, the group ended a 20hour mutiny and agreed to return to barracks. Allegations of fraud and disenfranchisement of voters have intensified since early June 2005 in light of revelations that President Arroyo had conversations with an official from the independent Commission on Elections during the counting of votes shortly after the May 2004 presidential elections. On June 27, 2005, President Arroyo, in a statement broadcast live on national television, admitted her participation in telephone conversations with an official of the Commission on Elections. As a result of these controversies, several members of the Arroyo Cabinet resigned their posts and, along with certain government officials, various opposition groups and individuals, began to call for the resignation or impeachment of President Arroyo. Impeachment complaints based on allegations of culpable violation of the Constitution, graft and corruption and betrayal of public trust have been filed against President Arroyo with the House of Representatives. On August 31, 2005, the House Committee on Justice had voted to quash all impeachment complaints previously filed. On September 6, 2005, the House of Representatives voted to uphold the decision of the House Committee on Justice to reject the impeachment complaints against President Arroyo. Several cases were filed with the Supreme Court questioning the constitutionality of the decision but none have been successful. In July 2006, a second impeachment complaint was filed. Since that time, several additional impeachment complaints were filed against President Arroyo which were subsequently dismissed by the House of Representatives in August 2006. There have been media reports of military plots to remove President Arroyo from office. On February 24, 2006, President Gloria Arroyo declared a State of National Emergency through Proclamation 1017 in 29
response to reports of an alleged attempted coup d’ etat. In connection with the proclamation, a number of opposition members were arrested or threatened with arrest. On March 3, 2006, President Arroyo lifted the state of national emergency following protest from the opposition and civil libertarians. Towards the end of Arroyo administration, the Philippines concluded a relatively peaceful election on May 10, 2010. It proclaimed Senator Benigno S. Aquino III and Jejomar Binay as President and Vice President respectively. There is a growing optimism in the new administration to deliver political and economic reforms. No assurance can be provided that the future political environment in the Philippines will be stable or that current or future governments will adopt economic policies conducive to sustaining economic growth. Political instability in the Philippines could negatively affect the general economic conditions and operating environment in the Philippines, which could have a material impact on the Company‘s business, financial condition and results of operation. In the past, the Philippine economy has experienced periods of slow or negative growth, high inflation, significant devaluation in the value of the Peso relative to the U.S. Dollar, and the imposition of exchange controls. The Asian economic crisis in 1997 led to a slowdown in the Philippine economy in 1997 and 1998. In 1999 and 2000, a number of the economic indicators showed some improvements although the pace of economic growth slowed again in 2001 after the impeachment of then President Joseph Estrada. Since 2001, when current President Arroyo came to power, the economy has seen generally stable growth although it was negatively affected by political scandals, an attempted coup d‘etat and the uncertainty generated by the May 2004 presidential election. Since December 31, 1997, the value of the Peso relative to the U.S. Dollar declined from P40.116 to over P56 in the second quarter of 2005 although it started to recover in the third quarter of 2005 until 2006 and closed at P49.03 as of December 29, 2006. There can be no assurance that: (a) the Peso will not be subject to continued depreciation or volatility; (b) the current exchange rate policy will remain the same; (c) the Government will act when necessary to stabilize, maintain or increase the value of the Peso, or that any such action, if taken, will be successful. Additionally, the Government‘s inability to generate sufficient revenues to service its budgetary requirements has created a ballooning budget deficit and has necessitated substantial domestic and international borrowings. The International Monetary Fund, the World Bank and the major credit ratings agencies have each expressed concern with the ability of the Government to continue running significant budget deficits and have urged the Government to adopt certain fiscal reform measures to address this issue. The major credit rating agencies have also expressed concerns regarding the financial problems of NPC and delays in reforming the energy sector, which have contributed to the deterioration of the Philippines‘ public-sector financial position. On January 17, 2005, S&P lowered its long-term foreign currency sovereign credit rating for the Philippines to ‗‗BB-‘‘ from ‗‗BB‘‘, and the Philippines‘ long-term local currency sovereign credit rating to ‗‗BB+‘‘ from ‗‗BBB-‘‘. S&P also lowered its short-term local currency sovereign credit rating on the Government to ‗‗B‘‘ from ‗‗A-3‘‘, and affirmed its short-term ‗‗B‘‘ foreign currency sovereign credit rating. S&P noted that their downgrades reflect the Government‘s inadequate response to its fiscal problems citing little progress on the Government‘s attempts to raise tax revenue and the Government‘s dependence on foreign debt. The inability of the Government to implement fiscal reform, or a delay in implementing such reforms, could negatively impact general economic conditions in the Philippines. On February 16, 2005, Moody‘s lowered the Philippines‘ foreign-currency rating for government bonds to B1 from Ba2, the long-term foreign-currency country ceiling for bonds to B1 from Ba2, the long-term foreign-currency ceiling for bank deposits to B1 from Ba3, and the local-currency rating of the government to B1 from Ba2. Moody‘s local-currency guideline remains A1. Moody‘s cited concerns that the large build-up in government and external debt introduces heightened vulnerability to shocks despite recent efforts by the government and legislature to enact fiscal reforms. Further, as on July 1, 2005, hours after the new VAT law came into effect, the Supreme Court issued a temporary restraining order suspending its implementation indefinitely. The Court‘s order came in response to petitions filed the day before by several 30
opposition lawmakers who argued that the new law was unconstitutional. However, the delay in implementing the new VAT law, as well as uncertainty regarding the political future of President Arroyo, led to S&P and Moody‘s each lowering their Philippine debt rating outlook from stable to negative. On September 1, 2005, the Supreme Court declared that the new VAT law is not unconstitutional. On October 18, 2005, The Supreme Court denied the motions for reconsideration and lifted the temporary restraining order on the implementation of the new VAT law. This decision has become final and the new VAT law came into effect on November 1, 2005. The expanded value-added tax law contains a provision by which the President will be required to raise the new VAT rate from 10% to 12% effective January 1, 2006 if either of two conditions is satisfied: (i) the VAT to GDP ratio in 2005 is more than 2.8%; or (ii) the Government deficit to GDP ratio is more than 1.5%. In 2004, the value-added tax to GDP ratio was 1.7%, while the deficit to GDP ratio was 3.9%. If the VAT is raised to 12%, the expected implementation date is February 1, 2006. In 2007, the Philippine GDP rose 7.2%, posting the fastest growth rate in three decades due to robust performances of the industrial and services sector. While the economy performed well in 2007, macroeconomic conditions became challenging in 2008: Inflation rose to an average of 9.3% in 2008 from the increase in global commodity prices and Economic slowdown in the United States where the Philippines is a major trading partner. Nonetheless, the Philippines registered a 4.6% growth. In 2009, the economy posted a weaker GDP growth of 0.92% following a global crisis year, but relatively better than Asian neighbors who posted negative growth. Following a relatively weak GDP figures in 2009, the economy is looking more firmly in a strong recovery mode. The government reported a better than expected GDP growth rate of 7.9% in the first half of 2010. While the economic growth is being solidified, other key economic indicators appears strong. Inflation is benign at 4.25%, prompting the Monetary Board to keep interest rates neutral. Meanwhile, exports have turnaround growing 38% and OFW Remittances gaining 6.9% from continued deployment of skilled workers abroad. However, key major risk is the larger projected budget deficit which has been revised upwards to Php325bln or 3.9% of GDP and concerns of a renewed recession in the United States. Any deterioration in economic conditions in the Philippines as a result of these or other factors, including a significant depreciation of the Peso or increase in interest rates, may materially adversely affect the Company‘s business, financial condition and results of operations. No assurance can be provided that the current or future governments will adopt economic policies conducive to sustained economic growth. The Company mitigates this risk by ensuring a mix of clients from various industries and verticals to minimize dependence of its business on a few industries as well as tapping internationally affiliated clients with a local base of operations.
Foreign Exchange Risk Any change in the value of the peso against the U.S. dollar could affect the dollar value of a foreign investor‘s return on an investment in the Offer Shares. Foreign exchange required for the repatriation of capital or remittance of dividends may be sourced from the Philippine banking system provided that the foreign investor registers his investment with the Bangko Sentral ng Pilipinas. In certain instances, the Bangko Sentral ng Pilipinas, with the approval of the President of the Philippines, may restrict the availability of foreign exchange. No assurances can be given that exchange controls and regulations in the future will not be changed. IPC is exposed to no or very minimal foreign exchange rate risk. Seventy-nine Percent (79%) of the Company‘s revenue comes from export, and customers pay in U.S. dollars even for local contracts. The functional and presentation currency of IP Converge Data Center, Inc. is the Philippine Peso. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency rate of exchange ruling at the end of reporting period. The result of the combination of net asset/liability movement and peso rate depreciation/appreciation is reported as foreign exchange gain/loss.
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IPC carries receivables and payables that are denominated in a currency other than the functional currency. The Company ensures that the net exposure is kept at an acceptable level by managing foreign currencies in possession relative to our sales and receivables denominated in foreign currencies.
Occurrence of natural catastrophes or blackouts In recent years, the Philippines has experienced several major natural catastrophes including typhoons, floods, volcanic eruptions, earthquakes, mudslides, and droughts. Late last year, Metro Manila as well as the northern provinces of Luzon were hit by two (2) successive typhoons which caused heavy flooding, power disruptions and huge damages to agricultural crops as well as residential houses and business establishments. Natural catastrophes may disrupt the Company‘s ability to deliver its products and services and impair the economic conditions in the affected areas, as well as the overall Philippine economy. The Philippines has also been subject to power outages due to power generation shortages and transmission problems, and from disruptions such as typhoons and floods. These types of incidents may materially disrupt and adversely affect the Company‘s business and operations. IP-Converge cannot assure prospective investors that the insurance coverage it maintains will be adequate compensation for all damages and economic losses resulting from natural catastrophes or blackouts, including possible business interruptions. Effects of existing or probable governmental regulations on the business Entities that provide Value-Added Services (VAS) to the public have been characterized as public utilities. As such, they are required to comply with the Constitutional limitation on foreign ownership in public utilities. Under the Philippine Constitution, only Filipino citizens or corporations the capital of which is at least 60% Filipino-owned can operate a public utility. Value-Added Services (VAS) Providers are under the control and supervision of the NTC. A ValueAdded Services (VAS) provider that does not put up its own network is not required to secure a franchise. However, Value-Added Services (VAS) providers are required to secure a valid Certificate of Registration from the NTC. The Certificate of Registration shall be valid for a maximum period of 5 years. The NTC requires a separate certificate of registration for a Value –Added Service (VAS) provider of VOIP. Furthermore, a duly registered Value-Added Services (VAS) provider is required to comply with service performance standards prescribed by the NTC. The Company complies with all material SEC and local government licensing and regulatory requirements to operate a business.
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USE OF PROCEEDS Offer Price per share Number of Offer Shares Gross Proceeds
Php Php
Underwriting and selling fees for the Offer shares Tax on Initial Public Offering1 Documentary Stamp Tax Philippine SEC filing and legal research fees Registration statement filing fee Legal research fee PSE listing and processing fees Listing fee Processing fee Estimated professional fees Estimated out-of-pocket and other expenses
4.20 45,466,667 190,960,001 5,728,800 7,638,400 227,333 527,380 5,274 763,840 56,000 2,320,000 2,000,000
Total Expenses
Php
19,267,027
Net Proceeds
Php
171,692,974
The Offer will raise gross proceeds of P190,960,001 and is expected to entail expenses in the amount of P19,267,027. The Offer is expected to generate net proceeds of approximately P171,692,974. The Offer proceeds will be used to fund the data center and network expansion in Fort Bonifacio and Cebu City. The following presents the timetable for the disbursement of the proceeds: Amount Proposed Timing of (in Philippine Pesos) Disbursement Data Center Expansion Fort Data Center – Project Preliminaries 2,000,000 Fourth Quarter of 2010 Utility Electrical Supply 3,620,000 to Second Quarter of Data Center Plant 34,545,000 2011 Data Center Civil works 70,200,000 Non-Data Center Civil Works Network Equipment Racks Cost of Sales Operating Expenses Data Center Expansion Total Uses of Proceeds
5,640,000 22,384,000 16,619,000 44,436,000 5,336,000 204,780,000
Cebu Data Center – Fourth Quarter of 2011 to Second Quarter of 2012
204,780,000
1
(N.B. The Company has a pending request for a ruling with the Bureau of Internal Revenue to confirm its position that it is not a closely-held corporation as such term is contemplated in the Tax Code, as amended, and hence, it should not be subject to tax on its initial public offering under Section 127 (B) thereof). 33
Following is a breakdown of the estimated costs for the Fort and Cebu data centers: Data Center Expansion (Amounts in Philippine Pesos) Project Preliminaries Utility Electrical Supply Data Center Plant Data Center Civil works Non-Data Center Civil Works Network Equipment Racks Cost of Sales Operating Expenses Data Center Expansion
Fort Data Center 1,000,000 3,620,000 34,545,000 47,100,000 2,574,000 11,192,000 10,072,000 33,580,000 3,082,000 146,765,000
Cebu Data Center 1,000,000 23,100,000 3,066,000 11,192,000 6,547,000 10,856,000 2,254,000 58,015,000
DATA CENTER AND NETWORK EXPANSION To address the impending shortage of data center capacity at the Company‘s main data center in RCBC Plaza, and realizing the need for premium data center space in the country, especially near the central business districts – IP-Converge has selected a 583 sqm. site with a one hundred and ninenteen (119) rack capacity, at the Bonifacio Technology Center in Fort Bonifacio Global City in Taguig City (―the Fort DC) as its second and expansion data center, and a second 500 sqm. Site with an estimated one hundred (100) rack capacity in Vicsal Building in Cebu (―the Cebu DC‖) as its third and expansion data center. These data centers will cater to a broad array of customer Managed Data Services needs – from low power requirements of SMEs and telecommunications companies; to high power, cooling and performance requirements of eCommerce and gaming companies; to disaster recovery and business continuity requirements of financial institutions, BPOs and other enterprises. These data centers will be built on existing buildings and land and will be designed or modified to support customers‘ requirements. See ―Plans And Prospects‖ on page 93 for a more detailed discussion on the proposed specifications of the expansion data centers. As of the date of this prospectus, IPC has a working draft of the lease agreement with Fort Bonifacio Development Corporation. The Company has identified a possible site for the planned Cebu Data Center and is currently negotiating the terms of a lease agreement. All of these IP-Converge facilities – including the existing data center in RCBC Plaza, Makati City – will provide specialist technical space design to support both corporate data center requirements and the technical installation and collocation needs of telecommunications and enterprise clients. All three (3) data centers will be connected via a communications network mesh, with direct access to Prolexic‘s DDoS mitigation platform. Connectivity into the Visayan region will be provided by IPC‘s partners, namely: ComPoint Networks, Inc. and Blue Media Corporation. The overall resulting network infrastructure provides customers with a choice between Makati, Fort Bonifacio and Cebu as a hub for production systems and networks while retaining access to IPC‘s Asian-facing Internet network and disaster recovery products and services. Clients can then use these as a spring board for servicing the IT needs of their employees, customers and partners throughout the country and the Asian region. The Fort Bonifacio and Cebu data centers will be custom-built facilities which incorporate certain design features based on trends in high performance computing (e.g. emergence of energy efficient blade server infrastructures), and the Company‘s experience in running a data center for the past five (5) years. The total required investment to fund the capital expenditures to build both facilities, as well as funding to operate both data centers in the first year of full operations until it reaches cash flow positive point, is Php 204,780,000, broken down into the following: Project Preliminaries – include expenses to initiate the projects, such as bonds, permits and insurance Utility Electrical Supply – is an upfront payment to the electricity provider to bring in input electrical power into the data center 34
Data Center Plant – includes purchase and installation of main electrical and cooling plants of the data center such as backup generator sets and fuel tanks, UPS units, switchgears and control panels, and data center cooling units (PACUs and FCUs) for the main data center areas, UPS rooms and office areas, as well as other support areas like security, Network Operations Center, and others Data Center Civil Works – includes the actual construction works and materials needed to build the data center, and includes: general civil works, raised flooring purchase and installation, waterproofing, purchase and installation of lighting systems, structural reinforcement, purchase and installation of fire suppression systems, CCTV systems (cameras and monitors), and access control. A major component of the civil works is the installation of dual electrical feeder lines from the utility service drop to the building entrances, through the building and to the data centers Non-Data Center Civil – works includes the actual construction works and materials needed to build the other areas in the data center such as lobbies, security areas, hallways, offices and meeting rooms. Also included are electrical works on such areas, structured cabling for phone and LAN, furniture, CCTV and access control (door locks). Network Equipment – includes the purchase and installation of all network equipment such as switches, routers and cabling to enable both data centers to provide network and internet connectivity services to customers Racks – pertains to expenses in the purchase and installation of actual customer racks and power provisions on each rack Cost of Sales – includes cost items mainly composed of electricity, space rental costs and maintenance costs, as well as personnel direct costs, hardware and software license costs and network / connectivity costs Operating expenses – include personnel salaries and expenses, supplied, travel, representation and others. In the interest of expense management – the data center components will be deployed in phases, based on actual usage and demand from customers. Funding requirements for the subsequent years for continued operation and maintenance of the data centers after the first year of operation is foreseen to be supported by positive cash flow and profitability from revenue generated from the services. The estimated capital expenditures to plan, design and build the Fort and Cebu Data Centers, as well as the estimated expenses to operate the data centers for the first three (3) years, address the current and immediate market needs for data center space. This would include expansion requirements of existing customers as well as the perceived and forecasted needs of prospective customers. The IP-Converge RCBC data center is already about 90% full. No specific use of proceeds has been allocated for the RCBC data center. The Company will obtain the remaining funds necessary to complete the data center expansion from other sources such as debt or internally generated funds to complete the specified purposes or uses discussed above. No part of the Offer proceeds will be used to reimburse any officer, director, employee or shareholder for service rendered, assets previously transferred, and money loaned or advanced or otherwise. The foregoing discussion represents a best estimate of the use of the net proceeds of the Offer based on the Company's current plans and anticipated expenditures. Actual use of the net proceeds may vary from the foregoing discussion and management may find it necessary or advisable to use portions of the net proceeds of the Offer for other purposes. In the event that there is any change in the Company‘s use of proceeds, the Company may temporarily reallocate the proceeds for other interim purposes, taking into consideration the prevailing business climate and the interests of the Company and the shareholders taken as a whole. In the event of any deviation, adjustment or reallocation in the planned use of proceeds, the Company will secure the approval of its Board of Directors for such deviation, adjustment or reallocation and promptly make the appropriate disclosures to the Philippine SEC and the PSE. The Company shall regularly disclose to the PSE, through the Online Disclosure System ("ODiSy"), any disbursements from the proceeds generated from the Offer.
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DETERMINATION OF OFFER PRICE The Offer Price is P4.20 per share, as a result of a book-building process. Prior to the Offer, there has been no public trading market for the Shares. Among the factors considered in determining the Offer Price range were the prevailing market conditions, the Company‘s historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company‘s management, and the relationship of the above factors to the market valuation of companies currently listed in the PSE. The Offer Price range was determined on the basis of a valuation process which considered, among other matters, the Company‘s earnings forecast for the year 2010, the size of the primary issuance of Shares required to raise the additional capital for the Company, the dilution to the Existing Shareholders, and the expected range of price-earnings multiples at which the Company expects to be valued. The final Offer Price was determined through a book-building approach. The Offer Price range was established by the Company in consultation with its Issue Manager and Underwriters and was determined based primarily on market based valuation methodologies and in particular, the price to earnings (P/E) multiple valuation approach. The Company and the Underwriters assessed the prevailing valuation of companies listed at the PSE and listed data center companies in other exchanges in other countries that the Company and the Underwriters deemed to be comparable to the Company. Specifically, the price-to-earnings (P/E) multiple of these comparable listed companies were utilized to provide a valuation benchmark. This P/E multiple benchmark adjusted for certain considerations including the Company‘s prospective earnings growth rate, general and business risks, and other factors and was then applied to the 2010 earnings after tax of the Company. The Company, in consultation with the Underwriters, applied a range of P/E multiples to the 2010 earnings after tax. The comparable companies had a weighted average price to earnings ratio of 34.34x. Applying the P/E ratio of the comparable companies to the estimated 2010 net income of the Company resulted in a valuation band of about P763.84 million in terms of post-offer market capitalization. As the comparable companies are listed in the NYSE, Nasdaq and the LSE, a 71% discount was further applied to account for the larger operation scale and more diversified business interests of the comparable companies and for being listed on foreign exchanges. Dividing the resulting 2010 post-offer market capitalization by the postoffer outstanding shares, or 181,866,669, results in a price of P4.20. This translates to a post-offer Price to Earnings Ratio of 9.92 times. The Company‘s earnings forecast is based on a number of assumptions about circumstances or events that have not yet occurred, including, but not limited to certain assumptions relating to the Company‘s revenue growth, and are subject to significant uncertainties and contingencies, as stated in the section ―Risk Factors‖ on pages 26 to 32, that are beyond the Company‘s control. Under no circumstances should the use of the forecasted values as a basis for pricing the Offer Shares be regarded as a representation, warranty, promise or prediction with respect to the accuracy of the underlying assumptions, or that the Company will achieve or is likely to achieve this particular result.
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DILUTION As of December 31, 2009, the Company‘s net tangible book value was P216,906,355 or P1.59 per Share. If the net proceeds in the estimated amount of P171,692,974 raised from the initial public offering of 45,466,667 shares of stock are received and recorded, it will result in an increase in net tangible book value to P2.14 per share to stockholders of the Company before the Offer, and a dilution of P2.06 per Share to those that will subscribe to the initial public offering. Before the Offer Net Tangible Book Value As of Dec. 31, 2009 Total No. of Shares Issued and Outstanding Book Value Per Share Net Proceeds Gross Proceeds At PhP 4.20 per Offer Share Less: Expenses At PhP 4.20 per Offer Share Net Proceeds At PhP 4.20 per Offer Share After the Offer Net Tangible Book Value plus Net Proceeds At PhP 4.20 per Offer Share Total No. of Shares Issued and Outstanding Book Value Per Share At PhP 4.20 per Offer Share
Php Php
216,906,355 136,400,002 1.59
Php
190,960,001 19,267,027 171,692,974
Php
388,599,329 181,866,669
Php
2.14
The following presents the dilution to the original stockholders as a result of the initial public offering:
Stockholders IPVG Corp. IPVG Employees, Inc. Other Stockholders Public Total Issued and Outstanding
Before Offer Number of Shares Percent 123,999,995 91.00% 12,400,000 9.00% 7 Nil 136,400,002 100.00
After Offer Number of Shares Percent 123,999,995 68.00% 12,400,000 7.00% 7 Nil 45,466,667 25.00% 181,866,669 100.00%
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PLAN OF DISTRIBUTION UNDERWRITING AGREEMENT BDO Capital & Investment Corporation (―BDO Capital‖) and Unicapital, Inc. (―Unicapital‖), the Underwriters, will underwrite on a firm basis the Offer Shares. The Underwriting Agreement entered into between the Company and Issue Manager and Underwriters is subject to certain conditions and may be terminated if certain conditions are not fulfilled or events, including force majeure, occur before the Shares are listed on the PSE. Such conditions are as follows: i.
In the reasonable opinion of the Underwriters, the Offer would be materially and adversely affected by the introduction of any new law or regulation or any change in existing laws or regulations; or any force majeure; or the occurrence of any adverse change in the Company‘s financial condition and prospects, general financial environment or stock market conditions that may have a material adverse effect on the marketability of the shares subject of the Offer (the ―Offer Shares‖);
ii.
Any material representation or warranty made by the Company or any information given in the Prospectus proves to have been false, incorrect or misleading as of the time it was made or deemed to have been made;
iii.
An order canceling, suspending or terminating the Offer or any part thereof issued by any competent Philippine governmental authority;
iv.
The Company shall be adjudicated bankrupt or insolvent, or shall admit in writing its inability to pay its debts as they mature, or shall make or threaten to make an assignment for the benefit of, or a composition or arrangement with, its creditors or any class thereof, or shall declare or threaten to declare a moratorium on its indebtedness or any class thereof; or the Company shall apply for or consent to the appointment of any receiver, trustee or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed and such appointment shall continue undischarged for a period of forty (45) days; or the Company shall institute (by petition, application or otherwise howsoever), or consent to the institution of, any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, suspension of payment, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted against it without its consent and shall remain pending for a period of ninety (90) days, or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against any material or substantial asset of the Company or any material part of thereof and such judgment, writ or similar process shall not be released, vacated or fully bonded within ninety (90) days after its issue or levy; or any event occurs which under the law of the Philippines or any applicable political subdivision thereof has an effect equivalent to any of the foregoing;
v.
There is a change in any law, rule, regulation, administrative practice or interpretation within the Philippines that could, in the reasonable opinion of the Underwriters, materially affect any of the features, yield, or marketability of the Offer Shares, or materially and adversely affect the financial condition, operations, profitability, or business prospects of the Company or the ability of the Underwriters to perform lawfully its obligations hereunder, or any court or administrative order, ruling, or interpretation which may have a similar effect is issued or is threatened to be issued; and
vi.
A general moratorium on the payment of external indebtedness is declared in the Philippines.
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The Underwriting Agreement provides that the Issue Manager and the Underwriters commit to underwrite, on a firm basis, the public offering, distribution and sale of the Offer Shares, and any portion of the Offer Shares made available to the Selling Agents remaining unsubscribed as of the last day of the Offer Period shall be immediately returned to and accepted by the Underwriters. Under other provisions in the Underwriting Agreement, the Company has agreed to indemnify the Issue Manager and Underwriters against certain liabilities and expenses, as well as to pay the latter the pre-agreed fee of 2.0% of the total issue size for its services as Issue Manager and Underwriters as well as the 1.0% brokers‘ commission of the Selling Agents. IP-Converge also engaged Unicapital to act as the Company‘s financial advisor for the Listing and registration of the Offer Shares. For its financial advisory services in connection with the filing of the Registration Statement with the SEC and the application for Listing by Initial Public Offer with the PSE, Unicapital shall be entitled to payment of a fixed retainer fee. On 05 October 2009, Unicapital and Majalco Finance, jointly referred to as Lenders, and IPVG and the Company, jointly referred to as Borrower, entered into a Credit Line Agreement wherein the Lenders renewed the Credit Line Facility of the Borrowers and granted an extension/restructuring of the outstanding principal loan of the Borrower. The credit facility has been extended by another 60 days from its original expiry date of September 11, 2010. The said extension is subject to certain terms and conditions Other than the foregoing, Unicapital and IP-Converge do not have any other business relationships. Unicapital is neither represented in the Company‘s Board of Directors nor is there a provision in the Underwriting Agreement which would entitle the Underwriters to a seat in the Company‘s Board of Directors as part of its compensation for underwriting services. BDO Capital & Investment Corporation is the wholly owned investment banking subsidiary of Banco De Oro Unibank, Inc. It obtained its license from the SEC to operate as an investment house in 1998 and is licensed by the SEC to engage in the underwriting and distribution of securities to the public. BDO Capital is primarily involved in equity management, underwriting and placement, debt management, underwriting and syndication, financial advisory services, project finance and securities trading. Its senior executives have extensive experience in the capital markets and performed lead roles in a substantial number of major equity and debt issues, both locally and internationally. BDO Capital has underwritten several public and private offerings of equity and debt in the Philippines since 1998. As of December 2009, BDO Capital has an authorized capital stock of P400,000,000.00 and paid up capital stock of P300,000,000.00, respectively. In its eleven years of existence, BDO Capital has undertaken capital markets transactions for both the Philippine government and the private sector.
BDO Capital & Investment Corp. Tel. Nos.: 840-7000 E-mail:
[email protected] Incorporated in the Philippines in 1994, Unicapital, Inc. has an authorized capital of P500,000,000, of which P424,713,500 are issued and outstanding. It obtained its license to operate an investment house in June 29, 1994 and is licensed by the SEC to engage in underwriting or distribution of securities to the public. Its executives have extensive experience in the capital markets and were involved in lead roles in a substantial number of major equity and debt issues. Unicapital‘s board of directors is chaired by Menardo R. Jimenez, Sr. Unicapital, Inc. Tel. Nos: 892-0911 to 96 Any questions relating to the Initial Public Offering may be addressed to the Underwriters or the Company.
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QUALIFIED INSTITUTIONAL BUYERS Offer Shares of 27,280,000 or a maximum of 60% of the Offer Shares shall be distributed by the Issue Manager and the Underwriters to institutional buyers through a book-building program for the domestic market, as per Article V of the Revised PSE Listing and Disclosure Rules. ―Qualified Institutional Buyers‖ as defined in the PSE Revised Listing Rules are limited to the following: mutual funds, pension or retirement funds, commercial or universal banks; trust companies; investment houses; insurance companies; investment companies; finance companies; venture capital firms; government financial institutions; trust departments of commercial or universal banks, non-bank quasi-banking institutions, trading participants of the Philippine Stock Exchange; non-stock savings and loan associations; educational assistance funds; and other institutions of similar nature. GENERAL PUBLIC The Offer Shares will be distributed by the Issue Manager and the Underwriters, and the participating PSE Trading Participants directly to their clients/general public. 13,640,000 Offer Shares or thirty percent (30%) of the Offer Shares shall be allocated to the general public. Each PSE Broker shall initially be allocated up to 102,500 Offer Shares (computed by dividing the Domestic Offer Shares allocated to the PSE Brokers between 133 PSE Brokers) and subject to reallocation as may be determined by the PSE. None of the shares are designated to be sold to specified persons. LOCAL SMALL INVESTORS Offer Shares of 4,546,667 or 10% of the Offer Shares will be distributed to ―local small investors‖ through the Underwriters. The term ‗‗Local Small Investors‘‘ is defined as a share subscriber or purchaser who is willing to subscribe or purchase a minimum board lot or whose subscription or purchase does not exceed P25,000. Should the total demand for the Offer Shares in the Local Small Investors‘ subscription exceed the maximum allocation, the Issue Manager and the Underwriters shall allocate the Offer Shares by balloting. Should the total demand from Local Small Investors be less than the 10% allotted to them, the unsold allocation shall be reallocated back for distribution to the general public. The Underwriters will underwrite the Offer Shares, on any clawback, clawforward or other such mechanism, on a firm commitment basis. On or before November 30, 2010, the PSE Brokers shall submit to the PSE Listing Department, or to its designated representative in the PSE their respective firm orders and commitments to purchase Offer Shares (―Firm Orders‖). Offer Shares not taken up by PSE Brokers will be distributed by the Underwriters directly to their clients and the general public and whatever remains will be purchased by the Underwriters. Banco De Oro Unibank, Inc. Trust and Investments Group, as Receiving Bank shall receive the application to subscribe forms and the corresponding payments of each PSE Broker and the Underwriters will be responsible for facilitating the issuance of the corresponding number of Offer Shares on the Listing Date. With respect to the LSIs, all applications to purchase or subscribe to the Offer Shares must be evidenced by a duly accomplished and completed application form. An application to purchase Offer Shares shall not be deemed as a duly accomplished and completed application unless submitted with all required relevant information and applicable supporting documents to the Underwriters or such other financial institutions that may be invited to manage the LSI Program. Payment for the Offer Shares must be made upon submission of the duly completed application form. All of the Offer Shares are lodged with the PDTC and shall be issued to the PSE Brokers and LSIs in scripless form. They may maintain the Offer Shares in scripless form or opt to have the stock certificates issued to them by requesting an upliftment of the relevant Offer Shares from the PDTC‘s electronic system after the closing of the Offer.
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SELLING SECURITY HOLDERS As Offer Shares will be taken from IPC‘s unissued Common Shares, no public offering of Offer Shares will be undertaken by the Company‘s security holders.
41
MARKET INFORMATION, DIVIDENDS AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION At present, the Company has an authorized capital stock of PHP 460,000,000 divided into 460,000,000 Common Shares with a par value of PHP 1.00 per share, out of which 136,400,002 shares are issued and outstanding. The Shares offered for subscription are 45,466,667 unclassified Common Shares with a par value of P1.00 at an Offer Price of P4.20 per share. After the completion of the Offer, the Company will have a total of 181,866,669 issued and outstanding Common Shares. Prior to the Offer, IP-Converge‘s Common Shares are not registered and publicly traded. On 20 September 2010, the Company filed its application for the listing and trading of the Common Shares in the Second Board of the Philippine Stock Exchange (PSE). The Board of Directors of the PSE approved the listing of the Common Shares on October 20, 2010. The Common Shares are not subject to outstanding options or warrants to purchase, or securities convertible into Common Shares. The Offer Shares shall be listed and traded under the stock symbol ―CLOUD‖ on the Second Board of the Philippine Stock Exchange. As of the date of this Prospectus, IPC has seven (7) individual and two (2) corporate stockholders. The Company‘s top 20 stockholders, their respective number of shares held, and the corresponding percentage of these shares out of the total Common Shares outstanding, are as follows: Rank 1 2 3
Name IPVG Corp. IPVG Employees, Inc. Other Stockholders Total Top 20 Total Outstanding
Class of Securities Common Common Common
Number of Shares 123,999,995 12,400,000 7 136,400,002 136,400,002
Percentage 91.00% 9.00% Nil 100.00% 100.00%
Please refer to section ―Security Ownership Of Certain Record And Beneficial Owners And Management‖ on pages 121 to 136 of this Prospectus for a detailed discussion on the beneficial ownership of the Company‘s common shares. DIVIDENDS On 03 February 2010, IPC‘s Board of Directors approved the declaration and issuance of cash dividends by the Company in the amount of P 5,000,000.00, payable to all holders of common stock of the Company as of 31 December 2009. The Company was also authorized to distribute the cash dividends to its shareholders in one lump sum. Under the Corporation Code and IPC‘s By-Laws, dividends shall be declared only from surplus profits (representing net accumulated earnings, with capital unimpaired, which is not appropriated for any other purpose) and shall be payable at such time and in such amounts as IPC‘s Board of Directors shall determine; provided, however, that no stock dividends shall be issued without the approval of the stockholders representing not less than 2/3 of all stock then outstanding and entitled to vote at the Company‘s general meeting or at a special meeting called for the purpose, and no property dividends shall be issued without the prior approval of the SEC. No dividends shall be declared that impair the Company‘s capital. Furthermore, under an Indemnity Agreement executed by the Company with TIDCORP in connection with a Guaranty Agreement issued by the Trade and Investment Development Corporation of the Philippines (―TIDCORP‖) to secure the debt of the Company, the Company cannot declare dividends
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without the prior written consent of TIDCORP. Other than the aforesaid, there are no other restrictions that would limit or would likely limit in the future IPC‘s ability to pay dividends on common equity. IP-Converge is a mature and stable technology Company with predictable revenues, profits and cash flow. While IPC shall continuously reinvest a significant portion of its profits in the succeeding year, the Company is also able to distribute a healthy allocation to its shareholders. In line with this, the Board of the Company plans to pass and implement a dividend policy wherein, a certain percentage of IP-Converge‘s annual net profit is to be declared as dividends to shareholders. RECENT SALES OF UNREGISTERED OR EXEMPT SECURITIES, INCLUDING RECENT ISSUANCE OF SECURITIES CONSTITUTING AN EXEMPT TRANSACTION Following is the list of sales of securities the Company issued for which exemptive relief under Section 10.1 of the SRC was claimed:
Sale of Securities to IPVG on 28 May 2007 In 28 May 2007, IP-Converge entered into a Subscription Agreement and Deed of Assignment of Advances in Payment of Subscription with IPVG. Under said contract, in payment of IPC‘s outstanding obligation to IPVG, IPC agreed to convert a portion of the said obligation in the amount of P 33,374,995.00 into (a) full payment for the balance of P 1,875,000.00 for IPVG‘s initial subscription of 2,500,000.00 shares, (b) full payment for the additional subscription of 7,499,995 shares from the unissued but authorized capital stock and (c) full payment for the additional subscription of 24,000,000 shares from the increase in the authorized capital stock. Pursuant to such, IP-Converge issued 33,374,995 shares with a par value of P1 per share. After said conversion of obligation into equity, IPVG owned 33,999,995 shares in IPC. No underwriters were engaged in this transaction. The issuance of additional shares to IPVG qualifies as an exempt transaction under Section 10.1(k) of the SRC (i.e., sale of securities to fewer than 20 persons in the Philippines during any 12-month period). A request for Confirmation of Exempt Transaction under SEC Form 10-1 was filed with the SEC on 10 October 2006, in relation to the subscription by IPVG to 7,499,995 shares and on 11 October 2006, in relation to the subscription by IPVG to 24,000,000 shares. The SEC, in its Resolution dated 30 March 2007 resolved that the issuance of additional Shares by the Company is an exempt transaction.
Sale of Securities to IPVG on 01 October 2007 On 01 October 2007, IP-Converge issued 90,000,000.00 Common Shares out of its unissued share capital to IPVG at an issue price of P 1.00 per share. Payments for the shares were made in cash. The said issuance was unanimously approved by IPC‘s Board of Directors in their meeting on 01 October 2007. The issuance of additional shares to IPVG qualifies as an exempt transaction under Section 10.1(e) of the SRC (i.e., sale of capital stock of a corporation to its own stockholder exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock). Accordingly, a Notice of Exempt Transaction was not required to be filed with the SEC. No underwriters were engaged in the above sale of the Company‘s securities.
Sale to IPVG Employees, Inc. On 24 February 2010, IPC entered into a Subscription Agreement with IPVG Employees, Inc. whereby IPVG Employees, Inc., a holding company for the Common Shares held by the employees of IPVG, subscribed to 12,400,000 Common Shares at a subscription price of P1.00 per Common Share, payable in cash. No underwriters were engaged in this transaction.
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On 04 February 2010, IP-Converge filed with the SEC a Notice of Exempt Transaction under SEC Form 10.1, claiming Section 10.1(k) of the SRC as basis for exemption of the issuance from the registration requirement (i.e., sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12month period).
Issuance of Qualifying Shares to Independent Directors On 09 September 2010, IPC entered into a Subscription Agreement with Rene R. Fuentes and Juan Victor S. Tanjuatco whereby the aforementioned two independent directors subscribed to 1 Common Share each at a subscription price of P1.00 per Common Share, payable in cash. No underwriters were engaged in this transaction. IP-Converge will file with the SEC a Notice of Exempt Transaction under SEC Form 10.1, claiming Section 10.1(k) of the SRC as basis for exemption of the issuance from the registration requirement (i.e., sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12-month period). RESTRICTION ON DISPOSAL AND ISSUANCE OF SHARE CAPITAL The Revised Listing Rules of the PSE require an applicant company whose shares are being listed on the Second Board of the PSE to cause existing shareholders owning at least 10% of the outstanding shares of the Company not to sell, assign or in any manner dispose of their shares for a period of 365 days after the listing of the shares. Furthermore, the Revised Listing Rules provide that should there be any issuance of shares or securities, or instruments which lead to issuance of shares or securities done and fully paid for within 365 days prior to the start of the offering period, all shares or securities availed shall be subject to a lock-up period of at least 365 days from full payment of the aforesaid shares of securities. To implement this lock-up requirement, the PSE requires the applicant company to lodge the shares with the PDTC through a PCD Participant for the electronic lock-up of the shares or to enter into an escrow agreement with the trust department or custodian unit of an independent and reputable financial institution. IPVG, Corp. which prior to the offer owns 123,999,995 common shares of IPC equivalent to 91.00% of IPC‘s total issued and outstanding shares prior to the Offer is covered by this lock-up requirement and will be held under escrow or electronic lock-up. In addition to the lock-up obligations required by the PSE, IPC has agreed with the Lead Underwriters that, other than in connection with the issuance of stock dividends, for a period of 365 days after the First Closing Date, neither the Company nor any person acting on its behalf will, without the prior written consent of the Lead Manager, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable for Shares or warrants or other rights to purchase Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the underlying securities, including equity swaps, forward sales and options.
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DESCRIPTION OF SECURITIES TO BE REGISTERED The following is general information relating to the Company’s capital stock, including brief summaries of relevant provisions of the Corporation Code and implementing regulations adopted by the SEC, as currently in effect, the SRC and the SRC Rules. The description below does not purport to be complete or to give full effect to the provisions of law and it is in all respects qualified by reference to the application provisions of the Company’s Articles of Incorporation and By-Laws. SHARE CAPITAL At present, IP-Converge has an authorized capital stock of P 460,000,000.00 divided into 460,000,000 Common Shares with par value of P1.00 per share. As of the date of this Prospectus, the Company‘s issued and outstanding capital stock is P 136,400,002 divided into 136,400,002 Common Shares. With the approval of a majority of the members of IPC‘s Board and the affirmative vote of stockholders representing at least 2/3 of the Company‘s outstanding capital stock given in a meeting duly called for the purpose, and subject to the approval of the SEC, IPC may increase or decrease its authorized capital stock, change the par value of its shares or reclassify or convert its existing Common Shares into preferred or redeemable preferred shares or such other class or series of shares, with rights, privileges, restrictions, limitations, features or preferences as the Company deems fit and necessary for its benefit provided that there shall at all times be a class of shares with complete voting rights. SHARE ISSUANCE Under the Corporation Code, IPC can issue shares of stock with such rights, privileges or restrictions as may be provided for in its Articles of Incorporation. Since all the shares comprising its authorized capital stock are common shares and there are no restrictions provided in its Articles of Incorporation, the Company‘s shares have full voting and dividend rights. The Company cannot issue Common Shares for consideration less than the par value of such shares as stated in its Articles of Incorporation. IPC may, however, issue Common Shares at a premium or for a consideration in excess of the par value of such shares, in which case the amount equal to the amount by which the subscription price exceeds the par value is credited to an account designated as paid-in surplus or additional paid-in capital. IPC may repurchase its own shares, provided that the Company has unrestricted retained earnings to pay for the shares to be acquired or repurchased, for legitimate corporate purpose or purposes. These purposes include, but are not limited to the following: to eliminate fractional shares arising out of stock dividends; to purchase shares of dissenting stockholders exercising their appraisal right; and to collect or settle an indebtedness arising out of an unpaid subscription in a delinquency sale and to purchase delinquent shares sold during sale. The shares so repurchased become treasury shares, which may again be sold for a reasonable price fixed by the Company‘s Board. Shares do not have voting rights or dividend rights as long as they remain in the treasury. As of the date of this Prospectus, IP-Converge does not hold any treasury shares. Under the SRC, shares of stock which are offered to the public in the Philippines are required to be registered with the SEC except when such shares are among those classified as exempt securities or where the offering qualifies as an exempt transaction under the SRC and the SRC Rules. The SEC may deny registration of shares and refuse to issue a permit to sell shares if the registration statement for the shares is 45
incomplete or inaccurate in any material respect, includes any untrue statement of material fact, omits to state a material fact required to be stated in the registration statement or necessary to make the statements therein not misleading. The SEC may also deny registration for the shares if the issuer corporation or any of its officers or directors is not qualified under the standards of the SRC, the SRC Rules or existing SEC regulations. PRE-EMPTION RIGHTS The Corporation Code confers the right of pre-emption on stockholders of a Philippine corporation, which entitles them to subscribe to all issues or other dispositions of shares by the corporation in proportion to their respective shareholdings, regardless of whether the shares proposed to be issued or otherwise disposed of are identical in all respects to the shares held. The pre-emption right conferred by the Corporation Code does not, however, apply to the issuance of shares made to ensure compliance with laws requiring share offerings or minimum share ownership by the public, in exchange for the acquisition of property required for corporate purposes, or in payment of a debt previously contracted. The Corporation Code allows Philippine corporations to provide for the exclusion of the right of preemption in their articles of incorporation. IPC‘s Articles of Incorporation expressly deny to its stockholders their right of pre-emption to subscribe to the Common Shares to be offered by the Company. OWNERSHIP LIMITATIONS The Company‘s Articles of Incorporation and By-Laws and the Corporation Code do not contain limits on the number of shares of its capital stock that a stockholder may own. However, foreign shareholding in the Company must comply with nationality restrictions. STOCKHOLDER ACTIONS
Meetings of Stockholders The Corporation Code requires all Philippine corporations to hold an annual general meeting of stockholders for the principal purpose of electing directors. IPC‘s annual general meeting of stockholders is required under its By-Laws to be held at any place designated by the Board of Directors in the city where its principal office is located on the last Monday of July of each year. Notices for the annual general meeting of stockholders shall be sent by the Corporate Secretary by personal delivery or by mail to each stockholder of record at his last known post office address, at least two (2) weeks prior to the date of the meeting, or by publication in a newspaper of general circulation in the Philippines. The notice shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. Unless otherwise provided by law, a majority of the Company‘s outstanding capital stock must be present or represented during the annual general meeting of its stockholders in order to constitute a quorum. If no quorum is constituted, the meeting shall be adjourned until the requisite number of stockholders shall be present.
Voting Rights Each stockholder entitled to vote is entitled to one vote for each share of capital stock he owns or holds and which is qualified to vote by the Company‘s Articles of Incorporation and By-Laws. Cumulative voting is allowed in the election of members of Board of Directors. Thus, in the election of directors, each stockholder is entitled to such number of votes as is equal to the product of the number of Common Shares owned by him and the number of directors to be elected. The stockholder may cumulate his votes in favor of one candidate or distribute these votes in such proportion and amount among as many of the candidates as the stockholder wishes. The election of directors may only be held at a meeting convened for that purpose at which stockholders representing a majority of its outstanding capital stock are present in person 46
or by proxy. However, any vacancy on its board, other than by removal or expiration of term, may be filled by the majority of the remaining directors if still constituting a quorum. At all meetings of stockholders, a stockholder may vote in person or by proxy executed in writing by the stockholder or his duly authorized attorney-in-fact. Each duly appointed proxy has the same rights as the stockholder by whom he was appointed to speak and vote at a meeting in respect of the number of shares held by the stockholder for which the relevant proxy has been executed and the proxy duly appointed. Unless otherwise provided in the proxy, it shall be valid only for the meeting at which it has been presented to the Corporate Secretary. Moreover, under the Corporation Code, no proxy shall be valid and effective for a period longer than five years at any one time. All proxies must be in the hands of the Corporate Secretary on the date specified in the notice, if not specified, at least two (2) days before the date set for the meeting. All proxies filed with the Corporate Secretary may be revoked by the stockholders either in an instrument in writing duly presented and recorded with the Corporate Secretary prior to a scheduled meeting or by their personal presence at the meeting. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or to receive payment of any dividend, or in order to make a determination of stockholders for any other lawful purpose, IPC‘s Board of Directors may fix and may provide that the stock and transfer books be closed for a stated period, which should not, in any case, exceed twenty (20) days. If the stock and transfer book be closed for the purpose of determining stockholders entitled to notice of, or to vote at, a meeting of stockholders, such books shall be closed for at least ten (10) working days immediately preceeding such meeting. In lieu of closing the stock and transfer books, the Board of Directors may fix in advance a date as the record date which, in no case, shall be more than twenty (20) days prior to the date on which the particular action requiring such determination of stockholders is to be taken.
Matters Requiring Stockholder Approval Some corporate acts may only be effected with the approval of the Company‘s stockholders. Any amendment to the By-Laws may only be effected with the approval of the Company‘s stockholders representing at least a majority of the outstanding capital stock at a stockholders‘ meeting convened for that purpose. The approval of stockholders representing at least 2/3 of the Company‘s outstanding capital stock is required for each of the following corporate actions: any amendment to the Articles of Incorporation; the removal of any director; the ratification of contracts entered into by a director by virtue of his office under which contract the director acquired a business opportunity which should have belonged to the Company; the ratification of corporate contracts the Company entered into with any of its directors if (a) the presence of the director in the Board of Directors‘ meeting at which the contract was approved was necessary to constitute a quorum for such meeting; or (b) the vote of the director was necessary for the approval of the contract; the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the Company‘s assets; the investment of funds in any other corporation or business or for any purpose other than the primary purpose for which the Company was organized; incurring, creating or increasing the Company‘s bonded indebtedness; the extension or shortening of the Company‘s term of corporate existence, which currently expires on June 25, 2055; the declaration of stock dividends; the conclusion of management contracts with another corporation in the event the stockholders representing the same interest of both the managing and the managed corporation own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; the delegation to the Company‘s Board of Directors of the power to amend or repeal the By-Laws or to adopt new By-Laws; 47
any plan or agreement of merger or consolidation with any corporation, including any amendment thereof; and the Company‘s voluntary dissolution. DIVIDENDS IP-Converge may pay dividends out of surplus profits or unrestricted retained earnings. These represent net accumulated earnings, with capital unimpaired, which is not appropriated for any other purpose. IPC may pay dividends in cash, by the distribution of property or by the issue of shares of stock. Dividends paid in the form of shares may only be paid with the approval of stockholders representing at least 2/3 of all stock then outstanding and entitled to vote at the annual general stockholders meeting or at a special stockholders meeting called for such purpose. No dividend shall be declared that will impair the Company‘s share capital. Furthermore, under an Indemnity Agreement executed by the Company with TIDCORP in connection with a Guaranty Agreement issued by TIDCORP to secure the debt of the Company, the Company cannot declare dividends without the prior written consent of TIDCORP. There is no law, jurisprudence or SEC regulation or ruling that specifically addresses the time limit after which a stockholder‘s entitlement to a declared but unclaimed dividend expires. The Company‘s Board of Directors has the discretion to declare cash or property dividends, in the case of property dividends, upon prior approval of the SEC. Under the Corporation Code, corporations with surplus profits in excess of 100.00% of their paid-up capital are required to declare and distribute those profits as dividends, except: when retaining the profits is justified by definite corporate expansion projects or programs approved by the board of directors; when the consent of creditors is required under any loan agreement and the consent has not been secured; or when it can be clearly shown that retaining the profits is necessary under the special circumstances of the corporation, as when special reserves are required for probable contingent liabilities. OTHER RIGHTS OF STOCKHOLDERS
Appraisal Right Under the Corporation Code, any of the Company‘s stockholders, including a minority stockholder, has the right to dissent and demand payment of the fair value of his shares in any of the following instances: any amendments to the Articles of Incorporation which has the effect of changing or restricting rights attached to his shares or of authorizing preferences superior to those of outstanding shares of any class, or of extending or shortening the term of the Company‘s corporate existence; the sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the Company‘s property and assets; the investment of corporate funds for purposes other than to accomplish the Company‘s primary purpose or investment in another corporation or business, except when the investment is reasonably necessary to accomplish the Company‘s primary purpose; and a merger or consolidation with another corporation. The fair value for the sale of shares by a dissenting stockholder may be agreed upon between the Company and said stockholder. If an agreement cannot be reached, the fair value will be determined by an independent committee. However, payment for the shares of any dissenting stockholder may be made only if the Company has unrestricted retained earnings to purchase his shares.
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Right to Inspection All stockholders, including minority stockholders, have the right to inspect the Company‘s corporate books and records at reasonable hours on business days. These records include minutes of all meetings of the Board of Directors and of the stockholders, stock registries, and records of the Company‘s business transactions. However, the right of inspection may be denied to stockholders seeking to examine the Company‘s records if they have improperly used any information obtained through any prior examination of the Company‘s records, or did not act in good faith or for a legitimate purpose in making a demand for inspection.
Right to File Derivative Suits The right of a stockholder to institute proceedings on IPC‘s behalf in a derivative suit is recognized under Philippine laws. Derivative suits may be filed if IPC is unable or unwilling to institute the necessary proceedings to redress wrongs committed against the Company or to vindicate corporate rights. The Regional Trial Court in the place of the Company‘s principal office, or in Metro Manila, Philippines, has original and exclusive jurisdiction over derivative suits and other intra-corporate disputes. MANAGEMENT
Board of Directors IPC‘s Board of Directors exercises all corporate powers, conducts all businesses and controls and holds all of the Company‘s properties and assets. IPC‘s By-Laws provide for the powers of the Board of Directors, which include but are not limited to the following: from time to time, to make and change rules and regulations not inconsistent with the By-Laws for the management of the Company‘s business and affairs; to undertake such steps and approve such actions as may be necessary to pursue the Company‘s business in relation to the primary purpose for which the Company was established; to purchase, receive, take or otherwise acquire in any lawful manner, for and in the Company‘s name, any and all properties, rights, interest or privileges, including securities and bonds of other corporations, as the transaction of the Company‘s business may reasonably or necessarily require, for such consideration and upon such terms and conditions as the Board of Directors may deem proper or convenient; to invest the Company‘s funds in another corporation or business or for any other purposes other than those for which the Company is organized, whenever in the judgment of the Board of Directors, the Company‘s interests would be promoted, subject to such stockholders‘ approval as may be required by law; to incur such indebtedness as the Board of Directors may deem necessary and, for such purpose, to make and issue evidence of such indebtedness including, without limitation, notes, deeds of trust, instruments, bonds, debentures, or securities, and/or pledge, mortgage, or otherwise encumber all or part of the Company‘s properties and rights, subject to such stockholders‘ approval as may be required by law; to guarantee, for and in the Company‘s behalf, obligations of other corporations or other entities in which the Company has lawful interest; to make provisions for the discharge of the Company‘s obligations as they mature, including payment in property, or in stocks, bonds, debentures or other securities of the Company lawfully issued for the purpose; to sell, lease, exchange, assign, transfer or otherwise dispose of any of the Company‘s property, real or personal, whenever in the Board of Directors‘ judgment, the Company‘s interest would thereby be promoted;
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to establish pension, retirement, bonus, profit sharing, or other types of incentives or compensation plans for the Company‘s employees, officers and directors and to determine the persons eligible to participate in any such plans and the amount of their respective participations; to prosecute, maintain, defend, compromise or abandon any lawsuit in which the Company or its officers are either plaintiffs or defendants in connection with the Company‘s business; to delegate, from time to time, any of the powers of the Board of Directors which may lawfully be delegated in the course of the Company‘s current business to any standing or special committee or to any officer or agent and to appoint any persons to be the Company‘s agents with such powers (including the power to sub-delegate) and upon such terms as it may deem fit; and to implement the By-Laws and to act on any manner not covered thereby, provided such matter does not require the approval or consent of the stockholders under any existing law, rule or regulation.
Directors’ Appointment, Resignation, Disqualification and Removal IPC‘s Articles of Incorporation provide that the current authorized number of directors is seven. IPC‘s Board of Directors shall be elected during each regular meeting of stockholders and shall hold office for one year and until their successors are elected and qualified. Under the Corporation Code, any director of a corporation may be removed from office by a vote of stockholders holding or representing at least 2/3 of the outstanding capital stock at a regular meeting of the corporation or at a special meeting called for the purpose and after previous notice to stockholders of the intention to propose such removal at the meeting has been sent. A special meeting of the stockholders may also be called for the purpose of removal of directors, by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders by any stockholder of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed as provided by the Company‘s By-Laws. Removal of a director may be with or without cause. However, removal without cause may not be used to deprive minority stockholders of the right of representation to which they may be entitled under the Corporation Code.
Meetings of the Board of Directors Regular meetings of IPC‘s Board of Directors are held twice a year on such dates and places as the Chairman of the Board, or in his absence, the President, may determine, or upon the request of the majority of the directors. A majority of the number of directors as fixed in the Company‘s Articles of Incorporation constitutes a quorum for the transaction of corporate business and every decision of at least a majority of the directors present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which requires the vote of a majority of all members of the Company‘s Board of Directors. Written notice of any meeting of IPC‘s Board of Directors, specifying the date, time, place and purpose or agenda of the meeting, shall be communicated by the Corporate Secretary to each director personally or by telephone, telex, telegram, e-mail or by written or oral message, and must be duly received by or on behalf of each director at least three (3) days before the date of the meeting. However, a director may waive this notice requirement, either expressly or impliedly.
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Compensation of Directors The Company‘s By-Laws provides that an amount, which shall not exceed 10.0% of the Company‘s net income before income tax during the preceding year, may by resolution of the Board, be allocated to and distributed among the members of the Board of Directors. Such compensation shall be determined and apportioned among the members in such manner as the Board of Directors may deem proper, subject to the approval of the stockholders representing at least a majority of the outstanding capital stock at a regular or special meeting of the stockholders. Members of committees may, upon resolution of the Board of Directors, be allowed similar compensation for attending committee meetings as may be determined by the Board of Directors. The Company‘s Corporate Governance Manual, which is currently under review and evaluation by the SEC, provides for the creation of a Compensation Committee tasked to, among others: Establish a formal and transparent procedure for developing a policy on executive renumeration and for fixing the renumeration packages of corporate officers and directors, and provide oversight over renumeration of senior management and other key personnel ensuring that compensation is consistent with the Company‘s culture, strategy and control environment; Designate amount of renumeration, which shall be at a sufficient level to attract and retain directors and officers who are needed to run the Company successfully; Establish a formal and transparent procedure for developing a policy on executive renumeration and for fixing the renumeration packages of individual directors, if any, and officers; Disallow any director to decide his or her own renumeration; and Review (if any) of the existing Human Resources Development or Personnel Handbook, to strengthen provisions on conflict of interest, salaries and benefits policies, promotion and career advancement directives and compliance of personnel concerned with all statutory requirements that must be periodically met in their respective posts, or in the absence of such Personnel Handbook, cause the development of such, covering the same parameters of governance stated above.
Directors’ Interests in Contracts Under the Corporation Code, IPC has the option to declare as void a contract that the Company has entered into with one or more of its directors, except when all of the following conditions are present: that the presence of such director in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; that the vote of such director was not necessary for the approval of the contract; and that the contract is fair and reasonable under the circumstances. Where any of the first two conditions set forth above is absent, such contract may be ratified by the vote of the Company‘s stockholders representing at least 2/3 of the Company‘s outstanding capital stock in a meeting called for the purpose. However, full disclosure of the adverse interest of the directors shall be made at such meeting and the contract shall be fair and reasonable under the circumstances.
Liability of Directors Under the Corporation Code, directors who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, shall be liable jointly and severally for all resulting damages suffered by the corporation, its stockholders and other third persons. Moreover, when a director or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as
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a trustee for the corporation and must account for the profit, which otherwise would have accrued to the corporation.
Disloyalty of a Director Under the Corporation Code, where a director, by virtue of his office, acquires for himself a business opportunity, which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account for all such profits by refunding the same, notwithstanding the fact that the director risked his own funds in the venture. However, the corporation‘s right to refund shall not be applicable in case the director‘s act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. DISTRIBUTION OF ASSETS ON A WINDING-UP Under the Corporation Code, upon the expiration of IPC‘s corporate charter or annulment thereof by forfeiture or otherwise, or upon the termination of the Company‘s corporate existence for other purposes in any other manner, IPC shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against the Company and enabling the Company to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which the Company has been established. At any time during said three years, IPC is authorized and empowered to convey all of its property to trustees for the benefit of the Company‘s stockholders, creditors, and other persons in interest. From and after any such conveyance of the Company‘s property in trust for the benefit of its stockholders, creditors and others in interest, all its interest in such property terminates, the legal interest vests in the aforesaid trustees, and the beneficial interest in the Company‘s stockholders, creditors or other persons in interest. Upon the winding up of the Company‘s corporate affairs, any asset distributable to any creditor or stockholder who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of the Company‘s capital stock and as otherwise allowed by the Corporation Code, IPC may not distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. FOREIGN OWNERSHIP RESTRICTIONS IPC is engaged in the information technology and telecommunications (IT&T) business and therefore classified as an information technology Company. As a general rule, companies engaged in the information technology business are not subject to any foreign nationality restriction. In IPC‘s case, however, since the Company possesses a Value-Added Service license or permit issued by the NTC, the Company is, by mandate of NTC, subject to a foreign nationality restriction of being at least 60.0% Filipino-owned with an allowable maximum foreign ownership of 40.0%. IPC is considered an entity wholly-owned by Filipino nationals since its ultimate stakeholders are Filipino nationals. ACCOUNTING AND AUDITING Philippine corporations are required to file copies of their annual financial statements with the SEC. Stockholders are entitled to request from the SEC or from the Company copies of its most recent financial statements which must include a balance sheet and a profit and loss statement as of the end of the last fiscal year. IPC‘s Board of Directors presents a financial report on the Company‘s operations for the preceding year at the annual general meeting of stockholders. This report includes the Company‘s audited financial statements.
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IPC has prepared and executed a Corporate Governance Manual, which is currently under review and evaluation by the SEC, which provides for the creation of an Audit Committee, members of which are appointed by the Company‘s Board of Directors and partly composed of an independent director, tasked to assist the board in monitoring the integrity of the Company‘s financial statements, its compliance with legal and regulatory requirements and the independence and performance of its internal and external auditors. The Company‘s Chairman should possess experience in accounting or related financial management experience. SHARE REGISTER IPC‘s stock transfer agent Securities Transfer Services, Inc., with offices at the 4 th Floor, Benpres Building, Exchange Road corner Meralco Avenue, Pasig City, Philippines, maintains the Company‘s register of stockholders. IPC‘s stockholders are allowed to inspect the Company‘s corporate books and records including the stock registry at reasonable hours on business days. OTHER SECURITIES IPC has not issued any form of securities (including stock options, warrants, debt securities, and securities subject to redemption or call) other than the Common Shares. PROVISIONS IN THE ARTICLES OF INCORPORATION AND BY-LAWS THAT WOULD DELAY, DETER OR PREVENT CHANGE IN CONTROL There are no provisions in the Company‘s Articles of Incorporation and By-Laws that may delay, deter or prevent a change in control of the Company.
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INTERESTS OF NAMED EXPERTS AND COUNSEL Certain legal matters under Philippine law relating to the registration of the Common Shares and the Listing were passed upon for the Company by Uy Law Firm, the Company‘s independent legal counsel. The services of Uy Law Firm was not hired by the Company on a contingent basis. As such, it does not have, and will not, receive any direct or indirect interest in the Company or in any of the Company‘s securities (including options, warrants or rights thereto) pursuant to, or in connection with the Common Shares. Neither has it acted, nor will it act, as promoter, underwriter, voting trustee, director, officer, or employee of the Company, except for one of the partners of the said firm who served as a nominee director and Corporate Secretary when the Company was incorporated in June 25, 2005, as she was then employed as Director for Legal Affairs of the Company‘s parent company, IPVG Corp. She however, subsequently ceased serving as such nominee director and Corporate Secretary of the Company within the same year, upon her having ceased to be connected with IPVG Corp. The financial statements of the Company for the year ended 2008 were audited by Punongbayan & Araullo. The financial statements of the Company for the years ended 2007, 2008, and 2009 including the notes thereto, have been audited by KPMG, independent public accountants and are incorporated by reference herein. The financial statements of the Company for the first half ended June 30, 2010 have been reviewed by KPMG, in accordance with Philippine Standard on Review Engagements 2410, ―Review of Interim Financial Information Performed by the Independent Auditor of the Entity‖. Both auditors have no shareholdings in the Company, nor any right to subscribe for or to nominate persons who may subscribe to securities in the Company.
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COMPANY HISTORY IP-Converge, a wholly owned subsidiary of publicly listed IPVG Corporation (PSE:‖IP‖), is a profitable information technology and communications services provider in the Philippines. Its core product and service is a ―Managed Data Services‖ suite which provides customers with competitively priced co-location and connectivity services, be it point to point data communications or connectivity to the Internet. In addition to its core products and services, the Company has also ventured into IT infrastructure security – specifically DDoS (―Distributed Denial of Service‖) attack protection, CRM (―Customer Relationship Management‖) solutions, Financial Solutions, Disaster Recovery and Business Continuity services, unified communications and messaging solutions, and other ancillary products and services. Incorporated in July 8, 2005 as a stock corporation, the Company began its operation with the acquisition of an international, telco-grade data center from Reach Networks, which the Company continues to operate The data center, which is used to provide Managed Data Services, is located at a prime location - the 34th floor of RCBC Plaza Tower II in Makati City, Philippines. By 2006, the Company tuned its strategy by maintaining a focused go-to-market strategy, zeroing in on several niche markets, selling in-demand products and services with a distinct market edge over competition, while conscious of maintaining its competitive cost structure, and thus maintaining relatively high profitability. Since then, the Company underwent unprecedented growth in revenue and size, and is now considered to be a frontrunner in the markets it operates in. The Company has a healthy mix of customers from different industries and verticals, from pure Internet based businesses to medium to large sized enterprises, both based locally and abroad. To this day, the Company continues to leverage on its robust network infrastructure and data center facilities, its strategic partnerships, and highly-skilled staff to make a strong statement in the global IT&T industry. The Company recently upgraded its original ISO certification to the new ISO 9001:2008 Certification (Quality Management Systems). The upgraded ISO certification expires on September 21, 2011. IPC was registered with the Board of Investments in the ICT Support Services Category on June 15, 2010, and was registered with the Philippine Economic Zone Authority as an Ecozone IT Enterprise at the RCBC Plaza on April 24, 2006. The vision of the Company is ―Shaping the IP landscape for the communities we serve‖, and its corporate mission is five-fold: Enable better business practices for its customers. Promote mutual growth among partners. Ensure career fulfillment for employees. Ensure maximum value on shareholders investments. Provide opportunities to develop ICT expertise for qualified marginalized youth. Below are selected milestones and achievements in the Company‘s young history: 2005 IPVG Corporation makes a strategic shift from media and web development activities to the Internet Service Provider (ISP) and communications business. IPVG enters into a Memorandum of Understanding (MOU) with one of Asia‘s largest IPbackbone carriers and telecommunications firms. The collaboration includes the resale of technology and telecommunications services to the Philippine market. IPVG signs a Reseller Agreement with PCCW, the largest communications provider in Hong Kong, and one of Asia‘s leading IT&T players. IPVG secures a Value-Added Services (VAS) registration from the National Telecommunications Commission (NTC) of the Philippines. IPVG signs an agreement with Reach Networks (HK), a joint-venture between PCCW and Telstra, for the acquisition of its Philippine Internet Data Center located in RCBC Plaza, Makati City. This marks IPVG‘s entry into communications and carrier-related space. 55
IPVG puts up IP-Converge and is incorporated as a wholly-owned subsidiary of IPVG Corp. 2006 IP-Converge is registered with the Philippine Export Zone Authority (PEZA) as an IT (Export) Enterprise. IP-Converge‘s installs its first off-shore point of presence (PoP) in Hong Kong, enabling the Company to expand its networks and provide fast connections within Asia IP-Converge partners with US-based Prolexic Technologies to offer the first and only DDoS Mitigation Service to the Philippine market National Telecommunications Commission (NTC) grants Value-Added Service (VAS) Provider license to IP-Converge for VOIP (Voice Over Internet Protocol) services. 2007 IP-Converge becomes Philippines‘ first and only Internet service provider with a direct connection to the Hong Kong Internet Exchange (HKIX), further enhancing the Company‘s ability to provide the fastest connections within Asia IP-Converge and First Cagayan Leisure and Resorts Corp. (FCLRC) form joint-venture corporation First Cagayan Converge Data Center, Inc. (FCCDCI). IP-Converge completes the provisioning of STM-1 fiber link connecting its facilities in Makati City to the Cagayan Export Processing Zone in northern Philippines. IP-Converge partners with US-based Salesforce.com as a Registered Consulting Partner, providing licenses and consulting services to Salesforce.com customers in the Asia-Pacific region. IP-Converge acquires a telco-grade, carrier-neutral Internet data center in Singapore through purchase of IP-Converge Pte. Ltd. 2008 IP-Converge begins full operations of its Singapore data center. IP-Converge hosts first On-Demand CRM Conference in the Philippines with Salesforce.com IP-Converge is awarded a ISO 9001:2000 certification IP-Converge becomes Salesforce.com‘s Authorized Training Center in the ASEAN region. 2009 Salesforce.com launches year-round monthly CRM seminars and workshops in the Philippines with IP-Converge. IP-Converge partners with US-based Neustar to offer its unique DNS infrastructure and web performance monitoring services in the country. IP-Converge is named Salesforce.com Top Partner for ASEAN (FY 2008) IP-Converge partners with Interactive Intelligence to offer unified IP communications software solutions to Philippine enterprises and the BPO sector. Based on IPC‘s records and to the best of the Company‘s knowledge, it has no history of bankruptcy, receivership or similar proceedings. Further, IPC has not undertaken any material reclassification, merger, consolidation, or purchase or sale of a substantial amount of assets, which transaction is not conducted in the ordinary course of business. The Company has a wholly-owned subsidiary, IPDS, which however, is not operational. Under its Articles of Incorporation, the primary purpose of IPDS is to render various services and applications, such as data center services, co-location services and managed services. The following page contains a chart summarizing IPC‘s Corporate Organizational Structure as of the date of this prospectus.
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PARENTS, SUBSIDIARIES, AND AFFILIATES The following section provides a discussion on the Company‘s affiliates.
IPVG Corp. IPVG, incorporated in May 19, 1964, is publicly listed on the Philippine Stock Exchange (PSE Ticker Symbol: IP). Its subsidiaries operate in the following business segments: (i) Communications (IP Services and Internet Security); (ii) Content (On-line gaming and Mobile solutions), and (iii) Business Process Outsourcing (BPO). IPVG reaches its customers through collaboration with international corporations that have proven to be market leaders in their respective geographic markets and industries. Its current partners include Fortune 1000 companies listed on the New York Stock Exchange such as PCCW. By pairing each of IPVG's business subsidiaries with strategic partners, IPVG can offer established product and proprietary business knowledge to the Philippine market. This has accelerated market penetration, and provided tangible, bottom line value. IPVG's senior management team includes several industry pioneers and veterans in the IT&T, DDoS mitigation, on-line gaming, mobile development and BPO sectors - together over 100 man-years of professional experience.
IP Converge Data Services, Inc. Incorporated in September 6, 2005, IPCDSI is a wholly-owned subsidiary of IP-Converge and is a single purpose vehicle (―SPV‖) for the lease contract with RCBC Plaza. The Company was incorporated to render various services and applications such as data center services, co-location services and managed services and such allied undertakings, and as a consequence and as may be necessarily useful and convenient in the premises, carry on and undertake such activities which may be reasonably and conveniently carried on in connection with or incidental to said purpose, or calculated, directly or indirectly, to enhance the value of or render profitable, any of the Corporation‘s property or rights and its principal registered office is located in Makati City, Metro Manila. 57
First Cagayan Converge Data Center, Inc. FCCDCI was registered with the SEC on November 17, 2007 and was formed as a joint venture between IPCDCI and FCLRC, to engage in information technology and communications, such as, but not limited to Internet Protocol Systems products and their improvements and other services related thereto, such as co‐location, bandwidth, disaster recovery services, software development, internet merchant payment processing and payment solution to the licensed locators of FCLRC, as well as the Cagayan Economic Zone Authority. FCCDCI has an authorized capital stock of P25 million divided into 25 million shares with a par value of P1 per share, of which P25 million has been subscribed and P6,250,000 has been paid. FCCDCI was established with FCLRC owning 60.0% and IPCDCI owning 40.0%. The Company started commercial operations on January 1, 2008. On January 1, 2009, IPCDCI effectively assigned its subscription rights (covering 9,999,998 shares of FCCDCI, which represent 40.0% of FCCDCI‘s outstanding capital stock) to IPVG, the consideration for which was paid in cash. Our acquisition of FCCDCI improves our communications infrastructure in the Philippines, particularly, in the Northern Luzon area. FCCDCI maintains an extensive fiber optic network and data center in Cagayan Economic Zone Authority. FCCDCI is a profitable subsidiary and diversifies our business model by capturing the enterprise market.
IP E-Game Ventures, Inc. (IP E-Games) IP E-Games, incorporated in 2006, is a publicly listed company in the Philippine Stock Exchange (PSE: EG) which operates the online gaming business unit of IPVG Corp. IP E-Games is ranked as the leading online games publisher in the Philippines and holds the top titles including RAN Online, Cabal Online, Audition Dance Battle, and Presidential Award recipient Korean game Granado Espada. Other games include Korean adventure games such as Dragonica and Nostale Online. The casual games of IP E-Games are published under X-Play Online Games Inc. (X-Play). IP E-Games strategic minority investors include the Philippine Star Group and E-Store Exchange (an affiliate of GMA7). IP E-Games is 76.96% owned by IPE Global Holdings, 14.49% owned by IPVG Corp. and 2.65% owned by IPVG Employees, Inc, 5.88% owned by PCD Nominees.
I-Pay Commerce Ventures, Inc. i-PCV, incorporated in 2007, is the payment services subsidiary of IPVG Corp. A certified Bangko Sentral ng Pilipinas (BSP) remittance agent, i-PCV provides value-added payment transactions to various partners in the Philippines and abroad. i-PCV offers multiple products to merchant partners that range from CoBranded Visa Debit Cards, Online payment solutions, Remittance programs, and Foreign Exchange Services, among others. i-PCV is uniquely positioned to become a leading remittance delivery channel as a result of strategic partnerships with global remittance companies with access to the widest retail base in the world. I-PCV is 57% owned by IPVG Corp., 23% owned by Elite Holdings, and 10% owned by iPCV‘s management.
IP Foundation, Inc. Incorporated in 2007, IP Foundation is the corporate social responsibility arm of the IPVG group. IP Foundation‘s mission is to save lives and bridge the digital divide. IP Foundation sponsors subsidized vaccination treatments for over 20,000 patient visits per year and provides grants for computer centers in the provinces. IP Foundation is a non-stock, non-profit organization.
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Prolexic Technologies, Inc. Prolexic is a wholly owned subsidiary of IPVG Corp. Founded in 2003, Prolexic provides cutting edge services that protect Internet operations from the debilitating service disruptions caused by Distributed Denial of Service (DDoS) attacks. Prolexic's origin was tied to small-medium businesses in gambling, gaming, and other vulnerable industries. As the threat of DDoS attacks has grown, these attacks have become recognized as significant threat to any online business including multinational financial institutions, banks, airlines, and other high visibility e-Commerce providers. Prolexic's customers can be rest assured that their network borders are secure, allowing them to focus on their businesses.
IP Contact Center Outsourcing Inc. Starting operations in July of 2006, IP Contact Center Outsourcing (IPCCO) is in the business of providing outsourced solutions based on the specific needs of customers. IPCCO has partnered with PCCW's (NYSE: PCCWY.PK) Contact Center business (PCCW Teleservices), the largest and most comprehensive provider of communication services in Hong Kong and one of Asia's leading players in the Information and Communications Technology industry. PCCW Teleservices currently operates 8 centers in Asia, servicing various sectors such as banking and finance, manufacturing, insurance, travel and tourism, public utilities and communication. With this partnership, IPCCO has become the 8th center in PCCW's network of contact centers. IPCCO is a whollyowed subsidiary of IPVG Corp.
Influent Influent is a US-based contact center incorporated in 1994, of which IPVG Corp. is an affiliate through the relationship with PCCW Teleservices Hong Kong. It provides outsourced customer contact solutions, including outbound business-to-consumer (B2C), outbound business-to-business (B2B), inbound customer care, sales, and non-voice business process outsourcing (BPO) to clients in a variety of industries. With existing client relationships with a wide range of Fortune 500 firms and other industry leading companies, Influent is well-positioned for continued growth in several market segments. The premier call center industry publication, Customer Interaction Solutions magazine, recently cited Influent in the "2008 Top 50 Teleservices Agency Ranking" as #7 in US domestic and #11 internationally. Based out of Dublin, Ohio, Influent has a global contact center network comprising 11 contact centers with over 2,300 seats in the US, Philippines, and Panama.
X-Play Online Games, Inc. X-Play, incorporated on December 20, 2007, is a joint venture between IP E-Games and GMA New Media Inc. (GMA-NMI), the digital media arm of GMA Network Inc. (PSE: GMA7). X-Play is the casual games division of IP E-Games and is the local publisher of the popular casual games such as Audition Dance Battle, first-person shooter game Operation 7 (OP7), music rhythm game Band Master, and online videoke game Superstar Online. X-Play is keen on revamping online casual gaming and bringing it to even greater heights as it focuses on designing, operating and maintaining casual online gaming and casual online gaming-related portals. X-Play also aims at evolving and promoting casual online gaming and its digital content development, especially with the convergence of traditional and digital media through IP e-Games and GMA-NMI. X-Play is a 50%:50% joint venture between IP E-games and GMA7 (through GMA New Media, Inc.).
RAN Online, Inc. RAN Online, Inc. was incorporated on August 3, 2006. It has an authorized capital stock of P1 million, divided into one million common shares, and a subscribed capital of P263,158. It is a wholly owned subsidiary of IP-Egames, that will provide information technology support services to third party gaming companies as well to affiliates. 59
Megamobile Megamobile Inc. incorporated in November 22, 2005, is the mobile communications business unit of IPVG Corp. (PSE:IP), is a value-added mobile services provider focused on delivering content and communications for communities. It is the mobile service partner of content providers and communities which include some of the biggest names in the publishing, online gaming, music and entertainment industries. Megamobile is a partnership formed by Mobile Interactive and Marketing Professionals with a combined experience over 2 decades in Multimedia and Digital Design Production, Full Life Cycle Systems Applications Development, Marketing and Business Development. Megamobile is the fusion of one of the best Filipino mobile technology provider and solid content development team in the industry today. Our mission is to create new and compelling wireless platforms and technologies and introduce them to local and international mobile consumers. Megamobile is now 70% owned by Linq, the venture capital arm and private equity division of the Inquirer Group. IPVG Corp. owns 21%, while the remainder is owned by Megamobile‘s management and founders.
PCCW Teleservices (Philippines), Inc. (formerly BPO Teleservices) (“PCCW-T”) PCCW-T, incorporated in 2009, is a 70:30 joint venture between PCCW Telservices Hong Kong and IPVG Corp., to serve as the business process outsourcing delivery center for the parents. PCCW Teleservices Hong Kong is a leading regional contact center service provider with significant presence in Greater China, and North America. PCCW Teleservices Hong Kong is a wholly-owned subsidiary of PCCW, which is a leading telecommunications company in Hong Kong and is listed on the Hong Kong Stock Exchange.
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ORGANIZATION IP-Converge is managed by a team of professionals who have highly-diverse entrepreneurial, business and technical skills in multiple spaces within the Internet, Information technology services, consulting and communications areas. Together, these individuals bring over 150 years of combined management experience to the Company. Jaime Enrique Y. Gonzalez, Chairman, has a successful track record in the internet space; having founded a series of internet start-ups that have been acquired by larger U.S. - based firms (match.ph/itzamatch.com). Mr. Gonzalez has taken IPVG from garage to public. He has a Bachelor of Arts in International Politics and Economics from Middlebury College, attended the program for Masters in Entrepreneurship at the Asian Institute of Management, and completed Business courses from Sophia University in Tokyo. Mr. Gonzalez is considered an expert authority on the Internet and online games space. Prior to IPVG, Mr. Gonzalez was involved in investment banking with a focus on fund-raising and restructuring. Roger G. Stone, Deputy Chairman, is a UK national with over 35 years experience in marketing, sales, software development and executive management in the IT and telecommunications industries. Mr. Stone has developed specialized expertise in establishing new operations in emerging markets particularly in Europe and Asia. More than 25 years of his working life has been on international assignments in UK, Austria, Hong Kong, India, Philippines, Vietnam, Thailand and Costa Rica. His career includes 25 years with Unisys Corp., mainly in Asia, heading operations in India and the Philippines, 3 years as head of retail operations for IDT Corp. in Europe, and immediately prior to joining IPVG, Mr. Stone was CEO of IQLudorum plc. He graduated from Loughborough University of Technology in the UK. Reynaldo R. Huergas, President, has a track record of more than 20 years in sales, marketing, and business development, with extensive experience in technology, telecommunications, and customer service management in Asia and the US. Prior to joining IPVG and IP-Converge, Mr. Huergas has held executive positions in Globe Telecom, myAyala Inc., and Global Data Hub (formerly Ayala Port), and occupied senior management positions in Unisys Corp. in the Philippines, Hong Kong, Singapore, and Indonesia as well. Mr. Huergas also worked at iAsiaworks (Silicon Valley), a venture-funded company in Sunnyvale, California engaged in Internet data center services in the Asia Pacific; as well as a content provider in Burlingame, California. Rene R. Fuentes, Independent Director. Rene R. Fuentes is currently the Liberal Arts Program Director and Advisor of SGV. His business experience during the past five years up to the present include management consultancy and directorship in foundations and private companies, which include La Flor De La Isabela, International Wine & Food Society (Philippine Branch), Philippine‐Australia Business Council, Philippine‐New Zealand Business Council, De La Salle University Science Foundation, Inc., and 1911 Insurance Agency Corporation. He took his Masters in Business Administration from the University of Sta. Clara, United States. Juan Victor S. Tanjuatco, Independent Director. Juan Victor S. Tanjuatco is a holder of a Masters Degree in Business Administration‐Finance from Wharton School of Finance and Commerce, University of Pennsylvania and a Bachelor of Arts Degree in Economics from Ateneo de Manila University (cum laude). He has built up his work expertise through extensive exposure in the United States with IBM Philadelphia, in Hongkong with Credit Agricole Indosuez (formerly Banque Indosuez), in New Zealand with Banque Indosuez, and in the Philippines with Banque Indosuez, Manila Offshore Branch and the Bancom Group, Inc. Mr. Tanjuatco is currently the Executive Vice President of the Export and Industry Bank, Chairman and Director of Tincan Mobile Solutions, Inc., Director of Ketmar Fast Food Corp., and President of Tanjuatco Development Corp. and Tanay Central Rice Mill, Inc.
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Juname C. De Leon, Corporate Secretary, Alternate Information Officer and Compliance Officer, was the Head of the Prosecution ad Enforcement Department of the PSE prior to joining the Company. Prior to that, she was also the Legal Counsel of Fortune Managers from 2002 to 2006, and held the position of Hearing Officer and Securities Review Counsel in the Securities and Exchange Commission from 1999 to 2002. She graduated from Ateneo de Manila University in 1995 with a degree in Juris Doctor, and from De La Salle University with a Bachelor of Science degree majoring in Legal Management. Patrick David R. De Leon, Chief Finance Officer and Treasurer, Mr. De Leon is a Bachelor of Arts and Bachelor of Science in Commerce graduate of De La Salle University (1982). He has also completed the Strategic Business Economics Program of the University of Asia & the Pacific (1996). Prior to joining the Corporation, Mr. De Leon was the Director of Information Technology of the Philippine Transmarine Carriers Group (PTC). He likewise served as Vice-President for First Maritime Shared Services Inc. and General Manager for LifeLinks International (LL). Mr. De Leon shall also serve as Deputy CFO for IPVG Corp. Percival C. de los Reyes, Senior Vice President for Managed Data Services, has had significant contributions to Globe Telecom and Philcom, prior to joining IP-Converge. Mr. de los Reyes has substantial experience in IT and telecommunications and has held senior sales director roles in several companies, including Orient Networks of Singapore where he worked as Country Director for the Philippines. Mr. de los Reyes also spent time with Swift Global USA in Washington, DC. Daniel dV. Viray, Vice President for Financial Systems, has had highly productive stints in several companies during his career with notable stops as Country Manager as well as Sales Director in multinational firms like Sun Microsystems and Hewlett Packard. Prior to joining IP-Converge, Mr. Viray was the Regional Sales Director of AurionPro Solutions Pte Ltd. In addition, he brings over 26 years of management and sales experience in banking and information technology. Edgar R. Gutierrez, Vice President for Technical Operations & Customer Support, has over 10 years experience in the Information and Communications Technology (ICT) industry. Mr. Gutierrez has worked with numerous service providers such as Sky Internet, Impact Information‘s Systems and Wolfpac Communications, focusing on network operations and Internet applications development. Hernand A. Hermida, Vice President for Product Development, has over 15 years experience in the Information and Communications Technology Industry and has worked in multiple roles in technical consulting, sales, marketing, business development and product management. Mr. Hermida was Head of Business Development at AyalaPort, and VP for Support Services at MISNet, a local IT firm. He also taught systems analysis and design, data communications & networking, C Language Programming, and Digital Systems Design for 2 years at the De La Salle University where he also attained his Bachelor of Science in Computer Science degree. Maria Carmencita T. Burgos, Assistant Vice President for Sales - Managed Data Services, has significant sales and marketing experience in mobile and data communications. She is a sales and account management pioneer in IP-Converge and is also currently the Sales & Marketing Director of First Cagayan Converge Data Center, Inc. (FCCDCI), joint-venture company of IP-Converge and First Cagayan Leisure and Resorts Corp. She graduated with a BA Political Science degree at U.P Diliman and conferred with an MBA from Ateneo De Manila. Donna B. Mantos, Controller, is a Certified Public Accountant and has over 9 yrs. of experience in the field of finance and accounting. She graduated with the highest honors at Mountain View College Valencia, Bukidnon with the degree of Bachelor of Science in Accountancy. Prior to joining IP Converge Data Center, Inc. she was the Finance Manager of IP Converge‘s parent company IPVG Corp. She has also worked at Solutions Insurance Brokers, Inc. as an accountant and MOF Company Inc. as Assistant Accounting Manager.
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As of the date of this Prospectus, IP-Converge has a total of seventy-eight (78) full time employees. Figure 1 in the subsequent pages shows the organizational chart of IP-Converge.
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Figure 1. IP Converge Organizational Chart
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Being the Company President, Mr. Reynaldo Huergas develops the strategic direction of the Company‘s business with assistance from IPVG management, and the Company‘s senior management team. Mr. Huergas oversees all aspects of the business, from sales / marketing, to operations, to finance, to general administration. As part of IPVG‘s management committee, Mr. Huergas updates IPVG on a weekly basis. Mr. Patrick David R. De Leon is the Chief Finance Officer, overseeing the finances of the Company, and he is assisted by Ms. Donna Mantos as the chief controller and a full time accounting staff. Mr. Percival De los Reyes is the SVP in charge of overseeing the entire Managed Data Services business. He has several other managers directly reporting to him that individually manages aspects of the business. Mr. Egie Gutierrez manages the Technical support operations, everything from service provisioning, the network operations center, systems support, customer support and helpdesk, backbone engineering and capacity planning – all of which has its own overseeing managers. Also reporting to Mr. De los Reyes is Ms. Maria Carmencita Burgos who manages a sales team composed of account managers. Some business development managers who are dedicated to oversee sales from different industry verticals report directly to Mr. De los Reyes. For the data center and facilities operations – Ms. Olga Nicomedes oversees this as Facilities manager, ensuring the continuous uptime and availability of the data center, as well as expansion, operations and capacity planning. Mr. Nino Valmonte is directly responsible for marketing for the entire Company – including corporate marketing, communications, public relations, and specific product / service marketing activities – done in collaboration with Product Management and the different Business Development managers and directors. Mr. Dan Viray as VP for Financial Services oversees the sales of the Company‘s various products and services with a specific focus on the financial sector. The sales and service delivery of IP-Converge‘s Financial Services and Solutions are under his responsibility and thus he has account managers under his charge who are in charge of delivering sales, and technical / project management personnel who are in charge of delivering consulting services for the Financial Solutions together with 3 rd party contractors and consultants who are hired on an as needed basis. Ms. Mimi Dizon as Business Development Director for CRM oversees CRM business of the Company, specifically the sales and service delivery of Salesforce.com and other CRM solutions in the near future. Under her are technical and project management personnel who are in charge of delivering consulting services on Salesforce.com. Mr. Hernand Hermida is the VP for Product Development – he and product management staff under him are in charge of overseeing the management of different products of IP-Converge (with the exception of Financial and CRM Solutions). Specific responsibilities include the packaging, marketing, product strategies, costing and pricing, as well as evaluating and developing new products and services that IPConverge would offer in addition to its existing products and services. In addition, business development managers in charge of delivering sales and service delivery on Unified Communications report to him directly, and thus he has sales and service delivery responsibilities for these products as well. The Corporate Finance and Investor Relations Division of IPVG (the Parent Company) is a shared resource unit that handles the investment banking requirements, mergers & acquisitions (M&A), fund raising (debt & equity), capital restructuring, and investor relations & communications requirements of listed and unlisted subsidiaries. IPC‘s Corporate Finance & Investor Relations team consists of 3 full-time senior managers and 3 junior managers that have an experienced track record in investment banking and corporate communications. The team is headed by Ricardo F. Lagdameo. The team has successfully fund raised over USD18M for IPVG, negotiated and secured investment lines with foreign private equity groups, structured over 6 joint-ventures for the IPVG group, secured over P400M in debt financing, and handled over 6 acquisitions with over USD25M in value for IPVG. The team has recently helped list IP-Egame Ventures ("EG"), and is also now working with Unicapital and BDO Capital for the listing of IP-Converge. The Corporate Finance and Investor Relations Division has also produced award winning annual reports which were recognized in the 2009 Anvil Awards.
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BUSINESS As the genesis of IP-Converge as a business was as a data center, its core product and service is thus a ―Managed Data Services‖ suite which provides customers with competitively priced co-location and connectivity services, be it point to point data communications or connectivity to the Internet. In addition to its core products and services, the Company also has ventured into IT infrastructure security – specifically DDoS (―Distributed Denial of Service‖) attack protection, CRM (―Customer Relationship Management‖) solutions, Financial Solutions, Disaster Recovery and Business Continuity services, unified communications and messaging solutions, and other ancillary products and services. IPC delivers IT and telecommunications integrated solutions to other telco providers and to corporate users. The solution range from the simple provision of bandwidth to fully integrated systems, where IPC initiates, designs, and manages the project from inception to handover. IPC‘s close partner relationships with major suppliers in the industry including PCCW, Microsoft, PLDT, e-PLDT, IDT, Globe allows it to provide redundant, telco-grade IT and telecom integrated solutions. Because of its strong IT&T network platform, the Company can offer a package of value added services to various institutions including the corporate and SME sectors locally and abroad. These value added services maintain business oriented functions, saving users from the cost and difficulty of doing it themselves. The majority of IP-Converge‘s revenue is monthly recurring, and most customer agreements that charge for monthly recurring fees are renewed on an annual (12 month) basis and the dates of renewal of all existing contracts is almost evenly distributed between all months of the fiscal year. The percentage of customer churn is low, so revenue retention is kept throughout the year. The only incidences of churn occur when the customer closes its business and is unable to continue the service, or IP-Converge terminate the customers‘ service due to non-payment of fees due. The revenue growth of IP-Converge on an annual basis is driven by excellent retention of recurring revenue (low churn) and quick replacement of lost revenue due to churn. In terms of NEW business, IP-Converge normally closes new business in all subcategories between the periods of February and October, new business taper during November and December as IPC‘s customers choose to delay purchase decisions during these times. PRINCIPAL PRODUCTS AND SERVICES The Company‘s products and services fall under two (2) major categories: Managed Data Services, and Business Solutions and Services. The following sections describes each product and service sub – category under both major categories, the platforms and technologies used to deliver each product / service to customers, partners and 3rd party providers that the Company has partnered with to deliver the services, as well typical profiles of customers who acquire each of the services.
Managed Data Services Co-location Services
The cCompany provides co-location services under the ―IPC Data Center‖ Brand. IP-Converge owns and maintains a telco-grade data center facility in the 34th floor of Tower II in RCBC Plaza, Makati City, Philippines. Thorough this facility, the Company provides a robust and secure space for customer to house their network equipment, web and application servers. The data center provides uninterrupted electrical power and cooling – to ensure that customer co-located equipment operates with no interruption and as optimal as possible. The data center is over 570 square meters and provides redundant power (from multiple main and UPS sources) and cooling (combination of in-row cooling and downthrow CRAC unit cooling) that ensures an ambient temperature of 20 to 25 degrees Celsius and maintains noncondensing humidity at 40 to 50%. Security measures are also in place to ensure that fires are suppressed 66
and controlled, and equipment and personnel are secured – this is achieved by CCTV monitoring and proximity card / biometric access control on certain high security areas. The data center is maintained and operated by a full time staff 24 x 7 and is augmented by 3 rd party contractors and suppliers. Customers who get co-location services from IP-Converge typically are enterprises that have applications or websites that require maximum uptime and availability and a highly secure environment within which their servers are stored. There are also enterprises who take space in IPC‘s data center to store equipment for backup and/or disaster recovery purposes, using IPC‘s data center as a hot, warm, or cold backup site that will be put into production if and when a disaster strikes their main production systems and/or location. Customers can get a range of co-location options: a.
Co-location rack – customer gets a lockable rack where servers and network equipment are placed. Customer may take multiple racks in one or several rows or areas. Typical racks are equipped with power feeds and sockets with actual power draw capped between 3 to 6KVAs
b.
Co-location area – customer gets space in square meters and either the customer supplies the racks to be placed in the area or IPC supplies and installs them. Power provision in the area is typically customized given the requirements of customers‘ equipment. Areas can be enclosed in a secure cage or suite.
c.
Custom power and cooling – while racks and areas are typically provided with standard power provisions, it is not uncommon for customers to be given customized power provision and usage of power is charged on a fixed basis per KVA (based on equipment power draw rating) or metered based on actual consumption (per KWH). There are also times where in IPC provides specialized cooling for customer racks when common cooling from CRACs and in-row cooling need to be augmented (e.g. for high powered equipment and data storage devices)
Being a telco-neutral data center, all major local and even international carriers have points of presences (PoPs) inside the data center – which means that the customer can choose to buy connectivity circuits from the different carriers with PoPs inside the data center, to connect their servers and equipment collocated in the data center – to the internet and/or to their respective offices and remote locations. The carriers who have PoPs in the Company‘s data center include: PLDT, Globe, Eastern Telecom, Bayantel, eMeralco Ventures, ComClark, FiberCity and Digitel. PCCW also has a PoP inside the facility. Customers who co-locate with the IPC data center save on local connectivity costs to the internet and to other points, as the data center is telco neutral – customers simply put their servers and equipment at the data center and pay IP-Converge a minimal ―cross connect fee‖ to facilitate connection between their servers and the local telco of their choice – definitely more cost effective than housing their servers on their own locations which will entail local connectivity costs to the nearest PoP of the telco. Customers also gain the added advantage of using a special facility, that is specifically designed to ensure computers and network equipment operate in an optimal environment (uninterrupted power and cooling). It is also not uncommon for some customers to use IPC‘s data center as their ―central connectivity hub‖ – meaning all their branch office connections are hubbed at the data center, again because co-locating their central network equipment at the data center allows them to connect to multiple telco providers. IP-Converge also has the ability to provide co-location services in Hong Kong and Singapore, through partner data centers where the IP-Converge Network PoPs are located. All customers of IP-Converge for the co-location service pay both a ―One-time setup fee‖ and a ―Monthly Recurring Fee‖. The One- time fee covers charges for material and labor to provision racks and areas and cross connects, and the monthly recurring fee covers the monthly use of the space plus power, plus usage of the cross connects if applicable. The monthly recurring fee ranges from a standard fee based on standard rack configurations and power, but it can also be different on a case to case basis depending on the space, cooling and power required. The minimum contract is typically twelve (12) months, with an option to renew further. 67
Internet Connectivity Services More than just a data center provider, IP-Converge also is an internet service provider (under the ―IPC Access‖ brand‖) and provides enterprises – both data center and non-data center customers with fast, reliable and highly available connectivity to the Internet. The Company maintains its own IP network that spans Manila, Singapore and Hong Kong – and customers who get internet connectivity services from IPConverge connects directly to this network. The figure below is a simplified diagram of the Company‘s IP Network.
As seen from the diagram, the network spans major communication points throughout Asia and from these points; it can reach customers and end-users (IPC‘s customers‘ customers or target users) with relative ease. The IP-Converge network is an Asian-facing network – the network was specifically designed and built to ensure low latency to most Asian countries. Furthermore, the strength of the IP-Converge network is that its 24 x 7 NOC actually take the time to tweak the paths based on customer preferences and idiosyncrasies of IP routing over the public Internet– whenever possible. The network has extended direct reach to local markets in Hong Kong, Singapore, and Manila. From these IP-transit and internet exchange peering points, IP-Converge customers are able to reach more Asian destinations such as China, Taiwan, Korea, Japan, Macau, Malaysia, Indonesia, Brunei, Thailand and Vietnam. Latency to the United States and Europe is also quite low and comparable to offerings of other local providers. The IP-Converge network is a combination of Commercial IP Port capacity from other providers and connections to multiple Internet Exchanges – between the two, Commercial IP port capacity is more expensive but is backed up by service level agreements from the providers and other value added services. Internet Exchanges on the other hand are cheaper, but does not have an SLA – it however, allows a member of the exchange to ―exchange traffic‖ between other providers connected to the same exchange, thereby 68
avoiding costly commercial IP Port expenses. The Company maintains a healthy mix of both to ensure a proper balance of traffic to and from multiple locations and providers, and also to control costs. In Hong Kong, IP Converge is directly peered with PCCW, Pacnet, the Hong Kong Internet Exchange (HKIX), the Equinix Internet Exchange, Seednet (Taiwanese Internet Exchange), and SK Telecom. In Singapore, IP-Converge is directly peered with PCCW (this peering is also used as a triangulation and redundant path to Hong Kong from Singapore), Singtel, Starhub and the Equinix Internet Exchange. In Manila, IP-Converge is directly peered with: Globe, Vitro‘s Internet Exchange, Eastern Telecom and PLDT. To connect all three (3) PoPs in a ―mesh‖ configuration, IP-Converge utilizes international leased circuits from multiple providers and these circuits traverse different submarine cables – APCN, APCN2, EAC, SMW3 and IAC. Having cable diversity guards against downtime brought about by submarine cable breaks (e.g. during earthquakes). Further all commercial IP ports and internet exchange ports the network is using are all ―burstable‖, meaning IPC has the ability to cater to sudden customer traffic surges and acquire additional bandwidth on demand. Finally, IP-Converge has made investments in placing network intelligence and security breach detection equipment at critical points within the network. Through these technologies, IPC is able to determine the behavior of the network traffic, create baselines and detect anomalies such as DDoS attacks. Through its close partnership with Prolexic Technologies – IPC is able to mitigate DDoS attacks to protect customers and ensure maximum uptime. Most of IP-Converge‘s customers for Internet Connectivity service are also co-location customers – the connection is delivered straight to customers‘ networking equipment in their racks within the data center. There are also customers who treat IP-Converge as a pure ISP – these would be enterprise and communications provider customers, so the service is delivered in conjunction with transport (local loop) services. Data Connectivity Services IP-Converge also provide customers with data connectivity services to connect their co-located servers and equipment (in the IPC Data Center) with their offices and other locations via a private data connection. As mentioned, IP-Converge also provides an ―ISP‖ service to some customers and thus delivery of the internet connectivity service to customer locations is also done via local transport data connectivity services – as a bundled service. IP-Converge deliver connectivity services locally or internationally, as a reseller and partner to multiple providers, most of these providers have PoPs inside the IP-Converge data center: PLDT, Globe, Eastern Telecom, Bayantel, eMeralco Ventures, ComClark, FiberCity and Digitel. The Company also resells circuits from PCCW, Verizon and Singtel on a case to case basis, for international connectivity requirements. IP-Converge purchases circuits from these providers and resell them to the customer. As a telco-neutral data center, customers can call on their preferred provider of choice and IP-Converge facilitates the delivery of the circuit services. The range of service options are numerous and include: Local Digital Leased Lines, Local Metro Ethernet, Wireless, International private leased circuits, International Ethernet private lines, IP-VPN, and Satellite. All customers of IP-Converge for the service pay both a ―One-time setup fee‖ and a ―Monthly Recurring Fee‖. The One- time fee covers charges for material and labor to provision data center and customer onsite cross connects, vertical cabling, customer premise equipment and network connection ports, and the monthly recurring fee covers the monthly use of the circuit. The monthly charge depends on the size of the circuit (bandwidth in Mbps) and the transport method (e.g. metroE, DLL, etc). The minimum contract is typically twelve (12) months, with an option to renew further. Professional and Managed Services 69
Both co-location and connectivity services (internet and data connectivity) are provisioned, maintained, monitored and operated 24 x 7 by facilities, network and systems administration, and customer service staff. It is the same staff that provides customers with a range of professional and managed services that include: a.
Project services for: - Planning, designing and Implementing LANs and WANs - Deploying network equipment (e.g. routers and firewalls) and servers at the data center - Software / OS installation and configuration - Data Center builds
b.
Ongoing managed services for: - Managing customer equipment at the data center - Monitoring, administration and maintenance of customer networks and servers - Data Backup and Recovery - Outsourced service desks and proactive notifications
c.
Technical Consulting
IPC‘s customers come to the Company for expert technical advice and outsource parts of their technical operations to the Company (e.g. customer outsource monitoring of their networks to IP-Converge). This is in part due to its technical staff‘s experience and skill gained through training and actual real-world experience in running a data center and communications business. Managed Services cover regularly scheduled and routine services that customers require such on-going maintenance and management, systems administration, break-fix services and service desk, among others to ensure customers‘ systems are running at an optimum level and ensure the availability of their missioncritical applications and data. For customers who require one-time project work or services on an ad-hoc basis - Implementation Services cover a range of services from server and equipment testing and mounting, cabling, server and system setup and even LAN/WAN implementation and design. Customers of IP-Converge for the service pay both a ―One-time Mobilization fee‖ and a ―Monthly Recurring Fee‖. The monthly charge depends on the specific scope of work for the managed services to be rendered, and at times covers additional costs such as special software and hardware tools. The minimum contract is typically twelve (12) months, with an option to renew further. There are also times when customers only engages IP-Converge for services on a one-time project basis – in this case there are no recurring charges, but only a project fee which is typically broken down into progress billing amounts. DDoS Protection Services IP-Converge delivers this service as a partner and reseller of US-based Prolexic Technologies – the world leader in providing protection against Distributed Denial of Service attacks or DDoS. The Company signed a one year contract with Prolexic in 2006, that automatically renews each year unless either party expresses desire to discontinue relationship through written notice at least 30 days prior. DDoS is currently the world‘s most costly cyber crime, able to cripple a network for a period of time by hackers remotely controlling thousands of computers that have been infected to send out bogus traffic to a specified target. By employing a unique philosophy in attack mitigation, Prolexic provides the world‘s premiere DDoS mitigation service that is more powerful and effective than any other 70
hardware or service on the market today. Leveraging a global mitigation network, proprietary state-of-theart technologies, and the world‘s most experienced DDoS mitigation teams, Prolexic (and by extension, IPConverge) protect customer networks and applications from any known DDoS attack. As an in-the-cloud service, there is no hardware to buy, and no staff to train. DDoS attacks continue to grow in both size and sophistication far beyond what ‗mitigation appliances‘ and traditional services can cope with. Whether an attack is a 50 Gigabit flood, or a sophisticated layer-7 low-and-slow attack, hundreds of organizations depend upon Prolexic‘s proven protection. Prolexic mitigates more DDoS attacks than any competitive service, and their 24x7 team of DDoS mitigation experts can react in real-time to new attacks. Prolexic‘s vast experience in combating the most innovative and aggressive attacks enables IP-Converge customers to remain one step ahead of the attackers. As an in-the-cloud service, there is no equipment to buy or staff to train. Customers of IP-Converge for the service pay both a ―One-Setup fee‖ and a ―Monthly Recurring Fee‖. There is a higher setup fee charged, if the customer signing up for the Prolexic service wants to be protected immediately (e.g. if the customer is already under attack). The monthly charge depends on the size of the ―clean bandwidth‖ returned to the customers‘ network in Mbps. Clean bandwidth refers to data with DDoS traffic already filtered out by Prolexic, and only contains legitimate traffic. The minimum contract is typically twelve (12) months, with an option to renew further. Business Continuity Services This service is offered to, and acquired by customers who require a secure area for business continuity as part of the implementation of the disaster recovery and business continuity plans. These customers require the use and deployment of information technology components to an alternative site in order to provide continuous access and delivery of critical business functions and considers this a high business priority. Companies who invest largely in business continuity measures avoid and prevent severe effects of any unplanned events or disasters, which lead to profit loss. To deliver these this services, IP-Converge has a Business Continuity Center, employing most of IPConverge‘s existing state-of the-art data center features such as uninterrupted power, cooling and security, as well as access to IP-Converge‘s network or facilities of all of the Company‘s telco-partners. All workstations have telephone and internet connectivity, and clients have the option of bringing in and using their own computers or the available computers in the workstations. This is a viable alternative to customers who do not have their own BCC, or does not have access to capital funds to build one for themselves. IPC Business Continuity is offered on a per-seat basis and clients are given the option of contracting seats on a dedicated or shared basis. Customers who get dedicated seats have exclusive access to the seats / workstations and may place their own PCs permanently during the contract period and may use them anytime for disaster simulations or practice or actual disasters. Customers who get shared seats ―share‖ access of their seats with other customers – they place their own PCs only when they are using it –during disaster simulations and actual disasters. Use of their seats is on a ―first come first served‖ basis, if other customers chose to use the seat during the same period as the others. Oftentimes, customers acquire IPC Business Continuity services in conjunction with co-location and connectivity services. For example, a customer would get several racks to store their backup servers and acquire connectivity to connect these racks to their offices. All customers of IP-Converge for the service pay both a ―One-time setup fee‖ and a ―Monthly Recurring Fee‖. The One- time fee covers charges for material and labor to provision BCC seats, and the monthly recurring fee covers the monthly ―reservation‖ of the seats. The monthly charge depends on the number of seats, sharing scheme (dedicated or shared) and whether they require a PC or not for each seat. Additional charges are incurred when the customer actually uses the seat during a disaster simulation or actual disaster. 71
Managed DNS Services2 This service provides IP-Converge customers with a high availability, scalable and managed DNS service. DNS stands for Domain Name Services, and this is a critical component of any IT infrastructure supporting not only external websites and portals but also enabling key business processes and applications inside the organization as well as emerging services such as VOIP. DNS is the system that converted URLs (―www.ip-converge.com‖) into an IP address (―204.232.11.23‖) that a user‘s internet browser needs to make a network connection to the web server in order to download webpages, perform application tasks, and others. Therefore, enterprises in every industry are striving to achieve 100% uptime for their DNS infrastructure. IP-Converge have partnered with US based company Neustar as a reseller for UltraDNS in the Philippines. The UltraDNS suite helps enterprises manage external and internal DNS, with no investments in hardware and software. UltraDNS enables customers to better manage their DNS infrastructure to improve user experience and productivity. UltraDNS is a managed service and features a worldwide network of clustered DNS servers that respond to DNS queries from users from anywhere in the world in milliseconds. The service also guarantees 100% uptime as the DNS servers are replicated between each other, so no DNS downtimes occur. Customers who subscribe to the service are given access to an easy to use management portal GUI that allows them to manage their DNS records effectively and easily. In addition, UltraDNS also has other DNS based solutions that enable disaster recovery and load balancing between production and backup sites. All customers of IP-Converge for the service pay both a ―One-time setup fee‖ and a ―Monthly Recurring Fee‖. The monthly charge depends on the DNS database size such as number of domains, records and monthly queries. Web Performance Monitoring Services Through the Company‘s partnership with US-based Neustar, IP-Converge also provide services for web performance monitoring. The service enables customers to monitor the performance of their websites and web-enabled applications -from simple monitoring to transactional load testing and complex ecosystem management. Through this service, customers are able to measure how fast their websites, web pages and transactions load – and also be alerted in case their websites or applications are too slow suddenly experiences an outage. It also features performance reports that are generated by the system based on data gathered while monitoring the websites – these reports can be sent automatically to the customer via email daily, weekly, monthly or the user can generate the reports on demand. Webmetrics has the most flexible website monitoring services platform enabling online businesses to solve immediate performance management needs. Its ease of use minimizes complexity as customers get access to a web based portal where they can configure their monitoring services; generate reports and alerts and others. Finally, customers are able to monitor the performance of their sites and network from over 100 major cities worldwide, from outside their data center – giving them a true picture of their sites performance – as how their users experience it. Webmetrics has the ability to monitor web sites, transactions, streaming video / audio and network services.
2
The two year contract with Neustar was signed in 2009 and was terminated by IPC in June 2010. Moving forward, this product will no longer be offered to clients. 72
All customers of IP-Converge for the service pay both a ―One-time setup fee‖ and a ―Monthly Recurring Fee‖. The monthly charge depends on the number of websites to be monitored and how often monitoring occurs. Others From time to time, and on a case to case basis, the Company also sells hardware and software to its customers, as a reseller for premium brands such as IBM, Dell, Cisco, Juniper and Oracle.
Business Solutions and Services Customer Relationship Management (CRM) Solutions CRM solutions are one of the few investments that your business can justify in this economy. Because to steer your Company through turbulent times, it's more important than ever to be on top of every lead, every opportunity, and every customer interaction. What companies cannot afford is a big up-front software investment that's expensive to install and maintain. With Salesforce CRM solutions and its cloudcomputing model, companies can prioritize its customers and keep track of its budget at the same time. Salesforce‘s business CRM products include applications for critical areas of businesses like Sales and Customer Service. There is no need to seek individual CRM solutions for sales force automation, customer service, partner management, marketing and campaign management, etc. Salesforce.com‘s CRM solutions provide everything in one neat package. Salesforce.com CRM is easier to deploy and implement compared to traditional on-premise CRMs. With its pay-as-you-go subscription model (―Software as a Service‖ or Saas), the price of success is dramatically lower. Companies large and small in every industry are experiencing success with business CRM solutions from salesforce.com. Salesforce CRM products work for businesses of all sizes and industries. Salesforce.com's CRM products and cloud-computing model (also known as software as a service) provide many benefits to companies, requiring only moderate operating expense and offering a pay-as-you-go model that can scale with the changing needs of companies. Salesforce CRM solutions offer the fastest path to customer success in the cloud. The Sales Cloud delivers the next generation of collaboration between sales and marketing across the enterprise. When sales, marketing, and partner organizations collaborate via business CRM products, everyone is connected to the best information, best content, best strategies, and best practices across the entire enterprise, helping companies close more deals to grow the business. An integral part of the salesforce.com CRM solution, the Sales Cloud gives business users the ability to tightly manage their sales process and marketing spend. The Service Cloud transforms customer service through the power of cloud computing. The Service Cloud of Salesforce CRM solutions brings together information from industry-leading cloud-computing services like Google, Facebook, and Twitter to capture every conversation and leverage every community expert in the cloud. By capturing these conversations in salesforce.com‘s business CRM solutions, the Service Cloud helps companies deliver the expertise of the community to customers, agents, and partners regardless of location or device. With salesforce.com‘s CRM products, the quality of customer service is consistent across every channel. Partner relationship management makes it easy for a company‘s business partners to access leads, collaborate on deals, and locate all the information needed in order to be successful. Salesforce.com‘s CRM products for partner management seamlessly integrates with the sales, 73
marketing and customer service components of Salesforce.com CRM solution, so companies get unparalleled visibility into the entire sales pipeline for direct and indirect channels. Marketing automation enables closed-loop marketing so that companies can execute, manage, and analyze the results of multichannel campaigns. Marketing executives can measure the ROI of budgets, tie revenue back to specific marketing programs, and make adjustments in real time, all in a single business CRM solution from salesforce.com. Solutions for collaboration make working with a company‘s important communities— customers, partners, employees, and more—easier and more effective than ever. Salesforce.com‘s CRM solutions includes a content library that brings Web 2.0 usability to a company‘s business content so a company can share it more effectively and enhance collaboration within the organization. Business CRM is also made more powerful with salesforce.com‘s Ideas, a feature which helps companies build an active online community where a company can create a dynamic dialogue with its customers, partners, and employees. CRM products are even more powerful when they integrate with the other tools you use every day, and Salesforce CRM integrates with Google Apps, Google AdWords, and the major business productivity tools from Microsoft and others. IP-Converge has been a partner of Salesforce.com since 2007, and is able to resell its solutions to customer on a per user per month basis – thus revenue from software license use is generated. The contract between IPC and Salesforce.com is renewable annually. In addition to the above contract that allows IP-Converge to resell Salesforce.com licenses, IP-Converge also provides the following Salesforce.com Certified Consulting Services to its customers: a. b. c. d. e. f. g. h. i.
Project Planning Requirements Gathering Workshop and Documentation – ―As-Is‖ and ―To-Be‖ processes Process and System Design and Configuration System Configuration Customizations using Force.com Development Platform Data Migration System Walkthrough and End Users Training Go-Live and Post-Live Support Training – both Basic Administration Training and Advanced Training (Development using Force.com)
Unified Communications Solutions IP-Converge has also ventured into providing Unified Communications Solutions, through its partnerreseller relationships with US based Interactive Intelligence, and UK-based Presence Networks. Unified Communications solutions feature software based solutions that melds multiple communication channels such as phone (voice), fax, email, instant messaging, video and others, into a single IP-based platform. a.
Interactive Intelligence IP-Converge offers a single-unified, IP-based, all-in-one, open standards-based software communications solution that gives power, flexibility and agility across multiple customer interaction channels, replacing multi-point and multi-vendor legacy solutions and the complexity that comes with them. There are two (2) variations of the solution that caters specifically to the needs of Contact or Call Centers and Enterprises (for corporate communications use). Contact and Call Centers would use Customer Interaction Center or 74
CIC, a feature packed variation that has capabilities to handle large volumes of incoming and outgoing calls in a blended environment that also combines interactions via email, chat and fax. CIC is the flagship solution and has all the following features out of the box and are fully configurable: -
Full PBX / IP-PBX capabilities – with agent software phones or actual (hard) phones. ACD with built-in multi-channel queuing Speech enabled IVR or touch tone IVR Recording, scoring and quality monitoring Outbound dialing and campaign management Customer self-service and eService automation Workforce Management Supervision and System Monitoring Built-in and customizable call, agent and system reporting Remote agent capabilities Unified communications messaging and voice mail Full featured operator software console Single intuitive desktop Central administration Integration to CRM and business applications Knowledge Management Skills-based routing Screen Recording Agent Monitoring, Scoring and Quality Management Multi-Site Routing and disaster recovery Customer Satisfaction Surveys
Enterprises who would need a single communication platform but do not experience the communication rigors and volumes of a typical call center would use Enterprise Interaction Center or EIC. As a local partner, IP-Converge is also certified to provide implementation and customization services for CIC and EIC. A typical project scope of work is setting up and installing the system and configuration based on the business rules and workflow desired by the company. IP-Converge derives revenue from this business through one-time chargeable software licenses and services. b.
Presence Networks In partnership with UK based Presence Networks, IPConverge offers customers with a fully featured unified communications platform on the ―Software As a Service‖ or SaaS model. Presence Networker is a cloud-based, multi-tenanted communications service that gives enterprises the ability to deploy a single and secure communications platform to allow employees, partners and customers of their choosing to interact and collaborate via voice, instant messaging and other means, using PC clients, web browsers, and mobile devices (Blackberries, iPhones, Windows Mobile devices and Symbian based mobile devices). Presence networker gives the following abilities for the enterprises‘ customers, partners and employees, within a secure and private platform exclusive to the enterprise: -
Secure, encrypted instant messaging – all IM conversations are logged and archived Voice communications using VoIP, including teleconferencing and bridging to standard PSTN lines 75
-
SMS messaging – also logged and archived Virtual meetings via video and presentation sharing Encrypted and secure file sharing and transmission Secure and controlled links to private and public websites and data feeds (e.g. Financial / stock tickers) Ability to set status (e.g. ―busy‖, ―available) and allow others to see one‘s status
As this is ―SaaS‖ modeled service, customers pay per month per user for this service, and the rate per user depends on what communication capabilities are enabled for the user. Minimum contract is twelve (12) months, with the option to renew. IP-Converge also derives revenue on a one time project basis, for customization services – in cases where the customer needs special branding or abilities that the standard Networker does not have out of the box. Financial Solutions The Company also sells and markets solutions and services specific to the banking and Financial industry, as a reseller and partner for leading financial systems providers Nucleus Software, Kalypto and Credence Analytics. IPC Financial Systems offer a wide array of advanced banking and financial applications ranging from Core Banking, to Credit Card Products, Loan Modules, and Risk & Treasury Management solutions. These applications provide financial institutions with a means to increase productivity through streamlined internal processes, operate multiple locations with ease, or jumpstart into a new business with minimal expense. All software described below are acquired by customers from IP-Converge (as a reseller partner) and revenue is derived from software license one time revenue, and professional services one-time revenue. a.
Credence Analytics Credence Analytics is a suite of software solutions for Financial institutions that include: -
Credence Analytics iDEAL Treasury System: An integrated Treasury System solution with Front, Mid-office and Back-office capabilities addressing the complete treasury and investment management requirements of banks and financial institutions. It offers a wide product coverage for foreign exchange and money market, fixed income, derivatives, equities, mutual funds, securities lending, etc. and enable straight through processing of all transactions at the treasury, with ready interfaces to trading and settlements system such as Reuters, Bloomberg, CCIL, RTGS, SWIFT, etc. The mid-office module offers extensive risk management and limit monitoring capabilities to the users.
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Credence Analytics RiskMark Risk Management System: A powerful Risk Management Solution designed to assist risk managers in estimating and managing risk on treasury and investments exposure. RiskMark also generates comprehensive risk Management Information System for the treasury mid-office. RiskMark quantifies the market risk of treasury and investment portfolio by computing the Value-at-Risk (VaR). The VaR of a portfolio indicates the maximum loss that can be expected on a treasury or investment portfolio under normal circumstances taking into account the Time Horizon, which is the specific period for which the given portfolio is held; and Level of Confidence, a measure of how sure one given portfolio is incurring a maximum loss if held for a specific period.
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Credence CALMs Asset Liability Management System: A comprehensive Asset and Liability Management solution designed to manage intermediation risk and the net worth of the institution by tracking risk, liquidity and capital. CALMs is designed to help the interest-rate risk management of the complete balance sheet of the institution. CALMs 76
go beyond mere regulatory reporting and is designed to serve as the central tool for analyzing, monitoring, and simulating the balance sheet, and aid in enterprise wide Risk Management.
b.
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Credence iDEAL for Borrowings Management: An integrated front and back-office system and leading Borrowings Management solution allowing straight through processing of multiple loan transactions and generation of future cash flows and regulatory MIS reports. System can handle a wide range of liability products like CPs, FDs, bank loans, inter-corporate deposits, foreign currency loans, and non-convertible debenture.
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Credence iDEAL Trust for Investments and Funds Management designed to automate the complete operations of Trust. Monitor client portfolio, client‘s transactions/funds sources, administration of various trust schemes, manage various investment outlets/fund applications, maintenance of trustor and trustee accounts, settlement of trust transactions, generation of regulatory and MIS reports and interface with the general ledger of the bank.
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Credence Mercury FX for Remittance Management: A browser-based, real-time branch reporting and workflow management system configured for communications and transactions between the treasury dealing room and the branches. Mercury FX is designed for information dissemination, dynamic rate-card publication, special rate negotiation, transaction reporting, authorization and confirmation, and database integration.
Nucleus Software (FinnOne) FinnOne is a powerhouse of seamlessly integrated software modules designed for banks and financial institutions. FinnOne suites provides solutions for the asset and liability sides of the business, core financial accounting, and customer service whereby implementation can be modularized as necessary for the financial institution. FinnOne supports for multi-branch, multi-currency, multi-product, bi-lingual implementations. The following are the solution suite of applications under FinnOne: -
c.
Core Banking System (CBS) Customer Acquisition System (CAS) for Loan Origination Lending: Loans Management System (LMS) Collections: Collection Management System (CMS) PDCMS: Post-Dated Check Management System GL: Extensive General Ledger Accounting FAS: Finance Against Securities Facilitator LiquiDeposits: Multi-Deposit Controller Comprehensive Regulatory Reports CMS: Collateral Management System LMGT: Lead Management System Power Pay CSM: Customer Service Module Forecaster SSO: FinnOne Single Sign On (to access different applications of FinnOne suite of products)
Kalypto Software KalyptoRisk Credit Risk Management Solution or Kalypto/Credit: Includes Risk Assessment, Risk 77
Measurement, Risk Mitigation, Risk Monitoring, Analytics and Capital Charge solutions. KalyptoRisk Operational Risk Management Solution or Kalypto/Ops: Includes Loss Event Management, KRI or Key Risk Indicators, Self-Assessment and PCR, Analytics and Capital Charge, and MIS/Executive Dashboard Reports d.
Professional Services IP-Converge also provides professional services in conjunction with the software licenses for the Financial Solutions, and includes the following as part of the standard scope of work: -
System Integration for end-to-end project delivery including hardware, system software, database management system, database administration, application solutions
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Project Management Services and local technical support
STATUS OF NEW PRODUCT OR SERVICE The Company has not publicly announced any new product or service in 2010 except for the offerings discussed in the preceding section. IMPLEMENTATION METHODOLOGY The following table describes the delivery method or platform of each of IPC‘s product/ service: IP-Converge Product / Service
Delivery Method or Platform
Colocation Services
Utilizing a data center that IPC owns and operates.
Internet Connectivity Services
Using IPC‘s own Internet-connecting network that it owns and operates
Data Connectivity Services
Using the resold facilities and capacities of other 3rd party providers, both local and international
Professional and Managed Services
Using IPC‘s own Network Operations Center (NOC) manned by technical professionals 24 x 7, and its own employed technical personnel and consultants
DDoS Protection Services
As the partner of US-based Prolexic Technologies. Prolexic has deployed a worldwide network reaching protection infrastructure, so IP-Converge customers actually utilize their service and infrastructure, while IP-Converge provides level 1 customer and technical support
Business Continuity Services
Utilizing a data center that it owns and operates.
Managed DNS Services
On a SaaS model (Software as a Service) where one pays for the use of the software on a recurring basis, rather than paying a fee for a perpetual license – as a partner of US-based Neustar. who has deployed a worldwide DNS infrastructure, so IP-Converge customers actually utilize Neustar‘s infrastructure for DNS. IPConverge provide level 1 customer and technical support.
Web Performance Monitoring Services
On a SaaS model (Software as a Service) where one pays for the use of the software on a recurring basis, rather than paying a fee 78
for a perpetual license – as a partner of US-based Neustar. who has deployed a worldwide DNS infrastructure, so IP-Converge customers actually utilize Neustar‘s infrastructure for DNS. IPConverge provide level 1 customer and technical support. Salesforce.com Solutions
On a SaaS model (Software as a Service) where one pays for the use of the software on a recurring basis, rather than paying a fee for a perpetual license – as a partner of US-based Salesforce.com. who has deployed a worldwide infrastructure, so IP-Converge customers actually utilize their own internet connection to access the Salesforce.com CRM tool, using their internet browsers. IPConverge provide level 1 customer and technical support. As well as consulting services to customize the CRM tool to suit the business needs, processes and reporting requirements of the customer.
Unified Communications Solutions
As a customer-premised deployed software. IP-Converge provides the software installers and perpetual licenses, as well as the services to deploy install and customize the system at the customers‘ premise. Or, on a SaaS model (Software as a Service) where one pays for the use of the software on a recurring basis, rather than paying a fee for a perpetual license – both Interactive Intelligence and Presence Networks (partners of IP-Converge). have deployed an internet accessible communication platform, so IP-Converge customers actually uses this for the service. IPConverge provide level 1 customer and technical support.
Financial Solutions
As a customer-premised deployed software. IP-Converge provides the software installers and perpetual licenses, as well as the services to deploy, install and customize the system at the customers‘ premise.
BREAKDOWN OF REVENUE BASED ON PRODUCTS The following table provides the breakdown of the Company‘s revenues based on products: For the six months ended June 30, 2010
2009
For the year ended December 31, 2009
2008
2007
Connectivity
61%
59%
57%
55%
70%
Co-location
16%
17%
17%
13%
15%
4%
6%
5%
8%
1%
Professional Services DDoS/Mitigation Services
12%
11%
13%
11%
12%
Financial Applications
1%
4%
5%
2%
1%
Salesforce.com
5%
4%
3%
2%
0%
Managed Services
0%
0%
0%
0%
0%
Altitude
0%
0%
0%
1%
1%
DC Projects
0%
0%
0%
7%
0%
New Products/Services
0%
0%
0%
0%
0%
100%
100%
100%
100%
100%
Total Revenues
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BREAKDOWN OF REVENUE CONTRIBUTED BY FOREIGN SALES A vast majority of IP-Converge‘s revenues are from companies registered in the Philippines. The following table summarizes IPC‘s foreign sourced revenue for 2009 and the equivalent percentage contribution to total revenues. Country
% to Total Revenue (2009)
Hong Kong
3.06%
British Virgin Islands
2.24%
Malaysia
1.13%
Taiwan
0.65%
PRINCIPAL SUPPLIERS IPC has existing agreements with companies from whom it leases/ purchases servers and other computer equipment necessary for its operations. The Company is also dependent on licensors or developers for its software solutions and services, and these licensors or developers may also be considered as the Company‘s major suppliers. Supplier Name
Products & Services Typically Supplied
Commverge
Networking and telecommunications equipment and services
HP
PC Servers and data storage equipment and services
Fujitsu
Networking and telecommunications equipment and services
NHR
Networking and telecommunications equipment and services
IBM
PC Servers and data storage equipment and services Networking and telecommunications equipment and services
ATI
Data center racks, power and cooling equipment and services
AXENTEL
Data center wiring
MDI
PC Servers, desktop PCs, portable PCs and other office equipment
MicroImage
PC Servers, desktop PCs, portable PCs and other office equipment
Microwarehouse
PC Servers, desktop PCs, portable PCs and other office equipment
MSI
PC Servers, desktop PCs, portable PCs and other office equipment
Lamco
PC Servers, desktop PCs, portable PCs and other office equipment
Zenshin
PC Servers, desktop PCs, portable PCs and other office equipment
SIM Computer
PC Servers, desktop PCs, portable PCs and other office equipment
Intergrated Computer
PC Servers, desktop PCs, portable PCs and other office equipment
Advance Mcrosystem
PC Servers, desktop PCs, portable PCs and other office equipment
MGE
Data center racks, power and cooling equipment and services
Powerlines
Data center wiring
AllTech
Data center wiring
MFB Products Phils.
Data center racks, power and cooling equipment and services
Trends & Technologies
Data center racks, power and cooling equipment and services
One Touch
CCTV and Physical security systems
DCDC
Data center cooling equipment and services
APC
Data center racks, power and cooling equipment and services
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MSI-ECS
PC Servers, desktop PCs, portable PCs and other office equipment
Dell
PC Servers and data storage equipment and services
PLDT
Local data connectivity lines
Globe
Local data connectivity lines
Bayan Telecommunications
Local data connectivity lines
Eastern Telecoms
Local data connectivity lines
Wifi City
Local data connectivity lines
eMeralco Ventures
Local data connectivity lines
Digitel
Local data connectivity lines
PCCW
International data connectivity lines, Internet services
Singtel
International data connectivity lines, Internet services
Pacnet
International data connectivity lines, Internet services
RCBC Realty
Office space, chilled water and electricity
Prolexic Technologies
DDoS mitigation services
Neustar
UltraDNS and Webmetrics services
Salesforce.com
Salesforce.com services
Interactive Intelligence
Unified communications software
Presence Networks
Unified communications software
Credence Analytics
Financial Services software and services
Nucleus Software
Financial Services software and services
The Company is not and does not expect to be reliant on one or a few suppliers. Other suppliers may be sourced for the Company‘s various needs without paralyzing its operations. None of the Company‘s directors, their associates or its shareholders, owning more than 5.0% of IPC‘s issued share capital, has any interest in any of the Company‘s suppliers. DEPENDENCE ON A FEW OR SINGLE CUSTOMER As of writing, IP-Converge‘s total number of customers exceeds two hundred (200). The following table summarizes IPC‘s top five customers in terms of revenue and the equivalent percentage contribution to total revenues as of June 30, 2010: Customer Name
% Contribution to Total Revenue as of June 30, 2010
Regional Gaming Company
5.6%
Local Telco
4.8%
Local ISP Provider
3.3%
Regional Telco
3.0%
Financial Institution
2.5%
IPC‘s customer service agreements include confidentiality and non-disclosure clauses. As such, client names have not been disclosed in the above tables. As illustrated in the above table, the biggest contribution of any single client to the Company‘s total revenues as of June 30, 2010 only accounted for 5.6% of revenues for that period. As of the date of this prospectus, IP-Converge is not and does not expect to become dependent on a single or few customers, the loss of which may have a material adverse effect on the registrant and its subsidiaries.
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TRANSACTIONS WITH AND/OR DEPENDENCE ON RELATED PARTIES
Management Agreement dated 06 September 2006 between IPVG and the Company Under the Management Agreement, the Company engaged IPVG to render consulting, advisory and management services related to the operations and development of the Company‘s business and to the dayto-day operations thereof, including, but not limited to strategic planning, corporate management, domestic and international marketing, fund raising, financial management, marketing and financial oversight, including, without limitation, advisory and consultancy services on the distribution and sale of the Company‘s products and services, selection, retention and supervision of independent auditors, financial advisors and legal counsel, structuring and implementation of equity participation plans, employee benefit plans and other incentive arrangements for key executives of the Company and such other services relating to the business of the Company. The term of the Agreement is five (5) years, commencing from the execution of the Agreement, unless sooner terminated by either of the parties. The consideration for the management services are the following (―Management Fees‖): a) monthly fee of P 560,000.00; and b) annual fee in an amount equivalent to 10% of the Company‘s net income after tax.
Service Agreement dated 12 April 2007 between IP E-Game Ventures and the Company Under the Service Agreement, the Company shall provide bandwidth services to IPEV for a term of one (1) year, which term may be renewed, at the Company‘s option, under such terms and conditions as the parties may mutually agree upon. For said services, IPEV shall pay the Company monthly service fees as indicated in said Agreement.
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Loan Agreement dated 17 August 2005 among IPVG, Hanley and the Company Under the Loan Agreement the Company obtained bridge financing from Hanley with IPVG as the guarantor in the amount of US$550,000.00, for the acquisition of internet data assets from REACH, pending the processing of the long term loan applied by the Company from banking/financial institutions. Reseller Agreement between FCCDCI and the Company FCCDCI and the Company IPC entered into an agreement whereby FCCDCI shall be a reseller of the Company‘s services. Reseller Agreement dated September 2006 between Prolexic and the Company Under the Reseller Agreement the Company was granted a non-exclusive, non-transferable, limited license to promote, offer, and resell the services of Prolexic (mitigation) to prospective clients as part of the bundled service solution offered by IPC on data center filtering solutions to internet traffic and reduction or elimination of denial of service of traffic. Tele-Marketing Sales Agreement between IPCCO and the Company Under the Tele-Marketing Sales Agreement, the Company contracted with IPCCO for the integration of value-added information technology, telecommunications and business management services in the Company‘s business. Facilities Service Contract between IPEV and the Company The Company and IPEV entered into a Facilities Service Contract for the lease of network resource center space for a monthly rental fee of PhP450,000.00. The rental income arising from these transactions amounted to PhP5,400,000.00 for both 2008 and 2007. Cost-sharing Agreement between IPVG and the Company The Company and IPVG entered into a Cost-sharing Agreement whereby IPVG shall furnish, subject to reimbursement by the Company, all or part of the following services to be utilized by the Company: (i) the premises, including related association dues, janitorial, utility services and other contractual services; (ii) furniture, fixtures and equipment (including computer equipment); (iii) telephone, telegraph, fax services bandwidth and co-location; (iv) mail service, including postage, and messenger services; and (v) insurance coverage, such as employee group insurance, general liability, workers‘ compensation and professional fees. IPC agreed to reimburse IPVG on a monthly basis in arrears for the costs of the services and facilities based on the actual cost attributable to the Company‘s use of services rendered. Advances from IPVG The Company and IPVG agreed to convert the outstanding payables of PhP183,912,000.00 into a loan payable subject to 10% interest per annum, payable on 31 December 2009. In 2009, the Company and IPVG agreed to offset the loss incurred in the sale of IPCP with the existing advances to IPVG to compensate for any decrease in value between the acquisition cost and selling price of its assets in IPCP. Loan Payable to Prolexic The Company and Prolexic entered into a Loan Agreement whereby the parties agreed that the outstanding trade liabilities of the Compamy to Prolexic amounting to US$600,000.00 (PhP27,720,000.00) be converted into a loan payable subject to 5% interest per annum, payable within a period of 12 months or on or before 30 September 2009. In 2009, the Company paid US$100,000.00 (PhP4,809,800.00) in cash and the remaining balance was assigned to IPVG based on agreement between Prolexic and IPVG. As such the Company no longer has an outstanding loan obligation to Prolexic. 83
Loan Agreement dated April 2007 between IPVG and the Company The Company and IPVG entered into a Loan Agreement whereby IPC borrowed an amount of PhP4,500,000.00 which shall be used and disbursed directly and exclusively for the payment of initial requirement for the CEZA Sta. Ana-Magapit Loop. Other Transactions The following are other transactions of the Company with related parties: 1.
2. 3. 4. 5.
Advances to officers and employees of PhP1,155,912 which are mostly unsecured, non-interest bearing and collectible on demand. These are updated monthly and mostly charged against salaries of officers and employees; Advances from IPVG amounting PhP28,256243 which are unsecured, interest bearing, and are collectible on demand; Reimbursable out-of-pocket expenses and other expenses amounting to PhP3,588,769 paid by IPVG on behalf of the Company or paid by the Company on behalf of other related parties; Allocation of rental expense to IPEV in 2008 of Php5,400,000; and Internet connectivity, server hosting, IMBS and other services amounting PhP111,909,041 rendered by the Company to FCCDCI, IPEV, Prolexic, IPCCO, IPAY and Influent.
EFFECTS OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
IP Converge is classified as a ―Value‐Added Service Provider‖ under the Public Telecommunications Act of the Philippines (Republic Act No. 7925) (the ―Act‖), defined as an entity which, relying on the transmission, switching and local distribution facilities of the local exchange and inter‐exchange operators, and overseas carriers, offers enhanced services beyond those ordinarily provided for by such carriers. As a Value‐Added Service Provider, the Company is under the supervision and regulation of the National Telecommunications Commission (―NTC‖). Pursuant to its rule‐making power under the Act, the NTC issued the following guidelines (under Memorandum Circular No. 02-05‐2008) relating to the provision of value‐added services: No entity shall provide value‐added service without a valid certificate of registration from the NTC. The Certificate of Registration shall be valid for a maximum period of five years. A duly registered Value‐Added Service Provider: (a) may utilize its own equipment capable of only of processing, routing and storing messages in whatever format; and (b) shall strictly comply with the service performance standards under NTC Memorandum Circular Nos. 10‐17‐2000 and 19‐12‐2004, and other applicable standards prescribed by the NTC. The rates for value‐added services shall be deregulated. The Value‐Added Service Provider shall inform the NTC of the rates for each of the value‐added services offered at least seven days prior to the offering of such value‐added service. Value‐Added Service Providers seeking increases in rates for existing services shall inform the NTC of the details of such increases prior to the implementation of the increase. The NTC, in the exercise of its mandate to protect consumers, may not allow the increase. In July 20, 2006, the Company was registered with the NTC as a Value Added Services Provider under NTC Certificate of Registration No. CCAD-0025-2006/VAS.
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MATERIAL CONTRACTS The following are summaries of the material terms of the principal contracts related to the Company’s business and should not be considered to be a full statement of the terms and provisions of such contract. Accordingly, the following summaries are subject to the full text of each contract. 1.
Service Agreement In the ordinary course of business, the Company enters into Service Agreements with its various clients. These Service Agreements states the description of the services to be rendered by the Company (whether it is co-location, bandwidth, internet and data connectivity, professional and managed services, DDoS protection, Business Continuity services, managed DNS, web performance monitoring, CRM solutions, Financial Solutions, Disaster Recovery and Business Continuity services, unified communications and messaging solutions, and other ancillary products and services), the consideration for said services, terms and conditions, warranties and representations, limitation of liabilities, obligations of each party, among other things. The initial term of most of these agreements is one (1) year, with automatic renewal, unless sooner terminated by either of the parties.
2.
Sales Teaming Agreement between Nucleus Software Exports Limited and the Company On 15 July 2008, Nucleus and the Company entered into a Sales Teaming Agreement wherein the Company shall market the software developed by Nucleus to prospective clients as indicated in said Agreement. The term of this Agreement is one (1) year, which automatically terminates, unless renewed in accordance with the provisions of said Agreement.
3.
Reseller Agreement between Prolexic Technologies, Inc. and the Company On September 2006, Prolexic and the Company entered into a Reseller Agreement wherein the Company is to promote and resell Prolexic Services only as part of a bundled service to the Company‘s current and prospective customers. The initial term of the Agreement is one (1) year, renewable for successive one (1) year periods unless sooner terminated by either of the parties.
4.
Data Service Agreement between Innove Communications, Inc. and the Company On 31 July 2009, Innove and the Company entered into a Data Service Agreement wherein the Company availed of the telecommunications services of Innove, more particularly, its International Private Leased Line (IPLC) Service. The initial term of the Agreement is one (1) year, with automatic renewal, unless sooner terminated by either of the parties.
5.
Managed Services and Reseller Agreement between Neustar, Inc. and the Company On 27 February 2009, Neustar and the Company entered into a Managed Services and Reseller Agreement wherein the Company is to avail the managed DNS services, load testing and monitoring services of Neustar, as well as, resell said services to third-party end users. The initial term of the Agreement is twenty-four (24) months plus the Ramp Period (as defined in said Agreement), with automatic renewal for twelve (12) months, unless sooner terminated by either of the parties.
6.
Master Subcontractor Services Agreement between Salesforce.com Singapore Pte Ltd and the Company On 01 November 2008, Salesforce.com and the Company entered into a Master Subcontractor Services Agreement wherein the Company is to perform Services (analysis, design, planning, development, consulting, implementation, education, training and other activities) and provide Deliverables (tangible results of the Services) to its customers or to Salesforce.com itself. The 85
Agreement shall commence on Effective Date and shall continue in force until termination according to the terms of the Agreement. 7.
Management Agreement between IPVG and the Company On 06 September 2006, IPVG and the Company entered into a Management Agreement wherein IPVG is to render consulting, advisory and management services related to the operations and development of the Company‘s business and to the day-to-day operations thereof, including, but not limited to strategic planning, corporate management, domestic and international marketing, fund raising, financial management, marketing and financial oversight, including, without limitation, advisory and consultancy services on the distribution and sale of the Company‘s products and services, selection, retention and supervision of independent auditors, financial advisors and legal counsel, structuring and implementation of equity participation plans, employee benefit plans and other incentive arrangements for key executives of the Company and such other services relating to the business of the Company. The term of the Agreement is five (5) years, commencing from the execution of the Agreement, unless sooner terminated by either of the parties.
8.
Lease Agreements between RCBC Realty Corporation and the Company On 02 September 2005, RCBC Realty Corporation and the Company entered into a two (2) Lease Agreements wherein the Company leased 330.80 square meters and 1,502.76 square meters of the 34th Floor Tower II of RCBC Plaza. The term of both Agreements is five (5) years, unless sooner terminated by the parties, and renewable, at the option of the Lessee, for a further term of three (3) years.
9.
Credit Line Agreement between Unicapital Incorporated/Majalco Finance and Investments, Inc. and IPVG/IPC
On 05 October 2009, Unicapital and Majalco Finance, jointly referred to as Lenders, and IPVG and the Company, jointly referred to as Borrower, entered into a Credit Line Agreement wherein the Lenders renewed the Credit Line Facility of the Borrowers and granted an extension/restructuring of the outstanding principal loan of the Borrower. The credit facility has been extended by another 60 days from its original expiry date of September 11, 2010. The said extension is subject to certain terms and conditions Other than the foregoing, the Company is not a party to any other contract or agreement of material importance and outside the ordinary and usual course of its business. PATENTS, TRADEMARKS, COPYRIGHTS
Patents IP-Converge currently does not have registered patents with the Philippine Intellectual Property Office.
Trademarks Following are the Company‘s trademarks registered with the Philippine Intellectual Property Office: Trademark IP-CONVERGE & LOGO
SPHERE LOGO
Registration No. 4-2007-005568
Expiry of Registration May 5, 2018
4-2007-006346
January 14, 2018
Description The mark consists of a sphere encased by a winding metallic strip with ―ipconverge‖ at the bottom written in SF square head extended font. Sphere encased by a winding metallic
86
Registration No.
Expiry of Registration
ip-converge
4-2007-006345
January 14, 2018
VOICES
4-2007-006854
May 5, 2018
Voice Over Internet Call Exchange Suite IP CONVERGE VOICE OVER INTERNET CALL EXCHANGE SUITE
4-2007-006852
February 11, 2018
4-2007-006853
June 9, 2018
IP-CONVERGE LOGO IP-CONVERGE
4-2007-012533 4-2007-012534
November 17, 2018 July 7, 2018
IP-CONVERGE
4-2007-012535
July 7, 2018
Sphere Device
4-2007-012536
November 3, 2018
THE LOOP
4-2008-011931
May 4, 2019
Trademark
Description strip The text ip-converge is written in SF square head extended font. The text ―VOICES‖ written in stylized font. Voice Over Internet Call Suite Wordmark The Text ―ip-converge‖ lies slanted on the top rightmost portion of the logo. The acronym ―VOICES‖ is located underneath ―ip-converge‖. The phrase ―Voice Over Internet Call Exchange Suite‘ is at the centermost portion descriptively underscoring the acronym ―VOICES‖. IP Converge and logo IP Converge is written in stylized letters. IP Converge is written in stylized letters. The mark is a sphere encased by a winding metallic strip. The mark consists of the words ―THE‖ and ―LOOP‖. The word is written in small, upper-case, block letters while the word ―loop‖ is written is continuous, outlined form. The word ―THE‖ is placed right beside the letter ―L‖ and just before the letter ―O‖.
The Company also registered on 1 August 2008 the trademark IP-Converge and Device in Singapore. The registration of this trademark is valid for a term of 10 years, or until 1 August 2018.
Copyrights The Company‘s copyrights registered and deposited in the National Library are as follows: Copyrighted Material IP Converge Portal The Loop
Registered January 8, 2008 January 2008
29,
Registration Number M 2008-38 M 2008-13
Issued January 2008` February 2008
Term 18, 11,
Lifetime of author and for 50 years after death Lifetime of author and for 50 years after death
Trademarks represent a valuable category for IP Converge in the form of brand identity and brand recognition. The trademarks, such as IP Converge and its logo, represent the trust and reputation of the Company's products and services in the marketplace. Backed by excellent products, quality services and IP Converge‘s competitive strengths, these trademarks have a value in the market, and will continue to increase as more advertising and marketing effort is expended. IP Converge secured the said intellectual property rights by undertaking the following steps: 87
1. 2.
For trademarks - by registering the trademarks with the Intellectual Property Office; and For copyrights – by registering and depositing in the National Library the copyrighted material.
EMPLOYEES As of the date of this Prospectus, IP-Converge has a total of seventy-eight (78) full time employees comprised of sixty-eight (68) regular employees, eight (8) probationary employees and two (2) consultants. Department
Regular
Probationary
Consultant
Office of the President
1
0
0
Technical Operations & Customer Support
26
1
0
Infrastructure Development
8
2
0
Sales - Managed Data Services
7
1
1
CRM Sales and Services
6
1
0
Marketing
2
0
0
Financial Systems Sales and Services
2
0
1
Product Development
4
0
0
Corporate Standards
1
1
0
Human Resources
1
1
0
Finance & Accounting
5
1
0
Gen. Administration
5
0
0
Total
68
8
2
The employees of IP-Converge are not unionized nor party to collective bargaining agreements with the Company. With the expansion into additional data centers, Infrastructure as a service and Professional services, IPC anticipates hiring twenty-five (25) new full time employees within the next twelve months.
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DESCRIPTION OF PROPERTIES As of December 31, 2009, the Company‘s furniture, fixtures, and equipment property and equipment are valued at PHP 116,130,435 (net of accumulated depreciation). IPC‘s Head Office / Data Center Facility / Network Operations Center are all located at the 34 th floor of RCBC Plaza - a triple A PEZA accredited building in the heart of Makati. The data center is laid out over 1,834 sqm. of one floor of the plaza and is readily accessible by road and through the helicopter pad on the roof of the building. The floor itself contains office space and 654sqm. of conditioned raised floor space for co-location of server and communications equipment. The same facility houses the Philippine data termination node for the PCCW worldwide network making it ideal for any client requiring data center services and internet bandwidth or to specific locations via IPLC. Both Reach Networks and Asia Netcom provide network facilities to IPC. Equipment in the data center is supplied by Cisco, Juniper Networks, HP, Foundry and Tipping Point. On 02 September 2005, the Company entered into two (2) Lease Agreements for the abovementioned space located at the 34th Floor Tower II of RCBC Plaza. The term of both Agreements is five (5) years, unless sooner terminated by the parties, and renewable, at the option of the Lessee, for a further term of three (3) years. The total annual rent for the above space is PHP13,201,632.00. The IP Converge Hong Kong Network PoP is located at IPF II Data Center, Basement 2, International Finance Center II, 8 Finance Street, Central Hong Kong while IP Converge Singapore Network PoP is based at New Tech Park, 151 Lorong Chuan, Singapore. Both IP Converge Network PoPs are located at the central business districts of Hong Kong and Singapore, respectively. IPC provides space, quality air-conditioning (n+1 system) and redundant power supported by two 200KVA UPS units. The building has stand-by power provided by seven Mitsubishi – diesel generators. The facility has biometric physical access and 24x7 video surveillance capabilities to assist the security team obtain a high level of access control and security. Firewalls and intrusion detection systems provide network security and the high levels of upstream bandwidth offer facilities to mitigate DOS attack. IPC takes on its 24x7 responsibility for systems management seriously. The following is a list of mortgaged properties located at the 34 th floor of the RCBC Plaza Tower II, Ayala Avenue, Makati City: 1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
Leasehold Improvement – includes design & construction of structural reinforcement of UPS Room including installation of 2 sets of Bus Duct Adapter (Siemens) and Digital Meter (G.E. Model VM63A +10). Total floor area is approximately 1,834 square meters. Machinery & Equipment Airconditioning System Fire Suppression System Laser Detection System Two (2) Uninterruptible Power Supplies Data/Voice Cabling System Furniture & office Equipment CCTV Equipment at Network Operations Center (NOC) CCTV Equipment PABX System Security Card Access System Computer & Network Equipment Additional Racks Facilities Expansion Routers & Security Equipment
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The above properties were mortgaged in favor of TIDCORP to secure the Indemnity Agreement issued by the Company in its favor. The Indemnity Agreement was in turn issued by the Company in favor of TIDCORP in connection with the guaranty by TIDCORP of a loan taken from Export and Industry Bank. During the existence of the mortgage, the Company shall not mortgage, pledge, encumber, or alienate the mortgaged properties or transfer the location thereof without first obtaining TIDCORP‘s written consent. Network (Juniper MX240 router) equipment is, in part, covered by lease financing agreements with Japan PNB Leasing. The leased properties amount to a total cost of approximately PHP7,500,000 and total monthly lease payments for the above properties amount to approximately PHP213,000. The leased properties are located in Metro Manila and may not be removed therefrom without the prior written consent of the lessors. IPC‘s lease financing agreement with Japan PNB Leasing expires on October 19, 2012. The contract of lease with Japan‐PNB Leasing and Finance Corporation, for part of the Network (Juniper MX240 router) equipment, provides for the following prohibitions, among others: (a) to lease or sublease, or sell, transfer, convey, assign, pledge or hypothecate, or otherwise dispose of the leased properties or any part thereof, or any interest therein, or lend the leased properties or any part thereof, or allow the leased properties to be used by anyone other than the Company; (b) to sell, transfer, convey, assign, pledge or hypothecate or otherwise dispose of its rights under the contract of lease; (c) to remove the leased properties from their location, or deliver the possession of the leased properties to a third party, or assign our interest under the lease to a third party; (d) to make any conditions to, or alterations or improvements on the leased properties or any part thereof; (e) to sublease the leased properties without the prior written consent of the lessor. Aside from the above, there are no litigation or claims of material importance known to the Company to be pending or threatened against the Company‘s properties. Except as otherwise stated in the Use of Proceeds Section (see pages 26 to 28), the Company does not intend to acquire any major property within the next twelve (12) months, other than the usual office furniture and equipment needed for the additional employees the Company intends to hire. Over the next three years, the Company will utilize approximately P86,888,000 from the Offer net proceeds to purchase hardware and software for its Fort data center and Cebu data center expansion, and managed services expansion. An estimated P70,200,000 of the Offer net proceeds will be used for leasehold improvements to the proposed Fort and Cebu data centers and approximately P5,650,000 will be used for leasehold improvements of common areas of the proposed data centers. (Please see discussion under ―Use of Proceeds‖ on pages 33 to Error! Bookmark not defined..) The following table provides a breakdown of the above-stated figures:
Fit-out of data center Equipment Data Center Plant Network Equipment Racks Total equipment Fit-out of common areas Total proceeds to be used to acquire PPE
Fort Data Center 47,100,000
Cebu Data Center 23,100,000
Total 70,200,000
34,545,000 11,192,000 10,072,000
1,192,000 6,547,000
2,574,000
3,066,000
34,545,000 22,384,000 16,619,000 73,548,000 5,640,000 149,388,000
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LITIGATIONS AND LEGAL PROCEEDINGS The following are the pending material legal proceedings to which IPC‘s parent company or some of its affiliates are a party, as of the date of this Prospectus: IP E-Game Ventures, Inc. versus Ariel Solleque and Mygame1, Inc. (formerly, Microgaming Technology Corporation) (Civil Case No. 08-151; Regional Trial Court (“RTC”) of Makati, Branch 146) For Injunction with Application for Temporary Restraining Order and Writ of Preliminary Injunction and Damages This is a civil case for breach of contract and damages which IP E-Game Ventures, Inc. (―E-Games‖) filed on January 15, 2008 against the respondents on the basis of Mr. Ariel Solleque‘s violation of a non‐compete clause. Microgaming Technology Corporation was also impleaded in the case for its tortuous interference with a valid contract for soliciting the transfer of Mr. Solleque. The complaint states, in part, that on July 24, 2006, E-Games employed Mr. Solleque. Before joining EGames, he was made to sign a non‐compete and non‐disclosure agreement which specified that within one year from his separation from E-Games, he will not work for any company whose business is directly related to that of E-Games. On December 10, 2007, Mr. Solleque resigned from E-Games. However, within one year from his separation, it was found that Mr. Solleque was working for Mygame1, Inc., E-Games‘ direct competitor, in violation of the non‐compete clause signed by Mr. Solleque. Worse, even before the effectivity of his resignation on January 11, 2008, it was found that he already associated himself with Mygame1, Inc.. Bad faith was also imputed on Mygame1, Inc. for its tortuous interference with a valid contract, Mygame1, Inc. having solicited the transfer of Mr. Solleque even with the knowledge of the existence of a valid non‐compete agreement between E-Games and Mr. Solleque. The total amount E-Games is claiming against the respondents is P10,000,000. The case is still pending at the RTC of Makati. Microgaming Technology Corp. / Gamesoft Technology Inc. This is a complaint filed with the NTC on July 1, 2009 by E-Games for the revocation of the Value‐Added Services registration of Gamesoft Technology Inc. on the grounds of failure to comply with NTC regulations by illegally undertaking the business of publishing online games without a Value‐Added Services license. Emma Grace Rallos v. IPVG Corp., Jaime Enrique Y. Gonzalez and Roger G. Stone (NLRC-NCRCase No.10-14636-08) A labor case filed against IPVG for alleged violations of the Labor Code with claims for moral and exemplary damages and attorney‘s fees. Ms. Grace Rallos was former Vice President for Human Resources and Organization Development of IPVG. She joined IPVG in September 2008 and was terminated on October 2008 due to redundancy. The case has been submitted and pending for, decision of the National Labor Relations Commission.
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Alexander Miranda v. IPVG Corp., Jaime Enrique Y. Gonzalez and Roger G. Stone (NLRC-NCRCase No.00-01-00423-09) This is a labor case filed against IPVG for alleged violations of the Labor Code with claims for moral and exemplary damages and attorney‘s fees. Mr. Alexander Miranda was formerly a Senior Developer/Architect of IPVG. He was terminated on December 18, 2008 for just cause. The Labor Arbiter ruled in favor of Mr. Miranda. An appeal filed by IPVG is pending with the National Labor Relations Commission. IPVG Corp. vs. Dong Hun Lee, in his personal capacity and as President of Sabiclub.com Corp. (IS No. 09L-03677; City Prosecution Office of Makati) This is a criminal case for violation of B.P. 22, otherwise known as the ‗Bouncing Checks Law‘ filed by IPVG against Dong Hun Lee for knowingly issuing checks without sufficient funds. The parties are actively pursuing settlement of the civil aspect of the case, while waiting for the resolution of the case. People of the Philippines vs. Mario Muñoz (Criminal Case No. 356224-25; Metropolitan Trial Court (“MTC”) of Makati, Branch 65) This is a criminal case for violation of B.P. 22 filed by E-Games, which was provisionally dismissed pursuant to a compromise agreement executed between E-Games and Mario Muñoz on March 5, 2009. The case is being revived for failure of Mario Muñoz to update his payments and to comply with the terms of the compromise agreement. There are no pending material legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their respective properties are subject, as of the date of this Prospectus.
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PLANS AND PROSPECTS IP-Converge‘s business model for Managed Data Services is founded on the Company‘s strong belief that the combination of robust and highly available physical infrastructure, content and applications, direct client support and implementation from one source will lead to higher levels of customer satisfaction and operating margins is a compelling value proposition to customers at various points in the spectrum: the start-ups, the internet based businesses (e-commerce and gaming) and the established, enterprise company ends of the markets the Company chooses to serve. It is IPC‘s continuing view that customers are becoming so discriminating in their IT, data center, communications and services needs that specialization of IP-Converge is increasingly important. The Company believes that its products will be particularly attractive to those customers with the following requirements: Resource efficient data centers that are able to continually maintain a healthy balance between power to IT loads and non-IT loads (e.g. cooling, lighting) Data centers that can cater to very high performance or complex sever farms and network infrastructure Tier III data Center facilities – with the ability of the data center to achieve an uptime for power, cooling and other infrastructure components close to 100% Fast access to network security, specifically DDoS protection Software as a Service Virtualization Business Continuity and Disaster Recovery Fully outsourced and managed services Flexibility to acquire capacity and services on-demand, when they need it. As well as the capability to cater to customer needs between every end of the spectrum A one-stop shop provider of IT, network and professional services The Company‘s growth is contingent on the Data Center and Network Expansion. DATA CENTER AND NETWORK EXPANSION To address the impending shortage of data center capacity at the Company‘s main data center in RCBC Plaza, and realizing the need for premium data center space in the country, especially near the central business districts – IP-Converge has selected a site at the Bonifacio Technology Center in Fort Bonifacio Global City in Taguig City (―the Fort DC) as its second and expansion data center, and a second site in Vicsal Building in Cebu (―the Cebu DC‖) as its third and expansion data center. These sites will be leased for a minimum of five years. As of the date of this prospectus, IPC has a working draft of the lease agreement with Fort Bonifacio Development Corporation. The Company site for the planned planned Cebu Data Center will also be leased. IPC is currently negotiating the terms of a lease agreement with the owners of the target Cebu data center site. These data centers will cater to a broad array of customer Managed Data Services needs – from low power requirements of SMEs and telecommunications companies; to high power, cooling and performance requirements of eCommerce and gaming companies; to disaster recovery and business continuity requirements of financial institutions, BPOs and other enterprises. These data centers will be built on existing buildings and land and will be designed or modified to support customers‘ requirements. All of these IP-Converge facilities – including the existing data center in RCBC Plaza, Makati City – will provide specialist technical space design to support both corporate data center requirements and the technical installation and collocation needs of telecommunications and enterprise clients.
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All three (3) data centers will adhere to IPC‘s telco-neutrality by inviting the same key service providers to establish network PoPs, namely PLDT, Globe, Eastern Telecom, Bayantel, Digitel, ComClark and other emerging and new providers, and will be connected via a communications network mesh with direct access to Prolexic‘s DDoS mitigation platform. Connectivity into the Visayan region will be provided by IPC‘s partners. The overall resulting network infrastructure provides customers with a choice between Makati, Fort Bonifacio and Cebu as a hub for production systems and networks while retaining access to IPC‘s Asian-facing Internet network and disaster recovery products and services. Clients can then use these as a spring board for servicing the IT needs of their employees, customers and partners throughout the country and the Asian region. The Fort Bonifacio and Cebu data centers will be custom built facilities which incorporates certain design features based on trends in high performance computing (e.g. emergence of energy efficient blade server infrastructures), and the Company‘s experience in running a data center for the past five (5) years.
The Fort Data Center To address the impending shortage of data center capacity at the Company‘s main data center in RCBC, and realizing the need for premium data center space in the country, especially near the central business districts – IP-Converge has selected a site in the Bonifacio Technology Building in the Fort Bonifacio Global City in Taguig City- as its second and expansion data center. IP-Converge will lease a section of one floor of the building to build its second data center. The site was selected after a long process of review and survey of other alternative sites for the following reasons: The location of the building is suitable for IP-Converge‘s customer profile – as it is within close proximity, but still outside the Makati Central Business District – making it highly suitable for organizations in need of accessible disaster recovery sites outside of main offices located within the Makati CBD. It is also within the emerging business hub within Fort Bonifacio where enterprises such as BPOs have setup operations and a number of companies have moved their corporate headquarters or main country headquarters (e.g. Deutsche Bank, HSBC, SunLife Financial, etc.). The building has plenty of space for expansion in case the Company has need of more data center space in the future. The floor plate and maximum loading of the floor selected is capable of supporting the weight of fully fitted standard data center racks and plant (e.g. UPS) with relatively minimal structural reinforcement There is ample power within the building, and plenty of space to put in support and plant equipment such as backup power generators and air-cooled chillers needed for cooling Both PLDT and Globe have facilities within Fort Bonifacio, making it possible for them to setup PoPs within the Fort DC, and conversely making it possible for customers and IP-Converge to achieve carrier diversity Although it is expected that there will be annual escalation on rental cost, rental costs (including association and maintenance fees) are relatively low compared to Makati CBD rates.
Cebu Data Center Cebu is emerging to be a global Business Process Outsourcing hub, and has long been an alternative base for international and local manufacturing companies to produce its products in the Philippines. Considered as the ―Manila of the South‖, Cebu has all the attributes needed by BPO providers – a business-friendly local policy environment, extensive infrastructure, efficient connectivity and adequate human resources (as 94
Cebu is the center of learning for the Visayas and Mindanao regions), as well as highly competitive office rent and wages. To some extent, enterprises consider doing business in Cebu as more cost-effective compared to Metro Manila. As of writing Cebu hosts 12 call centers, including those operated by USbased global BPO providers Convergys, Sykes, eTelecare, and PeopleSupport – with more following suit, as the cost of BPO operations in Metro Manila continues to rise. The Philippine Economic Zone Authority recently lowered the minimum floor size of a building outside Metro Manila and Metro Cebu that may seek IT zone status from 5,000 to 2,000 square meters. IT zone locators enjoy income tax holidays, tax-free capital equipment importation, exemption from local government imposts, simplified customs procedure and permanent residency for foreign investors, among other perks. It is the opinion of IP-Converge that the data center and connectivity market in Cebu remains highly untapped and therefore has mapped out an expansion strategy to establish a presence in Cebu – centered on a new data center to be built within an existing building and in partnership with Cebu-based strategic partners – as IPC seeks to leverage its partners‘ experience and coverage of the local market in Cebu adjoining provinces. IP-Converge will lease a section of one floor of the Vicsal building to build its Cebu DC. Following were the considerations of IPC in selecting this site: The location of the building is suitable for IP-Converge‘s target customers, close to the Cebu business district but also not very far from major manufacturing areas and IT parks. The floor plate and maximum loading of the floor selected is capable of supporting the weight of fully fitted standard data center racks and plant (e.g. UPS) with relatively minimal structural reinforcement There is ample power within the building, and plenty of space to put in support and plant equipment such as backup power generators and air-cooled chillers needed for cooling Although there will be annual escalation on the rental costs, rental costs (including association and maintenance fees) are relatively low compared to Cebu CBD rates.
Design Principles for the Fort and Cebu Data Centers The following are the design principles that have been conceptualized for the planned expansion data centers: Space The total number of racks that can be placed within the Fort data center is about one hundred (100) and approximately eighty-eight (88) within the Cebu data center. Each rack is capable of providing power up to 6KVA while the average power supply for all racks is up to 3 KVA. There will be separate areas that will contain and operate medium density racks (up to 3KVA per rack) and high-density racks (up to 6KVAs) – this allows for proper balancing and easier manageability of power and cooling. In addition to the data centers where customer racks are to be located – the facilities shall also have Business Continuity Areas with ten seats for the Fort data center and twelve (12) seats for the Cebu data center, and a special and secure areas to store backup storage tapes and other media, as well as a meeting rooms. For the Cebu data center staff, there will be office areas, facilities offices and a Network Operations Center (NOC), the NOC will house technical staff working 24 x 7 all year round, answering and servicing calls from customers as well as monitoring the network and performing service requests from customers. Power The incoming power to the premises is through local power utilities - the expected load is 2 MVA maximum for the Fort data center and 2000 Amperes for the Cebu data center to support power
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load, cooling load and other ancillary power loads. Emergency diesel standby generator units will be placed and will have the ability to supply as much as 1,931 KVAs (Fort data center) and 1,500 KVAs (Cebu data center) of power for the entire facility – more than capable to provide standby power to customer racks and the UPS units. The plant takes into minimum consideration the de-rating factor including altitude, ambient temperature, power factor, impact load and momentary overload, transient voltage drops, regenerative power, rectifier loads and phase load unbalance. The Emergency Generators fully backs up the electrical power supply of the whole premises. The fuel tank supporting the generator shall have 10,000 liters capacity, able to support backup power to the entire facility for 24 hours without refueling Uninterrupted Power Supply (UPS) units have a minimum back up of 10 minutes autonomy. The battery installation has a cell watch monitoring facility to monitor individual battery cells The Electrical System is designed to provide an average power density across the entire facility of 100 to 150 watts per square foot, and to support the mechanical and electrical equipment providing continuous and uninterrupted electrical power to the Computer Equipment in the Data Center, as well as the business continuity center (BCC). The Main UPS Switch Boards supplies power to the Uninterrupted Power Supply (UPS) Units and the UPS will be configured in parallel redundancy (N+1) on redundant power sources to the rack circuits, therefore enabling one UPS to be shut down for servicing and maintenance without affecting the loads. In addition, an external static by-pass switch is strung in parallel across the whole strings of UPS‘s to enable them to take a higher downstream fault current. The UPS supplies power to the UPS sub boards which then distribute power to respective Power Distribution Units (PDUs) on each rack. Cooling Data center cooling will be provided by six (6) 20TR air-cooled units that will supply cold air (temperature and humidity is configurable) to the customer racks through and underneath the raised floors – these will be on a N+1 configuration (5 units operating, 1 standby). Separate and small aircooled units will supply cooling to the UPS and office areas. Air-cooled units have been chosen to avoid higher capital costs and ongoing maintenance and operations costs associated with chilled-water cooling, which will require separate chilled water supply outdoor units and chilled water piping (both supply and return) all over the facility. Cooling efficiency shall be further achieved as customer racks will be arranged in a ―hot and cold aisle‖ configuration. In this data center configuration, the front portion racks face each other - and the space in between will be the "cold aisle". The cold aisle will have perforated floor tiles so cold air from the cooling units will flow out into the racks and into the equipment. The back portion of the racks also needs to face each other - this will be the "hot aisle". This will have no perforated tiles since it isn't necessary to cool the backs of equipments. The hot air from the hot aisle will rise up to the ceiling, then flow back to the PACUs to be reprocessed as cold air - then goes back to the cold aisle, so there is a convection cycle of hot and cold air. For this approach to work, racks have PERFORATED front and back doors. The cold air will go into the racks through the front door, and the hot air exhaust from the equipment's backside will flow out from the back doors. In our experience, this is the most efficient way to handle airflow and ensure that cold air only goes to parts of the equipment that need it - which is the front portion. Thermal walls will be used to isolate cold air within the data center and not allowing outside air and humidity to mix with the internal data center environment. Fire Protection and Physical Security A Fire Suppression System will be installed in the entire data center. This will be based on the FM200 system, a generally accepted system prevalent in most data centers – which discharges gas to lower the amount of oxygen in the air to take out the flames in case of a fire breakout. While the FM200 gas discharge nozzles will be spread throughout the data center, the system will be configured to have isolation capabilities – discharging FM200 gas only on areas affected by fire, leaving other areas untouched. Smoke detectors and 2 hour rated partition walls will also be installed. Fire extinguishers will also be installed for manual fire suppression – in compliance with the local fire code. The whole premises is monitored by security surveillances cameras strategically located in various critical areas within the data center – with digital recording Door access will be by proximity card readers (and biometric access devices in critical areas) working 96
in conjunction with Electro-magnetic locks, door contacts and emergency break glass to comply with local fire authority requirements. The facility will also be manned by security guards and facilities maintenance personnel on a 24 x 7 basis all year round. A Water Detection System shall also be installed and will consist of Water Detection Panels and Water Sensing Cables able to provide distance location of water detected and cable breaks. Upon activation the system provides an audio and visual alarm at the panel
Environmental Considerations in Data Center Design Builds IP-Converge has taken concrete steps and identified key strategies to ensure the environmental sustainability and energy efficiency of its future data centers. PUE stands for Power Usage Effectiveness, and is a measure how efficient a data center uses its power. Specifically, how much the power is actually used by the computing equipment (the IT load), as compared to non-IT load such as cooling, lighting and others. IP-Converge aims to achieve and consistently maintain a PUE ratio of between 1.4 to 1.5 on average, with the ultimate aim of achieving a PUE ratio of 1.6. This means that for both the Fort and Cebu data centers, every for every 1W of electricity, 0.4 to 0.6W is used for actual IT load, and the rest will be used for non-IT loads such as cooling and lighting. The subsequent points discuss how IP-Converge aims to achieve this: Green Data Center Design Adoption of a modular approach to deployment by building data center capacity on demand Ensuring a more energy efficient data center layout by minimizing the spaces in between racks and raised floor to ceiling distances but still ensuring optimal cooling and airflow between the racks Usage of energy efficient lighting such as low wattage bulbs (e.g. LEDs) The average power density of the data centers will be set to a relatively low average. Worldwide and historical trends have shown the demand for power in data centers increased from 40 Watts per square foot in 2003 to a projected 500 Watts per square foot in 2010. IP-Converge strongly believes that with the onset of more energy efficient servers N+1 configuration for data center design. For every plant component such as UPS and cooling Adoption of Green Technology Use of energy efficient cooling systems such as air-cooled cooling systems. Air cooled systems are more modular and generally more energy efficient, and does not utilize ground water to provide cold air. This results in reduced power typically needed to chill water in chilled-water systems and reducing water utility costs. Use of more energy efficient servers and networking equipment. IP-Converge aims to deploy a server farm as part of its expansion of Managed Data Services which utilizes servers with energy efficiency features such as the ability to power down power supplies when server load is low, and multi-core servers that are enabled for virtualization with discrete components such as processors, storage and memory that are more energy efficient. Networking equipment that delivers the same energy efficiency as servers mentioned above but also have the ability to turn off access ports that are unused are also available in the market. While IP-Converge has little to no control over the choices of equipment customers choose to buy and co-locate in its data center facilities, the Company will advise customers to acquire energy efficient equipment whenever possible, adopt virtualization technologies, or utilize IP-Converge‘s on-demand hosting platform on a virtualized environment instead of using their own servers. Adoption of best practices and green operations The ambient temperature of the data center will be kept between 20 to 25 degrees Celsius which is still within the optimal operating range of all computers but is not too low nor too high, thereby decreasing the load on cooling systems. Use of environmental monitoring systems that constantly measure the ambient temperature of critical points of the data center and supporting areas. Constant monitoring and adjustment of cooling systems to ensure temperatures are maintained at proper levels assist in minimizing customer equipment breakdowns due to high temperature environments, save on costs and decrease the PUE. 97
Promotion of energy and consumption consciousness within the Company with an emphasis on recycling, reduction and reusing, as well as proper and environmentally sustainable waste disposal, including e-waste.
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MANAGEMENT’S DISCUSSION AND A N A LY S I S The following historical financial data for the three years ended December 31, 2007, as restated, and 2008 were derived from our financial statements, as audited by Punongbayan & Araullo, a member of Grant Thornton International Ltd., in accordance with Philippine Financial Reporting Standards (“PFRS”) effective as of January 1, 2008. The selected historical financial data for the fiscal years ended December 31, 2008, as restated, 2009, and six-month periods ended June 30, 2009 and 2010 were derived from the financial statements of the Company, as audited by Manabat Sanagustin & Co.,CPAs, a member of KPMG, in accordance with PFRS effective as of January 1, 2009. Our historical results are not necessarily indicative of the results to be expected for future periods. The corresponding discussion should be read in conjunction with the audited financial statements and the notes thereto included as annexes to this Prospectus. Overview IP-Converge was incorporated in July 8, 2005 as a stock corporation and began its operation with the acquisition of an international, telco-grade data center from Reach Networks, which the Company continues to operate. The data center is located at a prime location - the 34th floor of RCBC Plaza Tower II in Makati City, Philippines. IP-Converge upholds its carrier and vendor-neutrality by peering with all major Internet exchanges in the Philippines and the Asia Pacific region, and by partnering with the world‘s leading hardware and software providers. Through its robust international network infrastructure and business relationships with global industry giants, IP-Converge is able to offer world-class IP-based solutions and services in the region. IP-Converge offers superior packages of integrated IT and telecommunications services to enterprises, institutions and other service providers. These solutions include Internet data center services, dedicated Internet connectivity, network security, and an array of business solutions and applications. The Company‘s expertise ranges from simple bandwidth provisioning to fully integrated network management systems and IT applications where IP-Converge initiates, designs, and manages the overall network of its clients. IP-Converge helps its customers minimize cost and difficulty from doing "IT" themselves. True to its Corporate Vision, "Shaping the IP landscape for the communities we serve", the Company‘s aim is to enable its customers to achieve their own corporate goals and support their growth moving forward. IP-Converge‘s Internet data center (IDC) facilities in Makati City, Metro Manila and Cagayan Province in Northern Luzon are purpose-built, state-of-the-art establishments backed by the Company‘s robust AsiaPacific network infrastructure. Peered with all major telecommunications providers and Internet exchanges in the Philippines and the Asia Pacific region, these IDCs are maintained by onsite facilities personnel, and monitored and operated by IP-Converge‘s Network Operations Center (NOC) in Makati City. IP-Converge‘s Asia Pacific network infrastructure utilizes capacity from multiple international submarine cable networks such as the EAC (East Asia Crossing), IAC (Intra-Asia Cable system), and AAG (AsiaAmerica Gateway). The Company also boasts of multi-gigabit peering with various exchange and content operators in Hong Kong such as Equinix, Google, Microsoft, and the Hong Kong Internet Exchange (HKIX), a major telecommunications hub in the Asia Pacific region. In addition to IDC and telecommunications facilities, the Company‘s strategic business partnerships with global industry leaders also serve as a key resource. It is with these partners and affiliates that IP-Converge ensures superior quality of its solutions and services, and promote mutual growth between parties.
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IP-Converge‘s business is based on a recurring revenue model comprised of collocation, connectivity solutions and managed infrastructure services. We consider these services recurring as our customers are generally billed on a fixed and recurring basis each month for the duration of their contract. Our recurring revenues have comprised more than 90% of our total revenues during the past three years, more than half of our monthly recurring revenue bookings come from existing customers, contributing to our revenue growth. In 2008, we reported nonrecurring revenue which primarily came from the setup and installation services that we perform related to a customer‘s in-house data center. The service is considered to be nonrecurring as we have not embarked on offering the service as standard part of our product portfolio. Although no opportunity of similar nature is being considered in the near future, we are open to options that would allow us to share our expertise to companies that will require our services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period. However, there are certain costs which are considered more variable in nature, including utilities and supplies, which are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will increase in the future on a per unit or fixed basis in addition to the variable increase related to the growth of consumption by the customer. Sales and marketing expenses consist primarily of commissions and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel, and bad debt expense. Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenue over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion on our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens or is acquired and before it starts generating any meaningful revenue. KEY PERFORMANCE INDICATORS For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data) Audited Audited 1
EBITDA
2
Core Net Income
3
Gross Margin
33,998
34,597
For the year ended December 31, 2009 2008 2007 Audited Audited Audited 72,689 ##
29,160 ##
94,044
25,082
21,355
33,211
4,261
79,108
28.20%
30.03%
29.20%
24.40%
39.20%
4
13.70% 0.15 0.18
13.51% 0.17 0.17
14.10% 0.28 0.27
5.50% 0.01 0.03
22.90% 2.52 2.33
5
0.88 1.21
0.74 1.41
0.56 2.70
0.81 2.13
EBITDA Margin Earnings Per Share Core Earnings Per Share Current Ratio Debt/Equity Ratio
0.60 2.41
1
EBITDA is derived as earnings excluding depreciation and amortization of furnitures and fixtures, software and licenses, and office equipment, financing costs, interest income, foreign exchange gains (losses), provision for (benefit from) income other nonrecurring gains (losses). 2 Core Income is measured as a net income attributable to stockholders, excluding foreign exchange gains (losses), impairment non-current assets, net of tax effect of aforementioned adjustments, as applicable. 3 Gross Margin is gross profit as a percentage of net revenues. 4 EBITDA margin is derived as a percentage of net revenues. 5 Current ratio is derived as ratio of current assets over current
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SELECTED FINANCIAL DATA The following tables present summary financial information for the Company and should be read in conjunction with the auditors‘ report and with IPC‘s consolidated financial statements and notes thereto contained in this Prospectus and the section entitled ―Management‘s Discussion And Analysis‖ on page 99. The tables below summarize financial data for IP-Converge for the six months ended June 30, 2009 and 2010, and for the years ended December 31, 2007, 2008 and 2009. The summary financial data as of and for the six months ended June 30, 2009, and 2010 and for the years ended December 31, 2009 and 2008 were derived from IPC's audited financial statements, prepared in accordance with PFRS and reviewed by KPMG Manabat Sanagustin & Co., in accordance with PSA, including the notes thereto, which are found elsewhere in this Prospectus. The summary financial information as of and for the year ended December 31, 2007 were derived from IPC's audited financial statements prepared in accordance with PFRS and reviewed by Punongbayan & Araullo, a member firm within Grant Thornton International Ltd., in accordance with PSA, including the notes thereto, which are found elsewhere in this Prospectus. The following information is not necessarily indicative of the results of future operations. For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data) SERVICE REVENUES - Net COST OF SERVICES GROSS PROFIT ADMINISTRATIVE EXPENSES Salaries and other employee benefits Management fee Depreciation and amortization Rent Transportation and travel Communication, light and water Professional fees Impairment losses on receivables Outside services Fees and subscriptions Representation and entertainment Miscellaneous OPERATING INCOME OTHER INCOME (EXPENSES) Foreign exchange gain (loss) - net Finance costs Finance income Others INCOME BEFORE INCOME TAX INCOME TAX EXPENSE NET INCOME/TOTAL COMPREHENSIVE INCOME
2009
For the year ended December 31, 2008 2007
Audited Php247,821 177,876 69,945
Audited Php256,179 179,251 76,929
Audited Php516,311 365,303 151,008
Audited Php527,818 398,873 128,944
Audited Php411,426 250,288 161,138
20,608 3,360 2,977 2,864 1,352 1,311 1,114 949 805 624 331 2,629 38,924 31,021
21,597 3,360 2,822 3,017 1,633 1,517 3,410 1,525 1,407 955 470 3,441 45,154 31,775
41,167 6,720 6,175 5,741 2,445 3,076 3,214 3,051 2,909 3,818 914 5,265 84,494 66,514
37,959 6,720 5,246 9,979 7,753 6,703 3,159 11,187 3,099 2,775 3,322 7,130 105,030 23,914
27,757 6,720 5,468 1,335 6,398 4,101 6,021 574 4,032 3,133 1,977 5,045 72,562 88,576
-1,988 -4,133 66 -521 -6,575 24,446 3,497
-7,364 -377 114 -271 -7,898 23,877 2,899
-25,448 1,922 365 -730 -23,891 42,623 7,490
-18,480 -2,908 6,011 -708 -16,085 7,828 6,476
-5,026 6,451 10,293 -989 10,728 99,305 13,746
20,949
20,978
35,132
1,352
85,559
101
For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data)
ASSETS Current Assets Cash Receivables - net Due from related parties Prepaid expenses and other current assets Total Current Assets Noncurrent Assets Investments in subsidiaries and jointlycontrolled entity Property and equipment - net Other noncurrent assets Total Noncurrent Assets Total Assets
Audited
Audited
2009
For the year ended December 31, 2008 2007
Audited
Audited
Audited
Php16,523 147,591 73,485 23,222 260,821
Php7,666 123,846 137,584 17,166 286,262
Php9,713 123,630 72,070 16,171 221,584
Php12,281 116,367 125,390 16,662 270,700
Php5,624 77,706 85,407 131,403 300,140
107,865 189,509 297,373 558,195
110,421 302,653 413,074 699,336
116,130 190,838 306,968 528,552
108,859 300,854 409,713 680,413
79,982 197,039 277,022 577,162
202,301 25,362
241,100 64,594
153,537 32,399
190,011 62,615
126,988 4,659
3,157 1,651 28,256 37,354 298,081
509 962 129,424 44,269 480,859
3,032 3,171 68,280 37,037 297,455
467 3,500 196,715 26,447 479,754
285 4,083 191,179 43,235 370,428
1,739
8,879
5,198
12,466
18,635
1,961 4,063 7,762 305,843
1,284 2,689 776 13,629 494,488
3,559 3,338 0 12,095 309,550
1,506 2,040 776 16,789 496,543
883 1,181 1,431 22,130 392,558
136,400
124,000
124,000
124,000
115,952 252,352
80,848 204,848
95,003 219,003
59,870 183,870
34,000 90,000 60,604 184,604
558,195
699,336
528,552
680,413
577,162
LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Loans payable - current portion Obligations under finance lease - current portion Income tax payable Due to a related party Other current liabilities Total Current Liabilities Noncurrent Liabilities Loans payable - net of current portion Obligations under finance lease - net of current portion Accrued retirement liability Other noncurrent liabilities Total Noncurrent Liabilities Total Liabilities Equity Capital stock Deposits for future stock subscriptions Retained earnings Total Equity Total Liabilities and Stockholders' Equity
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For the six months ended June 30, 2010 2009 (In Thousand Pesos, except per share data) CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization Finance costs Impairment losses on receivables Unrealized foreign exchange gain - net Retirement benefits Interest income Operating income before working capital changes Increase in: Receivables Due from related parties Prepaid expenses and other current assets Increase in other noncurrent assets Increase in: Accounts payable and accrued expenses Other current liabilities Other noncurrent liabilities Cash generated from operations Income taxes paid Interest received Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment Procceeds from sale of investments in subsidiaries and jointly controlled entities Increase in other noncurrent assets Acquisitions of intangible assets Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in due to a related party Proceeds from issuance of shares Net proceeds from (repayments of) loans payable Finance costs paid Increase (payments) of obligations under finance lease Proceeds from deposit on future stock subscription Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH NET INCREASE IN CASH CASH AT BEGINNING OF PERIOD CASH AT END OF PERIOD
Audited
Audited
2009
For the year ended December 31, 2008 2007
Audited
Audited
Audited
24,446
23,877
42,623
7,828
99,305
11,276 1,988 949 -843 724 -10
9,969 7,364 1,525 0 649 -114
21,126 25,448 3,051 -1,922 1,298 -40
17,773 18,480 11,187 2,467 860 -77
23,417 4,879 574 0 0 -201
38,531
43,270
91,585
58,517
127,974
-24,911 -1,415 -7,051 0
-9,975 -12,194 -504 0
-10,313 53,320 491 0
-27,730 -55,294 -21,273 0
-41,425 -53,393 -6,390 -136,014
48,765 5,136 0 59,055 -5,017 10 54,049
51,090 17,822 0 89,509 -5,436 114 84,186
-40,937 10,590 -776 103,959 -7,819 40 96,179
37,559 13,513 205 5,497 -7,167 77 -1,592
89,364 -1,211 -21,096 -5,421 0 -26,517
-1,518
-11,531
-25,181
-30,181
-66,655
-164
-829
-1,681
-12,360
175,372 -66,083 -2,491 81,618
-4,303 -1,758 -36,242
-175,372 201 -2,095 -243,922
-40,024 12,400
-67,291 0
-128,435
26,729
189,671
-10,496 -6,807
-1,607 -180
-37,484 -20,985
20,223 -3,332
-4,965 -3,082
-1,473
-7,364
4,617
805
-46,400
-76,442
-182,286
44,426
90,000 271,624
843 6,810 9,713 16,523
0 -4,615 12,281 7,666
1,922 -2,568 12,281 9,713
65 6,657 5,624 12,281
0 1,185 4,439 5,624
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SIX MONTHS ENDED JUNE ENDED JUNE 30, 2009
30,
2010
COMPARED
WITH
SIX
MONTHS
Results of Operations Revenues Our revenues for the six months ended June 30, 2010 and 2009 were generated from the following segments: For the six months ended June 30,
Change
(in thousands) Managed Data Services Business Solutions and Services Non-recurring revenue
2010 231,136 16,685
% 93% 7% 0%
2009 236,578 19,601
% 92% 8% 0%
Php -5,442 -2,916
% -2% -15%
Total Revenues - net
247,821
100%
256,179
100%
-8,358
-3%
Total revenues net of discounts declined by Php8.36 million or 3% to Php247.82 million from Php256.18 million during the six months ended June 30, 2010 and 2009, respectively. The year on year change in total revenues was primarily due to lower transfer price extended to FCCDCI. The increase in net customer count to 149 from 131 and orders from new and existing enterprise accounts were not enough to offset the decrease in MDS revenues. The Business Solutions and Services segment also experienced a year on year decline primarily due to lower contribution from the financial applications unit. The increase in revenue from our CRM application, Salesforce.com, was not enough to offset the decrease. We expect that our revenues will recover as we explore and launch new solutions and services that take advantage of synergies that our existing and new clients can take advantage of via our distinct boutique approach. Our Managed Data Services include revenue items reported as ―Others‖ in our audited financial statement. About 45% of these other revenues are management fees charged to FCCDCI for the consideration of reselling the services to other clients. Other items include rental charges to clients and related parties for the subleased equipment and office spaces and other incidental charges related to the delivery of our services. These revenue sources are not direct components of our core products and services and we are uncertain about their level of contribution moving forward. Cost of Revenues Our revenues are derived primarily from collocation and connectivity solutions. The largest components of our cost of revenues are bandwidth, mitigation, license fees for the business solutions, rental payments related to our data centers, utility costs, depreciation, data center employees‘ salaries and benefits, sales commissions, repairs and maintenance, supplies and equipment and security services. Our cost of revenues for the six months ended June 30, 2010 and 2009 were split among the following: For the six months ended June 30, (in thousands) Managed Data Services Business Solutions and Services Total Cost of Revenues
2010 170,876 6,999 177,876
% 96% 4% 100%
2009 168,700 10,550 179,251
% 94% 6% 100%
Change Php 2,176 -3,551 -1,375
% 1% -34% -1%
Total cost of revenues decreased by Php1.38 million or 1% to Php177.88 million from Php179.25 million during the six months ended June 30, 2010 and 2009, respectively. The decrease was mainly due to the lower cost on business solutions and services particularly related to our financial applications unit. Communication cost is relatively fixed and does not necessarily grow in proportion to our revenues. The
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growths experienced in utility costs and depreciation due to the increase in cooling and power requirements of our customers and equipment upgrades, respectively, contributed to the higher MDS cost of revenues. Our cost of revenues on business applications declined consistent with the revenue performance of the segment. We experience improvements in margin as our CRM application contributes revenues from services that do not necessitate additional license costs. We are working on positioning our competence in servicing the requirements of our clients in the region and retain the distinction as the most preferred customer service provider for the solutions that we offer. As a percentage of net revenues, our cost of revenues slightly increased from 70.0% to 71.8% resulting in a year on year gross margin decline from 30.0% to 28.2% as shown below: As % of Revenues (in thousands) Managed Data Services Business Solutions and Services Total Cost of Revenues
For the six months ended June 30, 2010 2009 69.0% 65.9% 2.8% 4.1% 71.8% 70.0%
Gross Margin
28.2%
30.0%
Operating Expenses Our operating expenses primarily consist of manpower costs, sales and marketing, and general and administrative expenses. Our operating expenses for the six months ended June 30, 2009 and 2010 are reported as follows: For the six months ended June 30, (in thousands) Manpower costs General and administrative Sales and marketing Total Operating Expenses
Change
2010 20,668 10,995 4,285
% 57% 31% 12%
2009 21,679 14,795 5,858
% 51% 35% 14%
Php -1,011 -3,800 -1,573
% -5% -26% -27%
35,947
100%
42,331
100%
-6,384
-15%
Our total operating expenses decreased by Php6.38 million or 15% to Php35.95 million from Php42.33 million for the six months ended June 30, 2010 and 2009, respectively. Reductions in general & administrative, manpower costs, and sales & marketing expenses significantly contributed to the year on year decline in expenses. Manpower costs is composed of salaries, employee benefits, and training and seminar expenses. Our manpower costs decreased by Php1.01 million, or 5%, as of June 30, 2010 as compared with same period in 2009 primarily due to lower overtime pay as a result of more efficient scheduling of personnel in charge of operations. Our headcount barely changed from 73 to 74, year on year. General and administrative expenses are comprised by office space lease, professional fees for legal and accounting services, outside services such as messenger and janitorial, repairs and maintenance, fees & subscriptions, office supplies and other general corporate expenses. Total general and administrative expenses decreased by Php3.80 million or 26% to Php10.99 million from Php14.80 million for the six months ended June 30, 2010 and 2009, respectively. Main contributors to the lower operating expense year on year are the reduction in legal and professional fees, communication, supplies, and other contractual services. Sales and marketing expenses are composed of advertising, travel, commissions, and provision for bad debts. Our total sales and marketing expenses decreased by Php1.57 million or 27% to Php4.29 million from Php5.86 million for the six months ended June 30, 2010 and 2009, respectively. Primary reasons for
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the decrease are the reductions in travel, advertising and promotions, commissions and provision for bad debt. The year on year movement in the allowance for impairment of trade receivables can be verified in Note 19 of our accompanying June 30, 2010 audited FS. While we experienced an overall reduction in sales and marketing campaign expenses year on year, we generally expect sales and marketing expenses to increase as we continue to look for ways of growing our business and invest in various initiatives; however, as a percentage of revenues, we expect the value of these activities to decrease. As a percentage of net revenues, our operating expenses declined to 14.5% from 16.5% resulting in a year on year EBITDA margin change to 13.7% from 13.5% as shown below:
As % of Revenues - net
For the six months ended June 30, 2010
2009
Manpower Costs General and administrative Sales and marketing Total Operating expenses
8.3% 4.4% 1.7% 14.5%
8.5% 5.8% 2.3% 16.5%
EBITDA Margin
13.7%
13.5%
Depreciation and amortization of other fixed assets and software and licenses increased by Php155 thousand, or 5%, mainly due to increased amortization on the growing software and licenses supported by slight increase in depreciation of computer equipment. Other Income (Expenses) The following table summarizes the breakdown of our other income (expenses) for the six months ended June 30, 2009 and 2010: For the six months ended June 30, (in thousands) Finance costs Foreign exchange gain (loss) -net Finance income Others Total other income (expenses)
Change
2010 -1,988 -4,133 66 -521
2009 -7,364 -377 114 -271
Php 5,376 -3,756 -47 -249
% -73% 997% -41% 92%
-6,575
-7,898
1,323
-17%
Our total net other expenses amounted to Php6.56 million as at June 30, 2010, a decrease of Php1.32 million, or 17%, from Php7.90 million in the same period in 2009. The change was due to the reduction in financing costs which is lower by Php5.38 million offset by unrealized foreign exchange loss which increased by Php3.76 million. Provision for Income Tax Provision for income tax amounted to Php3.50 million, an increase of Php0.60 million, or 21%, for the six months ended June 30, 2010 as compared with Php2.90 million in the same period in 2009. Net Income For the six months ended June 30, 2010, our reported net income of Php20.95 million is Php29 thousand or 0.1% lower than the audited Php20.98 million in the same period in 2009.
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Liquidity and Capital Resources
(in thousands) Cash Flows Net cash provided by operating activities Net cash provided by (used in) investing activities Capital Expenditures Net cash provided by (used in) financing activities Effect of exchange rate changes Net change in cash Beginning cash and cash equivalents Ending cash and cash equivalents
For the six months ended June 30, 2010 54,049 -1,681 -1,518 -46,400 843 6,810 9,713 16,523
2009 84,186 -12,359 -11,531 -76,442 -4,615 12,281 7,666
As at June 30, 2010, our cash and cash equivalents and short-term investments totaled Php16.52 million. Principal sources of consolidated cash and cash equivalents were cash flows from operating activities amounting to Php54.05 million. These funds were used principally for the payment of due to a related party amounting Php40.43 million; total debt principal and interest payments of Php10.50 million and Php6.81 million, respectively; and capital expenditures of Php1.52 million. Operating Activities Our consolidated net cash flows from operating activities for the six months ended June 30, 2010 decreased by Php30.14 million to Php54.05 million from Php84.19 million in the same period in 2009 primarily due to higher receivables and recognition of unrealized foreign exchange loss. Investing Activities Net cash used in investing activities amounted to Php1.68 million for the six months ended June 30, 2010, lower by Php10.68 million as compared with cash used amounting Php12.36 million in the same period in 2009 primarily due to lower capital expenditures. Financing Activities Our net cash used in financing activities amounted to Php46.40 million for the six months ended June 30, 2010, a decrease of Php30.04 million as compared with net cash used amounting Php76.44 million in the same period in 2009 resulting largely from the repayment of due to a related party amounting Php40.02 million and total loan principal and interest payments of Php10.50 million and Php6.81 million, respectively, partially offset by the Php12.40 million proceeds from the issuance of shares. The Php40.02 million decrease in due to a related party is part of an ongoing commitment to IPVG for the settlement of advances made to the Company. These advances and related agreements between the Company and IPVG are disclosed in Note 17 of the accompanying June 30, 2010 audited FS.
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YEAR ENDED DECEMBER DECEMBER 31, 2008
31,
2009
COMPARED
WITH
YEAR
ENDED
Results of Operations Revenues Our revenues for the years ended December 31, 2009 and 2008 were generated from the following segments: For the year ended December 31, (in thousands) Managed Data Services Business Solutions and Services Non-recurring revenue Total Revenues - net
Change
2009 Php475,887 40,424
% 92% 8% 0%
2008 463,040 26,581 38,196
% 88% 5% 7%
Php 12,847 13,843 -38,196
% 3% 52% -100%
516,311
100%
527,818
100%
-11,507
-2%
Total revenues net of discounts declined by Php11.51 million or 2% to Php516.31 million from Php527.82 million during the years ended December 31, 2009 and 2008, respectively. The year on year change in total revenues was primarily due to the recognition of nonrecurring revenue in 2008 pertaining to the services extended in the development of an in-house data center for a local client. Our recurring revenue sources on the other hand increased by Php26.69 million during the same period mainly due to increase in orders from both our existing customers and new customers, as also reflected in the growth in our enterprise customer count from 128 to 149. During the year ended December 31, 2009, we recorded Php40.42 million of revenue generated from our Business Solutions and Services segment which corresponds to a 52% growth. Our Managed Data Services also include revenue items reported as ―Others‖ in our audited financial statement. About 67% of these other revenues are management fees charged to FCCDCI for the consideration of reselling the services to other clients. Other items include rental charges to clients and related parties for the subleased equipment and office spaces and other charges related to the servicing of our products. These revenue sources do not form part of our core products and services and we are uncertain about their level of contribution moving forward. Cost of Revenues The largest components of our cost of revenues are bandwidth, mitigation, license fees for the business solutions, rental payments related to our data centers, utility costs, depreciation, data center employees‘ salaries and benefits, sales commissions, repairs and maintenance, supplies and equipment and security services. Our cost of revenues for the years ended December 31, 2009 and 2008 were split among the following: For the year ended December 31, (in thousands) Managed Data Services Business Solutions and Services Total Cost of Revenues
2009 Php330,663 34,640 365,303
% 91% 9% 100%
2008 Php386,873 12,000 398,873
Change %
97% 3% 100%
Php -56,210 22,639 -33,571
% -15% 189% -8%
Total cost of revenues declined by Php33.57 million or 8% to Php365.30 million from Php398.87 million during the years ended December 31, 2009 and 2008, respectively. The decline was mainly due to the absence of nonrecurring costs related to the revenue from the services extended to the data center development of a client. Excluding related nonrecurring costs, the decrease in cost of revenues would approximate the same rate of decline reported in revenues.
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Our cost of revenues on business applications and depreciation of network equipment, machinery, and data center leasehold improvements reported year on year growths consistent with the revenue performance and the continuous improvement in our infrastructure and network equipment, respectively. The accounting reclassification of rental expense pertaining to the data center space previously recorded as part of operating expense to cost of revenue partially offset the total year on year decrease. As a percentage of net revenues, our cost of revenues declined to 70.8% from 75.5% resulting in a year on year gross margin improvement to 29.2% from 24.4% as shown below: As % of Revenues (in thousands) Managed Data Services Business Solutions and Services Total Cost of Revenues
For the year ended December 31, 2009 2008 64.0% 73.3% 6.7% 2.3% 70.8% 75.6%
Gross Margin
29.2%
24.4%
Operating Expenses Our operating expenses primarily consist of manpower costs, sales and marketing, and general and administrative expenses. Our operating expenses for the years ended December 31, 2009 and 2008 are reported as follows: For the year ended December 31, (in thousands) Manpower costs General and administrative Sales and marketing Total Operating Expenses
Change
2009 Php41,478 28,116 8,725
% 53% 36% 11%
2008 Php38,100 38,562 23,123
% 38% 39% 23%
Php 3,378 -10,446 -14,397
% 9% -27% -62%
78,319
100%
99,784
100%
-21,465
-22%
Our total operating expenses decreased by Php21.47 million or 22% to Php78.32 million from Php99.78 million for the years ended December 31, 2009 and 2008, respectively. Reductions in general & administrative and sales & marketing expenses significantly contributed to the year on year decline in expenses. Manpower costs are composed of salaries, employee benefits, and training and seminar expenses. Our manpower costs increased by 9% as of December 31, 2009 as compared with same period in 2008, significantly due to the increase in our headcount by 8 or 12% from 65 as of December 2008 to 73 as of same period in 2009. Also, in line with our continuous commitment to deliver best practices to our customers, we more than doubled our expenses for training and seminar of our employees. General and administrative expenses are comprised by office space lease, professional fees for legal and accounting services, outside services such as messenger and janitorial, repairs and maintenance, fees & subscriptions, office supplies and other general corporate expenses. Total general and administrative expenses decreased by Php10.45 million or 27% to Php28.12 million from Php38.56 million for the years ended December 31, 2009 and 2008, respectively. Main contributors to the lower operating expense year on year are the reclassification of rent expense pertaining to the data center space from operating expense to cost of revenues and the reduction in communication, supplies, and other contractual services expenses brought about by policies employed to address efficient use of Company resources. Sales and marketing expenses are composed of advertising, travel, commissions, and provision for bad debts. Our total sales and marketing expenses decreased by Php14.40 million or 62% to Php8.73 million from Php23.12 million for the years ended December 31, 2009 and 2008, respectively. Primary reason for
109
the decrease is the lower provision for bad debt reported in 2009. We were also more conservative with our travels and other acquisition campaigns contributing almost half of the year on year decrease in total sales and marketing expense. As a percentage of net revenues, our operating expenses declined to 15.2% from 18.9% resulting in a year on year EBITDA margin improvement to 14.1% from 5.5% as shown below:
As % of Revenues - net
For the year ended December 31, 2009
2008
Manpower Costs General and administrative Sales and marketing Total Operating expenses
8.0% 5.4% 1.7% 15.2%
7.2% 7.3% 4.4% 18.9%
EBITDA Margin
14.1%
5.5%
Depreciation and amortization of other fixed assets and software and licenses increased by Php929 thousand mainly due to increased amortization on the growing software and licenses supported by slight increases in furniture & fixtures and computer equipment. As of the period ended December 31, 2009, we do not have any fully depreciated asset to recognize. Other Income (Expenses) The following table summarizes the breakdown of our other income (expenses) for the years ended December 31, 2009 and 2008: For the year ended December 31, (in thousands) Finance costs Foreign exchange gain (loss) -net Finance income Others Total other income (expenses)
Change
2009 -25,448 1,922 365 -730
2008 -18,480 -2,908 6,011 -708
Php -6,968 4,830 -5,646 -22
% 38% -166% -94% 3%
-23,891
-16,085
-7,806
49%
Our total other expenses amounted to Php23.89 million in 2009, an increase of Php7.81 million, or 49%, from Php16.09 million in the same period in 2008. The change was due to the combined effects of increase in financing costs by Php6.97 million due to increase in interest expense on loans and financial leases and lower interest income on bank deposits. These other expenses were partially offset by net foreign exchange gain of Php1.92 million. Provision for Income Tax Provision for income tax amounted to Php7.49 million, an increase of Php1.0 million, or 16%, in the year ended December 31, 2009 as compared with Php6.48 million in the same period in 2008 primarily due to higher taxable income. Net Income For the year ended December 31, 2009, our reported net income of Php35.13 million is Php33.78 million higher than the Php1.35 million in the same period in 2008 primarily as a result of decreases in cost of revenues and operating expenses, partially offset by higher other expenses and provision for income tax.
110
Liquidity and Capital Resources
(in thousands) Cash Flows Net cash provided by operating activities Net cash provided by (used in) investing activities Capital Expenditures Net cash provided by (used in) financing activities Effect of exchange rate changes Net change in cash Beginning cash and cash equivalents Ending cash and cash equivalents
For the year ended December 31, 2009 96,179 81,618 -25,181 -182,286 1,922 -2,568 12,281 9,713
2008 -1,592 -36,242 -30,181 44,426 65 6,657 5,624 12,281
As at December 31, 2009, our cash and cash equivalents and short-term investments totaled Php9.71 million. Principal sources of consolidated cash and cash equivalents were cash flows from operating activities amounting to Php96.18 million and net proceeds from sale of an investment in a subsidiary amounting to Php172.87 million. These funds were used principally for (1) the payment of due to a related party amounting Php128.43 million; (2) total debt principal and interest payments of Php37.48 million and Php20.99 million, respectively; and (3) capital expenditures of Php25.18 million. Operating Activities Our consolidated net cash flows from operating activities for the year ended December 31, 2009 increased by Php97.77 million to Php96.18 million from net use of Php1.59 million in the same period in 2008 primarily due to lower level of direct costs and operating expenses. A significant portion of our cash from operating activities is contributed by our managed data services segment, which accounted for an average of 90% of our total service revenues in 2008 and 2009. Revenues from our business solutions and services accounted for 8% and 5%, respectively, of our total service revenues for the years ended 2009 and 2008. Our accounts payable and accrued expenses decreased by Php40.94 million in 2009. Trade payables and accrued expenses decreased by about Php11.18 million and Php17.48 million, respectively. We recognize accrued expenses based on impending but unbilled obligations such as bonuses, license fees on applications that we offer, expected regulatory fees, and supplier billings. Investing Activities Net cash provided by investing activities amounted to Php81.62 million for the year ended December 31, 2009, an increase of Php117.86 million as compared with cash used in Php36.24 million in the same period in 2008 primarily due to the net proceeds from sale of an investment in IP Converge Pte. Ltd. amounting to Php172.87 million. Our capital expenditures on property & equipment and other noncurrent assets for the year ended December 31, 2009 totaled Php93.76 million, an increase of Php57.51 million, or 159%, as compared with Php36.24 million in the same period in 2008 primarily due to the full payment of the remaining outstanding balance amounting Php65.91 million on the indefeasible rights of use (IRU) capacity in cable systems as a result of an agreement entered with PCCW Global (Singapore) Pte. Ltd. The installation of the system is not yet complete as of this date. Financing Activities Our net cash used in financing activities amounted to Php182.29 million for the year ended December 31, 2009, an increase of Php226.71 million as compared with net cash provided amounting Php44.43 million in the same period in 2008 resulting largely from the repayment of due to a related party amounting Php128.43 million and total loan principal and interest payments of Php37.48 million and Php20.99 million, respectively.
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The gross amount of advances from IPVG Corp. as of December 31, 2009 and before the offset was Php234.68 million. In January 2009, we obtained a finance lease commitment from Japan-PNB Leasing and Finance Corporation (JPNB) for the purchase of a network equipment amounting Php5.08 million. The increase of Php4.62 million reported in our audited FS is net of payments made on all outstanding finance lease obligations for the year.
YEAR ENDED DECEMBER DECEMBER 31, 2007
31,
2008
COMPARED
WITH
YEAR
ENDED
Revenues Our revenues for the years ended December 31, 2008 and 2007 were generated from the following segments (pesos in thousands):
Revenues (in thousands) Managed Data Services Business Solutions and Services Non-recurring revenue Total Revenues - net
For the year ended December 31,
Change
2008 Php463,040 26,581 38,196
% 88% 5% 7%
2007 Php402,511 8,915
% 98% 2%
Php 60,529 17,666 38,196
% 15% 198% n/a
527,818
100%
411,426
100%
116,391
28%
Total revenues net of discounts increased by Php116.39 million or 28% to Php527.82 million from Php411.43 million during the years ended December 31, 2008 and 2007, respectively. The year on year change in total revenues was primarily due to the Php60.53 million additional revenues from Managed Data Services segment contributed by growths in collocation and DDOS mitigation services. In 2008, our Business Solutions and Services segment posted a remarkable growth of Php17.67 million, or 198%, coming from Salesforce.com and financial applications. Also in 2008, we recognized nonrecurring revenue amounting Php38.20 million pertaining to the services extended in the development of in-house data center for a local client. Cost of Revenues The main components of our cost of revenues are bandwidth, mitigation, license fees for the business solutions, rental payments related to our data centers, utility costs, depreciation, data center employees‘ salaries and benefits, sales commissions, repairs and maintenance, supplies and equipment and security services. Our cost of revenues for the years ended December 31, 2008 and 2007 were split among the following (pesos in thousands): For the year ended December 31,
Managed Data Services Business Solutions and Services Total Cost of Revenues
Change
2008 Php386,873 12,000
% 97% 3%
2007 242,400 7,888
% 97% 3%
Php 144,473 4,112
% 60% 52%
398,873
100%
250,288
100%
148,585
59%
Total cost of revenues increased by Php148.59 million or 59% to Php398.87 million from Php250.29 million during the years ended December 31, 2008 and 2007, respectively. The increase was mainly due to the subscription of additional bandwidth and the recognition of nonrecurring costs related to the revenue
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from the services extended to the data center development of a client. Excluding related nonrecurring costs, the decrease in cost of revenues would approximate the same rate of increase reported in revenues. Our cost of revenues on business applications and depreciation of network equipment, machinery, and data center leasehold improvements reported year on year growths consistent with the revenue performance. As a percentage of net revenues, our cost of revenues increased to 75.6% from 60.7% resulting in a year on year gross margin decline to 24.4% from 39.2% as shown below: As % of Revenues Managed Data Services Business Solutions and Services Total Cost of Revenues
For the year ended December 31, 2008 2007 73.3% 58.8% 2.3% 1.9% 75.6% 60.7%
Gross Margin
24.4%
39.2%
Operating Expenses Our operating expenses primarily consist of manpower costs, sales and marketing, and general and administrative expenses. Our operating expenses for the years ended December 31, 2007 and 2008 are reported as follows: For the year ended December 31, (in thousands) Manpower costs General and administrative Sales and marketing Total Operating Expenses
Change
2008 Php38,100 38,562 23,123
% 38% 39% 23%
2007 Php28,962 28,778 9,354
% 43% 43% 14%
Php 9,138 9,784 13,769
% 32% 34% 147%
99,784
100%
67,094
100%
32,691
49%
Our total operating expenses increased by Php32.69 million or 49% to Php99.78 million from Php67.09 million for the years ended December 31, 2008 and 2007, respectively. Increases in sales & marketing and general & administrative expenses significantly contributed to the year on year increase in operating expenses. Manpower costs are composed of salaries, employee benefits, and training and seminar expenses. Our manpower costs increased by Php9.14 million or 32% to Php38.10 million from Php28.96 million for the years ended December 31, 2008 and 2007, respectively, significantly due to the increase in our headcount by 6 or 10% to 65 from 59 for the years ended December 31, 2008 and 2007, respectively. General and administrative expenses are comprised by office space lease, professional fees for legal and accounting services, outside services such as messenger and janitorial, repairs and maintenance, fees & subscriptions, office supplies and other general corporate expenses. Total general and administrative expenses increased by Php9.78 million or 34% to Php38.56 million from Php28.78 million for the years ended December 31, 2008 and 2007, respectively. Main contributors to the higher operating expense year on year are higher rent, communication, and utilities. Sales and marketing expenses are composed of advertising, travel, commissions, and provision for bad debts. Our total sales and marketing expenses increased by Php13.77 million or 147% to Php23.12 million from Php9.35 million for the years ended December 31, 2008 and 2007, respectively. Primary reason for the increase is the higher provision for bad debt. Also in 2008, we embarked on various customer acquisition activities resulting in higher travel and advertising and promotions contributing significantly on the year on year increase in total sales and marketing expense.
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As a percentage of net revenues, our operating expenses increased to 18.9% from 16.3% resulting in a year on year EBITDA margin decline to 5.5% from 22.9% as shown below: As % of Revenues - net
For the year ended December 31, 2008
Manpower Costs General and administrative Sales and marketing Total Operating expenses EBITDA Margin
2007
7.2% 7.3% 4.4% 18.9%
7.0% 7.0% 2.3% 16.3%
5.5%
22.9%
Depreciation and amortization of other fixed assets and software and licenses slightly decreased by Php222 thousand due to revision in estimated useful life of property and equipment from 3 to 5 years to 7 to 10 years offsetting the additional depreciation and amortization resulting from new acquisitions of equipment. Other Income (Expenses) The following table summarizes the breakdown of our other income (expenses) for the years ended December 31, 2008 and 2009: For the year ended December 31, (in thousands) Finance costs Foreign exchange gain (loss) -net Finance income Others Total other income (expenses)
Change
2007 Php-18,480 -2,908 6,011 -708
2007 Php-5,026 6,451 10,293 -989
Php -13,454 -9,359 -4,282 282
% 268% -145% -42% -28%
-16,085
10,728
-26,814
-250%
Our total other expenses amounted to –Php16.09 million in 2008, an increase of Php26.81 million, or 250%, from other income of Php10.73 million posted in the same period in 2007. The change was due to the combined effects of increase in financing costs by Php13.45 million arising from higher interest expense on loans and financial leases, reporting of unrealized foreign exchange loss amounting Php2.91 million, and lower interest income on bank deposits. Provision for Income Tax The provision for income tax which amounted to Php6.48 million was lower by Php7.27 million, or 53%, for the year ended December 31, 2008 as compared with Php13.75 million in the same period in 2007 primarily due to lower taxable income. Net Income For the year ended December 31, 2008, as a result of the preceding discussions, our reported net income of Php1.35 million is Php84.21 million lower than the Php85.56 million in the same period in 2007. Liquidity and Capital Resources
(in thousands) Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Capital Expenditures
For the year ended December 31, 2008 -1,592 -36,242 -30,181
2007 -26,517 -243,922 -66,655
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Net cash provided by (used in) financing activities Effect of exchange rate changes Net change in cash Beginning cash and cash equivalents Ending cash and cash equivalents
44,426 65 6,657 5,624 12,281
271,624 0 1,185 4,439 5,624
As at December 31, 2008, our cash and cash equivalents and short-term investments totaled Php12.281 million. Principal source of consolidated cash and cash equivalents was cash provided by financing activities amounting Php44.43 million. The funds were used principally for the acquisition of property and equipment capital amounting Php30.18 million and as payments to prepaid operating expenses and other current assets. Operating Activities Our net cash used in operating activities for the year ended December 31, 2008 was lower by Php24.93 million to Php1.59 million from net use of Php26.52 million in the same period in 2007 primarily due to a more prudent working capital management supported by sound receivables and payables management. Investing Activities The net cash used in investing activities amounted to Php36.24 million for the year ended December 31, 2008 was lower by Php207.68 million as compared with the Php243.92 million cash used in the same period in 2007. The Company slowed down in its investment activities in 2008 focusing only on equipment and property acquisitions as compared with the investments in subsidiaries and joint venture in 2007. Financing Activities Our net cash from financing activities amounted to Php44.43 million for the year ended December 31, 2008, lower by Php227.20 million as compared with net cash provided amounting Php271.62 million in the same period in 2007. DEBT Unicapital Loan In 2009, the Company renewed its loan with Unicapital amounting to P 18.5M. The loan bears interest of 13.5% per annum and payable in lump sum upon maturity on September 10, 2010. During the period, the Company paid Php5.59M as partial settlement of the loan. The interest expense recognized relative to this loan amounted to P938,866 and P1,784,747 for the sixmonth period ended June 30, 2010 and 2009, respectively, which is included as part of ―Finance Costs‖ account in profit or loss. Majalco Loan In 2009, the Company obtained a loan with Majalco amounting to P 9.8M. The loan bears interest at 13.5% per annum payable in lump sum upon maturity on September 10, 2010. During the period, the Company paid Php2.94M as partial settlement of the loan. Interest expense relative to this loan amounted to P494,808 and P435,690 for the six-month period ended June 30, 2010 and 2009, respectively, which is included as part of ―Finance Costs‖ account in profit or loss. Export & Industry Bank (EIB) Loan On June 9, 2006, the Company entered into a Loan Agreement with EIB in the principal amount of $600,000 and a Standby Letter of Credit (SBLC) in the amount of $150,000. The face value of the SBLC
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shall be automatically reduced to $100,000 at the end of the third year; to $50,000 in the fourth year and nil at the end of the fifth year. The loan bears interest equivalent to one year London Interbank Offered Rate (LIBOR) plus 4% repriceable annually and is payable on quarterly principal payment of $37,500 up to 5 years. Interest expense relative to this loan amounted to P273,491 and P707,620 for the six-month period ended June 30, 2010 and 2009, respectively, and are included as part of ―Finance Costs‖ in profit or loss. As security for the loan, the Company entered into a Guarantee Agreement with PhilExim in favor of EIB on July 19, 2006, whereby PhilExim shall guarantee the Company‘s loan facility with EIB. CAPITAL EXPENDITURES The following table summarizes the Company‘s capital expenditures for the years 2009, 2008, and 2007. (in Php - cumulative based on acquisition cost)
For the years ended December 31, 2007 2008 2009 For the six months ended June 30, 2010
Computer Equipment
Network Equipment
Machinery and Equipment
Furniture, Fixtures and Office Equipment
Transportation Equipment
Leasehold Improvements
Total
7,544,031 8,269,596 8,298,596
51,214,879 90,240,579 106,427,381
23,144,666 23,198,666 24,904,379
5,198,272 6,957,154 6,957,154
1,646,000 3,176,000 3,176,000
30,457,186 33,705,184 40,964,233
119,205,034 165,547,179 190,727,743
8,389,043
107,002,877
25,543,629
6,979,654
3,176,000
41,154,233
192,245,436
TRENDS,
EVENTS, UNCERTAINTIES AND SEASONAL ASPECTS THAT HAVE MATERIAL EFFECT ON THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS IP-Converge currently does not anticipate events that will result in liquidity increasing or decreasing in a material manner such as cash flow or liquidity problems in the next twelve months. IP-Converge is not aware of any off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationship of the Company with unconsolidated entities or other persons created during the reporting period. The Company has not publicly announced any new product or service in 2010 except for the offerings discussed in the ―Principal Products and Services‖ section on page 66. No substantial product research and development will be undertaken in the next twelve months. The Company is not aware of any 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. There were no significant elements of income or loss that did not arise from the Company‘s continuing operations.
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INDEPENDENT ACCOUNTANTS The Company reappointed KPMG Manabat San Agustin & Co. in 2009 to conduct the audit of its financial statements for the year ended December 31, 2009 to replace, Punongbayan & Araullo, the independent public accountant, who conducted the audit for 2008. The Company previously appointed KPMG to conduct the 2006 and 2007 audit. The Company has not had any disagreements on accounting and financial disclosures with its independent public accountants during the last three years. EXTERNAL AUDIT FEES The following table sets out the aggregate fees billed for each of the last three (3) years for audit and auditrelated services rendered by KPMG for 2006, 2007, & 2009 and Punongbayan & Araullo for 2008, excluding fees directly related to the Offer.
Audit and Audit Related Fees
2007 110,000
2008 300,000
2009 250,000
The Company has not engaged KPMG for non-audit related services. No other fees were paid by the Company to KPMG. On March 2010, the Company adopted a Manual of Corporate Governance that provides for the constitution of the Audit Committee. The Company will still constitute an audit committee that will promulgate policies and procedures for the approval of the services. Currently, the stockholders appoint the Company‘s auditor during the annual stockholders‘ meeting.
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INDUSTRY OVERVIEW The business of IP-Converge falls under Information Technology and Communications (ITC) industry general as an ―outsourced service provider‖ as it relates to the Managed Data Services Business. But because of the diverse range of the Company‘s products and services, there are several categories within the ITC industry that IP-Converge has a direct market stake on, the table below shows these major subcategories and the subsequent paragraphs below discusses each ITC industry subcategory in detail. ICT Industry Subcategory
Subcategory Description
Managed Colocation Services
Service in which customer pays for the use of space in a 3rd party commercial data center facility to house or ―co-locate‖ their server computers and other networking / communications equipment – which is specifically designed to operate with uninterrupted power, cooling, technical support and data connectivity to the Internet and other locations (via wide area network)
How IP-Converge provides the subcategory service and competitors (not meant to be an exhaustive list) IP-Converge provide Co-location services utilizing a data center that it owns and operates. Other local players who are considered by IP-Converge as major competitors in this field are: Vitro (ePLDT) DataOne Asia TIM Globe Telecom Bayan Telecommunications Other major internet service providers IP-Converge‘s differentiator in the co-location market is primarily the fact that the data center is ―carrier-neutral‖, meaning all telecommunications providers have facilities inside the IPC data center and customers are able to choose from these different providers. Unlike other data centers that are owned by communications providers whereby customers have no choice but to use the providers‘ services – if they are able to use another providers‘ service, they are charged with a premium. In addition, IP-Converge is able to tailor fit co-location requirements of customers according to their specific needs – ―custom built‖ co-location solutions.
Enterprise Internet Connectivity Services
Service where customers pays for the use of a 3rd party provider‘s communications facilities designed to operate close to 100% availability - to access / connect to the Internet for the conduct of their business
IP-Converge provides internet services to enterprises (not consumers) using its own Internet-connecting network that it owns and operates. Such network includes connections to other internet service and telecommunications providers. Other local players who are considered by IP-Converge as major competitors in this field are: PLDT Globe Telecom Bayan Telecommunications Eastern Telecommunications DigiTel
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ICT Industry Subcategory
Subcategory Description
How IP-Converge provides the subcategory service and competitors (not meant to be an exhaustive list) Pacnet PhilCom PT&T Prime Communications Other major internet service providers IP-Converge differentiates its offering from its competitors in this space with the fact that its Internet services is ―Asian Centric‖ – meaning latency and connectivity to most Asian countries is faster than its competitors. This gives IPC an edge in winning customers who desire to reach an Asian user base faster. As a value added service, IPC also constantly optimizes its internet connectivity to ensure that customers get preferred routes through the Internet – enabling them to even have better latency.
Enterprise Data Connectivity Services
Service where customer pays for the use of a 3rd party provider‘s communications facilities designed to operate close to 100% availability – to facilitate communications (mostly private) across the enterprises‘ offices.
IP-Converge provides data connectivity services to enterprises (not consumers) using the resold facilities and capacities of other 3 rd party providers, both local and international. Therefore, other players considered by IPConverge as competitors are mostly the same suppliers to IP-Converge: PLDT Globe Telecom Bayan Telecommunications Eastern Telecommunications DigiTel FiberCity eMeralco Ventures Pacnet PCCW Verizon Business BT Other local and foreign telcos As IPC resells the data connectivity services of its communications partners to customers – the Company‘s differentiator, once again is its ―telco-neutrality‖, IPC is able to provide and in some cases -- aggregate services from multiple providers – IPC becomes a single point of contact. Leveraging on the Company‘s deep discount levels gives IPC the ability to provide competitive pricing.
Network Security
Service where customer pays for
IP-Converge provides ―DDoS Protection‖
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ICT Industry Subcategory
Subcategory Description
Services – DDoS Protection
the use of a 3rd party provider‘s resources to protect their network and IT infrastructure against ―Distributed Denial of Service‖ attacks or DDoS perpetrated by individuals or groups with the intent of crippling the operations of the target organizations‘ IT infrastructure, rendering it unavailable (or poorly responding) to legitimate users
How IP-Converge provides the subcategory service and competitors (not meant to be an exhaustive list) services to enterprises as the partner of USbased Prolexic Technologies. Prolexic has deployed a worldwide network reaching protection infrastructure, so IP-Converge customers actually utilize their service and infrastructure, while IP-Converge provides level 1 customer and technical support. There are no local competitors that provide the same service, however some 3rd party communication providers claim they provide ―DDoS protection‖ for an additional fee, if a company chooses to use their network. IPC believes that it can effectively compete in the DDoS Mitigation Services market because it is the only provider in this market – the offering is truly unique and it is the only effective solution to combat DDoS.
Managed Network and Professional Services
Service where customer pays for the services of 3rd party ―Operations Center‖ to ensure the continuous operations of their data communications network and IT infrastructure (both hardware and software), as well as for other associated tasks such as maintenance, installation / deployment and capacity planning
IP-Converge provide this service via its own Network Operations Center (NOC) manned by technical professionals 24 x 7. These services are mostly provided in conjunction with other services such as Managed Co-location services and internet / connectivity services, and rarely are provided on a standalone basis. Therefore, other competitors in this subcategory are the same ones, such as: Vitro (ePLDT) DataOne Asia TIM Globe Telecom Bayan Telecommunications Eastern Telecommunications Other major internet service providers However, there are some specialist BPO/Call Centers that provide technical services similar to this, among them include: Sykes Asia, PointWest, Convergys, Accenture. IP-Converge believes it can effectively compete in this line of service because these are bundled services with other Managed Data Services (e.g. co-location), and the services offered are always customized and built to suit customers requirements.
Business Continuity
Service where customers pays for the use of a provider‘s (usually a
Other local players who are considered by IPConverge as major competitors in this field are
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ICT Industry Subcategory Services
Customer Relationship Management (CRM) Solutions
Subcategory Description
data center) facilities as an alternative production site or backup site for their IT and / or network infrastructure in case their production site fails. Services would be a combination of colocation, connectivity (internet or site to site), managed and professional services and business continuity seats, and other services.
Service where customers acquire or pay for the use of software tools to manage and nurture their company‘s interactions with customers, sales prospects, partners and even employees. It involves using technology to organize, automate, and synchronize business processes— principally sales related activities, but also those for marketing, customer service, and technical support. Attached to this as 3rd party services to plan, customize, implement and deploy the chosen CRM software to suit the business needs and processes of the customer.
How IP-Converge provides the subcategory service and competitors (not meant to be an exhaustive list) also co-location service provides, and these are: Vitro (ePLDT) DataOne Asia TIM Globe Telecom Bayan Telecommunications IP-Converge‘s differentiator in this market is primarily the fact that the data center is ―carrier-neutral‖, meaning all telecommunications providers have facilities inside the IPC data center and customers are able to choose from these different providers. Unlike other data centers that are owned by communications providers whereby customers have no choice but to use the providers‘ services – if they are able to use another providers‘ service, they are charged with a premium. In addition, IP-Converge is able to tailor fit BCP requirements of customers according to their specific needs – ―custom built‖ co-location solutions. IP-Converge provides CRM Software on a SaaS model (Software as a Service) where one pays for the use of the software on a recurring basis, rather than paying a fee for a perpetual license – as a partner of US-based Salesforce.com. Salesforce has deployed a worldwide infrastructure, so IP-Converge customers actually utilize their own internet connection to access the Salesforce.com CRM tool, using their internet browsers. IP-Converge provide level 1 customer and technical support. As well as consulting services to customize the CRM tool to suit the business needs, processes and reporting requirements of the customer. IP-Converge is the ONLY consulting partner of Salesforce.com and the ONLY major reseller. The Company considers other companies who have similar CRM offerings with presence in the Philippines, as competitors: SAP
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ICT Industry Subcategory
Subcategory Description
How IP-Converge provides the subcategory service and competitors (not meant to be an exhaustive list) Oracle IBM Microsoft SAS IP-Converge competes effectively among other CRM software and service providers, because Salesforce.com is the only CRM application on the ―Software As a Service‖ model, and the model in itself is a compelling offering as it eliminates customers‘ capital expenditures on software licenses, unlike other CRM software being sold on the traditional software licensing models. IPC is also the ONLY Salesforce.com consulting partner in the Philippines, so there is no competition in the Salesforce.com consulting space.
Managed DNS Services
Service wherein customers pays for the use of another organization‘s globally deployed DNS infrastructure
There are many outsourced DNS services available in the market – most of them are even free of charge, but only Neustar has such as service in the world today, and IP-Converge represent them exclusively in the Philippines. Nevertheless other ISPs and domain registrars who offer free DNS services are considered as competitors in this space who charge for the same service for a fee include FreeDNS, OpenDNS, and EasyDNS. UltraDNS also has a load balancing solution that is an alternative to hardware based solutions offered by hardware vendors such as Cisco, F5 and Alteon, and other others. The UltraDNS product itself is a differentiator and allows IPC to compete in this market – it promises 99.999% SLA and other high availability options that organizations will find compelling.
Web Performance Monitoring
Service where customer pays for the use of a 3rd party‘s service infrastructure to monitor the uptime and performance of their websites and web enabled applications
Only Webmetrics (as offered by Neustar and exclusively represented by IP-Converge) offers this service in the Philippines. Neustar considers Gomez and Keynote as major competitors, offering the same service as Webmetrics, however both companies have no representatives in the Philippines. There are virtually no players in the web performance monitoring market that are present in the Philippines, and thus IPC believes it will have a distinct competitive
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ICT Industry Subcategory
Subcategory Description
How IP-Converge provides the subcategory service and competitors (not meant to be an exhaustive list) advantage. In addition, the Webmetrics product in itself is a unique offering that no other local competitor can counter.
Unified Communications
Solutions that customers acquire to enhance the multi-channel communications capability of their organizations. Solutions in this area are typically deployed either in a contact or call center environment or an enterprise environment and blends voice, email, chat and web interactions, including SMS, video and resource / file sharing in a single platform that can be deployed in multiple locations.
IP-Converge sells and markets two (2) solutions for this market: Interactive Intelligence and Presence Networks. In this space, the Company is in direct competition with other hardware based and hardwaresoftware based combination solution providers such as: Cisco, Avaya, 3Com, Alcatel-Lucent, IBM, NEC, Nortel, Polycom, and even Microsoft. This is on the straight premised based solutions which entail a one-time license fee for the use and acquisition of hardware and software. Interactive Intelligence is an ―all-in-one‖ unified communications solution that is highly customizable. IPC believes that the product features and technical superiority alone will give it an edge over competing products. An emerging trend is ―Communications as a Service‖ or CaaS, and in this area, IPConverge has a unique solution in the form of Presence Networks, which gives most of the functionalities delivered by on-premise solutions but users are charged on a per use basis (e.g. per user per month basis). Unified Communications as a Service is a new concept and this is a unique product offering in the local market. It is anticipated that because this is a new market trend, local competitors may announce new and similar offerings. IPC will compete on the basis of price and the Company‘s ability to customize the solution based on customers‘ unique requirements.
Banking and Financial Solutions
A host of point and suite solutions that specialize in enhancing the core business processes of banks and financial institutions such as: Treasury, Risk Management, Core banking, Assets and Liabilities Management, Loans, and others.
There are several competitors in this market sector in the Philippines including Misys, Sungard, Infosys, Oracle, Fiserv, AurioPro, 3i Infotech, among others. The Company intends to compete in this market on the basis of its ability to customize the solution to suit customers‘ unique needs, and product positioning specific to the needs of the small to medium-sized banks.
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With the roster of competitors in the markets the Company serves, both big and small - IP-Converge differentiates itself through customized system integration services, particularly into the e-Commerce and gaming sectors, financial services and specialized services in DDoS protection, disaster recovery, unified messaging and internet infrastructure enhancement. The usual first impression that the market has of IP-Converge might be that it is another data center and internet service provider. However, IPC has a different view of the business where the data center business is only but one part - specifically, IP-Converge has built, and will continue to build businesses around quality, focus and asset leverage. The focus is in packaging products and services for selected lines of business - targeting "niche" markets where the Company can add definite value to the customer and the customers' customer. Asset leverage is achieved by maximizing returns to assets by exploiting strong cross-selling opportunities among customers that can come from a lot of different verticals given the range of products and services the Company provides. The Go-to-Market Strategy leverages the Company's assets by providing both traditional "off-the-shelf" and boutique services to penetrate niche markets, given customers unique solutions and value. The Company believes that the ―Software as a Service‖ model IS the future, and further extends that concept into ―Infrastructure as a Service‖, offering software, hardware, network and specialized security and infrastructure solutions as a service – tapping into the customers‘ operational expense rather than capital expenses. The primary growth drivers for demand in the Philippines for services that IP-Converge currently provide are the following: 1.
The continuing increase and prevalence of Internet users in the Philippines According to Yahoo – the approximate number of Internet users in the Philippines is about 24 Million, or about 24.5% of a population of 98 Million. The number of internet users has continued to increase as shown in the table below (source: www.internetworldstats.com). It follows the worldwide trend for demand, and the figure below shows how the rate of internet penetration for Asia was from 2001 to 2007, all indications have shown that this trajectory will hold in the next 5 years. The demand for internet access has increased and continues to increase than ever before – this is driven by an increasing amount of content available in the internet and popular websites such as Google, Facebook and other social networking sites, YouTube and the shift of moving news and entertainment content from what used to be considered as mainstream media (publications, radio, television, etc) to the internet. Affordability of internet connectivity is another driver, as well as the accessibility for instance, the increasing prevalence of wireless internet and mobile internet using existing mobile infrastructures (e.g. GRPS and 3G over GSM). Yet another driver is the increasing popularity of online games, both massively multi-player online role playing games (MMORPGs) and traditional casual
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games – the growth on the internet games sector is driven by the younger generation. Finally, the emergence of P2P (peer to peer) digital content sharing has also spurned this growth exponentially. The overwhelming success of socialnetworking, multimedia sites, rich content sites, gaming sites and others has been a boon to the communications industry at large – and as a result, service providers seek to supply the demand for internet connectivity by acquiring capacity – both long term and short term – both of which IP-Converge can address, is currently addressing and will continue to address, its current crop of Communications Company customers can attest to that. On the flip side, a number of business have sprouted recently whose main sources of revenue are from Internet users – again, these would be businesses who put up new social-networking sites, multimedia sites, rich content sites, gaming sites and others. To bring their content to the Internet, these business will require co-location space on a preferably telco-neutral data center which can assure continuous operations of their applications by delivering specialized computing space, uninterrupted power and cooling, on-hand technical support 24 x 7 and quick access to connectivity to any provider they choose (thus, the importance of telco neutrality). Again, IP-Converge is well positioned to provide services for these businesses. 2.
The continuing increase and prevalence of Internet enabled technologies and tools from Enterprises and requirements for Disaster Recovery (DR) and Business Continuity (BC). As the level of comfort on using the Internet as a communications medium increase, enterprises also enhance operations to the Internet – such as publishing internal content and applications (such as intranets, employee portals, HR tools, sales tools, ordering tools, and others) over private and secure connections such as Virtual private networks (VPNs) over the public Internet – to give mobile access to their employees, partners, customers and other stakeholders. The efficiencies of mobile access to business content for employees have driven enterprises to expand to more locations, which further drive the demand for connectivity. The increased affordability and effectiveness of network security measures and tools has further driven the growth of enterprise demand for internet and related services. Further, certain industries have to meet compliance requirements for disaster recovery (DR) and business continuity – primarily the financial and BPO sectors. The financial sector has long been conscious of this and is further pushed to implement DR and BC plans by the BSP. BPOs, whose client base are primarily enterprises from other countries such as the US and Europe are forced to comply with DR and BC requirements of their own customers, who are in turn governed by compliance legislation such as Sarbanes-Oxley, and HIPAA. With access to capital funds limited, such enterprises will not be able to put up their own data center infrastructures and will be forced to look into alternatives provided by 3 rd parties such as IP-Converge – whose main value proposition is access to data center facilities and connectivity, plus services to enable and implement their DR and BC plans, as well as to ensure the maximum availability of their Internet enabled tools for collaboration with customers, prospects, partners and other stakeholders. IPConverge has already made investments (and will continue to invest) on robust data center and connectivity facilities and services on a large scale – enterprises can thus take advantage of the economies of scale. Using IP-Converge services on an annuity basis brings down the cost to entry for clients and enables them to utilize their capital funds to budget and spend for other IT and infrastructure components that these business consider as ―core‖.
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Furthermore, the primary advantage of IP-Converge over its competitors is that it is a true carrierneutral provider and is able to work hand in hand with all domestic telecommunications providers and ISPs. Customers are not forced to use the connectivity services of the telco that owns the data center where customers are co-located in. In addition, IP-Converge maintains points of presence in Hong Kong and Singapore, and has access to multiple gigabit capacity on the IAC (Intra-Asia Cable) Network, enabling it to provide fiber connectivity from Singapore to Tokyo, Japan. Lastly, IPConverge is also, to this date, the only provider in the Philippines with direct connectivity to the HKIX (Hong Kong Internet Exchange). 3.
The continuing increase in available internet bandwidth per dollar Meaning, more internet bandwidth can be bought for the same dollar as compared to the past - Internet access cost per Mbps decreases year on year. There are several drivers that lead to this – primarily is the continuous commoditization of internet access due to the wide array of access choices (e.g. DSL, leased lines, GPRS, etc), and the increasing supply of bandwidth from more and more providers. Another driver is increasing capacity on undersea cables – where most connectivity traffic passes through – old cables are replaced with new ones, and new cables (or additional capacity from existing cables) are made available almost once a calendar quarter now. As a result, for the same amount of money used to buy a 1Mbps DSL line to the Internet 2 years ago, buyers can now purchase twice that. It may appear at this point that this is detrimental to IP-Converge – but actually it is not, as the rate of demand for bandwidth outpaces the decreasing rate of price per Mbps. In addition, the decrease in bandwidth prices also allows IP-Converge to continuously reduce costs of sales (costs from other providers where IP-Converge buys from), and/or buy more capacity at a lower rate to address the demand of customers for more bandwidth. The Global demand for bandwidth has been growing, and is forecasted to continue growing, at between 60% and 100% per annum. From a financial perspective this investment is essentially a bet on where the Company believes intra-Asian and US facing bandwidth consumption is going and whether the price will hold up as time goes by. The Company‘s general view is that the next 5 years is quite benign as internet demand takes off in India, China, and south East Asia, it expects prices for bandwidth to remain reasonably stable. Industry experts and analysts do not expect a meltdown of year 2000 proportions – the ―dot com burst‖ era exacerbated by oversupply of network capacity, primarily submarine cables. Certainly the Company‘s own experience in selling bandwidth over the last 3 years has been good, in fact the Company has been able to hold retail prices by ensuring its overall packaged product is compelling, IPC has seen limited price erosion although it is budgeting on the basis of a 7-10% per year decline. The nature of the traffic handled by world wide bandwidth has changed over time, in the last three to four years there has been a massive increase in traffic, e.g. from the use of facilities like Facebook and YouTube. IPC believes that the Asian internet penetration will continue to increase dramatically and the bandwidth consumed
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per user also. The combination of these trends supports the forecast of demand doubling every year to 15 months. 4.
The growing threat of “bot-net” based security issues, including DDoS A ―bot-net‖ is a network of computers connected via the internet that are remotely controlled by a hacker. The hacker controls this bot-net remotely to generate network traffic to initiate DDoS attacks towards specific targets, send out spam, or even gather more computers to join the bot-net. Almost all the time, users of these internet-connected computers (from home or work) do not know they have been infected by bots, and the sources of these bots can come from malware from some websites, pirated copies of software, and even media like MP3s and videos downloaded from peer to peer sites or others. In the past, the number and size of these bot-nets were relatively small, but because of cheaper and faster internet connectivity – it becomes easier for hackers to spread their botnets to more and more computers. As a result, what used to be a few bot-nets with hundreds of computers have now evolved into thousands of bot-nets with tens of thousands of infected computers. This is the main cause as to why the spam and DDoS Problem is growing worse, as DDoS attacks are used from extortion to more politically motivated reasons. Prolexic currently sees around 50 DDoS attacks launched against its customers every day, and is currently tracking about 4,300 command and control servers which manipulate millions of botnet-controlled computers, and warned that the attacks are becoming increasingly sophisticated and targeted in nature. As IP-Converge is the only partner of Prolexic in the Philippines, and Prolexic is probably the only company in the world today that can protect networks effectively against DDoS and Bot-net related security issues – IP-Converge has a true potential to gain market share in specialized DDoS protection in the Philippines. DDoS attacks do happen in the Philippines but are not yet mainstream – but as data and history has shown, time will come that it will become mainstream – affecting the operations of local enterprises, communications and even government entities.
5.
The growing acceptance of CRM, specifically of the “Software as a Service” (SaaS) Model According to Gartner, the Asia/Pacific CRM market grew 27.1% in 2008 to US$506.8 million despite the global economic slowdown, and the need to retain the customer installed base, as well as growth for on-demand solutions, helped to sustain this market growth. IP-Converge‘s Salesforce.com license sales grew by 75% YoY from Nov 2008 to Nov 2009, and is expected to grow further as 2010 unfolds. This signifies an increasing demand for a web-based CRM solution such as Salesforce.com. The advantage of Salesforce.com over competing CRM providers is that it is web-based, and therefore solves the issue of accessibility and allows it to be updated in real time. With this type of CRM offered by Salesforce.com, there‘s no software or hardware to buy, install, or maintain to run the software. Whereas, traditional client/server CRM software requires significant investments in IT infrastructure, networks, and servers as well as IT professionals to install, deploy, and maintain the software as the vendor makes enhancements to features or functionality. The cloud computing (or web-based) approach to CRM software shifted the market from an ownership to a rental model, freeing businesses from the hassle and expense of software purchasing, deployment, and maintenance.
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M A N A GEM E NT A ND C E RTA IN SECURITY HOLDERS DIRECTORS AND EXECUTIVE OFFICERS As provided in its Articles of Incorporation, the Company shall have a Board of Directors (―Board‖) composed of seven (7) members. The Board of Directors is responsible for the overall management and direction of the Company. Each director has a term of office of one year and is eligible for re-election every year. Each director beneficially owns at least one share of the capital stock of the Company. The members receive such compensation as determined by the Board of Directors. By resolution passed by the majority of the Board, the Directors may designate one or more committees which, to the extent provided by said resolution, shall have and may exercise any of the powers of the Board which may lawfully be delegated in the management of the business and affairs of the Company. The officers of the Company are elected or appointed by the Board of Directors. The Chairman of the Board and the President/Managing Director are elected from the members of the Board. Individual curriculum vitae of each Director and Executive Officer are attached as Annex L of the Registration Statement. As of August 31, 2010, the Company‘s Board of Directors and Executive Officers are: Name
Age
Citizenship
Position
Jaime Enrique Y. Gonzalez Roger G. Stone
33 61
Filipino
Reynaldo R. Huergas Rene R. Fuentes Juan Victor S. Tanjuatco Marco Antonio Y. Santos Juname C. De Leon
63 63 62 41 39
Filipino Filipino Filipino Filipino Filipino
Patrick David R. De Leon
49
Filipino
Percival C. de los Reyes
62
Filipino
Daniel dV. Viray
53
Filipino
Edgar R. Gutierrez
34
Filipino
Hernand A. Hermida
36
Filipino
Maria Carmencita T. Burgos
29
Filipino
Donna B. Mantos
31
Filipino
Chairman Deputy Chairman and Director President and Director Independent Director Independent Director Director Corporate Secretary, Alternate Information Officer, Compliance Officer and Director Chief Financial Officer and Treasurer Senior Vice President for Managed Data Services Vice President for Financial Systems Vice President for Technical Operations & Customer Support Vice President for Product Development Assistant Vice President for Sales - Managed Data Services Controller
British
Year Position was Assumed 2005 2006 2006 2010 2010 2005 2009
2010 2008 2008 2008
2007 2010
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Profile and Business Experience of the Board of Directors and Executive Officers during the Past Five (5) Years IP-Converge is managed by a team composed by a set of professionals who have highly-diverse entrepreneurial, business and technical skills in multiple spaces within the Internet, Information technology services, consulting and communications areas. Together, these individuals bring over 150 years of combined management experience to the Company. Jaime Enrique Y. Gonzalez, Chairman, has a successful track record in the internet space; having founded a series of internet start-ups that have been acquired by larger U.S. - based firms (match.ph/itzamatch.com). Mr. Gonzalez has taken IPVG from garage to public. He has a Bachelor of Arts in International Politics and Economics from Middlebury College, attended the program for Masters in Entrepreneurship at the Asian Institute of Management, and completed Business courses from Sophia University in Tokyo. Mr. Gonzalez is considered an expert authority on the Internet and online games space. Prior to IPVG, Mr. Gonzalez was involved in investment banking with a focus on fund-raising and restructuring. Roger G. Stone, Deputy Chairman and Director, is a UK national with over 35 years experience in marketing, sales, software development and executive management in the IT and telecommunications industries. Mr. Stone has developed specialized expertise in establishing new operations in emerging markets particularly in Europe and Asia. More than 25 years of his working life has been on international assignments in UK, Austria, Hong Kong, India, Philippines, Vietnam, Thailand and Costa Rica. His career includes 25 years with Unisys Corp., mainly in Asia, heading operations in India and the Philippines, 3 years as head of retail operations for IDT Corp. in Europe, and immediately prior to joining IPVG, Mr. Stone was CEO of IQ-Ludorum plc. He graduated from Loughborough University of Technology in the UK. Reynaldo R. Huergas, President and Director, has a track record of more than 20 years in sales, marketing, and business development, with extensive experience in technology, telecommunications, and customer service management in Asia and the US. Prior to joining IPVG and IP-Converge, Mr. Huergas has held executive positions in Globe Telecom, myAyala Inc., and Global Data Hub (formerly Ayala Port), and occupied senior management positions in Unisys Corp. in the Philippines, Hong Kong, Singapore, and Indonesia as well. Mr. Huergas also worked at iAsiaworks (Silicon Valley), a venture-funded company in Sunnyvale, California engaged in Internet data center services in the Asia Pacific; as well as a content provider in Burlingame, California. Rene R. Fuentes, Independent Director. Rene R. Fuentes is currently the Liberal Arts Program Director and Advisor of SGV. His business experience during the past five years up to the present include management consultancy and directorship in foundations and private companies, which include La Flor De La Isabela, International Wine & Food Society (Philippine Branch), Philippine‐Australia Business Council, Philippine‐New Zealand Business Council, De La Salle University Science Foundation, Inc., and 1911 Insurance Agency Corporation. He took his Masters in Business Administration from the University of Sta. Clara, United States. Juan Victor S. Tanjuatco, Independent Director. Juan Victor S. Tanjuatco is a holder of a Masters Degree in Business Administration‐Finance from Wharton School of Finance and Commerce, University of Pennsylvania and a Bachelor of Arts Degree in Economics from Ateneo de Manila University (cum laude). He has built up his work expertise through extensive exposure in the United States with IBM Philadelphia, in Hongkong with Credit Agricole Indosuez (formerly Banque Indosuez), in New Zealand with Banque Indosuez, and in the Philippines with Banque Indosuez, Manila Offshore Branch and the Bancom Group, Inc. Mr. Tanjuatco is currently the Executive Vice President of the Export and Industry Bank, Chairman and Director of Tincan Mobile Solutions, Inc., Director of Ketmar Fast Food Corp., and President of Tanjuatco Development Corp. and Tanay Central Rice Mill, Inc.
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Marco Antonio Y. Santos, Director. Marco Y. Santos is a currently a Director of iPeople Inc. (PSE: IPO), whose key lines of business are focused on education and information technology. He is also ViceChairman of Tholons Southeast Asia, a consulting firm that specializes on business process outsourcing (BPO) and Executive Director for American Orient Capital Partners (Philippines) Inc. Mr. Santos was also the Chief Operating Officer of Mapua IT Center (a subsidiary of Mapua Institute of Technology) and Founder/CEO/Chairman of Edsamail. His career also includes a 3-year Marketing stint with Fuji Xerox Co. of Japan. He holds a Bachelor of Science degree in Management Engineering from the Ateneo De Manila University. Juname C. De Leon, Corporate Secretary, Alternate Information Officer and Compliance Officer, was the Head of the Prosecution ad Enforcement Department of the PSE prior to joining the Company. Prior to that, she was also the Legal Counsel of Fortune Managers from 2002 to 2006, and held the position of Hearing Officer and Securities Review Counsel in the Securities and Exchange Commission from 1999 to 2002. She graduated from Ateneo de Manila University in 1995 with a degree in Juris Doctor, and from De La Salle University with a Bachelor of Science degree majoring in Legal Management. Patrick David R. De Leon, Chief Finance Officer and Treasurer, Mr. De Leon is a Bachelor of Arts and Bachelor of Science in Commerce graduate of De La Salle University (1982). He has also completed the Strategic Business Economics Program of the University of Asia & the Pacific (1996). Prior to joining the Corporation, Mr. De Leon was the Director of Information Technology of the Philippine Transmarine Carriers Group (PTC). He likewise served as Vice-President for First Maritime Shared Services Inc. and General Manager for LifeLinks International (LL). Mr. De Leon shall also serve as Deputy CFO for IPVG Corp. Percival C. de los Reyes, Senior Vice President for Managed Data Services, has had significant contributions to Globe Telecom and Philcom, prior to joining IP-Converge. Mr. de los Reyes has substantial experience in IT and telecommunications and has held senior sales director roles in several companies, including Orient Networks of Singapore where he worked as Country Director for the Philippines. Mr. de los Reyes also spent time with Swift Global USA in Washington, DC. Daniel dV. Viray, Vice President for Financial Systems, has had highly productive stints in several companies during his career with notable stops as Country Manager as well as Sales Director in multinational firms like Sun Microsystems and Hewlett Packard. Prior to joining IP-Converge, Mr. Viray was the Regional Sales Director of AurionPro Solutions Pte Ltd. In addition, he brings over 26 years of management and sales experience in banking and information technology. Edgar R. Gutierrez, Vice President for Technical Operations & Customer Support, has over 10 years experience in the Information and Communications Technology (ICT) industry. Mr. Gutierrez has worked with numerous service providers such as Sky Internet, Impact Information‘s Systems and Wolfpac Communications, focusing on network operations and Internet applications development. Hernand A. Hermida, Vice President for Product Development, has over 15 years experience in the Information and Communications Technology Industry and has worked in multiple roles in technical consulting, sales, marketing, business development and product management. Mr. Hermida was Head of Business Development at AyalaPort, and VP for Support Services at MISNet, a local IT firm. He also taught systems analysis and design, data communications & networking, C Language Programming, and Digital Systems Design for 2 years at the De La Salle University where he also attained his Bachelor of Science in Computer Science degree. Maria Carmencita T. Burgos, Assistant Vice President for Sales - Managed Data Services, has significant sales and marketing experience in mobile and data communications. She is a sales and account management pioneer in IP-Converge and is also currently the Sales & Marketing Director of First Cagayan Converge Data Center, Inc. (FCCDCI), joint-venture company of IP-Converge and First Cagayan Leisure
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and Resorts Corp. She graduated with a BA Political Science degree at U.P Diliman and conferred with an MBA from Ateneo De Manila. Donna B. Mantos, Controller. Donna B. Mantos is a Certified Public Accountant and has over 9 yrs. of experience in the field of finance and accounting. She graduated with the highest honors at Mountain View College Valencia, Bukidnon with the degree of Bachelor of Science in Accountancy. Prior to joining IP Converge Data Center, Inc. she was the Finance Manager of IP Converge‘s parent company IPVG Corp. She has also worked at Solutions Insurance Brokers, Inc. as an accountant and MOF Company Inc. as Assistant Accounting Manager. Jose Voltaire A. Bautista – Assistant Corporate Secretary Atty. Jose Voltaire A. Bautista has been involved in litigation, labor, and corporate legal work for most part of his career. He graduated from the University of the Philippines Manila in 1998 with a degree in Bachelor of Arts in Organizational Communication and obtained his Ll. B. from San Beda College of Law in 2003. He was admitted to the Philippine Bar on May 5, 2004. He used to work from March 2004 until January 2010 as an underbar, junior, and later on, senior associate, in the law firm Rico and Associates, where his skills in the field of law practice were honed by Atty. Rex G. Rico, a legal practitioner with thirty-seven (37) years of experience. SIGNIFICANT EMPLOYEE While IPC values the contribution of each executive and non‐executive employee, no single employee who is not an executive officer is expected to make a significant contribution to the business. Other than standard employment contracts, there are no arrangements with non‐executive employees that will assure the continued stay of these employees with the Company. FAMILY RELATIONSHIPS Jaime Enrique Y. Gonzalez, Chairman and Chief Executive Officer and Marco Antonio Y. Santos, Deputy Chairman, are second cousins. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS To the best of the Company‘s knowledge, there has been no occurrence during the past five years up to the date of this Prospectus of any of the following events that are material to an evaluation of the ability or integrity of any of its directors and executive officers: a)
Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time;
b) Any conviction by final judgment in a criminal proceeding, domestic or foreign, or being subject to a pending criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses; c)
Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting such person‘s involvement in any type of business, securities, commodities, or banking activities; and
d) Being found by a domestic or foreign court of competent jurisdiction (in a civil action), the SEC or comparable foreign body, or a domestic or foreign exchange or other organized trading market or self-regulatory organization, to have violated a securities or commodities law or regulation and the judgment has not been reversed, suspended or vacated.
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DIRECTOR AND EXECUTIVE COMPENSATION As a standard arrangement with IPC‘s Board of Directors, an allowance or per diem, as may be fixed by the Board, is given to each member of the Board during each regular meeting of the Board, provided that the said director participates in the said meeting. Additionally, IPC‘s By-Laws provides that an amount which shall not exceed 10.0% of the Company‘s net income before income tax during the preceding year, may by resolution of the Board, be allocated to and distributed among the members of the Board. Such compensation shall be determined and apportioned among the members in such manner as the Board may deem proper, subject to the approval of the stockholders representing at least a majority of the outstanding capital stock at a regular or special meeting of the stockholders. IPC‘s By-Laws further provides that the officers enumerated therein (i.e., the Chairman of the Board, the President, the Vice-Presidents, the Treasurer and the Corporate Secretary) shall receive such remuneration as the Board may determine. All other officers shall receive such remuneration as the Board may determine upon recommendation of the Company‘s President. The following are IPC‘s most highly compensated executive officers for the years 2007, 2008 and 2009: Year 2007
2008
2009
Name Reynaldo R. Huergas Warren Liu Percival C. Delos Reyes Raymond R. Remoquillo Roberto B. Suarez Reynaldo R. Huergas Warren Liu Percival C. Delos Reyes Emerita M. Dizon Daniel DV. Viray Roberto B. Suarez Reynaldo R. Huergas Percival C. Delos Reyes Emerita M. Dizon Daniel DV. Viray Reynaldo R. Huergas Percival C. Delos Reyes Emerita M. Dizon Daniel DV. Viray
Position President Chief Technology Officer Senior Vice President Vice President - IT Sales Vice President - Facilities and Infrastructure President Chief Technology Officer Senior Vice President Director - Business Development CRM Vice President - Financial Systems Vice President - Facilities and Infrastructure President Senior Vice President Director - Business Development CRM Vice President - Financial Systems President Senior Vice President Director - Business Development CRM Vice President - Financial Systems
The table below illustrates the aggregate compensation received by the Company‘s directors and officers for the calendar years 2007, 2008, 2009 and 2010: Year Most highly compensated officers named above
Aggregate compensation of all officers and directors as a group unnamed
2007 2008 2009 2010* 2007 2008 2009 2010*
Salary (in P) 6,090,083 13,193,468 10,900,518 11,990,570 8,780,478 17,281,768 16,750,543 18,425,597
Bonus / Other Income (in P) 3,769,048 4,102,875 4,434,935 4,878,429 8,060,511 6,750,012 6,787,311 7,466,042
Total (in P) 9,859,132 17,296,343 15,335,453 16,868,999 16,840,988 24,031,780 23,537,854 25,891,639
*Estimated 2010 compensation
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EMPLOYMENT CONTRACTS AND TERMINATION CHANGE-IN-CONTROL ARRANGEMENTS
OF
EMPLOYMENT
AND
There are no special employment contracts between IPC and its named executive officers. The Company‘s standard employment contract for officers contains the following salient provisions: IPC has the right to transfer, relocate and reassign the officer to a similar position in any one of its subsidiaries and/or affiliates in accordance with operational demands and requirements, provided such transfer, relocation and reassignment shall not result in diminution of compensation and benefits already vested to the officer. Salary and benefits which the officers are entitled to include: (a) a monthly basic salary, which shall be subject to withholding tax and any deductions that the Company is authorized or required by law to make; (b) pre-approved business-related expenses incurred, such as travel, accommodation, food and communication expenses, shall be for the Company‘s account and shall be subject to reimbursement; (c) cellular phone entitlement; (d) opportunity to be part of the Company‘s employee stock option plan; and (e) monthly communication and gasoline allowance. The officer is prohibited, during his employment, from working for another employer and/or engaging in any activity prejudicial to the Company‘s interests or which will interfere with the officer‘s job performance, whether within or outside working hours. The Company‘s standard employment contract for managers contains the following salient provisions: Depending on operation requirements, the manager may be assigned to other jobs and locations. The manager may also be temporarily detailed or assigned to any affiliated company at such time and for such duration as IPC may determine. The manager shall be subject to a six months probationary period. Should the manager‘s performance be found satisfactory during the probationary period, his employment shall be converted to a regular status. The manager shall receive a monthly basic salary guaranteed at 13 months per annum. The basic salary shall be subject to annual review, taking into consideration the manager‘s performance and achievement of mutually agreed goals. The manager is prohibited, during his employment, from working for another employer and/or engaging in any activity prejudicial to the Company‘s interests or which will interfere with the manager‘s job performance, whether within or outside working hours. There are no arrangements for compensation to be received by named executive officers from the Company in the event of resignation, retirement or any other termination , or a change in control therein. WARRANTS AND OPTIONS OUTSTANDING IPC has not issued any form of securities (including stock options, warrants, debt securities, and securities subject to redemption or call) other than the Common Shares.
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SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS Following is the security ownership of record and beneficial owners of more than 5.0% of the Common Shares as of August 31, 2010: Title of Class
Common Shares Common Shares
Name and Address of Record Owner and Relationship with Issuer IPVG Corp.
IPVG Employees, Inc.
Name of Beneficial Owner and Relationship with Record Owner
Citizenship
Beneficial owner and record owner are the same Various employees of IPVG
Number of Shares Held
Percent
Filipino
123,999,995
91.00%
Filipino
12,400,000
9.00%
Other than the abovementioned, there are no other stockholders owning more than 5.0% of the Company‘s securities. SECURITY OWNERSHIP OF MANAGEMENT The following is the security ownership of the directors and officers of the Company as of August 31, 2010:
Title of Class
Common Share
Name of Beneficial Owner and Relationship with Issuer Jaime Enrique Y. Gonzalez, Chairman Roger G. Stone, Director and Deputy Chairman Reynaldo R. Huergas, Director and President Juname C. De Leon, Corporate Secretary Marco Antonio Y. Santos, Director Rene R. Fuentes, Independent Director Juan Victor S. Tanjuatco, Independent Director
Filipino British
Number of Shares Held; Nature of Beneficial Ownership 1 (direct) 1 (direct)
Filipino
1 (direct)
-nil-
Filipino
1 (direct)
-nil-
Filipino Filipino
1 (direct) 1 (direct)
-nil-nil-
Filipino
1 (direct)
-nil-
Citizenship
Percent
-nil-nil-
The Company has no knowledge of any voting trust agreements or any other similar arrangement which may result in a change in control of the Company.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has no transactions or proposed transactions with any of its directors or officers. The only stockholder of the Company that owns 10.0% or more of the total outstanding shares is IPVG.
Management Agreement dated 06 September 2006 between IPVG and the Company Under the Management Agreement, the Company engaged IPVG to render consulting, advisory and management services related to the operations and development of the Company‘s business and to the dayto-day operations thereof, including, but not limited to strategic planning, corporate management, domestic and international marketing, fund raising, financial management, marketing and financial oversight, including, without limitation, advisory and consultancy services on the distribution and sale of the Company‘s products and services, selection, retention and supervision of independent auditors, financial advisors and legal counsel, structuring and implementation of equity participation plans, employee benefit plans and other incentive arrangements for key executives of the Company and such other services relating to the business of the Company. The term of the Agreement is five (5) years, commencing from the execution of the Agreement, unless sooner terminated by either of the parties. The consideration for the management services are the following (―Management Fees‖): a)
monthly fee of P 560,000.00; and
b) annual fee in an amount equivalent to 10% of the Company‘s net income after tax. Apart from the foregoing, there are no other transactions during the last two years, or proposed transactions, involving the Company or any of its subsidiaries in which a director, executive officer or stockholder owning 10.0% or more of the total outstanding shares and members of the immediate family of such director, executive officer or stockholder had or is to have a direct or indirect material interest.
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CORPORATE GOVERNANCE On April 5, 2002, the SEC promulgated the Code of Corporate Governance (SEC Memorandum Circular No. 2, Series of 2002, as revised by SEC Memorandum Circular No. 6, Series of 2009) consistent with and in pursuit of the State‘s policy to promote corporate governance reforms aimed at raising investor confidence, developing the capital market, and helping achieve high, sustained growth for the corporate sector and the economy. This Code applies to all corporations whose securities are registered or listed, corporations which are grantees of permits/licenses and secondary franchise from the SEC. It also applies to public companies and branches or subsidiaries of foreign corporations operating in the Philippines whose securities are registered or listed. Each of these corporations is required to promulgate and adopt its corporate governance rules and principles. The Code of Corporate Governance prescribes the detailed qualifications and disqualifications, duties, functions and responsibilities of the Board of Directors and each member thereof, the Chairman, the Chief Executive Officer, and the Corporate Secretary. It also mandates the creation of specific board committees in aid of good corporate governance, to wit, an Audit and Compliance Committee, a Nomination Committee and a Compensation or Renumeration Committee, and requires the Board to commit itself to the protection of the rights of stockholders. To fully comply with the adopted leading practices on good corporate governance, IP-Converge has prepared and executed its Corporate Governance Manual which is currently pending review and evaluation by the SEC. The Company‘s Corporate Governance Manual provides for, among others, the following: Appointment of a compliance officer, who shall hold the position of a Corporate Secretary, and have direct reporting responsibilities to the Chairman of the Board, and monitor compliance with the provisions and requirements of the Corporate Governance Manual; Responsibilities, specific duties and functions of the Board of Directors, which includes ensuring that the Company complies with all relevant laws, regulations and codes of best business practices, adopting a system of internal checks and balances, and identify key risk areas and key performance indicators and monitor these factors with due diligence; Creation of Board Committees, such as the Audit Committee, the Nomination Committee and the Compensation Committee; Qualifications of the Company‘s External Auditor and Internal Auditor; The conduct of a training process for the purpose of conducting an orientation program or workshop to operationalize the Corporate Governance Manual; Procedures for monitoring and assessment compliance with the Corporate Governance Manual; and Penalties for non‐compliance with the Corporate Governance Manual.
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PHILIPPINE FOREIGN I N V E S TME N T, FOR E I GN OWNERSHIP AND EXCHANGE CONTROLS FOREIGN INVESTMENT AND EXCHANGE CONTROLS Under current BSP regulations, investments in listed Philippine securities which are funded with inward remittance of foreign currency must be registered with the BSP if foreign exchange needed to service capital repatriation and dividend remittance will be sourced from the banking system. If the foreign exchange required to service capital repatriation or dividend remittance will be sourced outside the banking system, registration is not required. The application for registration may be filed by a stockbroker/dealer or an underwriter directly with the BSP or with a custodian bank designated by the investor. A custodian bank may be authorized agent bank or offshore banking unit in the Philippines appointed by the investor to register the investment, hold shares for the investor, and represent the investor in all necessary actions in connection with his investments in the Philippines. A bank may act as securities custodian only upon prior Monetary Bank approval. Applications for registration must be accompanied by: (1) a purchase invoice or subscription agreement; (2) a credit advice or bank certification showing the amount of foreign currently inwardly remitted; and (3) transfer instructions from the stockbroker/dealer, in case of PSE-listed securities, or investee certification of receipt of investment. Upon submission of the foregoing, the BSP or investor‘s custodian bank will issue a Bangko Sentral ng Pilipinas Registration Document (―BSRD‖). Proceeds of investments or dividends of BSP-registered investments are eligible for repatriation or remittable immediately and in full through the Philippine commercial banking system, net of applicable tax, without need of BSP approval. Remittance shall be allowed by mere presentation of the BSRD or proof of sale or dividend declaration, at the exchange rate applicable on the date of actual remittance. Pending repatriation or investment, divestment proceeds, as well as dividends of registered investment may be lodged temporarily in interest-bearing deposit accounts. Interest earned thereon, net of taxes, shall likewise be remittable in full. Divestment proceeds or dividends on registered investments may be reinvested in the Philippines and are likewise qualified for repatriation. The foregoing is subject to the power of the BSP, with the approval of the President of the Philippines, to restrict the availability of foreign exchange during an exchange crisis, when an exchange crisis is imminent or in time of national emergency. Furthermore, there can be no assurance that BSP foreign exchange regulations will not be made more restrictive in the future. The registration with the BSP of all foreign investments in the Shares shall be the responsibility of the foreign investor. FOREIGN EQUITY LIMITATIONS Foreign investors are permitted to invest in only a limited number of securities of Philippine corporations due to restrictions on foreign ownership imposed under the Constitution and by Philippine statutes, particularly in respect of securities of corporations engaged in restricted business activities. The principal restricted business activities are the ownership of land, exploitation and development of natural resources, ownership of educational institutions, operation of public utilities, and advertising, commercial banking, mass media, retail trade and rural banking activities. Under the Foreign Investments Act of 1991, as amended, foreign investments in any Philippine corporation not engaged in a restricted business activity may not exceed 40% of a corporation‘s outstanding capital stock unless such foreign investment represents an inward remittance of at least US$200,000.
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Entities that provide Value-Added Services (VAS) to the public have been characterized as public utilities. As such, they are required to comply with the Constitutional limitation on foreign ownership in public utilities. Under the Philippine Constitution, only Filipino citizens or corporations the capital of which is at least 60% Filipino-owned can operate a public utility.
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THE PHILIPPINE STOCK MARKET BRIEF HISTORY The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was self-regulating, governed by its respective Board of Governors elected annually by its members. In 1992, the SEC proposed that the two stock exchanges, the Makati Stock Exchange and the Manila Stock Exchange unify and operate as the PSE. On March 20, 1993, the members of both exchanges agreed to a functional unification and to the employment of a full-time, professional president to administer the PSE. In March 1994, the licenses of the two exchanges were revoked. While the PSE maintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked by an automated trading system which integrates all bid and ask quotations from the bourses. On August 8, 2001, PSE completed its demutualization, converting from a non-stock member-governed institution into a stock corporation in compliance with the requirements of the Securities Regulation Code. The PSE has an authorized capital stock of P36.8 million, of which P9.2 million is subscribed and fully paid-up. Each of the 184 trading participants was granted 50,000 Common Shares of the new PSE at a par value of P1.00 per share. In addition, a trading right evidenced by a "Trading Participant Certificate" was immediately conferred on each member broker allowing the use of the PSE's trading facilities. As a result of the demutualization, the composition of the PSE Board of Governors was changed, requiring the inclusion of seven brokers and eight non-brokers, one of whom is the President. On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of a series of reforms aimed at strengthening the Philippine securities industry. Companies are listed either on the PSE‘s First Board, Second Board or the Small and Medium Enterprises Board under the following sectors: financial, industrial, holding firms, property, services and mining and oil. Each index represents the numerical average of the prices of component stocks. The PSE shifted from full market capitalisation to free float market capitalisation effective 3 April 2006 simultaneous with the migration to the free float index and the renaming of the PHISIX to PSEi. The PSEi includes 30 companies listed on the PSE. With the increasing calls for good corporate governance, the PSE has adopted an online daily disclosure system to improve the transparency of listed companies and to protect the investing public.
The table below sets forth movements in the composite index from 1995 to 2009, and shows the number of listed companies, market capitalization, and value of shares traded for the same period: Selected Stock Exchange Data Year Composite Index Number of Listed at Closing Companies 2002 1,018.41 234 2003 1,442.37 236 2004 1,822.83 236 2005 2,096.04 237 2006 2,982.54 240 2007 3,621.60 244 2008 1,872.85 246 2009 3,052.68 248
Aggregate Market Capitalization in P Bn 2,083.16 2,973.83 4,766.26 5,948.37 7,172.8 7,978.5 4,069.2 6,029.1
Combined Value of Turnover in P Bn 159.73 145.36 206.56 383.52 572.6 1,338.3 763.9 994.2
Source: Philippine Stock Exchange, Inc.
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As of the end of 2009, there are 248 listed companies with an aggregate market capitalization of P6,029.1 billion. TRADING The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To trade, bids or ask prices are posted on the PSE‘s electronic trading system. A buy (or sell) order that matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders received by one broker at the same price are crossed at the PSE at the indicated price. Payment for purchases of listed securities must be made by the buyer on or before the third trading day after the trade. Trading on the PSE starts at 9:30 a.m. and ends at 12:00 p.m. with a ten-minute extension during which transactions may be conducted, provided that they are executed at the last traded price and are only for the purpose of completing unfinished orders. Trading days are Monday to Friday, except legal holidays when the BSP clearing house is closed. Minimum trading lots range from ten to 5,000,000 shares depending on the price range and nature of the security traded. Odd-sized lots are traded by brokers on a board specifically designed for odd-lot trading. To maintain stability in the stock market, daily price swings are monitored and regulated. Under current PSE regulations, when the price of a listed security moves up by 50.0 per cent. or down by 40.0 per cent. in one day (based on the previous closing price or last posted bid price, whichever is higher), the price of that security is automatically frozen by the PSE, unless there is an official statement from the relevant company or a Government agency justifying such price fluctuation, in which case the affected security can still be traded but only at the frozen price. If the issuer fails to submit such explanation, a trading halt is imposed on the listed security the following day. Resumption of trading shall be allowed only when the disclosure of the issuer is disseminated, subject again to the trading band. SETTLEMENT The Securities Clearing Corporation of the Philippines (SCCP) is a wholly-owned subsidiary of the Philippine Stock Exchange, Inc., and was organized primarily as a clearance and settlement agency for SCCP-eligible trades executed through the facilities of the PSE. It is responsible for (a) synchronizing the settlement of funds and the transfer of securities through Delivery versus Payment (DVP) clearing and settlement of transactions of Clearing Members, who are also Trading Participants of the Exchange; (b) guaranteeing the settlement of trades in the event of a Trading Participant‘s default through the implementation of its Fails Management System and administration of the Clearing and Trade Guaranty Fund (CTGF), and; (c) performance of Risk Management and Monitoring to ensure final and irrevocable settlement. SCCP settles PSE trades on a 3-day rolling settlement environment, which means that settlement of trades takes place three (3) business days after transaction date (T+3). The deadline for settlement of trades is 12:00 noon of T+3. Securities sold should be in scripless form and lodged under the Phil. Depository & Trust Corporation‘s (PDTC‘s) book entry system. Each Trading Participant maintains a Cash Settlement Account with one of the two existing Settlement Banks of SCCP which are Banco de Oro – EPCI, Inc. and Rizal Commercial Banking Corporation. Payment for securities bought should be in good, cleared funds and should be final and irrevocable. Settlement is presently on a broker level. SCCP implemented its new clearing and settlement system called Central Clearing and Central Settlement (CCCS) last May 29, 2006. CCCS employs multilateral netting whereby the system automatically offsets ―buy‖ and ―sell‖ transactions on a per issue and a per flag basis to arrive at a net receipt or a net delivery security position for each Clearing Member. All cash debits and credits are also netted into a single net cash position for each Clearing Member. Novation of the original PSE trade contracts occurs, and SCCP stands between the original trading parties and becomes the Central Counterparty to each PSE-Eligible trade cleared through it.
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SCRIPLESS TRADING In 1995, the Philippine Depository & Trust Corporation (formerly the Philippine Central Depository, Inc.), was organized to establish a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional license by the Philippine SEC to act as a central securities depository. All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The depository service of the PDTC provides the infrastructure for lodgment (deposit) and upliftment (withdrawal) of securities, pledge of securities, securities lending and borrowing and corporate actions including shareholders‘ meetings, dividend declarations and rights offerings. The PDTC also provides depository and settlement services for nonPSE trades of listed equity securities. For transactions on the PSE, the security element of the trade will be settled through the book-entry system, while the cash element will be settled through the current settlement banks, Rizal Commercial Banking Corporation and Banco de Oro – Unibank, Inc. In order to benefit from the book-entry system, securities must be immobilized into the PDTC system through a process called lodgment. Lodgment is the process by which shareholders transfer legal title (but not beneficial title) over their shares of stock in favor of PCD Nominee Corporation (‗‗PCD Nominee‘‘), a corporation wholly owned by the PDTC whose sole purpose is to act as nominee and legal title holder of all shares of stock lodged into the PDTC. ‗‗Immobilization‘‘ is the process by which the warrant or share certificates of lodging holders are canceled by the transfer agent and the corresponding transfer of beneficial ownership of the immobilized shares in the account of PCNC through the PDTC participant will be recorded in the Issuer‘s registry. This trust arrangement between the participants and PDTC through PCD Nominee is established by and explained in the PDTC Rules and Operating Procedures approved by the Philippine SEC. No consideration is paid for the transfer of legal title to PCD Nominee. Once lodged, transfers of beneficial title of the securities are accomplished via book-entry settlement. Under the current PDTC system, only participants (e.g. brokers and custodians) will be recognized by the PDTC as the beneficial owners of the lodged equity securities. Thus, each beneficial owner of shares through his participant, will be the beneficial owner to the extent of the number of shares held by such participant in the records of the PCD Nominee. All lodgments, trades and uplifts on these shares will have to be coursed through a participant. Ownership and transfers of beneficial interests in the shares will be reflected, with respect to the participant‘s aggregate holdings, in the PDTC system, and with respect to each beneficial owner‘s holdings, in the records of the participants. Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the lodged shares, they must rely on their participant-brokers and/or participant-custodians. Any beneficial owner of shares who wishes to trade his interests in the shares must course the trade through a participant. The participant can execute PSE trades and non-PSE trades of lodged equity securities through the PDTC system. All matched transactions in the PSE trading system will be fed through the Securities Clearing Corporation of the Philippines (SCCP), and into the PDTC system. Once it is determined on the settlement date (trading date plus three trading days) that there are adequate securities in the securities settlement account of the participant-seller and adequate cleared funds in the settlement bank account of the participant-buyer, the PSE trades are automatically settled in the SCCP Central Clearing and Central Settlement (‗‗CCCS‘‘) system, in accordance with the SCCP and PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the securities is transferred from the participant-seller to the participant-buyer without the physical transfer of stock certificates covering the traded securities. If a stockholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the stockholder the legal title to the shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedures of the PDTC for the upliftment of shares lodged under the name of PCD Nominee. The transfer agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares lodged under PCD Nominee. The expenses for upliftment are for the account of the uplifting shareholder. The difference between the depository and the registry would be on the recording of ownership of the shares in the issuing corporations‘ books. In the depository set-up, shares are simply immobilized, wherein customers‘ certificates are canceled and a confirmation advice is issued in the name of PCD Nominee Corp. to confirm new balances of the shares lodged with the PDTC. Transfers among/between broker and/or custodian accounts, as the case may be, will only be made within the book-entry system of PDTC. However, as far as the issuing
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corporation is concerned, the underlying certificates are in the nominee‘s name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing company‘s transfer agents‘ books or system. Likewise, recording will already be at the beneficiary level (whether it be a client or a registered custodian holding securities for its clients), thereby removing from the broker its current ‗‗de facto‘‘ custodianship role.
AMENDED RULE ON LODGMENT OF SECURITIES On June 24, 2009, the PSE apprised all listed companies and market participants through Memorandum No. 2009-0320 that commencing on July 1, 2009, as a condition for the listing and trading of the securities of an applicant company, the applicant company shall electronically lodge its registered securities with the PDTC or any other entity duly authorized by the SEC, without any jumbo or mother certificate in compliance with the requirements of Section 43 of the Securities Regulation Code. In compliance with the foregoing requirement, actual listing and trading of securities on the scheduled listing date shall take effect only after submission by the applicant company of the documentary requirements stated in Article III Part A of the Revised Listing Rules. Further, the PSE apprised all listed companies and market participants on May 21, 2010 through Memorandum No. 2010-0246 that the Amended Rule on Lodgment of Securities under Section 16 of Article III, Part A of the Revised Listing Rules of the Exchange shall apply to all securities that are lodged with the PDTC or any other entity duly authorized by the SEC. For listing applications, the amended rule on lodgment of securities is applicable to: The offer shares/securities of the applicant company in the case of an initial public offering; The shares/securities that are lodged with the PDTC, or any other entity duly authorized by the Commission in the case of a listing by way of introduction; New securities to be offered and applied for listing by an existing listed company; and Additional listing of securities of an existing listed company. Pursuant to the said amendment, the PDTC issued an implementing procedure in support thereof to wit: For new companies to be listed at the PSE as of July 1, 2009 the usual procedure will be observed but the Transfer Agent on the companies shall no longer issue a certificate to PCD Nominee Corp but shall issue a Registry Confirmation Advice, which shall be the basis for the PDTC to credit the holdings of the Depository Participants on listing date. On the other hand, for existing listed companies, the PDTC shall wait for the advice of the Transfer Agents that it is ready to accept surrender of PCNC jumbo certificates and upon such advice the PDTC shall surrender all PCNC jumbo certificates to the Transfer Agents for cancellation. The Transfer Agents shall issue a Registry Confirmation Advice to PCNC evidencing the total number of shares registered in the name of PCNC in the Issuer‘s registry as of confirmation date.
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TAXATION The following is a general description of certain Philippine tax aspects of the investment in the Company. This discussion is based upon laws, rules and regulations, rulings, income tax conventions (treaties), administrative practices, and judicial decisions in effect at the date of this Prospectus. Subsequent legislative, judicial, or administrative changes or interpretations, which may be retroactive in nature, could affect tax consequences to the prospective investor. The tax treatment of a prospective investor may vary depending on such investor’s particular situation and certain investors may be subject to special rules not discussed below. This summary does not purport to address all tax aspects that may be applicable to an investor. This general description does not purport to be a comprehensive description of the Philippine tax aspects of the investment in shares and no information is provided regarding the tax aspects of acquiring, owning, holding, or disposing of the shares under applicable tax laws of other pertinent jurisdictions and the specific Philippine tax consequence in light of particular situations of acquiring, owning, holding, and disposing of the shares in such other jurisdictions. EACH PROSPECTIVE HOLDER SHOULD CONSULT WITH HIS/HER OWN TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF PURCHASING, OWNING AND DISPOSING OF THE COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NATIONAL TAX LAWS. The terms ―resident alien,‖ ―non-resident citizen,‖ ―non-resident alien,‖, ―domestic corporation‖ ―resident foreign corporation,‖ and ―non-resident foreign corporation‖ are used in the same manner as in the Tax Code. A ―resident alien‖ is an individual whose residence is within the Philippines and who is not a citizen thereof. A ―non-resident citizen‖ is a citizen of the Philippines who: (a) establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his/her physical presence abroad with a definite intention to reside therein; (b) leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; or (c) works and derives income from abroad and whose employment thereat requires him/her to be physically present abroad most of the time during the taxable year. A citizen of the Philippines who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall be treated as a non-resident citizen for the taxable year in which he/she arrives in the Philippines with respect to his/her income derived from sources abroad until the date of his/her arrival in the Philippines. A ―non-resident alien‖ is an individual whose residence is not within the Philippines and who is not a citizen thereof. A ―non-resident alien‖ may either be engaged or not engaged in trade or business in the Philippines. A ―non-resident alien‖ who stays in the Philippines for an aggregate period of more than 180 days during any calendar year is deemed a ―non-resident alien doing business in the Philippines.‖ A ―domestic‖ corporation is one which is created or organized in the Philippines or under its laws, while a ―foreign‖ corporation is one which is not domestic. A ―resident foreign corporation‖ refers to a foreign corporation engaged in trade or business in the Philippines, while a ―non-resident foreign corporation‖ refers to a foreign corporation not engaged in trade or business in the Philippines.
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CORPORATE INCOME TAX In general, a tax of thirty-five per cent is imposed upon the taxable net income of a domestic corporation from all sources (within and outside the Philippines). However, effective January 1, 2009, the corporate income tax rate was reduced to 30% pursuant to Republic Act 9337. Gross interest income from Philippine currency bank deposits and yield from deposit substitutes, trust fund and similar arrangements as well as royalties from sources within the Philippines are however subject to a final withholding tax of twenty per cent of the gross amount of such income. A resident foreign corporation (except certain types of corporations enumerated in the Tax Code) is subject to a tax of 30.00% of its taxable income (gross income less allowable deductions) from all sources within the Philippines except those items of income that are subject to final withholding tax, such as: (a) gross interest income from Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes, trust funds, and similar arrangements as well as royalties from sources within the Philippines that are generally taxed at the lower final withholding tax rate of 20.00% of the gross amount of such income; (b) interest income from a depository bank under the expanded foreign currency deposit system that is subject to a final tax at the rate of 7.50% of such income; and (c) net capital gains from the sale, exchange or other disposition of shares of stock in a domestic corporation not traded in the stock exchange. A minimum corporate income tax of 2.00% of the gross income as of the end of the taxable year is imposed on a domestic corporation, as well as on a resident foreign corporation (other than an international carrier, an offshore banking unit, or a regional or area headquarters or regional operating headquarters of a multinational company), beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the regular income tax for the taxable year. Any excess of the minimum corporate income tax over the ordinary corporate income tax shall be carried forward and credited against the latter for the three (3) immediately succeeding taxable years. Further, subject to certain conditions, the minimum corporate income tax may be suspended with respect to a corporation that suffers from losses on account of a prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The President of the Philippines may, upon the recommendation of the Secretary of Finance and upon occurrence of certain macroeconomic conditions, allow domestic and resident foreign corporations the option to be taxed on a gross basis at the rate of 15.00%. This authority has not been exercised to date. A final withholding tax of 30.00% is imposed, as a general rule, upon the gross income received during each taxable year of a non-resident foreign corporation from all sources within the Philippines, subject to the provisions of tax treaties between the Philippines and the country of residence of such foreign corporation. TAX ON DIVIDENDS Under current law, cash and property dividends received from a domestic corporation by individual stockholders who are either citizens or residents of the Philippines are subject to tax of ten per cent. Cash and property dividends received by domestic corporations or resident foreign corporations are not subject to tax. Cash and property dividends received from a domestic corporation by individual shareholders who are either citizens or residents of the Philippines are subject to a final withholding tax at the rate of 10.0 per cent. Cash and property dividends received by non-resident alien individuals engaged in trade or business in the Philippines are subject to a 20.0 per cent final withholding tax on the gross amount thereof, while cash and property dividends received by non-resident alien individuals not engaged in trade or business in the Philippines are subject to a final withholding tax at 25.0 per cent. of the gross amount, subject, however, to the applicable preferential tax rates under tax treaties executed between the Philippines and the country of residence or domicile of such nonresident foreign individuals.
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Cash and property dividends received from a domestic corporation by another domestic corporation or by resident foreign corporations are not subject to tax while those received by non-resident foreign corporations not engaged in trade or business in the Philippines are generally subject to tax at the rate of thirty-five per cent (35%). However, please note that effective January 1, 2009, the tax rate was reduced to 30% pursuant to Republic Act 9337.. Subject to applicable preferential tax rates under treaties in force between the Philippines and the country of domicile of such non-resident foreign corporation, cash and/or property dividends received from a domestic corporation by a non-resident corporation are subject to final withholding tax at the rate of 15 per cent; provided that the country in which the non-resident foreign corporation is domiciled (i) imposes no taxes on foreign– sourced dividends or (ii) allows a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the difference between the regular income tax on corporations and the 15 per cent tax on dividends. Philippine tax authorities have prescribed certain procedures for availment of tax treaty relief. Subject to the approval by the Philippine Bureau of Internal Revenue (―BIR‖) of the company‘s application for tax treaty relief, the company shall withhold taxes at a reduced rate on dividends to be paid to a non-resident holder, if such nonresident holder provides the company with proof of residence and, if applicable, individual or corporate status. Proof of residence for an individual consists of certification from his embassy, consulate, or other equivalent certifications issued by the proper Government authority, or any other official document proving residence. If the regular tax rate is withheld by the company instead of the reduced rates applicable under a treaty, the nonresident holder of the shares may file a claim for refund from the BIR. However, because the refund process in the Philippines requires the filing of an administrative claim and the submission of supporting information, and may also involve the filing of a judicial appeal, it may be impractical to pursue such a refund. Stock dividends distributed pro rata to any holder of shares of stock are not subject to Philippine income tax. However, the sale, exchange or disposition of shares received as stock dividends by the holder is subject to the capital gains or stock transaction tax.
SALE, EXCHANGE OR DISPOSITION OF SHARES Taxes on Capital Gains Net capital gains realised by a resident or non-resident other than a dealer in securities during each taxable year from the sale, exchange or disposition of shares of stock outside the facilities of the PSE, unless an applicable treaty exempts such gains from tax or provides for preferential rates, are subject to tax as follows: 5.0 per cent. on gains not exceeding P100,000 and 10.0 per cent. on gains over P100,000. An application for tax treaty relief must be filed (and approved) by the Philippine tax authorities in order to obtain an exemption under a tax treaty.
Taxes on Transfer of Shares Listed and Traded through the PSE A sale or other disposition of shares of stock through the facilities of the PSE by a resident or a non-resident holder, other than a dealer in securities, is subject to a stock transaction tax at the rate of 0.5 per cent. of the gross selling price or gross value in money of the shares of stock sold or otherwise disposed, unless an applicable treaty exempts such sale from said tax. This tax is required to be collected by and paid to the Government by the selling stockbroker on behalf of his client. The stock transaction tax is classified as a percentage tax in lieu of a capital gains tax. Under certain tax treaties, the exemptions from capital gains tax discussed herein may not be applicable to the stock transaction tax. In addition, VAT of 12.0 per cent. is imposed on the commission earned by the PSE-registered broker, and is generally passed on to the client.
Documentary Stamp Tax The original issue of shares is subject to documentary stamp tax of Php1.00 for each Php200.00, or a fractional part thereof, of the par value of the shares issued. The transfer of shares is subject to a documentary stamp tax of Php0.75 for each Php200.00, or a fractional part thereof of the par value of the shares transferred. However, the sale, barter or exchange of shares of stock listed and traded through the local stock exchange shall not be subject
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to documentary stamp tax for a period of five (5) years from the effectivity of Republic Act No. 9243 dated February 17, 2004. Please note that the said exemption expired on March 20, 2009. However, on June 30, 2009, President Gloria Macapal-Arroyo signed Republic Act 9648, which permanently exempts the sale, barter or exchange of shares of stock listed and traded through the local stock exchange from the documentary stamp tax and was made retroactive to March 20, 2009.
Tax on Initial Public Offering A sale or other disposition through IPO of shares of stock in closely held corporations as defined in the Tax Code is subject to a tax based on the gross selling price or gross value in money of the shares of stock sold or disposed. The tax rates applicable are graduated and dependent upon the proportion of shares of stock sold or disposed of to the total outstanding shares of stock after the listing on the PSE. These tax rates are presented below: Percentage of Stocks Sold to Outstanding Capital Stock Up to 25.00% Over 25.00% but not over 33 & 1/3% Over 33 & 1/3%
Rate Four percent (4.00%) Two percent (2.00%) One percent (1.00%)
The Tax Code defines a ―closely-held corporation‖ to mean either: (a) a corporation at least fifty percent (50.00%) in value of the outstanding capital stock; or (b) a corporation at least fifty percent (50.00%) of the total combined voting power of all classes of stock entitled to vote, is owned directly or indirectly by or for not more than 20 individuals, to be determined based on certain rules. The person liable for the payment of the tax is either the issuing corporation in a primary offering or the selling stockholder in a secondary offering. ESTATE AND GIFT TAXES The transfer of shares of stock upon the death of an individual holder to his heirs by way of succession, whether such holder was a citizen of the Philippines or an alien, regardless of residence, is subject to Philippine taxes at progressive rates ranging from 5.0 per cent. to 20.0 per cent., if the net estate is over P200,000. Individual and corporate holders, whether or not citizens or residents of the Philippines, who transfer shares of stock by way of gift or donation are liable to pay Philippine donors‘ tax on such transfer of shares ranging from 2.0 per cent. to 15.0 per cent. of the net gifts during the year exceeding ₱100,000. The rate of tax with respect to net gifts made to a stranger (i.e. one who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of relationship) is a flat rate of 30.0 per cent. Estate and donors‘ taxes, however, shall not be collected in respect of intangible personal property, such as shares of stock: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.
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FINANCIAL INFORMATION 1.
AUDITED YEARS ENDED
FINANCIAL STATEMENTS OF THE DECEMBER 31, 2009 AND 2008
COMPANY
FOR
THE
2.
AUDITED YEARS ENDED
FINANCIAL STATEMENTS OF THE DECEMBER 31, 2007 AND 2008
COMPANY
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THE
3.
FINANCIAL STATEMENTS OF THE DECEMBER 31, 2006 AND 2006
COMPANY
FOR
THE
4. REVIEWED FINANCIAL STATEMENTS OF THE COMPANY FIRST SIX MONTHS ENDED JUNE 30, 2009 AND 2010
FOR
THE
AUDITED YEARS ENDED
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