IMPORTANT NOTICE You must read the

Transcription

IMPORTANT NOTICE
You must read the following disclaimer before continuing. The following disclaimer applies to the
document following this page and you are therefore advised to read this disclaimer carefully before
accessing, reading or making any other use of the attached document. In accessing the attached
document, you agree to be bound by the following terms and conditions, including any modifications
to them from time to time, each time you receive any information from SSI Group, Inc. (the
“Company”) as a result of such access.
You acknowledge that the attached document and the information contained therein are strictly
confidential and intended for you only. You are not authorized to and you may not forward or deliver
the attached document, electronically or otherwise, to any other person or reproduce such document
in any manner whatsoever, nor may you disclose the information contained in the attached document
to any third-party or use it for any other purpose. Any forwarding, distribution, publication or
reproduction of the attached document in whole or in part or disclosure of any information
contained therein or any use of such information for any other purpose is unauthorized. Failure
to comply with this directive may result in a violation of the securities laws of applicable jurisdictions.
Nothing in this electronic transmission constitutes an offer to sell or a solicitation of an offer to buy
any securities in any jurisdiction where it is unlawful to do so, and access has been limited so that it
shall not constitute directed selling efforts (as defined in Regulation S under the U.S. Securities Act
of 1933, as amended (the “Securities Act”)) in the United States or elsewhere. The securities referred
to in the attached document have not been and will not be registered under the Securities Act or under
any securities laws of any state or other jurisdiction of the United States and may not be offered, sold,
resold, transferred or delivered, directly or indirectly, within the United States except pursuant to an
applicable exemption from the registration requirements of the Securities Act and in compliance with
any applicable securities laws of any state or other jurisdiction of the United States.
CONFIRMATION OF YOUR REPRESENTATION: IN ORDER TO BE ELIGIBLE TO VIEW THE
ATTACHED DOCUMENT, INVESTORS MUST COMPLY WITH THE FOLLOWING PROVISIONS.
YOU HAVE BEEN SENT THE ATTACHED DOCUMENT ON THE BASIS THAT YOU HAVE
CONFIRMED THAT YOU AND THE PERSON, IF ANY, FOR WHOSE ACCOUNT YOU ARE
ACTING, ARE LOCATED OUTSIDE OF THE UNITED STATES (WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT) AND, TO THE EXTENT YOU PURCHASE THE
SECURITIES DESCRIBED IN THE ATTACHED DOCUMENT, YOU WILL BE DOING SO
PURSUANT TO REGULATION S UNDER THE SECURITIES ACT; AND CONSENT TO DELIVERY
BY ELECTRONIC TRANSMISSION.
If you have gained access to this transmission contrary to the foregoing restrictions, you will be unable
to purchase any of the securities described therein.
This document has been made available to you in electronic form. You are reminded that documents
transmitted via this medium may be altered or changed during the process of transmission and
consequently neither SSI Group, Inc. nor any of its affiliates, directors, officers, employees, agents,
representatives or advisors accepts any liability or responsibility whatsoever in respect of any
difference between the document distributed to you in electronic format and the hard copy version.
You are reminded that the attached document has been delivered to you on the basis that you are a
person into whose possession this document may be lawfully delivered in accordance with the laws
of the jurisdiction in which you are located and you may not, nor are you authorized to, deliver this
document, electronically or otherwise, to any other person.
You are responsible for protecting against viruses and other destructive items. Your receipt of this
electronic transmission is at your own risk and it is your responsibility to take precautions to ensure
that it is free from viruses and other items of a destructive nature.
SSI GROUP, INC.
(Incorporated with limited liability in the Republic of the Philippines)
Primary Offer and Secondary Offer of 864,225,503 Comm on Shares
With an Over-allotment Option of up to 129,633,826 Comm on Shares
Offer Price of =
P 7.50 per Share
To be listed and traded on the Main Board of The Philippine Stock Exchange, Inc.
Joint Global Coordinators and Bookrunners
(in alphabetical order)
International Lead Managers and Underwriters
(in alphabetical order)
Sole Domestic Lead Manager and Underwriter
The date of this Prospectus is October 23, 2014.
THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND
SHOULD BE REPORTED IMMEDIATELY TO THE PHILIPPINE SECURITIES AND
EXCHANGE COMMISSION.
SSI Group, Inc.
6/F Midland Buendia Building
403 Senator Gil Puyat Avenue
Makati City 1200
Philippines
+632 890-8034
www.ssigroup.com.ph
This Prospectus relates to the offer and sale of 864,225,503 common shares (the “Firm Offer,” and
such shares, the “Firm Shares”), with par value of =
P 1.00 per share (the “Shares”), of SSI Group, Inc.,
a corporation organized under Philippine law (the “Company”). The Firm Shares will comprise (i)
695,701,530 new common shares to be issued and offered by the Company on a primary basis (the
“Primary Offer” and such common shares, the “Primary Offer Shares”) as further described below and
(ii) 168,523,973 existing common shares offered by the Selling Shareholders (as defined herein)
pursuant to a secondary offer (the “Secondary Offer” and such common shares, the “Secondary Offer
Shares”). The Firm Shares will be offered at a price of =
P 7.50 per Firm Share (the “Offer Price”). The
determination of the Offer Price is further discussed on page 61 of this Prospectus and is based on a
book-building process and discussions between the Company, BPI Capital Corporation, Credit Suisse
(Singapore) Limited and The Hongkong and Shanghai Banking Corporation Limited, Singapore
Branch (the “Joint Global Coordinators and Bookrunners”). A total of 3,312,864,430 Shares will be
outstanding after the Firm Offer. The Firm Shares will represent approximately 26.1% of the issued
and outstanding capital stock of the Company after completion of the Offer (as defined below).
Certain Selling Shareholders have granted Credit Suisse (Singapore) Limited or its relevant affiliate,
in its role as stabilizing agent (the “Stabilizing Agent”), an option exercisable in whole or in part from
and including the date of listing and when trading of the Shares commences on The Philippine Stock
Exchange, Inc. (“PSE”) (the “Listing Date”) and ending on the date 30 calendar days from and
including the Listing Date to purchase up to an additional 129,633,826 Shares at the Offer Price (the
“Optional Shares”), on the same terms and conditions as the Firm Shares as set forth in this
Prospectus, solely to cover over-allotments, if any (the “Over-allotment Option”). The Over-allotment
Option, to the extent not fully exercised by the Stabilizing Agent, shall be deemed cancelled and the
relevant Optional Shares shall be re-delivered to the relevant Selling Shareholders. The Firm Shares
and the Optional Shares are referred to as the “Offer Shares,” and the offer of the Offer Shares is
referred to as the “Offer.” See “Plan of Distribution” on page 186 of this Prospectus. The Offer Shares
will be listed and traded on the Main Board of the PSE.
Pursuant to its articles of incorporation as amended on August 29, 2014, the Company has an
authorized capital stock of =
P 5,000,000,000 divided into 5,000,000,000 Shares with a par value of
=
P 1.00 per Share, of which 2,617,162,900 Shares are outstanding as of the date of this Prospectus. The
Offer Shares are Shares of the Company.
The total proceeds to be raised by the Company from the sale of the Primary Offer Shares will be
approximately =
P 5,217.8 million. The net proceeds to be raised by the Company from the sale of the
Primary Offer Shares (after deduction of estimated fees and expenses of approximately =
P 422.0
million) will be approximately =
P 4,795.8 million. The Company intends to use the net proceeds from
the Primary Offer to fund capital expenditures in connection with our businesses. For a more detailed
discussion of the Company’s proposed use of proceeds, see “Use of Proceeds” on page 55 of this
Prospectus. The Selling Shareholders will receive net proceeds of approximately =
P 2,092.9 million
from the sale of the Secondary Offer Shares and the Optional Shares, assuming full exercise of the
Over-allotment Option (after deducting fees and expenses payable by the Selling Shareholders), while
the Company will not receive any of such proceeds.
i
The Joint Global Coordinators and Bookrunners will receive a transaction fee from the Company
based on a percentage of the gross proceeds from the sale of the Offer Shares. This is inclusive of the
amounts to be paid to other participating underwriters and selling agents, where applicable. Any Firm
Shares left unsubscribed after the Offer Period will be underwritten by the Joint Global Coordinators
and Bookrunners. For a more detailed discussion, see “Plan of Distribution” on page 186 of this
Prospectus.
At least 604,957,903 Firm Shares (or 70% of the Firm Shares) (the “Institutional Offer Shares”) are
being offered and sold (i) outside the Philippines and the United States by the International Lead
Managers and Underwriters in offshore transactions in reliance on Regulation S (“Regulation S”)
under the United States Securities Act of 1933, as amended (the “US Securities Act”) and (ii) to
domestic qualified institutional buyers (the “Domestic QIBs”) in the Philippines by the Sole Domestic
Lead Manager and Underwriter (the “Institutional Offer”).
259,267,600 Firm Shares (or 30% of the Firm Shares) (the “Trading Participants and Retail Offer
Shares”) are being offered in the Philippines to all of the trading participants of the PSE (the “PSE
Trading Participants”) and to local small investors (the “LSIs”) under the Local Small Investors
Program in the Philippines (the “Trading Participants and Retail Offer”). The amount of Offer Shares
to be made available to the PSE Trading Participants and LSIs will be up to 172,845,100 and
86,422,500 Firm Shares, or 20% and 10%, respectively, of the Firm Shares.
The allocation of the Firm Shares between the Trading Participants and Retail Offer and the
Institutional Offer is subject to adjustment as may be agreed between the Joint Global Coordinators
and Bookrunners. In the event of an under-application in the Institutional Offer and a corresponding
over-application in the Trading Participants and Retail Offer, Firm Shares in the Institutional Offer
may be reallocated to the Trading Participants and Retail Offer. If there is an under-application in the
Trading Participants and Retail Offer and if there is a corresponding over-application in the
Institutional Offer, Firm Shares in the Trading Participants and Retail Offer may be reallocated to the
Institutional Offer. The reallocation shall not apply in the event of over-application or
under-application in both the Trading Participants and Retail Offer and the Institutional Offer.
Each holder of Shares will be entitled to such dividends as may be declared by the Company’s Board
of Directors (the “Board”), provided that any stock dividend declaration requires the approval of
shareholders holding at least two-thirds of the Company’s total outstanding capital stock. The
Company and its subsidiaries have not established a specific dividend policy. The Corporation Code
of the Philippines, Batas Pambansa Bilang. 68 (the “Philippine Corporation Code”), has defined
“outstanding capital stock” as the total shares of stock issued, whether paid in full or not, except
treasury shares. There can be no guarantee that the Company will pay any dividends in the future.
Please see a more detailed discussion of the Company’s dividend policy under “Dividends and
Dividend Policy” on page 59 of this Prospectus.
All of the Shares issued and to be issued pursuant to the Offer have, or will have, identical rights and
privileges. The Shares may be owned by any person or entity regardless of citizenship or nationality,
subject to the nationality limits under Philippine law. The Philippine Constitution and related statutes
set forth restrictions on foreign ownership of companies engaged in certain activities. For more
information relating to restrictions on the ownership of the Shares, please see sections entitled “Risk
Factors” beginning on page 33 of the Prospectus and “Regulatory and Environmental Matters”
beginning on page 145 of the Prospectus.
The listing of the Offer Shares is subject to the approval of the PSE. An application to list the Offer
Shares as well as the rest of the Shares was approved on October 8, 2014 by the board of directors
of the PSE, subject to fulfillment of certain listing conditions. Such an approval for listing is
permissive only and does not constitute a recommendation or endorsement by the PSE or the
Philippine Securities and Exchange Commission (the “Philippine SEC”) of the Shares.
ii
Before making an investment decision, prospective investors should carefully consider the risks
associated with an investment in the Shares. These risks include:
•
risks relating to our business;
•
risks relating to our organization and structure;
•
risks relating to the Philippines;
•
risks relating to the Offer Shares; and
•
risks relating to the presentation of information in this Prospectus.
See the section entitled “Risk Factors” in this Prospectus, which, while not intended to be an
exhaustive enumeration of all risks, must be considered in connection with a purchase of the Offer
Shares.
ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL INFORMATION
CONTAINED HEREIN ARE TRUE AND CURRENT.
The Offer Shares are offered subject to the receipt and acceptance of any order by the Company and
subject to the Company’s right to reject any order in whole or in part. It is expected that the Offer
Shares will be delivered in book-entry form against payment thereof to the Philippine Depository and
Trust Corporation (the “PDTC”) on or about November 5, 2014.
By:
(original signed)
ZENAIDA R. TANTOCO
Chairperson and Chief Executive Officer
iii
No representation or warranty, express or implied, is made by the Company or the Joint Global
Coordinators and Bookrunners, regarding the legality of an investment in the Offer Shares under any
legal, investment or similar laws or regulations. The contents of this Prospectus are not investment,
legal or tax advice. Prospective investors should consult their own counsel, accountant and other
advisors as to legal, tax, business, financial and related aspects of a purchase of the Offer Shares. In
making any investment decision regarding the Offer Shares, prospective investors must rely on their
own examination of the Company and the terms of the Offer, including the merits and risks involved.
Any reproduction or distribution of this Prospectus, in whole or in part, and any disclosure of its
contents or use of any information herein for any purpose other than considering an investment in the
Offer Shares is prohibited.
THE OFFER SHARES ARE BEING OFFERED ON THE BASIS OF THIS PROSPECTUS ONLY.
ANY DECISION TO PURCHASE THE OFFER SHARES MUST BE BASED ONLY ON THE
INFORMATION CONTAINED HEREIN.
The Offer Shares have not been and will not be registered under the US Securities Act and are
not being offered or sold in the United States. The Offer Shares may be subject to certain transfer
restrictions as described herein.
No person has been authorized to give any information or to make any representations other than
those contained in this Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Joint Global Coordinators and
Bookrunners. This Prospectus does not constitute an offer to sell or the solicitation of an offer to
purchase any securities other than the Offer Shares or an offer to sell or the solicitation of an offer
to purchase such securities by any person in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale of the Offer Shares offered hereby shall,
under any circumstances, create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is correct as of any time
subsequent to the date hereof.
The operating information used throughout this Prospectus has been calculated by the Company
on the basis of certain assumptions made by it. As a result, this operating information may not be
comparable to similar operating information reported by other companies.
The distribution of this Prospectus and the offer and sale of the Offer Shares in certain
jurisdictions may be restricted by law. The Company and the Joint Global Coordinators and
Bookrunners require persons into whose possession this Prospectus comes to inform them about, and
to observe, any such restrictions. This Prospectus does not constitute an offer of, or an invitation to
purchase, any of the Offer Shares in any jurisdiction in which such offer or invitation would be
unlawful. Each prospective purchaser of the Offer Shares must comply with all applicable laws and
regulations in force in any jurisdiction in which it purchases, offers, sells or resells the Offer Shares,
or possesses and distributes this Prospectus and must obtain any consents, approvals or permissions
required for the purchase, offer, sale or resale by it of the Offer Shares under the laws, rules and
regulations in force in any jurisdiction to which it is subject or in which it makes such purchases,
offers, sales or resales, and none of the Company and the Joint Global Coordinators and Bookrunners
shall have any responsibility therefor.
In connection with the Offer, the Stabilizing Agent or any person acting on its behalf may
over-allot Offer Shares or effect transactions with a view to supporting the market price of the Offer
Shares at a level higher than that which might otherwise prevail for a limited period after the Listing
Date. However, there is no assurance that the Stabilizing Agent (or any person acting on behalf of the
Stabilizing Agent) will undertake stabilization activities. Any stabilization activities may begin on or
after the Listing Date and, if begun, may be ended at any time, but must end no later than 30 calendar
iv
days from and including the Listing Date. Any stabilization activities shall be done in compliance with
all applicable laws, regulations and rules. The total number of Offer Shares which the Stabilizing
Agent or any agent of it may buy to undertake any stabilizing activities shall not exceed 15% of the
aggregate number of the Firm Shares.
The Company reserves the right to withdraw the offer and sale of Offer Shares at any time, and
the Joint Global Coordinators and Bookrunners reserve the right to reject any commitment to
subscribe for the Offer Shares in whole or in part and to allot to any prospective purchaser less than
the full amount of the Offer Shares sought by such purchaser. If the Offer is withdrawn or
discontinued, the Company shall subsequently notify the Philippine SEC and the PSE. The Joint
Global Coordinators and Bookrunners and certain related entities may acquire for their own account
a portion of the Offer Shares.
Each offeree of the Offer Shares, by accepting delivery of this Prospectus, agrees to the
foregoing.
CONVENTIONS WHICH APPLY TO THIS PROSPECTUS
In this Prospectus, unless otherwise specified or the context otherwise requires, all references to
the “Company” are to SSI Group, Inc., and where the context otherwise requires, all of its
consolidated subsidiaries. All references to the “Group”, “we”, “us” and “our” are to the Company, its
consolidated subsidiaries, its joint ventures and an associate. All references to the “Philippines” are
references to the Republic of the Philippines. All references to the “Government” or the “National
Government” are to the national government of the Philippines. All references to the “BSP” are
references to Bangko Sentral ng Pilipinas, the central bank of the Philippines. All references to
“United States” or “US” are to the United States of America. All references to “Philippine peso,”
“Pesos” and “ =
P ” are to the lawful currency of the Philippines, all references to “US dollars” and
“US$” are to the lawful currency of the United States, and all references to “Euro” and “ =C ” are to the
lawful currency of the European Union. The Company publishes its financial statements in Pesos.
This Prospectus contains translations of certain Peso amounts into US dollar amounts at
specified rates solely for the convenience of the reader. These translations should not be construed as
representations that the Peso amounts represent such US dollar amounts or could be, or could have
been, converted into US dollars at the rates indicated or at all. Unless otherwise indicated, all
translations from Pesos to US dollars have been made at a rate of =
P 43.78 = US$1.00, the average rate
for the purchase of US dollars for Pesos which is quoted by the Philippine Dealing System on June
30, 2014. See “Exchange Rates” for further information regarding the rates of exchange between the
Peso and the US dollar.
The items expressed in the Glossary of Terms may be defined otherwise by appropriate
government agencies or regulations from time to time, or by conventional or industry usage.
BASIS FOR CERTAIN MARKET DATA
Certain statistical information and forecasts in this Prospectus relating to the Philippines and
other data used in this Prospectus were obtained or derived from internal surveys, market research,
governmental data, publicly available information and/or industry publications. Industry publications
generally state that the information they contain has been obtained from sources believed to be
reliable. This Prospectus also contains industry information which was prepared from available public
sources and independent market research conducted by Euromonitor to provide an overview of the
retail industries in which the Company’s businesses operate. However, there is no assurance that such
information is accurate or complete. Similarly, internal surveys, industry forecasts, market research,
governmental data, publicly available information and/or industry publications have not been
independently verified by the Company or the Joint Global Coordinators and Bookrunners and may not
be accurate, complete, up-to-date, balanced or consistent with other information compiled within or
outside the Philippines.
v
PRESENTATION OF FINANCIAL INFORMATION
The Company’s financial statements are reported in Pesos and are prepared based on its
accounting policies, which are in accordance with the Philippine Financial Reporting Standards
(“PFRS”) issued by the Financial Reporting Standards Council of the Philippines. PFRS include
statements named PFRS, Philippine Accounting Standards, and Philippine Interpretations of
International Financial Reporting Interpretations Committee interpretations issued by the Financial
Reporting Standards Council.
The Company’s fiscal year begins on January 1 and ends on December 31 of each year. SyCip
Gorres Velayo & Co. (“SGV & Co.”), a member firm of Ernst & Young Global Limited, has audited
the Company’s restated audited historical financial statements as of and for the years ended December
31, 2011, 2012 and 2013 and reviewed historical financial statements as of June 30, 2014 and for the
six months ended June 30, 2013 and 2014, which are included in this Prospectus. The latest audited
financial statements of the Company’s subsidiaries have been submitted to the Philippine SEC
together with the registration statement filed with respect to the Offer Shares.
Figures in this Prospectus have been subject to rounding adjustments. Accordingly, figures
shown in the same item of information may vary and figures which are totals may not be an arithmetic
aggregate of their components.
vi
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that are, by their nature, subject to
significant risks and uncertainties. These forward-looking statements include, without limitation,
statements relating to:
•
known and unknown risks;
•
uncertainties and other factors that may cause our actual results, performance or
achievements to be materially different from any future results; and
•
performance or achievements expressed or implied by forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding our present and
future business strategies and the environment in which we will operate in the future. Important
factors that could cause some or all of the assumptions not to occur or cause actual results,
performance or achievements to differ materially from those in the forward-looking statements
include, among other things:
•
our ability to maintain our relationships with brand principals;
•
our ability to identify and acquire brands suitable for the Philippine market;
•
our ability to successfully implement our current and future strategies;
•
our ability to anticipate and respond to local and regional market trends;
•
our ability to successfully manage our growth;
•
our ability to begin construction of and roll out our stores without delays due to regulatory
or other causes;
•
our ability to successfully manage our future business, financial condition, results of
operations and cash flow;
•
the condition of, and changes in, the Asian or global economies;
•
general political, social and economic conditions in the Philippines;
•
our ability to secure additional financing on competitive terms;
•
changes in interest rates, inflation rates and the value of the Peso against the US dollar and
other currencies;
•
changes in laws, rules and regulations, including tax laws and licensing requirements, in the
Philippines; and
•
competition in the Philippine lifestyle, fashion and retail industries.
Additional factors that could cause our actual results, performance or achievements to differ
materially from forward-looking statements include, but are not limited to, those disclosed under
“Risk Factors” and elsewhere in this Prospectus. These forward-looking statements speak only as of
the date of this Prospectus. The Company and the Joint Global Coordinators and Bookrunners
expressly disclaim any obligation or undertaking to release, publicly or otherwise, any updates or
revisions to any forward-looking statement contained herein to reflect any change in our expectations
with regard thereto or any change in events, conditions, assumptions or circumstances on which any
statement is based.
vii
This Prospectus includes statements regarding our expectations and projections for future
operating performance and business prospects. The words “believe”, “may”, “will”, “continue”,
“plan”, “expect”, “anticipate”, “estimate”, “project”, “intend” and similar words identify
forward-looking statements. In addition, all statements other than statements of historical facts
included in this Prospectus are forward-looking statements. Statements in the Prospectus as to the
opinions, beliefs and intentions of our Group accurately reflect in all material respects the opinions,
beliefs and intentions of its management as to such matters as of the date of this Prospectus, although
we give no assurance that such opinions or beliefs will prove to be correct or that such intentions will
not change. Our actual results could differ substantially from those anticipated in the Group’s
forward-looking statements. This Prospectus discloses, under the section “Risk Factors” and
elsewhere, important factors that could cause actual results to differ materially from our expectations.
All subsequent written and oral forward-looking statements attributable to the Group or persons acting
on behalf of the Group are expressly qualified in their entirety by the above cautionary statements.
viii
TABLE OF CONTENTS
GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
SUMMARY OF THE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION . . . . . . . . . .
28
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
EXCHANGE RATES
.......................................................
58
DIVIDENDS AND DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
DETERMINATION OF THE OFFER PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION . . . . . . . . . .
64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
REGULATORY AND ENVIRONMENTAL MATTERS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
BOARD OF DIRECTORS AND SENIOR MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
PRINCIPAL AND SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
DESCRIPTION OF THE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
THE PHILIPPINE STOCK MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
PHILIPPINE FOREIGN EXCHANGE CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
PHILIPPINE TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
ix
GLOSSARY OF TERMS
In this Prospectus, unless the context otherwise requires, the following terms shall have the
meanings set out below.
Affiliate .................................................. A corporation that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under
the common control of, another corporation.
apparel and footwear .............................. According to Euromonitor, the aggregation of clothing and
footwear including sales through both store-based
retailers and non-store retailers. This excludes black
market sales (i.e. untaxed, generated within informal
retailing) and duty free sales (travel retail). Items must be
new when sold to the consumer; second-hand/used items
are excluded. Antique and/or vintage clothing and
footwear is also excluded.
apparel and footwear specialty retailer .... According to Euromonitor, an apparel and footwear
specialty retailer refers to a retailer specializing in the sale
of all types of clothing, footwear, bags, accessories (such
as costume jewelry, belts, hats and caps), hosiery or a
combination of these. This includes retailers that carry a
combination of all products for men, women or children
and those that cater to a specific gender, age group or
product. This category excludes retailers of sports goods
and equipment.
Applicant ................................................ A person, whether natural or juridical, who seeks to
subscribe for the Offer Shares.
Application ............................................. An application to subscribe for Offer Shares pursuant to
the Offer.
Ayala Land ............................................. Ayala Land, Inc., a public company incorporated in the
Philippines with its shares listed on the PSE.
beauty and personal care......................... According to Euromonitor, the aggregation of bath and
shower, deodorants, hair care, color cosmetics, men’s
grooming, oral hygiene, fragrances, skin care,
depilatories, sun care and sets/kits, and baby- and
child-specific products. Black market sales and travel
retail are excluded.
BIR ........................................................ Philippine Bureau of Internal Revenue.
Board...................................................... The board of directors of the Company.
BPO........................................................ Business process outsourcing.
brand agreements .................................... For the purposes of this Prospectus, brand agreements
refer to the franchise, distribution and license agreements
entered into between members of our Group and various
brand principals for the rights to operate their respective
brands in the Philippines.
1
brand principal ....................................... For the purposes of this Prospectus, brand principal means
the management group of a brand with whom we have
entered into a brand agreement.
bridge ..................................................... For the purposes of this Prospectus, generally affordable
luxury brands that specifically target younger customers.
Please refer to “Business — Business Operations —
Specialty Retail Stores — Brands”.
broad market........................................... For the purposes of this Prospectus, the market segment
that generally targets both mass market and mid-to-upper
aspirational consumers.
BSP ........................................................ Bangko Sentral ng Pilipinas, the central bank of the
Philippines.
CAGR..................................................... Compound annual growth rate.
casual ..................................................... For the purposes of this Prospectus, generally brands that
design informal clothing emphasizing comfort. Please
refer to “Business — Business Operations — Specialty
Retail Stores — Brands”.
catchment area ........................................ The area and population from which a city or individual
service attracts visitors or customers.
the “Company” ....................................... SSI Group, Inc., a corporation organized under the laws of
the Philippines, and, where the context otherwise requires,
all of its consolidated subsidiaries, or where the context
refers to the time before it became the holding company of
its present subsidiaries.
concessionaire......................................... Generally a person or a firm that operates a business
within the premises belonging to another (the grantor)
under a concession, usually as the only seller of certain
goods or services. Please refer to “Business —
Department Store — Concessionaire Sales”.
convenience store ................................... According to Euromonitor, chained grocery retail outlets
selling a wide range of groceries and fitting several of the
following characteristics: extended opening hours; selling
area of less than 400 sq.m.; and handling two or more of
the following product categories: audio-visual goods (for
sale or rent), take-away food (ready-made sandwiches,
rolls or hot food), newspapers or magazines, cut flowers or
pot plants, or greetings cards.
Cornerstone Investors ............................. The entities listed under the “Plan of Distribution” section
which have entered into cornerstone investment
agreements with the Company, the Selling Shareholders
and the Joint Global Coordinators and Bookrunners.
Cornerstone Shares ................................. The Shares allocated to the Cornerstone Investors,
representing approximately 38.8% of the Offer Shares
(excluding any Optional Shares) and forming part of the
Institutional Offer.
2
department store ..................................... According to Euromonitor, an outlet selling mainly
non-grocery merchandise and at least five lines in
different departments, usually with a sales area of over
2,500 sq.m.
Domestic Receiving Agent ...................... BPI Capital Corporation.
Domestic Underwriting Agreement .......... The underwriting agreement dated October 23, 2014
between the Company, the Selling Shareholders and the
Sole Domestic Lead Manager and Underwriter.
EBITDA ................................................. Earnings before
Amortization.
Interest,
Taxes,
Depreciation
and
Euromonitor............................................ Euromonitor International Limited.
FamilyMart ............................................. Trademark owned by FM and licensed to SIAL CVS under
an Area Franchise Agreement entered into by FM and
PFM.
fast fashion ............................................. For the purposes of this Prospectus, brands carrying
affordable names and collections which are the result of
runway designs and which aim to move into stores in the
fastest possible way to respond to the latest trends. Please
First Closing Date................................... Delivery of the Primary Offer Shares, which is expected to
occur in Manila on or about November 7, 2014 or such
other date as the Joint Global Coordinators and
Bookrunners and the Company shall agree in writing.
FM ......................................................... Family Mart Co., Ltd., a corporation duly organized and
existing under the laws of Japan.
Foods, Drugs, and Devices and
Cosmetics Act ......................................... The Foods, Drugs, and Devices and Cosmetics Act of the
Philippines, Republic Act No. 3720.
footwear, accessories and luggage ........... For the purposes of this Prospectus, brands that generally
only focus on collections of shoes, accessories and
luggage. Please refer to “Business — Business Operations
— Specialty Retail Stores — Brands”.
GDP ....................................................... Gross domestic product, or the monetary value of all the
finished goods and services produced within a country’s
borders, calculated on an annual basis.
Government ............................................ The government of the Republic of the Philippines.
gross selling space .................................. The area of the store where items are displayed, including
the backroom and stockroom.
gross selling space growth ...................... The comparisons of gross selling space between two
corresponding periods.
3
“the Group”, “our”, “we” and “us” ......... The Company, its consolidated subsidiaries, its joint
ventures and an associate.
home ...................................................... For the purposes of this Prospectus, brands that generally
cater to the home and decor furnishings, furniture, and
interior design items. Please refer to “Business —
Business Operations — Specialty Retail Stores —
Brands”.
Institutional Offer ................................... The offer for sale of the Institutional Offer Shares outside
the United States in offshore transactions in reliance on
Regulation S under the United States Securities Act of
1933, as amended and to the domestic qualified
institutional buyers in the Philippines by the Sole
Domestic Lead Manager and Underwriter.
Institutional Offer Shares ........................ At least 604,957,903 Firm Shares, or 70% of the Firm
Shares, being offered for sale pursuant to the Institutional
Offer.
Institutional Offer Settlement Date.......... The date on which final allocation of the Institutional
Offer Shares is to be made, expected to be on or about
November 7, 2014.
International Lead Managers and
Underwriters ........................................... Credit Suisse (Singapore) Limited and The Hongkong and
Shanghai Banking Corporation Limited, Singapore
Branch.
International Underwriting Agreement..... The underwriting agreement dated October 23, 2014
between the Company, the Selling Shareholders and the
International Lead Managers and Underwriters.
jumbo certificate ..................................... A certificate covering all the securities lodged with the
PDTC and issued in the name of the PCD Nominee.
Listing Date............................................ The date on which trading of the Shares on the PSE
begins, expected to be on or about November 7, 2014.
LSIs........................................................ Local small investors.
luxury ..................................................... For the purposes of this Prospectus, exclusive, prestigious
brands which cater to the high-end luxury market. Please
Metro Cebu............................................. The metropolitan area comprising the city of Cebu, the
cities of Carcar, Danao, Lapu-Lapu, Mandaue, Naga and
Talisay and the municipalities of Compostela,
Consolacion, Cordoba, Liloan, Minglanilla and San
Fernando.
Metro Manila .......................................... The metropolitan area comprising the city of Manila, the
cities of Caloocan, Las Piñas, Navotas, Makati, Malabon,
Mandaluyong, Marikina, Muntinlupa, Parañaque, Pasay,
Pasig, Quezon City, San Juan, Taguig and Valenzuela and
the municipality of Pateros.
4
net sales ................................................. Gross sales net of VAT, less sales returns and allowances
and sales discounts.
Offer....................................................... The offer and sale of the Offer Shares on, and subject to,
the terms and conditions stated herein.
Offer Price.............................................. =
P 7.50 per Offer Share.
Offer Shares ........................................... The Firm Shares and the Optional Shares.
OFW....................................................... Overseas Filipino workers.
Optional Shares ...................................... Up to 129,633,826 Shares to be sold by certain Selling
Shareholders and purchased by the Stabilizing Agent upon
exercise of the Over-allotment Option.
Over-allotment Option ............................ An option granted by the Selling Shareholders to the
Stabilizing Agent, exercisable within 30 days from and
including the Listing Date, to purchase Optional Shares.
PCD........................................................ Philippine Central Depository.
PCD Nominee ......................................... PCD Nominee Corporation, a corporation wholly owned
by the PDTC.
PDS ........................................................ The Philippine Dealing System.
PDS Rate ................................................ The average rate on any particular date for the purchase of
US dollars for Pesos, which is quoted by the PDS.
PDTC ..................................................... The Philippine Depository and Trust Corporation.
Permit to Sell ......................................... The permit issued by the Philippine SEC granting the
effectiveness of the registration statement filed in relation
to the Offer Shares.
Pesos or =
P ............................................. The lawful currency of the Philippines.
PFM ....................................................... Philippine FamilyMart CVS, Inc., a joint venture
organized under the laws of the Philippines and owned as
to 60% by SIAL CVS, 37% by FM and 3% by Itochu
Corporation.
PFRS ...................................................... Philippine Financial Reporting Standards.
Philippines .............................................. Republic of the Philippines.
Philippine Corporation Code ................... Batas Pambansa Bilang 68 otherwise known as The
Corporation Code of the Philippines.
5
Philippine National ................................. As defined under the Foreign Investment Act, means a
citizen of the Philippines, or a domestic partnership or
association wholly-owned by citizens of the Philippines,
or a corporation organized under the laws of the
Philippines of which at least 60% of the capital stock
outstanding and the entitlement to vote is owned and held
by citizens of the Philippines, or a corporation organized
abroad and registered to do business in the Philippines
under the Philippine Corporation Code, of which 100% of
the capital stock outstanding and the entitlement to vote is
wholly-owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at
least 60% of the fund will accrue to the benefit of
Philippine nationals.
Philippine SEC ....................................... The Philippine Securities and Exchange Commission.
POS ........................................................ Point of sale.
Primary Offer ......................................... The offer and sale of the Primary Offer Shares.
Primary Offer Shares .............................. 695,701,530 new Shares to be issued and offered by the
Company pursuant to the Offer.
PSE ........................................................ The Philippine Stock Exchange, Inc.
PSE Main Board ..................................... The main board of the PSE that enables companies that
meet higher profit or other financial standards
requirements to raise funds in the market. Generally, to be
listed on the PSE Main Board, a company must have a
minimum authorized capital stock of =
P 500 million, of
which a minimum of twenty-five percent (25%) must be
subscribed and fully paid, and show, among others:
(i)
a track record of profitable operations for three full
fiscal years prior to the filing of the listing
application;
(ii)
positive shareholders’ equity in the fiscal year
immediately preceding the filing of the listing
application;
(iii) a market capitalization of at least =
P 500 million at
listing; and
(iv) operating history of at least three years prior to the
filing of the listing application.
PSE Trading Participants ........................ Duly licensed securities
participants of the PSE.
6
brokers
who
are
trading
“pull” merchandising .............................. a merchandising model where the product types and
moment of supply is driven by demand of the retailer and
the merchandise is “pulled” into the stores based on the
retailer’s instruction to suppliers, taking into account the
retailer’s observations and expectations of consumer
demand.
“push” merchandising ............................. a merchandising model where the product types and
moment of supply is decided by the supplier, and the
merchandise is “pushed” onto the market to retail stores
by the supplier.
Regulation S ........................................... Regulation S under the US Securities Act.
retailing .................................................. According to Euromonitor, retailing refers to sales of new
and used goods to the general public for personal or
household consumption. Excludes specialist retailers of
motor vehicles, motorcycles, vehicle parts and fuel. Also
excludes food service, rental and hire and wholesale
industries. Retailing is the aggregation of store-based
retailing and non-store-based retailing.
Rustan’s Group ....................................... The Rustan’s group of companies founded by Bienvenido
and Gliceria Tantoco, primarily comprising of Rustan
Commercial Corporation, a high-end Philippine retailer
and department store company, and our Group.
same store sales growth .......................... The comparisons of net sales between two periods
generated by the relevant stores. The stores that are
included in comparisons are those that have been in
operation during the entirety of the two periods of
comparison. The comparison for each store takes into
account net sales by that store during the same period it
was in operation in both the reporting period and the
period of comparison. The net sales of all the relevant
stores in the relevant period are then aggregated and
compared.
Secondary Offer...................................... The offer and sale of the Secondary Offer Shares.
Secondary Offer Shares........................... 168,523,973 Shares to be offered
Shareholders pursuant to the Offer.
by
the
Selling
sell-through ............................................ The amount of goods sold at full retail price.
Selling Shareholders ............................... Zenaida R. Tantoco, Ma. Carmencita T. Lopez, Ma. Elena
T. Valbuena, Ma. Teresa R. Tantoco, Wellborn Trading and
Investments, Inc. and Bordeaux Holdings, Inc.
Shares..................................................... The common shares of par value =
P 1.00 each of the
Company.
SIAL CVS .............................................. SIAL CVS Retailers, Inc., a private company incorporated
under the laws of the Philippines and a 50/50 joint venture
between our Group and Varejo Corporation, a subsidiary
of Ayala Land.
7
shop-in-shops.......................................... Exclusively designed sales areas situated within Rustan
Group’s department stores.
Sole Domestic Lead Manager and
Underwriter ............................................ BPI Capital Corporation.
sq.m. ...................................................... Square meters.
SRC ........................................................ Securities Regulation Code of the Philippines (Republic
Act No. 8799) and its implementing rules, as amended.
Stabilizing Agent .................................... Credit Suisse (Singapore) Limited or its relevant affiliate,
in its role as stabilizing agent, whereby it may engage in
stabilization activities relating to any over-allotment of
Shares from the Selling Shareholders for a period
beginning on the Listing Date and ending on a date no
later than 30 calendar days from and including the Listing
Date.
store-based retailing................................ According to Euromonitor, store-based retailing is the
aggregation of grocery retailers and non-grocery retailers.
Sales of new and used goods to the general public for
personal or household consumption from retail outlets or
market stalls. Excludes specialist retailers of motor
vehicles, motorcycles, vehicle parts, fuel. Also excludes
foodservice, rental and hire and wholesale industries,
including Cash and Carry. Excludes the informal retail
sector. Online or catalogue sales of store based retailers
are counted within Internet retailing or home shopping.
stores ...................................................... For the purposes of this Prospectus, stores refer to the
Company’s
free-standing
specialty
stores
and
shop-in-shops, and unless the context otherwise requires,
excludes the “FamilyMart” convenience stores and the
“Wellworth” department stores. Please refer to “Business
— Business Operations — Specialty Retail Stores —
Stores”.
Tantoco Family ....................................... Means all of the following:
(i)
Bienvenido R. Tantoco Sr., Bienvenido R. Tantoco
Jr., Zenaida R. Tantoco, Ma. Carmencita T. Lopez,
Ma. Lourdes Tantoco Pineda, Ma. Elena T. Valbuena,
Ma. Teresa R. Tantoco; and
(ii)
A relative up to the third degree of consanguinity of
any person named in clause (i) above.
Trading Participants and Retail Offer ...... The offer for sale of the Trading Participants and Retail
Offer Shares to be made in the Philippines.
Trading Participants and Retail Offer
Settlement Date ...................................... The date on which domestic subscriptions under the
Trading Participants and Retail Offer are paid, expected to
be on or about November 4, 2014.
8
Shares..................................................... 259,267,600 of the Offer Shares being offered pursuant to
the Trading Participants and Retail Offer.
United States or US ................................ The United States of America.
US dollars or US$ .................................. The lawful currency of the United States of America.
US Securities Act ................................... The United States Securities Act of 1933, as amended.
VAT ........................................................ Value-added tax.
Wellworth ............................................... Trademark with respect to the Company’s department
store operations and for which the Company has submitted
a registration application to the relevant Philippine
authorities for approval.
9
SUMMARY
The following summary is qualified in its entirety by, and is subject to, the more detailed
information and financial statements, including notes thereto, appearing elsewhere in this Prospectus.
Capitalized terms not defined in this summary are defined in the “Glossary of Terms,” “Risk Factors,”
“Business,” or elsewhere in this Prospectus.
OVERVIEW
We are the leading specialty retailer in the Philippines with an extensive portfolio of established
international brands. Our portfolio caters to all aspects of a quality lifestyle and is supported by a
nationwide strategic retail presence. We lead the Philippine specialist retail market in terms of the size
and breadth of our international brand portfolio and store footprint according to Euromonitor. As of
June 30, 2014, our retail network consists of 655 stores located within approximately 68 malls across
the Philippines, including Metro Manila, Luzon, Visayas and Mindanao, with a total gross selling
space of approximately 111,585 sq.m. We have a developing multi-format business model and recently
expanded our retail format offerings with new joint ventures in convenience stores under the
“FamilyMart” franchise and department stores under the “Wellworth” brand.
Established in 1987, we are the pioneer in introducing globally recognized brands through
specialty store retailing to the Philippine market and we continue to do so actively. The merchandise
sold in our strategically located network of stores covers a broad range of categories and brands, from
luxury and bridge apparel to casual wear and fast fashion, footwear, accessories and luggage, food,
home and décor, and beauty and personal care. We represented 103 brands as of June 30, 2014. Our
broad portfolio of international brands and retail formats targets the mid-to-upper tiers of the domestic
consumer spectrum, positioning us to further capitalize on the macro-economic trends of increasing
consumer spending and growing disposable income across the higher-income to middle-income
segments in the Philippines. We believe that our continued success can be partly attributed to our
ability to both track and anticipate constantly changing market trends and identify foreign brands that
are yet to be made available in the Philippine market, but which would be greatly welcomed by local
consumers. This competency also allows us to strategically expand the footprints of our existing
brands. Always attuned to the evolving needs and desires of the Filipino consumer, we have actively
transformed our business over time to capture a wider range of customers and consumer spending
opportunities.
Brand management and specialty retailing is our principal business. As of June 30, 2014, we had
existing brand agreements with 98 brand principals, substantially all of which are on an exclusive
basis. Our business is premised on the concept of bringing well-known and prestigious names and
products that we believe will enhance all aspects of the Philippine consumer’s lifestyle and re-creating
the international shopping experience associated with such brand names in the Philippine market. In
this regard, we believe that we have one of the largest and most attractive brand portfolio, comprising,
among others, such well-known brands as Hermès, Gucci and Salvatore Ferragamo for premium luxury
apparel and accessories, Zara, Bershka and Stradivarius for popular fast fashion, Lacoste and GAP for
casual wear, TWG and Oliviers & Co. for high-quality food and beverage selections, Samsonite for
stylish travel and luggage offerings, Payless ShoeSource for value-priced trendy footwear, Muji and
Pottery Barn for modern home furnishings and accessories, and “FamilyMart” for round-the-clock
quality offerings with everyday convenience. We believe our proven track record and ability to
provide brand principals an integrated offering of brand development and management services, which
are geared toward building a strong and sustainable retail presence in prime locations, makes us their
Philippine partner of choice. Our strong track record of brand agreement renewals with brand
principals is testimony to our success as a retail operator and ability to protect and promote the
integrity of international brands in the local market.
10
Our position as exclusive franchisee of such well-known and prestigious international brands and
our extensive and diversified portfolio enable us to secure prime retail space appropriate to the brands,
as mall operators are generally eager to have our brands included in their list of retail offerings. As
the market leader in the Philippine specialty retailing market, and in view of our extensive brand
portfolio, we are one of the first companies that landlords approach when it comes to selecting tenants
for their new mall developments, as our portfolio breadth allows us to anchor and populate a retail
development according to the developer’s vision. Store selection features significantly in our
development and management of the brands, as we take care to ensure the stores of each brand are
situated in areas frequented by its targeted customer demographic and that the surroundings are
suitable and complementary to the characteristics of the brand. For example, our luxury brand stores
are only located in premium upmarket malls in central business districts aimed at sophisticated and
affluent customers of all age groups looking for the best in fashion and lifestyle products. In summary,
we believe our synergistic relationship with retail developers significantly strengthens our ability to
position the brands effectively in the Philippine market.
As part of our growth strategy, we have recently expanded our presence to other retail formats
beyond specialty retailing in order to capture an even broader set of consumption opportunities and
spending patterns. In 2013, we added one of Japan’s largest convenience store franchises,
“FamilyMart”, to our retail portfolio. The “FamilyMart” operations are managed by our joint venture,
PFM, with FM, the owner of the Japanese franchise, and Itochu Corporation. PFM is owned 60% by
SIAL CVS (our 50/50 joint venture with Varejo Corporation, a wholly-owned subsidiary of Ayala
Land), 37% by FM and 3% by Itochu Corporation. As of June 30, 2014, we had a total of 46
convenience stores across Manila. We further diversified our operations by opening our first
department store in April 2014, targeting quality-conscious and aspirational middle-income
consumers, under the brand “Wellworth”, in Fairview Terraces, Quezon City — one of the new retail
spaces in Metro Manila. The “Wellworth” operations are managed by our 50/50 joint venture, SIAL
Specialty Retailers, Inc., also with Varejo Corporation.
We have grown steadily in recent years, with our net sales increasing from =
P 10,183 million in
2011 to =
P 12,788 million in 2013, representing a CAGR of 12.1% during that period. Our net income
P 614 million in 2013. In the
grew even faster at a CAGR of 52.4%, from =
P 264 million in 2011 to =
six months ended June 30, 2014, we recorded net income of =
P 486 million.
COMPETITIVE STRENGTHS
The market leader in specialty retailing with a nationwide strategic presence and a developing
multi-format business model that is well-positioned to benefit from favorable macroeconomic
and dem ographic trends in the Philippines
We are the leading specialty retailer in the Philippines by size of international brand portfolio
and store footprint according to Euromonitor. Established in 1987, but with a retail pedigree dating
back to the founding of the Rustan’s Group in 1951, we have benefited from a first mover advantage
in developing standalone specialty stores for an increasingly diverse range of international brands in
the Philippine market. We operate eight of the top ten designer apparel brands and nine of the top ten
luxury accessories brands in the Philippines in 2013, as defined by Euromonitor, and manage a total
of 67 international mid-to-upper tier apparel brands, as well as 36 brands in the footwear, accessories
and luggage, food, home and decor, and personal care categories. Our extensive nationwide retail
footprint consists of 655 directly-operated stores spread across approximately 68 malls throughout the
Philippines. In addition, we operated six stores in Guam as of June 30, 2014.
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Our portfolio of international brands and footprint of stores has grown significantly since we
commenced our retail operations in the Philippines and opened our first international branded retail
store in 1988. Since then, we have leveraged our experience and expertise in retail operations and deep
resources to expand our international offerings to Philippine consumers and establish our leading
retail presence in the local market. This has resulted in a stronger market position compared to our
competitors in the Philippine specialty retailing segment in terms of both international brand coverage
and store footprint.
We believe that our leading market position in specialty retailing of international brands, broad
brand portfolio, strategic store footprint and brand-centric management and execution capabilities
favorably position us to capitalize on the consumer trends resulting from the Philippines’ rising GDP,
increasing urbanization, growing middle class and rising levels of disposable consumer income. The
strong correlation between increasing disposable income and the resultant growth in discretionary
consumer spending is driving a corresponding increase in demand and growth in the specialty retailing
sector. With our recent expansion through joint ventures into quality everyday convenience through
our “FamilyMart” stores, and the creation of a new value-priced mid-market department store,
“Wellworth” to tap the burgeoning middle class of aspirational yet price-conscious shoppers, our
developing multi-format business model provides a platform to capture a broader range of
consumption opportunities and shopping patterns, fueled by a growing and increasingly affluent
consumer class.
Broad and growing international brand portfolio that is highly attractive to both consumers and
brand principals
We carry, on an exclusive basis, many of the world’s elite and highly-anticipated up-and-coming
international brands and products that appeal to increasingly discerning Filipino consumers. Our broad
and growing brand portfolio covers a wide range of distinctive merchandise across the market
categories of luxury and bridge, casual wear, and fast fashion, and offering an extensive product range
of apparel, footwear, accessories and luggage, food and dining, home and personal care — all targeting
the lucrative and growing middle- to higher-income market in the Philippines. Furthermore, we have
developed our own in-house concept store brands, “Beauty Bar” and “MakeRoom”, in the personal
care and home solutions categories, respectively, to carry both our own and also third-party brands,
many of which are exclusive to us in the Philippine market. In addition to specialty retailing, we
decided to grow our brand and retail offerings further, with the additions in 2013 and 2014,
respectively, of both “FamilyMart,” one of Japan’s largest convenience store franchises, and
“Wellworth,” a new value-priced but quality-focused, mid-market department store. Our convenience
store and department store businesses have enabled us to expand into and cater to other market
segments, in which we can leverage our retail foundation, both to serve identified market niches and
provide an improved quality experience. In an environment of rapidly changing consumer trends, we
benefit from a balanced mix of well-established and newer international retail offerings that enable us
to broaden our appeal across different segments of customers and provide them with retail choices at
various price points. This balance drives sustainable growth for our overall business.
We believe the size and breadth of our brand portfolio and the competitive advantages we derived
from the strength of our retail operations make us attractive to brand principals considering entry into
the Philippine market. International brand principals are usually highly selective when selecting the
local partners with whom they enter into cooperative arrangements to develop their brands in a foreign
country. While we already manage an extensive brand portfolio, an increasing number of brand
principals initiate contact with us to explore new partnership opportunities. We believe new brand
principals take comfort in our proven track record of understanding the local market and connectivity
to the Philippine consumer, and therefore what it takes for an international brand to be successful in
the Philippines, as illustrated by the breadth of our brand portfolio, the longevity of our relationships
with our major brand principals — some for as long as nearly three decades — and the breadth and
quality of the store footprints we have developed for our brands. Our competitive advantage in
securing strategic retail space due to the value of our brand portfolio to mall developers, and the
credibility associated with our retail history and financial standing in the Philippines also place us in
12
good stead with existing and prospective brand principals. We believe that brand principals recognize
our proven ability to develop and operate a well-managed retail presence for international brands in
the Philippine market, and to successfully replicate the global shopping experience for those brands,
according to their image and standards.
Extensive network of directly-managed stores with strategic geographic coverage difficult to
replicate
We believe that our specialty stores enjoy a footprint of prime locations across the Philippines
that would be challenging to replicate. Our stores are strategically located within malls, typically
situated in urban areas with high foot traffic, such as central business districts and major metropolitan
shopping districts, which attract a steady flow of target customers. Our store network includes
tenancies in the major shopping centers in Metro Manila as well as new mall developments in other
growth cities outside of Metro Manila that are complementary to our international brands. For
example, as of June 30, 2014, we had a total of 25 stores representing 23 brands in the major shopping
malls in Metro Cebu, which is considered the second most populous metropolitan area in the
Philippines after Metro Manila. As we have no exclusivity arrangements with any one mall developer
and treat all of them equally, we are able to gain access to most major mall developments in the
country and select store sites according to the suitability of the retail space in terms of catchment area,
customer demographics and image for our brands.
As the dominant player in the Philippine specialty retailing segment, we are key tenants of all
the major landlord groups and mall developers in terms of total leased floor area. Our current market
presence, as well as our ability to impact mall developments by offering a uniquely broad portfolio
of retail offerings, assists us to secure strategic locations for our brands in terms of access to their
targeted customer demographics and neighboring developments. Moreover, the breadth of our
international brand portfolio, valued and sought after by mall operators, provides us with the
advantage of being a “tenant of choice,” increasing our ability to gain attractive placements for our
brands in new retail developments. We believe that this competitive advantage positions us well to
benefit from the strong pipeline of new malls in Metro Manila and other Philippine provincial cities,
which will provide a continued supply of high-quality store locations for our brands. We believe that
our ability to secure prime locations is one of the factors that enable us to successfully develop the
Philippine businesses of our brand principals. We also believe that our ability to develop our existing
brands makes us the preferred partner for new brand principals seeking entry into the Philippine retail
market.
As of June 30, 2014, our specialty store network of international brands was the largest in the
country, with approximately 655 stores, representing a total gross selling space of 111,585 sq.m. 502
stores are located in Metro Manila, 58 in Luzon (excluding Metro Manila), 35 in Visayas and 60 in
Mindanao. In addition, we have another six stores located in Guam. Our stores are located in prime
retail space where consumer traffic is generally the most concentrated and brand visibility is the
highest. As of June 30, 2014, 67 new stores had been opened in 2014. The scale of our network
testifies to our success and strength in constructing and operating specialty stores for international
brand principals, which in turn facilitate our negotiations for favorable store-related arrangements,
allowing for realization of cost savings and greater efficiencies in our store development processes.
Proven brand-centric execution capabilities that have cemented our growing and long-standing
relationships with brand principals
We believe our integrated operational approach to brand and store management is a key success
factor in the development and operation of our business. In our role as the exclusive franchisee of
many of our international brand principals, we must be able to devote to our brand principals dedicated
and experienced resources that bring a customized approach to developing and managing their retail
presence in the Philippines. Leveraging the extensive resources, know-how and expertise, we operate
an efficient and effective structure of specialized brand-centric teams led by experienced
brand-merchandising managers. These professionals are supported, in turn, by the spectrum of
13
centralized operational divisions, including our capabilities and resources in sales and marketing,
customer relationship management, construction and engineering, finance and human resources. The
coordination between our individual brand teams and our centralized divisions drives our
effectiveness and efficiency in bringing the brands to market, developing their local store footprint,
and establishing their retail presence in the Philippines. We believe our well-structured processes
allow us to realize benefits of scale from our shared resources, thus optimizing our execution
capabilities and allowing us to achieve operational efficiencies, while tailoring our expertise and focus
to the requirements of our brand principals.
We offer a unique strength in understanding and selecting international brand merchandise for
the local market. Most of our brand principals adopt a “pull” merchandising model and sales
performance of our stores depends largely on our ability to select and purchase the most suitable mix
of merchandise from each brand to suit the needs and preferences of the local market. To achieve this,
our in-depth understanding not only of consumers and market segments in the Philippines but also of
the brands themselves — from their history, principles and values, to their merchandise and image —
is critical. Through our regular interaction and active management of our relationships with brand
principals, we receive early information on and access to international developments relating to our
brands, usually six to eight months ahead of the local market. Our international buying trips, made in
accordance with each brand’s seasonal schedules, provide us with intensive exposure to upcoming
retail trends on a worldwide basis. Combining this “first look” advantage with our knowledge of the
Philippine retail market, we refine our merchandising targets and strategies to ensure that we are
purchasing and importing the optimal mix of merchandise to generate customer sales. Our success in
merchandising is reflected in the continued growth of our sales and improvements in our gross
margins.
In addition, we know our customers and are harnessing systems and technology to get to know
them even better, and to use that knowledge to drive our retail performance. Our centralized customer
relationship management (“CRM”) system provides us with valuable and “real-time” insight into our
customer needs and preferences, and forms a cornerstone of our targeted merchandising and marketing
activities. This innovative system serves as the central repository for the customer information of more
than 88,000 shoppers — as of June 30, 2014. The consolidated information obtained through our POS
system enables us to provide in-store customers with personalized shopping experiences as well as
construct a more detailed picture of customer tastes, needs and buying habits. This in turn means that
we are able to segment our customer base into groups of buyers with different tastes or budgets and
in accordance with our product categories. The combination of both local and global market
knowledge, as enhanced by the CRM system, enables our brand-merchandising managers to stock our
stores with merchandise demanded by Philippine consumers. Our CRM system serves as a
comprehensive source of customer information that enables us to more effectively align our offerings
to changing customer needs, and therefore to drive sales through tailored merchandising strategies and
targeted marketing initiatives.
Highly experienced management team with significant expertise and solid track record of growth
and profitability
Our senior management team has deep experience across a broad range of disciplines in the
specialty retail industry, including sales, marketing, merchandising, operations, logistics, IT, real
estate, finance and human resources. Mr. Anthony T. Huang, our President, with his Rustan’s Group
and Tantoco family heritage, has extensive experience running branded consumer as well as
retail-oriented businesses. His vision and leadership has been instrumental to the growth of our Group
over the past two decades. Our Executive Vice-Presidents are industry veterans with in-depth
understanding of the Philippine market, and possess on average 20 years of experience in their
respective fields. Our merchandising group comprises brand-merchandising managers, many of whom
have been with us for an average of ten to 15 years and have acted as brand-merchandising managers
of “their” brands since the inception of these brand relationships. Our track record of growing our
brands, relationships with brand principals, and the resultant revenues and profits enjoyed by our
Group, are all testimony to the quality and ability of our management team and staff.
14
The quality of our store personnel is likewise a key factor to our success. As such, we take care
in selecting and appointing competent store managers who are well-educated and experienced with
international brand retailing, and we train them to be familiar with the relevant brand policies and
guidelines on daily store operations. To enhance the provision of quality services to our customers,
we also provide regular training to our retail staff, including courses on store operation skills,
marketing skills and product knowledge conducted by our brand principals. We firmly believe that our
corporate culture encourages our employees to consistently seek ways to enhance the value of our
Group and motivates them to strive for our continued success and expansion.
BUSINESS STRATEGIES
Our primary objective is to continue to strengthen our leading market position in both existing
and new formats through the effective management of our retail operations and careful strategic
expansion. We intend to achieve this by pursuing the following strategies:
Continue our expansion into high-growth consumer segments through further expansion of our
brand portfolio
We will continue to introduce new brands, position ourselves as the preferred partner for
international brands seeking access to the Philippines, and further grow our brand portfolio by: (1)
keeping track of international retail developments and identifying brands that have the potential to do
well in the Philippines, (2) evaluating these developments in our bi-annual business review meetings
and formulating appropriate outreach efforts to brand principals, (3) leveraging existing relationships
with brand principals to represent new brands under the same principal group, and (4) better
integrating our understanding of local business dynamics and consumer needs with our execution
capabilities to offer more efficient and effective services to both existing and prospective brand
principals. For example, due to our relationship with the Inditex group, built around our success with
managing their Zara brand since 2005, we expanded our relationship to also exclusively distribute
Massimo Dutti, Bershka, Stradivarius and Pull and Bear. Through our successful track record with
Gap, we also became the first international franchisee partner for Old Navy in 2014. We believe our
ongoing efforts have attracted an increasing number of quality brand principals to enter into brand
arrangements with us and to expand the scope of existing relationships, as evidenced by our success
in adding ten and 19 new brands in the year ended December 31, 2013 and the six months ended June
30, 2014, respectively, 13 of which resulted from dialogue initiated by the brand principals.
Significant opportunities also exist to invest further in brand categories which target the growing
middle class consumer segment in the Philippines - generally aspirational shoppers with rising levels
of disposable income. As the country’s economy improves, Filipinos are traveling more frequently,
increasing their exposure to international brands and trends and expanding their concepts of a quality
lifestyle. Exposure to international brands has also increased as a result of the large number of
Filipinos working abroad, or who have friends and family working abroad, as well as the greater use
of the Internet and social media. In this regard, we have implemented strategic initiatives to grow our
broad market brand offerings, such as Old Navy, F&F and Aéropostale, as well as selectively expand
into complementary lifestyle retail concepts, such as dining and home furnishings. The brands located
at our new retail development, Central Square in Fort Bonifacio, Taguig, Metro Manila, illustrate this
expanded focus. The first Asian outpost of Pottery Barn and the first Philippine store of Oliviers &
Co. - a French retailer of exclusive food products, are located at Central Square, and other
well-recognized mid-to-upper mid- market international apparel names will also be featured, including
the flagship stores of Michael Kors and Kate Spade, as well as brands new to the Philippine market,
such as Reiss and Cortefiel. These accompany a new flagship store of Marks & Spencer featuring its
well-known food section. We are also planning to expand our value-priced merchandise offerings
through our “Wellworth” operations by opening one more department store in 2015. Finally, we will
also continue to introduce niche non-luxury international brands that allow us to better penetrate other
developing cities in the Philippines.
15
Strengthen our market position through the expansion of our store footprint and active
management of our arrangements with brand principals
We intend to capitalize on our strong brand portfolio and market leadership in the specialty
retailing industry by further increasing our market penetration through an aggressive yet systematic
store expansion strategy. We aim to broaden consumer access to our brand offerings and increase
revenue growth by identifying and locating new stores in prime, high-traffic retail space, considering
factors such as local population density, target customer demographics, accessibility and profitability.
In Metro Manila and appropriate markets outside Metro Manila, we intend to continue to expand our
footprint in select new malls in order to retain our position as the leading specialty retailer with a
portfolio of quality store locations and a broad store footprint. This allows us to offer our brand
principals premium retailing space and support our business plans for further growth. We also plan to
continue our expansion outside Metro Manila into cities with large populations and increasing
disposable income, where we believe there is high growth potential for our growing portfolio of
mid-market brands. We will also focus on more strategic and flexible allocations of retail floor space
between brands and market segments, to capture increased spending opportunities and respond to
changing consumer trends. In addition, recognizing that the quality of the customer shopping
experience is one of the key drivers of store traffic and customer loyalty, we continually strive to
enhance the retail experience offered in our stores by focusing on store presentation and maintaining
the international shopping experience offered by our stores.
We are targeting 158 to 188 new store openings in 2014, and as of June 30, 2014, we have already
rolled out 67 new stores. The average size of these new stores is higher than the current average size
of our existing stores and we expect the new store openings to increase our total gross selling area by
approximately 40,000 sq.m. to 47,000 sq.m. in 2014. While the exact opening date for new stores may
depend on certain factors that we do not control, such as the completion of new malls and the
schedules set by our brand principals, we are confident that the remaining new stores will be opened
as we have already signed lease agreements or entered into discussions with landlords on these new
stores. For 2015, we intend to open between 100 to 115 new stores, which is expected to increase our
gross selling area by an additional 16,000 sq.m. to 19,000 sq.m. The average size of these new stores
to be opened in 2015 is lower than the average size of the new stores to be opened in 2014. We expect
that approximately 80% of the new stores will be located in Metro Manila, 10% in Luzon (excluding
Metro Manila), 6% in the Visayas and 4% in Mindanao, and will be spread across all of our brand
categories.
The efficient implementation of our store roll-out strategy — and consequent increase in our
merchandise sales — is important to our continued efforts to actively manage our relationships with
brand principals and negotiate better brand arrangements, and financial terms and conditions in
particular. For example, an increase in the number of stores we operate for a brand usually results in
an increase in the volume of merchandise purchased from the relevant brand principal, often allowing
us to negotiate more favorable prices or terms, and consequently lowering our procurement costs. We
believe our ability to obtain better terms under our brand agreements has contributed to the consistent
growth in our gross profit margins over the years. For the years ended December 31, 2011, 2012 and
2013, and for the six months ended June 30, 2014, our gross profit margins were 40.1%, 43.9%, 49.2%
and 56.8%, respectively.
Focus on optimizing sales performance and refining our sales strategies to achieve greater
margins
As our brand principals recognize our proven execution capabilities, we will continue to focus
on improving sales performance by optimizing the usage of consolidated data sourced from our
management information systems to provide real-time analysis of the sales, profitability and
operational margins of each store and brand. This will enable us to make informed decisions on our
brands’ development and strategic focus. The data will provide empirical support for strategic
decisions, such as store expansions, the reallocation of retail space, closing down of stores or even
discontinuation of brands. In addition, we expect this initiative to foster improved management of
16
merchandising and inventory, arising from better integrated sales and store data. As we grow our store
base, we will continue to refine our management and store operating systems to better support our
expansion strategy. We will also concentrate efforts to improve our retail execution through initiatives
to improve efficiencies in the store construction and opening processes, enhance the customer
experience, mobilize repeat customers, and advance same store sales growth and margins.
By focusing on our customer engagement strategy, we believe we will be able to improve our
retention of existing customers and attract new customers, thus capturing additional market share and
growing overall sales. Building on the brand-based customer knowledge produced by our existing
CRM system, we are investing in and implementing a comprehensive CRM system overhaul that will
provide us increased visibility across our business and allow us to evolve from considering individual,
brand-specific transactions to that of a holistic, company-wide view of shopping behavior. Our
upgraded ETP retail CRM platform is expected to allow us to consolidate and leverage customer
information across all of our brands to create increasingly personalized marketing communications
based on each individual customer’s overall preferences, to run targeted campaigns and promotions
and measure their effectiveness, track customer buying history and use it to up-sell and cross-sell,
capture the number of walk-ins at the store level and refine business strategies to increase customer
footfall and conversion ratio. In addition, our CRM staff will focus on utilizing consolidated customer
data to maintain and continuously improve our customer service at the store level. With access to more
detailed shopper profiles, our store personnel will have better insight into the needs and expectations
of our customers, and this will enable them to provide more personalized service and minimize the risk
of disappointing customers due to lack of knowledge, whether about the brands, product offerings, or
sales policies such as exchanges and returns.
In addition, we have plans to develop an integrated omni-channel approach to our specialty retail
business, which encompasses retail stores, mobile devices and the Internet. We expect to drive
sustainable long-term sales growth by improving our retail positioning, through expanding our
marketing channels to include more social media and mobile efforts, such as enhancements to our “SSI
Life” application to roll out sales initiatives such as electronic shopping vouchers across our brand
portfolio and increasing use of text message promotions and offers, which are popular with local
consumers. These efforts aim to broaden our touch points with customers and provide them with an
integrated shopping experience. They will also allow us to maximize the opportunities created by an
increase in convenience for customers to shop our merchandise across various channels, raise brand
awareness, drive foot traffic into our stores and increase overall sales. We expect that the adoption of
an omni-channel sales and marketing model with an integrated online and offline strategy, will both
strengthen existing brand principal and consumer relationships, as well as help attract additional brand
principals interested in entering the Philippine market, in turn allowing us to continue growing our
brand portfolio, expand our store footprint, increase our overall customer base, and ultimately enhance
our sales.
Continue to grow strategically and expand our multi-format business model
We plan to develop our multi-format business model by increasing the number of our
“FamilyMart” convenience stores and new value-priced “Wellworth” department stores. We are
targeting a total of 94 to 100 “FamilyMart” stores by the end of 2014, and as of June 30, 2014, we
have opened 46 “FamilyMart” stores. We intend to roll out more new convenience stores in 2015 and
have a total of 150 to 175 “FamilyMart” stores by the end of 2015. We will continue to source and
sell higher-margin products, such as hot food offerings and FM private label merchandise. In 2014,
we opened our first “Wellworth” department store in Fairview Terraces, Quezon City — one of the new
retail spaces in Metro Manila — and plan to open another department store during 2015. This new
department store will be situated in one of the new mall developments of our joint venture partner,
Ayala Land, in developing cities, where there is a growing market of consumers seeking quality,
value-priced international products in a contemporary shopping environment. Furthermore, as the
17
master franchisee for the “FamilyMart” convenience store chain in the Philippines, one of the key
strategies for our “FamilyMart” operations is the implementation of a franchise model to accelerate
our store roll-up program and rapidly expand our store network. We expect to implement this franchise
model by the end of the year.
Maintain our corporate culture and continue to focus on training
Due to the nature of our business and our brand-centric approach to operations, our employees
are critical to our success. To cope with the future expansion of our store network, we require more
store staff well-versed in international brand knowledge and trends, and possessing the acumen and
discipline to provide exemplary customer service. We expect to capitalize on our reputation for
customer service by further enhancing the quality of in-store customer support to help drive increased
sales productivity, through effective store personnel training, improved brand knowledge and a greater
alignment between staffing levels and individual brand requirements. We have implemented
well-defined staff-training policies and assessment procedures and plan to continue investing in
training programs and other initiatives to enhance our employees’ skills and productivity. We will
continue to focus on providing training to our employees to develop their understanding of our
customer-oriented corporate culture and service quality standards, facilitating their ability both to
respond to customers’ changing needs and preferences and comply with the requirements of brand
principals. We will continue to review and update our employee compensation plans and bonuses
based on individual performance, so that our employees are suitably incentivized.
RISKS OF INVESTING
Before making an investment decision, investors should carefully consider the risks associated
with an investment in the Shares. These risks include:
•
Risks relating to our business;
•
Risks relating to our organization and structure;
•
Risks relating to the Philippines;
•
Risks relating to the Offer Shares; and
•
Risks relating to the presentation of information in this Prospectus.
CORPORATE INFORMATION
The Company is a Philippine corporation with its registered office and principal executive
offices located at 6/F Midland Buendia Building, 403 Senator Gil Puyat Avenue, Makati City 1200
Philippines. The Company’s telephone number is +632 890-8034 and its fax number is +632 890-4441.
Our corporate website is www.ssigroup.com.ph. The information on our website is not incorporated
by reference into, and does not constitute party of, this Prospectus.
Investor Relations Office and Compliance Office
Our Investor Relations Office will be tasked with (a) the creation and implementation of an
investor relations program that reaches out to all shareholders and informs them of corporate activities
and (b) the formulation of a clear policy for accurately, effectively and sufficiently communicating
and relating relevant information to the Company’s stakeholders as well as to the broader investor
community.
18
Margarita A. Atienza, our Investor Relations Officer (“IRO”), will serve as our designated
investor relations manager and head our Investor Relations Office. The IRO will also be responsible
for ensuring that our shareholders have timely and uniform access to official announcements,
disclosures and market-sensitive information relating to us. As our officially designated spokesperson,
the IRO will be responsible for receiving and responding to investor and shareholder queries. In
addition, the IRO will oversee most aspects of our shareholder meetings, press conferences, investor
briefings, management of the investor relations portion of our website and the preparation of our
annual reports. The IRO will also be responsible for conveying information such as our policy on
corporate governance and corporate social responsibility, as well as other qualitative aspects of our
operations and performance.
Margarita A. Atienza also will serve as our Compliance Officer to ensure that we comply with,
and file on a timely basis, all required disclosures and continuing requirements of the Philippine SEC
and the PSE.
Our Investor Relations Office is located at 6/F Midland Buendia Building, 403 Senator Gil Puyat
Avenue, Makati City 1200, Philippines.
19
SUMMARY OF THE OFFER
Issuer...................................................... SSI Group, Inc., a corporation organized under Philippine
law. The trading symbol shall be “SSI”.
Selling Shareholders ............................... Zenaida R. Tantoco, Ma. Carmencita T. Lopez, Ma. Elena
T. Valbuena, Ma. Teresa R. Tantoco, Wellborn Trading and
Investments, Inc. and Bordeaux Holdings, Inc.
Joint Global Coordinators and
BPI Capital Corporation, Credit Suisse (Singapore)
Bookrunners ........................................... Limited and The Hongkong and Shanghai Banking
Corporation Limited, Singapore Branch
International Lead Managers and
Credit Suisse (Singapore) Limited and The Hongkong and
Underwriters ........................................... Shanghai Banking Corporation Limited, Singapore Branch
Sole Domestic Lead Manager and
BPI Capital Corporation
Underwriter ............................................
The Offer................................................ Offer of 864,225,503 Firm Shares, consisting of
695,701,530 new Shares to be issued and offered by the
Company and 168,523,973 existing Shares to be offered
by the Selling Shareholders, and an offer of up to
129,633,826
Optional
Shares
pursuant
to
the
Over-allotment Option (as described below).
Institutional Offer ................................... At least 604,957,903 Firm Shares, or 70% of the Firm
Shares, are being offered and sold (i) outside the
Philippines and the United States in offshore transactions
in reliance on Regulation S under the US Securities Act
and (ii) to Domestic QIBs in the Philippines. The Optional
Shares will form part of the Institutional Offer.
Trading Participants and Retail Offer ...... 259,267,600 Firm Shares are being offered in the Trading
Participants and Retail Offer in the Philippines at the
Offer Price. Out of the Trading Participants and Retail
Offer, 172,845,100 Firm Shares (or 20% of the Firm
Shares) are being allocated to all of the PSE Trading
Participants at the Offer Price and 86,422,500 Firm Shares
(or 10% of the Firm Shares) being allocated at the Offer
Price to LSIs. Each PSE Trading Participant shall initially
be allocated 1,299,500 Firm Shares and subject to
reallocation as may be determined by the PSE. Based on
the initial allocation for each trading participant, there
will be a total of 11,600 residual Firm Shares to be
allocated as may be determined by the PSE. Each LSI
applicant may subscribe up to a maximum of 3,300 Firm
Shares at the Offer Price. The Sole Domestic Lead
Manager and Underwriter shall purchase the Trading
Participants and Retail Offer Shares not taken up by the
PSE Trading Participants or clients of the Sole Domestic
Lead Manager and Underwriter or the general public in the
Philippines pursuant to the terms and conditions of the
Domestic Underwriting Agreement.
20
Eligible Investors.................................... The Trading Participants and Retail Offer Shares may be
purchased by any natural person of legal age residing in
the Philippines regardless of nationality, or any
corporation, association, partnership, trust account, fund
or entity residing in and organized under the laws of the
Philippines, regardless of nationality, subject to our right
to reject an Application or reduce the number of our Firm
Shares applied for subscription.
The Institutional Offer Shares are initially being offered
and sold to persons (i) outside the Philippines and the
United States in reliance on Regulation S and (ii) to
Domestic QIBs in the Philippines. Subscription to, and
purchase of, the Institutional Offer Shares in certain
jurisdictions may be restricted by law. Foreign investors
interested in subscribing or purchasing the Institutional
Offer Shares should inform themselves of the applicable
legal requirements under the laws and regulations of the
countries of their nationality, residence or domicile, and as
to any relevant tax or foreign exchange control laws and
regulations affecting them personally. Foreign investors,
both corporate and individual, warrant that their purchase
of the Institutional Offer Shares will not violate the laws
of their jurisdiction and that they are allowed to acquire,
purchase and hold the Institutional Offer Shares.
Restriction on Ownership ........................ The Philippine Constitution and related statutes set forth
restrictions on foreign ownership of companies engaged in
certain activities.
For more information relating to restrictions on the
ownership of the Shares, please see sections entitled “Risk
Factors” beginning on page 33 of the Prospectus and
“Regulatory and Environmental Matters” beginning on
page 145 of the Prospectus.
Offer Price.............................................. =
P 7.50 per Offer Share. The Offer Price was determined
based on a book-building process and discussions between
the Company and the Joint Global Coordinators and
Bookrunners.
Offer Shares ........................................... The Firm Shares and the Optional Shares.
Over-allotment Option ............................ Certain Selling Shareholders have granted the Stabilizing
Agent an option, exercisable in whole or in part, to
purchase up to 129,633,826 Optional Shares at the Offer
Price, on the same terms and conditions as the Firm Shares
as set out in this Prospectus, to cover overallotments, if
any. The Over-allotment Option is exercisable from and
including 30 days after the Listing Date. See “Plan of
Distribution — The Over-allotment Option”.
21
Cornerstone Investors ............................. •
•
•
•
•
•
•
•
Bank of the Philippine Islands acting through
its Asset Management and Trust Group
Capital Research and Management Company
Government Service Insurance System
Havenport Asset Management Pte Ltd
HSBC-FS B for Macquarie Asia New Stars Fund
MLIS — York Asian Event-Driven Ucits Fund
RBC Investor Services Bank S.A. a/c Macquarie Asia
New Stars Fund (Macquarie FD S)
York Asian Opportunities Investment Master Fund
The Cornerstone Investors will purchase an aggregate of
335,616,000 Offer Shares from the Company and the
Selling Shareholders at a price of =
P 7.50 per Offer Share.
This represents approximately 38.8% of the Firm Shares
and forms part of the Institutional Offer.
Transfer Restrictions ............................... The Institutional Offer Shares are initially being offered
and sold (i) outside the Philippines and the United States
in offshore transactions in reliance on Regulation S and
(ii) to Domestic QIBs in the Philippines. The Offer Shares
have not been and will not be registered under the US
Securities Act and are not being offered or sold in the
United States. The Offer Shares may be subject to certain
transfer restrictions as described herein. See “Plan of
Distribution — The Institutional Offer”.
Use of Proceeds ...................................... We intend to use a majority of our net proceeds from the
Primary Offer to fund capital expenditures to be incurred
by our subsidiaries in connection with our specialty
retailing business. See “Use of Proceeds” beginning on
page 55 of this Prospectus for details of how the total net
proceeds are expected to be applied.
Minimum Subscription ............................ Each application must be for a minimum of 500 Firm
Shares, and thereafter, in multiples of 100 Firm Shares.
Applications for multiples of any other number of Shares
may be rejected or adjusted to conform to the required
multiple, at the Company’s discretion.
Reallocation............................................ The allocation of the Firm Shares between the Trading
Participants and Retail Offer and the Institutional Offer is
subject to adjustment. In the event of an underapplication in the Institutional Offer and a corresponding
over-application in the Trading Participants and Retail
Offer, Firm Shares in the Institutional Offer may be
reallocated to the Trading Participants and Retail Offer. If
there is an under-application in the Trading Participants
and Retail Offer and if there is a corresponding
over-application in the Institutional Offer, Firm Shares in
the Trading Participants and Retail Offer may be
reallocated to the Institutional Offer. The reallocation
shall not apply in the event of over-application or
under-application in both the Trading Participants and
Retail Offer and the Institutional Offer.
22
Lock-up .................................................. The PSE rules require an applicant company to cause its
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 180
days after the listing of the shares. If the Over-allotment
Option is not exercised, 492,787,036 Shares held by
Wellborn Trading and Investments, Inc., 415,753,800
Shares held by Educar Holdings, Corp., 434,440,400
Shares held by Marjorisca, Inc., 434,412,500 Shares held
by Birdseyeview, Inc. and 438,780,247 Shares held by
Bordeaux Holdings, Inc. are subject to such 180-day
lock-up. If the Over-allotment Option is exercised,
466,043,679 Shares held by Wellborn Trading and
Investments, Inc., 415,753,800 Shares held by Educar
Holdings, Corp., 434,440,400 Shares held by Marjorisca,
Inc, 434,412,500 Shares held by Birdseyeview, Inc. and
414,967,821 Shares held by Bordeaux Holdings, Inc. are
subject to such 180-day lock-up. See “Plan of Distribution
— Lock-Up”.
In addition, if there is any issuance of shares or securities
such as private placements, assets for shares swap or a
similar transaction or instruments which lead to issuance
of shares or securities such as convertible bonds, warrants
or a similar instrument that are completed within 180 days
prior to the start of the offer period, and the transaction
price is lower than the Offer Price in the initial public
offering, all such shares or securities shall be subject to a
lock-up period of at least 365 days from full payment of
such shares or securities. To implement this lock-up
requirement, the PSE requires the applicant company to
lodge the shares with the PDTC through a Philippine
Central Depository (“PCD”) participant for the electronic
lock-up of the shares or enter into an escrow agreement
with the trust department or custodian unit of an
independent
and
reputable
financial
institution.
11,450,800 Shares held by Bienvenido R. Tantoco, Jr.,
100,787,300 Shares held by Wellborn Trading and
Investments, Inc., 96,452,200 Shares held by Educar
Holdings, Corp., 100,787,300 Shares held by Marjorisca,
Inc., 100,780,900 Shares held by Birdseyeview, Inc. and
89,741,500 Shares held by Bordeaux Holdings, Inc. are
subject to such 365-day lock-up. See “Plan of Distribution
— Lock-Up”.
23
To implement the foregoing lock-up requirements, the
PSE requires the applicant company to lodge the shares
with the PDTC through a Philippine Central Depository
(“PCD”) participant for the electronic lock-up of the
shares or enter into an escrow agreement with the trust
department or custodian unit of an independent and
reputable financial institution.
In addition, the Company and the Selling Shareholders
have agreed with the International Lead Managers and
Underwriters and the Sole Domestic Lead Manager and
Underwriter that, except in connection with the
Over-allotment Option, neither they nor any of the
Company’s affiliates nor any person acting on their behalf
will, without the prior written consent of the International
Lead Managers and Underwriters and the Sole Domestic
Lead Manager and Underwriter, issue, offer, pledge, 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 any 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 for a period of 180 days after the First Closing
Date.
Listing and Trading ................................ The Offer Shares are expected to be listed on the PSE
under the symbol “SSI”. See “Description of the Shares”.
All of the Offer Shares are expected to be listed on the
PSE on or about November 7, 2014. Trading of the
Company’s issued and outstanding Shares that are not
subject to lock-up is expected to commence on the same
date.
Dividends ............................................... The Company is authorized to declare dividends. A cash
dividend declaration requires approval from the Board. A
stock dividend declaration requires the further approval of
shareholders representing not less than two-thirds of the
Company’s outstanding capital stock. Dividends may be
declared only from available unrestricted retained
earnings. The Company and its subsidiaries have not
established a specific dividend policy. The Company can
give no assurance that it will pay any dividends in the
future. See “Dividends and Dividend Policy”.
24
Procedure for Application for the
Application forms and signature cards may be obtained
Trading Participants and Retail Offer ...... from the Sole Domestic Lead Manager and Underwriter or
from any participating PSE Trading Participant.
Applicants shall complete 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 Offer Shares. Failure to complete the
application form may result in the rejection of the
application. 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 latest articles
of incorporation and by-laws and other constitutive
documents (each as amended to date) duly certified
by its corporate secretary;
•
A certified true copy of the applicant’s Philippine
SEC certificate of registration duly certified by its
corporate secretary; and
•
A duly notarized corporate secretary’s certificate
setting forth the resolution of the applicant’s board
of directors or equivalent body authorizing the
purchase of the Firm Shares indicated in the
Application, identifying the designated signatories
authorized for the purpose, including his or her
specimen signature, and certifying to the percentage
of the applicant’s capital or capital stock held by
Philippine Nationals.
Foreign corporate and institutional applicants, who
qualify as Eligible Investors, in addition to the documents
listed above, are required to submit in quadruplicate, a
representation and warranty stating that their Application
will not violate the laws of their jurisdictions of
incorporation or organization, and that they are allowed,
under such laws, to acquire, purchase and hold the Firm
Shares.
Payment Terms for the Trading
The purchase price must be paid in full in Pesos upon the
Participants and Retail Offer ................... submission of the duly completed 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 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 an authorized bank.
25
All checks should be made payable to “SSI Group, Inc.
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 Sole Domestic Lead Manager
and Underwriter or the selling agents.
Acceptance or Rejection of Applications “Application to Subscribe” forms are subject to
for the Trading Participants and Retail
confirmation by the Sole Domestic Lead Manager and
Offer....................................................... Underwriter and the final approval of the Company. The
Company and the Sole Domestic Lead Manager and
Underwriter reserve the right to accept, reject or scale
down the number and amount of Offer Shares covered by
any application. The Company and the Joint Global
Coordinators and Bookrunners 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 and the Joint Global Coordinators and
Bookrunners may, in their sole discretion, deem
appropriate, subject to distribution guidelines of the PSE.
Applications with 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 Offer Shares at the
PSE.
Refunds for the Trading Participants and In the event that the number of Offer Shares to be received
Retail Offer ............................................ by an Applicant, as confirmed by the Sole Domestic Lead
Manager and Underwriter, is less than the number covered
by its Application, or if an Application is rejected by the
Company, then the Sole Domestic Lead Manager and
Underwriter shall refund, without interest, within five
banking days from the end of the offer period or on
November 7, 2014, all or a portion of the payment
corresponding to the number of Offer Shares wholly or
partially rejected. All refunds shall be made through the
Sole Domestic Lead Manager and Underwriter or selling
agent with whom the Applicant has filed the Application,
at the Applicant’s risk.
Registration and Lodgment of Shares
The Offer Shares are required to be lodged with the PDTC.
with PDTC ............................................. The Applicant may request to receive stock certificates
evidencing such Applicant’s investment in the Offer
Shares through his/her broker after the Listing Date. Any
expense to be incurred by such issuance of certificates
shall be borne by the Applicant.
26
Registration of Foreign Investments ........ The BSP requires that investments in shares of stock
funded by inward remittance of foreign currency be
registered with the BSP if the foreign exchange needed to
service capital repatriation or dividend remittance will be
sourced from the Philippine banking system. The
registration with the BSP of all foreign investments in the
Offer Shares shall be the responsibility of the foreign
investor. See “Philippine Foreign Exchange Controls”.
Tax Considerations ................................. See “Philippine Taxation” for further information on the
Philippine tax consequences of the purchase, ownership
and disposal of the Offer Shares.
Expected Timetable................................. The timetable of the Offer is expected to be as follows:
Pricing and allocation of the Institutional Offer October 23, 2014
Shares ...............................................................
Release of Listing Notice on Final Offer Price .. October 24, 2014
Submission of Firm Order and Commitments by October 29, 2014
PSE Trading Participants ...................................
Trading Participants and Retail Offer Period ..... October 27 to 31,
2014
November 4, 2014
Settlement Date .................................................
Institutional Offer Settlement Date .................... November 7, 2014
Listing Date and commencement of trading on
November 7, 2014
the PSE .............................................................
The dates included above are subject to the approval of the
PSE and the Philippine SEC, market and other conditions,
and may be changed.
Risks of Investing ................................... Before making an investment decision, prospective
investors should carefully consider the risks associated
with an investment in the Offer Shares. Certain of these
risks are discussed in the section entitled “Risk Factors”
and include: risks relating to our business, risks relating to
our organization and structure, risks relating to the
Philippines, risks relating to the Offer Shares and risks
relating to the presentation of information in this
Prospectus.
27
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following tables present summary consolidated financial information of the Company. This
summary should be read in conjunction with the independent auditors’ report and with the
consolidated financial statements of the Company and notes thereto contained in this Prospectus and
the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. The Company’s summary consolidated financial information as of and for the years
ended December 31, 2011, 2012 and 2013 was derived from the audited consolidated financial
statements of the Company, and the Company’s selected financial data as of June 30, 2014 and for the
six months ended June 30, 2013 and 2014, was derived from the reviewed consolidated financial
statements of the Company prepared in accordance with PFRS. The Company’s summary financial
information below should not be considered indicative of the results of future operations.
Furthermore, the translation of Peso amounts into US dollars as of and for the year ended December
31, 2013 as of and for the six months ended June 30, 2014 is provided for convenience only and is
unaudited. For readers’ convenience only, amounts in Pesos were converted to US dollars using the
PDS Rate as of June 30, 2014 of =
P 43.78 = US$1.00.
Summary Consolidated Statements of Comprehensive Income
For the year ended December 31,
2011
NET SALES ......................................................
COST OF GOODS SOLD .................................
GROSS PROFIT ...............................................
OPERATING EXPENSES
Selling and distribution ......................................
General and administrative .................................
OTHER INCOME (CHARGES)
Foreign exchange gains - net..............................
Share in net earnings of an associate .................
Interest accretion on security deposit .................
Interest income ..................................................
Share in net losses of joint ventures...................
Interest expense .................................................
Others - net........................................................
INCOME BEFORE INCOME TAX ..................
PROVISION FOR (BENEFIT FROM)
INCOME TAX
Current ..............................................................
Deferred.............................................................
NET INCOME ..................................................
2012
2013
(Audited)
(=
P million)
10,183
11,610
6,099
6,510
4,084
5,100
3,112
648
3,760
3,746
723
4,469
For the six months ended June 30,
2013
(Unaudited)
(US$ million)
12,788
292.1
6,496
148.4
6,292
143.7
4,584
791
5,375
104.7
18.1
122.8
2013
2014
2014
(Unaudited)
(=
P million)
(US$ million)
5,844
6,672
152.4
3,019
2,885
65.9
2,825
3,787
86.5
2,077
377
2,454
2,409
453
2,862
55.0
10.3
65.3
12
9
3
12
—
(14)
20
42
366
11
16
3
13
—
(22)
5
26
657
21
18
6
4
(20)
(93)
48
(16)
901
0.5
0.4
0.1
0.1
(0.5)
(2.1)
1.1
(0.4)
20.5
31
8
4
3
(10)
(22)
50
64
435
26
10
3
2
(81)
(125)
(9)
(174)
751
0.6
0.2
0.07
0.03
(1.8)
(2.8)
(0.2)
(3.9)
17.3
121
(19)
102
264
223
(28)
195
462
347
(60)
287
614
7.9
(1.4)
6.5
14.0
160
(19)
141
294
281
(16)
265
486
6.4
(0.4)
6
11.3
OTHER COMPREHENSIVE INCOME
Other comprehensive income to be
reclassified to profit or loss in subsequent
periods:
Cumulative translation adjustment on foreign
operations, net of deferred tax.......................
Other comprehensive income not to be
periods:
Re-measurement loss on retirement benefit,
net of deferred tax.........................................
1
(8)
2
0.04
(19)
(4)
(35)
TOTAL COMPREHENSIVE INCOME ............
246
581
450
28
3
2
0.04
(0.8)
0.5
—
—
13.2
298
488
11.3
Summary Consolidated Statements of Financial Position
As of December 31,
2011
2012
As of June 30,
2013
2013
(Audited)
(=
P million)
2014
2014
(Unaudited)
(Unaudited)
(US$ million) ( =
P million) (US$ million)
ASSETS
Current Assets
Cash and cash equivalents........................................
Trade and other receivables......................................
Merchandise inventory .............................................
Amounts owed by related parties .............................
Prepayments and other current assets .......................
1,866
273
4,652
16
163
1,256
376
5,394
6
227
1,135
499
5,899
9
331
25.9
11.4
134.7
0.2
7.6
965
327
6,943
9
535
22.0
7.5
158.6
0.2
12.2
Total Current Assets...............................................
6,970
7,259
7,873
179.8
8,779
200.5
Noncurrent Assets
Investment in an associate .......................................
Investment in joint ventures .....................................
Property and equipment ...........................................
Deferred tax assets...................................................
Security deposits and construction bonds .................
Other noncurrent assets ............................................
36
—
1,002
95
370
119
41
137
1,275
119
445
286
43
369
2,593
185
565
250
1.0
8.4
59.2
4.2
12.9
5.7
53
440
3,623
196
670
338
1.2
10.1
82.8
4.5
15.3
7.7
Total Noncurrent Assets .........................................
1,622
2,303
4,005
91.4
5,320
121.6
TOTAL ASSETS .....................................................
8,592
9,562
11,878
271.2
14,099
322.1
LIABILITIES AND EQUITY
Current Liabilities
Trade and other payables .........................................
Short-term loans payable..........................................
Current portion of long-term debt ............................
Amounts owed to related parties ..............................
Deferred revenue......................................................
Income tax payable ..................................................
6,130
520
—
175
12
46
6,596
673
—
0.3
15
134
3,498
3,811
108
0.2
23
210
79.9
87.0
2.5
0.004
0.5
4.8
3,633
4,379
333
0.2
22
215
83.0
100.0
7.6
0.004
0.5
4.9
Total Current Liabilities ........................................
6,883
7,418
7,650
174.7
8,582
196.0
Noncurrent Liabilities
Long-term debt ........................................................
Retirement benefit obligation ...................................
Deposits for future stock subscription ......................
Deposits for future stock subscription to SSI ...........
—
123
—
600
—
154
—
600
1,174
225
—
62
26.8
5.1
—
1.4
1,649
234
500
—
37.7
5.3
11.4
—
Total Noncurrent Liabilities...................................
723
754
1,461
33.3
2,383
54.4
25
75
(195)
25
175
(295)
200
—
500
4.6
—
11.3
2,117
—
(1,537)
48.4
—
(35.1)
470
629
1
(19)
900
615
(7)
(23)
1,290
839
(5)
(57)
29.5
19.2
(0.1)
(1.3)
1,290
1,325
(4)
(57)
29.5
30.3
(0.1)
(1.3)
Equity
Capital stock - =
P 100 par value
Issued - 21,171,629 shares in 2014, 2,000,000
shares in 2013 and 250,000 shares in 2012 and
2011....................................................................
Equity reserve ..........................................................
Retained earnings
Appropriated .......................................................
Unappropriated....................................................
Cumulative translation adjustment............................
Other comprehensive income....................................
Total Equity............................................................
986
1,390
2,767
63.2
3,134
71.7
TOTAL LIABILITIES AND EQUITY ....................
8,592
9,562
11,878
271.2
14,099
322.1
29
Summary Consolidated Statements of Cash Flows
2011
2012
2013
2013
(Audited)
(=
P million)
2013
2014
(Unaudited)
(US$ million)
2014
(Unaudited)
(=
P million)
(US$ million)
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax................................
366
656
901
20.5
437
751
17.2
Depreciation and amortization.....................
483
593
634
14.5
277
441
10.1
Interest expense ..........................................
14
22
92
2.1
21
125
2.8
Unrealized foreign exchange losses (gains) .
(12)
8
7
0.2
2
10
0.2
Adjustments for:
Loss on disposal of property and
equipment ...................................................
2
0.1
1
7
3
0.1
Share in net earnings of an associate ..........
(9)
(16)
(17)
(0.4)
(8)
(10)
(0.2)
Share in net losses of joint ventures ...........
—
—
20
0.5
10
81
1.8
Interest income ...........................................
(12)
(13)
(4)
(0.1)
(2)
(2)
(0.03)
Interest accretion on refundable deposits.....
(2)
(3)
(6)
(0.1)
(4)
(3)
(0.1)
Impairment loss ..........................................
—
—
—
—
—
5
0.1
Mark-to-market loss (gain)..........................
—
—
(3)
(0.06)
—
5
0.1
Operating income before working capital
changes ...........................................................
830
1,247
37.1
740
1,406
32.1
1,625
0
Decrease (increase) in:
Trade and other receivables ........................
(50)
(125)
(123)
(2.8)
(26)
Merchandise inventory ................................
(1,272)
(742)
(505)
(11.5)
(357)
Amounts owed by related parties ................
47
32
Prepayments and other current assets ..........
(55)
(63)
(3)
(0.1)
(39)
(102)
(2.3)
(92)
Trade and other payables ............................
790
466
Deferred revenue ........................................
12
3
(3,109)
(71.1)
(594)
Amounts owed to related parties .................
23
(175)
(0.1)
Retirement benefit obligation ......................
20
25
23
Net cash generated from (used in) operations ..
345
668
Interest received ..............................................
12
13
Income taxes paid ............................................
(105)
(128)
Net cash flows from (used in) operating
activities..........................................................
252
Acquisitions of property and equipment ...........
Additional investment in joint ventures............
Dividends received from investment in an
associate ..........................................................
169
(1,044)
3
(204)
3.9
(23.9)
0.1
(4.7)
Increase (decrease) in:
7
(2,187)
4
0.2
0
5
(0.2)
0.5
16
(50.0)
(347)
0.1
2
135
3.1
(0.3)
(0.01)
(0.003)
(0.0001)
8
0.2
473
10.8
1
0.03
(263)
(6.0)
(177)
(271)
(6.2)
553
(2,446)
(55.9)
(522)
203
4.6
(687)
(864)
(1,950)
(44.6)
(1,120)
(1,475)
(33.7)
—
(137)
(253)
(5.8)
(50)
(152)
(3.5)
11
11
16
0.4
—
—
—
CASH FLOWS FROM INVESTING
ACTIVITIES
Security deposits and construction bonds ....
(80)
(72)
(114)
(2.6)
(102)
(104)
(2.4)
Other noncurrent assets ...............................
22
(169)
35
0.8
101
(90)
(2.1)
(1,821)
(41.6)
Net cash flows used in investing activities ......
(734)
(1,231)
30
(2,266)
(51.8)
(1,171)
2011
2012
2013
2013
(Audited)
(=
P million)
2013
2014
(Unaudited)
(US$ million)
2014
(Unaudited)
(=
P million)
(US$ million)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from availment of:
Short-term loans payable.............................
270
383
4,203
96.0
1,496
2,356
700
53.8
Long-term debt ...........................................
—
—
1,283
29.3
485
Payment of short-term loans payable...........
—
(230)
(1,073)
(24.5)
(573)
(1,788)
(40.8)
16.0
Payment of:
Interest .......................................................
(14)
(22)
(82)
(1.9)
(21)
(125)
(2.8)
Dividends ...................................................
—
(46)
—
—
—
—
—
Proceeds from:
Subscriptions to capital stock......................
—
—
196
4.5
—
1,917
43.7
Deposits for future stock subscription .........
—
—
62
1.4
—
500
11.4
Sale of SSI investment in CCSI ..................
—
—
—
—
—
200
4.6
Payment of advances from stockholders ......
—
—
—
—
—
(61)
(1.4)
Payment for the purchase of SSI shares ......
—
—
—
—
—
(2,242)
(51.2)
Net cash flow from financing activities ...........
256
85
4,589
104.8
1,387
1,457
33.3
NET DECREASE IN CASH AND CASH
EQUIVALENTS..............................................
(226)
(593)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS..............................................
12
(17)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR .................................
2,080
END OF YEAR ..............................................
1,866
(123)
(2.9)
(306)
(161)
(3.7)
(9)
(0.2)
2
0.1
2
1,866
1,256
28.7
1,256
1,135
25.9
1,256
1,135
25.9
952
965
22.0
31
Key Financial and Operating Data
As of and for the year
ended December 31,
2011
2012
As of and for the six months
ended June 30,
2013
2013
2013
(US$ million,
except where
indicated)
(=
P million, except
where indicated)
2014
2014
(US$ million,
except where
indicated)
(=
P million, except
where indicated)
Key Financial Data
Net Sales .....................................................
10,183
11,610
12,788
292.1
5,844
6,671
152.4
Luxury & Bridge ....................................
2,406
2,656
2,907
66.4
1,332
1,438
32.8
Casual .....................................................
1,855
2,082
2,306
52.7
983
1,046
23.9
Fast Fashion ............................................
3,794
4,000
4,213
96.2
1,962
2,431
55.5
Footwear, Accessories & Luggage ............
1,113
1,534
1,746
39.9
847
952
21.7
Other .......................................................
1,015
1,338
1,616
36.9
720
804
18.4
Gross Profit ..................................................
4,084
5,100
6,292
143.7
2,825
3,787
86.5
56.8
Gross Profit Margin
(1)
(%)............................
40.1
43.9
49.2
49.2
48.3
56.8
EBITDA (2) ....................................................
830
1,247
1,625
37.1
740
1,406
32.1
EBITDA margin (3) (%) .................................
8.1
10.7
12.7
12.7
12.7
21.1
21.1
Other income (charges).................................
41
26
(16)
(0.4)
65
(174)
Net income ..................................................
264
462
614
14.0
295
486
(4)
11.1
Net income margin (4) (%) ............................
2.6
4.0
4.8
4.8
5.0
7.3
7.3
Total debt (5) .................................................
520
673
5,094
116.4
—
6,362
145.3
(584)
3,959
90.4
—
5,397
123.3
—
Net debt (6) ....................................................
(1,346)
Key Operating Data
Specialty retailing
Number of brands ....................................
76
81
91
—
85
103
Number of stores .....................................
439
524
597
—
577
655
—
Gross selling space (sq.m.) ......................
70,260
82,593
98,126
—
92,358
111,585
—
Growth in gross selling space (%) ...........
20.6
17.6
18.8
—
—
20.8 (7)
—
—
—
31
—
7
46
—
5,621
Convenience stores
Number of stores .....................................
—
—
3,711
—
843
—
—
—
—
—
51.0 (7)
—
—
Notes:
(1)
Gross profit as a percentage of net sales.
(2)
EBITDA is calculated as operating income before working capital changes as shown in the consolidated statements of
cash flows. Operating profit for the years ended December 31, 2011, 2012 and 2013 were restated as a result of a
retroactive application of pooling accounting treatment as a result of our reorganization. See Note 2 to our consolidated
financial statements contained elsewhere in this Prospectus. EBITDA is not a measure of performance under IFRS or
PFRS, and investors should not consider EBITDA in isolation or as alternatives to net income as an indicator of the
Company’s operating performance or to cash flow from operating, investing and financing activities as a measure of
liquidity or any measures of performance under PFRS. Because there are various EBITDA calculation methods, the
Company’s presentation of this measure may not be comparable to similarly titled measures used by other companies.
(3)
EBITDA as a percentage of net sales.
(4)
Net income as a percentage of net sales.
(5)
Interest-bearing loans and borrowings which include short-term loans payable, and current and noncurrent portions of
long-term debt.
(6)
Calculated as total debt less cash and cash equivalents.
(7)
Calculated against increase in gross selling space as of June 30, 2013.
32
RISK FACTORS
An investment in the Offer Shares involves a number of risks. The price of securities can and does
fluctuate, and any individual security is likely to experience upward or downward movements 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. Our past performance is not a guide to our future
performance. There may be a large difference between the buying price and the selling price of the
Offer Shares.
Investors should carefully consider all the information contained in this Prospectus, including
the risk factors described below, before deciding to invest in the Offer Shares. The occurrence of any
of the following events, or other events not currently anticipated, could have a material adverse effect
on our business prospects, financial condition, results of operation, the market price of the Offer
Shares and our ability to make dividend distributions to our shareholders. All or part of an investment
in the Offer Shares could be lost.
The means by which we intend to address the risk factors discussed herein are principally
presented under “Business — Competitive Strengths” beginning on page 103, “Business — Business
Strategies” beginning on page 107, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” beginning on page 69, and “Board of Directors and Senior Management
— Corporate Governance” on page 159 of this Prospectus.
This risk factors discussion does not purport to disclose all of the risks and other significant
aspects of investing in the Offer Shares. Investors should undertake independent research and study
the trading of securities before commencing any trading activity. Investors may request publicly
available information on us from the Philippine SEC. An investor should seek professional advice if
he or she is uncertain of, or has not understood, any aspect of this Offer or the nature of risks involved
in purchasing, holding and trading the Shares. Each investor should consult his or her own counsel,
accountant and other advisors as to the legal, tax, business, financial and related aspects of an
investment in the Shares.
Risks Relating to Our Business
Our rights to manage and operate our portfolio of brands and stores are dependent on the brand
agreements with our brand principals.
Our rights to manage and operate the brands we represent in the Philippines, and therefore
conduct our business, are derived exclusively from the rights granted to us by the brand principals in
the brand agreements we have entered into with them. However, there is no assurance that we will
continue to be granted rights by the brand principals to the brands in our portfolio. As a result, our
ability to continue operating in our current capacity is dependent on the renewal and continuance of
our contractual relationships with our brand principals. Any of our brand principals may decline to
extend the terms of our brand agreements, or those who granted us exclusive rights in the Philippines
may only agree to renewal on a non-exclusive basis or renew on less favorable terms, although we
have not experienced such instances. Furthermore, if any of our brand principals grants other parties
the right to franchise or distribute their products in the Philippines, we may face significant
competition from such other parties and may lose the benefit of the capital and other resources we
have expended to market the brands in the country. Additionally, if we lose any of our brand principals
for any reason, including due to changes in the business model of any brand principal, or any of our
brand principals deciding to cease investments in the Philippine market or enter the Philippine market
on their own, then our business, financial condition and results of operations may be adversely
affected.
33
We have entered into or may enter into additional brand agreements with internationally
recognized brands. Our agreements generally require us to comply with the agreed business plan for
the respective brand principal, which typically covers negotiated requirements for the number of
stores, merchandising, sales targets and fit-out requirements. We also have to comply with operating
standards which are subject to change over time, in some cases at the discretion of the brand principal,
and such standards may restrict our ability to make improvements or modifications to our store
operations without the consent of the brand. Such standards may also require the Company to develop
stores at a rate or in such a layout that is potentially costly for the Company or that the Company is
unable to meet, resulting in termination of agreement/brand rights, although we have not experienced
such instances. Some of our brand principals also restrict us from operating other brands that they
deem to be competitors. Failure to comply with the business plan, operating standards or
non-competition obligations could possibly lead to the loss of a brand principal, which could have a
negative effect on our reputation and make it more difficult to secure future brand partnership
opportunities, thereby adversely affecting our business, prospectus, financial condition and results of
operation.
In addition, some of our brand agreements are governed by the laws of foreign jurisdictions, such
as Italy, France and the United States. The laws of such foreign jurisdictions may differ significantly
from the laws of the Philippines and there may be difficulties with enforcing foreign judgments or
arbitral awards in the Philippines.
The success of our business depends on our ability to maintain and develop relationships with our
current and future brand principals.
We derive substantially all our revenue from direct sales of merchandise of our brand principals,
and our success depends on our ability to both retain existing brands and attract new brand principals.
We have long-standing working relationships with a large number of brand principals, most of which
have existing franchise or distribution arrangements with us, but for a small minority of brand
principals, our operation of their stores and sale of their merchandise are currently premised on verbal
extensions of prior written agreements. We are also in the process of actively negotiating with certain
brand principals for the renewal of the relevant brand agreements. If we are unable to maintain these
relationships, we may not be able to continue to maintain or further expand our brand portfolio and
store network. Furthermore, we receive training, merchandising, design and other operational support
from our brand principals, giving us the benefit of their global knowledge in the operation of specialty
stores, logistics, merchandising, and their brand image. Should adverse changes occur in market
conditions or our competitive position, we may not be able to maintain or negotiate continuing support
from our brand principals, thus losing our access to their assistance and the benefit of their expertise,
which could have a material adverse effect on our ability to run our operations successfully and
efficiently and, in turn, our profitability and prospects.
Moreover, our ability to compete successfully in a highly competitive retail environment depends
on a number of factors, including our ability to anticipate, gauge and respond to changing consumer
demands and tastes. We have to continue adding new, emerging and anticipated brands to our portfolio
or continue adjusting our merchandising mix for each brand to better cater to evolving consumer
preferences. However, if we are unable to maintain good relationships with our existing brand
principals, or if we are unable to develop and maintain relationships with new brand principals, we
may be unable to negotiate the expansion of our brand portfolio or merchandising options, diminishing
our ability to offer the range of merchandise demanded by our customers. As a result, our market
positioning, image and reputation may be adversely affected, and our revenue and profitability may
be impaired.
34
If we are unable to manage and effectively expand our brand and merchandise portfolio to respond
to changing market trends and consumer preferences, our sales and profitability could suffer.
Retail is an ever-changing industry with new brands constantly emerging and consumer trends
evolving every season. Our success depends in part on our ability to identify and acquire brands and
select merchandise that both meet our standards for quality and appeal to changing customer
preferences. We are required to translate dynamic market trends into performing brand and
merchandise offerings. Our senior management team and brand-merchandising managers are primarily
responsible both for identifying brands and purchasing merchandise that meet our specifications, and
for identifying and responding to changes in customer preferences. Failure to timely and accurately
forecast changes in customer preferences and market trends, and to respond by identifying and
developing relationships with appropriate brand principals, or by carrying the right mix of products
in our stores, could impair our plans for growth.
Consumer demand for our brands is directly affected by consumer preferences. Consumer
preferences in the markets in which we operate or intend to operate may cease to favor our store
formats and/or our brands, whether as a result of changes in fashion or lifestyle preferences, or global,
national or regional economic conditions. Moreover, the rapid emergence of new brands and changes
in consumer preferences have made it more difficult to reliably predict sales demand. If we do not
correctly gauge consumer needs and market trends and respond appropriately, we may face difficulties
in managing our brand and merchandise portfolio, which may result in decreased consumer interest in
the brands or merchandise we carry, and reduced product purchases from our stores. Even if we react
appropriately to changes in market trends and consumer preferences, there is no assurance that our
existing retail offerings will continue to appeal to customers, or that we will be able to gain market
acceptance for the new brands or merchandise we introduce. Any misjudgment on our part in the
positioning, selection and merchandising of our retail offerings may lead to an inability to clear
inventory and the need to increase discounts on products, thus impacting our sales and profitability.
Any of the foregoing could have a material adverse effect on our business, financial condition and
results of operations.
Future economic prospects and their impact on consumer spending patterns could adversely affect
our results of operations.
As most of the merchandise we sell in our stores, except for our “FamilyMart” convenience
stores, are generally viewed by consumers to be “discretionary” items rather than “necessities”, our
financial performance is sensitive to the current state of, and future changes in, the economic
condition of the Philippines, where we conduct essentially all of our operations, and the impact of
such economic conditions on consumer spending patterns. Changes in the demand from, or shopping
habits of, consumers in the markets in which we operate may adversely affect our business, including
by impacting inventory levels and capital costs. Weak economic conditions have, at times in the past,
caused the retail environment to deteriorate as consumers reduce their consumption of discretionary
items, and may do so again in the future. Uncertainties regarding future economic prospects may also
affect consumer spending habits, as consumer purchases of discretionary items generally decline
during periods of limited disposable income or economic uncertainty. Adverse economic changes in
any of the cities in which we operate our stores, in particular Metro Manila, could reduce consumer
confidence, and thereby negatively affect our sales and revenues.
Our growth prospects may be limited if we encounter difficulties in executing our expansion plans.
As part of our business strategy, we plan to expand our retail portfolio and store footprint. Our
ability to expand depends on, among others:
•
favorable economic conditions and regulatory environment;
•
our ability to maintain existing relationships with brand principals and add new brands to
our portfolio;
35
•
our ability to identify suitable sites for new stores and successfully negotiate lease
agreements for these sites on terms acceptable to us;
•
our ability to control “cannibalization” among different brands and adjacent retail outlets;
•
our ability to construct and open new stores in a timely and cost-efficient manner;
•
our ability to market existing brands in new geographic regions and introduce new brands
to the market;
•
our ability to continue to attract customers to our existing and new stores;
•
our ability to increase sales from existing customers or reduce inventory shrinkage and
improve our operating margins;
•
our ability to attract, train and retain talented personnel in sufficient numbers for our
expanded operations;
•
our ability to adapt and refine our operational and management systems, including our IT
and CRM systems, to support an expanded network and maintain the effectiveness of our
merchandising and sales processes;
•
our ability to control and manage our costs in our expanded network, in particular purchase
costs and expenses related to rent, logistics, human resources and marketing;
•
the availability of sufficient levels of cash flow or necessary financing to support our
expansion and operations;
•
our ability to obtain financing and other support from business partners for our expansion;
and
•
our ability to manage our multi-format business model.
If we fail to achieve any of the above, we may not be able to achieve our planned expansion
objectives. In addition, if we are unable to successfully manage the potential difficulties associated
with growth of our retail portfolio and store footprint, we may not be able to capture fully the benefits
of scale that we expect from expansion. Our ability to manage our future growth will also depend on
our ability to continue to successfully implement and improve our operational, financial and
management systems in the evolving competitive markets. Failure to execute our expansion strategies
effectively may result in limited growth and reduced profitability which could have a material adverse
effect on our business, prospects, financial condition and results of operations.
We may face increased competition in the Philippines from other retail companies as well as brand
principals, including those who may choose to terminate their partnership arrangements with us.
The retail industry in the Philippines is highly competitive. The intensity of the competition in
the Philippine retail market varies from region to region, but Metro Manila is generally considered to
be the most competitive market. Metro Manila is our largest market in terms of net sales. We face
potential competition principally on two levels: (i) with national and international retailers in the
Philippines and neighboring shopping destinations such as Hong Kong, Singapore and Bangkok,
among others, and (ii) with brands that are in competition with the brands in our portfolio, including
those which we are restricted by our brand principals from operating, as well as our existing brands
should the respective brand principals decide to discontinue their brand arrangements with us.
36
Our retail competitors, including operators of physical stores and online retailers, compete with
us on the basis of brand selection, product quality, acquisition or development of new brands,
customer service, and distribution networks. Our brand competitors compete with us on the basis of
product design and range, brand popularity, price, store location or a combination of these factors. We
anticipate competition from new market entrants and joint partnerships between national and
international operators and brand principals. We expect that an increasing number of international
retailers may enter the Philippine market in the event that the geographical and shareholding
restrictions on foreign enterprises engaged in the Philippine retail business are removed or diminished
and as the economy continues to improve. Potential competition may also come from our existing
brand principals, who may decide to terminate or not renew their arrangements with us and attempt
to operate their business in the Philippines on their own. In this regard, pursuant to the standard
policies of a small number of our brands, we have granted such brand principals certain options, which
are generally exercisable on the expiration or termination of the respective brand agreements, to
acquire our store businesses and/or lease rights to the store locations, or up to 100% equity interests
in relevant members of our Group. The regulatory and business environment of the Philippines,
however, constrains the practicability of exercising any such options. For example, please see
“Regulatory and Environmental Matters — The Retail Trade Liberalization Act and Regulatory and
Environmental Matters — Foreign Investments Act of 1991” for more details. Moreover in our 27-year
operating history, none of our brands have terminated their relationships with us, nor attempted to
operate on their own within the Philippines. Please see “Business — Specialty Retail Stores — Brand
Relationships” for more details.
In addition, some of our competitors are aggressively expanding their number of stores or their
brand offerings. Some of these competitors may have greater financial, distribution or marketing
resources than we do, and may be able or willing to devote greater resources to sourcing, promoting
and selling their brands and products. There can be no assurance that we will be able to compete
successfully against current competitors or new entrants. As competition in certain areas intensifies
or competitors open stores within close proximity to our stores, our results of operations may be
negatively impacted through a loss of sales, reductions in margins from competitive price changes or
greater operating costs. In addition, any loss of our market share could be permanent. Competitive
pressures, including those arising in connection with our expansion strategy (see “Business —
Business Strategies” in this Prospectus for details), may have a material adverse effect on our
business, financial condition and results of operations.
Our existing stores may not continue to operate on a profitable basis and our new stores may not
be profitable.
There is no assurance that our existing stores will be able to operate on a profitable basis,
particularly if the retail environment becomes less favorable to us. The areas surrounding our existing
stores may also change in terms of consumer demographics or store mix, as different businesses move
in and out of the surrounding locations, or there may be changes in the regulatory or industry
environment. There is no assurance that we will have the flexibility to move our existing store
locations or to modify our existing stores in response to any such changes. If we fail to predict and
respond to changes in our retail environment, our business, financial condition and results of
operations may be materially and adversely affected. Moreover, we refurbish our stores from time to
time in order to improve their appearance and preserve our customers’ shopping experience. Any
refurbishment to our existing stores may disrupt their business and cause loss of revenue during such
refurbishment period. If we are unable to complete such refurbishment in a timely manner, our sales
and profitability and results of operations may be adversely affected.
There is no assurance that future store openings will be successful or profitable. Delays in
opening new stores could impact our sales and financial results. Events such as construction delays
caused by permitting or licensing issues, material shortages, labor issues, weather delays or other acts
of god, discovery of contaminants, and accidents, could delay planned new store openings beyond
their expected dates or force us to abandon planned openings altogether. In addition, new retail stores
typically generate lower operating margins as pre-opening expenses are expensed as they are incurred
37
and fixed costs, as a percentage of net sales, are higher. The substantial management time and
resources which our retail store expansion strategy requires may also result in disruptions to our
existing business operations, which may decrease our profitability. As a result of the above factors,
there can be no assurance that we will be successful in opening and operating new stores on a
profitable basis.
In addition, the sales performance of our existing stores for a particular brand may be affected
by the opening of additional stores in other locations. As we operate a brand portfolio of substantial
breadth, the sales performance of existing stores for any of our brands may be affected by the opening
of stores of new brands added to our portfolio. Expansion into new geographical areas will also expose
us to additional operational, logistical and other risks. We may find it difficult to obtain regulatory or
local government approvals for our new stores in these areas due to differences in local requirements
and processes. Operationally, we may experience transportation and/or inventory management
difficulties, due to our lack of familiarity with the logistics network and transportation systems in
these new geographical areas. Any difficulties we experience with respect to developing our business
operations in new geographical areas may materially and adversely affect our business, financial
condition and results of operations.
Our brands may diminish in reputation and value.
Our brands and their related intellectual property are key assets of our business. Our success
depends largely on our ability to maintain and enhance the value of our brands and corresponding
consumer perceptions. However, we do not own the brands in our portfolio and therefore we may not
be able to control the development of these brands as a whole or influence the development of these
brands outside the Philippines. The reputation and value associated with these brands could be
adversely impacted by a number of factors, including: decline in competitiveness, diminished product
quality, incidents involving counterfeit products, disputes or litigation with third parties such as
employees, negative publicity or media coverage. If any of the brands we represent declines in
popularity or market acceptance, or if the brand principals become involved in events which adversely
affect their or the respective brand’s reputation, the image and popularity of the brands we represent
in the Philippines may likewise be adversely affected, which may negatively influence our sales and
business.
Our brand agreements generally grant us the right to use the brand principals’ intellectual
property in connection with the development, operation, promotion, marketing and management of
their brands in the Philippines. While the brand principals remain primarily responsible for the
protection of the intellectual property associated with their brands, if we or the brand principals fail
to identify unauthorized filings of the brand principals’ trademarks, or either of us fail to adequately
protect the brand principals’ trademarks and copyrights, the infringement of the intellectual property
rights associated with our brands by others may cause harm to, or a diminution in value of, the relevant
brand, and possibly a decrease in sales, in turn causing an adverse effect on our profitability and
results of operation.
New stores may place a greater burden on our existing resources and adversely affect our business.
Our proposed expansion will place increased demands on our operational, managerial, financial
and administrative resources. These increased demands could result in us facing various business and
operational risks, which may include insufficient cash flow, insufficient funding capability or an
inability to hire a suitable workforce. As a result, the financial performance of our existing stores may
deteriorate from lack of support and adequate resources. Moreover, there is no assurance that our new
stores will be immediately profitable, and the establishment of new stores may lower our profit
margins until they begin to generate profits. In addition, we may not be able to adapt our respective
management, manpower and information and other operating systems and resources to competitively
38
support the operations of our new stores. Any expansion may adversely affect the efficiency of our
existing operations and the quality of our customer service. In the event that we do not successfully
address these risks, our business, prospects, financial condition and results of operations could be
materially and adversely affected.
We lease substantially all of our premises and we may not be able to continue to renew these leases
or to enter into new leases in favorable locations on acceptable terms.
As of June 30, 2014, we have leased approximately 91% of our total gross selling space. Of our
aggregate leased selling space, approximately 13% is leased from related parties and approximately
87% is leased from third parties. Our lease terms generally average three years, and we have the option
to renew our leases upon expiry. However, there is no assurance that we will be able to renew our
leases with third parties or related parties on acceptable terms or at all. Leases of premises in large
shopping centers may not be available for extension because landlords may decide to change tenants
for better commercial arrangements or otherwise. If we are unable to renew leases with related parties,
we may have to enter into new agreements with third parties. There is no assurance that we will be
able to enter into such new agreements on terms which are acceptable to us or at all. In addition, we
have a 20-year land lease with Fort Bonifacio Development Corporation for our Central Square retail
development, in which some of our brands’ stores are located. Any inability to renew leases as they
expire, including our Central Square land lease, or to acquire new leases in other comparable or more
favorable locations on acceptable terms, the termination of the existing leases, or the revision of lease
terms to our detriment may have a material adverse effect on our business, financial condition and
results of operations. See “Business — Properties”.
In addition, a significant part of our expansion strategy entails the opening of new stores in
premium malls in urban business and shopping districts in Metro Manila and other cities of the
Philippines. Such locations are in high demand. There is no assurance that we will be able to identify
and procure suitable sites for our new stores. In particular, due to the size of our brand portfolio, we
may face competition among our brand principals for desirable store sites. We may not be able to lease
appropriate real estate for all new stores planned for each brand on terms acceptable to us or at all.
If we are not able to secure a tenancy for a particular brand, we may be forced to relocate to a
different, potentially less attractive, location, which may not be acceptable to our brand principal and
therefore could be potentially damaging to our relationship with such brand principal.
With a nationwide footprint of approximately 655 stores, a continued increase in property prices
in the Philippines will increase the costs that we incur in securing locations for our stores and may
increase our costs associated with locations that we already operate. Any sustained upward revisions
in rental rates at major malls may squeeze our margins, making it less economical to lease certain
stores and requiring us to discontinue operations at some of our stores. Furthermore, a number of our
landlords are normally granted the right to terminate the leases prior to their expiration upon the
occurrence of an event of default. In the event that any of our leases are terminated prior to their
expiration, or if our leases expire and are not renewed, we will need to relocate to alternative premises.
Relocation of any of our operations may cause disruptions to our business and may require significant
expenditure, and we cannot assure that we will be able to find suitable premises on acceptable terms
or at all, in a timely manner.
We depend on the development of mall operators for the growth of our business.
Historically, the development of our store network has been substantially mall-based. As of the
June 30, 2014, we had 570 independent stores in approximately 68 malls across the country. In finding
sites for our independent stores, we also benefit from being one of the major tenants in a number of
third-party malls in the Philippines, including Power Plant Mall, Greenbelt and Bonifacio High Street
in Metro Manila. A significant amount of our growth depends on the growth of mall operators,
particularly those in other less developed cities with significantly less premium retail space. There is
no assurance that these mall operators will continue to grow at a rate that is consistent with our
planned rate of growth, or that new malls will be developed and constructed in the cities where
39
we operate or wish to penetrate, or that such malls will offer suitable store sites for our brands. In
addition, there is no assurance that we will continue to be able to secure space in new malls on terms
acceptable to us or at all. In the event that we are unable to obtain space in a sufficient number of
malls, or malls in suitable locations for our brands, we may be unable to fully implement our
expansion plans, and our business, financial condition and results of operations may be materially and
adversely affected.
We are subject to risks associated with our dependence on the importation of foreign merchandise
sold in all of our stores.
As a specialty retailer of international brands, we purchase merchandise from our brand
principals directly or their authorized suppliers. As a result, our business is sensitive to the dynamics
of global trade, including international trade and related cost factors that impact any specific foreign
countries where our brand principals are located or from which our merchandise is sourced. Our
dependence on foreign imports makes us vulnerable to risks associated with products manufactured
abroad, including among other things, risks of damage, destruction or confiscation of products while
in transit to our distribution centers located in the Philippines, charges on or assessment of additional
import duties, VAT, tariffs and quotas, fluctuations in exchange rates, work stoppages, freight cost
increases, inflation, foreign government regulations, trade restrictions, and increased labor costs. Any
delay or interruption in receiving the merchandise we order could impair our ability to timely and
adequately supply products to our stores. The lack of sufficient new merchandise or the merchandise
anticipated by our customers could have a negative impact on our sales, which in turn may have a
material adverse effect on our profitability and results of operation.
As we typically place orders through individual purchase orders, we also may be subject to price
fluctuations based on changes in our brand principals’ businesses, cost structures or other factors.
Under our brand agreements, we generally have the autonomy to set retail prices for the merchandise
sold in our stores. However, our competiveness and profit margins may still be adversely affected if
our brand principals increase the prices of their merchandise and we are unable to offset such increase
in our merchandising costs or otherwise. In addition, the imposition of increased duties, taxes or other
charges on our imports, could also negatively impact our pricing strategies and generate a material
adverse effect on our profitability, business, and results of operations.
We rely upon independent third-party service providers for substantially all of our product
shipments and are subject to increased transportation costs as well as the risks of delay.
All merchandise purchased from our brand principals is shipped and delivered to our distribution
centers by third-party freight forwarders. In the instance of our “FamilyMart” convenience stores and
our “Wellworth” department store, we also rely on local transportation companies for the distribution
of merchandise from our designated warehouses to the stores. Delivery of merchandise from our
distribution centers to our specialty stores is generally handled by our internal truck fleet. Although
we do not have any long-term agreements with these service providers, we have maintained
long-standing relationships with them based on established terms of business. Any deterioration in or
other changes relating to such relationships including changes in supply and distribution chains, could
result in delayed or lost deliveries or damaged products. We may not be able to re-source lost or
damaged merchandise from our brand principals and/or suppliers or re-arrange shipment and delivery
in the shortest time possible. Moreover, these service providers are third parties whom we do not
control. They may decide to increase their prices for services provided to us or discontinue their
relationships with us. There is no assurance that we will be able to negotiate for or maintain terms
commercially acceptable to us, or locate replacement service providers on a timely basis. Delivery
disruptions may also occur for reasons out of our control, such as poor handling, transportation
bottlenecks, labor strikes, and adverse climate conditions. For example, in February 2014, the local
government imposed a truck ban in Manila, which was subsequently lifted in September 2014, that
created congestion at the Port of Manila and the Manila International Container Port, two of the
40
country’s biggest ports, and backlogs in deliveries to and from these ports, thereby causing delays in
transporting goods into and out of the city. Any occurrence of the foregoing could cause us to incur
costs or suffer reduced sales, which could materially and adversely affect our business, profitability
and competitiveness.
In addition, there is no assurance that we will be able to coordinate our logistics strategy to the
degree necessary for the realization of our growth plans. As we expand outside Metro Manila, we will
need to ensure that we are able to secure similarly efficient distributors and service providers for our
stores to be opened in other regions. Compared to our Metro Manila operations, which are relatively
more developed, we may not have the same or comparable logistics network and contacts with respect
to the delivery of our products across other regions in the Philippines. Our failure to establish effective
logistics networks could have a material and adverse effect on our expansion plans, operating costs
and our results of operations. Please see “Business — Business Operations — Specialty Retail Stores
— Merchandise, Inventory and Logistics” for details.
We rely on third-party suppliers and distributors for the provision of products that are necessary for
our convenience store and department store operations.
We purchase the products sold in our “FamilyMart” convenience stores and our “Wellworth”
department store (excluding products sold through concessionaire sales) from independent third-party
suppliers. We generally do not enter into long-term agreements with such suppliers, who may
unilaterally terminate their relationships with us or change their terms of business. There is no
assurance that our third-party suppliers will have sufficient resources to continue to meet our
demands, whether in terms of product, price or delivery. In addition, there is no assurance that our
third-party suppliers will not impose price increases for the products that we purchase from them. If
these suppliers cannot fulfill their obligations to supply sufficient quantities of merchandise to us, or
will only continue supplying products to us at increased prices, we may not be able to find suitable
alternative third-party suppliers on a timely basis to supply the same or similar types and quantities
of merchandise on comparable terms, if at all. Any of the foregoing may materially and adversely
affect our business, financial condition and results of operations.
In addition, we sell food and beverage products as well as other items such as drugs and medicine
in our “FamilyMart” convenience stores. This merchandise may be subject to certain regulatory
requirements, including food and drug safety standards, such as the Food, Drugs and Devices, and
Cosmetics Act, and the Food Safety Act. There is a risk that the quality of the products supplied to
us may be sub-standard or may be contaminated either intentionally or inadvertently. While we subject
our suppliers to rigorous inspection and compliance procedures, any failure by our third-party
suppliers to meet our standards or to comply with applicable regulations could result in liability and
harm to our operations and reputation. Please see “Business — Business Operations — Convenience
Stores — Supply” for details.
Our business relies on the satisfactory performance of our IT systems and any malfunction for an
extended period or loss of data could materially and adversely affect our ability to operate.
The effectiveness and efficiency of our operations are dependent on a number of management
information systems. We rely on our IT systems to manage many key aspects of our business, such as
demand forecasting, purchasing, supply chain management, store operations and sales processing,
staff planning and deployment, marketing and advertising, financial management and safeguarding of
information. These systems are critical to our operations, as we use them for the exchange of
information between our stores and our centralized teams, to manage procurement, sales and
inventory, to collect and analyze customer information, and to oversee our cash management and
internal processes. As we develop our online sales strategy, our reliance on appropriate IT systems will
also increase. There is no assurance that our IT systems will always operate without interruption or
malfunction in the future and that we will not lose data. Any failure of our management systems to
41
perform as anticipated or to meet the needs of our operations, particularly as we conduct our
expansion, could disrupt our business, expose us to operational inefficiencies and risks, and may result
in higher costs, reduced sales or otherwise adversely affect our results of operation and future
financial performance.
In addition, we are required to maintain a database of confidential customer information pursuant
to the terms of certain of our brand agreements. Any failure on our part to maintain the confidentiality
of such customer database could cause operational, reputational, legal and cost ramifications for us,
any of which could have a material and adverse effect on our business, financial condition and
prospects.
We rely on services rendered by independent contractors that may not always meet our requirements
for quality, availability or project completion, within our budget and in accordance with our
schedule.
We rely on independent contractors to provide various services, including construction, piling
and foundation and building and property fitting-out works. We generally select independent
contractors by conducting tenders and taking into consideration factors such as experience, reputation
for quality, track record and the contractor’s relationship with us. Although we supervise the
construction and fit-out progress of our independent contractors, there is no assurance that the services
rendered by any of our independent contractors will always be satisfactory or match our requirements
for quality, particularly in respect of the fitting-out works in our specialty stores where strict
compliance with the relevant brand principal’s requirements is required. In addition, we may be
required to provide additional capital in excess of the contractor’s bid to complete construction of a
new store or refurbishment of an existing store according to our requirements.
We have previously encountered delays in the commencement and completion of our stores and
construction or renovation projects due to, among others, delays in obtaining requisite governmental
permits or inclement weather conditions. There can be no assurance that such delays will not occur
again in the future. As a result, we may incur additional costs arising from delayed store openings and
operations, and our sales performance may be negatively affected. There is no assurance that we will
be able to find or engage an independent contractor for any particular project within our budget, which
could result in cost increases or project delays. Any of these factors could have a material adverse
effect on our business, financial condition and results of operations.
Our operations may require significant capital expenditure and financing which we may not be able
to secure.
Our growth depends on capital expenditures for the refurbishment of existing stores and the
development and fitting-out of new stores. We may not be able to fund capital improvements or
acquisitions solely from cash from our operating activities, or existing cash or proceeds from the Offer
and we may not be able to obtain additional debt or equity financing. Our ability to finance our capital
expenditure plans is subject to a number of risks, contingencies and other factors, some of which are
beyond our control. Furthermore, any adverse developments in the Asian and international equity
capital or credit markets or any decline in consumer disposable income in the Philippines may be a
barrier to raising financing and may increase the overall cost of our funds. We may also require
additional financing to fund day-to-day operational needs and debt service payments. Additional
financing, when needed, may not be available on acceptable terms, or at all. If we incur additional
debt, it will result in increased debt service obligations and could result in additional operating and
financing covenants, or liens on our assets, that could restrict our operations. Without the required
financing, we may not be able to continue our operations, implement our planned growth, hire, train
and retain employees or respond to competitive pressures. The lack of adequate funding facilities on
acceptable terms, or at all, could materially and adversely affect our ability to fund the development
and expansion of our business. Our inability to obtain sufficient funding to support our operations or
development strategies could have a material adverse effect on our business, prospects, results of
operations and financial condition.
42
Our margins may be affected by increases in our operating and other expenses.
Our operations may be subject to increases in operating and other expenses due to a number of
factors including, but not limited to, any of the following:
•
increases in merchandise purchase prices and inventory costs;
•
increases in rent;
•
increases in labor costs;
•
increases in construction, design, repair and maintenance costs for new and existing stores;
•
changes in laws, regulations or government policies which increase the cost of compliance
with such laws, regulations or policies;
•
increases in the rate of inflation;
•
adverse changes in the cost of existing and future debt financing;
•
increases in insurance premiums;
•
increases in the cost of utilities; and
•
increases in custom duties, business taxes, property taxes and other statutory charges.
Any increase in the above operating and other expenses will have an impact on our cash flows.
Furthermore, any sustained increases in our operating and other expenses could result in all or a
portion of our operations becoming unprofitable. If our stores do not generate revenue sufficient to
meet our operating expenses and debt service and capital expenditure requirements, our business,
results of operations and financial condition could be materially and adversely affected.
We have previously experienced negative cash flows from our operating activities and there can be
no assurance that we will not experience negative cash flows in the future.
P 553 million
Our net cash flows from (used in) operating activities amounted to =
P 252 million, =
million in the years ended December 31, 2011, 2012 and 2013, respectively. Our
and
negative cash flows from operations in the year ended December 31, 2013 was primarily due to a
decrease in trade and other payables of =
P 3,109 million, and an increase in merchandise inventory of
=
P 505 million. While this situation arose because we reduced our trade payable days in 2013 by
financing our inventory acquisition using short-term loans and increased our inventory due to the store
rollout for our new brands, there can be no assurance that we will not face negative cash flows in the
future, whether for increased inventory costs due to shifts in market demand, or otherwise, which
could negatively affect our liquidity and may materially and adversely affect our businesses,
prospects, financial condition and results of operations.
=
P (2,446)
Product liability claims in respect of defective goods and food safety and food-borne illness
concerns could adversely affect our reputation and our financial prospects.
Our business involves an inherent risk of product liability, product recall, adverse publicity and
exposure to public liability claims. Our TWG tea salons, Oliviers & Co. store, Marks & Spencer food
stores, and “FamilyMart” convenience stores sell perishable food products and food services. Our
central kitchen in Manila also prepares and supplies our TWG tea salons and some of our
“FamilyMart” convenience stores with food products. The preparation, packaging, transportation,
storage and sale of perishable food products and non-food products entail the inherent risks of product
contamination, deterioration or defect, which would potentially lead to product recalls, liability claims
and adverse publicity. Food and non-food products may contain contaminants that could, in certain
43
cases, cause illness, injury or death. Any sale of contaminated, deteriorated or defective products may
be grounds for product liability claims or product recalls. The risks of negative press, product liability
claims or product recall obligations are particularly relevant in the context of our sales of freshly
prepared food products, a service that is highlighted in our stores carrying our food brands and our
convenience stores, and a business we intend to continue operating. We expend significant efforts and
resources to comply with applicable laws and regulations with respect to food and safety standards and
only source from reputable suppliers with good track records. We also administer a system of quality
control and inspection for both our food and non-food products. If we are found responsible for
damage caused by contaminated or defective goods sold in our stores, the reputation of our stores may
be adversely affected. This could lead to the erosion of consumer confidence in the relevant brands
and a subsequent reduction in sales. Such an event would be likely to have an adverse effect upon our
business, financial condition, results of operations and prospects.
The sale of counterfeit products may affect our reputation and profitability.
As the brands we operate enjoy widespread consumer recognition, we may encounter
counterfeiting of the products sold in our stores, such as unauthorized imitation or replication of the
brands’ designs, trademarks, or labeling by third parties. We usually rely on our brand principals for
anti-counterfeiting efforts and enforcement of their intellectual property rights, but it can be
particularly difficult and expensive to detect and stop counterfeiting in the Philippines. Any actions
taken by our brand principals may require significant assistance on our part and force us to devote
substantial management time and resources, and may not provide a satisfactory or timely result, any
of which could harm sales and our results of operations. Under our brand agreements, we are generally
indemnified by our brand principals for any infringement of their intellectual property rights by third
parties. Moreover, we believe we serve vastly different markets to those targeted by counterfeiters.
However, there can be no assurance that any actions taken to combat counterfeiting of our brand
principals’ products will be successful in the prevention of counterfeiting, or that counterfeiting will
not negatively impact our sales. Despite our success in combating piracy through measures such as
pricing, the significant presence of counterfeit products in the market could dilute the value of the
brands we operate and impact product sales, adversely affecting our business and results of operations.
Damage to, or other potential losses involving, our assets may not be covered by insurance.
We maintain comprehensive property and liability insurance policies with coverage features and
insured limits that we believe are consistent with market practice in the retail industry in the
Philippines. Nonetheless, the scope of insurance coverage that we can obtain, or our ability to obtain
such coverage at reasonable rates, may be limited. In addition, certain types of losses, generally of a
catastrophic nature, such as natural disasters, terrorist acts, the outbreak of infectious disease or any
resulting losses, may be uninsurable, or the required insurance premiums may be too expensive to
justify obtaining insurance. In the event of a substantial loss, the insurance coverage we carry may not
be sufficient to pay the full market value or the replacement cost of our lost investment. We are also
subject to risks of increased premiums or deductibles, reduced coverage and additional or expanded
exclusions in connection with our existing insurance policies.
If we suffer any uninsured losses, damages or liabilities in the course of our operations, we may
not have sufficient funds to cover any such losses, damages or liabilities. Accordingly, we could lose
some or all of the capital we have invested in a store or in inventory, as well as the anticipated future
revenue from that store, and we could remain obligated for guarantees, debt or other financial
obligations related to such store. To the extent that we suffer losses or damages as a result of a risk
for which we do not maintain insurance or which is not covered by our insurance policies or where
the cost of the losses or damages exceeds our insurance coverage, we will have to bear such costs,
which could have a material adverse effect on our business, financial condition and results of
operations.
44
Our business and operations are dependent upon key executives.
We have been, and will continue to be, dependent on the expertise and experience of our senior
management and other key employees for the success of our business. The loss of any of our senior
management or other key employees could impair our ability to operate and impede the execution of
our strategies. We may not be able to replace such persons within a reasonable period of time with
individuals that possess comparable expertise and experience, or at all, which may disrupt our
business and impair our financial condition, results of operations and future prospects. In particular,
our President, Mr. Anthony T. Huang, is the primary person in-charge of maintaining and developing
our relationships with our brand principals. Pursuant to the terms of some of our brand agreements,
our arrangements with these brands are conditional on his continued employment with our Group. For
more information on our key personnel, see “Board of Directors and Senior Management” beginning
on page 155 of this Prospectus.
Our inability to attract and retain qualified personnel may affect our growth and results of
operations.
We have a strong management team with broad experience in the retail industry and all aspects
of our operations, including merchandising, brand management, supply chain management, store
operations, finance, marketing and human resources. Our significant growth places substantial
demands on our management team, and our continued growth could increase those demands. In
addition, pursuant to our brand agreements, we are required to recruit and maintain certain store
management personnel as well as qualified general store staff. If we are unable to recruit such
employees, or fail to motivate them to provide quality service, the image, operations and sales
performance of our stores could be adversely affected. Our ability to manage future growth will
depend on the adequacy of our resources and our ability to continue to identify, attract and retain
qualified personnel. Failure to do so could have a material adverse effect on our business, results of
operations and financial condition.
We operate in a regulated industry and our business is affected by the development and application
of regulations in the Philippines.
We operate our businesses in a regulated environment. Retail establishments in the Philippines
are subject to a variety of government ordinances, which vary from one locality to another but
typically include zoning considerations as well as the requirement to procure a variety of
environmental and construction-related permits. We must also comply with food safety, consumer
quality and pricing regulations.
The primary regulations applicable to our operations include standards regarding:
•
the suitability of the store site;
•
air pollution;
•
price controls;
•
food inspection;
•
promotional activities;
•
packaging safety;
•
waste discharge;
•
electricity supply;
•
construction;
45
•
business permits;
•
fire safety;
•
sanitation; and
•
sale of consumer products.
For more details, see “Regulatory and Environmental Matters” beginning on page 145 of this
Prospectus.
All construction and development plans are required to be filed with and approved by the local
government unit concerned. The requirements of each local government unit may vary but in general,
approval of such plans is conditional upon, among other things, the developer’s financial, technical
and administrative capabilities and, where the project site is leased, presentation of the lease contract
or authority from the registered owner of the land authorizing the construction. Alterations of
approved plans that affect significant areas of the project, such as infrastructure and public facilities,
also requires the prior approval of the relevant government unit. There can be no assurance that we
or our associates or partners will be able to obtain governmental approvals for our projects or that
when given, such approvals will not be revoked. There can also be no assurance that we will continue
to pass ongoing consumer safety and quality inspections in all of our store locations.
We may fail to fulfill the terms of licenses, permits and other authorizations, or fail to renew them
on expiration.
We are required to maintain and renew certain licenses, permits and other authorizations,
including business permits and permits concerning, for example, health and safety, environmental
standards and distribution standards. Our licenses, permits and other authorizations contain various
requirements that must be complied with to keep such licenses, permits and other authorizations valid.
If we fail to meet the terms of any of our licenses, permits or other authorizations necessary for our
operations, these may be suspended or terminated, leading to temporary or potentially permanent
closing of stores, temporary cessation of store operations, suspension of construction activities,
imposition of penalties and fines, or other adverse consequences. In addition, we cannot be certain that
any given license, permit or authorization will be deemed sufficient by the relevant governmental
authorities to fully cover activities conducted in reliance on such license, permit or authorization.
There can be no assurance that we will continue to be able to renew the necessary licenses,
permits and other authorizations for our stores as necessary or that such licenses, permits and other
authorizations will not be revoked. If we are unable to obtain or renew them or are only able to do
so on unfavorable terms, this could have a material and adverse effect on our business, financial
Our business, financial performance and results of operations are subject to seasonality.
The apparel, footwear and accessories industries have historically been subject to cyclical
variations, recessions in the general economy and uncertainties regarding future economic prospects
that affect consumer spending habits. Purchases of discretionary luxury items, such as products of our
brands, tend to decline during recessionary periods, when disposable income is lower. The success of
our operations depends on a number of factors impacting discretionary consumer spending, including
general economic conditions, consumer confidence, wages and unemployment, housing prices,
consumer debt, interest rates, fuel and energy costs, taxation and political conditions. A worsening of
the economy may negatively affect consumer purchases from our brands and could have a material
adverse effect on our business, financial condition and operating results.
46
We also experience seasonal fluctuations in our specialty stores and may continue to do so in our
specialty stores as well as our new department store format going forward. Sales generally slow down
in the first and third quarters of the year, and start to pick up in the second and last quarters, driven
by the summer and gift-giving holiday seasons as well as seasonal promotions and sales activities that
we conduct. If sales during our peak selling periods are significantly lower than we expect for any
reason, or if there is any prolonged disruption in our operations during our peak selling periods, we
may be unable to adjust our expenses in a timely manner and may be left with a substantial amount
of unsold inventory, especially seasonal merchandise that is difficult to liquidate after the applicable
season. This may materially and adversely affect our profitability, results of operations and financial
condition.
We are exposed to certain risks in connection with the substantial use of cash in our convenience
store operations.
Due to the nature of the convenience store business, we process a large volume of cash
transactions in the course of our business operations. Nearly all of our customer purchases are settled
in cash, thus exposing us to the risk of cash change shortages, as well as security issues such as theft.
Although we have a cash management policy, there is no guarantee that our cash management policy
is sufficient to protect us from such risks which, if substantial, could have an adverse effect on our
We may be subject to unionization, work stoppages, slowdowns or increased labor costs.
Our workforce is non-unionized. If our employees unionize, it could result in demands that may
increase our operating expenses and adversely affect our profitability. If our employees were to
unionize and we were unable to reach agreement on the terms of their collective bargaining agreement
or we were to experience widespread employee dissatisfaction, our business operations could be
subject to work slowdowns or stoppages. In addition, we may be subject to disruptions by organized
labor groups protesting the non-union status of our workforce. Any of these events would be disruptive
to our operations and could harm our business. Please see “Business — Employees” for details.
Continued compliance with, and any changes in, environmental laws and regulations may adversely
affect our results of operations and financial condition.
We are subject to various laws relating to environmental matters with respect to our
“FamilyMart” convenience store operations and the development of Central Square. Such laws provide
that we could be liable for the costs of removal of certain hazardous substances and remediation of
certain hazardous locations. The failure to remove or remediate such substances or locations, if any,
could adversely affect our operations on such sites and potentially also result in claims against the
owner by private plaintiffs. Additionally, we could be held liable if environmental claims are
successfully brought against us, arising in respect of real estate acquired with undisclosed or unknown
environmental problems or which are located on contaminated properties or as to which we have
established inadequate financial reserves.
In addition, we cannot predict what environmental legislation or regulations will be amended or
enacted in the future, how existing or future laws or regulations will be enforced, administered or
interpreted, or the amount of future expenditures that may be required to comply with these
environmental laws or regulations or to respond to environmental claims. The introduction or
inconsistent application of, or changes in, laws and regulations applicable to our business could have
a material adverse effect on our business, financial condition and results of operations.
47
Risks Relating to Our Organization and Structure
We are a holding company and depend on dividends from our subsidiaries to meet our obligations
and to provide funds for payment of dividends on our Shares.
We are a holding company and conduct substantially all of our operations through our
subsidiaries. Accordingly, dividends and other distributions that we receive from our subsidiaries are
our principal source of income. The amount of these dividends and distributions are an important
factor in our ability to pay dividends on our Shares (to the extent declared by our Board). Our
subsidiaries’ ability to pay dividends or make other distributions to us is subject to the availability of
distributable reserves and to these companies having sufficient funds that are not needed to fund their
respective operations, other obligations or business plans. Any limitation on the ability of our
subsidiaries to pay dividends and distributions to us could have a material and adverse effect on our
We are controlled by the Tantoco Family, whose interests may differ significantly from the interests
of other shareholders.
We are controlled by members of the Tantoco Family who, prior to the Offer, beneficially owned
100% of the Shares, and who, immediately after the Offer, will beneficially own approximately 73.9%
of the Shares. Members of the Tantoco Family also serve as our directors and executive officers.
Certain members of the Tantoco Family are also major shareholders of our Group, and, either
individually or collectively, have private interests in a number of other companies. There is nothing
to prevent companies that are controlled by the Tantoco Family from engaging in activities that
compete directly with our retail businesses or activities, which could have a negative impact on our
business. Further, they could influence the outcome of any corporate transaction or other matters
submitted to our shareholders for approval, including the election of directors, mergers and
acquisitions, and other significant corporate actions, to the extent they are not required to abstain from
voting in respect of such transactions. The interests of the Tantoco Family, as our controlling
shareholder, may differ significantly from or compete with our interests or the interests of our other
shareholders, and there can be no assurance that the Tantoco Family will exercise influence over us
in a manner that is in the best interests of our other shareholders.
Risks Relating to the Philippines
Our operations are concentrated in the Philippines, and therefore any downturn in general
economic conditions in the Philippines could have a material adverse impact on our business
operations.
As virtually all of our business operations are conducted in the Philippines and nearly all of our
revenue is sourced from the Philippines, the results of operations, financial condition and prospects
are subject to a significant degree to the general state of the Philippine economy. In the past, the
Philippines has experienced periods of slow or negative growth, high inflation, significant devaluation
of the Peso and the imposition of exchange controls. In addition, the global financial, credit and
currency markets, since the second half of 2007, have experienced, and may continue to experience,
significant dislocations and liquidity disruptions. These and other related events have had a significant
impact on the global capital markets and the global credit and financial markets as a whole. The
related slowdown in the economies of the United States, the European Union and certain Asian
countries has previously affected, and such slowdowns may adversely affect in the future, economic
growth in the Philippines. Our financial performance and results of operations are closely tied to the
performance of OFW remittances and the increase in BPO business in the Philippines, both of which
depend to a significant degree on the performance of the global economy.
48
Any deterioration in the Philippine economy as a result of these or other factors, including a
significant depreciation of the Peso or increase in interest rates, may adversely affect consumer
sentiment and lead to a reduction in demand for retail and consumer goods. This, in turn, could
materially and adversely affect our financial condition and results of operations, and our ability to
implement our business strategy and expansion plans.
Any political instability in the Philippines may adversely affect our business operations.
The Philippines has from time to time experienced political and military instability. The
Philippine Constitution provides that in times of national emergency, when the public interest so
requires, the Government may take over and direct the operation of any privately owned public utility
or business. In the last few years, there has been political instability in the Philippines, including
public and military protests arising from alleged misconduct by the previous administration.
In December 2011, the House of Representatives initiated impeachment proceedings against
Renato Corona, Chief Justice of the Supreme Court of the Philippines for improperly issuing decisions
that favored former President Arroyo, as well as failure to disclose certain properties, in violation of
rules applicable to all public employees and officials. In July 2013, a major Philippine newspaper
exposed a scam relating to the diversion and misuse of the Priority Assistance Development Fund by
some members of Congress through pseudo-development organizations headed by Janet Lim Napoles,
which prompted a number of investigations, including one in the Senate, on certain individuals.
Subsequently in September 2013, cases of plunder and malversation of public funds were filed with
the Office of the Ombudsman against Janet Lim Napoles, three Senators, a few members of the House
of Representatives and other Government personnel. In July 2014, a valid impeachment complaint,
endorsed by three representatives from the House of Representatives, against President Aquino over
his controversial budget spending program, the Disbursement Acceleration Program, was filed, and the
House Committee on Justice is mandated to handle the complaint.
No assurance can be given that the political environment in the Philippines will stabilize and any
political instability in the future could reduce consumer demand for retail and consumer goods to our
disadvantage, or result in inconsistent or sudden changes in regulations and policies that affect our
business operations, which could have an adverse effect on our results of operations and financial
condition.
Continued terrorist activities and high-profile violent crime in the Philippines could destabilize the
country, adversely affecting our business environment.
The Philippines has been subject to a number of terrorist attacks in the past several years. The
Philippine army has been in conflict with the Abu Sayyaf organization which has been identified as
being responsible for certain kidnapping incidents and other terrorist activities particularly in the
southern Philippines. Moreover, isolated bombings have taken place in the Philippines in recent years,
mainly in regions in the southern part of the Philippines, such as the province of Maguindanao.
Although no one has claimed responsibility for these attacks, it is believed that the attacks are the
work of various separatist groups, possibly including the Abu Sayyaf organization. An increase in the
frequency, severity or geographic reach of these terrorist acts could destabilize the Philippines and
adversely affect the country’s economy.
The Government, through the Armed Forces of the Philippines (“AFP”), has clashed with
members of several separatist groups seeking greater autonomy, including the Moro Islamic Liberation
Front (“MILF”), the Moro National Liberation Front (“MNLF”) and the New People’s Army. On
October 19, 2011, 19 AFP troops were killed in a firefight with MILF members in the southern region
of the Philippines. On December 16, 2011, five AFP soldiers were killed in a clash with New People’s
Army members. In August, 2013, a series of bombings occurred in the cities of Cagayan de Oro and
Cotabato City, as well as other areas in Maguindanao and North Cotabato provinces, all located in
Mindanao, and in September, 2013, armed clashes took place between the MNLF and the AFP in
Zamboanga City in Mindanao, with a number of civilians held hostage. These continued conflicts
49
between the Government and separatist groups could lead to further injuries or deaths of civilians and
members of the AFP, which could destabilize parts of the country and adversely affect or hamper the
country’s economy. Any such destabilization could cause interruption to parts of our business and our
expansion plans, and materially and adversely affect our financial conditions, results of operations and
prospects.
Territorial and other disputes with China and a number of Southeast Asian countries may disrupt
the Philippine economy and business environment.
The Philippines, China and several Southeast Asian nations have been engaged in a series of long
standing territorial disputes over certain islands in the West Philippine Sea, also known as the South
China Sea. Despite efforts to reach a compromise, a dispute arose between the Philippines and China
over a group of small islands and reefs known as the Scarborough Shoal. From April 2012 to date,
actions taken by both sides have threatened to disrupt trade and other ties between the two countries,
including a temporary ban by China on Philippine banana imports, a temporary suspension of tours to
the Philippines by Chinese travel agencies and the rejection by China of the Philippines’ request for
arbitral proceedings administered in accordance to the United Nations Convention on the Law of the
Sea to resolve the disputes. Recent talks between the Government and the United States about
increased American military presence in the country, particularly through possible American forays
into and use of Philippine military installations, may also further increase tensions.
There had been other occurrences of territorial disputes with Malaysia and Taiwan. In March
2013, several hundred armed Filipino-Muslims illegally entered Lahad Datu, Sabah, Malaysia in a bid
to enforce the Sultan of Sulu’s alleged historical claim on the territory. Clashes between the
Filipino-Muslim individuals and the Malaysian armed forces resulted in casualties on both sides.
Taiwan imposed economic sanctions on the Philippines as a result of an incident in May 2013,
whereby a Taiwanese fisherman was unintentionally killed by a Philippine Coast Guard ship that
opened fire on his vessel in a disputed exclusive economic zone between Taiwan and the Philippines.
The sanctions were eventually lifted after a formal apology was issued by the Government. However,
the incident has raised tensions between the two countries in recent months.
Should territorial disputes between the Philippines and other countries in the region continue or
escalate further, the Philippines and its economy may be disrupted and our operations could be
adversely affected as a result. In particular, further disputes between the Philippines and other
countries may lead to reciprocal trade restrictions on imports or suspension of visa-free access and/or
OFW permits. Any impact from these disputes in countries from which we import goods, or where
substantial OFW remittances are sourced could materially and adversely affect our business, financial
Future changes in the value of the Peso against the US dollar and other currencies may adversely
affect our results of operations.
We primarily purchase imported products from our brand principals in the United States and
Europe, or from their authorized suppliers outside the Philippines. Fluctuations in the exchange rate
between the Peso against foreign currencies, particularly against the US dollar and the Euro, will
therefore affect our net profit margins and may result in net foreign currency gains or losses. There
is no assurance that the exchange rate of the Peso will remain stable against the US dollar, Euro or
any other foreign currencies in the future. Any significant changes in the exchange rate between the
Peso against the US dollar, Euro or any other foreign currencies may adversely affect our results of
operations, despite our mitigating actions. At present, the country’s exchange rate policy supports a
freely floating exchange rate system whereby the BSP leaves the determination of the exchange rate
to market forces. Under a market-determined exchange rate framework, the BSP does not set the
foreign exchange rate but instead allows the value of the Peso to be determined by the supply and
demand of foreign exchange.
50
Foreign exchange regulations in the Philippines may limit our access to foreign currency for
service of foreign-currency denominated debts.
Under existing foreign exchange controls in the Philippines, as a general rule, Philippine
residents may freely dispose of their foreign exchange receipts and foreign exchange may be freely
sold and purchased outside the Philippine banking system. Restrictions exist on the sale and purchase
of foreign exchange in the Philippine banking system. In the past, the Government has instituted
restrictions on the ability of foreign companies to use foreign exchange revenues or to convert Pesos
into foreign currencies to satisfy foreign currency-denominated obligations, and no assurance can be
given that the Government will not institute such or other restrictive exchange policies in the future.
The occurrence of natural disasters or other catastrophes, severe weather conditions, or outbreaks
of contagious diseases may materially and adversely affect the Philippine economy and disrupt our
operations.
The Philippines has experienced a number of major natural catastrophes over the years, including
typhoons, droughts, floods, volcanic eruptions and earthquakes. In the past, these events have affected
our operating results. For example, Typhoon Yolanda in 2013 negatively affected the operating results
of our specialty stores. There can be no assurance that the occurrence of such catastrophes will not
materially disrupt our operations in the future. We could experience substantial inventory or property
loss as a result of any such catastrophes, and we might not be able to rebuild or restore operations in
a timely fashion. We maintain third-party insurance covering only fire, floods and typhoons. We do
not maintain full third-party insurance to cover all cases of loss of material property or other
catastrophes, and we do not maintain business interruption insurance. Therefore, the occurrence of
natural or other catastrophes or severe weather conditions could have a material adverse effect on our
In 2003, Taiwan, the People’s Republic of China, Singapore and other countries experienced an
outbreak of SARS, which adversely affected the economies of many countries in Asia, including the
Philippines. In addition, since late 2003, a number of countries in Asia, including the Philippines, as
well as countries in other parts of the world, have had confirmed cases of the highly pathogenic H5N1
strain of the avian influenza virus in birds. Furthermore, certain countries in Southeast Asia have
reported cases of bird to human transmission of avian influenza resulting in numerous human deaths.
In 2009, a new strain of the H5N1 influenza virus known as swine flu was found to have been
transmitted to humans. Following an initial outbreak in Mexico, swine flu was contracted by humans
around the world, including Southeast Asia, causing death in some instances. The contagious nature
and global reach of this disease led the World Health Organization to describe the outbreak as a
pandemic. Avian influenza, swine flu and SARS outbreaks have adversely affected, and any future
outbreaks of these diseases or other contagious diseases could adversely affect, the Philippine
economy and economic activity in the region and could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Risks Relating to the Offer Shares
There can be no guarantee that the Offer Shares will be listed on the PSE.
Purchasers of Offer Shares will be required to pay for such Offer Shares on the Trading
Participants and Retail Offer Settlement Date and on the Institutional Offer Settlement Date, which are
expected to be on or about November 4, 2014 and November 7, 2014, respectively. There can be no
guarantee that listing will occur on the anticipated Listing Date or at all. Delays in the admission and
the commencement of trading in shares on the PSE have occurred in the past. If the PSE does not admit
the Offer Shares onto the PSE, the market for the Offer Shares will be illiquid and shareholders may
not be able to trade the Offer Shares. This may materially and adversely affect the value of the Offer
Shares.
51
There has been no prior market for the Shares, so there may be no liquidity in the market for the
Offer Shares and the price of the Offer Shares may fall.
As there has been no prior trading in the Shares, there can be no assurance that an active market
for the Offer Shares will develop following the Offer or, if developed, that such market will be
sustained.
The Offer Price has been determined after taking into consideration a number of factors
including, but not limited to, our prospects, the market prices for shares of companies engaged in
related businesses similar to that of our business and prevailing market conditions. The price at which
the Shares will trade on the PSE at any point in time after the Offer may vary significantly from the
Offer Price.
The market price of the Shares may be volatile, which could cause the value of investors’
investments in the Shares to decline.
The market price of Shares could be affected by several factors, including:
•
general market, political and economic conditions;
•
changes in earnings estimates and recommendations by financial analysts;
•
changes in market valuations of listed stocks in general and other retail stocks in particular;
•
the market value of our assets;
•
changes to Government policy, legislation or regulations; and
•
general operational and business risks.
In addition, many of the risks described elsewhere in this Prospectus could materially and
adversely affect the market price of the Shares.
In part as a result of global economic downturns, the global equity markets have historically
experienced price and volume volatility that has affected the share prices of many companies. Share
prices for many companies have experienced wide fluctuations that have often been unrelated to the
operating performance of those companies. Fluctuations such as these may adversely affect the market
price of the Shares.
Shareholders may be subject to limitations on minority shareholders’ rights and regulations may
differ from those in more developed countries.
Our corporate affairs are governed by our Articles and by-laws and the Philippine Corporation
Code. The laws of the Philippines relating to the protection of interests of minority shareholders differ
in some respects from those established under the laws of more developed countries. Such differences
may mean that our minority shareholders may have less protection than they would have under the
laws of more developed countries. The obligation under Philippine law of majority shareholders and
directors with respect to minority shareholders may be more limited than those in certain other
countries such as the United States or the United Kingdom. Consequently, minority shareholders may
not be able to protect their interests under current Philippine law to the same extent as in certain other
countries.
The Philippine Corporation Code, however, provides for minimum minority shareholders
protection in certain instances wherein a vote by the shareholders representing at least two-thirds of
the Company’s outstanding capital stock is required. Please see “Description of the Shares —
Fundamental Matters”. The Philippine Corporation Code also grants shareholders an appraisal right
allowing a dissenting shareholder to require the corporation to purchase his shares in certain instances.
52
Please see “Description of the Shares — Appraisal Rights”. Derivative actions are rarely brought on
behalf of companies in the Philippines. Accordingly, there can be no assurance that legal rights or
remedies of minority shareholders will be the same, or as extensive, as those available in other
jurisdictions or sufficient to protect the interests of minority shareholders.
There can be no assurance that we will be able to pay dividends or maintain any given level of
dividends.
There is no assurance that the Company can or will declare dividends on the Shares in the future.
Future dividends, if any, will be at the discretion of the Board and will depend upon the Company’s
future results of operations and general financial condition, capital requirements, its ability to receive
dividends and other distributions and payments from its subsidiaries, foreign exchange rates, legal,
regulatory and contractual restrictions, loan obligations and loan covenants, including loan obligations
and loan covenants of its subsidiaries, and other factors the Board may deem relevant. See “Dividends
and Dividend Policy” beginning on page 59 of this Prospectus.
Future sales of Shares in the public market could adversely affect the prevailing market price of the
Shares and shareholders may experience dilution in their holdings.
In order to finance the expansion of our business and operations, the Board will consider the
funding options available to them at the time, which may include the issue of new Shares. If additional
funds are raised by us through the issuance of new equity or equity-linked securities other than on a
pro rata basis to existing shareholders, the percentage ownership of existing shareholders may be
reduced, shareholders may experience subsequent dilution or such securities may have rights,
preferences and privileges senior to those of the Offer Shares. Furthermore, the market price of the
Shares could decline as a result of future sales of substantial amounts of the Shares in the public
market or the issuance of new Shares, or the perception that such sales, transfers or issuances may
occur. This could also materially and adversely affect the prevailing market price of the Shares or our
ability to raise capital in the future at a time and at a price we deem appropriate.
The Shares may be subject to Philippine foreign ownership limitations, if we acquire land in the
Philippines.
Although we currently do not own land in the Philippines, the Philippine Constitution and related
statutes restrict land ownership to Philippine Nationals. The term “Philippine National”, as defined
under the Foreign Investment Act, means a citizen of the Philippines, or a domestic partnership or
association wholly-owned by citizens of the Philippines, or a corporation organized under the laws of
the Philippines of which at least 60% of the capital stock outstanding and the entitlement to vote is
owned and held by citizens of the Philippines, or a corporation organized abroad and registered to do
business in the Philippines under the Philippine Corporation Code, of which 100% of the capital stock
outstanding and the entitlement to vote is wholly-owned by Filipinos or a trustee of funds for pension
or other employee retirement or separation benefits, where the trustee is a Philippine national and at
least 60% of the fund will accrue to the benefit of Philippine nationals. As of the June 30, 2014, we
do not own land in the Philippines. However, this does not preclude us from acquiring land in the
Philippines in the future should the demand of our operations so require.
Considering the foregoing, in the event that we acquire land in the Philippines and for so long
as we continue to own land in the Philippines, foreign ownership in our capital stock is limited to a
maximum of 40% of our issued and outstanding capital stock. We cannot allow the issuance or the
transfer of shares to persons other than Philippine Nationals and cannot record transfers in our books
if such issuance or transfer would result in us ceasing to be a Philippine National for purposes of
complying with the restrictions on foreign land ownership discussed above. These restrictions may
adversely affect the liquidity and market price of the Shares, to the extent international investors are
not permitted to purchase Shares in normal secondary transactions.
53
Investors may incur immediate and substantial dilution as a result of purchasing Shares in the
Offer.
The issue price of the Shares in the Offer may be substantially higher than the net tangible book
value of net assets per share of the outstanding Shares. Therefore, purchasers of Shares in the Offer
may experience immediate and substantial dilution and our existing shareholders may experience a
material increase in the net tangible book value of net assets per share of the Shares they own. See
“Dilution” beginning on page 63 of this Prospectus.
Future changes in the value of the Peso against the US dollar, the Euro and other currencies will
affect the foreign currency equivalent of the value of the Shares and any dividends.
Fluctuations in the exchange rate between the Peso and other currencies will affect the foreign
currency equivalent of the Peso price of the Shares on the PSE. Such fluctuations will also affect the
amount in foreign currency received upon conversion of cash dividends or other distributions paid in
Pesos by us on, and the Peso proceeds received from any sales of, the Shares.
Risks Relating to the Presentation of Information in this Prospectus
Certain information contained herein is derived from unofficial publications.
Certain information in this Prospectus relating to the Philippines, the industries in which we
compete and the markets in which we operate, including statistics relating to market size, is derived
from various Government and private publications. This Prospectus also contains industry information
which was prepared from available public sources and independent market research conducted by
Euromonitor to provide an overview of the retail industries in which the Company’s businesses
operate. The information contained in that section may not be consistent with other information
regarding the Philippine retail industry. Similarly, industry forecasts and other market research data,
including those contained or extracted herein, have not been independently verified by us nor the Joint
Global Coordinators and Bookrunners, nor any of their respective affiliates or advisors, and may not
be accurate, complete, up to date or consistent with other information compiled within or outside the
Philippines. In particular, the section “Industry” in this Prospectus does not present the opinions of
the Company, the Joint Global Coordinators and Bookrunners or any of their respective affiliates.
54
USE OF PROCEEDS
We estimate that our net proceeds from the Primary Offer, based on an Offer Price of =
P 7.50 per
Offer Share, will be approximately =
P 4,795.8 million after deducting the applicable underwriting fees
and commissions and expenses for the Primary Offer (excluding any additional expenses that may be
incurred in relation to the Over-allotment Option) payable by us.
We intend to use a majority of our net proceeds from the Primary Offer to fund capital
expenditures to be incurred by our subsidiaries in connection with our specialty retailing business.
Please see “Business — Business Strategies” for the discussion on opening of new stores. We intend
to use the remainder of our net proceeds from the Primary Offer to fund our “FamilyMart”
convenience stores operations and “Wellworth” department store operations, and repay existing debt.
Disbursements in connection with the following proposed use of proceeds are expected to be
completed by the end of 2015. To accomplish such purposes, we intend to infuse the balance of the
net proceeds from the Primary Offer, after repayment of the Company’s short term debt in the amount
of =
P 345 million, into our operating subsidiaries through equity infusions.
Further details of the proposed use of proceeds, based on an Offer Price of =
P 7.50 per Offer
Share, are as follows:
Proposed Use
Estimated Amount
Percentage
(=
P million)
(%)
Specialty retailing
Store development mainly consisting of the construction of new stores ...............
2,500.0
52.1
146.3
3.0
to our obligations under the joint venture agreement ...........................................
253.8
5.3
Repayment of existing debt ..............................................................................
1,500.0
31.3
Other corporate purposes ................................................................................
395.7
8.3
Total Amount .....................................................................................................
4,795.8
100.0
“FamilyMart” convenience stores
Equity investments in the joint venture consisting of capital injection pursuant
to our obligations under the joint venture agreement ...........................................
“Wellworth” department store
Equity investments in the joint venture consisting of capital injection pursuant
Capital expenditures for our operations
Expenses for buildings and leasehold improvements include, but are not limited to, the
following: building construction/structural works, civil/architectural electrical, mechanical, sanitary,
plumbing, cabling works and expenses for securing necessary permits, licenses and professional
advisory and labor fees.
Expenses for furniture and fixtures are expected to include, among other items, purchases of
display fixtures/modules/gondolas/racks, shopping carts and baskets, cash POS counters, pallet racks,
shelves and cabinets for storing inventory, lockers, table counters and office furnishings.
Expenses for equipment are expected to include, among other items, elevators, escalators, air
conditioning units, refrigeration systems, generator sets, barcode printers, kiosks, card printers, bill
and coin counters, computers, weighing scales, facsimile machines, handheld scanners, laminating
machines, paging systems, paper shredders, security systems and voice and data cabling.
55
If the expected gross proceeds are not realized, the Company will use its internally generated
funds from operations and existing cash, existing credit lines, and other potential borrowings to
finance the expected uses.
Discharge of Debt
We intend to use approximately =
P 1.5 billion of the net proceeds from the Primary Offer to pay
certain short term loan obligations. The details of these facilities are detailed in the table below:
Amount to be paid
Interest Rate
(=
P)
(stated)
Banco De Oro Unibank .......................................................................................
600 million
3.5% to 4.75%
Security Bank Corporation ..................................................................................
500 million
3.75%
China Banking Corporation .................................................................................
400 million
3.75%
Total ...................................................................................................................
1.5 billion
—
Bank
The above short term loans were used for the construction of new stores, inventory acquisitions
and as working capital. Depending on the schedule of rollovers, the Company intends to pay the short
term loans in the fourth quarter of 2014 or the first quarter of 2015.
The balance of our net proceeds from the Primary Offer will be used for other general corporate
purposes, including as additional working capital, for inventory purchases, repairs and maintenance
of existing stores, and advertising and marketing activities.
The proposed use of proceeds described above represents best estimates of the use of net
proceeds of the Primary Offer based on our current plans and expenditures. Other than as described
above, no part of the net proceeds from the Primary Offer shall be used to acquire assets or finance
the acquisition of other businesses, or to reimburse any officer, director, employee or shareholder of
the Group for services rendered, assets previously transferred, money loaned or advanced, or
otherwise. The actual amount and timing of disbursement of the net proceeds from the Primary Offer
for the uses stated above will depend on various factors which include, among others, changing market
conditions or new information regarding the cost or feasibility of our expansion projects. Our cost
estimates may change as we develop our plans, and actual costs may be different from our budgeted
costs. To the extent that the net proceeds from the Primary Offer are not immediately applied to the
above purposes, we will invest the net proceeds in interest-bearing short term demand deposits and/or
money market instruments, and/or repay existing debt. None of the proceeds from the Primary Offer
will be used to repay any debts of the Company with the Joint Global Coordinators and Bookrunners.
In the event of any deviation, adjustment or reallocation in the planned use of proceeds, we shall
inform our shareholders, the Philippine SEC and the PSE in writing at least 30 days before such
deviation, adjustment or reallocation is implemented. Any material or substantial adjustments to the
use of proceeds, as indicated above, should be approved by the Board and disclosed to the PSE. In
addition, we shall submit via the PSE’s Electronic Disclosure Generation Technology (“PSE EDGE”)
the following disclosure to ensure transparency in the use of proceeds:
(i)
any disbursements made in connection with the planned use of proceeds from the Offer;
(ii)
quarterly progress report on the application of the proceeds from the Offer on or before the
first 15 days of the following quarter; the quarterly progress reports should be certified by
the Company’s Chief Financial Officer or Treasurer and external auditor;
(iii) annual summary of the application of the proceeds on or before January 31 of the following
year; the annual summary report should be certified by the Company’s Chief Financial
Officer or Treasurer and external auditor; and
56
(iv) approval by the Board of any reallocation on the planned use of proceeds, or any change
in the Work Program. The actual disbursement or implementation of such reallocation must
be disclosed by the Company at least 30 days prior to the said actual disbursement or
implementation.
The quarterly and annual reports required in items (ii) and (iii) above must include a detailed
explanation for any material variances between the actual disbursements and the planned use of
proceeds in the Prospectus, if any. The detailed explanation must state the approval of the Board as
required in item (iv) above.
Expenses
Based on an Offer Price of =
P 7.50 per Offer Share, we estimate that the total proceeds from the
Primary Offer, total expenses for the Primary Offer and the net proceeds from the Primary Offer will
be (excluding any additional expenses that may be incurred in relation to the Over-allotment Option):
Estimated total proceeds from the Primary Offer .....................................................................
=
P 5,217.8
million
Estimated expenses
Underwriting and selling fees for Offer Shares .............................................................................
=
P 112.2
million
Taxes to be paid by the Company .................................................................................................
=
P 212.2
million
PSE listing and processing fee ......................................................................................................
=
P 22.4
million
Philippine SEC registration, filing and research fees .....................................................................
=
P 3.9
million
Estimated professional fees ...........................................................................................................
=
P 50.6
million
Estimated other expenses ..............................................................................................................
=
P 20.7
million
Total expenses .............................................................................................................................
=
P 422.0
million
Estimated net proceeds from the Primary Offer ........................................................................
=
P 4,795.8
million
Based on an Offer Price of =
P 7.50 per Offer Share, we estimate that the total proceeds from the
Secondary Offer, total expenses for the Secondary Offer and the net proceeds from the Secondary
Offer will be:
If Over-allotment
Assuming full
Option is not fully
exercise of Over-
exercised
allotment Option
=
P 1,263.9
million
=
P 2,236.2
million
Underwriting and selling fees for Offer Shares ..................................................
=
P 27.2
million
=
P 48.1
million
Taxes to be paid by the Shareholders ..................................................................
=
P 51.2
million
=
P 90.6
million
Philippine SEC registration, filing and research fees ..........................................
=
P 0.4
million
=
P 0.4
million
Estimated other expenses ...................................................................................
=
P 4.2
million
=
P 4.2
million
Total expenses ...................................................................................................
=
P 83.0
million
=
P 143.3
million
Net proceeds from the Secondary Offer ..........................................................
=
P 1,180.9
million
=
P 2,092.9
million
Estimated total proceeds from the Secondary Offer .......................................
Estimated expenses
The Company will not receive any of the proceeds from the Secondary Offer. The actual
underwriting and selling fees and other Offer-related expenses may vary from the estimated amounts
indicated above.
57
EXCHANGE RATES
Fluctuations in the exchange rates between the Peso and the US dollar and other foreign
currencies will affect the equivalent in US dollars and such other foreign currencies of the Peso price
of the Shares on the PSE, of dividends distributed in Pesos by the Company, if any, and of the Peso
proceeds received by investors on a sale of the Shares on the PSE, if any. Fluctuations in such
exchange rates will also affect the Peso value of the Company’s assets and liabilities which are
denominated in currencies other than Pesos, if any.
The PDS, a computer network supervised by the BSP, through which the members of the Bankers
Association of the Philippines effect spot and forward currency exchange transactions, was introduced
in 1992. The PDS was adopted by the BSP as a means to monitor foreign exchange rates. The PDS
Rate is the average rate for the purchase of US dollars with Pesos which is quoted by the PDS and
published in BSP’s Reference Exchange Rate Bulletin and the major Philippine financial press on the
following business day. On June 30, 2014, the PDS Rate was =
P 43.78 = US$1.00.
The following table sets out certain information concerning the PDS Rate between the Peso and
the US dollar for the periods and dates indicated, expressed in Pesos per US$1.00:
Peso/US dollar exchange rate
Year
Period end
Average 1
High 2
Low 3
2011 .................................................................................
43.928
43.312
44.585
41.955
2012 .................................................................................
41.192
42.249
44.246
40.862
2013 .................................................................................
44.414
42.416
44.660
40.569
45.155
44.927
45.404
44.343
2014
January . ........................................................................
February .......................................................................
44.656
44.895
45.406
44.523
March ...........................................................................
44.996
44.792
45.236
44.436
April ............................................................................
44.463
44.642
45.003
44.371
May ..............................................................................
43.927
43.924
44.541
43.620
June ...............................................................................
43.780
43.818
44.017
43.558
July ...............................................................................
43.421
43.467
43.647
43.280
August ...........................................................................
43.590
43.783
44.130
43.566
September ......................................................................
44.965
44.192
45.085
43.475
Source: Reference Exchange Rate Bulletin, Treasury Department of the BSP.
1
Weighted average rate under the PDS.
2
Highest daily closing exchange rate for the period.
3
Lowest daily closing exchange rate for the period.
58
DIVIDENDS AND DIVIDEND POLICY
The Company is authorized to declare dividends. A cash dividend declaration does not require
any further approval from shareholders. Each holder of Shares will be entitled to such dividends as
may be declared by the Board, provided that any stock dividends declaration requires the further
approval of shareholders holding at least two-thirds of the Company’s total outstanding capital stock.
The Philippine Corporation Code has defined “outstanding capital stock” as the total shares of stock
issued, whether paid in full or not, except treasury shares. The Company may declare dividends only
from its unrestricted retained earnings, representing the net accumulated earnings of the Company
with its unimpaired capital, which are not appropriated for any other purpose.
In relation to foreign shareholders, dividends payable may not be remitted using foreign
exchange sourced from the Philippine banking system unless the investment was first registered with
the BSP. See “Philippine Foreign Exchange Controls” on page 181 of this Prospectus.
The Company is allowed under Philippine laws to declare property and stock dividends, subject
to certain requirements. See “Description of the Shares — Rights Relating to Shares — Dividend
Rights” on page 169 of this Prospectus.
Record Date
Pursuant to existing Philippine SEC rules, cash dividends declared by the Company must have
a record date not less than ten days and more than 30 days from the date the cash dividends are
declared.
With respect to stock dividends, the record date is to be not less than ten days and more than 30
days from the date of shareholder approval, provided however, that the set record date is not to be less
than ten trading days from receipt by the PSE of the notice of declaration of stock dividend. If no
record date is set, under Philippine SEC rules, the record date will be deemed fixed at 15 days from
the date of the stock dividend declaration. In the event that a stock dividend is declared in connection
with an increase in authorized capital stock, the corresponding record date is to be fixed by the
Philippine SEC.
Dividends
The table below sets out the dividends declared by the Group for the years ended December 31,
2011, 2012 and 2013, respectively. All dividends declared were cash dividends.
2011
2012
2013
(=
P million)
The Company..................................................................................
—
—
100
Stores Specialists, Inc. ................................................................
—
46.4
—
Rustan Marketing Specialists, Inc ................................................
8.1
13.2
100
Subsidiaries
Other than as set forth above, none of our other subsidiaries declared any dividends for the years
ended December 31, 2011, 2012 and 2013, respectively.
59
For the year ended December 31, 2013, the percentage of revenue and income contributed by our
subsidiaries are as set forth below:
For the year ended December 31, 2013
(Contribution in %)
Net Sales
Net Income
Stores Specialists, Inc. .......................................................................................
48.3
52.1
All other subsidiaries .........................................................................................
51.7
47.9
The table below sets out our revenue breakdown by category for the year ended December 31,
2013.
For the year ended
December 31, 2013
%
Net Sales
Luxury & Bridge ......................................................................................................................
22.7
Casual .......................................................................................................................................
18.0
Fast Fashion ..............................................................................................................................
32.9
Footwear, Accessories & Luggage ..............................................................................................
13.7
Other .........................................................................................................................................
12.7
The Company and its subsidiaries have not established a specific dividend policy. Dividends
shall be declared and paid out of the Company’s unrestricted retained earnings which shall be payable
in cash, property or stock to all shareholders on the basis of outstanding stock held by them. Unless
otherwise required by law, the Board shall determine the amount, type and date of payment of the
dividends to the shareholders, taking into account various factors, including:
•
the level of the Company’s cash earnings, return on equity and retained earnings;
•
its results for and its financial condition at the end of the year in respect of which the
dividend is to be paid and its expected financial performance;
•
the projected levels of capital expenditures and other investment plans;
•
restrictions on payments of dividends that may be imposed on it by any of its financing
arrangements and current or prospective debt service requirements; and
•
such other factors as the Board deems appropriate.
The Company cannot provide any assurance that it will pay any dividends in the future.
60
DETERMINATION OF THE OFFER PRICE
The Offer Price has been set at =
P 7.50 per Offer Share. The Offer Price was determined through
a book-building process and discussions among the Company and the Joint Global Coordinators and
Bookrunners. Since the Shares have not been listed on any stock exchange, there has been no market
price for Shares derived from day-to-day trading.
The factors considered in determining the Offer Price were, among others, our ability to generate
earnings and cash flow, our short and long term prospects, the level of demand from institutional
investors, overall market conditions at the time of launch of the Offer and the market price of listed
comparable companies particularly in the Association of Southeast Asian Nations region, with
reference to the relevant country’s stock market index. The Offer Price does not have any correlation
to the book value of the Offer Shares.
61
CAPITALIZATION
The following table sets out the Company’s consolidated short-term debt, and long-term debt,
equity and capitalization as of June 30, 2014 and as adjusted to reflect the sale of the Offer Shares
based on an Offer Price of =
P 7.50 per Offer Share, assuming no exercise of the Over-allotment Option,
and the use of proceeds as described in this Prospectus.
The table should be read in conjunction with the Company’s consolidated financial statements
and the notes thereto included in this Prospectus beginning on page F-2, and is based on the
assumption that the Offer Price is =
P 7.50 per Offer Share. Other than as described herein 1 , there has
been no material change in the Company’s capitalization since June 30, 2014.
As adjusted after giving
effect to the Offer and
increased capital 2
Actual as of June 30, 2014
(=
P million)
Total short-term debt 4 ....................................................
Total long-term debt
5
....................................................
(US$ million) 3
(=
P million)
(US$ million) 3
4,379.0
100.0
2,879.0
65.8
1,982.8
45.3
1,982.8
45.3
2,117.2
48.4
3,312.9
75.7
Equity:
Capital stock: =
P 100 par value per Share;
Issued - 21,171,629 shares issued and fully paid up
as of June 30, 2014 ...................................................
Capital paid in excess of par value .............................
4,178.8
95.4
(1,537.1)
—
(35.1)
(1,537.1)
(35.1)
Appropriated ..............................................................
1,290.0
29.5
1,290.0
29.5
Unappropriated ...........................................................
1,324.9
30.3
1,246.2
28.5
Equity reserve ................................................................
—
Retained earnings
Cumulative translation adjustment ..................................
(3.5)
Other comprehensive income ..........................................
(57.3)
(0.1)
(1.3)
(3.5)
(57.3)
(0.1)
(1.3)
Total equity ....................................................................
3,134.1
71.6
8,430.0
192.6
Total equity, long-term debt and short-term debt ...........
9,495.9
216.9
13,291.8
303.7
1
To fund the acquisition of some fourth quarter inventory and our spring and summer collections, our total debt increased
P 7,795 million as of October 10, 2014.
from =
P 6,362 million as of June 30, 2014 to =
2
As approved by the Board on June 18, 2014, the Company increased its authorized capital stock from =
P 3,000,000,000
P 5,000,000,000 divided into
divided into 30,000,000 common shares with par value of =
P 100.00 per Share to =
5,000,000,000 common shares with par value of =
P 1.00 per Share. Of the increase in the authorized capital stock of
=
P 500,000,000 representing 500,000,000 Shares has been fully subscribed and paid by
P 2,000,000,000, the amount of =
way of cash to and in favor of the Company.
3
Based on the PDS Rate of =
P 43.78 = US$1.00 on June 30, 2014.
4
Comprised of short-term loans payable.
5
Comprised of current portion of long-term debt and long-term debt (noncurrent portion).
62
DILUTION
As of June 30, 2014, the Company’s net tangible book value per Share was =
P 1.48 1 . Net tangible
book value per Share represents total assets minus total liabilities and goodwill, divided by the total
number of Shares outstanding. After giving effect to the sale of the Primary Offer Shares (at an Offer
Price of =
P 7.50 per Primary Offer Share), and deducting estimated discounts, commissions, estimated
fees and expenses of the Offer, together with the amount of =
P 500,000,000 representing 500,000,000
shares fully subscribed and paid by way of cash in August 2014, the net tangible book value per Share
P 7.50, the Shares will be purchased
would increase to =
P 2.54 per Offer Share. At the Offer Price of =
=
at a premium of P 4.96 to net tangible book value per Share.
The following table illustrates dilution on a per Share basis based on an Offer Price of =
P 7.50
per Primary Offer Share assuming full exercise of the Over-allotment Option:
Offer Price per Primary Offer Share .........................................................................................
=
P 7.50
Net tangible book value per Share as of June 30, 2014 1 .................................................................
=
P 1.48
Difference between Offer Price per Offer Share and net tangible book value per Offer Share as of
June 30, 2014 ................................................................................................................................
=
P 6.02
Pro forma net tangible book value per share after the Offer and increased capital 2 .......................
=
P 2.54
Dilution to investors in the Offer
3
................................................................................................
=
P 4.96
The exercise of the Over-allotment Option will not result in any dilution on a per Share basis,
as all Optional Shares are being offered by the Selling Shareholders.
The following table sets out the shareholdings, and percentage of Shares outstanding, of existing
and new shareholders of the Company immediately after completion of the Offer, assuming full
exercise of the Over-allotment Option:
Number of Shares
%
Existing shareholders .........................................................................................
2,319,005,101
70.0
New investors ....................................................................................................
993,859,329
30.0
Total ..................................................................................................................
3,312,864,430
100.0
See also “Risk Factors — Risks Relating to the Offer Shares — Future sales of Shares in the
public market could adversely affect the prevailing market price of the Shares and shareholders may
experience dilution in their holdings” on page 53 of this Prospectus.
1
Net tangible book value per share is calculated using the number of shares as of June 30, 2014 adjusted to reflect the
stock split approved by the Philippine SEC on August 29, 2014. Prior to the stock split, the net tangible book value per
share based on the outstanding shares of 21,171,629 as of June 30, 2014 is =
P 148.03. The number of shares has increased
as a result of stock split from 21,171,629 shares to 2,117,162,900 shares and the net tangible book value per share based
on the post-stock split outstanding shares of 2,117,162,900 as of June 30, 2014 is =
P 1.48.
2
Total equity after giving effect to the Offer and the amount of =
P 500,000,000 representing 500,000,000 Shares fully
subscribed and paid by way of cash on April 15, 2014, divided by Shares issued and fully paid after the Offer.
3
Calculated as Offer Price of =
P 7.50 per Offer Share less pro forma net tangible book value per Share after the Offer.
63
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following tables present selected consolidated financial information of the Company. This
selected data should be read in conjunction with the independent auditors’ report and with the
consolidated financial statements of the Company and notes thereto contained in this Prospectus and
the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. The Company’s selected financial data as of and for the years ended December 31, 2011,
2012 and 2013 was derived from the audited consolidated financial statements of the Company, and
the Company’s selected financial data as of June 30, 2014 and for the six months ended June 30, 2013
and 2014, was derived from the reviewed consolidated financial statements of the Company prepared
in accordance with PFRS. The Company’s consolidated financial information below should not be
considered indicative of the results of future operations. Furthermore, the translation of Peso amounts
into US dollars as of and for the year ended December 31, 2013 as of and for the six months ended
June 30, 2014 is provided for convenience only and is unaudited. For readers’ convenience only,
amounts in Pesos were converted to US dollars using the PDS Rate as of June 30, 2014 of =
P 43.78 =
US$1.00.
Consolidated Statements of Comprehensive Income
2011
NET SALES ...................................................
COST OF GOODS SOLD ..............................
GROSS PROFIT ............................................
OPERATING EXPENSES
Selling and distribution....................................
General and administrative ..............................
OTHER INCOME (CHARGES)
Foreign exchange gains - net ...........................
Share in net earnings of an associate ...............
Interest accretion on security deposit ...............
Interest income ................................................
Share in net losses of joint ventures ................
Interest expense ...............................................
Others - net .....................................................
INCOME BEFORE INCOME TAX ...............
PROVISION FOR (BENEFIT FROM)
INCOME TAX
Current ............................................................
Deferred ..........................................................
NET INCOME ................................................
2012
2013
(Audited)
(=
P million)
10,183
11,610
6,099
6,510
4,084
5,100
3,112
648
3,760
3,746
723
4,469
2013
(Unaudited)
(US$ million)
12,788
292.1
6,496
148.4
6,292
143.7
4,584
791
5,375
104.7
18.1
122.8
2013
2014
2014
(Unaudited)
(=
P million)
(US$ million)
5,844
6,672
152.4
3,019
2,885
65.9
2,825
3,787
86.5
2,077
377
2,454
2,409
453
2,862
55.0
10.3
65.3
12
9
3
12
—
(14)
20
42
366
11
16
3
13
—
(22)
5
26
657
21
18
6
4
(20)
(93)
48
(16)
901
0.5
0.4
0.1
0.1
(0.5)
(2.1)
1.1
(0.4)
20.5
31
8
4
3
(10)
(22)
50
64
435
26
10
3
2
(81)
(125)
(9)
(174)
751
0.6
0.2
0.07
0.03
(1.8)
(2.8)
(0.2)
(3.9)
17.3
121
(19)
102
264
223
(28)
195
462
347
(60)
287
614
7.9
(1.4)
6.5
14.0
160
(19)
141
294
281
(16)
265
486
6.4
(0.4)
6
11.3
OTHER COMPREHENSIVE INCOME
Other comprehensive income to be
periods:
Cumulative translation adjustment on
foreign operations, net of deferred tax ........
Other comprehensive income not to be
periods:
Re-measurement loss on retirement benefit,
net of deferred tax ......................................
1
(8)
2
0.04
(19)
(4)
(35)
TOTAL COMPREHENSIVE INCOME ..........
246
581
450
64
3
2
0.04
(0.8)
0.5
—
—
13.2
298
488
11.3
Consolidated Statements of Financial Position
As of December 31,
2011
2012
As of June 30,
2013
2013
(Audited)
(=
P million)
2014
2014
(Unaudited)
(Unaudited)
(US$ million) ( =
P million) (US$ million)
ASSETS
Current Assets
Cash and cash equivalents........................................
Trade and other receivables......................................
Merchandise inventory .............................................
Amounts owed by related parties .............................
Prepayments and other current assets .......................
1,866
273
4,652
16
163
1,256
376
5,394
6
227
1,135
499
5,899
9
331
25.9
11.4
134.7
0.2
7.6
965
327
6,943
9
535
22.0
7.5
158.6
0.2
12.2
Total Current Assets...............................................
6,970
7,259
7,873
179.8
8,779
200.5
Noncurrent Assets
Investment in an associate .......................................
Investment in joint ventures .....................................
Property and equipment ...........................................
Deferred tax assets...................................................
Security deposits and construction bonds .................
Other noncurrent assets ............................................
36
—
1,002
95
370
119
41
137
1,275
119
445
286
43
369
2,593
185
565
250
1.0
8.4
59.2
4.2
12.9
5.7
53
440
3,623
196
670
338
1.2
10.1
82.8
4.5
15.3
7.7
Total Noncurrent Assets .........................................
1,622
2,303
4,005
91.4
5,320
121.6
TOTAL ASSETS .....................................................
8,592
9,562
11,878
271.2
14,099
322.1
LIABILITIES AND EQUITY
Current Liabilities
Trade and other payables .........................................
Short-term loans payable..........................................
Current portion of long-term debt ............................
Amounts owed to related parties ..............................
Deferred revenue......................................................
Income tax payable ..................................................
6,130
520
—
175
12
46
6,596
673
—
0.3
15
134
3,498
3,811
108
0.2
23
210
79.9
87.0
2.5
0.004
0.5
4.8
3,633
4,379
333
0.2
22
215
83.0
100.0
7.6
0.004
0.5
4.9
Total Current Liabilities ........................................
6,883
7,418
7,650
174.7
8,582
196.0
Noncurrent Liabilities
Long-term debt ........................................................
Retirement benefit obligation ...................................
Deposits for future stock subscription to SSI ...........
—
123
—
600
—
154
—
600
1,174
225
—
62
26.8
5.1
—
1.4
1,649
234
500
—
37.7
5.3
11.4
—
Total Noncurrent Liabilities...................................
723
754
1,461
33.3
2,383
54.4
25
75
(195)
25
175
(295)
200
—
500
4.6
—
11.3
2,117
—
(1,537)
48.4
—
(35.1)
470
629
1
(19)
900
615
(7)
(23)
1,290
839
(5)
(57)
29.5
19.2
(0.1)
(1.3)
1,290
1,325
(4)
(57)
29.5
30.3
(0.1)
(1.3)
Equity
Capital stock - =
P 100 par value
Issued - 21,171,629 shares in 2014, 2,000,000
shares in 2013 and 250,000 shares in 2012 and
2011....................................................................
Equity reserve ..........................................................
Retained earnings
Appropriated .......................................................
Unappropriated....................................................
Cumulative translation adjustment............................
Other comprehensive income....................................
Total Equity............................................................
986
1,390
2,767
63.2
3,134
71.7
TOTAL LIABILITIES AND EQUITY ....................
8,592
9,562
11,878
271.2
14,099
322.1
65
Consolidated Statements of Cash Flows
2011
2012
2013
2013
(Audited)
(=
P million)
2013
2014
(Unaudited)
(US$ million)
2014
(Unaudited)
(=
P million)
(US$ million)
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax................................
366
656
901
20.5
437
751
17.2
Depreciation and amortization.....................
483
593
634
14.5
277
441
10.1
Interest expense ..........................................
14
22
92
2.1
21
125
2.8
Unrealized foreign exchange losses (gains) .
(12)
8
7
0.2
2
10
0.2
Adjustments for:
Loss on disposal of property and
equipment ...................................................
2
0.1
1
7
3
0.1
Share in net earnings of an associate ..........
(9)
(16)
(17)
(0.4)
(8)
(10)
(0.2)
Share in net losses of joint ventures ...........
—
—
20
0.5
10
81
1.8
Interest income ...........................................
(12)
(13)
(4)
(0.1)
(2)
(2)
(0.03)
Interest accretion on refundable deposits.....
(2)
(3)
(6)
(0.1)
(4)
(3)
(0.1)
Impairment loss ..........................................
—
—
—
—
—
5
0.1
Mark-to-market loss (gain)..........................
—
—
(3)
(0.06)
—
5
0.1
Operating income before working capital
changes ...........................................................
830
1,247
37.1
740
1,406
32.1
1,625
0
Trade and other receivables ........................
(50)
(125)
(123)
(2.8)
(26)
Merchandise inventory ................................
(1,272)
(742)
(505)
(11.5)
(357)
Amounts owed by related parties ................
47
32
Prepayments and other current assets ..........
(55)
(63)
(3)
(0.1)
(39)
(102)
(2.3)
(92)
Trade and other payables ............................
790
466
Deferred revenue ........................................
12
3
(3,109)
(71.1)
(594)
Amounts owed to related parties .................
23
(175)
(0.1)
Retirement benefit obligation ......................
20
25
23
Net cash generated from (used in) operations ..
345
668
Interest received ..............................................
12
13
Income taxes paid ............................................
(105)
(128)
Net cash flows from (used in) operating
activities..........................................................
252
Acquisitions of property and equipment ...........
Additional investment in joint ventures............
Dividends received from investment in an
associate ..........................................................
169
(1,044)
3
(204)
3.9
(23.9)
0.1
(4.7)
Increase (decrease) in:
7
(2,187)
4
0.2
0
5
(0.2)
0.5
16
(50.0)
(347)
0.1
2
135
3.1
(0.3)
(0.01)
(0.003)
(0.0001)
8
0.2
473
10.8
1
0.03
(263)
(6.0)
(177)
(271)
(6.2)
553
(2,446)
(55.9)
(522)
203
4.6
(687)
(864)
(1,950)
(44.6)
(1,120)
(1,475)
(33.7)
—
(137)
(253)
(5.8)
(50)
(152)
(3.5)
11
11
16
0.4
—
—
—
CASH FLOWS FROM INVESTING
ACTIVITIES
Security deposits and construction bonds ....
(80)
(72)
(114)
(2.6)
(102)
(104)
(2.4)
Other noncurrent assets ...............................
22
(169)
35
0.8
101
(90)
(2.1)
(1,821)
(41.6)
Net cash flows used in investing activities ......
(734)
(1,231)
66
(2,266)
(51.8)
(1,171)
2011
2012
2013
2013
(Audited)
(=
P million)
2013
2014
(Unaudited)
(US$ million)
2014
(Unaudited)
(=
P million)
(US$ million)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from availment of:
Short-term loans payable.............................
270
383
4,203
96.0
1,496
2,356
700
53.8
Long-term debt ...........................................
—
—
1,283
29.3
485
Payment of short-term loans payable...........
—
(230)
(1,073)
(24.5)
(573)
(1,788)
(40.8)
16.0
Payment of:
Interest .......................................................
(14)
(22)
(82)
(1.9)
(21)
(125)
(2.8)
Dividends ...................................................
—
(46)
—
—
—
—
—
Proceeds from:
Subscriptions to capital stock ....................
—
—
196
4.5
—
1,917
43.7
Deposits for future stock subscription .........
—
—
62
1.4
—
500
11.4
Sale of SSI investment in CCSI .................
—
—
—
—
—
200
4.6
Payment of advances from stockholders ......
—
—
—
—
—
(61)
(1.4)
Payment for the purchase of SSI shares ......
—
—
—
—
—
(2,242)
(51.2)
Net cash flow from financing activities ...........
256
85
4,589
104.8
1,387
1,457
33.3
NET DECREASE IN CASH AND CASH
EQUIVALENTS..............................................
(226)
(593)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS..............................................
12
(17)
BEGINNING OF YEAR .................................
2,080
END OF YEAR ..............................................
1,866
(123)
(2.9)
(306)
(161)
(3.7)
(9)
(0.2)
2
0.1
2
1,866
1,256
28.7
1,256
1,135
25.9
1,256
1,135
25.9
952
965
22.0
67
Key Financial and Operating Data
ended December 31,
2011
2012
ended June 30,
2013
2013
2013
(US$ million,
except where
indicated)
(=
P million, except
where indicated)
2014
2014
(US$ million,
except where
indicated)
(=
P million, except
where indicated)
Key Financial Data
Net Sales .....................................................
10,183
11,610
12,788
292.1
5,844
6,671
152.4
Luxury & Bridge ....................................
2,406
2,656
2,907
66.4
1,332
1,438
32.8
Casual .....................................................
1,855
2,082
2,306
52.7
983
1,046
23.9
Fast Fashion ............................................
3,794
4,000
4,213
96.2
1,962
2,431
55.5
1,113
1,534
1,746
39.9
847
952
21.7
Other .......................................................
1,015
1,338
1,616
36.9
720
804
18.4
Gross Profit ..................................................
4,084
5,100
6,292
143.7
2,825
3,787
86.5
56.8
Gross Profit Margin
(1)
(%)............................
40.1
43.9
49.2
49.2
48.3
56.8
EBITDA (2) ....................................................
830
1,247
1,625
37.1
740
1,406
32.1
EBITDA margin (3) (%) .................................
8.1
10.7
12.7
12.7
12.7
21.1
21.1
41
26
(16)
(0.4)
65
(174)
Net income ..................................................
264
462
614
14.0
295
486
(4)
11.1
2.6
4.0
4.8
4.8
5.0
7.3
7.3
Total debt (5) .................................................
520
673
5,094
116.4
—
6,362
145.3
(584)
3,959
90.4
—
5,397
123.3
—
Net debt (6) ....................................................
(1,346)
Key Operating Data
Specialty retailing
Number of brands ....................................
76
81
91
—
85
103
Number of stores .....................................
439
524
597
—
577
655
—
70,260
82,593
98,126
—
92,358
111,585
—
20.6
17.6
18.8
—
—
20.8 (7)
—
—
—
31
—
7
46
—
5,621
Convenience stores
Number of stores .....................................
—
—
3,711
—
843
—
—
—
—
—
51.0 (7)
—
—
Notes:
(1)
(2)
(3)
(4)
(5)
Interest-bearing loans and borrowings which include short-term loans payable, and current and noncurrent portions of
long-term debt.
(6)
(7)
68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial conditions and
certain trends, risks and uncertainties that may affect our business should be read in conjunction with
the independent auditors’ reports and our audited consolidated financial statements, reviewed
financial statements, and notes thereto contained in this Prospectus. The discussion contains
forward-looking statements and reflects our current views with respect to future events and financial
performance. Actual results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors such as, but not limited to, those set out in the section entitled
“Risk Factors” and elsewhere in this Prospectus.
Overview
Our revenue is primarily derived from merchandise sold through our stores. For the three years
ended December 31, 2011, 2012 and 2013 and for the six months ended June 30, 2013 and 2014, our
P 6,672
P 5,844 million and =
P 12,788 million, =
P 11,610 million, =
net sales was =
P 10,183 million, =
million, respectively. Through a joint venture arrangement we have entered into with one of our
brands, Samsonite, we generate additional income and this is recorded in our income statement as
other income under the line item “share in net earnings of an associate”. Our Group holds a 40%
interest in the associate, Samsonite Philippines, Inc., a joint venture company, whilst the remaining
60% is owned by Samsonite Corporation, Inc.
We entered into two joint venture arrangements in 2012 to launch our “FamilyMart” convenience
stores in the Philippines and “Wellworth” department store. The “FamilyMart” convenience stores are
managed and operated by the joint venture, Philippine FamilyMart CVS, Inc. (“PFM”), which is
60%-owned by SIAL CVS, our 50/50 joint venture with Varejo Corporation, 37%-owned by Family
Mart Co., Ltd. (“FM”) and 3%-owned by Itochu Corporation. The “Wellworth” department store is
69
managed and operated by our 50/50 joint venture, SIAL Specialty Retailers, Inc., which we formed
with Varejo Corporation. Varejo Corporation is a wholly-owned subsidiary of Ayala Land. The net
income generated from these joint ventures is shared with our joint venture partners. We began
opening “FamilyMart” stores in April 2013 and our first “Wellworth” department store opened in April
2014. Our financial statements therefore do not reflect a full year of operational results for
“FamilyMart” or “Wellworth” operations. As unconsolidated joint ventures, our financial results for
these operations are reflected in the line item “share in net losses of joint ventures” under other
income in our income statement for the periods ended December 31, 2013 and June 30, 2014. The
operations were loss-making in 2013 and in the first six months of 2014, and we expect their
operations to be loss-making in the near future as these businesses continue to ramp up their
operations.
The Group has determined that it is operating as one operating segment. Based on management’s
assessment, no part or component of the business of the Group meets the qualifications of an operating
segment as defined by PFRS 8. The Company’s store operations are its only income generating activity
and such is the measure used by the chief operating decision maker in allocating resources. In the
future, the Group expects to have limited income generated from rentals to third parties of floor space
in Central Square.
The Company derives its primary income from the sales of merchandise to external customers
and that is the only basis for segment reporting purposes. Sales are reported on an entity-wide basis.
Such information is measured using the same accounting policies and estimates as the Group’s
consolidated financial statements.
The table below sets out certain key financial and operating data of the Company as of and for
the years ended December 31, 2011, 2012 and 2013 and as of June 30, 2014 and for the six months
ended June 30, 2013 and 2014.
ended December 31,
2011
2012
2013
ended June 30,
2013
2013
(US$ million,
except where
indicated)
(=
P million, except
where indicated)
2014
2014
(=
P million, except
where indicated)
(US$ million,
except where
indicated)
Key Financial Data
Net Sales .....................................................
10,183
11,610
12,788
292.1
5,844
6,671
152.4
Luxury & Bridge ....................................
2,406
2,656
2,907
66.4
1,332
1,438
32.8
Casual .....................................................
1,855
2,082
2,306
52.7
983
1,046
23.9
Fast Fashion ............................................
3,794
4,000
4,213
96.2
1,962
2,431
55.5
1,113
1,534
1,746
39.9
847
952
21.7
18.4
Other .......................................................
1,015
1,338
1,616
36.9
720
804
Gross Profit ..................................................
4,084
5,100
6,292
143.7
2,825
3,787
86.5
Gross Profit Margin (1) (%)............................
40.1
43.9
49.2
49.2
48.3
56.8
56.8
EBITDA (2) ....................................................
830
1,247
1,625
37.1
740
1,406
32.1
EBITDA margin (3) (%) .................................
8.1
10.7
12.7
12.7
12.7
21.1
21.1
41
26
(16)
(0.4)
65
(174)
Net income ..................................................
264
462
614
14.0
295
486
2.6
4.0
4.8
4.8
5.0
7.3
7.3
Total debt (5) .................................................
520
673
5,094
116.4
—
6,362
145.3
(584)
3,959
90.4
—
5,397
123.3
111,585
Net debt (6) ....................................................
(1,346)
(4)
11.1
Key Operating Data
Gross selling space (sq.m.) ...........................
70,260
82,593
98,126
—
92,358
Growth in gross selling space (%) ................
20.6
17.6
18.8
—
—
70
20.8 (7)
—
—
Notes:
(1)
(2)
(3)
(4)
(5)
Interest-bearing loans and borrowings which include short-term loans payable and current and noncurrent portion of
long-term debt.
(6)
(7)
Factors Affecting Our Results of Operations
Our results of operations are affected by a variety of factors. Set out below is a discussion of the
most significant factors that have affected our financial results in the past and which we expect to
affect our results in the foreseeable future. Factors other than those set forth below could also have
a significant impact on our results of operations and financial condition.
Philippine macroeconomic conditions and domestic consumer trends
As substantially all of our stores are in the Philippines, our operations are substantially affected,
and will continue to be affected, by Philippine macroeconomic conditions. Demand for, and the
prevailing prices of, our products across our brand categories and retail formats are directly related
to the strength of the Philippine economy and consumer confidence, including overall growth levels,
and the amount of business activity in the Philippines. The Philippines was first awarded an
investment-grade rating in March 2013. According to Euromonitor, this has enhanced overall
sentiment in terms of foreign investment and overall consumer purchasing behavior, in addition to
rising remittances from abroad and the increase in higher paying BPO jobs. As a result of the
significant economic growth in the Philippines over the last ten years, the country has seen rapid
growth in personal disposable income, consumer purchasing power and demand for consumer
products. Demand across the spectrum of consumer goods has increased, from the luxury goods market
to the broad market. Heightened brand awareness, which has been boosted by the rising popularity of
fashion bloggers and social media activity, also supports our core business, as we continue to bring
to market new brands which reflect the latest trends adopted by the Filipino consumer. As a result, the
pricing of our products, and thus our gross profit margin, is tied to consumer demand and our ability
to meet consumer preferences for our products.
While our revenues have historically grown year on year, we believe our profitability has been,
and will continue to be, tied to the strength of the Philippine economy and consumer confidence.
Growth in stores, brands and channels
The growth in our number of new stores, brands and retail formats, has been, and will continue
to be, the key factor driving our revenue growth and profitability. We work closely with our brand
principals to determine the most suitable locations for the deployment of stores into new geographic
regions which will, in turn, increase our customer base. At the same time, the increase in the number
of stores and the number of brands available in our historic markets, predominantly Metro Manila, has
raised our market and customer reach in those regions.
71
The increase in our new stores depends to a large extent on the construction by developers in the
Philippines of new malls appropriate to our brands. The steady development of new malls in recent
years has facilitated our growth, and we expect the pace of development to continue in the near future.
As we open new stores, we incur capital expenditures for store fit-out, and increased rental
expense for the new locations, often well in advance of the store reaching its targeted sales levels. Our
stores typically take three to four years to reach their target sales levels, but generally become
profitable in the first two years of operation.
Also, our recent move into new retail formats, with the launch of the “FamilyMart” convenience
stores and “Wellworth” department store, and the addition of new broad market brands to our
portfolio, have expanded our customer base, our sales channels and the breadth of our product
offerings. We are also seeking to increase our sales through online and mobile marketing, promotions
and new sales platforms. Finally, as the volumes under purchase orders with our suppliers increase,
we are able to obtain more preferential pricing from those suppliers, increasing our gross margin on
products from those suppliers.
The following table sets out our number of stores and average gross selling space as of and for
the years ended December 31, 2011, 2012 and 2013, and as of and for the six months ended June 30,
2013 and 2014.
ended December 31,
2011
(1)
2012
ended June 30,
2013
2013
2014
.....................................
439
524
597
577
655
Luxury & Bridge ...................................
110
119
130
127
143
Casual ....................................................
72
77
94
86
109
Number of stores
Fast Fashion ...........................................
37
47
62
54
75
Footwear, Accessories & Luggage ..........
140
173
187
184
201
Other......................................................
80
108
124
124
127
104,889
(2)
.........
64,268
76,426
90,359
87,475
Luxury & Bridge ...................................
9,613
10,903
12,015
11,835
13,362
Casual ....................................................
10,031
10,876
12,494
11,906
14,285
Fast Fashion ...........................................
23,762
25,937
30,510
29,060
38,454
Footwear, Accessories & Luggage ..........
10,216
14,943
18,632
17,891
20,626
Other......................................................
10,647
13,767
16,709
16,783
18,162
Average gross selling space (sq.m.)
Notes:
(1)
Number of stores as of the end of the period; excludes the six stores operated by the Group in Guam, which contribute
de minimis sales to our total net sales for the years ended December 31, 2011, 2012 and 2013 and the six months ended
June 30, 2014.
(2)
Average of the beginning and ending gross selling space for the period.
Sell-through and sales cycle management
Sell-through refers to the amount of our goods sold at full retail price. While we sell most of the
goods acquired from our suppliers, our revenue and gross profit are driven to a large extent by our
ability to sell goods at full retail price, or in accordance with the sales prices we designate for
collections. Our ability to attain high levels of sell-through depends on a number of factors, including
gauging consumer sentiment, our ability to anticipate market trends and maintain the optimal stock
and mix of products in line with those trends, the effective marketing of our products and sales
promotions, and our ability to deliver a shopping experience in our stores that is in line with what our
customers would expect to experience from the international brands we represent in foreign markets.
The appeal of our brands’ collections to the Filipino consumers, and our ability to procure the right
72
products from those collections in the right quantities, drives our sell-through rates. Delays in opening
a new store negatively impacts our sell-through, as merchandise purchased for the new store opening
may fall out of fashion, requiring us to sell the merchandise at a discount. Management of our sales
cycles, and the timing and duration of discounted sales, is also a key driver of the average selling price
and, consequently, gross margin for many of our brands.
Our sell-through and success of our sales are also impacted by weather conditions - please refer
to the paragraph headed “Seasonality and Weather” below.
Our ability to manage costs and expenses effectively
We operate in a volume driven industry and must carefully control our costs. The cost of the
merchandise for our stores is the largest component of our cost of goods sold (comprising 39.4% of
net sales in the first six months of 2014), and the steady increase in volume of goods purchased from
our suppliers has allowed us to obtain improved pricing terms from those suppliers over time,
increasing our gross margin on such products.
We also believe that we have the capability to attract the highest quality staff because of our
position as the number one employer and trainer of specialty store retail personnel in the Philippines.
This ensures that we keep our stores consistently staffed with properly trained personnel who
efficiently manage our stores, improving inventory and cash management, reducing stock loss and
increasing net sales. Experienced personnel are also essential to minimizing costs when ramping up
new stores, as they guide our stocking of inventory and staffing levels.
As a result of the breadth of our international brand portfolio, we are able to secure prime retail
space appropriate to our brands under attractive lease terms, as mall operators are generally eager to
have our brands included in their list of retail offerings. We manage and monitor these lease
arrangements closely with our brand principals. Our rental rates under our leases increase in line with
market rates, and we expect these rates to continue increasing in the near future.
As our cost of goods sold consists largely of purchase orders denominated in US dollars, and our
revenues are entirely in Pesos, we are exposed to fluctuations in the exchange rate of the Peso against
the US dollar. For most of our brands, we submit purchase orders two to three times a year. Typically
we hold six to eight months’ worth of inventory for each brand, however for brands that are new to
the Philippine market, we may hold inventory for longer periods while we ramp up our store
operations. For further information, please refer to the paragraph headed “Liquidity and Capital
Resources — Inventory” below. We do not enter into hedging arrangements to offset foreign currency
fluctuations.
As a result of the foregoing, our operating margin 1 amounted to 3.2%, 5.4%, 7.2% and 13.9% for
the years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2014,
respectively.
Competition from other retailers
Our results of operations are affected by the competition we face from other retailers in the
Philippines. The retail market is competitive and many of our competitors offer similar products and
pursue similar strategies as we do. Historically, the opening of competing stores has resulted in
negative effects on the net sales of our stores in the same vicinity. We have found this to be historically
true for our broad market brands, and expect it to also be the case for our new retail formats. Given
the interconnectedness of retailers in the Philippines, our sales and operating performance depend on,
among other factors, the overall growth of the Philippines retail industry and the intensity of
competition among market players.
1
Operating margin is calculated as operating income (gross profit less operating expenses) as a percentage of net sales.
73
Seasonality and weather
We experience seasonal fluctuations in our operations. Our sales typically peak during the fourth
quarter of the year due to increased sales attributable to the Christmas and New Year holidays. The
second quarter of the year is also a peak season as it coincides with summer break shopping, back to
school shopping, as well as Mother’s Day, a significant gifting celebration in the Philippines. We incur
additional expenses in advance of peak selling periods to carry out marketing and advertising
activities and require additional working capital to acquire additional inventory. We also incur
additional expenses in hiring of part-time employees, which are typically offset by increases in net
sales during the relevant period.
In addition, weather conditions in the Philippines have historically affected our operating results.
Typhoons, monsoon rains or other extreme weather conditions over a prolonged period might make it
difficult for our customers to travel to our stores. Generally, our business slows down during the
monsoon season from July through September.
Critical Accounting Policies
Critical accounting policies are those that are both (i) relevant to the presentation of our financial
condition and results of operations and (ii) require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting the possible future
resolution of the uncertainties increase, those judgments become even more subjective and complex.
To provide an understanding of how our management forms its judgments about future events,
including the variables and assumptions underlying its estimates, and the sensitivity of those
judgments to different circumstances, we have identified the critical accounting policies discussed
below. While we believe that all aspects of our financial statements should be studied and understood
in assessing our current and expected financial condition and results of operations, we believe that the
following critical accounting policies warrant particular attention. For more information, see Note 2
to our audited consolidated financial statements as of and for the years ended December 31, 2011,
2012 and 2013 and the reviewed consolidated interim financial statements as of June 30, 2014 and for
the six months ended June 30, 2013 and 2014.
Merchandise Inventory
Merchandise inventory is valued at cost which is determined using the specific identification or
weighted average methods.
Investments in an Associate and Joint Ventures
The Group’s investment in joint ventures and an associate follows:
Percentage of Ownership As of
December 31,
June 30,
2011
2012
2013
2014
SIAL CVS Retailers, Inc. .............................................
—
50%
50%
50%
SIAL Specialty Retailers, Inc. ......................................
—
50%
50%
50%
40%
40%
40%
40%
Joint Ventures:
Associate:
Samsonite Philippines, Inc. ...........................................
The Group’s investments in an associate and joint ventures are accounted for under the equity
method of accounting in the consolidated financial statements. An associate is an entity in which the
74
Group has significant influence and which is neither a subsidiary nor a joint venture, generally
accompanying a shareholding of between 20% and 50% of the voting rights. A joint venture is a
contractual arrangement whereby the Group together with another venture undertakes an economic
activity that is subject to joint control.
Under the equity method, the investments in an associate and joint ventures are initially
recognized at cost. The carrying amounts of the investments are adjusted to recognize changes in the
Group’s share of net assets of the associate and joint ventures since the acquisition date. Goodwill
relating to the associate and joint ventures are included in the carrying amount of the investment and
are neither amortized nor individually tested for impairment.
The consolidated statement of comprehensive income reflects the Group’s share of the results of
operations of the associate and joint ventures. Any change in other comprehensive income of those
investees is presented as part of the Group’s other comprehensive income. In addition, when there has
been a change recognized directly in the equity of the associate or joint venture, the Group recognizes
its share of any changes, when applicable, in the consolidated statement of changes in equity.
Unrealized gains and losses resulting from transactions between the Group and the associate or joint
venture are eliminated to the extent of the interest in the associate or joint venture.
The aggregate of the Group’s share of profit or loss of an associate and joint ventures is shown
on the face of the consolidated statement of comprehensive income outside operating profit and
represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate or
joint venture.
The financial statements of the associate and joint ventures are prepared for the same reporting
period as the Group. When necessary, adjustments are made to bring the accounting policies in line
with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognize
an impairment loss on its investments in its associate and joint ventures. At each balance sheet date,
the Group determines whether there is objective evidence that the investments in the associate and
joint ventures are impaired. If there is such evidence, the Group calculates the amount of impairment
as the difference between the recoverable amount of the associate or joint venture and its carrying
value, and then recognizes the loss as “Share of earnings/losses of an associate and joint ventures” in
the consolidated statement of comprehensive income.
Upon loss of significant influence over the associate or joint control over the joint ventures, the
Group measures and recognizes any retained investment at its fair value. Any difference between the
carrying amount of the associate or joint ventures upon loss of significant influence or joint control
and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss.
Property and Equipment
Property and equipment are stated at cost, excluding the cost of day to day servicing, less
accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of
replacing part of such property and equipment when the costs are incurred and if the recognition
criteria are met.
The initial cost of property and equipment comprises its purchase price, including import duties,
taxes and any directly attributable costs of bringing the asset to its working condition and location for
its intended use. Expenditures incurred after the property and equipment have been put into operation,
such as repairs and maintenance and overhaul costs, are normally charged to consolidated statement
of comprehensive income in the period in which the costs are incurred. In situations where it can be
75
clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits
expected to be obtained from the use of an item of property and equipment beyond its originally
assessed standard of performance, the expenditures are capitalized as an additional cost of property
and equipment.
Construction in progress represents properties under construction and is stated at cost. This
includes cost of construction and other direct costs. Construction in progress is not depreciated until
such time that the relevant assets are completed and are available for use.
Depreciation is calculated using the straight-line method over the following estimated useful
lives of the assets, or in the case of leasehold improvements, the term of the related lease or estimated
useful lives of the improvement, whichever is shorter:
Estimated useful lives
Category
(in years)
Leasehold improvements ................................................................................................................
2-5
Store, office, warehouse furniture and fixtures ...............................................................................
3-5
Building.........................................................................................................................................
10-20
Transportation equipment ..............................................................................................................
3-15
The carrying values of property and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying values may not be recoverable.
The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted
if appropriate, at each financial year-end.
Fully depreciated assets are retained in the accounts until these are no longer in use. When assets
are retired or otherwise disposed of, both the cost and related accumulated depreciation and
amortization and any allowance for impairment losses are removed from the accounts and any
resulting gain or loss is credited or charged to current operations. An item of property and equipment
is derecognized upon disposal or when no future economic benefits are expected from its use or
disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between
the net disposal proceeds and the carrying amount of the asset) is included in the consolidated
statement of comprehensive income in the year the asset is derecognized.
Description of Selected Income Statement Items
Revenue
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Group and the revenue can be reliably measured, regardless of when the payment is being made.
Revenue is measured at the fair value of the consideration received or receivable, taking into account
contractually defined terms of payment and excluding discounts, returns and other sales taxes or
duties. The Group assesses its revenue arrangements against specific criteria in order to determine if
it is acting as principal or agent and has concluded that it is acting as a principal in all of its revenue
arrangements. The following specific recognition criteria must be met before revenue is recognized:
Sale of merchandise
Revenue from the sale of merchandise, presented as “net sales”, is recognized when the
significant risks and rewards of ownership of the merchandise have passed to the buyer, which is
generally at the time the sale is consummated. Gross sales reflects the actual amount charged to
customers at the point of sale, net of any applicable sales discounts, and is inclusive of VAT. Net sales
is calculated by deducting VAT from our gross sales.
76
Cost of goods sold
Cost of goods sold includes the purchase price of the products sold, our contribution towards
advertising costs for a brand’s global marketing spend (if required), personnel costs, royalty fees,
travel and transportation, rent costs for our warehouses, utilities, repairs and maintenance, security
and safety, insurance, supplies and maintenance, outside services, taxes and licenses, and other
expenses related to the products sold. The portion of depreciation and amortization which is directly
attributable to bringing goods to their intended condition and location is also included in the cost of
goods sold.
Operating expenses
Operating expenses are decreases in economic benefits during the accounting period in the form
of outflows or decrease of assets or incurrence of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants. Operating expenses are recognized when
incurred.
Selling and Distribution expenses
Selling and distribution expenses include rent costs for our stores, personnel costs, depreciation
and amortization, utilities, supplies and maintenance, credit card charges, security services,
advertising, taxes and licenses, global marketing contribution fees, repairs and maintenance, delivery
and freight charges, communication, travel and transportation, professional fees, outside services,
insurance, entertainment, amusement and recreation, and other ancillary expenses.
General and Administrative Expenses
General and administrative expenses include personnel costs, depreciation and amortization, rent
costs for our offices, advertising, supplies and maintenance, taxes and licenses, utilities, travel and
transportation, communication, repairs and maintenance, professional fees, security services,
insurance, outside services, entertainment, amusement and recreation, and other ancillary expenses.
Other income (charges)
Other income includes gains in foreign exchange, our share in net earnings of an associate,
interest accretion on security deposits, interest income arising from bank deposits and short-term
investments, and others — net (being the income from items sold (i) on consignment, (ii) through
institutional sales, or (iii) through bank promotions), with the share in net losses of joint ventures and
interest expenses as other charges.
Interest income
Interest income is recognized as interest accrued (using the effective interest method) and is
earned from cash in banks and short-term investments.
Results of Operations
The six months ended June 30, 2014 compared with the six months ended June 30, 2013.
Net sales
For the six months ended June 30, 2014, our net sales were =
P 6,672 million, an increase of 14.2%
compared to =
P 5,844 million for the six months ended June 30, 2013. Our growth in net sales for the
six months ended June 30, 2014 was primarily driven by the net addition of 73 stores and ten brands
in the year ended December 31, 2013, with the net addition of 58 stores and 12 brands for the six
77
months ended June 30, 2014 also playing a part. The additions in the six months ended June 30, 2014
allowed us to increase our gross selling space by 20.8%, or 19,227 sq.m, as compared against our gross
selling space at June 30, 2013, thereby reaching a larger number of consumers. Our net sales also
reflect continuing strong sell-through of the products we choose for our stores.
Given that our new stores and brands typically require three to four years to ramp up their
operations and gain market acceptance, our gross selling space growth rate was higher than our total
revenue growth.
In the six months ended June 30, 2014, we added a total of 19 new international brands to our
portfolio: A2 by Aerosoles, Acca Kappa, Alexander McQueen, Clarins, Cortefiel, Diptyque, F&F,
Giuseppe Zanotti, Givenchy, Issac Mizrahi, Longchamp, MBT, Old Navy, Oliviers & Co., Pottery
Barn, Pull and Bear, Reiss, Saville Row and West Elm.
Cost of Goods Sold
For the six months ended June 30, 2014, our cost of goods sold was =
P 2,885 million, a decrease
of 4.4% compared to =
P 3,019 million for the six months ended June 30, 2013. This reduction reflected
a lowering of our procurement costs due to lower-priced large volume orders offsetting the increase
in merchandise sold. Also, as we reduced our trade payable days, by financing our inventory
acquisition using short-term loans, suppliers provided us with more favorable pricing for their goods.
Gross Profit
For the six months ended June 30, 2014, our gross profit was =
P 3,787 million, an increase of
34.0% compared to =
P 2,826 million for the six months ended June 30, 2013. For the reasons stated
above, our gross profit margin increased to 56.8% for the six months ended June 30, 2014, from 48.3%
six months ended June 30, 2013, due to our net sales increasing more rapidly than our cost of goods
sold.
Operating expenses
For the six months ended June 30, 2014, our operating expenses amounted to =
P 2,862 million,
an increase of 16.6% compared to =
P 2,454 million for the six months ended June 30, 2013. This
increase was largely due to an increase in selling and distribution expenses. Increased selling and
distribution expenses reflected rent and one-off set up expenses for new stores and an increase in
average rental rates for existing stores, as well as personnel and utilities costs for our new stores. The
increase in operating expenses was also affected by an increase in general and administrative
expenses, which were primarily incurred for personnel costs in our merchandising and other
departments, in connection with the addition of new brands and stores, as well as increases in rent
costs for our offices, supplies and maintenance expenses and taxes and licenses.
For the six months ended June 30, 2014, we incurred other charges of =
P 174 million, whereas for
the six months ended June 30, 2013 we received other income of =
P 65 million. This change resulted
primarily from an increase in our interest expense from =
P 21 million for the six months ended June
30, 2013, to =
P 125 million for the six months ended June 30, 2014, as we moved from trade payables
to short-term loans to finance our inventory procurement. There was also an increase in our share in
net losses of joint ventures which rose from =
P 10 million for the six months ended June 30, 2013, to
=
P 81 million for the six months ended June 30, 2014, as we increased investment in our FamilyMart
and Wellworth businesses. This decrease in other income was also due to the decline in income from
others - net (being the income from items sold (i) on consignment, (ii) through institutional sales, or
(iii) through bank promotions) from =
P 51 million for the six months ended June 30, 2013 to a loss of
=
P 9 million incurred for the six months ended June 30, 2104 as a result of decreased institutional sales
and bank promotions.
78
Provision for income tax
For the six months ended June 30, 2014, our provision for income tax was =
P 265 million, which
was 86.7% higher than the =
P 142 million recorded for the six months ended June 30, 2013. The
increase was attributable to the increase in our income before tax and the decline in non-taxable
income. Our effective tax rates 2 for the first six months of 2013 and for the first six months of 2014
were 32.5% and 35.2%, respectively, compared to the standard Philippine corporate tax rate of 30%.
Net income
As a result of the foregoing, for the six months ended June 30, 2014, our net income was =
P 486
million, an increase of 65.0% compared to =
P 295 million for the six months ended June 30, 2013. Our
net income margin increased to 7.3% for the six months ended June 30, 2014, from 5.0% for the six
months ended June 30, 2013, due primarily to our increased gross profit margin, offset in part by
increased operating expenses and taxes.
2013 compared with 2012
Net sales
P 11,610 million
In 2013, our net sales were =
P 12,788 million, an increase of 10.1% compared to =
in 2012. This increase in net sales was largely due to the increase in sales volume as a result of the
net addition of 85 stores and five brands in 2012 and 73 stores and ten brands in 2013, allowing us
to increase our gross selling space by 18.8% or 15,533 sq.m. over the period and to reach a larger
number of consumers. Our growth in net sales for the year ended December 31, 2013 was primarily
driven by new store openings and brand additions in the year ended December 31, 2012, with new
store openings and brand additions in the year ended December 31, 2013 also playing a part. Our net
sales also reflect continuing strong sell-through of the products we choose for our stores.
revenue growth. Furthermore, sales in the usually peak fourth quarter of 2013 were affected by the
subdued sentiment following Typhoon Yolanda.
In 2013, we added a total of ten new international brands to our portfolio: Aéropostale, American
Tourister, Bershka, Brooks Brothers, Desiqual, Dune, Nars, Stradivarius, Swarovski and Women’s
Secret.
Cost of Goods Sold
P 6,510
In 2013, our cost of goods sold was =
P 6,496 million, a decrease of 0.2% compared to =
million in 2012. This reduction reflected a lowering of our procurement costs due to lower-priced large
volume orders offsetting the increase in merchandise sold. Also, as we reduced our trade payable days
in 2013 by financing our inventory acquisition using short-term loans, suppliers provided us with more
favorable pricing for their goods.
Gross Profit
P 5,099 million
In 2013, our gross profit was =
in 2012. For the reasons stated above, our gross profit margin increased to 49.2% in 2013, from 43.9%
in 2012. The strong sell-through performance and effective management of the discount sales cycle
also contributed to the higher gross profit margin.
2
Effective tax rate is calculated as provision for income tax over income before income tax.
79
Operating expenses
In 2013, our operating expenses amounted to =
P 5,375 million, an increase of 20.3% compared to
million in 2012, primarily due to the growth of our operations. The percentage increase in
operating expenses was greater than the percentage increase in net sales due in large part to the
significant number of new stores that were opened, ramp up time related to these new stores as well
as the subdued consumer sentiment in the fourth quarter of 2013. This increase was largely due to an
increase in selling and distribution expenses. Increased selling and distribution expenses reflected rent
and one-off setup expenses for new stores and an increase in average rental rates for existing stores,
as well as personnel and utilities costs for our new stores. Minor increases in supplies and maintenance
expenses, security expenses and advertising, and other ancillary expenses were also contributory
factors. The increase in operating expenses was also affected by an increase in general and
administrative expenses, which were primarily incurred for personnel costs in our merchandising and
other departments, in connection with the addition of new brands and stores, as well as advertising
expenses.
=
P 4,469
In 2013, we incurred other charges of =
P 16 million, whereas in 2012 we received other income
million. This change resulted primarily from an increase in our interest expense from =
P 22
of
million in 2012 to =
P 92 million in 2013, as we moved from trade payables to short-term loans to
finance our inventory procurement. In 2013, we also recognized, for the first time, our share in net
losses of joint ventures of =
P 20 million because of the addition of our new line of business, the
“FamilyMart” convenience stores. Finally, there was also a decrease in our interest income from =
P 13
million in 2012 to =
P 4 million in 2013. These changes were offset by an increase in foreign exchange
P 21 million in 2013, as a result of the appreciation of the Peso.
gains from =
=
P 26
P 194
In 2013, our provision for income tax was =
P 288 million, which was 48.1% higher than the =
million recorded in 2012. The increase was attributable mainly to the increase in our income before
tax and our inability to deduct from taxable income our share in net losses of joint ventures, as well
as a reduction in our non-taxable income, namely, interest income. Our effective tax rates for 2012 and
2013 were 29.6% and 31.9%, respectively, compared to the standard Philippine corporate tax rate of
30%.
Net income
As a result of the foregoing, our net income in 2013 was =
P 614 million, an increase of 32.8%
=
compared to P 462 million in 2012. Our net income margin increased to 4.8% in 2013, from 4.0% in
2012, due primarily to our increased gross profit margin, offset in part by increased operating
expenses and taxes.
2012 compared with 2011
Net sales
P 10,183 million
In 2012, our net sales were =
in 2011. This increase in net sales was largely due to the increase in sales volume as a result of the
net additions of 83 stores and three brands in 2011 and 85 stores and five brands in 2012, allowing
us to increase our gross selling space by 17.6% or 12,333 sq.m. over the period and to reach a larger
number of consumers. Our growth in net sales for the year ended December 31, 2012 was primarily
driven by new store openings and brand additions in the year ended December 31, 2011, with new
store openings and brand additions in the year ended December 31, 2012 also playing a part. Our net
sales also reflect continuing strong sell-through of the products we choose for our stores.
80
revenue growth.
In 2012, we added a total of six new international brands to our portfolio: Bobbi Brown,
Clinique, Hackett, Superdry, Tommy Hilfiger and TWG.
Cost of Goods Sold
P 6,099
In 2012, our cost of goods sold was =
million in 2011. The increase was due to the increase in the volume of merchandise sold being offset
in part by a lowering of our procurement costs due to lower-priced large volume orders.
Gross Profit
P 4,084 million
In 2012, our gross profit was =
in 2012. For the reasons stated above, our gross profit margin increased to 43.9% in 2012, from 40.1%
in 2011, due to our net sales increasing more rapidly than our cost of goods sold.
Operating expenses
In 2012, our operating expenses amounted to =
P 4,469 million, an increase of 18.9% compared to
=
P 3,760 million in 2011, primarily due to the growth of our operations. This increase was largely due
to an increase in selling and distribution expenses. Increased selling and distribution expenses
reflected rent for new stores and an increase in average rental rates for existing stores, as well as
personnel and utilities costs for our new stores. Minor increases in utilities, security expenses,
advertising, taxes and licenses and other ancillary expenses were also contributory factors. The
increase in operating expenses was also affected by an increase in general and administrative
expenses, which were primarily incurred for personnel costs in our merchandising and other
departments, in connection with the addition of new brands and stores, as well as increases in taxes
and licenses and professional fees resulting from implementation of our CRM program and sales
training for our personnel.
P 41 million in
In 2012, our other income was =
P 26 million, a decrease of 36.8% compared to =
2011. This decrease in other income was primarily due to the decline in income from others - net
(being the income from items sold (i) on consignment, (ii) through institutional sales, or (iii) through
P 5 million in 2012 as a result of reduced institutional
bank promotions) from =
P 22
sales and bank promotions, and an increase in our interest expense from =
million in 2012. This was offset in part by our share in the net earnings of our associate company,
P 16 million in 2012.
Samsonite Philippines, Inc. which increased from =
P 102
In 2012, our provision for income tax was =
P 194 million, which was 90.2% higher than the =
million recorded in 2011. The increase was attributable to the increase in our income before tax and
the decline in non-taxable income. Our effective tax rates for 2011 and 2012 were 27.8% and 29.6%,
respectively, compared to the standard Philippine corporate tax rate of 30%.
Net income
As a result of the foregoing, our net income in 2012 was =
P 462 million, which was 74.9% higher
than the =
P 264 million recorded in 2011. Our net income margin increased to 4.0% in 2012 from 2.6%
in 2011, due primarily to our increased gross profit offset in part by increased operating expenses and
taxes.
81
Liquidity and Capital Resources
We have historically met our liquidity needs through cash flows from operating activities, and
cash flow from financing activities, comprising both short- and long-term debt. Our principal uses of
cash have been, and are expected to continue to be, operating costs, including purchases of
merchandise and payroll costs, capital expenditures for property, plant and equipment and interest and
principal payments on our borrowings. In the future, we expect to fund our working capital
requirements and other liquidity needs mainly from cash flow from our operations, from the proceeds
of this Offer and through further long-term bank financing. See “Use of Proceeds” beginning on page
55 of this Prospectus.
On May 8, 2013, the Group obtained a =
P 2 billion syndicated term loan facility from Bank of
Philippine Islands (“BPI”), Security Banking Corporation (“SBC”), China Banking Corporation
(“CBC”), Metropolitan Bank & Trust Co. (“MBTC”) and Rizal Commercial Banking Corporation
(“RCBC”). The purpose of the loan was to finance the capital expenditures related to the construction
of Central Square and other corporate purposes. The loan carries an interest of a fixed base rate plus
an interest spread of 150 basis points per annum or a 5.5% per annum floor rate. The syndicated term
loan will mature on February 20, 2020. We drew =
P 0.7 billion in the six month period ended June 30,
=
2014 and P 1.3 billion in the year ended December 31, 2013. Principal repayments are due quarterly
starting August 20, 2014. Under this loan facility, we are required to maintain a debt to equity ratio
of 2.0x and a debt service coverage ratio of at least 1.2x. Such financial covenants are calculated based
on our latest annual consolidated financial statements. As of our most recent audited financial
statements dated December 31, 2013, we are in compliance with such financial covenants with a debt
to equity ratio of 1.84x and a debt service coverage ratio of 17.62x.
On October 18, 2013, our subsidiaries, International Specialty Concepts, Inc., International
Specialty Fashions, Inc., International Specialty Retailers, Inc. and International Specialty Wear, Inc.
entered into an agreement with The Hongkong and Shanghai Banking Corporation on the provision of
a =C 2 million unsecured loan which was payable 90 days after the arrangement. The loan had an annual
interest rate of 2.7% and matured on January 6, 2014. Also in 2013, Rustan Marketing Specialists, Inc.
obtained a =
P 352 million short-term foreign currency deposit unit loan from BPI on December 27,
2013, which bore an interest rate of 1.3% and matured on February 25, 2014.
Working Capital
As of December 31, 2011, 2012 and 2013 and June 30, 2014, our net current assets, or the
P 159 million),
difference between total current assets and total current liabilities, were =
P 87 million, ( =
=
=
P 223 million and P 197 million, respectively.
Our trade payables represent amounts owed to suppliers of our merchandise inventory, and have
decreased over time as we have transitioned from accounts payable to short-term loans to finance
acquisition of our merchandise inventory.
The following table sets forth a summary of the inventory, trade payable and trade receivable
turnover for the periods indicated:
As of December 31,
As of June 30,
2011
2012
2013
2014
240
282
317
403 (2)
...............................
295
308
226
151 (4)
Turnover of trade receivables (days) (5) ...........................
4
4
6
4 (6)
Turnover of inventory (days) (1) ......................................
Turnover of trade payable (days)
(3)
82
Notes:
(1)
Calculated as the average of the merchandise inventory balances at the beginning and at the end of the year, divided
by cost of goods sold for the year and multiplied by 365.
(2)
Calculated as the average of the merchandise inventory balances at the beginning and at the end of the period, divided
by cost of goods sold for the period and multiplied by 181.
(3)
Calculated as the average of the trade payable balances at the beginning and at the end of the year, divided by cost of
goods sold for the year and multiplied by 365.
(4)
Calculated as the average of the trade payable balances at the beginning and at the end of the period, divided by cost
of goods sold for the period and multiplied by 181.
(5)
Calculated as the average of the trade receivable balances at the beginning and at the end of the year, divided by net
sales for the year and multiplied by 365.
(6)
Calculated as the average of the trade receivable balances at the beginning and at the end of the period, divided by net
sales for the period and multiplied by 181.
Current Assets
Our current assets consist of cash and cash equivalents, trade and other receivables, merchandise
inventories, amounts owed by related parties and prepayments and other current assets. Total current
P 7,259
assets as of December 31, 2011, 2012 and 2013 and June 30, 2014 were =
P 6,970 million, =
=
=
million, P 7,873 million and P 8,779 million, respectively. As of December 31, 2013, merchandise
inventories comprised the bulk of our current assets, totaling =
P 5,899 million (or 74.9% of our total
current assets), followed by cash and cash equivalents, totaling =
P 1,135 million. As of June 30, 2014,
merchandise inventories totaled =
P 6,943 million (or 79.1% of our total current assets) and cash and
cash equivalents totaled =
P 965 million.
Inventory
Inventory is valued at cost. Inventories in transit are valued at invoice cost including related
import costs. We do not write-off or provide for inventory losses and obsolescence but instead offer
discounts to sell slow-moving inventory.
Our carrying amount of inventories amounts to =
P 6.9 billion for the six months ended June 30,
=
P 5.4 billion as
2014 and P 5.9 billion as of December 31, 2013 (compared to a carrying amount of =
December 31, 2012).
Inventory is derecognized when sold or otherwise disposed of.
Typically we hold six to eight months’ worth of inventory for each brand, however, for brands
that are new to the Philippine market we may hold inventory for longer periods while we ramp up our
store operations.
Current Liabilities and Provisions
Our current liabilities consist of trade and other payables, short-term loans payable, current
portion of long-term debt, amounts owed to related parties, deferred revenue and income tax payable.
As of December 31, 2011, 2012 and 2013 and June 30, 2014, current liabilities were =
P 6,883 million,
=
P 8,582 million, respectively. As of December 31, 2013 and June
P 7,418 million, =
P 3,632 million, respectively, and
30, 2014, trade and other payables totaled =
consisted primarily of trade payables to our suppliers. In 2013, we moved from trade payables to
short-term loans to finance our inventory acquisition.
83
Cash Flows
The following table sets out information from our statements of cash flows for the periods
indicated. The translation of Peso amounts into US dollars for the year ended December 31, 2013 and
for the six months ended June 30, 2014 are provided for convenience only and are unaudited.
2011
2012
2013
2013
2013
(Audited)
(Unaudited)
(=
P million)
(US$ million) (1)
Net cash flows from (used in)
operating activities ..............................
252
Net cash flows used in investing
activities .............................................
(734)
Net cash flows from financing
activities .............................................
256
85
Net increase (decrease) in cash and
cash equivalents ..................................
(226)
(593)
553
(1,231)
2014
2014
(Unaudited)
(US$ million) (1)
(=
P million)
(2,446)
(55.9)
(522)
(2,266)
(51.8)
(1,171)
(1,821)
(41.6)
4,589
104.8
1,387
1,457
33.3
(124)
(2.8)
(306)
203
(161)
4.6
(3.7)
Note:
(1)
Based on the PDS Rate of =
P 43.78 = US$1.00 on June 30, 2014.
Net cash flows from (used in) operating activities
The net cash flows from operating activities for the six months ended June 30, 2014 was =
P 203
million, which comprised operating income before working capital changes of =
P 1,406 million,
adjusted for changes in working capital and income tax paid, partially offset by interest received. The
changes in working capital were attributable primarily to an increase in merchandise inventory of
=
P 1,044 million.
In 2013, net cash flows used in operating activities was =
P 2,446 million, which comprised
operating income before working capital changes of =
P 1,625 million adjusted for changes in working
capital and income tax paid, partially offset by interest received. The changes in working capital were
attributable primarily to a decrease in trade and other payables of =
P 3,109 million, due to a decrease
in trade payables that were funded by an increase in short-term debt.
In 2012, net cash flows from operating activities was =
P 553 million, which comprised operating
income before working capital changes of =
P 1,247 million adjusted by income tax paid, partially offset
by interest received. The changes in working capital were attributable primarily to increases in
P 125 million, which were
merchandise inventories of =
P 742 million and trade and other receivables of =
offset by an increase in trade and other payables of =
P 466 million.
In 2011, net cash flows from operating activities was =
P 252 million, which comprised operating
=
income before working capital changes of P 830 million, adjusted primarily for changes in working
capital. The changes in working capital were attributable mainly to an increase in merchandise
P 790
inventories of =
P 1,272 million which was offset by an increase in trade and other payables of =
million.
Net cash flows used in investing activities
For 2011, 2012 and 2013 and the six months ended June 30, 2014, net cash flows used in
P 1,821 million,
P 1,231 million, =
investing activities were =
P 734 million, =
respectively. For 2011, 2012, 2013 and the six months ended June 30, 2014, this consisted primarily
84
of acquisitions of property and equipment for the opening of 83, 85, 73 and 67 new stores,
respectively, security deposit payments made to lessors for these stores and store renovations. From
2012, net cash flows used in investing activities also consisted of investments in our joint ventures
as we launched our “FamilyMart” convenience stores and “Wellworth” department store.
Net cash flows from financing activities
For 2011, 2012 and 2013 and the six months ended June 30, 2014, net cash flows used in
P 1,457 million,
P 85 million, =
financing activities were =
P 256 million, =
respectively. In 2013, this was attributable mainly to the proceeds from the Group’s availment of loans
during the year and the issuance of shares, as offset by loan repayments.
Indebtedness
As of June 30, 2014 our total debt was =
P 6,362 million. We had an outstanding total long-term
=
debt of P 2 billion as of June 30, 2014. As of June 30, 2014, we had short-term loans payable of
=
P 4,379 million with interest rates ranging from 2.7% to 5.5% per annum. The short-term notes were
obtained to support working capital requirements.
Capital Expenditures
We make substantial capital expenditures annually to support our business goals and objectives.
As part of our strategy, we invest capital in developing and constructing new stores in each of our
business segments. We also invest in on-going maintenance of existing stores. In general, we renovate
our stores every three to five years. In addition, we invest in installing new information technology
systems and upgrading our existing systems.
The following table sets out our capital expenditures (additions to property and equipment) in
2011, 2012 and 2013, and the six months ended June 30, 2013 and 2014.
For the six months
2011
2012
2013
ended June 30,
2013
2014
(=
P million)
Leasehold improvements .........................................
536
692
1,044
490
998
Store, Office, Warehouse Furniture and Fixtures .....
137
156
318
188
213
Transportation equipment ........................................
2
3
216
211
3
Construction in progress .........................................
14
14
373
231
261
Total ......................................................................
689
865
1,951
1,120
1,475
We have historically funded our capital expenditures primarily through net cash flows from
operating activities and existing cash reserves. From time to time, we have also funded our capital
expenditures with the proceeds of debt facilities. Our capital expenditures for the above periods were
related to the development and construction of new stores and ongoing maintenance across all our
stores.
Although these are our current plans with respect to our capital expenditures, such plans may
change as a result of a change in circumstances and the actual amount of expenditures may vary from
the planned amount of expenditures for a variety of reasons, including changes in market conditions,
85
competition and other factors. As we continue to expand, we may require additional capital. In
particular, as of June 30, 2014, we have contributed =
P 651 million towards the construction of Central
Square, and expect the total cost of construction to reach over =
P 800 million. Please see “Use of
Proceeds” for more details on our current capital expenditure requirements.
Contractual obligations and commitments
Set out below is a summary of our contractual commitments by maturity:
As of June 30, 2014
Payments Due by Period
Less than
Total
12 months
2015-2020
(=
P million)
Short-term loans payable and current portion of long-term debt .......
4,712
4,712
—
Long-term debt (non-current) ...........................................................
1,649
—
1,649
Trade and other payables..................................................................
3,633
3,633
—
Income tax payable ..........................................................................
215
215
—
Total ................................................................................................
10,209
8,560
1,649
Off-balance sheet arrangements
As of June 30, 2014, we were not a financial guarantor of the obligations of any unconsolidated
entity. Other than standby letters of credit issued in connection with our trade financing, we are not
a party to any off-balance sheet obligations or arrangements. Our standby letters of credit are
contingent liabilities not included in our balance sheet or disclosed in the notes to our consolidated
financial statements, because we believe the possibility of them being called upon is remote.
Key performance indicators
The following are the major performance measures we use as of and for the years ended
December 31, 2011, 2012 and 2013, and as of and for the six months ended June 30, 2013 and 2014.
As of and for the six
ended December 31,
months ended June 30,
2011
2012
2013
2013
2014
Net Sales ( =
P million) .............................................
10,183
11,610
12,788
5,844
6,672
Gross profit ( =
P million) .........................................
4,084
5,100
6,292
2,825
3,787
Net income ( =
P million) .........................................
264
462
614
294
486
Gross selling space (sq.m.) .....................................
70,260
82,593
98,126
92,358
111,585
Growth in gross selling space (%) ..........................
20.6
17.6
18.8
—
Note:
(1)
86
20.8 (1)
Net sales. Net sales comprise revenues from the sale of merchandise after deduction of returns,
allowances for damaged goods, and any discounts. Net sales are recognized when the risks and
rewards of ownership of the merchandise have passed to the buyer, which is generally at the same time
the sale is consummated.
Gross Profit. Gross profit is the difference between net sales and cost of goods sold.
Net income. Net income is calculated by deducting cost of goods sold, operating and other
expenses as well as income taxes from net sales.
Gross selling space. Gross selling space is the total area of each store, including the backroom
and stockroom.
Growth in gross selling space. Growth in gross selling space is calculated as the percentage
change of gross selling space over each relevant period.
Our key financial ratios and profitability ratios for the years ended December 31, 2011, 2012 and
2013 are set forth in the table below.
2011
2012
2013
1.01
0.98
1.03
.......................................................
58.93
58.00
17.62
Total debt to EBITDA (3) ..............................................................
0.63
0.54
3.14
58.93
58.00
17.62
..................................................................
0.53
0.48
1.84
Total asset to equity ratio (6) .........................................................
8.71
6.88
4.29
EBITDA margin (%) ....................................................................
8.1
10.7
12.7
Net income margin (%) ................................................................
2.59
3.98
4.80
29.04
38.90
29.53
Financial Ratios
Current ratio (1) .............................................................................
Debt service coverage ratio
Interest cover
(4)
(2)
............................................................................
Total debt to equity
(5)
Profitability Ratios
Return on equity (%)
(7)
................................................................
Notes:
(1)
Calculated as total current assets divided by total current liabilities
(2)
Calculated as EBITDA divided by the sum of interest expense and principal payments on long term debt
(3)
Calculated as total debt divided by total EBITDA
(4)
Calculated as EBITDA divided by interest expense
(5)
Calculated as total debt divided by total equity
(6)
Calculated as total assets divided by total equity
(7)
Net income as a percentage of average total equity at the beginning and at the end of the year
Quantitative and qualitative disclosure of market risk
Our principal financial instruments are cash and cash equivalents and short-term and long-term
loans. The main purpose of these financial instruments is to anticipate future funding requirements of
the Group. The Group has various other financial assets and liabilities such as trade and other
receivables, trade and other payables, short-term loan payable and long-term debt, amounts owed to/by
related parties and security deposits and construction bonds which arise directly from its operations.
87
The main risks arising from the financial instruments are credit risk, foreign currency risk and
liquidity risk. The Group’s management reviews and approves policies for managing each of these
risks and they are summarized below. The Group also monitors the market price risk arising from all
financial instruments. The magnitudes of these risks that have arisen over the years are discussed
below.
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial
instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from
our customer credit card purchases. To manage this risk, the Group trades only with recognized,
creditworthy third parties, mostly with credit card companies. Trade receivables from third parties are
monitored on an on-going basis with the result that the exposure of the Group to bad debts is not
significant. There is no allowance for impairment of receivables since the Group expects to fully
realize its receivables from its debtors. With respect to credit risk from other financial assets of the
Group, which is mainly comprised of cash in banks, short-term investments, amounts owed by related
parties, trade and other receivables and security deposits, the exposure of the Group to credit risk
arises from the default of the counterparty, with a maximum exposure equal to the carrying amounts
of these instruments.
There is no significant concentration of credit risk in the Group.
Foreign Currency risk
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in
foreign exchange rates. The Group is exposed to the effect of fluctuations in the prevailing foreign
currency exchange rates on its financials and cash flows. This arises from foreign currency
denominated cash in banks and trade and other payables as of June 30, 2014, December 31, 2013, 2012
and 2011. To manage this risk, management closely monitors the fluctuations in exchange rates so as
to anticipate the impact of foreign currency risks, and adjusts product pricing accordingly. However,
the Group does not have a foreign currency hedging policy. See “Risk Factors — Risks relating to the
Philippines — Future changes in the value of the Peso against the US dollar and other currencies may
adversely affect our results of operations”.
Liquidity risk
The Group faces the risk that it will not have sufficient cash flows to meet its operating
requirements and its financing obligations when they come due. To manage this risk, the Group’s
objective is to maintain a balance between continuity and flexibility. The Group seeks to manage its
liquid funds through cash planning on a monthly basis. The Group uses historical figures and
experiences and forecasts of its collections and disbursements to do so.
Also the Group only places funds in money market instruments which exceed the Group’s
requirements. Placements are strictly made based on cash planning assumptions and cover only a short
period of time.
88
INDUSTRY
The information below has been derived in part from publicly available government sources,
market data providers and other independent third party sources. In addition, this section and other
sections of the Prospectus contain information extracted from a commissioned report prepared by
Euromonitor for inclusion in this Prospectus and such information reflects estimates of market
conditions based on publicly available sources and trade opinion surveys. References to Euromonitor
should not be considered as the opinion of Euromonitor as to the value of any security or the
advisability of investing in the Group. The Directors believe that the sources of information contained
in this section are appropriate sources for such information and have taken reasonable care in
reproducing such information. The Directors have no reason to believe that such information is false
or misleading or that any material fact has been omitted that would render such information false or
misleading. The information set out in this section has not been independently verified by the Group,
the Joint Global Coordinators and Bookrunners or any other party involved in the Offer and neither
they nor Euromonitor give any representations as to its accuracy and the information should not be
relied upon in making, or refraining from making, any investment decision.
Overview of the Philippine Economy
The Philippine economy experienced steady growth with GDP expanding at a CAGR of 13.2%
from 2009 to 2013 and GDP per capita growing at a CAGR of 11.3%. According to Euromonitor, the
Philippines’ GDP is expected to grow from US$285 billion in 2014 to US$436 billion in 2018,
representing a CAGR of 11.2%. According to Standard and Poor’s, in May 2014, they have upgraded
the credit rating of the Philippines from BBB- to BBB, citing the country’s ongoing reforms, which
it believes will result in gains in government revenue generation, spending efficiency and
improvements in the public debt profile and investment environment. Previously, in October 2013,
Moody’s Investors Service upgraded the rating of the Philippines from Ba1 to Baa3 and assigned a
positive outlook to the rating. According to Moody’s Investors Service, the factors that prompted the
upgrade were the sustainability of the country’s robust economic performance, ongoing fiscal and debt
management policies, stability of the Philippines’ funding conditions, political stability and improved
governance.
Gross Domestic Product, Philippines (2009-2018)
2009-2013
2009
2010
2011
2012
2013
CAGR
GDP (US$ million) ........................................
168,484.7
199,590.9
224,082.0
250,204.9
276,650.9
13.2%
GDP per capita (US$) ....................................
1,833.6
2,135.9
2,357.4
2,587.3
2,811.7
11.3%
2014
2015
2016
2017
2018
2014-2018
CAGR
GDP (US$ million) ........................................
285,315.8
311,089.6
348,516.2
389,870.3
436,316.5
11.2%
GDP per capita (US$) ....................................
2,850.4
3,055.8
3,367.0
3,705.3
4,080.2
9.4%
Source: Euromonitor after desk research on government websites and publically accessible databases
Philippine population
According to Euromonitor, the Philippines currently has a population of over 98 million, which
grew at a CAGR of 1.7% between 2009 and 2013 and is expected to continue to grow at a CAGR of
1.7% from 2014 to 2018. The urban population in the Philippines is expected to grow at a CAGR of
2.3%, while the rural population is expected to grow at a CAGR of 1.0%, between 2014 and 2018.
89
Population statistics, Philippines (2009-2018)
2014
2009-2013
2014-2018
CAGR
CAGR
’000s
2009
2013
2018
Population, total.............................................
91,886.4
98,393.6
100,096.5
106,934.2
1.7%
1.7%
Population, urban ...........................................
44,560.0
48,515.5
49,615.9
54,364.5
2.1%
2.3%
Population, rural ............................................
47,326.4
49,878.1
50,480.6
52,569.7
1.3%
1.0%
Average age (years) .......................................
25.3
26.1
26.3
27.0
—
—
Bright prospects for consumer spending due to rising disposable income
Domestic consumption is driven by rising disposable income, especially amongst the middle
class (defined by Euromonitor as households with an annual income between 75% and 125% of the
Philippines’ median annual income (US$6,720 in 2013)), fuelled by overall strong economic growth.
Annual disposable income in the Philippines increased from US$129 billion in 2009 to US$208 billion
in 2013, representing a CAGR of 12.7% and, according to Euromonitor, is expected to reach US$320
billion in 2018, representing a CAGR of 10.7% over the period from 2014 to 2018. Consumer
expenditure grew at a CAGR of 12.6% between 2009 and 2013 and is expected to grow (at a CAGR
of 10.7%) between 2014 and 2018.
Annual Disposable Income and Consumer Expenditure, Philippines (2009-2018)
2009-2013
2009
2010
2011
2012
2013
CAGR
Annual disposable income (US$ million) .......
129,141.1
146,495.1
168,939.9
190,380.0
208,220.9
12.7%
Consumer expenditure, total (US$ million) ....
125,446.0
141,963.2
163,849.2
184,786.5
201,884.8
12.6%
2014
2015
2016
2017
2018
2014-2018
CAGR
Annual disposable income (US$ million) .......
212,908.3
232,417.2
258,039.0
286,883.2
319,630.4
10.7%
Consumer expenditure, total (US$ million) ....
206,371.8
225,280.8
250,127.5
278,216.3
310,096.6
10.7%
Per capita consumer expenditure is expected to grow in the Philippines between 2014 and 2018
at a CAGR of 8.9%, which, according to Euromonitor will be the fastest rate amongst Southeast Asian
countries reviewed.
Consumer Expenditure per capita (2014-2018)
2014-2018
2014
2015
2016
2017
2018
CAGR
The Philippines (US$)....................................
2,061.7
2,212.9
2,416.5
2,644.2
2,899.9
8.9%
Indonesia (US$) .............................................
1,955.6
2,130.0
2,325.1
2,478.7
2,653.5
7.9%
Malaysia (US$) ..............................................
5,955.4
6,472.0
7,056.6
7,611.5
8,170.8
8.2%
Singapore (US$) ............................................
21,415.2
22,539.6
23,441.3
24,481.2
25,708.4
4.7%
Thailand (US$) ..............................................
3,131.6
3,348.9
3,545.0
3,733.7
3,950.2
6.0%
90
The number of Philippine households with annual disposable incomes over US$5,000 and less
than or equal to US$35,000 is expected to increase from 44% of households in 2009 to 65% of
households in 2018.
Breakdown of Households by Annual Disposable Income, Philippines
2018
2009
9%
2%
44%
26%
54%
65%
≤US$5,000
US$>5,000-US$35,000
>US$35,000
The Philippines is a major supplier of workers to other parts of the world and remittances by
OFWs to the Philippines from overseas plays a significant role in the Philippines’ economy. According
to the Economist Intelligence Unit, remittances by OFWs grew at a CAGR of 7.3% from 2009 to 2013
and are expected to continue growing at a CAGR of 7.0% from 2014 to 2018.
Remittances to the Philippines (2009-2018)
2009-2013
Workers’ remittances (US$ million) ...............
Workers’ remittances (US$ million) ...............
2009
2010
2011
2012
2013
19,726.0
21,369.0
23,058.0
24,641.0
26,119.5
2014
2015
2016
2017
2018
27,947.8
29,904.2
31,997.5
34,237.3
36,633.9
CAGR
7.3%
2014-2018
CAGR
7.0%
Source: The Economist Intelligence Unit
Consumer spending in the Philippines has also increased as a result of growing employment in
the BPO industry. According to the BPO Association of the Philippines, the Philippine BPO industry
more than doubled between 2009 and 2013, from over US$7 billion to almost US$16 billion, and is
expected to reach US$25 billion in 2016.
Domestic BPO industry size (2009-2016)
2013-2016
2009
2010
2011
2012
2013
2016
CAGR
Philippines BPO industry size
(US$ million) .........................................
7,200
8,800
Sources: BSP, BPO Association of the Philippines
91
11,000
13,200
15,840
25,000
7.3%
Overview of the Philippine Retail Industry
The overall retailing market in the Philippines has continued to improve as a result of high GDP
growth, rising disposable income, increased OFW remittances and rising incomes arising from the
continued growth of the BPO industry. Higher purchasing power of consumers has resulted from
growing OFW remittances and rising incomes in the BPO industry. Market size of retailing in total
grew from over US$50 billion in 2009 to nearly US$71 billion in 2013 at a CAGR for that period of
8.9%. This was similarly reflected across retail channels of convenience stores, department stores and
internet retailing, which each experienced even higher levels of growth at CAGRs of 19.6%, 11.4%
Market size of Retailing in the Philippines (2009-2013)
2009-2013
(excluding sales tax)
2009
2010
2011
2012
2013
50,259.1
54,948.5
59,785.3
65,653.2
70,795.3
8.9%
2,094.0
2,297.6
2,469.9
2,787.1
2,954.7
9.0%
..
271.2
321.1
368.8
446.4
555.4
19.6%
....
2,949.2
3,376.1
3,760.5
4,222.2
4,534.5
11.4%
Internet retailing (US$ million) (2) ..................
154.6
185.6
218.0
266.1
315.3
19.5%
Retailing, total (US$ million)
(1)
.....................
CAGR
Apparel and footwear specialist retailers
(US$ million) (2) .............................................
Convenience store retailing (US$ million)
Department store retailing (US$ million)
(2)
(2)
2014-2018
CAGR
(excluding sales tax)
2014
2015
2016
2017
2018
Retailing, total (US$ million) (1) .....................
71,100.4
77,054.3
83,597.0
90,743.2
98,593.5
(US$ million) (2) .............................................
2,932.5
3,248.4
3,490.3
3,764.8
4,068.8
8.5%
Convenience store retailing (US$ million) (2) ..
681.8
885.1
1,063.9
1,256.5
1,457.8
20.9%
Department store retailing (US$ million) (2) ....
4,471.9
5,065.0
5,553.4
6,100.4
6,714.1
10.7%
349.6
412.3
465.4
519.0
573.4
13.2%
Internet retailing (US$ million)
(2)
..................
8.5%
Notes:
(1)
The ‘Retailing’ data is updated as of July 2013.
(2)
The ‘Convenience store retailing’, ‘Department store retailing’, ‘Internet retailing’ and ‘Apparel and footwear specialist
retailers’ data is updated as of August 2014.
Source: Euromonitor after desk research and trade interviews with retailers and distributors
The economic center of the Philippines, Manila City accounted for 35% of the country’s total
GDP in 2011. The retail industry in the city of Manila and Metro Manila as a whole is also flourishing
due to both domestic demand from rising income levels and with tourism as one of the priority
industries of the Philippines. Metro Manila houses some of the largest shopping malls in the world
such as SM City North Edsa. In 2012, the Globe Shopper Index ranked Metro Manila as the 11th most
attractive shopping destination in Asia Pacific. As a result, discretionary expenditure is expected to
be further bolstered by the boom in shopping malls in Metro Manila.
In the midst of heightened consumer spending, retailers have increasingly expanded their
presence, with more stores opened across the country, and many have moved past the boundaries of
Metro Manila towards key cities in other provinces. Growing purchasing power and appreciation for
branded goods has resulted in households becoming increasingly willing to spend more at specialist
retailers and department stores. The increasingly busy lifestyles of Filipinos and rising
income-generating opportunities have fuelled demand for convenience store retailing. Finally, internet
retailing has grown quickly as well, reaching over $315 million in 2013.
92
Philippine Apparel and Footwear Sector
The apparel and footwear sector in the Philippines totaled over US$9.1 billion in 2013, having
grown between 2009 and 2013 at a CAGR of 9.9%. Within the overall market, designer and casual
fashion apparel growth have outpaced the total market growth. Designer apparel grew at a CAGR of
12.5% from 2009 to 2013, accounting for nearly US$89 million in 2013, and casual fashion apparel
grew at a CAGR of 10.4%, accounting for nearly US$3.3 billion.
Market Size of Apparel and Footwear, Philippines (2009-2018)
2009-2013
2009
Apparel and footwear, total (US$ million) .....
2010
6,243.9
6,980.4
2011
7,766.0
2012
8,481.9
2013
9,114.8
CAGR
9.9%
Designer apparel (US$ million) ......................
55.3
63.1
70.3
79.3
88.6
12.5%
Casual fashion apparel (US$ million) .............
1,892.0
2,114.9
2,352.0
2,593.7
2,807.2
10.4%
Others (US$ million) (1) ..................................
4,351.9
4,865.5
5,414.1
5,888.2
6,307.6
9.7%
2014
2015
9,096.8
9,705.3
2014-2018
CAGR
2016
2017
2018
10,328.7
10,992.7
11,684.8
6.5%
7.8%
Designer apparel (US$ million) ......................
90.6
98.1
106.1
114.1
122.4
Casual fashion apparel (US$ million) .............
3,017.8
3,229.0
3,455.1
3,679.6
3,911.5
6.7%
Others (US$ million) (1) ..................................
6,687.7
7,083.5
7,484.9
7,909.9
8,346.6
5.7%
Note:
(1)
“Others” will refer to mainly fashion apparel produced by local direct sellers and non-branded manufacturers, and also
include the following categories of products — “Office/Formal Wear — Non-Designer”; “Lingerie, Nightwear, and
Swim-wear — Non-Designer, Non-Casual”; “Footwear — Non-Designer, Non-Casual”, which essentially do not fall
under “Designer Apparel and Designer Footwear” and “Casual Fashion Apparel and Casual Footwear”.
Source: Euromonitor after desk research and trade interviews with apparel and footwear brand owners, distributors and
retailers
Distribution of apparel and footwear in the Philippines is mainly conducted through apparel and
footwear specialist retailers and department stores, which, in 2013, accounted for US$2.95 billion and
US$4.5 billion, respectively representing 32% and 50% of the total market.
Distribution of Apparel and Footwear, Philippines (2009-2013)
2009-2013
2009
Department stores (US$ million) ....................
2010
2011
2012
2013
CAGR
2,949.2
3,376.1
3,760.5
4,222.2
4,534.5
11.4%
(US$ million).................................................
2,094.0
2,297.6
2,469.9
2,787.1
2,954.7
9.0%
Traditional grocery retailers (US$ million) .....
1,161.6
1,282.6
1,490.2
1,586.2
1,655.2
9.3%
Other store-based retailing (US$ million) .......
963.0
1,092.8
1,193.6
1,304.1
1,369.4
9.2%
Non-store retailing (US$ million)...................
214.6
250.9
281.9
313.4
341.3
12.3%
6,243.9
6,980.4
7,766.0
8,481.9
9,114.8
9.9%
retailers
93
Growth Outlook
The apparel and footwear market is expected to grow at a CAGR of 6.5% over the period from
2014 to 2018, while designer apparel is expected to grow at 7.8% over that same period.
•
Disposable income drives growth for apparel.
From 2009 to 2013, continued improvement in the Philippine economy resulted in an overall
increase in disposable income and consumer spending. This took the form of increased employment
opportunities arising from BPO, as well as increasing remittances from OFWs working abroad. These
aspects helped to increase the level of optimism across most income groups in the country toward the
Philippine economic outlook and fuelled demand for lifestyle discretionary goods such as higher
quality and accordingly priced apparel.
•
Growing demand for casual apparel due to fast fashion and the burgeoning middle-class
The growing middle-class drives much of the demand for casual apparel in the Philippines. In
particular, growth in demand for fast fashion within the casual apparel sub-segment has been driven
by consumers who seek both the latest trends and affordability and often mix luxury brand apparel
with that of bridge brands. This has resulted in a market preference for stylish yet reasonable-priced
apparel, enabling consumers to make multiple purchases within a short timeframe to remain in line
with the latest fashion trends. Between 2012 and 2014, the casual apparel sub-segment saw a
significant development due to the entry of popular international brands, such as “Uniqlo”, “Forever
21”, “H&M”, “Old Navy”, “Aeropostale”, “Stradivarius”, “Bershka” and “Pull and Bear”. In 2013, the
top ten leading brands for casual apparel were “Marks & Spencer”, “Zara”, “Gap”, “Guess”, “Mango”,
“Debenhams”, “Lacoste”, “Topshop/Topman”, “Cache Cache” and “Aeropostale”, of which seven
were managed by Stores Specialists, Inc. , according to Euromonitor.
•
Strong foreign fashion and brand influences
The Philippines have traditionally had close cultural ties with the United States and, as a result,
American culture strongly influences the fashion scene in the Philippines. Additionally, Filipinos
living and working overseas have greater exposure to both American and other foreign influences and
often spread word about foreign brands to their families in the Philippines. This influence has helped
facilitate the entry of new brands and trends, particularly American ones, into the Philippine market.
•
Shopping malls the favoured shopping medium amongst Filipinos
Although bargain hunters in the Philippines often still shop in market districts, malls are
increasingly favored by consumers looking for a range of products in one shopping destination,
including apparel, footwear, and beauty and personal care merchandise, especially given their
generally convenient locations and wide arrays of products and services.
•
Rosy outlook for retailers over the forecast period
With the Philippines’ positive economic outlook, Euromonitor expects retailers to benefit from
strong consumer confidence from 2014 to 2018, especially amongst high-earners and those involved
with the growing business process outsourcing sector. Department stores and other existing retailers
are expected to continue to expand and to bring new brands to the Philippines. Euromonitor also
expects competition amongst retailers to intensify as they seek exclusive rights to import new brands
into the country.
94
•
Growing purchasing power and appreciation for branded goods benefit specialist retailers
and department stores
Due to the positive economic outlook, previously price conscious consumers are becoming more
willing to spend as they enjoy increased incomes and higher purchasing power. Increasingly affordable
brands brought in by specialist retailers and department stores are expected to contribute to an
increasing appreciation of branded goods in the Philippines, particularly apparel and personal
accessories.
Luxury Goods
The Philippine luxury goods market (designer apparel (ready to wear) and luxury accessories)
has grown along with the apparel and footwear market. Designer apparel (ready to wear) is defined
by Euromonitor as designer clothing and designer footwear and excludes designer (haute couture)
sports apparel. Designer clothing and designer footwear cover men, women and children ranges and
also include clothing accessories and hosiery. Examples of designer brands include “Burberry”,
“Christian Dior”, “D&G”, “Versace”, “Paul Smith Junior”, “Jean Paul Gaultier”, “Chloe”, “Missoni”,
“Gucci”, “Fendi”, “Little Marc”, “Louis Vuitton” and “Stella McCartney”.
Within the luxury goods sector, designer apparel and super premium beauty and personal care are
among the categories that experienced the greatest increase in demand due to the rising level of
disposable income in the Philippines amongst both wealthy and aspirational consumers. Between 2009
and 2013, the target market for designer apparel (ready to wear) expanded, as younger Filipinos with
increased purchasing power sought out luxury goods. According to Euromonitor, diffusion brands,
which are brand extensions marketed at slightly lower price points, are also entering the market.
Instead of eroding the market for existing luxury brands, succeeded in targeting different consumer
demographics. As a result, the designer apparel (ready to wear) sector grew at a CAGR of 12.5% from
2009 to 2013.
Designer Apparel (ready to wear) Brands by Market Share (2011-2013)
2011
2012
2013
Lacoste ............................................................................................
13.7%
13.6%
14.8%
Louis Vuitton ...................................................................................
9.0%
8.8%
8.7%
Salvatore Ferragamo.........................................................................
6.9%
6.6%
6.5%
Calvin Klein Jeans ...........................................................................
5.9%
6.2%
6.4%
Hugo Boss .......................................................................................
4.0%
3.9%
3.8%
Armani Exchange .............................................................................
3.9%
3.8%
3.7%
Burberry...........................................................................................
4.1%
3.8%
3.6%
7 For All Mankind ...........................................................................
3.6%
3.6%
3.5%
Tommy Hilfiger................................................................................
2.8%
2.8%
2.7%
Gucci ...............................................................................................
2.6%
2.7%
2.6%
Others ..............................................................................................
43.5%
44.1%
43.7%
Total ................................................................................................
100.0%
100.0%
100.0%
retailers
95
Of the top ten designer apparel (ready to wear) brands, Stores Specialists, Inc. represents
“Lacoste”, “Salvatore Ferragamo”, “Calvin Klein Jeans”, “Hugo Boss”, “Armani Exchange”,
“Burberry”, “Tommy Hilfiger” and “Gucci”.
Luxury Accessories Brands by Market Share (2011-2013)
2011
2012
2013
Louis Vuitton ...................................................................................
18.5%
28.2%
29.7%
Longchamp.......................................................................................
7.0%
7.0%
7.8%
Gucci ...............................................................................................
7.2%
6.4%
6.5%
Furla ................................................................................................
3.7%
3.7%
3.7%
Hermès.............................................................................................
3.5%
3.6%
3.6%
Bottega Veneta .................................................................................
3.6%
3.6%
3.4%
Bally ................................................................................................
3.1%
3.0%
2.8%
Tod’s................................................................................................
2.0%
2.0%
2.0%
Burberry...........................................................................................
2.3%
1.9%
1.8%
Jimmy Choo .....................................................................................
1.2%
1.4%
1.8%
Others ..............................................................................................
47.9%
39.2%
36.9%
Total ................................................................................................
100.0%
100.0%
100.0%
retailers
Of the top ten luxury accessories brands, Stores Specialists, Inc. represents “Longchamp”,
“Gucci”, “Furla”, “Hermès”, “Bottega Veneta”, “Bally”, “Tod’s”, “Burberry”, and “Jimmy Choo”.
Competitive Landscape
The Philippine luxury market (designer apparel (ready to wear) and luxury accessories) is highly
consolidated among local companies, including Stores Specialists, Inc. , that market a portfolio of
brands, generally on an exclusive basis. The major distributors’ consolidation of brands allows them
to leverage economies of scale and has enabled them to maintain premium pricing.
Growth Outlook
From 2014 to 2018, Euromonitor expects demand for luxury goods to remain strong due to the
Philippine economy’s continued positive outlook. Wealthier Filipinos are expected to continue to seek
out luxury goods and services while the purchasing power of less affluent Filipinos will increase as
the country’s GDP and disposable income continue to grow, further broadening the consumer segment
for luxury products.
•
High-end malls and boutique outlets on the rise amid heightened interest in luxury goods
From 2009 to 2013, due to the overall improving economy, an increasing number of shopping
centres focused on luxury goods were launched in the Philippines. Premium shopping centres, such as
Greenbelt 4 in Metro Manila, have also experienced an increase in the number of visitors, leading
many brands to open additional stores. This in turn led to heightened interest in luxury goods, which
contributed to the rising demand for such products.
96
•
Consumers benefit from wider variety as more players enter the retail scene
With an expected increase in new premium shopping centres in the Philippines over 2014 to
2018, Euromonitor forecasted that luxury goods will continue to experience a sustained growth in
segment performance as the increase in retail space enables retailers to quickly roll out new stores,
resulting in a more dynamic luxury goods market. Euromonitor also expects importers to bring new
foreign luxury brands to the Philippine market and less popular brands to benefit through increased
visibility due to the dynamic market.
•
Growth in mall and retail developments outside Metro Manila
Increasingly, foreign luxury brands expand outside Metro
cities to mitigate costs. Provincial cities can provide relatively
office space. Provincial governments also provide incentives as
the problems of over-congestion and flood incidences in Metro
to develop from 2014 to 2018.
Manila and look at other Philippine
cheap access to manpower, land and
a reward for job creation. In light of
Manila, next-tier cities are expected
Specialist Retailing
Apparel and Footwear
Specialty retailers refers to companies that manage retail stores on behalf of both apparel and
footwear brands, including both stand-alone stores and retail space that is part of a department or
multi-brand store. Between 2009 and 2013, the improving economy and growing purchasing power in
the Philippines led to increased interest in branded apparel. Additionally, fashion bloggers have begun
to spur further interest in brand names. Given this positive environment, close to 450 apparel
specialist stores opened in the Philippines in 2013. Many of these new openings were by large chains
hoping to grow market share and maximise sales, with many located in major shopping centres that
have been constructed outside of Metro Manila.
A small number of large companies lead amongst apparel and footwear specialist retailers in the
Philippines. These include Stores Specialists, Inc. and Robinsons Retail Holdings, Inc., each of which
holds exclusive rights to several international brands and continue to invest in expanding their
portfolios. Despite the strong presence of international brands, local companies continue to maintain
a strong presence in the market. Suyen Corporation led the market in apparel and footwear retailing
with local brand, Bench, seeing strong growth in the period from 2009 to 2013. Another local brand,
Penshoppe, operated by Golden ABC, Inc., came in second despite a stagnating market share over the
2011 to 2013 period.
Amongst specialty retailers who carry international brands and are known in the industry as
Stores Specialists, Inc. ’s closest competitors, Stores Specialists, Inc. , Suyen Corporation and LVMH,
P 1 billion,
P 6.6 billion and =
were the market leaders in terms of revenue in 2013, with =
P 12.7 billion, =
respectively (including revenues of these retailers from sales of local brands as well).
97
Top International Brand Specialty Retailers in the Philippines by Revenue (2011-2013)
=
P
million
2011
2012
2013
Stores Specialists, Inc. .....................................................................
10,183.0
11,610.0
12,788.0
Suyen Corporation............................................................................
2,849.5
4,199.2
6,684.5
LVMH ............................................................................................
981.6
1,051.8
1,080.2
Robinsons Specialty Stores, Inc........................................................
635.5
725.2
920.8
Vogue Concepts, Inc.........................................................................
344.2
423.1
575.2
Retail Specialist, Inc. ......................................................................
Not available
268.9
293.5
Primer International Holdings & Management, Inc ...........................
129.0
167.6
159.4
Note:
(1)
Includes only specialty retailers who carry international brands. However, revenues posted in table above include
revenues from sales of local brands by retailers as well. This list is not exhaustive, and includes only companies who
are known in the industry as Stores Specialists, Inc.’s closest competitors.
Sources: Stores Specialists, Inc; Philippines SEC
As of August 2014, Stores Specialists, Inc., Suyen Corporation and Primer International
Holdings & Management, Inc. led the market in terms of number of outlets (international apparel and
footwear brands), with 565, 162 and 175, respectively, amongst international brand specialty retailers
who are known in the industry as Stores Specialists, Inc.’s closest competitors and considered
significant players in the industry.
Top International Brand Specialty Retailers in the Philippines
Number of international brands
Total number of outlets
carried (apparel and footwear)
(international brands)
Stores Specialists, Inc.....................................................
84
565
Suyen Corporation ..........................................................
16
162
Primer International Holdings & Management, Inc..........
78
175
Robinsons Specialty Stores, Inc. .....................................
14
83
Vogue Concepts, Inc. ......................................................
8
43
TFB Inc. .........................................................................
1
41
Retail Specialist, Inc. ....................................................
11
37
The Body Shop ...............................................................
1
31
Parkniton International ..................................................
2
28
SM Retail .......................................................................
2
79
Marithe Francois Girbaud ...............................................
1
23
H&F Retail Concepts ......................................................
7
20
Note:
(1)
This information was gathered from public sources and official websites as of August 2014, and may differ from actual
figures depending on the frequency with which this information is updated by the relevant parties. Only Apparel and
Footwear brands are covered. The list above is not exhaustive and include only companies who are known in the industry
as Stores Specialists, Inc. ’s closest competitors and who are consider significant players in the industry.
Sources: Stores Specialists, Inc.; Euromonitor after desk research on company websites and public sources.
98
With the various barriers to entry for this market segment, the top importers and distributors are
poised to continue to maintain strong market positions. Due to the logistical complications resulting
from the unique geography of the Philippines and the underdeveloped infrastructure in the country,
international apparel and footwear brands prefer to partner with leading local importers and
distributors, who are familiar with Filipino customers and have an established footprint, rather than
enter the Philippine market through their own subsidiaries. As a result, Euromonitor predicts that
apparel and footwear brands that do not yet have a retail presence in the Philippines will choose to
enter the country’s market through partnerships with local importers and distributors, hence leading
to further consolidation of the industry.
Due to regulatory restrictions on foreign companies and also as a result of their long-standing
relationships and expertise in the industry, the major importers and distributors are the generally the
ones chosen by new brands entering the Philippine market. The entry of additional foreign brands has
introduced affordable prices and increased branding and marketing budgets, further causing the market
for apparel distribution to consolidate. As Filipinos generally view imported products as trendy and
high-end, local distributors are likely to continue to see weaker demand for domestic products in a
brand-conscious market.
Convenience Store Retailing
Top 5 Convenience Stores Brands by Market Share (2011-2013)
2011
2012
2013
“7-Eleven” .......................................................................................
48.8%
52.4%
56.0%
“MiniStop” .......................................................................................
32.9%
31.2%
27.1%
(note)
............................................................................
—
—
0.7%
“Circle K”........................................................................................
—
—
0.1%
“San Miguel Foodshop” ...................................................................
1.5%
—
—
“FamilyMart”
Others ..............................................................................................
16.8%
16.4%
16.1%
Total ................................................................................................
100.0%
100.0%
100.0%
Note:
(1)
FamilyMart is a joint venture owned 60% by SIAL CVS, 37% by FM and 3% by Itochu Corporation. (Source: Stores
Specialists, Inc.)
The convenience store is a relatively underdeveloped retail format in the Philippines. According
to The Economist Intelligence Unit, the rise of the Philippine BPO industry, which generally operates
24 hours per day, has been a predominant force driving the proliferation and popularity of the
convenience store format. At the same time, according to Euromonitor, the lifestyles of Philippine
consumers, especially those living in Metro Manila and provincial cities, are becoming more
fast-paced and driving heightened demand for convenience.
The convenience store retailing sector in the Philippines is dominated by international chains
“7-Eleven” and “MiniStop”. These market leaders have sought to adapt their product offerings to the
Philippine market, in particular in the food service side of the business by offering rice meals instead
of the typical sandwiches and other ready meals. Convenience store growth is driven by an increased
need for convenience amongst Filipinos and twenty-four hour accessibility, particularly in areas where
BPO establishments are located. Convenience stores reflected this demand as they became more
aggressive in opening new stores and expanding to new locations not just in the Metro Manila area
but also in key cities across the Philippines.
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Competition has intensified in convenience store retailing as convenience stores have sought to
expand into new markets, especially underserved areas beyond Metro Manila. The entry of Japanese
brand “FamilyMart” in 2013, via a joint venture that includes Stores Specialists, Inc. , also contributed
to the heightened competition amongst convenience stores.
Department Store Retailing
Top 5 Department Store Brands by Market Share (2011-2013)
2011
SM Department Store .......................................................................
2012
39.1%
2013
39.2%
38.7%
Robinsons Department Store.............................................................
6.3%
6.4%
6.3%
Rustan’s Department Store ...............................................................
1.5%
1.5%
1.7%
Metro ...............................................................................................
1.3%
1.4%
1.5%
Marks & Spencer .............................................................................
0.8%
0.9%
0.9%
Others ..............................................................................................
51.0%
50.5%
50.9%
Large domestic conglomerates continue to hold a major share of the Philippine department store
retailing market. These companies are expanding rapidly by making major investments to open new
stores in locations where there is lower penetration, including in key cities outside of Metro Manila.
As for department store retailing, many of these expansion strategies are designed to leverage the
rising income levels in developing Philippine cities. Meanwhile, other department store players, such
as Metro, which originated in a non-Metro Manila location, also continue to be ambitious in their
expansion across the country.
Online Retailing
The online retail market in the Philippines is in the early stages of its development. The
increasing penetration of the internet and rise in social networking sites in the Philippines have
created new opportunities for retailers and apparel brands to offer their products online. Selling sites
that have recently entered the market offer consumers a wide array of local and international brands,
price discounts and waived delivery charges.
According to Euromonitor, consumers still prefer to purchase apparel in brick-and-mortar stores.
However, online retailers are predicted to have an effect on brick-and-mortar stores as consumers
obtain more access to comparative information on product pricing. Brick-and-mortar stores may seek
to compete with online retailers by venturing into online retailing themselves or providing better
quality or competitively priced apparel.
Recent Trends and Growth Drivers of Online Retailing in the Philippines
Between 2009 and 2013, the use of social media expanded in the Philippines. Social networking
sites helped to promote brands and retailers and encouraged the expansion of internet retailing in the
Philippines, especially amongst apparel specialist retailers, bags and luggage specialist retailers,
beauty specialist retailers, and leisure and personal goods specialist retailers.
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Despite the positive prospects for internet retailing, as Filipinos’ shopping habits largely remain
traditional, the market size of internet retailing remains low in comparison with other types of
retailing. According to Reader’s Digest Trusted Brand 2013 Survey, Filipinos are among the most
active in social media, but only 17% have made the shift to online shopping in the last two years.
Difficulties in shipping across the different islands of the Philippines continue to limit internet
retailing, but, nonetheless, as more Filipinos get access to the internet through mobile devices and
become accustomed to online shopping, internet retailing is expected to reach US$573 million in
2018.
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BUSINESS
OVERVIEW
Established in 1987, we are the pioneer in introducing globally recognized brands through
specialty store retailing to the Philippine market and we continue to do so actively. The merchandise
sold in our strategically located network of stores covers a broad range of categories and brands, from
luxury and bridge apparel to casual wear and fast fashion, footwear, accessories and luggage, food,
home and décor, and beauty and personal care. We represented 103 brands as of June 30, 2014. Our
broad portfolio of international brands and retail formats targets the mid-to-upper tiers of the domestic
consumer spectrum, positioning us to further capitalize on the macro-economic trends of increasing
consumer spending and growing disposable income across the higher-income to middle-income
segments in the Philippines. We believe that our continued success can be partly attributed to our
ability to both track and anticipate constantly changing market trends and identify foreign brands that
are yet to be made available in the Philippine market, but which would be greatly welcomed by local
consumers. This competency also allows us to strategically expand the footprints of our existing
brands. Always attuned to the evolving needs and desires of the Filipino consumer, we have actively
transformed our business over time to capture a wider range of customers and consumer spending
opportunities.
Our position as exclusive franchisee of such well-known and prestigious international brands and
our extensive and diversified portfolio enable us to secure prime retail space appropriate to the brands,
as mall operators are generally eager to have our brands included in their list of retail offerings. As
the market leader in the Philippine specialty retailing market, and in view of our extensive brand
portfolio, we are one of the first companies that landlords approach when it comes to selecting tenants
for their new mall developments, as our portfolio breadth allows us to anchor and populate a retail
development according to the developer’s vision. Store selection features significantly in our
development and management of the brands, as we take care to ensure the stores of each brand are
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situated in areas frequented by its targeted customer demographic and that the surroundings are
suitable and complementary to the characteristics of the brand. For example, our luxury brand stores
are only located in premium upmarket malls in central business districts aimed at sophisticated and
affluent customers of all age groups looking for the best in fashion and lifestyle products. In summary,
we believe our synergistic relationship with retail developers significantly strengthens our ability to
position the brands effectively in the Philippine market.
As part of our growth strategy, we have recently expanded our presence to other retail formats
beyond specialty retailing in order to capture an even broader set of consumption opportunities and
spending patterns. In 2013, we added one of Japan’s largest convenience store franchises,
“FamilyMart”, to our retail portfolio. The “FamilyMart” operations are managed by our joint venture,
PFM, with FM, the owner of the Japanese franchise, and Itochu Corporation. PFM is owned 60% by
SIAL CVS (our 50/50 joint venture with Varejo Corporation, a wholly-owned subsidiary of Ayala
Land), 37% by FM and 3% by Itochu Corporation. As of June 30, 2014, we had a total of 46
convenience stores across Metro Manila. We further diversified our operations by opening our first
department store in April 2014, targeting quality-conscious and aspirational middle-income
consumers, under the brand “Wellworth”, in Fairview Terraces, Quezon City — one of the new retail
spaces in Metro Manila. The “Wellworth” operations are managed by our 50/50 joint venture, SIAL
Specialty Retailers, Inc., also with Varejo Corporation.
We have grown steadily in recent years, with our net sales increasing from =
P 10,183 million in
2011 to =
P 12,788 million in 2013, representing a CAGR of 12.1% during that period. Our net income
P 614 million in 2013. In the
grew even faster at a CAGR of 52.4%, from =
six months ended June 30, 2014, we recorded net income of =
P 486 million.
COMPETITIVE STRENGTHS
The market leader in specialty retailing with a nationwide strategic presence and a developing
multi-format business model that is well-positioned to benefit from favorable macroeconomic
and dem ographic trends in the Philippines
We are the leading specialty retailer in the Philippines by size of international brand portfolio
and store footprint according to Euromonitor. Established in 1987, but with a retail pedigree dating
back to the founding of the Rustan’s Group in 1951, we have benefited from a first mover advantage
in developing standalone specialty stores for an increasingly diverse range of international brands in
the Philippine market. We operate eight of the top ten designer apparel brands and nine of the top ten
luxury accessories brands in the Philippines in 2013, as defined by Euromonitor, and manage a total
of 67 international mid-to-upper tier apparel brands, as well as 36 brands in the footwear, accessories
and luggage, food, home and decor, and personal care categories. Our extensive nationwide retail
footprint consists of 655 directly-operated stores spread across approximately 68 malls throughout the
Philippines. In addition, we operated six stores in Guam as of June 30, 2014.
Our portfolio of international brands and footprint of stores has grown significantly since we
commenced our retail operations in the Philippines and opened our first international branded retail
store in 1988. Since then, we have leveraged our experience and expertise in retail operations and deep
resources to expand our international offerings to Philippine consumers and establish our leading
retail presence in the local market. This has resulted in a stronger market position compared to our
competitors in the Philippine specialty retailing segment in terms of both international brand coverage
and store footprint.
We believe that our leading market position in specialty retailing of international brands, broad
brand portfolio, strategic store footprint and brand-centric management and execution capabilities
favorably position us to capitalize on the consumer trends resulting from the Philippines’ rising GDP,
increasing urbanization, growing middle class and rising levels of disposable consumer income. The
strong correlation between increasing disposable income and the resultant growth in discretionary
consumer spending is driving a corresponding increase in demand and growth in the specialty retailing
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sector. With our recent expansion through joint ventures into quality everyday convenience through
our “FamilyMart” stores, and the creation of a new value-priced mid-market department store,
“Wellworth” to tap the burgeoning middle class of aspirational yet price-conscious shoppers, our
developing multi-format business model provides a platform to capture a broader range of
consumption opportunities and shopping patterns, fueled by a growing and increasingly affluent
consumer class.
Broad and growing international brand portfolio that is highly attractive to both consumers and
brand principals
We carry, on an exclusive basis, many of the world’s elite and highly-anticipated up-and-coming
international brands and products that appeal to increasingly discerning Filipino consumers. Our broad
and growing brand portfolio covers a wide range of distinctive merchandise across the market
categories of luxury and bridge, casual wear, and fast fashion, and offering an extensive product range
of apparel, footwear, accessories and luggage, food and dining, home and personal care — all targeting
the lucrative and growing middle- to higher-income market in the Philippines. Furthermore, we have
developed our own in-house concept store brands, “Beauty Bar” and “MakeRoom”, in the personal
care and home solutions categories, respectively, to carry both our own and also third-party brands,
many of which are exclusive to us in the Philippine market. In addition to specialty retailing, we
decided to grow our brand and retail offerings further, with the additions in 2013 and 2014,
respectively, of both “FamilyMart,” one of Japan’s largest convenience store franchises, and
“Wellworth,” a new value-priced but quality-focused, mid-market department store. Our convenience
store and department store businesses have enabled us to expand into and cater to other market
segments, in which we can leverage our retail foundation, both to serve identified market niches and
provide an improved quality experience. In an environment of rapidly changing consumer trends, we
benefit from a balanced mix of well-established and newer international retail offerings that enable us
to broaden our appeal across different segments of customers and provide them with retail choices at
various price points. This balance drives sustainable growth for our overall business.
We believe the size and breadth of our brand portfolio and the competitive advantages we derived
from the strength of our retail operations make us attractive to brand principals considering entry into
the Philippine market. International brand principals are usually highly selective when selecting the
local partners with whom they enter into cooperative arrangements to develop their brands in a foreign
country. While we already manage an extensive brand portfolio, an increasing number of brand
principals initiate contact with us to explore new partnership opportunities. We believe new brand
principals take comfort in our proven track record of understanding the local market and connectivity
to the Philippine consumer, and therefore what it takes for an international brand to be successful in
the Philippines, as illustrated by the breadth of our brand portfolio, the longevity of our relationships
with our major brand principals — some for as long as nearly three decades — and the breadth and
quality of the store footprints we have developed for our brands. Our competitive advantage in
securing strategic retail space due to the value of our brand portfolio to mall developers, and the
credibility associated with our retail history and financial standing in the Philippines also place us in
good stead with existing and prospective brand principals. We believe that brand principals recognize
our proven ability to develop and operate a well-managed retail presence for international brands in
the Philippine market, and to successfully replicate the global shopping experience for those brands,
according to their image and standards.
Extensive network of directly-managed stores with strategic geographic coverage difficult to
replicate
We believe that our specialty stores enjoy a footprint of prime locations across the Philippines
that would be challenging to replicate. Our stores are strategically located within malls, typically
situated in urban areas with high foot traffic, such as central business districts and major metropolitan
shopping districts, which attract a steady flow of target customers. Our store network includes
tenancies in the major shopping centers in Metro Manila as well as new mall developments in other
growth cities outside of Metro Manila that are complementary to our international brands. For
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example, as of June 30, 2014, we had a total of 25 stores representing 23 brands in the major shopping
malls in Metro Cebu, which is considered the second most populous metropolitan area in the
Philippines after Metro Manila. As we have no exclusivity arrangements with any one mall developer
and treat all of them equally, we are able to gain access to most major mall developments in the
country and select store sites according to the suitability of the retail space in terms of catchment area,
customer demographics and image for our brands.
As the dominant player in the Philippine specialty retailing segment, we are key tenants of all
the major landlord groups and mall developers in terms of total leased floor area. Our current market
presence, as well as our ability to impact mall developments by offering a uniquely broad portfolio
of retail offerings, assists us to secure strategic locations for our brands in terms of access to their
targeted customer demographics and neighboring developments. Moreover, the breadth of our
international brand portfolio, valued and sought after by mall operators, provides us with the
advantage of being a “tenant of choice,” increasing our ability to gain attractive placements for our
brands in new retail developments. We believe that this competitive advantage positions us well to
benefit from the strong pipeline of new malls in Metro Manila and other Philippine provincial cities,
which will provide a continued supply of high-quality store locations for our brands. We believe that
our ability to secure prime locations is one of the factors that enable us to successfully develop the
Philippine businesses of our brand principals. We also believe that our ability to develop our existing
brands makes us the preferred partner for new brand principals seeking entry into the Philippine retail
market.
As of June 30, 2014, our specialty store network of international brands was the largest in the
country, with approximately 655 stores, representing a total gross selling space of 111,585 sq.m. 502
stores are located in Metro Manila, 58 in Luzon (excluding Metro Manila), 35 in Visayas and 60 in
Mindanao. In addition, we have another six stores located in Guam. Our stores are located in prime
retail space where consumer traffic is generally the most concentrated and brand visibility is the
highest. As of June 30, 2014, 67 new stores had been opened in 2014. The scale of our network
testifies to our success and strength in constructing and operating specialty stores for international
brand principals, which in turn facilitate our negotiations for favorable store-related arrangements,
allowing for realization of cost savings and greater efficiencies in our store development processes.
Proven brand-centric execution capabilities that have cemented our growing and long-standing
relationships with brand principals
We believe our integrated operational approach to brand and store management is a key success
factor in the development and operation of our business. In our role as the exclusive franchisee of
many of our international brand principals, we must be able to devote to our brand principals dedicated
and experienced resources that bring a customized approach to developing and managing their retail
presence in the Philippines. Leveraging the extensive resources, know-how and expertise, we operate
an efficient and effective structure of specialized brand-centric teams led by experienced
brand-merchandising managers. These professionals are supported, in turn, by the spectrum of
centralized operational divisions, including our capabilities and resources in sales and marketing,
customer relationship management, construction and engineering, finance and human resources. The
coordination between our individual brand teams and our centralized divisions drives our
effectiveness and efficiency in bringing the brands to market, developing their local store footprint,
and establishing their retail presence in the Philippines. We believe our well-structured processes
allow us to realize benefits of scale from our shared resources, thus optimizing our execution
capabilities and allowing us to achieve operational efficiencies, while tailoring our expertise and focus
to the requirements of our brand principals.
We offer a unique strength in understanding and selecting international brand merchandise for
the local market. Most of our brand principals adopt a “pull” merchandising model and sales
performance of our stores depends largely on our ability to select and purchase the most suitable mix
of merchandise from each brand to suit the needs and preferences of the local market. To achieve this,
our in-depth understanding not only of consumers and market segments in the Philippines but also of
105
the brands themselves — from their history, principles and values, to their merchandise and image —
is critical. Through our regular interaction and active management of our relationships with brand
principals, we receive early information on and access to international developments relating to our
brands, usually six to eight months ahead of the local market. Our international buying trips, made in
accordance with each brand’s seasonal schedules, provide us with intensive exposure to upcoming
retail trends on a worldwide basis. Combining this “first look” advantage with our knowledge of the
Philippine retail market, we refine our merchandising targets and strategies to ensure that we are
purchasing and importing the optimal mix of merchandise to generate customer sales. Our success in
merchandising is reflected in the continued growth of our sales and improvements in our gross
margins.
In addition, we know our customers and are harnessing systems and technology to get to know
them even better, and to use that knowledge to drive our retail performance. Our CRM system provides
us with valuable and “real-time” insight into our customer needs and preferences, and forms a
cornerstone of our targeted merchandising and marketing activities. This innovative system serves as
the central repository for the customer information of more than 88,000 shoppers — as of June 30,
2014. The consolidated information obtained through our POS system enables us to provide in-store
customers with personalized shopping experiences as well as construct a more detailed picture of
customer tastes, needs and buying habits. This in turn means that we are able to segment our customer
base into groups of buyers with different tastes or budgets and in accordance with our product
categories. The combination of both local and global market knowledge, as enhanced by the CRM
system, enables our brand-merchandising managers to stock our stores with merchandise demanded by
Philippine consumers. Our CRM system serves as a comprehensive source of customer information
that enables us to more effectively align our offerings to changing customer needs, and therefore to
drive sales through tailored merchandising strategies and targeted marketing initiatives.
Highly experienced management team with significant expertise and solid track record of growth
and profitability
Our senior management team has deep experience across a broad range of disciplines in the
specialty retail industry, including sales, marketing, merchandising, operations, logistics, IT, real
estate, finance and human resources. Mr. Anthony T. Huang, our President, with his Rustan’s Group
and Tantoco family heritage, has extensive experience running branded consumer as well as
retail-oriented businesses. His vision and leadership has been instrumental to the growth of our Group
over the past two decades. Our Executive Vice-Presidents are industry veterans with in-depth
understanding of the Philippine market, and possess on average 20 years of experience in their
respective fields. Our merchandising group comprises brand-merchandising managers, many of whom
have been with us for an average of ten to 15 years and have acted as brand-merchandising managers
of “their” brands since the inception of these brand relationships. Our track record of growing our
brands, relationships with brand principals, and the resultant revenues and profits enjoyed by our
Group, are all testimony to the quality and ability of our management team and staff.
The quality of our store personnel is likewise a key factor to our success. As such, we take care
in selecting and appointing competent store managers who are well-educated and experienced with
international brand retailing, and we train them to be familiar with the relevant brand policies and
guidelines on daily store operations. To enhance the provision of quality services to our customers,
we also provide regular training to our retail staff, including courses on store operation skills,
marketing skills and product knowledge conducted by our brand principals. We firmly believe that our
corporate culture encourages our employees to consistently seek ways to enhance the value of our
Group and motivates them to strive for our continued success and expansion.
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BUSINESS STRATEGIES
Our primary objective is to continue to strengthen our leading market position in both existing
and new formats through the effective management of our retail operations and careful strategic
expansion. We intend to achieve this by pursuing the following strategies:
Continue our expansion into high-growth consumer segments through further expansion of our
brand portfolio
We will continue to introduce new brands, position ourselves as the preferred partner for
international brands seeking access to the Philippines, and further grow our brand portfolio by: (1)
keeping track of international retail developments and identifying brands that have the potential to do
well in the Philippines, (2) evaluating these developments in our bi-annual business review meetings
and formulating appropriate outreach efforts to brand principals, (3) leveraging existing relationships
with brand principals to represent new brands under the same principal group, and (4) better
integrating our understanding of local business dynamics and consumer needs with our execution
capabilities to offer more efficient and effective services to both existing and prospective brand
principals. For example, due to our relationship with the Inditex group, built around our success with
managing their Zara brand since 2005, we expanded our relationship to also exclusively distribute
Massimo Dutti, Bershka, Stradivarius and Pull and Bear. Through our successful track record with
GAP, we also became the first international franchisee partner for Old Navy in 2014. We believe our
ongoing efforts have attracted an increasing number of quality brand principals to enter into brand
arrangements with us and to expand the scope of existing relationships, as evidenced by our success
in adding ten and 19 new brands in the year ended December 31, 2013 and the six months ended June
30, 2014, respectively, 13 of which resulted from dialogue initiated by the brand principals.
Significant opportunities also exist to invest further in brand categories which target the growing
middle class consumer segment in the Philippines - generally aspirational shoppers with rising levels
of disposable income. As the country’s economy improves, Filipinos are traveling more frequently,
increasing their exposure to international brands and trends and expanding their concepts of a quality
lifestyle. Exposure to international brands has also increased as a result of the large number of
Filipinos working abroad, or who have friends and family working abroad, as well as the greater use
of the Internet and social media. In this regard, we have implemented strategic initiatives to grow our
broad market brand offerings, such as Old Navy, F&F and Aéropostale, as well as selectively expand
into complementary lifestyle retail concepts, such as dining and home furnishings. The brands located
at our new retail development, Central Square in Fort Bonifacio, Taguig, Metro Manila, illustrate this
expanded focus. The first Asian outpost of Pottery Barn and the first Philippine store of Oliviers &
Co. - a French retailer of exclusive food products, are located at Central Square, and other
well-recognized mid-to-upper mid- market international apparel names will also be featured, including
the flagship stores of Michael Kors and Kate Spade, as well as brands new to the Philippine market,
such as Reiss and Cortefiel. These accompany a new flagship store of Marks & Spencer featuring its
well-known food section. We are also planning to expand our value-priced merchandise offerings
through our “Wellworth” operations by opening one more department store in 2015. Finally, we will
also continue to introduce niche non-luxury international brands that allow us to better penetrate other
developing cities in the Philippines.
Strengthen our market position through the expansion of our store footprint and active
management of our arrangements with brand principals
We intend to capitalize on our strong brand portfolio and market leadership in the specialty
retailing industry by further increasing our market penetration through an aggressive yet systematic
store expansion strategy. We aim to broaden consumer access to our brand offerings and increase
revenue growth by identifying and locating new stores in prime, high-traffic retail space, considering
factors such as local population density, target customer demographics, accessibility and profitability.
In Metro Manila and appropriate markets outside Metro Manila, we intend to continue to expand our
footprint in select new malls in order to retain our position as the leading specialty retailer with a
107
portfolio of quality store locations and a broad store footprint. This allows us to offer our brand
principals premium retailing space and support our business plans for further growth. We also plan to
continue our expansion outside Metro Manila into cities with large populations and increasing
disposable income, where we believe there is high growth potential for our growing portfolio of
mid-market brands. We will also focus on more strategic and flexible allocations of retail floor space
between brands and market segments, to capture increased spending opportunities and respond to
changing consumer trends. In addition, recognizing that the quality of the customer shopping
experience is one of the key drivers of store traffic and customer loyalty, we continually strive to
enhance the retail experience offered in our stores by focusing on store presentation and maintaining
the international shopping experience offered by our stores.
We are targeting 158 to 188 new store openings in 2014, and as of June 30, 2014, we have already
rolled out 67 new stores. The average size of these new stores is higher than the current average size
of our existing stores and we expect the new store openings to increase our total gross selling area by
approximately 40,000 sq.m. to 47,000 sq.m. in 2014. While the exact opening date for new stores may
depend on certain factors that we do not control, such as the completion of new malls and the
schedules set by our brand principals, we are confident that the remaining new stores will be opened
as we have already signed lease agreements or entered into discussions with landlords on these new
stores. For 2015, we intend to open between 100 to 115 new stores, which is expected to increase our
gross selling area by an additional 16,000 sq.m. to 19,000 sq.m. The average size of these new stores
to be opened in 2015 is lower than the average size of the new stores to be opened in 2014. We expect
that approximately 80% of the new stores will be located in Metro Manila, 10% in Luzon (excluding
Metro Manila), 6% in the Visayas and 4% in Mindanao, and will be spread across all of our brand
categories.
The efficient implementation of our store roll-out strategy — and consequent increase in our
merchandise sales — is important to our continued efforts to actively manage our relationships with
brand principals and negotiate better brand arrangements, and financial terms and conditions in
particular. For example, an increase in the number of stores we operate for a brand usually results in
an increase in the volume of merchandise purchased from the relevant brand principal, often allowing
us to negotiate more favorable prices or terms, and consequently lowering our procurement costs. We
believe our ability to obtain better terms under our brand agreements has contributed to the consistent
growth in our gross profit margins over the years. For the years ended December 31, 2011, 2012 and
2013, and for the six months ended June 30, 2014, our gross profit margins were 40.1%, 43.9%, 49.2%
Focus on optimizing sales performance and refining our sales strategies to achieve greater
margins
As our brand principals recognize our proven execution capabilities, we will continue to focus
on improving sales performance by optimizing the usage of consolidated data sourced from our
management information systems to provide real-time analysis of the sales, profitability and
operational margins of each store and brand. This will enable us to make informed decisions on our
brands’ development and strategic focus. The data will provide empirical support for strategic
decisions, such as store expansions, the reallocation of retail space, closing down of stores or even
discontinuation of brands. In addition, we expect this initiative to foster improved management of
merchandising and inventory, arising from better integrated sales and store data. As we grow our store
base, we will continue to refine our management and store operating systems to better support our
expansion strategy. We will also concentrate efforts to improve our retail execution through initiatives
to improve efficiencies in the store construction and opening processes, enhance the customer
experience, mobilize repeat customers, and advance same store sales growth and margins.
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By focusing on our customer engagement strategy, we believe we will be able to improve our
retention of existing customers and attract new customers, thus capturing additional market share and
growing overall sales. Building on the brand-based customer knowledge produced by our existing
CRM system, we are investing in and implementing a comprehensive CRM system overhaul that will
provide us increased visibility across our business and allow us to evolve from considering individual,
brand-specific transactions to that of a holistic, company-wide view of shopping behavior. Our
upgraded ETP retail CRM platform is expected to allow us to consolidate and leverage customer
information across all of our brands to create increasingly personalized marketing communications
based on each individual customer’s overall preferences, to run targeted campaigns and promotions
and measure their effectiveness, track customer buying history and use it to up-sell and cross-sell,
capture the number of walk-ins at the store level and refine business strategies to increase customer
footfall and conversion ratio. In addition, our CRM staff will focus on utilizing consolidated customer
data to maintain and continuously improve our customer service at the store level. With access to more
detailed shopper profiles, our store personnel will have better insight into the needs and expectations
of our customers, and this will enable them to provide more personalized service and minimize the risk
of disappointing customers due to lack of knowledge, whether about the brands, product offerings, or
sales policies such as exchanges and returns.
In addition, we have plans to develop an integrated omni-channel approach to our specialty retail
business, which encompasses retail stores, mobile devices and the Internet. We expect to drive
sustainable long-term sales growth by improving our retail positioning, through expanding our
marketing channels to include more social media and mobile efforts, such as enhancements to our “SSI
Life” application to roll out sales initiatives such as electronic shopping vouchers across our brand
portfolio and increasing use of text message promotions and offers, which are popular with local
consumers. These efforts aim to broaden our touch points with customers and provide them with an
integrated shopping experience. They will also allow us to maximize the opportunities created by an
increase in convenience for customers to shop our merchandise across various channels, raise brand
awareness, drive foot traffic into our stores and increase overall sales. We expect that the adoption of
an omni-channel sales and marketing model with an integrated online and offline strategy, will both
strengthen existing brand principal and consumer relationships, as well as help attract additional brand
principals interested in entering the Philippine market, in turn allowing us to continue growing our
brand portfolio, expand our store footprint, increase our overall customer base, and ultimately enhance
our sales.
Continue to grow strategically and expand our multi-format business model
We plan to develop our multi-format business model by increasing the number of our
“FamilyMart” convenience stores and new value-priced “Wellworth” department stores. We are
targeting a total of 94 to 100 “FamilyMart” stores by the end of 2014, and as of June 30, 2014, we
have opened 46 “FamilyMart” stores. We intend to roll out more new convenience stores in 2015 and
have a total of 150 to 175 “FamilyMart” stores by the end of 2015. We will continue to source and
sell higher-margin products, such as hot food offerings and FM private label merchandise. In 2014,
we opened our first “Wellworth” department store in Fairview Terraces, Quezon City — one of the new
retail spaces in Metro Manila — and plan to open another department store during 2015. This new
department store will be situated in one of the new mall developments of our joint venture partner,
Ayala Land, in developing cities, where there is a growing market of consumers seeking quality,
value-priced international products in a contemporary shopping environment. Furthermore, as the
master franchisee for the “FamilyMart” convenience store chain in the Philippines, one of the key
strategies for our “FamilyMart” operations is the implementation of a franchise model to accelerate
our store roll-up program and rapidly expand our store network. We expect to implement this franchise
model by the end of the year.
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Maintain our corporate culture and continue to focus on training
Due to the nature of our business and our brand-centric approach to operations, our employees
are critical to our success. To cope with the future expansion of our store network, we require more
store staff well-versed in international brand knowledge and trends, and possessing the acumen and
discipline to provide exemplary customer service. We expect to capitalize on our reputation for
customer service by further enhancing the quality of in-store customer support to help drive increased
sales productivity, through effective store personnel training, improved brand knowledge and a greater
alignment between staffing levels and individual brand requirements. We have implemented
well-defined staff-training policies and assessment procedures and plan to continue investing in
training programs and other initiatives to enhance our employees’ skills and productivity. We will
continue to focus on providing training to our employees to develop their understanding of our
customer-oriented corporate culture and service quality standards, facilitating their ability both to
respond to customers’ changing needs and preferences and comply with the requirements of brand
principals. We will continue to review and update our employee compensation plans and bonuses
based on individual performance, so that our employees are suitably incentivized.
HISTORY
We were established in the Philippines on December 9, 1987. As of June 30, 2014, we managed
a portfolio of 103 brands with approximately 655 stores across the country.
Set out below are the key milestones in our Group’s history.
1987 ......................
Establishment of Stores Specialists, Inc. as part of the Rustan’s Group and
commencement of specialty retail operations.
1988 ......................
Opening of the first specialty store for United Colors of Benetton.
1990 - 1991 ...........
Opening of the first stores for Lacoste, Marks & Spencer and Savatore
Ferragamo, three of our most enduring brand relationships.
1995 - 2002 ...........
Embarked on rapid expansion with first store openings for an assortment of
brands, including Anne Klein, Charriol, Polo Ralph Lauren, Nine West,
Marlboro Classics, Armani Exchange, DKNY, CK Underwear, CK Jeans, Polo
Jeans, Kenneth Cole, Bally, Lush, and launched our in-house retail concept
brands, “Beauty Bar” and “MakeRoom”.
2003 ......................
First specialty store openings for luxury brands, Gucci, Bottega Veneta, Prada,
Yves Saint Laurent, Burberry’s and Tod’s in Greenbelt 4, the first premium mall
in Metro Manila solely dedicated to prestigious international brands.
2005 ......................
Further expansion of our brand portfolio through the opening of the first stores
for Zara and Debenhams, as well as the first stores for Hugo Boss and another
two beauty and personal care brands, Fruits & Passion and Dashing Diva.
2007 ......................
Opening of the first GAP store in the Philippines, alongside first store openings
for Michael Kors, Marc Jacobs, Ermenegildo Zegna, Cartier and Dunhill.
2008 - 2009 ...........
Opening of the first Hermès, Jimmy Choo, Banana Republic, Tory Burch,
Massimo Dutti, Samsonite, Steve Madden and Aerosoles stores in the
Philippines.
2010 ......................
Opening of the first Payless ShoeSource and Muji stores.
2012 ......................
Expansion into lifestyle dining with our representation of TWG, a well-known
luxury tea company.
110
2013 ......................
Formation of a joint venture with Family Mart Co., Ltd., owner of the
“FamilyMart” convenience store franchise, Ayala Land and Itochu Corporation
to introduce “FamilyMart” convenience stores throughout the Philippines,
further expanding our product offerings and retail formats.
2014 ......................
Continued growth of international recognition of our retail management skills,
with the addition of Old Navy and Pottery Barn brands. We are the first
franchisee in Asia for Pottery Barn, and the first globally for Old Navy.
Opening of our first “Wellworth” department store, “Wellworth” through our
joint venture with Ayala Land.
Corporate Restructuring
The Tantoco Family undertook a restructuring of its ownership over our Group in order to
convert a subsidiary, Casual Clothing Specialists, Inc. (“CCSI”) into our new holding company, SSI
Group, Inc. SSI Group, Inc. is still principally directly owned and controlled by the Tantoco Family
members, directly or through their respective holding companies. CCSI was deemed to be the vehicle
for the Offer and listing of the Group based on its qualification under the listing eligibility
requirements of the PSE. The Group’s former holding company, Stores Specialists, Inc. was converted
into a wholly-owned operating subsidiary of SSI Group, Inc. Stores Specialists, Inc. remains as
primary franchisee under our brand agreements and also acts as the principal shareholder of most of
our operating subsidiaries.
Prior to the restructuring activities undertaken in contemplation of the Offer, CCSI was owned
100% by Stores Specialists, Inc. and its nominees. In December 2013, CCSI declared cash dividends
of =
P 100 million to be paid to Stores Specialists, Inc. On April 3, 2014, the Philippine SEC approved
the increase in authorized capital stock of CCSI from =
P 200 million divided into 2,000,000 shares with
=
=
3
billion
divided
into 30,000,000 shares with par value of
100.00
per
share,
to
P
par value of P
=
P 100.00 per share. Of the increased authorized capital stock of CCSI, Stores Specialists, Inc.
P 175 million was paid
subscribed to 7,000,000 shares for a consideration of =
P 700 million, of which =
and =
P 525 million remained outstanding as of June 30, 2014 as subscription receivables. On April 10,
2014, all of the shares held by Stores Specialists, Inc. in CCSI were sold to the Tantoco Family via
a deed of sale and a deed of assignment of subscription rights. As a result of the share sale, CCSI
ceased to be a subsidiary of Stores Specialists, Inc. In turn, CCSI purchased all of the shares held by
the Tantoco Family in Stores Specialists, Inc. for a total consideration of =
P 2.2 billion and funded such
purchase primarily with loan proceeds secured from the Bank of Philippine Islands. This transaction
resulted in Stores Specialists, Inc. becoming a wholly-owned subsidiary of CCSI.
On April 15, 2014, using the proceeds of the sale of its shares in Stores Specialists, Inc. to CCSI,
the Tantoco Family settled the outstanding =
P 525 million subscription payable on the 7,000,000 shares
in CCSI previously subscribed by Stores Specialists, Inc. and now owned by the Tantoco Family.
Simultaneously, the Tantoco Family further subscribed to an additional unissued 12,171,629 shares in
CCSI, which amounted to =
P 1.2 billion. In addition, the Tantoco Family subscribed an additional
5,000,000 shares in CCSI for a total consideration of =
P 500 million following approval by the
P 5 billion on
Philippine SEC of the increase in authorized capital stock of CCSI from =
P 3 billion to =
August 29, 2014. On January 10, 2014, Casual Clothing Retailers, Inc. was incorporated for the
purpose of continuing the businesses of CCSI, including operation of the brands under our
arrangements with GAP Inc.
On June 18, 2014, certain resolutions were approved by the Board and shareholders of CCSI in
preparation for the Offer, including, among others: (1) change in its corporate name from “Casual
Clothing Specialists, Inc.” to “SSI Group, Inc.”; (2) change in its primary purpose as a retail company
P 5 billion;
to that of a holding company; (3) increase in its authorized capital stock from =
P 3 billion to =
=
=
(4) reduction of par value of its shares from P 100.00 per share to P 1.00 per share; and (5) increase
in the number of members of its board of directors from five to nine. These changes, including the
111
appropriate amendments to its articles of incorporation, were submitted to the Philippine SEC on July
30, 2014 and approved on August 29, 2014. As of the date of this Prospectus, the Company has an
authorized capital stock of =
P 5,000,000,000 divided into 5,000,000,000 Shares with a par value of
=
P 1.00 per Share, and 2,617,162,900 Shares are outstanding.
The above corporate restructuring resulted in SSI Group, Inc. being wholly owned by members
of the Tantoco Family, which in turn gives the Tantoco Family ownership and control of our Group.
As of April 15, 2014, the above restructuring was deemed legally complete, subject to certain
regulatory approvals from the Philippine Bureau of Internal Revenue.
112
113
60%
40%
Samsonite
Philippines, Inc. (21)
Samsonite
Corporation, Inc.
Global Specialty
Retailers, Inc. (4)
100%
Specialty
Investments, Inc. (3)
100%
SIAL CVS
Retailers Inc. (6)
50%
PFM (20)
60%
SIAL Specialty
Retailers, Inc. (5)
50%
CORPORATE AND SHAREHOLDING STRUCTURE
50%
50%
Varejo
Corporation
Specialty Office Concepts,
Inc. (8)
100%
Rustan Specialty Concepts,
Inc. (7)
100%
Stores Specialists, Inc. (2)
100%
SSI Group, Inc. (1)
International Specialty Apparel, Inc. (19)
Fastravel Specialists Holdings, Inc. (18)
Casual Clothing Retailers, Inc. (17)
Specialty Food Retailers, Inc. (16)
Rustan Marketing Specialists, Inc. (15)
Luxury Concepts, Inc. (14)
International Specialty Wear, Inc. (13)
International Specialty Retailers, Inc. (12)
International Specialty Fashions, Inc. (11)
International Specialty Concepts, Inc. (10)
Footwear Specialty Retailers, Inc. (9)
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Notes:
(1)
CCSI was renamed as SSI Group, Inc. to serve as the new holding company of our Group and is wholly-owned by the
Tantoco Family. The Philippine SEC approved the name change on August 29, 2014.
(2)
Stores Specialists, Inc. is 100% owned by CCSI, inclusive of qualifying shares held by nominee directors.
(3)
Specialty Investments, Inc. (“SII”) is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(4)
Global Specialty Retailers, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by nominee
directors.
(5)
SIAL Specialty Retailers, Inc., a joint venture of our Group, is 50% owned by SII and 50% owned by Varejo Corporation,
a subsidiary of Ayala Land, and was formed to operate the “Wellworth” department store operations.
(6)
SIAL CVS, a joint venture of our Group, is 50% owned by SII and 50% owned by Varejo Corporation.
(7)
Rustan Specialty Concepts, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by nominee
directors.
(8)
Specialty Office Concepts, Inc. is 100% owned by Rustan Specialty Concepts, Inc., inclusive of qualifying shares held
by nominee directors.
(9)
Footwear Specialty Retailers, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(10)
International Specialty Concepts, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(11)
International Specialty Fashions, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(12)
International Specialty Retailers, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(13)
International Specialty Wear, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(14)
Luxury Concepts, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by nominee directors.
(15)
Rustan Marketing Specialists, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(16)
Specialty Food Retailers, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by nominee
directors. Specialty Food Retailers, Inc. was previously known as Special Tea Blends, Inc.
(17)
Casual Clothing Retailers, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by nominee
directors.
(18)
Fastravel Specialists Holdings, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(19)
International Specialty Apparel, Inc. is 100% owned by Stores Specialists, Inc., inclusive of qualifying shares held by
nominee directors.
(20)
Philippine FamilyMart CVS, Inc. is owned as to 60% SIAL CVS, 37% by FM and 3% by Itochu Corporation, and was
formed to operate the “FamilyMart” convenience store operations.
(21)
Samsonite Philippines, Inc., an associate of our Group, is owned as to 40% by SII and 60% by Samsonite Corporation,
Inc.
114
BUSINESS OPERATIONS
Overview
Our principal business segment is the management and operation of international lifestyle brands
through stores situated in prime retail space in the Philippines. Our brand portfolio can be broadly
classified into five categories: luxury and bridge, casual, fast fashion, footwear, accessories and
luggage, and others. As of June 30, 2014, we managed 103 brands through a nationwide retail footprint
of approximately 655 stores. In 2013 and 2014, we took steps toward expanding our product offerings
and retail formats through two joint ventures with Ayala Land to develop and operate in the Philippine
market: “FamilyMart”, one of the largest convenience store franchise chains in Japan, and
“Wellworth”, a new department store targeted at the mid-price retail market.
SPECIALTY RETAIL STORES
Overview
Since establishment, we have focused on developing, managing and operating a strong retail
presence for international brand principals in the Philippines. We believe we are the market leader in
specialty retailing of international brands in the Philippines in terms of our extensive retail portfolio,
strategic store footprint and proven brand-centric management and execution capabilities. Our growth
has been driven over the years by our commitment to interpreting global trends for Filipino tastes and
delivering to the Filipino consumers quality international offerings that will enhance all aspects of
their lifestyle. Our brands cover a broad spectrum of product categories from luxury apparel and
casual wear to footwear, accessories and luggage, food and beverage, personal care and home. The
combined store network of the international brands we manage is one of the largest in the country, with
a total gross selling space of approximately 111,585 sq.m. Ten and 19 new brands were added to our
portfolio in the year ended December 31, 2013 and the six months ended June 30, 2014, respectively,
including prominent names such as Alexander McQueen, Givenchy, Old Navy and Pottery Barn,
bringing the number of our managed brands to 103.
Brands
Our portfolio of international brands and network of stores has grown significantly since we
commenced our retail operations in the Philippines and opened our first international branded store
in 1988. Since then, we have leveraged our retail heritage, know-how, and extensive resources to
expand our range of international offerings to the Philippines and establish a dominant specialty retail
presence in the Philippines.
We believe that our success in partnering with brand principals can be attributed to the
combination of: (1) our proven ability to maintain and protect their brand integrity and faithfully
replicate in-country the international shopping experience associated with their brands in line with
their global standards and (2) deep product knowledge gained from our direct operation of stores with
established infrastructure and operating systems modeled on international best practices. Our ability
to authentically recreate in the Philippine market the international shopping experience of our brands
makes us the partner of choice for those seeking entry into the Philippine market. For some principals,
such as Pottery Barn and Old Navy, we are the only partner in Asia trusted to date with their brand.
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The following table sets out, in alphabetical order, the international brands we represented as of
June 30, 2014, other than our own “Beauty Bar” and “MakeRoom” concept brands, and the year we
added each of these brands to our portfolio.
A2 by Aerosoles
2014
Acca Kappa
2014
Aéropostale
2013
Aerosoles
2008
Agatha
2008
Alexander McQueen
2014
American Tourister
2013
Anne Klein
1995
Armani Exchange
1998
Bally
2001
Banana Republic
2008
Bass
1994
Bershka
2013
Bobbi Brown
2012
Bottega Veneta
2003
Brooks Brothers
2013
Burberry
2003
Cache Cache
2010
Cartier
2007
Charriol
1996
CK Jeans
1997
CK Underwear
1998
Clarins
2014
Clinique
2012
Cortefiel
2014
Dashing Diva
2005
Debenhams
2005
Desigual
2013
Diesel
2002
Diptyque
2014
DKNY
2001
Dune
2013
Dunhill
2007
Ecco
2006
Ermenegildo Zegna
2007
Essences
2011
F&F
2014
Fruits & Passion
2005
Furla
2006
Gant
2011
GAP
2007
Giuseppe Zanotti
2014
Givenchy
2014
Gucci
2003
Hackett
2012
Hermès
2009
Hugo Boss
2005
Isaac Mizrahi
2014
Jessica
1998
Jimmy Choo
2009
Juicy Couture
2010
1990
Kate Spade
2003
Kenneth Cole
2000
Lacoste
Lacoste Accessories
2003
L’Occitane
2008
Le Sportsac
2011
Longchamp
2014
Lush
2001
MAC Cosmetics
2009
Marc by Marc Jacobs
2008
Marc Jacobs
2007
Marks & Spencer
1990
Massimo Dutti
2009
MBT
2014
MCS
1995
Michael Kors
2007
Muji
2010
Nars
2013
Nine West
1996
Oka-B
2008
Old Navy
2014
Oliviers & Co.
2014
Payless ShoeSource
2010
Polo Ralph Lauren
1996
Pottery Barn
2014
Prada
1999
Pull and Bear
2014
Reiss
2014
Replay
2011
Saint Laurent
2003
Salvatore Ferragamo
1991
Samsonite
2008
Saville Row
2014
Sinéquanone
2008
Springfield
2003
Steve Madden
2008
Stradivarius
2013
Stride Rite
2010
Superga
2008
Superdry
2012
Swarovski
2013
Tod’s
2003
Tommy Hilfiger
2012
Tory Burch
2009
TWG
2012
Vilebrequin
2009
Vince Camuto
2011
West Elm
2014
Women’s Secret
2013
Zara
2005
We offer a comprehensive and highly-attractive portfolio of lifestyle brands catering to different
gender, age, occupation, income and demographics. For example, we carry bridge brands aimed at
younger aspirational customers interested in stylish and fashionable yet affordable apparel and
footwear. Our luxury brands, on the other hand, seek to capture the tastes of the country’s affluent
consumers that are modern, sophisticated, well-informed on international lifestyle trends, attuned to
stylistic innovations and requiring products of both high quality and recognized prestige. Recognizing
the significant opportunities presented by the growing middle class in the Philippines, we have
expanded our broad market offerings on both the brand and retail category levels with the addition of
international mid-market names such as Payless ShoeSource, F&F and Old Navy, as well as
complementary products such as food and home furnishings.
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The following table further describes our brand categories and product offerings.
Categories
Luxury
Description
Products
Exclusive, prestigious brands which cater to the high-end
Apparel, footwear,
luxury market. Examples are Hermès, Gucci and Cartier.
timepieces, jewelry and
accessories
Bridge
Affordable luxury brands that specifically target younger
Apparel, footwear and
customers. Examples are Kate Spade, Michael Kors and
accessories
Tory Burch.
Casual
Can be used to describe a variety of styles, but brands in
this category design informal clothing that usually
accessories
emphasizes comfort. Examples are GAP, Lacoste and Tommy
Hilfiger.
Fast Fashion
Affordable names and collections which are the result of
runway designs moving into stores in the fastest possible
accessories
way to respond to the latest trends. Examples are Zara,
Stradivarius, Bershka and Old Navy.
Footwear, Accessories
Brands that focus only on collections of shoes, accessories
Footwear, accessories and
and Luggage
and luggage. Examples are Steve Madden, Nine West,
luggage
Payless ShoeSource and Samsonite.
Others
Include:
Home
Brands that cater to home furnishings and
Furniture, furnishings and
accessories, and interior design items.
accessories
Examples are Pottery Barn and Muji.
Food
Mostly food brands such as TWG and Oliviers
Food and beverage
& Co.
products
Personal
Brands which manufacture products dedicated
Cosmetics (skin care and
Care
to health and beauty, including perfume,
make up products), and
sunscreen, nails, hair and skin care products
other beauty and personal
and cosmetics. Examples are Lush, L’Occitane,
care products in our
Beauty Bar and Fruits & Passion.
Beauty Bar concept stores
Self-owned retail concept stores
To expand our retail portfolio, we opened our first personal care concept store, “Beauty Bar” in
Metro Manila in 1998, which carries a wide variety of beauty products, including our private label
merchandise and trendy niche third-party brands such as Smashbox, Burt’s Bees, Prestige, Palladio,
the Balm and ArtDeco. In addition, we launched our “Beauty Bar” online shopping website in 2010
to enable customers to shop the brands and merchandise we carry more conveniently. Our other
self-owned specialty concept brand, “MakeRoom”, launched in 2001, focuses on offering innovative
and stylish home organization and storage solutions to consumers looking for high-quality and
functional choices. As of June 30, 2014, we operated 26 “Beauty Bar” stores and 12 “MakeRoom”
stores in the Philippines.
Brand Relationships
Substantially all of our brand arrangements are in the form of exclusive franchise or distribution
agreements with brand principals, pursuant to which we provide comprehensive retail management
services, and acquire the right to construct, manage and operate customized stores for their brands in
the Philippines. Our senior management is responsible for overseeing the overall development of the
117
brands’ retail operations in the Philippines, including the formulation of initial business plans and
strategies with brand principals. In addition, we assign to each brand a brand-merchandising manager
who has primary responsibility for the day-to-day execution of all aspects of the relevant brand
arrangements with the respective brand principal.
We are generally responsible, with strategic guidance from our brand principals, for all aspects
of the brands’ Philippine businesses, including the selection of store sites, construction and fitting-out
of the stores, marketing and promotions, merchandising, pricing and after-sales service. Our brand
principals provide operational support in the form of promotional materials, signage, design schemes,
construction parameters and store personnel training, amongst others. We maintain close working
relationships with our brand principals to ensure that our stores adhere to their often strict standards
and that our brand management services properly convey their images.
Under our brand agreements, we must source the merchandise sold in our stores directly from our
brand principals or their approved suppliers. In addition to minimum advertising and product purchase
spend obligations, we have a number of further obligations under the brand agreements, including
ensuring that our stores are constructed and periodically refurbished in accordance with the standards
mandated by our brand principals. All such construction and refurbishment costs are borne by us.
Pursuant to the terms of our brand agreements, we are required to obtain the necessary business
licenses and permits for store operations, and are responsible for compliance with applicable local
laws and regulations. Substantially all of our brand agreements grant us exclusive rights in the
Philippine market for an average term ranging from three to eight years.
Most of our brand agreements include terms that allow automatic renewal upon their expiry, and
many of our brand principals have been with us for ten years or more. At times, for commercial
considerations, we deliberately allow our brand agreements to lapse, but none of our brand principals
have voluntarily discontinued their cooperation with us in at least the last three years. Occasionally,
we have also granted a right of first refusal or options in favor of some of our brand principals
pursuant to the terms of their respective brand agreements, to acquire equity interests in the relevant
subsidiary of our Group or the relevant lease rights to their store locations, which they may exercise
in the event we decide to sell or transfer the store businesses that we operate for them in the
Philippines or upon expiration or termination of the relevant brand agreements. For some of our brand
principals, we are required to make royalty payments and meet minimum purchase requirements and
sales targets, defaults of which may result in termination of the relevant brand agreements. We have
historically met these targets, and if we anticipate any extenuating circumstances, we negotiate revised
targets. Please see “Risk Factors — We may face increased competition in the Philippines from other
retail companies as well as brand principals, including those who may choose to terminate their
partnership arrangements with us” for details.
Stores
Network and Size
As of June 30, 2014, our retail footprint included approximately 655 stores in Metro Manila and
other major cities in the Philippines, as well as six stores in Guam. As of June 30, 2014, we have de
minimis sales from our Guam operations, which are loss-making. Our stores are located primarily in
major malls in premium shopping districts with well-established customer traffic. In 2013, we opened
73 new stores and added ten brands to our portfolio. As of June 30, 2014, another 67 new stores were
opened and 19 new brands partnered with us.
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The table below sets out details of our store network by brand category as of June 30, 2014.
Number of
Gross selling
stores
space (sq.m.)
Categories and number of brands
Luxury and Bridge ..............................................................................
44 brands
143
14,128
Casual .................................................................................................
13 brands
109
14,846
Fast Fashion ........................................................................................
10 brands
75
42,983
Footwear, Accessories and Luggage .....................................................
17 brands
201
21,393
Others ................................................................................................
19 brands
127
18,234
Total ...................................................................................................
103 brands
655
111,585
The following table sets out the number of our stores, gross selling space and growth in gross
selling space for our stores as of December 31, 2011, 2012 and 2013, and as of June 30, 2014.
As of December 31,
2011
2012
As of June 30,
2013
2013
2014
Number of brands .....................................
76
81
91
85
103
Number of stores ......................................
439
524
597
577
655
Gross selling space (sq.m.) .......................
70,260
82,593
98,126
92,358
111,585
Growth in gross selling space (%).............
20.6
17.6
18.8
—
20.8 (1)
Note:
(1)
Calculated against increase in gross selling space at June 30, 2013.
Locations and Premises
The following table sets out our store footprint by region as of December 31, 2011, 2012 and
2013 and as of June 30, 2014.
As of December 31,
Region
2011
Metro Manila..................................................................
2012
361
As of June 30,
2013
424
2014
459
502
Luzon (Excluding Metro Manila) ....................................
29
46
55
58
Visayas ...........................................................................
18
18
28
35
Mindanao .......................................................................
31
36
55
60
Metro Manila presents an attractive market for specialty brand retailing given its expanding
economy and developing business and shopping districts. Our stores are located in premium locations
that offer the right mix of high foot traffic and consistency with the positioning of the brands we
represent. Our stores can be found in a number of the major malls in the city, including Greenbelt,
Glorietta, Bonifacio High Street, Power Plant Mall, the Shangri-la Plaza and SM Megamall.
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The growth in our brand portfolio also enabled us to expand into other regions and cities where
new mall developments suitable for our store locations have been constructed. In 1997, we opened our
first store in Metro Cebu, which is considered the second most populous metropolitan area in the
Philippines after Metro Manila, and as of June 30, 2014, we had a total of 25 stores representing 23
brands in the major shopping malls in Metro Cebu. In addition, we operate six stores representing
three brands — Beauty Bar, Aerosoles and GAP — in Guam.
Shop-in-Shops
We operated 85 shop-in-shops as of June 30, 2014, which are specially-designed sales areas
situated in the Rustan’s Group department stores located in Metro Manila and Metro Cebu. The terms
of our brand agreements apply equally to our shop-in-shops, including payment obligations and terms
of sale. There are no substantive differences in the lease agreements for our free-standing stores and
our shop-in-shops. Our shop-in shops are operated in the same manner as our free-standing stores.
Leasing
Our long-standing relationships with the major Philippine developers and mall operators,
including Ayala Land, SM Prime Holdings, Inc., Shangri-La Plaza Corporation, Rockwell Land
Corporation and Megaworld Corporation, assist us to secure prime locations for our stores. Our
sustained length of cooperation with such developers and our status as key tenants in terms of total
leased floor area, combined with our substantial portfolio of international brands, enhance our
relationships with such developers, and underpin our mutual synergies. As a result, we are often able
to obtain advance information on newly available retail spaces or new mall developments to be
constructed, as well as market data on commercial real estate in Metro Manila and the other cities in
which we operate. The strength of our brand portfolio makes us the “tenant of choice” for many
developments, and often drives developers to partner with us early in the development process to
ensure the availability of our brands in their new malls and to draw on our retail expertise.
Our lease terms generally average three years, and the terms and conditions, including rental
rates, are determined at arm’s length, based on market conditions. We have no exclusivity
arrangements with any developer or mall operator and endeavor to treat all developers and operators
equally. Our leasing strategy is driven primarily by the suitability of the retail space in terms of image
and customer demographics for particular brands. Please see “Business — Properties” for more
details.
Site Selection
Under our brand agreements, we have the right to propose sites for new stores. We regularly
identify opportunities to increase our network in new malls and other promising retail locations, based
upon detailed demographic analysis and market intelligence. In assessing sites, we determine first and
foremost whether the proposed location is suitable for the brand’s image and target demographics. We
then evaluate local market conditions in accordance with the relevant operational policies agreed with
our brand principals. These factors include, among others, local market capacities and potential
growth, targeted customer preferences, purchasing power and demand for the branded products,
accessibility of the proposed store location and surrounding environment, average rent price, set-up
costs and coverage of existing stores. With a view to our long-term, sustainable growth, we manage
potential “cannibalization” through regular reviews of the overall profile of our retail presence both
in existing locations and in locations proposed for new stores.
Central Square Development
We have entered into a 20-year land lease agreement with Fort Bonifacio Development
Corporation, an affiliate of Ayala Land, for the construction of our first retail development — Central
Square — consisting of three above-ground retail floors dedicated to our brands and two basement
levels anchored by a Rustan’s Supermarket. Central Square is prominently situated within one of the
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most urbanized central districts of Metro Manila, Bonifacio Global City in Taguig, with total gross
leasable space of 9,741.3 sq.m. Brands located at Central Square include the flagship stores of Michael
Kors and Marks & Spencer, Kate Spade, the first Oliviers & Co. store in the Philippines and the first
Pottery Barn store in Asia.
Central Square represented an opportunity to showcase the impressive array of international
brands that we manage, including many that are new to the Philippine market. Despite our Central
Square development venture, we do not currently intend to expand into the retail development
business. Further, to offer a complete shopping experience to our customers in Central Square, we
entered into a cooperation agreement with Ayala Land, pursuant to which it has sole ownership of the
fourth above-ground floor in the retail development. This floor is currently being used to host and
operate the first 4-D cineplex in the Philippines. We also lease space to well-known third-party food
retail brands, such as Baskin Robbins and Starbucks Reserve.
Design, Construction and Fitting-Out
Under the terms of most of our brand agreements, the stores we operate are required to adhere
to the design concepts and engineering parameters provided by the brand principals. Our Group has
long-standing relationships with a few reputable third-party design firms, who execute these design
concepts under our supervision. Our appointed designers typically send our brand principals proposed
floor plans and specifications of the new store premises, which are used by our brand principals’
design teams to prepare prototype plans, design concepts and architectural drawings that they then
furnish to us. Our designers are permitted to modify these plans and drawings to comply with
applicable legal requirements. Final development plans are submitted to the brand principals for
approval, and construction and fitting-out works are conducted in strict accordance with the approved
plans. Our appointed designers are responsible for all communications with our brands’ in-house
design teams and finalization of the design and decor of the stores.
We implement a bidding process with respect to the selection of contractors for construction of
our stores and have developed strong relationships with several of the most accomplished contractors
in the country. Our dedicated team of technical personnel, all of whom have architecture or
engineering backgrounds, is responsible for monitoring the progress of store development and
providing monthly reports to our management. While our brand principals are not required to approve
our choice of contractors, there are regular communications between the brand’s engineering team and
our contractors and the brand principal may send its own personnel to visit the sites and inspect the
works-in-progress. This is particularly true if the store being constructed marks that brand’s first foray
into the Philippines. Our third-party contractors also assist us with obtaining the necessary permits for
store construction.
We are also generally required to purchase certain furnishings and decorations as specified by
our brand principals, directly from them or through their approved suppliers. This is to ensure that our
stores have the same design feel as the brand’s other stores around the world. The attention we pay
in executing the brand’s concept extends to minute details, such as the lighting and music at our stores.
In this way, we are able to recreate the international shopping experience associated with each brand
for their stores in the Philippines. As our relationships with our brands evolve and the number of stores
we operate for them increases, we are often able to propose alternate local suppliers from whom we
can source certain items of similar quality but at significantly lower cost.
Our brand-merchandising managers have full oversight of the store development project
throughout the entire construction and fitting-out process, and they remain in constant contact with the
brand principals. We believe the close involvement of our brand-merchandising managers in the store
development process facilitates merchandising of that store and helps to ensure that such stores are
constructed, stocked and opened in a timely and effective manner.
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Under our brand agreements with brand principals, we are also required to carry out store
refurbishments, typically every three to five years, in order to keep the stores fresh and optimize
customer experience, preserving the integrity and image of our international brands. We follow the
same processes and procedures for refurbishments as for new store construction, and ensure that we
adhere to the operational policies and standards set by our brand principals.
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Store Operations
Dedicated Brand Teams
We adopt an integrated, brand-centric operational structure for all of our brands. Every brand is
serviced by a dedicated brand team helmed by a brand-merchandising manager, who is the go-to
person on all matters relating to the development, operation and management of that brand in the
Philippines. Behind each brand-merchandising manager is a specialized team assigned to the brand,
to provide customized directional guidance and handle key aspects of the business relationship with
our brand principals, including the development and execution of follow-up business plans, site
selection, construction and fitting-out of stores, store openings, merchandising, supply and logistics,
marketing and promotion, sales and pricing, and recruitment and training of store personnel. Our
brand-merchandising managers remain in close contact with their brand principal counterparts in
respect of sales and inventory purchases, target setting and tracking, and business plan discussions and
updates. By providing our brand principals with regular and consistent access to a team very familiar
with their brand image and operations, this service model contributes strongly to our relationships
with our brand principals.
We provide in-house training to our merchandising personnel and require that they accumulate
sufficient experience before they are permitted to commence handling of merchandise purchases.
Many of our most senior and experienced brand-merchandising managers have acted as
brand-merchandising managers of “their” brands since the commencement of our relationships with
those brands. They continuously track fashion trends and feedback from customers to ensure that the
merchandise we are importing and selling meets consumer preferences.
Shared Resources
Our brand teams are supported by the full scale of our shared operational resources, including
construction and engineering, sales and marketing, customer relationship management, supply and
logistics, finance and human resources. The coordination between our individual brand teams and our
centralized divisions throughout key aspects of store operations drives our effectiveness and
efficiency in bringing our brands to market and establishing their retail presence in the Philippines.
Although each brand development strategy is customized, we believe our well-structured
operational processes allow us to realize benefits of scale in our execution. For example, we are able
to negotiate with third-party contractors for favorable terms and to achieve cost savings in our
construction of stores across all brands. We are also better able to obtain premium page placements
in newspapers and glossy magazines, which are highly-demanded by advertisers, but without
necessarily paying increased prices, due to the scale of advertisements we regularly place for the
brands we operate. Our integrated operational structure optimizes our overall execution capabilities
and enables us to achieve greater cost efficiencies for our brand, yet allows us to tailor our expertise
and focus to the specific requirements of our brand principals.
Store Personnel and Brand Standards
We take care in selecting and appointing competent store managers who are experienced with
international brand retailing and we train them to be familiar with the relevant brand policies and
guidelines on daily store operations. To enhance the quality of our customer service, we also provide
regular training to our retail staff, including courses on salesmanship, store operation and product
knowledge.
We conduct regular store supervision and both periodic and ad-hoc inspections to ensure that our
stores comply with the operational policies set by our brand principals. Applicable guidelines cover
an extensive list of standards and requirements, including dress code and conduct of store personnel,
store opening hours, warranty and customer service, window displays, and terms and conditions of
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merchandise sales. Our store managers supervise the daily operations of each store and are responsible
for ensuring that store operations comply with the relevant standards. They also periodically report to
our head office on the operating conditions of the stores. Our brand-merchandising managers both
closely monitor the performance of the stores and periodically inspect each store.
Merchandise, Inventory and Logistics
Merchandising
Pursuant to the terms of our brand agreements, we source the merchandise sold in our stores
directly from our brand principals or their approved suppliers. With the exception of brands who adopt
the “push” merchandising model or impose product mix restrictions, our brand principals grant us
autonomy to decide the amount of purchases we require as well as the merchandise mix, which we
determine based on sales performance of the stores, customer preferences and market conditions. An
important advantage of our sourcing arrangements with our brand principals is the prevention of any
counterfeit products being supplied to our stores.
Our brand-merchandising managers typically go on seasonal buying trips arranged by our brand
principals. In order to fulfill the minimum purchase requirements under our brand agreements, we
formulate an annual merchandising budget for each brand, which is reviewed every season prior to
buying trips. It typically takes six to eight months for the merchandise that we order to be delivered
and shipped to our distribution centers in the Philippines. For the few brands that adopt a “push”
merchandising model, the brand principals decide the merchandise mix and frequency of product
delivery. However, we are generally able to discuss with them any adjustments to the merchandise mix
that we think are necessary to increase the appeal of the store collections to the Philippine consumer.
Payment arrangements for our merchandising purchases vary from brand to brand, and are usually
subject to negotiations with our brand principals.
Our extensive knowledge of retail offerings that appeal to local consumers provides us with a
marked advantage in the formulation of our merchandising strategies. We analyze sales, market trends
and consumer preferences to identify consumer opportunities that help guide each season’s
merchandising process. In addition, our brand-merchandising managers streamline each brand’s entire
product line by editing, adding and deleting styles, with the objective of maximizing profitable sales
across the targeted customer segments. We work in close collaboration with brand principals to ensure
that all merchandise sourced from them and sold in the stores is specifically tailored to address and
capture the intended consumer market opportunities, yet conveys the distinctive image and value
associated with each brand.
Inventory
As each brand’s purchasing policy may differ, we try to adopt a flexible inventory control
system. For brands which do not require us to maintain a fixed level of inventory, our team of
dedicated staff closely monitors the inventory levels of individual stores and the sales status of
best-selling products, identifying both fast-selling and slow-moving products. The nature of our brand
principals’ businesses generally requires us to maintain seasonal inventory for many of the
international brands we operate. Excess inventory is usually disposed of through end-of-season sales,
special sales pursuant to tie-ups with credit card companies and other similar institutions, and special
mall sales. Our brand agreements generally require us to obtain and maintain insurance for inventory
stored in our warehouses and stores.
Distribution Centers
We currently have eight distribution centers with warehouse facilities located in strategic areas
throughout Metro Manila to ensure the efficient coordination of our merchandise shipments and the
timely delivery of products to our stores. Some distribution centers are specially operated to
accommodate brands with particular specifications for the handling and storage of their merchandise.
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We have implemented a warehouse management system, which is a sub-component of our core
centralized enterprise retail merchandise management system. This system enables us to streamline
warehouse administration, increase the efficiency and accuracy of our receiving and distribution
processes and improve control over the movement and storage of inventory within our warehouses.
Please see “— Information Technology Systems” for more details.
Central Kitchen
We have set up a 720 sq.m. central kitchen facility in Makati, Metro Manila to support the
operations of our TWG tea salon and boutiques, each of which also houses a separate seating section
that serves customers tea-infused dishes and savories for in-store dining. This facility was constructed
and is operated in accordance with the relevant requirements and standards as mandated by our
“TWG” brand principal. The kitchen is managed by a commissary head with a staff of almost 70
employees, including a head chef who is responsible for savories and pastries. Our central kitchen
facility will likewise service the requirements of any additional food-related retail offerings that we
expand into in the future.
Logistics
As of June 30, 2014, we had standing accounts with eight international third-party freight
companies based in the main geographic areas from which our brands originate their merchandise.
Although we do not enter into long-term agreements with our logistics service providers, most of them
have provided services to us for more than ten years according to well-established terms of business.
They are responsible for shipping merchandise from our brand principals to our distribution centers
based on our purchase orders. Delivery of merchandise from our distribution centers to our stores in
Metro Manila is generally handled by our internal truck fleet. For stores located outside Metro Manila,
we use external transportation providers for merchandise delivery. Pursuant to the terms of our
shipping arrangements, the third-party service providers are responsible for any loss that may occur
during transportation and we have the right to seek indemnification or damages from these providers
for any such losses.
Our logistics staff is responsible for managing our distribution centers and warehouse inventory
levels and coordinating with our brand-merchandising managers for the shipment and arrival of
merchandise. They monitor and update our brand-merchandising managers on shipment progress and
arrivals to improve coordination and timely plan deliveries to our stores. This ensures that every store
maintains appropriate and updated merchandise inventory throughout the year, to maximize sales.
Sales and Marketing
We have a centralized sales and marketing division, which works closely with the different brand
teams to carry out marketing and promotional activities specific to each brand’s policies. We manage
our marketing and promotional activities on a brand-by-brand basis, and in accordance with the agreed
business plans. The dedicated team for each brand guides the brand’s in-country marketing efforts,
with operational support from our centralized sales and marketing division. This approach enables us
to provide our brand principals with the benefits of both specialized staff who are experienced with
their product offerings and targeted clientele as well as the industry relationships, experience and
market knowledge of our centralized sales and marketing division.
Our brands may have strict requirements with respect to the creation and implementation of
marketing initiatives. In this regard, we often have to commit to a local advertising spend. Certain
brands also require us to submit annual marketing plans for approval. Promotional and advertising
materials are usually provided by our brand principals and all marketing activities must be
pre-approved by them. Itemized invoices and accounting reports of marketing expenditures and details
of activities are regularly provided to our brand principals for review. We believe that the close
coordination of marketing activities with our brand principals enhances our corporate brand image and
reputation with brand principals.
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Promotional activities approved by the brands generally include print advertising in glossy
magazines and newspapers and other marketing campaigns such as event sponsorship and special
sales. In respect of print advertising, we are usually the single largest advertiser in local fashion
magazines, and so are better-positioned to negotiate favorable rates as well as secure optimal page
placements for our advertisements. In addition, due to the breadth of our brand portfolio, we
frequently receive requests from print media to assist with loans of merchandise for their editorial
features and spreads, which in turn provides us with access to product placement opportunities at
minimal cost. We conduct regular end-of-season sales twice a year and schedule additional special
selling periods to take advantage of gifting holidays such as Valentine’s Day, Mother’s Day and
Christmas. We also provide certain discounts between holidays to promote sales.
In addition to the promotional activities we undertake pursuant to our brand principals’
requirements, we also create marketing initiatives to promote our brands and increase consumer
awareness, enhance sales from existing clientele and further expand our customer base. An example
of our recent efforts is the launch of our mobile application “SSI Life”, which allows users to receive
app-exclusive offers from our roster of labels, along with electronic vouchers and product news. Users
of “SSI Life” also receive exclusive campaign notifications every time they visit a mall in which our
brands are located. In addition, we increased our usage of text message promotions as this has proven
to be very popular with local consumers. We have created Facebook pages for some of our stores such
as “MakeRoom”, through which consumers can obtain the latest information on our products and
promotions. These social media sites can also serve as efficient customer communications channels.
Pricing
Most of our brand principals do not set requirements as to pricing for the merchandise sold in
our stores. Instead they provide recommended prices, which we consider in setting our prices, along
with other factors including procurement costs, product appeal and market conditions. Once product
pricing is determined, it is followed uniformly by our stores. Our pricing strategy is to be competitive
with international retail prices.
Sales return policy
All stores adopt our standardized sales return policy. Under our sales return policy, customers
with receipts may, within seven to 30 days from purchase, depending on the brand, return unused
products purchased at full price and exchange them for new products or store credit.
Customers
Target Customers
Due to the positioning of our brands and our overall retail concept premised on providing local
consumers with quality lifestyle choices, we generally target domestic consumers from middle- to
upper-class households, having exposure to international brands and shopping experiences due to
overseas travels or through family or friends living abroad. Based on our current CRM database
covering approximately 88,960 individuals, the majority of our shoppers are female and mainly from
the 31 to 41 and 41 to 50 age groups.
For our broad market offerings, we aim to attract the growing middle class consumers who are
experiencing increased levels of disposable income and becoming more discerning with their retail
options. With the anticipated development of the country’s tourism industry, we expect to expand our
marketing efforts to tap the opportunities presented by an increase in tourists visiting the Philippines
and grow sales from this developing consumer segment.
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Customer Relationship Management
Our customer relationship management strategy comprises of two main components: maintaining
high quality customer service levels, and enhancing our understanding of customer preferences to
better tailor our retail offerings. We believe customer service is a vitally important differentiator
across the retail industry and we instill in our people a long-term commitment to providing consistent
levels of service in each store.
Our customer relations management team is responsible both for monitoring customer perception
of our brands and retail offerings, and better utilization of the consolidated store data to enhance our
customer engagement strategies. Issues tracked include feedback on price, product range, service,
overall customer experience and trust of our corporate brand. We believe that we have a strong
understanding of the respective customer segments of our brands and the customer insights gained
have driven our sales and marketing initiatives.
We have commenced the implementation of our centralized and innovative CRM system, which
is a customer-focused business strategy designed to optimize revenue, profit and customer
satisfaction. By recording our customers’ product likes and dislikes, their spending patterns and even
their location, age and gender, across all the brands we operate, our CRM system enables us to
construct a detailed picture of their tastes, needs and buying habits. This in turn means that we are able
to segment our customer base into groups of buyers with different tastes or budgets and in accordance
with our brand and product categories. Not only can we better understand our customer base for each
brand, but we can also identify promising prospects for up-sell and cross-sell across our entire retail
portfolio, allowing us to target them with customized marketing messages and offers.
Electronic Gift Card
We successfully launched our “Purple Card”, which is linked to our central electronic gift
certificate system, and is accepted for use at the majority of our stores as a gift card with a pre-loaded
spending amount. This initiative has proven to be popular with our customers, and as of June 30, 2014,
we had issued 72,290 Purple Cards with more =
P 180.7 million worth of gift certificates used or
redeemed.
Loyalty Program
For certain brands such as Marks & Spencer and Lacoste, we have also implemented customer
loyalty programs designed by the brand principals, which allow consumers to enjoy additional benefits
when shopping at their stores. Marks & Spencer’s loyalty program is points-based, whereas Lacoste
offers discounts for its members based on an accumulated annual spending target.
Information Technology Systems
We use our information systems to manage our store operations and supply chain. Our core
enterprise retail management system integrates and provides business process support and intelligence
across all aspects of our operations from merchandising, store sales and inventory management to
finance and accounting and administration. As a result of our immediate access to inventory, sales and
other operational data from the store level to our distribution centers to our head office, we are able
to make informed decisions on merchandise and store planning, sales and marketing, and inventory
management, all based on real-time data. This system is complemented by the installation of our POS
system at all of our stores with the functionality to record real-time sales and inventory movements.
Such data is fed, on a daily basis, to our centralized systems that have data analysis capabilities. This
allows relevant personnel, such as stores managers, brand-merchandising managers, finance staff and
other team members, to have constant visibility and access to real-time key performance indicators,
allowing them to monitor each brand’s market performance.
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In addition, our CRM system helps us identify frequently visiting customers and analyze their
relevant information (such as spending history and preferences). Such information allows us to better
prepare our brand development and merchandising purchase plans. The system also provides support
for our marketing plans and enables us to maintain a relationship with our customers through mailings,
group emails, text messages and telephone calls.
Competition
In general, apparel, footwear and accessories retailing in the Philippine is highly competitive and
fragmented, with the presence of both local and foreign brands covering a wide range of products from
mass to luxury. Foreign brand retailing, however, is conducted through specialty stores operated by
local companies such as our Group, under franchise or distribution arrangements from foreign brand
principals. We compete with local retailers such as Robinsons Specialty Stores, Inc., Suyen Corp,
Retail Specialist, Inc., Vogue Concepts, Inc., the Primer Group, and SM Retail, Inc. We likewise
compete with international retailers such as Uniqlo and H&M that directly operate their stores in the
Philippines.
With almost three decades of being in the international specialty store business, we were able to
grow our portfolio of brands and store network, and enjoy a significant advantage over our
competitors due to the long-standing relationships we have established with our brand principals and
suppliers. We especially dominate the luxury and designer apparel and accessories categories,
representing eight of the top ten designer apparel brands and nine of the top ten luxury accessories
brands in the Philippines in 2013, according to Euromonitor.
We believe our primary competitive strengths lie in the following: (1) established relationship
with brand principals; (2) understanding of the lifestyle specialty retailing industry, fashion trends and
market demand; (3) brand portfolio; and (4) store network. Please refer to the section entitled
“Industry” beginning on page 89 of this Prospectus for more details.
CONVENIENCE STORES
Overview
As part of our strategy to expand into other retail formats in order to capture a broader mix of
discretionary and non-discretionary spending, our Group, through our joint venture, SIAL CVS, with
Varejo Corporation, a wholly-owned subsidiary of Ayala Land, formed a new joint venture, Philippine
FamilyMart CVS, Inc. (“PFM”), with Family Mart Co., Ltd. (“FM”), the owner of the Japanese
convenience store chain, and Itochu Corporation. PFM is owned as to 60% by SIAL CVS, 37% by FM
and 3% by Itochu Corporation. PFM was established to develop, manage and operate the
“FamilyMart” convenience store franchise in the Philippines.
We believe that our “FamilyMart” stores are differentiated from the average convenience store
by enhanced shop designs and feel that provide a quality customer shopping experience, and which
offers much more than a grab-and-go stop for everyday staples.
Stores
Network
In April 2013, we opened our first “FamilyMart” convenience store in Glorietta, a large shopping
mall in Metro Manila. We are targeting a total of 94 to 100 “FamilyMart” stores by the end of 2014,
and as of June 30, 2014, we have already opened 46 “FamilyMart” stores. We intend to roll out more
convenience stores in 2015 and have a total of 150 to 175 “FamilyMart” stores by the end of 2015.
We lease all of the space used for our convenience stores.
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The following table illustrates our “FamilyMart” store network as of June 30, 2014.
As of June 30,
Area
2014
Metro Manila
Makati ................................................................................
16
Quezon City .........................................................................
10
Ortigas/San Juan/Mandaluyong City ....................................
9
Bonifacio Global City ..........................................................
4
Manila ..................................................................................
2
Pasay/Paranque ...................................................................
2
Outside Metro Manila
Cavite ..................................................................................
3
Site Selection and Layout
We have a dedicated network development team that works with real estate agents to identify
potential store locations. Our operations team is also tasked with identifying potential sites for new
“FamilyMart” stores and leveraging our relationships with the major Philippine developers to secure
desired locations. Due to our partnership with Ayala Land, we are also kept updated on future new
Ayala Land developments that may provide suitable sites for our convenience stores. If the potential
sites that we have identified are located in Ayala Land’s property developments, the operations
personnel seconded from Ayala Land will proactively intercede on our behalf and assist with the
securing of such sites.
Unlike traditional convenience stores which are typically situated in residential areas, our
“FamilyMart” convenience stores are mostly located within office and commercial districts and some
select residential areas. Our initial target customer base includes families spending time in shopping
malls and the urban working middle-class with busy lifestyles. In particular, many of our convenience
stores are located in areas where there is a concentration of BPOs. As these call centers generally
operate on a 24-hour basis, we determined that there is demand by their employees for round-the-clock
convenient but high quality meals. Despite being located in office or commercial buildings, our
convenience stores operate 24 hours a day, seven days a week, to maximize customer sales.
Under the terms of the brand agreement, our brand principal, FM, provides us with the
specifications and plans for store layout and fitting-out, guidance and recommendations on
procurement of merchandise and supplies, merchandise display, pricing and sales promotion, customer
service, store staff management and training, as well as IT and distribution order systems. We appoint
a contractor from our regular panel of contractors to fit out new “FamilyMart” stores, including the
installation of equipment, furniture and fittings, security systems and telephone and data lines. Our
network development team then completes an asset checklist verification.
We design the layout of our “FamilyMart” stores according to our overall concept of a modern
and chic design featuring brighter and cleaner environments. We use different decor features including
color, lighting, signage and other visual devices to encourage customers to visit our convenience
stores and make purchases. Furthermore, as our convenience stores provide a wide selection of hot
foods and ready-to-eat meals, we have installed small dine-in areas for customers’ use.
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Following completion of store construction, we hand over the store to our store opening team,
who is then responsible for inventory delivery, securing necessary permits for operations and
coordinating the opening of the store for business.
Operations
Our “FamilyMart” operations are principally managed by a general manager, who is seconded
from our Company, and assisted by a head consultant designated by FM, our Japanese partner and
brand principal. We have two additional Japanese consultants, also nominated by FM, who advise our
operations team on merchandising, store construction and corporate planning. As our operations team
includes personnel seconded from each of our Company, Ayala Land and FM, all parties are able to
participate in the development and management of the “FamilyMart” operations through
representatives.
Our operational standards and policies were agreed upon by all three joint venture partners at the
commencement of our “FamilyMart” franchise business. They allow our operations team full
discretion to decide on most operational matters. As required by our agreed policies, we prepare yearly
business plans, development plans and budgets.
Products and Services
Our product mix offers a broad range of items that cater to customers’ daily dietary needs. As
a Japanese convenience store franchise, we have also provided for more varied and higher-quality
offerings of ready-to-eat meals and hot savories, including Japanese staples such as onigiri, soba and
bentos. We have leveraged our scale and market reputation to establish supplier relationships that
facilitate providing a broad range of food and non-food offerings to our customers.
After opening a new convenience store, we gradually refine the mix of products and brands sold
based on sales trends at the store and perceived customer profiles. We review our product mix and new
product opportunities on a continuing basis in order to respond to the changing demands of our
customers. Our merchandising mix team works with a range of suppliers to launch new products on
a weekly basis and stock up on popular items to ensure that our store inventory is kept fresh and
updated in accordance with customer preferences.
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We believe that the following products and services, which are the focus for our merchandising
and service strategy, help drive foot traffic to our “FamilyMart” stores:
•
Fresh and frozen foods — Our fresh food products include ready-to-eat meals, hot snacks,
pastries and sandwiches, all of which are sourced on a daily basis from established food
operators. We have also employed a consultant chef, who is charged with developing new
food offerings, which are then evaluated by our management in weekly internal tastings. We
believe that our fresh food initiatives, combined with the small dining-in areas that we
install in our convenience stores, help to increase our customer traffic during breakfast,
lunch and dinner periods, as well as after-hours, and lift overall sales per store.
•
Japanese snacks and food — We believe that we have successfully differentiated ourselves
from our competitors by making available to customers Japanese food and beverage
products that they would not be able to easily locate in other convenience stores, such as
bentos, Japanese branded snacks and sake.
•
Private label — We carry “FamilyMart” private label food products such as potato chips,
which are sourced from FM in Japan.
•
In-store services — In addition to selling products, we also offer in-store services, such as
bill payment, to provide increased levels of convenience for our customers and help further
drive store traffic. We aim to provide more services in our stores, such as money
remittances, ATM services and auto fare collection, going forward.
Supply
Purchases from FM and third party suppliers principally comprise of the products sold in our
convenience stores. In addition to FM-supplied goods, our merchandising mix division generally
sources our supplies from Philippine-based suppliers. Our central kitchen in Makati, Metro Manila,
supplies many of the fresh food offerings of some of our convenience stores. We aim to provide a
comprehensive range of quality products at competitive prices to our customers and believe that the
quality of our suppliers plays an important part in our merchandising strategy. In selecting our
suppliers, we consider their quality of product offerings, financial stability, product selection, price
competitiveness and after-sales services. We strive to manage the quality of the products supplied to
ensure strict adherence to quality standards and only purchase from suppliers whose products meet all
applicable health and safety standards. While we have historically maintained a good working
relationship with our suppliers, we generally do not enter into long-term agreements with them.
Inventory and Logistics
We have one distribution center located in Metro Manila, which is equipped with air-conditioned
and chilled facilities and is supported by IT systems and a warehouse management system. We
generally try to maintain at least 30 days’ inventory for non-perishable items. Our prepared hot food
items are replenished daily, whereas we maintain six months’ to one year’s inventory for
“FamilyMart” private label merchandise, as stock is shipped from Japan only twice per year. Our
vendors deliver products to our distribution center, which then processes and distributes these to our
individual stores throughout Metro Manila. This enables timely restocking, which also helps to ensure
that products are simultaneously available at each convenience store, minimizing the storage space
required at each store. In addition, we have recently set up a second central kitchen in Pasig, Metro
Manila to exclusively service and supply the fresh food offerings of our FamilyMart convenience
stores.
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To support our store growth, our policy is to maintain a scalable and robust IT infrastructure with
reusability and rich product features which, coupled with IT discipline with proactive monitoring,
increases the efficiency of our operations and enhances the customer experience at our convenience
stores. We have implemented a computerized logistics and management system that enables our
operations and logistics teams to track and manage inventory, order products from suppliers and
organize and schedule deliveries of products from our warehouse to each of our convenience stores.
Quality Control
We maintain rigorous quality control oversight at our distribution center and convenience stores
and regularly inspect the quality of our products. Our policies require the inspection of product
deliveries for damage, missing products, expiry dates and other health and safety concerns, and
mandate the return of unsatisfactory products to our suppliers. Our store operations team is tasked
with monitoring the quality of our “FamilyMart” stores. They conduct weekly surveys of the service,
quality and cleanliness levels of each convenience store. We enforce quality control at both the
distribution center and at each convenience store, and we may impose disciplinary action on
responsible parties in the event any individual store fails to meet our required standards. We only
purchase from suppliers whose products meet all applicable health and safety standards, including
those pertaining to food and drugs.
Customers
We serve the mass market in the Philippines, and our customer base primarily comprises of
walk-in store traffic. As such, we do not have any material exposure to, nor are we dependent upon,
any particular customer demographic. While our customers come from all socio-economic and
demographic groups, we focus in particular on convenience-oriented individuals, such as young
working adults, who are an increasingly affluent demographic and tend to appreciate the convenience
and 24-hour accessibility that our “FamilyMart” stores offer, as well as the quality of our store
experience and our product offerings. As the Philippines continues to become increasingly urbanized
and given the transition from traditional to modern grocery retail outlets, we believe that our
“FamilyMart” stores will continue to be well-positioned to meet the changing lifestyle preferences of
the urban population.
Pricing
Our pricing strategy seeks to offer products at competitive prices, taking into account our brand
positioning and the product features for each product category. We continually monitor market prices
and trends and implement appropriate adjustments to our prices and promotions as and when
necessary. As a convenience store operator, our primary aim is to ensure convenience and accessibility
and, as such, we generally do not engage in direct price competition with other convenience store
operators.
Marketing and Promotion
We strive to create strong brand values, aiming to associate shopping at our “FamilyMart” stores
with convenience, quality, value and choice. Periodically, we have promotional offers and also
organize events and competitions, in which customers can win prizes, to encourage them to visit our
convenience stores. We conduct a variety of sales and promotional campaigns at our convenience
stores, which we generally time to coincide with festive holidays such as New Year and Christmas.
During our sales and promotional campaigns, we offer our customers discounted products and special
festive products, such as Christmas snacks, to encourage greater patronage at our convenience stores
and increase sales. To support our promotional and other initiatives, we are also considering the
implementation of a customer loyalty program and a mix-and-match promotion that will provide us
with increased promotional flexibility.
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Competition
The convenience store segment comprises a small but rapidly growing proportion of the
Philippines retail market. Family Mart, operated by our Group as a joint venture with Ayala Land, FM
and Itochu Corporation, is the third largest convenience store operator in the Philippines. While
Philippine Seven Corporation, the operator of the “7-Eleven” chain, and Robinsons Retail Holdings,
Inc., the operator of the “Ministop” chain under its franchise agreement with Japan-based Ministop
Co. Ltd., hold a combined market share of approximately 90.8% as of 2013, the market is currently
underpenetrated and there is substantial room for “FamilyMart” to grow. Indonesia-based “Alfamart”
has also recently announced its intention to open convenience stores in the Philippines. It is expected
that the rapidly growing BPO sector will drive strong growth in convenience stores as BPO sector
workers generally work late shifts and purchase food at convenience stores that are open 24/7.
Convenience stores are also expected to gradually replace the traditional sari-saris.
Convenience stores in the Philippines compete on the basis of store location, product assortment
and quality. Our “FamilyMart” convenience stores are differentiated from competitors by offering a
higher end product assortment and atmosphere, stressing cleanliness and comfortable seating, and
offering fresh prepared foods that include high quality Japanese snacks. These offerings particularly
appeal to the BPO office worker population, as they often work late hours when other food options
are limited and have relatively high purchasing power. Please refer to the section entitled “Industry”
beginning on page 89 of this Prospectus for more details.
DEPARTMENT STORE
Overview
Our Group, through SII, together with Varejo Corporation, a wholly-owned subsidiary of Ayala
Land, formed a new 50/50 joint venture, SIAL Specialty Retailers, Inc., to develop, manage and
operate “Wellworth” department stores in the Philippines. Opening its first store in April 2014 in
Fairview Terraces, Quezon City, “Wellworth” is a new entrant to the department store market, and
aimed at tapping the country’s growing middle-market segment of aspirational, price-conscious and
value-driven shoppers. It offers quality merchandise from both international and local retail suppliers
at affordable prices in an exciting and dynamic shopping environment.
Stores
Our “Wellworth” department store design concept aims to be consistent with our focus on
providing consumers a more modern and elevated shopping experience for the burgeoning middle
class. Designed by an international architectural and design firm in collaboration with a local interior
designer, “Wellworth” aims to offer a refreshing take on the department store format through its visual
elements and play on colors and materials.
Our department store in Ayala Land’s Fairview Terraces features 15,000 square meters of gross
floor area spread across four floors. Each level has its own design style, from lighting to the color
palette of the decor. The lower ground floor houses the children’s section, which is filled with light
colors and wood to create a calm and serene atmosphere. The upper ground floor takes advantage of
natural light to create a bright and cheerful space for beauty aficionados; across it lies the men’s
section, which incorporates a more rugged and masculine feel. On the second level, the ladies’ section
features highlight walls, LED backlit images and exciting visual merchandising displays. On the same
floor, the teens’ section has touches of industrial cool through exposed brick walls and vintage-looking
pieces. The topmost floor has the home section, comprising several stores-within-a-store, with each
space having its own color scheme and style to give customers a varied shopping experience.
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We plan to roll out one additional “Wellworth” store, averaging a gross floor area of
approximately 6,500 to 8,500 sq.m. in UP Town Center (also an Ayala Land development) in 2015.
This will increase our total selling space up to approximately 21,000 sq.m.
Site Selection
Future sites will be determined in accordance with the overall development vision for our
“Wellworth” operations as the department store anchor tenant in strategically complementary new
mall developments by Ayala Land in key locations across the Philippines. All department store
locations will be secured on standard lease terms provided by Ayala Land for anchor tenants.
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Operations
Our “Wellworth” operations are principally managed by a general manager, who is seconded
from our Company, and guided by strategies and directives set by the operational board, which is
composed of representatives from our Company and Ayala Land. As our management and operations
teams likewise include personnel seconded from our Company and Ayala Land, both of us are able to
participate in the development and execution the agreed annual business plan for the daily
administration of Wellworth.
The “Wellworth” teams are primarily and independently responsible for overseeing the
day-to-day management of stores, reviewing the merchandise and brand mixes, cash flow and financial
management, human resources and supervising our overall performance. Our central merchandising
personnel negotiate contracts with key concessionaires and obtain regular sales reports generated from
our supplier management system to assist them with store monitoring and management.
Sales
Revenue is generated from the retail sale of concessionaire and self-owned private label
merchandise. For the period commencing from the opening of our first “Wellworth” store in April
2014 to June 30, 2014, concessionaire merchandise accounted for 78% of sales, while self-owned
private label merchandise accounted for 22%. A few of the brands we manage are also represented and
sold in our department store, such as Saville Row, Beauty Bar and Debenhams.
Concessionaire sales
Under our concessionaire agreements, suppliers of various branded goods occupy designated
areas in our department stores, and are responsible for ensuring that their merchandise is sufficiently
stocked, and for deploying their own sales staff to man their area. In turn, we provide the fixtures,
signages, marketing collaterals, and receive a commission from the sales they generate.
Concessionaires are likewise required to abide by our store policies and procedures. We believe that
our concessionaire arrangements enable us to offer a wide range of merchandise to our customers
without having to bear the risks and costs of inventory management, including the risks associated
with obsolete merchandise.
To create a seamless customer service environment, the concessionaires’ sales staff go through
our basic customer service training. We also constantly interact with our concessionaires, providing
guidance and recommendations relating to their sales performance, marketing and promotional
strategies, merchandise mix and quality and the visual presentation of their designated areas.
Sales of Private Label Merchandise
While the bulk of the merchandise sold in our department store stems from our concessionaires,
we believe our “Wellworth” department store’s self-owned private label merchandise sets us apart
from our competition. These products are selectively merchandised from various suppliers and
vendors to support and complement the image, pricing and merchandise strategies of our “Wellworth”
department stores. As of June 30, 2014, we offer customers exclusive merchandise from more than 30
private labels across a wide spectrum of product categories. Two of our five largest contributors to
sales are our private labels.
Merchandise
Our “Wellworth” department store carries over 500 brands composed of leading national brands,
exclusive international brands, and affordable private labels. It offers a wide range of children’s,
men’s, ladies’, cosmetics, sportswear, stationery, travel and home selections geared for modern
middle-income Filipino families and young professionals.
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Our major product categories are as follows:
•
Women’s Apparel: Women’s apparel consists of dresses, eveningwear, suits, coats and
sportswear separates — skirts, pants, blouses, jackets and sweaters. We work with women’s
apparel vendors to present the merchandise and highlight the best of the vendor’s product.
•
Women’s Shoes, Handbags and Accessories: Women’s accessories include belts, gloves,
scarves, hats and sunglasses and complement our shoes and handbags assortments.
•
Men’s Apparel and Shoes: Men’s apparel and shoes include suits, dress shirts and ties, sport
coats, jackets, trousers, casual wear and eveningwear as well as business and casual
footwear.
•
Accessories and Jewelry: Our accessories and jewelry offering includes scarves, hats, belts,
necklaces, bracelets, rings, earrings and watches that are selected to complement our
apparel merchandise offering.
•
Cosmetics and Fragrances: Cosmetics and fragrances include facial and skin cosmetics,
skin therapy and lotions, soaps, fragrances, candles and beauty accessories.
•
Home Furnishings and Décor: Home furnishings and décor include linens, tabletop, kitchen
accessories, furniture, rugs, decorative items (frames, candlesticks, vases and sculptures) as
well as collectables. Merchandise for the home complements our apparel offering in terms
of quality and design.
Merchandising
We believe that the ability of our “Wellworth” operations team to effectively leverage our
specialty store merchandising experience and in-depth knowledge of our customers and the markets
within which we operate allow us to select an appropriate merchandise assortment that is tailored to
fully address our target customers’ needs. The merchandising group works closely with department
store managers to adjust the product and brand mix for each category, depending on consumer
preferences. We communicate with our concessionaires and vendors frequently, providing feedback on
current demand for their products, suggesting changes to specific product categories or items, and
ensure that we are able to continuously offer a broad range of merchandise. We have not entered into
any long-term supply arrangements with our principal merchandising sources. Our vendor base is
diverse, and we believe that the breadth of our sourcing helps mitigate risks associated with a single
brand or designer.
We evaluate the sales and profitability performance of each vendor and adjust our future
purchasing decisions from time to time based upon the results of this analysis. By controlling the
selection of concessionaires and direct purchase suppliers, we are able to reduce the risks arising from
product quality issues. Although our suppliers are responsible for ensuring the quality of their goods,
we take into account any record of defective goods and customer complaints and inform them of such
so that improvements can be made.
Inventory Management
For our concessionaire arrangements, we generally bear little inventory risk. Concessionaires
manage and monitor their inventory to achieve agreed-upon sales targets while we provide them with
verifiable reports. For our “Wellworth” operations, we follow the same IT infrastructure and support
for inventory management and logistics which we have established for our specialty stores. We also
implemented a dynamic inventory management policy to allow better visibility of the flow of
merchandise and more effectively time sales promotions at our department store.
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Pricing
We determine the prices of our self-owned private label merchandise, while concessionaires set
the price for the merchandise they sell in our department store. Market checks are conducted regularly
to ensure that our pricing remains competitive and while we do not have control over the pricing
structure of our concessionaires, we request that their merchandise be within a certain price range
consistent with our department store value proposition. To further strengthen customers’ perception of
receiving good value for money, we regularly launch promotions and sale events offering various
products at discounts from the usual retail price. Although we cannot unilaterally discount the prices
of concessionaire goods, concessionaires often choose to apply discounts to the prices of their goods
in conjunction with our promotions.
Customer Service
Our “Wellworth” department store primarily targets the middle income consumer segment.
Shoppers from this segment are characterized by rapidly increasing purchasing power, interest in
higher-quality, brand names and new lifestyle products and active preference for an enjoyable
shopping experience in comfortable surroundings. In this regard, we believe that good customer
service is critical to our ability to attract and retain loyal customers. As such, we have implemented
structured training and development programs for our “Wellworth” and concessionaire employees
which seek to improve our standard of customer service. “Wellworth” employees, as well as personnel
employed by concessionaires, are trained in understanding service from a customer’s perspective and
to meet and exceed the “Wellworth” customers’ expectations.
Information and service counters are available in our department store to assist customers with
any queries. Our information staff and sales associates instill and reinforce a culture of
relationship-based service recognized by our customers. We provide them with training in the areas
of customer service, selling skills and product knowledge. Our sales associates maintain contact with
our customers between store visits and ensure that our customers are aware of the latest merchandise
offerings and fashion trends.
We have also created a Facebook page for our “Wellworth” department store, which provides
customers with updates on our products and periodic in-store promotions to drive foot traffic to our
department stores. This has generated more than 80,000 “likes” since it was created. We have also
launched a points-based loyalty card program - “Shine Card” - designed to cultivate a long-term
relationship with our customers. This loyalty program focuses on encouraging repeat purchases and
rewarding our most active customers with special privileges such as invites to exclusive in-store
events. Upon attaining specified point levels, customers can also redeem their points for certain gift
offerings. To date, we have approximately 20,000 members.
Competition
The Philippine department store industry is concentrated with a few operators. According to
Euromonitor, the top three players in 2013 were SM Retail, Inc. with a market share of 43.9%,
Robinsons Retail Holdings, Inc. with 7.2%, and Rustan Commercial Corporation with 3.5%. Among
the top three players, SM Retail, Inc. and Robinsons Retail Holdings, Inc. each have a large
nationwide store network that caters mainly to the mass market. Rustan Commercial Corporation, in
contrast, is the only department store retailer that specifically targets the luxury market.
We believe “Wellworth” is positioned to fill the gap presented by the current competitive
landscape of the department store retailing segment, and capture the growing but largely untapped
aspirational middle-market with a better value proposition — more stylish and better-quality
merchandise at affordable prices, combined with enhanced customer service and elevated store
ambiance. “Wellworth” sells the retail concept of trading-up to a better lifestyle not necessarily being
heavy on the budget to consumers. Please refer to the section entitled “Industry” beginning on page
89 of this Prospectus for more details.
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OUR EMPLOYEES
As of June 30, 2014, we employed a total of more than 4,300 permanent staff, of which
approximately 60% are store-based. Permanent staff generally includes executive directors, senior
management, administrative and headquarters staff and store staff. We also hire temporary staff,
including staff on short-term contracts as well as those on part-time and hourly-rated employment,
particularly during our sales periods. With respect to our convenience store operations, as the majority
of our stores operate 24 hours a day and seven days a week, we employ two shifts of staff at each store.
At any given time, we require at least two employees to be stationed at each store. We select store
managers from a pool of our promising and talented convenience store employees.
The following table sets forth our employees by function as of June 30, 2014.
Number of
Operations
Function
Specialty Stores ............................................ Executive and Managerial
Administrative and head office staff
Employees
767
684
Store personnel — Full time
2,267
Store personnel — part-time or temporary
1,720
Subtotal
5,438
Convenience stores ....................................... Executive and Managerial
103
64
296
138
Subtotal
601
Department Store ......................................... Executive and Managerial
37
40
56
229
Subtotal
362
Total
6,401
In line with our expansion and store development plans, we anticipate hiring approximately 20%
to 30% additional employees within the next 12 months, subject to the changing needs of our business.
We believe that we are in compliance with all minimum compensation and benefit standards as well
as applicable labor and employment regulations.
As of June 30, 2014, none of our employees belonged to any union nor were they parties to any
collective bargaining agreements. To the best of our knowledge, we have not experienced any strikes
or other disruptions due to labor disputes. As of June 30, 2014, we had a low staff turnover rate and
our management believes that our relationship with our employees has consistently been good.
Staff recruitment and training
We recognize the importance of having a strong team of management and technical personnel to
meet our growth plans, and so we place great emphasis on staff training and development. When
employees commence work, they receive basic training and are subsequently given opportunities to
attend further training programs, such as managerial and leadership, sales agent, credit control, system
138
and technical trainings programs. In particular, we devote tremendous resources to the training of our
brand operations teams and store personnel to increase their skill levels, ensuring the consistent
application of our brands’ internal policies and procedures, which allows us to preserve brand integrity
and instill key corporate values.
Employee Compensation and Benefits
Our Group has adopted a compensation policy which we believe to be competitive with industry
standards in the Philippines. We offer our employees incentive-based compensation depending on their
ability to meet our incentive program’s criteria, which include sales, profitability, inventory control
and compliance with standard operating procedures. Given the greater incentives now available to our
employees, we believe that our incentive program will allow us to achieve a higher retention rate and
reduce our training and recruitment costs, as well as increase our sales. Furthermore, members of our
staff also enjoy specific benefits particular to our business such as employee discounts for purchases
of merchandise from the brands we represent, as well as special private sales held only for our
employees. Salaries and benefits are reviewed periodically and adjusted to retain current employees
and attract new employees. Performance is reviewed annually and employees are rewarded based on
the attainment of defined objectives.
INTELLECTUAL PROPERTY
As of June 30, 2014, we registered 12 trademarks in the Philippines and submitted the
applications for the registration of 19 trademarks, as enumerated in the following table. We intend to
file the registration applications for another 11 trademarks. We are also the owner of six domain
names,
including:
www.ssilife.com.ph;
www.ssilife.ph;
www.ssilife.com;
www.ssi.ph;
www.ssigroup.com.ph; and www.storesspecialistsinc.com.ph.
Name of Trademark
Logo / Symbol
Expiry Date
August 28, 2017
“MAKEROOM THE
STORAGE AND
ORGANIZATION SPECIALIST
& DEVICE”
(42006008298)
August 28, 2017
“MAKEROOM THE
STORAGE AND
& DEVICE”
(42006008299)
August 28, 2017
“MAKEROOM THE
STORAGE AND
& DEVICE”
(42006008300)
“MAKEROOM THE
August 28, 2017
STORAGE AND
& DEVICE”
(42006008301)
139
Name of Trademark
Logo / Symbol
Expiry Date
August 28, 2017
“MAKEROOM THE
STORAGE AND
& DEVICE”
(42006008302)
August 6, 2017
“MAKEROOM THE
STORAGE AND
& DEVICE”
(42006008303)
September 12, 2023
“WELLWORTH”
(42013000265)
January 2, 2024
“WELLWORTH RUNNING
RIBBON PATTERN
(WITH COLOR)”
(42013012064)
January 2, 2024
RIBBON PATTERN
(PLAIN ONLY)”
(42013012086)
January 2, 2024
“W WELLWORTH LOGO
(PLAIN ONLY)”
(42013012087)
January 2, 2024
“W WELLWORTH LOGO
(PLAIN ONLY)”
(42013012089)
“WELLWORTH ‘W’ RIBBON
January 2, 2024
DESIGN (PLAIN ONLY)”
(42013012091)
Pending application
“BEAUTY BAR”
(42001008393)
“W WELLWORTH LOGO
Pending application
(WITH COLOR)”
approval
(42013012065)
“W WELLWORTH LOGO
Pending application
(WITH COLOR)”
approval
(42013012067)
140
Name of Trademark
Logo / Symbol
Expiry Date
“W WELLWORTH LOGO
Pending application
(WITH COLOR)”
approval
(42013012069)
“W WELLWORTH LOGO
Pending application
(WITH COLOR)”
approval
(42013012072)
“W WELLWORTH LOGO
Pending application
(PLAIN ONLY)”
approval
(42013012088)
“W WELLWORTH LOGO
Pending application
(PLAIN ONLY)”
approval
(42013012090)
Pending application
DESIGN (WITH COLOR)”
approval
(42013012081)
Pending application
approval
(42013012082)
Pending application
approval
(42013012083)
Pending application
approval
(42013012084)
Pending application
approval
(42013012092)
Pending application
approval
(42013012093)
Pending application
approval
(42013012094)
“W WELLWORTH LOGO
Pending application
(WITH GRAY BACKGROUND)”
approval
(42013012074)
141
Name of Trademark
Logo / Symbol
Expiry Date
“W WELLWORTH LOGO
Pending application
approval
(42013012076)
“W WELLWORTH LOGO
Pending application
approval
(42013012077)
“W WELLWORTH LOGO
Pending application
approval
(42013012079)
Pending application
RIBBON PATTERN
approval
(WITH COLOR)”
(42013012063)
Pending application
RIBBON PATTERN
approval
(PLAIN ONLY)”
(42013012085)
“SSI LOGO (WITH COLOR)”
Pending application
“SSI LOGO (PLAIN ONLY)”
Pending application
“SSI WORD MARK AND
Pending application
LOGO (WITH COLOR)”
Pending application
“SSI WORD MARK AND
LOGO (PLAIN ONLY)”
“SSI WORD MARK”
Pending application
142
Name of Trademark
Logo / Symbol
Expiry Date
Pending application
“SSI GROUP, INC. LOGO
(WITH COLOR)”
Pending application
“SSI GROUP, INC. LOGO
(PLAIN ONLY)”
Pending application
“SSI GROUP, INC. WORD
MARK AND LOGO
(WITH COLOR)”
Pending application
MARK AND LOGO
(PLAIN ONLY)”
Pending application
MARK”
PROPERTIES
As of June 30, 2014, we owned one property and leased 686 properties in the Philippines.
Self-owned property
We own one property - the Central Square building - located at Fort Bonifacio, Taguig, Metro
Manila, with total gross floor area of 33,813 sq.m. This property is a retail development, which we
constructed for our stores and is situated on land owned by Fort Bonifacio Development Corporation.
We also entered into a cooperative agreement with Ayala Land, pursuant to which we transferred
ownership to them of the uppermost floor and permitted the construction of a cineplex that it operates.
As of June 30, 2014, other than liens created by operation of law, there were no mortgage, lien
or other encumbrances attached to this property or any limitations on our ownership or usage of this
property. Please see “— Central Square Development” for more details.
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Leased properties
The table below sets forth a summary of the properties leased by our Group as of June 30, 2014.
Our leased properties comprise our stores, our offices, distribution centers and central kitchen. The
lease rates and terms for these properties follow standard market rates and practices for similar
businesses.
Region
Rental Scheme
Lease Rates
=
P 20,000
Metro Manila ................ Fixed
Luzon (excluding Metro
- =
P 704,000
=
P 2,600
Fixed per sq.m.
=
P 250
% of sales
3% - 7%
Basic + % of sales
=
P 900
Basic + % of sales or minimum,
=
P 255
whichever is higher
P 4,000 per sq.m.
or =
P 450 to =
Fixed per sq.m.
=
P 500
Manila) ..................... Basic + % of sales
-
1 - 3
1 - 3
1 - 20
- =
P 1,000 per sq.m. + 3%
-
Term (years)
=
P 3,800
per sq.m. + 3% - 5%
1 - 3
1 - 3
1 - 3
=
P 350
- =
P 423 per sq.m. + 3%
1 - 3
=
P 385
- =
P 1,520 per sq.m. + 3% or
1 - 3
whichever is higher
=
P 675
to =
P 1,600 per sq.m.
% of sales or minimum, whichever is
4% or =
P 300 per sq.m.
1 - 3
higher
=
P 311
Visayas.......................... Fixed per sq.m.
- =
P 487
1 - 3
Basic + % of sales
=
P 1,464
per sq.m. + 3%
1 - 3
=
P 400
-
=
P 1,240
1 - 3
whichever is higher
=
P 550
- =
P 1,686 per sq.m.
per sq.m. + 3% or
=
P 68
Mindanao ...................... Fixed per sq.m.
2
% of sales
7%
Basic + % of sales
=
P 200
1 - 3
-
=
P 300
- =
P 1,275 per sq.m. + 3% or
whichever is higher
=
P 400
-
=
P 1,421
Other areas .................... Basic + % of sales
=
P 829
Basic + % of sales in excess of
=
P 250
per sq.m. + 3%
=
P 1,400
1 - 3
1 - 3
per sq.m.
per sq.m. + 8%
per sq.m. + 4% - 5%
3 - 6
3 - 6
minimum sales
REGULATORY COMPLIANCE AND LEGAL PROCEEDINGS
Our legal department is responsible for ensuring our continued compliance with applicable laws
and regulations, including any changes or updates, that may materially impact or adversely affect our
operations and business.
As of the date of the Prospectus, neither our Company nor any of our subsidiaries or affiliates
or any of our properties is engaged in or a subject of any material litigation, claims or arbitration,
either as plaintiff or defendant, which could be expected to have a material effect on our financial
position, and we are not aware of any facts likely to give rise to any proceedings which would
materially and adversely affect our business or operations.
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REGULATORY AND ENVIRONMENTAL MATTERS
The Retail Trade Liberalization Act
Republic Act No. 1180, or the Retail Trade Nationalization Law, prohibits any person who is not
a citizen of the Philippines, and associations, partnerships or corporations not wholly owned by
citizens of the Philippines, from engaging directly or indirectly in the retail trade business. Under this
law, a corporation needs to be 100% owned by citizens of the Philippines in order to engage in retail
business in the Philippines.
Republic Act No. 1180 was subsequently superseded by Republic Act No. 8762, or the Retail
Trade Liberalization Act, which defined retail trade as any act, occupation or calling of habitually
selling directly to the general public any merchandise, commodity or good for consumption.
Under the Retail Trade Liberalization Act, foreign-owned partnerships, associations or
corporations formed and organized under the laws of the Philippines may, upon registration with the
Philippine SEC and the Department of Trade and Industry (“DTI”), or in the case of foreign-owned
single proprietorships, with the DTI, engage or invest in the retail trade business, under the following
categories:
Category A
Enterprises with paid-up capital that is less than the equivalent of US$2,500,000 in Pesos shall be
reserved exclusively for Filipino citizens and corporations wholly-owned by Filipino citizens.
Category B
Enterprises with a minimum paid-up capital that is equivalent to US$2,500,000 in Pesos, but is less than
US$7,500,000, may be wholly-owned by foreigners except for the first two years after the effectively
of the Retail Trade Liberalization Act (wherein foreign participation was limited to not more than 60%
of total equity).
Category C
Enterprises with a paid-up capital that is equivalent to or more than US$7,500,000 in Pesos may be
wholly owned by foreigners, provided that in no case shall the investments for establishing a store in
Categories B and C be less than the equivalent of US$830,000 in Pesos.
Category D
Enterprises specializing in high-end or luxury products with a paid-up capital that is equivalent to
US$250,000 in Pesos per store may be wholly owned by foreigners.
Any foreign investor may be allowed to invest in existing retail stores. However, the investment
must comply with the paid-up capitalization requirements enumerated above. Furthermore, foreign
investors whom are also retailers and invest in existing retail stores are required to be pre-qualified
with the Board of Investments before they can buy shares.
No foreign retailer is allowed to engage in retail trade in the Philippines unless all the following
qualifications are met:
(1)
A minimum of US$200 million net worth in its parent corporation for Categories B and C,
and US$50 million net worth in its parent corporation for Category D;
(2)
Five retail branches or franchises in operation anywhere around the world unless such
retailers has at least one store capitalized at a minimum of US$25 million;
(3)
Five-year track record in retailing; and
(4)
Only nationals from, or judicial entities formed or incorporated in, countries which allow
the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines.
The implementing rules of Republic Act No. 8762 define a foreign retailer as an individual who
is not a Filipino citizen, or a corporation, partnership, association, or entity that is not wholly-owned
by Filipinos, engaged in retail trade. The DTI is authorized to pre-qualify all foreign retailers before
they are allowed to conduct business in the Philippines.
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Foreign Investments Act of 1991
Republic Act No. 7042, or the Foreign Investments Act of 1991 (“FIA”) liberalized the entry of
foreign investment into the Philippines. Under the FIA, in domestic market enterprises, foreigners may
own as much as 100% equity except in areas specified in the Foreign Investment Negative List. The
Foreign Investment Negative List enumerates industries and activities which have foreign ownership
limitations under the FIA and other existing laws.
For the purpose of complying with nationality laws, the term “Philippine National” is defined
under the FIA as any of the following:
(1)
A citizen of the Philippines;
(2)
A domestic partnership or association wholly-owned by citizens of the Philippines;
(3)
A corporation organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines;
(4)
A corporation organized abroad and registered as doing business in the Philippines under
the Corporation Code, of which 100% of the capital stock outstanding and entitled to vote
is wholly owned by Filipinos; or
(5)
A trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine National and at least 60% of the fund will accrue to the benefit
of Philippine Nationals.
For as long as the percentage of Filipino ownership of the capital stock of the corporation is at
least 60% of the total shares outstanding and voting, the corporation shall be considered as a 100%
Filipino-owned corporation.
A corporation with more than 40% foreign equity may be allowed to lease land for a period of
25 years, renewable for another 25 years. In connection with the ownership of private land, however,
the Philippine Constitution states that no private land shall be transferred or conveyed except to
citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines at least 60% of whose capital is owned by such citizens.
The Consumer Act
The provisions of the Republic Act No. 7394, otherwise known as the Consumer Act of the
Philippines (“Consumer Act”), are principally enforced by the DTI, and seek to: (1) protect consumers
against hazards to health and safety, (2) protect consumers against deceptive, unfair and
unconscionable sales acts and practices; (3) provide information and education to facilitate sound
choice and the proper exercise of rights by the consumer; (4) provide adequate rights and means of
redress; and (5) involve consumer representatives in the formulation of social and economic policies.
This law further imposes rules to regulate such matters as: (1) consumer product quality and
safety; (2) the production, sale, distribution and advertisement of food, drugs, cosmetics and devices
as well as substances hazardous to the consumer’s health and safety; (3) fair, honest consumer
transactions and consumer protection against deceptive, unfair and unconscionable sales acts or
practices; (4) practices relative to the use of weights and measures; (5) consumer product and service
warranties; (6) compulsory labeling and fair packaging; (7) liabilities for defective products and
services; (8) consumer protection against misleading advertisements and fraudulent sales promotion
practices; and (9) consumer credit transactions.
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The Consumer Act establishes quality and safety standards with respect to the composition,
contents, packaging, labeling and advertisement of products and prohibits the manufacture for sale,
offer for sale, distribution, or importation of products which are not in conformity with applicable
consumer product quality or safety standards promulgated under the law.
The Consumer Act requires that consumer products for retail sale to the public shall be offered
with an appropriate price tag, label, or marking publicly displayed to indicate the price of the
consumer product per unit in Philippine Pesos and centavos. The products shall not be sold at a price
higher than that stated in the price tag, label or marking, and shall be sold without discrimination to
all buyers. However, where the consumer products for sale are too small or the nature of the products
makes it impractical to place a price tag on each article, a price list placed at the nearest point where
the products are displayed indicating the retail price of the same shall suffice.
Manufacturers, distributors, importers or repackers of consumer products are required to indicate
in their labels or packaging a parallel translation in the English or Filipino language of the nature,
quality, quantity and other relevant prescribed information or instructions of such consumer products
in a manner that cannot be easily removed, detached or erased. In addition to the information required
to be displayed in the principal and secondary panels, DTI Administrative Order No. 01-08 mandates
that all consumer products sold in the Philippines, whether manufactured locally or imported shall
indicate and specify the (a) country of manufacture; (b) required information of consumption duration
safety; (c) warranty of the manufacturer; (d) weight content prior to packaging; (e) consumer
complaint desk address; and (f) all other information necessary for giving effect to a consumer’s right
to information.
The DTI is tasked with implementing the Consumer Act with respect to labels and packaging of
consumer products other than food products, and regulates product labeling, proper and correct
description of goods, product labels with foreign characters/languages, data/information on product
contents and origins and other similar matters. With respect to the packaging and repackaging of food
products, such activities are regulated by the Department of Health (“DOH”) and the Food and Drug
Administration (“FDA”). Establishments engaged in these activities are required to comply with,
among others, the current guidelines promulgated by the DOH on good manufacturing practice in
manufacturing, packing, repacking, or holding food.
The law also prohibits the dissemination of any false, deceptive or misleading advertisement by
Philippine mail or in commerce by print, radio, television, outdoor advertisement or other medium for
the purpose of inducing or which is likely to induce directly or indirectly the purchase of consumer
products or services. An advertisement shall be false, deceptive or misleading if it is not in conformity
with the provisions of the Consumer Act or if it is misleading in any material respect. In determining
whether any advertisement is false, deceptive or misleading, there shall be taken into account, among
other things, not only representations made or any combination thereof, but also the extent to which
the advertisement fails to reveal material facts in the light of such representations, or materials with
respect to consequences which may result from the use or application of consumer products or services
to which the advertisement relates under the conditions prescribed in said advertisement, or under
such conditions as are customary or usual.
No person shall conduct any sales campaigns, including beauty contests, national in character,
sponsored and promoted by manufacturing enterprises without first securing a permit from the DTI
prior to the commencement thereof. A sales promotion which is intended for broad consumer
participation and utilizes mass media shall indicate the duration, commencement and termination of
the promotion, the deadline for submission of entries and the governing criteria or procedure to be
followed therein. The winners in any sales promotion shall be determined at a definite time and place
and shall be verified by a representative of the DTI and the sponsor.
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The Price Act
To the extent that SSI’s retail businesses touch on basic necessities and prime commodities,
Republic Act No. 7581, or the Price Act, may apply. This law provides for price controls for basic
necessities and prime commodities in certain situations, pursuant to the policy of the government to
ensure the availability of basic necessities and prime commodities at reasonable prices at all times
without denying legitimate business a fair return on investment. Basic necessities include rice, corn,
bread, fish, dried and canned fish and other marine products, fresh vegetables, pork, beef, poultry,
milk, coffee and cooking oil, salt, laundry soap, detergents, firewood, charcoal, candles and drugs
classified as essential by the DOH. Prime commodities include fresh fruits, flour, dried, processed and
canned pork, beef and poultry meat, dairy products not falling under basic necessities, noodles,
onions, garlic, vinegar, patis, soy sauce, toilet soap, fertilizer, pesticides, herbicides, poultry, swine
and cattle feeds, paper, school supplies, electrical supplies, batteries, among others.
Under the Price Act, the prices of basic commodities are automatically frozen at their prevailing
prices or placed under automatic price control whenever:
(1)
That area is proclaimed or declared a disaster area or under a state of calamity;
(2)
That area is declared under an emergency;
(3)
The privilege of the writ of habeas corpus is suspended in that area;
(4)
That area is placed under martial law; or
(5)
That area is in a state of rebellion or war.
If the prevailing price of any basic necessity is excessive or unreasonable, the implementing
agency may recommend to the President the imposition of a price ceiling for the sale of the basic
necessity at a price other than its prevailing price.
Unless sooner lifted by the President, price control of basic necessities under this section shall
remain effective for the duration of the condition that brought it about, but not for more than 60 days.
The Price Act considers it unlawful for any person habitually engaged in the production,
manufacture, importation, storage, transport, distribution, sale or other methods of disposition of
goods to engage in price manipulation of any basic necessity or prime commodity through:
(1)
Hoarding, defined as the undue accumulation by a person or combination of persons of any
basic commodity beyond his or their normal inventory levels or the unreasonable limitation
or refusal to dispose of, sell or distribute the stocks of any basic necessity of prime
commodity to the general public or the unjustified taking out of any basic necessity or
prime commodity from the channels of reproduction, trade, commerce and industry;
(2)
Profiteering, defined as the sale or offering for sale of any basic necessity or prime
commodity at a price grossly in excess of its true worth; and
(3)
Cartels, defined as any combination of or agreement between two or more persons engaged
in the production, manufacture, processing, storage, supply, distribution, marketing, sale or
disposition of any basic necessity or prime commodity designed to artificially and
unreasonably increase or manipulate its price.
148
The Department of Agriculture (“DA”), DTI, Department of Environment and Natural Resources
(“DENR”) and DOH are the implementing agencies responsible for the enforcement of the provisions
of the Price Act. The implementing government agencies of the Price Act are granted the authority
thereunder to issue suggested retail prices, whenever necessary, for certain basic necessities and/or
prime commodities for the information and guidance of the concerned trade, industry and consumer
sectors.
Health Regulations
The FDA, under the DOH administers and enforces the law, and issues rules and circulars, on
safety and good quality supply of food, drugs and cosmetics to consumers, and the regulation of the
production, sale, and traffic of the same to protect the health of the people.
The Food, Drugs and Devices, and Cosmetics Act
Republic Act No. 3720, or the Food, Drugs, and Cosmetics Act, was passed into law on June 22,
1963, and was later amended by Executive Order No. 175 (which was renamed the same to the Food,
Drugs and Devices, and Cosmetics Act) and Republic Act No. 9711.
“Food” is defined under this law as any processed substance which is intended for human
consumption and includes drink, beverages, chewing gum and any substances which have been used
as an ingredient in the manufacture, preparation or treatment of food. On the other hand, “cosmetic”
is defined as any substance or preparation intended to be placed in contact with the various external
parts of the human body or with the teeth and the mucous membranes of the oral cavity, with a view
exclusively or mainly to cleaning them, perfuming them, changing their appearance and/or correcting
body odor, and/or protecting the body or keeping them in good condition.
The Food, Drugs and Devices, and Cosmetics Act covers both locally manufactured and imported
products and establishes standards as well as quality measures for food, drugs and cosmetics. A
comprehensive enforcement framework was set up which is deemed as necessary to ensure a pure and
safe supply of food, drugs and cosmetics in the country.
Under The Food, Drugs and Devices, and Cosmetics Act, the following, among others, are
prohibited:
(1)
The manufacture, import, export, sale, offer for sale, distribution, transfer, non-consumer
use, promotion, advertising or sponsorship of any health products (defined as food,
cosmetics, devices, biologicals, vaccines, in-vitro diagnostic reagents, and household/urban
hazardous substances) that are adulterated, unregistered or misbranded;
(2)
The adulteration or misbranding of any health product;
(3)
The refusal to permit entry or inspection by officers or employees, duly designated by the
Secretary of Health, of any factory, warehouse, or establishment in which food, drugs,
devices or cosmetics are manufactured, processed, packed or held, for introduction into
domestic commerce or are held after such introduction, or to enter any vehicle being used
to transport or hold such food, drugs, devices, or cosmetics, in domestic commerce, or to
allow samples to be collected;
(4)
The alteration, mutilation, destruction, obliteration, or removal of the whole or any part of
the labeling of, or the doing of any other act with respect to health products, if such act is
done while the article is held for sale (whether or not the first sale) which results in the
article being adulterated or misbranded; and
(5)
The sale, offering for sale, importation, exportation, distribution or transfer of any health
product beyond its expiration or expiry date, if applicable.
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The commission of any of the prohibited acts stated above can result in imprisonment and/or a
fine, in the sole discretion of the courts. Furthermore, any article of food, drug, device or cosmetic
that is adulterated or misbranded when introduced into domestic commerce may be seized and held in
custody pending proceedings, without a hearing or court order, when the Director General of the FDA
has reasonable cause to believe from facts found by him or any officer or employee of the FDA that
such health products may cause harm or prejudice to the consuming public.
For the purposes of enforcement of the Food, Drugs and Devices, and Cosmetics Act, officers or
employees duly designated by the Secretary of Health, upon presenting appropriate credentials to the
owner, operator, or agent in charge, are authorized to enter, at reasonable hours, any factory,
warehouse, or establishment in which food, drugs, devices or cosmetics are manufactured, processed,
packed, or held, for introduction into domestic commerce; and, to inspect, in a reasonable manner,
such factory, warehouse, establishment, or vehicle and all pertinent equipment, finished or unfinished
materials, containers, and labeling therein.
The Secretary of Health may cause to be disseminated information regarding food, drugs,
devices, or cosmetics in situations involving, in the opinion of the Secretary, imminent danger to
health, or gross deception of the consumer. The Secretary of Health shall not be prohibited from
collecting, reporting and illustrating the results of investigations of the DOH.
The Food Safety Act
Republic Act No. 10611, or the Food Safety Act of 2013, aims to strengthen the food safety
regulatory system in the Philippines by principally delineating the mandates and responsibilities of
concerned government agencies.
The National Dairy Authority, National Meat Inspection Service (“NMISI”), and Bureau of
Fisheries and Aquatic Resources under the DA are the government agencies responsible for the
development and enforcement of food safety standards and regulations in the primary production and
post-harvest stages for milk, meats, and fish, respectively, while the FDA under the DOH is
responsible for the safety of processed and pre-packaged foods.
The law also created the Food Safety Regulation Coordinating Board (“FSRCB”) which is tasked
to monitor and coordinate the performance and implementation of the mandates of the government
agencies under the law, and to establish the policies and procedures for coordination among agencies
involved in food safety.
Under the Food Safety Act, where it is evident that food originating within the country or
imported from another country is likely to cause serious risk to human health, the FSRCB may cause
the suspension of its importation or distribution in the market or the use of the food in question, or
lay down other special conditions and apply other appropriate interim measures as necessary.
Appropriate authorizations shall be developed and issued in the form of a permit, license and
certificate of registration or compliance that would cover establishments, facilities engaged in
production, post- harvest handling, processing, packing, holding or producing food for consumption
in accordance with the mandated issuances of regulatory agencies issuing such authorizations. Special
derogations shall be provided due to geographical location and after an assessment of risks, especially
for micro, small and medium-sized food business operators and health products. Regular inspection
of food business operators shall also be performed.
The DA, the DOH and the local government units, where applicable, shall be allowed to collect
fees for the inspection of food products, production and processing facilities, issuance of import or
export certificates, laboratory testing of food samples and other fees as may be deemed necessary.
Fees shall be based on an officially-approved procedure for estimating the cost of the activity
undertaken and shall be subject to government accounting and auditing rules and regulations.
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Food business operators or those who undertake to carry out any of the stages of the food supply
chain are held principally responsible in ensuring that their products satisfy the requirements of the
law and that control systems are in place to prevent, eliminate, or reduce risks to consumers.
Non-compliance with the provisions of the Food Safety Act may result in a fine and a suspension of
any government-issued authorization, as necessary.
The Intellectual Property Code
To encourage the transfer and dissemination of technology, prevent or control practices and
conditions that may in particular cases constitute an abuse of intellectual property rights having an
adverse effect on competition and trade, all technology transfer arrangements shall comply with the
provisions of Republic Act No. 8293, or the Intellectual Property Code of the Philippines. Technology
transfer arrangements refer to contracts or agreements involving the transfer of systematic knowledge
for the manufacture of a product, the application of a process, or rendering of a service including
management contracts; and the transfer, assignment or licensing of all forms of intellectual property
rights.
The law provides for several prohibited clauses in the technology transfer agreement which, on
its face, may be considered to have an adverse effect on competition and trade. These include, among
others, provisions such as: a) those which impose upon the licensee the obligation to acquire from a
specific source capital goods, intermediate products, raw materials, and other technologies, or of
permanently employing personnel indicated by the licensor; b) those pursuant to which the licensor
reserves the right to fix the sale or resale prices of the products manufactured on the basis of the
license; c) those that contain restrictions regarding the volume and structure of production; and d)
those which prevent the licensee from adapting the imported technology to local conditions, or
introducing innovation to it, as long as it does not impair the quality standards prescribed by the
licensor.
The law also provides for several mandatory provisions, to wit:
(1)
That the laws of the Philippines shall govern the interpretation of the same and in the event
of litigation, the venue shall be the proper court in the place where the licensee has its
principal office;
(2)
Continued access to improvements in techniques and processes related to the technology
shall be made available during the period of the technology transfer arrangement;
(3)
In the event the technology transfer arrangement shall provide for arbitration, the Procedure
of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the
United Nations Commission on International Trade Law or the Rules of Conciliation and
Arbitration of the International Chamber of Commerce shall apply and the venue of
arbitration shall be the Philippines or any neutral country; and
(4)
The Philippine taxes on all payments relating to the technology transfer arrangement shall
be borne by the licensor.
Technology transfer arrangements that conform to the foregoing need not be registered with the
Documentation, Information and Technology Transfer Bureau. Non-conformance, however, shall
automatically render the technology transfer arrangement unenforceable, unless said technology
transfer arrangement is approved and registered with the Documentation, Information and Technology
Transfer Bureau in exceptional or meritorious cases where substantial benefits will accrue to the
economy, such as high technology content, increase in foreign exchange earnings, employment
generation, regional dispersal of industries and/or substitution with or use of local raw materials, or
in the case of Board of Investments, registered companies with pioneer status.
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The Philippine Labor Code
Presidential Decree No. 442, as amended, or the Philippine Labor Code, is the principal labor law
of the Philippines. It contains most of the Philippines’ labor laws, and includes rules on illegal
recruitment, wages of workers, rights of union members, collective bargaining and employment
termination. It also deals with employers’ rights, which include the right to make and enforce
reasonable regulations, to reorganize and streamline commercial processes, and to terminate
employees.
Along with other statutory enactments, the law also provides the minimum terms, conditions and
benefits of employment that employers must provide and comply with and to which employees are
entitled to as a matter of legal right. These include, but are not limited to, provisions on wage, work
hours, safety, health, paid leaves, medical leaves and others.
In the absence of a retirement plan provided by their employers, private-sector employees who
have reached 60 years of age or more, but not beyond 65 years of age which is, the compulsory
retirement age for private-sector employees without a retirement plan, and who have rendered at least
five years of service in an establishment, may retire and receive a minimum retirement pay equivalent
to one-half month’s salary for every year of service, with a fraction of at least six months being
considered as one whole year. For the purpose of computing the retirement pay, “one-half month’s
salary” shall include all of the following: fifteen days salary based on the latest salary rate; in
addition, one-twelfth of the thirteen month pay and the cash equivalent of five days of service
incentive leave pay. Other benefits may be included in the computation of the retirement pay upon
agreement of the employer and the employee or if provided in a collective bargaining agreement.
Other social security benefits are also required to be extended to employees such as those under
the Social Security System (“SSS”), National Health Insurance Act of 1995, and Home Development
Fund Law.
Under Republic Act No. 8282, or the Social Security Law, SSS coverage is compulsory for all
employees under 60 years of age and their employers. Pursuant thereto, and beginning as of the last
day of the calendar month when an employee’s compulsory coverage takes effect and every month
thereafter during his employment an employer is obligated to deduct and withhold from each
employee’s monthly salary, wage, compensation or earnings, the employee’s contribution in an amount
corresponding to his salary, wage, compensation or earnings. In the same period, the employer, for its
part, makes a counterpart contribution for the employee, and remits both amounts to the SSS. These
payments allow covered employees to claim specific benefits under the Social Security Law, which
includes pension benefits, death benefits, permanent disability benefits, funeral benefits, sickness
benefits and maternity-leave benefits. The Social Security Law imposes penal sanctions if an employer
fails to remit the contributions to the SSS. For corporate employers, the penalty is imposed on its
president and members of the board of directors.
Republic Act No. 7875, or the National Health Insurance Act, was promulgated pursuant to the
policy of the government to adopt an integrated and comprehensive approach to health development
and to make essential goods, health and other social services available to all the people at affordable
cost. Towards this end, it created the National Health Insurance Program (“NHIP”) to provide health
insurance coverage and ensure affordable and accessible health care services to all Filipino citizens.
All persons currently eligible for benefits under the SSS are immediately and automatically members
of the NHIP. The Philippine Health Insurance Corporation (“PhilHealth”) was established to
administer the NHIP, and is tasked to formulate and promulgate policies for its sound administration
of the NHIP.
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An employer is required to deduct and withhold the contributions from the employee’s salary,
wage or earnings, make a counterpart contribution for the employee, and remit both amounts to
PhilHealth. The NHIP will then subsidize personal health services required by the employee subject
to certain terms and conditions under the law. The National Health Insurance Act likewise imposes
penal sanctions if an employer does not remit the contributions to PhilHealth. For corporate
employers, the penalty is imposed on its president and members of the board of directors.
Republic Act No. 9679, as amended, or the Pag-IBIG Fund Law, created the Home Development
Mutual Fund (“HDMF”), a national savings program as well as a fund to provide for affordable shelter
financing to Filipino workers. Coverage under the HDMF is mandatory for all employees covered by
the SSS and their employers, notwithstanding any waiver of coverage previously issued. Under the
law, an employer must deduct and withhold 2% of the employee’s monthly compensation, and likewise
make a counterpart contribution of 2% of the employee’s monthly compensation, up to a maximum of
=
P 5,000, and remit the contributions to the HDMF. Refusal or failure without lawful cause to comply
with the law is punishable by fine and/or imprisonment.
ENVIRONMENTAL LAWS
Philippine Environmental Impact Statement System
Presidential Decree No. 1586 established the Environmental Impact Statement System (“EIS
System”), which is a system primarily concerned with assessing the direct and indirect impacts of a
project on the biophysical and human environment, and with ensuring that these impacts are addressed
by appropriate environmental protection and enhancement measures.
In general, projects that pose potential significant impact to the environments are required to
secure Environmental Compliance Certificates (“ECCs”). The ECC is a government certification that:
a) the proposed project or undertaking will not cause a significant negative environmental impact; b)
that the proponent has complied with all the requirements of the EIS system and; c) that the proponent
is committed to implement its approved environmental management plan or that it will comply with
the mitigation measures required therein. The ECC contains specific measures and conditions that the
project proponent must undertake before and during the operation of a project, and in some cases,
during the abandonment phase of the project to mitigate identified environmental impacts.
In particular, development projects that are classified by law as:
a)
Environmentally Critical Projects; or
b)
Projects within statutorily defined environmentally critical areas,
are required to obtain an ECC prior to the commencement of its project. The DENR determines
whether a project is environmentally critical or located in an environmentally critical area through its
regional offices or through the Environmental Management Bureau (“EMB”).
As a requirement for the issuance of an ECC, a proponent of an environmentally critical project
is required to submit, among other documentation, an Environmental Impact Statement (“EIS”) which
is a comprehensive study of the significant impacts of a project on the environment. The EIS will
include an Environmental Management Plan/Program that the proponent will fund and implement to
protect the environment to the EMB. A project in an environmentally critical area, on the other hand,
is generally required to submit an Initial Environmental Examination (“IEE”), which is similar to an
EIS, but with reduced details of data and depth of assessment and discussion, without prejudice to the
right of the DENR to require a more detailed EIS.
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Project proponents that prepare an EIS are required to establish an Environmental Guarantee
Fund (“EGF”) when the ECC is issued to projects determined by the DENR to pose significant public
risks to life, health, property and the environment. The EGF is intended to answer for damages caused
by such a project as well as any rehabilitation and restoration measures. Project proponents that
prepare an EIS are also mandated to include a commitment to establish an Environmental Monitoring
Fund (“EMF”) when an ECC is eventually issued. The EMF shall be used to support activities of a
multi-partite monitoring team which will be organized to monitor compliance with the ECC and
applicable laws, rules and regulations.
Project proponents for development projects classified as unlikely to cause adverse
environmental impacts may secure a Certificate of Non-Coverage (“CNC”). A CNC is a certification
issued by the EMB certifying that, based on the project description submitted, the project is not
covered by the EIS system and is not required to secure an ECC.
Toxic Substances, Hazardous and Nuclear Wastes Control Act
Republic Act No. 6969, or the Toxic Substances, Hazardous and Nuclear Wastes Control Act,
mandates control and management of import, manufacture, process, distribution, use, transport,
treatment and disposal of toxic substances and hazardous and nuclear wastes. It seeks to protect public
health and the environment from unreasonable risks posed by these substances.
Hazardous Waste Generators, i.e. persons (natural or juridical) who generate or produce
hazardous wastes, through any commercial, industrial or trade activities, are required to register with
the EMB Regional Office having jurisdiction over the location of the waste generator. A DENR I.D.
Number shall be issued upon registration.
This is a one-time permit unless there is a change in the hazardous wastes produced. To the extent
that SSI’s businesses produce hazardous waste (defined as “substances that are without any safe
commercial, industrial, agricultural or economic usage and are shipped, transported or brought from
the country of origin for dumping or disposal into or in transit through any part of the territory of the
Philippines”), this law is generally applicable.
The Clean Air Act
Republic Act No. 8749, or the Philippine Clean Air Act of 1999 focuses primarily on pollution
prevention and provides for a comprehensive management program for air pollution.
Under the law, all stationary sources of air pollution that have the potential to emit 100 tons per
year or more of any regulated air pollutant, or when required under the ECC, must secure an Authority
to Construct and Permit to Operate from the EMB prior to commencement of construction or
operation.
The Authority to Construct and Permit to Operate is a one-time permit while the permit to operate
must be renewed yearly. To the extent that SSI’s businesses may be stationary sources of air pollution,
or when required by an ECC in the case of a particular development project, this law is generally
applicable.
Discharge Permit
Laguna Lake Development Authority (“LLDA”) Board Resolution No. 33, series of 1996,
requires all development projects, installations, and activities that discharge liquid waste or regulated
effluents into and pose a threat to the environment of the Laguna de Bay Region to obtain a Discharge
Permit from the LLDA. The Discharge Permit authorizes the owner or operator to discharge
wastewater, provided the permit specifies the quantity and quality of effluent that the facility is
allowed to discharge into a particular body of water in compliance with schedule and monitoring
requirements. To the extent that SSI’s businesses may discharge liquid waste or regulated effluents to
the environment of the Laguna de Bay Region, a Discharge Permit may be required.
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BOARD OF DIRECTORS AND SENIOR MANAGEMENT
The overall management and supervision of the Company is undertaken by the Board at the
direction of the shareholders. The Company’s executive officers and management team support the
Board by preparing appropriate information and documents concerning the Company’s business
operations, financial condition and results of operations for its review.
The Board and Senior Management
The Board consists of nine members, of which two are independent directors. Appointments of
the independent directors as members of the Board will take effect immediately upon the issuance by
the Philippine SEC of the Permit to Sell the Offer Shares of the Company without any further action
required.
The following table sets out certain information regarding the members of the Board. All
members of the Board and executive officers listed below are citizens of the Philippines.
Name
Age
Position
Zenaida R. Tantoco ............................................
68
Chairman
Anthony T. Huang .............................................
43
President
Ma. Teresa R. Tantoco .......................................
50
Treasurer
Ma. Elena T. Valbuena .......................................
56
Director
Bienvenido V. Tantoco III ..................................
48
Director
Eduardo T. Lopez III .........................................
46
Director
Edgardo Luis Pedro T. Pineda, Jr .......................
43
Director
Baltazar N. Endriga ............................................
74
Independent Director
Carlo L. Katigbak ...............................................
44
Independent Director
The following table sets out certain information regarding the Company’s executive officers.
Name
Age
Position
Zenaida R. Tantoco ............................................
68
Chief Executive Officer
Anthony T. Huang .............................................
43
President
Elizabeth T. Quiambao .......................................
62
Executive Vice President
Rossellina J. Escoto ...........................................
61
Vice President - Finance
Reuben J. Ravago ..............................................
45
Vice President - IT
Margarita A. Atienza ..........................................
41
Vice President - Investor Relations
Rosanno P. Nisce ................................................
50
Corporate Secretary
Cheryl Anne M. Berioso ....................................
35
Head of Corporate Planning
The business experience for the past five years of each of the Company’s directors and executive
officers is set out below.
Zenaida R. Tantoco, 68, is the Chairman and Chief Executive Officer of the Company. Ms.
Tantoco is also the Chairman and Chief Executive Officer of all of our other Group companies. She
has over 40 years of experience in the retail business, and serves as the President of Rustan
Commercial Corporation and Rustan Marketing Corporation. In addition, she is a member of the board
of directors of several Rustan’s Group companies, including, among others, Rustan Commercial
Corporation, Rustan Marketing Corporation and Rustan Coffee Corporation. Ms. Tantoco graduated
cum laude from the Assumption College with a Bachelor of Science degree in Business
Administration.
155
Anthony T. Huang, 43, is the President of the Company. Mr. Huang is also the President and a
director of all of our other Group companies. He joined the Group in 1995 and has over 22 years of
experience in the retail business. He also serves as the Executive Vice President of Rustan Marketing
Corporation. He is a member of the board of directors of Sta. Elena Properties, Inc. Rustan
Supercenters, Inc. and Commonwealth Foods, Inc. Mr. Huang graduated from the University of Asia
and the Pacific with a Bachelor of Arts degree in Humanities.
Ma. Teresa R. Tantoco, 50, is the Treasurer of the Company. Ms. Tantoco is also the Treasurer
and a director of our Group companies, including, among others, International Specialty Apparel, Inc.,
Specialty Food Retailers, Inc., International Specialty Retailers, Inc., International Specialty Wear,
Inc., Footwear Specialty Retailers, Inc., International Specialty Fashions, Inc. and Luxury Concepts,
Inc. In addition, she serves as the Treasurer and a director of RPG Distribution Services, Inc., Rustan
Marketing Corporation, and is a member of the board of directors of Rustan Commercial Corporation.
Ms. Tantoco graduated from John Cabot International College with a Bachelor of Science degree in
Business Administration.
Ma. Elena T. Valbuena, 56, is a Director of the Company. Ms. Valbuena is also a member of the
board of directors of our Group companies, including, among others, Stores Specialists, Inc. Rustan
Marketing Specialists, Inc. International Specialty Concepts, Inc. and Specialty Investments, Inc. She
is a director of Rustan Commercial Corporation and serves the Vice President of Buying for its Home
Division. In addition, she is a member of the board of directors of Rustan Coffee Corporation, Rustan
Marketing Corporation and RPG Distribution Services, Inc. Ms. Valbuena graduated from the
Assumption College with a Bachelor of Science degree in Entrepreneurship.
Bienvenido V. Tantoco III, 48, is a Director of the Company. Mr. Tantoco is the President of
Rustan Supercenter, Inc. He was also the Executive Vice President and General Manager of Rustan
Supercenter, Inc. prior to his appointment as the President. In addition, he served as the Vice President
for Corporate Planning and later with the Office of the President, of Rustan Commercial Corporation.
Mr. Tantoco graduated from Connecticut College with a Bachelor of Arts degree in Economics, and
J.L Kellogg Graduate School of Management, Northwestern University with a Master of Management
degree, majors in Marketing, Accounting, and Organizational Behavior.
Eduardo T. Lopez III, 46, is a Director of the Company. Mr. Lopez is the General Manager and
Vice President of Finance and Administration of Superstar Security Agency, Inc., the Assistant to the
President of Unilogix, Inc., the owner and General Manager of Blue Line Art Gallery, Inc., and the
owner and General Manager of Secondo Time Pieces. He is a director of Touch Media Philippines, Inc.
and Market Intelligence Holdings, Corp. In addition, Mr. Lopez serves as a member of the board of
directors of Rustan Commercial Corporation, Rustan Marketing Corporation, Rustan Supermarket,
Inc., Rustan Coffee Corporation, Rustan Superstore Administration, Inc., Rustan Investments
Management Corporation and Rustan Design Specialists, Inc. Mr. Lopez graduated from Ateneo De
Manila University with a Bachelor of Science degree in Economics, Santa Clara University with a
Bachelor of Science degree in Economics, and Stanford University with a Master of Science degree
in Management.
Edgardo Luis Pedro T. Pineda, Jr, 43, is a Director of the Company. Mr. Pineda is also a director
of our Group companies, Stores Specialists, Inc. and Rustan Marketing Specialists, Inc. a director of
our Group companies, Stores Specialists, Inc. and Rustan Marketing Specialists, Inc. In addition, he
is a director of Rustan Commercial Corporation, Rustan Marketing Corporation, Rustan Supermarket,
Inc., Rustan Coffee Corporation, Rustan Superstore Administration, Inc., Rustan Investments
Management Corporation and Rustan Design Specialists, Inc. Mr. Pineda graduated from Fordham
University with a Bachelor of Science degree in Business Administration, and Stanford University
with a Master of Science degree in Business Management.
156
Baltazar N. Endriga, 74, is an independent Director of the Company. Mr. Endriga is also the
President of Meridian International College of Business, Arts and Technology and the Managing
Director of Endriga, Manangu & Associates, Certified Public Accountants. In addition, he is a member
of the National Executive Council — National Movement for Free Elections, and a board member of
Miriam College Foundation and Kalayaan College, respectively. Prior to that, among other positions,
he was the President of the Credit Information Corporation, a board member and Treasurer of the
Management Association of the Philippines, President and Chief Academic Officer of University of
the East, and a faculty member of De La Salle University Graduate School of Busines. Mr. Endriga
graduated magna cum laude from University of the East with a Bachelor of Business Administration
degree, major in Accounting, and Harvard Business School with a Master of Business Administration
degree.
Carlo L. Katigbak, 44, is an independent Director of the Company. Mr. Katigbak is also the
President and Chief Executive Officer of Skycable Corporation, the Managing Director of Bayantel
Holdings Corporation and the President of ABS-CBM Convergence Corp. In addition, he is a member
of the Board of Trustees of Knowledge Channel Foundation. Mr. Katigbak graduated from the Ateneo
de Manila University with a Bachelor of Science degree, major in Management Engineering and
Harvard Business School, Advanced Management Program.
Executive Officers
Elizabeth T. Quaimbao, 62, is the Executive Vice President of the Company. Mrs. Quaimbao is
also the Executive Vice President and General Manager of all of our other Group companies, except
for Rustan Marketing Specialists, Inc. Prior to joining the Group in 1994, she was an auditor with SGV
& Co., the Controller of Philippine Aerospace Development Corp., the Vice President of Tourist Duty
Free Shops and Vice President of Grosby Footwear, Inc. Mrs. Quaimbao graduated magna cum laude
from the University of Santo Tomas with a Bachelor of Science degree in Commerce, major in
Accountancy and is a certified public accountant.
Rosselina J Escoto, 61, is the Vice President of Finance for the Company. Mrs. Escoto is also
the Finance Manager of our Group companies, Stores Specialists, Inc, Global Specialty Retailers, Inc.
Footwear Specialty Retailers, Inc., Luxury Concepts, Inc., International Specialty Fashions, Inc. and
International Specialty Concepts, Inc. Prior to joining the Group in 1997, she was an auditor with SGV
& Co., and also held a senior management position with the PSE. Mrs. Escoto graduated magna cum
laude from the University of Santo Tomas with a Bachelor of Science degree in Commerce, major in
Accountancy and is a certified public accountant.
Reuben J. Ravago, 45, is the Vice President of IT for the Company. Mr. Ravago is the Chief
Technical Consultant for Rustan Commercial Corporation, and the founder and Chief Technology
Architect of OLM Technologies, Inc. Prior to joining the Group in 2007, he was a senior technology
consultant with SGV Associates, and the Managing Director and IT Director of K2 Interactive, Inc.
Mr. Ravago graduated from the University of the Philippines with a Bachelor of Science in Computer
Science and a Master of Science degree in Electrical Engineering (Computers and Communication).
Margarita A. Atienza, 41, is the Vice President of Investor Relations and Compliance for the
Company. Prior to joining the Group in 2014, she was an Associate Director for Client Coverage with
BPI Capital Corporation, which she joined in 2008. Ms. Atienza graduated from the Ateneo de Manila
University with a Bachelors Degree in Social Sciences and the Asian Institute of Management with a
Masters in Business Administration.
157
Rosanno P. Nisce, 50, is the Corporate Secretary of the Company. Mr. Nisce is the Managing
Partner of the Nisce Mamuric Guinto Rivera and Alcantara Law Offices. He has been in law practice
for 25 years, specializing in corporate and commercial law. Mr. Nisce graduated from the Ateneo De
Manila University with a Bachelor of Arts degree in Economics, and obtained his Bachelor of Laws
degree from the Ateneo de Manila School of Law. He subsequently obtained his Master of Laws degree
in International Banking and Financial Law from the Morin Center of the Boston University School
of Law.
Cheryl Anne M. Berioso, 35, is the Head of Corporate Planning for the Company. Prior to the
joining the Group in 2001, she was a market and planning analyst with the Bank of Commerce, as well
as the Secretary for the Executive and Asset and Liabilities Committees. Ms. Berioso graduated from
De La Salle University with a Bachelor of Science in Applied Economics and a Master of Science
degree in Economics.
Significant Employees
The Company does not believe that its business is dependent on the services of any particular
employee.
Family Relationships
Bienvenido Tantoco, Sr. is the patriarch of the Tantoco Family, and together with his wife, the
late Gliceria R. Tantoco, are the founders of the Rustan’s Group. They have six children, Bienvenido
R. Tantoco, Jr., Zenaida R. Tantoco, Ma. Carmencita T. Lopez, Ma. Elena T. Valbuena, Ma. Lourdes
T. Pineda and Ma. Teresa R. Tantoco (collectively, the “Second Generation”).
As set out below, the Board is comprised of several members of the Second Generation, as well
as several of their children:
Zenaida R. Tantoco, is the Chairman and Chief Executive Officer of the Company.
Anthony T. Huang, is the President of the Company and the son of Zenaida R. Tantoco.
Ma. Teresa R. Tantoco, is the Treasurer of the Company.
Ma. Elena T. Valbuena, is a Director of the Company.
Bienvenido V. Tantoco III, is a Director of the Company and the son of Bienvenido R. Tantoco, Jr.
Eduardo T. Lopez III, is a Director of the Company and the son of Ma. Carmencita.
Edgardo Luis Pedro T. Pineda, Jr, is a Director of the Company and the son of Ma. Lourdes T.
Pineda.
The only family members who hold senior management positions are Zenaida R. Tantoco, Ma.
Teresa R. Tantoco and Anthony T. Huang.
Involvement in Certain Legal Proceedings of Directors and Executive Officers
To the best of the Company’s knowledge and belief and after due inquiry, none of the Directors,
nominees for election as director, or executive officers of the Company, its subsidiaries and affiliates
have in the five year period prior to the date of this Prospectus: (1) had any petition filed by or against
any business of which such person was a general partner or executive officer either at the time of the
bankruptcy or within a two-year period of that time; (2) convicted by final judgment in a criminal
proceeding, domestic or foreign, or have been subjected to a pending judicial proceeding of a criminal
nature, domestic or foreign, excluding traffic violations and other minor offenses; (3) subjected to any
order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of
158
competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring,
suspending or otherwise limiting their involvement in any type of business, securities, commodities
or banking activities; or (4) found by a domestic or foreign court of competent jurisdiction (in a civil
action), the Philippine 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.
Corporate Governance
The Board approved our corporate governance manual on August 4, 2014 to monitor and assess
the level of the Company’s compliance with leading practices on good corporate governance as
specified in the Philippine SEC Circulars. In addition to establishing specialized committees to assist
in complying with principles of good corporate governance, the manual also outlines specific
investors’ rights and protections and enumerates particular duties expected from the members of the
Board, officers and employees. It also features a disclosure system which requires adherence to the
principles of transparency, accountability and fairness. A compliance officer is responsible for the
formulation of specific measures to determine the level of compliance with the manual by members
of the Board, officers and employees. As of the date of this Prospectus, the Company has not
encountered any material deviations from the standards specified in the manual.
The manual also identifies the Company’s policy with respect to the related party transactions,
which covers any contract, agreement, transaction, arrangement or dealing of the Company with a
director of officer or any related party. The manual provides that such related party transactions shall
be entered into by the Company on an arms’ length basis and under such terms that inure to the benefit
and best interest of the Company and its shareholders as a whole, considering relevant circumstances,
but subject to the review and approval requirements set forth in the manual and the Corporation Code.
A copy of the manual containing the foregoing provisions was submitted to the Philippine SEC
together with the registration statement filed with respect to the Offer Shares.
Committees of the Board
Pursuant to
committees. Each
upon approval by
will serve until a
our corporate governance manual, the Board has created each of the following
member of the respective committees named below will immediately assume office
the Philippine SEC of the Company’s application to register the Offer Shares and
successor shall have been elected and appointed.
Audit Committee
The Company’s audit committee is responsible for assisting the Board in its fiduciary
responsibilities by providing an independent and objective assurance to its management and
shareholders of the continuous improvement of its risk management systems, business operations and
the proper safeguarding and use of its resources and assets. The audit committee provides a general
evaluation of and assistance in the overall improvement of its risk management, control and
governance processes. The audit committee shall have functions and powers prescribed by the Board
and in accordance with applicable laws and regulations, including, among others, assisting the Board
in the performance of its oversight responsibility for the financial reporting process, system of internal
control, audit process and monitoring of compliance with laws, rules and regulations, oversight over
the external auditors, the nature, scope and expenses of the audit, and evaluation and determination
of any non-audit work and review of the non-audit fees paid to the external auditors.
The audit committee shall also be responsible for promulgating a charter which shall set out its
purposes, membership, structure, operations, reporting process, resources and other relevant
information in accordance with SEC Memorandum Circular No. 4 (2012). The charter shall be
159
submitted to the Board for approval in accordance with our corporate governance manual and
implemented upon the listing of the Offer Shares. The audit committee must comprise of at least three
members, including at least one independent director, one of whom shall serve as the chairman of the
committee. The audit committee reports to the Board and is required to meet at least twice a year.
The appointments of the members of the audit committee will take effect immediately upon the
issuance by the Philippine SEC of the Permit to Sell the Offer Shares of the Company, without any
further action required.
Remuneration and Compensation Committee
The Company’s remuneration and compensation committee is responsible for objectively
recommending a formal and transparent framework of remuneration and evaluation for the members
of the Board and the Company’s key executives to enable them to run the Company successfully. The
remuneration and compensation committee must comprise at least three members, including one
independent director. The remuneration and compensation committee reports directly to the Board and
is required to meet at least once a year.
The appointments of the members of the remuneration and compensation committee will take
effect immediately upon the issuance by the Philippine SEC of the Permit to Sell the Offer Shares of
the Company, without any further action required.
Nomination Committee
The Company’s nomination committee is responsible for providing the Company’s shareholders
with an independent and objective evaluation and assurance that the members of the Board are
competent and will foster long-term success and competitiveness. The nomination committee must
comprise at least five members, including one independent director. The nomination committee reports
directly to the Board and is required to meet at least once a year.
The appointments of the members of the nomination committee will take effect immediately
upon the issuance by the Philippine SEC of the Permit to Sell the Offer Shares of the Company,
without any further action required.
Executive Compensation Table
Compensation
The following table sets out the Company’s chief executive officer (“CEO”) and the four most
highly compensated senior officers for the years ended December 31, 2011, 2012 and 2013:
Name
Position
Zenaida R. Tantoco..................................................................................................
Chairman and CEO
Anthony T. Huang ...................................................................................................
President
Elizabeth T. Quiambao ............................................................................................
Executive Vice President
Rossellina J. Escoto ................................................................................................
Vice President - Finance
Reuben J. Ravago ....................................................................................................
Vice President - IT
160
The following table identifies and summarizes the aggregate compensation of the Company’s
CEO and the four most highly compensated executive officers, as well as the aggregate compensation
paid to all other officers and Directors as a group, for the years ended December 31, 2011, 2012 and
2013:
Year
Total
(=
P million)
CEO and the four most highly compensated executive officers named above .......
2012
14.7
2013
15.6
2014 (estimated)
19.2
2012
1.4
2013
3.1
2014 (estimated)
3.3
Aggregate compensation paid to all other officers and Directors as a group
unnamed..............................................................................................................
Standard Arrangements
Other than payment of reasonable per diem as may be determined by the Board for its meetings,
there are no standard arrangements pursuant to which our Directors are compensated directly or
indirectly, for any services provided as a director.
Other Arrangements
On August 4, 2014, the Board approved the establishment of a stock grant plan to reward and
compensate the key executive officers for services rendered in a given year. The shares to be issued
pursuant to the stock grant for the year 2014 will be issued to eligible executive officers after the Offer
and will be based on the Offer Price.
Apart from the foregoing, there are no other arrangements pursuant to which any of our Directors
is compensated, directly or indirectly, for any service provided as a director.
Warrants and Options Outstanding
As of the date of this Prospectus, there are no outstanding warrants or options held by the
Company’s chief executive officer, the named executive officers, and all officers and Directors as a
group.
161
PRINCIPAL AND SELLING SHAREHOLDERS
Shareholders
The following table sets out the Company’s shareholders as of the date of this Prospectus. The
Tantoco Family is the Company’s single largest shareholder and directly and indirectly owns and
controls 100% of the Company. As of the date of this Prospectus, the Tantoco Family directly owned
approximately 14.1% of the Company’s issued share capital and beneficially owned 100% of the
issued common share capital of the Company.
Shareholders as of the date of this Prospectus
Name of Shareholder
Number of
% of Total
Shares Held
Outstanding Shares
Wellborn Trading and Investments, Inc. (See Note 1 below). .................................
493,639,700
18.9
Bordeaux Holdings, Inc. (See Note 2 below) .........................................................
469,736,400
17.9
Birdseyeview, Inc. (See Note 3 below) ..................................................................
434,412,500
16.6
Marjorisca, Incorporated (See Note 4 below) .........................................................
434,440,400
16.6
Educar Holdings, Corp. (See Note 5 below) ..........................................................
415,753,800
15.9
Ma. Elena T. Valbuena ..........................................................................................
93,113,200
3.6
Ma. Teresa R. Tantoco ..........................................................................................
93,107,199
3.6
Ma. Carmencita T. Lopez ......................................................................................
89,108,100
3.4
Bienvenido R. Tantoco Jr. .....................................................................................
59,936,900
2.3
Zenaida R. Tantoco ...............................................................................................
33,913,800
1.3
Bienvenido R. Tantoco Sr. ....................................................................................
500
0.0
Bienvenido V. Tantoco, III. ...................................................................................
100
0.0
Anthony T. Huang.................................................................................................
100
0.0
Edgardo Luis Pedro T. Pineda, Jr. .........................................................................
100
0.0
Eduardo T. Lopez, III. ..........................................................................................
100
0.0
Balthazar N. Endriga ...........................................................................................
1
0.0
Total.....................................................................................................................
2,617,162,900
100.0
Notes:
(1)
Wellborn Trading and Investments, Inc. is beneficially owned by Zenaida R. Tantoco, Anthony T. Huang, Michael T.
Huang and Catherine T. Huang as to 77.9%, 7.4%, 7.4% and 7.4%, respectively.
(2)
Bordeaux Holdings, Inc. is wholly and beneficially owned by Ma. Lourdes T. Pineda.
(3)
Birdseyeview, Inc. is wholly and beneficially owned by Ma. Teresa R. Tantoco.
(4)
Marjorisca, Incorporated is wholly and beneficially owned by Ma. Elena T. Valbuena.
(5)
Educar Holdings, Corp. is beneficially owned by seven members of the Lopez family, Eduardo S. Lopez, Jr., Ma.
Carmencita T. Lopez, Eduardo T. Lopez III, Emmanuel T. Lopez, Ma. Margarita L. De Jesus, Ma. Carmencita L. Tiangco,
and Enrique Antonio T. Lopez, each of whom holds an equal shareholding interest of 14.3%.
162
Selling Shareholders
The table below sets forth, for the Selling Shareholders, the number of Shares held by it before
the Offer, the number of Shares to be sold by it in the Offer and the number of Shares to be owned
by it immediately after the Offer.
Selling Shareholders
Common
Shares held
before the
Offer
% of
Common
Shares
outstanding
before the
Offer
Common
Shares to
be sold in
the Firm
Offer
Common
Shares to
be sold
pursuant
to the
Overallotment
Option
No exercise of
Over-allotment Option
Common
Shares held
after the Offer
%
Full exercise of
Over-allotment Option
Common
Shares held
after the Offer
%
Zenaida R. Tantoco ...........
33,913,800
1.3
33,913,700
—
100
—
100
—
Ma. Carmencita T. Lopez ..
89,108,100
3.4
33,270,962
25,593,048
55,837,138
1.69
30,244,790
0.91
Ma. Teresa R. Tantoco ......
93,107,199
3.6
34,764,130
26,741,638
58,343,069
1.76
31,601,431
0.95
Ma. Elena T. Valbuena ......
93,113,200
3.6
34,766,364
26,743,357
58,346,836
1.76
31,603,479
0.95
Wellborn Trading and
Investments, Inc................
493,639,700
18.9
852,664
26,743,357
492,787,036
14.87
466,043,679
14.07
Bordeaux Holdings, Inc. ..
469,736,400
17.9
30,956,153
23,812,426
438,780,247
13.25
414,967,821
12.53
TOTAL .............................
1,272,618,400
48.7
168,523,973 129,633,826
1,104,094,427
33.33
974,461,301
29.41
The PSE rules require existing shareholders owning at least 10% of the outstanding shares of a
company not to sell, assign or in any manner dispose of their shares for a period of 180 days after the
listing of the shares. The following shareholders are covered by the aforesaid 180-day PSE lock-up
requirement:
% Total of
Number of
Name of Shareholders
Wellborn Trading and Investments, Inc. ..................
Shareholding
Common
% Total of
% Total of
Assuming Full
Shares Held
Shareholding
Shareholding
Exercise of the
before the
before the
after the Firm
Over-allotment
Offer
Offer
Offer
Option
493,639,700
18.9
14.88
14.07
Bordeaux Holdings, Inc. .........................................
469,736,400
17.9
13.24
12.53
Birdseyeview, Inc. ..................................................
434,412,500
16.6
13.11
13.11
Marjorisca, Incorporated .........................................
434,440,400
16.6
13.11
13.11
Educar Holdings, Corp. ............................................
415,753,800
15.9
12.55
12.55
In addition, if there is any issuance of shares or securities such as private placements, assets for
shares swap or a similar transaction or instruments which lead to issuance of shares or securities such
as convertible bonds, warrants or a similar instrument that are completed within 180 days prior to the
start of the offer period, and the transaction price is lower than the Offer Price in the initial public
offering, all such shares or securities shall be subject to a lock-up period of at least 365 days from full
payment of such shares or securities. 11,450,800 shares held by Bienvenido R. Tantoco, Jr.,
100,787,300 shares held by Wellborn Trading and Investments, Inc., 96,452,200 shares held by Educar
Holdings Corp., 100,787,300 shares held by Marjorisca, Inc., 100,780,900 shares held by
Birdseyeview, Inc. and 89,741,500 shares held by Bordeaux Holdings, Inc. are subject to such 365-day
lock-up.
To implement the foregoing lock-up requirements, the PSE requires the applicant company to
lodge the shares with the PDTC through a Philippine Central Depository (“PCD”) participant for the
electronic lock-up of the shares or enter into an escrow agreement with the trust department or
custodian unit of an independent and reputable financial institution.
163
In addition to the foregoing lock-ups, the Company and the Selling Shareholders have agreed
with the Joint Global Coordinators and Bookrunners that, except in connection with the
Over-allotment Option, they will not, without the prior written consent of the Joint Global
Coordinators and Bookrunners, issue, offer, pledge, 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 any 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
for a period of 180 days after the listing of the Offer Shares.
Security ownership of certain record and beneficial owners holding more than 5% of the
Company’s voting securities as of the date of this Prospectus
Name of
beneficial
owner and
relationship
Title of
Name and address of record owners
with record
Class
and relationship with the Company
owner
See Note 1
Common ...... Wellborn Trading and Investments, Inc.
4/F Midland Buendia Building,
% of total
No. of Shares
outstanding
Citizenship
held
Shares
Filipino
493,639,700
18.9
Filipino
469,736,400
17.9
Filipino
434,412,500
16.6
Filipino
434,440,400
16.6
Filipino
415,753,800
15.9
below
403 Senator Gil Puyat Avenue,
Makati City
Common ...... Bordeaux Holdings, Inc.
19/F BDO Plaza, 8737 Paseo de Roxas,
See Note 2
below
Makati City
Common ...... Birdseyeview, Inc.
25B Tamarind Road, South Forbes Park,
See Note 3
below
Makati City
Common ...... Marjorisca, Incorporated
25B Tamarind Road, South Forbes Park,
See Note 4
below
Makati City
Common ...... Educar Holdings, Corp.
2/F Urban Building, 405 Senator Gil
See Note 5
below
Puyat Avenue, Makati City
Notes:
(1)
Wellborn Trading and Investments, Inc. is beneficially owned by Zenaida R. Tantoco, Anthony T. Huang, Michael T.
Huang and Catherine T. Huang as to 77.9%, 7.4%, 7.4% and 7.4%, respectively.
(2)
Bordeaux Holdings, Inc. is wholly and beneficially owned by Ma. Lourdes T. Pineda.
(3)
Birdseyeview, Inc. is wholly and beneficially owned by Ma. Teresa R. Tantoco.
(4)
Marjorisca, Incorporated is wholly and beneficially owned by Ma. Elena T. Valbuena.
(5)
Educar Holdings, Corp. is beneficially owned by seven members of the Lopez family, Eduardo S. Lopez, Jr., Ma.
Carmencita T. Lopez, Eduardo T. Lopez III, Emmanuel T. Lopez, Ma. Margarita L. De Jesus, Ma. Carmencita L. Tiangco,
and Enrique Antonio T. Lopez, each of whom holds an equal shareholding interest of 14.3%.
164
Security Ownership of Management as of the date of this Prospectus
Amount and
Title of Class
Name of beneficial owner
nature of
% of total
beneficial
outstanding
ownership
Citizenship
Shares
100 Shares
Filipino
0.0
Named Executive Officers
Common shares ..............
Anthony T. Huang
Except as disclosed above, none of the Company’s other executive officers or department
managers own shares directly or indirectly in the Company. Ownership in the Company is limited to
that indicated in the foregoing.
Voting Trust Holders of 5% or more
There were no persons holding more than 5% of a class of Shares under a voting trust or similar
agreement as of the date of this Prospectus.
Recent Issuances of Securities Constituting Exempt Transactions by the Company
Not applicable.
Changes in Control
Except for the corporation restructuring, as described in “Business — History — Corporate
Restructuring” on page 111 of this Prospectus, there has been no change in the control of the Company
since it was formed on April 16, 2007. As of the date of this Prospectus, there are no arrangements
that may result in a change in the control of the Company.
165
RELATED PARTY TRANSACTIONS
In the ordinary course of our business, we engage in a variety of transactions with related parties.
Related party transactions, by their very nature, involve conflict of interest situations between our
Group and the related parties with whom we enter into such transactions. As provided in our corporate
governance manual, our policy with respect to related party transactions is to ensure that these
transactions are entered into on terms which are not more favorable to the related party than those
generally available to third parties dealing at arm’s length basis and are not detrimental to our
non-interested shareholders. All related party transactions shall be reviewed by the appropriate
approving authority, as may be determined by the Board. Material related party transactions shall
require the approval of at least a majority of the Board. Additionally, any interested Directors,
shareholders or management of our Company or the relevant member of our Group must abstain from
deliberations and voting at the relevant Board meeting and/or general meeting in deciding on the
related party transactions.
The following table sets out the principal ongoing related party transactions within the Group as
of June 30, 2014:
Related Parties
Nature of Transactions
Rustan Commercial Corporation ...................................... The Group rents retail space in Rustan’s Group department stores
for its shop-in-shops. As of June 30, 2014, we operate 85
shop-in-shops, for which we have entered into lease agreements on
terms determined at arm’s length and based on market conditions.
Philippine Family Mart CVS, Inc. (“PFM”) ..................... In 2013, the Group made advances amounting to =
P 5.2 million to
PFM in connection with payment of certain start-up costs incurred
by PFM, including, among others, professional fees, salaries, and
repair and maintenance expenses.
Rustan Marketing Corporation ......................................... The Group purchases items such as perfumes and watches from
Rustan Marketing Corporation, which is the exclusive Philippine
distributor of these products, for sale in our stores. These purchases
were made on terms determined at arm’s length.
In addition, our associate, SPI, has granted Rustan Marketing
Corporation the right to undertake wholesale distribution of
Samsonite
products
in
the
Philippines.
Pursuant
to
this
arrangement, Rustan Marketing Corporation purchases Samsonite
products from SPI, and SPI recognizes revenue from the sales of
these products.
SIAL CVS Retailers, Inc. (“SIAL CVS”) ......................... In 2013, the Group made advances amounting to =
P 4.3 million to
SIAL CVS in connection with payment of certain start-up costs
incurred by SIAL CVS, including, among others, professional fees,
salaries, and repair and maintenance expenses.
Samsonite Philippines, Inc. (“SPI”). ................................ SPI has granted Stores Specialists, Inc. the right to undertake retail
sales of Samsonite products in the Philippines. Pursuant to this
arrangement, Stores Specialists, Inc. operates the Samsonite stores
in the Philippines and purchases Samsonite products from SPI for
sale in these stores.
166
Specific details of these transactions are set out below:
•
Related rent expenses in connection with the leasing of retail space for our stores from related
P 68.5
P 71.5 million and =
P 120.5 million, =
P 136.5 million, =
parties amounted to =
P 123.3 million, =
million, for the years ended December 31, 2011, 2012 and 2013 and the six months ended June
30, 2013 and 2014, respectively;
•
Reimbursement to related parties for payments of various expenses amounted to =
P 3.3 million,
=
=
=
=
P 0.3 million, P 0.4 million, P 9.6 million and P 0.3 million for the years ended December 31,
2011, 2012 and 2013 and the six months ended June 30, 2013 and 2014, respectively; and
•
Short-term non-interest bearing cash advances to related parties amounted to =
P (48.8) million,
=
P 0.6 million for the years ended December 31,
P 11.3 million and =
P 2.3 million, =
P (5.8) million, =
2011, 2012 and 2013 and the six months ended June 30, 2013 and 2014, respectively.
For more information, see Note 21 to our audited consolidated financial statements as of and for
the years ended December 31, 2011, 2012 and 2013 and the reviewed consolidated interim financial
statements as of June 30, 2014 and for the six months ended June 30, 2013 and 2014.
167
DESCRIPTION OF THE SHARES
The Shares to be offered shall be 864,225,503 common shares of the Company, with a par value
per Share, to be issued and offered by the Company and the Selling Shareholders by way of
a Primary Offer and Secondary Offer. A total of 3,312,864,430 Shares shall be outstanding after the
Offer, assuming the Over-allotment Option is fully exercised.
=
P 1.00
SHARE CAPITAL INFORMATION
As of the date of this Prospectus, the Company’s authorized capital stock is =
P 5,000,000,000
=
divided into 5,000,000,000 common shares with a par value of P 1.00 per share. As of the date of this
Prospectus, the Company’s issued and outstanding share capital consisted of 2,617,162,900 common
shares. The Company is authorized to issue only common shares, unless it amends its Articles.
OBJECTS AND PURPOSES
Pursuant to the Company’s Articles of Incorporation, its primary purpose is to invest in,
purchase, subscribe for, or otherwise acquire and own, hold, use, develop, sell, assign, transfer, lease,
mortgage, pledge, exchange, or otherwise dispose of real and personal property of every kind and
description, including shares of stock, bonds, debentures, notes, evidences of indebtedness, and other
securities, contracts, or obligations of any corporation or corporations, association or associations,
domestic or foreign, and to pay therefore in whole or in part in cash or by exchanging therefore stocks,
bonds, or other evidences of indebtedness or securities of this or any other corporation, and while the
owner or holder of any such real or personal property, stocks, bonds, debentures, notes, evidences of
indebtedness or other securities contracts, or obligations, to receive, collect and dispose of the
interest, dividends, and income arising from such property, to possess and exercise in respect thereof,
all the rights, powers and privileges of ownership, including all voting powers on any stocks so owned,
and to guarantee any debt or obligation of any corporation, any stocks, bonds, debentures, notes,
evidences of indebtedness or other securities of which are held or to be acquired by it. In no case,
however, shall the Corporation be engaged as a stock broker or dealer in securities, or as an Investment
House, mutual fund or trust company. The Company’s amended Articles of Incorporation do not
provide for a specific secondary purpose in addition to the express powers of a corporation as stated
in Section 36 of the Corporation Code.
Under Philippine law, a corporation may invest its funds in any other corporation or business or
for any purpose other than the primary purpose for which it was organized when approved by a
majority of the board of directors and ratified by the shareholders representing at least two-thirds of
the outstanding capital stock, at a shareholders’ meeting duly called for the purpose; provided,
however, that where the investment by the corporation is reasonably necessary to accomplish its
primary purpose, the approval of the shareholders shall not be necessary.
SHARE CAPITAL
A Philippine corporation may issue common or preferred shares, or such other classes of shares
with such rights, privileges or restrictions as may be provided for in the articles of incorporation and
by-laws of the corporation. Subject to the approval by the Philippine SEC, a corporation may increase
or decrease its authorized capital stock, provided that the increase or decrease is approved by a
majority of the board of directors and by shareholders representing at least two-thirds of the
outstanding capital stock of the corporation voting at a shareholders’ meeting duly called for the
purpose.
A corporation is empowered to acquire its own shares for a legitimate corporate purpose,
provided that the corporation has unrestricted retained earnings or surplus profits sufficient to pay for
the shares to be acquired. Examples of circumstances where the corporation is allowed to purchase its
own shares are: elimination of fractional shares arising out of stock dividends, the purchase of shares
of dissenting shareholders exercising their appraisal right as referred to below and the collection or
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compromise of an indebtedness arising out of an unpaid subscription in a delinquency sale or to
purchase delinquent shares during such sale. When a corporation repurchases its own shares, the
shares become treasury shares, which may be resold at a reasonable price fixed by the board of
directors.
The Board is authorized to issue shares from the treasury from time to time. Treasury shares may
be issued to any person, corporation or association, whether or not a shareholder of the Company,
including the Company’s officers or employees for such consideration in money as the Board may
determine.
LIMITATIONS ON FOREIGN OWNERSHIP
In the event that the Company acquires land as part of its expansion plans, the Company will be
subject to nationality restrictions stipulated under the Philippine Constitution and other laws, limiting
ownership of companies who own land to citizens of the Philippines, or Philippine Nationals who are
corporations or associations organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding is owned and held by citizens of the Philippines. The Company is thus
constrained to keep the foreign equity interest in it below the 40% threshold and any sale or transfer
of Shares in excess of this threshold shall not be recorded in the Company’s stock and transfer book.
If all the Offer Shares are sold to person or entities that are not Philippine Nationals, the
Company will still be considered a Philippine National.
RIGHTS RELATING TO SHARES
Voting Rights
The Company’s Shares have full voting rights. Each common share entitles the holder to one
vote. Members of the Board are elected by the shareholders at the annual shareholders’ meeting.
Cumulative voting is allowed whereby a shareholder may cumulate his votes by giving one candidate
as many votes as the number of directors to be elected multiplied by the number of his Shares. The
Philippine Corporation Code provides that voting rights cannot be exercised with respect to shares
declared delinquent, treasury shares, or if the shareholder has elected to exercise his right of appraisal
referred to below.
Dividend Rights
The Shares shall have full dividend rights. Dividends on the Shares, if any, are paid in
accordance with Philippine Law. Dividends are payable to all shareholders on the basis of outstanding
Shares held by them, each Share being entitled to the same unit of dividend as any other Share.
Dividends are payable to shareholders whose names are recorded in the stock and transfer book as of
the record date fixed by the Board. The PDTC has an established mechanism for distribution of
dividends to beneficial owners of Shares which are traded through the PSE and lodged with the PDTC
as required for scripless trading.
Under Philippine law, a corporation can only declare dividends to the extent that it has
unrestricted retained earnings that represent the undistributed earnings of the corporation which have
not been allocated for any managerial, contractual or legal purposes and which are free for distribution
to the shareholders as dividends. A corporation may pay dividends in cash, by the distribution of
property or by the issuance of shares. Dividends may be declared by the board of directors except for
stock dividends which may only be declared and paid with the approval of shareholders representing
at least two-thirds of the issued and outstanding capital stock of the corporation voting at a
shareholders’ meeting duly called for the purpose.
The Philippine Corporation Code generally requires a Philippine corporation with retained
earnings in excess of 100% of its paid-in capital to declare and distribute as dividends the amount of
169
such surplus. Notwithstanding this general requirement, a Philippine corporation may retain all or any
portion of such surplus in the following cases: (i) when justified by definite expansion plans approved
by the board of directors of the corporation; (ii) when the required consent of any financing institution
or creditor to such distribution has not been secured; (iii) when retention is necessary under special
circumstances, such as when there is a need for special reserves for probable contingencies; or (iv)
when the non-distribution of dividends is consistent with the policy or requirement of a Government
office.
Philippine corporations whose securities are listed on any stock exchange are required to
maintain and distribute an equitable balance of cash and stock dividends, consistent with the needs of
shareholders and the demands for growth or expansion of the business.
See “Dividends and Dividend Policy” beginning on page 59 of this Prospectus.
Pre-emptive Rights
The Philippine Corporation Code confers pre-emptive rights on shareholders of a Philippine
corporation entitling such shareholders to subscribe for all issues or other dispositions of
equity-related securities by the corporation in proportion to their respective shareholdings, regardless
of whether the equity-related securities proposed to be issued or otherwise disposed of are identical
to the shares held. A Philippine corporation may, however, provide for the denial of these pre-emptive
rights in its articles of incorporation. The Company’s articles of incorporation currently contain such
a denial of pre-emptive rights on all classes of shares issued by the Company and therefore further
issues of shares can be made without offering such shares on a pre-emptive basis to the existing
shareholders.
Derivative Rights
Philippine law recognizes the right of a shareholder to institute proceedings on behalf of the
corporation in a derivative action in circumstances where the corporation itself is unable or unwilling
to institute the necessary proceedings to redress wrongs committed against the corporation or to
vindicate corporate rights as, for example, where the directors themselves are the malefactors.
Appraisal Rights
The Philippine Corporation Code grants a shareholder a right of appraisal in certain
circumstances where he has dissented and voted against a proposed corporate action, including:
•
an amendment of the articles of incorporation which has the effect of adversely affecting
the rights attached to his shares or of authorizing preferences in any respect superior to
those of outstanding shares of any class or of extending or shortening the term of corporate
existence;
•
the sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially
all the assets of the corporation;
•
a merger or consolidation; and
•
investment by the corporation of funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized.
In these circumstances, the dissenting shareholder may require the corporation to purchase its
shares at a fair value, which in default of agreement is determined by three disinterested persons, one
of whom shall be named by the shareholder, one by the corporation, and the third by the two thus
chosen. Regional Trial Courts will, in the event of a dispute, determine any question about whether
a dissenting shareholder is entitled to this right of appraisal. The remedy will only be available if the
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corporation has unrestricted retained earnings sufficient to support the purchase of the shares of the
dissenting shareholders. From the time the shareholder makes a demand for payment until the
corporation purchases such shares, all rights accruing on the shares, including voting and dividend
rights, shall be suspended, except the right of the shareholder to receive the fair value of the share.
Right of Inspection
A shareholder has the right to inspect the records of all business transactions of the corporation
and the minutes of any meeting of the board of directors and shareholders at reasonable hours on
business days and may demand a copy of excerpts from such records or minutes at his or her expense.
However, the corporation may refuse such inspection if the shareholder demanding to examine or copy
the corporation’s records has improperly used any information secured through any prior examination,
or was not acting in good faith or for a legitimate purpose in making his demand.
Right to Financial Statements
A shareholder has a right to be furnished with the most recent financial statement of a Philippine
corporation, which shall include a balance sheet as of the end of the last taxable year and a profit or
loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the
results of its operations. At the meeting of shareholders, the board of directors is required to present
to the shareholders a financial report of the operations of the corporation for the preceding year, which
shall include financial statements duly signed and certificate by an independent certified public
accountant.
BOARD OF DIRECTORS
Unless otherwise provided by law, the corporate powers of the Company are exercised, its
business is conducted, and its property is controlled, by the Board. The Company has nine Directors,
two of which are independent Directors within the meaning set out in Section 38 of the SRC. Each
Director shall have a term of one year. The Board shall be elected during each regular meeting of
shareholders at which shareholders representing at least a majority of the issued and outstanding
capital stock are present, either in person or by proxy.
Under Philippine law, representation of foreign ownership on the Board is limited to the
proportion of the foreign shareholding. Directors may only act collectively; individual directors have
no power as such. Five directors, which is a majority of the Board, constitute a quorum for the
transaction of corporate business. Except for certain corporate actions such as the election of officers,
which shall require the vote of a majority of all the members of the Board, every decision of a majority
of the quorum duly assembled as a board is valid as a corporate act.
Any vacancy created by the death, resignation or removal of a director prior to expiration of such
director’s term may be filled by a vote of at least a majority of the remaining members of the Board,
if still constituting a quorum; otherwise, the vacancy must be filled by the shareholders at a meeting
duly called for the purpose. Any director elected in this manner by the Board shall serve only for the
unexpired term of the director whom such director replaces and until his successor is duly elected and
qualified.
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SHAREHOLDERS’ MEETINGS
Annual or Regular Shareholders’ Meetings
The Philippine Corporation Code requires all Philippine corporations to hold an annual meeting
of shareholders for corporate purposes including the election of directors. The Company’s by-laws
provide for annual meetings on the first Monday of June of each year at the Company’s principal
office. If the date of the annual meeting falls on a legal holiday, the annual meeting shall be held on
the next succeeding business day, which is not a legal holiday, at such hour as may be specified in the
notice of said meeting.
Special Shareholders’ Meeting
Special meetings of shareholders, for any purpose or purposes, may at any time be called by: (a)
the Board of Directors, at its own instance, or at the written request of shareholders representing a
majority of the outstanding capital stock; or (b) the President.
Notice of Shareholders’ Meeting
Whenever shareholders are required or permitted to take any action at a meeting, a written notice
of the meeting shall be given which shall state the place, date, and time of the meeting, and purposes
for which said meeting is called. Under the Company’s by-laws, as amended, notice of a shareholder’s
meeting must be sent to all shareholders of record, at least two weeks prior to the date of the meeting.
The Company is required under the SRC to send to its shareholders of record at least 15 business days
prior to the date of the annual or special meeting, an information statement and proxy form (in case
of proxy solicitation) relating to such shareholders’ meeting. Notices of a shareholders meeting shall
be sent by the Corporate Secretary by personal delivery or by mailing the notice to each shareholder
of record at his last known address or by publication in a newspaper of general circulation. Notice of
any meeting may be waived, expressly or impliedly, by any shareholder, in person or by proxy, before
or after the meeting.
The notice shall state the place, date and hour of the meeting, and the purpose or purposes for
which the meeting is called. In case of special meetings, only matters stated in the notice can be the
subject of motions or deliberations at such meeting. Notice of any meeting may be waived, expressly
or impliedly, by any shareholder, in person or by proxy, before or after the meeting.
When the meeting of shareholders is adjourned to another time or place, it shall not be necessary
to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned
are announced at the meeting at which the adjournment is taken. At the reconvened meeting, any
business may be transacted that might have been transacted on the original date of meeting.
Quorum
Unless otherwise provided by an existing shareholders’ agreement or by law, in all regular or
special meeting of shareholders, shareholders who own or hold a majority of the outstanding capital
shares must be present or represented in order to constitute a quorum, except in those cases where the
Philippine Corporation Code provides a greater percentage vis-a-vis the total outstanding capital
shares. If no quorum is constituted, the meeting shall be adjourned until shareholders who own or hold
the requisite number of shares shall be present or represented.
Voting
At each meeting of the shareholders, every shareholder who has voting power upon the matter
in question shall be entitled to vote in person or by proxy executed in writing by the shareholder or
his duly authorized attorney-in-fact, for each share held by such shareholder.
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Fixing Record Dates
The Company’s by-laws provide that for purposes of determining the shareholders entitled to
notice of, or to vote or be voted at any meeting of shareholders, or entitled to receive payment of any
dividends or other distribution or allotment of any rights, or to exercise the rights in respect of any
change, conversion or exchange of the capital stock, the Board of Directors may provide that the stock
and transfer books be closed for at least ten working days preceding the date of any meeting of
shareholders, or the date that the allotment of rights or capital stock shall go into effect. In lieu of
closing the stock and transfer book, the directors may also fix in advance a date as the record date for
any such determination of shareholders, provided, that any record date so set shall in no case be less
than ten working days prior to the date of the relevant meeting of shareholders or the date when the
payment of dividend or allotment of rights shall take effect.
Notwithstanding the provisions of the Company’s by-laws on the setting of the record dates, the
Philippine SEC may, from time to time, promulgate rules for listed companies such as the Company
relating to the fixing of such record dates. Under existing Philippine SEC rules, cash dividends
declared by corporations whose shares are listed on the PSE shall have a record date which shall not
be less than ten and not more than 30 days from the date of declaration. With respect to stock
dividends, the record date shall not be less than ten nor more than 30 days from the date of shareholder
approval; provided, however, that the record date set shall not be less than ten trading days from
receipt by the PSE of the notice of declaration of stock dividend. In the event that a stock dividend
is declared in connection with an increase in authorized capital stock, the corresponding record date
shall be fixed by the Philippine SEC.
PROXIES
Shareholders may vote at all meetings the number of shares registered in their respective names,
either in person or by proxy duly given in writing and duly presented to and received by the Corporate
Secretary for inspection and recording not later than ten days before the time set for the meeting. No
proxy bearing the signature that is not legally acknowledged by the Corporate Secretary shall be
honored at the meetings. Unless otherwise provided in the proxy, it shall be valid only for the meeting
at which it has been presented to the Corporate Secretary.
No member of the PSE and no broker/dealer shall give any proxy, consent or authorization, in
respect of any securities carried for the account of a customer to a person other than the customer,
without the express written authorization of such customer. The proxy executed by the broker shall be
accompanied by a certification under oath stating that before the proxy was given to the broker, he had
duly obtained the written consent of the persons in whose account the shares are held.
There shall be a presumption of regularity in the execution of proxies and proxies shall be
accepted if they have the appearance of prima facie authenticity in the absence of a timely and valid
challenge.
Proxies should comply with the relevant provisions of the Philippine Corporation Code, the SRC,
the Implementing Rules and Regulations of the SRC (as amended), and Philippine SEC Memorandum
Circular No. 5 (series of 1996) issued by the Philippine SEC.
TRANSFER OF COMMON SHARES AND SHARE REGISTER
All transfers of shares on the PSE shall be effected by means of a book-entry system. Under the
book-entry system of trading and settlement, a registered shareholder shall transfer legal title over the
shares to such nominee, but retains beneficial ownership over the shares. The transfer of legal title is
done by surrendering the stock certificate representing the shares to participants of the PDTC System
173
(i.e., brokers and custodian banks) that, in turn, lodge the same with the PCD Nominee. A shareholder
may request upliftment of the shares from the PDTC, in which case a certificate of stock will be issued
to the shareholder and the shares registered in the shareholder’s name in the books of the company.
See “The Philippine Stock Market” beginning on page 176 of this Prospectus.
Philippine law does not require transfers of the Company’s Shares to be effected on the PSE, but
any off-exchange transfers will subject the transferor to a capital gains tax that may be significantly
greater than the stock transfer tax applicable to transfers effected on an exchange. See “Philippine
Taxation” beginning on page 182 of this Prospectus. All transfers of Shares on the PSE must be
effected through a licensed stockbroker in the Philippines.
ISSUES OF SHARES
Subject to otherwise applicable limitations, the Company may issue additional Shares to any
person for consideration deemed fair by the Board, provided that such consideration shall not be less
than the par value of the issued Shares. No share certificates shall be issued to a subscriber until the
full amount of the subscription together with interest and expenses (in case of delinquent Shares) has
been paid and proof of payment of the applicable taxes shall have been submitted to the Company’s
Corporate Secretary. Under the PSE Rules, only fully-paid shares may be listed on the PSE.
SHARE CERTIFICATES
Certificates representing the Shares will be issued in such denominations as shareholders may
request, except that certificates will not be issued for fractional shares. Shareholders wishing to split
their certificates may do so upon application to the Company’s stock transfer agent. Shares may also
be lodged and maintained under the book-entry system of the PDTC. See “The Philippine Stock
Market” beginning on page 176 of this Prospectus.
MANDATORY TENDER OFFER
In general, under the SRC and its implementing rules and regulations, it is mandatory for any
person or group of persons acting in concert and intending to acquire at least (a) 35% of (i) any class
of any equity security of a corporation listed in the Philippines or (ii) any class of any equity security
of a Philippine corporation with assets of at least =
P 50 million and having 200 or more shareholders
with at least 100 shares each; (b) 35% of such equity over a period of 12 months; or (c) less than 35%
of such equity that would result in ownership of over 51% of the total outstanding equity, to make a
tender offer to all the shareholders of the target corporation on the same terms. Generally, in the event
that the securities tendered pursuant to such an offer exceed that which the acquiring person or group
of persons is willing to take up, the securities shall be purchased from each tendering shareholder on
a pro rata basis, disregarding fractions, according to the number of securities tendered by each security
holder. In the event that the tender offer is oversubscribed, the aggregate amount of securities to be
acquired at the close of such tender offer shall be proportionately distributed to both the selling
shareholders with whom the acquirer may have been in private negotiations and minority shareholders.
Where a mandatory tender offer is required, the acquirer is compelled to offer the highest price paid
by him for such shares during the past six months. Where the offer involves payment by transfer or
allotment of securities, such securities must be valued on an equitable basis. However, if any
acquisition of even less than 35% would result in ownership of over 51% of the total outstanding
equity, the acquirer shall be required to make a tender offer for all the outstanding equity securities
to all remaining shareholders of the said corporation at a price supported by a fairness opinion
provided by an independent financial adviser or equivalent third party. The acquirer in such a tender
offer shall be required to accept any and all securities thus tendered.
No Mandatory Tender Offer is required in: (i) purchases of shares from unissued capital shares
unless it will result a 50% or more ownership of shares by the purchaser; (ii) purchases from an
increase in the authorized capital shares of the target company; (iii) purchases in connection with a
foreclosure proceedings involving a pledge or security where the acquisition is made by the debtor or
174
creditor; (iv) purchases in connection with a privatization undertaken by the government of the
Philippines; (v) purchases in connection with corporate rehabilitation under court supervision; (vi)
purchases through an open market at the prevailing market price; or (vii) purchases resulting from a
merger or consolidation.
FUNDAMENTAL MATTERS
The Philippine Corporation Code provides that certain significant acts may only be implemented
with shareholders’ approval. The following require the approval of shareholders representing at least
two-thirds of the issued and outstanding capital stock of the corporation:
•
amendment of the articles of incorporation;
•
removal of directors;
•
sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of
the assets of the corporation;
•
investment of corporate funds in any other corporation or business or for any purpose other
than the primary purpose for which the corporation was organized;
•
delegation to the board of directors of the power to amend or repeal by-laws or adopt new
by-laws;
•
merger or consolidation;
•
an increase or decrease in capital stock;
•
extension or shortening of the corporate term;
•
creation or increase of bonded indebtedness; and
•
declaration of stock dividends.
The approval of shareholders holding a majority of the outstanding capital shares of a Philippine
corporation, including non-voting preferred shares, is required for the adoption or amendment of the
by-laws of such corporation.
ACCOUNTING AND AUDITING REQUIREMENTS
Philippine stock corporations are required to file copies of their annual consolidated financial
statements with the Philippine SEC. Corporations whose shares are listed on the PSE are also required
to file quarterly consolidated financial statements (for the first three quarters) with the Philippine SEC
and the PSE. Shareholders are entitled to request copies of the most recent financial statements of the
corporation which include a statement of financial position as of the end of the most recent tax year
and a profit and loss statement for that year. Shareholders are also entitled to inspect and examine the
books and records that the corporation is required by law to maintain.
The Board is required to present to shareholders at every annual meeting a financial report of the
operations of the Company for the preceding year. This report is required to include audited
consolidated financial statements.
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THE PHILIPPINE STOCK MARKET
Information presented in this section has been sourced from publicly available documents. The
Company, the Joint Global Coordinators and Bookrunners or any of their respective subsidiaries,
affiliates or advisers make no representation as to the veracity and accuracy of this information.
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-regulatory, governed by its respective Board of Governors elected annually by its members.
Several steps initiated by the government have resulted in the unification of the two bourses into
the PSE. The PSE was incorporated in 1992 by officers of both the Makati and the Manila Stock
Exchanges. 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 bids, and ask quotations from
the bourses.
In June 1998, the Philippine SEC granted the PSE Self-Regulatory Organization status, allowing
it to impose rules as well as enforce penalties on erring trading participants and listed companies. On
August 8, 2001, the PSE completed its demutualization, converting from a non-stock membergoverned institution into a stock corporation in compliance with the requirements of the SRC. The PSE
P 61.058 million is subscribed and fully
has an authorized capital stock of =
P 120 million, of which =
paid-up. Each of the 184 member-brokers was granted 50,000 shares of the new PSE at a par value
of =
P 1.00 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.
Classified into financial, industrial, holding firms, property, services, and mining and oil sectors,
companies are listed either on the PSE’s Main Board or the Small, Medium and Emerging Board.
Previously, the PSE allowed listing on the First Board, Second Board or the Small, Medium and
Enterprises Board. With the issuance by the PSE of Memorandum No. CN-No. 2013-0023 dated June
6, 2013, revisions to the PSE Listing Rules were made, among which changes are the removal of the
Second Board listing and the requirement that lock-up rules be embodied in the articles of the
incorporation of the Issuer. Each index represents the numerical average of the prices of component
stocks. The PSE shifted from full market capitalization to free float market capitalization effective as
of April 3, 2006 simultaneous with the migration to the free float index and the renaming of the
PHISIX to PSEi. The PSEi is composed of 30 selected stocks 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 public investors.
176
The table below sets out movements in the composite index as of the last business day of each
calendar year from 2000 to 2013 and shows the number of listed companies, market capitalization, and
value of shares traded for the same period:
Aggregate Market
Combined Value
Composite Index
Number of Listed
Capitalization
of Turnover
at Closing
Companies
(=
P billions)
(=
P billions)
2000 ....................................................
1,494.5
226
2,576.5
357.5
2001 ....................................................
1,168.1
228
2,143.3
159.5
2002 ....................................................
1,014.4
232
2,083.2
159.7
2003 ....................................................
1,442.4
235
2,973.8
145.4
2004 ....................................................
1,822.8
236
4,766.2
206.6
2005 ....................................................
2,096.0
237
5,948.4
383.5
2006 ....................................................
2,982.5
240
4,277.8
572.6
2007 ....................................................
3,621.6
244
7,977.6
1,338.3
2008 ....................................................
1,872.9
246
4,069.2
763.9
2009 ....................................................
3,052.7
248
6,029.1
994.2
2010 ....................................................
4,201.1
253
8,866.1
1,210.0
2011 ....................................................
4,372.0
253
8,697.0
1,422.6
2012 ....................................................
5,812.7
254
10,930.1
1,771.7
2013 ....................................................
5,889.8
257
11,931.3
2,546.2
Year
Trading
The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To
trade, bid 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 of purchases
of listed securities must be made by the buyer on or before the third trading day (the settlement date)
after the trade.
Trading on the PSE runs from at 9:30 a.m. until 12:00 p.m., followed by a one and a half hour
break. Trading resumes at 1:30 p.m. in the afternoon and ends at 3:30 p.m., inclusive of a 10-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 and days when the BSP clearing house is closed.
Minimum trading lots range from 5 to 1,000,000 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% or down by 50% 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 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 a reasonable explanation, a trading
halt is imposed by the PSE on the listed security the following day. Resumption of trading shall be
allowed only when the disclosure of the company is disseminated, subject again to the trading ban.
177
Non-Resident Transactions
When the purchase/sale of Philippine shares involves a non-resident, whether the transaction is
effected in the domestic or foreign market, it will be the responsibility of the securities dealer/broker
to register the transaction with the BSP. The local securities dealer/broker shall file with the BSP,
within three business days from the transaction date, an application in the prescribed registration form.
After compliance with other required undertakings, the BSP shall issue a Certificate of Registration.
Under BSP rules, all registered foreign investments in Philippine securities including profits and
dividends, net of taxes and charges, may be repatriated.
Settlement
The Securities Clearing Corporation of the Philippines (“SCCP”) is a wholly-owned subsidiary
of the PSE, 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: (1) 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; (2)
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; (3) performance of Risk Management and Monitoring to ensure final
and irrevocable settlement.
SCCP settles PSE trades on a three-day rolling settlement environment, which means that
settlement of trades takes place three 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
Philippine Depository & Trust Corporation’s (“PDTC”, formerly the Philippine Central Depository,
Inc.) book entry system. Each Trading Participant maintains a Cash Settlement Account with one of
the five existing Settlement Banks of SCCP which are Banco De Oro Unibank, Inc. (“BDO”), Rizal
Commercial Banking Corporation (“RCBC”), Metropolitan Bank & Trust Company (“Metrobank”),
Deutsche Bank, Union Bank of the Philippines (“Unionbank”), The Hongkong and Shanghai Banking
Corporation Limited and Maybank Philippines, Inc. (“Maybank”). 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.
Scripless Trading
In 1995, the PDTC, 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 non-PSE 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, BDO, RCBC, Metrobank, Deutsche
Bank, Unionbank, The Hongkong and Shanghai Banking Corporation Limited and Maybank.
178
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 cancelled by the transfer agent and the
corresponding transfer of beneficial ownership of the immobilized shares in the account of PCD
Nominee 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 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 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 SCCP and into the PDTC system. Once it is determined on the settlement date (T+3) 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 CCCS, 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 shareholder 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 shareholder the legal title to the
shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedure 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 the shares
in the issuing corporations’ books. In the depository set-up, shares are simply immobilized, wherein
customers’ certificates are cancelled and a confirmation advice is issued in the name of PCD Nominee
Corp. 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 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.
179
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 SRC. 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 PSE’s Revised Listing Rules.
For listing applications, the amended rule on lodgment of securities is applicable to:
a.
The offer shares/securities of the applicant company in the case of an initial public offering;
b.
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;
c.
New securities to be offered and applied for listing by an existing listed company; and
d.
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 of 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 a confirmation date.”
Issuance of Stock Certificates for Certificated Shares
On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply
with PDTC through his broker or custodian-participant for withdrawal from the book-entry system and
return to the conventional paper-based settlement. If a shareholder wishes to withdraw his
stockholdings from the PDTC system, the PDTC has a procedure of upliftment under which the PCD
Nominee will transfer back to the shareholder the legal title to the shares lodged. The uplifting
shareholder shall follow the Rules and Operating Procedures of the PDTC for the uplifting of the
shares lodged under the name of the PCD Nominee. The transfer agent shall prepare and send a
Registry Confirmation Advice to the PDTC covering the new number of shares lodged under the PCD
Nominee. The expenses for upliftment are on the account of the uplifting shareholder.
Upon the issuance of stock certificates for the shares in the name of the person applying for
upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement
system, and trading on such shares will follow the normal process for settlement of certificated
securities. The expenses for upliftment of the shares into certificated securities will be charged to the
person applying for upliftment. Pending completion of the upliftment process, the beneficial interest
in the shares covered by the application for upliftment is frozen and no trading and book-entry
settlement will be permitted until the relevant stock certificates in the name of the person applying for
upliftment shall have been issued by the relevant company’s transfer agent.
180
PHILIPPINE FOREIGN EXCHANGE CONTROLS
Under current BSP regulations, an investment in listed Philippine securities (such as the Shares)
must be registered with the BSP if the foreign exchange needed to service the repatriation of capital
and the remittance of dividends, profits and earnings derived from such Shares is to be sourced from
the Philippine banking system. If the foreign exchange required to service capital repatriation or
dividend remittance is sourced outside the Philippine banking system, registration is not required. BSP
Circular No. 471 (Series of 2005), however, subjects foreign exchange dealers and money changers
to Republic Act No. 9160 (the Anti-Money Laundering Act of 2001, as amended) and requires these
non-bank sources of foreign exchange to require foreign exchange buyers to submit, among others, the
original BSP registration document in connection with their application to purchase foreign exchange
exceeding US$5,000 for purposes of capital repatriation and remittance of dividends.
The application for registration may be done directly with the BSP or through a custodian bank
duly designated by the foreign investor. A custodian bank may be a commercial bank or an offshore
banking unit registered with the BSP to act as such and 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. Applications for registration must be accompanied
by: (1) purchase invoice, subscription agreement and proof of listing on the PSE (either or both); and,
(2) the original Certificate of Inward Remittance of foreign exchange and its conversion to Pesos
through an authorized agent bank of the BSP in the format prescribed by the BSP.
Upon registration of the investment, proceeds of divestments, or dividends of registered
investments are repatriable or remittable immediately and in full through the Philippine banking
system, net of applicable tax, without need of BSP approval. Capital repatriation of investments in
listed securities is permitted upon presentation of the BSP registration document and the broker’s sales
invoice, at the exchange rate prevailing at the time of purchase of the foreign exchange from the
banking system. Remittance of dividends is permitted upon presentation of: (1) the BSP registration
document; (2) the cash dividends notice from the PSE and the PCD printout of cash dividend payment
or computation of interest earned; (3) copy of secretary’s sworn statement on the board resolution
covering the dividend declaration; and (4) detailed computation of the amount applied for in the
format prescribed by the BSP. Pending reinvestment or repatriation, divestment proceeds, as well as
dividends of registered investments, may be lodged temporarily in interest-bearing deposit accounts.
Interest earned thereon, net of taxes, and may also be remitted in full. Remittance of divestment
proceeds or dividends of registered investments may be reinvested in the Philippines if the
investments are registered with the BSP or the investor’s custodian bank.
The foregoing is subject to the power of the BSP, through the Monetary Board, with the approval
of the President of the Philippines, to suspend temporarily or restrict the availability of foreign
exchange, require licensing of foreign exchange transactions or require delivery of foreign exchange
to the BSP or its designee during an exchange crisis, when an exchange crisis is imminent, or in times
of national emergency.
The registration with the BSP of all foreign investments in the Offer Shares shall be the
responsibility of the foreign investor.
181
PHILIPPINE TAXATION
Statements made concerning taxation laws in the Philippines are based on those laws currently
in force as of the date of this Prospectus and do not take into consideration any changes in law
occurring after such date. The following summary is not and does not purport to be a comprehensive
description of all the tax implications relevant to any decision to invest in the Shares. It also does not
deal with the tax implications applicable to all types and categories of investors, some of which may
be subject to specific laws and regulations. Interested buyers of the Shares are advised to consult their
own tax advisers concerning the tax implications of their investment in the Shares.
Corporate Income Tax
The National Internal Revenue Code, or Republic Act No. 8424, as amended, as a general rule,
imposes on domestic corporations a tax of 30% on its taxable income from all sources within and
outside the Philippines. A minimum corporate income tax of 2% of the gross income of the corporation
as of the end of the taxable year, beginning on the fourth taxable year in which the corporation
commenced its business operations, may be imposed in lieu of the ordinary income tax if the minimum
corporate income tax is greater than the computed ordinary income tax for the taxable year.
The law allows the corporation to carry forward and credit against the ordinary corporate income
tax, for three immediately succeeding taxable years, any excess of the minimum corporate income tax
over the ordinary income tax. Further, the Secretary of Finance is authorized to suspend the imposition
of the minimum corporate income tax on any corporation which suffers losses on account of a
prolonged labor dispute, force majeure, or legitimate business reverses.
Note that, among other exceptions, the rates of tax on certain passive incomes are different from
the 30% rate imposed on ordinary income tax, such as:
Interest from deposits and yield or any
other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements, and royalties
Final tax of 20%
Capital gains from sale of shares of stock
not traded in the stock exchange
Not over =
P 100,000.00 — Final tax of 5%
Amount in excess of =
P 100,000.00 — Final tax of
10%
Interest income derived from a depository
bank under the expanded foreign currency
deposit system
Final tax of 7.5%
Dividends received by a domestic
corporation or a resident foreign
corporation from another domestic
corporation (Intercorporate Dividends)
None
Capital gains realized from the sale,
exchange or disposition of lands and
buildings
Final tax of 6%
182
Tax on Dividends
A final tax of 10% is imposed upon cash and property dividends actually or constructively
received by individual shareholders, who are either citizens or residents of the Philippines, from a
domestic corporation. A final tax of 20% is imposed upon cash and property dividends actually or
constructively received by non-resident alien individuals engaged in trade or business in the
Philippines, while a final tax of 25% is imposed upon cash and property dividends actually or
constructively received by non-resident alien individuals not engaged in trade or business in the
Philippines. In the case of non-resident alien individuals, preferential tax rates under specific tax
treaties executed by the Philippines and the country of residence or domicile of the non-resident alien
may apply.
As already mentioned, intercorporate dividends received by a domestic corporation or a resident
foreign corporation from another domestic corporation are not subject to tax. Cash and property
dividends issued to and received by non-resident foreign corporations, on the other hand, are generally
subject to a final withholding tax at the rate of 30%, without prejudice to the applicability of specific
tax treaties, which allows for preferential tax rates, executed by the Philippines and the country of
residence or domicile of the non-resident corporation. The regular tax rate of 30% may be further
reduced if the domicile-country of the non-resident foreign corporation shall allow a credit against the
tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to at least 15%, which represents the difference between the regular income tax rate of 30%
and the 15% tax on dividends.
Note that there are certain procedures that must be followed to avail of preferential tax rates
under specific tax treaties. If the Bureau of Internal Revenue (“BIR”) approves an application for tax
treaty relief, a company shall withhold taxes using the preferential rates on dividends to be paid to a
non-resident holder. If the regular tax rate is imposed notwithstanding the applicability of preferential
rates under a tax treaty, the non-resident shareholder may file a claim for refund from the BIR.
Stock dividends distributed to shareholders are not subject to Philippine income tax. However,
the subsequent sale, exchange or disposition of such shares is subject to capital gains or stock
transaction taxes.
Sale, Barter, Exchange or Disposition of Shares through an Initial Public Offering
The sale, barter, exchange or other disposition through initial public offering of shares of stock
in closely-held corporations (defined as any corporation where at least 50% in value of the outstanding
capital stock or at least 50% 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) is subject to a tax at the rates
provided below based on the gross selling price or the gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed of in accordance with the proportion of shares of stock
sold, bartered, exchanged or otherwise disposed of to the total outstanding shares of stock after the
listing in the local stock exchange:
Up to 25%
4%
Over 25% but not over 33 1/3%
2%
Over 33 1/3%
1%
The tax imposed on the sale, barter, exchange or other disposition of shares of stock through an
initial public offering shall be paid by the issuing corporation.
183
Capital Gains from Sale of Shares of Stock Not Traded on the Stock Exchange
A final tax at the rates provided below shall be imposed on the net capital gains realized by a
resident or non-resident, other than a dealer of securities, during the taxable year, from the sale,
exchange or other disposition of shares of stock in a domestic corporation outside of the facilities of
the PSE, unless preferential rates under a specific tax treaty applies:
Gains not exceeding =
P 100,000.00
Gains over
5%
=
P 100,000.00
10%
For the preferential tax rates under specific tax treaties to apply, an application for tax treaty
relief must be filed with and approved by the BIR.
Note that, if the fair market value of the shares of stock sold is greater than the actual
consideration or selling price, the amount by which the fair market value of the shares exceeds the
selling price shall be deemed a gift subject to donor’s tax under applicable provisions of the National
Internal Revenue Code.
Tax on Sale, Barter, Exchange or Disposition of Shares of Stock Listed and Traded through the
PSE
The sale, barter, exchange or disposition of shares of stock listed and traded through the PSE,
other than by a dealer of securities, and in lieu of a capital gains tax, is subject to a tax at the rate
of 0.5% of the gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or disposed, unless an applicable tax treaty exempts such sale from the said tax. This tax
is collected and paid to the government by the selling stockbroker on behalf of his client.
In addition, a value-added tax of 12% is imposed on the commission earned by the stockbroker,
which is generally passed on to the client.
Listed companies which fail to maintain, at all times, a minimum percentage of listed securities
held by the public at 10% of the listed companies’ issued and outstanding shares (“Minimum Public
Ownership”) shall be subject to a trading suspension for a period of not more than six months. The
sale, barter, transfer and/or assignment of shares of listed companies that fail to meet the Minimum
Public Ownership requirement will be subject to capital gains and documentary stamp taxes.
Documentary Stamp Tax
The original issuance of shares of stock is subject to a documentary stamp tax of =
P 1.00 for every
=
P 200.00 par value, or a fraction thereof, of the shares of stock issued. The transfer of shares of stock
P 200.00 par value, or a fractional part
is subject to a documentary stamp tax of =
P 0.75 for each =
thereof, of the share of stock transferred.
The sale, barter, exchange or disposition of shares of stock listed and traded on the PSE is not
subject to documentary stamp tax.
Finally, the borrowing and lending of securities executed under the securities borrowing and
lending program of a registered exchange, or in accordance with regulations prescribed by the
appropriate regulatory authority, are exempt from documentary stamp taxes, provided that any
borrowing or lending of securities agreement should be duly covered by a master securities borrowing
and lending agreement acceptable to the appropriate regulatory authority and should by duly
registered and approved by the BIR.
184
Estate and Gift Taxes
Generally, the transfer of shares of stock upon the death of an individual holder to his heir is
subject to tax at rates ranging from 5% to 20%, assuming that the value of the net estate of the
deceased is over =
P 200,000.00. On the other hand, individuals and corporations who transfer shares
of stock by way of gift or donation are liable to pay donors’ tax on such transfer ranging from 2% to
15% (or a flat rate of 30% under certain conditions) of the value of the net gifts for the year exceeding
=
P 100,000.00.
Intangible personal property, such as shares of stock, are exempt from estate or donors’ taxes
under the following conditions:
(1)
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 with respect to intangible personal property of citizens of the
Philippines not residing in that foreign country; or
(2)
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.
Tax Laws Outside of the Philippines
The tax treatment of a non-resident shareholder in jurisdictions outside of the Philippines may
vary depending on the tax laws applicable to such non-resident shareholder in connection with its
domicile, business activities or unique circumstances. This Prospectus does not discuss possible tax
considerations of non-resident shareholders under foreign laws.
Prospective shareholders must consult with their tax advisers as to the particular tax implications
of purchasing, owning and disposing of the Shares, which consultation must include the applicability
and effect of foreign laws.
185
PLAN OF DISTRIBUTION
At least 604,957,903 Firm Shares are being offered for subscription (i) outside the Philippines
to persons outside the United States by the International Lead Managers and Underwriters, and (ii) to
Domestic QIBs in the Philippines by the Sole Domestic Lead Manager and Underwriter (the
“Institutional Offer”). 259,267,600 Firm Shares (the “Trading Participants and Retail Offer Shares”),
or 30% of the Firm Shares, are being offered by the Sole Domestic Lead Manager and Underwriter at
the Offer Price to all of the PSE Trading Participants and local small investors (“LSIs”) in the
Philippines (the “Trading Participants and Retail Offer”). The allocation of the Offer Shares between
the Trading Participants and Retail Offer and the Institutional Offer is subject to adjustment as agreed
between the Joint Global Coordinators and Bookrunners. The Sole Domestic Lead Manager and
Underwriter will underwrite, on a firm commitment basis, the Offer Shares relating to the Trading
Participants and Retail Offer and the Joint Global Coordinators and Bookrunners will underwrite, on
a firm commitment basis, the Offer Shares relating to the Institutional Offer. There is no arrangement
for the Joint Global Coordinators and Bookrunners to return any of the Offer Shares relating to the
Trading Participants and Retail Offer or the Institutional Offer to the Company.
THE TRADING PARTICIPANTS AND RETAIL OFFER
The Trading Participants and Retail Offer Shares shall initially be offered by the Sole Domestic
Lead Manager and Underwriter to all of the PSE Trading Participants and LSIs in the Philippines. The
PSE shall allocate approximately 172,845,100 Firm Shares, or 20% of the Firm Shares, among the PSE
Trading Participants. Each PSE Trading Participant shall initially be allocated approximately
1,299,500 Firm Shares (computed by dividing the Trading Participants and Retail Offer Shares
allocated to the PSE Trading Participants between 133 PSE Trading Participants) and subject to
reallocation as may be determined by the PSE. The balance of 11,600 Firm Shares shall be allocated
by the PSE to the PSE Trading Participants. In addition, approximately 86,422,500 Firm Shares, or
10% of the Firm Shares, shall be allocated to the LSIs. Prior to the closing of the Trading Participants
and Retail Offer, any allocation of Trading Participants and Retail Offer Shares not taken up by the
PSE Trading Participants and the LSIs shall be distributed by the Sole Domestic Lead Manager and
Underwriter to its clients or the general public in the Philippines or as otherwise agreed with the
International Lead Managers and Underwriters. Trading Participants and Retail Offer Shares not taken
up by the PSE Trading Participants, the clients of the Sole Domestic Lead Manager and Underwriter,
or the general public shall be purchased by the Sole Domestic Lead Manager and Underwriter pursuant
to the terms and conditions of the Domestic Underwriting Agreement.
To facilitate the Trading Participants and Retail Offer, the Company and the Selling Shareholders
have appointed BPI Capital Corporation to act as the Sole Domestic Lead Manager and Underwriter.
The Company, the Selling Shareholders and the Sole Domestic Lead Manager and Underwriter shall
enter into a Domestic Underwriting Agreement to be dated on or about October 23, 2014 (the
“Domestic Underwriting Agreement”), whereby the Sole Domestic Lead Manager and Underwriter
agrees to underwrite, on a firm commitment basis, any Firm Shares allocated in the Trading
Participants and Retail Offer, subject to agreement between the Joint Global Coordinators and
Bookrunners on any clawback, clawforward or other such mechanism, on a firm commitment basis.
BPI Capital Corporation is a Philippine corporation organized in the Philippines as a
wholly-owned subsidiary of Bank of the Philippine Islands. It obtained its license to operate as an
investment house in 1994 and is licensed by the SEC to engage in underwriting and distribution of
securities to the public. As of December 31, 2013, its total assets amounted to =
P 4,287 million and its
=
P 2.0 billion of which
capital base amounted to P 4,187 million. It has an authorized capital stock of =
approximately =
P 506.4 million represents its paid-up capital.
186
On or before October 29, 2014, the PSE Trading Participants shall submit to the designated
representative of the PSE Listing Department their respective firm orders and commitments to
purchase Offer Shares. Trading Participants and Retail Offer Shares not taken up by the PSE Trading
Participants and LSIs will be distributed by the Sole Domestic Lead Manager and Underwriter directly
to its clients and the general public and whatever remains will be purchased by the Sole Domestic Lead
Manager and Underwriter.
With respect to the LSIs, all applications to purchase or subscribe for 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 Sole Domestic Lead
Manager and Underwriter 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.
The Sole Domestic Lead Manager and Underwriter shall receive from the Company and the
Selling Shareholders a fee equivalent to 2.0% of the gross proceeds of the Trading Participants and
Retail Offer, inclusive of the amounts to be paid to the PSE Trading Participants. The underwriting
fees shall be withheld by the Sole Domestic Lead Manager and Underwriter from the proceeds of the
Trading Participants and Retail Offer. PSE Trading Participants who take up Trading Participants and
Retail Offer Shares shall be entitled to a selling fee of 1.0% of the Trading Participants and Retail
Offer Shares taken up and purchased by the relevant PSE Trading Participant; any such selling fees
will be shared among the Joint Global Coordinators and Bookrunners pro rata to their respective
underwriting commitments. The selling fee, less a withholding tax of 10%, will be paid by the Sole
Domestic Lead Manager and Underwriter to the PSE Trading Participants within ten banking days of
the Listing Date.
All of the Trading Participants and Retail Offer Shares are or shall be lodged with the PDTC and
shall be issued to the PSE Trading Participants and LSIs in scripless form. They may maintain the
Trading Participants and Retail Offer Shares in scripless form or opt to have the stock certificates
issued to them by requesting an upliftment of the relevant Trading Participants and Retail Offer Shares
from the PDTC’s electronic system after the Listing Date.
THE INSTITUTIONAL OFFER
At least 604,957,903 Firm Shares, or 70% of the Firm Shares, will be offered for subscription
(i) outside the Philippines to persons outside the United States by the International Lead Managers and
Underwriters, and (ii) to certain Domestic QIBs in the Philippines by the Sole Domestic Lead Manager
and Underwriter, in each case in offshore transactions in reliance on Regulation S under the US
Securities Act. The Institutional Offer includes the Cornerstone Shares allocated to Cornerstone
Investors.
The allocation of the Firm Shares between the Trading Participants and Retail Offer and the
Institutional Offer is subject to further adjustment as may be agreed between the Joint Global
Coordinators and Bookrunners. In the event of an under-application in the Institutional Offer and a
corresponding over-application in the Trading Participants and Retail Offer, Firm Shares in the
Institutional Offer may be reallocated to the Trading Participants and Retail Offer. If there is an
under-application in the Trading Participants and Retail Offer and if there is a corresponding
over-application in the Institutional Offer, Firm Shares in the Trading Participants and Retail Offer
may be reallocated to the Institutional Offer. The reallocation shall not apply in the event of
over-application or under-application in both the Trading Participants and Retail Offer and the
Institutional Offer.
187
The International Underwriting Agreement dated October 23, 2014 entered into among the
Company, the Selling Shareholders and the International Lead Managers and Underwriters, is subject
to certain conditions and may be subject to termination by the International Lead Managers and
Underwriters if certain circumstances, including force majeure, occur on or before the Offer Shares
are listed on the PSE. Under the terms and conditions of the International Underwriting Agreement,
each of the International Lead Managers and Underwriters has agreed, severally and not jointly, to
procure purchasers for or failing which to purchase the respective number of Institutional Offer Shares
indicated in the following table.
Number of
Institutional Offer Shares
Credit Suisse (Singapore) Limited ..........................................................................................
172,845,101
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch .......................
345,690,201
Total ......................................................................................................................................
518,535,302
In addition, pursuant to the Domestic Underwriting Agreement, the Sole Domestic Lead Manager
and Underwriter agrees to underwrite, on a firm commitment basis, the number of Institutional Offer
Shares indicated in the following table, subject to agreement between the Sole Domestic Lead
Manager and Underwriter and the International Lead Managers and Underwriters on any clawback,
clawforward or other such mechanism, on a firm commitment basis.
Number of
Institutional Offer Shares
BPI Capital Corporation .........................................................................................................
86,422,601
The foregoing tables do not reflect the exercise of the Over-allotment Option that may or may
not be exercised by Credit Suisse (Singapore) Limited or its relevant affiliate as Stabilizing Agent to
purchase up to 129,633,826 additional Shares.
The International Lead Managers and Underwriters and their respective affiliates have engaged
in transactions with, and have performed various investment banking, commercial banking and other
services for, the Company in the past, and may do so for the Company, the Selling Shareholders and
their respective subsidiaries and affiliates from time to time in the future. However, all services
provided by the International Lead Managers and Underwriters, including in connection with the
Offer, have been provided as independent contractors and not as fiduciaries to the Company or the
Selling Shareholders. The International Lead Managers and Underwriters do not have any right to
designate or nominate a member of the Board. The International Lead Managers and Underwriters
have no direct relationship with the Company in terms of share ownership and, other than as
International Lead Managers and Underwriters for the Offer, do not have any material relationship
with the Company. The International Lead Managers and Underwriters have agreed to underwrite, on
a firm commitment basis, 518,535,302 Institutional Offer Shares, or 60.0% of the Firm Shares.
Investors in the Institutional Offer (but not the Trading Participants and Retail Offer) will be
required to pay, in addition to the Offer Price, a brokerage fee of 1.0% of the Offer Price.
Cornerstone Investment Agreements
Concurrently with and as part of the Institutional Offer, each of the entities listed below (the
“Cornerstone Investors”, and each a “Cornerstone Investor”) has entered into a cornerstone investment
agreement with the Company, the Selling Shareholders and the Joint Global Coordinators and
Bookrunners to purchase an aggregate of not less than 335,616,000 Offer Shares (the “Cornerstone
Shares”) from the Company and the Selling Shareholders at a price of =
P 7.50 per Offer Share. The
Cornerstone Shares represent not less than 33.8% of the total Offer Shares (including the Optional
Shares).
188
The Offering is not conditional on the completion of the purchase of the Cornerstone Shares by
any of the Cornerstone Investors. Cornerstone Investors may also participate in the Offer by
purchasing Offer Shares through the book building process for the Offer Shares in addition to their
Cornerstone Shares. The purchase of Cornerstone Shares will not limit the number of Shares which
the Cornerstone Investors may purchase as part of the Offer.
The Cornerstone Investors
The following table sets out details of the Cornerstone Investors.
Investor
Bank of the Philippine Islands acting through its Asset
Description
One of the largest institutions in the investment community in
Management and Trust Group ................................................ the Philippines with approximately =
P 110 billion in local
equities as of August 2014. It manages a total of 26 unit
investment trust funds and has an advisory role to eight mutual
funds.
Capital Research and Management Company ......................... Capital Research and Management Company is incorporated in
the State of Delaware, United Sates. It is the investment
adviser to SMALLCAP World Fund, Inc. and American Funds
Insurance Series — Global Small Capitalization Fund.
Government Service Insurance System (“GSIS”) .................... The GSIS is a social insurance institution in the Philippines
created under Commonwealth Act Number 186 that was passed
on November 14, 1936. To secure the future of all employees
of the Philippine government, it provides and administers a
pension fund that has the following social security benefits:
compulsory life insurance, optional life insurance, retirement
benefits, and disability benefits for work-related accidents and
death benefits. Likewise, the GSIS manages the General
Insurance Fund as mandated by Republic Act 696 or the
Property Insurance Law. It provides comprehensive protection
to government insurable interest.
Havenport Asset Management Pte Ltd .................................... Havenport Asset Management Pte. Ltd. is a company
incorporated in Singapore and is headquartered in Singapore.
Havenport Asset Management Pte. Ltd. is an Asia Pacific
equity specialist and manages assets for sovereign wealth
funds, corporate pension plans, endowment schemes and retail
unit trusts with clients spread across the globe and in the
region.
HSBC-FS B for Macquarie Asia New Stars Fund ................... A fund incorporated in the Cayman Islands and managed by
Macquarie Funds Management Hong Kong Limited
MLIS — York Asian Event-Driven Ucits Fund....................... A fund managed by York Capital Management (Asia) HK
Advisors Limited
RBC Investor Services Bank S.A. a/c Macquarie Asia New
A fund incorporated in Luxembourg and managed by
Stars Fund (Macquarie FD S) ................................................ Macquarie Funds Management Hong Kong Limited
York Asian Opportunities Investment Master Fund................. A fund managed by York Capital Management (Asia) HK
Advisors Limited
189
THE OVER-ALLOTMENT OPTION
In connection with the Offer, subject to the approval of the Philippine SEC, certain Selling
Shareholders have granted the Stabilizing Agent an Over-allotment Option, exercisable in whole or in
part to purchase up to 15% of the total number of Firm Shares on the same terms and conditions as
the Firm Shares, as set forth herein, from time to time for a period which shall not exceed 30 calendar
days from and including the Listing Date. In connection therewith, the relevant Selling Shareholders
have entered into a greenshoe agreement with the Stabilizing Agent to utilize up to an additional
129,633,826 Shares, among others, to cover over-allocations under the Institutional Offer. Any Shares
that may be delivered to the Stabilizing Agent under the greenshoe agreement will be re-delivered to
the relevant Selling Shareholders either through the purchase of Shares in the open market by the
Stabilizing Agent in the conduct of stabilization activities or through the exercise of the
Over-allotment Option by the Stabilizing Agent. The Optional Shares may be over-allotted and the
Stabilizing Agent may effect price stabilization transactions for a period beginning on or after the
Listing Date, but extending no later than 30 days from the Listing Date. The Stabilizing Agent may
purchase Shares in the open market only if the market price of the Shares falls below the Offer Price.
Such activities may stabilize, maintain or otherwise affect the market price of the Shares, which may
have the effect of preventing a decline in the market price of the Shares and may also cause the price
of the Shares to be higher than the price that otherwise would exist in the open market in the absence
of these transactions. If the Stabilizing Agent commences any of these transactions, it may discontinue
them at any time. Once the Over-allotment Option has been exercised by the Stabilizing Agent, it will
no longer be allowed to purchase Shares in the open market for the conduct of stabilization activities.
The Over-allotment Option, to the extent not fully exercised by the Stabilizing Agent, shall be deemed
cancelled and the relevant Optional Shares shall be re-delivered to the relevant Selling Shareholders.
LOCK-UP
The PSE rules require existing shareholders owning at least 10% of the outstanding shares of a
company not to sell, assign or in any manner dispose of their shares for a period of 180 days after the
listing of the shares. If the Over-allotment Option is not exercised, 492,787,036 Shares held by
Wellborn Trading and Investments, Inc., 415,753,800 Shares held by Educar Holdings, Corp.,
434,440,400 Shares held by Marjorisca, Inc., 434,412,500 Shares held by Birdseyeview, Inc. and
438,780,247 Shares held by Bordeaux Holdings, Inc. are subject to such 180-day lock-up. If the
Over-allotment Option is exercised, 466,043,679 Shares held by Wellborn Trading and Investments,
Inc., 415,753,800 Shares held by Educar Holdings, Corp., 434,440,400 Shares held by Marjorisca, Inc,
434,412,500 Shares held by Birdseyeview, Inc. and 414,967,821 Shares held by Bordeaux Holdings,
Inc. are subject to such 180-day lock-up.
In addition, if there is any issuance or transfer of Shares (i.e., private placements, asset for shares
swap or a similar transaction) or instruments which lead to issuance of Shares (i.e., convertible bonds,
warrants or a similar instrument) done and fully paid for within 180 days prior to the start of the Offer,
and the transaction price is lower than that of the Offer Price, all such Shares issued or transferred
shall be subject to a lock-up period of at least 365 days from full payment of such Shares.
11,450,800 Shares held by Bienvenido R. Tantoco, Jr., 100,787,300 Shares held by Wellborn
Trading and Investments, Inc., 96,452,200 Shares held by Educar Holdings, Corp., 100,787,300 Shares
held by Marjorisca, Inc., 89,741,500 Shares held by Birdseyeview, Inc. and 100,780,900 Shares held
by Bordeaux Holdings, Inc. are subject to such 365-day lock-up.
190
In addition, the Company and the Selling Shareholders have agreed with the International Lead
Managers and Underwriters and the Sole Domestic Lead Manager and Underwriter that, except in
connection with the Over-allotment Option, neither they nor any of the Company’s affiliates nor any
person acting on their behalf will without the prior written consent of the International Lead Managers
and Underwriters and the Sole Domestic Lead Manager and Underwriter, issue, offer, pledge, 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 any 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 for a period of 180 days after the First Closing Date.
SELLING RESTRICTIONS
Philippines
No securities, except of a class exempt under Section 9 of the SRC or unless sold in any
transaction exempt under Section 10 thereof, shall be sold or distributed by any person within the
Philippines, unless such securities shall have been registered with the Philippine SEC on Form 12-1
and the registration statement has been declared effective by the Philippine SEC.
191
LEGAL MATTERS
Certain legal matters as to Philippine law in connection with the Offer will be passed upon by
Romulo Mabanta Buenaventura Sayoc & De Los Angeles, legal counsel to the International Lead
Managers and Underwriters and the Sole Domestic Lead Manager and Underwriter, and Picazo Buyco
Tan Fider & Santos, legal counsel to the Company. Certain legal matters as to United States federal
law in connection with the Offer will be passed upon by Milbank, Tweed, Hadley & McCloy LLP,
United States legal counsel to the International Lead Managers and Underwriters, and Jones Day,
United States legal counsel to the Company. None of the above mentioned advisers have any direct
or indirect interest in the Company arising from the Offer.
192
INDEPENDENT AUDITORS
SGV & Co., a member firm of Ernst & Young Global Limited, independent auditors, have
reviewed our interim consolidated financial statements as of June 30, 2014 and for the six months
ended June 30, 2013 and 2014, as well as audited our restated audited consolidated financial
statements as of and for the years ended December 31, 2011, 2012 and 2013.
SGV & Co. has acted as our independent auditors since inception. Ladislao Z. Avila, Jr. is our
current audit partner and has served as such since 2005. We have not had any material disagreements
on accounting and financial disclosures with our current independent auditors for the same periods or
any subsequent interim period. SGV & Co. has neither shareholdings in us nor any right, whether
legally enforceable or not, to nominate persons or to subscribe for the securities in us. SGV & Co. will
not receive any direct or indirect interest in us or in any securities thereof (including options, warrants
or rights thereto) pursuant to or in connection with the Offer. The foregoing is in accordance with the
Code of Ethics for Professional Accountants in the Philippines set by the Board of Accountancy and
approved by the Professional Regulation Commission.
The following table sets out the aggregate fees billed for each of the last two fiscal years for
professional services rendered by SGV & Co., excluding fees directly related to the Offer.
2012
2013
(=
P million)
Audit and audit-related fees
Audit services (1) ..............................................................................................
3.7
4.0
Other assurance and related services ...............................................................
—
—
Tax fees .............................................................................................................
—
—
All other fees .....................................................................................................
—
—
Total ..................................................................................................................
3.7
4.0
Note:
(1)
This category includes the audit of annual financial statements, review of interim financial statements and services that
are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements
for those calendar years.
In relation to the audit and review of our annual financial statements, our corporate governance
manual provides that the Audit Committee shall, among other activities (i) evaluate significant issues
reported by the independent auditors in relation to the adequacy, efficiency and effectiveness of
policies, controls, processes and activities of the Company; (ii) ensure that other non-audit work
provided by the independent auditors is not in conflict with their functions as independent auditors;
and (iii) ensure the compliance of the Company with acceptable auditing and accounting standards and
regulations.
193
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements of the Company as of and for the years ended December 31, 2011,
2012 and 2013 and Reviewed Consolidated Financial Statements of the Company as of June 30,
2014 and for the six months ended June 30, 2013 and 2014
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
Statements of Financial Position as of December 31, 2011, 2012 and 2013 and Interim
Consolidated Statements of Financial Position as of June 30, 2014 (with Comparative
Audited Figures as of December 31, 2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Statements of Comprehensive Income for the years ended December 31, 2011, 2012 and
2013 and Interim Consolidated Statements of Comprehensive Income for the six-month
periods ended June 30, 2013 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Statements of Changes in Equity for the years ended December 31, 2011, 2012 and 2013
and Interim Consolidated Statements of Changes in Equity for the six-month periods ended
June 30, 2013 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013 and
Interim Consolidated Statements of Cash Flows for the six-month periods ended June 30,
2013 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-8
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-10
Independent Auditors’ Report on Supplementary Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
F-71
Supplementary Schedules as of and for the year ended December 31, 2013 . . . . . . . . . . . .
F-72
Independent Auditors’ Report on Supplementary Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
F-89
Supplementary Schedules as of and for the six months ended June 30, 2014
...........
F-90
Statement of Management’s Responsibility for the Financial Statements of the Company
as of December 31, 2011, 2013 and 2013 and June 30, 2014 and for the years ended
December 31, 2011, 2012 and 2013 and the six-months ended June 30, 2013 and 2014 . . .
F-108
Statements of Management’s Responsibility
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
F-11
F-12
F-13
F-14
F-15
F-16
F-17
F-18
F-19
F-20
F-21
F-22
F-23
F-24
F-25
F-26
F-27
F-28
F-29
F-30
F-31
F-32
F-33
F-34
F-35
F-36
F-37
F-38
F-39
F-40
F-41
F-42
F-43
F-44
F-45
F-46
F-47
F-48
F-49
F-50
F-51
F-52
F-53
F-54
F-55
F-56
F-57
F-58
F-59
F-60
F-61
F-62
F-63
F-64
F-65
F-66
F-67
F-68
F-69
F-70
F-71
F-72
F-73
F-74
F-75
F-76
F-77
F-78
F-79
F-80
F-81
F-82
F-83
F-84
F-85
F-86
F-87
F-88
F-89
F-90
F-91
F-92
F-93
F-94
F-95
F-96
F-97
F-98
F-99
F-100
F-101
F-102
F-103
F-104
F-105
F-106
F-107
F-108
SSI Group, Inc.
6/F Midland Buendia Building
403 Senator Gil Puyat Avenue
Makati City 1200
Philippines
INTERNATIONAL LEAD MANAGERS AND UNDERWRITERS
Credit Suisse (Singapore) Limited
One Raffles Link
#03-01/#04-01 South Lobby
Singapore 039393
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
21 Collyer Quay #09-02
HSBC Building
Singapore 049320
SOLE DOMESTIC LEAD MANAGER AND UNDERWRITER
BPI Capital Corporation
8F BPI Building,
Ayala Ave. cor. Paseo de Roxas,
Makati City, 1226
Philippines
LEGAL COUNSEL TO SSI GROUP, INC.
As to United States Federal and New York law
As to Philippine law
Jones Day
31/F Edinburgh Tower
The Landmark
15 Queen’s Road Central
Hong Kong
Picazo Buyco Tan Fider & Santos Law Office
Penthouse
Liberty Center
104 H.V. de la Costa St. Salcedo Village
1227 Makati City, Philippines
LEGAL COUNSEL TO THE INTERNATIONAL LEAD MANAGERS AND UNDERWRITERS
AND SOLE DOMESTIC LEAD MANAGER AND UNDERWRITER
As to United States Federal and New York law
As to Philippine law
Milbank Tweed Hadley & McCloy LLP
30/F Alexandra House
18 Chater Road
Central
Hong Kong
Romulo Mabanta Buenaventura Sayoc &
de los Angeles
21/F Philamlife Tower,
8767 Paseo de Roxas
Makati City, 1226
Philippines
INDEPENDENT AUDITORS
SyCip Gorres Velayo & Company
(a member firm of Ernst & Young Global Limited)
6760 Ayala Avenue
Makati City 1226
Philippines

IMPORTANT NOTICE You must read the

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