Document 6524351
Transcription
Document 6524351
COVER SHEET 4 4 0 9 SEC Registration Number 2 G O G R O UP , [ F o r m e r l y A T S ( A T S C ) , I N C . C o n s o l i d a t e d I n c . ] (Company’s Full Name) 1 2 T H U. N. F L O O R T I M E S A V E. C O R N E R E R M I T A M A N I L A P L A Z A T A F T B U I L D I N G A V E. (Business Address: No. Street City/Town/Province) 1 2 JEREMIAS E. CRUZABRA 528-7608 / 554-8777 loc. 9154 (Contract Person) (Company Telephone Number) 3 1 Month Day (Fiscal Year) 0 6 1 7 - A 2 2 Month Day (Annual Meeting) (Form Type) DECEMBER 31, 2011 (Secondary License Type, If Applicable) Corporation Finance Department Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings 1,976 Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document ID Cashier STAMPS Remarks: Please use BLACK ink for scanning purposes. SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-A ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES 1. For the fiscal year ended December 31, 2011 2. SEC Identification Number 4409 4. Exact name of issuer as specified in its charter 2GO Group, Inc. 5. 3. BIR Tax Identification No. 000-313-401 Philippines 6. Province, Country or other jurisdiction of incorporation (SEC Use Only) Industry Classification Code: or organization 7. th 12 Floor Times Plaza Bldg. United Nations Ave. corner Taft Ave., Ermita, Manila ______1000____ Address of principal office 8. Postal Code (02) 528-7608 / (02) 554-8777 loc. 9154 Issuer's telephone number, including area code 9. ATS Consolidated (ATSC), Inc.; Sergio Osmeña Blvd., North Reclamation Area, Cebu City Former name, former address, and former fiscal year, if changed since last report. 10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding Common stock, P 1 par value Redeemable preferred stock, P 1 par value 2,446,136,400 4,560,417 11. Are any or all of these securities listed on a Stock Exchange. Yes [X] No [ ] Philippine Stock Exchange - Common Stock and Redeemable Preferred Stock 12. Check whether the issuer: (a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17.1 thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports); Yes [X] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days. Yes [X] No [ ] 13. Aggregate market value of the voting stock held by non-affiliates as of March 30, 2012: P 137,481,410.95 2 TABLE OF CONTENTS PAGE NO. PART I – BUSINESS AND GENERAL INFORMATION Item Item Item Item 1 2 3 4 Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders 4 16 19 20 PART II – OPERATIONAL AND FINANCIAL INFORMATION Item 5 Item 6 Item 7 Item 8 Market for Registrant’s Common Equity and Related Stockholder Matters Management’s Discussion and Analysis of Financial Condition & Results of Operations Financial Statements Information on Independent Accountant and Other Related Matters 20 21 32 33 PART III – CONTROL AND COMPENSATION INFORMATION Item 9 Item 10 Item 11 Item 12 Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions 34 41 42 44 PART IV – CORPORATE GOVERNANCE 45 Item 13 45 Corporate Governance PART V – EXHIBITS AND SCHEDULES Item 14 a. Exhibits b. Reports on SEC Form 17-C 60 60 SIGNATURES INDEX TO EXHIBITS, FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES 3 PART I – BUSINESS AND GENERAL INFORMATION Item 1. Business 2GO GROUP, INC. Business Development 2GO Group, Inc. (the “Registrant”, the “Company”, or “2GO”), formerly ATS Consolidated (ATSC), Inc., was formed and organized in May 26, 1949 under the corporate name William Lines, Inc. Driven by the vision of providing the nation with the best shipping services, on December 21, 1995, William Lines, Inc., Carlos A. Gothong Lines, Inc. and Aboitiz Shipping Corporation consolidated their resources and expertise and marked the birth of William, Gothong & Aboitiz, Inc. (“WG&A”). Thereafter, on February 4, 2004, WG&A changed its corporate name to Aboitiz Transport System (ATSC) Corporation as a result of the buyout that Aboitiz Equity Ventures, Inc. (AEV) made of the respective interests of Chiongbian and Gothong in WG&A in 2002. On August 24, 2011, the Securities and Exchange Commission (SEC) approved the change of corporate name of Aboitiz Transport System (ATSC) Corporation to ATS Consolidated (ATSC), Inc. On March 9, 2012, the SEC approved a subsequent change of the corporate name of ATS Consolidated (ATSC), Inc. to 2GO Group, Inc. During the past three (3) years, 2GO and its subsidiaries have engaged into mergers and significant purchases of shares of stocks. In August 2009, 2GO Express, Inc. (formerly ATS Express, Inc, formerly Aboitiz One, Inc.) formed a joint venture with Kerry Logistics Network Limited of Hong Kong (KLN) for its international freight forwarding business. In July 2010, the SEC approved the statutory merger of the Registrant with Zoom in Packages, Inc. (ZIP), a wholly owned subsidiary of the Company. Further, in August 2010, the SEC also approved the statutory merger of the Company with another wholly owned subsidiary – Reefer Van Specialists, Inc (RVSI). The mergers are expected to further improve the effectiveness and efficiency of freight services of 2GO as well as reduce costs as people, processes, systems are integrated. On December 01, 2010, the former major stockholders of 2GO, namely AEV and Aboitiz and Company, Inc. (ACO), sold their shareholdings in 2GO to Negros Navigation Co., Inc. (NENACO), which sale was consummated on December 28, 2010. The equity value included all the logistics and shipping businesses of the Company, except its interest in its joint ventures with the Jebsen Group of Norway. AEV’s and ACO’s shareholdings in 2GO represented 77.24% and 15.96%, respectively, of the total outstanding common shares of 2GO. In February 2011, as a result of the mandatory tender offer requirement, NENACO's ownership in 2GO increased by 4.92%. The majority owner of the registrant, NENACO, is one of the oldest domestic shipping companies in the Philippines. It was organized and registered with the SEC on July 26, 1932 for the purpose of transporting passengers and cargoes at various ports of call in the Philippines. Further, its principal office is located at Pier 2, North Harbor, Tondo, Manila. Corporate Structure 4 On various dates in 2011, the SEC approved the application of the Company and its subsidiaries to amend their Articles of Incorporation and By-laws, which include, among others, the change in their corporate names to ATS Consolidated (ATSC), Inc. [formerly Aboitiz Transport System (ATSC) Corporation], ATS Express, Inc. (formerly Aboitiz One, Inc.), and ATS Distribution, Inc. (formerly Aboitiz One Distribution, Inc.). Further, to create a unified identity for the Company and its brand structure, in February and March 2012, the Registrant and its subsidiaries amended its Articles of Incorporation and By-Laws to further change its corporate name to 2GO Group, Inc. [formerly ATS Consolidated (ATSC), Inc.], 2GO Express, Inc. (formerly ATS Express, Inc.), and 2GO Logistics, Inc. (formerly ATS Distribution, Inc.). NN-ATS Logistics Management & Holdings Co., Inc. (NALMHCI) was organized and incorporated last November 22, 2011. It is 100%-owned by 2GO. The purpose of NALMHCI is primarily to act as managing agents, local agents or representatives of (i) subsidiaries and affiliates engaged in logistics activities, (ii) corporations, (iii) partnerships, (iv) agencies, (v) associations, (vi) enterprises, (vii) establishments, (viii) institutions, private or governmental, domestic or foreign, except the management of funds, portfolios, or other similar assets of the managed entities; and to undertake, organize, form, promote, develop or establish businesses, and all forms of enterprises, whether here or abroad, as are necessary, suitable, or convenient to be undertaken, organized, formed, promoted, developed or established to carry out, directly or indirectly, the purposes and interests or to enhance the businesses or to render more valuable or profitable any of its rights, properties, interests or enterprises. Further, on March 8, 2012, the SEC approved the registration of Special Container and Value Added Services, Inc., a 100%-owned company by the registrant as well. It has a primary purpose of engaging in domestic and/or international business of transporting any and all kinds of goods and cargoes, by sea, air and land, functioning as non-vessel operating common carrier, engaging in cargo forwarding including acting as cargo consolidator and break-bulk agent, and courier for mails, letters, pouches, other cargoes and personal effects of any and all kinds, types and nature. Brand Structure The Company is engaged in the movement of people operating under brand names ‘SuperFerry’, ‘SuperCat’, and ‘Cebu Ferries’ and in the movement of cargos operating under the brand name ‘2GO’. However, with the change in the Company’s corporate name to “2GO Group, Inc.”, the Company and its subsidiaries started the standardization of its brands on the latter part of 2011 and implemented the following brand structure: 5 The Company adopted the stronger brand “2GO” as its flagship brand for its various businesses. Going forward, the Company will function with three core business units, as follows: 2GO Freight —this unit will continue to handle commercial and personal shipping needs including household goods, auto rolling cargo shipping, containerized shipping, break bulk & LCL consolidation, freight refrigerated vans, and ISO tank shipments. 2GO Travel — integrating the country’s leading passenger ships and fast ferries, Negros Navigation, SuperFerry, SuperCat, and Cebu Ferries, this unit offers the biggest fleet and the widest choice of route linking Luzon, Visayas, and Mindanao, through land and sea multimodal transport linkages. 2GO Supply Chain —this unit leverages on the Company’s more than 100 years of expertise in Logistics, Distribution, Warehousing, and Inventory Management. All these changes reflect an important redirection for 2GO i.e. towards becoming a world-class transport, logistics, and supply chain company. With the change in company name and brand structure, the Company is also now in the process of changing the names of the vessels with the Maritime Industry and Authority. Vessel Fleet As of December 31, 2011, 2GO and its subsidiaries has a total fleet of 29 operating vessels, of which 19 are company-owned ships. The fleet consists of 8 fast crafts, 12 RoRo/Pax vessels (of which 3 vessels are time chartered from its parent company, NENACO), and 9 freighters (of which 3 are also time chartered from NENACO and 4 from MCCP). The Company’s vessel fleet has a combined Gross Registered Tonnage of approximately 204,140 metric tons, total passenger capacity of approximately 20,360 passengers and aggregate cargo capacity of approximately 6,059 twentyfoot equivalent units (TEUs). Currently, 2GO operates 9 RoRo/Pax vessels calling on Manila as their homeport. These vessels are larger coastwise vessels that sail from Luzon to Visayas and Mindanao. Further, 2GO operates 3 medium-sized vessels, the Cebu Ferries, operating in the Visayas and Mindanao routes and with Cebu as their homeport. The 8 fast craft passenger vessels, on the other hand, are smaller fast crafts that ply on short distances. The Company also operates 5 purely-cargo vessels to fully complement its freight business. Ports of call The Company’s extensive presence throughout the country is carried out through its branch operations and agency networks. These are located primarily in Bacolod, Batangas, Butuan, Cagayan de Oro, Calapan, Cebu, Coron, Cotabato, Davao, Dipolog, Dumaguete, General Santos, Iligan, Iloilo, Jagna, Manila, Ormoc, Ozamis, Puerto Princesa, Surigao, Tagbilaran, and Zamboanga. Market Share As of December 31, 2011, 2GO continues to dominate the Philippine Sea Travel with 93% market share in the passage service, specifically in ports that they serve. Freight market share is estimated at 33%. Subsidiaries and Affiliate of 2GO In 2011, 2GO has three (3) operating subsidiaries and one (1) affiliate, 2GO Express, Inc., The Supercat Fast Ferry Corp. (SFFC), NALMHCI and MCC Transport Philippines, Inc. (MCCP). On March 2012, the Registrant incorporated a new company named Special Container and Value Added Services, Inc. The new company will take over the reefer van container business of the Company and the isotank business of one of its subsidiaries, 2GO Express, Inc. 6 Product Lines and Markets Briefly, the Company’s product lines and solutions are described as follows: 1. PASSAGE In 2011, 2GO improved its course not only as a low-cost operator with unbundled price structure through its former SuperFerry, Cebu Ferries and SuperCat brands, but also as a leisure travel option as it is now jointly operated with Negros Navigation (the parent company’s passage brand). It is also the year where the integration of all passage brands, namely: Negros Navigation, SuperFerry, CebuFerries and SuperCat, was completed. During the year, all policies, procedures and systems were aligned and streamlined. Routes were rationalized and thus, eliminate duplications among the Company’s vessels. There were also rationalization made on the workforce among the Company, NENACO and its subsidiaries. In December 2011, the Company operated additional 3 RoRo/Pax vessels under time charter from NENACO. Thus, towards the end of the year, all passage brands of the Company were fully integrated and now took on a new passage brand, 2GO Travel starting 2012. The new brand aims to provide exciting tour packages and activities as well as more affordable, comfortable, safe and reliable travel experience. To drive passenger volume and sales, the Company offered various signature price promotions such as the “Crazy Tawad Fares”, the “year-round low price regular fare offering” and “Todo Todo Sale Sail”, a special promo with defined selling and sailing dates. Special price promotions are also offered coinciding with festivities in the ports the company serve. The promotions offered were being complemented also through providing customers with the convenience and speed in their dealings with us. Ticketing systems were enhanced to be able to accept credit and ATM (automated teller machine) cards through the Internet as modes of payment. Ticket delivery service, through our in-house call center, was offered as another ticket access option for customers. Ticket delivery is offered in partnership with its subsidiary, 2GO Express. During the last quarter of 2011, more than eighty percent (80%) of ticketing outlets were converted into the web-based ticketing system that allows for ticketless transactions. The said innovation will entail significant savings in terms of printing as well as the administrative costs of these tickets to the outlets. To further encourage customers to buy their tickets early (and on the company’s end, to push early build-up of volumes), larger discounts on their fares are offered to customers who buy their tickets in advance. A ticket to the Visayas region can be bought for as low as P450, while a ticket to Mindanao can be bought for as low as P750. The ticketing system is linked to pricing software or a revenue management system that automatically adjusts prices based on demand. The pricing software is similar to those employed by hotels and airlines. The best practices of 2GO and its parent company, NENACO, on revenue management are being integrated into this pricing software. 2GO Travel sells tickets using four distribution channels: (1) over 1,200 online outlets nationwide composed of company-owned corporate outlets, and third party outlets and network agencies, (2) an in-house call center; (3) through the 2GO Travel website; and (4) on-line third party-operated marketing websites (i.e. ensogo.com) for extremely discounted package fares during the lean season. As of March 1, 2012, 2GO Travel calls on 18 ports, namely: Manila, Bacolod, Cagayan de Oro, Cebu, Tagbilaran, Batangas, Caticlan, Dumaguete, Puerto Princessa, General Santos, Iligan, Iloilo, Ormoc, Butuan, Ozamis, Dipolog, Surigao, and Zamboanga. Frequencies vary per destination. Customers have six (6) types of accommodations to choose from, namely: stateroom, cabin, tourist, mega value, super value and airline seat. With the introduction of the new Batangas-Caticlan route, 2GO Travel has set in motion to establish itself as the premiere “Domestic Cruise Line”. The vessels servicing the new route have undergone renovation on their interior designs, modernization of furniture, amenities and suites to entice large segment of the Boracay-bound tourist market. 2GO Travel is also now available as one of the transportation options to foreign travel websites as the company marked the beginning of its partnerships with international travel websites such as myboracayguide.com, myboholguide.com and mycebuguide.com, 2GO Travel has also opened the 2GO TraveLink service for customers who opt to purchase bus or boat transfers with their ferry tickets issued in one e-ticket. This provides a hassle-free, seamless transportation service that the Company is well known. 2GO TravelLink service is preliminarily offered to its Boracay package and will eventually be replicated to the rest of its ports of call. The 2GO TravelLink service also ables 2GO Travel to offer more travel frequencies to its customers – while it only have once a week call on Dumaguete, it can actually serve customers in 7 Dumaguete daily through the 2GO TravelLink service via Bacolod or Cebu wherein 2GO Travel offers five to six times weekly service. 2GO Travel has also numerous hotel partners that customers may avail of a hotel package together with their purchase of transportation tickets. Shuttle services continue to serve selected routes, depending on market demand. 2. FREIGHT With the coming together of 2GO and its parent company’s freight business, now called 2GO Freight, routes served by the Company’s vessels were rationalized. Port links previously served by both 2GO and NENACO on the same departure dates were eliminated. This allowed the Company and NENACO to retire 4 vessels (2 RoRo/Pax and 2 freighters) resulting in substantial savings in fuel and other vessel operating costs. While the number of vessels has been reduced, the scope of ports served has increased. Freight Revenue grew by P352.3 million or 7% year-on-year despite a reduction in the number of trips by 242 trips or a reduction of 13%. This is attributed to a 5% increase in rates and a 1% increase in volume or an increase of 1,503 TEU’s. While revenue was increased, costs were reduced substantially with the integration of container yards in almost all major ports. These include Bacolod, Iloilo, Cebu, Palawan, Cagayan de Oro, Ozamis, Iligan, Zamboanga, Davao, and General Santos. Further, under the 2GO Express unit of the registrant, 2GO introduced new products and services that helped boost revenues in its domestic and international courier, such as the Budget Box and International Budget Box, US Visa delivery, and expanded offerings under its partnership with international logistics provider United Parcel Service (UPS). Third party logistics remained robust with an increase in warehouse capacity to nearly 39,000 pallets. In 2011, the rd warehouse capacity increased by 56,000 pallets with the completion of the 3 warehouse and said warehouse was being sub-leased. 2GO has been bundling more value-added services and offering more flexible solutions for our customers that would further strengthen our position as the country’s only integrated chain solutions provider. Competition 1. PASSAGE The operating environment in 2011 for the Company faced challenges for its passage business due to stiff competition from the airlines. SuperFerry 1 was decommissioned out of operational constraints and St. Joseph the Worker, one of NENACO’s vessels, continued to run as replacement. However, sea transport continues to be one of the primary means of inter-island transport in the Philippines especially for travellers who wish to bring many baggages. 2GO Travel’s ports of call are based in Central Visayas, Western Visayas, Northern Mindanao, and Southern Mindanao. 2GO Travel competes with airlines and other domestic inter-island ferries principally in terms of price. With the recent aggressive entry of another budget airline, AirPhil Express, and the acquisition of more airplanes by Zestair and Cebu Pacific, all budget airlines severely cut prices to regain market share thus, eating more into the shipping market. Cutthroat competition is an effect of ‘fare diving’ to compensate for rising costs especially fuel. There is no limit to competition in terms of pricing which can also be readily copied by any player. In terms of service, the sea players compete by providing reliable service to passengers in the form of safety and on-time departures and arrivals. Customers also look for convenience in ticket purchases, frequency of schedules, improved facilities on-board and entertainment. In 2011, among the principal competitors of 2GO Travel are Cebu Pacific, Philippine Airlines, AirPhil Express, ZestAir and various Bus Lines. Geographic areas of competition include Bacolod, Iloilo, Cebu, Tagbilaran, Dumaguete, Cagayan de Oro, Iligan, Dipolog, Ozamis, Cotabato, Davao, General Santos, Surigao, Zamboanga, Butuan, and Panay area (for the Bus Lines). 8 In order to attract passengers to travel by sea, 2GO Travel maintains a suitable gap between the price of 2GO Travel tickets and airline fares. On top of that, customers continue to have the benefit of a larger baggage allowance. While the entire fleet is going through a re-branding, most vessels have already improved its interior decoration and improved on-board amenities and entertainment. With this new marketing strategy, 2GO Travel now sells itself as a domestic cruise that sells a “fun and memorable experience” on-board the ship. As airlines fiercely compete with each other in a constant price-war, 2GO Travel maintains its price by offering leisure travel and entertainment on-board the vessels. 2GO Travel’s new direction of being an affordable domestic cruise has also been featured in travel shows such as the famous “TravelTime” show & magazine by Susan Calo Medina, a famous Filipino travel writer and TV host with viewership that encompasses all market classes and overseas Filipino workers through TFC (The Filipino Channel). Travel magazines have also featured benefits of cruising around the Philippines. The marketing team has been entertaining numerous media requests to feature the new brand. Billboards are also being used to communicate the new brand’s image. In addition, the brand has also been advertising in Cinemas across Metro Manila to try and get more of the leisure travelers to travel by sea. Despite the challenges, 2GO Travel remains undaunted and focused to seek better ways to deliver service consistently and be a sought-after leisure alternative to move around the islands. 2GO Travel is committed to consistently provide a reliable, convenient and affordable sea service with a passion to serve its entire customer. 2. FREIGHT Major competitors of 2GO in the domestic shipping industry specifically in major areas of Visayas and Mindanao regions include Phil Span Asia Container Corporation (formerly Sulpicio Lines), Lorenzo Shipping, National Marine Corporation, Solid Shipping, Oceanic Shipping Lines and CAGLI (Carlos A. Gothong Lines), among others. While the tendency of most competitors has been to offer lower rates, 2GO Freight has been able to maintain the loyalty and patronage of its customers even at higher rates owing to higher service levels experienced by clients. 2GO Freight continues to receive awards from quality conscious clients for higher KPI performance levels. Such high ratings often translate to higher market shares enjoyed by 2GO from the higher paying client base. Safety, Security and Quality Standards 2GO’s fleet, comprising of the SuperFerries, Cebu Ferries and 2GO freighters, was formerly managed by Aboitiz Jebsen Bulk Transport Corporation (ABOJEB), an international ship management company. On October 15, 2011, the Ship Management Division (SMD) of the registrant’s parent company, NENACO, took over the ship, crewing and purchasing management as well as the ship cost accounting and fuel management of the whole 2GO fleet from ABOJEB. NENACO, as a ship management company is certified as compliant with the International Safety Management Code (ISM) administered by the Maritime Industry Authority (MARINA) and the National Security Programme for Sea Transport and Maritime Infrastructure (NSPSTMI), an International Ship and Port Security Code (ISPS) certification administered by the Office for Transport Security. NENACO maintains the 2GO fleet to international standards of safety, security and seaworthiness. NENACO ensures each ship of 2GO is manned with qualified, certified, medically fit and suitably experienced seafarers and qualified and competent shore-based staff to support the quality, safe, secure and efficient operation of vessels. NENACO ensures that the entire 2GO fleet has to undergo a periodic ISM, NSPSTMI/ISPS external audits conducted by the authorities to ensure continuous improvement of safety, security and quality on board. The ISM and ISPS codes are International Maritime Organization (IMO) initiated mandatory requirement for all companies that operate ships. The ISM’s objectives are to prevent maritime accidents, provide competent crews, emergency preparedness, ensure a planned maintenance system and protection of the environment while the ISPS Code ensures that security threats are recognized and security breaches are prevented. 2GO and NENACO believe that appropriate training for the vessel officers, crew and shore-based personnel is vitally important. VIDEOTEL, the world’s leading producer and provider of high quality marine training programs, has been the partner of NENACO for the past 3 years for implementing structured and tailor-made training programs. 2GO and NENACO added competent shore-based personnel, sent most of the Technical Superintendents to GL (Germanisher Lloyd) Academy to undertake a rigid Superintendents Training Course and reorganized to meet the demands of managing a bigger fleet. 9 Moreover, 2GO and NENACO will start to implement on 2012 the BASSNET Fleet Management System, an integrated software suite-based on modern technology covering all the main areas of maritime operations. Customers The Company has a wide customer base that includes manufacturers of consumer goods and finished products, traders of commercial, industrial and agricultural goods as well as the general public. The Company monitors its top 50 customers. No single customer accounts for 20% or more of the Company’s freight revenue. Purchases of Materials, Parts and Supplies Materials, parts and supplies are obtained mostly from local suppliers at competitive rates. Fuel and lubes, the biggest operating expense of the Company is purchased from a major fuel provider. Selected Major Suppliers of the Registrant: Items/Services Supplied Major Supplier Fuel, diesel and lubricants 1. 2. 3. 4. Petrilliam Blac Corporation Promethium Marketing Co. Chevron Phils., Inc. Petron Corp. Vessel repair and drydocking 1. Subic Shipyard 2. Keppel Philippines Marine Inc. Stevedoring and Arrastre 1. Asian Terminal Inc. Insurance 1. Pioneer Insurance and Surety Corp. 2. Steamship Mutual Management (Bermuda) Limited 3. Philippine Charter Insurance Corporation Contract for Distribution and Repair and General Services 2GO also contracts with more than 20 major trucking, forwarding and container repair companies in the Philippines, including affiliated companies, to provide door to door, door to pier, pier to door distribution services required by its customers, as well as stevedoring and arrastre services. These contracts are conducted on an arms-length basis. The Company’s passenger ticketing and cargo booking are principally conducted through its network of branches and sales agents, most of which are situated at ports served by the Company. In addition, independent agencies/outlets are also maintained in urbanized areas such as Manila, Cebu, and Cagayan de Oro. These Agencies and Outlets are covered by Agency Contracts renewable annually, subject to certain conditions. Contracts with affiliated companies for agency and general services are conducted on an arms-length basis. General service contracts include contracts with engineering, repair and service companies, independent concessionaires, and janitorial service providers. Patents, Trademarks, Copyrights, Licenses, Franchises, Concessions and Royalty Agreement held 2GO’s vessels are duly registered with MARINA and subjected to regular survey and ISM audit to ascertain its adherence to vessel and manning safety standards. The company is the holder of several Certificates of Public Convenience (CPC), Provisional Authority (PA) and Special Permit (SP) issued by MARINA to service domestic ports of call. Related Party Transactions Related party transactions with both customers and suppliers are discussed in the Note 24 to Consolidated Financial Statements. 10 Employees 2GO has a complement of 1,005 employees as of December 31, 2011, of which, 824 are regular, 48 are probationary, and 133 are contractual. The Company is not unionized. It has a Labor Management Council (LMC) that is a member of the Philippine Association of Labor Management Council, wherein the labor and the management work hand in hand to accomplish certain goals using mutually acceptable means. With this council, labor and management representatives discuss and decide on issues of equal concern to both parties. They are social partners sharing a common interest in the success and growth of the enterprise and the economy. LMC aims to promote harmony among all the 2GO employees, the officers, staff and other employees of the Company and to establish an equally beneficial relationship. 2GO’s LMC holds a regular yearly convention to bring all chairmen and representatives to a forum with the principals and officers of the Company. The convention seeks to promulgate resolutions most of which are economic demands from the Labor sector and management; address all other concerns and issues; amend the charter; and to hold elections for the officers of the national LMC. The establishment of the LMC in September 23, 1986 has given rise to more benefits and privileges to the employees. More significantly the merging of three of the most prominent and well respected shipping lines in the country has seen a dramatic improvement in terms of employee benefits and privileges far better than any other company in the industry offers. This includes among others, medical allowances, group hospitalization plan, educational assistance for qualified dependents, mortuary assistance and privilege pass for employees and their immediate family members. Government Regulations The MARINA through Memorandum Circular No. 79 requires all owners/operators of inter-island vessels engaged in Public Transport Service to secure a certificate of accreditation of domestic shipping enterprise / entities from the Authority before they can provide a water transport service. The Circular is intended to foster standards for domestic shipping operations in order to protect public interest and to generate vital information that will enable MARINA to effectively supervise, regulate and rationalize the organizational movement, ownership and operation of all inter-island water transport utilities, and consequently, to prevent the proliferation of incompetent, inefficient, unreliable and fly-by-night operators. Accreditation serves as a prerequisite to the granting of franchises for individual vessel operations. 2GO vessels have been issued Certificates of Public Convenience/Provisional Authorities to operate in specified routes. Research and Development Activities Research and development (R&D) are the company’s activities to discover and create new lines of services and/or make major improvements on the existing ones. During the year, the Company allocated and spent reasonable amount on R&D activities. This is consistent with the Company's strategy to focus its efforts on developing and maintaining its existing value-added businesses where it believes much of its future will lie. Costs and Effects of Compliance with Environmental Laws With regard to environmental laws, 2GO follows the regulations embodied in the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the protocol of 1978 (MARPOL 73/78). The said Convention includes regulations aimed at preventing and minimizing pollution from ships - both accidental pollution and that from routine operations - and currently includes, among others, Regulations for the Prevention of Pollution by Oil, Prevention of Pollution by Harmful Substances Carried by Sea in Packaged Form, Prevention of Pollution by Garbage from Ships to which the Company observes. During the year, the Company incurred less than a million to comply with these rules and regulations. The existing government regulations are intended to achieve the goal of the government to develop the country’s water transport system. The goal is to provide adequate, safe, efficient, economical and shipping services that are at par with the world’s best that will cater to the transport requirements of a growing national economy and for regional development. 11 Major Risks Involved in the Business of 2GO and its Subsidiaries Major risks involved in the business of 2GO and its subsidiaries are discussed under Part IV-Corporate Governance in pages 39-40. SIGNIFICANT SUBSIDIARIES OF 2GO 1. 2GO Express, Inc. Business Development 2GO Express (formerly ATS Express, Inc.; formerly Aboitiz One, Inc.) was incorporated on July 20, 1978. It is 100% owned by 2GO. It is in the business of offering supply chain solutions in accordance with customers’ needs. 2GO Express’ operation is supported by a logistical backbone which comprises delivery vans, motorcycles, trucks and vans, refrigerated trucks and vans, prime movers and trailers. The company has more than 237 retail outlets and agents at various strategic locations nationwide, providing customers easy access and convenience. Through 2GO Express’ subsidiaries, it offers a whole range of 2GO supply chain solutions. Supply chain solutions include warehousing services, transport and logistics, sales and merchandising and trade marketing. 2GO Express’ Subsidiaries Hapag-Lloyd Philippines, Inc. (HLP) HLP was incorporated on April 23, 1992. It is 85% owned by 2GO Express. It is in the business of acting as an agent of Hapag-Lloyd AG, a global shipping container line engaged in global door-to-door container transport. Hapag-Lloyd AG provides global shipping services to major trade lanes such as Europe, Asia, North America, Canada, the Middle East and the South American East Coast. Hansa Meyer-ATS Projects, Inc. (HATS) HATS, formerly Aboitiz Projects TS Corporation, was incorporated on August 5, 1996. It is 50% owned by 2GO Express. It is in the business of project cargo transportation and management, which involves the haulage and transportation of heavy and bulk-sized equipment such as those used in mining, power plants and telecommunication infrastructure. It is a joint venture between 2GO Express and Hansa Meyer Global Transport Pte. Ltd., a transportation company headquartered in Germany specializing in project transport logistics and engineering project management consultancy. 2GO Logistics, Inc. 2GO Logistics (formerly ATS Distribution, Inc.; formerly Aboitiz One Distribution, Inc.) was incorporated on January 10, 2008. It is 100% owned by 2GO Express. It is in business of providing complete supply chain management. It has two (2) state-of-the-art warehouses Edan warehouse – 6,500 pallet positions Elisco warehouse – 30,148 pallet positions rd With the completion of its 3 warehouse, the said warehouse capacity increased by approximately 56,000 pallets and the same was being sub-leased. ScanAsia Overseas Inc. (SOI) SOI was incorporated on September 13, 1985. The 100%-purchase of SOI in June 2008 completes 2GO’s portfolio for a full supply chain solutions provider. 12 It is in the business of sales, marketing, warehousing and transportation of temperature-controlled and ambient food products to its customers in the Philippines. It is the Philippines’ premier chilled distributor carrying approximately 80% of the products in the chiller section in any supermarket today. SOI has nationwide coverage for both retail and foodservice segments. SOI is considered as brand builders vs. regular trading companies. Kerry – ATS Logistics Inc. (KALI) KALI was incorporated on March 30, 2009. It is 49% owned by 2GO Express thru KLN Logistics Holdings Philippines, Inc. It is in the business that aims to offer innovative, cost effective and reliable services on international air and sea freight and cargo forwarding, cargo consolidation, as a project cargo and break bulk agent, warehousing and distribution, trucking and door-to-door delivery. With the global clout of KLN and the domestic dominance of 2GO, KALI is poised to provide better service to its clients. WRR Trucking Corporation (WTC) WTC was incorporated on March 25, 2008. It is 100% owned by 2GO Express. It is in the business of providing and engaging in the business of transportation, hauling or forwarding of cargo, freight, merchandise, chassis, goods and other articles within the lawful commerce of men by means of trucks, automobiles, container vans and rail and to do such other acts and things to transact all business directly or indirectly incidental or conducive to the prosecution of such business. Participation in Bankruptcy, Receivership or Similar Proceedings Neither 2GO Express nor any of its subsidiaries has ever been the subject of any bankruptcy, receivership or similar proceedings. Merger or Purchase of Significant Amount of Assets Not in the Ordinary Course of Business In December 2004, 2GO Express acquired additional 12.59%, 15.55% and 9.50% ownership interest in shares of stock of Aboitiz Logistics, Inc. (ALI), HLP and APTSC (now Hansa Meyer-ATS Projects, Inc.). Further, in October 2006, 2GO Express acquired additional 809,782 common shares or 5.71% from Mr. Edelino Medina in ALI, thus resulting to a 100% ownership of 2GO Express. In March 2007, the respective Boards of the then Aboitiz One, Inc. and ALI approved the merging of the two entities with the former being the surviving entity. The actual merger was effected mid of 2007. In July 2007, the 2GO Express’ Board approved the acquisition of additional 50% of the outstanding capital stock of each of RVSI and Refrigerated Transport Services, Inc. (RTSI) making 2GO Express the 100% owner of both companies. However, in September 2008, RTSI was sold to Mr. Ed Medina. In June 2008, the 2GO Express Board approved the acquisition of SOI to complement its existing services and provide a full range of supply chain solutions. In August 2009, 2GO Express formed a joint venture with Kerry Logistics Network Limited of Hong Kong (KLN) for the international freight forwarding business. KLN is the leading Asia-based provider of logistics services and supply chain solutions. It operates in over 300 cities globally, 23 countries worldwide and serve over 127 cities throughout Mainland China. Further, in June 2010, SEC approved the declaration of RVSI as property dividend by 2GO Express to 2GO Group, Inc. However, effective September 2010, RVSI was consequently merged by way of a statutory merger to 2GO Group, Inc. Competition As a full supply chain service provider, 2GO Express does not have any competitor that can offer the same breadth of services. However, 2GO Express has different competitors on the various components of its portfolio. And, some of 2GO Express’ competitors are also its customers. 13 Principal Suppliers 2GO Express loads with SuperFerry vessels of 2GO and with Cebu Pacific Air to transport cargoes by sea and air, respectively. Some of its major truckers include Northern Luzon Trucking and Sun-Gold Forwarding Corp. Other suppliers include Shell, Petron, and Zenshin. 2GO Express manages a pool of suppliers, mainly small to medium entrepreneurs: Truckers • Operate-To-Own – a scheme provided to entrepreneur aspirants, where both parties undergo a contract that 2GO Express will provide the vehicle under certain terms and conditions and the courier will own it after a defined period. • Sub-Contracted Truckers – small to medium truckers are outsourced either on a lock-in scheme or variable trip basis per day. Agents 2GO Express’ retail outlets are also composed of agents who accept documents, cargo and money for outbound transactions, and deliver the same for inbound transactions. They are paid on commission scheme or fix fee per day depending on the type of product, volume handled, and geographic location. Aside from commission, agents are supported through advertising and promotional activities to direct customers to their outlets. Incentive schemes are also in place to encourage sales and compliance to operating policies and procedures. Outsourced Functions Certain functions are outsourced to third parties and are being paid either per piece, per head, per man-hour or fix fee depending on the type of activity. The objective is to focus on business units’ core competencies. Service level agreements are drawn for each supplier. Regular performance reviews or evaluations are conducted in order to ensure compliance and adherence to the contract as well as to all policies and procedures set. 2GO Express looks at its suppliers as partners, with a joint commitment that as it grows its business, it also grows theirs. Customer 2GO Express and its subsidiaries’ primary customers are manufacturers of high-value, fast moving consumer goods, electronics and telecommunication companies who recognize the need to outsource parts of or their entire supply chain. They are open to integrate, collaborate, and share information. Currently, the industries that fall as our secondary customers are pharmaceuticals, branded apparels, automobiles, retailers, distributors and financial institutions. Transactions With and/or Dependence on Related Parties Services to and from related parties consist mostly of cargo freight, handling and hauling, and management services which are made at normal market price. Effect of Existing or Probable Governmental Regulations The passage of Republic Act 9337 last May 24, 2005 has abolished the franchise tax of 2GO Express. It is now subject to the corporate income tax. 2. The Supercat Fast Ferry Corporation (SFFC) SFFC was incorporated on June 20, 2001. It is 100% owned by 2GO. It is in the business of providing fast craft passenger services under the “Supercat” brand name. At present, SFFC operates eight (8) fast craft vessels with a total gross weight of 1,813 tons and a total passage capacity of 2,305 passengers. Its vessels service the ports of Cebu, Ormoc, Tagbilaran, Bacolod, Iloilo, Batangas and Calapan. 14 3. NN-ATS Logistics Management & Holding Co., Inc. (NALMHCI) NALMHCI was organized and incorporated on November 22, 2011. It is a wholly-owned subsidiary of 2GO. The purpose of NALMHCI is primarily to act as managing agents, local agents or representatives of (i) subsidiaries and affiliates engaged in logistics activities, (ii) corporations, (iii) partnerships, (iv) agencies, (v) associations, (vi) enterprises, (vii) establishments, (viii) institutions, private or governmental, domestic or foreign, except the management of funds, portfolios, or other similar assets of the managed entities; and to undertake, organize, form, promote, develop or establish businesses, and all forms of enterprises, whether here or abroad, as are necessary, suitable, or convenient to be undertaken, organized, formed, promoted, developed or established to carry out, directly or indirectly, the purposes and interests or to enhance the businesses or to render more valuable or profitable any of its rights, properties, interests or enterprises. NALMHCI is the holding company of the following companies with its percentage ownership: Company Name (1) J & A Services Corporation (1, 2) Red.Dot Corporation (3) Super Terminal Inc. Supersail Services Inc. North Harbor Tugs Corporation Sungold Forwarding Corporation (1) (2) (3) Acronym J&A RDC STI SSI NHTC SFC % Ownership 80.0 80.0 50.0 100.0 58.9 51.1 The Company directly owns the remaining 20% ownership in J&A and RDC RDC was incorporated on October 3, 2009 and started its commercial operations on February 1, 2010 NALMHCI has control over STI since it has the power to cast the majority of votes at the BOD’s meeting and the power to govern the financial and reporting policies of STI 4. Special Container and Value Added Services, Inc. (SCVASI) SCVASI was formed and organized on March 8, 2012. It is a wholly-owned subsidiary of the registrant. It has a primary purpose of engaging in domestic and/or international business of transporting any and all kinds of goods and cargoes, by sea, air and land, functioning as non-vessel operating common carrier, engaging in cargo forwarding including acting as cargo consolidator and break-bulk agent, and courier for mails, letters, pouches, other cargoes and personal effects of any and all kinds, types and nature. Item 2. Properties 2GO Vessels As of December 31, 2011, 2GO and its subsidiaries have a total fleet of 29 operating vessels, of which 19 are company-owned ships. The fleet consists of 8 fast crafts, 12 RoRo/Pax vessels (of which 3 vessels are time chartered from its parent company, NENACO), and 9 freighters (of which 3 are also time chartered from its parent company and 4 from MCCP). The Company’s vessel fleet has a combined Gross Registered Tonnage of approximately 204,140 metric tons, total passenger capacity of approximately 20,360 passengers and aggregate cargo capacity of approximately 6,059 twentyfoot equivalent units (TEUs). Currently, 2GO operates 9 RoRo/Pax vessels calling on Manila as their homeport. These vessels are larger coastwise vessels that sail from Luzon to Visayas and Mindanao. Further, 2GO operates 3 medium-sized vessels, the Cebu Ferries, operating in the Visayas and Mindanao routes and with Cebu as their homeport. The 8 fast craft passenger vessels, on the other hand, are smaller fast crafts that ply on short distances. The Company also operates 5 purelycargo vessels to fully complement its freight business. 15 Land, Buildings and Warehouses The Company owns several pieces of land and a number of buildings and warehouses. These are used in the normal course of business. For details of their locations, please refer to Schedules E.1 and E.2. Insurance Coverage The 2GO vessels are appropriately supported by the top Marine Insurance players throughout the world. The Hull and Machinery insurance, which insures physical damage to the ships, is being underwritten by reputable local and foreign insurers and is fronted by Pioneer Insurance. Likewise, the War & Strikes cover which protects the vessels against war and war-like operations is insured through Pioneer Insurance. The Protection and Indemnity (P&I) Insurance covering the legal liabilities of the shipowners such as but not limited to pollution, wreck removal and damages to fixed and floating objects is placed with The Steamship Mutual Underwriting Association (Bermuda) Ltd. The Marine Cargo insurance covering claims arising from losses and damages to cargoes is placed with Philippine Charter Insurance Corporation and Chartis Insurance Philippines, Inc (formerly Philam Insurance Co., Inc) whilst the insurance cover specifically tailored to protect Bangko Sentral ng Pilipinas (BSP) shipments is fronted by Pioneer Insurance. The Commercial General Liability of all the Company's owned, affiliated and associated offices are fully insured by Oriental Assurance Corporation. Furthermore, all passengers boarding any 2GO vessels are secured against injuries and/or loss of life with Philippine Charter Insurance Corporation. On the other hand, members of the technical crew of the 2GO vessels are insured with Philippine Charter Insurance Corporation. The land-based employees, on the other hand, are covered by Chartis Insurance Philippines, Inc. The rest of the Company's properties nationwide, including the containers vans & the container handling equipment are likewise fully covered with insurance policies issued by respectable insurance companies in the country. Container Yard and Warehousing Facilities The Company has one of the most extensive networks of container yards and warehousing facilities nationwide. Most of the Company’s container yards have been cemented, whether in whole or in part, to achieve greater efficiency in terminal operations, allow for shorter turnaround time in port, greater utilization in stacking of containers and lower repair and maintenance costs for the operating equipment used at the container yards. The Company also has sufficient warehouse space. Warehouses are either owned or leased by the Company. The Company’s warehouse network consists of warehouses at Bacolod, Butuan, Cebu, Davao, Dumaguete, General Santos, Iligan, Iloilo, Ozamis, Zamboanga and Manila. Containers and Other Equipment 2GO owns and leases a variety of containers and other equipment of various types and sizes for use in its cargo operations including forklift, top loaders, yard tractors and trailers or chassis. Master lease agreements entitle the Company to use the containers in exchange for a per diem rate for the duration of the lease. Lease purchase agreements allow the Company to use the containers for a specified number of years while it continues to pay the lessor a fixed per diem rate and gives the Company the option to acquire the containers at the end of the lease. Installment purchase agreements allow the Company to pay the full purchase price of the containers by installments in accordance to a fixed schedule. Containers under capital leases as of December 31, 2011 are shown under the “Property and Equipment” account in Note 14 of the consolidated financial statements. 16 Liens and Encumbrances Detailed discussion as regards the mortgage, liens and encumbrance over the properties of the registrant are disclosed under Note 20 of the consolidated financial statements. 2GO EXPRESS Leases Major leases of 2GO Express include rental offices, outlets and warehouses nationwide. The lease contracts for its outlets nationwide are renewable every year. Item 3. Legal Proceedings There are certain legal cases filed against 2GO and its subsidiaries in the normal course of business. Management and its legal counsel believe that they have substantial legal and factual bases for their position and are of the opinion that losses arising from these cases, if any, will not have a material adverse impact on the consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders Nothing was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II - OPERATIONAL AND FINANCIAL INFORMATION Item 5. A. Market Price of and Dividends on Registrant’s Common Equity and Related Stockholder Matter. Market Information The Common Stock of the Corporation is listed at the Philippine Stock Exchange. As of latest market date, April 30, 2012, the market price of the Company’s common stock is P2.08 per share. Below is the range of high and low bid information for the Company’s common equity for each quarter within the last two fiscal years and any subsequent interim period: High Low 2012 First Quarter P = 4.72 P = 1.33 2011 First Quarter Second Quarter Third Quarter Fourth Quarter P = 1.95 1.94 1.90 1.48 P = 1.77 1.61 1.20 1.33 2010 First Quarter Second Quarter Third Quarter Fourth Quarter P = 1.18 1.16 1.34 1.18 P = 1.02 1.08 1.16 1.12 17 B. Stockholders The number of common shareholders of record as of April 30, 2012 is 1,974. The top 20 common stockholders as of April 30, 2012 are as follows: No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Name Negros Navigation Co., Inc. PCD Nominee Corporation (Filipino) Union Properties, Inc. Abacus Securities Corporation Santiago Tanchan III Constantine Tanchan PCD Nominee Corporation (Foreign) Harrison Abella Ong Ramon Rivero Fast Cargo Transport Corp. Union Bank of the Philippines Philips Multiemployer Retirement Plan Prudential Guarantee & Ass Inc. AMA Rural Bank of Mandaluyong, Inc. Alexander J. Tanchan Ramon R. Rivero Elizabeth Chiu Iker Aboitiz Lilian S. Lim Frederick Ong Jr. No. of Shares Held 2,400,141,991 18,170,024 1,578,125 1,530,000 1,262,500 1,262,500 1,144,676 890,062 757,500 744,875 744,875 631,250 458,287 441,875 430,260 404,000 378,750 372,389 315,625 311,496 % to Total 98.12% 0.74% 0.06% 0.06% 0.05% 0.05% 0.05% 0.04% 0.03% 0.03% 0.03% 0.03% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.01% 0.01% As of March 31, 2012, the total number of shares owned by the public is equivalent to 48,872,177 shares or equivalent to 1.99%. C. Dividends Declaration On December 01, 2010, the Board approved the declaration of a special cash dividend equivalent to P0.15 per share to all 2GO stockholders of record as of December 15, 2010. The special cash dividend represents the sales proceeds of the Aboitiz Jebsen companies net of taxes and other related costs. Dividends were paid last January 12, 2011. Further, there were no dividends declared during the year 2009 as well as the year 2011. Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations Fiscal Year 2011 vs. 2010 Consolidated Income Statements Consolidated revenues increased by P1.4 billion compared to the previous year to reach P13.0 billion from P11.6 billion. Both shipping and supply chain revenues went up during the year, contributing 14% and 9% increase in revenues respectively. The increase in revenues can be attributed to a large extent to business rationalization with the integration of its operations with its parent company, NENACO. In terms of revenue mix, the shipping business accounts for 60% while supply chain accounts for 40% of the total revenues. Freight revenue jumped 7% against last year from P5.3 billion to P5.7 billion in 2011 resulting from higher average price. Passage revenue, on the other hand, grew 9% from P2.2 billion in 2010 to P2.4 billion in 2011. The increase in passage revenue is attributed to the combined increase in passenger volume and average price which both increased by 5% during the year. Revenues from supply chain also went up during the year, contributing P411.6 million additional revenues against last year as it continues to grow the trading business due to a rise in the number of principals. 18 Total costs and expenses amounted to P13.3 billion, 9% or P1.1 billion higher than P12.2 billion in 2010. The increase is largely attributable to higher operating expenses, which jumped 15% against last year mainly due to higher fuel expense and outside services. Fuel, oil and lubricants soared 22% or P636.7 million during the year resulting from higher fuel prices. In 2011, the average fuel prices went up by more than 18%, or P4.32 per liter compared to 2010. However, the Company has implemented freight rate increases during the year to lessen the negative impact to its margins. The Company’s vessel fleet comprising of the SuperFerries, Cebu Ferries and 2GO freighters was managed by Aboitiz Jebsen Bulk Transport Corporation (ABOJEB) and the management cost was included in outside services under operating expenses. However, on October 15, 2011, the Ship Management Division (SMD) of the registrant’s parent company, NENACO, took over the ship, crewing and purchasing management as well as the ship cost accounting and fuel management of the whole vessel fleet from ABOJEB. The expanding trading business contributed to higher cost of goods sold which increased 18% or P394.9 million compared to 2010. On the other hand, the Group was able to cut down overhead expenses by a huge 30% or P442.4 million against last year mainly due to lower personnel costs and outside services. During the year, the Group streamlined its manpower and rationalized its costs with the integration of its business operations with NENACO. In 2011, the Company recognized impairment loss on assets held for sale amounting to P223.6 million for 2GO1 and 2GO2 vessels, as a result of the Company’s integration with NENACO and vessels’ route rationalization. Finance costs of P407.5 million were substantially higher versus last year from increased interest bearing loans. 2GO registered P634.3 million net loss attributable to holders of the Parent Company (P625.6 million excluding minority shareholders). Income before income tax is up 47% or P714.0 million against last year. This is the result of the various synergy initiatives undertaken by the Company which are now slowly coming into fruition as demonstrated by the overhead cost reduction of over 30% compared to last year. Earnings per Share Earnings per share is computed by dividing Net Income Attributable to Equity Holders of the Parent over weighted average number of common shares outstanding for the year. Earnings per share for 2011 stood at (P0.26)/share compared to (P0.33)/share in 2010. 19 In Millions Pesos CONTINUING OPERATIONS REVENUES Freight Passage Sale of goods Service fees Food and beverage Others COSTS AND EXPENSES Operating Terminal Cost of goods s old Overhead OTHER INCOME (CHARGES) Impairment loss on goodwill, property and equipment and assets held for sale Equity in net earnings (los ses) of as sociates Interest and financing charges Others - net INCOME (LOSS) BEFORE INTEGRATION COSTS INTEGRATION COSTS INCOME (LOSS) BEFORE INCOME TAX FROM CONTINUING OPERATIONS PROVISION FOR (BENEFIT FROM) INCOME TAX NET INCOME (LOSS) FROM CONTINUING OPERATIONS NET INCOME FROM DISCONTINUED OPERATIONS NET INCOME (LOSS) Years Ended December 31 2011 2010 2009 Variance '11 vs '10 % % to Revenues 2011 2010 5,678 2,384 3,029 1,251 260 369 12,971 5,326 2,179 2,566 1,064 160 316 11,611 5,256 2,238 1,735 813 469 10,510 352 205 463 188 100 53 1,360 7% 9% 18% 18% 63% 17% 12% 44% 18% 23% 10% 2% 3% 100% 46% 19% 22% 9% 1% 3% 100% 8,192 1,495 2,602 1,034 13,323 7,093 1,474 2,207 1,476 12,250 5,832 1,381 1,461 1,449 10,123 1,099 21 395 (442) 1,073 15% 1% 18% -30% 9% 63% 12% 20% 8% 103% 61% 13% 19% 13% 106% (224) (15) (407) 300 (346) (698) (123) (779) 40 (228) 71 (896) (1,535) - 57 (74) 309 292 679 - -2% 0% -3% 2% -3% -5% -1% -7% 0% -2% 1% -8% -13% 0% (821) (1,535) 679 714 47% -6% -13% (195) (421) 167 226 54% -2% -4% (626) (1,114) 512 488 44% -5% -10% (626) 359 (755) 111 623 0% -5% 3% -7% 555 71% (55) -136% (179) -78% 229 324% 550 61% 837 55% (123) N/A (359) -100% 129 17% Consolidated Balance Sheets Consolidated assets of 2GO stood at P12.1 billion as of December 31, 2011, posting a 4% or P443.3 million reduction from P12.6 billion as of December 31, 2010. The decrease is largely attributable to the reduction in property and equipment, which reduced by 25% from P6.2 billion in 2010 to P4.6 billion as of end of 2011. During the year, the Company sold one (1) RoPax vessel for net cash proceeds of P103.7 million that resulted to a gain from sale amounting to P4.6 million. The Group also disposed certain property and equipment which includes vessel parts, containers, freight equipment, and transportation and handling equipment for net proceeds of P58.2 million, resulting to gain from sales of P6.8 million. Total current assets jumped 22% from P4.8 billion to P5.9 billion as of December 31, 2011. The increase was mainly attributed to the classification of five (5) of the Group’s existing vessels as assets held for sale with total carrying values of P692.6 million, net of impairment losses. The management assessed that these vessels met the criteria as assets held for the following reasons: (1) the related assets are available for immediate sale; (2) preliminary negotiations with willing buyers were executed; and (3) the sale is expected to be completed within 12 months from the end of reporting period. The Group recognized deferred tax assets of P964.1 million as management believes that sufficient taxable profit will be available in the near future against which the NOLCO can be utilized. Total liabilities amounted to P8.8 billion, 2% higher against P8.6 billion as at December 31, 2010. In March 2011, the Company’s P2.0 billion short-term debt was refinanced to long term loan and another P2.0 billion loan was used to refinance the existing long-term debt of the Company as of 31 December 2010. 20 The total long-term debt amounted to P4.0 billion which consist of Series A and Series B Term Loans amounting to P2.0 billion each. The interest on each of the Series A and Series B Term Loans is a combination of fixed and floating rates. Fifty percent (50%) of the principal amount of each of the Series A Term Loan and Series B Term Loan, respectively, have a fixed interest rate, and the remaining fifty percent (50%) have a quarterly floating annual interest rate, provided, such floating interest rate shall have a minimum of 5.0% per annum. The principal of the loans is subject to 16 quarterly amortizations which commenced at the end of the third quarter from the drawdown date until March 2016. Total Stockholders’ Equity decreased by 16% or P649.8 million to P3.3 billion from P3.9 billion as of December 31, 2010 mainly due to the net loss incurred for the year. In Millions Pes os ASSETS Current Assets Cash and cash equivalents Trade and other receivables Inventories Other current assets As sets held for sale Total Current Assets 2011 Audited 906 2,898 407 996 5,208 693 5,901 2010 As Res tated 805 2,523 564 952 4,844 4,844 Variance Inc/(Dec) % Change 102 375 (157) 45 364 693 1,057 13% 15% -28% 5% 8% 100% 22% 21 In Millions Pesos Noncurrent Assets Property and equipment Available-for-sale investments Investments in associates Investment property Software development cos ts Deferred tax assets - net Goodwill Other noncurrent assets Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Loans payable Trade and other payables Income tax payable Redeemable preferred shares Current portions of: Long-term debt Obligations under finance lease Noncurrent portion of long-term debt presented as current Total Current Liabilities Noncurrent Liabilities Long-term debt - net of current portion Obligations under finance lease - net of current portion Accrued retirement benefits Deferred tax liabilities - net Redeemable preferred shares Other noncurrent liabilities Total Noncurrent Liabilities Total Liabilities Equity Attributable to the equity holders of the Parent Company: Share capital Additional paid-in capital Acquisitions of non-controlling interests Excess of cost over net ass et value of investments Unrealized gain on available-for-sale investments Share in cumulative translation adjustments of associates Retained earnings (deficit) Treasury shares Non-controlling interests Total Equity TOTAL LIABILITIES AND EQUITY 2011 Audited 2010 As Restated Variance Inc/(Dec) % Change 4,651 9 100 10 14 964 250 233 6,231 12,132 6,196 10 115 10 45 719 250 386 7,731 12,575 (1,545) (1) (15) (31) 245 (153) (1,500) (443) -25% -5% -13% 0% -69% 34% 0% -40% -19% -4% 1,215 3,432 6 26 1,993 4,543 - (777) (1,110) 6 26 -39% -24% N/A N/A 786 30 5,495 197 8 1,783 8,523 589 22 (1,783) (3,028) 300% 267% -100% -36% 3,178 92 52 0 8 3,331 8,826 37 20 4 23 12 96 8,619 3,178 54 32 (4) (23) (4) 3,234 207 N/A 145% 165% -94% -100% -30% 3353% 2% 2,485 911 6 (11) 0 5 (50) (59) 3,288 19 3,306 12,132 2,485 911 6 (9) 15 6 585 (59) 3,940 16 3,956 12,575 (2) (15) (1) (634) (652) 2 (650) (443) 0% 0% 0% 23% -98% -11% -109% 0% -17% 13% -16% -4% 22 Material Changes (+/-5% or more) in the Financial Statements Income Statement 11.7% higher total revenues due to: 16.8% increase in other revenues 61.9% increase in food and beverages 18.0% increase in sale of goods 17.6% increase in service fees 9.4% increase in passage revenues 6.6% increase in freight revenues 8.8% higher costs and expenses as a result of: 17.9% higher cost of goods sold 15.5% higher operating expenses; but 30.0% lower overhead costs Balance Sheet 3.5% lower total assets due to: 69.4% decrease in software development costs 39.8% decrease in non-current assets 24.9% decrease in property and equipment 13.2% decrease in investments in associates; but 34.2% increase in deferred tax assets due to accumulated net loss 21.8% increase in current assets 2.4% higher total liabilities due to increase in long-term debt, obligations under finance lease, pension liability, redeemable preferred shares and other non-current liabilities offset by lower deferred tax liabilities 16.43% lower stockholders’ equity from lower retained earnings, unrealized gain of AFS investments and in share in cumulative translation adjustment (CTA) Consolidated Cash Flow Statements Highlights: In Millions Pes os Net cas h flows from (used in) operating activities Net cas h flows from (used in) investing activities Net cas h flows from financing activities NET INC (DEC) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS,BEGINNING CASH AND CASH EQUIVALENTS, END Years Ended December 31 2011 2010 2009 (463) 619 1,034 225 (3,410) (1,409) 340 2,500 378 102 (291) 3 805 1,096 1,093 906 805 1,096 Increase (Decrease) '11 vs '10 '10 vs '09 (1,082) (415) 3,635 (2,001) (2,160) 2,122 393 (294) (291) 3 102 (291) The Group ended the year 2011 with P906.3 million cash balance, 13% or P101.6 million higher compared to 2010. Net cash from operating activities was down 175% or P1.1 billion from P619.3 million the previous year as the Group updated payment of its trade and other payables, including income taxes and creditable withholding taxes, totaling P795.3 million. Net cash generated from investing activities amounted to P224.6 million which were largely due to the sale of property and equipment and investments in a subsidiary, partially offset by the capital expenditures of P398.0 spent in 2011 for vessels’ capitalized drydocking and major repairs. During the year, the Company sold one (1) RoPax vessel for net cash proceeds of P103.7 million. The Group also disposed certain property and equipment which includes vessel parts, containers, freight equipment, and transportation and handling equipment for net proceeds of P58.2 million. Also, in 2011, the Company collected the proceeds from the sale of its investments from the Jebsen Group of Companies amounting to P399.9 million. During the year, the Company was able to refinance both its short-term and long-term loans with Banco de Oro Unibank, Inc. (BDO) by availing P4.0 billion term loans. Proceeds from the loans were mainly used to: refinance the P2 billion (in-default) corporate loan pay due portion of loans payable worth P1.7 billion 23 pay interest for the year of P363.3 million pay dividend amounting to P366.0 million settle debt transaction costs and finance lease obligations of P48.9 million and P100.6 million, respectively. Fiscal Year 2010 versus 2009 Consolidated Income Statements 2GO, for the most part of 2010, operated on limited capacity as most of its fleet was on scheduled drydocking and maintenance. Consolidated revenues increased by P1.1 billion compared to the previous year to reach P11.6 billion. Revenue from supply chain solutions, specifically trading, contributed to higher revenues overall. Local freight business also registered an increase of 1%, contributing a total of P5.3 billion revenue in 2010. The market was being served by chartering freighter vessels in the absence of its own vessels that were on drydock and maintenance. Freight utilization reached 94% on SuperFerry vessels. 2GO has fully integrated its total supply chain solutions business, the objective of which is to provide a more seamless solution to clients. Both Zoom in Packages (ZIP) and Reefer Van Specialists (RVSI) have been merged with ATS. ZIP’s business focus is on full container load (FCL) and loose container load (LCL) cargo while RVSI focuses on the cold chain business, which involves the transport of frozen and perishable goods. Merging these companies is seen to result in cost efficiencies and better synergies and ultimately serving customers better. Passenger business, inclusive of auxiliary revenues, reduced by P58.7 million or 3% to register at P2.18 billion revenues from P2.24 billion in 2009. It was able to however, maximize its limited operating capacity by achieving load factor of 79%. Total costs and expenses reached P12.2 billion, 21% higher than 2009. This is largely brought about by higher fuel expense as a result of rising average fuel prices. Given the uncertain fuel price behavior, 2GO continues to undertake various initiatives to mitigate its negative impact including the use of less expensive type of fuel. Terminal expenses increased due higher outside services costs. The expanding trading business also contributed to higher cost of sales. 2GO registered a P808.7 million Net Loss Attributable to Holders of the Parent Company. 2GO booked a one-time Impairment loss on ships in operation of P778.8 million during the year. Finance costs of P228.8 million were substantially higher versus last year from increased interest bearing loans. 2GO borrowed funds to finance the purchase of three roll-on roll-off passenger vessels and two fast crafts. 2GO also benefited from deferred income tax of P472.7 million. In December 2010, 2GO principal shareholders, Aboitiz Equity Ventures, Inc. (AEV) and Aboitiz and Company (ACO), sold their combined shareholdings of 93.2% in 2GO to Negros Navigation (NENACO) for a price of P1.8813 per share or a total of P4.3 billion. The sale, however, excluded the Aboitiz Jebsen group of companies, which includes international freight chartering, ship management and manpower businesses. The Company sold its 62.5% equity stake in each of Aboitiz Jebsen Bulk Transport Corporation, Aboitiz Jebsen Manpower Solutions, Inc. and Jebsen Maritime Inc. to AEV for a total price of P 355.9 million. It also sold its 50% equity stake in Jebsen Management (BVI) Limited to AEV for P 44.0 million. Buyers AEV and ACO paid the full price last January 2011. 2GO recognized a net gain of P213 million from this sale. During the period, 2GO recorded P305.4 million in net income from discontinued operations generated from the Aboitiz Jebsen group. Earnings per Share Earnings per share is computed by dividing Net Income Attributable to Equity Holders of the Parent over weighted average number of common shares outstanding for the year. Earnings per share for 2010 stood at (P0.33)/share. This is lower versus 2009 because of the net loss generated for the year. Consolidated Balance Sheets and Cash Flow Statements The consolidated balance sheets as of December 31, 2010 were restated to reflect the balance sheets of its business alliances. 24 As of December 31, 2010, consolidated assets of 2GO amounted to P12.6 billion, posting an 18% increase from December 31, 2009 of P10.6 billion. Property and equipment registered a 29% increase from P4.8 billion to P6.2 billion from the acquisition of three ropax vessels and higher vessel refurbishments & improvements. Assets of the company were being re-fleeted and modernized to increase operating efficiencies. Higher deferred income taxes from P255.5 million to P719.0 million also contributed to the increase in overall assets or 181% and higher other noncurrent assets from P262.9 million to P386.1 million or 47%. Total current assets are about the same in 2010, reducing marginally byP44.0 million or less than 1%. The decrease was mainly attributed to lower cash and cash equivalents from P1.1 billion to P804.7 million. The P291.0 million decrease was offset by higher freight receivables and non-trade receivables relating to the sale of the Aboitiz Jebsen group of companies. Receivables from service fees and insurance and other claims however reflected a decrease as of the period. Total liabilities amounted to P8.6 billion, a 58% increase from 2009. Total interest bearing loans stood at P4.0 billion. This is inclusive of the P2.0 billion five-year corporate fixed rate note facility issued last May to finance vessel acquisitions and maintenance. Trade and other payables also registered higher than last year bought about by higher accrued expenses and dividends payable. 2GO declared special cash dividends equivalent to P0.15 per share to all stockholders on record as of December 15, 2010. The special cash dividend represents the sales proceeds of the Aboitiz Jebsen companies, net of taxes and other related costs. The dividend payment was made on January 12, 2011. Stockholders’ Equity decreased by 23% to P3.9 billion from P5.2 billion as of December 31, 2009 mainly due to lower retained earnings brought about by the net loss for the period. Cash Flow Statements Total additions to property and equipment reached P3.7 billion mainly because of vessel acquisitions and drydocking of five (5) vessels to ensure their future reliability. These expenditures were financed by long-term debt. Cash and cash equivalents at the end of the period stood at P804.7 million. Fiscal Year 2009 versus 2008 Consolidated Income Statements 2GO ended the year 2009 with net income attributable to equity holders of parent of P546.1 million, a 559% improvement over just P82.8 million in 2008. Consolidated revenues increased by P237.2 million, largely from the sale of goods and service fees. In September 2009, 2GO lost a ship and the Maritime Industry Authority (MARINA) thereafter temporarily suspended the remainder of its fleet. This greatly affected freight and passenger business. All vessels ultimately passed the MARINA’s audit and inspection and were cleared for sailing shortly after the suspension. All 2GO vessels, their cargo and passengers are fully insured to the extent mandated by law. Devastating typhoons, affecting overall operations although 2GO responded with speed and resources, also plagued the last quarter of 2009. Local freight business contributed P5.3 billion in revenues for the year 2009, a 3% or P148.3 million decreased from the same period in 2008. Passenger business, inclusive of auxiliary revenues, reduced by P342.8 million or 13% to register at P2.2 billion revenues from P2.6 billion in 2008. On the other hand, 2GO’s overall value added business, inclusive of supply chain, jumped P709.3 million to reach P2.5 billion in 2009. 2GO continues to build on this business with bright industry prospects. Fuel costs and charter hire costs dropped in 2009 leading to a P353 million decline in operating expenses and 48% improvement in earnings before interest, taxes, depreciation and amortization (EBITDA) to register at P1.4 billion in 2009. Earnings per Share Earnings per Share is computed by dividing Net Income Attributable to Equity Holders of the Parent Company over weighted average number of common shares outstanding for the year. Earnings per share for 2009 stood at P0.22/share. This is higher versus 2008 because of higher net income. 25 Consolidated Balance Sheets and Cash Flow Statements On April 30, 2009, the principal stockholders of 2GO namely, AEV and ACO, received a firm and final advice from KGLI-NM, that the proposed acquisition of 2GO shares will not come to fruition based on the terms agreed upon in the Memorandum of Agreement signed on September 23, 2008. 2GO and NENACO however, agreed to continue to explore service and process improvements for better margins and cost benefits to both companies. As of December 31, 2009, consolidated assets of 2GO amounted to P10.6 billion, posting a 13% increase from December 31, 2008 of P9.4 billion. Total current assets reflected a 15% increase from P4.2 billion to P4.8 billion as of December 31, 2009. The increase was mainly attributed to higher Non-trade receivables by P266.6 million directly related to the SuperFerry 9 incident and higher Inventories such as materials, parts and supplies by P164.8 million. 2GO’s net Property and Equipment increased by P580.3 million. Assets of the company were being re-fleeted and modernized to increase operating efficiencies. Slowly, 2GO is increasing its capacities after it sold vessels in the past to capitalize on high market rates. In 2009, internally generated funds were used to purchase two freighters, two fast crafts, and one roro-passenger vessel at very competitive rates. In addition to asset purchases, funds were also use for the regular maintenance of its assets, including drydocking and vessel improvements. Total liabilities amounted to P5.5 billion, a 13% increase from 2008. Total interest bearing debt was up by P100.1 million from P1.3 billion in 2008. 2GO continued to be committed in gearing towards a more solid financial position and delivering positive cash flows. Trade and other payables showed a P177.5 million or 5% addition from 2008 mainly from the increase in trade payables. Stockholders’ Equity likewise increased by 12% to P5.2 billion from P4.6 billion as of December 31, 2008 due to higher net income of December 31, 2009. Cash generated from operations amounted to P1.1 billion. Total capital expenditures for the period stood at P1.9 billion. Cash and cash equivalents at the end of the year was at P1.1 billion. Material Changes (+/-5% or more) in the Financial Statements Income Statements 2% higher total revenues due to: 20% increase in service fees from higher warehousing revenue 49% increase in sale of goods due to full year operation of Scanasia Overseas, Inc., (Scanasia) a supply chain company acquired by 2GO Express, Inc. in June 2008 2% lower costs and expenses as a result of: 6% lower operating expense primarily due to 34% lower fuel price, 19% lower food and subsistence, 41% lower sales concessions and 32 percent lower commissions 27% lower terminal costs due to lower transshipment fees. Balance Sheets 13% higher total assets due to: 18% higher net receivable primarily due to increase in non-trade receivables. 52% increase of inventories because of higher merchandise inventory and higher materials, parts and supplies of spare parts 11% higher prepaid expenses 328% higher investment in associates from MCCP’s improved results of operations and additional investment with Kerry-ATS Logistics Inc. (KALI), the joint venture with Kerry Logistics Network of Hong Kong or KLN 14% higher property and equipment from additional vessels purchased. 68% higher loans payable from additional bank borrowings 12% higher stockholders’ equity from higher retained earnings 26 Key Performance Indicators (KPIs) The following KPIs are used to evaluate the financial performance of 2GO and its subsidiaries: a. Revenues – 2GO revenues consist of shipping and supply chain revenues and they are recognized when the related goods or services are delivered or rendered. Total Revenue in 2011 is P13.0 billion compared to P11.6 billion in 2010. b. Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) - is calculated by adding back interest expense, amortization and depreciation into income before income tax, excluding extraordinary gains or losses. The Group’s EBITDA for 2011 is P1,027 million. c. Income before Income Tax (IBT) – is the earnings of the company before income tax expense. The loss before income tax for 2011 is P820.9 million, 47% higher compared to P1.5 billion in 2010. 2GO reflected close to P345.8 million other charges in 2011 brought about by the recognition of vessel impairment loss on ships in operation and finance costs. d. Debt-to-Equity Ratio – is determined by dividing total liabilities over stockholders’ equity. 2GO’s debt-to-equity ratio in 2011 is 2.67:1:00. e. Current ratio – is measured by dividing total current assets by total current liabilities. The Company’s current ratio in 2011 is 1.07:1:00. The following table shows comparative figures of the top five KPIs for 2011, 2010, and 2009 (amounts in millions except for the financial ratios) based on the consolidated financial statements of 2GO and its subsidiaries: 2GO Group, Inc. and Subsidiaries In Millions Pesos except Ratios Revenues EBITDA IBT Debt-to-Equity Ratio Current Ratio 2011 12,971 1,027 (821) 2.67 : 1.00 1.07 : 1.00 2010 11,611 709 (1,535) 2.18 : 1.00 0.57 : 1.00 2009 10,510 1,621 679 1.06 : 1.00 0.89 : 1.00 2GO Express, Inc. and Subsidiaries In Millions Pesos except Ratios Revenues EBITDA IBT Debt-to-Equity Ratio Current Ratio 2011 5,182 537 32 3.91 : 1.00 0.97 : 1.00 2010 4,771 685 215 3.33 : 1.00 1.00 : 1.00 2009 4,044 809 191 3.93 : 1.00 0.94 : 1.00 Supercat Fast Ferry Corporation In Millions Pesos except Ratios Revenues EBITDA IBT Debt-to-Equity Ratio Current Ratio 2011 638 113 (22) 3.24 : 1.00 0.38 : 1.00 2010 591 166 27 2.31 : 1.00 0.39 : 1.00 2009 439 172 79 4.85 : 1.00 0.44 : 1.00 27 MCC Transport Philippines, Inc. In Millions Pesos except Ratios Revenues EBITDA IBT Debt-to-Equity Ratio Current Ratio 2011 955 24 (84) 8.79 : 1.00 1.10 : 1.00 2010 1,050 126 137 2.20 : 1.00 1.46 : 1.00 2009 966 197 195 6.31 : 1.00 1.17 : 1.00 Other Information Other material events and uncertainties known to management that would address the past and would have an impact on 2GO’s future operations are discussed below. i. Total fuel/lubes expense is a major component of 2GO’s total costs and expenses. 2GO is constantly looking for ways to reduce fuel consumption to lessen the impact of the increasing fuel prices on the bottom line. ii. Except as disclosed in the management discussion and analysis and notes to the financial statements, there are no other known events that will trigger direct or contingent financial obligation that is material to 2GO, including any default or acceleration of an obligation. There are also no other known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on revenues or income from operations. iii. All significant elements of income or loss from continuing operations are already discussed in the management discussion and notes to financial statements. Likewise any significant elements of income or loss that did not arise from 2GO’s continuing operations are disclosed either in the management discussion or notes to financial statements. iv. There is no material off-balance sheet transaction, arrangement, obligation, and other relationships of 2GO with unconsolidated entities or other persons created during the reporting period. v. Seasonal aspects of the business are considered in 2GO’s financial forecast. vi. 2GO does not expect any liquidity or cash problem within the next twelve months. Capital expenditures are funded through cash generated from operations and additional borrowings. Outlook With a stronger handle on costs and expenses today, the next focus is on top line revenues. We aim to continue providing value added services at the lowest cost. Super Ferry vessels, with lower cost per slot can command higher service margins from its frequency, speed, reliability and overall better service. The realization of the synergies pursued with aggressiveness throughout 2011, is expected to be the fulcrum with which improvements in top line revenues would provide healthier gross margins and bottom line figures in 2012. The consolidated entity has sets its sights on aggressive targets and a strong passion for the Supply Chain business. Sales and business development teams are now in the final stages of securing new account principals which can bring about unprecedented growth to the Company on the Logistics business. This is completely in line with the vision of the senior leadership to transform 2GO, together with its parent company, NENACO, from a mere shipping company to a total logistic solutions package to a wider clientele base, thus creating greater value to shareholders. Item 7. Financial Statements The consolidated financial statements and schedules listed in the accompanying Index to Financial Statements and Supplementary Schedules are filed as part of this SEC Form 17-A. The management is not aware of any significant or material events or transactions not included nor disclosed in the consolidated financial statements in compliance with the SRC Rule 68. 28 Item 8. Information on Independent Accountant and Other Related Matters The accounting firm of SGV & Co. (SGV) has been 2GO's Independent Public Accountant since year 1977. This is reckoned to be the approximate date based on the available records. Representatives of SGV will be present during the annual meeting and will be given the opportunity to make a statement if they so desire. They are also expected to respond to appropriate questions if needed. In August 2009, the Board of Directors of 2GO approved the consolidation of its Audit Committee to the newly created Audit and Corporate Governance Committee. The incumbent members of the said Committee are: Mr. Francis C. Chua as chairperson, Messrs. Patrick Ip, Mark E. Williams and Geoffrey M. Seeto as members, and Mr. Evan C. McBride as ex-officio member. At its regular board meeting on April 23, 2009, the Board of Directors approved a resolution to delegate to the Board of Directors the authority to appoint the Company’s external auditors. The stockholders ratified the same resolution during its annual stockholders meeting. Further, in compliance with the SEC guidelines on the rotation of external auditors under SRC Rule 68, Paragraph 3(b)(iv), 2GO has already adopted and incorporated the said guidelines in its Code of Corporate Governance. Moreover, the Registrant will also adopt and observe the two-year cooling of period in the re-engagement of the same signing partner or individual auditor in compliance with the provisions under SRC Rule 68, Paragraph 3(b)(ix). Ms. Josephine H. Estomo has been assigned as the signing partner of 2GO starting fiscal year 2011. She replaced Mr. Ladislao Z. Avila Jr., who had been the signing partner since fiscal year 2006, in compliance with the five years rotation requirement under SRC Rule 68, Paragraph 3(b)(iv). (1) External Audit Fees and Services Estimates for December 31, 2012 Audit Fees Audit-Related Fees All Other Fees TOTAL P 1,000,000 P 1,000,000 Year ended December 31, 2011 P Year ended December 31, 2010 1,300,000 P 1,300,000 P 1,000,000 P 1,000,000 Audit Fees This represents professional fees for financial assurance services rendered for the Company’s Annual Financial Statements, review and opinion for SEC Annual Report. Audit-Related Fees This represents professional fees for technology and security risk services rendered by the external auditor in connection with the Audit on Company’s Annual Financial Statements. All Other Fees This represents fees for services rendered in reviewing and issuing opinion with regards to the Company’s annual reportorial requirement with Maritime Industry Authority (MARINA). Audit services provided to the Company by external auditor, SGV, have been pre-approved by the Audit and Corporate Governance Committee and recommended to the Board of Directors for approval. The Audit and Corporate Governance Committee has reviewed the magnitude and nature of these services to ensure that they are compatible with maintaining the independence of the external auditor. (2) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There was no event in the past years where SGV and the Registrant had any disagreements with regard to any matter relating to accounting principles or practices, financial statement disclosure or auditing scope or procedure. 29 PART III - CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers of the Registrant The names, ages, citizenship, position and offices held or will hold, and brief description of business experience during the past 5 years (except those years stated otherwise) and other directorships held in reporting companies, including name of each company, of all directors and executive officers are as follows: DIRECTORS Mr. Francis C. Chua, 61 years old, Filipino, has served as Chairman of the Board since July 2011 and as an Independent Director of 2GO since January 2011. He is also the Chairman of the Board Audit and Corporate Governance Committees. Mr. Chua also sits as the Chairman of the Board of NENACO since July 2011. His other current positions include Honorary Consulate General of the Republic of Peru in Manila; President and Eminent Adviser of the Philippine Chamber of Commerce and Industry; Chairman of the Philippine Chamber of Commerce and Industry Foundation, CLMC Group of Companies, and Green Army Philippines Network Foundation; President of DongFeng Automotive, Inc. and Philippine Satellite Corporation; Director of Philippine Stock Exchange, National Grid Corporation of the Philippines, Bank of Commerce, Basic Energy, and Overseas Chinese University; and Trustee of Xavier School Educational Trust Fund, and Adamson University. He graduated with a Bachelor of Science degree in Industrial Engineering from the University of the Philippines. Mr. Sulficio O. Tagud, Jr., 61 years old, Filipino, has served as the President and Chief Executive Officer and a Director of 2GO since December 2010. Mr. Tagud is also the Chairman of the Compensation, Remuneration and Nomination Committee of the Company. He has also served as the Chairman and President of KGLI-NM Holdings, Inc. since July 2008; Chairman and Chief Executive Officer of NENACO since August 2004; and Chairman and CEO of Negros Holdings & Management Corporation since December 2006. He graduated Class Valedictorian with a Bachelor of Science degree in Business Administration, major in Economics (Magna Cum Laude) at Xavier University, Cagayan De Oro City. He also completed his Masters in Industrial Economics at the Center for Research and Communication in Manila, and Masters in Business Administration at the Ateneo de Manila University. He also completed Real Estate Development Program at the Urban Land Institute at Washington, D.C., U.S.A. Mr. Jeremias E. Cruzabra, 45 years old, Filipino, has served as Director since December 2010, Treasurer and Chief Finance Officer since June 2011, and Corporate Information Officer since December 2011 of 2GO. He has served also as the Chief Finance Officer of NENACO since April 2004; Chief Finance Officer and Board Director of KGLI-NM Holdings, Inc. since July 2008; Court-Appointed Receiver of Selegna Holdings Corporation since November 2006; Chief Finance Officer (and later Trustee) of Sapphire Securities, Inc. (owned by the Brunei Investment Agency) from 1997 to 1999. He started his career with SGV & Co. (a member company of Ernst & Young) from 1988 to 1992. After SGV, Mr. Cruzabra held managerial/executive positions in several subsidiaries of Metro Pacific Corporation from 1992 to 1997. Mr. Cruzabra, who is a Certified Public Accountant, graduated with a Bachelor of Science degree in Commerce, major in Accounting (Magna Cum Laude). He completed his Masters in Business Administration at Murdoch University in Perth, Western Australia. Amb. Raul Ch. Rabe, 71 years old, Filipino, has been an Independent Director of 2GO since December 2010. He is also the Chairman of the Risk Management Committee. He has also served as a member of the Board of Directors of KGLI-NM Holdings, Inc. since July 2008; Bancommerce Investment Corporation since 2007; PET Plans, Inc. since 2007; Vivant Corporation since 2002; Bank of Commerce since 2001; Corporate Secretary of Manila Economic and Cultural Office since 2001, and of Counsel for Rodrigo, Berenguer and Guno since 1999. He graduated with a Bachelor of Arts degree at the University of Santo Tomas, and Bachelor of Laws degree from the Ateneo de Manila Law School. He also completed the Colombo Plan Scholarship on Diplomacy at the Australian Institute of Foreign Service in Canberra, Australia. Atty. Monico V. Jacob, 66 years old, Filipino, has served as an Independent Director of 2GO since December 2011. He also sits on the Board of NENACO as an Independent Member since December 2010. As a partner of the Jacob & Jacob Law Firm, he has been involved in corporate recovery work including rehabilitation receiverships and restructuring advisory in the following firms: The Uniwide Group of Companies, ASB Holdings, Inc., RAMCAR Group of Companies, Atlantic Gulf and Pacific Company of Manila, Inc., Petrochemicals Corporation of Asia-Pacific, All Asia Capital and Trust Corporation (now known as Advent Capital and Finance Corporation), Nasipit Lumber Company, Inc. and NENACO. His current positions include: President and CEO of Systems Technology Institute, Inc. (STI), Information and Communications Technology Academy, Inc., PhilPlans First, Inc., Philhealthcare, Inc., Banclife Insurance Co. Inc., and JTH Davies Holdings, Inc.; Member of the Boards of Jollibee Foods, Inc., Advent Capital and 30 Finance Corp., Asian Life Financial Assurance, Asian Terminals, Inc., Mindanao Energy, Inc., Phoenix Petroleum Philippines, Inc., De los Santos – STI College, De los Santos – STI Medical Center, Philippine Health Educators, Inc., and Anvaya Cove Beach and Nature Club; and Chairman of the Boards of Total Consolidated Asset Mgmt, Inc., and Global Resource for Outsourced Workers, Inc. He received his Bachelor of Arts in Liberal Arts from Ateneo de Naga and Bachelor of Laws from the Ateneo de Manila University. Mr. Nelson T. Yap, 53 years old, Filipino, has served as Director of 2GO since December 2011. Mr. Yap has over 30 years of professional experience in public accounting, financial management, treasury, analysis, controls, accounting, budgeting, tax planning and management reporting with a multinational insurance company, a Hong Kong regional headquarter overseeing operations in Netherlands Antilles, U.K., France, Australia, and the U.S., and with a listed BPO company. During the past 5 years, he has served as a Director of NENACO since December 2011; Group Comptroller of Paxys, Inc., a publicly-listed BPO company, from 2006 to September 2011; and as th Treasurer/Comptroller of NGL Pacific Limited from 2005 to June 2006. Mr. Yap, a Certified Public Accountant (15 Board placer), graduated with a Bachelor of Science degree in Commerce, major in Accounting (Cum Laude) from the Xavier University, Cagayan De Oro City. He took his Masters in Business Administration from Ateneo Graduate School of Business (no thesis) and further completed the same from Murdoch University in Perth, Western Australia. Mr. Mark E. Williams, 38 years old, American, has served as Director of 2GO since December 2010. He is also a member of the Board Compensation, Remuneration and Nomination, and Board Audit and Corporate Governance Committees. He currently sits as a Director of NENACO and has also served as Investment Director of KGLI-KSCC since 2008. He obtained his Bachelor of Science degrees in Accounting, Business Administration, and Finance at the University of Akron in Akron, Ohio, U.S.A. He completed his Juris Doctorate degree at Case Western Reserve University, Cleveland, Ohio, U.S.A., and also obtained a Masters degree in Business Administration, concentration in Finance, from Weatherhead School of Management of the same university. Mr. Geoffrey M. Seeto, 42 years old, Australian, has been appointed as a Director of 2GO since October 2011. Mr. Seeto is also a Member of the following Company Board Committees: (i) Compensation, Remuneration and Nomination; (ii) Audit and Corporate Governance; and (iii) Risk Management. He is also a member of the Board of NENACO since December 2010. He is the Head of Asia Infrastructure, Singapore with Babcock and Brown. He led infrastructure investments including PPP transactions throughout Singapore, Thailand and other ASEAN countries. Prior to Babcock and Brown, he spent 10 years with ABN Amro Bank in Singapore, the Netherlands and Canada, also specializing in infrastructure investments, mergers and acquisitions. He received his Bachelor of Economics Degree and Masters of Law from the University of Sydney, Australia. Mr. Patrick Ip, 42 years old, Chinese, was appointed as Director of 2GO since October 2011. He currently sits as a Member of the Board Risk Management and Board Audit and Corporate Governance Committees of 2GO. Mr. Ip is also a Director of NENACO, a Member of the Hong Kong Institute of Directors and is the Head of Portfolio Supervision Management for China-ASEAN Capital Advisory Company, the advisor to the China-ASEAN Investment Cooperation Fund. Prior to this he was the Chief Financial Officer of the private equity arm of the French bank, Natixis. There he was responsible for all private equity activities in Asia (e.g. India). Throughout his career he gained substantial experience in auditing and financial transaction advisory, legal and compliance, litigation and arbitration as well as hedge fund and alternative investment. Mr. Ip is a Chartered Financial Analyst, a Certified Public Accountant (Hong Kong) and a Chartered Certified Accountant with PwC in London. He took his Bachelor of Laws degree from the London University Law Schools and his Bachelor of Arts degree major in Accounting and Finance from the Leeds University, UK. Mr. Ramon G. Villordon, Jr., 59 years old, Filipino, has served as Director and President of 2GO from June 01 up to December 5, 2011. He also served as a member of the Board and President of NENACO from June 01 up to December 5, 2011. Prior to this, he was a Senior Vice President of 2GO and has served as the President and Chief Executive Officer of SuperCat Fast Ferry Corporation and Cebu Ferries Corp. from 2002 to 2011. He graduated with a Bachelor of Science degree in Business Management from the University of San Carlos. Ms. Michelle Lu, 51 years old, Chinese, has served as Director of 2GO from December 2010 to October 2011. She was also a member of the Nominations, Audit and Corporate Governance and Risk Management Committees of 2GO. She was the Managing Director of the China-ASEAN Capital Advisory Company and advisor to the China-ASEAN Investment Cooperation Fund. Prior to this role, Ms. Lu was Managing Director and Head of Infrastructure China at Standard Chartered Bank, with responsibility for managing the Standard Chartered IL & FS Asia Infrastructure Growth Fund. She has also held senior management roles at Macquarie Bank, Temasek Holdings and Hutchison Port Holdings. Her extensive experience in private equity investment includes shipping, ports, airports, toll roads, wastewater treatment, renewable energy, metal and mining, and telecom. She graduated with a Bachelor of Science in Physics at the Beijing Normal University in China, and obtained a Masters Degree in Business Administration from San Jose State University, California, U.S.A. 31 Atty. Amado R. Santiago III, 45 years old, Filipino, has served as the Corporate Secretary of 2GO since December 2010. He is the Managing Partner of the Santiago & Santiago Law Offices and is engaged in the general practice of law. He specializes in corporate litigation, which includes corporate rehabilitation proceedings under the Securities and Exchange Commission Rules on Corporate Recovery, Interim Rules of Procedure on Corporate Rehabilitation and the Rules of Procedure on Corporate Rehabilitation. He is also engaged in the practice of taxation law. He received his Bachelor of Science degree in Management, major in Legal Management (1988) from the Ateneo de Manila University. He graduated from the Ateneo de Manila School of Law in 1992 and is a member of the Philippine Bar. Atty. Manuel Eduardo C. Carlos, 36 years old, Filipino, has served as the Assistant Corporate Secretary since December 2010. He is the Associate Lawyer of the Santiago & Santiago Law Offices. Under this law firm, he specializes in corporate mergers and acquisitions and corporate housekeeping. He is also engaged in the practice of taxation law. He acts as corporate counsel, director and/or corporate secretary/assistant corporate secretary of various corporate clients. He received his Bachelor of Science degree in Management, major in Legal Management (1997) from the Ateneo de Manila University. He graduated from the Ateneo de Manila School of Law in 2002 and is a member of the Philippine Bar. Nomination Committee and Nominees for Election as Members of the Board of Directors In compliance with SEC Guidelines on the Nomination and Election of Independent Directors under SRC Rule 38, the Company Board created on February 26, 2003 a Nomination Committee (which was consolidated with the Compensation/Remuneration Committee in August, 2009.). As of December 31, 2011, the composition of the Board Compensation, Remuneration and Nomination Committee is as follows: Chairman: Members: Mr. Sulficio O. Tagud Jr. Mr. Mark E. Williams Mr. Geoffrey M. Seeto The Compensation, Remuneration and Nomination Committee promulgated the guidelines, which govern the conduct of the nomination of the members of the Company Board. It had pre-screened and short listed all candidates and came up with the following individuals as nominees for independent directors for the ensuing year (2012-2013): (1) Amb. Raul Ch. Rabe as nominated by Mr. Mark E. Williams (2) Mr. Francis C. Chua as nominated by Mr. Geoffrey M. Seeto (3) Atty. Monico V. Jacob as nominated by Mr. Mark E. Williams The nominating persons are not related to the nominees within the fourth degree of consanguinity. Further, the Committee approved on July 20, 2005 the Company’s Amended By-Laws incorporating the procedures for the nomination and election of Independent Directors under Rule 38 of the Securities Regulation Code, as the same may be amended from time to time. Period in Which Directors and Executive Officers Should Serve The directors and executive officers should serve for a period of one (1) year and until the election and qualification of their successors. Terms of Office of a Director The nine (9) directors shall be stockholders and shall be elected annually by the stockholders owning a majority of the outstanding common shares of the Registrant for a term of one (1) year and shall serve until the election and qualification of their successors. Any vacancy in the board of directors other than removal or expiration of term may be filled by a majority vote of the remaining members thereof at a meeting called for that purpose if they still constitute a quorum, and the director or directors so chosen shall serve for the unexpired term. 32 Significant Employees The Corporation considers the contribution of every employee important to the fulfillment of its goals. Family Relationships Stephen Rey R. Tagud, Vice President for Passage, is the son of Sulficio O. Tagud, Jr. and are, thus, related to each other within the fourth degree of consanguinity. Other than the one disclosed above, there are no other family relationships within the fourth degree of consanguinity known to the Registrant. Involvement in Certain Legal Proceedings To the knowledge and/or information of 2GO, none of its nominees for election as directors, the present members of its Board of Directors or its executive officers, is presently or during the last five (5) years been involved in any legal proceeding in any court or government agency on the Philippines or elsewhere which would put to question their ability and integrity to serve 2GO and its stockholders. With respect to its nominees for election as directors, the present members of its Board of Directors and its executive officers, the Company is not aware that during the past five (5) years up to even date of: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any conviction by final judgment of such person in a criminal proceeding, excluding traffic violations and other minor offenses; (c) such person being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, by any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting such person’s involvement in any type of business, securities, commodities or banking activities; and (d) such person being found by a domestic or foreign court of competent jurisdiction (in a civil action), the Commission 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. Resignation or Refusal to Stand for Re-election by Members of the Board of Directors No Director has declined to stand for re-election to the board of directors since the date of the last annual meeting of the Registrant because of a disagreement with the Registrant on matters relating to the Registrant’s operations, policies and practices. However, on October 13, 2011, Ms. Michelle X. Lu tendered her resignation as a Director and as a Member of the Compensation, Remuneration and Nomination, Audit and Corporate Governance, and Risk Management Committees, which resignation the Company accepted on said date. Likewise, on December 05, 2011, Mr. Ramon G. Villordon, Jr. tendered his resignation as President and Director of the Company, which resignation the Company accepted on said date. Item 10. Executive Compensation The following table summarizes certain information regarding compensation paid or accrued during the last three fiscal years and to be paid in the ensuing fiscal year to the Registrant’s Chief Executive Officer and each of the Registrant’s four other most highly compensated executive officers: 33 SUMMARY OF COMPENSATION TABLE Amounts in Thousands of Pesos (‘000s) Year Salary Bonus th th (13 and 14 Months Pay) 2010 2011 Projected 2012 2010 2011 29,640 16,366 7,914 4,940 3,454 1,319 25,938 25,213 4,830 4,202 - Projected 26,636 2012 4,376 - Other Annual Compensation Top Five (5) Highly Compensated Executives: Sulficio O. Tagud Jr. – President and Chief Executive Officer (2012 only) Enrique M. Aboitiz Jr. – President and Chief Executive Officer (2010 only) Jeremias E. Cruzabra – EVP-Chief Finance Officer, Treasurer and Corporate Information Officer (2012 only) Lilian P. Cariaso – Chief Finance Officer, CIO and CRO (2010 and 2011 only) Evelyn L. Engel – Chief Executive Officer – Passage (2010 and 2011 only) Susan V. Valdez – Chief Executive Officer – Freight (2010 and 2011 only) Norissa L. Ridgwell – SVP-COO Freight (2010 only) Charity Joyce Marohombsar – VP Customer Care Management (2011 only) All above named officers as a group All officers and directors as group unnamed - - On June 2011, Mr. Ramon G. Villordon Jr. was appointed as the Company’s President until his resignation on December 2011 and on the same date, Mr. Sulficio O. Tagud Jr. was appointed by the Company’s Board of Directors as the new President of 2GO. Further, Ms. Evelyn L. Engel, Ms. Lilian P. Cariaso, Ms. Charity Joyce Morohombsar and Ms. Susan V. Valdez have resigned from the Company effective June 30, July 31, August 31, and September 10, 2011, respectively. The Company has no significant or special arrangements of any kind as regard to the compensation of all officers and directors other than the funded, noncontributory tax-qualified retirement plans covering all regular employees. Each director receives a monthly allowance of P80,000 except for the Chairman of the Board who receives P120,000 a month. Further, a per diem of P30,000 is given to each Director and P45,000 for the Chairman for every Board meeting attended. Such allowances and per diems are shared equally with NENACO whenever board meetings of NENACO and the Company are held on the same day. Further, for 2012 estimates, the compensation of the Company’s officers is shared proportionately with NENACO. The above share of 2GO is equivalent to the 80% compensation of the officers. Except for the regular company retirement plan, which by its very nature will be received by the officers concerned only upon retirement from the Company, the above-mentioned directors and officers do not receive any profit sharing nor any other compensation in the form of warrants, options, bonuses, etc. Likewise, there are no standard arrangements that compensate directors directly or indirectly, for any services provided to the Company either as director or as committee member or both or for any other special assignments. 34 Item 11. Security Ownership of Certain Beneficial Owners and Management Security ownership of certain record and beneficial owners of five per centum (5%) or more of the outstanding capital stock of the Registrant as of April 30, 2012: Title of Class Name and Address of Record Owner and Relationship with 2GO Name of Beneficial Owner and Relationship with Record Owner Citizenship No. of Shares Held Percent of Class Common 1. Negros Navigation Co., Inc. Pier 2, North Harbor, Manila (PARENT COMPANY) Negros Navigation Co., Inc. Authorized Representative: Mr. Sulficio O. Tagud Jr. President Filipino 2,400,141,995 98.12% Preferred 1. PCD Nominee Corporation (Filipino) 37/f Enterprise Building Ayala Avenue, Makati City (STOCKHOLDER) Various Clients Filipino 2,973,451 65.20% NENACO, the parent company of the Registrant, is one of the oldest domestic shipping companies in the Philippines. It is 59.55% owned by KGLI-NM Holdings, Inc. and 39.88% by China-ASEAN Marine B.V. Security Ownership of Management – Record and Beneficial Owners as of April 30, 2012: Title of Class Common Common Common Common Common Common Common Common Common Name of Beneficial Owner and Position Citizenship Francis C. Chua Chairman of the Board, Independent Director Filipino Sulficio O. Tagud, Jr. President and CEO Filipino Jeremias E. Cruzabra CFO, Treasurer, CIO Filipino Nelson T. Yap Director Mark E. Williams Director Filipino Geoffrey M. Seeto Director Raul C. Rabe Independent Director Australian Patrick Ip Director Monico V. Jacob Independent Director Chinese TOTAL American Filipino Filipino Amount and nature of ownership (Indicate record and/or beneficial) 1,000 – “direct” 9,000 – “indirect” Record Owner: PCD Nominee Corporation (Filipino) 1,000 – “indirect” Record Owner: PCD Nominee Corporation (Filipino) 1,000 – “indirect” Record Owner: PCD Nominee Corporation (Filipino) 1 – “direct” 1,000 – “indirect” Record Owner: PCD Nominee Corporation (Non-Filipino) 1 – “direct” 1,000 – “indirect” Record Owner: PCD Nominee Corporation (Filipino) 1 – “direct” 1 – “direct” Percent of Class 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1,004 ”direct”; 13,000 “indirect” 35 Security Ownership of the Directors and Officers in the Registrant as a Group: Common is 14,004 shares; Preferred – none. Voting trust holders of 5% or More No person holds more than five per centum (5%) of a class under a voting trust agreement or similar arrangement. Changes in Control In December 28, 2010, NENACO purchased the shareholdings of AEV in 2GO comprising 1,889,489,607 common shares at a purchase price of approximately PhP3.55 billion and the shareholdings of ACO in 2GO comprising 390,322,384 common shares at a purchase price of approximately PhP734 million. In February 2011, as a result of the mandatory Tender Offer, NENACO purchased an additional 120,330,004 common shares in 2GO. NENACO now owns 2,400,141,995 common shares of 2GO, equivalent to 98.12% Item 12. Certain Relationships and Related Transactions In the ordinary course of business, the Registrant has transactions with fellow subsidiaries, associates, and other related companies consisting of ship management services, charter hire, management services, courier services, purchases of steward supplies, availment of stevedoring, arrastre, trucking, rental and repair services. The Registrant needs these services to complement its services to the freight and passage customers. The identification of the related parties transacting business with the Registrant and how the transaction prices were determined by the parties are discussed in the Note 24 of the consolidated financial statements. The Registrant will continue to engage the services of these related parties as long as it is economically beneficial to both parties. The Corporation has no transaction during the last two years or proposed transaction to which it was or is to be a party in which any of its directors, officers, or nominees for election as directors or any member of the immediate family of any of the said persons had or is to have a direct or indirect material interest. Moreover, 2GO and its subsidiaries do not have existing or proposed transactions with parties that are considered outside of the definition of "related parties" but have the influence of negotiating the terms of material transactions that may not be available to other, more clearly independent parties on an arm's length basis. PART IV – CORPORATE GOVERNANCE ITEM 13. Corporate Governance There have been studies relating managerial behaviour and organizational performance to good corporate governance. While academic research and institutional studies have very limited explanatory power to draw substantive conclusions about the impact of corporate governance on corporate performance, there are plenty of hard evidence to show that investors pay more for well-governed companies. There is also widespread recognition on the importance of transparency and accountability both in government and in the business community. As businesses continue to open up to the global market and liberalization happens, the decision-making process becomes more diffused. This brings up the level of accountability of corporate leaders to all their stakeholders, including employees, customers and in particular, their shareholders. In 2GO, no less than its Board of Directors, at the top of the Company’s corporate governance structure, who takes the lead. It is the Board who is tasked to strike a balance between conformance and performance; long-term strategy and day-to-day operations; form and substance. The Board is the key to the success of any corporate governance directive. BOARD STRUCTURE Compliance to the principles of good governance starts at the top. The director’s position is one built on trust and integrity. The Board has the fiduciary responsibility to ensure the company’s prosperity by collectively directing the company’s affairs, while meeting the appropriate interests of all its stakeholders. 36 The 2GO Board is a team of nine (9) highly respectable individuals—seven (7) non-executive directors which includes the Chairman and only two (2) executive directors. Of the nine (9), there are three (3) independent directors, including the Chairman, who are experts in their respective fields. Chairman : Members : Francis C. Chua, Independent Director Sulficio O. Tagud, Jr. Jeremias E. Cruzabra Nelson T. Yap Raul Ch. Rabe, Independent Director Monico V. Jacob, Independent Director Mark E. Williams Geoffrey M. Seeto Patrick Ip Splitting up the role of the Chairman and the Chief Executive Officer (CEO) was brought into focus when shortcomings in corporate governance were observed in companies where the two roles are combined. Thus, to foster an appropriate balance of power, increased transparency, accountability and control over company operations, the elected Chairman of the Board, a non-executive director, is separate and distinct from the appointed CEO of 2GO. BOARD MEETINGS In the January 16, 2012 report to the SEC, the 2GO Corporate Secretary’s Certification on Directors’ Attendance in Board Meetings summarized the attendance record of the members of the Board of Directors of the corporation for the period January 1, 2011 to December 29, 2011. Director Francis C. Chua Sulficio O. Tagud, Jr. Jeremias E. Cruzabra Nelson T. Yap Mark E. Williams Geoffrey K. Seeto Raul Ch. Rabe Patrick Ip Monico V. Jacob Ramon G. Villordon, Jr. Michelle Lu Jon Ramon M. Aboitiz Enrique M. Aboitiz, Jr. Bob D. Gothong Jan 21 P P P NA P NA P NA NA NA P P P P Mar 2 P P P NA P NA P NA NA NA P P P P Apr 28 P P P NA P NA P NA NA NA P P P X Jun 1 P P P NA P NA P NA NA P P P P P Meetings Held in 2011 Jun Jul Jul Oct 15 6 19 13 P P P P P P P P P P P P NA NA NA NA P P P P NA NA NA P P P P P NA NA NA P NA NA NA NA P P P P P P P X X NA NA NA X NA NA NA NA NA NA NA Dec 5 P P P P P P P P P NA NA NA NA NA Dec 29 P P P P P P P P P NA NA NA NA NA P/M 10/10 10/10 10/10 2/2 10/10 3/3 10/10 3/3 2/2 5/5 7/8 4/5 4/5 3/4 P = Present X = Absent M = Maximum Number of Meetings that the relevant Board Member could have attended during the period January 1 to December 29, 2011 NA = “Not Applicable” because the Board Member was not a member of the Board during the relevant meeting date. BOARD COMMITTEES The Board has three (3) committees—the Compensation, Remuneration and Nomination Committee, the Audit and Corporate Governance Committee, and the Risk Management Committee. The Board and its committees oversee and advise management in developing the company’s financial and business goals, oversee its public disclosures and the processes behind them, and evaluate management's performance in pursuing and achieving those goals. 37 COMPENSATION, REMUNERATION AND NOMINATION COMMITTEE The Compensation, Remuneration and Nomination Committee is mainly responsible for Establishing the criteria for the selection of directors and senior management and recommend Board nominees and committee membership. Establishing the overall compensation philosophy of the company including directors and employee compensation, benefits and incentive plans. This committee is likewise is responsible in reviewing the management development and succession policies. In 2011, the committee membership was as follows: Chairman Members : Mr. Sulficio O. Tagud, Jr. : Mr. Mark E. Williams Mr. Geoffrey M. Seeto Mr. Geoffrey M. Seeto was appointed by the Board as a member of the Committee in October 2011, replacing Ms. Michelle Lu upon her resignation. AUDIT AND CORPORATE GOVERNANCE COMMITTEE The Board Audit and Corporate Governance Committee has oversight function over the audit activities performed by the company’s internal auditors and the nominated external auditor for the year. The committee oversees internal and disclosure controls and procedures. The committee also takes the lead in promulgating and overseeing the principles of corporate governance by reviewing committee charters, directors’ independence as well as code of ethics for executives, employees and directors. Composition The Board Audit and Corporate Governance Committee is composed of four (4) board members, one (1) of which is an independent director and one (1) ex-officio member. Chairman Members : Mr. Francis C. Chua, Independent Director : Mr. Patrick Ip Mr. Mark E. Williams Mr. Geoffrey M. Seeto Mr. Evan C. Mcbride, Ex-Officio member Mr. Patrick Ip was appointed by the Board as a member of the Committee in October 2011, replacing Ms. Michelle Lu upon her resignation. Mr. Evan C. Mcbride, on the other hand, is a Director of NENACO. Committee Meetings The Audit and Corporate Governance Committee met three (3) times in 2011. All three meetings were duly attended by the committee members. In its meetings, the committee tables for discussion the audit master plan for the year; the highlights of internal audit results and the corresponding action plans; the performance of the internal audit team; the selection and approval of the external auditor for the year and their audit timetable; and the presentation and endorsement for Board approval of the prior year’s audited financial statements. In the presentation of the audit master plan for the year, the committee reviews and assesses the robustness of the audit risk assessment methodology used by internal audit as this becomes the basis in allocating its limited manpower resources to auditable units that are rated to be comparatively riskier than others. A detailed Audit Committee Report for 2011 is presented in a subsequent section. 38 RISK MANAGEMENT COMMITTEE The ultimate accountability over risk oversight and risk management in the organization rests with the Board. However, the Risk Management Committee, as a Board subcommittee, is responsible in leading the organization’s strategic direction in the management of material business risks such that leaders are able to make informed decisions. The committee also provides oversight for the establishment, implementation, and effectiveness review and assessment of the company’s risk management framework. The 2GO Risk Management Committee in 2011 was composed of the following: Chairman Members : Amb. Raul Ch. Rabe : Mr. Mark E. Williams Mr. Geoffrey M. Seeto Mr. Evan C. Mcbride, Ex-Officio Member Mr. Patrick Ip Mr. Patrick Ip was appointed by the Board as a member of the Committee in October 2011, replacing Ms. Michelle Lu upon her resignation. Mr. Enrique M. Aboitiz, Jr. was also appointed by the Board as a member of the Risk Management Committee from March until his resignation on June 15, 2011. EXECUTIVE COMPENSATION POLICY Meritocracy based. This is the corporate compensation philosophy for executive remuneration in 2GO. Commensurate compensation is given based on the annual performance evaluation of its executives. Any change in compensation is subject to full discussion and concurrence by the Board upon the review and recommendation of its Board Compensation, Remuneration and Nomination Committee. COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT The table of the monthly fixed allowance and per diem per meeting attendance of the 2GO Board of Directors in 2011 is shown below. Compensation Monthly Fixed Allowance Board Meeting Per Diem Committee Meeting Per Diem Director P80,000 P30,000 P30,000 Chairman of the Board P120,000 P45,000 SOCIAL RESPONSIBILITY In the pursuit of the mission to become more responsible corporate citizens, efforts of 2GO on corporate social responsibility programs for 2011 were geared towards three (3) main areas: education, social advocacy and environmental protection and rehabilitation. CODE OF BUSINESS CONDUCT The 2GO Code of Business Conduct serves to guide employees actions aligned with the company’s corporate values. The Code consists of policies relating to ethical and legal standards of behaviour that 2GO expects of its employees. Its applicability extends to all the business units in the organization. The Code explicitly states the corresponding disciplinary actions that include suspension and termination for violations committed against company policies and the Code. CORPORATE GOVERNANCE SCORECARD While companies are not expressly mandated to comply with recommended best practices on corporate governance, the “comply-or-explain” approach employed by the SEC and PSE through its Corporate Governance scorecard and disclosures definitely exerted pressure for companies to comply. For the past 4 years, 2GO has participated in the assessment of corporate governance standards and practices of publicly listed companies. This is an annual appraisal conducted by the Institute of Corporate Directors in partnership with the Securities and Exchange Commission. 39 2GO corporate governance scorecard has improved from its 70% rating in 2007 to 90.3% in 2009 or from a second quartile ranking up to the Silver Category. The company is waiting for its 2010 scorecard. The improvement is a testimony of the company’s unwavering pursuit of systemic corporate governance reforms within the organization. OUTLOOK For any company, more so for publicly listed companies such as 2GO, the practice of good corporate governance is believed to bring about added shareholder value. Thus, there is a willingness to pay a premium for well-governed companies. Under the new management, there is assurance to uphold the same level of commitment to the standards and principles of good corporate governance. The direction is to lead the business to a healthy and robust future as businesses become more complex and as markets become more open and global. FURTHER INFORMATION The following are available on www.atsc.com.ph/IR/governance ATS Corporate Governance ATS Articles of Incorporation ATS Code of Business Conduct ATS By-Laws ATS Anti-Money Laundering Statement of Policies & Procedures INFORMATION TECHNOLOGY GOVERNANCE The year 2011 can be summarized as a transition year for the entire organization. With Information Technology (IT) already playing an important and strategic role in both NENACO and 2GO, the integration of the different IT applications, infrastructure and IT organization was seen as a critical success factor of the Merger and Acquisition (M&A). The Information Technology agenda was then tackled at the highest level of management. Since both NENACO and 2GO had their own passage and freight systems, a formal selection process consisting of rd internal evaluation as well as a 3 party (i.e., SGV & Co.) assessment were conducted to identify the best system to be adopted by the integrated company. The Freight division easily selected the eFOS freight system from 2GO. However, the Passage division had to spend more time evaluating the merits of the passage systems from both companies. Eventually, the Nexus passage system from 2GO was selected. Part of the agreement, however, were the enhancements on both eFOS and Nexus system to accommodate key functionalities from the NENACO systems that were deemed to be better or more appropriate for the integrated Freight and Passage processes. By December 2011, the Freight and Passage divisions were already using one freight and passage systems respectively. The Supply Chain systems, Quikair for the Express business and SAP for the Distribution, were retained, as they did not have a competing system from NENACO. An integrated Financials and HR system using the Oracle EBS R12 system was being developed and is scheduled to Go Live by July 2012. The NENACO and IT teams also underwent its own integration program. NENACO team members where relocated to the 2GO IT area and an integrated IT organizational structure was implemented to provide more focus on Applications Development as well as End-User Support – the two areas where we needed to provide the most, due to the ongoing business units’ integration programs. A job/task analysis project was also initiated to further review the current IT structure and complement. The increase in attrition affecting mostly the rank & file IT employees were countered by retention initiatives as well as an increased effort to hire replacements. On the IT infrastructure side, maintenance activities were continually being done to cover the extensive data centre and network infrastructure. With the integration of systems, some of the NENACO infrastructure have already been made redundant and are being slowly decommissioned to reduce the IT operations cost. 40 rd With IT outsourcing as a major direction for cost reduction objectives, the email service was outsourced to a 3 Party email provider by the end of December 2011. Future areas for outsourcing include Backup and Recovery services, Collaboration and Workflow. With the IT applications and infrastructure seen to continue evolving in the 2012-2013 time frame, both the IT Strategy Committee and the Information Security Committee will be reconvened to serve as the venue for discussion and agreement of the future IT directions, initiatives and investments. ENTERPRISE WIDE RISK MANAGEMENT PROGRAM (ERM) In 2011, initiatives were focused on the integration of NENACO and 2GO. Policies and procedures were integrated in order to support the merging of processes of two separate companies. Risk Management team focused on integrating the insurance requirements for both NENACO and 2GO. Insurance policies were reviewed and correspondingly, adopt an insurance program that best fit the requirements of NENACO and 2GO under a cost-effective package. The management of both NENACO and 2GO considers Risk Management as an integral part of business operations, maintaining its direction that ERM is a shared responsibility, company-wide, and ensure that risk exposures are identified and proactively manage in order to create value-adding service to the organization and consistently achieve stakeholder’s expectation. Risk Management team has developed a road map for re-launching of ERM program to the newly-integrated NENACO and 2GO. The road map will run its full course within 2012 with the following phases: I. Policy Creation a. Revisit current ERM philosophy and framework b. Validating if philosophy and frame will still be applicable c. Establishing Risk Management Council who will drive ERM initiatives II. Concept Loading a. Re-launching ERM philosophy and framework to all business units b. Cascading ERM concepts to all team members III. Planning and Management a. Creating Risk Register on a per business unit level b. Validating if current identified risk and its treatment are still applicable c. Identifying, assessing and treating new risks inherent to integration of NENACO and 2GO IV. Establish Business Continuity Management a. Assessing the need for Business Continuity Program b. Establishing business continuity plan for the top identified risk exposure V. Validation and Review a. Validating if risk treatment are being implemented b. Reviewing if the risk treatment strategies are effective and efficient c. Assessing the maturity of Risk Awareness within the group The end goal is that by the end of 2012, ERM philosophy and framework is already re-established within the 2GO Group, Inc. and its allied companies. Concurrently, Risk Management team will embark on re-assessing the Strategic Risks which were previously identified. There is a need to validate if risk exposures are still applicable after the change in management and integration of NENACO and 2GO. The following has to be validated: 1. What are the new Strategic Risks that the company considers? a. Are previously identified strategic risks still applicable? b. Are there new Strategic Risks identified based on the current company strategies and objectives? c. What strategic risks need to be address immediately? 41 2. What are the new Strategic Risks that the company considers? a. Are the identified risk treatment implemented? If not, how we effectively address the risks? b. What are the current controls in order to minimize the impact of the identified risks? Within the first half of 2012, it is expected the new top risks are already identified and the risk owner will treat their risks and corresponding programs and projects will be instituted as risk response to effectively manage its risk exposures. We saw in previous years the importance of implementing Risk Management framework as a tool in handling difficult times. Hence, re-establishing ERM to the newly-integrated NENACO and 2GO will be of utmost value-adding initiative for the whole organization. Focus and attention on raising risk awareness and re-embedding risk management culture within the policies and processes throughout the organization will provide more confidence in achieving corporate goals, thereby delighting those we serve and delivering our vision as face the future of NENACO and 2GO. AUDIT COMMITTEE REPORT The Board Audit Committee (AudCom) is an independent operating body directly reporting to the Board of Directors. It assists the Board in the carrying out its functions by providing an oversight role in ensuring the integrity of the company’s financial reports, its compliance with regulatory requirements, and the performance of the company’s internal audit function. The AudCom maintains an effective working relationship with the Board by providing them information necessary in making good governance and audit-related decisions. Membership The Board Audit Committee is composed of four (4) Directors and one (1) Ex-Officio member: Francis C. Chua, Chairman, Independent Director Michelle Lu, Director * Mark Williams, Director Geoffrey Seeto, Director Evan McBride, Ex-Officio * resigned effective October 13, 2011, replaced by Patrick Ip Meetings The Board AudCom held three (3) meetings in 2011. All meetings were attended by the AudCom members. Committee Member Feb 25 Apr 28 July 20 Francis Chua Mark Williams Geoffrey Seeto Evan McBride Michelle Lu (attendance via phone patch) In the February 25 meeting, the AudCom reviewed, discussed and endorsed for Board approval 2010 Audited Financial Statements of 2GO presented by SGV & Co., the Company’s external auditing firm. The general assessment of the company’s internal control system and the internal audit plans and programs for 2011 were likewise presented to during this meeting. In the subsequent meetings, internal audit reports were presented and discussed extensively. For 2011, discussion highlights were focused in the areas of vessel and passenger safety and security, physical and environmental data security and access as well as process controls in its supply chain and freight businesses. The selection and approval of the external auditor for the year 2011—SGV & Co. -- was agreed upon and endorsed to the Board during the AudCom’s midyear meeting in July. 42 System of Internal Controls The framework of control, risk management and governance processes are existing within the 2GO group of companies. The integration and streamlining efforts of management as a result of the buyout caused some of these processes to be combined and/or reduced to provide the basic elements of control and good governance needed to sustain operations. There is continuous effort to further enhance and align processes to meet organizational goals. The culture of accountability is apparent with the general adherence of employees to management policies and directives in order to achieve company objectives. The internal control system is effectively designed to safeguard assets; to secure the relevance, reliability and integrity of information and as far as possible the completeness and accuracy of records; and to ensure compliance with statutory requirements. For 2011, most business units posted increases in their audit ratings compared to the previous year. The less-thansatisfactory results of the supply chain operations and systems audits caused management to focus its efforts in improving this segment of the business. Various measures are being undertaken by management including organization restructuring across all business units to allow streamlining of functions for the effective execution of responsibilities. Continuous enhancement of performance metrics and speedy resolution of audit issues raised are likewise given focus to assure company objectives are met. Moving forward, 2GO management is responsible in maintaining the internal control system and ensuring that resources are properly applied in the manner and to the activities intended. The AudCom is pleased to note that the business units have been proactive in addressing recommendations with regards to the enhancement of the internal control environment. Internal Audit In accordance with established Standards and Code of Ethics of the profession, the Internal Audit Department (IAD) continually strives to improve the proficiency, effectiveness and quality of the internal audit activities. The IAD reports to the Board AudCom the highlights on the validation of the operational effectiveness of key activities and controls. The assessment focused on policies and procedures relating to processes in finance, operations, and IT systems. The accomplishments realized by IAD in 2011 were not without difficulties. There were a number of constraints and limiting factors such as unfilled manpower plantilla in Audit and changes in the organizational processes that warranted a shift in the audit focus and strategies more relevant to the situation. Despite above operational challenges and with limited resources at hand, IAD continued to deliver its value-adding services to help improve operations; to serve the shareholders and management of 2GO; to partner with the business units in enhancing current performance and future competitiveness; to supply a source of future management talent; and to be an active participant in the improvement of 2GO. Risk Management Risk management is fast becoming an ingrained concept and way-of-life in the organization. However, the establishment of a comprehensive Business Continuity Plan remains a major area that needs top management support and directive to see it to completion. Corporate Governance Good corporate governance is practiced not because it is required by law but because it promotes 2GO core values of transparency, openness, and accountability. For 2GO, corporate governance and a value-oriented management are pillars of business resilience. 43 External Audit SGV & Co. was appointed external auditor of 2GO for 2011. In compliance with corporate governance policy, SGV & Co. reported during the November 2010 meeting, that it will be replacing its Lead Financial Audit Partner, Ladislao Z. Avila in 2011 as it is his fifth year as SGV partner assigned to 2GO. Josephine H. Estomo is serving her first year term as the signing partner designated by SGV & Co. SGV & Co audit work focused mainly on audits of internal controls and how these safeguard the financial reporting including the financial statements of the Company. 2011 Financial Results During the period covered by this report, the new Board AudCom concurred with the opinions expressed by SGV & Co., on the overall presentation of the financial statements of the Company. The audit also included an evaluation of the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management. The audit concluded that the balance sheets and the related statement of income and expenses, cash flows, changes in capital and reserves present fairly, in all material aspects, the financial position of 2GO. Based on the judgment about quality of accounting principles, SGV & Co. disclosed that the accounting principles used by 2GO are in compliance with the Philippine Financial Reporting Standards. Significant accounting principles are disclosed in the notes to the financial statements, as required by the standards. Approval Approved by the 2GO Board of Directors, upon the favorable recommendation of the Board Audit Committee, and signed on its behalf by: Mr. Francis C. Chua Chairman, 2GO Board Audit Committee 44 PART V - EXHIBITS AND SCHEDULES Item 14. Exhibits and Reports on SEC Form 17-C a) Exhibits - See accompanying Index to Exhibits The exhibits, as indicated in the Index to Exhibits are either not applicable to the Company or require no answer. b) Reports on SEC Form 17-C During the last six months of CY 2011, the Company filed the SEC 17-C report. The list of the reports submitted to the Commission is as follows: Date of Report Title of Report Item No. Dec 29 Board of Directors’ Approval on Change of Company’s Corporate Name 9 Dec 06 Resignation and Appointment of Board of Directors 4 Nov 15 Appointment of Acting Corporate Information Officer 4 Aug 15 SEC Approval of ATS’ Amended Articles of Incorporation 9 Jul 12 Notice of Termination of Employment 9 Jul 06 Appointment of Chairman of the Board and Chief Executive Officer 4 Item Title Other Events Resignation, Removal or Election of Registrant’s Directors or Officers Resignation, Removal or Election of Registrant’s Directors or Officers Other Events Other Events Resignation, Removal or Election of Registrant’s Directors or Officers 45 46 2GO GROUP, INC. Formerly “ATS Consolidated (ATSC), Inc.”, “Aboitiz Transport System (ATSC) Corporation” CERTIFIED CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY SCHEDULES FOR THE SECURITIES AND EXCHANGE COMMISSION TABLE OF CONTENTS EXHIBIT I Statement of Management’s Responsibility for Consolidated Financial Statements Independent Auditors’ Report on the Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2011 and 2010 Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Changes in Equity for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 Notes to Consolidated Financial Statements EXHIBIT II – SUPPLEMENTARY SCHEDULES Report of Independent Auditors on Supplementary Schedules Schedule I – List of Philippine Financial Reporting Standards (PFRS) effective as at December 31, 2011 and List of New and Amended Accounting Standards and Interpretations and Improvements to PFRS that became effective as at January 1, 2011 Schedule II – Financial Soundness Indicators Schedule III – Retained Earnings Available for Dividend Declaration Schedule IV – Supplementary Schedules Required by Paragraph 6D, Part II Under SRC Rule 28, As Amended (2011) Schedule V – Map of the Conglomerate or Group of Companies of the Registrant Showing the relationships between and among the company and its ultimate parent company, middle parent, subsidiaries or cosubsidiaries, and associates EXHIBIT III - SUBSIDIARIES OF THE REGISTRANT 2GO Group, Inc. has consolidated subsidiaries that are wholly-owned namely: Name Jurisdiction 2GO Express, Inc. (Incorporated on July 20, 1978) Philippines Supercat Fast Ferry Corporation (Incorporated on June 20, 2001) Philippines NN-ATS Logistics Management & Holdings, Inc. (Incorporated on November 22, 2011) Philippines Special Container and Value Added Services, Inc. (Incorporated on March 08, 2012) Philippines 47
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