2010 Annual Report
PHILWEB’S OFFICES ARE LOCATED AT THE ALPHALAND SOUTHGATE TOWER, ON THE CORNER OF CHINO ROCES AVENUE AND EDSA IN MAGALLANES, MAKATI CITY
PhilWeb Corporation is the first and largest Internet gaming company in the Philippines. We are the dominant technology - based gaming firm listed on the Philippine Stock Exchange, with a total market capitalization of over P20 billion. PhilWeb exudes trust and quality in the gaming industry by providing superior and innovative products with the highest standards of customer service. We establish strategic partnerships to ensure a fair, secure and legal gaming experience for our customers. We create a rewarding and dynamic work environment where we attract, retain and motivate highly competent, passionate and innovative people and deliver abovemarket value for our shareholders. PhilWeb today serves over 60,000 customers a day at our nationwide network of online cafĂŠs, sports betting kiosks and mobile games. We are a lean organization, with just 220 employees at the end of 2010, but a highly productive one. In the last five years since your Company entered the gaming business, we have generated P260 billion in Gross Bets. Our vision is to be the dominant gaming solutions provider in the AsiaPacific region.
table of contents
Annual Report 2010 5
Letter to Shareholders
Big Game Inc.
PEGS CafĂŠs and ISBS Kiosks Distribution
Internet Sports Betting Stations
Premyo sa Resibo
PhilWeb Asia Pacific
Corporate Governance and CSR
Board of Directors
Statement of Managementâ€™s Responsibility
Report of Independent Auditors
Consolidated Statements of Financial Position
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Statements
letter to shareholders
L - R: DENNIS O. VALDES (PRESIDENT), ROBERTO V. ONGPIN (CHAIRMAN) 4
letter to shareholders
The year 2010 marked a significant milestone in the history of your Company. We marked our tenth anniversary in January. After a decade of progress, we have achieved much but there is still much more to be done and many more opportunities to be seized. We remain ever optimistic as we move into our second decade. The events of 2010 demonstrated that we are laying the foundation for continued aggressive growth in the years to come. We began 2010 by teaming up with ISM Communications Corporation to invest in Acentic GmbH, a Germanregistered company that provides video on demand and high-speed Internet access to a network of over 180,000 hotel rooms in Europe. We believe that we can offer our gaming products on this network, and are working on solutions for this new market. Acentic is our first foray outside our native shores, but by no means our last. We also formed two companies with an eye towards new markets, PhilWeb International Gaming Corporation. and PhilWeb Asia-Pacific Corporation. In August, we received our first license to conduct gaming outside of the Philippines â€“ a Cambodian license to launch a 6/49 lottery product in both mobile and kiosk formats. We hope to launch this and other new products in that country by early 2011. On the local front, the most important development of 2010 was our signing of a new contract with PAGCOR in December. This new agreement gives us the ability to open a minimum of 100 new PAGCOR e-Games (or PEGS)
letter to shareholders
Cafés per year, starting in 2011 through 2016. The contract can also be extended beyond July 2016. All these events contributed to making 2010 a recordsetting year for your Company.
In December 2010, ISM sold 40% of its 77.7% stake in Eastern Communications to Vega Telecom, a unit of San Miguel Corporation. Vega will further strengthen Eastern’s telecommunication services and provide cash for their capital requirements. The sale enabled ISM to realize a P269 million gain for the year, of which PhilWeb equitized a profit of P65 million.
450 267 133 2006
REVENUE MILLION PESOS
For the fifth straight year, we set new highs in both Revenues and Net Income. For the first time ever, Revenues were over a billion pesos, totaling P1.04 billion, a 27% increase versus the previous year. Net Income came in at P709 million, also a record at 29% higher than the P551 million achieved in 2009. Our Income Statement remains outstanding, with a remarkable profit margin of 68%. Our balance sheet remains strong. We continue to generate a substantial amount of cash and have no debt.
Moreover, with the high cash levels on our balance sheet, we declared and paid a dividend of P0.10 per share in 2010. This is the first time in our history that we have paid a dividend, so 2010 was truly a year of firsts. We fully expect to be able to continue to pay regular dividends to our stockholders from now on. Financial performance, of course, is a reflection of excellent execution on the business side. Our core business, the PEGS Cafés, had a good year, despite opening only 19 new cafés all year. We began 2010 with 171 cafés, but after the May elections and the new Aquino government took over, no new cafés were approved as the new PAGCOR administration understandably had to study the business and assess it for themselves. Meanwhile, the pipeline of interested PEGS operators ballooned, and the pent up demand was such that within a week of the signing of our new contract with PAGCOR, two new cafés immediately opened, bringing the total number of PEGS cafés to 190 at the end of 2010. As of this writing, we have over 100 new PEGS in the pipeline waiting to open.
letter to shareholders
The new PAGCOR administration has seen the remarkable profitability of the PEGS business for them, noting that we remitted a total of P1.3 billion to them in 2010. This amount comes without a centavo of capital expenditure or operating expense on PAGCOR’s part, and therefore flows directly to their bottom line. This year, 2011, will be a banner year for the PEGS business. Not only are we poised to open up more PEGS cafés than we have ever done in a year but the sites have already been identified and implementation is on-going.
Additionally we continue to invest in café improvements and expansion. Among our improvements in 2010 were the introduction of a second gaming software in the PEGS network and the planned introduction of a third gaming software early this year. More games mean more customer choices, and we believe this will greatly enhance our customers’ satisfaction as we complete our software installations. Our second largest business segment is now our BigGame cafés. BigGame, Inc. is a wholly owned subsidiary of PhilWeb, through which we operate 13 PEGS cafés directly. We treat BigGame, Inc. as an R&D laboratory for PEGS, testing the ideas and product improvements within BigGame, Inc.’s smaller network before presenting the results to the entire network of PEGS operators. Among the enhancements tested in Big Game, Inc. and successfully rolled out to other operators have been the introduction of larger LCD screens, upgrading to wider cubicles, installation of ATM machines within PEGS, and others. In 2010, BigGame, Inc. revenues reached a total of P143 million, 43% more than the P100 million is achieved in 2009. We are expecting even bigger growth from BigGame, Inc. in 2011. Our other businesses also did well during 2010. Our Internet Sports Betting Stations, a network of over 175 kiosks where punters can bet on sporting events, now has a total of four different products to sell - Basketball Jackpot, Basketball 38, NBA Ending and MegaSportsWorld. Basketball Jackpot is our longest-running sports betting
NET INCOME MILLION PESOS
letter to shareholders
product and is still the biggest of the four. The two other basketball-based betting variants are still in their launch phases and are just in the initial stages of market acceptance. MegaSportsWorld enables bettors to place wagers on any sporting event in the world, using odds from Las Vegas bookmakers. Our first revenue-generating mobile product, Premyo Sa Resibo or PSR, had one of its best years in 2010. Now five years old, this text-based raffle that we manage of behalf of the Bureau of Internal Revenue is one of their long-running, tax collection programs and one that shows no sign of any slowdowns. We are proud that PSR has now generated over 172 million total text entries and given away over P159 million in prizes. Over 140 people have become instant millionaires, all thanks to Premyo Sa Resibo. Among the most exciting developments on your Companyâ€™s horizon is our Asia Pacific expansion. We have on-going projects in ten countries, including Cambodia, Laos, Vietnam, Nepal, India, Sri Lanka, Guam, Saipan, Palau and Timor Leste. These projects range from setting up variations of our Internet gaming cafĂŠs to running lotteries and other gaming products. As noted, we have received our first gaming license, for a 6/49 lottery in Cambodia, and will soon be launching this product in the region. Cambodia is a young republic bordered by three countries with large, affluent populations, Thailand to its west, Vietnam to its east and China to its north. It has much potential to become a regional gaming hub and we are excited to be part of that growth. In late 2010, we opened our first foreign office, in Phnom Penh, which we foresee will be our hub for the Indochina region. Last year was a year of office openings. We began the year completing our move to our new offices occupying three floors of the Alphaland Southgate Tower in Makati. As we push forward towards more aggressive growth, it is good to be able to occasionally look back and see what we have accomplished on behalf of you, our Stockholders. It is even better when our progress is noticed by others. Late last year, Forbes Asia magazine included us in their list of the 200 Best Under a Billion, a listing of companies throughout the region, all with market capitalizations
letter to shareholders
under a billion U.S. dollars, that they deemed to be the cream of the crop. When we attended the awards ceremony in Hong Kong, we found out that we had been one of three companies slated to receive an extra award. PhilWeb was also awarded as the Most Profitable of the 200, based on our profit margins. Despite all these achievements, there is much left to do, and as we move forward into 2011 and beyond, we will count on your continued support of our management initiatives to be able to realize our vision to be the dominant gaming solutions provider in the Asia Pacific region. 6 February 2011
ROBERTO V. ONGPIN Chairman
L - R: HERA SIU (PRESIDENT OF SAP CHINA), CHRISTOPHER FORBES (VICE CHAIRMAN OF FORBES), DENNIS VALDES AND SIMON GALPIN (DIRECTOR-GENERAL OF INVEST HONG KONG)
DENNIS O. VALDES President
PAGCOR e-Games (PEGS) are Internet cafés that are exclusively dedicated to casino games. With technology provided by PhilWeb, patrons can choose from over 300 casino games, including baccarat, blackjack, various slot machine games, video poker and others. Most PEGS cafés operate 24/7. There are now 190 PEGS cafés, with the majority owned and operated by entrepreneurs all over the country. The PEGS Operators handle the day - to - day operations of the cafés and get a monthly commission based on the PEGS Casino Winnings.
91 76 47
GROSS BETS BILLION PESOS
In 2010, the PAGCOR e-Games stations grew to 190 with the addition of 19 new cafés. Branches were added in 10 new locations, Bacolod City, Cauayan, Laoag City, Bantayan Island, Mabalacat, Kawit, Pagadian, Legaspi City, Biñan and IloIlo City. These new locations, as well as growth within existing sites, increased the number of gaming terminals by 10% over the previous year, bringing the total to 4,662. With a larger network in place, gross bets placed in 2010 rose to P91.1 billion -- a 21% growth from 2009. On the other hand, the Casino Win in 2010 grew to P3.3 billion, an increase of 24% from the previous year. While growth can be partially attributed to the increase in gross bets, the higher percentage increase in Casino Wins also tracks the shift of player interests towards higher house-advantage games such as slots.
More resources were deployed in 2010 to improve the service capability of PEGS operators, with the goal of increasing variety while ensuring quality, integrity of service, and reliability. There are currently three major gaming softwares available in PEGS, giving more than 500 game options to cafĂŠ patrons. The rollout of a single launchpad access to these games will continue into 2011. Gaming servers are distributed across several locations to guarantee business continuity. These server sites are connected using redundant links from several data providers. Customer service for PEGS operators were improved through a variety of measures. A dedicated PEGS hotline (333-3388) assists all operators needing technical assistance. A toll-free number exists for provincial cafes (1-800-10-PHILWEB) to improve access to service. Advisories on PEGS maintenance activities are regularly issued with improved field support. We also conduct equipment checks and inspections as part of our service to PEGS operators, as well as to strengthen our overall Internet security.
2010 GAME DISTRIBUTION 14% 30%
SLOTS OTHERS BLACKJACK BACCARAT
3.3 2.7 1.5
CASINO WINS BILLION PESOS
L - R: FERDIMARK L. MARIANO (VP - PEGS OPERATIONS), BRIAN K. NG (SVP - PEGS), MARK ALLAN E. DE UNGRIA (VP - PEGS ROLLOUT) 11
BigGame, Inc., or BGI, is a wholly owned subsidiary of PhilWeb Corporation. BGI owns and operates thirteen PEGS CafĂŠs. The BGI network of PEGS serves as an R&D. New ideas are tested in the BGI network and the results are communicated to PEGS Operators during quarterly Operator Meetings.
2010 ended big for BigGame, Inc., the flagship operator and development laboratory of the PAGCOR e-Games network. BGI has maintained a steep growth curve since its acquisition in 2005. In 2010, gross bets placed through BGIâ€™s PEGS cafes grew to P 14 billion, resulting in a casino win of P526 million. This is an increase of 34% and 42% for gross bets and casino wins respectively from 2009. BGIâ€™s operator commission in 2010 was P143 million, an increase of 43% from 2009.
A BAR AT BGI DOĂ‘A JUANA ENABLES PATRONS TO DRINK AND GAME AT THE SAME TIME.
GROSS BETS BILLION PESOS
BGI introduced a number of new concepts to improve playersâ€™ game experience: t
Two new sites were opened in 2010 in Cebu, bringing the total BGI locations to 13. Aside from these, the Tomas Morato and DoĂąa Juana branches were renovated to increase terminal capacity and enhance patron experience.
4VQFS7*13PPNToUIFTFSPPNTDPNQMFNFOUUIFTFNJ privacy of VIP gaming booths, giving high roller gamers a venue to enjoy their games in complete privacy. &OIBODFE #BS 4FSWJDFT o B DPNQMFUF CBS XBT JOTUBMMFE in BGI Dona Juana to test the acceptability of this as an alternative gaming area. The bar has touch screen computers to enable patrons to continue gaming while enjoying their drinks. -$% %JTQMBZT GPS 1SPHSFTTJWF +BDLQPUT o BMMPXT TMPU machine gamers to quickly find out which slot games have accumulated large jackpots. The screen display also rotates to advertise other services available in the PEGS.
t t t
&OIBODFE 5SBJOJOH 1SPHSBNT o UIF USBJOJOH GPS #(* Gaming Assistants has been improved, and GAâ€™s are now required to pass a certification exam. "5. NBDIJOFT TFMFDUFE CSBODIFT IBWF JOTUBMMFE Automatic Teller Machines on - site so players can avoid leaving the premises for banking services. -PZBMUZ $BSE 1SPHSBN #(* BMTP QVU JO QMBDF B MPZBMUZ program that allows players to earn rewards and points during their visits. Points earned were converted to raffle tickets for the following activities: t +VOF UP "VHVTU i*UT 3BJOJOH (BEHFUTw SBÃµF with a Samsung Home Entertainment System as the Grand Prize t 4FQUFNCFS UP 0DUPCFS UIF i&BTZ UP (FU[w raffle with a 1.1L Hyundai Getz as the Grand Prize t /PWFNCFS UP +BOVBSZ i$ISJTUNBT 'JFTUB #POBO[Bw SBGGMF XJUI B 'PSE 'JFTUB BT UIF Grand Prize
BGIâ€™S LOYALTY CARD PROGRAM ENABLED PATRONS TO GET RAFFLE TICKETS TO WIN EXCITING PRIZES.
526 359 201
CASINO WINS MILLION PESOS
L - R: MAZY V. TAYAMEN (AVP - CUSTOMER SERVICES), SHERWIN A. SIKAT (SR. MGR. - BGI) 13
pegs cafés and isbs kiosks in the philippines
PEGS Cafés CAR-Cordillera Administrative Region (1) Region I - Ilocos Region (3) Region II - Cagayan Valley (4) Region III - Central Luzon (26) Region IV - A Calabarzon (25) Region IV - B Mimaropa (2) Region V - Bicol Region (4) Region VI - Western Visayas (4) Region VII - Central Visayas (21) Region VIII - Eastern Visayas (1) Region IX - Western Mindanao (2) Region X - Northern Mindanao (6) Region XII - Central Mindanao (3) Region XIII - Caraga Region (2) NCR - National Capital Region (86) ARMM- Autonomous Region in Muslim Mindanao Region XI - Southern Mindanao
ISBS Kiosks NCR Region I Region III Region IV-A Region IV-B Region V Region VI Region VII Region VIII Region X
(117) (1) (3) (9) (2) (7) (15) (3) (17) (1)
Internet Sports Betting Stations, or ISBS, are a network of kiosks that sell sports betting products. The ISBS network had its beginnings in 2003, with the launch of PhilWeb’s first gaming product, Basketball Jackpot. Today, there are over 175 ISBS kiosks nationwide, selling a combination of up to four products: Basketball Jackpot, NBA Ending, Basketball 38 and MegaSportsWorld sports bets. The ISBS kiosk is a low start-up cost business. Operators need only four square meters of space, a computer, printer, scanner, and Broadband Internet access in order to start selling. BASKETBALL JACKPOT www.basketballjackpot.net Basketball Jackpot is still the most saleable sports betting game. There are four available game formats — Last 2, Last 3, Quarter Ending and Last 2 Jackpot Special — and the game is played on all games of the PBA, NBA and the UAAP. In Last 2, the punter picks a two-digit combination between 00-99. The winning combination is based on the last digits of the final scores of the teams playing in a featured basketball game. Thus, if Team A were to beat Team B with a score or of 93-89, then the Last 2 winning combination would be 3-9. Last 3 is an extension of the Last 2 digits game. It is a three-digit combination based on the winning Last 2 combination plus the last digit of the score of the highest pointer of the game. Quarter Ending is based on selecting a two-digit combination for the leading and trailing teams’ scores at the end of each quarter. This game format is offered for the first three quarters of a featured basketball game.
L - R: MA. TERESITA R. GONZALEZ (AVP - SPORTS GAMING), ANTONIO K. GARCIA (SVP - SPORTS AND MOBILE)
Last 2 Jackpot Special is a variant with a progressive jackpot, wherein a punter is asked to make a six-digit wager. The winning combination is based on the Quarter 2, Quarter 3 and Last 2 digits results. A punter who makes the correct guess wins a P100,000 jackpot. If no one guesses the combination correctly, a portion of the bets is added to the jackpot prize for the subsequent game. NBA ENDING NBA Ending is exactly like Basketball Jackpot, except that it features over 180 NBA games all year. This allows gamers a massive increase in the games they can bet on, since the total number of PBA and UAAP games in a year is only 250 and 48 respectively. BASKETBALL 38 www.basketballjackpot.net/B38 In June 2010, Basketball 38 was launched as the latest product for our ISBS network. Basketball 38 is a four-number combination game based on the results of manually drawn numbers using four, separate, domed courts, with numbers on their floors ranging from 1 to 38. The winning number combination is determined in the exact order of the numbers drawn from Court I to Court IV.
BASKETBALL 38 IS OUR NEWEST PRODUCT SOLD IN OUR ISBS NETWORK.
Basketball 38 features three daily draws, at 11AM, 3PM and 7PM, and these draws are streamed live on the Internet. Punters can win in multiple ways. A correct P10 bet on the winning four-number combination wins P1 million. There are also consolation prizes for guessing three out of four and two out of four numbers.
MEGASPORTSWORLD PhilWeb partnered with MegaSportsWorld (MSW) in January 2010 to offer sports betting from our network of ISBS. MSW is part of the Asian Logic Group of Companies and is a fully licensed sportsbook with access to odds makers all over the world. Through MSW, our punters can bet on soccer, tennis, NBA and NFL games, baseball, and virtually any sport on the planet. The most popular sport events to bet on have been the Pacquiao boxing matches.
In 2010, Basketball Jackpot saw a 20% increase in gross bets from the 2009 figure. More than P226 million in gross bets were collected from the 175 kiosks compared to P189 million from the previous year. The PBA is also returning to its tried-and-tested three-conference format, and thus, we expect our Basketball Jackpot revenues to increase even more in 2011. Basketball 38, NBA Ending and MSW are comparatively small compared to Basketball Jackpot, as they are all newly launched products. All three had combined gross bets of P47 million for the year. 2011 will see an increase in the number of ISBS kiosks, as PEGS operators have become interested in the product and are asking to install them within their PEGS. With the expected increase in the number of kiosks this year, we expect our revenues for Basketball Jackpot, NBA Ending, Basketball 38 and MSW to grow even further.
THE PACQUIAO BOXING MATCHES HAVE ATTRACTED THE MOST BETS ON END of BOX MEGASPORTSWORLD.
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premyo sa resibo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
Premyo Sa Resibo (PSR) is a nationwide, mobile, text-based program of the Bureau of Internal Revenue (BIR), in which participants send in data from their official receipts via SMS in exchange for raffle entries. The BIR oversees the PSR program and decides the rules and conduct of the game, and tasks PhilWeb to manage the day-to-day operations.
PSR is the centerpiece of PhilWebâ€™s mobile gaming platform; it demonstrates how >1!FHIH0!"(*!5)=1@;$4!)1!)99#$++,?$!@)%8),91!2;)2!,1?'5?$4!2;$!)@2,?)2,'1!':!-''2;+! )2!)55!(A!(=8$#%)#D$2+0!(A!Q&8$#%)#D$2+0!)14!(A!()?$%'#$!'=25$2+B!>1!)44,2,'1!2'!(A! partnerships can be leveraged to achieve A)55+0!-''2;+!3$#$!)@2,?)2$4!,1!@,2&!)14!%=1,@,8)5!;)55+0!)+!3$55!)+!9'?$#1%$12!'::,@$+! results. SMS entries only cost P2.50 each, and ,1!A$2#'!A)1,5)B!C;$!3;'5$7&$)#!2)6!@)%8),91!3)+!8#'%'2$4!-&!%$)1+!':!8'+2$#+0! :5&$#+0!(A(0!)14!'2;$#!@'55)2$#)5+0!)+!3$55!)+!@'14=@2,19!")@;,1D'!9)%$+!:'#! the texter gets a chance to win P1 million and 8)#2,@,8)12+!)14!2;$!<>*!Q$58!M$+D0!3;$#$!:#'125,1$#+!@'=54!)1+3$#!R=$#,$+!'1!2)67 #$5)2$4!%)22$#+B!!!! various other prizes. !!
In 2010, PSR launched an aggressive campaign that involved the activation of booths at all SM Supermarkets, SM Hypermarkets, and SM Savemore outlets. In addition to SM Malls, booths were activated in city and municipal halls, as well as government offices in Metro Manila. The wholeyear tax campaign was promoted by means of posters, flyers, SMS, and other collaterals, as well as conducting games for participants and the BIR Help Desk, where frontliners could answer queries on tax-related matters. In addition, nationwide mall events were held at select SM Malls for the P1 million raffle draw (SM San Lazaro in August, SM Baguio in October, and SM Davao in December of 2010). Special concerts were also held at the participating malls along with the raffle draw. PSR campaign updates are regularly disseminated nationwide through a dialogue among the PSR campaign heads, Taxpayer Assistance Unit Heads, and Heads of the Special Investigation Division of the BIR Regional Offices. +VMZ TBX UIF MBVODI PG UIF i.BMBZ .P 4XFSUF .P /Bw QSPHSBN 5IJT DSFBUFE BO JODSFBTF JO QBSUJDJQBUJPO as consumers were given another opportunity to take part in PSR raffle draws, which was reinforced through FLORENTINO B. MAURICIO (SVP - PSR) 18
premyo sa resibo
the announcement of winners on its website, www. premyosaresibo.com.ph, and in print advertisements. Promotions also included the placement of program collaterals in several establishments and the execution of above-the-line and below-the-line strategies, including supermarket activations and activations via print ads, radio, and minimal TV placements. 5IFTUSBUFHJFTFNQMPZFEJOUIFi.BMBZ.P 4XFSUF.P/Bw program succeeded in bringing PSR to the fore as a simple and legitimate raffle. Its longer presence in the target market also was key in persuading consumers to participate in the program. In addition, the program employed improved feedback mechanisms that guided and informed the campaign execution.
BIR DEPUTY COMMISSIONER NELSON ASPE AWARDS A BRAND NEW CAR TO A LUCKY PSR WINNER.
i.BMBZ .P 4XFSUF .P /Bw QSPWFE UP CF B TVDDFTTGVM alternative for the BIRâ€™s public relations efforts, as well as a strategic market presenceâ€”as reinforcement of the BIRâ€™s advocacy of OR issuance, tax compliance, and tax remittance. 2010 also marked the re-launching of the P20 PSR Card, where participants have the chance to win P1 million in the regular raffle draw and another P1 million instantly in the i4DSBUDIBOE.BUDIwQPSUJPOPGUIFDBSE In 2010, popular TV personality Boy Abunda also agreed to be the official endorser of PSR. Also a partnership between PSR and MyPhone was also established in 2010, with many MyPhone cellular phone units as instant prizes in various draws of PSR. PSR continues to offer a motivating, exciting reason for consumers to request receipts for all their purchases of goods and services, and in doing so helps the BIR collect tax revenues effectively and efficiently. CELEBRITY HOST BOY ABUNDA IS PSRâ€™S NEWEST ENDORSER.
philweb asia-pacific corporation
PhilWeb Asia-Pacific Corporation (PWAP) was incorporated in 2010 with a mandate to take the existing profitable businesses of PhilWeb in the Philippines and duplicate them with local partners in Asia Pacific countries. PWAP is headed by Michael Grandinetti, whose extensive international experience includes stints as a Partner of Deloitte Touche Micronesia and CEO of a private equity fund.
PHILWEB CHAIRMAN ROBERTO V. ONGPIN SIGNING OUR MEMORANDUM OF AGREEMENT WITH MADAM HUN SENG NY, PRESIDENT OF 5-P CORPORATION OF CAMBODIA.
PWAP plans to bring e-games cafés, lottery, scratch cards and other gaming products into the Asia Pacific region. The lottery is generally set up as a national lottery using either 6/49 or Basketball 38 as an established model. Scratch cards are instant-win type solutions, while the e-Games café model is based on our successful PEGS café.
CAMBODIA In February 2010, we signed a Memorandum of Agreement (MOA) with 5-P Corporation, whose President is Madam Hun Sen Ny. 5-P Corporation will assist us with gaming activities in Cambodia. The MOA has an 80:20 equity split in favor of PWAP. 5-P has obtained a license to operate the 6/49 lottery, which it will contribute to the joint venture company. PWAP hired a Cambodian General Manager who started working full time in 2011. PWAP is exploring offering e-games cafés at selected border sites targeted to foreigners. Cambodia is bordered by Thailand, Vietnam and Laos, where gaming for local nationals is illegal. These countries will be our target market. LAOS In November 2010, we have entered into a joint venture agreement with Simuong
L - R: MICHAEL GRANDINETTI (PRESIDENT - PHILWEB ASIA PACIFIC), SCOTT SPROULE (CHIEF TECHNICAL ADVISOR) 20
philweb asia-pacific corporation
Group, represented by its president, Mr. Ekaphanh Phapithak. Our Memorandum of Agreement is identical to the one executed in Cambodia, and we are confident of our Laos partner’s ability to provide us with the necessary support to engage in the gaming business. We have received our representative office, business and tax licenses to do business in Laos. Additionally, we have shortlisted a candidate to be our Laos country manager. We have also applied with the Ministry of Planning and Investment for our e-games café license in three border locations adjacent to Thailand, China and Vietnam. PWAP is also in negotiations to acquire the country’s sole operator of scratch cards. Although Laos is a small country, the fact that it borders several countries with large populations and whose populations have no access to gambling convince us that Laos will be a very big opportunity for PWAP.
NEPAL, INDIA AND SRI LANKA Part of PhilWeb’s international expansion strategy involves gaming prospects in the Indian sub-continent. These are in Nepal, India and Sri Lanka. Nepal is a landlocked country bordered by Tibet, China and India. Considering that the country only allows gambling among Non-Nepalis, the company is eyeing building a gaming café along Nepal’s borders to tap foreigners, especially Indians, who visit the country for tourism, business, work, and family reasons. With Nepal as a popular tourist destination for South Asian gamblers and tourists, this is definitely a great opportunity for PhilWeb to establish itself on the international scene. PWAP has been in discussions with a Nepalese conglomerate with roots in India and Sri Lanka about offering national lotto and scratch cards. Through this potential partner, we would gain a foothold into the Indian sub-continent.
PHILWEB ASIA PACIFIC PRESIDENT MICHAEL GRANDINETTI SIGNING OUR MEMORANDUM OF AGREEMENT WITH MR. EKAPHANH PHAPITHACK, PRESIDENT OF THE SIMUONG GROUP OF LAOS. WITNESSING ARE PHILWEB PRESIDENT DENNIS VALDES, AND MS. SOMSYHAPAN GNA SOMBOUN AND MR. SOURISACK CHANLEUSA OF THE SIMUONG GROUP.
philweb asia-pacific corporation
GUAM AND MICRONESIA We have entered into a Memorandum of Agreement with the Calvo family, who control the largest business conglomerate on the island of Guam. The MOA has a 51:49 equity split in favor of PWAP. Guam has long been a vacation destination for Japanese and Korean tourists, making it an ideal location for gaming. In addition, the U.S. government recently announced the deployment of certain military personnel previously stationed in Okinawa, Japan to Guam. The U.S. government expects to spend billions of dollars on Guam in Phase 1 of this operation. Our business model for Guam is formulated after a successful one in the U.S. that operates sweepstakes cafés. Recent state court rulings have upheld the validity of sweepstakes cafés as not constituting gambling, as long as certain parameters are followed. PWAP and the Calvos are in the process of incorporating in the Territory of Guam and are applying for our business license with the Department of Revenue and Taxation. We expect to launch two sweepstakes cafés in April 2011. We are additionally working with the Calvos on establishing sweepstakes cafes in The Commonwealth of the Northern Mariana Islands (Saipan). EAST TIMOR East Timor has never allowed gaming before but through our local contacts and with the consent of the local Catholic Church, we have been asked to submit a proposal on establishing a national lotto, bingo and scratch card. Our lottery pitch has reached the Prime Minister’s office and we are now looking for an appropriate local partner to support our business in East Timor. PALAU The Republic of Palau is an independent island nation located in the southwest Pacific. Palau has entered into a Covenant of Free Association
philweb asia-pacific corporation
with the United States of America. PWAP envisions entering into an 80:20 venture with a local business partner to offer e-games cafĂŠs to the Taiwanese, Koreans and Japanese tourists visiting the island. Our main goals for 2011 are profitable expansion and to see the fruition of PWAPâ€™s projects in each of the partner countries. Our priorities include: t 5IFJOUSPEVDUJPOPGMPUUPBOETDSBUDIDBSETJO$BNCPEJB followed by the construction of border e-games cafĂŠs. t *O-BPTXFBJNUPDSFBUFCPSEFSFHBNFTDBGĂ?T GPMMPXFE by the launch of lotto and scratch cards if these prove to be viable business ventures. t (VBNXJMMTFFUIFDSFBUJPOPGTXFFQTUBLFTDBGĂ?T t 1BMBVXJMMTFFUIFDSFBUJPOPGFHBNFTDBGĂ?TGPSGPSFJHO play only. t 5IFMBVODIPGMPUUPBOETDSBUDIDBSETJO/FQBMBOE&BTU Timor is also a high priority. PWAP is currently establishing an office in Cambodia and has received its foreign permit license in Laos. PWAP is also incorporating the Territory of Guam and Palau with the intent of becoming operational in all four jurisdictions mentioned above by the 2nd quarter of 2011.
BPO SERVICES FOR ONLINE CASINOS PhilWeb has taken an important step towards international, web-based expansion by securing a business process outsourcing (BPO) contract to manage online casinos on behalf of foreign principals. The online casino market is one of the fastest expanding Internet properties. PhilWeb has been studying the management of online casinos and marketing various services to foreign principals. We aim to provide casino operators a buffet of services that will range from digital marketing services to full turnkey solutions. As a pioneer in Internet gaming, your company has expanded to share its expertise by offering BPO services to potential casino operators. The Philippines is the leading business process outsourcing country in the world and Philweb intends to be a global player in servicing casino operators. To be the leader in this industry, we are expanding our service offerings to include call center services, client distribution, payment gateway options, on-the-ground events, full ad and media planning, and search engine optimization. PhilWebâ€™s experience in online casino management and our stature as a reputable, publicly listed company have attracted several proposals for partnership and cooperation in the online casino field. PROXIMITY CARD SYSTEM Credit card penetration in the Philippines is a low 7.7%, while debit card users amount to only 32.6% of the total population. As such, a majority of Filipinos have only limited access to various financial and electronic transactions such as online banking, e-commerce, and automated cash management. Realizing the potential of this underserved market, PhilWeb is studying the introduction of a Proximity Card System that will serve a significant 59.7% of total unbanked Filipinos. Proximity Cards will work as a stored value card or cash card that can be used for multiple transactions, including online shopping and online gaming, as well as offline payment services such as mass transit fares, payment for utility bills, toll fees, parking fees, gasoline stations, and retail outlets, among others. L - R: RAFAEL G. ONGPIN (SVP - MARKETING), GIL G. EDEZA (SVP - ONLINE) 24
The processing system for proximity cards will make use of a Smart Card Processor that will be able to connect to any banking or financial institution for fund sourcing and cash management. Connection to as many possible points of sale and card-reading facilities will be assured, while providing a safe and secure platform for the card users. PhilWeb is confident that providing electronic payment solutions to the vast untapped market via a Smart Proximity Card System will result in widespread adoption and profitability. TV GAMING In 2010, PhilWeb began negotiations with TV5 to develop television programming that allows viewers to interact via their mobile phones. As part of this arrangement, PhilWeb will provide the game content, prizes, game engines, backend and mobile infrastructure, while TV5 will provide production and airtime. Revenue will be shared between the two partners. The initial offering will likely be in the form of a game show on TV5, where viewers can choose any of several possible outcomes of a contest that involves some skill and effort. Participation via mobile will consist of simple keywords sent through SMS. Initially, Smart and Talk â€˜N Text mobiles will be accepted. PhilWeb believes that broadcast-based mobile represents a huge market, especially given the TV audience numbers nationwide. As competition for a limited advertising market continues, many networks are seeking to supplement their revenue through non-ad sources, of which mobile participation is one of the most promising. TV viewers in the Philippines are already well accustomed to the idea of obtaining program-related value-added services via their mobile phones, as this practice is now widespread.
corporate governance and csr
Your Company recognizes that its primary responsibility is to its stakeholders. This responsibility extends beyond financial results, and includes its social responsibility to the community at large. As PhilWeb grows and delivers profits to its stakeholders, it also amasses resources that can make a huge difference in the lives of the less privileged. In 2011, your Company will explore ways in which it can impact the community it serves for the better. By being responsible corporate citizens, we are confident that we can be a positive force for transformation in our society. PHILWEB FOUNDATION, INC. PhilWeb established the PhilWeb Foundation in June 2010, with the aim of donating one percent of the Companyâ€™s annual profit to the Foundation. With this, the Foundation aims to create nationwide sustainable programs focused on alleviating poverty, improving standards and accessibility to education, and improving the welfare of deserving communities. In 2011 PhilWeb Foundation will establish a scholarship program with the University of the Philippines. This program will be aimed at deserving students in the field of Internet Technology, with the aim of providing scholars their full tuition, plus a living allowance and ultimately, access to PhilWebâ€™s Management Training Program. The PhilWeb Foundation recognizes that education can change lives, and thus is dedicated to its educational scholarship programs.
L - R: CARLA S. VARGAS (AVP - HR & ADMINISTRATION) 26
PhilWeb Corp eyes international expansion The Philippine Star, 28 May 2010, Page B3 By Mary Ann LL. Reyes
PhilWeb Corp., the country’s first and largest publicly listed Internet company, expects its performance this year to break all records, largely due to the success of its Pagcor e-Games Cafés (PEGS). PhilWeb President Dennis Valdes said that they are looking at duplicating the success of PEGS in other countries like Vietnam, Laos, Saipan, Palau, Papua New Guinea, East Timor and Nepal. PhilWeb declares first dividend Business Mirror, 20 August 2010, Page A1 By Lennie Lectura
PhilWeb Corp., a listed online technology firm, declared its first dividend at P0.10 per share. In a statement, the company said the dividends will be paid on September 20 to shareholders of record as of September 3. The total dividend payment will amount to over P125 million, based on the company’s total 1,257,922,603 outstanding shares. PhilWeb brings Internet gaming, casino to Laos Daily Tribune, 26 November 2010, Page B8 By Danessa O. Rivera
PhilWeb Corp. unit PhilWeb Asia-Pacific Corp. signed a memorandum of understanding with a Laos-based industrial conglomerate for joint development and operation of Internet and mobile games in Laos. PhilWeb will jointly develop and operate with Simuong Group (SMG), an industrial conglomerate based in Vientiane, games which include Internet gaming cafés (similar to those operated by PhilWeb on behalf of PAGCOR), lotteries and others.
CORPORATE SERVICES L – R:
Michelle S. Ongpin – Assistant to the Chairman Zaldy M. Prieto – SVP & CFO Cliburn Anthony A. Orbe – VP, Corporate Services Marriana H. Yulo – SVP, Corporate Finance Rodolfo A. Ponferrada – SVP, Legal Counsel
EXECUTIVE OFFICERS EXECUTIVE OFFICERS Roberto V. Ongpin – Chairman Ray C. Espinosa – Vice Chairman Eric O. Recto – Vice Chairman Dennis O. Valdes – President Michael T. Grandinetti – President, PhilWeb Asia Pacific SENIOR EXECUTIVES Brian K. Ng – SVP, PEGS Ferdimark L. Mariano – VP, PEGS Operations Mark Allan E. de Ungria – VP, PEGS Roll Out Sherwin Allan E. Sikat – Senior Manager, BigGame, Inc. Antonio Jose K. Garcia – SVP, Sports and Mobile Gaming Florentino B. Mauricio – SVP, PSR Maria Teresita R. Gonzales – AVP, Sports Gaming Gil E. Edeza – SVP, Online Casinos Rafael A.S.G. Ongpin – SVP, Marketing Atty. Rodolfo A. Ponferrada – SVP, Legal Counsel Atty. Cliburn Anthony A. Orbe – VP, Corporate Services Atty. Raymund S. Aquino – AVP, Legal Carla S. Vargas – AVP, Human Resources and Administration Mazy V. Tayamen – AVP, Customer Services Marianna H. Yulo – SVP, Corporate Finance Zaldy M. Prieto – CFO and SVP Melecio A. Santiago, Jr. – Senior Manager, Internal Audit Josephine A. Manalo – Assistant to the Chairman Michelle S. Ongpin – Assistant to the Chairman Michael A. P. Asperin – Group Security Director Scott A. Sproule – Chief Technical Advisor Alexander C. Manabal – AVP, IT Operations Anthony M. San Pedro – AVP, IT Quality Assurance and Configuration Rogelio C. Delgado – AVP, Security and Software Development
board of directors
ROBERTO V. ONGPIN was elected chairman of the Company in January 2000, the year he founded the Company. He is the chairman of ISM Communications Corporation, Developing Countries Investment Corporation, Alphaland Corporation, At ok-Big Wedge Co., Inc., Acentic GmbH, anon-executive director of Forum Energy PLC (UK), a director of San Miguel Corporation, Ginebra San Miguel, Inc., Petron Corporation, and Shangri-La Asia (Hong Kong), and the Deputy Chairman of the South China Morning Post (Hong Kong). He was formerly the chairman and managing partner of SyCip Gorres Velayo & Co. from 1964 to 1979 , and served as the Minister of Trade and Industry of the Republic of the Philippines from 1979 to 1986. Mr. Ongpin graduated cum laude in Business Administration from the Ateneo de Manila University, is a certified public accountant and has an MBA from Harvard University.
ERIC O. RECTO was elected vice chairman on July 28, 2006 after having been president and director of the Company since March 2005. He is also the vice chairman of Alphaland Corporation and Atok-Big Wedge Co., Inc., the president of Petron Corporation, a director and the president of ISM Communications Corporation, a director and the CEO of Eastern Telecommunications Philippines, Inc., a director of Manila Electric Company, Acentic GmbH, San Miguel Corporation, and the president of Top Frontier Investment Holdings, Inc. and Q-Tech Alliance Holdings, Inc. Prior to joining the Company, Mr. Recto served for three years as an Undersecretary of the Department of Finance of the Philippine Government in charge of handling both the International Finance Group and the Privatization Office. Before his work with the government, he was the CFO of Alaska Milk Corporation and prior to that, Belle Corporation. Mr. Recto has a degree in Industrial Engineering from the University of the Philippines as well as an MBA from the Johnson School, Cornell University.
RAY C. ESPINOSA was elected vice chairman of the Company on June 20, 2006. He is president and CEO of Mediaquest Holdings, Inc., ABC Development Corporation (TV5), and Mediaskape, Inc. (Cignal TV). He is a director of the Philippine Long Distance Telephone Company (PLDT), ePLDT, Manila Electric Co., and Metro Pacific Investment, Corp., a director and the corporate secretary of Cyber Bay Corp., and an independent director the Lepanto Consolidated Mining Company. He is also the president of Nation Broadcasting Corp. (NBC) and other subsidiaries of Mediaquest Holdings, Inc. He was a partner of SyCip Salazar Hernandez & Gatmaitan from 1982 to 2000, a foreign associate at Covington and Burling (Washington, D.C., U.S.A.) from 1987 to 1988, and a law lecturer at the Ateneo de Manila School of Law from 1983 to 1985 and 1989. He is a member of the Integrated Bar of the Philippines and has a Master of Laws degree from the University of Michigan Law School.
board of directors
DENNIS O. VALDES was elected director of the Company in July 2006. He is the president of the Company, a director of ISM Communications Corp. and Alphaland Corporation, and treasurer of Atok-Big Wedge., Inc. His previous work experience includes ten years with the Inquirer Group of Companies, as a director of the newspaper, and also expanding their internet, printing and ink-making operations. Prior to that he spent six years with The NutraSweet Company developing their business in Asia. He is a certified public accountant, graduated magna cum laude in Business Administration and Accountancy from the University of the Philippines and has an MBA from the Kellogg School of Management, Northwestern University.
TOMAS I. ALCANTARA was elected independent director of the Company in May 2002. He is the Chairman and President of Alsons Consolidated Resources, Inc., Alto Power Management Corp., Alsons Development and Investment Corporation, Lima Land, Inc. and Sarangani Agricultural Co., Inc., among others. He is a director of Holcim Philippines and DBP-Daiwa Securities Corp. He serves as the Chairman of the Philippines-Japan Economic Cooperation Committee. He studied at the Ateneo de Manila University, the Columbia University Graduate School of Business and the Harvard Business School. He was formerly the Chairman of the Manila Economic and Cultural office (MECO) and served the Philippine Government in various capacities as Undersecretary for Industry and Investments, Department of Trade and Industry, Vice Chairman and Managing Head, Board of Investments and Special Envoy of the President of the Philippines to APEC.
RAMON S. ANG was elected director of the Company in November 2001. He is currently the vice chairman, president and COO of San Miguel Corporation, the chairman and CEO of Petron Corporation and the vice chairman of the Manila Electric Company (MERALCO). He holds the positions of chairman, president or director of over 35 companies related to or subsidiaries of San Miguel Corporation, and is also the chairman of Liberty Telecoms Holdings, The Purefoods-Hormel Company, Inc., Philippine Diamond Hotel & Resort, Inc., Magnolia, Inc. and Cyber Bay Corporation. He was previously the CEO of Paper Industries Corporation of the Philippines (PICOP) and the executive managing director of Northern Cement Corporation, among others. He has a BS degree in Mechanical Engineering from Far Eastern University. BENITO R. ARANETA was elected independent director of the Company in March 2003. He is the chairman and CEO of the Araneta Properties, Inc., the chairman and president of Boie, Inc. and Philipine-American Drug Co., the chairman of Takeda Pharmaceutical (Philippines), Inc., and a director of Southeast Asia Cement Corp., Honda Philippines, Inc., among others.
board of directors
ROBERT CREAGER was elected director of the Company on February 4, 2010. He is currently a member of the Board of Supervisors of Acentic GmbH, a company registered in Germany but headquartered in the U.K. which was acquired by PhilWeb and ISM Communications Corporation in December 2009. Acentic is an international provider of digital and internet protocol converged services to hotels, tourism facilities and healthcare premises, as well as high-speed internet access (HSIA) in many of the world’s leading hotel chains including Accor, Dorint, Intercontinental Hotel Group, Hilton, Hyatt, Maritim, Marriott, Movenpick and Starwood in more than 30 countries in Europe, Middle East and Africa. Mr. Creager was the founder of MagiNet Corporation, currently known as DoCoMo Intertouch, which is the largest provider of in-room interactive television and HSIA services for the hospitality industry in Asia. He also served as the executive vice president of TVU Networks Corporation and was formerly the CEO of AMG Media Vision Inc.
CRAIG EHRLICH was elected director of the Company in May 2002. He is the former long time chairman of the GSM Association (GSMA), the global trade association representing more than 700 2nd and 3rd generation network operators, serving more than 4 billion customers across 218 countries and territories. He is a board member of the International Telecommunications Union (ITU), Bharti Airtel, India’s largest (by market capitalization) telecommunications company, the chairman of Carmel Ventures Asia, and the founding chairman of Novare Technologies Ltd., a Hong Kong software development company. He was the former group managing director of Sunday Communications Limited, a Hong Kong mobile operator. In the Philippines, he is a director and vice chairman of ISM Communications Corporation. Mr. Ehrlich, a Hong Kong resident since 1987, holds a BA degree from the University of California Los Angeles, a master’s degree from Occidental College and a postgraduate fellowship with the Coro Foundation.
MARIANO L. GALICIA, JR. was elected director of the Company in December 2005. He was formerly a senior vice president of Fort Bonifacio Development Corp., group vice-president of ePLDT, group vice-president for corporate services of Metro Pacific Corp., human resources director of Johnson & Johnson (Phils.) Inc., Jansen Pharmaceuticals and J&J Medical Phils., Inc. and group manager of Del Monte Philippines, Inc./ Del Monte International Inc. He has a Bachelor of Science degree from the University of the Philippines.
MARIO J. LOCSIN was elected director of the Company in January 2000. He is also currently the president of Inpilcom, Inc. He is also a director of ISM Communications Corporation, Eastern Telecommunications Philippines, Inc. as well as an independent director of Alphaland Corporation and Atok-Big Wedge Co., Inc. In the past, he served
board of directors
as the president and COO (until February 8, 2011) of Eastern Telecommunications Philippines, Inc., a director of Belle Corporation, APC Group, Southwest Resources, Philippine Long Distance Telephone Co. and Pilipino Telephone Co., as well as a director, executive vice president and COO of Philippine Airlines.
MARIO A. ORETA was elected independent director of the Company in March 2005. He is the president of Alphaland Corporation (Macondray Plastics, Inc.), Alphaland Development, Inc. and Alphaland Heavy Equipment Corporation, the chairman of Major Holdings Corporation, Major Properties Corporation, Major Homes, Inc. and La Finca Farm and Country Resort as well as a director of ISM Communications Corporation and Atok-Big Wedge Co., Inc. He was the founder and managing partner of Tanjuatco, Oreta and Factoran Law Offices.
RAFAEL B. ORTIGAS was elected director of the Company in April 2002. He is the executive vice president of Sagitro, Inc. and Itogon-Suyoc Resources, Inc., a vice president of Leafar Commercial Corporation, the chairman, president and director of Rising Sons of 3K, Inc., the chairman and director of CK3K, Inc. and GSC-3KCK, Inc. and a director of Vinmer Realty, Inc. and Concrete Aggregates Corp., a director and treasurer of Creative Trade Center Services, Inc. and a vice president and director of ISM Communications Corporation and a delegate general partner of Ortigas and Company, Ltd. Partnership. He has a Bachelor of Science degree in Computer Science from De Las Salle University and an MBA from Ateneo de Manila Graduate School of Business.
GEORGE H. TAN was elected director of the Company on June 20, 2006. Currently, he is an Executive Advisor to ePLDT, Inc. He was formerly the senior vice president of ePLDT, Inc., and was the president and CEO of Digital Paradise, Inc., operator of Netopia, the largest chain of internet cafes in the Philippines. He was the executive vice president and chief finance officer of William, Gothong and Aboitiz, Inc. from 1998 to 1999. He was an associate professor and held various key positions in the Asian Institute of Management from 1989 to 1997. He is a certified public accountant and has a Masterâ€™s degree (with distinction) in Business Management from the Asian Institute of Management. DELFIN J. WENCESLAO, JR. was elected director of the Company in May 2004. He is presently the chairman and president of D.M. Wenceslao & Associates, Inc. and Fabricom Manufacturing Corporation, the chairman of Philippine Ecopanel, Inc. and Mandaue Land Consortium, Inc., the president and director of Bay Dredging, Inc. and Bay Resources and Development Corporation, the managing director of R-I Consortium and a director of Private Infrastructures Development Corp. (PIDC).
statement of managementâ€™s responsibility
report of independent auditors
report of independent auditors
consolidated statements of financial position PHILWEB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31 Note
4 5, 15 6 8 7
P355,830,777 152,974,235 536,247,991 658,432,096 45,051,036 1,748,536,135
P879,742,668 70,712,134 64,231,212 36,944,464 1,051,630,478
8 9 10
897,207,289 196,820,886 28,104,983 1,122,133,158
813,033,607 204,875,675 42,077,294 1,059,986,576
ASSETS Current Assets Cash and cash equivalents Accounts receivable - net Notes receivable Investment held for sale Prepaid expenses and other current assets Total Current Assets Noncurrent Assets Investment in an associate Property and equipment - net Other assets Total Noncurrent Assets
LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Notes payable Due to suppliers Total Current Liabilities
11 12 13
P108,191,656 138,856,600 2,579,871 249,628,127
P112,703,475 13,471,697 126,175,172
Noncurrent Liabilities Retirement benefits liability Operators’ deposits Total Noncurrent Liabilities
8,849,597 36,300,000 45,149,597
5,773,644 32,800,000 38,573,644
1,111,355,369 341,433 535,660,889 926,460,372 (126,494) 2,573,691,569 2,200,000 2,575,891,569
1,074,548,667 341,433 506,280,305 22,584,066 343,240,264 (126,497) 1,946,868,238 1,946,868,238
Total Liabilities Equity Capital stock Surplus from write-down of capital stock Additional paid-in capital Stock options outstanding Retained earnings Treasury stock
Non-controlling interest Total Equity
See Notes to the Consolidated Financial Statements.
consolidated statements of comprehensive income PHILWEB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31 2010
P896,855,047 142,998,688 1,039,853,735
P717,178,252 100,386,118 817,564,370
P393,853,616 55,938,973 449,792,589
92,341,048 80,255,411 53,437,837 51,172,851 45,656,035 40,246,520
90,876,814 59,763,407 40,622,976 28,532,150 28,883,076 23,600,919
82,941,003 39,364,157 24,489,299 21,054,745 19,469,999 15,584,252
18,455,454 19,805,853 10,461,508 10,900,029 7,616,792 3,525,778 4,149,001 438,024,117
10,352,040 10,296,513 6,069,847 6,268,945 5,351,283 2,470,054 7,082,530 320,170,554
8,049,575 5,257,359 4,510,899 11,155,218 2,871,153 330,506 7,975,366 243,053,531
Note NET SERVICE REVENUES Internet application service income Commission income OPERATING EXPENSES Salaries and benefits 15, 17, 20 Depreciation and amortization 9 Outsourced services Representation and entertainment Rent 19 Utilities and communications Impairment losses on input tax, other assets, advances and receivables Professional fees Taxes and licenses Advertising and promotion Supplies Operator incentives Miscellaneous OPERATING INCOME OTHER INCOME (CHARGES) Equity in net earnings of an associate Interest income Interest expense Miscellaneous - net
84,173,682 35,066,148 (14,069,119) 2,052,041 107,222,752
INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (BENEFIT) NET INCOME/TOTAL COMPREHENSIVE INCOME EARNINGS PER SHARE: Basic Diluted
34,626,605 21,649,130 (998,049) 55,277,686 552,671,502 1,468,822
60,683,654 18,890,717 5,946,558 85,520,929 292,259,987 (23,535)
See Notes to the Consolidated Financial Statements.
consolidated statements of changes in equity PHILWEB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended December 31 Note 1, 16 CAPITAL STOCK Authorized Common shares - P1 par value in 2010 and 2009 (P.01 in 2008) Balance at beginning of year Adjustment in number of shares as a result of increase in par value
Issued and outstanding Common shares at beginning of year Adjustment in number of shares as a result of increase in par value Issuances of common shares Common shares at end of year
506,280,305 29,380,584 535,660,889
476,124,998 30,155,307 506,280,305
466,833,862 9,291,136 476,124,998
22,584,066 (22,005,051) (579,015) -
16,332,041 25,819,202 (19,567,177) 22,584,066
2,062,857 21,415,351 (7,146,167) 16,332,041
343,240,264 (125,832,262) 709,052,370
RETAINED EARNINGS (DEFICIT) Balance at beginning of year Cash dividends Net income for the year Balance at end of year TREASURY STOCK, At cost
ADDITIONAL PAID-IN CAPITAL Balance at beginning of year Additions during the year Balance at end of year STOCK OPTIONS OUTSTANDING Balance at beginning of year Vested Exercised Forfeited/expired Balance at end of year
2008 Number of Shares
Subscribed shares at end of year
2009 Number of Shares
Subscribed Subscribed shares at beginning of year Adjustment in number of shares as a result of increase in par value Issuance of common shares (net of subscription)
SURPLUS FROM WRITE-DOWN OF CAPITAL STOCK
2010 Number of Shares
See Notes to the Consolidated Financial Statements.
consolidated statements of cash flows PHILWEB CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 2010
18,455,454 14,069,119 3,075,953
Note CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization Impairment losses on input tax, other assets, advances and receivables Interest expense Retirement benefits cost Loss on disposals of property and equipment Equity in net earnings of an associate Interest income Unrealized foreign exchange gain Vested stock options Operating income before working capital changes Decrease (increase) in: Receivables Prepaid expenses and other current assets Increase (decrease) in: Accounts payable and accrued expenses Due to suppliers Cash generated from operations Interest received Interest paid Income tax paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment Decrease (increase) in other assets Proceeds from disposals of property and equipment Increase in investments in subsidiaries and an associate Increase in notes receivable Net cash used in investing activities
(84,173,682) (35,066,148) (4,654,781) -
(34,626,605) (21,649,130) 25,819,202
(60,683,654) (18,890,717) (6,676,518) 21,415,351
(4,511,819) (10,891,826) 577,619,049 35,066,148 (14,069,119) -
37,968,298 (45,056) 567,331,718 21,649,130 -
11,148,532 (7,413,881) 247,680,462 18,890,717 (2,253,078)
(658,432,096) (472,471,984) (1,189,965,512)
47,500 (338,475,644) (443,023,604)
consolidated statements of cash flows
Years Ended December 31 Note
CASH FLOWS FROM FINANCING ACTIVITIES Increase in notes payable Proceeds from subscriptions to and issuances of common stock Increase in operators’ deposits Increase in non-controlling interest Cash dividends paid Net cash provided by financing activities
P 22,282,326 9,300,000 -
P 6,374,969 7,300,000 -
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR
See Notes to the Consolidated Financial Statements.
PHILWEB CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Reporting Entity PhilWeb Corporation (“Parent Company”) was originally a mining and exploration company and registered with the Philippine Securities and Exchange Commission (SEC) on August 20, 1969 under the name South Seas Oil and Mineral Exploration Co. Inc. In 2000, upon the approval by the stockholders and effectivity of the Restructuring Plan, which includes, among others, the change in the primary purpose from a mining and oil exploration company to that of an internet company and change in corporate name to “PhilWeb.Com., Inc.”, the Parent Company focused its activities on building its internetbased products and services. The internet business of the Parent Company started commercial operations on January 1, 2001. On November 5, 2002, the SEC approved the change in corporate name of the Parent Company from “PhilWeb.Com, Inc.” to “PhilWeb Corporation”. This change in corporate name is in line with emphasis and focus of the Parent Company on the internet gaming industry. On May 29, 2003, the stockholders approved a resolution to amend the primary purpose of the Parent Company to gaming, and to include the current internet business activities as an additional secondary purpose of the Parent Company, thereby amending the Second Article of its Articles of Incorporation. Under the same resolution, the Board of Directors was also granted the authority to determine the text of the gaming purpose clause in the amended Articles of Incorporation. The change in the primary and secondary purpose completed the Parent Company’s transformation into a gaming and internet company. The Parent Company’s shares are listed at the Philippine Stock Exchange (PSE) under the stock symbol “WEB”. The Parent Company has applied for the necessary clearances from the Bureau of Internal Revenue (BIR) for the dissolution of the following wholly-owned subsidiaries which have not been in operation since 2002: 1. PhilWeb Cyberworld Corporation 2. PhilWeb Software Corporation
The consolidated financial statements include the accounts of the Parent Company and the following wholly-owned subsidiaries, which were all incorporated in the Philippines (Phil.), and special purpose entities (SPEs) incorporated in the British Virgin Islands, (collectively referred to as a the “Group”): Subsidiaries PhilWeb Convergence Corporation PhilWeb Cyberworld Corporation(a) PhilWeb Software Corporation(a) BigGame, Inc. Premyo sa Resibo, Inc.
PhilWeb Casino Corporation (a)
PhilWeb Gaming Solutions Corporation (a)
PhilWeb Leisure & Tourism Corporation (a) PhilWeb Tourism and Entertainment Corporation (a)
PhilWeb International Gaming Corporation (a)
Line of Business Internet access provider Operates internet cafes and kiosks Computer software programming and development services Operates internet casino station operations Develops and markets computer systems, applications, programs and operate gaming platforms in relation to Premyo sa Resibo program of the BIR and Philippine Amusement and Gaming Corporation (PAGCOR). Develops, engages and maintains gaming systems and applications for all types of casino operations whether land-based, internet-based or virtual Engages, develops, creates, markets, promotes, manages, operates and licenses game promotions and gaming solutions, either by itself or in conjunction with other companies Establishes, operates, and maintains leisure and tourismoriented activities Establishes, operates and maintains leisure-oriented activities, except in the travel agency business, and facilities such as but not limited to hotels, courts, stadiums and other facilities for the conduct of any and all kinds of sports and games Engages in international gaming ventures including all forms of gaming which are legal in the countries in which it operates.
Date and Place of Incorporation September 6, 2000, Phil. July 6, 2000, Phil. April 3, 2000, Phil. February 11, 2005, Phil December 8, 2006, Phil
December 22, 2006, Phil.
May 8, 2007, Phil.
June 6, 2007, Phil.
July 26, 2007, Phil.
November 18, 2009, Phil.
Subsidiaries PhilWeb Homeplay, Inc. (a)
PhilWeb Mobile Lottery Corp. (a)
PhilWeb Asia Pacific Corp. (a)
Date and Place of Line of Business Incorporation Operate, as may be permitted by October 23, 2009, Phil. law, on-line websites and internet casinos Operate, as may be permitted by February 3, 2010, Phil. law, either alone or in partnership with others, mobile-based lottery games and other related mobile games offerings. Engage in international gaming July 13, 2010, Phil. ventures including all forms of gaming which are legal in countries in which it will operate. The Company incorporated PhilWeb (Cambodia) Ltd. under the laws of The Kingdom of Cambodia, to form a joint venture company which shall operate internet-based and mobile-based games of chance including but not limited to lottery, internet casino café and other games of chance as they become legally available in the kingdom of Cambodia.
(a) No commercial operations yet as of December 31, 2010.
Special Purpose Entities Immediate Focus Investments Limited (b) Leadwood Investments Limited (b) Now Gain Investments Limited (b) Nottendale Investments Limited (b)
Purpose Holds 2.285 billion shares of ISM Communications Corporation (ISM) which represents 1.19% ownership interest in ISM Holds 5.429 billion shares of ISM which represents 2.83% ownership interest in ISM
Uscon Limited (c)
(b) Acquired in 2007 (c) Acquired in 2009
The Parent Company’s registered office address is at The Penthouse, Alphaland Southgate Tower, 2258 Chino Roces Avenue corner EDSA, Makati City. 2. Basis of Preparation Statement of Compliance The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRSs).
notes The consolidated financial statements as of and for the year ended December 31, 2010, 2009 and 2008 were approved and authorized for issuance by the Chairman, President and Chief Financial Officer on February 2, 2011, respectively, as authorized by the Board of Directors of the Parent Company. Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of the subsidiaries are included in the consolidated financial statements from the date when control commences until the date when control ceases. Special Purpose Entities The Group has a number of SPEs for investment purposes. An SPE is consolidated when the substance of its relationship with the Group indicates that the SPE is controlled by the Group. Transactions Eliminated on Consolidation Intra-group balances, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The financial statements of the subsidiaries and SPEs are prepared for the same reporting period as the Parent Company, using consistent accounting policies. Basis of Measurement The consolidated financial statements have been prepared under the historical cost basis of accounting. Functional and Presentation Currency The consolidated financial statements are presented in Philippine peso, which is also the Parent Company’s functional currency. All financial information presented in Philippine peso has been rounded off to the nearest peso unless otherwise stated. Use of Estimates and Judgments The preparation of consolidated financial statements in conformity with PFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. However, uncertainty about these estimates and judgments could result in outcome that could require a material adjustment to the carrying amount of the affected asset or liabilities in the future. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.
notes In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the Group’s consolidated financial statements is included in the following discussion: Estimating Allowance for Impairment of Receivables and Other Current Assets The Group maintains an allowance for impairment losses at a level considered adequate to provide for uncollectible receivables. The level of this allowance is evaluated by the Group on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with the customer, the customer’s payment behavior and known market factors. The Group reviews the age and status of receivables, and identifies accounts that are to be provided with allowance on a continuous basis. The review is accomplished using a combination of specific and collective assessment. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. An increase in the allowance for impairment losses would increase the recorded operating expenses and decrease current assets. As of December 31, 2010 and 2009, allowance for impairment losses on receivables amounted to P0.7 million and P4.4 million, respectively (see Note 5). As of December 31, 2010 and 2009, allowance for impairment losses on input tax amounted to P53.3 million and P34.8 million, respectively (see Note 7). Estimating Allowance for Impairment Losses on Non-financial Assets The Group assesses impairment of non-financial assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following:
significant underperformance relative to the expected historical or projected future operating results;
significant changes in the manner of use of the acquired assets or the strategy for overall business; and
significant negative industry or economic trends.
An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. Other assets from discontinued operations were fully provided with allowance for impairment loss amounting to P61.6 million as of December 31, 2010 and 2009, respectively (see Note 10). Estimating Useful Lives of Property and Equipment The Group reviews annually the estimated useful lives of property and equipment based on the period over which the assets are expected to be available for use and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property and equipment would increase the recorded depreciation and amortization expenses and decrease noncurrent assets.
notes The net book value of the Group’s property and equipment as of December 31, 2010 and 2009 amounted to P196.8 million and P204.9 million, respectively (see Note 9). Estimating Realizability of Deferred Tax Assets The Group reviews the carrying amounts of deferred tax assets at each reporting date and reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Group reviews its projected performance in assessing the sufficiency of future taxable income. As of December 31, 2010, 2009 and 2008, temporary differences relating to unrecognized deferred tax assets amounted to P123.5 million, P144.8 million and P237.4 million, respectively (see Note 14). Share-based Payments The Parent Company grants share-based payments to all employees, officers and directors of the Group as well as such other qualified persons determined as eligible by the BOD. These transactions are accounted for as equity-settled share-based payments. PFRS 2 has been applied to all equity-settled grants. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed over the vesting period, based on the Parent Company’s estimate of awards that will eventually vest. Equity-settled grants are not remeasured for subsequent changes in the value of the equity instruments. Fair value for stock options is measured using the Black-Scholes option pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations. Operating Leases The Group has entered into various lease agreements as lessee. The Group has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under operating lease agreements. Rent expense recognized in profit or loss amounted to P45.7 million, P28.9 million, and P19.5 million for the years ended December 31, 2010, 2009 and 2008, respectively (see Note 19). Retirement Benefits Liability The determination of the Parent Company’s retirement liability and employee benefits is dependent on selection of certain assumptions used by the actuary in calculating such amounts. Those assumptions, include among others, discount rates, expected return on plan assets and salary increase rates. Actual results that differ from the Parent Company’s assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized income/expense and recorded asset/liability in such periods. As of December 31, 2010 and 2009, retirement benefits liability amounted to P8.8 million and P5.8 million, respectively. Retirement benefits cost amounted to P3.1 million, P1.5 million and P1.2 million in 2010, 2009 and 2008, respectively (see Note 20).
notes Contingencies The Group is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of possible claims has been developed in consultation with its legal counsel and is based upon an analysis of potential results. The Group does not believe that these proceedings will have a material effect on the Group’s financial position (see Note 25). 3. Summary of Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, except for the changes in accounting policies as explained below. Adoption of New and Revised Standards, Amendments to Standards and Interpretations The Financial Reporting Standards Council approved the adoption of a number of new and revised standards, amendments to standards, and interpretations as part of PFRSs. Revised Standard, Interpretation and Amendments to Standards Adopted in 2010
Revised PFRS 3, Business Combinations (2008), effective for annual periods beginning on or after July 1, 2009, incorporates the following changes that are likely to be relevant to the Company’s operations:
The definition of a business has been broadened, which is likely to result in more acquisitions being treated as business combinations. Contingent consideration will be measured at fair value, with subsequent changes therein recognized in profit or loss. Transaction costs, other than share and debt issue costs, will be expensed as incurred. Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss recognized in profit or loss. Any non-controlling interest will be measured at either fair value, or at its proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis.
Revised PFRS 3, which becomes mandatory for the Group’s consolidated financial statements, will be applied prospectively.
Revised PAS 27, Consolidated and Separate Financial Statements (2008), effective for annual periods beginning on or after July 1, 2009, requires accounting for changes in ownership interests by a Company in a subsidiary, while maintaining control, to be recognized as an equity transaction. When a Company loses control of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognized in profit or loss.
Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners, provides guidance on the accounting for non-reciprocal distributions of non-cash assets to owners acting in their capacity as owners. It also applies to distributions in which the owners may elect to receive either the non-cash asset or a cash alternative. The liability for the dividend payable is measured at fair value of the assets to be distributed. The interpretation is effective for annual periods beginning on or after July 1, 2009.
Amendments to PFRSs 2, Share-based Payment: Group Cash-settled Share-based Payment Transactions, clarify the scope of PFRS 2, that an entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and regardless of whether the transaction is equity-settled or cash-settled; and the interaction of PFRS 2 and other standards, that in PFRS 2, a “group” has the same meaning as in PAS 27, Consolidated and Separate Financial Statements, that is, it includes only a parent and its subsidiaries. The amendments are effective for annual periods beginning on or after January 1, 2010.
Improvements to PFRSs 2009, include 15 amendments to 12 standards. Some of these amendments may have significant implications for current practice, in particular the amendments to PAS 17, Leases, may affect the classification of leases of land and buildings, particularly in jurisdictions in which such leases often are for a long period of time. The improvements are generally effective for annual periods beginning on or after January 1, 2010.
PFRS 2 Share-based Payment and PFRS 3 Business Combinations (Revised 2008). The amendments clarify that business combinations as defined in PFRS 3 (2008) are outside the scope of PFRS 2, notwithstanding that they may be outside the scope of PFRS 3. Therefore business combinations among entities under common control and the contribution of a business upon the formation of a joint venture will not be accounted for under PFRS 2.
PAS 38 Intangible Assets. The amendments clarify that (i) an intangible asset that is separable only together with a related contract, identifiable asset or liability is recognized separately from goodwill together with the related item; and (ii) complementary intangible assets with similar useful lives may be recognized as a single asset. The amendments also describe valuation techniques commonly used by entities when measuring the fair value of intangible assets acquired in a business combination for which no active market exists.
Philippine Interpretation IFRIC 9 Reassessment of Embedded Derivatives. The IASB amended the scope of IFRIC 9 so that embedded derivatives in contracts acquired in business combinations as defined in PFRS 3 (2008), joint venture formations and common control transactions remain outside the scope of IFRIC 9.
Philippine Interpretation IFRIC 16 Hedges of a Net Investment in a Foreign Operation. The amendments remove the restriction that prevented a hedging instrument from being held by a foreign operation that itself is being hedged.
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The amendments clarify that the required disclosures for non-current assets (or disposal groups) classified as held for sale or discontinued operations are specified in PFRS 5.
PFRS 8 Operating Segments. The amendments clarify that segment information with respect to total assets is required only if such information is regularly reported to the chief operating decision maker.
PAS 1 Presentation of Financial Statements. The amendments clarify that they classification of the liability component of a convertible instrument as current or non-current is not affected by terms that could, at the option of the holder of the instrument, result in settlement of the liability by the issue of equity instruments. 49
PAS 7 Statement of Cash Flows. The amendments clarify that only expenditures that result in the recognition of an asset can be classified as a cash flow from investing activities.
PAS 17 Leases. The IASB deleted guidance stating that a lease of land with an indefinite economic life normally is classified as an operating lease, unless at the end of the lease term title is expected to pass to the lessee. The amendments clarify that when a lease includes both the land and building elements, an entity should determine the classification of each element based on paragraphs 7 - 13 of PAS 17, taking account of the fact that land normally has an indefinite economic life.
PAS 36 Impairment of Assets. The amendments clarify that the largest unit to which goodwill should be allocated is the operating segment level as defined in PFRS 8 before applying the aggregation criteria of PFRS 8.
PAS 39 Financial Instruments: Recognition and Measurement. The amendments provide: (i) additional guidance on determining whether loan prepayment penalties result in an embedded derivative that needs to be separated; (ii) clarify that the scope exemption in PAS 39 paragraph 2(g) is restricted to forward contracts, i.e. not options, between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination at a future acquisition date within a reasonable period normally necessary to obtain any required approvals and to complete the transaction; and (iii) clarify that the gains or losses on a cash flow hedge should be reclassified from other comprehensive income to profit or loss during the period that the hedged forecast cash flows impact profit or loss.
Improvements to PFRSs 2008 - Amendments to PFRS 5 Non-current Assets Held for Sale and Discontinued Operations, specify that if an entity is committed to a plan to sell a subsidiary, then it would classify all of that subsidiary’s assets and liabilities as held for sale when the held for sale criteria in paragraphs 6 to 8 of PFRS 5 are met; this applies regardless of the entity retaining an interest (other than control) in the subsidiary; and disclosures for discontinued operations are required by the parent when a subsidiary meets the definition of a discontinued operation. The amendments are effective for annual periods beginning on or after July 1, 2009.
The adoption of the above revised standard, interpretation and amendments to standards did not have a material effect on the Group’s consolidated financial statements. New or Revised Standards, Amendments to Standards and Interpretations Not Yet Adopted The Group will adopt the following amendments to standards and interpretations in the respective effective dates: January 1, 2011
Amendment to PAS 32, Financial Instruments: Presentation - Classification of Rights Issues, permits rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency to be classified as equity instruments provided the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. The amendment is applicable for annual periods beginning on or after February 1, 2010. 50
Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, addresses issues in respect of the accounting by the debtor in a debt for equity swap transaction. It clarifies that equity instruments issued to a creditor to extinguish all or part of a financial liability in a debt for equity swap are consideration paid in accordance with PAS 39 paragraph 41. The interpretation is applicable for annual periods beginning on or after July 1, 2010.
Revised PAS 24 Related Party Disclosures (2009), amends the definition of a related party and modifies certain related party disclosure requirements for governmentrelated entities. The revised standard is effective for annual periods beginning on or after January 1, 2011.
Prepayments of a Minimum Funding Requirement (Amendments to Philippine Interpretation IFRIC-14: PAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). These amendments remove unintended consequences arising from the treatment of prepayments where there is a minimum funding requirement and result in prepayments of contributions in certain circumstances being recognized as an asset rather than an expense. The amendments are effective for annual periods beginning on or after January 1, 2011.
Improvements to PFRSs 2010 contain 11 amendments to six standards and to one interpretation. The amendments are generally effective for annual periods beginning on or after January 1, 2011. The following are the said improvements or amendments to PFRSs which the Group did not early adopt. None of these is expected to have a significant effect on the consolidated financial statements of the Group.
PFRS 3 Business Combinations. The amendments: (i) clarify that contingent consideration arising in a business combination previously accounted for in accordance with PFRS 3 (2004) that remains outstanding at the adoption date of PFRS 3 (2008) continues to be accounted for in accordance with PFRS 3 (2004); (ii) limit the accounting policy choice to measure non-controlling interests upon initial recognition at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets to instruments that give rise to a present ownership interest and that currently entitle the holder to a share of net assets in the event of liquidation; and (iii) expand the current guidance on the attribution of the market-based measure of an acquirer’s share-based payment awards issued in exchange for acquiree awards between consideration transferred and post-combination compensation cost when an acquirer is obliged to replace the acquiree’s existing awards to encompass voluntarily replaced unexpired acquiree awards. The amendments are effective for annual periods beginning on or after July 1, 2010. Early application is permitted and is required to be disclosed.
PAS 27 Consolidated and Separate Financial Statements. The amendments clarify that the consequential amendments to PAS 21 The Effects of Changes in Foreign Exchange Rates, PAS 28 Investments in Associates and PAS 31 Interests in Joint Ventures resulting from PAS 27 (2008) should be applied prospectively, with the exception of amendments resulting from renumbering. The amendments are effective for annual periods beginning on or after July 1, 2010. Early application is permitted.
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PFRS 7 Financial Instruments: Disclosures. The amendments add an explicit statement that qualitative disclosure should be made in the context of the quantitative disclosures to better enable users to evaluate an entity’s exposure to risks arising from financial instruments. In addition, the IASB amended and removed existing disclosure requirements. The amendments are effective for annual periods beginning on or after January 1, 2011. Early application is permitted and is required to be disclosed.
PAS 1 Presentation of Financial Statements. The amendments clarify that disaggregation of changes in each component of equity arising from transactions recognized in other comprehensive income is also required to be presented, but may be presented either in the statement of changes in equity or in the notes. The amendments are effective for annual periods beginning on or after January 1, 2011. Early application is permitted.
PAS 34 Interim Financial Reporting. The amendments add examples to the list of events or transactions that require disclosure under PAS 34 and remove references to materiality in PAS 34 that describes other minimum disclosures. The amendments are effective for annual periods beginning on or after January 1, 2011. Early application is permitted and is required to be disclosed.
Philippine Interpretation IFRIC 13 Customer Loyalty Programmes. The amendments clarify that the fair value of award credits takes into account the amount of discounts or incentives that otherwise would be offered to customers that have not earned the award credits. The amendments are effective for annual periods beginning on or after January 1, 2011. Early application is permitted and is required to be disclosed.
January 1, 2012
Disclosures - Transfers of Financial Assets (Amendments to PFRS 7), require additional disclosures about transfers of financial assets. The amendments require disclosure of information that enables users of financial statements to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities; and to evaluate the nature of, and risks associated with, the entity’s continuing involvement in derecognized financial assets. Entities are required to apply the amendments for annual periods beginning on or after July 1, 2011. Earlier application is permitted. Entities are not required to provide the disclosures for any period that begins prior to July 1, 2011.
Deferred Tax: Recovery of Underlying Assets (Amendments to PAS 12) introduces an exception to the current measurement principles of deferred tax assets and liabilities arising from investment property measured using the fair value model in accordance with PAS 40 Investment Property. The exception also applies to investment properties acquired in a business combination accounted for in accordance with PFRS 3 Business Combinations provided the acquirer subsequently measure these assets applying the fair value model. The amendments integrated the guidance of Philippine Interpretation SIC-21 Income Taxes - Recovery of Revalued NonDepreciable Assets into PAS 12, and as a result Philippine Interpretation SIC-21 has been withdrawn. The effective date of the amendments is for periods beginning on or after January 1, 2012 and is applied retrospectively. Early application is permitted.
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notes January 1, 2013
PFRS 9 Financial Instruments (2009) was issued as the first phase of the PAS 39 replacement project. The chapters of the standard released in 2009 only related to the classification and measurement of financial assets. PFRS 9 (2009) retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and contractual cash flow characteristics of the financial asset. In October 2010, a new version of PFRS 9 Financial Instruments (2010) was issued which now includes all the requirements of PFRS 9 (2009) without amendment. The new version of PFRS 9 also incorporates requirements with respect to the classification and measurement of financial liabilities and the derecognition of financial assets and financial liabilities. The guidance in PAS 39 on impairment of financial assets and hedge accounting continues to apply. The new standard is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. PFRS 9 (2010) supersedes PFRS 9 (2009). However, for annual periods beginning before January 1, 2013, an entity may elect to apply PFRS 9 (2009) rather than PFRS 9 (2010).
The Group will assess the impact of the above amendments to standards and interpretations on the consolidated financial statements upon their adoption in their respective effective dates. Financial Instruments Non-derivative Financial Instruments Non-derivative financial instruments comprise of cash and cash equivalents, accounts receivables, notes receivable, other assets, accounts payable and accrued expenses, notes payable, due to suppliers and operators’ deposits. A financial instrument is recognized if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognized if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control of substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognized if the Group’s obligations specified in the contract expire or are discharged or cancelled. Financial assets are classified as either financial assets at fair value through profit or loss (FVPL), loans and receivables, held-to-maturity (HTM) investments, or available-forsale (AFS) financial assets, as appropriate. When financial assets are initially recognized, they are measured at fair value. In the case of investments not at FVPL, fair value at initial recognition includes directly attributable transaction costs. The Group determines the classification of its financial assets and financial liabilities upon initial recognition and, where allowed and appropriate, re-evaluates this designation at each reporting date. The Group has no HTM investments, AFS financial assets and financial assets and liabilities at FVPL as of December 31, 2010 and 2009. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument classified as a liability are recognized in profit or loss. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Group has a legally enforceable right to offset and intends to settle either on a net basis or to realize the asset and settle the liability simultaneously.
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notes Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS or FVPL financial asset. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment in value. Any interest earned on loans and receivables shall be recognized as part of “Interest income” in profit or loss on an accrual basis. Gains or losses are recognized in profit or loss when loans and receivables are derecognized or impaired. Cash includes cash on hand and in banks and is stated at its face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition and that are subject to an insignificant risk of change in value. The Group’s cash and cash equivalents, accounts receivables, notes receivable and other assets are included under this category (see Notes 4, 5, 6 and 10). Other Financial Liabilities This category pertains to financial liabilities that are not designated as at FVPL at the inception of the liability. This includes liabilities arising from operations or borrowings. These are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Classified under this category are the Group’s accounts payable and accrued expenses, notes payable, due to suppliers and operators’ deposits (see Notes 11, 12, 13 and 21). Property and Equipment Property and equipment are carried at cost less accumulated depreciation, amortization and impairment losses, if any. Initially, an item of property and equipment is measured at its cost, which comprises its purchase price and any directly attributable costs of bringing the asset to the location and condition for its intended use. Subsequent costs that can be measured reliably are added to the carrying amount of the asset when it is probable that future economic benefits, associated with the asset will flow to the Group. Purchased software that is integral to the functionality of the related equipment is capitalized as part of the equipment. The costs of day-to-day servicing of an asset are recognized in profit or loss in the period in which they are incurred.
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notes Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful life of the improvements or the term of the lease, whichever is shorter. The estimated useful lives are as follows:
Computer software Computer equipment Network and data communication equipment Leasehold and site improvements Furniture and fixtures Office equipment Transportation equipment
Number of Years 5 - 10 3-5 5 5 3-5 3-5 3
The useful lives and depreciation and amortization method are reviewed at each reporting date to ensure that they are consistent with the expected pattern of economic benefits from those assets. When an asset is disposed of, or is permanently withdrawn from use and no future economic benefits are expected from its disposal, the cost or revalued amount and any related accumulated depreciation, amortization and impairment losses, if any, are removed from the accounts and any resulting gain or loss arising from the retirement or disposal is recognized in profit or loss. Impairment of Assets Financial Assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial 55
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notes recognition). The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss is recognized in profit or loss. Interest income continues to be recognized based on the effective interest rate of the asset. The financial assets, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in profit or loss to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. If a future write-off is later recovered, any amounts formerly charged are recognized in profit or loss. Non-financial Assets Non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any such indication exists and where the carrying amount of an asset exceeds its recoverable amount, the asset or cash-generating unit is written down to its recoverable amount. The estimated recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction less the cost of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss. Recovery of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The recovery is recognized in profit or loss. However, the increase in the carrying amount of an asset due to a recovery of an impairment loss is recognized to the extent that it does not exceed the carrying amount that would have been determined (net of depreciation and amortization) had no impairment loss been recognized for that asset in prior years. Investment in an Associate Investment in an associate is accounted for under the equity method. An associate is an entity over which the Group has significant influence and is neither a subsidiary nor an interest in joint venture. Significant interest is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Under the equity method, investment in an associate is carried in the consolidated statements of financial position at cost plus post-acquisition changes in the net assets of the investee, less any impairment in value. The Group’s share in the investee’s post acquisition profits or losses is recognized in profit or loss, and its share of postacquisition movements in the investee’s equity reserves, if any, is recognized directly in equity. The share in the profit or losses of associates is shown on the face of the consolidated statements of comprehensive income. This is the profit or losses attributable to equity holders of the associate and therefore is profit or losses after tax and net on non-controlling interest in the subsidiaries of the associates. Unrealized gains arising from intercompany transactions are eliminated to the extent of the Group’s interests thereon. Unrealized losses are eliminated similarly but only to the extent that 56
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notes there is evidence of impairment of the asset transferred. Dividends received are treated as a reduction of the carrying value of the investments. Business Combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. Non-current Assets Held for Sale Non-current assets, or disposal group comprising assets and liabilities, that are expected to be recoverable primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of the carrying amount and fair value less costs to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets, liabilities on pro rata basis, except that no loss is allocated to financial assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss. Non-controlling Interest Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized as a result of such transactions. The adjustments to non-controlling interests are based on proportionate amount of the net assets of the subsidiary. Share-based Transactions The Parent Company has a stock option plan for directors, officers and other key employees, whereby employees render service for shares or rights over shares (“equitysettled transaction”). The rights granted under the plan are not assignable and nontransferable. The cost of the equity-settled transaction is measured by reference to the fair value of the stock option at the date when they are granted. Fair value is determined using an option-pricing model as discussed in Note 16 to the consolidated financial statements. The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance is fulfilled (“vesting period”). No expense is recognized for grants that do not ultimately vest. The dilutive effect of outstanding option is reflected as additional share-dilution in the computation of earnings per share (see Note 18). Treasury Shares Own equity instruments which are reacquired are carried at cost and are deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. When the shares are retired, the capital stock account is reduced by its par value and the excess of cost over par value upon retirement is debited to additional paid-in capital to the extent of the specific or average additional paid-in capital when the shares were issued and to retained earnings for the remaining balance. 57
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notes Revenue and Expense Recognition Revenue is recognized upon performance of the related service, when it is probable that the economic benefits associated with the transaction will flow to the Group, and the amount of the revenue can be measured reliably and is measured at fair value of the consideration received or receivable. Description of the Group’s revenues are as follows: Internet Application Service Income Internet application service income refers to revenues earned from providing technical, marketing and cash management services for internet gaming operations of PAGCOR, particularly for sports betting and internet casino operations. Revenue is based on agreed percentages of net winnings from the sports betting and internet casino operations. For sports betting, net winnings is derived after deducting from gross bets the payout to winners, commissions to gaming operators, franchise taxes and software licensing fees. For internet casino, net winnings is derived after deducting from casino winnings the commissions to gaming operators, franchise taxes and software licensing fees. Also included in revenues are the software licensing fees the Parent Company receives from sports betting. Internet application service income also include the Group’s share in the income of Premyo sa Resibo Program (PSR Program) which is recognized as a percentage of net revenue of PSR. Where the PSR Program incurs a net loss, such loss is immediately recognized in the Group’s statements of comprehensive income. Commission Income Commission income from the operation of PAGCOR eGames stations (PeGS) is computed based on agreed percentage of gross winnings from PeGS’ operations. Interest Income Interest income from bank deposits and short-term investments, net of final tax, is recognized on a time proportion basis that reflects the effective yield on the assets. Other income is recognized when earned. Expenses are recognized when incurred. Operating Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of the Group’s benefit. Foreign Currency Transactions Transactions in foreign currencies are translated to Philippine peso at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are restated to the Philippine peso at the exchange rate at that date. Income Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity in other comprehensive income. Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date.
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notes Deferred tax is provided using the balance sheet liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, and the carry forward tax benefits of the net operating loss carryover (NOLCO) and the excess of minimum corporate income tax (MCIT) over the regular corporate income tax. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related income tax benefit will be realized. Retirement Benefits The Parent Company accrues retirement benefits expense based on the provisions of Republic Act (R.A.) 7641. The Parent Company’s net obligation in respect of its retirement plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. The benefit is discounted to determine its present value, using the projected unit credit method performed by a qualified actuary. The discount rate is the yield at the reporting date of long-term government bonds that have maturity dates approximating the terms of the Parent Company’s plan. When the benefits of the plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in profit or loss. In calculating the Parent Company’s obligation in respect to the plan, to the extent that any cumulative unrecognized actuarial gain or loss exceeds 10 percent of the greater of the present value of the defined benefit obligation and the fair value of the plan assets of the previous period, the portion is recognized in the consolidated statements of comprehensive income over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognized.
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notes Earnings Per Share Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of common shares outstanding during the year, adjusted for own shares held. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible notes and share options granted to employees. Related Parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. Transactions between related parties are on an arm’s length basis in a manner similar to transactions with non-related parties. Provisions and Contingencies A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Contingent liabilities are not recognized in the consolidated financial statements. These are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed when an inflow of economic benefits is probable. Events After the Reporting Date Post year-end events that provide additional information about the Group’s position at the reporting date (adjusting events) are recognized in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material. 4. Cash and Cash Equivalents This account at December 31 consists of: 2010 P123,715,644 232,115,133 P355,830,777
Cash on hand and in banks Short-term investments
2009 P60,509,661 819,233,007 P879,742,668
Cash in banks earns annual interest at the respective bank deposit rates. Short-term investments are made for varying periods of up to three months depending on the immediate cash requirements of the Group and earn annual interest at the prevailing short-term investment rate.
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5. Accounts Receivables This account at December 31 consists of: Note Trade receivables Claims from telecommunication companies Receivable from PAGCOR Receivables from eCasino operation Advances to a related party Advances to officers and employees Advances to customers/suppliers
Allowance for impairment losses
2010 P8,383,598 3,988,171 43,393,406 12,152,263 57,234,533 1,289,187 27,205,567 153,646,725 (672,490) P152,974,235
2009 P6,354,486 5,741,689 24,425,121 15,398,967 775,624 22,449,542 75,145,429 (4,433,295) P70,712,134
Trade receivables are generally on a 30-day credit term. Claims from telecommunication companies represent amounts collectible for the subsidiary’s share in the value of the text entries of customers. These are short-term in nature and are recognized at fair value which approximates their amortized costs. Receivable from PAGCOR represents their unpaid share in marketing expenses advanced by the Parent Company. The Parent Company and PAGCOR shares in marketing incurred for the PeGS operation. These marketing expenses are pre-approved and shall be reimbursed by PAGCOR upon completion of their review of all the documentations required. Receivables from eCasino operation pertain to uncollected grosshold (cash) from PeGS operators. These are collected and deposited in the Parent Company’s bank account the banking day following the reporting date. 6. Notes Receivable This account at December 31 consists of: 2010 P482,016,779 54,231,212 P536,247,991
First Digital Trading Ltd. (FDTL) Other
2009 P 64,231,212 P64,231,212
The Parent Company extended fully guaranteed loans to FDTL, a company based in Hong Kong, in the amounts of Euro 8.1 million and US$0.28 million. The Euro loan bears an interest rate of 90-day Euro LIBOR plus 550 basis points (bps), while the USD loan is 90-day SIBOR plus 550 bps. Both loans will mature on June 30, 2011.
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notes Other receivable represent various drawdowns from the US$1.5 million credit line extended by the Parent Company to a third party which bear interest at 7% per annum, payable in one year from drawdown date, inclusive of a one year grace period on the principal. Each drawdown is evidenced by a secured promissory note executed by the borrower in favor of the Parent Company. As indicated in the agreement, in case of default, the Parent Company has the sole option to require the borrower to assign, by way of dacion en pago, all intellectual and other propriety rights to the architectural, structural, mechanical and electrical designs and financial model for a multi-use entertainment complex being developed by the borrower. With this, management believes that the notes receivable are fully collectible and recoverability may take in the form of the aforementioned dacion en pago arrangement or in cash. On December 13, 2010, the Company collected P10 million which is equivalent to US$228 thousand. 7. Prepaid Expenses and Other Current Assets This account at December 31 consists of:
Input tax valued added tax Prepaid rent Prepaid expenses Other current assets Allowance for impairment losses on input tax
2010 P80,697,456 4,697,042 12,832,446 119,598 98,346,542 (53,295,506) P45,051,036
2009 P57,390,024 4,625,809 9,170,208 598,475 71,784,516 (34,840,052) P36,944,464
The movements of the allowance for impairment losses in respect of input tax during the year are as follows: Amount P24,488,012 10,352,040 34,840,052 18,455,454 P53,295,506
Balance at January 1, 2009 Impairment losses on input tax Balance at December 31, 2009 Impairment losses on input tax Balance at December 31, 2010
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8. Investment in an Associate This account at December 31 consists of investment in ISM, an associate: Carrying Value 2009 2010 Cost of investment in ISM Balance at beginning of year Acquisitions Balance at end of year Accumulated equity in net earnings: Balance at beginning of year Equity in net earnings for the year Balance at end of year
P204,476,469 338,475,644 542,952,113
270,081,494 84,173,682 354,255,176
235,454,889 34,626,605 270,081,494
On July 2, 2001, the Parent Company entered into a Memorandum of Agreement (MOA) with ISM, wherein ISM appointed the Parent Company to manage the transformation of ISM from a mining company to a company engaged in information technology, multimedia, telecommunications, and other similar industries, including the identification and negotiation with potential investors who will infuse the necessary capital or assets for projects in such industries. In order to generate investor confidence in the new corporate direction of ISM, the Parent Company subscribed to 12,000,068,290 unissued shares of ISM at its par value of P0.01 per share, for which the Parent Company made a partial payment of twenty five percent (25%) on such subscription. On February 16, 2009, the Parent Company exercised its right to subscribe to 1 share for every 1.92 common shares of ISM held. The subscription payment amounted to P166,225,645 which covers 16,622,564,499 shares of ISM. This subscription increased the Parent Company’s holdings in ISM from 24.5 billion shares or 19.41% in 2008 to 41.1 billion shares or 21.47% in February 2009. On June 1, 2009, the Parent Company purchased 5,428,740,000 common shares of ISM through Uscon Limited, a Hongkong based company. The total additional investment amounted to P172,250,000 which was also paid in the same month. This brings the holdings of the Parent Company to ISM from 41.1 billion shares or 21.47% to 46.6 billion shares or 24.31%. On May 27, 2010 ISM, with the approval of Securities and Exchange Commission changed the par value of its stock from P0.01 to P1.0 per share. Consequently the total number of shares held by the Parent Company is reduced to 466 million shares which still represents 24.31% of ISM outstanding shares. ISM is listed on the PSE based on its closing price of P3.90 per share at the reporting date. The fair value of the Group’s investment is P1.8 billion.
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notes A summary of the consolidated financial information of ISM follows:
Consolidated assets Consolidated liabilities Consolidated revenue Net income attributable to equity holders of ISM
2010 P5,036,288,606 1,256,375,733 1,004,943,310 323,987,607
2009 P4,765,401,484 657,561,615 987,195,605 116,599,284
On December 30, 2010, ISM sold its 100% equity interest in AGNP to Vega Telecom, Inc., a domestic company. Since AGNP owns 40% of ETPI, the transaction led to ISM losing its 40% equity interest in ETPI. Consequently, ISM’s shareholding has been reduced to 37.69% from 77.69% of the total outstanding shares of ETPI of prior year. This transaction resulted to a net gain in ISM of P269 million. Investment Held for Sale On December 22, 2009, the Parent Company entered into an Agreement relating to the sale and purchase in January 2010 of certain shares of Acentic GmbH with LBC Capital Sarl (LBC Capital), Host Union International Limited and ISM Communications Corporation. On January 11, 2010, the Parent Company completed the acquisition on 32.5% of Acentic GmbH, a Germany based company engaged in hotels and other multi-dwelling establishment thru Host Union International Limited in the amount equivalent to P658 million. The transaction was funded on the same date. The above investment is presented as held for sale following the commitment of the Group’s management on June 16, 2010, to a plan to sell the assets. Efforts to sell the investment have commenced, and a sale is expected by 2011. Management assessed that there is no indication of impairment on the held for sale asset. In view thereof, no impairment loss was recognized in the books.
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6,611 (2,133) 30,455 14,651 (674)
31,172 (3) 136,028 33,270 (225) 169,073 P99,587 P77,8 46
December 31, 2010
Net carrying value: December 31, 2009
December 31, 2010
December 31, 2010
P39,655 38,240 (2,133) 75,762 32,927 (2,071)
Leasehold and Site Improvements
Accumulated depreciation and amortization: January 1, 2009 Depreciation and amortization for the year Disposals December 31, 2009 Depreciation and amortization for the year Disposals
P219,394 16,276 (56) 235,614 11,940 (634)
Gross carrying value: January 1, 2009 Additions Disposals December 31, 2009 Additions Disposals
Computer Equipment and Software
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P62,012 23,613 85,625 15,572 -
Network and Data Communication Equipment
P26,715 8,016 (24) 34,707 10,689 (279)
Furniture and Fixtures
P7,452 3,825 11,277 2,019 -
The movements and balances of this account (in thousands) as of and for the years ended December 31 are as follows:
9. Property and Equipment
P20,749 1,367 22,116 1,052 -
59,763 (2,136) 260,226
P375,977 91,337 (2,213) 465,101 74,199 (2,984)
10. Other Assets This account at December 31 consists of: Cash held in trust for PAGCOR Advances for projects Rental and other deposits Less allowance for impairment loss
Other assets from discontinued operations Less allowance for impairment loss
2010 P 10,179,082 23,304,100 33,483,182 (5,378,199) 28,104,983
2009 P12,500,000 5,378,199 29,577,294 47,455,493 (5,378,199) 42,077,294
61,590,318 (61,590,318) -
61,590,318 (61,590,318) -
Other assets from discontinued operations represent receivables and related assets from the Group’s ISP business which was discontinued when the Group focused operations on the internet gaming business. The Group has provided full allowance for impairment loss on these assets. In 2010, Parent Company reverted the cash held in trust for PAGCOR to cash in bank upon completion of the Textingo Project. 11. Accounts Payable and Accrued Expenses This account at December 31 consists of: 2010 P82,147,441 22,440,598 3,603,617 P108,191,656
Accounts payable - trade Accrued expenses and other payables Commissions payable
2009 P84,896,556 27,789,272 17,647 P112,703,475
Commissions payable represents unpaid commission earn by Internet Sports Betting Station (ISBS) operators. The commission is calculated as a percentage of gross bets. The details of the accrued expenses and other payables account are as follows: 2010 P3,330,810 8,082,922 1,163,700 1,611,118 2,241,044 4,085,817 1,925,187 P22,440,598
ISBS Operators advance payment Contractors Audit fees Travel expenses Utilities and communications Manpower services Ads and promo
2009 P8,822,155 9,330,000 1,600,000 1,622,928 2,956,658 2,388,563 1,068,968 P27,789,272
ISBS operators advance payment that represents deposit from operators for betting credit fund. 66
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12. Notes Payable This account represents unsecured short-term notes payable to the Bank of Commerce bearing an interest of 5% per annum. The notes were subsequently paid on January 28, 2011. The Parent Company recognized P14.1 million interest expense in 2010. 13. Due to Suppliers This account pertains to outstanding payable related to previous line of business of the Group. 14. Income Taxes and Registration with the Board of Investments (“BOI”) Effective March 14, 2001, the Parent Company was registered with the BOI as a new IT service firm, providing Internet services and other IT-related services on a pioneer status. As a BOI-registered enterprise, the Parent Company is entitled to certain tax and non-tax incentives which include, among others, an income tax holiday (ITH) for a period of six (6) years, extendable under certain conditions to eight (8) years; tax and duty-free importation of capital equipment; and, tax credit on domestic capital equipment. On February 26, 2007, the Parent Company was registered with the BOI, under Registration No. 2007-030, on a pioneer status as New IT Service Firm in the Field of an Application Service Provider. ITH entitlement period started on March 1, 2007 to February 28, 2013. As a BOI-registered enterprise, the Parent Company is entitled to certain tax and non-tax incentives which include among others, income tax holiday for a period of six (6) years from March 2007, provided, however, that the Parent Company has complied with the infusion of the minimum investment cost of US$2.5 million or its peso equivalent within one year from the date of its BOI registration. In 2008, the Parent Company has complied with all the requirements of the BOI. In 2010, 2009 and 2008, the Parent Company availed of P186.5 million, P166.7 million and P90.3 million income tax holiday exemptions, respectively. In 2010, BigGame, Inc. availed of P8 million income tax exemption. Under Section 13 (2) of PD No. 1869, as amended and re-enacted by Republic Act No. 9487, the exemptions granted for earnings derived from the operations conducted under the PAGCOR franchise specifically from the payment of any tax, income or otherwise, a well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporations with whom PAGCOR has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under the franchise. Thus Biggame Inc. as a PAGCOR contractee is exempted from the payment of any tax, income or otherwise, on its revenue from PAGCOR. Income tax expense for the years ended December 31 consists of: 2010 P P -
Current tax expense Deferred tax expense (benefit)
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2009 P568,499 900,323 P1,468,822
2008 P876,788 (900,323) (P23,535)
notes Deferred tax expense (benefit) recognized in the previous two annual periods pertain to the tax effect of a subsidiary’s NOLCO amounting to P23,534 and MCIT amounting to P876,789 as of December 31, 2008 respectively, which were both applied in 2009. Deferred tax assets of the Group at December 31 have not been recognized in respect of the following items because it is not probable that future tax benefits will be available against which the Group can utilize the benefits therefrom. 2010 Unamortized portion of preoperating expenses capitalized for tax reporting purposes Allowance for impairment loss Net operating loss carry over Retirement benefits liability Unrealized foreign exchange loss
P 75,690,581 43,652,263 8,849,597 (4,654,781) P123,537,660
P40,876,142 75,690,581 22,454,161 5,773,644 P144,794,528
P66,035,188 75,690,581 98,129,717 4,268,191 (6,676,518) P237,447,159
15. Related Party Transactions In 2010, ISM recognized administrative expenses amounting to P13 million. The Parent Company bills ISM for the latter’s share in administrative expenses which include salaries of common personnel, rental, communication and utility expenses. The total amount of outstanding receivables from ISM as of December 31, 2010 is P57,234,533, included in receivables. These are unsecured and payable on demand. Compensation and short-term employee benefits of key management personnel of the Group in 2010, 2009 and 2008 amounted to P57.6 million, P32.2 million and P23.6 million, respectively. The Group has no key management compensation relating to postemployment benefits or other long-term benefits for the years ended December 31, 2010, 2009 and 2008. 16. Capital Stock Change in Par Value of Capital Stock On September 22, 2009, PSE approved the change in par value of the Parent Company’s shares from P0.01 to P1. Surplus from Write-down of Capital Stock This represents the excess of the total reduction in par value of the common stock of the Parent Company over the accumulated deficit balance in connection with the quasireorganization completed in 1984. Stock Option Plan On February 15, 2000, the BOD approved the Parent Company’s Stock Option Plan (“Plan”) covering all employees, officers and directors of the Parent Company, its subsidiaries as well as such other qualified persons determined as eligible by the BOD. The aggregate number of shares that may be purchased under the Plan shall not be more than five percent (5%) of the total number of shares of the outstanding capital stock of the Parent Company, at a price not less than eighty percent (80%) of the fair market value of the shares on the date the option is granted. Effectivity date is one (1) year after an 68
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notes option is awarded to the participant. 1/3 of the total number of options covered by a grant shall vest upon effectivity date; 1/3 shall vest one year after effectivity date and 1/3 shall vest two years after the effectivity date. Options may be exercised within a period of three (3) years, starting after the lapse of one (1) year from the date of grant. The fair value of stock option is estimated using an option pricing method, which considered annual stock volatility, risk-free interest rate, expected life of option and exercise price. The Company had the following grants: Date of Grant March 2, 2005 January 20, 2006 November 29, 2006
Number of shares granted 1,249,972,739 1,786,500,000 1,156,000,000
Details of stock option transactions at December 31 are as follows: 2009
Options outstanding, beginning of year Adjustment in number of shares as a result of increase in par value Exercised Granted Forfeited/expired
Number of options
Weighted average exercise price of options
Number of Options (a)
Number of Options (a)
Weighted average exercise price of option (a)
(2,353,395,034) (11,694,197) (136)
2008 Weighted average exercise price of options (a)
Options outstanding, end of year
Options exercisable, end of year
(a) This does not consider the impact of the change in the par value of the common shares in 2009.
The options outstanding at December 31, 2010 and 2009 have an exercise price in the range of P1.30 to P2.48 per share, as adjusted for the increase in par value of the common shares in 2009. The weighted average share price at the date of exercise for share options exercised in 2010 and 2009 was P1.8696 per share. 17. Salaries and Benefits This account consists of: Note Salaries and wages Retirement benefits cost Vested stock options
2010 P89,265,095 3,075,953 P92,341,048
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2009 P63,552,159 1,505,453 25,819,202 P90,876,814
2008 P60,311,771 1,213,881 21,415,351 P82,941,003
18. Earnings Per Share
Common shares outstanding at beginning of year Weighted average number of shares issued during the year Weighted average common shares outstanding - basic Effects of share options Weighted average common shares outstanding - diluted
(a) The number of shares was adjusted for the impact of the change in par value of common shares in 2009.
Basic EPS is computed as follows:
Net income (a) Weighted average number of shares outstanding - basic (b) Basic EPS (a/b)
Diluted EPS is computed as follows:
Net income (a) Weighted average common shares outstanding - diluted (c) Diluted EPS (a/c)
19. Lease Commitments The Group leases its main and other offices under various operating lease arrangements with terms ranging from three (3) to five (5) years. Such leases are renewable at the end of the lease term upon mutual consent of the parties. Total rentals recognized in profit or loss amounted to about P45.7 million, P28.9 million and P19.5 million in 2010, 2009 and 2008, respectively. Noncancellable operating lease rentals as of December 31, 2010, 2009 and 2008 are payable as follows:
Less than one year Between one and five years
2010 P25,601,993 58,979,953 P84,581,946
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2009 P12,103,765 36,311,439 P48,415,204
2008 P20,104,863 11,256,732 P31,361,595
20. Retirement Benefits The Parent Company accrues retirement benefits for its employees in compliance with Republic Act 7641 “Philippine Retirement Law” which requires a company to pay a minimum retirement benefit to employees who retires after reaching the mandatory age of 65 years old or the optional retirement age of 60 years old, with at least five (5) years of service to the Parent Company. The reconciliation of the present value of the defined benefit obligation to the recognized liability included under “Noncurrent liability” section of the consolidated statements of financial position is as follows:
Present value of defined benefit obligation Unrecognized actuarial gains Recognized liability for defined benefit obligation
2010 P13,802,769 (4,953,172) P8,849,597
2009 P7,828,808 (2,055,164) P5,773,644
The movements in the present value of defined benefit obligation are shown below:
Present value of the defined benefit obligation at the beginning of year Current service cost and interest cost (see below) Actuarial gains Present value of the defined benefit obligation at the end of year
P7,828,808 3,028,831 2,945,130
P3,480,570 1,523,036 2,825,202
The retirement benefits cost recognized in profit or loss and included under “Salaries and benefits” consists of:
Current service cost Interest cost Actuarial loss (gain) recognized for the year
2010 P2,302,318 726,513
2009 P1,081,004 442,032
2008 P920,887 288,097 4,897 P1,213,881
The principal actuarial assumptions used to determine retirement benefits are as follows: 2010 7.93% 6.00%
Discount rate Future salary increases
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2009 9.28% 5.00%
2008 12.7% 5.0%
notes The historical information of the amounts for the current year and for the three previous annual periods is as follows:
Present value of the defined benefit obligation Experience adjustments on plan liabilities
21. Operators’ Deposits Operator’s deposits consists of cash received from operators upon opening of PeGS Station. This serves as a bond/security in case the operators defaults from payments. This deposit shall be returned to the operator after the termination of the contract. 22. Other Contracts and Commitments On June 2, 2008, the Parent Company entered into a MOA with First Digital Trading Ltd. for the latter to develop customized software for possible use of the Parent Company for PAGCOR’s Tele/TV Sabong game offering. The Tele/TV Sabong software was no longer completed due to the numerous changes required by PAGCOR and the Parent Company on the software specifications which First Digital Trading Ltd. could not provide. In 2008, the parties have agreed to novate the MOA by changing the software program to be developed by First Digital Trading Ltd. for the Parent Company. There are no changes nor development in the matter as of date. 23. Financial Risk and Capital Management Financial Instruments The Group’s principal financial instruments consist of cash and cash equivalents, accounts receivables - net, notes receivables, other assets, accounts payables and accrued expenses, notes payable, due to suppliers and operators’ deposits. The main risks arising from the Group’s financial instruments are liquidity risk, credit risk and market risk. The policies for managing each of these risks are provided below: a. Credit Risk is the risk arising from inability of a debtor to make payments when receivables are due. The Group’s internet gaming businesses are made on cash basis and internet gaming operators are covered by required security deposits. Other receivables arise from one-off transactions and are due and demandable on a short term basis. Due to these reasons, management believes that the Group’s exposure to credit risk is manageable as of December 31, 2010 and 2009. The carrying amount of receivables represents the Group’s maximum exposure to credit risk in relation to financial assets. The maximum exposure to credit risk as of December 31, 2010 and 2009 amounted each to P0.9 billion .
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notes The aging of receivables as of December 31 is as follows:
Current Past due 0-30 days Past due 31-60 days More than 60 days
P9,152,909 14,290,638 2,627,122 127,576,056
P25,362,156 10,383,995 2,087,901 37,311,377
b. Liquidity Risk is the risk that the Group will be unable to meet its obligations as they fall due. To effectively manage liquidity risk, the Group monitors its cash flows and ensures that credit facilities are available to meet its obligation when they fall due. The Group’s ratio of current assets to current liabilities as of December 31, 2010 and 2009 are 7.0:1 and 8.3:1, respectively. The current liabilities of the Group are expected to be paid within one year. c. Market Risk is the risk that changes in market prices primarily foreign exchange rates, will affect the Group’s income or value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Foreign Exchange Risk is the risk that changes in foreign exchange rates will affect the Group’s income. The Group’s exposure to foreign exchange risk is minimal and limited to its US dollar denominated notes receivable and notes payable amounting to $1.5 million and $3.2 million as of December 31, 2010. In 2009, the Group’s exposure the foreign exchange risk is also minimal and limited to its US dollar denominated notes receivable amounting to $1.4 million. The US dollar exchange rate as of December 31, 2010 and 2009 are US dollar 1 = P43.84 and US dollar 1 = P46.20, respectively. Sensitivity Analysis A 10% strengthening of the Philippine peso against US dollar as at December 31, 2010 would have increased the equity and profit by P7.5 million and decreased in 2009 by P4.4 million. A 10% weakening of the peso against US dollar as at December 31, 2010 and 2009 would have had the equal but opposite effect, on the basis that all other variables remain constant. Fair Values The fair values of the Group’s financial instruments approximate their carrying amounts as of reporting date because of their relatively short-term nature. Capital Management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
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notes The Group defines capital as total equity, which includes capital stock, surplus from write-down of capital stock, additional paid-in capital, stock options outstanding and retained earnings (deficit), net of treasury stock. There were no changes in the Group’s capital management during the year. 24. Segment Reporting The Group has only one operating segment that is, it has only one significant group of related products or services that is subject to the same risks and returns. The Group’s operations and sources of revenues are interdependent, share the use of the facilities of the Parent Company, particularly computer equipment and are under agreements with PAGCOR, the Group being PAGCOR’s partner in the internet gaming business. There is no other distinguishable operating segment; hence, the management believes that there is no particular disclosure on segment reporting. The Group’s Chairman of the BOD reviews internal management reports on a quarterly basis. 25. Contingencies The Group is a party to certain lawsuits or claims filed by third parties which are either pending decision by the courts or are subject to settlement agreements. The outcome of these lawsuits or claims cannot be presently determined. In the opinion of management and its legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material effect on the consolidated financial statements.
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LEGAL COUNSELS CASTILLO LAMAN TAN PANTALEON & SAN JOSE LAW OFFICES PONFERRADA ORBE & ALTUBAR LAW OFFICES INDEPENDENT PUBLIC ACCOUNTANTS KPMG MANABAT SANAGUSTIN & CO. BANKS ASIA UNITED BANK BANK OF COMMERCE BANK OF THE PHILIPPINE ISLANDS BANCO DE ORO UNIBANK METROPOLITAN BANK AND TRUST COMPANY PHILIPPINE NATIONAL BANK SECURITY BANK & TRUST CORPORATION STERLING BANK OF ASIA UNION BANK OF THE PHILIPPINES UNITED COCONUT PLANTERS BANK STOCK TRANSFER SERVICE AGENT AB STOCK TRANSFERS CORPORATION PHILWEB CORPORATION IS LISTED ON THE PHILIPPINE STOCK EXCHANGE. TICKER SYMBOL: WEB
Penthouse, Alphaland Southgate Tower 2258 EDSA corner Chino Roces Avenue Makati City, 1232 Philippines Telephones: +632.338.5599, +632.814.1818 Facsimile: +632.886.6008 Email: firstname.lastname@example.org Corporate website: philweb.com.ph basketballjackpot.net ecasinofilipino.com premyosaresibo.com.ph
Published on Feb 13, 2011