New Suitability Criteria & Second Board Listing Rules

November 26, 1998 PSE CIRCULAR FOR BROKERS NO. 2661-98 SUBJECT : New Suitability Criteria & Second Board Listing Rules Pursuant to the directive of the Securities and Exchange Commission (SEC) contained in its letter of 20 November 1998, we are attaching the approved New Suitability Criteria & Second Board Listing Rules for your information and guidance. The aforesaid criteria and rules amend Chapters 1, 3 & 4 of the Manual of Rules Governing the Listing of Securities (Listing Rules). cdll The Suitability Criteria was adopted by the Exchange's Board of Governors on 27 May 1998 and approved by the SEC in June of 1998. The aforesaid listing rules, on the other hand, was adopted by the Exchange's Board of Governors on 12 August 1998 and approved by the SEC on 12 November 1998. (SGD.) JOSE LUIS U. YULO, JR. President & CEO SUITABILITY CRITERIA Notwithstanding the provisions provided in these rules and other rules and regulations of the Exchange, the following may be grounds for disqualification from listing of securities in the Exchange: a) The applicant company fails to demonstrate its stable financial condition, prospects for continuing growth or viability and sustainability of projected earnings; b) Any material representation or warranty made by the applicant company in its Listing Application, and other related documents submitted in relation thereto, proves to have been incomplete, incorrect or misleading as of the time it was made or deemed to have been made; c) There is a serious question relating to the integrity or capability of any of the applicant company's director, executive officer, promoter or control person. A serious question exists relative to the above parties if during the past five (5) years any of the following events occurred: (i) Any bankruptcy petition filed by or against any business of which such person was a director, general partner or executive officer either at the time of the bankruptcy or within two (2) years prior to that time; (ii) Any conviction by final judgment in a criminal proceeding for an offense involving moral turpitude, domestic or foreign, including a nollo contendere case, or being subject to a pending criminal proceeding for an offense involving moral turpitude, domestic or foreign, excluding traffic violations and other minor offenses; LexLib (iii) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; and (iv) Being found by a domestic or foreign court of competent jurisdiction (in a civil action), the Commission or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self-regulatory organization, to have violated a securities or commodities law, and the judgment has not been reversed, suspended, or vacated. d) The applicant company engages in operations which are contrary to the public interest, morals, good customs, public order or public policy; e) There exists an action or claim against all or substantially all (as defined under Section 40 of the Corporation Code of the Philippines) of the applicant company's property; f) The applicant company or any of its officers and directors has become the subject of legal proceedings for suspension of payments or other debt relief within the past five (5) years, or otherwise becomes unable to pay its debts as they mature or shall make or threaten to make an assignment for the benefit of, or a composition or arrangement with, creditors or any class thereof, of shall declare or threaten to declare a moratorium on indebtedness; g) The applicant company has applied for or has consented to the appointment of any receiver, trustee or similar officer, for it or substantially all of its property pursuant to the Rules of Court of other relevant laws; or a competent court, arbitrator or government agency appoints such officer, for the applicant company or all or substantially all of its property; h) The introduction of a new law or regulation or any change in existing laws or regulations, which has a material and adverse effect on the applicant company; i) There is a change or impending change in any law, rule, regulation, administrative practice or interpretation that could materially affect any of the features, yield or marketability of the securities sought to be listed; j) An order is issued by the Securities and Exchange Commission (SEC) or any government agency canceling, terminating, suspending or otherwise prohibiting the listing of securities of the applicant company; cdlex k) The Exchange has determined that transactions entered into between the applicant company and its directors and/or officers pose material conflict(s) of interest and are disadvantageous to the applicant company using the following criteria: (1) the arrangement is unnecessary or not beneficial to the operations of the company; (2) the terms of the arrangement are not the same or less favorable than those which may be obtained from other persons; (3) the transaction has not been ratified by independent directors and/or shareholders; (4) the transaction has not been adequately disclosed to existing shareholders. l) The applicant company fails to comply with published rules and requirements which the Exchange may deem necessary and hereinafter prescribe; and m) Any other event or circumstance which in the judgment of PSE, in its conduct of due diligence, may render the listing of the applicant company inconsistent with the Listing Rules. SECOND BOARD LISTING A. RATIONALE There shall be a Second Board to enable the following companies to list in the Exchange: 1. companies which demonstrate a potential for superior growth but have no track record of profitable operations; and 2. companies with a track record of profitable operations but are not able to comply with the capital and profitability requirements of the First Board. B. DEFINITIONS For the purpose of qualifying for listing in the second category of the Second Board, the following terms are explained and defined: Track record is profitable operations for at east three (3) full fiscal years immediately prior to application for listing. LLcd Profitable operations is attaining at least a fifteen percent (15%) return on equity for each of the past three (3) full fiscal years. Return on equity shall mean the pre-tax profit of a company, excluding extraordinary and non-recurring items, divided by the average stockholders' equity. An extraordinary item is one which is unusual in nature and is infrequent in occurrence; and a non-recurring item is one which is either unusual in nature or is infrequent in occurrence. Extraordinary and non-recurring items may include, but are not limited to, gains or losses resulting from: sale of plant assets, sale of real property, sale and acquisition of another company, write-off of a division, government seizure of assets, strikes, fire, theft, natural calamities, and other fortuitous events. The Exchange reserves the right to determine items as extraordinary and/or non-recurring. The average stockholders equity shall be the average of the stockholders equity at the beginning and the stockholders equity at the end of a fiscal year. A company with no track record of profitable operations shall mean a company which fails to meet the above definitions, including start-up or newly incorporated companies. LLphil Build-Operate-and-Transfer Projects (BOT Projects) shall mean the schemes or contractual arrangements specified under R.A. 6957, as amended by R.A. 7718. C. REQUIREMENTS 1. General Requirements The following requirements shall be applicable to applicant companies with or without a track record of profitable operations: a. Valuation of Tangible Assets When required by the Exchange, the applicant company shall engage the services of two (2) independent appraisers duly accredited by the Exchange in determining the value of their tangible assets. b. Minimum Number of Directors and Stockholders The applicant company shall at all times have a minimum of seven (7) directors. The company shall likewise maintain at least five hundred (500) stockholders. Each of these stockholders must hold at least one (1) boardlot of shares of the company. c. Applicability of Rules on Initial Public Offering and First Board Listing The applicant must comply with the requirements set forth in Chapter 1 of these Rules (Initial Public Offering). Unless inconsistent with the requirements in this Chapter, requirements set forth in Chapter 2 hereof (First Board Listing) shall likewise apply to the Second Board. cdlex d. Other Documentary Requirements When required by the Exchange, and in addition to the pertinent requirements under Chapter 2, an applicant company shall submit other documentary requirements. 2. Companies With No Track Record Of Profitable Operations Companies with no track record of profitable operations must comply with the following requirements: a. Minimum Capital Requirement An applicant company with no track record of profitable operations must have an authorized capital stock of One Hundred Million Pesos (P100,000,000.00) or more, of which a minimum of twenty-five percent (25%) must be subscribed and fully paid. Further, an applicant company must have already disbursed at least seventy-five percent (75%) of its paid-up capital to the project, venture or business referred to in the business plan submitted to the Exchange. b. Superior Growth Potential/Classification under the List of Preferred Industries The applicant company must demonstrate its potential for superior growth to the Exchange. The applicant company must likewise be operating in an industry classified by the Exchange in its "List of Preferred Industries". c. Financial Statements Audited financial statements for the last three (3) full fiscal years of the applicant company and its subsidiaries shall be submitted to the exchange. d. Business Plan The applicant company shall submit a comprehensive business plan covering a minimum period of three (3) years reckoned from date of filing of the listing application. The study shall describe the technical, commercial and financial aspects of the company's business plans. The business plan must be reviewed and certified by an independent auditor. The Exchange reserves the right to require modifications or adjustments to the assumptions used in the applicant company's projections. When required by the Exchange, the applicant company shall submit additional business plans covering years subsequent to the first three (3) year-plan submitted. LexLib In the Event that at the end of the fiscal year in any of the next three (3) fiscal years after listing of the company's shares, there is a twenty percent (20%) negative deviation from the projected pre-tax profits stipulated in the business plan, excluding extraordinary and non-recurring items, the listed company and the issue manager and/or lead underwriter which undertook the required due diligence shall submit an explanation for said deviation to the Exchange. If the explanation is found to be unsatisfactory and unacceptable, the Exchange, after informing the Commission, may impose any of the following sanctions against the company, the issue manager and lead underwriter: a) public reprimand; and/or b) fine of Fifty Thousands Pesos (P50,000.00) to Five Hundred Thousand Pesos (P500,000.00). Further, at the discretion of the Exchange, trading of the listed company's securities may be suspended for a period of one (1) month to one (1) year. aisadc The imposition of the foregoing is without prejudice to further action by the Commission. e. Company Engaged in Infrastructure or BOT Project As an exception to Section C.2.b. hereof, an applicant company engaged in an infrastructure or BOT project is allowed to list under the first category of the Second Board provided that: 1) the infrastructure or BOT project contributes to the overall economic growth of the Philippines or which is in pursuance of national economic objectives and policies of the government; 2) the applicant company is a holder of a government franchise covering the project with a period of effectivity of not less than twenty (20) years, but with at least eighteen (18) years remaining from the date of filing of the application for listing; 3) in the absence of a government franchise, the applicant company must posses a government contract covering the project with a period of effectivity of not less than ten (10) years, but with at least eight (8) years remaining from the date of filing of the listing application; LLjur 4) the applicant company must have a valid permit or license obtained from the appropriate government agency; 5) the initial project cost which shall cover the first five (5) years shall not be less than Five Hundred Million Pesos (P500,000,000); 6) the applicant company must have already disbursed at least seventy-five percent (75%) of its paid-up capital to the project, which in turn should not be less than twenty-five (25%) of its total project cost. f. Lock-Up The applicant company shall cause all its existing stockholders to enter into an agreement with the Exchange not to sell, assign or in any manner dispose of their shares for a minimum period of three hundred and sixty five (365) days after the listing of the shares. After said period has elapsed, two-thirds (2/3) of the shares of each stockholder shall remain locked-up for another three hundred and sixty five (365) days; and after the second 365-day period has elapsed, one-third (1/3) of said shares and any residual fractional shares shall remain locked-up for another three hundred and sixty-five (365) days. Said lock-up shall be implemented as far as it is in accordance with Chapter 2(C), No. 13 hereof. cdll 3. Companies With Track Record of Profitable Operations An applicant company with a track record of profitable operations must comply with the following requirements: a. Authorized Capital Stock From the time of filing of the listing application to the actual listing of its shares, the applicant company must have an authorized capital stock of at least One Hundred Million Pesos (P 100,000,000.00) but less than Four Hundred Million Pesos (P400,000,000.00), of which a minimum of twenty-five percent (25%) must be subscribed and fully paid. b. Financial Statements 1) Audited financial statements for the last three (3) full fiscal years of the applicant company and its subsidiaries shall be submitted to the Exchange. 2) The applicant company shall likewise submit projected financial statements covering the next fiscal year. In the event that at the end of the following fiscal year there is a twenty percent (20%) negative deviation from the projected pre-tax profits stipulated in the financial statements, excluding extraordinary and non-recurring items, the listed company and the issue manager and/or lead underwriter which undertook the required due diligence shall submit an explanation for said deviation to the Exchange. If the explanation is found to be unsatisfactory and unacceptable, the Exchange, after informing the Commission, may impose any of the following sanctions against the company, the issue manager and lead underwriter: a) public reprimand; and/or b) fine of Fifty Thousand Pesos (P50,000.00) to Five Hundred Thousand Pesos (P500,000.00). Further, at the discretion of the Exchange, trading of the listed company's securities may be suspended for a period of one (1) month to one (1) year. cdt The imposition of the foregoing is without prejudice to further action by the Commission. c. Lock-Up The applicant company shall cause its stockholders to enter into an agreement with the Exchange not to sell, assign or in any manner dispose of their shares for a minimum period of one hundred and eighty (180) days after the listing of the shares. Said lock-up shall be implemented in accordance with Chapter 2 (C), No. 13 hereof. D. RESTRICTIONS 1. Holding companies or companies whose earnings are derived exclusively from passive income are not qualified to list under the Second Board. 2. Companies listed under the Second Board are prohibited from offering secondary shares to the public. E. TRANSFER TO THE FIRST BOARD Upon application and showing that it has already met the requirements for listing in the First Board, the applicant company may, upon written request to the Exchange, be elevated for listing in the First Board. LexLib Preferred Industries for the Second Board Qualified companies classified under the following industries shall be allowed for listing in the Second Board: 1. Electronics 2. Mining and Oil Exploration (companies must conform to the standards to be prescribed by the Exchange for technical assessment and/or valuation of mineral and petroleum assets and mineral and petroleum) 3. Manufacture/Assembly of Motor Vehicles and Components 4. Footwear and Leathergoods 5. Marble 6. Jewelry 7. Services (limited to Information Technology Services, Construction Services, Professional Services, biotechnology, Education Services, and Health and Medical Services) 8. Consumer Products 9. Manufacturers/Producers with capability to export sufficient to qualify with the requirements of the Board of Investments (BOI) and/or the Philippine Export Zone Authority (PEZA) 10. Agro-Industrial 11. Low-Cost Housing The Listing Committee may remove or add industries in the 'List of Preferred Industries' as it deems proper. cdll An updated list shall be published by the Exchange from time to time.