Cosmos Bottling Corporation

July 6, 1998 PSE CIRCULAR FOR BROKERS NO. 1534-98 SUBJECT : Cosmos Bottling Corporation RFM Corporation ("RFM"), parent company of Cosmos Bottling Corporation ("Cosmos") confirmed to the Exchange, in a letter dated 03 July 1998, the accuracy of the contents of the attached news article published in the July 1, 1998 issue of the Malaya which reported that Cosmos is implementing a new concept designed to make it grow, hit market demand, be free from high cost of borrowing from banks at prohibitive cost. The Company talked with land owners and equipment suppliers to build, operate and manufacture plants exclusively for Cosmos and that they consider the land owner and the equipment supplier as partners. cdlex RFM in said letter explained that: "The news article was a result of an ambush interview made by the reporter of Malaya and we did not know that said article will come out in the newspaper. Nevertheless, we wish to inform you that facts mentioned in the news article are generally accurate. For your information. (SGD.) REYNOLD P. ONG Vice-President, Listings and Disclosure Group THROUGH BUILD-OPERATE SHARE COSMOS BEATS HIGH COST OF BORROWING By VIC S. LOPEZ Cosmos Bottling Corp. (CBC), the softdrink subsidiary of RFM Corp., is implementing a new concept designed to make it grow, hit market demand, be free from high cost of borrowing, or having its cake and eating it too. It can also be called as Build-Operate-Share. Cosmos, according to its president Antonio I. Panajon, is expanding without spending a single centavo. Panajon, in an interview said that the new concept is new in the softdrink industry, which like other industries have to cope with high interest rates. So instead of borrowing from banks at prohibitive cost, Cosmos talked with land owners and equipment suppliers to build, operate and manufacture plants exclusively for Cosmos. cdt Panajon explained that they have started the new concept last month with the inauguration of its new plant in Pangasinan. Panajon said that they consider the land owner and the equipment supplier as partners. The land owner will put up the building and the supplier furnish the plant. Cosmos then would lease the land and the plant for around P300,000 to P400,000 a month while the equipment supplier will install the necessary equipment at no cost to CBC but will be paid according to what the plant produces on a monthly basis. "We can easily pay the equipment supplier within a year's time," Panajon said. A one line equipment for a bottling firm cost about P15 million, Panajon said. The land owner will have a minimum 10-year contract with CBC which is renewable on agreement by both parties. Should the land owner refuses to renew the contract then CBC would just transfer the plant to a new site this time with a new business partner. "There is no capital outlay and no new loan for capital expenditure," says Panajon of this new concept. After the initial plant in Pangasinan, Panajon said that they will introduce the same concept in Metro Manila and another in a northern province. Panajon said that a lot of land owners which has also been hit by the depressed demand in property prices has opted to co-venture with CBC. It guarantees the land owner a ready income monthly while waiting for the property prices to go up, Panajon said. Panajon added that Cosmos can expand simultaneously in different locations of the country without having to worry of where to get the money and at the same time sustained growth of the business as well as spur property growth in the business. "It is also one way of getting around the situation," Panajon said. "We are not yet talking here of the employment opportunities the concept will enhance because of the concept," Panajon said. cdlex At present CBC has only 11 plants spread nationwide not including the recently inaugurated Pangasinan plant. CBC has acquired Jazz Cola in 1996 and became the country's second largest softdrink bottler with 18 percent of the market. Cosmos' present 12 plants is a far cry from the market leader Coca-Cola Bottlers Phils. Inc. with 24 plant while third largest manufacturer Pepsi-Cola Phils. has almost the same number of plants with CBC. Cosmos posted a net asset of P4 billion and a net sales of P1.7 billion in 1996. Cosmos is RFM's most profitable subsidiary and is expected to maintain its high margins over the next few years with gross profit margins of above 50 percent while operating margin is between 20 to 25 percent and a net profit of 15 to 18 percent. Cosmos is the only independent bottler in the country and controls the low-end segment of the multi-billion softdrink market. Gouco Securities said that CBC continued to exhibit strong sales in spite of strong competition from its rivals. Gouco said that CBC has a little way of capital expenditures this year which is mostly earmarked for bottles. Panajon said that from more than P1 billion last year, CBC's capex this year is only P700 million. Cosmos has managed to pay off its debts (incurred in the acquisition of Jazz and RC Cola and plant expansion) with total bank debt of only P81.7 million as of end-March from P1.11 billion as of year-end 1977. Panajon said that their remaining debts is from advances from its mother firm, RFM, and not to the banks. "All-in-all, we are debt free as far as bank loans are concerned," Panajon insisted.