Bacnotan Consolidated Industries Inc. Comprehensive Corporate Disclosure

September 15, 1998 PSE CIRCULAR FOR BROKERS NO. 2140-98 SUBJECT : Bacnotan Consolidated Industries Inc . Comprehensive Corporate Disclosure Further to Circular No. 1717-98 dated July 24, 1998, pertaining to the joint venture agreement between Bacnotan Consolidated Industries, Inc. (BCII) and Holderbank Financiere Glaris, Ltd. (Holderbank) in Union Cement Corporation (UCC), attached herewith is a corporate disclosure from BCII on the following: aisadc I. Rationale for the strategic partnership agreement; II. Corporate and financial restructuring of BCII; III. Discussion of the valuation of shares of BCII's subsidiaries which are parties to the agreement; IV. UCC's pro-forma balance sheet (post-agreement); V. Ownership structure of BCII and its cement subsidiaries before and after entry of Holderbank; VI. Impact of the joint venture agreement on BCII and its cement subsidiaries; and VII. Corporate background of Holderbank and UCC. For your information. (SGD.) REYNOLD P. ONG Vice President, Listings and Disclosure Group STRATEGIC PARTNERSHIP AGREEMENT BETWEEN BACNOTAN CONSOLIDATED INDUSTRIES, INC. & HOLDERBANK FINANCIERE GLARIS, LTD. IN UNION CEMENT CORPORATION I. RATIONALE FOR THE STRATEGIC PARTNERSHIP AGREEMENT Bacnotan Consolidated Industries, Inc. (BCII) had implemented a plan to pursue a strategic partnership agreement (the "Agreement") with the world's largest cement producer to achieve the following objectives: A. Strengthen the Financial Position of the BCII Group's Cement Operating Companies (Opcos) The Agreement was pursued with the objective of strengthening the financial positions of BCII's three cement operating companies, namely: Bacnotan Cement Corporation (BCC). Davao Union Cement Corporation (DUCC) and HI Cement Corporation (HCC), through cash infusions. B. Strengthen the Leadership Position of the Opcos in the Philippine Cement Market In addition to the cash infusion, the strategic partner (SP) will be expected to provide technical and marketing support to the Opcos in terms of standards of best practice and new product research, which would significantly enhance and upgrade BCII's cement products. C. Strengthen BCII's Financial Position The Agreement should enable BCII to generate cash which it can utilize to strengthen its financial position and implement committed and new investments in non-cement projects. D. Focus the SP's Investment on the BCII Group's Opcos In order to focus the SP's investment to the Opcos, it was necessary to incorporate a new strategic partnership vehicle. Union Cement Corporation (UCC), which would be the holding company for the Opco shares and the recipient of the SP's cash infusion, to be utilized for implementing the Opcos debt reduction program. II. THE CORPORATE AND FINANCIAL RESTRUCTURING OF BCII BCII with transfer to UCC its investments in the Opcos, BCC, DUCC and HCC, UCC is the holding company for BCII's cement companies that was recently formed to allow the entry of Holderbank Financiere Glaris, Ltd. (Holderbank or HO) as strategic partner. LLphil The Agreement will also involve the transfer of HCC shares owned by Atlas Cement Corporation (ACC) to UCC. ACC is a 53%-owned subsidiary of BCII. Holderbank, through its wholly-owned subsidiary. Holderfin B.V., will invest a total of US$210 million (P8.715 million at the assumed exchange rate of P41.50: US$1.00) in UCC. Of the total US$210 million investment, US$168 million (P6.972 million) will represent Holderbank's subscription to UCC shares, equivalent to 40% of UCC's total shares outstanding, post-Agreement. The balance of US$42 million (P1.743 million) will represent Holderbank's subscription to UCC's bonds, which are convertible into 196.333.700 new shares of UCC after the end of the 6th year, subject to nationality requirements. US$120 million (P4.980 million) of Holderbank's US$210 million infusion into UCC will be made available to the three Opcos for debt reduction purposes. BCII will receive the balance of US$90 million (P3.735 million) in exchange for a portion of its Opco shares. III. THE STRATEGIC PARTNERSHIP AGREEMENT A. Valuation of the Opco and UCC Shares Holderbank did its own enterprise valuation of the Opcos, which resulted in an aggregate value of US$300 million (P12.450 million at the assumed exchange rate of P41.50:US$1.00) for the BCII/ACC Group's Opco shares, broken down as follows: TABLE 1 Valuation of Opco Shares Owned by the BCII/ACC Group No of Common Shares Owned by the BCII/ACC Group Value per Share BCC P3,022,060,930 158,406,001 P19.08 DUCC 2,912,375,342 645,904,275 P4.51 HCC 6,515,563,728 461,643,308 1 P14.11 P12,450,000,000 BCII-owned: 63,450,000 shares ACC-owned: 398,193,308 shares 461,643,308 shares B. UCC's Pro-Forma Balance Sheet (Post-Agreement) (in Pmm) Assets Liabilities & Stockholders Equity Liabilities Cash P4,980 1 Convertible Debt P1,743 2 Investment in Opco Shares 12,450 Stockholders Equity Total Assets P17,430 Capital Stock P968 ====== Additional Paid-Up Capital 14,719 P15,687 Total Liabilities & Stockholders Equity P17,430 ====== Table 2 BCII ACC HO Total Equity Contribution P3,094,959,962 P5,620,040,038 P6,972,000,000 P15,687,000,000 Price per Share P15.00 P15.00 P18.00 N A No. of UCC Shares Issued 206,330,700 374,669,400 387,333,400 968,333,500 Resulting Ownership 21.31% 38.69% 40.00% N A D. Ownership Structure of Opcos, Pre and Post-Agreement The ownership structure of BCII Group's Opcos before and after the Agreement is summarized as follows: 1. Ownership Structure Before the Entry of Holderbank 2. Ownership Structure After the Entry of Holderbank BCII will continue to own directly its interests in non-cement companies such as Bacnotan Steel Corporation. Bacnotan Steel Industries, Inc., Bacnotan Industrial Park Corporation and United Pulp and Paper Company, Inc. E. Transaction Timetable The closing of the strategic partnership transaction is expected within October 1998, upon the completion or the requisite transaction closing documents. III. IMPACT OF THE SP AGREEMENT ON BCII AND THE OPCOS A. BCC, DUCC and HCC The US$120 million (P4.980 million) component of Holderbank's fresh cash infusion will be made available to BCC, DUCC and HCC to significantly reduce their outstanding debts, which were incurred to finance their respective capacity expansion and capital expenditure programs. The significant reduction of the Opco's debts will strengthen their financial position and enable them to compete effectively in the current Philippine cement market. Equally important, the Opcos will be able to avail of Holderbank's technical expertise, particularly in maintaining optimal cement manufacturing operations and new product research, thereby upgrading the Opco's cement products. B. BCII 1. Increase in Asset Values In exchange for its Opco shareholdings, which have a carrying cost of P5.101 million as of June 30, 1998. BCII will receive assets with a total value of approximately P9.817 million, broken down as follows: Cash P3,735 million Direct Investment in UCC Shares 3,095 million Indirect Investment in UCC Shares (ACC's Direct Investment in UCC of P5,620 billion x 53.15% BCII ownership in ACC) 2,987 million P9,817 million ========== 2. Impact of the Transaction of BCII's Pro-Forma Consolidated Financial Statement as of June 30, 1998 BCII Unaudited Financial Statements as of June 30, 1998 (in Thousand Pesos) Pre-Agreement Post-Agreement Assets Current Assets 4,650,621 9,706,000 Investment in Stocks 1,427,141 8,730,713 Land and Development 591,566 591,566 Property, Plant & Equipment - Net 18,772,980 18,772,980 Other Assets 447,672 509,333 Total Assets 25,889,980 38,310,592 ======== ======== Liabilities & Stockholders' Equity Current Liabilities 9,004,789 9,065,406 Long-Term Debt 5,690,431 7,433,431 Deferred Liabilities 423,429 1,634,302 Minority Interest 5,473,498 11,808,287 20,592,147 29,941,426 Stockholders' Equity Capital Stock 2,092,634 2,092,634 Retained Earnings 3,207,758 6,279,090 Treasury Stock (2,558) (2,558) Total Stockholders' Equity 5,297,834 8,369,166 Total Liabilities & Stockholders' Equity 25,889,980 38,310,592 ======== ======== Book Value Per Common Share 50.65 86.85 Debt/Equity Ratio 58.42 47.53 3. The US$90 million (P3,375 billion) cash which BCII will receive from the Agreement will enable BCII to pursue its investments in its non-cement projects and significantly strengthen its financial position. cdll IV. CORPORATE BACKGROUND OF HOLDERBANK AND UCC A. Holderbank Holderbank is the leading cement producer worldwide. The company has operations in 56 countries with subsidiaries and affiliates in North America, Europe, Latin America, Africa, Oceania and Asia. In Asia, its interests include Puttalam Cement Company Ltd. (Sri Lanka), Naga Cement Ltd. (Cambodia), and Morning Star Cement Ltd. (Vietnam), among others. In the Philippines, Holderbank, through its subsidiary Holderfin B.V., currently owns 40% of Alcem Holdings, Inc. The group has more than 100 cement plants and grinding stations, 240 quarries, gravel and sand operations and over 600 ready mixed concrete facilities. Holderbank's main focus is on its cement operations, which accounted for 56% of sales in 1997. The company has a healthy mix of positions in industrialized nations as well as emerging markets. Holderbank's aggregate cement capacity is over 80 million tons, of which roughly 50% is currently located in emerging markets. B. UCC As previously mentioned, UCC is the strategic partnership vehicle of the BCII Group and Holderbank, which will own the shares in BCC, DUCC and HCC. With the implementation of the Agreement, UCC will become the largest Philippine cement holding company, with an aggregate annual clinker capacity of 5.5 million metric tons. Footnotes 1. Represents USS$120 million (P4,980 million at P41.50:US$1.00) which will be made available by UCC to the Opcos for debt reduction purposes. 2. Represents the US$90 million (P1,743 million at P41.50:US$1.00) subscription of Holderbank to UCC's Convertible Debt.