Alaska Milk Corporation

September 28, 1998 PSE CIRCULAR FOR BROKERS NO. 2251-98 SUBJECT : Alaska Milk Corporation Further to Circular No. 1904-98 dated August 17, 1998 pertaining to the acquisition by Alaska Milk Corporation ("AMC") of all the sales and distribution functions of Alaska Trading Co., Inc. (ATCI), attached herewith is a comprehensive corporate disclosure from AMC on the following: I. Discussion of the acquisition of the sales and distribution function of ATCI; a. Distribution Agreement between AMC and ATCI; b. Terms of the deal (that is, amount of consideration, terms of payment). II. Reasons for the acquisition by AMC of all the sales and distribution functions of ATCI; and III. Projected/Pro-forma financial statements of AMC with and without the reversion of ATCI's distribution rights back to AMC with assumptions for the aforesaid projections. Furthermore, with regard to AMC's plan for future joint venture with other foreign or local consumer food companies, AMC advised the Exchange that: ". . . while there have been preliminary discussions with certain consumer food companies for the possibility of entering into joint ventures, there are as yet no immediate plans for these types of investments. Hence, it may be premature at this point to identify the prospective joint venture partners as well as the nature of the possible undertakings. . ." For your information. (SGD.) REYNOLD P. ONG Vice-President, Listings and Disclosure Group CASTILLO LAMANTAN PANTALEON & SAN JOSE LAW OFFICES 8 September 1998 VIA TELECOPIER & BY HAND Philippine Stock Exchange, Inc. Phil. Stock Exchange Center Exchange Road, Ortigas Center Pasig City Fax No. (632) 634-59201/5113 Attention: Mr . Reynold P . Ong Vice-President, Listings and Disclosure Group Re : Alaska Milk Corporation's Disclosure on Assumption of Distribution Rights Gentlemen : Hereunder is the report you requested in your letter of 26 August 1998: COMPREHENSIVE CORPORATE DISCLOSURE On 13 October 1994, Alaska Milk Corporation (AMC) granted Alaska Trading Co., Inc. (ATCI) exclusive distribution rights to all retail establishments and other outlets throughout the Philippines for AMC's milk and other food products. This agreement was to take effect for a period of five years from 1 October 1994 until 30 September 1999. Due to a change in management of both AMC and ATCI, both parties entered into a Memorandum of Agreement on 15 July 1998 for the reversion of ATCI's distribution rights back to AMC, to take effect under a separate contract on or before 15 August 1998. Pursuant to such arrangement, ATCI was to assign and transfer to AMC on or before 15 August 1998, all existing lease agreements it has with certain third parties over warehouses currently used for distribution of the said products. Furthermore, AMC was to absorb ATCI's entire sales force and assume all of ATCI's account receivable aged 61 days or less. Older receivables were to remain the responsibility of ATCI. prLL To implement the Memorandum of Agreement, in part, AMC and ATCI entered into an agreement on 14 August 1998 for a mutual rescission of the existing Distribution Agreement between AMC and ATCI. The total consideration for the rights reversion was P130 million which represent the following: penalty for pre-termination of ATCI's distribution rights undertaking on the part of ATCI not to compete with AMC's business assignment of ATCI's customer list accounts business investigation services to be rendered by ATCI to determining feasibility of AMC's assumption of distribution operations or of its reassignment to a 3rd party. The terms of payment of the aforesaid consideration are as follows: a) P25,000,000.00 paid on 15 July 1998 as penalty for pre-termination of the Distribution Agreement b) P75,000,000.00 paid on 15 August 1998 broken down as follows: i Thirty Five Million Pesos Customer Lists ii Thirty Five Million Pesos initial payment for non-compete clause iii Five Million down payment for business investigating services c) P30,000,000.00 to be paid on 30 June 1999, broken down as follows: i Fifteen Million Pesos balance for non-competition clause ii Fifteen Million Pesos balance for business investigating services. The move to fold in the distribution function into AMC is driven by the need to gain greater control of the distribution of all AMC products and all other products distributed under the Alaska corporate umbrella. Essentially, this will provide AMC with greater latitude to implement changes in the distribution operations to maximize distribution efficiencies and align more closely marketing goods and distribution targets. This is also a step towards providing AMC greater leverage in future joint ventures with other foreign or local consumer food companies. There has been no change in the capital structure of AMC by virtue of the assumption of distribution functions. The following information about AMC is provided as per your request: Authorized Capital Stock P1,000,000,000.00 Par Value P1.00 per share Paid-up Capital P250,000,000.00 Primary Purpose: "To produce, process, manufacture, can, freeze, preserve, refine, pack, buy and sell at wholesale and otherwise deal in food and food products of every class and description, whether for human or animal consumption, including all kinds of milk and dairy products; fruits and vegetable juices; and other milk or dairy preparations including products and by-products." Board of Directors: Mr. Wilfred Uytengsu, Chairman Mr. Wilfred Steven Uytengsu, Jr. Mr. Michael Uytengsu Mr. Grahame Tonkin Mr. Justinus Sanders Atty. Alejandro Barin Atty. Enrique Belo Please be informed that ATCI continues to be a privately-owned corporation under the ownership of private individuals not related in any manner to AMC management or any of AMC's employees. As such, AMC is not in a position to disclose information concerning its current corporate and financial structure, as requested in your letter. For your information and guidance. Very truly yours, (SGD.) ZENAIDA L. SALIPSIP Assistant Corporate Secretary ALASKA MILK CORPORATION PROJECTED BALANCE SHEET CONSOLIDATED 1998 (IN THOUSAND PESOS) PROJECTED 1998 W/ATCI W/O ATCI ASSETS Current Assets Cash and Cash Equivalents 520,926 1,015,369 Accounts Receivable 614,482 385,132 Inventories 602,549 508,239 Other Current Assets 21,312 21,312 Total Current Assets 1,759,268 1,930,052 Property, Plant and Equipment net 286,921 251,771 Other Assets 94,831 2,984 TOTAL ASSETS 2,141,020 2,184,807 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts Payable and Accrued Expenses 234,200 239,718 Long Term Debt Net of Current Portion 3,225 3,225 Total Liabilities 237,425 242,944 Stockholders' Equity Capital Stock 961,444 961,444 Retained Earnings 942,151 980,419 Total Stockholders' Equity 1,903,595 1,941,863 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 2,141,020 2,184,807 NET SALES 2,941,324 2,856,174 COST OF SALES & OPERATING EXPENSES 2,556,015 2,444,991 INCOME FROM OPERATIONS 385,309 411,183 OTHER INCOME (CHARGES) Interest net 48,352 69,544 Net Miscellaneous Income (Expense) 13,033 13,033 Total Other Income (Charges) 61,385 82,577 INCOME (LOSS) BEFORE INCOME TAX 445,694 493,759 PROVISION FOR INCOME TAX 136,175 144,973 NET INCOME (LOSS) 310,519 348,787 Retained Earnings at Beginning of Period 665,042 665,042 Treasury Stocks 33,410 33,410 Retained Earnings at End of Period P942,151 P980,419 ======= ======= ALASKA MILK CORPORATION ASSUMPTIONS TO PROJECTED FINANCIAL STATEMENTS 1998 (IN THOUSAND PESOS) 1. Net Sales - With the reversion of ATCI's distribution rights to AMC, AMC will henceforth book revenues based on Net Price to Trade (NPT) instead of the Net Transfer Value (NTV) formerly charged to the distributor. This will raise 1998 Net Sales by P85MM to P2.94B with the reversion versus P2.86B without the reversion. The same volume growth assumptions of 2% for liquid canned milk and 12% for powdered milk were used with and without the reversion of the distribution rights to AMC. 2. Operating Expenses - Operating Expenses will increase by P112MM as a result of the reversion of the distribution rights back to AMC: a) Administrative Expenses The increase in Administrative Expenses will arise from: i. P25MM outright expense paid to ATCI as penalty for the pre-termination of the existing distribution agreement with reference to the September 8, 1998); Balance of P105MM payment to ATCI related to the rescission of the Distribution Agreement (please refer to letter of September 8, 1998) which will be amortized over a period of three to five years, portions of which is charged to the remaining 4.5 months of 1998: ii. Additional administrative expenses related to distribution operations covering the salaries/bonuses of administrative personnel, warehouse rental, utilities, and various administrative expenses. b) Selling Expenses The increase in selling expenses is due mainly to the salaries/bonuses of the sales organization, in-house/third-party trucking and freight expenses and various selling/promotional expenses. 3. Interest Income A reduction in interest income of P21MM due to lower investible cash balances owing to higher working capital requirements and the payments due ATCI. Placement rate assumed is the same with and without the reversion at 11.2% (net). 4. Accounts Receivables Receivables are expected to increase by P229MM to P614MM from P385MM as AMC now assumes all trade receivables from about 3,000 customers. In addition, the payment pattern for supermarkets are generally longer at about 60 days. 5. Inventories Finished Goods inventories is projected to increase by P94MM from P602MM to P508MM due to additional stocks that will be maintained in 13 existing warehouses nationwide. 6. Property, Plant, and Equipment An increase of P35MM was provided mainly for the purchase of delivery trucks/vans as well as salesmen's vehicles relating to the distribution operations. 7. Net Income Net income is expected to decline to P310MM as a result of the reversion of the distribution rights back to AMC versus earlier projected P349MM without the ATCI transaction. cdlex