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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER L-4753
PUERTO RICAN CEMENT COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
COMMONWEALTH OF PUERTO RICO 51-A-66-0189525
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
PO BOX 364487 - SAN JUAN, PUERTO RICO 00936-4487
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (787) 783-3000
Securities registered pursuant to Section l2 (b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section l2 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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[Cover page 1 of 2 pages]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $$273,285,209. This market value was computed by reference to
the closing price of the stock on The New York Stock Exchange on March 19,
l998.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the close of the period covered by this report:
COMMON STOCK, $1.00 PAR VALUE 5,452,074 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
l. Portions of the Company's Annual Report to Security Holders for
the fiscal year ended December 3l, 1997, are incorporated by
reference into Parts I and II.
2. Portions of the Company's definitive proxy statement for the
1998 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A are incorporated by reference into Part III.
[Cover page 2 of 2 pages]
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CROSS REFERENCE SHEET AND TABLE OF CONTENTS
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Page
ITEM Number Reference
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PART I
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1. Business.................................................................. 6 (1)
General Development of Business....................................... 6
Financial Information About Industry Segments......................... 6 (2)
Narrative Description of Business..................................... 7
Financial Information about Foreign and Domestic
Operations and Export Sales......................................... 13
Executive Officers of the Company .................................... 13
2. Properties................................................................ 14 (3)
3. Legal Proceedings......................................................... 15 (4)
4. Submission of Matters to a Vote of Security Holders....................... 15
PART II
5. Market for the Company's Common Equity
and Related Stockholder Matters......................................... 16 (5)
6. Selected Financial Data................................................... 16 (6)
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 16 (7)
8. Financial Statements and Supplementary Data............................... 16 (8)
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 16
</TABLE>
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<TABLE>
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PART III
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l0. Directors of the Company and Executive Officers........................... 16 (9)
11. Executive Compensation.................................................... 16 (10)
l2. Security Ownership of Certain Beneficial Owners
and Management.......................................................... 16 (11)
13. Certain Relationships and Related Transactions............................ 17 (12)
PART IV
l4. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................................. 17
</TABLE>
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(l) Information incorporated by reference to the Company's Annual
Report to Stockholders for the year ended December 3l, l997
("Annual Report") and the Board of Directors' Proxy Statement
for use in connection with the Company's Annual Meeting of
Stockholders to be held on May 6, l998 ("Proxy Statement").
(2) Annual Report, page 27, section entitled "Notes to Consolidated
Financial Statements, Note 13 / Financial Data by Industries."
(3) Annual Report, page 22, section entitled "Notes to Consolidated
Financial Statements, Note 5 / Property, Plant and Equipment" and
page 27, section entitled "Notes to Consolidated Financial
Statements, Note 14 / Lease Commitments."
(4) Annual Report, pages 28 to 29, section entitled "Notes to
Consolidated Financial Statements, Note 16 / Contingent
Liabilities and Other Commitments."
(5) Annual Report, page 33, section entitled "Common Share Prices and
Dividends Per Share," page 31, section entitled "Five-Year
Statistical Comparison" and pages 23 to 24, section entitled
"Notes to Consolidated Financial Statements, Note 10 / Long-term
Debt."
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(6) Annual Report, page 15, section entitled "Selected Financial
Data."
(7) Annual Report, pages 13 to 15, section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(8) Annual Report, pages 16 to 31, sections entitled "Report of
Independent Accountants," "Consolidated Statement of Income and
Retained Earnings," "Consolidated Balance Sheet," "Consolidated
Statement of Cash Flows," "Notes to Consolidated Financial
Statements," "Consolidated Fourth Quarter Results," "Financial
Results by Quarter," and "Five-Year Statistical Comparison."
(9) Proxy Statement, pages 2 to 8, section entitled "Information
about Nominees, Directors and Principal Stockholders."
(l0) Proxy Statement, pages 11 to 19, sections entitled "Executive
Compensation" through and including section entitled "Certain
Transactions with Management and Others.
(11) Proxy Statement, pages 2 to 10, sections entitled "Information
about Nominees, Directors and Principal Stockholders" and
"Security Ownership of Certain Beneficial Owners."
(12) Proxy Statement, page 19, sections entitled "Compensation
Committee Interlocks and Insider Participation" and "Certain
Transactions with Management and Others."
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PART I
Item l. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Organization
Puerto Rican Cement Company, Inc. ("PRC" or the "Company") was organized under
the laws of the Commonwealth of Puerto Rico in l938. The Company is engaged in
the production and sale of cement, ready-mixed concrete and lime; PRC is also
engaged in the paper and packaging business and realty operations.
Merger of Subsidiaries
Effective January 1, 1997, PRC merged its two ready-mixed concrete
subsidiaries, Concreto Mixto, Inc. ("CMI") and Ready Mix Concrete, Inc.
("RMC"), with RMC resulting as the surviving corporation. The merger allowed
the Company to achieve economic efficiencies through the elimination of
duplicate administrative functions, the consolidation of management functions
and the reduction of related costs. The Company's manufacturing and operating
facilities were not materially affected by this merger.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates within three industry segments: (i) cement and related
products; (ii) paper and packaging; and (iii) realty operations. The cement and
related products segment includes the manufacture and sale of cement,
ready-mixed concrete and lime. The paper and packaging segment includes the
manufacture and sale of multi-wall paper and polypropylene bags. The realty
operations include the development, sale and rental of real property owned by
the Company.
Information on the industry segments in which the Company has been engaged for
the last three fiscal years, including the amounts of revenue, operating profit
and identifiable assets attributable to each of the Company's industry
segments, is included as part of PRC's Annual Report, page 27, section entitled
"Notes to Consolidated Financial Statements, Note 13 / Financial Data by
Industries," which includes the financial statements and schedules furnished
pursuant to Item 14 and is incorporated herein by reference.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
CEMENT AND RELATED PRODUCTS SEGMENT
CEMENT OPERATIONS
Principal product. PRC produces Portland grey cement, Type I, manufactured
under specifications of the American Society for Testing Materials.
Portland grey cement is used primarily in the construction of residential,
commercial and public buildings, and highways.
PRC's cement plant is located in Ponce, on the southern coast of Puerto Rico.
The cement manufacturing process generally involves the extracting, crushing,
grinding and blending of limestone, clay and other raw materials. These raw
materials are proportioned automatically according to chemical analysis and
blended to obtain a stable quality. The Company manufactures cement using the
dry process technology, which is more fuel efficient than other technologies.
Raw materials, pursuant to the dry-process technology, are first processed
through a preheating tower, where heat is supplied from hot gases originated in
a rotary kiln, to effect partial calcination of the materials before they enter
into the rotary kiln. Once in the rotary kiln, the material is exposed to
extremely high temperatures which create a chemical reaction that converts it
into clinker. The clinker drops from the kiln and is cooled with air. At the
same time, this air serves to recapture the kiln's heat for use in the
preheating process. Finally, gypsum is added to the clinker and both materials
are ground to form finished cement.
The Company sells and distributes cement (both in bulk and bagged) and related
products in Puerto Rico. Sales are made on a direct basis to customers which
consist of independent local distributors, including ready-mixed concrete
producers, building material dealers, concrete products manufacturers,
government agencies, and general and highway contractors.
During the fiscal year ended December 3l, l997, the Company sold 1,097,453 tons
of Portland grey cement to customers in Puerto Rico. Approximately 27.2% of the
cement sold by PRC in 1997 was sold to its ready-mixed concrete subsidiary,
RMC.
Raw Materials. PRC owns, in fee, properties containing limestone and sand
deposits which directly adjoin or are close to its cement plant site. The
Company also owns properties near such plants that contain clay deposits. The
Company has not conducted a systematic exploratory drilling program ordinarily
considered necessary for the establishment of limestone and other raw materials
reserve and, accordingly, makes no tonnage estimate of the availability of such
raw materials. However, based on the results of scattered drilling on deposits
of substantial depths, and past and present production from PRC's properties,
the Company believes that the availability of limestone and other raw materials
presents no foreseeable problem. There have been no recent material changes in
the exploitation of the principal raw material deposits, and no material
changes are expected.
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PRC purchases raw gypsum in the open market from sources outside Puerto Rico.
Coal for firing the kilns is purchased from Carbones de Colombia, S.A., a
Colombian supplier, under a long-term supply contract. Electricity is purchased
from the Puerto Rico Electric Power Authority, and water is obtained from wells
located on the Company's properties.
Competition. PRC is the principal producer of cement in Puerto Rico. During
l997, the other cement manufacturing company in Puerto Rico, San Juan Cement
Company, Inc., accounted for approximately 40% of the total bags of cement sold
in Puerto Rico. The amount of cement imported to the Puerto Rico market during
1997 was not significant.
Competition for the market is based on the price and quality of the products.
Seasonal Effect on Sales. Demand for cement and related products is largely
dependent on the requirements of the construction industry, which in Puerto
Rico and the Caribbean are not necessarily seasonal because of year-round
favorable climatic conditions. However, the requirements of the construction
industry depend to some extent on Puerto Rico's general economic conditions.
READY-MIXED CONCRETE OPERATIONS
Principal product. Ready-mixed concrete is produced in batching plants by mixing
controlled portions of cement, aggregates, water and chemical additives. The
product is delivered to construction sites by concrete-mixer trucks owned by
RMC, the Company's ready-mixed concrete subsidiary. The Company sells this
product primarily to contractors on public construction projects as well as to
residential and industrial builders. Net sales totaled $81,500,000 in 1997.
The Company's annual ready-mixed concrete production capacity is over 1.5
million cubic yards, which is distributed in 18 batching plants, with delivery
accomplished by a fleet of 224 concrete-mixer trucks. Only three batching plants
are located on land owned by the Company while the remaining plants are located
on parcels of land leased to the Company pursuant to operating leases with terms
ranging from one to ten years.
Raw materials. RMC purchases most of its cement from PRC. Aggregates, mainly
sand and gravel, and chemical additives used to produce concrete are purchased
from various suppliers.
Competition. The Company believes that it is the largest producer of
ready-mixed concrete in Puerto Rico. The Company competes with various large
ready-mixed companies and several small ready-mixed operators. Competition is
considered to be strong and is based primarily on price, although product
quality, consistency and customer service are also taken into consideration.
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Seasonal Effect on Sales. Demand for cement products, including ready-mixed
concrete, is largely dependent on the requirements of the construction
industry, which in Puerto Rico and the Caribbean are not necessarily seasonal
because of year-round favorable climatic conditions. However, the requirements
of the construction industry depend to some extent on Puerto Rico's general
economic conditions.
LIME OPERATIONS
Principal product. The Company manufactures and sells hydrated lime, types Q
and S (both in bulk and bagged), and pebble lime (bulk only).
During the fiscal year ended December 3l, l997, approximately 24% of the lime
produced by the Company was sold to the local construction and agricultural
industries. The remaining 76% was sold to other industries for chemical use,
both locally and in export markets. Approximately 21% (15% in 1996) of total
sales of lime were made to the local Government or its agencies, mainly for use
in connection with chemical water purification. Export sales for the year ended
December 31, 1997 represented 50% of total lime sales. A significant
portion of the exported lime is used in the alumina refining industry, and thus
the demand may vary depending upon the market conditions of that industry.
Raw Materials. Limestone with a high level of calcium carbonate is the only raw
material used in the production of lime. The Company currently purchases
limestone from various sources close to the plant.
Competition. The Company is the only producer of lime in Puerto Rico. No
material amount of lime was imported to the Puerto Rico market during 1997.
Seasonal Effect on Sales. Due to the year-round favorable weather conditions of
Puerto Rico and the Caribbean area, sales of limestone are not necessarily
seasonal.
AGGREGATES OPERATIONS
Principal product. The Company expects to commence an operation to extract
limestone from the earth's crust in the municipality of Guanica, Puerto Rico
assuming that the legal proceedings with respect to permits for this project are
concluded favorably (refer to Part I, Item 3, "Legal Proceedings"). This
operation is located on property leased from the Government of Puerto Rico. The
limestone material extracted from this property will be sold principally to the
Company's lime subsidiary, Florida Lime Corporation.
The Company also expects to begin the development of a 300-unit, low-cost
housing project on its Vega Alta property assuming that the legal proceedings
with respect to permits for this site are concluded favorably (refer to Part I,
Item 3, "Legal Proceedings"). As part of this project, the portion of the land
to be developed has to be leveled and prepared resulting in the production of
aggregates (principally sand and crushed limestone). These aggregates will be
used principally to supply the Company's ready-mixed concrete operations.
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Raw materials. Guanica - The Company signed a 5-year lease contract, renewable
for two additional 5-year periods. The lease provides for a maximum extraction
of 500,000 cubic meters of raw material per year. The fees for extraction are
$1.00 per cubic meter for the first two years, $1.05 for the next three years
and $1.10 for the second 5-year period. The contract also provides for an
annual fee of $15,000 for the first 5-year period and $20,000 for the second
5-year period. The annual fees as well as the extraction fees for the third
5-year period will be negotiated in the future.
The Guanica facility will provide the Company with high-quality limestone
material needed in the production of lime.
Vega Alta - PRC owns, in fee, a property located in Vega Alta.
Competition. The Guanica site is expected to be the principal
supplier of limestone to the Company's lime subsidiary.
The housing project at Vega Alta will compete with other real estate projects
on the island. Due to a vast need for low-cost housing in the area of Vega
Alta, the Company has received numerous requests from potential buyers and has
created a waiting list for this purpose.
Seasonal Effect on Sales. Due to the year-round favorable weather conditions of
Puerto Rico and the Caribbean area, housing development and aggregate
production are not necessarily seasonal.
PAPER AND PACKAGING SEGMENT
Principal Product. Multi-wall paper bags are produced by the Company's St.
Regis Paper and Bag Division. Polypropylene bags are produced by the Company's
wholly-owned subsidiary, Poly Bags and Packaging, Inc., which commenced
production during 1997. Both types of bags are marketed almost exclusively in
Puerto Rico.
During 1997, paper bag sales were made to the following customers: 41% to PRC
and its subsidiaries; 32% to the grain and animal feed industry; 16% to sugar
producers; and 11% for other miscellaneous uses. Polypropylene bag sales during
the year were made to the following customers: 73% to Florida Lime Corporation;
24% to the grain and animal feed industry; and 3% for other miscellaneous uses.
Raw Materials. The Company purchases the paper, polypropylene and other
related raw materials from various sources outside of Puerto Rico.
Competition. The Company is the principal producer of multi-wall paper bags and
the only producer of polypropylene bags in Puerto Rico. The Company competes
based on the price and quality of its products principally against imported
products.
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REALTY OPERATIONS SEGMENT
The Company, through one of its wholly-owned subsidiaries, owns and holds for
future development and sale approximately 532 acres of land throughout Puerto
Rico. The Company expects to develop a 300-unit housing project on 80 of these
acres located in Vega Alta.
Total Revenue
Set forth below are (i) the total revenue (in thousands of dollars), net of
intercompany sales, for each of the last three fiscal years contributed by any
class of similar products that accounted for l0% or more of the Company's
consolidated net sales in such fiscal years and (ii) the Company's consolidated
net sales (in thousands of dollars) for each of the last three fiscal years:
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Ready-mixed Portland Consolidated
concrete grey cement net sales
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1997 $81,501 $64,790 $156,675
1996 $75,606 $62,409 $149,277
1995 5,317 84,969 100,232
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New Products
PRC has not made any public announcements regarding, nor has it otherwise made
public information about, any product or industry segment that is material to
the Company's business.
Patents and Trademarks
St. Regis Paper and Bag Division had the right to use, until December 3l, l997,
certain trademarks, trade names and patents owned by Stone Container
Corporation (which trademarks, trade names and patents were once owned by St.
Regis Paper Company of New York, then acquired by Champion International during
l985, and after that sold to Stone Container Corporation). The Company annually
negotiates the renewal of this agreement for the continuing use of such
trademarks, trade names and patents. PRC believes that failure to renew such
agreement would have no material impact on this business segment.
Credit and Working Capital Practices
As of December 31, 1997, the Company had invested approximately 11% of its total
assets in inventory, which consists mainly of operating supplies and repair
parts for its equipment. Taking into account the geographical locations of the
Company's manufacturing facilities as compared to the geographical locations of
its major suppliers, such investment in inventory is considered normal by
industry standards. No significant amounts of finished goods are required to be
maintained in inventory to meet rapid delivery requirements of customers. PRC
sells its products to customers under normal commercial open account payment
terms.
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Customers
During fiscal year l997, 14% of the Company's total dollar sales in the cement
and related products segment were made to five (5) unrelated customers. None of
these customers accounted for 10% or more of the Company's consolidated sales.
Backlog
In the opinion of the Company, backlog is not a relevant consideration in the
types of business in which it is engaged.
Government Contracts
No material portion of the business of PRC is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
Government.
Research and Development
During the last three fiscal years, other than for the conversion of two slurry
mills to cement grinding mills completed in the third quarter of 1995, PRC has
not spent any material amount of money on research and development activities
relating to the development of new products, services or techniques or the
improvement of existing products, services or techniques for itself or for any
of its customers.
Environmental Compliance
During l978, PRC completed the installation of air pollution control
equipment in its cement and lime plants located in Ponce at an aggregate
approximate cost of $l7,000,000. Such equipment was installed in order to
comply with regulations established by the Puerto Rico Environmental Quality
Board ("EQB") and the terms of a consent order signed in August l974 (as
amended in July l976 and February l978) with the United States Environmental
Protection Agency ("EPA").
The Company financed the cost of the pollution abatement program through a loan
obtained in l975 from the Government Development Bank for Puerto Rico. This
loan was defeased in l985 as fully described in a Current Report on Form 8-K
dated September l985.
PRC's plants are in compliance with existing environmental regulations. No
significant expenditures for pollution control equipment are expected in the
near future.
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Regulations issued by the EPA limit PRC's annual clinker production capacity.
In 1997, such regulations limited the Company's capacity to 971,000 tons. The
Company complied with these limitations and such limitations did not have a
material effect on the capital expenditures, earnings or competitive position
of PRC. During 1997, the EPA authorized an increase in the Company's annual
clinker production capacity limit to 1,238,100 tons. The Company has solicited
approval from the local EQB and expects to receive a final approval for the
raise in the clinker production capacity during 1998.
Employees
As of December 3l, l997, the Company and its subsidiaries had 1,015 employees.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
During 1997, none of PRC's industry segments depended to any material extent on
foreign operations. A significant portion of Florida Lime Corporation's sales
volume depended on export sales.
(e) EXECUTIVE OFFICERS OF THE COMPANY
1. Miguel Nazario, age 50, President and Chief Executive Officer of the
Company since January 1, 1995; Vice President from August 8, l994 to
December 31, 1994; prior to joining PRC, Mr. Nazario held various
administrative positions over a ten-year period, most recently as a
member of the Corporate Manufacturing Staff of Digital Equipment
Corporation.
2. Jose O. Torres, age 52, Assistant Secretary, Treasurer and Vice President
of Finance since January 1, 1988; Acting Vice President of Sales from
August 1996 to August 1997; Vice President and Treasurer from October
l983 to December 31, 1987; Vice President of Sales from l982 to
October l983; Treasurer from l976 to l982.
3. Angel M. Amaral, age 64, Vice President and Controller since June l982;
Controller from l976 to June l982.
4. Rene Di Cristina, age 47, President of RMC since September 1997; Vice
President of RMC from January to September 1997; General Manager of CMI
from August 1996 to December 1996; Vice President of Sales of PRC from
October 1983 to August 1996.
5. Benito del Cueto, age 63, Vice President of Realty Operations of the
Company since January 1996; Vice President of Desarrollos Multiples
Insulares, Inc., a wholly-owned subsidiary of PRC from 1973 to December
1995.
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6. Antonio L. Ferre Rangel, age 31, Executive Vice President since February
1998; Vice President of Operations and Strategic Planning since January
1996 to February 1998; Vice President of Strategic Planning from January
1995 to December 1996. Mr. Ferre joined the Company in 1992.
7. Eufemio Toucet, age 55, Vice President and General Manager of St. Regis
Paper and Bag Division since January 1996; Consultant to the Company from
May 1995 to December 1995; prior to joining the Company, Mr. Toucet was
President and owner of Reliable Packaging, Inc. and prior to that worked
with Digital Equipment Corporation as Business Operations Manager.
8. Juan R. Taraza, age 59, Vice President of Sales and Marketing since
August 1997. Mr. Taraza joined the Company in June 1961.
All officers are elected to serve for a term of one year and until the election
and qualification of their respective successors.
Item 2. PROPERTIES
Used in cement and related products segments
Cement. PRC owns, in fee, a cement plant located in Ponce, Puerto Rico on a
25 acre site. The Ponce cement plant operates under the dry process technology
and during the last fiscal year, 1,094,000 tons of cement were produced. During
that same period, 917,000 tons of clinker were produced for an approximate 79.4%
(78.1% in 1996) of its effective kiln's clinker production capacity.
The Company owns, in fee, properties containing adequate deposits of limestone
and other raw materials, used in the production of Portland grey cement, which
directly adjoin or are near the plant sites.
PRC leases, under a long-term lease expiring in year 2004, with the
municipality of Ponce, a parcel of land on which it installed certain
facilities for receiving and handling coal. The coal received through said
facility is used as fuel in the Company's cement and hydrated lime
manufacturing operations.
Lime. PRC owns, in fee, a lime manufacturing plant that is located within the
Ponce cement plant premises. During 1997, the lime plant produced 33,277 tons
of lime and was operated at approximately 76% of its capacity. The Company
believes the plant to be in good condition and properly maintained.
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Ready-mixed concrete. PRC owns, in fee, eighteen batching plants used in the
production of ready-mixed concrete. Three of these batching plants are located
on sites owned, in fee, by the Company. The remaining plants are located on
leased properties with terms ranging from one to ten years. The Company does
not expect any problem in the renewal of these contracts. The Company also owns
a fleet of 224 concrete-mixer trucks.
During l997, PRC continued the repairs and maintenance program on its plants.
The Company believes that its plants are currently in good condition and
properly maintained.
Used in paper and packaging segment
The manufacturing plant of the St. Regis Paper and Bag Division is located on a
site owned, in fee, by the Company in Ponce, Puerto Rico. The Company believes
the plant to be in good condition and properly maintained.
Used in realty operations
PRC and one of its subsidiaries own, in fee, and hold for future development
and sale, approximately 532 acres of land throughout Puerto Rico.
Used for office facilities
The Company and its subsidiaries own a one story building which houses its
executive offices located at the Amelia Industrial Park, in Guaynabo, Puerto
Rico.
RMC's administrative offices are located on leased property in Carolina, Puerto
Rico.
Information about leased properties is incorporated by reference from the
Annual Report, page 27, section entitled "Notes to Consolidated Financial
Statements, Note 14 / Lease Commitments."
Item 3. LEGAL PROCEEDINGS
There are presently pending against the Company the legal proceedings described
in the Annual Report, pages 28 to 29, section entitled "Notes to Consolidated
Financial Statements, Note 16 / Contingent Liabilities and Other Commitments,"
furnished pursuant to Item 14, to which reference is hereby made and which is
incorporated by reference herein.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
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PART II
Items 5 through 8 of Part II of this report are omitted as permitted by General
Instruction G (2) since the information required by such items is contained in
the Company's Annual Report which is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item l0. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
Information required herein is contained in a definitive Proxy Statement for
use in connection with the Company's Annual Meeting of Stockholders to be held
on May 6, l998 filed with the Commission pursuant to Regulation l4A pages 2 to
8, section entitled "Information about Nominees, Directors and Principal
Stockholders" and is incorporated herein by reference.
(b) Identification of Executive Officers. (See Item 1. Business Section.
Sub-section (e))
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is contained in the Proxy Statement, pages 11 to
19, section entitled "Executive Compensation" through and including the section
entitled "Certain Transactions with Management and Others," and is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item l2 is contained in the Proxy Statement, pages 2
to 10, sections entitled "Information about Nominees, Directors and Principal
Stockholders" and "Security Ownership of Certain Beneficial Owners," and is
incorporated herein by reference.
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is contained in the Proxy Statement, page 19,
sections entitled "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions with Management and Others" and is incorporated herein
by reference.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-K:
1. Financial Statements incorporated by reference to the Annual
Report, pages 16 to 29; and
2. Financial statement schedules and supplementary data required by
Item 8 of Form 10-K filed herewith.
The financial statement schedules required by Item 14(d) of Form 10-K are
excluded since the Company is primarily an operating company. All subsidiaries
included in the consolidated financial statements being filed, in the aggregate,
do not have any minority equity interest and/or indebtedness to any person other
than the Company or the consolidated subsidiaries in amounts which together
exceed l0% of PRC's total consolidated assets at December 3l, l997.
(b) Reports on Form 8-K: None.
(c) Exhibits required by Section 601 Regulation S-K:
3. Certificate of Incorporation and By-laws
i. Certificate of Incorporation and amendment thereto filed
as an exhibit to Form S-l on March 25, 1963, with (i)
composite copy of the Certificate of Incorporation dated
May l6, l983 filed as an exhibit to Form 10-K for the
fiscal year ended December 31, 1983, (ii) amendment dated
May 6, 1987 filed as an exhibit to Form 10-Q for the
fiscal quarter ended June 30, 1987 and (iii) amendment
dated May 5, 1993 (increasing the number of authorized
shares of common stock from 10 million to 20 million)
filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1993.*
17
<PAGE> 18
ii. By-Laws of the Company, as amended, filed as an exhibit to
Form 10-K for the fiscal year ended December 31, 1987,
with (i) amendment dated January 1993 filed as an exhibit
to Form 10-K for the fiscal year ended December 31, 1993,*
and (ii) amendment dated December 22, 1994, filed as an
exhibit to Form 10-K for the fiscal year ended December
31, 1994.*
l0. Material contracts
10.1 Coal Purchase/Sale Agreement between PRC and
Carbones de Colombia, S.A. dated as of December 14,
1982 filed as an exhibit to Form 10-K for the fiscal
year ended December 31, 1982.* Copy of addendum No.
5 which changed the quantity of coal purchases to
100,000 tons per year through the year 2000, was
filed as an exhibit to Form 10-Q for the fiscal
quarter ended March 31, 1992.*
10.2 (a) Consolidated and restated loan agreement dated
as of September 27, 1985 among PRC, PRC's Guarantors
and the Government Development Bank for Puerto Rico
for approximately $18.3 million encompassing all
outstanding debt of the Company to the bank as of
that date.*
(a) Indenture trust agreement dated September 27,
l985 between PRC as grantor and Banco de Ponce
as trustee for the benefit of the Government
Development Bank for Puerto Rico.*
(Both documents listed above in this paragraph l0.2
were filed as exhibits to a Current Report on Form
8-K dated September l985 and are related to the
early extinguishment of the debt transaction
described therein.)
10.3 Form of Severance Compensation Agreement executed
by PRC during the third quarter of 1989 with a
consultant and 18 of the PRC's key officers, filed
as an exhibit to Form 10-Q for the fiscal quarter
ended September 30, 1989.**
10.4 Amendment to the Consulting Agreement between PRC
and Antonio Luis Ferre dated January 1, 1995 filed
as an exhibit to Form 10-K for the fiscal year ended
December 31, 1994.**
10.5 Note Purchase Agreement dated January 27, 1997,
with respect to $50,000,000 of Series A and
$20,000,000 of Series B Senior Secured Notes due
January 27, 2017 (used to refinance the outstanding
principal balances of various long-term debt) filed
as an exhibit to Form 10-K for the fiscal year ended
December 31, 1996.*
18
<PAGE> 19
13. Annual Report to security holders for the year ended December
3l, l997.
21. Subsidiaries of the Company are included as part of the Annual
Report to security holders, page 33, section entitled
"Subsidiaries." All of the Company's subsidiaries are
incorporated under the laws of the Commonwealth of Puerto Rico,
except for Caribbean Cement Carriers Corporation, which is
incorporated under the laws of the Republic of Panama, and
Ferre Export Corporation, which is incorporated under the laws
of the state of New York.
23. Consent of Price Waterhouse, independent public accountants.
27. Financial Data Schedule.
----------------------------------
* Incorporated herein by reference.
** Exhibit constitutes a management contract or compensatory plan or
arrangement required to be filed pursuant to Item 601 (b) (10) (iii).
19
<PAGE> 20
S I G N A T U R E S
Pursuant to the requirements of Section l3 or 15(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PUERTO RICAN CEMENT COMPANY, INC.
(REGISTRANT)
Date: March 25, 1998 By: /s/ Miguel Nazario
--------------------------------
Miguel Nazario
President and Chief Executive
Officer and Director
20
<PAGE> 21
Pursuant to the requirements of the Securities Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
Date: March 25, 1998 By: /s/ Miguel Nazario
------------------------------------------
Miguel Nazario
President, Chief Executive
Officer and Director
Date: March 25, 1998 By: /s/ Antonio Luis Ferre
------------------------------------------
Antonio Luis Ferre
Director and Chairman
of the Board
Date: March 25, 1998 By: /s/ Alberto M. Paracchini
------------------------------------------
Alberto M. Paracchini
Director and Vice Chairman
of the Board
Date: March 25, 1998 By: /s/ Hector del Valle
------------------------------------------
Hector del Valle
Director and Vice Chairman
of the Board
Date: March 25, 1998 By: /s/ Antonio L. Ferre Rangel
------------------------------------------
Antonio L. Ferre Rangel
Director and Executive
Vice President
Date: March 25, 1998 By: /s/ Jose O. Torres
------------------------------------------
Jose O. Torres
Vice President of Finance,
Assistant Secretary and Treasurer
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
Date: March 25, 1998 By: /s/ Angel M. Amaral
------------------------------------------
Angel M. Amaral
Vice President and Controller
Date: March 25, 1998 By: /s/ Jose J. Suarez
------------------------------------------
Jose J. Suarez
Director
Date: March 25, 1998 By: /s/ Carlos del Rio
------------------------------------------
Carlos del Rio
Director
Date: March 25, 1998 By: /s/ Esteban D. Bird
------------------------------------------
Esteban D. Bird
Director
Date: March 25, 1998 By: /s/ Emilio J. Venegas
------------------------------------------
Emilio J. Venegas
Director
Date: March 25, 1998 By: /s/ Oscar A. Blasini
------------------------------------------
Oscar A. Blasini
Director
Date: March 25, 1998 By: /s/ Rosario J. Ferre
------------------------------------------
Rosario J. Ferre
Director
Date: March 25, 1998 By: /s/ Federico F. Sanchez
------------------------------------------
Federico F. Sanchez
Director
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
Date: March 25, 1998 By: /s/ Jorge L. Fuentes
------------------------------------------
Jorge L. Fuentes
Director
Date: March 25, 1998 By: /s/ Luis A. Ferre Rangel
------------------------------------------
Luis A. Ferre Rangel
Director
Date: March 25, 1998 By: /s/ Juan A. Albors
------------------------------------------
Juan A. Albors
Director
Date: March 25, 1998 By: /s/ Waldemar Del Valle Armstrong
------------------------------------------
Waldemar Del Valle Armstrong
Director
</TABLE>
23
<PAGE> 24
PUERTO RICAN CEMENT COMPANY, INC.
AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of independant accountants ......................................................... 25
Schedule VIII - Valuation and Qualifying accounts for the years ended
December 31, 1995, 1996 and 1997 ....................................................... 26
Financial Data Schedule ................................................................... 27
</TABLE>
24
<PAGE> 25
The Chase Manhattan Bank Building
PO Box 363566
San Juan PR 00936-3566
Telephone 787 754 9090
[PRICE WATERHOUSE LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Puerto Rican Cement Company, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 20, 1998 appearing on page 16 of the 1997 Annual Report to
Shareholders of Puerto Rican Cement Company, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedules listed in Item 14(a) of this Form 10-K. In our opinion these
Financial Statement Schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse
PRICE WATERHOUSE
San Juan, Puerto Rico
February 20, 1998
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 10 Expires Dec. 1, 1998
Stamp 1457942 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
25
<PAGE> 26
SCHEDULE
VIII
PUERTO RICAN CEMENT COMPANY, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------
Additions Deductions from
Balance at Charged to Additions Reserves Balance at
Write-off
Beginning Cost and Charged to of Uncollectible End of
DESCRIPTION of Year Expenses Other (1) Accounts Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts
1995 $1,094,003 $505,013 $59,228 $1,539,788
1996 $1,539,788 $ 0 $ 1,203 $1,538,585
1997 $1,538,585 $ 0 $86,616 $1,451,969
</TABLE>
(1) Additions include allowance for doubtful accounts of $505,013 of the
ready-mixed concrete subsidiaries acquired in November 21, 1995.
26
<PAGE> 1
EXHIBIT 13
Puerto Rican Cement Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section represents Management's discussion and analysis of the Company's
consolidated financial condition and results of operations. It should be read in
conjunction with the accompanying financial statements.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
During 1997, consolidated sales increased by $7.5 million, or 5%, to $156.8
million from $149.3 million during 1996. This increase was principally a result
of increases of 5.4% in cement sales, 7.8% in ready-mixed concrete sales, and
3.6% in paper bag sales, offset by a decrease of 14% in lime sales due to a
reduction in exports.
Consolidated gross margins reported at 29.8% for 1997 compared favorably
with gross margins of 28.1% for 1996. The principal reasons for this increase
were improvements in inventory management and production schedules in both the
cement and bag divisions which yielded lower costs of sale. This reduction in
costs resulted in spite of brief interruptions in the clinker production related
to the plant upgrade project currently underway.
Consolidated selling, general and administrative expenses increased by $2.7
million, or 14.1%, to $21.9 million in 1997 from $19.2 million in 1996. This
increase was principally attributable to the additional selling costs resulting
from higher sales, normal inflationary growth, and higher expenses related to
professional fees for legal, advertising and security services associated mainly
with the development of the Company's new real estate projects and related legal
proceedings for permits. These expenses will continue to impact general and
administrative expenses during 1998. The Company's new projects will not be
contributing to consolidated operations pending the granting of these permits.
Interest and financial charges increased $1.3 million, or 28.9%, to $5.8
million in 1997 compared with $4.5 million for 1996. This increase reflects the
effect of slightly higher interest rates on the $50 million, Series A Notes
issued in January 1997 as compared to the shorter term indebtedness refinanced
with the proceeds from the issuance of these Notes, and the interest on the
additional $20 million in Series B Notes issued in July 1997. Interest income
also increased during 1997 by $900,000, or 33.3%, to $3.6 million compared with
$2.7 million in 1996. This increase resulted from additional investments in the
Company's portfolio, specifically the $70 million, zero-coupon investment
acquired for $17.6 million in December 1996.
CEMENT AND RELATED PRODUCTS SEGMENT
Cement operations. During 1997, cement dollar sales increased by 5.4 percent.
This was principally due to an increase in sales volume of 59,000 tons, or 5.7%,
to 1,097,000 tons in 1997 from 1,039,000 tons in 1996. Improved efficiencies in
inventory management and the manufacturing processes, which resulted in lower
costs, favorably impacted the cement operation's gross margins.
Ready-mixed concrete operations. Sales in RMC represented the most
significant change in consolidated net sales. Ready-mixed concrete dollar sales
increased by $5.9 million, or 7.8%, to $81.5 million in 1997 from $75.6 million
in 1996. This was mainly a result of an increase in sales volume of 3.6 percent.
Also, RMC passed through to its clients increases in the cost and transportation
of aggregates used as raw material. The gross margins of the ready-mixed
concrete operations were favorably impacted by the increase in sales volume,
coupled with economies achieved by the merger of the Company's two ready-mix
concrete subsidiaries which took effect on January 1, 1997.
Lime operations. Total lime sales decreased in 1997 by 7,000 tons, or
16.7%, as a result of the net effect of an increase in local sales of 2,000
tons, or 12%, offset by a decrease in export sales of 9,000 tons, or 34%.
PAPER AND PACKAGING SEGMENT
Multi-wall paper bags operations. During 1997, there was an increase in dollar
sales of multi-wall paper bags of 3.6 percent. The increase resulted mainly from
a 9.4% hike in the pasted bag division sales, offset by a slight decline in the
pocket bags division sales. Efficiencies achieved through improvements in the
inventory management and manufacturing process resulted in lower costs, which
yielded improved gross margins for the year.
1996 COMPARED WITH 1995
Fiscal year 1996, represented the first full year of operation as subsidiaries
of PRC of the two ready-mixed concrete companies acquired by the Company in
November 1995. Accordingly, most of the significant changes in the comparative
amount figures resulted from the inclusion of a full year of operation of the
ready-mixed subsidiaries during 1996 compared with less than two months of
operation in 1995.
During 1996, consolidated net sales increased 49% to $149.3 million from
$100.2 million in 1995. This increase was principally due to $48.1 million (net
of intercompany sales) of additional sales contributed by the ready-mixed
operations. Net sales also increased by 6% and 40% on the cement and lime
operations, respectively. Export sales accounted for the lime sales increase.
Consolidated gross margin decreased to 28% in 1996 compared with 36% in
1995. The inclusion of lower gross margins from the ready-mixed concrete
operations was the
13
<PAGE> 2
Puerto Rican Cement Company, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
principal reason for this decline. Cost of sales was also affected in 1996 by
the additional purchases of higher cost clinker which in turn, increased the
cost of producing cement.
Consolidated selling, general and administrative expenses increased by $5.5
million compared with 1995, due to related expenses contributed by the
ready-mixed operations. During 1995, only the last two months of operations were
impacted by selling, general and administrative expenses from the ready-mixed
operations. Consolidated interest and financial charges increased to $4.5
million in 1996 from $2.4 million in 1995 due to interest expense related to
financial agreements entered in November 1995. Also, interest related to loans
used in the mills conversion project was charged to expense during 1996. During
the first three quarters of 1995, these expenses were capitalized as part of the
cost of this project.
CEMENT AND RELATED PRODUCTS SEGMENT
Cement operations. Cement sales increased by 6% during 1996. The increase was
principally due to a higher volume of cement sales. Cement sold in 1996 totaled
1,039,000 tons, an increase of 7% from sales of 968,000 tons in the prior year.
Sales of cement to the ready-mixed subsidiaries were 31% higher than the prior
year. Average selling price per bag of cement decreased less than 1%,
principally as a result of higher bulk sales during 1996. Gross margin decreased
from 40% in 1995 to 37% in 1996. During 1996, the Company more than doubled its
purchases of clinker when compared with 1995, in order to meet the greater
demand for cement during this year. This higher cost clinker directly impacted
cost of sales, resulting in the decrease in gross margins. Clinker production
was 2% lower in 1996 compared with 1995.
Ready-mixed concrete operations. Results for 1996, included for the first
time a full year of operations of the Company's ready-mixed concrete
subsidiaries. Results for 1995, included only two months of the operations of
the ready-mixed subsidiaries. Gross margin for the ready-mixed operation in 1996
increased from 5% for the two-month period of operations of 1995, to 8% for the
12-months of 1996. Income from operations was $0.5 million in 1996 compared with
a loss of $0.3 million during the shorter 1995 period. Comparisons between a
complete year to a segment of less than two months are not realistic for this
particular period.
Hydrated lime operations. Hydrated lime sales increased 40% from $3.6
million in 1995 to $5.1 million in 1996. This increase resulted from a higher
volume of export sales which increased from 10,600 tons in 1995 to 26,300 tons
in 1996. Gross margin increased from 7% in 1995 to 21% in 1996. This significant
improvement resulted from the high level of export sales which contributed to
better capacity utilization of the hydrated lime plant, thereby resulting in a
lower cost per unit produced.
PAPER AND PACKAGING SEGMENT
Paper and packaging sales (net of intercompany sales) in 1996 were $6.0 million
compared with $6.2 million in 1995, a decrease of 2%. Income from operations for
this segment increased 46% to $0.8 million due to decreases in paper cost,
improvements in inventory management and production schedules, and adjustments
in sale prices to customers.
SIGNIFICANT EVENTS
Merger
Effective January 1, 1997, the Company merged its two ready-mixed concrete
subsidiaries, Concreto Mixto, Inc. and Ready Mix Concrete, Inc. ("RMC"), being
RMC the surviving entity. This strategic step resulted in economic efficiencies
for the Company through the elimination of duplicate administrative functions
and their related costs.
Plant Upgrade Project
The Company's plant upgrade project, which core is to increase the clinker
production capacity by 30% has advanced up to the point allowed by the permits
secured. During 1997 and the first quarter of 1998 the Company performed all the
modifications allowed and is awaiting the final local agency permits to proceed.
San Juan Cement legal case
As further discussed in Note 16 to the financial statements, the Company is the
defendant in an antitrust case brought by SJC, the other cement manufacturer in
Puerto Rico. The case is currently in a stay of the proceedings, requested
jointly by PRC and SJC, and granted by the Courts in April 1997.
Other Legal Proceedings
The Company is involved in other legal proceedings related to its subsidiary RMC
which are fully discussed in Note 16 to the financial statements.
Realty / Limestone Extraction
The Company has temporarily suspended its operations at Vega Alta and Guanica
pending the conclusion of legal proceedings surrounding the permits for these
projects (please refer to Note 16 to the financial statements for more details).
The Vega Alta project consists of the development of a 300-unit, low-cost
housing project on 80 acres of real estate owned by the Company, and the Guanica
project consists of the extraction of limestone from a leased facility.
14
<PAGE> 3
Puerto Rican Cement Company, Inc.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues(1) $156,774,092 $149,276,622 $100,231,963 $ 92,829,872 $ 84,027,588
Income before income tax 22,805,472 21,568,030 23,049,750 21,342,365 19,145,787
Tax provision 6,802,261 6,879,639 7,257,317 5,579,153 6,710,065
Effect of change in accounting
for postretirement benefits
other than pensions, net (1,409,400)
Cumulative effect of change in
accounting for income tax 853,410
Net income 16,003,211 14,688,391 15,792,433 15,763,212 11,879,732
Net income per share(2) 2.91 2.66 2.90 2.76 2.14
Current assets 81,725,557 86,800,526 78,548,232 47,298,323 51,207,564
Current liabilities 18,924,124 30,481,303 27,977,386 16,872,039 17,273,306
Working capital 62,801,433 56,319,223 50,570,846 30,426,284 33,934,258
Current ratio 4.32 2.85 2.81 2.80 2.96
Property, plant and equipment, net 158,610,632 143,088,242 142,567,213 112,299,027 107,968,603
Long-term investments 46,367,581 46,980,338 31,228,541 42,030,507 32,512,367
Total assets 291,051,116 281,203,510 255,014,868 201,869,754 193,283,596
Long-term debt (exclusive of
current portion) 76,179,792 67,023,200 57,549,475 31,696,403 26,633,080
Deferred income taxes 35,859,657 33,323,351 30,808,654 27,722,814 26,028,233
Stockholders' equity, net 157,064,315 147,421,046 135,805,923 122,971,336 120,675,030
Dividends per share 0.76 0.70 0.68 0.62 0.53
Cement sales in tons 1,097,453 1,038,798 968,188 959,561 855,540
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Including revenue from realty operations of:1997-$99,012; 1996-$103,794;
1995-$101,997; 1994-$97,095; 1993-$653,721.
(2) Excluding, in 1993, the cumulative effects of changes in accounting for
postretirement benefits and income taxes of ($0.24) and $0.15,
respectively.
As part of an initiative to develop the Company's real estate for various
uses, such as low-cost housing, the Company has plans to start the preparation
and leveling of land at its Vega Alta site. As a by-product, this process will
result in the incidental extraction of aggregates. The Company expects to use
these aggregates in its ready-mixed concrete subsidiary. Once the initial site
of extraction is leveled, the Company will proceed with the development of the
low-income housing project called Las Orquideas.
The Company also leases a site in the southern town of Guanica which the
Company expects will become an important source of limestone material for the
Company's lime subsidiary, Florida Lime Corporation.
Issuance of Notes
During 1997, the Company completed the private issuance of $50 million in Series
A and $20 million in Series B Senior Secured Notes. As further discussed in Note
10 to the financial statements, proceeds from these issuances were used to repay
short- and medium-term debt, and to finance projects now under development. As a
result of this refinancing transaction, the Company's current ratio improved to
4.32 to 1 as of December 31, 1997 from 2.85 to 1 as of December 31, 1996.
Stock Repurchase
The Company repurchased 68,000 shares of its common stock for $3.3 million on
March 19, 1998 in a privately negotiated transaction approved by the Company's
Board of Directors at its January 1998 meeting.
At its February 1998 meeting, the Company's Board of Directors
approved a program to repurchase up to 300,000, or 5.5%, of the Company's
outstanding common stock.
15
<PAGE> 4
Puerto Rican Cement Company, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE
February 20, 1998
To the Board of Directors
and Stockholders of
Puerto Rican Cement Company, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Puerto Rican
Cement Company, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse
Certified Public Accountants
(OF PUERTO RICO)
License No. 10 Expires Dec. 1, 1998
Stamp 1457844 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.
16
<PAGE> 5
Puerto Rican Cement Company, Inc.
CONSOLIDATED STATEMENT OF INCOME AND
RETAINED EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $156,675,080 $149,172,828 $100,129,966
Revenue from realty operations, net 99,012 103,794 101,997
- ------------------------------------------------------------------------------------------------------------
156,774,092 149,276,622 100,231,963
- ------------------------------------------------------------------------------------------------------------
Cost and expenses, including depreciation,
depletion and amortization of $12,383,769
(1996 - $11,111,840; 1995 - $7,320,130)
Cost of sales 110,010,997 107,291,187 64,232,980
Selling, general and administrative expenses 21,879,599 19,168,663 13,690,290
- ------------------------------------------------------------------------------------------------------------
131,890,596 126,459,850 77,923,270
- ------------------------------------------------------------------------------------------------------------
Income from operations 24,883,496 22,816,772 22,308,693
- ------------------------------------------------------------------------------------------------------------
Other charges (credits):
Interest and financial charges, net of
interest charged to construction 5,765,894 4,464,152 2,423,200
Interest income (3,601,063) (2,660,077) (2,528,677)
Other income (86,807) (555,333) (635,580)
- ------------------------------------------------------------------------------------------------------------
Total other charges (credits) 2,078,024 1,248,742 (741,057)
- ------------------------------------------------------------------------------------------------------------
Income before taxes 22,805,472 21,568,030 23,049,750
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes:
Current income taxes 4,265,955 4,402,169 4,199,686
Deferred income taxes 2,536,306 2,477,470 3,057,631
- ------------------------------------------------------------------------------------------------------------
6,802,261 6,879,639 7,257,317
- ------------------------------------------------------------------------------------------------------------
Net income 16,003,211 14,688,391 15,792,433
Retained earnings at beginning of year 137,047,068 126,216,785 114,140,497
Cash dividends declared, $0.76, $0.70 and $0.68
per share in 1997, 1996 and 1995, respectively (4,172,076) (3,858,108) (3,716,145)
- ------------------------------------------------------------------------------------------------------------
Retained earnings at end of year $148,878,203 $137,047,068 $126,216,785
============================================================================================================
Earnings per share:
Net income per share $ 2.91 $ 2.66 $ 2.90
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 6
Puerto Rican Cement Company, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,995,634 $ 14,808,709
Investments available-for-sale 5,580,202 4,595,908
Short-term investments 6,967,225 1,917,616
Notes and accounts receivable, net 28,763,683 27,410,312
Inventories 32,885,743 33,443,290
Prepaid expenses 4,533,070 4,624,691
- ----------------------------------------------------------------------------------------------
Total current assets 81,725,557 86,800,526
Property, plant and equipment, net 158,610,632 143,088,242
Long-term investments 46,367,581 46,980,338
Other assets 4,347,346 4,334,404
- ----------------------------------------------------------------------------------------------
$291,051,116 $281,203,510
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 668,724 $ --
Current portion of long-term debt 1,109,781 15,401,050
Accounts payable 6,843,256 7,798,595
Accrued liabilities 7,075,160 5,300,186
Dividends payable 1,035,894 1,050,144
Income taxes payable 2,191,309 931,328
- ----------------------------------------------------------------------------------------------
Total current liabilities 18,924,124 30,481,303
- ----------------------------------------------------------------------------------------------
Long-term liabilities:
Long-term debt, less current portion 76,179,792 67,023,200
Deferred income taxes 35,859,657 33,323,351
Other long-term liabilities 3,023,228 2,954,610
- ----------------------------------------------------------------------------------------------
Total long-term liabilities 115,062,677 103,301,161
- ----------------------------------------------------------------------------------------------
Total liabilities 133,986,801 133,782,464
- ----------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, authorized 2,000,000 shares of $5.00
par value each; none issued
Common stock, authorized 20,000,000 shares of $1.00
par value each; 6,000,000 shares issued 6,000,000 6,000,000
Additional paid-in capital 14,702,914 14,702,914
Unrealized gain on investments available-for-sale, net 567,745 110,361
Retained earnings 148,878,203 137,047,068
- ----------------------------------------------------------------------------------------------
170,148,862 157,860,343
Less - 547,926 (1996-472,926) shares of common stock
in treasury, at cost 13,084,547 10,439,297
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 157,064,315 147,421,046
- ----------------------------------------------------------------------------------------------
Commitments and contingent liabilities
- ----------------------------------------------------------------------------------------------
$291,051,116 $281,203,510
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 7
Puerto Rican Cement Company, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,003,211 $ 14,688,391 $ 15,792,433
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided (used)
by operating activities (net of effect of acquisitions):
Depreciation, depletion and amortization 12,383,769 11,111,840 7,320,130
Accretion of discounts on investments (2,859,626) (1,485,257) (2,202,236)
Provision for deferred income taxes 2,536,306 2,477,470 3,057,631
Provision for postretirement benefits 246,832 244,215 404,804
Postretirement benefits paid (174,899) (153,364) (151,522)
Gain on sale of land and equipment (30,976) (121,800) (420,635)
Gain on sale of investments available-for-sale (50,451) (26,630) (22,092)
Changes in assets and liabilities:
(Increase) decrease in notes and accounts receivable (1,353,371) (2,883,927) 3,781,010
Decrease (increase) in inventories 557,547 (1,220,875) (1,793,997)
Decrease in prepaid expenses 91,621 127,496 450,554
(Increase) in other assets (68,154) (1,720,590) (188,512)
(Decrease) in accounts payable (955,339) (649,259) (4,353,055)
Increase (decrease) in accrued liabilities 1,774,976 (464,033) (964,873)
Increase (decrease) in income taxes payable 1,259,981 596,664 (329,845)
(Decrease) in long-term liabilities (3,315) (9,671) --
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 13,354,901 5,822,279 4,587,362
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,358,112 20,510,670 20,379,795
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of ready-mixed concrete operations,
net of cash acquired -- -- (5,793,226)
Capital expenditures (28,028,571) (11,662,959) (10,249,840)
Proceeds from sale of land and equipment 208,600 208,958 436,545
Proceeds from sale of investments available-for-sale 1,102,609 550,290 12,974,530
Purchases of investments available-for-sale (1,130,294) (550,290) --
Redemption of investments held-to-maturity 1,974,000 2,390,650 --
Purchases of investments held-to-maturity (4,000,000) (17,623,200) (3,708,372)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,873,656) (26,686,551) (6,340,363)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (2,645,250) -- (2,181,000)
(Decrease) in short-term borrowing -- -- (2,420,000)
Increase in notes payable 668,724 -- --
Proceeds from loans 70,800,000 36,168,271 38,370,962
Payment of principal on long-term debt (75,934,679) (18,943,349) (32,323,466)
Payment of notes payable -- (4,100,000) (300,000)
Dividends paid (4,186,326) (3,739,968) (3,700,994)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (11,297,531) 9,384,954 (2,554,498)
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (11,813,075) 3,209,073 11,484,934
Cash and cash equivalents at beginning of year 14,808,709 11,599,636 114,702
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,995,634 $ 14,808,709 $ 11,599,636
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 8
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
NOTE 1. REPORTING ENTITY AND SUMMARY OF ACCOUNTING POLICIES
The Company was organized in 1938 under the laws of the Commonwealth of Puerto
Rico. It is engaged primarily in the production and sale of cement and related
products principally within the island of Puerto Rico.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SUMMARY OF ACCOUNTING POLICIES
The following summarizes the most significant accounting policies judged by
management to be the most appropriate in the circumstances to present the
Company's consolidated financial position, results of operations and cash flows
in conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries: Florida Lime Corporation ("FLC"), Ready Mix Concrete,
Inc. ("RMC"), Desarrollos Multiples Insulares, Inc. ("DMI") and Poly Bags and
Packaging, Inc. ("PBPI"). All material intercompany accounts and transactions
have been eliminated in consolidation.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, interest-bearing deposits and other
investments with maturities of less than three months at the time of acquisition
are considered cash equivalents.
REVENUE RECOGNITION
Revenue is recognized when the product is shipped in accordance with billing
terms which are generally FOB shipping point.
INVESTMENTS
Investments in equity securities that have readily determinable fair values and
all investments in debt securities are accounted for as follows:
- - Debt securities for which the Company has the positive intent and ability
to hold to maturity are classified as investments held-to-maturity and
reported at cost, adjusted for amortization of premiums or accretion of
discounts. Such debt securities are reported as short-term or long-term
investments, depending on whether the remaining term to maturity is shorter
or longer than one year.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
- - Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as investments available-for-sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported, net of taxes, in a separate component of
shareholders' equity.
INVENTORIES
Inventories are stated at the lower of average cost or market. Inventory cost
includes the related material, labor and overhead cost.
Land for sale includes the original cost of land and all development costs
incurred to bring land to a salable condition.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and depletion. Depreciation is provided on the straight-line basis over the
estimated useful life of each type of asset. Depletion of quarries is calculated
on the units-of-production method.
Maintenance and repair costs which do not extend the life or improve
productive capacity of the respective assets are expensed as incurred. Cost of
renewals and betterments is capitalized. When assets are sold, retired or
otherwise disposed of, their cost and related accumulated depreciation are
removed from the accounts, and any gain or loss is credited or charged to
income.
INTEREST CHARGED TO CONSTRUCTION
The Company capitalizes interest as a component of the cost of construction.
Capitalized interest totaled $812,000 in 1995. No interest was capitalized in
1997 and 1996.
GOODWILL
Goodwill, included in other assets, is amortized on a straight-line basis over
the estimated period of benefit not to exceed 30 years.
INCOME TAXES
Income taxes are accounted for following an asset and liability approach. Under
this approach, deferred taxes are recognized for temporary differences between
the tax basis and financial reporting basis of assets and liabilities, using
enacted tax laws and rates.
EMPLOYEE BENEFIT PLANS
The Company has a non-contributory retirement plan. Pension costs are computed
on the basis of accepted actuarial methods. The Projected Unit Credit method is
used to determine pension expense. Pension expense includes service cost for
benefits earned during the period, interest cost and amortization of
unrecognized prior service cost, of gains and losses on plan assets and of the
transition amount over a 15-year period. The Company's funding policy is to
contribute annually the maximum amount deductible for income tax.
20
<PAGE> 9
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also offers postretirement medical and life insurance benefits
to certain retired employees under an unfunded plan. The expected cost of
providing postretirement health care and other benefits to an employee or its
beneficiaries is recognized over their service period, is computed based on
accepted actuarial methods, and includes service costs for benefits earned
during the period, interest costs and amortization of actuarial gains and
losses.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of shares
of common stock outstanding during the year. The weighted average number of
shares outstanding for the last three fiscal years was 5,502,074 in 1997,
5,521,486 in 1996 and 5,452,204 in 1995.
During 1997, SFAS 128, "Earnings per Share," went into effect. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. It simplifies the standards for computing EPS previously found in
APB Opinion 15, "Earnings per Share," and makes them comparable to international
EPS standards. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic and diluted EPS on the face of the Income Statement for
all entities with complex capital structures. The Company has a simple capital
structure, therefore, this Statement has no effect on its EPS computation.
PROFIT RECOGNITION ON SALES OF REAL ESTATE
Land and development costs are allocated proportionately to lots sold based on
area and total project cost. Income on sale of land is recognized at the time of
sale except where the collection of such income is not reasonably assured and
revenue therefore is not measurable.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. Comprehensive income has been defined as the change in equity of a
business enterprise during a period from transactions and other events or
circumstances, except those resulting from investments by owners and
distributions to owners.
This pronouncement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The pronouncement does not require a specific format
for the financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This statement is effective for fiscal years beginning after December
15, 1997 and reclassification of financial statements for earlier periods
provided for comparative purposes is required.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement supersedes SFAS 14, "Financial Reporting of Segments of a
Business Enterprises," but retains the requirements to report information about
major customers. This statement is effective for financial statement for periods
beginning after December 15, 1997, and requires comparative information for
earlier years.
NOTE 2. MERGERS AND ACQUISITIONS
On November 20, 1995, the Company purchased 100% of the outstanding shares of
RMC and Concreto Mixto, Inc. ("CMI"). These acquisitions, which were accounted
under the purchase method, were financed with the issuance of notes payable, the
reissuance of 107,874 shares of the Company's common stock held in treasury
(22,352 were issued in 1996), and cash.
The principal business of RMC and CMI is to produce, sell and distribute
ready-mixed concrete throughout the island of Puerto Rico.
The following is a summary of the assets acquired and liabilities assumed
from RMC and CMI at the date of their acquisition (in thousands):
<TABLE>
<S> <C>
Current assets $19,869
Property, plant and equipment 27,242
Goodwill 1,657
Other assets 782
---------------------------------------------------------
49,550
---------------------------------------------------------
Current liabilities 13,186
Long-term debt 12,788
---------------------------------------------------------
25,974
---------------------------------------------------------
Net assets $23,576
=========================================================
</TABLE>
Unaudited, proforma consolidated results of operations assuming that the
acquisition of RMC and CMI had occurred as of January 1, follow (in thousands,
except per share figures):
<TABLE>
<CAPTION>
1995
- --------------------------------------------------------------
<S> <C>
Net sales $144,385
Net income 14,789
Per share 2.71
</TABLE>
The above proforma information includes amortization of goodwill,
depreciation and other adjustments related to the acquisition.
21
<PAGE> 10
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accompanying statement of income and retained earnings includes the
results of operations of RMC and CMI since November 20, 1995, the date of the
acquisitions.
Effective January 1, 1997, the Company merged its two ready-mixed concrete
subsidiaries, RMC and CMI, in a tax-free reorganization with RMC resulting as
the surviving company. The subsidiary's manufacturing and operating facilities
were not materially affected by the merger.
NOTE 3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable at December 31, consist of:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Notes receivable:
Trade $ 452,043 $ 480,124
Other 1,184,949 1,168,069
- -----------------------------------------------------------------------
1,636,992 1,648,193
=======================================================================
Accounts receivable:
Trade 27,737,244 26,713,689
Employees and affiliated companies 77,820 49,057
Other 763,596 537,958
28,578,660 27,300,704
- -----------------------------------------------------------------------
LESS - Allowance for
doubtful accounts 1,451,969 1,538,585
- -----------------------------------------------------------------------
27,126,691 25,762,119
- -----------------------------------------------------------------------
$28,763,683 $27,410,312
=======================================================================
</TABLE>
NOTE 4. INVENTORIES
Inventories at December 31, consist of:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------
<S> <C> <C>
Finished products $ 1,891,283 $ 2,219,159
Work-in-process 2,973,083 4,510,088
Raw materials 3,939,004 3,544,512
Coal and fuel oil 4,015,335 2,928,482
Maintenance and
operating supplies 19,564,436 19,738,447
Land held for sale 502,602 502,602
- -------------------------------------------------------
$32,885,743 $33,443,290
=======================================================
</TABLE>
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, consist of:
<TABLE>
<CAPTION>
Useful life
in years 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and quarries $ 12,576,694 $ 9,912,326
Buildings and structures 50 41,244,348 39,233,787
Machinery and equipment 5-20 120,279,062 105,382,873
Pollution control equipment 25 31,001,463 30,963,507
Automobiles and trucks 3-10 20,610,177 19,301,363
Rental property 10 653,524 653,524
Construction in progress 6,244,405 1,803,570
- ----------------------------------------------------------------------------------
232,609,673 207,250,950
LESS - Accumulated
depreciation and depletion 73,999,041 64,162,708
- ----------------------------------------------------------------------------------
$158,610,632 $143,088,242
==================================================================================
</TABLE>
NOTE 6. INVESTMENTS
The carrying and market values, and scheduled maturities of investments at
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments available-for-sale, at market value:
U.S. Treasury securities
Due within 1 year $ 748,064 $ 749,063
Due from 1 to 5 years 1,172,204 1,169,847 $ 1,838,196 $ 1,846,290
- -------------------------------------------------------------------------------------------------------------------------------
1,920,268 1,918,910 1,838,196 1,846,290
Municipal and other U.S. government agency securities
Due from 1 to 5 years 1,153,996 1,165,056 1,179,127 1,169,718
Marketable equity securities 1,752,177 2,496,236 1,430,997 1,579,900
- -------------------------------------------------------------------------------------------------------------------------------
$ 4,826,441 $ 5,580,202 $ 4,448,320 $ 4,595,908
===============================================================================================================================
Short-term investments held-to-maturity, at amortized cost:
Municipal and other U.S. government agency securities $ 1,050,069 $ 1,047,612 $ 1,917,616 $ 1,904,982
U.S. Treasury securities 5,917,156 5,885,551 -- --
- -------------------------------------------------------------------------------------------------------------------------------
$ 6,967,225 $ 6,933,163 $ 1,917,616 $ 1,904,982
===============================================================================================================================
Long-term investments held-to-maturity, at amortized cost:
U.S. Treasury securities
Due from 1 to 5 years $19,122,433 $18,700,964 $24,101,670 $23,253,296
Due from 5 to 20 years 18,916,213 22,181,600 17,715,663 17,114,370
- -------------------------------------------------------------------------------------------------------------------------------
38,038,646 40,882,564 41,817,333 40,367,666
Municipal and other U.S. government agency securities
Due from 1 to 5 years 8,328,935 8,488,696 5,163,005 4,986,817
- -------------------------------------------------------------------------------------------------------------------------------
$46,367,581 $49,371,260 $46,980,338 $45,354,483
===============================================================================================================================
</TABLE>
22
<PAGE> 11
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The scheduled maturities of investments, based on their carrying book
values, at December 31, 1997, are summarized below:
<TABLE>
<S> <C>
Marketable equity securities, with no maturity $ 2,496,236
Due within one year 7,716,288
Due within 1 to 5 years 29,786,271
Due within 5 to 20 years 18,916,213
- ---------------------------------------------------------------
$58,915,008
===============================================================
</TABLE>
Gross and net unrealized gains and (losses) at December 31, amounted to
approximately:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to-
for-sale maturity for-sale maturity
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross unrealized gains $ 756,117 $3,515,767 $156,997 $ 6,631
Gross unrealized losses (2,357) (545,560) (9,409) (1,645,119)
--------------------------------------------------------------
Net unrealized gain
(loss) 753,760 $2,970,207 147,588 $(1,638,488)
========== ===========
Deferred income taxes (186,015) (37,227)
--------- --------
Net unrealized gain
reported in
stockholders' equity $ 567,745 $110,361
========= ========
</TABLE>
Gross proceeds from the sale of available-for-sale investments amounted to
$1,103,000 and $550,000 in 1997 and 1996, respectively. Gross realized gains on
the sale of these investments totaled $50,000 in 1997 and $27,000 in 1996.
NOTE 7. OTHER ASSETS
Other assets at December 31, consist of:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Investment in real estate $ 94,533 $ 94,533
Goodwill, net of accumulated
amortization of $112,212
(1996 - $57,000) 1,541,321 1,596,533
Other long-term assets 2,711,492 2,643,338
- ------------------------------------------------------------
$4,347,346 $4,334,404
============================================================
</TABLE>
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities at December 31, consist of:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Accrued taxes other than on income $ 988,190 $ 924,643
Accrued payroll expenses 3,000,618 2,889,914
Accrued interest expense 2,226,969 293,796
Other accrued liabilities 859,383 1,191,833
- ------------------------------------------------------------------
$7,075,160 $5,300,186
==================================================================
</TABLE>
NOTE 9. SHORT-TERM BORROWING
The Company has lines of credit available for short-term borrowing and discount
of trade notes receivable in the aggregate amount of $20,600,000. However, under
other loan agreements with financial institutions, the Company may incur
additional unsecured short-term borrowing up to $10,000,000 and may discount
trade notes receivable up to $5,000,000 through 1999. No commitment fees are
paid on these credit facilities.
Short-term borrowing amounting to $7,145,000 outstanding at December 1996
were refinanced with proceeds from the issuance of $70,000,000 long-term notes,
as further described in Note 10. As the result of this refinancing, they were
classified as long-term debt at December 31, 1996.
The maximum aggregate short-term borrowing outstanding at any month-end was
$3,940,000 in 1997 and $7,145,000 in 1996. The approximate average aggregate
short-term borrowing outstanding during the year was $980,160 in 1997 and
$1,249,000 in 1996. The weighted average interest rate of such borrowing
computed annually was 6.27% during 1997 and 6.12% during 1996.
NOTE 10. LONG-TERM DEBT
Long-term debt at December 31, consists of:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
7.29% Series A Senior Secured Notes,
payable in full on January 27, 2017,
interest payable semiannually $50,000,000
7.34% Series B Senior Secured Notes,
payable in full on January 27, 2017,
interest payable semiannually 20,000,000
Revolving credit facility, paid off
during 1997 -- $17,623,200
Term loans and other borrowing,
with fixed interest rates ranging
from 6.15% to 6.56%, refinanced
in January 1997 -- 50,000,000
6.32% note, payable in twenty
equal quarterly installments
of $200,000 commencing
February 1996, followed by
eight equal quarterly installments
of $500,000 in 2001 and 2002;
interest payable monthly 6,400,000 7,200,000
Notes, with fixed interest rates ranging
from 5% to 6%, paid-off in
November 1997 -- 7,448,893
Notes payable - one non-interest bearing
for $150,000 due on July 30, 1998,
three for $150,000 each at 7% due in
1999 to 2001, and one for $200,000 at
7% due in quarterly installments
commencing on October 1, 1997 784,792 --
Borrowing against cash surrender value
of life insurance policies, bearing
interest at 5%, and other 104,781 152,157
- ----------------------------------------------------------------------------
Total 77,289,573 82,424,250
Less - Current portion 1,109,781 15,401,050
- ----------------------------------------------------------------------------
Total long-term debt $76,179,792 $67,023,200
============================================================================
</TABLE>
23
<PAGE> 12
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company repaid the $17.6 million revolving credit facility
with funds generated from the operations.
On January 27, 1997, the Company announced the private placement of $70
million in Series A & B Senior Secured Notes (the "Notes") due in 2017. Series A
Notes in the amount of $50 million were issued on that date, at an interest of
7.29% payable semiannually. Proceeds from this issuance were used to refinance
short- and medium-term debt, including certain principal payments due in 1996
which were refinanced on a short-term basis in anticipation of the issuance of
the Notes.
On July 10, 1997, the Company issued the $20 million in Series B Notes, at
an interest of 7.34% payable semiannually. Proceeds from this issuance were used
mostly to finance the acquisition of new equipment and for the improvement and
modernization of the cement plant.
The Notes are secured by a zero-coupon bond from the U.S. Treasury placed
as collateral. The bond was purchased in December 1996 for $17.6 million and
will accrue to $70 million shortly after the maturity of the Notes.
The balance sheet classification of the Company's long-term debt at
December 31, 1996 is presented reflecting the effect of the issuance of the $50
million Notes.
Aggregate maturities of long-term debt at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Years Amount
--------------------------------------------------
<S> <C>
1998 $ 1,109,781
1999 1,005,000
2000 1,005,000
2001 2,169,792
2002 and thereafter 72,000,000
--------------------------------------------------
$77,289,573
==================================================
</TABLE>
In September 1985, the Company restructured the terms of all of its
outstanding debt with the Government Development Bank for Puerto Rico ("GDB").
The maturity date on the loans from GDB was extended to September 2002, and the
annual interest rate was fixed. No interest or principal payments are required
before maturity. Simultaneously, the Company placed U.S. government securities,
with a cost of $8 million and a maturity value of $49.8 million, in an
irrevocable trust. The principal and interest of these securities will be
sufficient to fund the scheduled principal and interest payments on the
Company's debt with the GDB. Accordingly, such debt was considered extinguished
in 1985 and is not included as a liability in the consolidated balance sheet.
The total balance of debt with GDB, not included in the consolidated balance
sheet, consisting of principal plus accumulated interest, amounted to $40.2
million at December 31, 1997 (1996 - $38.4 million).
The loan agreements with banks and other financial institutions impose
certain restrictions on the Company. The most important restrictions are
limitations on unsecured short-term borrowing and on discounting with recourse
of trade paper from customers (See Note 9), maintaining working capital in
excess of certain defined minimums and limitations on funded debt and other
indebtedness. Other restrictions under such loan agreements relate to
investments in and advances to subsidiaries and other persons, disposition of
fixed assets, and payment of dividends. At December 31, 1997, the Company was in
compliance with the provisions of the loan agreements. Restrictions imposed by
the Notes issued in January and July 1997 are similar, yet more flexible, to the
restrictions contained in the loan agreements existing at December 31, 1996.
NOTE 11. INCOME TAXES
Consolidated tax returns are not permitted under the Puerto Rico Income Tax Law;
therefore, losses, if any, of subsidiaries cannot be used to offset taxable
income of other members of the consolidated group.
The Puerto Rico Income Tax Law allows an accelerated flexible depreciation
method for certain property purchased prior to 1996, by which a taxpayer may
claim depreciation at any rate without reference to useful lives. The
depreciation claimed was limited to an amount not greater than income before
taxes (determined without taking into consideration the depreciation deduction).
Deferred income taxes of $35,860,000 (1996 - $33,323,000) have been accumulated
primarily from using the flexible depreciation method for tax purposes only.
The benefit available under the accelerated depreciation methods are
limited by the alternative minimum tax ("AMT") provisions of the income tax law.
The AMT is based on 22% of regular taxable income with certain adjustments for
preference items, one of which relates to the accelerated depreciation methods.
Any AMT paid may be used to reduce the regular tax liability of future years, to
the extent that the regular tax exceeds the AMT.
A new Puerto Rico Internal Revenue Code (the "Code") was enacted in 1994.
The Code reduced the maximum corporate income tax rate from 42% to 39% for
calendar year 1996 and thereafter. Also, the Code generally provides a 100%
deduction for dividends from controlled Puerto Rico corporations.
Other provisions of the Code include the replacement of the flexible
depreciation method for property acquired after December 31, 1995, with a new
accelerated depreciation method and the repeal of the reserve method for bad
debts with recapture of the existing reserve over a four-year period. These
provisions, effective for calendar year 1996, reduced the alternatives for
deferral of income taxes.
24
<PAGE> 13
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for deferred income taxes for the years ended December 31,
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax applicable to:
Flexible depreciation taken during the year $ 1,919,921 $ 9,565,906
Reversal of flexible depreciation taken in prior years $(2,483,526) (2,643,825) (2,342,018)
AMT credit used (generated) 4,875,563 3,423,687 (4,246,939)
Postretirement benefit obligation (28,054) (35,432) (98,780)
Difference between pension credits and amounts deductible for tax purposes 14,955 49,467 (98,305)
Other temporary differences 157,368 (236,348) 277,767
- --------------------------------------------------------------------------------------------------------------------------------
$ 2,536,306 $ 2,477,470 $ 3,057,631
================================================================================================================================
</TABLE>
The reconciliation of the difference between the Puerto Rico statutory tax
rate on income before taxes and the consolidated effective tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of
pre-tax pre-tax pre-tax
Amount income Amount income Amount income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed tax provision $ 8,894,134 39.0 $ 8,411,532 39.0 $ 9,680,895 42.0
Increase (decrease) in taxes resulting from:
Tax exempt income (57,644) (0.2) (143,540) (0.7) -- --
Interest earned on exempt securities (1,317,225) (5.8) (941,102) (4.4) (1,017,843) (4.4)
Interest deducted for tax but not for
financial statements (698,223) (3.1) (698,223) (3.2) (1,089,746) (4.7)
Enacted future rate changes -- -- -- -- (755,000) (3.3)
Other items (18,781) (0.1) 250,972 1.2 439,011 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
$ 6,802,261 29.8 $ 6,879,639 31.9 $ 7,257,317 31.5
====================================================================================================================================
</TABLE>
The deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Prepaid pension cost $ 1,094,727 $ 1,079,772
Non-current:
AMT credit $4,995,088 --
Postretirement benefit liability $ 1,179,059 1,151,005 --
Property, plant and equipment -- 35,777,522 -- 38,292,875
Other 180,201 346,668 115,766 212,563
- --------------------------------------------------------------------------------------------------------
Total deferred tax asset/liability $ 1,359,260 $37,218,917 $6,261,859 $39,585,210
========================================================================================================
Net deferred tax liability $35,859,657 $33,323,351
========================================================================================================
</TABLE>
One of the consolidated subsidiaries enjoys a tax exemption grant under the
provisions of the Puerto Rico Tax Incentives Act of 1987. Under this grant, the
exemption rates applicable to income, property and municipal taxes range from
50% to 90% through year 2008.
The subsidiaries' aggregate retained earnings amounted to $23,440,000 at
December 31, 1997, (1996 - $21,443,000) and arose substantially from partially
tax exempt operations. The subsidiaries' retained earnings are substantially
exempt upon distribution to the Company; therefore, no income taxes have been
provided for such earnings.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all
non-union employees of the Parent Company and all of its wholly-owned
subsidiaries, excluding RMC which employees are covered by a separate plan
described subsequently in this Note. The benefits are based on years of service
and the employees' average compensation during the last five years of
employment.
25
<PAGE> 14
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 543,821 $ 482,883 $ 474,075
Interest cost on projected
benefit obligation 1,564,011 1,437,542 1,314,808
Actual return on plan assets (6,693,175) (1,880,634) (1,589,649)
Deferral and amortization -
net 4,546,996 52,829 52,829
- ------------------------------------------------------------------------------------
Net periodic pension
expense $ (38,347) $ 92,620 $ 252,063
====================================================================================
</TABLE>
The following table sets forth the plan's obligations and amounts
recognized in the Company's consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligations -
Accumulated benefit
obligation, including vested
benefits of $18,265,535
(1996 - $18,140,655) $20,395,714 $18,391,695
=======================================================================
Projected benefit obligation for
service rendered to date $23,856,631 $21,380,815
Plan assets at fair value 30,683,621 25,105,539
- -----------------------------------------------------------------------
Excess of plan assets over
projected benefit obligation 6,826,990 3,724,724
Unrecognized prior service cost 1,498,447 1,710,584
Unrecognized net gain (4,874,154) (1,863,064)
Unrecognized portion of transition
cost at January 1, 1987, being
recognized over 15 years (637,228) (796,536)
- -----------------------------------------------------------------------
Prepaid pension cost included in
prepaid expenses $ 2,814,055 $ 2,775,708
=======================================================================
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of benefit
obligation and the projected benefit obligation were 7.0% and 7.25% in 1997 and
1996, respectively. The expected long-term rate of return on assets was 9% and
8% in 1997 and 1996, respectively. Investments held by the Plan include
high-grade corporate bonds, U.S. Treasury securities, and common stock,
including 160,245 shares of the Company. The plan is administered by a Board of
Trustees composed of five Directors of the Company. The Board uses two
independent money managers which, within certain established guidelines, make
investment decisions regarding the assets of the plan.
RMC has a noncontributory defined benefit pension plan. This plan provides
coverage to substantially all the subsidiary's non-union employees. Benefits
under the plan are based on years of service and the employees' highest
consecutive five-year average compensation within the last ten completed years
of service. The plan's funded status includes an accumulated benefit obligation
of $4,035,000, including $4,008,000 of vested benefits, a projected benefit
obligation of $4,107,000 and plan assets at fair value of $4,491,000.
The Company also provides health care and life insurance benefits to
participants of the plan after retirement. The employees, upon retirement, have
the option of continuing their participation in the Company's medical group
insurance coverage under the same terms and conditions as prescribed for active
employees. The life insurance plan coverage decreases, for a period of ten years
after age 65, at an annual rate of 7-1/2%. The Company also provides severance
benefits under the terms of collective bargaining agreements. The costs of these
benefits are not significant.
The postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $ 57,237 $ 57,784 $ 52,791
Interest cost 190,010 190,830 189,058
Amortization and deferral - net (415) (4,397) (4,926)
- --------------------------------------------------------------------------------
Postretirement benefit expense $ 246,832 $ 244,217 $ 236,923
================================================================================
</TABLE>
The postretirement benefit liability includes the following components:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of postretirement
benefit obligations:
Retirees $1,190,992 $ 1,213,562
Fully eligible active plan participants 618,534 609,852
Other active plan participants 957,904 957,899
- -----------------------------------------------------------------------------
Accumulated postretirement
benefit obligation 2,767,430 2,781,313
Unrecognized actuarial loss (gain) 7,076 (52,356)
- -----------------------------------------------------------------------------
Postretirement benefit liability
included in other long-term liabilities $2,774,506 $ 2,728,957
=============================================================================
</TABLE>
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.25%. The assumed health care cost trend rate used to measure
the accumulated postretirement benefit obligation was 10.5% initially, declining
gradually to 5.25% in year 2018 and thereafter. A one-percentage-point increase
in the assumed health care cost trend rate would have increased the 1997
postretirement benefit expense by $15,781 and would have increased the 1997
accumulated postretirement benefit obligation by $133,010.
26
<PAGE> 15
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. FINANCIAL DATA BY INDUSTRIES
The Company operates in the cement and related products, and paper and packaging
industries, and in realty operations mainly within the island of Puerto Rico.
Operations in the cement and related products industry involves production and
sale of cement, lime and ready-mixed concrete. Operations in the paper and
packaging industry involve production and sale of paper and polypropylene bags.
Realty operations involve the development, sale and lease of real property.
The Company's financial data by industries for the years ended December 31,
is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
Cement and related products $150,638 $143,083 $ 93,922
Paper and packaging 6,036 6,090 6,208
Realty operations 99 104 102
- ---------------------------------------------------------------------------
$156,773 $149,277 $100,232
===========================================================================
Inter-segment sales:
Cement and related products $ 30,003 $ 27,505 $ 1,926
Paper and packaging 4,267 3,667 3,428
- ---------------------------------------------------------------------------
$ 34,270 $ 31,172 $ 5,354
===========================================================================
Operating profit:
Cement and related products $ 23,521 $ 21,866 $ 21,625
Paper and packaging 1,263 847 582
Realty operations 99 104 102
- ---------------------------------------------------------------------------
$ 24,883 $ 22,817 $ 22,309
===========================================================================
Identifiable assets:
Cement and related products $222,695 $219,502 $204,196
Paper and packaging 6,353 5,152 3,978
Realty operations 882 879 1,226
Corporate 61,121 55,671 45,615
- ---------------------------------------------------------------------------
$291,051 $281,204 $255,015
===========================================================================
Depreciation, depletion and
amortization:
Cement and related products $ 12,261 $ 11,032 $ 7,243
Paper and packaging 123 80 77
- ---------------------------------------------------------------------------
$ 12,384 $ 11,112 $ 7,320
===========================================================================
Capital expenditures:
Cement and related products $ 27,421 $ 11,613 $ 10,207
Paper and packaging 608 50 43
- ---------------------------------------------------------------------------
$ 28,029 $ 11,663 $ 10,250
===========================================================================
</TABLE>
Operating profit is total revenue less operating expenses. Interest expense
and income taxes have not been deducted in computing operating profit.
Identifiable assets are those that are used in the Company's operations in
each segment. Corporate assets are principally investments and other assets not
used by any industry segment.
None of the Company's largest customers accounted for 10% or more of total
consolidated sales in 1997. Export sales were not significant.
As discussed in Note 1, SFAS 131, "Disclosure About Segments of an
Enterprise and Related Information," will require certain changes to the above
disclosure in the 1998 financial statements and comparative information for
earlier years must be restated.
To reconcile industry information with consolidated amounts, the following
eliminations have been made: $34,270,000 in 1997, $31,172,000 in 1996 and
$5,354,000 in 1995 of inter-segment sales; $22,300 in 1997, $72,600 in 1996 and
$52,800 in 1995 relating to the net change in inter-segment operating profit in
beginning and ending inventories; and $15,948,000 in 1997, $15,666,000 in 1996
and $6,217,000 in 1995 of receivables arising from inter-segment sales.
NOTE 14. LEASE COMMITMENTS
The Company and its subsidiaries lease certain facilities and equipment under
operating lease agreements. Rental expense under such agreements aggregated to
$898,000 in 1997, $781,000 in 1996 and $296,000 in 1995.
At December 31, 1997, the approximate future minimum lease payments under
noncancellable operating leases were as follows:
<TABLE>
<CAPTION>
Year
--------------------------------------------------
<S> <C>
1998 $ 497,319
1999 468,587
2000 446,831
2001 385,661
2002 and thereafter 1,120,129
--------------------------------------------------
$2,918,527
==================================================
</TABLE>
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS
The carrying amount of these assets approximates fair value because of the short
period of time to maturity of those instruments.
INVESTMENTS
The fair values of investments are estimated based on their quoted market prices
or those of similar investments.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated using discounted
cash flows based on the current rates offered to the Company for debt of the
same remaining maturities.
27
<PAGE> 16
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amount and estimated fair values of these financial
instruments at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,996 $ 2,996 $14,809 $14,809
Investments available-for-sale 5,580 5,580 4,596 4,596
Short-term investments 6,967 6,933 1,918 1,905
Long-term investments 46,368 49,371 46,980 45,354
Long-term debt 77,290 78,059 82,424 81,999
</TABLE>
NOTE 16. CONTINGENT LIABILITIES AND OTHER COMMITMENTS
The Company is obligated to purchase, under a long-term supply contract, a
minimum of 100,000 metric tons of coal annually through the year 2000. The
purchase price is negotiated annually. Coal purchases have exceeded the minimum
amount required by the contract. Purchases under the contract amounted to
$6,729,000 in 1997, $6,337,000 in 1996 and $6,543,000 in 1995.
In November 1995, San Juan Cement Company, Inc. ("SJC") filed a claim
against the Company and its two ready-mixed concrete subsidiaries, RMC and CMI,
in the United States District Court of Puerto Rico. SJC claimed that the
acquisition of these two ready-mixed companies by the Company, in November 1995,
violated the federal antitrust laws, specifically the Clayton Act, claiming that
it tends to substantially lessen competition. After the acquisition, the
complaint was amended to include the rescission of the agreement, the
divestiture of such companies and, the naming of a trustee to manage the assets
of the acquired companies. On April 15, 1997, the Court granted a joint motion
requesting a temporary stay of the proceedings in an attempt to reach a mutual
understanding that may lead to a voluntary dismissal of this litigation; the
case has remained under this stay since then.
While there can be no certainty, the Company believes, based on the advice
of its legal counsel, that an adverse final ruling in the lawsuit brought by SJC
is not reasonably likely to have a material adverse effect on the Company's
financial condition or results of operations. In addition, the Company believes
that the cost of the defense of such litigation will not have a material adverse
effect on the Company's financial condition or results of operations.
RMC is also the defendant in a complaint filed before the Puerto Rico's
Public Service Commission (the "Commission") by an independent truckers'
association (the "Association"). The Association initially requested the
prospective payment of freight tariff for the handling of aggregates approved by
the Commission in 1988. The subsidiary was paying the tariff based on
individually negotiated contracts at rates different from those approved by the
Commission.
In August 1996, the Association amended their complaint to include
back-charges for the difference between the 1988 tariff and the amount actually
paid by RMC.
In September 1996, the San Juan Superior Court entered a partial decision
upholding the validity of the 1988 tariff. The Company immediately filed an
appeal as to the validity of this tariff, with a motion for reconsideration
pending before the Court at the date of these statements. Pending the final
decision of the Court, the Company is currently paying the 1988 tariff.
The Association's complaint before the Commission with respect to the
retroactive payment of the amount not paid is still pending a resolution of the
Commission. While there can be no certainty, the Company believes based on the
advice of its legal counsel, that it is likely to prevail on this matter. In any
event, the Company believes that an adverse outcome of such proceedings should
not have a material adverse effect on the Company's financial position or
results of operations.
Because of disputes with the Government of Puerto Rico, as more fully
described below, the Company has suspended the development of a 300-unit housing
project at Vega Alta and the work at its limestone extraction operation at
Guanica.
On July 8, 1997, the Puerto Rico Planning Board (the "Planning Board")
issued a temporary cease and desist order against the housing project, asserting
that the Company does not have the permits needed to extract and process sand
and gravel from the site. The Company had previously received permits to build a
housing project there, including a "temporary aggregate permit" which the
Company believes
28
<PAGE> 17
Puerto Rican Cement Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
was properly obtained and is sufficient to conduct the planned
operations. The Planning Board held public hearings on the dispute on August 25,
and September 23 and 24, 1997. The hearings have concluded and the Planning
Board upheld their position. The Company is in the process of filing an appeal
to the decision before the Puerto Rico Appellate Circuit Court.
On July 11, 1997, the Puerto Rico Permits and Regulations Administration
(the "Administration"), revoked a permit granted to the Company to operate a
limestone extraction operation at its Guanica site. A permit had been granted by
the Administration's Ponce office. The Company has appealed this decision before
the Puerto Rico Circuit Court of Appeals and is awaiting a decision.
Management believes, based on the advice of its legal counsel, that the
outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
On June 27, 1997, the Company filed a lawsuit against the Puerto Rico
Department of Consumer Affairs (the "Department") in response to a Department's
investigation of the Company's labeling of bags of cement during 1995 and 1996.
The Department has asserted that the bags should have disclosed that the cement
was manufactured utilizing some imported clinker. The lawsuit was based on the
Company's belief that the Department did not have the legal authority with
respect to this matter. However, it was determined that the Department had the
authority to investigate disclosure of clinker content and Company's labels.
Administrative hearings were held on January 8, 14 and 29, and March 13, 1998 by
an independent judge named by the Department. On March 16, 1998, the independent
judge issued a favorable decision on the case which held that the Company did
not violate any Department rule. This decision could be appealed by the
Department within a 30-day period.
Management believes, based on the advice of its legal counsel, that the
outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is a defendant in a number of other legal proceedings arising
in the normal course of business. Management believes, based on the opinion of
legal counsel, that the final outcome of these matters will not significantly
affect the Company's financial position or results of operations.
NOTE 17. STOCKHOLDERS' EQUITY
During 1997, the Company purchased 75,000 shares of its outstanding stock for
$2,645,250. The Company purchased these shares for future corporate purposes and
does not intend to retire or cancel them. In April 1996, the Company reissued
22,352 shares of its common stock held in treasury to complete the acquisition
of RMC.
The changes in the treasury stock and additional paid-in-capital components
of shareholders' equity are detailed below:
<TABLE>
<CAPTION>
Treasury Additional
Number stock at paid-in
of shares cost capital
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 495,278 $10,967,229 $14,482,054
Treasury stock reissued (22,352) (527,932) 220,860
- --------------------------------------------------------------------------------
Balance at December 31, 1996 472,926 10,439,297 14,702,914
Treasury stock purchased 75,000 2,645,250 --
- --------------------------------------------------------------------------------
Balance at December 31, 1997 547,926 $13,084,547 $14,702,914
================================================================================
</TABLE>
NOTE 18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash was paid during the year for:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Interest (net of amount
capitalized) $3,833,000 $4,377,000 $2,603,000
========================================================================
Income taxes $3,535,000 $3,805,000 $4,501,000
========================================================================
</TABLE>
29
<PAGE> 18
Puerto Rican Cement Company, Inc.
CONSOLIDATED FOURTH QUARTER RESULTS
(000's Omitted, Except Per Share Amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
---------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $36,977 $37,193 $156,774 $149,277
Cost of sales 26,569 26,538 110,011 107,291
- -----------------------------------------------------------------------------------------------------
Gross margin 10,408 10,655 46,763 41,986
Selling, general and administrative expenses 6,390 5,264 21,880 19,169
- -----------------------------------------------------------------------------------------------------
Income from operations 4,018 5,391 24,883 22,817
- -----------------------------------------------------------------------------------------------------
Other charges (credits):
Interest and financial charges 1,524 1,105 5,766 4,464
Interest income (973) (760) (3,601) (2,660)
Other income (159) (85) (87) (555)
- -----------------------------------------------------------------------------------------------------
392 260 2,078 1,249
- -----------------------------------------------------------------------------------------------------
Income before income taxes 3,626 5,131 22,805 21,568
Tax provision 884 1,536 6,802 6,880
- -----------------------------------------------------------------------------------------------------
Net income $ 2,742 $ 3,595 $ 16,003 $ 14,688
=====================================================================================================
Earnings per share of common stock* $ 0.51 $ 0.65 $ 2.91 $ 2.66
=====================================================================================================
</TABLE>
FINANCIAL RESULTS BY QUARTERS
<TABLE>
<CAPTION>
(000's Omitted, Except Per Share Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Mar. 31 June 30 Sept. 30 Dec. 31 1997 Mar. 31 June 30 Sept. 30 Dec. 31 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $37,212 $43,429 $39,156 $36,977 $156,774 $37,403 $41,010 $33,671 $37,193 $149,277
==================================================================================================================================
Gross profit 10,649 13,775 11,931 10,408 46,763 10,363 11,914 9,054 10,655 41,986
==================================================================================================================================
Income before
income tax 5,289 7,947 5,943 3,626 22,805 5,305 6,867 4,265 5,131 21,568
Tax provision 1,346 2,801 1,771 884 6,802 1,612 2,362 1,370 1,536 6,880
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,943 $ 5,146 $ 4,172 $ 2,742 $ 16,003 $ 3,693 $ 4,505 $ 2,895 $ 3,595 $ 14,688
==================================================================================================================================
Per share* $ 0.71 $ 0.93 $ 0.76 $ 0.51 $ 2.91 $ 0.67 $ 0.82 $ 0.52 $ 0.65 $ 2.66
==================================================================================================================================
</TABLE>
* Based on weighted average number of outstanding shares of 5,502,074 in 1997
and 5,521,486 in 1996.
30
<PAGE> 19
Puerto Rican Cement Company, Inc.
FIVE-YEAR STATISTICAL COMPARISON
<TABLE>
<CAPTION>
December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET SUMMARY
Cash and equivalents $ 2,995,634 $ 14,808,709 $ 11,599,636 $ 114,702 $ 431,293
Investments available-for-sale 5,580,202 4,595,908 4,473,536
Short-term investments 6,967,225 1,917,616 974,073 520,000
Accounts receivable-net 28,763,683 27,410,312 24,526,385 14,358,827 13,626,159
Inventories 32,885,743 33,443,290 32,222,415 28,916,950 33,141,836
Prepaid expenses 4,533,070 4,624,691 4,752,187 3,907,844 3,488,276
- ---------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS -- TOTAL 81,725,557 86,800,526 78,548,232 47,298,323 51,207,564
Property, plant and equipment-net 158,610,632 143,088,242 142,567,213 112,299,027 107,968,603
Other assets 4,347,346 4,334,404 2,670,882 241,897 1,595,062
Long-term investments 46,367,581 46,980,338 31,228,541 42,030,507 32,512,367
- ---------------------------------------------------------------------------------------------------------------------------
$291,051,116 $281,203,510 $255,014,868 $201,869,754 $193,283,596
===========================================================================================================================
Notes payable (includes current
portion of long-term debt
and short-term borrowing) $ 1,778,505 $ 15,401,050 $ 11,749,853 $ 8,598,571 $ 7,491,735
Accounts payable and
accrued liabilities 17,145,619 15,080,253 16,227,533 8,273,468 9,781,571
- ---------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES -- TOTAL 18,924,124 30,481,303 27,977,386 16,872,039 17,273,306
Long-term debt (exclusive
of current portion) 76,179,792 67,023,200 57,549,475 31,696,403 26,633,080
Deferred income taxes 35,859,657 33,323,351 30,808,654 27,722,814 26,028,233
Postretirement benefit liability 3,023,228 2,954,610 2,873,430 2,607,162 2,673,947
Capital stock (1)(2) 7,618,367 10,263,617 9,514,825 8,830,839 18,783,431
Unrealized gain on investments
available-for-sale 567,745 110,361 74,313
Retained earnings 148,878,203 137,047,068 126,216,785 114,140,497 101,891,599
- ---------------------------------------------------------------------------------------------------------------------------
$291,051,116 $281,203,510 $255,014,868 $201,869,754 $193,283,596
===========================================================================================================================
STATISTICAL DATA
Book value per share $ 28.81 $ 26.67 $ 24.67 $ 22.38 $ 20.78
Shares outstanding at year-end 5,452,074 5,527,074 5,504,722 5,494,200 5,807,700
Number of stockholders 597 622 655 684 705
Average number of employees 1,015 969 939 552 533
Capital expenditures(3) $ 28,028,571 $ 11,662,959 $ 10,249,840 $ 11,256,763 $ 9,136,968
===========================================================================================================================
</TABLE>
(1) Includes the purchase of 75,000 in 1997, 75,000 shares in 1995, and 313,500
shares in 1994 of the Company's outstanding stocks for $2,645,250,
$2,181,000, and $9,953,000, respectively.
(2) Also includes the issuance of 107,874 shares of the Company's common stock
held in treasury for the acquisition of RMC.
(3) Includes expenditures in kiln capacity increase project in 1997, and mill
conversion in 1995, 1994, and 1993.
31
<PAGE> 20
Puerto Rican Cement Company, Inc.
DIRECTORS AND OFFICERS
DIRECTORS
ANTONIO LUIS FERRE
Chairman of the Board of the Company and President of
El Dia, Inc. (Newspaper Publishing Group)
ALBERTO M. PARACCHINI
Vice Chairman of the Board of the Company and Director
of Banco Popular de Puerto Rico (Commercial Bank)
HECTOR DEL VALLE
Vice Chairman of the Board of the Company
MIGUEL A. NAZARIO
President and Chief Executive Officer of the Company
ANTONIO LUIS FERRE RANGEL
Executive Vice President
WALDEMAR DEL VALLE ARMSTRONG
Attorney-at Law, Partner of Parra, Del Valle, Frau & Limeres
JOSE J. SUAREZ
Consultant to the Company
ESTEBAN D. BIRD
President of Bird Construction Company (General Contractors)
OSCAR A. BLASINI
President of G.B. Investments, Inc.
(Real Estate Development and Investments)
ROSARIO J. FERRE
Second Vice President of Luis A. Ferre Foundation, Inc.
EMILIO J. VENEGAS
President of Sanson Corporation (Rock and Concrete Products)
and Secretary of Venegas Construction Corporation (General Contractors)
FEDERICO F. SANCHEZ
President of Federico F. Sanchez and Company, Inc. and Interlink
Group, Inc. (Real Estate Consultants, Brokers and Developers)
JORGE L. FUENTES
Chairman of the Board and Chief Executive Officer of
Gabriel Fuentes, Jr. Construction Company, Inc. and
Chairman of the Board and Chief Executive Officer of
Fuentes Concrete Pile, Inc. (Concrete Pile Foundations)
JUAN A. ALBORS
President and General Partner of Albors Development Corp.
(Real Estate Developers and Investors)
LUIS ALBERTO FERRE RANGEL
Co Director, El Dia, Inc. (Newspaper Publishing Group)
CARLOS DEL RIO
Senior Vice President and Chief Operating Officer - MOVA
Pharmaceutical Corporation (Pharmaceutical Products
Manufacturer)
OFFICERS
MIGUEL A. NAZARIO
President and Chief Executive Officer
ANTONIO LUIS FERRE RANGEL
Executive Vice President
JOSE O. TORRES
Assistant Secretary, Vice President of Finance and Treasurer
JUAN R. TARAZA
Vice President - Sales and Marketing
ANGEL M. AMARAL
Vice President and Controller
BENITO DEL CUETO
Vice President - Real Estate
EUFEMIO TOUCET
Vice President and General Manager
St. Regis Paper and Bag Division
RENE DI CRISTINA
President Ready Mix Concrete, Inc.
ETIENNE TOTTI DEL VALLE
Secretary
32
<PAGE> 21
Puerto Rican Cement Company, Inc.
STOCKHOLDER INFORMATION
STATUTORY OFFICES
Ponce, Puerto Rico
EXECUTIVE OFFICES
Guaynabo, Puerto Rico
SUBSIDIARIES*
Florida Lime Corporation
Ready Mix Concrete, Inc.
Poly Bags & Packaging, Inc.
Desarrollos Multiples Insulares, Inc.
Limestone Materials, Inc.
*All Subsidiaries are 100% owned
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services
New York, New York
INDEPENDENT ACCOUNTANTS
Price Waterhouse
San Juan, Puerto Rico
PUBLIC RELATIONS
Gavin Anderson & Company
New York, New York
LEGAL COUNSEL
Totti & Rodriguez Diaz
San Juan, Puerto Rico
FORM 10-K
A copy of the Annual Report as filed with the Securities and Exchange Commission
on Form 10-K will be mailed upon request made to Mr. Jose O. Torres, Vice
President of Finance and Treasurer, Puerto Rican Cement Company, Inc., PO Box
364487, San Juan, Puerto Rico 00936-4487.
PUERTO RICAN CEMENT COMPANY, INC.
ANNUAL MEETING
The Annual Meeting of Stockholders of Puerto Rican Cement Company, Inc. will be
held at the office of the Company, Amelia Industrial Park, Guaynabo,
Puerto Rico, Wednesday, May 6, 1998 at 10:00 a.m.
COMMON SHARE PRICES
AND DIVIDEND PER SHARE
The Company's common stock is listed on the New York Stock Exchange (trading
symbol:PRN). The following table sets forth the high and low sales price per
share of the common stock.
<TABLE>
<CAPTION>
Price per share ($) 1997 1996
- -------------------------------------------------------------------------
High Low High Low
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 28 3/4 28 5/8 34 32 1/8
Second Quarter 32 11/16 32 1/4 33 3/4 31 1/8
Third Quarter 40 1/8 39 7/8 31 7/8 28 5/8
Fourth Quarter 50 9/16 50 3/16 31 3/8 28 1/8
Full Year 50 9/16 28 5/8 34 28 1/8
Dividends per share $0.76 $0.70
</TABLE>
INTERNET ADDRESS
http//www.prcement.com
PRN
LISTED
NYSE
33
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,995,634
<SECURITIES> 12,547,427
<RECEIVABLES> 28,189,287
<ALLOWANCES> 1,451,969
<INVENTORY> 32,885,743
<CURRENT-ASSETS> 81,725,557
<PP&E> 232,609,673
<DEPRECIATION> 73,999,041
<TOTAL-ASSETS> 291,051,116
<CURRENT-LIABILITIES> 18,924,124
<BONDS> 76,179,792
0
0
<COMMON> 6,000,000
<OTHER-SE> 151,064,315
<TOTAL-LIABILITY-AND-EQUITY> 291,051,116
<SALES> 156,675,080
<TOTAL-REVENUES> 156,774,092
<CGS> 110,010,997
<TOTAL-COSTS> 131,890,596
<OTHER-EXPENSES> 2,078,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,805,472
<INCOME-TAX> 6,802,261
<INCOME-CONTINUING> 16,003,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,003,211
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.91
</TABLE>
