<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number: 1-4753
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PUERTO RICAN CEMENT COMPANY, INC.
---------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
COMMONWEALTH OF PUERTO RICO 51-A-66-0189525
- - --------------------------- ---------------
<S> <C>
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer ID No.)
PO Box 364487 - San Juan, P.R. 00936-4487
- - ------------------------------ ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (787) 783-3000
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NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 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
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common stock, $1 Par Value; 5,379,074 Shares Outstanding
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<PAGE> 2
PUERTO RICAN CEMENT COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet as of September 30, 1998 and
December 31, 1997.......................................................... 1 - 2
Consolidated Statement of Income for the three-month and
nine-month periods ended on September 30, 1998 and 1997.................... 3
Consolidated Statement of Comprehensive Income for the nine-
month periods ended on September 30, 1998 and 1997......................... 4
Consolidated Statement of Cash Flows for the nine-month
periods ended on September 30, 1998 and 1997............................... 5
Consolidated Statement of Changes in Stockholders' Equity for
the nine-month periods ended on September 30, 1998 and 1997................ 6
Notes to Consolidated Financial Statements................................. 7 - 9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 10 - 14
Part II - Other Information.......................................................... 15 - 16
Signatures................................................................. 17
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Puerto Rican Cement Company, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
--------- --------
(In thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,058 $ 2,996
-------- --------
Investments available-for-sale 8,302 5,580
-------- --------
Short-term investments 5,182 6,967
-------- --------
Notes and accounts receivable - net of allowance
for doubtful accounts of $1,503 in 1998 and
$1,452 in 1997 32,188 28,764
-------- --------
Inventories:
Finished products 1,876 1,891
Work in process 8,017 2,973
Raw materials 4,432 3,939
Maintenance and operating supplies 21,892 23,580
Land held for sale, including development costs 503 503
-------- --------
Total inventories 36,720 32,886
-------- --------
Prepaid expenses 6,674 4,533
-------- --------
Total current assets 90,124 81,726
Property, plant and equipment - net of accumulated
depreciation and depletion of $83,607 in 1998
and $73,999 in 1997 160,960 158,611
Long-term investments 37,872 46,367
Other assets 8,902 4,347
-------- --------
Total $297,858 $291,051
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
Puerto Rican Cement Company, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
--------- --------
(In thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Notes payable $ 5,018 $ 669
Current portion of long-term debt 1,005 1,110
Accounts payable 7,514 7,879
Accrued liabilities 7,718 7,075
Income taxes payable 3,298 2,191
-------- --------
Total current liabilities 24,553 18,924
-------- --------
Long-term liabilities
Long-term debt, less current portion 75,377 76,180
Deferred income taxes 34,324 35,860
Other long-term liabilities, including
postretirement benefits 3,061 3,023
-------- --------
Total long-term liabilities 112,762 115,063
-------- --------
Total liabilities 137,315 133,987
-------- --------
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; issued 6,000,000 shares, outstanding
5,379,074 shares as of September 30, 1998 and 5,452,074 shares as
of December 31, 1997 6,000 6,000
Additional paid-in capital 14,703 14,703
Accumulated other comprehensive income 268 568
Retained earnings 156,187 148,878
-------- --------
177,158 170,149
Less: Shares of common stock in treasury, at cost
(620,926 shares as of September 30, 1998 and
547,926 shares as of December 31, 1997) 16,615 13,085
-------- --------
Stockholders' equity - net 160,543 157,064
-------- --------
Total $297,858 $291,051
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
Puerto Rican Cement Company, Inc.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 36,525 $ 39,131 $ 112,318 $ 119,723
Revenue from real estate operations 25 25 75 74
----------- ----------- ----------- -----------
36,550 39,156 112,393 119,797
Cost of sales 26,455 27,225 81,357 83,442
----------- ----------- ----------- -----------
Gross margin 10,095 11,931 31,036 36,355
Selling, general and administrative expenses 5,925 5,463 17,719 15,490
----------- ----------- ----------- -----------
Income from operations 4,170 6,468 13,317 20,865
----------- ----------- ----------- -----------
Other charges (credits):
Interest and financial charges 1,489 1,535 3,857 4,242
Interest income (842) (968) (2,502) (2,628)
Other expense (income) 220 (42) (226) 72
----------- ----------- ----------- -----------
Total other charges (credits) 867 525 1,129 1,686
----------- ----------- ----------- -----------
Income before income tax 3,303 5,943 12,188 19,179
Provision for income tax 884 1,771 2,834 5,917
----------- ----------- ----------- -----------
Net income $ 2,419 $ 4,172 $ 9,354 $ 13,262
=========== =========== =========== ===========
Income per share:
Net income $ 0.45 $ 0.76 $ 1.73 $ 2.40
=========== =========== =========== ===========
Average Common Shares Outstanding 5,379,074 5,518,741 5,396,963 5,518,741
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
Puerto Rican Cement Company, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
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<S> <C> <C>
(In Thousands)
Net income $ 9,354 $ 13,262
------- --------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gain (loss)
arising during the period 314 918
Less: reclassification adjustment for
(gain) loss included in net income (903) -
------- --------
Other comprehensive income before tax (589) 918
Income tax expense related to items of other
comprehensive income 146 (228)
------- --------
Other comprehensive income, net of tax (443) 690
Cumulative effect of change in accounting principle,
net of tax of $48 143
------- --------
Comprehensive income $ 9,054 $ 13,952
======= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
Puerto Rican Cement Company, Inc.
Consolidated Statement of Cash Flows - Unaudited
<TABLE>
<CAPTION>
For the nine months ended September
30, 1998 30, 1997
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,354 $ 13,262
-------- --------
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation and depletion 9,944 9,108
Accretion of discount on investments (2,009) (2,014)
Provision for deferred income taxes (1,769) 2,752
Postretirement benefits cost 42 56
Gain on sale of investments available-for-sale (891) (50)
Loss (gain) on sale or disposition of fixed assets 10 (39)
Changes in assets and liabilities:
Increase in notes and accounts receivable (3,995) (2,373)
Increase in inventories (3,834) (186)
Increase in prepaid expenses (2,141) (1,033)
Increase in other long-term assets (1,000) (314)
Increase (decrease) in accounts payable 659 (348)
Increase in accrued liabilities 639 2,943
Increase in income taxes payable 1,435 122
-------- --------
Total adjustments (2,910) 8,624
-------- --------
Cash provided by operations 6,444 21,886
-------- --------
Cash flows from investing activities:
Capital expenditures (12,776) (20,281)
Increase in notes receivable (3,026) -
Redemption of investments held-to-maturity 3,373 500
Proceeds from sale of investments available-for-sale 6,690 1,103
Purchase of investments available-for-sale - (1,130)
Proceeds from sale of fixed assets 514 155
-------- --------
Cash provided by (used in) investing activities (5,225) (19,653)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (3,530) (2,645)
Repayment of long-term debt (907) (68,271)
Dividends paid (3,069) (3,150)
Proceeds from loans - 70,000
Increase in notes payable 4,349 800
-------- --------
Cash used in financing activities (3,157) (3,266)
-------- --------
Decrease in cash and cash equivalents ($ 1,938) ($ 1,033)
======== ========
Cash and cash equivalents - beginning of year $ 2,996 $ 14,809
Cash and cash equivalents - end of period 1,058 13,776
-------- --------
Decrease in cash and cash equivalents ($ 1,938) ($ 1,033)
======== ========
See notes to consolidated financial statements
</TABLE>
5
<PAGE> 8
Puerto Rican Cement Company, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Preferred stock:
Balance at beginning and end of period $ - $ -
--------- ---------
Common stock:
Balance at beginning and end of period 6,000 6,000
--------- ---------
Additional paid-in-capital:
Balance at beginning and end of period 14,703 14,703
--------- ---------
Accumulated other comprehensive income:
Balance at beginning of period 568 110
Other comprehensive income (300) 690
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Balance at end of period 268 800
--------- ---------
Retained earnings:
Balance at beginning of period 148,878 137,047
Net income 9,354 13,262
Cash dividends declared (2,045) (3,136)
--------- ---------
Balance at end of period 156,187 147,173
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Shares of common stock in treasury - at cost:
Balance at beginning of period (13,085) (10,440)
Treasury stock acquired (3,530) (2,645)
--------- ---------
Balance at end of period (16,615) (13,085)
--------- ---------
Total stockholders' equity $ 160,543 $ 155,591
========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 9
PUERTO RICAN CEMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Puerto Rican Cement Company, Inc. (the "Company" or
"Registrant"), the accompanying unaudited financial statements contain all
adjustments necessary to present fairly its financial position as of September
30, 1998 and December 31, 1997; the results of operations for the three-month
and nine-month periods ended September 30, 1998 and 1997; and the comprehensive
income, cash flows, and changes in stockholders' equity for the nine-month
periods ended September 30, 1998 and 1997. The results of operations are not
necessarily indicative of the results to be expected for the full year.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and displaying of comprehensive income
and its components in general-purpose financial statements. Comprehensive income
is intended to show all changes in the equity of a business enterprise during a
period from transactions and other events or circumstances, except those
resulting from investments by or distributions to owners. Certain
reclassifications have been made to the Company's 1997 financial statements to
conform these statements to the 1998 presentation.
Effective July 1, 1998, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the "Statement"). The Statement
was issued in June 1998, and requires that an entity recognize all derivatives
as either assets or liabilities in the Company's statement of financial position
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as hedge. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. Further, the
Statement permits, at the time of its implementation, the reclassification of
securities currently classified as held-to-maturity, without calling into
question the Company's original intent.
The Company is not currently engaged in any activities with derivatives.
Therefore, Management believes that the impact of the adoption of this Statement
is not significant. However, at the time of implementation of this Statement,
the Company reclassified to available-for-sale investments that were previously
classified as held-to-maturity. These investments are composed of U.S.
Government and Agency securities with maturities ranging from November 15, 2000
to November 15, 2001, and at the time of implementation had a book value of
$7,842,000 and a market value of $8,033,000. As of September 30, 1998, these
securities had a carrying value of $7,944,000 and a fair market value of
$8,302,000.
7
<PAGE> 10
PUERTO RICAN CEMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Investments, including short-term, available-for-sale, and long-term
investments, decreased by $7.5 million to $51.4 million as of September 30, 1998
from $58.9 million as of December 31, 1997. This decrease resulted mainly from
the redemption of $3.4 million in short-term investments and the sale of $5.8
million in available-for-sale investments, net of $2.0 million of accretion in
value of the Company's investment in zero-coupon notes. The proceeds from the
redemption and sale of investments were used to finance capital expenditures,
principally modifications made to the Company's kiln, up to what was allowed by
available permits, during the first quarter of 1998 as part of a plant expansion
project.
Notes and accounts receivable increased by $3.4 million to $32.2 million as of
September 30, 1998 from $28.8 million as of December 31, 1997. The increase
resulted mainly from a higher receivable trade balance in our ready-mixed
concrete subsidiary due to an interruption in the collections caused by
Hurricane Georges during the last ten days of September.
Consolidated inventories increased by $3.8 million to $36.7 million as of
September 30, 1998 from $32.9 million as of December 31, 1997. The increase
resulted mainly from the build up of work in process inventory, specifically
clinker, established to prevent a supply shortage during the planned production
interruption period related to the plant upgrade project. This increase was
partially offset by a decrease in operating supplies, mainly coal.
Property, plant and equipment increased by $2.4 million to $161.0 million as of
September 30, 1998 from $158.6 million as of December 31, 1997. This increase
resulted mainly from capital expenditures of $12.8 million net of depreciation
and amortization of $9.9 million.
Prepaid expenses increased by $2.2 million to $6.7 million as of September 30,
1998 from $4.5 million as of December 31, 1997. This increase resulted from the
timing in the payments of property tax, business volume tax, and insurance
premiums, which are prepaid and amortized over the covered period.
Other assets increased by $4.6 million to $8.9 million as of September 30, 1998
from $4.3 million as of December 31, 1997. This increase was principally due to
long-term notes received by our recently created subsidiary Ponce Capital
Corporation as part of financing agreements with certain customers. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for information on this subsidiary).
Total current liabilities increased by $5.7 million to $24.6 million as of
September 30, 1998 from $18.9 million as of December 31, 1997. The increase was
mainly due to an increase in short-term borrowings and income taxes payable.
Short-term borrowings amounting to $2,850,000 were used by Ponce Capital
Corporation to fund its operations. Current income taxes payable increased
mainly due to the reversal of temporary differences in our deferred tax items,
as explained below.
8
<PAGE> 11
PUERTO RICAN CEMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Deferred income taxes decreased by $1.7 million to $34.2 million as of September
30, 1998 from $35.9 million as of December 31, 1997. The decrease resulted
mainly from the recapture during 1998 of flexible depreciation taken during
prior years for income tax purposes.
At its October 28, 1998 meeting, the Board of Directors of the Registrant
declared a 19 cents per share dividend on its common stock, payable on November
23, 1998 to stockholders of record on November 9, 1998. As of September 30,
1998, the Registrant had 5,379,074 shares of common stock issued and
outstanding.
As of September 30, 1998, $53.2 million, or 17.9%, of the Company's total
consolidated assets, were attributable to its ready-mixed concrete subsidiary,
Ready Mix Concrete, Inc. ("RMC").
9
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Working capital as of September 30, 1998, increased by $2.8 million to $65.6
million from $62.8 million as of December 31, 1997. This increase was the result
of a reclassification of $8.3 million in long-term investments to
available-for-sale as discussed in the Notes to the Financial Statements, net of
an increase in current liabilities resulting from higher short-term borrowings
and income taxes payable. Short-term borrowing were used to finance
the operations of Ponce Capital Corporation. The current ratio decreased to 3.67
to 1 as of September 30, 1998, from 4.32 to 1 as of December 31, 1997, even
though there was an increase in working capital. This was the result of the
increase in short-term borrowings discussed above.
Capital expenditures incurred during the nine-month period ended September 30,
1998, totaled $12.8 million. Depreciation and depletion expense for the same
period totaled $9.9 million.
As of September 30, 1998, the approximate aggregate maturities of long-term debt
for the remainder of 1998 and thereafter were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 200
1999 1,005
2000 1,005
2001 2,172
2002 and thereafter 72,000
-------
Total $76,382
=======
</TABLE>
Loan agreements with term lenders impose certain restrictions on the Company
concerning working capital, indebtedness, dividends, investments and certain
advances, among other restrictions. As of September 30, 1998, the Company was in
compliance with the provisions of the loan agreements.
Short-term borrowings (in thousands) as of September 30, 1998 were composed of
the following:
<TABLE>
<S> <C>
Non-interest bearing, short-term financing agreement dated May 1,
1998, for the purchase of income tax credits,
payable in full on October 30, 1998. $1,210
Reverse repurchase agreement, bearing interest at 5.85%,
due on November 18, 1998. 2,850
Short-term financing agreement dated August 1, 1998, bearing
interest at 6.7%, for the payment of insurance premiums, due in
monthly installments of $127, including
interest, through April 1999. 958
------
$5,018
======
</TABLE>
10
<PAGE> 13
The Company has available credit facilities in the aggregate amount of
$20,600,000 with commercial banks for short-term financing and discount of trade
paper from customers. As of September 30, 1998, no amount was outstanding under
these facilities. The maximum aggregate short-term borrowing outstanding at any
month-end during the nine-month period ended September 30, 1998 was $3,335,000
bearing interest at rates ranging from 6.06% to 6.28%. These short-term
facilities are renewable annually at the discretion of the banks, which at this
time do not require any commitment fees.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
The Company realized third quarter net income of $2,419,000, or $0.45 per share,
compared with $4,172,000, or $0.76 per share, for the same period last year,
representing a decrease of $0.31 per share.
Consolidated net sales for the third quarter of 1998 decreased by 6.6% to $36.6
million compared with $39.2 million in the same period of 1997. This decrease
resulted mainly from a 10.3% reduction in cement sales, which totaled 251,000
tons in the third quarter of 1998 from 279,000 tons in the same period of 1997,
coupled with a slight decrease in the average selling price per unit. The volume
decrease was principally due to bad weather during the third quarter of 1998.
Hurricane Georges passed over the island on September 21, 1998, causing severe
damage to Puerto Rico's infrastructure. Although the Company's facilities
sustained comparatively light damage, the construction industry's operations
were severely affected during the last ten days of the quarter. The decrease in
average selling price was due to an increase in the proportion of bulk cement
sales relative to bagged cement sales. The price of bulk cement is lower than
the price of bagged cement.
Consolidated cost of sales for the third quarter of 1998 decreased by $770,000,
or 2.9%, to $26.5 million from $27.2 million for the comparable period of 1997.
This decrease was mostly attributable to lower volume of sales in our cement
operations as mentioned above. The decrease in cost of sales was not
proportionate to the reduction in sales because of an increase in the cement's
cost of production. This increase resulted mainly from interruptions in our
production due to the passage of Hurricane Georges as explained above.
Gross margins decreased to 27.6% during the third quarter of 1998 compared with
gross margins of 30.5% during the same period of 1997. Profit margins were
affected by the higher costs described in the preceding paragraph.
Selling, general and administrative expenses for the third quarter of 1998
increased by $460,000, or 8.5%, to $5.9 million from $5.5 million for the
comparable period of 1997. This increase was principally attributable to higher
professional fees for legal services associated mainly with ongoing legal
proceedings against local Government agencies in the federal and local courts.
These expenses are expected to continue to impact operations throughout the
remainder of the year.
The provision for income taxes as a proportion of income for the third quarter
of 1998 decreased to 26.8% from 29.8% for the same period of 1997. This decrease
resulted from a proportionately higher tax-free income for the period.
11
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
Consolidated net sales for the nine-month period ended September 30, 1998
decreased by $7.4 million to $112.3 million compared with $119.7 million for the
same period of 1997. Cement sales during the nine-month period ended September
30, 1998 decreased by 59,000 tons to 778,000 tons. Ready-mixed concrete sales
for the nine-month period ended September 30, 1998 decreased by 3.5% to $59.9
million from $62.0 million for the same period of 1997. The decrease in the
volume of cement and ready-mixed concrete sales was mostly the result of
unusually bad weather during the second and third quarters of 1998. Lime sales
for the nine-month period ended September 30, 1998 increased by 19% as compared
with sales during the same period of 1997 due to higher export sales during this
period, slightly offset by a slowdown in the local markets. Sales in the
Company's paper and bag division for the nine-month period ended September 30,
1998 remained constant when compared with sales during the same period of 1997.
Gross margins over the nine-month period ended September 30, 1998 were reported
at 27.6% compared with 30.3% in the same period of 1997. The decrease in gross
margins resulted from higher costs attributable to production interruptions
during the period. As explained above, Hurricane Georges disrupted the Company's
production during the latter part of the third quarter. In addition, the Company
interrupted its clinker production for 33 days during the months of January and
February to perform the work allowed by current permits on its kiln as part of a
plant upgrade project. The Company purchased higher-cost clinker to continue the
production of cement during the interruption period.
Consolidated selling, general and administrative expenses during the nine-month
period ended September 30, 1998 increased 14.4%, to $17.7 million from $15.5
million over the comparable period of 1997. This increase was principally
attributable to higher professional fees for legal services associated mainly
with ongoing legal proceedings against local Government agencies in the federal
and local courts. These expenses are expected to continue to impact operations
throughout the remainder of the year.
Interest and financial charges during the nine-month period ended September 30,
1998 decreased by $385,000 to $3.9 million compared with $4.2 million for the
same period of 1997. This decrease resulted mainly from interest charges
capitalized as part of the plant upgrade project, partially offset by additional
interest charges on the $20 million Series B Senior Secured Notes issued in July
1997.
During the nine-month period ended September 30, 1998 the Company reported other
income of $226,000. During the same period of 1997, there were other expenses of
$72,000. The main reason for this change was the realization of $900,000 on the
sale of investments available-for-sale, net of the write-off of obsolete spare
parts inventory during 1998.
12
<PAGE> 15
Year 2000 Status
STATE OF READINESS - The Company has taken various actions to address the Year
2000 problem. The Year 2000 problem is the result of certain computer programs
being unable to distinguish between the years 1900 and 2000, and therefore
possibly being unable to function or functioning improperly. The Company has
formed a committee to identify existing or potential instances of Year 2000
problems and to propose and implement actions to solve such problems. As a
result of actions being taken to address the Year 2000 problem, the Company and
its subsidiaries expect to be substantially Year 2000 compliant by or before
March 31, 1999.
The Company is in the process of migrating its computerized applications to a
new processing architecture commonly known as an Enterprise Resource Planning
System. The company providing the application software for this migration is JD
Edwards. The Company has been advised that the system will be Year 2000
compliant. Applications that will be migrated include general ledger, accounts
payable, procurement, inventory management, and payroll. Migration to the new
system will be done utilizing a phased approach with full conversion completed
by December 1999. Since payroll will be the last application to be converted,
program changes are being made to make the current system Year 2000 compliant in
the event there is project slippage which will cause us to miss our December
1999 goal of full conversion to the new system. The changes that need to be made
to the payroll system are simple in nature and are being done by internal
personnel. We estimate that changes to the present payroll system will require
approximately 200 person hours with a completion date of March 31, 1999. The
mainframe computer that supports the current applications, as well as the
computer that was recently acquired to support the new applications, are
believed to be Year 2000 compliant.
A recent study made of all personal computers indicated that a small number (15)
of computers are not Year 2000 compliant. These are older systems that cannot be
upgraded and will be replaced during calendar year 1999.
In the area of manufacturing, the software that supports the x-ray process used
in the cement plant needs to be upgraded to make it Year 2000 compliant. The
vendor that supports the software has been contacted and the upgrading is
scheduled to be done during January 1999.
The Company does not depend heavily on third parties. A study of our suppliers
indicated that Year 2000 compliance does not appear to be a substantial problem.
The local banks we deal with have reported that they expect to be Year 2000
compliant during the first half of 1999. The Company's customers may also have
Year 2000 problems. While the Company does not expect that any such problem
would directly prevent or limit such customers' ability to purchase the
Company's products, if such customers were unable to operate or encountered
substantial problems in their ability to operate, sales by the Company could be
affected.
YEAR 2000 COST ISSUES - The estimated cost to bring the Company into Year 2000
compliance is expected to be less than $100,000. This amount includes the
changes made to the payroll system, replacement of older personal computers, and
upgrade of software to the x-ray application.
13
<PAGE> 16
YEAR 2000 RISK FACTORS - Year 2000 risk factors facing the Company are minimal.
We base this on our belief that the changes that need to be made are minimal,
simple in nature and easily corrected
YEAR 2000 CONTINGENCY PLANS - The Company's contingency plan is focused on the
migration of its applications to an Integrated Enterprise Resource Planning
system. Changes are being made to the present payroll system to make it Year
2000 compliant and will be used in the event of project slippage that could
delay the use of the new system as planned.
New Subsidiary - Ponce Capital Corporation
On March 19, 1998, the Company incorporated a new subsidiary, Ponce Capital
Corporation ("PCC"), under the laws of the Commonwealth of Puerto Rico. PCC was
established for the purpose of providing financing for the purchase of
equipment, primarily to existing or prospective customers in the construction
and related industries. PCC began operations during September after obtaining
its license from the Puerto Rico Commissioner of Financial Institutions.
Forward-Looking Statements
Certain statements contained in this document, including in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results or performance of the Company and its
businesses to be materially different from that expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; political and social conditions;
government regulations and compliance therewith; demographic changes; sales mix;
pricing levels; changes in sales to, or the identity of, significant customers;
changes in technology, including the technology of cement production; capacity
constraints; availability of raw materials and adequate labor; availability of
liquidity sufficient to meet the Company's needs; the ability to adapt to
changes resulting from acquisitions; and various other factors referenced in
this Management's and Discussion Analysis. The Company could be particularly
affected by weather in Puerto Rico, changes in the Puerto Rico economy, and
changes in the Government of Puerto Rico or the manner in which it regulates the
Company.
The Company assumes no obligation to update forward-looking statements to
reflect actual results or changes in or additions to the factors affecting such
forward-looking statements.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
As reported in the Company's 1997 Annual Report, the Company and RMC are
involved in several legal proceedings. Recent developments with respect to these
proceedings are described below.
On October 22, 1998, Essroc San Juan, Inc. (formerly known as San Juan Cement
Co., Inc.), as plaintiff, and the Company and RMC, as defendants, agreed to
dismiss with prejudice a civil suit brought by San Juan Cement Co., Inc. seeking
relief pursuant to the Federal Clayton Act. In a joint stipulation filed by all
parties and approved by the United States District Court for Puerto Rico, all
proceedings have been terminated in this legal action relating to the
acquisition by the Company of two ready-mixed concrete companies, RMC and
Concreto Mixto, Inc. ("CMI") in 1995. CMI was merged into RMC effective January
1, 1997.
On June 27, 1997, the Company filed a lawsuit against the Puerto Rico Department
of Consumer Affairs (the "Department") in response to the Department's
investigation of the Company's labeling of bags of cement during 1995 through
1997. The Department had asserted that the Registrant's bags should have been
labeled with a disclosure that the cement could not be used in public works.
Management believes that the Department's basis for this request was the fact
that the cement was manufactured utilizing some imported clinker. The lawsuit
was based on the Company's belief that the Department did not have legal
jurisdiction with respect to this matter or, even if it did have jurisdiction,
that the Registrant had not violated any Department rule. On August 18, 1997, it
was determined that the Department had the authority to conduct the
investigations. Administrative hearings were held on January 8, 14 and 29, and
March 13, 1998 by an independent administrative judge appointed by the
Department. On March 16, 1998, the administrative judge issued a decision in the
case, holding that the Company did not violate any Department rule. On April 16,
1998, the Department appealed the decision of the administrative judge. On June
29, 1998, the Court of Appeals upheld the administrative judge's decision and
ordered the dismissal of the case. On August 4, 1998, the Department appealed
this decision to the Puerto Rico Supreme Court.
On July 8, 1997, The Puerto Rico Planning Board (the "Planning Board") issued a
temporary cease and desist order against the Company's planned housing project
at Vega Alta, asserting that the Company did 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 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
Planning Board upheld their cease and desist order upon termination of those
hearings.
15
<PAGE> 18
On August 22, 1997, the Company filed an appeal before the Court of Appeals
seeking to overturn the action of the Planning Board, but the Court ruled that
the Planning Board's action was a temporary suspension not currently subject to
court review. On September 25, 1997, the Company requested a cerciorari from the
Puerto Rico Supreme Court regarding this matter. On June 30, 1998, the Supreme
Court announced the Court was evenly divided. As a result, the decision of the
Court of Appeals that the Company's appeal of the Planning Board's actions was
not currently subject to court review was affirmed. On July 17, 1998 the Company
requested a motion for rehearing by the Supreme Court. On October 22, 1998, the
Supreme Court denied this motion.
On February 25, 1998, the Planning Board issued a final cease and desist order
against the project. As a separate action, on March 27, 1998, the Company
appealed this decision before the Puerto Rico Court of Appeals.
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 Puerto Rico tax authority has commenced an initiative to audit all companies
with revenues in excess of $10 million. As part of that initiative, the
Company's 1995 income tax return is currently under audit. The tax authorities
are discussing with management the tax treatment of certain transactions, but
have not issued a deficiency notice.
Management believes, based on the advise of its tax consultants, that the
Company's tax positions are supportable and is vigorously defending its
positions.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
27. Financial Data Schedule (for SEC use only).
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
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
By: /s/ Angel Amaral
-------------------------------------
Angel Amaral
Vice President and Controller
By: /s/ Jose O. Torres
-------------------------------------
Jose O. Torres
Vice President of Finance
and Treasurer
Date: 11/13/98
17
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