SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 1-13914
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
(Exact name of Registrant as specified in its Charter)
Delaware ###-##-####
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Carretera #2, Km 19.4
Barrio Candelaria
Toa Baja, Puerto Rico 00949
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (787) 251-2000
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./x/ Yes / / No
As of August 12, 1996, there were 21,500,000 shares of
Common Stock issued and outstanding. This amount includes
5,000,000 shares of Class A Common Stock and 16,500,000 shares of
Class B Common Stock.
This report on Form 10-Q/A is being filed to amend and
restate in its entirety the quarterly report on Form 10-Q for the
quarterly period ended June 30, 1996 which was originally filed
by the Company on October 8, 1996.
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
at June 30, 1996 and September 30, 1995 4
Condensed Consolidated Statements of Operations
(unaudited) for the Nine Months Ended June 30,
1996 and 1995 6
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months Ended June 30,
1996 and 1995 7
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended June 30,
1996 and 1995 8
Notes to Condensed Consolidated Financial
Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II OTHER INFORMATION
Item 5. Other Information 21
See accompanying notes to condensed financial statments.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars in thousands)
June 30, September 30,
1996 1995
------------ -------------
ASSETS (unaudited)
Cash and cash equivalents $ 47,781 $ 46,091
Accounts receivable:
Trade, less allowance for doubtful
accounts of $934 at June 30,
1996 and $1,458 at September 30, 1995 17,096 16,086
Due from PepsiCo, Inc. and affiliated
companies 3,328 2,913
Other 2,178 341
Inventories 3,768 4,542
Prepaid expenses and other current assets 2,882 2,516
-------- ------------
Total current assets 77,033 72,489
Investment in Buenos Aires Embotelladora
S.A. (BAESA) 19,617 74,128
Property, plant and equipment, net 51,303 36,445
Intangible assets, net 1,458 2,163
Other assets 123 441
--------- ------------
Total assets $ 149,534 $ 185,666
========= ============
See accompanying notes to condensed consolidated financial statements.
4
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, September 30,
1996 1995
------------ -------------
Liabilities: (unaudited)
Current installments of long-term debt $ 1,550 1,550
Current installments of capital lease
obligations 228 1,204
Short term borrowings 35,916 4,600
Accounts payable:
Trade 17,612 12,536
Affiliate 2,173 1,181
Income taxes payable 866 123
Deferred income taxes - 530
Other accrued expenses 9,817 6,477
-------- --------
Total current liabilities 68,162 28,201
Long-term debt, excluding current
installments 5,202 6,365
Capital lease obligations, excluding
current installments 675 848
Accrued pension cost, long-term 2,871 2,871
Deferred income taxes 5,278 18,732
Total liabilities
82,188 57,017
Shareholders' equity: -------- ---------
Class A common shares of $0.01 par value;
authorized, issued and
outstanding 5,000,000 shares 50 50
Class B common shares, $0.01 par value;
authorized 35,000,000
shares; issued and outstanding
16,500,000 shares 165 165
Additional paid-in capital 90,738 90,738
Retained earnings (deficit) (21,382) 39,472
Cumulative translation adjustment (681) (232)
Pension liability adjustment (1,544) (1,544)
-------- --------
Total shareholders' equity 67,346 128,649
Total liabilities and shareholders' -------- --------
equity $149,534 $185,666
======== ========
See accompanying notes to condensed consolidated financial statements.
5
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in thousands except per share data)
(Unaudited)
Nine Months Ended June 30,
1996 1995
------------- ------------
Net Sales $ 79,117 83,634
Cost of Sales 54,980 49,990
------------- -----------
Gross profit 24,137 33,644
Selling and marketing expenses 32,246 22,826
Administrative expenses 6,928 4,738
Restructuring charges 2,922 -
------------- -----------
Income (loss) from operations 17,959 6,080
------------- -----------
Other income (expenses):
Interest expense (876) (808)
Interest income 1,889 158
Other, net (230) 518
------------- -----------
Total other income (expenses) 783 (132)
Income (loss) before income tax ------------- ----------
expense and equity in net
earnings/(loss) of BAESA (17,176) 5,948
Income tax expense 601 134
Income (loss) before equity in net ------------- -----------
earnings/(loss) of BAESA 17,777 5,814
Equity in net earnings/(loss) of BAESA, ============= ===========
net of income tax
benefit/(expense) of $13,454 and
$(962) in 1996
and 1995 respectively 37,769 5,362
------------ -----------
Net income/(loss) $ 55,546 11,176
============ ===========
Earnings per common share:
Income before equity in net
earnings/(loss) of BAESA $ (0.83) $ 0.32
============ ===========
Net income/(loss) $ (2.58) $ 0.62
============ ===========
Weighted average number of shares
outstanding (in thousands) 21,500 18,000
============ ===========
See accompanying notes to condensed consolidated financial statements.
6
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in thousands except per share data)
(Unaudited)
Three Months Ended June 30,
1996 1995
------------- ------------
Net Sales $ 24,615 $ 30,832
Cost of Sales 19,915 19,103
------------ ----------
Gross profit 4,700 11,729
Selling and marketing expenses 11,620 8,121
Administrative expenses 3,605 1,784
Restructuring charges 2,922 -
------------ ----------
Income (loss) from operations 13,447 1,824
------------ ----------
Other income (expenses):
Interest expense (511) (77)
Interest income 524 81
Other, net (450) 58
------------ ----------
Total other income (expenses) 437 62
Income (loss) before income tax ------------ ----------
expense and equity in net
earnings/(loss) of BAESA (13,884) 1,886
Income tax benefit 90 503
------------ ----------
Income (loss) before equity in net
earnings/(loss) of BAESA (13,794) 2,389
Equity in net earnings/(loss) of BAESA,
net of income tax benefit/(expense)
of $10,691 and $(54) in 1996
and 1995 respectively (32,132) 26
------------- ----------
Net income/(loss) $ 45,926 $ 2,415
============= ==========
Earnings per common share:
Income before equity in net
earnings/(loss) of BAESA $ (0.64) $ 0.13
============= ==========
Net income/(loss) $ (2.14) $ 0.13
============= ==========
Weighted average number of shares
outstanding (in thousands) 21,500 18,000
============= ==========
See accompanying notes to condensed consolidated financial statements.
7
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1996 and 1995
(U.S. Dollars in thousands)
(Unaudited)
1996 1995
Cash flows from operating activities: ----------- ----------
Net income/(loss) $(55,546) $11,176
Adjustments to reconcile net
earnings/(loss) to net cash provided by
(used in) operating activities:
(Gain)/Loss on disposal of property,
plant, and equipment 510 (455)
Intangible write-off 647
Depreciation and amortization 3,951 3,378
Equity in net (earnings)/loss of BAESA 37,769 (5,362)
Changes in assets and liabilities:
Accounts receivable (3,262) (3,897)
Inventories 774 1,218
Prepaid expenses and other current assets (366) (1,668)
Accounts payable 6,068 1,258
Other liabilities and accrued expenses 2,810 4,519
Income taxes payable 743 466
Other, net 308 (694)
------ -----
Net cash provided by (used in) operating activities (5,594) 9,939
Cash flows from investing activities:
Proceeds from the sale of property,
plant and equipment 1,280 483
Purchases of property, plant and equipment (20,531) (4,497)
Dividends received from affiliates 2,839 2,839
------ -----
Net cash (used in) investing activities (16,412) (1,175)
Cash flows from financing activities:
Proceeds from short term borrowings 48,316 17,600
Repayment of short-term borrowings (17,000) (17,250)
Repayment of long-term debt (1,163) (1,162)
Repayment of capital lease obligations (1,149) (1,961)
Dividends paid (5,308) (4,826)
----- -----
Net cash provided by (used in) financing activities 23,696 (7,599)
Net increase in cash and cash equivalents 1,690 1,165
Cash and cash equivalents at beginning of period 46,091 1,347
------ ------
Cash and cash equivalents at the end of period $47,781 $2,512
======= ======
Supplemental disclosures:
Cash paid for:
Interest $1,769 $1,066
Income taxes 186 211
See accompanying notes to condensed consolidated financial statements.
8
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars in thousands except share and per share data)
(Unaudited)
(1) Accounting Principles and Basis of Presentation
The accompanying condensed consolidated financial statements,
footnotes, and discussions should be read in conjunction with the
consolidated financial statements, related footnotes, and
discussions contained in the Company's annual report on form 10-K
for the fiscal year ended September 30, 1995. In the opinion of
the Company's management, the unaudited consolidated interim
financial statements reflect all adjustments necessary for a fair
presentation, including recognition of certain charges, including
marketing and other expenses and the write-off of pre-paid tax
and intangible items carried over from prior periods. Operating
results for the nine months and three months ended June 30, 1996
are not necessarily indicative of the results that may be
expected for the fiscal year ended September 30, 1996.
(2) Inventories
Inventories consist of the following:
June 30, September 30,
1996 1995
------------ ---------------
Raw materials $1,365 $ 1,247
Finished goods 1,823 2,048
Other 580 1,247
------- --------
$3,768 $ 4,542
======= ========
(3) Property, Plant and Equipment, Net
Property, plant and equipment consists of the following:
June 30, September 30,
1996 1995
------------ --------------
Land and improvements $8,061 $ 1,159
Buildings and improvements 16,060 5,592
Machinery, equipment and vehicles 45,033 36,173
Bottles, cases and shells 1,479 1,585
Furniture and fixtures 1,941 1,833
Construction in process 167 12,224
------- -------
72,741 58,566
Less accumulated depreciation and
amortization (21,438) (22,121)
-------- -------
Property, plant and equipment, net $51,303 $ 36,445
======== ========
9
The Company capitalizes interest cost as a component of the
cost of certain building and improvements, and machinery. The
following is a summary of interest cost incurred:
June 30,
1996 1995
---------- -----------
Interest cost capitalized $ 893 $ 258
Interest cost charged to income 876 808
---------- -----------
$1,769 $ 1,066
========== ===========
(4) Accounting for Long Lived Assets
During the period ended June 30, 1996 the Company adopted the
provisions of FASB 121 - Accounting for Long Lived Assets. The
application of this accounting pronouncement resulted in the
write down of long lived assets and a non-cash charge in the
amount of $1,400. The Company deems an asset to be impaired if a
forecast of undiscounted future cash flows directly related to
the asset, including disposal value, if any, is less than its
carrying amount. Of the total impairment loss, $0.6 million
represents impairment of manufacturing equipment and furniture,
and $0.8 million represents impairment to manufacturing plant.
Factors leading to the impairment were the Company's decision, in
mid-1996, to consolidate all of its manufacturing activities in
its new manufacturing facility, and anticipated losses from the
disposition of the former manufacturing facility, and remaining
unused equipment. The amount of the impairment was calculated
using a recent appraisal of the estimated value of such property
less estimated costs of disposition. The aforementioned non-cash
charge of $1,400 has been included as part of the restructuring
charges reported by the Company. See Note 8.
10
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) Shareholders' Equity
The Company declared and paid cash dividends of $5,308 during
the nine months ended June 30, 1996 and $4,826 during the nine
months ended June 30, 1995.
In connection with the Company's September 19, 1995 public
offering (the "Offering") of 7,000,000 Class B common shares, the
Company changed its capital structure to 5,000,000 authorized shares
of $0.01 par value Class A common shares and 35,000,000 authorized
shares of $0.01 par value Class B common shares.
On August 14, 1995, the Company's Board of Directors declared a
24,000 to 1 stock split effective concurrently with the effective
date of the Offering. The par value of each share is $0.01. A
total of $179 was reclassified from the Company's additional paid-in
capital account to the Company's Class A and B common share
accounts. All share and per share amounts have been restated to
retroactively reflect the stock split.
Earnings per common share are determined by dividing net income
by the weighted average number of common shares outstanding during
each year.
(6) Income Tax
Income tax expense for the nine months ended June 30, 1996 and
1995 consisted of the following:
June 30,
1996 1995
----------- ----------
Current $ 601 $134
Deferred - -
----------- ----------
Income tax expense $ 601 $134
=========== ==========
Deferred income tax benefit / (expense) of $13,454 and $(962)
for the nine month period ended June 30, 1996 and 1995,
respectively, have been provided in connection with the Company's
equity in net earnings / (loss) of BAESA.
(7) Related Party Transactions
The Company paid approximately $1,682 and $1,917 during the nine
months ended June 30, 1996 and 1995, respectively, for advertising
fees to a firm controlled by a shareholder of the Company.
The Company paid approximately $232 and $414 during the nine
months ended June 30, 1996 and 1995, respectively, for consulting
fees to a shareholder and director of BAESA.
The Company paid approximately $151 during the nine months ended
June 30, 1996 for construction management services to a shareholder
and director of the Company.
11
(8) Restructuring Charges
The Company's results of operations for the nine months ended
June 30, 1996 have been affected by the incurrance of several non-
recurring restructuring charges totalling $2.9 million. These
charges were comprised of the following: (1) a $1.4 million fixed
asset write-down related to the closing of all bottling operations
in the old plant, which is now for sale and (2) $1.4 million in
pension asset write-offs and costs associated with employee
termination. The amount of $1.4 million in pension asset write-off
and costs associated with employee termination referred to above,
includes $0.6 million of a pension plan intangible asset judged to
be of no value to the Company, and $0.8 million of benefits relating
to two executives of the Company who had either resigned or where
the decision had been taken, pending Board approval, to discontinue
their employment with the Company.
12
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Investment in BAESA
The following condensed unaudited financial information relating
to BAESA as of June 30, 1996 and 1995, and for the nine months then
ended and audited balance sheet financial information as of
September 30, 1995 is as follows (in thousands of U.S. dollars) has
been provided to the Company by BAESA. Its inclusion in this report
is for information purposes only and the Company makes no
representation as to the accuracy or completeness of such
information. At the present time, the Company does not control, or
have significant influence over, the management or operations of
BAESA. The Company accounts and will continue to account for its
investment in BAESA using the equity method of accounting. For
further information regarding BAESA, investors should consult
information made publicly available by BAESA to its shareholders.
June 30, September 30,
1996 1995
(unaudited) (audited)
ASSETS --------------- --------------
Cash and cash equivalents $45,241 $ 57,617
Accounts receivable, net 63,580 105,478
Inventories 36,644 56,349
Other current assets 19,466 25,933
----------- ---------
Total current assets 164,931 245,377
Property, plant and equipment, net 663,370 655,414
Intangible assets, net 87,354 88,017
Investment in joint venture 107,316 107,385
Deferred income tax, net - 10,530
Other assets 12,296 21,201
---------- ----------
Total assets $1,035,267 $1,127,924
=========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current installments of long-term debt $287,371 $ 48,457
Bank loans and overdrafts 359,927 182,672
Accounts payable, income taxes
payable, and accrued expenses 151,303 114,950
--------- ----------
Total current liabilities 789,601 346,079
Long-term debt, excluding current
installments 98,247 323,737
Deferred income taxes 7,568 7,625
Other long-term liabilities 11,176 10,715
--------- ----------
Total liabilities 915,592 688,156
Total shareholders' equity 119,675 439,768
Total liabilities and --------- ----------
shareholders' equity $1,035,267 $1,127,924
========== ==========
13
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Nine Months Ended Three Months End
June 30, June 30,
----------------------- ----------------------
RESULTS OF OPERATIONS 1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $545,564 $506,238 $118,093 $139,653
Cost and expenses:
Cost of sales (341,524) (261,739 (105,386 (77,462)
Selling and marketing (262,178) (117,776) (119,361) (37,736)
Administrative expenses (146,569) (71,984) (87,298 (25,112)
Restructuring charges (21,071) - (9,531) -
---------- -------- --------- --------
(771,342) (451,499) (321,576) (140,310)
---------- -------- --------- --------
Income / (loss) from
operations (225,778) 54,739 (203,483) (657)
Other expenses, net (65,095) (15,382) (24,587) (6,360)
---------- --------- --------- ---------
Income / (loss) before
income tax (expense) /
benefit and equity in
earnings of affiliated
company (290,873) 39,357 (228,070) (7,017)
Income tax (expense) /
benefit (14,560) (3,741) (23,554) (6,406)
----------- -------- ---------- ---------
Income / (loss) before
equity in earnings of
affiliated company (305,433) 35,616 (251,624) (611)
Equity in earnings of
affiliated company 4,653 3,783 223 809
----------- -------- ----------- ---------
Net income / (loss) $(300,780) $39,399 $(251,401 $ 198
=========== ========= =========== =========
14
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General Overview
The following discussion of the financial condition and results
of operations of the Company should be read in conjunction with this
overview and the Condensed Consolidated Financial Statements of the
Company and the Notes thereto, as of and for the nine month periods
ended June 30, 1995 and 1996 (the"1995 nine month interim period"
and the "1996 nine month interim period," respectively) and as of
and for the three month interim periods ended June 30, 1995 and 1996
(the "1995 three month interim period" and the "1996 three month
interim period," respectively).
Presentation of Financial Information
In addition to conducting its own bottling operations, the
Company indirectly owns 12,345,347 shares, or approximately 17% of
the outstanding capital stock, and, through June 30, 1996, exercised
significant influence over the management of BAESA, subject to the
right of PepsiCo, Inc. ("PepsiCo") and certain of its affiliates
(collectively, "Pepsi Cola International" or "PCI") to approve
certain management decisions. As of July 1, 1996, PepsiCo assumed
operating control of BAESA. See Item 5 "Other Information." The
financial information relating to the Company set forth below
reflects the operations of the Company and its equity interest in
the net earnings of BAESA.
Seasonality
The historical results of operations of the Company have not
been significantly seasonal. The Company believes that this is
partly attributable to existing capacity constraints in recent years
which prevented the Company from meeting increased demand during
peak periods. However, the Company anticipates that its results of
operations in the future may be increasingly seasonal in the summer
and holiday seasons.
15
The Company
General
The following table sets forth certain financial information as
a percentage of net sales for the Company for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Nine Months Three Months Interim
Interim
---------------------- -------------- -------------------
1993 1994 1995 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 59.8 58.2 59.4 59.8 69.5 61.9 80.9
Gross Profit 40.2 41.8 40.6 40.2 30.5 38.1 19.1
Selling and Marketing 28.0 29.3 26.6 27.3 40.8 26.3 47.2
Administrative Expenses 11.4 10.1 5.5 5.7 8.8 5.8 14.6
Intangibles and Fixed
Asset Write-offs - 2.8 - - - - -
Restructuring Charges - - - - 3.7 - 11.9
Income (Loss) from
Operations 0.8 (0.4) 8.5 7.2 (22.7) 6.0 (54.6)
</TABLE>
1996 Nine Month Interim Period Compared to 1995 Nine Month Interim Period
Net Sales. Net Sales for the Company decreased $4.5 million,
or 5.4%, for the 1996 nine month interim period from the 1995 nine
month interim period to $79.1 million. This decrease was primarily
the result of the significant increase in discounts provided to
customers partially offset by a 6.3% increase in sales volume in the
1996 nine month interim period as compared to the 1995 nine month
interim period. This increase in discounts resulted from increased
competitive activity. The average net sales price on an eight ounce
equivalent basis decreased during the 1996 nine month interim period
by approximately 10.9% as compared to the 1995 nine month interim
period.
Cost of Sales. Cost of sales for the Company increased $5.0
million, or 10.0% for the 1996 nine month interim period from the
1995 nine month interim period to $55.0 million. This increase
resulted primarily from the increase in sales volume, the increase
in the costs of certain raw materials, and the costs associated with
the start-up of the new manufacturing facility in Toa Baja and the
inefficiencies associated with the operation of two production
facilities during the transition period to the new plant.
Gross Profit. Gross profit for the Company decreased by $9.5
million to $24.1 million in the 1996 nine month interim period from
$33.6 million in the 1995 nine month interim period. As a
percentage of net sales, gross profit decreased to 30.5% in the 1996
nine month interim period from 40.2% in the 1995 nine month interim
period due primarily to the higher discounts provided to customers
and the lower average net sales price.
Selling and Marketing Expense. The Company has a number of
marketing arrangements with PepsiCo pursuant to which the Company is
required to make certain investments in marketing, new products,
packaging introductions and certain capital goods. The Company
receives reimbursements from PepsiCo for a portion of such
expenditures, which it is able to use to offset traditional
marketing expenses or to acquire fixed assets. The Company's
selling and marketing expenses are shown net of all such
reimbursements from PepsiCo.
Selling and marketing expenses for the Company increased $9.4
million, or 41.3%, to $32.2 million for the 1996 nine month interim
period from the 1995 nine month interim period. This increase is
the result of greater marketing activities during the 1996 nine
month interim period resulting primarily from a significant increase
in competition, expenses associated with the launch of Teem, a
lemon/lime soft drink, which was launched during October 1995, as
well as additional marketing activities undertaken to promote the
Company's products. The increase also resulted from an expensing in
the 1996 interim period of certain prepaid marketing and expense
items carried over from prior periods.
16
Administrative Expenses. Administrative expenses for the
Company increased $2.1 million or 46.2% for the 1996 nine month
interim period from the 1995 nine month interim period to $6.9
million primarily as a result of increased professional services
provided to the Company. As a percentage of net sales,
administrative expenses increased to 8.8% in the 1996 nine month
interim period from 5.7% in the 1995 nine month interim period.
Restructuring Charges. The Company's results of operations
for the nine months ended June 30, 1996 have been affected by the
incurrance of several non-recurring restructuring charges totalling
$2.9 million. These charges were comprised of the following: (1) a
$1.4 million fixed asset write-down related to the closing of all
bottling operations in the Company's old bottling plant, which is
now for sale, and (2) $1.5 million in pension asset write-offs and
costs associated with employee termination.
Income (Loss) from Operations. Income (loss) from operations
for the Company decreased to $(18.0) million in the 1996 nine month
interim period, from $6.1 million in the 1995 nine month interim
period. The decrease is the result of lower average net sales, the
increased discounts offered to customers, the significant increase
in selling and marketing expenditures, the restructuring charges
recognized during the 1996 nine month interim period of $3.8 million
and the recognition of certain charges including marketing and other
expenses and the write-off of prepaid tax carried over from prior
periods.
Income Tax Expense. Income tax expense for the Company
increased by $0.5 million for the 1996 nine month interim period to
$0.6 million. This increase is due primarily to interest earnings
on proceeds on deposit from the Company's September 1995 initial
public offering.
Equity in Net Earnings (Loss) of BAESA, Net of Income Tax.
Equity in net earnings (loss) of BAESA, net of income tax, amounted
to $(37.8) million during the 1996 nine month interim period,
compared to $5.4 million during the 1995 nine month interim period.
The decrease is attributable to losses incurred by BAESA for the
1996 interim period. Following June 30, 1996, the Company will
continue to account for its investment in BAESA using the equity
method of accounting. Based on BAESA's publicly announced results
for its fiscal year ended September 30, 1996, the Company's equity
in the loss reported by BAESA will reduce the Company's investment
in BAESA as of September 30, 1996 to zero, meaning that no further
equity in losses of BAESA will be reported by the Company until
BAESA reports profits sufficient to produce a positive investment in
BAESA on the Company's balance sheet.
Net Income (Loss). Net income (loss) for the 1996 nine month
interim period for the Company was $(55.5) million, compared to
$11.2 million during the 1995 nine month interim period. Net (loss)
in the 1996 nine month interim period primarily reflects loss before
equity in net earnings (loss) of BAESA of $(17.8) million and equity
in net loss of BAESA, net of income tax of $(37.8) million, as
compared to income before equity in net earnings of BAESA of $5.8
million and equity in net earnings of BAESA of $5.4 million in the
1995 nine month interim period.
1996 Three Month Interim Period Compared to 1995 Three Month Interim
Period
Net Sales. Net Sales for the Company decreased $6.2 million,
or 20.2%, for the 1996 three month interim period from the 1995
three month interim period to $24.6 million. This decrease was
primarily the result of an increase in discounts provided to
customers and a decrease in sales volume of 3% in the 1996 three
month interim period as compared to the 1995 three month interim
period. This increase in discounts resulted from increased
competitive activity. The average net sales price on an eight ounce
equivalent basis decreased by 17.5% during the 1996 three month
interim period as compared to the 1995 three month interim period.
Cost of Sales. Cost of sales for the Company increased $0.8
million, or 4.2% for the 1996 three month interim period from the
1995 three month interim period to $19.9 million. This increase
resulted primarily from the increase in the cost of certain raw
materials and costs associated with the move to the new
manufacturing facility in Toa Baja.
Gross Profit. Gross profit for the Company decreased to $4.7
million in the 1996 three month interim period from $11.7 million in
the 1995 three month interim period. As a percentage of net sales,
17
gross profit decreased to 19.1% in the 1996 three month interim
period from 38.1% in the 1995 three month interim period due
primarily to the higher discounts provided to customers and the
lower average net sales price.
Selling and Marketing Expense. The Company has a number of
marketing arrangements with PepsiCo pursuant to which the Company is
required to make certain investments in marketing, new products,
packaging introductions and certain capital goods. The Company
receives reimbursements from PepsiCo for a portion of such
expenditures, which it is able to use to offset traditional
marketing expenses or to acquire fixed assets. The Company's
selling and marketing expenses are shown net of all such
reimbursements from PepsiCo.
Selling and marketing expenses for the Company increased $3.5
million, or 43.1%, to $11.6 million for the 1996 three month interim
period from the 1995 three month interim period. This increase
resulted from the increase in marketing activities undertaken to
promote the Company's products during the 1996 three month interim
period resulting primarily from a significant increase in
competition. The increase also resulted from the expensing in the
1996 interim period certain prepaid marketing and expense items
carried over from prior periods.
Administrative Expenses. Administrative expenses for the
Company increased $1.8 million or 102% for the 1996 three month
interim period from the 1995 three month interim period to $3.6
million primarily as a result of the increased professional services
provided to the Company. As a percentage of net sales,
administrative expenses increased to 14.6% in the 1996 three month
interim period from 5.8% in the 1995 three month interim period.
Restructuring Charges. The Company's results of operations for
the three months ended June 30, 1996 have been affected by the
incurrance of several non-recurring restructuring charges totalling
$2.9 million. These charges were comprised of the following: (1) a
$1.4 million fixed asset write-down related to the closing of all
bottling operations in the old plant, which is now for sale, and (2)
$1.5 million in pension asset write-offs and costs associated with
employee termination.
Income (Loss) from Operations. Income (loss) from operations
for the Company decreased to $(13.4) million in the 1996 three month
interim period, from $1.8 million in the 1995 three month interim
period. The decrease is the result of lower net sales during the
1996 three month interim period, the increased discounts offered to
customers, the increased selling and marketing expenditures, the
increase in administrative expenses, and the restructuring charges
recognized during the 1996 three month interim period and the
recognition of certain charges including marketing and other
expenses and the write-off of prepaid tax carried over from prior
periods.
Income Tax Benefit. Income tax benefit for the Company
decreased by $0.4 million for the 1996 three month interim period to
$0.1 million primarily resulting from lower taxable income earned
during the 1996 three month interim period.
Equity in Net Earnings (Loss) of BAESA, Net of Income Tax.
Equity in net earnings (loss) of BAESA, net of income tax, amounted
to $(32.1) million during the 1996 three month interim period,
compared to $0.03 million during the 1995 three month interim
period. The decrease is attributable to losses incurred by BAESA
for the 1996 interim period in connection with continued depressed
economic conditions in Argentina, lower sales volume levels in
Argentina resulting from such economic conditions, losses incurred
in BAESA's Brazilian operations and substantial write-offs and other
charges.
Net Income (Loss). Net income (loss) for the 1996 three month
interim period for the Company was $(45.9) million, compared to $2.4
million during the 1995 three month interim period. Net (loss) in
the 1996 three month interim period primarily reflects loss before
equity in net loss of BAESA of $(13.8) million and the equity in net
loss of BAESA, net of income tax, of $(32.1) million as compared to
income before equity in net earnings of BAESA of $2.4 million and
equity in net earnings of BAESA of $0.03 million in the 1995 three
month interim period.
Liquidity and Capital Resources
18
At June 30, 1996, the Company had $47.8 million of cash and
cash equivalents, of which $43.0 million represented proceeds from
the Company's initial public offering of equity securities, and the
balance indebtedness for borrowed money.
The Company has announced that its current priority is to
restore profitability with respect to its Puerto Rican operations.
The Company's management is formulating a plan of immediate action
to reduce expenditures and improve operating efficiencies. In that
connection, the Company has made a decision not to proceed further
with a possible expansion in Western Europe, and has determined to
set aside its other expansion plans temporarily while efforts are
taken to restore profitability. Also, the Company has used
approximately $13 million of the approximately $43 million in cash
set aside from its September 1995 initial public offering to support
these efforts through the repayment of indebtedness and by additions
to the Company's working capital. In addition, the Company
currently is negotiating the refinancing of its remaining debt to
include a payment schedule which more closely matches the life of
its production assets. Banco Popular de Puerto Rico, holder of the
debt, is assisting the Company with this effort.
Net cash provided by (used in) operating activities for the
Company for the 1996 nine month interim period was $(5.6) million
compared to $9.9 million during the 1995 nine month interim period.
This decrease was mainly a result of the net loss of $(55.5) million
incurred during the 1996 interim period compared to net income of
$11.2 million earned during the 1995 nine month interim period. As
of June 30, 1996, the Company had $46.5 million in net operating
loss carryforwards available to offset future Puerto Rican income
taxes. The Company believes that its strong cash position is
adequate to meet its operating requirements for the foreseeable
future.
Cash flows used in investing activities for the Company
amounted to $(16.4) million during the 1996 nine month interim
period, as compared to $(1.2) million during the 1995 nine month
interim period. Purchases of property, plant and equipment, net
amounted to $(20.5) million during the 1996 nine month interim
period compared to $(4.5) million during the 1995 nine month interim
period. Dividends received from BAESA amounted to $2.8 million for
the nine month interim periods 1996 and 1995. In view of the
current financial difficulties being experienced by BAESA as
reported in its recent public announcements, the Company does not
believe that BAESA will be in a position to pay dividends on its
shares in the foreseeable future. In addition, because the Company
exerts no influence over BAESA, even if BAESA does return to
profitability, the Company would not be able to affect decisions
made by BAESA with respect to the payment of dividends. As a
result, the Company is unable to predict whether or when BAESA will
pay any future dividends.
Cash flows provided by (used in) financing activities for the
Company during the 1996 nine month interim period was $23.7 million
compared to $(7.6) million during the 1995 nine month interim
period. The significant financing activities for the Company in the
1996 nine month interim period were the payment of dividends and the
issuance of notes payable of $48.3 million offset by the repayment
of debt of $19.3 million. The significant financing activities in
the 1995 nine month interim period for the Company included the
payment of dividends and the repayment of debt. The Company paid
$5.3 million and $4.8 million in the 1996 and 1995 nine month
interim periods, respectively, in dividends. In the future, the
payment of dividends will be in part dependent on the receipt of
dividends from BAESA and in part dependent on the achievement of
adequate levels of profitability in the Company's Puerto Rican
operations, and, under certain conditions, the consent by Banco
Popular.
In November 1994, the Company and its subsidiaries entered into
a Credit Agreement with Banco Popular. The Credit Agreement
provides for borrowings by the Company from time to time of $5
million in revolving loans, $8.8 million in term loans and $15
million in non-revolving loans. In December 1995, Banco Popular
increased the amount the Company may borrow under revolving loans to
$10.0 million. As of June 30, 1996, the Company had outstanding
under the Credit Agreement revolving loans in an aggregate principal
amount of $10.0 million, term loans in an aggregate principal amount
of $6.8 million and non-revolving loans in an aggregate principal
amount of $15.0 million. These loans mature on March 30, 1997,
September 10, 2000 and November 10, 1996, respectively, and bear
interest at a floating rate of 2% over and above the cost to Banco
Popular of "936 Funds" (as defined below) (the "936 Rate"). At June
30, 1996, the 936 Rate was 5.1%.
19
The weighted average interest rate on such borrowings was 7.1%
in the first nine months of the fiscal year 1996. "936 Funds" are
defined in the Credit Agreement as deposits in U.S. dollars in
immediately available funds by Section 936 Corporations on the first
day of the relevant funding period for a period equal to such
funding period and in an amount equal or comparable to the principal
amount of the relevant loan. The Company is required to make
monthly payments of principal in the amount of $128,205 with respect
to the outstanding term loans. The Company may prepay certain of
the loans subject to the terms and conditions of the Credit
Agreement.
Under the terms of the Credit Agreement, the Company is subject
to the following financial restrictions: (i) the Company must
maintain a minimum Operating Cash Flow to total Debt Service ratio
(as defined in the Credit Agreement) of 1.50 to 1 for each fiscal
year during the term of the Credit Agreement (ii) a minimum ratio of
current assets to current liabilities of 0.40, 0.60, 0.75 and 1.00
to 1, respectively, and a maximum ratio of Total Liabilities to
Tangible Net Worth of 4.0, 4.0, 3.0 and 2.0 to 1, respectively, for
the fiscal years 1996 through 1998 and thereafter, and (iii) a
minimum Tangible Net Worth of $15 million through the end of the
fiscal year 1996 and of $18 million, $21.5 million, $25 million and
$30 million for each succeeding fiscal year thereafter. The Company
is currently in compliance with these financial restrictions. The
entire principal amount of loans outstanding under the Credit
Agreement becomes immediately due and payable, subject to a cure
period, if the Company violates any of these financial restrictions.
Furthermore, the Company may not pay dividends (other than amounts
declared by and received from BAESA as dividends) without the
consent of Banco Popular if an event of default under the Credit
Agreement (including a violation of the financial restrictions
described above) has occurred or would occur because of the payment
of dividends.
As a result of the Company initially providing to Banco Popular
incorrect financial statements for the first and second quarters
ended December 31, 1995 and March 31, 1996 and certain other
circumstances, the Company was in technical default of the terms of
the Credit Agreement. The Company has, however, received from Banco
Popular a written waiver of such default. The Company believes that
it is currently in full compliance with the terms of the Credit
Agreement.
Pursuant to the Credit Agreement, the Company has granted Banco
Popular a security interest in all its machinery and equipment,
receivables, inventory and the real property on which the Company's
bottling plant in Toa Baja, Puerto Rico (the "Toa Baja Plant") and
the Company's plant in Rio Piedras, Puerto Rico (the "Rio Piedras
Plant").
The Company's franchise arrangements with PepsiCo require it
not to exceed a ratio of senior debt to subordinated debt to equity
of 65 to 25 to 10. The Company is currently in compliance with
these covenants.
Capital expenditures for the Company totaled $20.5 million in
the 1996 nine month interim period and $4.5 million in the 1995 nine
month interim period. The Company's capital expenditures have been
financed by a combination of borrowings from third parties and
internally generated funds. The Company expects to make
approximately $3.0 million in additional capital expenditures during
the fiscal year 1996 for the completion of the construction of the
Toa Baja Plant.
20
PART II - OTHER INFORMATION
Item 5. Other Information
The Company recently discovered accounting irregularities that
have required it to restate its financial results for the first and
second quarters ended December 31, 1995 and March 31, 1996. These
irregularities resulted in a substantial understatement of certain
expenses, primarily discounting and marketing expenses, and a
corresponding overstatement of operating income. This restatement
resulted in an operating loss in both quarters.
After discovering the accounting irregularities, the Company's
Board of Directors retained Rogers & Wells as independent counsel
to conduct an investigation of the circumstances which resulted in
the irregularities. Rogers & Wells, working with the independent
accounting firm of Price Waterhouse, which was retained to assist
with the investigation, conducted a thorough investigation of these
circumstances and has made its report to the Company's Board of
Directors. Taking into consideration the findings of the
investigation and in consultation with the Company's independent
auditors regarding their materiality, the Company concluded that the
irregularities did not have a material effect on any Company
financial statements prior to the first and second quarters of
fiscal 1996, and thus that no restatements for any prior periods are
required.
Based on the Company's investigation, the Company believes that
the accounting irregularities involved a series of entries made in
the Company's accounting records by certain employees of the Company
which had the effect of improperly recording certain expenses
(primarily marketing and discounting expenses) as non-chargeable
items, or of not recording such expenses at all. These entries
resulted in a corresponding overstatement of the Company's operating
income.
In consultation with its auditors, and with Price Waterhouse,
which assisted with the independent counsel investigation into the
accounting irregularities, the Company has taken definitive steps to
insure that internal management and accounting controls will prevent
future accounting irregularities. Certain employees who the Company
believes were principally involved in causing the accounting
irregularities, are no longer employed by the Company or remain
under strict supervision. In addition, the Company has replaced the
senior officers in charge of the Company's accounting records with
individuals whose integrity is not in question. The Company has
adopted a comprehensive series of strict new internal management and
accounting controls including implementation of strict control over
preparation, review and documentation of all entries to the
Company's books of account, monthly review of all journal entries by
the Company's independent internal audit function and adoption of a
corporate code of ethics. Also, the Company has created the
position of financial account analyst who will be charged with
monthly review of all significant account balances. There is, as
well, a heightened level of awareness on the part of the internal
audit committee. The chairmanship of the committee has been
assigned to a person very experienced in the field of public
accounting. Analysis of the Company's sensitive and critical
accounts is being reviewed at the higher levels of management.
Furthermore, implementation of procedures to liquidate those
accounts related to credits and discounts granted to customers on a
timely basis, so as to reduce the level of uncertainty inherent in
estimating the appropriate balance accrued at the end of each month,
have been implemented. Finally, a process of mutual reconciliation
with the Company's franchisor in so far as amounts due from and to
it at the end of each month has been implemented.
The Company has been named as a defendant in several class
action shareholder lawsuits alleging violations of federal
securities laws in connection with disclosures in its previous
financial statements (now restated) for the first and second
quarters of fiscal 1996, and contained in other Company disclosure
documents. At least two of these lawsuits also allege that the
financial statements issued in connection with the Company's
September 1995 public offering also misrepresented or omitted to
disclose material information. The Company has referred these
lawsuits to legal counsel for appropriate action, and the Company
intends to defend them vigorously.
Additionally, in connection with its goal of restoring the
profitability of its Puerto Rican bottling operations, the Company
has reorganized its senior management and Board of Directors. On
June 11, 1996, Rafael Nin, one of the founding shareholders and a
member of the Board of Directors of the Company replaced Charles H.
Beach as the Company's President and Chief Executive Officer.
Effective August 8, 1996, Charles Beach, the Chairman of the Board
21
of Directors, and Michael Gerrits, who together are the controlling
shareholders of the Company, resigned as Board members. The Company
further restructured its Board of Directors under the leadership of
a new Chairman John W. Beck. Beck is the retired chairman and chief
executive officer of First National Bank, Orlando/Winter Park,
Florida and has been a Director of the Company since 1987. The
Board also appointed Richard Reiss, a certified public accountant
and well known business consultant in Puerto Rico, to chair the
Audit Committee.
In connection with his continued service as President and Chief
Executive Officer, Mr. Nin requested, and was granted by the
Company's controlling stockholders, a ten-year voting trust
agreement which entitles him to vote, but not own, 5 million Class A
shares, a controlling interest in the Company. Mr. Nin was granted
a two-year option at $1 per share on these controlling shares, to be
exercised for the exclusive benefit of the Company. At his request,
this option may not be exercised for his own benefit. All remaining
9.5 million founding shareholder shares, not subject to the option,
will be free from shareholder agreement trading restrictions after
September 28, 1998. A prior option to purchase a substantial
interest in the Company, previously reported as granted to Nin upon
his appointment as chief executive officer, was never formalized,
and has been withdrawn by mutual agreement.
The Company does not expect to return to profitability during
the fourth quarter primarily because of continuing pricing pressures
in the Puerto Rican soft drink market, production and volume
interruptions and start-up costs associated with the opening of the
Toa Baja plant and expected losses by BAESA in its fourth quarter
results.
In connection with efforts being made to improve the
profitability of BAESA, in which the Company owns approximately a
17% interest, the transfer of voting control from the Essential
Shareholders to PepsiCo (Phase II of the current agreement with
PepsiCo relating to BAESA voting control) occurred on July 1, 1996.
As a result of this change, the Company's investment in BAESA most
likely will cause the Company to be an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company
Act"). In order to avoid being required to register as an
investment company, which the Company believes would impose
burdensome restrictions on its future operations, the Company's
Board of Directors has expressed its intention to take steps as soon
as is reasonably possible which are intended to result in the
Company not being required to register as an investment company.
In connection with the transition to Phase II, BAESA agreed to
use its best efforts in the future, at the request of the Company,
but without expense or liability (tax or otherwise) to BAESA, to
assist the Company in effecting transactions which the Company
considers necessary or advisable in order to avoid the requirement
that it register as an investment company. There can be no
assurances, however, that the Company will be successful in finding
a way to avoid registration, or that if the Company is ultimately
required to register, it will not adversely effect the Company's
future business operations. In addition, PepsiCo has pledged
support to work together with the Company to advance its outstanding
products in Puerto Rico and any place both parties find mutually
beneficial.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates
indicated.
Signatures Title Date
/s/ Rafael Nin Chief Executive December 23, 1996
- ------------------------- Offier
Rafael Nin
/s/ David L. Virginia Chief Financial December 23, 1996
- -------------------------- Officer and Chief
David L. Virginia Accounting Officer
23
