SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
<checked-box> QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
or
<square> 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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. <checked-box> Yes <square> No
As of May 13, 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.
<PAGE>
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets (unaudited) at March 31, 1996 3
and September 30, 1995
Condensed Consolidated Statements of Operations (unaudited)
for the Six Months Ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended March 31, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION 23
</TABLE>
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STATEMENTS.
2
<PAGE>
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)
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
--------- -------------
<S> <C> <C>
ASSETS (unaudited)
Cash and cash equivalents $ 48,348 $ 46,091
Accounts receivable:
Trade, less allowance for doubtful accounts of $1,059 at
March 31, 1996 and $1,458 at September 30, 1995 16,343 16,086
Due from PepsiCo, Inc. and affiliated companies 4,040 2,913
Other 571 341
Inventories 4,666 4,542
Prepaid expenses and other current assets 6,677 2,516
------ -------
Total current assets 80,645 72,489
Investment in BAESA 62,601 74,128
Property, plant and equipment, net 48,316 36,445
Intangible assets, net 2,128 2,163
Notes receivable - officers and employees 774 -
Other assets 1,324 441
-------- --------
Total assets $ 195,788 $ 185,666
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
--------- -------------
<S> <C> <C>
Liabilities: (unaudited)
Current installments of long-term debt $ 1,550 $ 1,550
Current installments of capital lease obligations 253 1,204
Short term borrowings 25,785 4,600
Accounts payable:
Trade 15,295 12,536
Affiliate 1,674 1,181
Income taxes payable 455 123
Deferred income taxes 530 530
Other accrued expenses 2,534 6,477
--------- -------------
Total current liabilities 48,076 28,201
Long-term debt, excluding current installments 5,590 6,365
Capital lease obligations, excluding current installments 733 848
Accrued pension cost, long-term 2,871 2,871
Deferred income taxes 15,969 18,732
--------- -------------
Total liabilities 73,239 57,017
Shareholders' equity:
Class A common shares of $0.01 par value; authorized, 50 50
issued and
outstanding 5,000,000 shares
Class B common shares, $0.01 par value; authorized 165 165
35,000,000
shares; issued and outstanding 16,500,000 shares
Additional paid-in capital 90,738 90,738
Retained earnings 33,661 39,472
Cumulative translation adjustment (521) (232)
Pension liability adjustment (1,544) (1,544)
________ ________ ---------- -------------
Total shareholders' equity 122,549 128,649
======== ======== ---------- -------------
Total liabilities and shareholders' equity $ 195,788 $ 185,666
========== =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1996 1995
<S> <C> <C>
Net Sales $ 57,844 $ 52,802
Cost of Sales 34,820 30,887
------- ----------
Gross profit 23,024 21,915
Selling and marketing expenses 15,166 14,705
Administrative expenses 3,323 2,954
--------- ---------
Income from operations 4,535 4,256
---------- ----------
Other income (expenses):
Interest expense (365) (731)
Interest income 1,365 77
Other, net 220 460
---------- ----------
Total other income (expenses) 1,220 (194)
--------- ----------
Income before income tax expense and equity in
net earnings/(loss) of BAESA 5,755 4,062
Income tax expense 691 637
---------- ----------
Income before equity in net earnings/(loss) of BAESA 5,064 3,425
Equity in net earnings/(loss) of BAESA, net of income tax
benefit/(expense) of $2,763 and $(1,016) in 1996
and 1995 respectively (5,637) 5,336
---------- ----------
Net income/(loss) (573) 8,761
========== ==========
Earnings per common share:
Income before equity in net earnings/(loss) of BAESA $ 0.24 $ 0.19
========== ===========
Net income/(loss) $ (0.03) $ 0.49
========== ===========
Weighted average number of shares outstanding 21,500 18,000
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
<S> <C> <C>
Net Sales $ 26,857 $ 24,745
Cost of Sales 15,924 14,076
---------- ----------
Gross profit 10,933 10,669
Selling and marketing expenses 7,031 7,159
Administrative expenses 1,725 1,452
---------- ----------
Income from operations 2,177 2,058
---------- ----------
Other income (expenses):
Interest expense (202) (377)
Interest income 680 45
Other, net 82 434
---------- ----------
Total other income (expenses) 560 102
---------- ----------
Income before income tax expense and equity in
net earnings/(loss) of BAESA 2,737 2,160
Income tax expense 425 315
---------- ----------
Income before equity in net earnings/(loss) of BAESA 2,312 1,845
Equity in net earnings/(loss) of BAESA, net of income tax
benefit/(expense) of $1,485 and $(530) in 1996
and 1995 respectively (3,014) 2,784
---------- ----------
Net income/(loss) $ (702) $ 4,629
========== ==========
Earnings per common share:
Income before equity in net earnings/(loss) of BAESA $ 0.11 $ 0.10
========== ==========
Net income/(loss) $ (0.03) $ 0.26
========== ==========
Weighted average number of shares outstanding 21,500 18,000
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ (573) $ 8,761
Adjustments to reconcile net earnings/(loss) to net cash
provided by (used in) operating activities:
Gain on disposal of property, plant, and equipment (528) (455)
Depreciation and amortization 2,525 2,420
Equity in net (earnings)/loss of BAESA 5,637 (5,336)
Changes in assets and liabilities:
Accounts receivable (1,614) (546)
Inventories (124) 660
Accounts payable 3,252 4,421
Other liabilities and accrued expenses (4,475) 3,095
Income taxes payable 862 400
Prepaid expenses and other current assets (4,161) (4,130)
Other, net (892) 206
----------- -----------
Net cash provided by (used in) operating activities (91) 9,496
----------- -----------
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment 1,184 483
Purchases of property, plant and equipment (15,007) (4,801)
Increase in notes receivable - officers and employees (774) -
Dividends received from affiliates 2,839 2,839
----------- -----------
Net cash (used in) investing activities (11,758) (1,479)
----------- -----------
Cash flows from financing activities:
Proceeds from short term borrowings 21,185 500
Repayment of long-term debt (775) (775)
Repayment of capital lease obligations (1,066) (1,296)
Dividends paid (5,238) (4,696)
----------- -----------
Net cash provided by (used in) financing activities 14,106 (6,267)
----------- -----------
Net increase in cash and cash equivalents 2,257 1,750
Cash and cash equivalents at beginning of period 46,091 1,347
----------- -----------
Cash and cash equivalents at the end of peri $ 48,348 $ 3,097
=========== ===========
Supplemental disclosures:
Cash paid for:
Interest $ 987 $ 731
Income taxes 186 211
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
7
<PAGE>
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 (consisting of only recurring
adjustments) necessary for a fair presentation. Operating results for the six
months and three months ended March 31, 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:
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995
<S> <C> <C>
Raw materials $ 1,546 $ 1,247
Finished goods 2,240 2,048
Other 880 1,247
------- -------
$ 4,666 $ 4,542
======= =======
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995
<S> <C> <C>
Land and improvements $ 1,159 $ 1,159
Building and improvements 5,592 5,592
Machinery, equipment and vehicles 36,511 36,173
Bottles, cases and shells 1,313 1,585
Furniture and fixtures 2,529 1,833
Construction in process 25,161 12,224
------ ------
72,265 58,566
Less accumulated depreciation and amortization
(23,949) (22,121)
------ ------
Property, plant and equipment, net $ 48,316 $ 36,445
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
March 31,
<S> <C> <C>
1996 1995
Interest cost capitalized $ 623 $ -
Interest cost charged to income 365 731
------ ----
$ 988 $ 731
====== =======
</TABLE>
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) SHAREHOLDERS' EQUITY
The Company declared and paid cash dividends of $5,238 during the six
months ended March 31, 1996 and $4,696 during the six months ended March 31,
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.
(5) INCOME TAX
Income tax expense for the six months ended March 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
March 31,
<S> <C> <C>
1996 1995
Current $691 $637
Deferred - -
Income tax expense $691 $637
</TABLE>
Deferred income tax benefit / (expense) of $2,763 and $(1,016) for the six
month period ended March 31, 1996 and 1995, respectively, have been provided in
connection with the Company's equity in net earnings / (loss) of BAESA.
(6) RELATED PARTY TRANSACTIONS
The Company paid approximately $1,101 and $771 during the six months ended
March 31, 1996 and 1995, respectively, for advertising fees to a firm
controlled by a shareholder of the Company.
The Company paid approximately $232 and $146 during the six months ended
March 31, 1996 and 1995, respectively, for consulting fees to a shareholder and
director of BAESA.
The Company paid approximately $151 during the six months ended March 31,
1996 for construction management services to a shareholder and director of the
Company.
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) INVESTMENT IN BAESA
Condensed unaudited financial information relating to BAESA as of March
31, 1996 and 1995, and for the six months then ended and audited balance sheet
financial information as of September 30, 1995 is as follows (in thousands of
U.S. dollars):
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 37,436 $ 57,617
Accounts receivable, net 106,422 105,478
Inventories 51,080 56,349
Other current assets 32,322 25,933
--------- --------
Total current assets 227,260 245,377
Property, plant and equipment, net 703,364 655,414
Intangible assets, net 85,418 88,017
Investment in joint venture 110,630 107,385
Deferred income tax, net 20,978 10,530
Other assets 29,845 21,201
---------- --------
Total assets $ 1,177,495 $ 1,127,924
========== ==========
LIABILITIES
$ 59,111 $ 48,457
Current installments of long-term debt
Bank loans and overdrafts 260,769 182,672
Accounts payable, income taxes payable, and accrued 145,348 114,950
expenses ========= =========
Total current liabilities 465,228 346,079
Long-term debt, excluding current installments 321,461 323,737
Deferred income taxes 8,288 7,625
Other long-term liabilities 10,441 10,715
-------- -------
Total liabilities 805,418 688,156
Total shareholders' equity 372,077 439,768
------- --------
Total liabilities and shareholders' equity $ 1,177,495 $ 1,127,924
========== =========
</TABLE>
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
March 31, March 31,
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS 1996 1995 1996 1995
(UNAUDITED) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 427,525 $ 366,585 $ 200,403 $ 198,977
Cost and expenses:
Cost of sales (236,138) (184,277) (118,280) (98,084)
Selling and marketing expenses (142,817) (80,040) (74,165) (47,617)
Administrative expenses (57,493) (43,710) (26,740) (25,012)
Restructuring charges (11,540) - - -
Start-up costs in Brazil (1,778) (3,162) (1,134) -
--------- -------- --------- --------
(449,766) (311,189) (220,319) (170,713)
--------- -------- --------- --------
Income / (loss) from operations (22,241) 55,396 (19,916) 28,264
(40,508) (9,022) (21,740) (5,885)
========== ========= ========= ========
Other expenses, net
Income / (loss) before income tax (expense) (62,749) 46,374 (41,656) 22,379
/ benefit and equity in earnings of affiliated
company
Income tax (expense) / benefit 8,994 (10,147) 13,072 (3,664)
-------- --------- -------- -------
Income / (loss) before equity in earnings of (53,755) 36,227 (28,584) 18,715
affiliated company
Equity in earnings of affiliated company 4,430 2,974 2,166 1,738
-------- --------- --------- -------
Net income / (loss) $ (49,325) $ 39,201 $ (26,418) $ 20,453
========== ========= ========== ========
</TABLE>
<PAGE>
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 and of BAESA should be read in conjunction with this
overview and the Condensed Consolidated Financial Statements of the Company and
of BAESA, and the Notes thereto, as of and for the six month periods ended
March 31, 1995 and 1996 (the"1995 six month interim period" and the "1996 six
month interim period," respectively) and as of and for the three month interim
periods ended March 31, 1995 and 1996 (the "1995 three month interim period"
and the "1996 three month interim period," respectively).
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain forward-looking statements, particularly with
regard to capital expenditures and investment in BAESA. The Company wishes to
ensure that such statements are accompanied by meaningful cautionary statements
pursuant to the safe harbor established in the Private Securities Litigation
Reform Act of 1995. Accordingly, such statements are qualified in their
entirety by reference to the following discussion of certain important factors
that could cause actual capital expenditures and the impact on the Company of
its investment in BAESA to differ materially from those projected in such
forward-looking statements.
The risks and uncertainties affecting the forward-looking statements include
the effects of the uncertainty and volatility of the economic climates in both
Argentina and Brazil on BAESA and the resulting impact on the Company's
investment in BAESA. Additionally, the Company may be affected by the
inability of BAESA to ensure that the consolidation of certain operating
subsidiaries and the reduction of the workforce will reduce fixed and variable
costs and that these measures will not have adverse consequences for BAESA,
including the possibility of employee lawsuits. The Company cautions that the
above list of factors affecting its investment in BAESA may not be exhaustive.
BAESA operates in the highly competitive soft-drink market in countries the
economies of which have been subject to political and economic instability in
the past and some of which are currently having economic difficulties. New
risk factors emerge from time to time and management cannot predict such risk
factors, nor can it assess the impact, if any, of such risk factors on the
Company's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those projected in
any forward-looking statements. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results.
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 exercises 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. 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.
The financial information for BAESA presented below has been prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP") and with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation" ("SFAS 52"). Pursuant to recently-adopted
amendments to Regulation S-X, BAESA has adopted the U.S. dollar as the
reporting currency in its filings with the Commission. The financial
statements of BAESA that were previously issued in Pesos have been recast as if
the U.S. dollar had been the reporting currency, following a methodology
consistent with SFAS 52.
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.
BAESA's results of operations are seasonal. A large percentage of BAESA's
net sales are earned in the months of December through February, which
correspond to the summer and the holiday season in the countries where BAESA
operates. Accordingly, BAESA's results of operations for interim periods
during the year are not necessarily indicative of the results for the full
year.
<PAGE>
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 Six Months Interim Three Months Interim
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1996 1995 1996
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 58.5 60.2 56.9 59.3
Gross Profit 40.2 41.8 40.6 41.5 39.8 43.1 40.7
Selling and Marketing 28.0 29.3 26.6 27.8 26.2 28.9 26.2
Expenses
Administrative Expenses 11.4 10.1 5.5 5.6 5.8 5.9 6.4
Intangibles and Fixed Asset - 2.8 - - - - -
Write-offs
Income (Loss) from Operations 0.8 (0.4) 8.5 8.1 7.8 8.3 8.1
</TABLE>
1996 SIX MONTH INTERIM PERIOD COMPARED TO 1995 SIX MONTH INTERIM PERIOD
NET SALES. Net Sales for the Company increased $5.0 million, or 9.5%,
for the 1996 six month interim period from the 1995 six month interim period to
$57.8 million. This increase was primarily the result of an 11.4% increase in
beverage sales volume partially offset by an increase in discounts provided to
customers in the 1996 six month interim period as compared to the 1995 six
month interim period. The average sales price on an eight ounce equivalent
basis decreased during the 1996 six month interim period by approximately 1.6%
as compared to the 1995 six month interim period.
COST OF SALES. Cost of sales for the Company increased $3.9 million, or
12.7% for the 1996 six month interim period from the 1995 six month interim
period to $34.8 million. This increase resulted primarily from the increase in
sales volume.
GROSS PROFIT. Gross profit for the Company increased by $1.1 million to
$23.0 million in the 1996 six month interim period from $21.9 million in the
1995 six month interim period. As a percentage of net sales, gross profit
decreased to 39.8% in the 1996 six month interim period from 41.5% in the 1995
six month interim period due primarily to the higher discounts provided to
customers and the lower 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 $0.5 million, or
3.1%, to $15.2 million for the 1996 six month interim period from the 1995 six
month interim period. This increase is the result of greater marketing
activities during the 1996 six month interim period in connection with the
launch of Teem, a lemon/lime soft drink, which was launched during October
1995.
ADMINISTRATIVE EXPENSES. Administrative expenses for the Company
increased $0.4 million or 12.5% for the 1996 six month interim period from the
1995 six month interim period to $3.3 million. As a percentage of net sales,
administrative expenses increased to 5.8% in the 1996 six month interim period
from 5.6% in the 1995 six month interim period.
INCOME FROM OPERATIONS. Income from operations for the Company increased
to $4.5 million in the 1996 six month interim period, from $4.3 million in the
1995 six month interim period. The increase is the result of higher net sales,
partially offset by higher cost of sales from the increased sales volume.
INCOME TAX EXPENSE. Income tax expense for the Company increased by $0.1
million for the 1996 six month interim period to $0.7 million. The increase in
taxable income during the 1996 six month interim period contributed to the
increase in income tax expense.
EQUITY IN NET EARNINGS (LOSS) OF BAESA, NET OF INCOME TAX. Equity in net
earnings (loss) of BAESA, net of income tax, amounted to $(5.6) million during
the 1996 six month interim period, compared to $5.3 million during the 1995 six
month interim period. The decrease is attributable to losses incurred by BAESA
for the 1996 interim period resulting from restructuring charges in connection
with continued depressed economic conditions in Argentina, lower sales volume
levels in Argentina resulting from such economic conditions, and losses
incurred in BAESA's Brazilian operations.
NET INCOME (LOSS). Net income (loss) for the 1996 six month interim
period for the Company was $(0.6) million, compared to $8.8 million during the
1995 six month interim period. Net (loss) in the 1996 six month interim period
primarily reflects income before equity in net earnings (loss) of BAESA of $5.1
million offset by equity in net loss of BAESA, net of income tax of $(5.6)
million as compared to income before equity in net earnings (loss) of BAESA of
$3.4 million offset by equity in net earnings of BAESA of $5.3 million in the
1995 six month interim period.
1996 THREE MONTH INTERIM PERIOD COMPARED TO 1995 THREE MONTH INTERIM PERIOD
NET SALES. Net Sales for the Company increased $2.1 million, or 8.5%,
for the 1996 three month interim period from the 1995 three month interim
period to $26.9 million. This increase was primarily the result of a 14.5%
increase in beverage sales volume partially offset by an increase in discounts
provided to customers in the 1996 three month interim period as compared to the
1995 three month interim period. The average sales price on an eight ounce
equivalent basis decreased by 5.2% 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 $1.8 million, or
13.1% for the 1996 three month interim period from the 1995 three month interim
period to $15.9 million. This increase resulted primarily from the increase in
sales volume.
GROSS PROFIT. Gross profit for the Company increased by $0.3 million to
$10.9 million in the 1996 three month interim period from $10.7 million in the
1995 three month interim period. As a percentage of net sales, gross profit
decreased to 40.7% in the 1996 three month interim period from 43.1% in the
1995 three month interim period due primarily to the higher discounts provided
to customers and the lower 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 decreased $0.1 million, or
1.8%, to $7.0 million for the 1996 three month interim period from the 1995
three month interim period.
ADMINISTRATIVE EXPENSES. Administrative expenses for the Company
increased $0.3 million or 18.8% for the 1996 three month interim period from
the 1995 three month interim period to $1.7 million primarily as a result of
the additional expenses incurred by the Company in connection with its ongoing
reporting requirements with the Commission and The New York Stock Exchange (the
"Exchange") as a result of its listing on the Exchange. As a percentage of net
sales, administrative expenses increased to 6.4% in the 1996 three month
interim period from 5.9% in the 1995 three month interim period.
INCOME FROM OPERATIONS. Income from operations for the Company increased
to $2.2 million in the 1996 three month interim period, from $2.1 million in
the 1995 three month interim period. The increase is the result of higher net
sales during the 1996 three month interim period, partially offset by higher
cost of sales from the increased sales volume.
INCOME TAX EXPENSE. Income tax expense for the Company increased by $0.1
million for the 1996 three month interim period to $0.4 million primarily
resulting from higher 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 $(3.0) million during
the 1996 three month interim period, compared to $2.8 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, and losses incurred in BAESA's
Brazilian operations.
NET INCOME (LOSS). Net income (loss) for the 1996 three month interim
period for the Company was $(0.7) million, compared to $4.6 million during the
1995 three month interim period. Net (loss) in the 1996 three month interim
period primarily reflects income before equity in net earnings (loss) of BAESA
of $2.3 million offset by equity in net loss of BAESA, net of income tax of
$(3.0) million as compared to income before equity in net earnings (loss) of
BAESA of $1.8 million offset by equity in net earnings of BAESA of $2.8 million
in the 1995 three month interim period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had $48.3 million of cash and cash
equivalents, of which $46.5 million represented proceeds from the Company's
initial public offering of equity securities, and indebtedness for borrowed
money, including short-term borrowings and capital lease obligations, of $33.9
million.
Net cash provided by (used in) operating activities for the Company for
the 1996 six month interim period was $(0.1) million compared to $9.5 million
during the 1995 six month interim period. This decrease was mainly a result
of the net loss of $(0.6) million incurred during the 1996 interim period
compared to net income of $8.8 million earned during the 1995 six month interim
period. As of March 31, 1996, the Company had $24.6 million in net operating
loss carryforwards available to offset future Puerto Rican income taxes. The
Company believes that net cash provided by operating activities for the Company
will be sufficient to meet its operating requirements for the foreseeable
future.
Cash flows used in investing activities for the Company amounted to
$(11.8) million during the 1996 six month interim period, as compared to $(1.5)
million during the 1995 six month interim period. Purchases of property, plant
and equipment, net amounted to $15.0 million during the 1996 six month interim
period compared to $4.8 million during the 1995 six month interim period.
Dividends received from BAESA amounted to $2.8 million for the six month
interim periods 1996 and 1995.
In connection with efforts being made to improve the profitability of
BAESA, in which the Company owns approximately a 17% interest, BAESA, Charles
H. Beach (Chairman and Chief Executive Officer of BAESA and President and Chief
Executive Officer of the Company) and PepsiCo have decided to accelerate the
transfer of voting control from the members of the Charles H. Beach Voting
Trust and the Michael Gerrits Voting Trust (together, the "Essential
Shareholders"), controlled respectively by Charles H. Beach and Michael
Gerrits, to PepsiCo (Phase II of the current agreement with PepsiCo relating to
BAESA voting control) effective 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
will result in the Company not being required to register as an investment
company.
As a result of this action by the Board of Directors, pursuant to Rule
3a-2 under the Investment Company Act, the Company believes it will have a
period of one year after July 1, 1996 before it is required to register.
During that period the Company will explore a number of alternatives, including
(i) accelerating its program of expanding its operating businesses, including
the possible acquisition of new bottling franchises, in order to reduce the
relative size of the Company's BAESA investment, and (ii) disposing of, through
a sale or a spin-off transaction, sufficient BAESA shares to avoid the need to
register. The Company will also explore the possibility of applying for an
exemptive order from the Securities and Exchange Commission which would exempt
the Company from registration as an investment company.
Cash flows provided by (used in) financing activities for the Company
during the 1996 six month interim period was $14.1 million compared to $(6.3)
million during the 1995 six month interim period. The significant financing
activities for the Company in the 1995 six month interim period were the
payments of dividends and the issuance of notes payable of $21.2 million offset
by the repayment of debt of $1.8 million. The significant financing activities
in the 1996 six month interim period for the Company included the payment of
dividends and the repayment of debt. The Company paid $5.2 million and $4.7
million in the 1996 and 1995 six month interim periods, respectively, in
dividends.
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 March 31, 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 31, 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
March 31, 1996, the 936 Rate was 5.1%.
The weighted average interest rate on such borrowings was 7.1% in the
first six 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. Prior to the time that any expansion
opportunities may become available the Company may use a portion of the net
proceeds of an initial public offering completed in September 1995 to repay the
current amount outstanding on the $10.0 million maximum principal amount of
outstanding short-term revolving credit indebtedness under 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.
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 R<i'>o Piedras, Puerto
Rico (the "R<i'>o Piedras Plant") are located.
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 $15.0 million in the 1996
six month interim period and $4.8 million in the 1995 six 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 $6.0 million in additional capital expenditures
during the fiscal year 1996 for the completion of the construction of the Toa
Baja plant.
BAESA
GENERAL
BAESA established operations and acquired certain bottling assets for the
purpose of producing, selling and distributing PepsiCo products in the
Brazilian states of Rio de Janeiro, S<a~>o Paulo, Rio Grande do Sul, Santa
Catarina and Paran<a'> (the "Southern Brazil Franchise"). These operations
commenced during the fiscal year 1995. The results of operations of the
Southern Brazil Franchise have been included in the consolidated financial
information of BAESA since December 1, 1994.
RESTRUCTURING CHARGES
BAESA's results of operations for the six months ended March 31, 1996
have been adversely affected by the continuation of depressed economic
conditions in Argentina, resulting in lower sales volume and margin levels in
Argentina as compared to the six months ended March 31, 1995. BAESA's earnings
in its Brazilian operations were also negatively impacted during the 1996 six
month interim period and continue to be negatively impacted by high fixed costs
resulting from large infrastructure investments to cover anticipated future
volume needs. BAESA expects that its future results of operations will also be
significantly adversely affected by the continuation of such depressed economic
conditions and the continuation of reduced case sales volumes in Argentina. In
addition, BAESA is still in the process of extending coverage to all of its
franchise territories in Brazil. Until Argentine economic conditions improve
and BAESA improves its coverage and achieves higher sales volume in Brazil,
BAESA expects that its operations will continue to be adversely affected.
BAESA made a determination during the 1996 six month interim period to
undertake certain restructuring measures, including the consolidation of
certain operating subsidiaries and the reduction of its workforce by 1,257
permanent positions, in an effort to lower BAESA's fixed and variable costs.
The costs associated with these restructuring measures will include severance
costs, relocation expenses and costs related to the consolidation of certain
operating subsidiaries. As a result of the restructuring measures, the
consolidation of certain operating subsidiaries and other operational measures
to increase profitability, BAESA expects annual savings of approximately $41.0
million. There is no assurance that such savings will be achieved.
During the 1996 six month interim period, BAESA incurred a net loss of
$(49.3) million, including a restructuring charge of $11.5 million.
In Brazil, 749 positions, representing approximately 15% of the workforce
currently in place, will be permanently eliminated. BAESA expects that this
measure will result in annual savings of $12.5 million. In Argentina and
Uruguay, 508 positions, or 24% of the workforce, will be eliminated. BAESA
expects that this measure will result in a savings of $11.9 million on an
annual basis. Additionally, BAESA will merge three wholly-owned subsidiaries
into its Buenos Aires entity and it will consolidate production/operations,
sales/marketing, finance and human resources areas in Argentina and Uruguay.
In Argentina, BAESA plans to reduce production capacity to provide
substantial annual savings, including the closing of a manufacturing plant.
During the next few months, some of the equipment in Argentina will be shifted
to meet stronger production demands, principally in Brazil.
BAESA believes that the restructuring changes have not affected BAESA's
ability to manufacture, sell and distribute its products, nor are the
restructuring changes expected to affect BAESA's ability to meet sales needs if
and when market levels in Argentina return to their 1994 levels.
INCOME TAX EXPENSE
The Brazilian government recently enacted a change in the effective
corporate income tax rate to approximately 31% compared to a previous rate of
approximately 49%. This change resulted in a charge to income taxes in the
accompanying consolidated result of operations of $4.1 million from the write-
down of deferred tax assets previously recognized in Brazil during the 1996 six
month interim period.
COMPARABILITY
BAESA has experienced significant increases in sales volumes during the
periods covered by the Condensed Consolidated Financial Statements of BAESA.
The magnitude of these increases was due to the acquisition of the Southern
Brazil Franchise areas during the 1995 six month interim period. While BAESA
expects its sales volumes to continue to increase, such increases are not
likely to continue at the rates shown for the periods covered by the Condensed
Consolidated Financial Statements of BAESA.
1996 SIX MONTH INTERIM PERIOD COMPARED TO 1995 SIX MONTH INTERIM PERIOD
NET SALES. Net sales for BAESA increased $60.9 million, or 16.6% for the
1996 six month interim period from the 1995 six month interim period, to $427.5
million. This increase resulted from sales in the Southern Brazil Franchise
territories, which were in operation for only four months in the 1995 six month
interim period. Net sales in the 1996 six month interim period for BAESA's
Argentine and Brazilian operations were $200.8 million and $200.4 million,
respectively, reflecting case sales volumes of 53.5 million and 71.1 million
cases, respectively. Sales of all soft drinks in Argentina during the 1996 six
month interim period declined $42.7 million or 17.5% due to adverse economic
conditions in Argentina. Furthermore, an increase in sales volume of cola soft
drinks, which requires higher excise taxes, has been experienced in Argentina,
resulting in lower net sales.
COST OF SALES. Cost of Sales for BAESA increased $51.9 million, or
28.1%, for the 1996 six month interim period from the 1995 six month interim
period, to $236.1 million. This increase resulted primarily from the increase
in sales volume and a decrease in incentives from PepsiCo for the Brazil
franchise territory as such franchise territory is no longer a startup
operation. In addition, BAESA's sales volume of non-returnable packages
increased significantly during the 1996 six month interim period compared to
the 1995 six month interim period, resulting in higher cost of raw materials.
SELLING AND MARKETING EXPENSES. BAESA has a number of marketing
arrangements with PepsiCo pursuant to which BAESA is required to make certain
investments, based on a percentage of net sales, in marketing, new products,
packaging introductions and certain capital goods. BAESA receives
reimbursement from PepsiCo for a portion of such expenditures, which it is able
to use to offset traditional marketing expenses or to acquire fixed assets.
Selling and marketing expenses for BAESA increased by $62.8 million or
78.4%, to $142.8 million during the 1996 six month interim period from the 1995
six month interim period. This increase resulted primarily from the increase
in sales volume from the 1995 interim period and the introduction of a guarana
flavored soft drink (a Brazilian specialty drink). Furthermore, a larger
selling and marketing workforce has been in place in Brazil. In addition, the
contribution by PepsiCo of marketing incentives in Brazil has been reduced as
such franchise territory is no longer a start-up operation.
ADMINISTRATIVE EXPENSES. Administrative expenses for BAESA increased
$13.8 million, or 31.5%, for the 1996 six month interim period from the 1995
six month interim period to $57.5 million. This increase is attributable to
the additional personnel hired as BAESA's Brazilian operations expanded since
the initiation of operations on December 1, 1994. BAESA's Brazilian franchises
were in operation for only four months during the 1995 interim period. As a
percentage of net sales, administrative expenses for the 1996 six month interim
period increased from 11.9% in the 1995 six month interim period to 13.4% due
to the expansion of the operations in Brazil.
RESTRUCTURING CHARGES. BAESA incurred $11.5 million in restructuring
charges during the 1996 six month interim period. These restructuring charges
were the result of (i) the continued depressed economic conditions in
Argentina, which resulted in lower sales volume levels in Argentina and (ii)
BAESA's earnings in its Brazilian operations being negatively impacted by high
fixed costs resulting from large infrastructure investments to cover future
volume needs. BAESA's restructuring measures include the consolidation of
certain operating subsidiaries and a reduction of its workforce by 1,257
permanent positions, in an effort to lower BAESA's fixed costs. The costs
associated with these restructuring measures will include severance costs,
relocation expenses and costs related to the consolidation of certain operating
subsidiaries.
In Brazil, 749 positions, representing approximately 15% of the workforce
currently in place, will be permanently eliminated. BAESA expects that this
measure will result in annual savings of $12.5 million. In Argentina and
Uruguay, 508 positions, or 24% of the workforce, will be eliminated. BAESA
expects that this measure will result in a savings of $11.9 million on an
annual basis. Additionally, BAESA will merge three wholly-owned subsidiaries
into its Buenos Aires entity and it will consolidate production/operations,
sales/marketing, finance and human resources areas in Argentina and Uruguay.
In Argentina, BAESA plans to reduce production capacity to provide
substantial annual savings, including the closing of a manufacturing plant.
During the next few months, some of the equipment in Argentina will be shifted
to meet stronger production demands, principally in Brazil.
BAESA believes that the restructuring changes have not affected BAESA's
ability to manufacture, sell and distribute its products, nor are the
restructuring changes expected to affect BAESA's ability to meet sales needs if
and when market levels in Argentina return to their 1994 levels.
START-UP COSTS IN BRAZIL. BAESA incurred $1.8 million and $3.2 million
in start-up costs in the 1996 six month interim period and the 1995 six month
interim period, respectively, in connection with the commencement of its
operations in Brazil. The start-up costs, which were incurred in both the 1996
and the 1995 six month interim periods were non-recurring and were charged to
income in such periods.
INCOME/(LOSS) FROM OPERATIONS. Income (loss) from operations decreased
$77.6 million, to $(22.2) million. This decrease was a result of continued
depressed economic conditions in Argentina, resulting in lower sales volume
levels in Argentina, as well as losses incurred in BAESA's Brazilian
operations. BAESA recorded $11.5 million in restructuring charges in the 1996
six month interim period associated with restructuring measures taken in
response to the adverse economic conditions in Argentina and losses incurred in
the Brazilian operations.
OTHER INCOME (EXPENSES). The net financing costs of BAESA are composed
of interest expense, offset by interest income, foreign currency gains or
losses associated with monetary assets and liabilities denominated in foreign
currencies and gains or losses resulting from forward contracts. Net financing
cost for the 1996 six month interim period increased by $25.5 million from the
1995 six month interim period. This change resulted from an increase in
interest cost of $22.9 million during the 1996 six month interim period on debt
incurred mainly to fund BAESA's expansion in Brazil, and a decrease in interest
income of $0.4 million from the 1995 six month interim period as a result of
lower amounts of cash and cash equivalents invested during the 1996 six month
interim period.
BAESA's foreign exchange position is affected by its monetary assets or
liabilities denominated in currencies other than those of the countries in
which BAESA operates. BAESA records a foreign exchange gain or loss if the
exchange rate of the functional currency to the other currency in which the
monetary assets or liabilities is denominated fluctuates.
INCOME TAX (EXPENSE)/BENEFIT. Income tax (expense)/benefit during the
1996 six month interim period amounted to $9.0 million as compared to $(10.1)
million recognized as income tax expense during the 1995 six month interim
period. The income tax benefit recognized during the 1996 six month interim
period resulting from losses incurred during the period was offset by an
expense recognized as the result of a recently enacted lower effective
corporate income tax rate of 31%. As BAESA previously recognized an income tax
benefit in its Brazilian operations, this government action resulted in a $4.1
million income tax charge during the 1996 six month interim period from the
write-down of BAESA's tax asset previously recorded at the higher income tax
rate of 49%.
EQUITY IN NET EARNINGS OF AFFILIATED COMPANY. Equity in net earnings of
affiliated company increased $1.5 million or 49.0% for the 1996 six month
interim period from the 1995 six month interim period to $4.4 million in net
income through BAESA's 45% equity in the net earnings of Embotelladoras
Chilenas Unidas S.A. ("ECUSA"), a joint venture in Chile between BAESA and
Compa<n~><i'>a Cervecer<i'>as Unidas S.A. ("CCU") established on November 1,
1994. The increase in the 1996 six month interim period from the 1995 six
month interim period is primarily attributable to CCU being established for
only five months during the 1995 six month interim period.
NET INCOME (LOSS). Net income (loss) for BAESA decreased by $88.5
million to $(49.3) million in the 1996 six month interim period from $39.2
million in the 1995 six month interim period, as a result of adverse economic
conditions in Argentina, losses in BAESA's Brazilian operations, higher
financing costs and higher raw material prices and restructuring charges.
1996 THREE MONTH INTERIM PERIOD COMPARED TO 1995 THREE MONTH INTERIM PERIOD
NET SALES. Net sales for BAESA increased $1.4 million, or 0.7% for the
1996 three month interim period from the 1995 three month interim period, to
$200.4 million. This increase resulted from a 28.7% sales volume increase in
the Southern Brazil Franchise territories in the 1996 three month interim
period as compared to the 1995 three month interim period, offset by a 12.0%
decrease in sales volume in Argentina in the 1996 three month interim period as
compared to the 1995 three month interim period. Net sales in the 1996 three
month interim period for BAESA's Argentine and Brazilian operations were $94.6
million and $93.1 million, respectively, reflecting case sales volumes of 25.6
million and 32.1 million cases, respectively. Sales of all soft drinks in
Argentina during the 1996 three month interim period declined $18.3 million or
16.2% due to adverse economic conditions in Argentina. Furthermore, an
increase in sales volume of cola soft drinks, which requires higher excise
taxes, has been experienced in Argentina, resulting in lower net sales.
COST OF SALES. Cost of Sales for BAESA increased $20.2 million, or
20.6%, for the 1996 three month interim period from the 1995 three month
interim period, to $118.3 million. This increase resulted primarily from the
increase in sales volume from the 1995 three month interim period, an increase
in costs associated with a larger infrastructure in Brazil from the 1995 three
month interim period, and the decrease in incentives from PepsiCo for the
Brazil franchise territory as such franchise territory is no longer a start-up
operation. In addition, BAESA's sales volume of non-returnable packages
increased significantly during the 1996 three month interim period compared to
the 1995 three month interim period, resulting in higher cost of raw materials.
SELLING AND MARKETING EXPENSES. BAESA has a number of marketing
arrangements with PepsiCo pursuant to which BAESA is required to make certain
investments, based on a percentage of net sales, in marketing, new products,
packaging introductions and certain capital goods. BAESA receives
reimbursement from PepsiCo for a portion of such expenditures, which it is able
to use to offset traditional marketing expenses or to acquire fixed assets.
Selling and marketing expenses for BAESA increased by $26.5 million or
55.8%, to $74.2 million during the 1996 three month interim period from the
1995 three month interim period. This increase resulted primarily from the
increase in sales volume from the 1995 interim period and the introduction of a
guarana flavored soft drink (a Brazilian specialty drink). Furthermore, a
larger selling and marketing workforce has been in place in Brazil. In
addition, the contribution by PepsiCo of marketing incentives in Brazil has
been reduced as such franchise territory is no longer a start-up operation.
ADMINISTRATIVE EXPENSES. Administrative expenses for BAESA increased
$1.7 million, or 6.9%, for the 1996 three month interim period from the 1995
three month interim period to $26.7 million. This increase is attributable to
the additional personnel hired as BAESA's Brazilian operations expanded since
the initiation of operations on December 1, 1994. As a percentage of net
sales, administrative expenses for the 1996 three month interim period
increased from 12.6% in the 1995 three month interim period to 13.3% due to the
expansion of the operations in Brazil.
START-UP COSTS IN BRAZIL. BAESA incurred $1.1 million in start-up costs
in the 1996 three month interim period in connection with the expansion into
the Minas Gerais franchise territory. The start-up costs, which were incurred
in the 1996 three month interim period, were non-recurring and were charged to
income in such period.
INCOME/(LOSS) FROM OPERATIONS. Income (loss) from operations decreased
$48.2 million, to $(19.9) million. This decrease was a result of continued
depressed economic conditions in Argentina, resulting in lower sales volume
levels in Argentina as well as losses incurred in BAESA's Brazilian operations.
OTHER INCOME (EXPENSES). The net financing costs of BAESA are composed
of interest expense, offset by interest income, foreign currency gains or
losses associated with monetary assets and liabilities denominated in foreign
currencies and gains or losses resulting from forward contracts. Net financing
cost for the 1996 three month interim period increased by $11.1 million from
the 1995 three month interim period. This change resulted from an increase in
interest cost of $10.8 million during the 1996 three month interim period on
debt incurred mainly to fund BAESA's expansion in Brazil.
BAESA's foreign exchange position is affected by its monetary assets or
liabilities denominated in currencies other than those of the countries in
which BAESA operates. BAESA records a foreign exchange gain or loss if the
exchange rate of the functional currency to the other currency in which the
monetary assets or liabilities is denominated fluctuates.
INCOME TAX (EXPENSE)/BENEFIT. Income tax (expense)/benefit during the
1996 three month interim period amounted to $13.1 million as compared to $(3.7)
million recognized as income tax expense during the 1995 three month interim
period. The increase in income tax benefit is a result of the recognition of
benefit of taxable losses incurred in BAESA's franchise territory of Brazil.
EQUITY IN NET EARNINGS OF AFFILIATED COMPANY. Equity in net earnings of
affiliated company increased $0.4 million or 24.6% for the 1996 three month
interim period from the 1995 three month interim period to $2.2 million in net
income through its 45% equity in the net earnings of ECUSA, a joint venture in
Chile between BAESA and CCU established on November 1, 1994.
NET INCOME (LOSS). Net income (loss) for BAESA decreased by $46.9
million to $(26.4) million in the 1996 three month interim period from $20.5
million in the 1995 three month interim period, as a result of adverse economic
conditions in Argentina, losses in BAESA's Brazilian operations, higher
financing costs and higher raw material prices.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, BAESA had $37.4 million of cash and cash equivalents,
and $641.3 million in indebtedness for borrowed money, including short-term
borrowings of $260.8 million.
Because BAESA does not anticipate any significant devaluation or
revaluation of the currencies of the countries in which it operates relative to
the U.S. dollar in the short term, BAESA does not presently engage in any
hedging or other transactions intended to offset the effects of fluctuations in
currency exchange rates, although it may do so in the future.
During the past year, BAESA's principal sources of liquidity have been
financing and, to a lesser extent, net cash provided by operating activities.
Due to the slowdown in the Argentine economy and its commencement of operations
in Brazil, BAESA has significantly increased its investment in working capital.
BAESA has instituted a program to minimize working capital requirements, which
is expected to benefit BAESA in the fiscal year 1996. In addition, BAESA has
obtained favorable credit terms from its major raw material suppliers,
resulting in a reduction of working capital requirements.
BAESA has made substantial investments in capital goods and equipment to
expand its production capacity. Capital expenditures totaled $152.4 million in
the 1996 six month interim period. BAESA's capital expenditures have been
financed by borrowings from third parties. BAESA will continue to expand
production capacity over the next several years to meet expected increases in
consumer demand. Capital expenditures will be used for the purchase of
bottling lines and plants, warehouses, trucks, returnable containers, tools of
the trade and related bottling company investments, and will be financed with a
combination of funds currently held by BAESA and borrowings from third parties.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In connection with efforts being made to improve the profitability of
BAESA, in which the Company owns approximately a 17% interest, BAESA, Charles
H. Beach (Chairman and Chief Executive Officer of BAESA and President and Chief
Executive Officer of the Company) and PepsiCo have decided to accelerate the
transfer of voting control from the Essential Shareholders to PepsiCo (Phase II
of the current agreement with PepsiCo relating to BAESA voting control)
effective 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 will result in the Company
not being required to register as an investment company.
As a result of this action by the Board of Directors, pursuant to Rule
3a-2 under the Investment Company Act, the Company believes it will have a
period of one year after July 1, 1996 before it is required to register.
During that period the Company will explore a number of alternatives, including
(i) accelerating its program of expanding its operating businesses, including
the possible acquisition of new bottling franchises, in order to reduce the
relative size of the Company's BAESA investment, and (ii) disposing of, through
a sale or a spin-off transaction, sufficient BAESA shares to avoid the need to
register. The Company will also explore the possibility of applying for an
exemptive order from the Securities and Exchange Commission which would exempt
the Company from registration 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 agreed to support and encourage the Company's effort to
identify and acquire additional PepsiCo franchise territories in the Caribbean
and other appropriate regions.
<PAGE>
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.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/S/ CHARLES H. BEACH Chief Executive Officer May 15, 1996
Charles H. Beach
/S/ RAFAEL V. FARACE Chief Financial Officer and Chief May 15, 1996
Rafael V. Farace Accounting Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996
<PERIOD-START> OCT-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 46,703 48,348
<SECURITIES> 0 0
<RECEIVABLES> 22,021 22,013
<ALLOWANCES> (1,027) (1,059)
<INVENTORY> 4,137 4,666
<CURRENT-ASSETS> 75,442 80,645
<PP&E> 63,212 72,265
<DEPRECIATION> (23,152) (23,949)
<TOTAL-ASSETS> 185,114 195,788
<CURRENT-LIABILITIES> 34,694 48,076
<BONDS> 6,765 6,323
0 0
0 0
<COMMON> 215 215
<OTHER-SE> 125,122 124,399
<TOTAL-LIABILITY-AND-EQUITY> 185,114 195,788
<SALES> 30,987 26,857
<TOTAL-REVENUES> 30,987 26,857
<CGS> (18,896) (15,924)
<TOTAL-COSTS> (28,481) (24,629)
<OTHER-EXPENSES> 823 762
<LOSS-PROVISION> (148) (51)
<INTEREST-EXPENSE> (163) (202)
<INCOME-PRETAX> 3018 2737
<INCOME-TAX> (266) (425)
<INCOME-CONTINUING> 129 (702)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 129 (702)
<EPS-PRIMARY> 0.01 (0.03)
<EPS-DILUTED> 0.01 (0.03)
</TABLE>
