SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark One)
/x/ 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
/ / 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 Identification No.)
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 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.
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 March 31, 1996 which was originally filed
by the Company on May 15, 1996 and which was amended 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) 4
at March 31, 1996 and September 30, 1995
Condensed Consolidated Statements of Operations 6
(unaudited) for the Six Months Ended March 31, 1996 and
1995
Condensed Consolidated Statements of Operations 7
(unaudited) for the Three Months Ended March 31, 1996
and 1995
Condensed Consolidated Statements of Cash Flows 8
(unaudited) for the Six Months Ended March 31, 1996 and
1995
Notes to Condensed Consolidated Financial Statements 9
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II OTHER INFORMATION
Item 5. Other Information 19
See accompanying notes to condensed consolidated financial statements.
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)
March 31, September 30,
1996 1995
------------- -------------
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 14,428 16,086
Due from PepsiCo, Inc. and affiliated
companies 2,004 2,913
Other 571 341
Inventories 4,666 4,542
Prepaid expenses and other current assets 5,530 2,516
-------- --------
Total current assets 75,547 72,489
Investment in BAESA 62,601 74,128
Property, plant and equipment, net 47,111 36,445
Intangible assets, net 2,128 2,163
Notes receivable - officers and employees 775 -
Other assets 1,324 441
-------- ---------
Total assets $189,486 $ 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
March 31, September 30,
1996 1995
----------- -------------
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 5,279 6,477
-------- -------
Total current liabilities 50,821 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 75,984 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 24,614 39,472
Cumulative translation adjustment (521) (232)
Pension liability adjustment (1,544) (1,544)
------- -------
Total shareholders' equity 113,502 128,649
------- -------
Total liabilities and shareholders' equity 189,486 185,666
======= =======
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)
Six Months Ended March 31,
1996 1995
----------- -----------
Net Sales $ 54,502 $ 52,802
Cost of Sales 35,065 30,887
------ ------
Gross profit 19,437 21,915
Selling and marketing expenses 20,626 14,705
Administrative expenses 3,323 2,954
------ -----
Income/(loss) from operations (4,512) 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/(loss) before income tax expense
and equity in net earnings/(loss) of BAESA (3,292) 4,062
Income tax expense 691 637
Income/(loss) before equity in net
earnings/(loss) of BAESA (3,983) 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) $(9,620) 8,761
======== =====
Earnings per common share:
Income/(loss) before equity in net
earnings/(loss) of BAESA $ (0.19) $ 0.19
========== =======
Net income/(loss) $ (0.45) $ 0.49
========== =======
Weighted average number of shares
outstanding 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 March 31,
1996 1995
-------------- ------------
Net Sales $ 25,085 $ 24,745
Cost of Sales 16,141 14,076
---------- ----------
Gross profit 8,944 10,669
Selling and marketing expenses 10,754 7,159
Administrative expenses 1,725 1,452
---------- ----------
Income/(loss) from operations (3,535) 2,058
---------- ----------
Other income (expenses):
Interest expense (211) (377)
Interest income 680 45
Other, net 91 434
--------- ----------
Total other income (expenses) 560 102
Income/(loss) before income tax
expense and equity in net
earnings/(loss) of BAESA (2,975) 2,160
Income tax expense 425 315
-------- ----------
Income/(Loss) before equity in net
earnings/(loss) of BAESA (3,400) 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) $ (6,414) 4,629
Earnings per common share:
Income/(loss) before equity in net
earnings of BAESA $ (0.16) $ 0.10
======== =========
Net income/(loss) $ (0.30) $ 0.26
======== =========
Weighted average number of shares
outstanding 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
Six Months Ended March 31, 1996 and 1995
(U.S. Dollars in thousands)
(Unaudited)
1995 1994
Cash flows from operating activities: ----------- ----------
Net income/(loss) $ (9,620) $ 8,761
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Gain on disposal of property, plant, and equipment (529) (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 2,337 (546)
Inventories (124) 660
Prepaid expenses and other current assets (3,014) (4,130)
Accounts payable 3,252 4,421
Other liabilities and accrued expenses (1,199) 3,095
Income taxes payable 332 400
Other, net (883) 206
-------- -------
Net cash provided by (used in) operating activities (1,286) 9,496
-------- -------
Cash flows from investing activities:
Proceeds from the sale of property,
plant and equipment 1,175 483
Purchases of property, plant and
equipment (13,802) (4,801)
Increase in notes receivable-officers and employees (775) -
Dividends received from affiliates 2,839 2,839
-------- -------
Net cash (used in) investing activities (10,563) (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 equivalent at beginning
of period 46,091 1,347
Cash and cash equivalent at the end of -------- -------
period $ 48,348 $ 3,097
Supplemental disclosures: ======== =======
Cash paid for:
Interest $ 988 $ 731
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, including those
related to the restatement of the results of operations for the
second quarter, necessary for a fair presentation. For
additional information, please refer to page of this Form 10-
Q/A. 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.
This report on Form 10-Q/A is being filed to restate the
Condensed Consolidated Financial Statements of the Company which
were included in the Company's report on Form 10-Q for the three
and six-month periods ended March 31, 1996 which was filed on May
15, 1996. Subsequent to the filing of that report, the Company
discovered accounting irregularities which resulted in a
substantial understatement of certain expenses, primarily
discounting and marketing expenses, and a corresponding
overstatement of income from operations for both the three-month
period ended December 31, 1995, and the three-month period ended
March 31, 1996. As a result of the restatement contained in this
report, the Company is reporting a net loss for the three months
ended March 31, 1996 of $(6.4) million, or $(.30) per share,
rather than net income of $(0.70) million, or $(0.03) per share,
which was reported in the originally filed report on Form 10-Q
for its second fiscal quarter.
(2) Inventories
Inventories consist of the following:
March 31, September 30,
1996 1995
--------- ------------
Raw materials $1,546 $ 1,247
Finished goods 2,240 2,048
Other 880 1,247
------ --------
$4,666 $ 4,542
====== ========
(3) Property, Plant and Equipment, Net
Property, plant and equipment consists of the following:
March 31, September 30,
1996 1995
--------- -------------
Land and improvements $1,159 $ 1,159
Buildings 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 23,956 12,224
--------- ------------
71,060 58,566
Less accumulated depreciation and
amortization (23,949) (22,121)
---------- -------------
Property, plant and equipment, net $47,111 $ 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:
March 31,
1996 1995
---------- -----------
Interest cost capitalized $ 623 $ -
Interest cost charged to income 365 731
---------- -----------
$ 988 $ 731
10
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:
March 31,
1996 1995
----------- ----------
Current $691 $637
Deferred - -
----------- ----------
Income tax expense $691 $637
=========== ==========
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.
11
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) Investment in BAESA
The following 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 (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 time of
filing of this Form 10-Q/A, the Company does not control, or have
significant influence over, the management or operations of BAESA.
For further information regarding BAESA, investors should consult
information made publicly available by BAESA to its shareholders.
March 31, September 30,
1996 1995
(unaudited) (audited)
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
Current installments of long-term
debt $ 59,111 $ 48,457
Bank loans and overdrafts 260,769 182,672
Accounts payable, income taxes
payable, and accrued expenses 145,348 114,950
-------- --------
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
========== ===========
12
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Six Months Ended Three Months Ended
March 31, March 31,
----------------------- ----------------------
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 (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
Other expenses, net (40,508) (9,022) (21,740) (5,885)
---------- --------- --------- ---------
Income / (loss) before
income tax (expense) /
benefit and equity in
earnings of affiliated
company (62,749) 46,374 (41,656) 22,379
Income tax (expense) /
benefit 8,994 (10,147) 13,072) (3,664)
----------- -------- ---------- ---------
Income / (loss) before
equity in earnings of
affiliated company (53,755) 36,227 (25,584) 18,715
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
=========== ========= =========== =========
13
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General Overview
This report on Form 10-Q/A is being filed to restate the Condensed
Consolidated Financial Statements of the Company which were included
in the Company's report on Form 10-Q for the three and six-month
periods ended March 31, 1996 which originally was filed on May 15,
1996. Subsequent to the filing of that report, the Company
discovered accounting irregularities which resulted in a substantial
understatement of certain expenses, primarily discounting and
marketing expenses, and a corresponding overstatement of income from
operations for both the three-month period ended December 31, 1995,
and the three-month period ended March 31, 1996. A separate report
on Form 10-Q/A amending the Company's report on Form 10-Q for the
three-month period ended December 31, 1995 was filed simultaneously
with this report. As a result of the restatement contained in this
report, the Company is reporting a loss from operations for the
three months ended March 31, 1996 of $(3.5) million, rather than
income from operations of $2.2 million which was reported in the
originally filed report on Form 10-Q for its second fiscal quarter.
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 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 highest 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.
14
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 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).
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, during the period covered by this
report, 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. 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 (loss) 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.
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
------------------------ ------------------ --------------------
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 58.5 64.3 56.9 64.3
Gross Profit 40.2 41.8 40.6 41.5 35.7 43.1 35.7
Selling and Marketing 28.0 29.3 26.6 27.8 37.8 28.9 42.9
Expenses
Administrative Expenses 11.4 10.1 5.5 5.6 6.1 5.9 6.9
Intangibles and Fixed
Asset Write-offs - 2.8 - - - - -
Income (Loss) from
Operations 0.8 (0.4) 8.5 8.1 (8.3) 8.3 (14.1)
</TABLE>
1996 Six Month Interim Period Compared to 1995 Six Month Interim
Period Net Sales. Net Sales for the Company increased $ 1.7
million, or 3.2%, for the 1996 six month interim period from the
1995 six month interim period to $54.5 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. This increase in discounts
resulted from increased competitive activity. The average net
sales price on an eight ounce equivalent basis decreased
during the 1996 six month interim period by approximately 7.2% as
compared to the 1995 six month interim period.
15
Cost of Sales. Cost of sales for the Company increased $4.2
million, or 13.5% for the 1996 six month interim period from the
1995 six month period to $35.0 million. This increase resulted
primarily from the increase in sales volume and the increase in
the costs of certain raw materials, principally aluminum cans and
resin for the production of plastic bottles and preforms.
Gross Profit. Gross profit for the Company decreased by
$2.5 million to $19.4 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 35.7% 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 the lower net sales price and the higher cost of certain
raw materials.
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
$5.9 million, or 40.2%, to $20.6 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 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 other marketing activities undertaken to promote the
Company's products.
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 6.1% in the 1996 six month interim period from 5.6%
in the 1995 six month interim period.
Income from Operations. Income/(loss) from operations for
the Company decreased to ($4.5) million in the 1996 six month
interim period, from $4.3 million in the 1995 six month interim
period. The decrease is the result of a lower average net sales
price, higher cost of sales from the increased sales volume and
the increase in selling and marketing expenditures.
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 ($9.6) million, compared to $8.8
million during the 1995 six month interim period. Net (loss) in the
1996 six month interim period primarily reflects equity in net loss of
BAESA, net of income tax of $(5.6) million as compared to equity in
net earnings of BAESA of $5.3 million during the 1995 interim period.
1996 Three Month Interim Period Compared
to 1995 Three Month Interim Period
Net Sales. Net Sales for the Company increased $0.3 million,
or 1.4%, for the 1996 three month interim period from the 1995 three
month interim period to $25.1 million. This increase was primiarly
the result of a 14.5% increase in beverage sales volume partially
offset by an increase in discounts provided to customers in the 1996
16
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 11.5% 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 $2.1
million, or 14.7% for the 1996 three month interim period from the
1995 three month interim period to $16.1 million. This increase
resulted primiarly from the increase in sales volume.
Gross Profit. Gross profit for the Company decreased by
$1.7 million to $9.0 million in the 1996 three month interim period
from $10.7 million in 1995 three month interim period. As a
percentage of net sales, gross profit decreased to 35.7% in the 1996
three month interim period from 43.1% in the 1995 three month interim
period due primarily tothe 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 Comapny's selling and
marketing expenses are shown net of all such reimbursements from
PepsiCo.
Selling and marketing expenses for the Company increased
$3.6 million, or 50.2%, to $10.7 million for the 1996 three month
interim period from the 1995 three month interim period as a reuslt
of increased marketing activities undertaken during the period
resulting from a significant increase in competition.
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 6.9% in the 1996 three
month interim period from 5.9% in the 1995 three month interim period.
Income from Operations. Income (loss) from operations for
the Company decreased to $(3.5) million in the 1996 three month
interim period, from $2.1 million in the 1995 three month interim
period. The decrease is the result of lower average net sales during
the 1996 there month interim period, higher costs of sales from the
increased sales volume and increased selling and marketing
expenditures.
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 earings (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 atttributable 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
<PAGE>
BAESA's Brazilian operations.
Net Income/(Loss). Net income (loss) for the 1996 three
month interim period for the Company was $(6.4) million, compared
to $4.6 million during the 1995 three month interim period. Net
(loss) in the 1996 three month interim period primarily reflects
equity in net loss of BAESA, net of income tax of $(3.0) million as
compared to equity in net earnings of BAESA of $2.8 million in the
1995 three month interim period. In addition, net loss in the 1996
three month interim period reflects net loss before equity in net
earnings (loss) of BAESA of $(3.4) million as compared to net income
of $1.8 million during the 1995 three month interim period.
Liquidity and Capital Resources
At March 31, 1995, the Company had $48.3 million of cash
and cash equivalents, of which $44 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) operations activities for the
Company for the 1996 six month interim period was $(1.3) million
compared to $9.5 million during the 1995 six month interim period.
This decrease was mainly a result of the net loss of $(6.9) 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 $(10.5) 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 $13.8 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.
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 interim six
month period. The significant financing activities for the Company
in the 1996 six month interim period were the payments of dividends
and the issuance of notes payable of $21.1 million offset by the repayment
of debt of $1.8 million. The significant financing activities in the
1995 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 year 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
18
million, $25 million and $30 million for each succeeding fiscal
year thereafter. The Company is currently in compliance with
these financing 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.
17
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 Toa Baja plant and the Rio Piedras plant are located.
The Company's franchise arraignments 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 $13.8 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 primarily for the
completion of the construction of the Toa Baja plant.
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 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.
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 affect the Company's
future business operations. In addition, PepsiCo agreed to support
and encourage the Company's effort to identify and acqauire
additional PepsiCo franchise territories in the Caribbean and other
appropriate regions.
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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
- ----------------------- Officer
Rafael Nin
/s/ David L. Virginia Chief Financial December 23, 1996
- ------------------------ Officer and Chief
David L. Virginia Accounting Officer
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