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 JUNE 30, 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 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. <square> Yes <checked-box> No
As of August 12, 1996, there were 21,500,000 shares of Common Stock
issued and outstanding. This amount includes 5,000,000 shares of Class A
Common Stock and 16,500,000 shares of Class B Common Stock.
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 June 30, 1996 and September
30, 1995 3
Condensed Consolidated Statements of Operations (unaudited) for the Nine Months
Ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Operations (unaudited) for the Three Months
Ended June 30, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended June 30, 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 14
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION 20
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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<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>
June 30, September 30,
1996 1995
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 47,781 $ 46,091
Accounts receivable:
Trade, less allowance for doubtful accounts of $934 at
June 30, 1996 and $1,458 at September 30, 1995 17,096 16,086
Due from PepsiCo, Inc. and affiliated companies 3,328 2,913
Other 2,178 341
Inventories 3,768 4,542
Prepaid expenses and other current assets 2,882 2,516
---------- ----------
Total current assets 77,033 72,489
Investment in Buenos Aires Embotelladora S.A. (BAESA) 19,617 74,128
Property, plant and equipment, net 51,303 36,445
Intangible assets, net 1,458 2,163
Other assets 123 441
---------- ----------
Total assets $ 149,534 $ 185,666
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
----------- -------------
<S> (unaudited)
<C> <C>
Liabilities:
Current installments of long-term debt $ 1,550 $ 1,550
Current installments of capital lease obligations 228 1,204
Short term borrowings 35,916 4,600
Accounts payable:
Trade 17,612 12,536
Affiliate 2,173 1,181
Income taxes payable 866 123
Deferred income taxes - 530
Other accrued expenses 9,817 6,477
---------- ----------
Total current liabilities 68,162 28,201
Long-term debt, excluding current installments 5,202 6,365
Capital lease obligations, excluding current installments 675 848
Accrued pension cost, long-term 2,871 2,871
Deferred income taxes 5,278 18,732
---------- ----------
Total liabilities 82,188 57,017
---------- ----------
Shareholders' equity:
Class A common shares of $0.01 par value; authorized,
issued and outstanding 5,000,000 shares 50 50
Class B common shares, $0.01 par value; authorized
35,000,000 shares; issued and outstanding 16,500,000 shares 165 165
Additional paid-in capital 90,738 90,738
Retained earnings (deficit) (21,382) 39,472
Cumulative translation adjustment (681) (232)
Pension liability adjustment (1,544) (1,544)
---------- ----------
Total shareholders' equity 67,346 128,649
---------- ----------
Total liabilities and shareholders' equity $ 149,534 $ 185,666
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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<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>
Nine Months Ended June 30,
1996 1995
------------- -------------
<S> <C> <C>
Net Sales $ 79,117 $ 83,634
Cost of Sales 54,980 49,990
------------ -------------
Gross profit 24,137 33,644
Selling and marketing expenses 32,246 22,826
Administrative expenses 6,065 4,738
Restructuring charges 3,785 -
------------ -------------
Income (loss) from operations (17,959) 6,080
------------ -------------
Other income (expenses):
Interest expense (876) (808)
Interest income 1,889 158
Other, net (230) 518
------------ -------------
Total other income (expenses) 783 (132)
------------ -------------
Income (loss) before income tax expense and
equity in net earnings/(loss) of BAESA (17,176) 5,948
Income tax expense 601 134
------------ -------------
Income (loss) before equity in net earnings/(loss) of BAESA (17,777) 5,814
============ =============
Equity in net earnings/(loss) of BAESA, net of income tax
benefit/(expense) of $13,454 and $(962) in 1996
and 1995 respectively (37,769) 5,362
------------- -------------
Net income/(loss) $ (55,546) 11,176
============= =============
Earnings per common share:
Income before equity in net earnings/(loss) of BAESA $ (0.83) $ 0.32
============= =============
Net income/(loss) $ (2.58) $ 0.62
============= =============
Weighted average number of shares outstanding (in thousands) 21,500 18,000
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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<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 June 30,
1996 1995
----------- ------------
<S> <C> <C>
Net Sales $ 24,615 $ 30,832
Cost of Sales 19,915 19,103
----------- -----------
Gross profit 4,700 11,729
Selling and marketing expenses 11,620 8,121
Administrative expenses 2,742 1,784
Restructuring charges 3,785 -
----------- -----------
Income (loss) from operations (13,447) 1,824
----------- -----------
Other income (expenses):
Interest expense (511) (77)
Interest income 524 81
Other, net (450) 58
----------- -----------
Total other income (expenses) (437) 62
----------- -----------
Income (loss) before income tax expense and
equity in net earnings/(loss) of BAESA (13,884) 1,886
Income tax benefit 90 503
----------- -----------
Income (loss) before equity in net earnings/(loss) of BAESA (13,794) 2,389
Equity in net earnings/(loss) of BAESA, net of income tax
benefit/(expense) of $10,691 and $(54) in 1996
and 1995 respectively (32,132) 26
----------- -----------
Net income/(loss) $ (45,926) $ 2,415
============ ===========
Earnings per common share:
Income before equity in net earnings/(loss) of BAESA $ (0.64) $ 0.13
============ ===========
Net income/(loss) $ (2.14) $ 0.13
============ ===========
Weighted average number of shares outstanding (in thousands) 21,500 18,000
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ (55,546) $ 11,176
Adjustments to reconcile net earnings/(loss) to net cash
provided by (used in) operating activities:
(Gain)/Loss on disposal of property, plant, and equipment 510 (455)
Intangible write-off 647
Depreciation and amortization 3,951 3,378
Equity in net (earnings)/loss of BAESA 37,769 (5,362)
Changes in assets and liabilities:
Accounts receivable (3,262) (3,897)
Inventories 774 1,218
Prepaid expenses and other current assets (366) (1,668)
Accounts payable 6,068 1,258
Other liabilities and accrued expenses 2,810 4,519
Income taxes payable 743 466
Other, net 308 (694)
---------- ----------
Net cash provided by (used in) operating activities (5,594) 9,939
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment 1,280 483
Purchases of property, plant and equipment (20,531) (4,497)
Dividends received from affiliates 2,839 2,839
---------- ----------
Net cash (used in) investing activities (16,412) (1,175)
Cash flows from financing activities:
Proceeds from short term borrowings 48,316 17,600
Repayment of short-term borrowings (17,000) (17,250)
Repayment of long-term debt (1,163) (1,162)
Repayment of capital lease obligations (1,149) (1,961)
Dividends paid (5,308) (4,826)
---------- ----------
Net cash provided by (used in) financing activities 23,696 (7,599)
Net increase in cash and cash equivalents 1,690 1,165
Cash and cash equivalents at beginning of period 46,091 1,347
---------- ----------
Cash and cash equivalents at the end of period $ 47,781 $ 2,512
========== ==========
Supplemental disclosures:
Cash paid for:
Interest $1,769 $ 1,066
Income taxes 186 211
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
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<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 necessary for a fair presentation,
including recognition of certain charges, including marketing and other
expenses and the write-off of pre-paid tax and intangible items carried over
from prior periods. Operating results for the nine months and three months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ended September 30, 1996.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
------- -------------
<S> <C> <C>
Raw materials $ 1,365 $ 1,247
Finished goods 1,823 2,048
Other 580 1,247
------- -------
$ 3,768 $ 4,542
======= =======
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
---------- -------------
<S> <C> <C>
Land and improvements $ 8,061 $ 1,159
Buildings and improvements 16,060 5,592
Machinery, equipment and vehicles 45,033 36,173
Bottles, cases and shells 1,479 1,585
Furniture and fixtures 1,941 1,833
Construction in process 167 12,224
-------- --------
72,741 58,566
Less accumulated depreciation and amortization (21,438) (22,121)
-------- --------
Property, plant and equipment, net $ 51,303 $ 36,445
======== ========
</TABLE>
8
PAGE
<PAGE>
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>
June 30,
1996 1995
-------- ---------
<S> <C> <C>
Interest cost capitalized $ 893 $ 258
Interest cost charged to income 876 808
-------- ---------
$ 1,769 $ 1,066
======== =========
</TABLE>
(4) ACCOUNTING FOR LONG LIVED ASSETS
During the period ended June 30, 1996 the Company adopted the provisions
of FASB 121 - Accounting for Long Lived Assets. The application of this
accounting pronouncement resulted in the write down of long lived assets in the
amount of $1,400.
9
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<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) SHAREHOLDERS' EQUITY
The Company declared and paid cash dividends of $5,308 during the nine
months ended June 30, 1996 and $4,826 during the nine months ended June 30,
1995.
In connection with the Company's September 19, 1995 public offering (the
"Offering") of 7,000,000 Class B common shares, the Company changed its capital
structure to 5,000,000 authorized shares of $0.01 par value Class A common
shares and 35,000,000 authorized shares of $0.01 par value Class B common
shares.
On August 14, 1995, the Company's Board of Directors declared a 24,000 to
1 stock split effective concurrently with the effective date of the Offering.
The par value of each share is $0.01. A total of $179 was reclassified from
the Company's additional paid-in capital account to the Company's Class A and B
common share accounts. All share and per share amounts have been restated to
retroactively reflect the stock split.
Earnings per common share are determined by dividing net income by the
weighted average number of common shares outstanding during each year.
(6) INCOME TAX
Income tax expense for the nine months ended June 30, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
June 30,
1996 1995
-------- ---------
<S> <C> <C>
Current $ 601 $ 134
Deferred - -
-------- ---------
Income tax expense $ 601 $ 134
======== =========
</TABLE>
Deferred income tax benefit / (expense) of $13,454 and $(962) for the nine
month period ended June 30, 1996 and 1995, respectively, have been provided in
connection with the Company's equity in net earnings / (loss) of BAESA.
(7) RELATED PARTY TRANSACTIONS
The Company paid approximately $1,682 and $1,917 during the nine months
ended June 30, 1996 and 1995, respectively, for advertising fees to a firm
controlled by a shareholder of the Company.
The Company paid approximately $232 and $414 during the nine months ended
June 30, 1996 and 1995, respectively, for consulting fees to a shareholder and
director of BAESA.
The Company paid approximately $151 during the nine months ended June 30,
1996 for construction management services to a shareholder and director of the
Company.
10
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<PAGE>
(8) RESTRUCTURING CHARGES
The Company's results of operations for the nine months ended June 30,
1996 have been affected by the incurrance of several non-recurring
restructuring charges totalling $3.8 million. These charges were comprised of
the following: (1) a $0.5 million expense incurred in connection with the
accelerated transition of management control of BAESA to PepsiCo., effective
July 1, 1996, (2) a $1.4 million fixed asset write-down related to the closing
of all bottling operations in the old plant, which is now for sale, (3) $1.4
million in pension asset write-offs and costs associated with employee
termination and (4) $0.5 million in expenses associated with conducting the
Company's study of expansion opportunities within Western Europe.
11
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<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) INVESTMENT IN BAESA
The following condensed unaudited financial information relating to BAESA
as of June 30, 1996 and 1995, and for the nine months then ended and audited
balance sheet financial information as of September 30, 1995 is as follows (in
thousands of U.S. dollars) has been provided to the Company by BAESA for
inclusion in this report and the Company makes no representation as to the
accuracy or completeness of such information. At the present time, the Company
does not control, or have significant influence over, the management or
operations of BAESA. For further information regarding BAESA, investors should
consult information made publicly available by BAESA to its shareholders.
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
(unaudited) (audited)
=========== =============
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 45,241 $ 57,617
Accounts receivable, net 63,580 105,478
Inventories 36,644 56,349
Other current assets 19,466 25,933
----------- -----------
Total current assets 164,931 245,377
Property, plant and equipment, net 663,370 655,414
Intangible assets, net 87,354 88,017
Investment in joint venture 107,316 107,385
Deferred income tax, net - 10,530
Other assets 12,296 21,201
----------- -----------
Total assets $ 1,035,267 $ 1,127,924
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current installments of long-term debt $ 287,371 $ 48,457
Bank loans and overdrafts 359,927 182,672
Accounts payable, income taxes payable, and accrued expenses 151,303 114,950
----------- -----------
Total current liabilities 789,601 346,079
Long-term debt, excluding current installments 98,247 323,737
Deferred income taxes 7,568 7,625
Other long-term liabilities 11,176 10,715
----------- -----------
Total liabilities 915,592 688,156
Total shareholders' equity 119,675 439,768
----------- -----------
Total liabilities and shareholders' equity $ 1,035,267 $ 1,127,924
=========== ===========
</TABLE>
12
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<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
June 30, June 30,
------------------------------ -----------------------------
RESULTS OF OPERATIONS 1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 545,564 $ 506,238 $ 118,093 $ 139,653
Cost and expenses:
Cost of sales (341,524) (261,739) (105,386) (77,462)
Selling and marketing expenses (262,178) (117,776) (119,361) (37,736)
Administrative expenses (146,569) (71,984) (87,298) (25,112)
Restructuring charges (21,071) - (9,531) -
----------- ---------- ---------- ----------
(771,342) (451,499) (321,576) (140,310)
----------- ---------- ---------- ----------
Income / (loss) from operations (225,778) 54,739 (203,483) (657)
Other expenses, net (65,095) (15,382) (24,587) (6,360)
----------- ---------- ---------- ----------
Income / (loss) before income tax (expense) /
benefit and equity in earnings of affiliated
company (290,873) 39,357 (228,070) (7,017)
Income tax (expense) / benefit (14,560) (3,741) (23,554) 6,406
----------- ---------- ---------- ----------
Income / (loss) before equity in earnings of
affiliated company (305,433) 35,616 (251,624) (611)
Equity in earnings of affiliated company 4,653 3,783 223 809
----------- ---------- ---------- ----------
Net income / (loss) $ (300,780) $ 39,399 $ (251,401) $ 198
=========== ========== ========== ==========
</TABLE>
13
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<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 should be read in conjunction with this overview and
the Condensed Consolidated Financial Statements of the Company and the Notes
thereto, as of and for the nine month periods ended June 30, 1995 and 1996
(the "1995 nine month interim period" and the "1996 nine month interim period,"
respectively) and as of and for the three month interim periods ended June 30,
1995 and 1996 (the "1995 three month interim period" and the "1996 three month
interim period," respectively).
PRESENTATION OF FINANCIAL INFORMATION
In addition to conducting its own bottling operations, the Company
indirectly owns 12,345,347 shares, or approximately 17% of the outstanding
capital stock, and, through June 30, 1996, exercised significant influence over
the management of BAESA, subject to the right of PepsiCo, Inc. ("PepsiCo") and
certain of its affiliates (collectively, "Pepsi Cola International" or "PCI")
to approve certain management decisions. As of July 1, 1996, PepsiCo assumed
operating control of BAESA. See Item 5 "Other Information." The financial
information relating to the Company set forth below reflects the operations of
the Company and its equity interest in the net earnings of BAESA.
SEASONALITY
The historical results of operations of the Company have not been
significantly seasonal. The Company believes that this is partly attributable
to existing capacity constraints in recent years which prevented the Company
from meeting increased demand during peak periods. However, the Company
anticipates that its results of operations in the future may be increasingly
seasonal in the summer and holiday seasons.
14
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<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 Nine Months Three Months
Interim Interim
<S> -------------------------------- ----------------- -------------------
1993 1994 1995 1995 1996 1995 1996
-------- -------- ------- ------ ------ ------- -------
<C> <C> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 59.8 58.2 59.4 59.8 69.5 61.9 80.9
Gross Profit 40.2 41.8 40.6 40.2 30.5 38.1 19.1
Selling and Marketing Expenses 28.0 29.3 26.6 27.3 40.8 26.3 47.2
Administrative Expenses 11.4 10.1 5.5 5.7 7.6 5.8 11.1
Intangibles and Fixed Asset Write-offs - 2.8 - - - - -
Restructuring Charges - - - - 4.8 - 15.4
Income (Loss) from Operations 0.8 (0.4) 8.5 7.2 (22.7) 6.0 (54.6)
</TABLE>
1996 NINE MONTH INTERIM PERIOD COMPARED TO 1995 NINE MONTH INTERIM PERIOD
NET SALES. Net Sales for the Company decreased $4.5 million, or 5.4%,
for the 1996 nine month interim period from the 1995 nine month interim period
to $79.1 million. This decrease was primarily the result of the significant
increase in discounts provided to customers partially offset by a 6.3% increase
in sales volume in the 1996 nine month interim period as compared to the 1995
nine month interim period. This increase in discounts resulted from increased
competitive activity. The average net sales price on an eight ounce equivalent
basis decreased during the 1996 nine month interim period by approximately
10.9% as compared to the 1995 nine month interim period.
COST OF SALES. Cost of sales for the Company increased $5.0 million, or
10.0% for the 1996 nine month interim period from the 1995 nine month interim
period to $55.0 million. This increase resulted primarily from the increase in
sales volume, the increase in the costs of certain raw materials, and the costs
associated with the move to the new manufacturing facility in Toa Baja.
GROSS PROFIT. Gross profit for the Company decreased by $9.5 million to
$24.1 million in the 1996 nine month interim period from $33.6 million in the
1995 nine month interim period. As a percentage of net sales, gross profit
decreased to 30.5% in the 1996 nine month interim period from 40.2% in the 1995
nine month interim period due primarily to the higher discounts provided to
customers and the lower average net sales price.
SELLING AND MARKETING EXPENSE. The Company has a number of marketing
arrangements with PepsiCo pursuant to which the Company is required to make
certain investments in marketing, new products, packaging introductions and
certain capital goods. The Company receives reimbursements from PepsiCo for a
portion of such expenditures, which it is able to use to offset traditional
marketing expenses or to acquire fixed assets. The Company's selling and
marketing expenses are shown net of all such reimbursements from PepsiCo.
Selling and marketing expenses for the Company increased $9.4 million, or
41.3%, to $32.2 million for the 1996 nine month interim period from the 1995
nine month interim period. This increase is the result of greater marketing
activities during the 1996 nine month interim period resulting primarily from a
significant increase in competition, expenses associated with the launch of
Teem, a lemon/lime soft drink, which was launched during October 1995, as well
as additional marketing activities undertaken to promote the Company's
products. The increase also resulted from an expensing in the 1996 interim
period of certain prepaid marketing and expense items carried over from prior
periods.
15
PAGE
<PAGE>
ADMINISTRATIVE EXPENSES. Administrative expenses for the Company
increased $1.3 million or 28.0% for the 1996 nine month interim period from the
1995 nine month interim period to $6.0 million primarily as a result of
increased professional services provided to the Company. As a percentage of
net sales, administrative expenses increased to 7.6% in the 1996 nine month
interim period from 5.7% in the 1995 nine month interim period.
RESTRUCTURING CHARGES. The Company's results of operations for the nine
months ended June 30, 1996 have been affected by the incurrance of several non-
recurring restructuring charges totalling $3.8 million. These charges were
comprised of the following: (1) a $0.5 million expense incurred in connection
with the accelerated transition of management control of BAESA to PepsiCo.,
effective July 1, 1996, (2) a $1.4 million fixed asset write-down related to
the closing of all bottling operations in the Company's old bottling plant,
which is now for sale, (3) $1.4 million in pension asset write-offs and costs
associated with employee termination and (4) $0.5 million in expenses
associated with conducting the Company's study of expansion opportunities
within Western Europe.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations for the
Company decreased to $(18.0) million in the 1996 nine month interim period,
from $6.1 million in the 1995 nine month interim period. The decrease is the
result of lower average net sales, the increased discounts offered to
customers, the significant increase in selling and marketing expenditures, the
restructuring charges recognized during the 1996 nine month interim period of
$3.8 million and the recognition of certain charges including marketing and
other expenses and the write-off of prepaid tax carried over from prior
periods.
INCOME TAX EXPENSE. Income tax expense for the Company increased by $0.5
million for the 1996 nine month interim period to $0.6 million. This increase
is due primarily to interest earnings on proceeds on deposit from the Company's
September 1995 initial public offering.
EQUITY IN NET EARNINGS (LOSS) OF BAESA, NET OF INCOME TAX. Equity in net
earnings (loss) of BAESA, net of income tax, amounted to $(37.8) million during
the 1996 nine month interim period, compared to $5.4 million during the 1995
nine month interim period. The decrease is attributable to losses incurred by
BAESA for the 1996 interim period resulting from restructuring charges in
connection with continued depressed economic conditions in Argentina, lower
sales volume levels in Argentina resulting from such economic conditions,
losses incurred in BAESA's Brazilian operations and substantial write-offs and
other charges.
NET INCOME (LOSS). Net income (loss) for the 1996 nine month interim
period for the Company was $(55.5) million, compared to $11.2 million during
the 1995 nine month interim period. Net (loss) in the 1996 nine month interim
period primarily reflects loss before equity in net earnings (loss) of BAESA of
$(17.8) million and equity in net loss of BAESA, net of income tax of $(37.8)
million, as compared to income before equity in net earnings of BAESA of $5.8
million and equity in net earnings of BAESA of $5.4 million in the 1995 nine
month interim period.
1996 THREE MONTH INTERIM PERIOD COMPARED TO 1995 THREE MONTH INTERIM PERIOD
NET SALES. Net Sales for the Company decreased $6.2 million, or 20.2%,
for the 1996 three month interim period from the 1995 three month interim
period to $24.6 million. This decrease was primarily the result of an increase
in discounts provided to customers and a decrease in sales volume of 3% in the
1996 three month interim period as compared to the 1995 three month interim
period. This increase in discounts resulted from increased competitive
activity. The average net sales price on an eight ounce equivalent basis
decreased by 17.5% during the 1996 three month interim period as compared to
the 1995 three month interim period.
COST OF SALES. Cost of sales for the Company increased $0.8 million, or
4.2% for the 1996 three month interim period from the 1995 three month interim
period to $19.9 million. This increase resulted primarily from the increase in
the cost of certain raw materials and costs associated with the move to the new
manufacturing facility in Toa Baja.
GROSS PROFIT. Gross profit for the Company decreased to $4.7 million in
the 1996 three month interim period from $11.7 million in the 1995 three month
16
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interim period. As a percentage of net sales, gross profit decreased to 19.1%
in the 1996 three month interim period from 38.1% in the 1995 three month
interim period due primarily to the higher discounts provided to customers and
the lower average net sales price.
SELLING AND MARKETING EXPENSE. The Company has a number of marketing
arrangements with PepsiCo pursuant to which the Company is required to make
certain investments in marketing, new products, packaging introductions and
certain capital goods. The Company receives reimbursements from PepsiCo for a
portion of such expenditures, which it is able to use to offset traditional
marketing expenses or to acquire fixed assets. The Company's selling and
marketing expenses are shown net of all such reimbursements from PepsiCo.
Selling and marketing expenses for the Company increased $3.5 million, or
43.1%, to $11.6 million for the 1996 three month interim period from the 1995
three month interim period. This increase resulted from the increase in
marketing activities undertaken to promote the Company's products during the
1996 three month interim period resulting primarily from a significant increase
in competition. The increase also resulted from the expensing in the 1996
interim period certain prepaid marketing and expense items carried over from
prior periods.
ADMINISTRATIVE EXPENSES. Administrative expenses for the Company
increased $1.0 million or 53.7% for the 1996 three month interim period from
the 1995 three month interim period to $2.7 million primarily as a result of
the increased professional services provided to the Company. As a percentage
of net sales, administrative expenses increased to 11.1% in the 1996 three
month interim period from 5.8% in the 1995 three month interim period.
RESTRUCTURING CHARGES. The Company's results of operations for the three
months ended June 30, 1996 have been affected by the incurrance of several non-
recurring restructuring charges totalling $3.8 million. These charges were
comprised of the following: (1) a $0.5 million expense incurred in connection
with the accelerated transition of management control of BAESA to PepsiCo.,
effective July 1, 1996, (2) a $1.4 million fixed asset write-down related to
the closing of all bottling operations in the old plant, which is now for sale,
(3) $1.4 million in pension asset write-offs and costs associated with employee
termination and (4) $0.5 million in expenses associated with conducting the
Company's study of expansion opportunities within Western Europe.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations for the
Company decreased to $(13.4) million in the 1996 three month interim period,
from $1.8 million in the 1995 three month interim period. The decrease is the
result of lower net sales during the 1996 three month interim period, the
increased discounts offered to customers, the increased selling and marketing
expenditures, the increase in administrative expenses, and the restructuring
charges recognized during the 1996 three month interim period and the
recognition of certain charges including marketing and other expenses and the
write-off of prepaid tax carried over from prior periods.
INCOME TAX BENEFIT. Income tax benefit for the Company decreased by $0.4
million for the 1996 three month interim period to $0.1 million primarily
resulting from lower taxable income earned during the 1996 three month interim
period.
EQUITY IN NET EARNINGS (LOSS) OF BAESA, NET OF INCOME TAX. Equity in net
earnings (loss) of BAESA, net of income tax, amounted to $(32.1) million during
the 1996 three month interim period, compared to $0.03 million during the 1995
three month interim period. The decrease is attributable to losses incurred by
BAESA for the 1996 interim period in connection with continued depressed
economic conditions in Argentina, lower sales volume levels in Argentina
resulting from such economic conditions, losses incurred in BAESA's Brazilian
operations and substantial write-offs and other charges.
NET INCOME (LOSS). Net income (loss) for the 1996 three month interim
period for the Company was $(45.9) million, compared to $2.4 million during the
1995 three month interim period. Net (loss) in the 1996 three month interim
period primarily reflects loss before equity in net loss of BAESA of $(13.8)
million and the equity in net loss of BAESA, net of income tax, of $(32.1)
million as compared to income before equity in net earnings of BAESA of $2.4
million and equity in net earnings of BAESA of $0.03 million in the 1995 three
month interim period.
17
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $47.8 million of cash and cash
equivalents, of which $43.0 million represented proceeds from the Company's
initial public offering of equity securities, and the balance indebtedness for
borrowed money.
The Company has announced that its current priority is to restore
profitability with respect to its Puerto Rican operations. The Company's
management is formulating a plan of immediate action to reduce expenditures and
improve operating efficiencies. In that connection, the Company has made a
decision not to proceed further with a possible expansion in Western Europe,
and has determined to set aside its other expansion plans temporarily while
efforts are taken to restore profitability. Also, the Company has used
approximately $13 million of the approximately $43 million in cash set aside
from its September 1995 initial public offering to support these efforts
through the repayment of indebtedness and by additions to the Company's working
capital. In addition, the Company currently is negotiating the refinancing of
its remaining debt to include a payment schedule which more closely matches the
life of its production assets. Banco Popular de Puerto Rico, holder of the
debt, is assisting the Company with this effort.
Net cash provided by (used in) operating activities for the Company for
the 1996 nine month interim period was $(5.6) million compared to $9.9 million
during the 1995 nine month interim period. This decrease was mainly a result
of the net loss of $(55.5) million incurred during the 1996 interim period
compared to net income of $11.2 million earned during the 1995 nine month
interim period. As of June 30, 1996, the Company had $46.5 million in net
operating loss carryforwards available to offset future Puerto Rican income
taxes. The Company believes that its strong cash position is adequate to meet
its operating requirements for the foreseeable future.
Cash flows used in investing activities for the Company amounted to
$(16.4) million during the 1996 nine month interim period, as compared to
$(1.2) million during the 1995 nine month interim period. Purchases of
property, plant and equipment, net amounted to $(20.5) million during the 1996
nine month interim period compared to $(4.5) million during the 1995 nine month
interim period. Dividends received from BAESA amounted to $2.8 million for the
nine month interim periods 1996 and 1995.
Cash flows provided by (used in) financing activities for the Company
during the 1996 nine month interim period was $23.7 million compared to $(7.6)
million during the 1995 nine month interim period. The significant financing
activities for the Company in the 1996 nine month interim period were the
payment of dividends and the issuance of notes payable of $48.3 million offset
by the repayment of debt of $19.3 million. The significant financing
activities in the 1995 nine month interim period for the Company included the
payment of dividends and the repayment of debt. The Company paid $5.3 million
and $4.8 million in the 1996 and 1995 nine month interim periods, respectively,
in dividends. In the future, the payment of dividends will be in part
dependent on the receipt of dividends from BAESA and in part dependent on the
achievement of adequate levels of profitability in the Company's Puerto Rican
operations, and, under certain conditions, the consent by Banco Popular.
In November 1994, the Company and its subsidiaries entered into a Credit
Agreement with Banco Popular. The Credit Agreement provides for borrowings by
the Company from time to time of $5 million in revolving loans, $8.8 million in
term loans and $15 million in non-revolving loans. In December 1995, Banco
Popular increased the amount the Company may borrow under revolving loans to
$10.0 million. As of June 30, 1996, the Company had outstanding under the
Credit Agreement revolving loans in an aggregate principal amount of $10.0
million, term loans in an aggregate principal amount of $6.8 million and non-
revolving loans in an aggregate principal amount of $15.0 million. These loans
mature on March 30, 1997, September 10, 2000 and November 10, 1996,
respectively, and bear interest at a floating rate of 2% over and above the
cost to Banco Popular of "936 Funds" (as defined below) (the "936 Rate"). At
June 30, 1996, the 936 Rate was 5.1%.
The weighted average interest rate on such borrowings was 7.1% in the
first nine months of the fiscal year 1996. "936 Funds" are defined in the
Credit Agreement as deposits in U.S. dollars in immediately available funds by
Section 936 Corporations on the first day of the relevant funding period for a
period equal to such funding period and in an amount equal or comparable to the
principal amount of the relevant loan. The Company is required to make monthly
18
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<PAGE>
payments of principal in the amount of $128,205 with respect to the outstanding
term loans. The Company may prepay certain of the loans subject to the terms
and conditions of the Credit Agreement.
Under the terms of the Credit Agreement, the Company is subject to the
following financial restrictions: (i) the Company must maintain a minimum
Operating Cash Flow to total Debt Service ratio (as defined in the Credit
Agreement) of 1.50 to 1 for each fiscal year during the term of the Credit
Agreement (ii) a minimum ratio of current assets to current liabilities of
0.40, 0.60, 0.75 and 1.00 to 1, respectively, and a maximum ratio of Total
Liabilities to Tangible Net Worth of 4.0, 4.0, 3.0 and 2.0 to 1, respectively,
for the fiscal years 1996 through 1998 and thereafter, and (iii) a minimum
Tangible Net Worth of $15 million through the end of the fiscal year 1996 and
of $18 million, $21.5 million, $25 million and $30 million for each succeeding
fiscal year thereafter. The Company is currently in compliance with these
financial restrictions. The entire principal amount of loans outstanding under
the Credit Agreement becomes immediately due and payable, subject to a cure
period, if the Company violates any of these financial restrictions.
Furthermore, the Company may not pay dividends (other than amounts declared by
and received from BAESA as dividends) without the consent of Banco Popular if
an event of default under the Credit Agreement (including a violation of the
financial restrictions described above) has occurred or would occur because of
the payment of dividends.
As a result of the Company initially providing to Banco Popular incorrect
financial statements for the first and second quarters ended December 31, 1995
and March 31, 1996 and certain other circumstances, the Company was in
technical default of the terms of the Credit Agreement. The Company has,
however, received from Banco Popular a written waiver of such default. The
Company believes that it is currently in full compliance with the terms of the
Credit Agreement.
Pursuant to the Credit Agreement, the Company has granted Banco Popular a
security interest in all its machinery and equipment, receivables, inventory
and the real property on which the Company's bottling plant in Toa Baja, Puerto
Rico (the "Toa Baja Plant") and the Company's plant in R<i'>o Piedras, Puerto
Rico (the "R<i'>o Piedras Plant").
The Company's franchise arrangements with PepsiCo require it not to
exceed a ratio of senior debt to subordinated debt to equity of 65 to 25 to 10.
The Company is currently in compliance with these covenants.
Capital expenditures for the Company totaled $20.5 million in the 1996
nine month interim period and $4.5 million in the 1995 nine month interim
period. The Company's capital expenditures have been financed by a combination
of borrowings from third parties and internally generated funds. The Company
expects to make approximately $3.0 million in additional capital expenditures
during the fiscal year 1996 for the completion of the construction of the Toa
Baja Plant.
19
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<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company recently discovered accounting irregularities that have
required it to restate its financial results for the first and second quarters
ended December 31, 1995 and March 31, 1996. These irregularities resulted in a
substantial understatement of certain expenses, primarily discounting and
marketing expenses, and a corresponding overstatement of operating income.
This restatement resulted in an operating loss in both quarters.
After discovering the accounting irregularities, the Company's Board of
Directors retained Rogers & Wells as independent counsel to conduct an
investigation of the circumstances which resulted in the irregularities.
Rogers & Wells, working with the independent accounting firm of Price
Waterhouse, which was retained to assist with the investigation, conducted a
thorough investigation of these circumstances and has made its report to the
Company's Board of Directors. Taking into consideration the findings of the
investigation and in consultation with the Company's independent accountants
regarding their materiality, the Company concluded that the irregularities did
not have a material effect on any Company financial statements prior to the
first and second quarters of fiscal 1996, and thus that no restatements for any
prior periods are required.
In addition, 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 controls will prevent future accounting irregularities.
The Company has been named as a defendant in several class action
shareholder lawsuits alleging violations of federal securities laws in
connection with disclosures in its previous financial statements (now restated)
for the first and second quarters of fiscal 1996, and contained in other
Company disclosure documents. At least two of these lawsuits also allege that
the financial statements issued in connection with the Company's September 1995
public offering also misrepresented or omitted to disclose material
information. The Company has referred these lawsuits to legal counsel for
appropriate action, and the Company intends to defend them vigorously.
Additionally, in connection with its goal of restoring the profitability
of its Puerto Rican bottling operations, the Company has reorganized its senior
management and Board of Directors. On June 11, 1996, Rafael Nin, one of the
founding shareholders and a member of the Board of Directors of the Company
replaced Charles H. Beach as the Company's President and Chief Executive
Officer. Effective August 8, 1996, Charles Beach, the Chairman of the Board of
Directors, and Michael Gerrits, who together are the controlling shareholders
of the Company, resigned as Board members. The Company further restructured
its Board of Directors under the leadership of a new Chairman John W. Beck.
Beck is the retired chairman and chief executive officer of First National
Bank, Orlando/Winter Park, Florida and has been a Director of the Company since
1987. The Board also appointed Richard Reiss, a certified public accountant
and well known business consultant in Puerto Rico, to chair the Audit
Committee.
In connection with his continued service as President and Chief Executive
Officer, Mr. Nin requested, and was granted by the Company's controlling
stockholders, a ten-year voting trust agreement which entitles him to vote, but
not own, 5 million Class A shares, a controlling interest in the Company. Mr.
Nin was granted a two-year option at $1 per share on these controlling shares,
to be exercised for the exclusive benefit of the Company. At his request, this
option may not be exercised for his own benefit. All remaining 9.5 million
founding shareholder shares, not subject to the option, will be free from
shareholder agreement trading restrictions after September 28, 1998. A prior
option to purchase a substantial interest in the Company, previously reported
as granted to Nin upon his appointment as chief executive officer, was never
formalized, and has been withdrawn by mutual agreement.
The Company does not expect to return to profitability during the fourth
quarter primarily because of continuing pricing pressures in the Puerto Rican
soft drink market, production and volume interruptions and start-up costs
associated with the opening of the Toa Baja plant and expected losses by BAESA
in its fourth quarter results.
In connection with efforts being made to improve the profitability of
BAESA, in which the Company owns approximately a 17% interest, the transfer of
voting control from the Essential Shareholders to PepsiCo (Phase II of the
20
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<PAGE>
current agreement with PepsiCo relating to BAESA voting control) occurred on
July 1, 1996. As a result of this change, the Company's investment in BAESA
most likely will cause the Company to be an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). In
order to avoid being required to register as an investment company, which the
Company believes would impose burdensome restrictions on its future operations,
the Company's Board of Directors has expressed its intention to take steps as
soon as is reasonably possible which are intended to result in the Company not
being required to register as an investment company.
In connection with the transition to Phase II, BAESA agreed to use its
best efforts in the future, at the request of the Company, but without expense
or liability (tax or otherwise) to BAESA, to assist the Company in effecting
transactions which the Company considers necessary or advisable in order to
avoid the requirement that it register as an investment company. There can be
no assurances, however, that the Company will be successful in finding a way to
avoid registration, or that if the Company is ultimately required to register,
it will not adversely effect the Company's future business operations. In
addition, PepsiCo has pledged support to work together with the Company to
advance its outstanding products in Puerto Rico and any place both parties find
mutually beneficial.
21
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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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/S/ RAFAEL NIN Chief Executive Officer October 7, 1996
- -------------------------------------------
Rafael Nin
/S/ DAVID L. VIRGINIA Chief Financial Officer and Chief October 7, 1996
- --------------------------------------------
David L. Virginia Accounting Officer
</TABLE>
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000948086
<NAME> PEPSI-COLA PUERTO RICO BOTTLING COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 47,761
<SECURITIES> 0
<RECEIVABLES> 23,536
<ALLOWANCES> 934
<INVENTORY> 3,768
<CURRENT-ASSETS> 77,033
<PP&E> 72,741
<DEPRECIATION> (21,438)
<TOTAL-ASSETS> 149,534
<CURRENT-LIABILITIES> 68,162
<BONDS> 5,877
0
0
<COMMON> 215
<OTHER-SE> 69,356
<TOTAL-LIABILITY-AND-EQUITY> 149,534
<SALES> 24,615
<TOTAL-REVENUES> 24,615
<CGS> (19,915)
<TOTAL-COSTS> (37,997)
<OTHER-EXPENSES> 74
<LOSS-PROVISION> (65)
<INTEREST-EXPENSE> (511)
<INCOME-PRETAX> (13,884)
<INCOME-TAX> (90)
<INCOME-CONTINUING> (45,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,926)
<EPS-PRIMARY> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
