SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 865 Km. 0.4
BO. CANDELARIA ARENAS
TOA BAJA, PUERTO RICO 00949
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (787) 251-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Class B Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
Based upon the closing price of the Class B Common Stock on December
19, 1996, as reported on the New York Stock Exchange Composite Tape
(as reported by The Wall Street Journal), the aggregate market value
of the Registrant's Class B Common Stock held by non-affiliates of the
Registrant as of such date was approximately $70,125,000.
As of December 19, 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.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 1996 Proxy Statement of Pepsi-Cola Puerto
Rico Bottling Company are incorporated by reference into Part III of
this Form 10-K to the extent provided herein.
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
Index to Annual Report on Form 10-K
Year Ended September 30, 1996
ITEM NO. PAGE NO.
PART I
Item 1. BUSINESS............................................. 1
Item 2. PROPERTIES........................................... 14
Item 3. LEGAL PROCEEDINGS.................................... 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................ 17
Item 6. SELECTED FINANCIAL DATA.............................. 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................56
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS........................57
Item 11. EXECUTIVE COMPENSATION..................................57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...........................................58
SIGNATURES........................................................61
i
PART I
Item 1. BUSINESS
General
Pepsi-Cola Puerto Rico Bottling Company (the "Company") is a
holding company which, through its manufacturing and distribution
subsidiaries, produces, sells and distributes a variety of soft
drink and fruit juice products, iced teas, isotonics and bottled
water in the Commonwealth of Puerto Rico ("Puerto Rico"),
pursuant to exclusive franchise arrangements with PepsiCo, Inc.
("PepsiCo") and other franchise arrangements. The Company also
has rights to sell PepsiCo products to distributors in the U.S.
Virgin Islands. The Company produces, sells and distributes soft
drink products under the Pepsi-Cola, Diet Pepsi, Pepsi Free,
Slice, Wonder Kola, On-Tap and Mountain Dew trademarks pursuant
to exclusive franchise arrangements with PepsiCo. The Company
produces (through an arrangement with a co-packer), sells and
distributes isotonics under the All Sport trademark pursuant to
an exclusive franchise arrangement with PepsiCo. In addition,
the Company produces, sells and distributes tonic water, club
soda and ginger ale under the Seagram trademark under an
exclusive arrangement with Joseph E. Seagram & Sons, Inc.
("Seagram") and sells and distributes fruit juice products under
the Welch's trademark, iced teas under the Lipton trademark and
bottled water under the Naya trademark. The Company also
produces, sells and distributes bottled water under its own
Cristalia trademark.
In addition to conducting its own bottling operations, the
Company indirectly owns 12,345,347 shares, or approximately 17%
of the outstanding capital stock of Buenos Aires Embotelladora
S.A. ("BAESA"). BAESA is a Pepsi-Cola franchised bottler, with
the exclusive rights to produce, sell and distribute PepsiCo soft
drink products directly and through its subsidiaries in
Argentina, Brazil, Costa Rica and Uruguay and through a joint
venture in Chile.
A subsidiary of the Company manufactures and sells plastic
bottles and "preforms" (small molded plastic units which are
expanded with air to produce plastic bottles).
For its fiscal year ended September 30, 1996, the Company
had a loss from operations of $(26.8) million compared to income
from operations of $9.7 million during fiscal 1995. This severe
impact on the profitability of the Company's operations resulted
primarily from intense competitive pressures in Puerto Rico which
produced lower sales prices, increased discounts offered to
customers and a significant increase in selling and marketing
expenditures. In addition, during the course of fiscal 1996, the
Company discovered accounting irregularities that required it to
restate its financial statements for the first and second
quarters ended December 31, 1995 and March 31, 1996. Responding
to the circumstances surrounding the discovery of these
irregularities has required extensive management attention. In
connection with the accounting irregularities, the Company has
been named as a defendant in a number of class action shareholder
lawsuits alleging violations of federal securities laws, and the
Securities and Exchange Commission is investigating the
circumstances surrounding the accounting irregularities.
Responding to these lawsuits and this investigation has also
required extensive management attention and the expenditure of
substantial amounts for legal defense. In addition, BAESA
encountered financial difficulties during the course of fiscal
1996. The Company's net loss of $(74.3) million for fiscal 1996
reflects loss before equity in earnings (loss) of BAESA of
$(22.9) million and equity in net loss of BAESA, net of income
tax of $(51.5) million. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In response to the difficulties faced by the Company during
the past fiscal year, the Company has taken a number of steps
intended to restore the profitability of its Puerto Rican
bottling operations including the reorganization of its senior
management and Board of Directors, the implementation of new
pricing initiatives, the consolidation of most of its existing
operations in its new Toa Baja bottling facility and other cost
reduction measures. There can be no assurance, however, that the
Company will be successful in reaching its goal of restoring the
profitability of its Puerto Rican bottling operations.
This Report contains forward looking statements of expected
future developments. The Company wishes to insure that such
statements are accompanied by meaningful cautionary statements
pursuant to the safe harbor established in the Private Securities
Litigation Reform Act of 1995. The forward looking statements in
this Report refer to the ability of the Company to implement
pricing initiatives in a manner that improves the pricing
environment in the marketplace, its ability to generate cost
savings through the consolidation of existing operations, its
expected future capital expenditures and the ability to achieve
its goal of restoring the profitability of its Puerto Rico
bottling operations as a result of these pricing initiatives and
cost savings. These forward looking statements reflect
management's expectations and are based upon currently available
data; however, actual results are subject to future events and
uncertainties which could materially impact actual performance.
The Company's future performance also involves a number of risks
and uncertainties. Among the factors that can cause actual
performance to differ materially are: continued competitive
pressures with respect to pricing in the Puerto Rican market
notwithstanding the implementation of the pricing initiatives,
the inability to achieve cost savings due to unexpected
developments at the Company's new plant and other factors,
changed plans regarding capital expenditures, adverse
developments with respect to litigation, economic, climatic and
political conditions in Puerto Rico, and the impact of such
conditions on consumer spending.
The Company was incorporated and acquired the franchise
rights to produce, sell and distribute PepsiCo soft drink
products in Puerto Rico in 1987. In 1989, the Company became one
of the founding shareholders of BAESA, which was incorporated and
commenced operations in the Buenos Aires metropolitan area in
that year.
Principal Market
The principal market for the Company's products is Puerto
Rico, a commonwealth of the United States with a population of
approximately 3.7 million.
Currently, approximately 35% of the population of Puerto
Rico is under the age of 18 and 45% of the population is under
the age of 25 which the Company believes is significant because
young people are major consumers of soft drinks.
The Beverage Industry in Puerto Rico
Consumption and Market Trends
The Puerto Rican soft drink market is characterized by
relatively low per capita consumption. In addition, the
imposition of the Carbonated Beverage Tax had a material adverse
effect on per capita consumption of soft drinks in the years in
which it was in effect. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -
General Overview - Carbonated Beverage Tax." Consumption levels
have generally increased since the replacement of the Carbonated
Beverage Tax in January 1994 but remain low compared to
consumption levels in the United States. In 1995, the annual per
capita consumption of soft drink products in Puerto Rico was
approximately 410 eight-ounce servings, as compared with
approximately 816 eight-ounce servings in the United States.
Market Share and Sales Data
This subsection contains information regarding the Puerto
Rican soft drink industry and the Company's market share thereof.
Certain information regarding the Puerto Rican soft drink take-
home market segment (retail sales to customers) has been obtained
or derived from data published by Asesores, Inc. ("Asesores"), an
independent research company. Asesores publishes bimonthly
estimates of beverage consumption in the soft drink take-home
market segment based on information obtained through weekly
surveys of the consumption patterns of panels of individual
consumers throughout Puerto Rico. The data for the surveys are
collected in two ways: product presence is verified through an
inventory "pantry check"; and information on purchases during the
prior week is collected utilizing personal interviews. For each
product category, the recorded information includes in-home
presence, brand and type, size, quantity purchased, price and
establishment where purchased. The universe of the study is
defined as "all family households in Puerto Rico." The sample is
stratified and proportional by geographic area, urban and rural
zone, socio-economic levels and age group. The consumption and
sales information relating to the take-home market segment may
not be representative of sales of the Company's products as a
whole.
2
As used throughout this Form 10-K, the term "soft drink"
refers generally to carbonated, nonalcoholic beverages. Soft
drink products can be classified as colas or other flavored soft
drinks. References to the term "case" throughout this Form refer
to 192 ounces of finished beverage product (24 eight-ounce
servings).
Soft Drink Products
The following table shows the estimated total sales volume
of the soft drink industry in Puerto Rico as well as the
Company's total soft drink sales volume for the periods
indicated:
Estimated Industry
Volume Company Volume
Calendar Year (in millions of cases)(1) (in millions of cases)
- ------------- ------------------------- ----------------------
1990.................... 61.3 23.2
1991.................... 54.6 24.1(2)
1992.................... 52.7 23.2(2)
1993.................... 54.1 24.5(2)
1994.................... 60.9 26.6
1995.................... 63.3 27.2(3)
1996.................... 60.1 29.1(4)
- ---------------
(1) Source: Company estimates.
(2) Actual Company soft drink volume during 1991, 1992 and 1993 were 24.1,
23.2 and 24.5 million cases respectively, of which 1.4, 1.4 and 2.3
million cases, respectively, were exported to Argentina.
(3) Represents fiscal year 1995 sales volume.
(4) Represents fiscal year 1996 sales volumes.
Soft drink products can be classified as colas or other
flavored soft drinks. The cola and flavored soft drinks segments
represented approximately 64% and 36%, respectively, of the soft
drink market in Puerto Rico in 1996. The following chart shows
the Company's case sales volume of cola soft drinks for the
periods indicated:
Company Cola
Volume
Calendar Year (in millions of cases)
------------- ----------------------
1990......................................... 21.4
1991......................................... 22.5
1992......................................... 21.6
1993......................................... 21.9
1994......................................... 24.8
1995 (fiscal year cola sales volume)......... 24.9
1996 (fiscal year cola sales volume)......... 25.9
Sales of cola soft drinks represented approximately 90% of
the Company's total soft drink sales volume in the fiscal year
1996.
3
The following chart reflects the Company's share of the soft
drink and cola take-home market segments in Puerto Rico for the
periods indicated:
Company Share of Company Share of
Soft Drink Take-Home Cola Take-Home
Calendar Year Market Segment(1) Market Segment(1)
- ------------- -------------------- -----------------
1990............................ 47.3% 58.7%
1991............................ 47.8 60.7
1992............................ 53.1 61.4
1993............................ 49.1 59.5
1994............................ 49.3 56.7
1995 (for the twelve-month
period ended August 31, 1995). 49.4 56.5
1996 (for the twelve-month
period ended August 31, 1996). 47.3 54.2
- ----------------
(1) Source: Asesores
Other Products
The Company's total sales volume of non-carbonated
beverages, including water, fruit juices, iced teas and
isotonics, was 3.9 and 3.7 million cases, representing 12.9% and
11.4% of total sales volume, in calendar year 1995 and fiscal
year 1996, respectively. The Company estimates that the industry
sales volume of such beverages in Puerto Rico was 36.8 million
cases in fiscal year 1996. The Company believes that its sales
of non-carbonated beverages will represent an increasingly higher
percentage of its total sales. The Company expects that the Toa
Baja plant which was completed in early calendar year 1996 will
enable the Company to begin or expand production of such products
to meet anticipated growth in demand for such products.
Business Strategy
The Company's current business strategy is to restore the
profitability of its Puerto Rican bottling operations. The
Company intends to pursue this strategy through the
implementation of new pricing initiatives designed to address the
current intense price competition in the soft drink market in
Puerto Rico, the realization of efficiencies and cost savings
through the consolidation of its existing operations in its new
Toa Baja manufacturing facility, and the implementation of
further cost cutting measures. There can be no assurance,
however, that the Company will be successful in achieving its
goal of restoring the profitability of its Puerto Rican bottling
operations.
The Company completed, during the fiscal year 1996, the
construction of the Toa Baja plant and the consolidation of its
operations in the Toa Baja plant. The Toa Baja plant has 3
bottling lines and increased the Company's annual production
capacity by 60% (at comparable utilization rates) to
approximately 44 million cases per year. The Company commenced
operations at the Toa Baja plant in the third fiscal quarter and
plans to close and sell the Rio Piedras plant as soon as
possible. The plastics production facility has moved to Toa Baja
in the first fiscal quarter of fiscal year 1997. Several
facilities leased by the Company in the San Juan area and
elsewhere in Puerto Rico were closed as a result of the
completion and consolidation of operations in the Toa Baja plant.
The Company anticipates that the opening of the new plant and the
closing of leased facilities will lead to cost savings in the
manufacturing and distribution of the Company's products,
eliminate existing capacity constraints and the need for co-
packing arrangements and improve production efficiency.
The Company is pursuing opportunities to expand its presence
in the flavored soft drink markets through the introduction of
new products under both PepsiCo and other trademarks in 1996 and
1997.
4
Franchise Arrangements
PepsiCo Products
The Company has entered into a master franchise commitment
letter (the "Franchise Commitment Letter") with PepsiCo with
respect to the sale of PepsiCo soft drink products in Puerto
Rico. The Company has also entered into exclusive bottling
appointment agreements (each an "Exclusive Bottling Appointment"
and collectively, with the Franchise Commitment Letter, the
Concentrate Price Agreement and the Cooperative Advertising and
Marketing Agreement between PepsiCo (or its affiliates) and the
Company, the "Franchise Arrangements") for the relevant
trademarks Pepsi-Cola, Diet Pepsi, Pepsi Free, Diet Pepsi Free,
Lemon-Lime Slice, Diet Lemon-Lime Slice, Mandarin Orange Slice,
Diet Mandarin Orange Slice, Teem, Diet Teem, Mirinda, On-Tap,
Wonder Kola, Mountain Dew and All Sport. The Franchise
Arrangements grant the Company exclusive rights to produce,
bottle, sell and distribute PepsiCo soft drink products in Puerto
Rico. The Franchise Arrangements also authorize the Company to
supply canned beverages to the U.S. Virgin Islands, provided that
it remains competitive in price, quality and quantity. The
Company has the right of first refusal to purchase distribution
rights for PepsiCo products in the U.S. Virgin Islands when such
rights become available. If the Company wishes to bottle, sell
or distribute any flavored soft drink or other carbonated
beverage other than the products covered by the Exclusive
Bottling Appointments, PepsiCo has the right of first refusal to
provide the Company with concentrate for any such soft drink or
to supply the Company with such other carbonated beverage at
prevailing market prices. The Franchise Commitment Letters run
concurrently with the Exclusive Bottling Appointments and
terminate in the event of the termination or expiration of the
Exclusive Bottling Appointments. All of the Franchise
Arrangements have the provisions described below.
The Franchise Arrangements require the Company to purchase
its entire requirements of concentrates and syrups for all of the
PepsiCo soft drink products from certain affiliates of PepsiCo.
Pursuant to the Concentrate Price Agreement between the Company
and PepsiCo, PepsiCo charges the Company the actual price of a
unit of concentrate that is paid by bottlers for the same or
similar concentrate in the continental United States on an
equivalent yield basis based upon the then current domestic list
price for each of the respective PepsiCo products.
The Franchise Commitment Letter requires the Company to
attain minimum volume and market share levels of the cola market
and flavored soft drink market, minimum levels of nominal and
effective distribution and minimum levels of capital
expenditures. The Company believes it has so far exceeded such
minimum levels. The Exclusive Bottling Appointments require the
Company to maintain the share, distribution and expenditure
targets for the PepsiCo soft drink products set forth in the
Franchise Commitment Letter. In a number of minor respects, the
Company may not have during the past fiscal year met certain
market share requirements contained in the Exclusive Bottling
Appointments with respect to certain soft drink flavors. The
Company has not received any notice from PepsiCo regarding any
violations and does not believe that there is any risk to the
Company of the Company being adversely affected by them. In the
event the Company materially fails to achieve such aggregate
market share distribution or capital expenditure and such failure
continues for a period of 12 months following notice thereof from
PepsiCo, then PepsiCo has the right to require the Company to
dispose of the bottling business, plant and operating assets to a
purchaser satisfactory to PepsiCo, or, if such purchaser is not
found, to terminate the agreement. As required by the Exclusive
Bottling Appointments, the Company has also developed a postmix
department with the necessary infrastructure to provide effective
service to the food service channel of distribution.
The Company is obligated under the Franchise Arrangements to
use, handle and process the concentrates purchased from PepsiCo
and to bottle, label, package and distribute the PepsiCo soft
drink products in accordance with PepsiCo's instructions. The
Company must maintain and operate its plants and all sales and
distribution equipment in clean and sanitary conditions in
accordance with PepsiCo's standards and specifications, and
otherwise must satisfy PepsiCo's quality control standards. The
Company must comply with all standards and specifications with
respect to the treatment and purification of water used in
manufacturing PepsiCo soft drink products and the maintenance and
operation of water treatment and purifying equipment. The
Company must also conduct tests of the PepsiCo soft drink
products and the water used in their manufacture, maintain
records of such testing and permit PepsiCo access to its
facilities for inspection purposes.
5
The Company is required to test market and introduce new
packages, sizes and products as PepsiCo may direct and promote
and advertise the PepsiCo soft drink products. The Company is
also required to make capital expenditures to maintain a
sufficient inventory of bottles, cartons, containers and cases.
The Franchise Arrangements also require the Company to
display all advertising and promotional materials furnished by
PepsiCo or its affiliates and to incur mutually agreed upon
marketing, advertising and sales promotion expenditures. See
"- Marketing."
The Franchise Arrangements require the Company to not exceed
a ratio of senior debt to subordinated debt to equity of 65 to 25
to 10.
The Exclusive Bottling Appointments have ten-year terms
expiring on November 5, 2003. Each of the Exclusive Bottling
Appointments will automatically be extended for an additional
five-year term expiring on November 5, 2008, provided the Company
is not in breach of any provisions of the Franchise Arrangements.
Thereafter, each agreement is automatically renewed for
additional five-year terms unless either party gives written
notice of its intention not to renew the agreement at least 18
months prior to the date of expiration of the term. PepsiCo may
terminate the Franchise Arrangements if the Company fails to
comply in any material respect with the terms and conditions of
the Franchise Arrangements, subject to a right to cure in certain
instances. In addition, PepsiCo may terminate the Franchise
Arrangements if there is a change of effective control of the
Company without PepsiCo's prior written consent. For purposes of
the Franchise Arrangements, a change of effective control of the
Company shall be deemed to have occurred if the Essential
Shareholders (as defined below), directly or indirectly, cease to
own or have the power to vote in the aggregate at least a
majority of the voting stock of the Company. The "Essential
Shareholders" are the members of the Charles H. Beach Voting
Trust and the Michael J. Gerrits Voting Trust (together, the
"Essential Shareholders") controlled by Charles H. Beach and
Michael J. Gerrits, respectively. The Essential Shareholders are
thus required under the terms of the Franchise Arrangements to
retain voting control of the Company. (See "Security Ownership"
in the Company's Proxy Statement for 1996 incorporated herein by
reference).
In September 1996 in connection with his continued service
as President and Chief Executive Officer, Mr. Rafael Nin
requested, and was granted by the Essential Shareholders and
certain other shareholders, a ten-year voting trust (the "Voting
Trust") which entitles him to vote, but not own, 5,000,000 Class
A Shares representing a controlling interest in the Company. In
connection with the execution of the Voting Trust agreement,
PepsiCo consented to the change of effective control of the
Company from the Essential Shareholders to Mr. Nin, acting as
voting trustee (the "Trustee"). The initial term of the Voting
Trust is five years and is automatically renewed for an
additional five-year period unless either PepsiCo or the Trustee
notifies the other party of non-renewal at least six months prior
to the end of the initial five-year term, provided that PepsiCo
may not unreasonably withhold its consent to the additional five-
year period. Under the terms of the Voting Trust, Mr. Nin is
entitled to resign as Trustee at any time, which results in a
termination of the Voting Trust. If the Voting Trust is
terminated because of the resignation or death of the Trustee,
PepsiCo has the right for a period of ninety days after such
resignation or death to appoint a new Trustee to replace Mr. Nin
for the remaining term of the Voting Trust, subject to the
approval of the beneficial owners of a majority of the Class A
Shares. Upon the termination of the Voting Trust at the
expiration of its term, the Class A Shares held in the Voting
Trust will be returned to the Essential Shareholders and the
terms of the Franchise Arrangements applicable to the Essential
Shareholders will again become effective.
In connection with the Voting Trust, Mr. Nin was granted a
two-year option at $1 per share on the Class A Shares held in the
Voting Trust, to be exercised for the exclusive benefit of the
Company.
In addition to the products covered by the Franchise
Arrangements, the Company has the rights to sell and distribute
Lipton Ice Tea Original Formula pursuant to a joint venture
arrangement between PCI and Lipton.
6
Other Products
The Company has reached agreement on the terms of a soft
drink trademark license and bottling agreement with Seagram for
the exclusive rights to produce, sell and distribute tonic water,
club soda and ginger ale under the Seagram trademark in Puerto
Rico. The Company must purchase concentrate from Seagram at a
price per unit mutually agreed upon by Seagram and the Company.
The Company is obligated to meet specified production levels.
The Company may not produce, sell or distribute any other tonic
water, club soda or ginger ale other than the Seagram trademark.
The Company has further agreed to maintain certain production and
quality control standards, and to use its best efforts to
advertise and promote the sale, distribution and consumption of
the Seagram products in the franchise territory. The license and
bottling agreement with Seagram is effective through January 31,
2000 and is renewable for successive ten-year terms thereafter at
the option of Seagram. The agreement with Seagram may be
terminated in the event that the Company does not comply with its
terms and, in the case of the Company's bankruptcy, appointment
of a receiver or assignment for the benefit of creditors.
The Company has entered into a sales and distribution
agreement effective through March 31, 1997 with Welch Foods Inc.
("Welch's") for the rights to sell and distribute non-carbonated
fruit juice beverages under the Welch's trademark in Puerto Rico.
The Company must purchase the product from certain authorized
sellers and may not manufacture, sell or distribute certain
specified brand names which compete with Welch's products. The
Company is actively negotiating the renewal of this distribution
agreement.
The Company has entered into an exclusive distributorship
agreement effective through 2013 with Nora Beverages Inc. to
distribute natural spring water under the Naya trademark in
Puerto Rico and St. Maarten.
Franchise Protection
The Company's Franchise Arrangements with PepsiCo are
subject to Act No. 75 of June 24, 1964 of Puerto Rico, as
amended, ("Act 75"), which provides that a company that grants
distribution rights to a distributor in Puerto Rico may not
unilaterally terminate, perform any act detrimental to or refuse
to renew its agreement with the distributor without just cause,
and would be required to pay damages to the distributor as
specified in Act 75 in the event of a termination, impairment or
non-renewal without just cause, which are specific acts set forth
in Act 75 which are attributable to the distribution. Act 75
does not protect a distributor in the event of a breach by such
distributor.
Proprietary Trademarks
The Company produces, sells and distributes bottled water
under its own Cristalia trademark in one-gallon and five-gallon
containers. The Company's sales of Cristalia bottled water
totalled $4.5 million in 1996 and accounted for 4.4% of the
Company's net sales and 9.4% of sales volume for the fiscal year
1996.
Production
Soft drinks are produced by mixing water, concentrate and
sweetener and injecting carbon dioxide gas into the mixture to
produce carbonation immediately prior to bottling. Prior to
mixing, the water is processed to eliminate mineral salts,
chlorinated and then passed through purification tanks containing
sand filters to eliminate remaining impurities and carbon filters
to eliminate chlorine taste, copper and odors. The purified
water is then combined with processed sugar and concentrate.
Following carbonation the mixture is bottled in prewashed bottles
or aluminum cans. The Company maintains a laboratory area at its
production facility where raw materials are tested and samples of
soft drink products are analyzed to ensure quality control.
The raw materials used by the Company in the production of
soft drinks include concentrate, syrup, water, sugar, carbon
dioxide gas, glass and plastic bottles, aluminum cans and other
packaging material. The Company is obligated under the terms of
the Franchise Arrangements to obtain concentrate for the
production of soft drink products from PepsiCo or its affiliates.
The Company obtains water from publicly available supplies (such
7
as municipal water systems) and from its own drilled wells. The
Company obtains all of its sugar requirements from a number of
independent suppliers and distributors located in the United
States and Puerto Rico. The Company does not directly purchase
low calorie sweetener for use in diet soft drinks because these
sweeteners are already contained in the diet soft drink
concentrates purchased by the Company. The Company purchases its
supplies of carbon dioxide gas from a number of independent
suppliers in Puerto Rico and elsewhere. The Company purchases
plastic bottles used in the bottling process principally from its
plastics operation and from other independent suppliers as
needed. The Company also manufactures preforms which are
utilized in bottle manufacture. Plastics were also sold to BAESA
during the first quarter of 1996. All bottles used in the
bottling process of Cristalia are purchased by the Company from a
number of independent suppliers. The Company purchases its
aluminum can requirements from Crown Cork & Seal.
None of the raw materials or supplies used by the Company is
currently in short supply, although the available supply of
certain materials could be adversely affected in the future due
to reasons outside the Company's control.
The following table sets forth the principal raw materials
utilized in the soft drink production process and the approximate
percentage of the Company's total cost in the fiscal year 1996
represented by each of them.
Percentage of
Fiscal Year
Raw Material 1996 Cost
- ------------ -------------
Packaging.................................. 45.8%
Concentrate................................ 29.9
Sugar/fructose............................. 16.9
Carbon dioxide gas......................... 1.1
Other...................................... 6.3
-----
Total............................ 100.0%
=====
The Company produces bottled water under its Cristalia
trademark at a facility located in Ponce. The water obtained
from a spring and several wells is passed through purification
tanks containing sand filters and carbon filters and subjected to
reverse osmosis treatment to filter out impurities and certain
minerals. After the water is passed through an ozonator for
further treatment, it is bottled in one- and five-gallon
containers.
The Company currently produces soft drinks at its plant in
Toa Baja and bottled water at a leased facility in Ponce. The
Company moved its manufacturing operations from Rio Piedras to
Toa Baja during the third quarter of fiscal year 1996. The
following chart shows the approximate effective production
capacity, number of shifts and bottling lines, and average fiscal
year 1996 capacity utilization for the Toa Baja plant:
Approximate Effective Number of Average 1996
Plant Production Capaity(1) Bottling Lines Capacity Utilization(2)
- ----- --------------------- -------------- -----------------------
Toa Baja...... 44,347(2 shifts) 3 65%
- ----------------
(1) Approximate effective production capacity is expressed in thousands of
cases per year, assuming the number of shifts indicated. Effective
production capacity is a plant's theoretical installed capacity,
adjusted for seasonal variations in demand as well as regular
maintenance and repair.
(2) Actual production in fiscal year 1996 expressed as a percentage of
approximate effective production capacity.
The Company expects to produce substantially all of its
products during fiscal year 1997 in its soft drink plant in Toa
Baja or in its water plant in Ponce (the "Water Plant"). The
remaining volume is purchased from outside sources. The Toa Baja
plant is located approximately 15 miles west of San Juan and the
Water Plant is located on the southern portion of the island of
Puerto Rico. The Rio Piedras plant has been cleared of all
producing equipment and is currently on the market for sale.
8
Distribution
Once the bottling process is complete, the Company packages
its soft drink products in cases, tanks and boxes for
distribution throughout its franchise territory. The Company
uses two primary methods of distribution for its soft drink
products: conventional routes and bulk presell delivery. In the
conventional route form of distribution, a truck owned or leased
by the Company is loaded with the Company's beverage products and
visits each of the Company's customers along an assigned
distribution route. The customer places orders and accepts
delivery of the amount of the Company's products needed at that
time. The drivers and sales persons which deliver the Company's
products along the conventional route system are employees of the
Company in Puerto Rico. The conventional route form of
distribution is the main form of distribution currently used by
the Company in Puerto Rico.
Under the bulk presell method of distribution, the Company's
account representatives and key account salespersons visit
customers assigned to their route and fill out order forms for
the Company's products. These orders are processed at the
Company's plant and the products are delivered the next day in
trailer loads by independent truck drivers or in bulk (less than
trailer loads) by the Company's employees in Company-owned or
leased trucks. The bulk presell method is mostly used for
wholesalers and large retailers.
The Company intends to emphasize the "route presell" method
of distribution for its conventional routes where feasible to
capitalize on its planned introduction of new products and
packaging formats. Under the route presell method, employees of
the Company visit customers assigned to their route and take
orders which are processed at the end of the day. The ordered
products are then delivered the next day by the Company's
employees in Company-owned or leased trucks. The Company has
conducted pilot tests for the route presell method in the San
Juan metropolitan area and these tests indicate that the route
presell method of distribution is preferred by the Company's
customers. In addition, this method provides better route
coverage in densely populated areas and facilitates the
distribution of the Company's existing products as well as the
introduction of new products.
As of September 30, 1996, the Company had approximately 112
distribution routes (conventional, bulk and presell) and its
transportation fleet consisted of approximately 125 trucks. The
Company's products are also distributed to restaurants and soda
fountains in post-mix form.
In addition, the Company has approximately 1,250 "single
service" and 1,500 "full service" vending machines throughout
Puerto Rico. In the "single service" format, the proprietor of
the location of the machine purchases a minimum amount of the
Company's products while in the "full service" format, the
Company pays a commission to the proprietor and supplies and
retains the profit from sales from the machines. The Company is
responsible for refurbishing and maintaining the vending machines
and there is no charge for installation and maintenance or rental
fees for the vending machines. The Company's bottled water is
distributed to customers in private homes, businesses and
government agencies some of which have coolers installed by the
Company. The Company receives a rental payment for each cooler
installed by the Company.
In the fiscal year 1996, approximately 52% of the Company's
net sales was to supermarkets and grocery stores, 29% was to
"cash and carries" (small, high-volume wholesalers) and similar
businesses, 12% was to restaurants and soda fountains and 7% was
through other distribution channels. The Company also
distributes its products through vending machines and is in the
process of rapidly expanding its placement of vending machines
throughout Puerto Rico. The Company's Cristalia brand bottled
water is distributed to private homeowners, businesses and
government agencies. Most sales to the Company's customers are
on a credit basis, with payment due approximately 30 days after
delivery. Credit sales and cash sales accounted for
approximately 81% and 19%, respectively, of the Company's total
sales in the fiscal year 1996.
Marketing
The Company has entered into a cooperative advertising and
marketing agreement with affiliates of PepsiCo in Puerto Rico.
This arrangement provides for advertising of Pepsi-Cola and other
PepsiCo soft drink products on television and radio stations,
billboards, newspapers and other media. The total amount spent
9
by the Company on advertising pursuant to this cooperative
arrangement in any year is determined by the amount set forth in
that year's cooperative marketing agreement.
A primary basis of competition among soft drink bottling
companies is sales promotion activities, including television,
radio and billboard advertising and "point of purchase"
promotional devices, such as display racks and cases, clocks,
neon signs and other merchandise and equipment bearing the Pepsi
logo and placed in retail outlets where the Company's products
are sold.
The Company also uses point-of-purchase promotional devices
approved by PepsiCo in marketing its products. These products
consist primarily of prominent in-store displays such as racks
and cases. These products are delivered to the Company's
customers by distribution trucks along with soft drink
deliveries. The Company shares the cost of these point-of-
purchase promotional devices, excluding design costs, with
PepsiCo. PepsiCo reimburses the Company for PepsiCo's share of
its marketing expenditures. PepsiCo may from time to time during
the year pay for marketing expenditures directly, subject to
agreement with the Company, and will be credited for such
payments toward PepsiCo's share of marketing expenditures.
The Company has entered into long-term arrangements to offer
discounts to selected customers, such as the major supermarket
chains in Puerto Rico. The Company has also entered into
cooperative marketing agreements with its customers relating to
special displays and promotional campaigns for the Company's
products.
The Company frequently uses promotional campaigns such as
concerts and sports events, merchandise giveaways, contests and
similar programs to increase sales of its products. These
programs are typically heavily advertised and frequently result
in increased sales and higher per capita consumption of the
Company's products during the time the program is being
conducted.
The Company sells its soft drink and water products in a
variety of non-returnable bottles, both glass and plastic, and in
cans, in a variety of sizes. The Company currently sells its
products in 15 different packaging formats. The Company
continually examines sales data and customer preferences in order
to develop a mix of packaging formats which consumers will
consider most desirable in order to increase sales and per capita
consumption of the Company's products. All the packaging formats
utilized by the Company for soft drink products are subject to
the approval of PepsiCo.
A primary basis of competition in the soft drink industry in
Puerto Rico is the "image" that a particular soft drink has among
consumers. The Company intends to continue to promote the image
of PepsiCo products among consumers in Puerto Rico by means of
advertising which depicts PepsiCo products as the preferred soft
drink products among consumers.
The Company uses its management information systems in order
to evaluate sales data for purposes of forecasting future sales
and establishing sales quotas and forecasts. Based on the
information compiled in the Company's historical sales records,
the Company may initiate one or more of the marketing programs
described above in order to increase sales volume or per capita
consumption of its soft drink products.
Competition
The soft drink industry in Puerto Rico is highly
competitive. In addition, during fiscal 1996, the Company faced
intense price competition resulting in substantially lower net
prices. The Company's principal competitors in Puerto Rico are
the local bottlers and distributors of Coca-Cola in the cola
market and Seven-Up in the flavored soft drink market. The
Company's other competitors include bottlers and distributors of
nationally and regionally advertised and marketed products, as
well as bottlers of smaller private label soft drinks, which the
Company believes have historically represented less than 4% of
total soft drink sales in Puerto Rico. During fiscal year 1996
the Coca-Cola franchise was sold to an investor group headed by a
Florida-based businessman and the Seven-Up Company was sold in
part to its management group in a leveraged buy-out transaction.
These two transactions have resulted in a significant increase in
competition in the Puerto Rican soft drink market, increasing the
Company's marketing and discount expenditures during fiscal year
1996.
10
Carbonated soft drink products compete with other major
commercial beverages, such as coffee, milk and beer, as well as
non-carbonated soft drinks, citrus and non-citrus fruit drinks
and other beverages.
The principal methods of competition in the soft drink
industry in Puerto Rico are pricing, advertising and product
image. In addition, the Company provides discounts to certain of
its large customers such as supermarket chains, fast food chains
and other retail outlets which carry PepsiCo soft drink products.
The following charts compare the market share of PepsiCo
soft drink products and Coca-Cola soft drink products in the
Puerto Rican soft drink take-home market at the end of the
periods indicated.
Soft Drinks Take-Home Market Share(1)
-------------------------------------
Calendar Year PepsiCo Products Coca-Cola Products
------------- ---------------- ------------------
1990............................ 47.3% 29.7%
1991............................ 47.8 24.5
1992............................ 53.1 28.7
1993............................ 49.1 33.0
1994............................ 49.3 33.0
1995 (for the twelve-month
period ended August 31, 1995)... 49.4 32.3
1996 (for the twelve-month
period ended August 31, 1996)... 47.3 32.6
- ----------------
(1) Source: Asesores
Plastic Products
Beverage Plastics Company, a subsidiary of the Company,
manufactures and sells non-returnable plastic bottles and
preforms. In 1996, the plastic bottles manufactured by that
subsidiary were used entirely in the Company's soft drink
production and distribution business, and the preforms were all
used in the manufacture of plastic bottles or sold to the
Argentine and Brazilian operations of BAESA. Sales to BAESA were
discontinued in early 1996.
Government Regulation
The Company's operations are subject to the regulatory
oversight of the U.S. Department of Agriculture and Department of
Labor, the Food and Drug Administration, the Occupational Safety
and Health Administration, the Environmental Protection Agency
and the Puerto Rico Environmental Quality Board.
The Company is required to obtain municipal licenses for its
bottling plants. The Company is currently in compliance with
such requirements. Additionally, the Company routinely obtains
the necessary approvals to operate certain machinery and
equipment, such as boilers, steamers, compressors and precision
instruments, from municipal authorities.
Environmental Regulation
The Company has entered into a stipulation, dated September
11, 1990 (the "Stipulation") with the Puerto Rico Aqueduct and
Sewer Authority ("PRASA") with respect to the discharge of waste
water in excess of pretreatment permit limitations. Pursuant to
the terms of the Stipulation, PRASA and the Company agreed on a
compliance plan by which the Company would invest approximately
$1.0 million for the construction of a waste water treatment
plant in its bottling facilities and would pay an administrative
penalty to PRASA. The Company also entered into a settlement
with PRASA covering surcharges to be paid by the Company for the
discharge of waste water in excess of surcharge limits. Under
the terms of the settlement, the Company agreed to pay PRASA the
amount of $60,000 in accord and satisfaction for any surcharges
which might have been computed and notified on or before June 1,
1991. The settlement provides for prospective surcharges as
follows: (a) $48,000 for the period from June 1, 1991 to December
31, 1991; (b) $10,000 per month for the period from January 1,
11
1992 through and until June 30, 1993; and (c) $12,500 per month
for the period from July 1, 1993 through and until the waste
treatment facility at the Toa Baja plant is completely built and
operational. The settlement also provides for additional
surcharges if certain limits are exceeded. The Company received
a permit from PRASA to operate its Toa Baja plant until June 28,
1997 while a PH Equalization Facility is being placed in service
and the discharge of waste water is characterized. This process
will provide the information needed to obtain the permanent
permit. The Company hopes that the results of the
characterization of the discharge of waste water will permit it
to make use of a municipal waste treatment facility, for which it
would pay a monthly fee, and thereby avoid the need to construct
a separate waste water treatment plant adjacent to its Toa Baja
manufacturing facility. The Company places a high priority on
quality control and industrial safety and believes that it is in
material compliance with all other applicable regulations. The
Company received the Quality Award from PepsiCo in 1993 and 1994.
The International Bottled Water Association's Quality Award has
been received by the Company's Water Plant for 1994, 1995 and
1996.
Taxation
The Puerto Rican government currently imposes an excise tax
on carbonated beverages of 5% of the "taxable price in Puerto
Rico." The "taxable price in Puerto Rico" for a product
manufactured in Puerto Rico is effectively defined under the
Puerto Rico Excise Act as 72% of the manufacturer's sales price.
The Company is thus subject to an excise tax at an effective rate
of 3.6% (or 5% of 72%) of the sales price of its soft drink
products.
Employees
At September 30, 1996, the Company had 477 full-time
employees, approximately 65% of which were represented by a labor
union. The Company believes that its relationship with its
employees and their unions is excellent. The Company has not
experienced any strike or work stoppage since the Company was
acquired in 1987. Labor relations are generally governed by
union agreements entered into from time to time between the
Company and its employees. The Company has entered into three
such agreements, with its union employees in its manufacturing
and distributing subsidiaries, its plastics subsidiary and its
bottled water division, respectively. The Company's agreements
relating to its manufacturing and distributing subsidiaries
expires on December 31, 1997. The agreement relating to its
plastics subsidiary expired on October 1, 1996. The Company
currently is in the process of renegotiating this agreement.
Each of the agreements relating to the manufacturing and
distributing subsidiaries and the agreement relating to the
plastics subsidiary are subject to automatic renewal for
additional one-year terms unless terminated by either party in
writing. The Company's agreement relating to the bottled water
division became effective January 1995 and expires on December
31, 1998. The Company and the labor union are in the process of
renegotiating the agreement relating to its manufacturing and
distribution subsidiaries with the intention of increasing
efficiencies and lowering the operating costs in both
subsidiaries.
Executive Officers of the Company
The executive officers of the Company are elected by the
Board of Directors and serve at its discretion. There is no
family relationship among any of the officers or directors.
The following table sets forth certain information regarding
the executive officers of the Company.
Name Age Position Officer Since
- ---- --- --------- -------------
Rafael Nin............ 52 President and Chief 1996
Executive Officer
C. Leon Timothy....... 61 Senior Vice President- 1990
Investor Relations
David Cuthbertson..... 55 Vice President - 1990
Operations
Manuel Bonilla........ 46 Vice President - Sales 1996
and Marketing
Reinaldo Rodriguez.... 51 Vice President - Human 1996
Resources
David Lee Virginia.... 46 Vice President - Finance 1996
Officer
Jose Gonzalez 39 Vice President - Internal 1996
Audit
12
On June 11, 1996, Rafael Nin, one of the Company's 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 were then 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. See "Business-Franchise Arrangements". All
remaining 9.5 million founding shares, not subject to the option,
are free from shareholder agreement trading restrictions. 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 following is a brief description of the business
background of each of the executive officers of the Company.
Rafael Nin has been a Director of the Company since May
1987. He was elected President and Chief Executive Officer in
June 1996. He has been a Director of Bestov Foods S.A., a Pizza
Hut franchise in Argentina since 1992, and has acted as President
and Chief Executive Officer of Kana Development, Inc., a land
development company, since 1983.
C. Leon Timothy has been a Senior Vice President of the
Company since February 1990 and a Director of the Company since
December 1992. He was a Director of BAESA from April 1990 until
July 1996 and a Senior Vice President of BAESA responsible for
shareholder relations until July 1996.
David Cuthbertson has been a Vice President of the Company
in charge of operations since July 1990. He was a regional Sales
Manager for Crown Cork and Seal Company from 1979 to June 1990.
Manuel Bonilla has been a Vice President of the Company in
charge of Sales and Marketing since September 1996. He was Vice
President of Sales for Philip Morris Latin America from 1987 to
August 1996.
Reinaldo Rodriguez has been Vice President of the Company in
charge of Human Resources since September 1996. He was Vice
President in charge of Human Resources for BAESA form 1990 to
July 1996, and he was Personnel Director for Pepsi Cola Puerto
Rico Bottling Company from 1982 to 1990.
David Lee Virginia has been Vice President of the Company in
charge of Finance since September 1996. He was Planning Director
for Pepsi Cola Engarrafadora Ltda from 1994 to 1996. He was with
BAESA in a number of positions including Vice President -
Treasurer from 1992 to September 1994 and he was Vice President
in charge of Finance for Pepsi Cola Puerto Rico Bottling Co. from
1987 to 1992.
Jose Gonzalez has been a Vice President of the Company in
charge of Internal Audit since October 1996. He was previously
Audit Manager, since December 1995. He was Controller and
Operations Manager for The West Company from 1993 to 1995 and
Assistant Controller for Nypro Puerto Rico Inc. from 1992 to
1993. Previous positions include Senior Accountant for Motorola
of Puerto Rico and Senior Auditor for Coopers & Lybrand, from
1988 to 1992.
13
Investment in BAESA
On July 1, 1996, voting control of BAESA was transferred to
PepsiCo with the result that the Company no longer exercises any
significant influence or control over BAESA. As a result of this
change, the Company's investment in BAESA may 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 reasonably possible which
are intended to result in the Company not being required to
register as an investment company. The Company expects to file
with the Securities and Exchange Commission an application for an
exemptive order from registration under the Investment Company
Act. There can be no assurances, however, that the Company will
be successful in obtaining such an exemptive order or will
otherwise find 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.
Item 2. PROPERTIES
Properties
The properties of the Company primarily consist of bottling,
warehouse, distribution, plastic production and office
facilities, located in Puerto Rico. The Company owns the
property previously used as a bottling plant in Rio Piedras and
one bottling plant in Toa Baja. Substantially all of the
Company's real property, machinery and equipment are pledged
pursuant to the terms of a Credit Agreement among the Company and
its subsidiaries and Banco Popular de Puerto Rico. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - The Company - Liquidity and Capital
Resources." The principal offices of the Company are located in
Toa Baja. The Company leases two warehouse and distribution
facilities in Ponce, Mayaguez and the production facilities for
Cristalia bottled water in Ponce. The remainder of the Company's
properties is held in fee.
At September 30, 1996, the net book value of all land,
buildings, machinery, and equipment owned by the Company in
Puerto Rico was approximately $53.7 million. The total annual
rent paid by the Company for the year ended September 30, 1996
for its leased production, distribution and office facilities and
equipment in Puerto Rico was approximately $1.4 million.
Item 3. LEGAL PROCEEDINGS
Nine putative class actions alleging federal securities
violations by the Company and others have been filed since August
14, 1996:
1. Robert and Ilene Weiss v. Pepsi-Cola Puerto Rico
Bottling Co., Charles H. Beach and Rafael V. Farace, U.S.
District Court for the Southern District of Florida, Civil Action
No. 96-2290, filed 8/14/96, Judge Moore.
2. Louis Goldstein v. Pepsi-Cola Puerto Rico Bottling Co.,
Charles H. Beach, Michael J. Gerrits and Rafael V. Farace, U.S.
District Court for the Eastern District of New York, Civil Action
No. 96-4010, filed 8/14/96, Judge Gleeson.
3. The Great Neck Capital Appreciation Investment
Partnership, L.P. and Sam Tave v. Charles H. Beach, Michael J.
Gerrits, Rafael V. Farace and Pepsi-Cola Puerto Rico Bottling
Company, U.S. District Court for the Southern District of
Florida, Civil Action No. 96-8578, filed 8/15/96, Judge Moore.
4. Luis A. Rivera Pomales, Rosa I. Quintana, Frank
Fernandez, Tallaboa Heavy Equipment Corp., Rafael Tamayo,
Internal Medicine Corp., Nelson Capote, Myrta Oceguera, Evencio
Rodrigues v. Pepsi-Cola Puerto Rico Bottling Co., Paine Webber,
Incorporated, Oppenheimer & Co., Inc. KPMG Peat Marwick, KPMG
14
Peat Marwick, LLP, KPMG Finsterbusch Pickenhayn Sibille, Charles
H. Beach, Michael J. Gerrits, James C. Keavney, John W. Beck,
Charles R. Krauser, Anton Schedlbauer, C. Leon Timothy, Raymond
Ulrich, ABC Inc., DEF, Inc. Mr. X and Mrs. Y, U.S. District Court
for the District of Puerto Rico, Civil Action No. 96-1997, filed
8/16/96, Judge Dominguez.
5. Joseph Singer v. Charles H. Beach, Michael J. Gerrits,
Rafael V. Farace and Pepsi Cola Puerto Rico Bottling Company,
U.S. District Court for the Southern District of Florida, Civil
Action No. 96-2459, filed 8/29/96, Judge Moore.
6. Annabella Sykes Ray. On behalf of herself and all
others similarly situated v. Pepsi-Cola Puerto Rico Bottling
Company, a Delaware corporation, Charles H. Beach and Rafael V.
Farace, U.S. District Court for the Southern District of Florida,
Civil Action No. 96-8590, filed 8/20/96, Judge Moore.
7. Sweetwater Investments, Inc. On behalf of itself and
all others similarly situated v. Pepsi Cola Puerto Rico Bottling
Co., Charles H. Beach, Michael J. Gerrits, James C. Keavney, John
W. Beck, Charles R. Krauser, Angel Collado-Schwatz, Rafael Nin,
Anton Schedlbauer, C. Leon Timothy, Raymond Ulrich and Rafael V.
Farace, U.S. District Court for the Southern District of Florida,
Civil Action No. 96-8671, filed 9/26/96, Judge Moore.
8. Turabo Medical Center, Harzan Mortgage, Sara Pons,
Virgilio Cardona de la Obra, Charlie La Costa, Miguel A. Ortiz
Flores, Trustee of Miguel A. Ortiz Flores Keogh Plan, Hipolito
Miranda, Cesar A. Cruz, David W. Tsao and Vivien Chen, Luz
Correa, Hector Velez, Pedro Zervignon, Elsa Castro Perez, Dr.
Robreto Rodriguez Velez, Oscar Rivera and Anabel A. Rivera, Diana
Nazario, Kau Shing Fung and Mui Chun Wong, Orlando Marrero
Santiago, Marcos Bandrich, Alfredo Garcia Sasco and Wilma Bordoy
Otero, Ernesto Iglesias, Rodfam Investments, Inc. v. Charles H.
Beach, Michael J. Gerrits, Rafael V. Farace and Pepsi-Cola Puerto
Rico Bottling Company, U.S. District Court for the District of
Puerto Rico, Civil Action No. 96-2250, filed 10/11/96, Judge
Dominguez.
9. Joseph Shanken on behalf of himself and all others
similarly situated v. Pepsi-Cola Puerto Rico Bottling Company,
Charles H. Beach, Michael J. Gerrits and Rafael V. Farace, U.S
District Court for the Southern District of Florida (Northern
Division), Civil Action No. 96-8712, filed 10/18/96, Judge Moore.
All nine actions allege violations of Sections 10(b) and 20
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
based on accounting irregularities in the Company's reported
financial results for its first and second quarters ended
December 31, 1995, and March 31, 1995, respectively. Three of
the nine actions (the Pomales, Sweetwater and Shanken cases)
further claim violations of the Securities Act of 1933; i.e., a
fraudulent scheme to misrepresent the Company's financial
condition, beginning with misrepresentations in the Company's
September 19, 1995 initial public offering and continuing in its
quarterly financial reports. One of the nine actions (the
Pomales case) additionally alleges a claim for "Fault, Negligence
and Tort-Recklessness" based on the same allegations underlying
the federal securities claims.
Plaintiffs in all the actions seek, inter alia, unspecified
money damages. Plaintiffs in the Pomales case seek, inter alia,
rescissory or compensatory damages which are alleged to be
estimated to exceed $70,000,000, together with pre-judgment
interest; and judgment declaring null and void the sale of the
Company's common shares initially sold to the public in the
Company's September 19, 1995 initial public offering and all
subsequent trading in such shares. Similarly, plaintiff in the
Sweetwater Investments, Inc., case seeks inter alia, recision of
the stock purchases. The Company's time to respond to any of the
complaints has not yet expired.
On or about October 15, 1996, The Great Neck Capital
Appreciation Investment Partnership, L.P., Singer, Weiss,
Sweetwater Investment and Ray plaintiffs each separately filed
motions to consolidate all actions against the Company pending in
Florida (other than the Shanken action which had not yet been
filed), to appoint a lead plaintiff, and to appoint lead
plaintiffs' counsel. All Florida plaintiffs, including the
plaintiff in the Shanken case, seek to transfer the consolidated
actions to the District of Puerto Rico. The Company has opposed
this effort, and the issue remains sub judice.
15
On or about October 18, 1996, the Pomales and Turabo Medical
Center plaintiffs in the actions pending in the District of
Puerto Rico moved for consolidation, which was granted by the
court on November 4, 1996. On November 13, 1996, the Company's
motion to Consolidate and Transfer Actions to the Southern
District of Florida was filed with the Judicial Panel on
Multidistrict Litigation, and briefing by the parties has been
completed. A hearing on the Company's motion is scheduled for
January 24, 1997. In November 1996, plaintiffs in the Florida
actions moved for class certification. The Company's time to
respond to the class certification motion has not yet expired.
The Company intends to defend these lawsuits vigorously.
However, there can be no assurance that there will not be
developments with respect to these lawsuits adversely affecting
the Company's financial condition. Also, accounting and legal
fees incurred by the Company are likely to continue to be
excessive in the foreseeable future.
In addition, in connection with the accounting
irregularities, the Securities and Exchange Commission has issued
an Order Directing Private Investigation and Designating Officers
to Take Testimony, styled In the Matter of Pepsi-Cola Puerto Rico
Bottling Company, File No. HO-3199. The Staff of the SEC is
currently engaged in that investigation and the Company is
cooperating fully.
In November 1995, the Company obtained directors, officers
and entity liability insurance coverage. The Company has been
recently advised by the insurance carrier that based on the
allegations contained in the complaints relating to the lawsuits
described above, the insurance carrier (although not implying
that it believes such allegations to be true) now believes that
certain of the claims appear not to be covered by the policies,
and that other claims may not be covered. The Company intends to
vigorously contest this interpretation of the policies by the
insurance carrier, but there can be no assurance that any
coverage ultimately will be available to the Company under the
policies with respect to some or all of the claims under these or
similar lawsuits.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securityholders
during the fourth quarter of the fiscal year ended September 30,
1996.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of December 19, 1996, there were (i) 5,000,000 shares of
Class A Common Stock, par value $.01 per share (the "Class A
Shares"), issued and outstanding and held by 29 shareholders of
record, and (ii) 16,500,000 shares of Class B Common Stock, par
value $.01 per share (the "Class B Shares" and together with the
Class A Shares, the "Common Stock"), issued and outstanding and
held by 730 registered shareholders of record. The principal
market for the Company's Class B Shares is the New York Stock
Exchange, Inc. (the "NYSE"). The Class A Shares are not listed
for trading on any securities exchange.
The Company's Class B Shares have been listed for trading on
the NYSE since September 20, 1995 under the symbol PPO. The
following table sets forth, for the periods indicated, the high
and low sales prices of the Company's Class B Shares on the NYSE
as reported in the consolidated transaction reporting system.
The closing sale price of the Company's Class B Shares on the
NYSE on December 19, 1996, as reported in the consolidated
transaction reporting system, was $4.25.
High Low
---- ---
1995
- ----
Fourth Quarter (from September 20).. $14.00 $12.75
1996
- ----
First Quarter....................... $14.00 $11.00
Second Quarter...................... $13.12 $9.00
Third Quarter....................... $10.125 $7.875
Fourth Quarter...................... $ 7.875 $4.50
First Quarter (from October 1,
1996 through December 19, 1996)..... $ 5.50 $4.25
The Company's Board of Directors from time to time may
declare, and the Company may pay, dividends on its outstanding
shares of Common Stock in the manner and upon the terms and
conditions provided by law. Pursuant to the terms of the Credit
Agreement, 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.
The Company does not expect to pay any dividends for the
foreseeable future.
The following table sets forth the cash dividends paid by
the Company with respect to the Common Stock for the dates
indicated. Dividend per share amounts prior to September 1995
have been adjusted to give retroactive effect to the stock split
on August 14, 1995 and are calculated on the basis of 18,000,000
shares of Common Stock outstanding on the date of each payment.
No stock dividends have been paid. The dividends paid on
April 4, 1994 were paid out of the proceeds received by the
Company through its sales of shares of BAESA to the public in
underwritten secondary offerings. The Company completed an
initial public offering in September 1995 whereby 3,500,000 Class
B shares of Common Stock were issued.
Dividends Paid
Date Per Share
- ---- --------------
October 1993........................... $0.28
April 4, 1994.......................... $0.90
December 14, 1994...................... $0.14
December 16, 1994...................... $0.11
December 27, 1995...................... $0.24
17
Item 6. SELECTED FINANCIAL DATA
Presentation of Financial Information
The following tables present summary consolidated financial
information of the Company and reflect the results of operations
of the Company and its equity interest in the net earnings of
BAESA. This data has been derived from the Consolidated
Financial Statements of the Company and its subsidiaries and from
information 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 provided by BAESA. 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. The
Consolidated Financial Statements of the Company as of
September 30, 1995 and 1996 and for each of the three years ended
September 30, 1996 have been audited by KPMG Peat Marwick LLP,
independent public accountants. The Consolidated Financial
Statements of BAESA as of September 30, 1995 and for each of the
two years ended September 30, 1995 have been audited by KPMG
Finterbush Pickenhayn Sibille. The consolidated financial
statements of BAESA as of September 30, 1996 and for the year
then ended are unaudited. Prior to 1992, Puerto Rico Plastics
("PRP"), and the Company did not have an equity interest in each
other. However, PRP and the Company were entities under common
control since they were owned by the same group of shareholders
in the identical ownership percentage. During 1992, PRP merged
with the Company and, accordingly, fiscal year 1992 and
thereafter are presented on a consolidated basis.
On August 14, 1995, the Company approved a stock split (the
"Stock Split"), pursuant to which the Essential Shareholders
received 5,000,000 Class A Shares and 5,200,000 Class B Shares,
and the Non-Essential Shareholders received 7,800,000 Class B
Shares, in exchange for their holdings of Common Stock of the
Company. The per share information included through August 1995
has been adjusted to give retroactive effect to the Stock Split
and is calculated on the basis of 18,000,000 shares of Common
Stock outstanding. The Company completed an initial public
offering in September 1995 whereby 3,500,000 Class B Shares of
common stock were issued. On June 8, 1992, the Company
purchased and retired 6,000,000 shares of Common Stock (as
adjusted for the Stock Split). As a result, the per share
information included below for periods prior to June 8, 1992 is
calculated on the basis of 24,000,000 shares of Common Stock
outstanding.
18
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
<TABLE>
<CAPTION> Period
from December
29, 1991 Fiscal Year Ended
through September 30,
September ---------------------------------
30, 1992 1993 1994 1995 1996
--------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............. $68,956 $98,010 $104,048 $114,301 $102,891
Cost of sales......... 43,408 58,562 60,574 67,846 74,956
------- ------- -------- -------- --------
Gross profit....... 25,548 39,448 43,474 46,455 27,935
Selling and marketing
expenses............ 20,044 27,432 30,497 30,458 42,456
Administrative
expenses............. 9,129 11,254 10,528 6,262 9,606
Restructuring Charges - - - - 2,700
Intangibles and fixed
asset write-offs - - 2,886 - -
------- ------- ------- ------- -------
Income (loss) from
operations........ (3,625) 762 (437) 9,735 (26,827)
------- ------- ------- ------- -------
Gain on sale by PCPRB
of Class B BAESA
Shares, net......... 60,915 22,746 15,924 - -
Gain on early
termination of
supply agreement.... - - - - 2,111
Interest expense...... (2,199) (1,457) (1,237) (1,215) (1,523)
Interest income....... 140 402 147 207 2,418
Other income, net..... (966) 32 (332) 391 (256)
------- ------- ------- ------- -------
Total other income
(expenses)...... 57,890 21,723 14,502 (617) 2,750
------- ------- ------- ------- -------
Income (loss) before
income tax
benefit (expense)
and equity in
net earnings
(loss) of BAESA. 54,265 22,485 14,065 9,118 (24,077)
Income tax expense
(benefit)........... 22,125 (880) 6,243 (297) (1,205)
------- ------- ------- ------- -------
Income (loss) before
equity in net
earnings (loss) of
BAESA............... 32,140 23,365 7,822 9,415 (22,872)
Equity in net earnings
of BAESA, net of
income taxes........ 10,755 9,414 9,753 5,638 (51,458)
------- ------- ------- ------- -------
Net income/(loss) $42,895 $32,779 $17,575 $15,053 $(74,330)
======= ======= ======== ======= =======
Earnings Per Share (1)
Income (loss) before
equity in net
earnings of BAESA,
net of income taxes. $1.49 $1.30 $0.43 $0.52 $(1.06)
Net Income........... $1.99 $1.82 $0.98 $0.83 $(3.46)
Dividends declared per
share of Common
Stock(1)............ $0.47 $1.34 $1.18 $0.27 $0.24
Weighted average number
of shares of
Common Stock
outstanding (in
thousands).......... 21,531 18,000 18,000 18,105 21,500
- -----------------
(1) Earnings per share of Common Stock and dividends
declared per share of Common Stock are determined by dividing
net income by the weighted average number of common shares outstanding
during each period and dividends declared by the number of shares
of Common Stock outstanding at the time of dividend declaration,
respectively. The number of shares of Common Stock outstanding
at the time of dividend declaration was 24,000,000 in 1991 and 1992,
18,000,000 in 1993 and 1994, 18,105,000 in 1995 and 21,500,000 in 1996.
</TABLE>
19
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1992 1993 1994 1995 1996
------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of period):
Assets:
Cash and cash equivalents....... $ 14,691 $ 7,348 $ 1,347 $ 46,091 $ 18,614
Short Term Investment........... 0 0 0 0 12,904
Accounts receiveable, net....... 12,614 13,871 11,881 16,427 14,562
Notes receivable................ - 473 - - -
Accounts receivable from
affiliates and intercompany
advances....................... 1,882 9,366 3,729 2,913 -
Inventories.................... 4,545 3,994 5,452 4,542 4,495
Deferred Income Taxes.......... - - - - 187
Other current assets........... 2,637 2,275 1,216 2,516 1,857
-------- -------- --------- --------- --------
Total current assets.... 36,369 37,327 23,625 72,489 52,619
Investment in BAESA............ 41,852 39,892 69,870 74,128 -
Deferred income tax long-term.. - - - - 2,076
Long-lived assets for sale;
principally land and building. - - - - 3,805
Property, plant and equipment,
net........................... 32,878 33,355 32,397 36,445 49,936
Notes receivable................ 1,593 - - - -
Intangible assets, net.......... 4,446 3,509 2,293 2,163 1,459
Other assets.................... 1,607 1,067 693 441 86
-------- --------- --------- --------- ---------
Total assets............ $ 118,745 $ 115,150 $ 128,878 $ 185,666 $ 109,981
========= ========= ========== ========= =========
Liabilities:
Current installments of long-
term debt................... $ 587 $ 933 $ 1,549 $ 1,550 $ 1,550
Current installments of
capital lease obligations... 2,042 2,409 2,537 1,204 341
Notes payable to bank......... 3,000 - 4,250 4,600 25,000
Accounts payable - trade...... 11,688 8,472 7,469 12,536 16,619
Notes and accounts payable -
affiliates.................. 167 5,000 2,078 1,181 50
Income taxes payable.......... 22,038 1,455 229 123 115
Other accrued taxes and
expenses.................... 6,803 12,071 3,678 7,007 8,672
-------- --------- --------- --------- ---------
Total current liabilities.. 46,325 30,340 21,790 28,201 52,347
Long-term debt, excluding
current installments........ 1,086 9,595 7,915 6,365 4,813
Capital lease obligations,
excluding current
installments................ 6,669 4,999 2,070 848 871
Deferred income taxes, net..... 10,884 7,661 18,273 18,732 0
Other liabilities.............. 1,597 2,610 2,899 2,871 2,593
-------- --------- --------- --------- ---------
Total liabilities......... 66,561 55,205 52,947 57,017 60,624
-------- --------- --------- --------- ---------
Shareholders' equity:
Class A Shares................. 50 50 50 50 50
Class B Shares................. 130 130 130 165 165
Additional paid in capital..... 28,033 28,033 47,967 90,738 90,738
Retained earnings............. 24,352 32,931 29,307 39,472 (40,232)
Cumulative transation
adjustment................... - - - (232) 0
Pension liability adjustment... (381) (1,199) (1,523) (1,544) (1,364)
-------- --------- --------- --------- ---------
Total shareholder's equity... 52,184 59,945 75,931 128,649 49,357
-------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity....... $ 118,745 $ 115,150 $ 128,878 $ 185,666 $ 109,981
========= ========= ========= ========= =========
Other Data:
Depreciation and amorization... 3,674 4,954 4,917 4,781 5,589
Capital expenditures(1)........ 3,796 2,075 3,961 10,418 24,237
Case sales volume(2)........... 19,581 27,937 28,781 30,684 32,073
- -----------------
(1) Capital expenditures represent purchases of property, plant and equipment.
(2) Case sales volume information is unaudited.
</TABLE>
20
Item 7. 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 Consolidated Financial
Statements of the Company, and the Notes thereto, for the fiscal
year ended September 30, 1994 (the "fiscal year 1994"), the
fiscal year ended September 30, 1995 (the "fiscal year 1995") and
the fiscal year ended September 30, 1996 (the "fiscal year
1996").
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 1.
Business-Investment in BAESA." 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.
Accounting Irregularities
The Company recently discovered accounting irregularities
that required it to restate its financial results for the first
and second quarters ended December 31, 1995 and March 31, 1996.
These irregularities resulted in a substantial understatement of
certain expenses, primarily discounting and marketing expenses,
and a corresponding overstatement of operating income. This
restatement resulted in an operating loss in both quarters.
After discovering the accounting irregularities, the
Company's Board of Directors retained Rogers & Wells as
independent counsel to conduct an investigation of the
circumstances which resulted in the irregularities. Rogers &
Wells, working with the independent accounting firm of Price
Waterhouse, which was retained to assist with the investigation,
conducted a thorough investigation of these circumstances and has
made its report to the Company's Board of Directors. Taking into
consideration the findings of the investigation and in
consultation with the Company's independent auditors regarding
their materiality, the Company concluded that the irregularities
did not have a material effect on any Company financial
statements prior to the first and second quarters of fiscal 1996,
and thus that no restatements for any prior periods are required.
Based on the Company's investigation, the Company believes
that the accounting irregularities involved a series of entries
made in the Company's accounting records by certain employees of
the Company which had the effect of improperly recording certain
expenses (primarily marketing and discounting expenses) as non-
chargeable items, or of not recording such expenses at all.
These entries resulted in a corresponding overstatement of the
Company's operating income.
In consultation with its auditors, and with Price Waterhouse
LLP, 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
officer in charge of the Company's accounting records with an
individual 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
21
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 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.
Seasonality
The historical results of operations of the Company have not
been significantly seasonal. The Company believes that this
could have been attributable to existing capacity constraints
while operating out of the old plant 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 season now
that it has additional capacity in its new plant.
Carbonated Beverage Tax
Prior to May 1991, carbonated beverages were not subject to
any excise taxes in Puerto Rico. From May 24, 1991 through
December 31, 1993, the Puerto Rican government imposed the
Carbonated Beverage Tax of 13.5 cents per liter on all carbonated
beverages manufactured in, or imported to, Puerto Rico, including
extracts or syrups used as raw material for the manufacture of
finished products. The imposition of the Carbonated Beverage Tax
had a material adverse effect on the operations, sales and
profits of soft drink bottlers in Puerto Rico, including the
Company, due to the resulting depressed level of demand and the
Company's inability to pass on the full effect of the tax to its
customers. As of January 1, 1994, the Carbonated Beverage Tax
was repealed and carbonated beverages were subjected to the lower
general excise tax imposed on most consumer goods in Puerto Rico.
The current excise tax on carbonated beverages is 5% of the
"taxable price in Puerto Rico," which is defined as 72% of the
manufacturer's sales price for products manufactured in Puerto
Rico. The Company is thus currently subject to an excise tax at
an effective rate of 3.6% (or 72% of 5%) of the sales price of
its soft drink products which represents approximately 1.5 cents
per liter.
The amount of excise taxes paid by the Company on its
products is deducted from the Company's gross sales; thus the
Company's net sales reflect this deduction. The Company's net
sales decreased significantly during the periods in which the
Carbonated Beverage Tax was in effect. The amount of excise tax
paid by the Company was $17.6 million in the fiscal year 1993,
$6.0 million in the fiscal year 1994, $2.3 million in the fiscal
year 1995, and $2.5 million in the fiscal year 1996 corresponding
to approximately 12%, 4%, 2% and 2.4% of gross sales,
respectively.
Income Taxes
The Company's income is subject to various methods of
taxation. Certain of the Company's wholly owned subsidiaries
qualify and have elected to be treated as Section 936
Corporations. Pursuant to such election, the majority of income
derived from the Puerto Rico operations of such subsidiaries is
entitled to a tax credit for purposes of U.S. income taxation.
Nevertheless, such operations are subject to Puerto Rican
taxation (at graduated statutory rates between 22% and 45%
through June 30, 1995 and between 22% and 43% for tax years
beginning after June 30, 1995). However, the Company has been
subject to a lower effective Puerto Rican tax rate due to the
availability of net operating losses from its Puerto Rican
operations which offset Puerto Rican taxable earnings and the
availability of certain tax exemptions granted by the Puerto
Rican tax authority with respect to the Company's plastics
operations.
In this connection, on August 20, 1996, the U.S. Congress
adopted, and President Clinton signed into law, the Small
Business Job Protection Act which generally repealed the Section
936 tax reductions. A ten year phase out of the Section 936 tax
22
credit was adopted for existing credit claimants and the credit
was eliminated for companies establishing new Puerto Rico
operations and for existing companies that add substantial new
lines of business within Puerto Rico. This Act is effective for
tax years beginning after December 31, 1995. Existing claimants
may elect to utilize [reduced credit bases] on the applicable
percentage limitations or utilize the economic activity
limitations. The Company has been utilizing the economic
activity limitations and does not anticipate changing its
election.
As of September 30, 1995, the Company and its subsidiaries
had approximately $48.0 million in net operating losses available
to offset against future earnings for purposes of Puerto Rican
taxation and $24.7 million in U.S. net operating losses. The net
operating losses belong to the Company and its manufacturing and
distributing subsidiaries. For Puerto Rican and U.S. tax
purposes, related entities such as the Company and its wholly-
owned subsidiaries may not join in the filing of a consolidated
income tax return. As a result, the net operating losses of one
entity may not be absorbed or utilized to offset the taxable
income of any other related entity. Only the entity that
generated losses may use such losses to offset its own future
taxable income. See Note 7 to the Consolidated Financial
Statements of the Company.
The Company
General
The following table sets forth certain financial information
as a percentage of net sales for the Company for the periods
indicated.
Fiscal Year
------------------------------
1996 1995 1994
--------- --------- --------
Net Sales............................ 100.0% 100.0% 100.0%
Cost of Sales........................ 72.8 59.4 58.2
Gross Profit......................... 27.2 40.6 41.8
Selling and Marketing Expenses....... 41.3 26.6 29.3
Administrative Expenses.............. 9.3 5.5 10.1
Intangibles and Fixed Asset Write-
offs and Restructuring Charges..... 2.6 0 2.8
Income (Loss) from Operations........ (26.1) 8.5 (0.4)
Fiscal Year 1996 Compared to Fiscal Year 1995
Net Sales. Net sales for the Company decreased $11.4
million or 10.0% for the fiscal year 1996 from the fiscal year
1995 to $102.9 million. This decrease was primarily the result
of the significant increase in discounts provided to customers
partially offset by a 4.5% increase in sales volume in fiscal
1996 as compared to fiscal 1995. The increase in discounts
resulted from intense competitive activity. The average net
sales price on an eight ounce serving equivalent basis decreased
during fiscal 1996 by approximately 14.5% as compared to fiscal
1995.
Cost of Sales. Cost of sales for the Company increased $7.1
million, or 10.5%, for the fiscal year 1996 from the fiscal year
1995 to $75.0 million. This increase resulted primarily from the
increase in sales volume, the increase in the costs of certain
raw materials, the costs associated with the start-up of the new
manufacturing facility in Toa Baja, and the inefficiencies
associated with operating both manufacturing facilities, during
the transition period to the new plant which occurred in the
third quarter.
Gross Profit. Gross profit for the Company decreased by
$18.5 million to $27.9 million for the fiscal year 1996 from
$46.5 million in the fiscal year 1995. As a percentage of net
sales, gross profit decreased to 27.2% in the fiscal year 1995
from 40.6% in the fiscal year 1995 due to the higher discounts
provided to customers, increased sales volume at the
corresponding lower average net selling prices, and the higher
cost of sales due to raw material price increases, higher
temporary costs of production associated with the start-up of the
new manufacturing plant in Toa Baja, and the operation of both
the old and new production facilities during the start-up of the
Toa Baja manufacturing facility.
23
Selling and Marketing Expenses. 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 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
$12.0 million, or 39.4%, to $42.5 million for the fiscal year
1996 from the fiscal year 1995. This increase is primarily the
result of increased marketing activities during the fiscal year
1996 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. This increase also resulted from expensing
in fiscal year 1996 certain prepaid marketing and expense items
carried over from prior periods.
Administrative Expenses. Administrative expenses for the
Company increased $3.3 million or 53.4% for the fiscal year 1996
from the fiscal year 1995, to $9.6 million. This increase is
primarily a result of the cost of increased professional services
associated with the Company being a public company and the
transition to the new management of $1.4 million, legal and
accounting costs associated with the restatement of first and
second quarter results and professional fees associated with
certain civil litigation of $0.9 million, a $0.5 million expense
incurred in connection with the accelerated transition of
management control of BAESA to PepsiCo, effective July 1, 1996,
and $0.5 million in expenses associated with the Company's study
of expansion opportunities within Western Europe. As a
percentage of net sales, administrative expenses increased to
9.3% during fiscal year 1996 from 5.5% in fiscal year 1995.
Restructuring Charges. The Company's results of operations
for the fiscal year 1996 have been affected by the incurrance of
several non-recurring restructuring charges totalling $2.7
million. These charges were comprised of the following: (i) a
$1.4 million fixed asset write-down related to closing all
bottling operations in the Company's old bottling plant, which is
now for sale and (ii) $1.3 million in pension asset write-offs
and costs associated with employee terminations.
Income (Loss) from Operations. Income (loss) from
operations for the Company decreased to $(26.8) million during
the fiscal year 1996, from $9.7 million for the fiscal year 1995.
The decrease is the result of lower average net sales, the
increased discounts offered to customers, a significant increase
in selling and marketing expenditures, higher professional fees,
the restructuring charges of $2.7 million, and the recognition of
certain charges, including marketing and other expenses, and, the
write-off of prepaid tax carried over from prior periods.
Gain on Early Termination of Supply Agreement. This item
consists of gain realized from the cancellation of the preform
supply agreement with BAESA and corresponding extinguishment of
any debt due to BAESA. See Note 8 to the Consolidated Financial
Statements.
Equity in Net Earnings (Loss) of BAESA. Based on information
disseminated after July 1, 1996 by BAESA, equity in net earnings
(loss) of BAESA, net of income tax, amounted to $(51.5) million
during the fiscal year 1996, compared to $5.6 million in the
fiscal year 1995. The decrease is attributable to the losses
incurred by BAESA for the fiscal year 1996 as reported in BAESA's
public announcement. The Company's equity in the loss reported
by BAESA has reduced the Company's investment in BAESA to zero,
meaning that no further equity in losses of BAESA will be
reported by the Company until BAESA reports profits sufficient to
produce a positive investment in BAESA on the Company's balance
sheet.
Net Income (Loss). Net income (loss) during the fiscal year
1996 was $(74.3) million, compared to $15.1 million during the
fiscal year 1995. Net (loss) during the fiscal year 1996
primarily reflects loss before equity in net earnings (loss) of
BAESA of $(22.9) million, and equity in net loss of BAESA, net of
income tax of $(51.5) million, as compared to income before
equity in net earnings of BAESA of $9.4 million and equity in
earnings of BAESA of $5.6 million during the fiscal year 1995.
Fiscal Year 1995 Compared to Fiscal Year 1994
24
Net Sales. Net sales for the Company increased $10.3
million, or 9.9%, for the fiscal year 1995 from the fiscal year
1994 to $114.3 million. This increase was primarily the result
of a 4.3% increase in case sales volume of soft drinks, a 21.8%
increase in case sales volume of Cristalia water over the fiscal
year 1994 and an increase in the average sales price of
approximately 6% effective January 1, 1995 which accounted for a
$1.3 million increase in net sales during fiscal year 1995 over
fiscal year 1994. Furthermore, as of January 1, 1994, the
Carbonated Beverage Tax was replaced by a lower general excise
tax. This led to a reduction in excise taxes paid by the Company
of approximately $3.7 million during the fiscal year 1995 as
compared to the fiscal year 1994. As a result of the reduction
in the excise tax, the Company was able to realize a higher net
selling price for soft drinks in the fiscal year 1995.
Cost of Sales. Cost of sales for the Company increased $7.3
million, or 12.0%, for the fiscal year 1995 from the fiscal year
1994 to $67.8 million. This increase is primarily attributable
to an increase in sales volume in the fiscal year 1995 over the
fiscal year 1994 and the increase in the cost of certain raw
materials, principally aluminum and resin, used for the
production of cans, plastic bottles and preforms.
Gross Profit. Gross profit for the Company increased by
$3.0 million to $46.5 million in the fiscal year 1995 from $43.5
million in the fiscal year 1994. As a percentage of net sales,
gross profit decreased to 40.6% in the fiscal year 1995 from
41.8% in the fiscal year 1994 due to the higher cost of raw
materials incurred during the fiscal year 1995.
Selling and Marketing Expenses. Selling and marketing
expenses for the Company amounted to $30.5 million in the fiscal
years 1995 and 1994. Selling and marketing expense as a
percentage of net sales for the Company decreased to 26.6% in the
fiscal year 1995 from 29.3% in the fiscal year 1994. This
decrease resulted from greater efficiencies achieved in marketing
and selling efforts and the higher net selling price during the
fiscal year 1995.
Administrative Expenses. Administrative expenses for the
Company decreased $4.3 million, or 40.5%, in the fiscal year 1995
from the fiscal year 1994, to $6.3 million. See Note 8 to the
Consolidated Financial Statements of the Company.
Intangible and Fixed Asset Write-offs. Intangible and fixed
asset write-offs for the Company were $2.9 million in the fiscal
year 1994, consisting of write-offs of $1.0 million of certain
intangibles and $1.9 million of certain fixed assets that were
either unrecoverable or obsolete.
Income (Loss) from Operations. Income (loss) from
operations for the Company increased to $9.7 million in the
fiscal year 1995, from a loss of ($0.4) million in the fiscal
year 1994. The increase is the result of higher net sales, lower
administrative expenses during fiscal year 1995 and the
recognition of certain intangibles and fixed asset write-offs
during the fiscal year 1994.
Gain on Sale by the Company of Class B BAESA Shares. The
Company sold 1.3 million Class B BAESA Shares during the fiscal
year 1994 and thereby recognized a gain of $15.9 million in the
fiscal year 1994. See Note 5 to the Consolidated Financial
Statements of the Company.
Income Tax Expense (Benefit). Income tax expense for the
Company decreased in the fiscal year 1995 to ($0.3) million from
$6.2 million in the fiscal year 1994. The income tax expense
recorded during the fiscal year 1994 was primarily attributable
to the gain of $15.9 million recognized in connection with the
sale of Class B BAESA Shares by the Company.
Equity in Net Earnings of BAESA, Net of Income Tax. Based
on information provided to the Company by BAESA, equity in net
earnings of BAESA, net of income tax, amounted to $5.6 million
during the fiscal year 1995, compared to $9.8 million in the
fiscal year 1994. The decrease is attributable to the decrease
in the Company's interest in BAESA. During fiscal year 1994, the
Company's interest in BAESA ranged from 17% to 23%, while this
ownership interest remained at approximately 17% during fiscal
year 1995.
25
Net Income. Net Income for the Company decreased to
$15.1 million in the fiscal year 1995 from $17.6 million in the
fiscal year 1994. Net income for fiscal year 1994 includes a
gain of $15.9 million realized in connection with the sale by the
Company of 1.3 million Class B BAESA Shares, partially offset by
the income tax expense relating to such gain.
Liquidity and Capital Resources
At September 30, 1996, the Company had $31.5 million of cash
and cash equivalents and short-term investments, and indebtedness
for borrowed money, including short-term and long-term borrowings
and capital lease obligations, of $32.6 million.
The Company has announced that its current priority is to
restore profitability with respect to its Puerto Rican
operations. 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. Also, as of September 30, 1996, the Company has
used approximately $17.1 million of the 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 was $(6.8) million for the fiscal year 1996 as compared
with $16.5 million for the fiscal year 1995 and $(7.9) million
for the fiscal year 1994. The decrease was mainly a result of
the net loss of $(74.3) million incurred during fiscal 1996
compared to net income of $15.1 for fiscal 1995 and $17.6 in
fiscal 1994. As of September 30, 1996, the Company had $48.4
million in net operating loss carry forwards 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.
Net cash provided by (used in) investing activities for the
Company was $33.0 million for the fiscal year 1996, as compared
with $5.9 million for the fiscal year 1995 and $22.7 million for
the fiscal year 1994. Purchases of property, plant and
equipment, net, amounted to $(24.2) million during the fiscal
year 1996 as compared with $(10.4) million during fiscal year
1995 and $(4.0) million during fiscal year 1994. Purchases of
short term investments were $(12.9) million during fiscal year
1996 as compared to $0.0 for fiscal year 1995 and fiscal year
1994. These short term investments consist of short term
discount notes which the Company expects to hold until maturity.
During fiscal year 1994, proceeds from the sale of Class B BAESA
Shares contributed $23.5 million towards the cash provided by
investing activities as compared to $0.0 for fiscal year 1995 and
fiscal year 1996. Dividends received from BAESA amounted to $2.8
million in fiscal year 1996, as compared with $2.8 million in
fiscal year 1995 and $3.2 million in fiscal year 1994. In view
of the current financial difficulties being experienced by BAESA
as reported in its recent public announcements, the Company does
not believe that BAESA will be in a position to pay dividends on
its shares in the foreseeable future. In addition, because the
Company exerts no influence over BAESA, even if BAESA does return
to profitability, the Company would not be able to affect
decisions made by BAESA with respect to the payment of dividends.
As a result, the Company is unable to predict whether or when
BAESA will pay any future dividends.
Cash flows provided by (used in) financing activities for
the Company were $12.3 million for the fiscal year 1996 as
compared with $34.2 million for the fiscal year 1995 and $(20.8)
million for the fiscal year 1994. The significant financing
activities for the Company in fiscal year 1996 were the payment
of dividends and the issuance of notes payable of $47.9 million
offset by the repayment of debt of $27.5 million. The
significant financing activities of the Company in fiscal year
1995 were from the issuance of 3.5 million Class B Common Shares
in a primary offering in the Company's initial public offering as
well as the payment of dividends and the repayment of debt. The
significant financing activities of the Company during the fiscal
year 1994 were the payment of dividends and the repayment of
debt. 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. The Company does not
expect to pay any dividends for the foreseeable future.
26
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 September 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 $6.0 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 January
10, 1997, 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") or at LIBOR if 936 Funds are not
available. At September 30, 1996, the 936 Rate was 5.3%.
The weighted average interest rate on such borrowings was
7.4% for 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 thousand 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 0.60,
0.75 and 1.00 to 1, respectively, and a maximum ratio of Total
Liabilities to Tangible Net Worth (as defined in the Credit
Agreement) of 4.0, 3.0 and 2.0 to 1, respectively, for the fiscal
year 1996, 1997 and thereafter, and (iii) a minimum Tangible Net
Worth of $15 million through the end of fiscal year 1996 and of
$18 million, $21.5 million, $25 million and $30 million,
respectively, through the end of fiscal 1997, 1998, 1999 and
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 during part of the fiscal year
1996. 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 Toa Baja plant and the Rio Piedras plant are located.
The Company's franchise arrangements with PepsiCo require it
not to exceed a ratio of senior debt to subordinated debt to
equity of 65 to 25 to 10. The Company is currently in compliance
with these covenants. See "Business of the Company - Franchise
Arrangements."
Capital expenditures for the Company totaled $24.2 million
in the fiscal year 1996, $10.4 million in the fiscal year 1995
and $4.0 million in the fiscal year 1994. The Company's capital
expenditures have been financed by a combination of borrowings
from third parties and internally generated funds. The Company
estimates that its capital expenditures for the Company for the
fiscal years 1997 and 1998 may be approximately $4 million and
$4 million, respectively.
27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is submitted pursuant to the
requirements of Item 8.
Page
Pepsi-Cola Puerto Rico Bottling Company and Subsidiaries ----
Independent Auditors' Report............................... 29
Consolidated Balance Sheets at September 30, 1996 and 1995. 30
Consolidated Statements of Income/(Loss) for the Years Ended
September 30, 1996, 1995 and 1994........................ 32
Consolidated Statements of Shareholders'Equity for the Years
Ended September 30, 1996, 1995 and 1994.................. 34
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994........................ 35
Notes to Consolidated Financial Statements................. 37
Schedule II - Valuation and Qualifying Accounts............ 60
28
Independent Auditors' Report
The Board of Directors
Pepsi-Cola Puerto Rico Bottling Company
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Pepsi-Cola Puerto Rico Bottling Company and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated
statements of income/(loss), shareholders' equity and cash flows
for each of the years in the three-year period ended September
30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Pepsi-Cola Puerto Rico Bottling Company and
subsidiaries as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
December 9, 1996
Stamp No. 1354169 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
29
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
CONSOLIDATED BALANCE SHEET
(U.S. Dollars in thousands, except share date)
September 30, September 30,
1996 1995
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 18,614 $ 46,091
Short term investments 12,904 -
Accounts Receivable:
Trade, less allowance for doubtful
accounts of $1,158 and $1,458 in
1996 and 1995, respectively 11,262 16,086
Due from PepsiCo, Inc. and affiliated
companies 877 2,913
Other 2,423 341
Inventories 4,495 4,542
Deferred income taxes 187 -
Prepaid expenses and other current
assets 1,857 2,516
---------- ----------
Total current assets $ 52,619 $ 72,489
Investment in BAESA - 74,128
Deferred income tax, long-term 2,076 -
Long-lived assets for sale principally
land and building 3,805 -
Property, plant and equipment, net 49,936 36,445
Intangible assets, net of accumulated
amortization 1,459 2,163
Other assets
86 441
---------- ----------
Total assets $ 109,981 $ 185,666
30
September 30, September 30,
1996 1995
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,550 $ 1,550
Current installments of capital lease
obligations 341 1,204
Notes payable to bank 25,000 4,600
Accounts Payable:
Trade 16,619 12,536
Affiliates 50 1,181
Income Taxes Payable 115 123
Accrued payroll 2,951 2,376
Accrued other taxes 701 260
Deferred income taxes 0 530
Other accrued expenses 5,020 3,841
---------- ---------
Total current liabilities $52,347 $28,201
Long-Term debt, excluding current
installments 4,813 6,365
Capital lease obligations, excluding
current installments 871 848
Accrued pension cost, long-term 2,593 2,871
Deferred income tax, net - 18,732
---------- ---------
Total liabilities $60,624 $57,017
========== =========
Shareholders' equity:
Class A common shares, $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 in 1996
and 1995 165 165
Additional paid-in capital 90,738 90,738
Retained earnings/(deficit) (40,232) 39,472
Cumulative translation adjustment 0 (232)
Pension liability adjustment (1,364) (1,544)
---------- ---------
Total shareholder's equity 49,357 128,649
---------- ---------
Total liabilities and shareholders'
equity $109,981 $185,666
=========== ==========
31
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(U.S. Dollars, except per share amounts)
Fiscal Year Ended
-----------------------------------------
September 30, September 30, September 30,
1996 1995 1994
------------- ------------- -------------
Net Sales $102,891 $114,301 $104,048
Cost of Sales 74,956 67,846 60,574
------ ------ ------
Gross profit 27,935 46,455 43,474
Selling and marketing expenses 42,456 30,458 30,497
Administrative expenses 9,606 6,262 10,528
Restructuring Charges 2,700 - -
Intangible and fixed asset
write-offs - - 2,886
------ ------ ------
Income (loss) from operations (26,827) 9,735 (437)
Other income (expenses):
Gain on sale by PCPRBC of
Class B common shares of
BAESA, net - - 15,924
Gain on early termination of 2,111 - -
supply agreement
Interest expense (1,523) (1,215) (1,237)
Interest income 2,418 207 147
Other, net (256) 391 (332)
------ ------ ------
Total other income/(expense) 2,750 (617) 14,502
Income (loss) before income (24,077) 9,118 14,065
tax benefit/(expenses) and
equity in net earnings/(loss)
of BAESA
Income tax benefit/(expense) 1,205 297 (6,243)
------ ------ ------
Income/(loss) before equity $ (22,872) $9,415 $7,822
in net earnings/(loss) of
BAESA
32
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(U.S. Dollars, except per share amounts)
Equity in net earnings/(loss) (51,458) 5,638 9,753
of BAESA, net of income tax
benefit/(expense) of $20,062
($1,657) and ($716) in 1996,
1995 and 1994, respectively
Net income/(Loss) (74,330) $15,053 $17,575
Earnings/(Loss) per common
share: Income/(loss) before
equity in net earnings/(loss)
of BAESA, net of income taxes.. ($1.06) $0.52 $0.43
Net income/(loss) ($3.46) $0.83 $0.98
Weighted average number of
shares outstanding
(thousands) 21,500 18,105 18,000
33
<TABLE>
<CAPTION>
Pepsi-Cola Puerto Rico Bottling Company
Consolidated Statements of Shareholders' Equity
(U.S. Dollars in thousands)
Fiscal Years Ended September 30, 1996, 1995 and 1994
Class Class Additional
A B Paid- Retained Cumulative Pension Total
Common Common in Earnings Translation Liability Shareholders'
Shares Shares Capital (Deficit) Adjustment Adjustment Equity
------ ------ -------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1993 $ 50 $ 130 $ 28,032 $ 32,932 $ - ($ 1,199) $ 59,945
Cash dividends on Common shares
declared in October 1993
(per share $0.28) - - - (5,040) - - (5,040)
Cash dividends on common shares
declared in April 1994
(per share $0.90) - - - (16,160) - - (16,160)
Equity adjustment to recognize
minimum pension liability - - - - - (324) (324)
Adjustment related to issuance of
BAESA Shares, net of tax effect
of $8,124 - - 19,935 - - 19,935
Net Income - - - 17,575 - - 17,575
------- -------- -------- --------- --------- ----------- ----------
Balances at September 30, 1994 $ 50 $ 130 $ 47,967 $29,307 $ 0 ($ 1,523) $ 75,931
Cash dividends on common shares
declared in December 1994
(per share $0.25) - - - (4,888) - - (4,888)
Equity adjustment to recognize minimum
pension liability - - - - - (21) (21)
Class B common shares issuance, net - 35 42,771 - - - 42,806
Translation adjustment - - - - (232) - (232)
Net Income - - - 15,053 - - 15,053
------- -------- -------- --------- --------- ----------- ----------
Balances at September 30, 1995 $ 50 $ 165 $ 90,738 $39,472 ($ 232) ($1,544) $128,649
Cash dividends on common shares
declared in December 1995
(per share $0.24) - - - (5,374) - - (5,374)
Equity adjustment to recognize minimum
pension liability - - - - - 180 180
Translation adjustment - - - - 232 - 232
Net Income - - - (74,330) - - (74,330)
------- -------- -------- --------- --------- ----------- ----------
Balances at September 30, 1996 $ 50 $ 165 $ 90,738 ($40,232) $ 0 ($1,364) $ 49,357
======== ======== ======== ========= ========= ======== =========
</TABLE>
34
PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars in thousands)
<TABLE>
<S> <C> <C> <C>
Fiscal Year Ended
-----------------------------------------
September 30, September 30, September 30,
1996 1995 1994
------------- ------------- -------------
Cash flows from operating activities:
Net income/(Loss) $(74,330) $15,035 $17,575
Adjustments to reconcile net earnings to
net cash provided by(used in) operating
activities:
Gain on early termination of supply agreement (2,111) - -
(Gain)/Loss on sale by PCPRBC of class
B common shares of BAESA, net - - (15,924)
(Gain)/Loss on sale of property, plant
and equipment (675) 17 1,549
Impairment on long-lived assets 1,134 - -
Intangible asset write-off 624 - 2,886
Depreciation and amortization 5,589 4,781 4,917
Deferred income taxes (1,462) (377) 2,315
Equity in net (earnings)/losses of BAESA 51,458 (5,638) (9,753)
Changes in assets and liabilities:
Accounts receivable 4,778 (3,730) (1,739)
Inventories 47 910 (1,458)
Prepaid expenses and other current assets 659 (1,335) (1,037)
Accounts payable 5,063 4,170 (8,130)
Other liabilities and accrued expenses 2,195 2,594 (1,455)
Income tax payable (8) (106) 517
Other, net 247 158 1,836
======= ====== ======
Net cash provided by (used in) operating
activities (6,792) 16,497 (7,901)
Cash flows from investing activities:
Proceeds from sale of Class B common - - 23,524
shares of BAESA, net
Proceed from sale of property, plant
and equipment 1,347 1,662 -
Purchases of property, plant and (24,237) (10,418) (3,961)
equipment
Short term investments (12,904) - -
Dividends received from affiliate 2,839 2,839 3,152
Net cash provided by (used in) investing
activities (32,955) (5,917) 22,715
</TABLE>
35
<TABLE>
<S> <C> <C> <C>
Fiscal Year Ended
-------------------------------------
September 30, September 30, September 30,
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Proceeds from issuance of Class B common
stock, net - 42,806 -
Proceeds from short-term borrowings 47,900 350 4,250
Repayment of short-term borrowings (27,500) - -
Repayment of long-term debt (1,552) (1,549) (3,865)
Repayment of capital lease obligations (1,204) (2,555) -
Dividends paid (5,374) (4,888) (21,200)
------- ------- --------
Net cash provided by (used in) financing
activities 12,270 34,164 (20,815)
Net increase in cash and cash equivalents (27,477) 44,744 (6,001)
Cash and cash equivalents at beginning
of period 46,091 1,347 7,348
------ ------ ------
Cash and cash equivalents at the end of
period $18,614 $46,091 $1,347
======= ======= ======
Supplemental cash flow disclosures:
Cash paid for:
Interest $2,416 $1,550 $1,457
Income taxes 186 175 5,524
Non-cash transaction
Purchases of vehicles through capital leases amounting to $364
</TABLE>
36
PEPSI COLA PUERTO RICO BOTTLING
COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars in thousands except share data)
Fiscal Years ended September 30, 1996, 1995 and 1994
NOTE 1. DESCRIPTION OF BUSINESS
Pepsi Cola Puerto Rico Bottling Company ("PCPRBC" or "the
Company") bottles, sells and distributes beverages sold primarily
under the Pepsi Cola ("PepsiCo") trademark in the Commonwealth of
Puerto Rico. The Company's division of Cristalia Premium Water,
("Cristalia"), is engaged in extracting processing, bottling and
distributing bottled water in Puerto Rico. Beverage Plastics
Company ("BEV"), a wholly-owned subsidiary, manufactures plastic
preforms and plastic bottles in Puerto Rico, primarily for use by
the Company. The Companies operate under exclusive bottling
appointments and franchise agreements with the franchisor which
include operating and marketing commitments, term limitations and
extensions, and conditions for termination. The Exclusive
Bottling Appointments have ten-year terms expiring on November 5,
2003. Each of the Exclusive Bottling Appointments will
automatically be extended for an additional five-year term
expiring on November 5, 2008, provided PCPRB is not in breach of
any provisions of the franchise arrangement.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Consolidation and Organization
The consolidated financial statements include the financial
statements of PCPRB and its wholly-owned subsidiaries
operating in Puerto Rico and the accounts for Argentine
Bottling Associates ("ABA"), a general partnership and BAESA
Shareholder Associates ("BSA"), a general partnership
(collectively, the "Company"). As of September 30, 1996,
PCPRB had a 51.93% interest in ABA, which had a 58.99%
interest in BSA, which in turn had a 55.06% interest in BAESA.
As of September 30, 1995, PCPRB had a 51.89% interest in ABA,
which had a 59.24% interest in BSA, which in turn had a 55.40%
interest in BAESA. As of September 30, 1994, PCPRB had a
51.07% interest in ABA, which in turn had a 59.62% interest in
BSA which in turn had a 55.93% interest in Buenos Aires
Embotelladora S.A. and subsidiaries ("BAESA"). BSA was formed
in 1994 in connection with "Southern Cone" acquisitions by
BAESA (see note 5). The Company's resulting investment in
BAESA of approximately 17%, as of September 30, 1996 and 1995,
is accounted for under the equity method of accounting. All
balances and transactions have been eliminated in
consolidation, including significant intercompany profit on
assets remaining within the group.
B. Inventories
Inventories are stated at the lower of cost (first-in first-
out method) or net realizable value.
C. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property
and equipment under capital leases are stated at the present
value of minimum lease payments. Depreciation on property,
plant and equipment is calculated using the straight-line
method at rates based on the estimated useful lives of the
related assets. Plant and equipment held under capital leases
and leasehold improvements are amortized straight-line over
the shorter of the lease term or the estimated useful life of
the asset.
The estimated useful lives (in years) of the Company's
property, plant and equipment are as follows:
37
Useful Life
-----------
Building and Improvements 40
Machinery and Equipment 10 and 15
Plastic returnable bottles 4
Cases and Shells 5 and 10
Furniture and Fixtures 5 to 10
The cost of maintenance and repairs is charged to expenses as
incurred. The cost of significant renewals and improvements
is added to the carrying amount of the respective fixed
assets. The carrying amounts and accumulated depreciation for
assets sold or retired are eliminated from the respective
accounts and gains or losses realized on disposition are
reflected in the consolidated statement of income/(loss).
D. Intangible Assets
The cost in excess of fair value of net assets of companies
acquired in purchase transactions is being amortized on a
straight-line method over its economic life not to exceed 40
years. In 1996, the Company wrote-off other intangibles of
$624 due to the loss of value of these. In 1994, the Company
wrote off the unamortized portion of the intangible asset
related to the assembled work force, which was in place when
the Company was purchased in 1987, due to higher than
anticipated employee turnover levels. The costs had been
scheduled to be amortized over a 12 year period. In 1994, the
Company wrote-off its remaining organizational cost related to
IBMC, due to the dissolution of IBMC after the sale of its net
assets to BAESA (see note 8). Other intangibles are also
amortized on a straight-line method over their estimated
useful life. Intangible assets at September 30, 1996 and 1995
are summarized as follows:
1996 1995
---- ----
Goodwill................................. $1,277 $1,277
Trademark (14 Years)..................... 300 300
Water distribution rights (20 years)..... 165 165
Unrecognized prior service cost of
pension cost............................. 23 48
Other.................................... 184 772
------ ------
$1,949 $2,562
Less accumulated amortization
$(490) $(399)
------ ------
$1,459 $2,163
====== ======
38
Amortization expense for the Company for the years ended
September 30, 1996, 1995 and 1994 is summarized as follows:
1996................................ $ 90
1995................................ 90
1994................................ 135
The Company periodically reevaluates the recoverability of its
intangible assets as well as their amortization periods to
determine whether an adjustment to the carrying value or a
revision to the estimated useful levies is appropriate. The
primary indicators of recoverability are the current and
forecasted operating cash flows which pertain to that
particular asset. An entity that has a deficit in its cash
flow from operations for a full fiscal year, in light of the
surrounding economic environment, is viewed by the Company as
a situation which could indicate an impairment of value.
Taking into account the above factors, the Company determines
that an impairment loss has been triggered when the future
projected undiscounted cash flows associated with the
intangible asset does not exceed its current carrying amount
and the amount of the impairment loss to be recorded is the
difference between the current carrying amount and the future
projected undiscounted cash flows. The Company currently is
generating negative cash flow from operations but believes
that the existing condition is temporary. Based on the
Company's policy, management believes that there is no
impairment of value related to the intangible assets as of
September 30, 1996.
E. Investment in BAESA
Investments in less than 50% owned affiliates are accounted
for under the equity method. Under this method of accounting
a proportionate share of profits or losses are recorded as an
increase or reduction of the investments. In the case of
losses these are recorded to the extent of the amount of the
investment since the Company does not guarantee any of the
debts of the investee nor is committed to provide any further
financial support.
F. Investment Securities
Investment securities at September 30, 1996 consist of short
term discount notes. The Company classifies its debt and
equity securities in one of three categories: trading,
unavailable-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to
hold the security until maturity. All other securities not
included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums
or discounts. Unrealized holding gains and losses on trade
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect on available-for-
sale securities are excluded from earnings and are reported as
a separate component of stockholders' equity until realized.
Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be
other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Premiums and
discounts are amortized or accredited over the life of the
related held-to-maturity security as an adjustment to yield
using the effective interest method. Dividend and interest
income are recognized when earned.
All of the Company's investment securities are considered to
be held-to-maturity.
39
G. Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109
("Statement 109"), "Accounting form Income Taxes". Under the
assets and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in
tax rates is recognized for income for the period that
includes the enactment date.
H. Cooperative Marketing Agreement
The Company and PepsiCo are required under the franchise
arrangement to spend a specified amount, based on prior
calendar year volume, on the marketing of PepsiCo beverage
products. The Company and PepsiCo have historically spent
significantly more on marketing than called for by the
franchise arrangement. Furthermore, the Company and PepsiCo
develop a Cooperative Marketing Agreement (CMA) on an annual
basis to promote PepsiCo beverage products in the Company's
franchise territory. The total amount spent by the Company
and PepsiCo on advertising pursuant to this cooperative
arrangement in any year is determined by the amount set forth
in that year's CMA, which may be adjusted subject to mutual
agreement by the parties. The CMA provides for, among other
things, marketing related asset investments, as well as
expenditures for advertising and promotions. PepsiCo
reimburses the Company for PepsiCo's share of the marketing
expenditures, which have been paid directly by the Company.
The reimbursements are reflected in the consolidated
statements of income/(loss) as a reduction of selling and
marketing expenses.
During 1995, the Company implemented Statement of Position No.
93-7, "Reporting on Advertising Costs", ("SOP 93-7"), issued
by the Accounting Standards Executive Committee. The adoption
of SOP 93-7 did not have a material effect on the Company's
financial position or results of operations.
The Company expenses production costs of advertising the first
time the advertising takes place. All other advertising and
promotional costs are expended when incurred. Advertising and
marketing expenditures reflected in the accompanying
consolidated statements of income/(loss) amount to $11,396,
$4,220 and $3,565 in 1996, 1995 and 1994, respectively.
I. Issuance of BAESA Shares
Increases and decreases in the Company's investment in BAESA
resulting from BAESA's issuance of newly issued shares are
reflected as adjustments to additional paid-in capital to the
extent that the proceeds to BAESA exceed or are less that the
Company's carrying value in the shares.
J. Cash Equivalents
Cash equivalents of $17,647 at September 30, 1996 consist of
discount notes with an initial term of less than three months.
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
K. Recapitalization
In connection with the Company's public offering (the
"offering") of 7,000,000 Class B common shares in September
1995, 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.
40
In connection with the offering, the Company sold 3,500,000
Class B common shares while certain of the principal
shareholders sold 3,500,000 Class B common shares of the
Company. The shares were sold at $14.00 per share. The
Company did not receive any proceeds from the sale by the
principal shareholder.
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/(loss) per common share is determined by dividing net
income/(loss) by the weighted average number of common shares
outstanding during each year.
L. Adoption of New Accounting Pronouncement.
During the year ended September 30, 1996, the Company adopted
the provisions of the Financial Accounting Standard Board
Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of".
The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company deems an asset to be
impaired if a forecast of undiscounted future cash flows
directly related to the assets, including disposal value, if
any, is less than its carrying amount.
As a result of the implementation of SFAS No. 121, the Company
revalued certain of its long-lived assets and recorded a non-
cash charge of $1,400. Of the total impairment loss, $600
represent the impairment of manufacturing equipment and
furniture, and $800 represent impairment to manufacturing
plant. Factors leading to the impairment were the Company's
decision, in mid-1996, to consolidate its manufacturing
activities in its new manufacturing facility, and anticipated
losses from the disposition of the former manufacturing
facility, and remaining unused equipment. The amount of
impairment was calculated using a recent appraisal of the
estimated value of the property less estimated costs of
disposition. The balance at September 30, 1996 remained at
$1,400.
NOTE 3 - INVENTORIES
Inventories consists of the following:
1996 1995
---- ----
Raw Materials $1,346 $1,247
Finished Goods 1,684 2,048
Spare Parts and Supplies 1,072 1,037
Work-in Process 393 210
------ ------
$4,495 $4,542
====== ======
41
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
1996 1995
---- ----
Land and Improvements................... $7,057 $1,159
Building and Improvements............... 14,301 5,592
Machinery, equipment and vehicles....... 45,931 36,173
Bottles, cases and shells............... 1,401 1,585
Furniture and Fixtures.................. 1,877 1,833
Construction in Process................. 1,941 12,224
------ ------
72,508 58,566
Less accumulated depreciation and
amortization........................... (22,572) (22,121)
-------- -------
Property, plant and equipment, net $49,936 $36,445
======= =======
NOTE 5 - INVESTMENT IN BAESA
Summarized financial information for this investment, accounted
for under the equity method is as follows:
The following condensed audited financial information relating
to BAESA as of September 30, 1996 and 1995, (in thousands of U.S.
dollars) has been provided to the Company by BAESA; its inclusion
in this report is for disclosure purposes only and the Company
makes no representation as to the accuracy or completeness of
such information. At the present time, the Company does not
control, or have significant influence over, the management or
operations of BAESA. For further information regarding BAESA,
investors should consult information made publicly available by
BAESA to its shareholders.
September 30,
-------------
ASSETS 1996 1995
---- ----
Cash and cash equivalents............... $27,361 $57,617
Accounts receivable, net................ 64,069 105,478
Inventories............................. 31,077 56,349
Deferred income tax, net................ 6,681 1,264
Other current assets.................... 8,469 24,669
------- -------
Total current assets.................. 137,657 245,377
Property, plant and equipment, net...... 586,908 655,414
Intangible assets, net.................. 79,092 88,017
Investment in joint venture............. 106,918 107,385
Deferred income tax, net................ - 10,530
Other assets............................ 16,805 21,201
------- --------
Total assets.......................... $927,380 $1,127,924
42
September 30,
-------------
LIABILITIES 1996 1995
---- ----
Current installments of long-term debt
and captial lease obligations.......... $290,299 $48,457
Bank loans and overdrafts............... 375,788 182,672
Accounts payable, income tax payable and
accrued expenses....................... 190,981 114,950
------- -------
Total current liabilities............. $857,068 346,079
Long term debt.......................... 87,461 323,737
Deferred income taxes................... 7,740 7,625
Other long-term liabilities............. 8,385 10,715
------- -------
Total liabilities..................... 960,654 688,156
Total shareholders' equity/(deficit).... (33,274) 439,768
-------- -------
Total liabilities and shareholders'
equity/(deficit)..................... $927,380 $1,127,924
======== ==========
43
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
Net Sales $680,236 $670,449 $465,071
-------- -------- --------
Cost and Expenses:
Cost of sales...................... (472,692) (345,103) (242,790)
Selling and marketing expenses..... (354,880) (160,644) (110,973)
Administrative expenses............ (192,210) (93,418) (41,677)
Start-up costs in Brazil........... (3,162) (7,040)
Restructuring costs............... (34,782) - -
--------
(1,054,564) (602,327) (402,480)
----------- -------- -------
Income (loss) from operations...... (374,328) 68,122) 62,591
Other income (expenses), net...... (75,459) (30,785) 3,577
-------- ------- -----
Income/(loss) before income tax
(expense)benefit and equity in net
earnings of affiliate............ (449,787) 37,337 66,168
Income/(loss) tax (expense) benefit. (8,191) 3,079 (17,643)
------- ----- ------
Income/(loss) before equity in net
earnings of affiliate............ (457,978) 40,416 48,525
Equity in net earnings of affiliate 5,597 4,359 -
Net income/(loss)................ $(452,381) $44,775 $48,525
======== ======= =======
43
Business
BAESA produces, sells and distributes "Pepsi Products" in
various Argentine provinces, Chile, Uruguay and Costa Rica.
BAESA has been awarded the exclusive rights to produce, sell
and distribute PepsiCo soft drink products in the Southern
Brazil franchise territories and commenced such operations on
December 1, 1994.
Foreign Currency Translation and Transaction
For purposes of preparation of its financial statement, BAESA
uses local currencies as the functional currencies except in
highly inflationary counties such as Brazil and Uruguay.
Assets and liabilities denominated in foreign currencies other
than the functional currency are translated into the
functional currency at exchange rates prevailing in the
exchange market at each balance sheet date.
Results of operations for foreign subsidiaries, other than
those located in highly inflationary countries, are translated
into U.S. dollars using the average exchange rates during the
period, while assets and liabilities are translated into U.S.
dollars using current rates in effect at the balance sheet
date. Resulting translation adjustments are recorded as
cumulative translation adjustments in shareholders'
equity/(deficit). For subsidiaries in highly inflationary
countries, the U.S. dollar is used as the functional currency.
Therefore, non-monetary assets and liabilities are translated
at historical exchange rates, while monetary assets and
liabilities are translated using the current exchange rate,
results of operations are translated using a combination of
historical and average exchange rates, and all translation
adjustments are reflected in the consolidated statements of
income/(loss).
Southern Cone Acquisitions
In November 1993, BAESA acquired from PepsiCo its bottling
operations in Chile and Uruguay and was granted the rights to
produce, sell and distribute PepsiCo soft drink products in
Southern Brazil (the Southern Cone acquisitions). In
connection with the Southern Cone acquisitions, ABA and
PepsiCo formed BSA. PepsiCo contributed 100% of the capital
stock in its Pepsi Cola bottling and distribution operations
in Chile and Uruguay to BAESA in exchange for 16,372,973 newly
issued Class B shares of common stock of BAESA. Such Class B
Shares are beneficially owned by PepsiCo through BSA. ABA
contributed 26,859,135 Class A shares of the common stock of
BAESA to BSA in exchange for a general partnership interest in
BSA.
Pursuant to the Partnership Agreement between ABA and PepsiCo
(the "Partnership Agreement"), the principal controlling
shareholders of the Company had the right as representatives
of ABA for a period ending not later than December 1, 1999 to
vote all of the BAESA shares held by BSA and by another
shareholder of BAESA. These shares represent approximately
60.2% of BAESA's outstanding capital stock and approximately
85.1% of the voting rights outstanding. Pursuant to the
Partnership Agreement, ABA would cease to be, and PepsiCo
would become the controlling shareholder of BAESA by December
1, 1999. The transfer of voting control to PepsiCo occurred
on July 1, 1996. For the period that commenced subsequent to
July 1, 1996, the Company does not have access to information
about BAESA's financial operations other than the information
about BAESA's financial operations other than the information
which is made public by BAESA.
In November 1994, BAESA entered into an agreement with
Compania Cervecerias Unidas S.A. ("CCU") whereby the soft
drink bottling operations of CCU in Chile were combined with
the operations of Embochile. The formation of this joint
venture required BAESA to contribute the operations of
Embochile to the joint venture in addition to the equivalent
of $50,000 to CCU in exchange for 45% interest of the newly
created joint venture. In addition, BAESA has the option to
44
acquire and additional 4% interest of the joint venture for
$14,000. The investment is accounted for under the equity
method by BAESA. This transaction resulted in BAESA
recognizing an excess of cost over fair value of asset
acquired of approximately $60,200. In connection with this
agreement with CCU, BAESA made a capital contribution of
$1,800 to Embochile during October 1994. BAESA paid $10,000
of the total required payment, the remaining balance of
$40,000 is to be paid over the next four years. The shares of
Embochile serve as collateral for the outstanding required
payment.
Brazil
BAESA, pursuant to the Southern Cone acquisitions, was
scheduled to receive various franchise rights for the Southern
brazilian States of Rio de Janeiro, Rio Grande do sul, Santa
Catarina, Sao Paulo and Parana as they became available
between September 1994 and November 1996. However, BAESA and
the previous company holding such franchise rights to produce,
sell and distribute PepsiCo products in the southern
Brazilian territories, reached an agreement to accelerate,
subject to certain terms and conditions, BAESA's operation of
PepsiCo's bottling franchises in all of the southern Brazilian
franchise territories to December 1, 1994. BAESA agreed to
purchase certain assets from the previous franchise holder,
including returnable glass bottles, plastic cases and certain
other assets. BAESA paid $57,000 under the agreement, of
which $22,000 was paid in December 1993, $2,900 in September
1994 and the balance during fiscal year 1995. The $24,000
deposit has been classified as a prepayment and therefore in
other assets in BAESA's balance sheet as of September 30,
1994. Total start-up expenses incurred in Brazil amounted to
$7,040 and $3,162 in 1994 and 1995, respectively.
On May 16, 1995, PepsiCo, and BAESA signed an Amendment
Agreement (the "Amendment") to the original franchise
agreements between the parties. Pursuant to the Amendment,
effective on January 1, 2000, PepsiCo will increase the
concentrate price for PepsiCo products for the Southern Brazil
territories to 20% of net wholesale selling price ("NWSP").
In addition, pursuant to the Amendment, PepsiCo will grant
BAESA the franchise rights for the majority of the Minas
Gerais region in Brazil effective March 25, 1996. The
concentrate price of the Minas Gerais territory shall be 20%
of NWSP as soon as BAESA takes over this territory.
Income Taxes
BAESA accounts for income taxes pursuant to Statement 109.
Income taxes is calculated separately for BAESA and each of
its subsidiaries as required by the tax laws in which BAESA
and its subsidiaries operate. The difference between the
computed expected tax expense based on statutory tax rates of
each country of operation and the effective income tax rate in
mainly attributable to the recognition of benefits arising
from tax leases and the effect of indexing for inflation for
tax purposes. The statutory tax rate in many of the countries
in which BAESA operates is lower than the U.S. statutory tax
rate.
Cooperative Marketing Agreement
BAESA and each of this bottling subsidiaries participate with
PepsiCo in a CMA on an annual basis to market and promote
PepsiCo beverage products in BAESA's franchise territories.
The CMA provides for among other things, marketing related
asset investments, as well as expenditures for advertising and
promotions. PepsiCo reimburses BAESA for PepsiCo's share of
marketing expenditures. These reimbursements are reflected on
BAESA's consolidated statements of income/(loss) as reduction
of selling and marketing expenses.
During 1995, BAESA adopted SOP 93-7. The adoption of SOP 93-7
did not have a material effect on BAESA's financial position
or results of operations.
Issuance of BAESA Shares
In 1994, BAESA completed a secondary public offering (national
and international) whereby 5.8 million previously unissued
Class B common shares of BAESA were sold at $17.25 per share.
Concurrent with this public offering, PCPRB sold 1.3 million
shares of Class B common shares of BAESA. The total proceeds
to BAESA from the offering was $138,133, net of underwriting
commissions and related expenses. PCPRB recognized a gain of
$15,924 attributable to the difference between PCPRB'S basis
of its interest in BAESA and the proceeds from the sale.
45
Furthermore, PCPRB increased additional paid in capital by
$19,935 net of tax effect, attributable to the sale of the 5.8
million Class B shares mentioned above and the issuance of
16,372,973 Class B shares in conjunction with the Southern
Cone acquisition, representing the difference between the
Company's equity interest in BAESA after the issuance of
shares and the historical book value of its interest in BAESA.
NOTE 6 - NOTES PAYABLE TO BANK AND LONG TERM DEBT
In November 1994, the Company and its subsidiaries entered into a
credit Agreement with Banco Popular. The Credit Agreement
provides for borrowing 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 September 30, 1996, the Company had
outstanding under the Credit Agreement revolving loans in an
aggregate principal amount of $10.0 million, term loan aggregate
principal amount of $6.0 million and non-revolving loans in an
aggregate principal amount of $10.0 million, term loan aggregate
principal amount of $6.0 million and non-revolving loans in
aggregate principal amount of $15.0 million. These loans mature
on March 30, 1997, September 10, 2000 and January 10, 1997
respectively, and bear interest at a floating rate of 2% over and
above the cost of Banco Popular of "936 funds" or LIBOR lending
rates (ranging from 6.64% to 7.27%). The Agreement contains
various covenants and events of default typical of a credit
facility agreement of this size and nature, including additional
debt restrictions and maintaining a minimum level of tangible net
worth. As of September 30, 1996, the Company was not in
compliance with some of these covenants but had obtained a waiver
from the lending institution.
Long-term debt consists of the following at September 30, 1996
and 1995:
Term Loan of $6,000 in 1996 and $8,800 in
1995 to Banco Popular, payable in 78 1996 1995
monthly payments of $128 excluding ---- ----
interest, refinanced under the above
mentioned Agreement. Interest is payable
monthly in arrears at 936 rate plus 2%...... $6,026 $7,564
Others...................................... 337 331
------ -----
Total long-term debt...................... 6,363 7,915
Less current installments................... (1,550) (1,550)
------ -----
Long-term debt, excluding current
installments............................. $4,813 $6,365
====== ======
The aggregate maturities of long-term debt at September 30, 1996
are as follows:
1997.............................................. $1,550
1998.............................................. 1,592
1999.............................................. 1,549
2000.............................................. 1,418
2001.............................................. 9
Thereafter........................................ 245
-----
Total $6,363
======
The Company is negotiating the refinancing of its credit facility
to include a payment schedule which more closely matches the life
of its productive assets.
46
NOTE 7 - INCOME TAXES
PCPRB and its subsidiaries are subject to U.S. Federal income
taxes; however, each has elected the benefit of Section 936 the
U.S. Internal Revenue Code. Section 936 presently allows the
Company a tax credit equal to a portion of the amount of U.S.
income tax expense attributable to earnings derived from
operations within Puerto Rico and to certain qualified
investments maintained in Puerto Rico subject to certain
limitations. The tax credit against U.S. income taxes on
possession business income, as computed under current law, is
subject to one of two limitations to be chosen by PCPRB and its
subsidiaries, the Economic Activity Limitation or a credit of 55%
(in 1996 and lesser in subsequent years down to 40% in 1998) of
their taxable income. PCPRB and its subsidiaries elected the
Economic Activity Limitation to calculate their 1995 and future
Section 936 credits. However, the Small Business Job Protection
Act of 1996 repealed Section 936 and provided for a 10-year
phaseout period. During the phaseout period, the Section 936
credit must be computed under the Economic Activity Limitation.
In addition, during the taxable years commencing after December
31, 2001, the Section 936 credit will be subject to a net income
limitation. In order to utilize income tax credits available
under Section 936 each company is required to derive at least 80%
of its gross income from sources within Puerto Rico, and at least
75% of gross income must be gross income must be from an active
trade or business in Puerto Rico. Distributing, Manufacturing
and BEV were in compliance with these gross income requirements
for the years ended September 30, 1996 and 1995. However, PCPRB
did not meet these gross income requirements for the years ended
September 30, 1996 and 1995 and, therefore is not allowed the
benefit of Section 936 for such years.
The Company was granted, effective October 1988, a ten-year tax
exemption for its plastic preforms manufacturing and sales
operations (BEV), pursuant to the provisions to the Puerto rico
Tax Incentives Act of 1987 for certain net industrial development
income. Under the terms of the grant, the Company received a 90%
exemption from Puerto Rico income tax. The Company also received
a full exemption from Puerto Rico income and municipal tax on
interest, rents, dividends and other investments and was granted
a 60% exemption from municipal tax and a 90% exemption from
property tax. In exchange for these tax exemptions, the Company
agreed to manufacture plastic preforms and plastic bottles,
employ a minimum number of persons and maintain equipment and
facilities in Puerto Rico.
For the years ended September 30, 1996, 1995 and 1994, the
combined income tax expense (benefit) of PCPRB and its
subsidiaries attributable to income from continuing operations
consisted of the following:
1996 1995 1994
Current: ---- ---- ----
U.S. $(150) $(477) $2,073
Puerto Rico 185 557 1,855
---- ------ ------
Total current income tax expense 35 80 3,928
---- ------ ------
Deferred:
U.S. (326) 893 2,315
Puerto Rico (914) (1,270) -
---- ------
Total deferred income tax expense
(benefit) (1,240) (377) 2,315
------ ------ ------
Total income tax expense (benefit ($1,205) $(297) $6,243
======= ====== ======
47
Income tax expense (benefit) attributable to income from
continuing operations for the years ended September 30, 1996,
1995 and 1994 differed from the amounts computed by applying the
U.S. statutory tax rate of 35% as a result of the following:
Year End Year End Year End
September 30, September 30, September 30,
1996 1995 1994
------------- ------------- -------------
Computed "expected" tax expense $(8,209) $3,191 $4,923
Change in the beginning-of-the-
year balance of the valuation
allowance for deferred tax
assets 17,734 (2,742) 2,488
Foreign tax credit, net of gross-
up of foreign taxes - (222) -
Puerto Rico income taxes (9,668) 2,029 1,855
Possessions tax credit (1,484) (2,823) (3,147)
Other, net 422 270 124
------- ------ ------
Income tax expense (benefit) $(1,205) $(297) $6,243
Current and deferred income tax expense (benefit) of $20,062),
$1,657 and $716 for 1996, 1995 and 1994, respectively, has been
provided (credited) in connection with the equity in net
earnings/(losses) of BAESA.
The significant components of deferred income tax expense
(benefit) attributable to income from continuing operations for
the years ended September 30, 1996, 1995 and 1994 are as follows:
Year End Year End Year End
September 30, September 30, September 30,
1996 1995 1994
------------- ------------- -------------
Deferred tax (benefit) expense
(exclusive of the effects of
other components listed below)... $(18,974) $2,365 $(173)
Increase (decrease) in beginning
of the year balance of the
valuation allowance for deferred
tax assets....................... 17,734 (2,742) 2,488
-------- -------- ------
Total deferred income tax
expense (benefit) $(1,240) $(377) $2,315
-------- -------- ------
48
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1996 and 1995 are presented below:
September 30,
-------------
1996 1995
Deferred Taxes ---- ----
Deferred tax assets:
Property, plant and equipment principally, due
to differences in depreciable lives $334 $ -
Federal net operating loss carryforwards 8,633 -
Puerto Rico net operating loss carryforwards 18,703 10,446
Accrued expenses 763 -
Past service cost for pension plan 426 261
Inventories principally due to additional
costs inventoried for tax purposes 127 -
Amortization of organizational costs - 103
Accounts receivable, principally due to
allowance for doubtful accounts 405 -
Other, net 66 200
------- ------
Total gross deferred tax assets 29,457 11,010
Less: valuation allowance (27,194) (9,358)
------- ------
Net deferred tax assets $2,263 $1,652
------- ------
Deferred tax liabilities:
Accounts receivable, principally due to
allowance for doubtful accounts - ($392)
Inventories, principally due to additional
costs inventoried for tax purposes - (59)
Property, plant and equipment, principally due
to differences in depreciable lives - (73)
Investment in affiliate - (20,390)
Total gross deferred tax liabilities - (20,914)
------- --------
Net deferred tax asset (liabilities) $2,263 (19,262)
======= ========
The subsequent recognition of tax benefits related to the
valuation allowance for deferred tax assets as of September 30,
1996 and 1995 will be allocated to income from continuing
operations, except for $102 of the September 30, 1995 balance
which will be allocated to equity in net earnings of BAESA.
On December 31, 1993, PCPRB's manufacturing and distributing
divisions were contributed to two newly formed subsidiaries,
Manufacturing and Distributing. PCPRB's Puerto Rico tax net
operating loss carryforwards followed the respective assets of
the divisions. During the year ended September 30, 1996,
Manufacturing utilized $3,819 of the prior year Puerto Rican net
operating loss carryforwards.
49
Deferred tax benefits for the federal and Puerto Rican tax net
operating loss carryforwards of PCPRB, Manufacturing and
Distributing have been partially reserved because realization of
that benefit for tax purposes is dependent upon the existence of
future taxable income. At September 30, 1996, PCPRB,
Manufacturing and Distributing have net operating loss
carryforwards for federal tax purposes of $24,667, which expire
in 2011, and for Puerto Rican income tax purposes as follows:
Amount Year of Expiration
- ------- ------------------
$ 3,098............................... 1998
4,891............................... 1999
3,642............................... 2000
11,657............................... 2001
24,657............................... 2002
------
$47,955...............................
=======
For U.S. income tax purposes, ABA and BSA are considered
partnerships and, as a result, do not pay income tax on their
income. ABA's and BSA's income gains, losses deductions and
credits flow-through and are recognized proportionately by their
partners on their U.S. income tax return. Therefore, a tax
provision was not computed on ABA's and BSA's income.
NOTE 8 - RELATED PARTY TRANSACTIONS
The following are transactions between PCPRB and BAESA that took
place during the years ended September 30, 1996, 1995 and 1994.
1996 1995 1994
---- ---- ----
Sale of preforms to BAESA, including
guaranteed payments..................... $2,235 4,419 4,852
Charges from PCPRB to BAESA
Management Fees....................... - - 1,467
Sale of property and equipment and other
assets............................... - - 935
Sale of machinery to unconsolidated
affiliate of BAESA.................... - 208 -
Charges by BAESA to PCPRB for management
fee................................... 888 848 4,528
PCPRB sold preforms to BAESA pursuant to a long-term supply
contract. In management's opinion, the terms of this long-term
supply contract were reasonable and, at the time such contract
was entered into, no other comparable long-term supply contract
was available to BAESA from an unrelated interest due to the
hyperinflationary conditions in Argentina at the time. This
contract was terminated subsequent to September 30, 1996. As
part of the negotiation which led to the cancellation of the long-
term preforms supply contract, outstanding obligations of the
Company to BAESA and its subsidiaries amounting to $2,065,063
were settled for a cash payment of $50,000. In addition, the
Company was relieved from obligations related to certain
operating leases. This transaction was accounted for as a gain
on the early termination of a supply Agreement.
50
The following are transactions between PCPRB and subsidiaries,
including ABA, with other related parties for the years ended
September 30, 1996, 1995 and 1994:
Accounts receivable other includes, $40 and $80 at September 30,
1996 and 1995, respectively, due from two partners of ABA.
As of January 1, 1995, the Company entered into an agreement with
a shareholder and former director who was to provide construction
management services for approximately $200. No amounts were paid
as of September 30, 1995 related to these services. During 1996
$151 was paid under this agreement (no additional payments are
contemplated).
PCPRB paid approximately $2,105, $2,700 and $4,400 during 1995
and 1994, respectively in advertising fees to a firm controlled
by a shareholder of the Company.
PCPRB paid approximately, $232 and $350 during 1995 and 1994,
respectively for consulting fees to a shareholder of BAESA and a
former director of the Company.
Certain members of the Company's Board of Directors and certain
of its executive officers were also directors and/or officers of
BAESA until approximately the end of June 1996.
Pursuant to the terms of a ten-year Voting Trust Agreement (five
year initial term and renewal option for a second five-year term)
and a related Stock Option Agreement, the 5,000,000 Class A
shares authorized and outstanding were placed into a voting
trust, the trustee of which is the present President of the
Company, who has the unrestricted right to vote such shares for a
period of ten years. The voting trust provides the President of
the Company with an indemnity and hold harmless with respect to
his duties and functions as trustee. The President may terminate
the Voting Trust at his will. Pursuant to the Stock Option
Agreement, the President of the Company has the right to purchase
the aforementioned 5,000,000 Class A Shares, for the exclusive
benefit of the Company, within a period of two years ending on
September 28, 1998, at a price of $1 per share.
PCPRB paid or assumed approximately $133 in 1996, for legal fees
incurred by the President and the Chairman of the Board of
Directors in connection with the issues in litigation involving
the Company and certain of its directors, and the issues relating
to the Stock Option Agreements and the Voting Stock Agreement
approved by the Board of Directors.
NOTE 9 - BUSINESS AND CREDIT CONCENTRATIONS
Financial instruments, which subject the company to
concentrations of credit risk consist primarily of trade
receivables. Most of the Company's customers are located in
Puerto Rico. Two customers accounted for approximately 28% of
the Company's sales during 1996, 1995 and 1994. Although the
Company's exposure to credit risk associated with non payments by
customers is affected by conditions for occurrences with Puerto
Rico, that risk is mitigated by the large number of entities
comprising the Company's customer base. As of September 30,
1996, no single receivable from a customer exceeded 15% of the
company's trade receivables at that date. The Company reviews a
customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical
trend, and other information.
NOTE 10 - PENSION PLANS
The Company has two separate non-contributory defined benefit
pension plans covering eligible salaried and hourly employees of
the company and its subsidiaries in Puerto Rico. The benefits
under the salaried employees' plan are based on years of serviced
and the employees' average earnings during the last five years of
employment. The benefits under the hourly employees' plan are
based on a fixed amount times years/credit service. The
Company's funding policy is to make the annual contributions as
51
required by applicable regulations. Contributions are intended
to provide for benefits attributed to service to date as well as
for those expected to be earned in the future. Both plans are
insured by the Pension benefit Guarantee Corporation. This
insurance requires all members of the controlled group to be
jointly and severally liable for the unfunded pension
obligations. The only event that may trigger a full payment of
the unfunded liability is a plan termination which management
believes is a remote possibility.
In accordance with the provisions of Accounting Standards Board
Statement No. 87, "Employers Accounting for Pensions", the
Company recognized an additional minimum liability, computed as
the excess of the accumulated benefit obligation over the fair
value of plan assets of $1,388 and $1,592 at September 30, 1996
and 1995 respectively, with a related intangible asset (limited
to the unrecognized prior service cost of the related plans) of
$23 and $48 at September 30, 1996 and 1995 respectively, with the
remainder being reflected as an adjustment to shareholders'
equity.
The following table sets forth the funded status of the plans and
amounts recognized in the balance sheet at September 30, 1996 and
1995.
1996 1995
---- ----
Actuarial present value of obligations:
Accumulated benefit obligation, including
vested benefits of $7,290 in 1996 and $6,682
in 1995 $7,356 $6,784
====== ======
Projected benefit obligations for services
rendered to date 7,711 7,174
Plan assets at fair value, primarily
consisting of common stocks and time deposits 4,579 3,656
----- -----
Projected benefit obligation in excess of plan
assets 3,132 3,518
Unrecognized net loss from past experience
different from that assumed (1,721) (1,935)
Unrecognized prior service cost (23) (48)
Adjustment to recognize minimum liability 1,388 1,592
----- -----
Accrued pension cost at September 30, 1996 and
1995 ($2,593 and $2,871 respectively, long
term) $2,776 $3,127
====== ======
Net pension expense for 1996 and 1995 included
the following components:
Service cost for benefits earned during the
period $160 $150
Interest cost on projected benefit obligation 518 496
Actual return on plan assets (533) (187)
Net amortization and deferral 442 82
---- ----
Net periodic pension cost $587 $541
==== ====
The actuarial present value of the projected benefit obligation
was determined using a weighted-average discount rate of 7% at
September 30, 1996 and 1995 and an expected long-term rate of
return on plan assets of 9% for the two years. The rate of
increase in future compensation levels for the salaried plan was
4%. The cost of retroactive benefits resulting from plan
amendments is amortized over the future worklife expectancy of
the active participants.
52
NOTE 11 - STOCK OPTION PLANS
The Company is in the process of establishing two Stock Option
Plans, subject to the approval by the Board of Directors and the
shareholders of the Company, for the granting of stock options to
purchase Class B Shares to certain employees and directors of the
Company and its affiliates who have serviced in such capacities
for at least one year prior to the date the options are granted.
It is expected that all officers and directors and other
employees of the Company and its affiliates will be eligible to
participate under this stock option plan, as deemed appropriate
by the Company's Board of Directors. One of these stock option
plans will be qualified for income tax purposes, whereas, the
other will not be a qualified plan. The stock option plan that
will be qualified for income tax purposes will have exercise
prices not less than the fair market value of the Class B shares
at the date of grant; the exercise prices in the non-qualified
stock option plan may be less than the fair market value of the
Class B shares at the date of grant. Subsequent to September 30,
1996, the Company granted an option to the President of the
Company to acquire 190,000 shares to under the qualified plan,
subject to the constitution and approval of the plans by the
Board of Directors and shareholders of the Company. These plans
replace a stock option plan that existed and was terminated
during 1996.
The Company has granted another stock option to the President of
the Company to acquire 1,516,667 Class B Shares of the Company,
at an exercise price of $5 a share. This stock option will be
exercisable in whole or in part until exercised in full. A
similar option previously granted to the former president of the
Company was cancelled during 1996.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
A.Operating Leases
The Company and its subsidiaries lease office and operating
facilities under operating leases with unexpired terms ranging
from two to nine years.
Rent expense under all noncancelable operating leases for the
Company and its subsidiaries for the years ended September 30,
1996, 1995 and 1994 is summarized as follows:
1996................................................. $1,387
1995................................................. 1,287
1994................................................. 1,187
Following is a summary of future minimum lease payments under
noncancelable operating leases and the present value of future
payments under capital leases as of September 30, 1996.
Total Operating Leases
----------------------
1997...................................... $ 781
1998...................................... 682
1999...................................... 585
2000...................................... 457
2001...................................... 398
Thereafter................................ 934
Total minimum lease payments............ $3,837
53
Total Capital Leases
--------------------
1997....................................... $ 421
1998....................................... 382
1999....................................... 322
2000....................................... 149
2001....................................... 69
Thereafter................................. 21
-----
Total minimum lease payments............. 1,364
Less amount representing interest at
10.25% to 12%............................. 152
-----
Present value of lease payments.......... 1,212
Less current installments.................. 341
-----
Capital lease obligations, excluding
current installments.................... $871
=====
In 1991 the Company entered into an agreement with the Puerto
Rico Aqueduct and Sewer Authority (PRASA) to invest approximately
$15,000 to build a new bottling facility and waste water
treatment plant. The Company is required to pay utilities
surcharges of approximately $13 per month until the new facility
is operational.
B. Legal Proceedings
The Company is a defendant in nine putative class actions
alleging federal securities violations by the Company and various
officers and directors of the Company. Plaintiffs in all actions
seek unspecified money damages except one case in which
plaintiffs seek rescissory or compensatory damages that are
alleged to be estimated in excess of $70,000, together with
judgement declaring null and void the sale of the Company's
common shares initially sold to the public in the Company's
September 19, 1995 initial public offering and all subsequent
trading in such shares.
The Company intends to contest the cases vigorously. No
discovery has been taken in any of the actions. It is not
possible at this early stage of the proceedings to determine the
likelihood and amount of the possible loss if any.
In November 1995, the Company obtained directors, officers and
entity liability insurance coverage. The Company has been
recently advised by the insurance carrier that based on the
allegations contained in the complaints relating to the lawsuits
filed against the Company, the insurance carrier (although not
implying that it believes such allegations to be true) now
believes that certain of the claims appear not to be covered by
the policies, and that other claims may also not be covered.
The Company intends to vigorously contest this interpretation
of the policy by the insurance carrier, but there can be no
assurance that any coverage ultimately will be available to the
Company under the policy with respect to some or all of the
claims under these or any similar lawsuits.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, bank loans and overdrafts, accrued
payroll, taxes and other current liabilities approximate fair
value because of the short maturity of these instruments.
The fair value of each of the Company's long-term debt
instruments is based on the amount of future cash flows
associated with each instrument discounted using the company's
current borrowing rate for similar debt instruments of comparable
maturity. The carrying amounts approximate the estimated fair
value at September 30, 1996.
54
The Company currently does not hold any derivatives.
Under the equity method, the Company's investment in BAESA has
been reduced to zero. At September 30, 1996, such investment has
an estimated fair value of $35,500 determined using a basis The
New York Stock Exchange quoted closing value per share on that
date.
NOTE - 14 INTANGIBLE AND FIXED ASSET WRITE-OFFS
In 1996, the Company recorded a non-cash charge of approximately
$600 in order to write-off an intangible.
In 1994, the Company recorded a charge of approximately $2,900 in
order to write-off approximately $1,000 of certain intangibles
and approximately $1,900 of fixed assets.
55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
56
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding the Company's Directors is incorporated
by reference to the information contained under the caption
"Proposal No. 1 - Election of Directors" in the Company's 1996
Proxy Statement (the "Proxy Statement"), which is to be filed
with the Securities and Exchange Commission in January 1997.
Information regarding the Company's Executive Officers is set
forth in Part I of this Form 10-K pursuant to Instruction G of
Form 10-K.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference to the information contained under the caption
"Executive Compensation" in the Company's Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information regarding stock ownership of each person known to
the Company to be the beneficial owner of more than 5% of its
outstanding Common Stock is incorporated by reference to the
information contained under the caption "Security Ownership" in
the Company's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related
transactions is incorporated by reference to the information
contained under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement.
With the exception of the information specifically incorporated
by reference, the Company's Proxy Statement is not to be deemed
filed as part of this report for purposes of this Part III.
57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Documents filed as part of this report:
(1) A list of the financial statements filed as
part of this report appears on page 28.
(2) A list of financial statement schedules
required to be filed as part of this report appears on
page 28.
(3) The following exhibits are filed as part of
this report:
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995).
3.2 Amended and Restated By-Laws of the Company
(incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995).
4.1 Form of Specimen Stock Certificate
representing Class B Shares (incorporated by reference
to Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-
94620) (the "S-1 Registration Statement").
9.1 Form of Charles H. Beach Voting Trust
Agreement (incorporated by reference to Exhibit 9.1 to
Amendment No. 1 to the S-1 Registration Statement).
9.2 Michael Gerrits Voting Trust Agreement
(incorporated by reference to Exhibit 9.2 to Amendment
No. 1 to the S-1 Registration Statement).
9.3 Form of Amendment No. 1 to Michael Gerrits
Voting Trust Agreement (incorporated by reference to
Exhibit 9.3 to Amendment No. 1 to the S-1 Registration
Statement).
9.4 Charles Krauser Voting Trust Agreement
(incorporated by reference to Exhibit 9.4 to Amendment
No. 1 to the S-1 Registration Statement).
9.5 Form of Amendment No. 1 to Charles Krauser
Voting Trust Agreement (incorporated by reference to
Exhibit 9.5 to Amendment No. 1 to the S-1 Registration
Statement).
10.1 Franchise Commitment Letter (incorporated by
reference to Exhibit 10.1 to the S-1 Registration
Statement).
10.2 Letter Agreement between the Company and PepsiCo
extending term of Exclusive Bottling Appointments
(incorporated by reference to Exhibit 10.2 to the S-1
Registration Statement).
10.3 Form of Exclusive Bottling Appointment
(incorporated by reference to Exhibit 10.3 to the S-1
Registration Statement).
10.4 Material Differences in Exclusive Bottling
Appointments (incorporated by reference to Exhibit 10.4
to the S-1 Registration Statement).
10.5 Concentrate Price Agreement (incorporated by
reference to Exhibit 10.5 to the S-1 Registration
Statement).
10.6 Amended and Restated General Partnership Agreement
for BSA (incorporated by reference to Exhibit 10.6 to
Amendment No. 1 to the S-1 Registration Statement).
10.7 Shareholders Agreement (incorporated by reference
to Exhibit 10.7 to Amendment No. 1 to the S-1
Registration Statement).
10.8 Amendment No. 1 to Shareholders Agreement
(incorporated by reference to Exhibit 10.8 to Amendment
No. 1 to the S-1 Registration Statement).
58
10.9 Amendment No. 2 to Shareholders Agreement
(incorporated by reference to Exhibit 10.9 to Amendment
No. 1 to the S-1 Registration Statement).
10.10 Amendment No. 3 to Shareholders Agreement
(incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995).
10.11 Stock Option Agreement dated as of September 28,
1996 among Rafael Nin, Pepsi-Cola Puerto Rico Bottling
Company and the Shareholders (incorporated by reference
to Exhibit 1 to the Schedule 13D of Rafael Nin dated
October 9, 1996).
10.12 Voting Trust Agreement dated September 28, 1996
among Rafael Nin, Pepsi-Cola Puerto Bottling Company
and the Grantors (incorporated by reference to Exhibit
2 to the Schedule 13D of Rafael Nin dated October 9,
1996).
21.1 List of Subsidiaries (incorporated by reference to
Exhibit 21.1 to the S-1 Registration Statement).
- -----------------
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1996.
(c) The exhibits listed under Item 14(a)(3) are filed
herewith or incorporated herein by reference.
(d) The Consolidated Financial Statements and the financial
statement schedules listed under Item 14(a)(2) are filed
herewith.
59
<TABLE>
<CAPTION>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions
-------------------------------------------
Description Balance at Charged to
beginning of costs and Charged to Balance at end
period expenses other accounts Deductions(1) of period
------------ ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended September 30, 1996:
Allowance for doubtful accounts 1,458 511 - (811) $1,158
Fiscal Year Ended September 30, 1995:
Allowance for doubtful accounts 1,220 386 - (148) $ 1,458
Fiscal Year Ended September 30, 1994
Allowance for doubtful accounts 1,998 338 - (1,116) $ 1,220
- -----------------
(1) Uncollectible receivables.
</TABLE>
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pepsi-Cola Puerto Rico Bottling Company
By: /s/ Rafael Nin
-------------------------------
Name: Rafael Nin
Title: Chief Executive Officer
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 Director and Chief December 23, 1996
- ---------------------- Executive Officer
Rafael Nin
/s/ John William Beck Director December 23, 1996
- ----------------------
John William Beck
/s/ Charles R. Krauser Director December 23, 1996
- ----------------------
Charles R. Krauser
/s/ Anton Schedlbauer Director December 23, 1996
- ----------------------
Anton Schedlbauer
/s/ C. Leon Timothy Director December 23, 1996
- ----------------------
C. Leon Timothy
/s/ Richard Reiss Huyke Director December 23, 1996
- -----------------------
Richard Reiss Huyke
/s/ David L. Virginia Vice President and December 23, 1996
- ----------------------- Chief Financial
David L. Virginia Officer
61
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> SEP-30-1996
<CASH> 18,614
<SECURITIES> 12,904
<RECEIVABLES> 15,720
<ALLOWANCES> 1,158
<INVENTORY> 4,495
<CURRENT-ASSETS> 52,619
<PP&E> 72,508
<DEPRECIATION> (22,572)
<TOTAL-ASSETS> 109,981
<CURRENT-LIABILITIES> 52,347
<BONDS> 5,684
0
0
<COMMON> 215
<OTHER-SE> 50,506
<TOTAL-LIABILITY-AND-EQUITY> 109,981
<SALES> 102,891
<TOTAL-REVENUES> 102,891
<CGS> (74,956)
<TOTAL-COSTS> (129,208)
<OTHER-EXPENSES> 4,273
<LOSS-PROVISION> (510)
<INTEREST-EXPENSE> (1,523)
<INCOME-PRETAX> (24,077)
<INCOME-TAX> (1,205)
<INCOME-CONTINUING> (22,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,330)
<EPS-PRIMARY> (3.46)
<EPS-DILUTED> (3.46)
</TABLE>
