SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[Checked Box] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
or
[Square] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-13914
PEPSI-COLA PUERTO RICO RETAILING 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. [Checked Box] Yes [Square] 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. [Square]
Based upon the closing price of the Class B Common Stock on December 19,
1997, 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 $111,375,000.
As of December 19, 1997, 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 1997 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.
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PEPSI-COLA PUERTO RICO BOTTLING COMPANY
---------------------------------------
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED SEPTEMBER 30, 1997
ITEM NO. PAGE NO.
- -------- --------
PART I
Item 1. BUSINESS......................................................... 2
Item 2. PROPERTIES.......................................................14
Item 3. LEGAL PROCEEDINGS................................................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................15
Item 6. SELECTED FINANCIAL DATA..........................................16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................26
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................48
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS.................................49
Item 11. EXECUTIVE COMPENSATION...........................................49
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................49
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K..............................................................50
SIGNATURES.......................................................53
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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, 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, Teem 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 and distributes
bottled water under its own Cristalia trademark.
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 Buenos Aires
Embotelladora S.A. ("BAESA"), which was incorporated and commenced operations in
the Buenos Aires metropolitan area in that year.
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, 1997, the Company had a loss from
operations of ($21.4) million (including ($13.2) million related to the
settlement of civil litigation), compared to ($26.8) million during fiscal 1996.
This loss from the Company's operations resulted primarily from intense
competitive pressures in Puerto Rico which produced net lower sales prices
reflecting increased discounts offered to customers, and cost (including legal
fees) associated with the settlement of certain shareholder class action
lawsuits against the Company and some of its directors and the ongoing
investigation by the Securities and Exchange Commission (the "SEC") of the
circumstances surrounding certain accounting irregularities which precipitated
the shareholder lawsuits.
This annual report on Form 10-K 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 ability to pay dividends, 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 economic, climatic and political conditions in Puerto Rico, and the impact of
such conditions on consumer spending.
2
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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
inhabitants.
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.
Although the Company has rights to sell PepsiCo products to distributors in
the U.S. Virgin Islands, it is not required to do so under its franchise
agreements with PepsiCo. During the fiscal year ended September 30, 1997, less
than 1% of the Company's sales by volume were to distributors in the U.S. Virgin
Islands.
THE BERVERAGE INDUSTRY IN PUERTO RICO
CONSUMPTION AND MARKET TRENDS
The Puerto Rican soft drink market is characterized by relatively low per
capita consumption as compared to the United States. In addition, the imposition
of the Carbonated Beverage Tax (in effect from 1991 to 1993) 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. Based
on information from Asesores (as defined below), the soft drink market grew
approximately 12.8% in the 12 month period ended August 31, 1997.
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 the product is 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.
The Company plans to report market share data obtained from A.C. Nielsen,
an independent research company. The Company believes that the methodology used
by A.C. Nielsen to derive market share data represents a more recognized
measurement system, and is consistent with that generally used in the United
States to derive market share data for the soft drink bottling business. The
A.C. Nielsen service has only recently been made available for use in Puerto
Rico. The data collection for this service began approximately three years ago.
A.C. Nielsen market share data is presented for comparison purposes in this
report.
As used throughout this Form, 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 report 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.
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The cola and flavored soft drinks segments represented approximately 52.8%
and 13.6%, respectively, of the soft drink market in Puerto Rico in fiscal year
1997. 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)(1)
------------- -------------------------
1990......................................... 21.4
1991......................................... 22.5
1992......................................... 21.6
1993......................................... 21.9
1994......................................... 24.8
1995 *....................................... 24.9
1996 *....................................... 25.9
1997 *....................................... 27.4
----------
(1) SOURCE: Asesores
* Represents cola sales volume for the twelve month period ended on
September 30 of the respective years.
Sales of cola and flavored soft drinks represented approximately 82.0% and
6.8%, respectively, of the Company's total soft drink sales volume in the fiscal
year 1997. Sales of cola and flavored soft drinks represented approximately
85.4% and 7.1%, respectively, of the Company's total net sales in fiscal year
1997.
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 *.............................. 49.4 56.5
1996 *.............................. 47.3 54.2
1997 *.............................. 42.6 47.8
- ----------
(1) SOURCE: Asesores
* For these years, the data given in the table is for the twelve month period
ended on August 31.
In fiscal year 1997, approximately 80% of the Company's net sales of cola
soft drinks was to supermarkets, grocery stores, cash and carry wholesalers and
similar businesses in the take-home segment of the market, and approximately 20%
was to restaurants and soda fountains and other distribution channels in the
non-take-home market segment.
Other Products
The Company's total sales volume of non-carbonated beverages, including
water, fruit juices, iced teas and isotonics, was 3.7 million cases,
representing approximately 11.7% and 11.2% of the Company's total sales volume,
and approximately 8.1% and 7.5% of the Company's total net sales, in fiscal year
1996 and fiscal year 1997, respectively. The Company estimates that the industry
sales volume of such beverages in Puerto Rico was 34 million cases in fiscal
year 1997.
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 bottling facility during fiscal year 1997,
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.
4
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The Company completed, during the fiscal year 1996, the construction of the
Toa Baja plant and the consolidation of its operations in this facility during
1997. 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 of 1996 and has closed the Rio Piedras plant which
is currently for sale. The plastics production facility moved to Toa Baja in the
first 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
has realized significant savings through its move to the new Toa Baja facility.
The Company is also expanding its bottled water distribution by introducing
new package formats in twenty-ounce and two liter sizes.
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 of 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 Letter runs concurrently with the Exclusive Bottling
Appointments and will 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 certain
minimum market share and distribution (in terms of sales volume) levels of the
cola market and flavored soft drink and minimum levels of capital expenditures.
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. The flavored soft drink market share
level requirements and the capital expenditure requirements only apply through
1992 and 1991, respectively. The Company is required to, at all times, maintain
(i) a minimum market share of 56.7% in the cola market as measured by the
rolling average of the last six consumer consumption surveys (each covering two
months) conducted by Asesores, and (ii) an annual growth rate of sales volume
for bottles, cans and post-mix of soft drinks in excess of the soft drink
industry annual average growth rate for bottles and cans in Puerto Rico, as
measured by Asesores. The Company has not during the past fiscal year met
certain market share and distribution requirements contained in the Franchise
Commitment Letter. Based on the market data provided by Asesores for the six
consumer surveys in the period ended August 31, 1997, the Company's market share
for cola soft drinks was 49.5%. The Company's annual sales growth rate for soft
drinks for the twelve month period ended August 31, 1997 was approximately 4.7%
as compared to the industry average annual growth rate of approximately 12.8%
for the same period, as measured by Asesores. The Company has not received any
notice from PepsiCo regarding any violations and does not believe that there is
any risk to the Company being adversely affected by them. The Company and
PepsiCo are working together to address the issue of the Company's failure to
meet the market share and distribution requirements contained in the Franchise
Commitment Letter. In the event the Company materially fails to achieve such
aggregate market share distribution or capital expenditure requirements 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.
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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.
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 1997 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.
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In connection with the Voting Trust, Mr. Nin was granted a two-year option,
expiring in September 1998 at $1 per share, on the Class A Shares held in the
Voting Trust, to be exercised for the exclusive benefit of the Company.
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 a sales and distribution agreement 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.
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 totaled $4.9 million in fiscal year 1997 and
accounted for 4.9% of the Company's net sales and 9.4% of sales volume for the
fiscal year 1997.
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 or high factor corn syrup, 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
as municipal water systems) and from its own drilled wells. The Company obtains
all of its sweetener
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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 the bottle manufacturing process.
Preforms were also sold to BAESA during the first fiscal quarter of 1996. All
bottles used in the bottling process of Cristalia products 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 fiscal year 1997 represented by each of them.
PERCENTAAGE OF
FISCAL YEAR
RAW MATERIAL 1997 COST
------------ -----------
Packaging.............................................. 41.5
Concentrate............................................ 36.8
Sugar/fructose......................................... 15.2
Carbon dioxide gas..................................... 1.4
Other.................................................. 5.1
------
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 1997 capacity utilization for the Toa Baja plant:
<TABLE>
<CAPTION>
APPROXIMATE EFFECTIVE NUMBER OF AVERAGE 1997
PLANT PRODUCTION CAPACITY(1) BOTTLING LINES CAPACITY UTILIZATION(2)
----- ---------------------- -------------- -----------------------
<S> <C> <C> <C>
Toa Baja................ 44,347 (2 shifts) 3 68%
</TABLE>
- ----------
(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 1997 expressed as a percentage of
approximate effective production capacity.
The Company produced all of its products during fiscal year 1997 in its
soft drink plant in Toa Baja and 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
<PAGE>
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 three primary methods of distribution for its soft
drink products: conventional routes, bulk presell and route 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 believes 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, 1997, the Company had approximately 135 distribution
routes (conventional, bulk and presell) and its transportation fleet consisted
of approximately 113 trucks. The Company's products are also distributed to
restaurants and soda fountains in post-mix form.
In addition, the Company has approximately 1,289 "single service" and 1,831
"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 1997, approximately 48% of the Company's net sales was
to supermarkets and grocery stores, 34% was to "cash and carry's" (small,
high-volume wholesalers) and similar businesses, 13% was to restaurants and soda
fountains and 5% 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 93% and 7%, respectively, of
the Company's total sales in the fiscal year 1997.
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 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.
9
<PAGE>
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.
During fiscal year 1997, two customers accounted for approximately 20% of
the Company's sales. One of these customers, the Pueblo supermarket chain
("Pueblo") in Puerto Rico, accounted for approximately 6.5% of the Company's
sales during fiscal year 1997. In July 1997, Pueblo terminated a long-term
marketing arrangement with the Company which had been in effect since January
1995, pursuant to which Pepsi-Cola products were given special prominence in
Pueblo supermarkets in terms of shelf space and special displays. In connection
with the termination of this arrangement with the Company, Pueblo entered into a
similar arrangement with the Coca-Cola bottling company in Puerto Rico under
which the same prominence was given to Coca-Cola products. As a result of the
termination of this arrangement with Pueblo, the Company's sales to Pueblo have
declined substantially. Although the Company's sales to Pueblo have been
adversely affected by these circumstances, the Company was successful in
consummating a new marketing arrangement with another substantial customer
resulting in increased sales of the Company's products to that customer which
have substantially offset the decline in sales to Pueblo. The second customer
which accounted for the balance of the 20% of the Company's sales (referred to
above) was Montalvo, a large "cash and carry" (high volume) wholesaler.
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 and 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
PepsiCo 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 year 1997, the Company faced intense price competition resulting
in substantially lower net sale 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 private label soft drinks the Company believes have
historically represented approximately 5% 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 discount expenditures
during fiscal year 1997.
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.
10
<PAGE>
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.
<TABLE>
<CAPTION>
SOFT DRINK TAKE-HOME MARKET SHARE(1)
------------------------------------
CALENDAR YEAR PEPSICO PRODUCTS COCA-COLA PRODUCTS
------------- ------------------- ------------------
<S> <C> <C>
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
1997 (for the twelve-month period ended August 31, 1997)...... 42.6 44.1
----------
(1) SOURCE: Asesores
<CAPTION>
SOFT DRINK TAKE-HOME MARKET SHARE(1)
------------------------------------
CALENDAR YEAR PEPSICO PRODUCTS COCA-COLA PRODUCTS
------------- ------------------ ------------------
<S> <C> <C>
1995 (for the twelve-month period ended September 30, 1995)..... 33.1 28.0
1996 (for the twelve-month period ended September 30, 1996)..... 34.2 30.0
1997 (for the twelve-month period ended September 30, 1997)..... 33.0 40.7
</TABLE>
----------
(1) SOURCE: A.C. Nielsen
PLASTIC PRODUCTS
Beverage Plastics Company, a subsidiary of the Company, manufactures and
sells non-returnable plastic bottles and preforms. In 1997, 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.
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 have invested
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
11
<PAGE>
1, 1991. The settlement provides for 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, 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 while a PH Equalization Facility is being placed in service and the
discharge of waste water is characterized. The Company may, at a later date,
either build the PH Equalization Facility or may enter into an agreement with
the Commonwealth of Puerto Rico with the respect to the discharge of waste water
and the payment of a fee to handle such discharge on a permanent basis. Such
decision would be subject to final approval of PRASA and the Commonwealth of
Puerto Rico. The characterization process will provide the information needed to
obtain a 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, 1996 and 1997.
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, 1997, the Company had 568 full-time employees,
approximately 63% 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. A new agreement relating to the Company's
manufacturing and distributing subsidiaries was signed on November 25, 1997 and
expires on December 31, 2001. This new agreement provides the Company with a
reduction in operating costs as part of its strategy to increase and maintain
operating efficiencies. The agreement relating to its plastics subsidiary
expired on October 1, 1996. The Company currently is in the process of
renegotiating this agreement. The Company's agreement relating to the bottled
water division became effective in January 1995 and expires on December 31,
1998.
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.
<TABLE>
<CAPTION>
Name Age Position Officer Since
- ---- --- -------- -------------
<S> <C> <C> <C>
Rafael Nin.................. 53 President and Chief Executive Officer 1996
C. Leon Timothy............. 62 Senior Vice President -- Investor Relations 1990
A. David Velez.............. 43 Vice President -- Chief Operating Officer 1997
Reinaldo Rodriguez.......... 52 Vice President -- Human Resources 1996
David Lee Virginia.......... 47 Vice President -- Chief Financial Officer 1996
Jose Gonzalez............... 40 Vice President -- Internal Audit 1996
</TABLE>
The following is a brief description of the business background of each of
the executive officers of the Company.
12
<PAGE>
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 is 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.
A. David Velez has been a Vice President of the Company in charge of
operations since March, 1997. He was the General Manager for BAESA's operations
in Rio de Janeiro from October 1995 to February 1997. Prior to that he was the
General Manager for PepsiCo's Miami bottling operations.
Reinaldo Rodriguez has been Vice President of the Company in charge of
Human Resources since September 1996 and from 1987 to 1990. He was Vice
President in charge of Human Resources for BAESA from 1990 to July 1996, and he
was Personnel Director for Pepsi Cola Metropolitan Bottling Company from 1982 to
1987.
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 employed 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. Mr. Virginia was also the Vice President of Finance of
Speciality Frozen Products LP from January 1993 to August 1993.
Jose Gonzalez has been a Vice President of the Company in charge of
Internal Audit since September 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 and Account Manager for Nypro Puerto
Rico Inc. from 1989 to 1993. Previous positions include Senior Accountant for
Motorola of Puerto Rico and Senior Auditor for Coopers & Lybrand, from 1985 to
1992.
INVESTMENT IN BAESA
In addition to conducting its own bottling operations, the Company owns
12,345,348 shares, or approximately 17% of the outstanding capital stock of
BAESA as of September 30, 1997, and, through June 30, 1996, exercised
significant influence over the management of BAESA, subject to the right of
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 and the Company does not control, or have
significant influence over, the management or operations of 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. The transfer
of operating control from the Company to PepsiCo, which had been scheduled to
take place on December 1, 1999 under a Partnership Agreement dated November 1,
1993 between an affiliate of the Company and PCI governing the corporate
governance of BAESA (the "Partnership Agreement"), resulted from the decision by
Charles Beach (who at the time was the chief executive officer of both the
Company and BAESA) pursuant to the terms of the Partnership Agreement, to
accelerate the transfer of operating control of BAESA to PepsiCo to July 1,
1996. On May 9, 1997, the Buenos Aires Stock Exchange suspended trading of
BAESA's Class B Shares after its fiscal second quarter results for the period
ended March 31, 1997 showed a negative net worth under Argentine accounting
principles of $18.7 million. The New York Stock Exchange also halted trading in
BAESA's American Depository Shares. On December 5, 1997, BAESA announced a
financial restructuring which would result in the issuance of additional equity
by BAESA in exchange for a portion of its outstanding debt, and would (if the
Company does not elect to exercise its preemptive rights to purchase its pro
rata share of the additional equity) result in the Company's 17% interest in the
outstanding capital stock of BAESA being diluted to a .34% interest. The company
withdrew its interest in BAESA Shareholder Associates, and liquidated Argentine
Bottling Associates, two partnerships, which previously held the Company's
interest in BAESA, during fiscal year 1997. These actions have resulted in the
Company holding its BAESA shares directly, and eliminates for future periods,
the accounting requirement that the Company report on an equity basis the
results of operations of BAESA.
13
<PAGE>
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, 1997, the net book value of all land, buildings,
machinery, and equipment owned by the Company in Puerto Rico was approximately
$51.1 million. The total annual rent paid by the Company for the year ended
September 30, 1997 for its leased production, distribution and office facilities
and equipment in Puerto Rico was approximately $1.7 million.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, the Company settled eight putative class actions
alleging federal securities violations by the Company and various officers and
directors of the Company based on accounting irregularities that required the
Company to restate certain of its reported financial results and other alleged
misstatements and omissions in the Company's disclosure documents. The
settlement resulted in the payment of $2.5 million and 2.5 million in previously
issued and outstanding shares of Class B Common Stock to the plaintiffs and
their attorneys. The 2.5 million Class B Shares were acquired by the Company
from a number of the Company's shareholders, including the original organizers
of the Company, in connection with the settlement of the litigation. The
settlement resulted in the dismissal of all eight actions. In connection with
the settlement and their contribution of Class B Shares to the Company for use
in the settlement, certain of the Company's directors and the founding
shareholders were released by the Company from all possible claims arising out
of the circumstances which precipitated the litigation and certain other
possible claims. The Company believes that the decision by such shareholders to
contribute the 2.5 million Class B Shares was motivated principally by their
desire to facilitate the settlement of the litigation and thereby preserve and
enhance the value of their remaining investment in the Company. Based on the
investigation conducted by the Company and its counsel of the accounting
irregularities which precipitated the litigation, the Company is not aware of
any factual basis upon which valid and substantial claims could have been made
against any of the directors or shareholders who were released from such
possible claims. The decision by the Company to release such persons from such
possible claims was made in response to requests from such directors and
shareholders.
In addition, the Securities and Exchange Commission (the "Commission") has
issued a formal order of investigation in connection with accounting
irregularities uncovered during 1996. The staff of the Commission is currently
engaged in that investigation and the Company is cooperating fully.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 19, 1997, 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 (although all of these shares are held in
a voting trust for which Rafael Nin, the Company's President, acts as voting
trustee), 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,
1997, as reported in the consolidated transaction reporting system, was $6.75.
<TABLE>
<CAPTION>
1995 HIGH LOW
- ---- ---- ---
<S> <C> <C>
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
1997
- ----
First Quarter ................................................................ $5.50 $3.875
Second Quarter................................................................ $5.00 $4.125
Third Quarter................................................................. $6.50 $4.250
Fourth Quarter................................................................ $8.0625 $5.875
First Quarter (from October 1, 1997 through December 19, 1997)................ $7.6875 $6.6875
</TABLE>
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 (as defined below), the Company may not pay 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.
15
<PAGE>
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
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. The inclusion in this report of
such information provided by BAESA is for information purposes only and the
Company makes no representation as to the accuracy or completeness of such
information. At the present time, the Company does not control, or have
significant influence over, the management or operations of BAESA. 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, 1997 have been audited by KPMG Peat Marwick LLP, independent
public accountants. The Consolidated Financial Statements of BAESA as of
September 30, 1996 and for each of the two years ended September 30, 1996 have
been audited by KPMG Finsterbush Pickenhayn Sibille. 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, the financial results
for 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.
16
<PAGE>
<TABLE>
<CAPTION>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ......................... $ 98,010 $ 104,048 $ 114,301 $ 102,891 $ 99,172
Cost of sales ..................... 58,562 60,574 67,846 74,956 68,237
--------- --------- --------- --------- ---------
Gross profit ................... 39,448 43,474 46,455 27,935 30,935
Selling and marketing expenses .... 27,432 30,497 30,458 42,456 30,224
Administrative expenses ........... 11,254 10,528 6,262 9,606 8,424
Restructuring Charges ............. -- -- -- 2,700 535
Litigation settlement expenses .... -- -- -- -- 13,172
Intangibles and fixed asset
write-offs ..................... -- 2,886 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from
operations ................ 762 (437) 9,735 (26,827) (21,420)
--------- --------- --------- --------- ---------
Gain on sale by PCPRB of
Class B BAESA Shares, net ...... 22,746 15,924 -- -- --
Gain on early termination of
supply agreement ............... -- -- -- 2,111 --
Interest expense .................. (1,457) (1,237) (1,215) (1,523) (2,644)
Interest income ................... 402 147 207 2,418 1,218
Other income, net ................. 32 (332) 391 (256) 1
--------- --------- --------- --------- ---------
Total other income
(expenses) .................. 21,723 14,502 (617) 2,750 (1,425)
--------- --------- --------- --------- ---------
Income (loss) before income
tax benefit (expense)
and equity in net earnings
(loss) of BAESA ............. 22,485 14,065 9,118 (24,077) (22,845)
Income tax expense/(benefit) ...... (880) 6,243 (297) (1,205) (3,342)
--------- --------- --------- --------- ---------
Income (loss) before equity
in net earnings (loss) of BAESA 23,365 7,822 9,415 (22,872) (19,503)
Equity in net earnings of
BAESA, net of income taxes ..... 9,414 9,753 5,638 (51,458) --
--------- --------- --------- --------- ---------
Net income/(loss) ................. $ 32,779 $ 17,575 $ 15,053 $ (74,330) $ (19,503)
========= ========= ========= ========= =========
Earnings Per Share(1)
Income (loss) before equity
in net earnings of BAESA, net
of income taxes ............. $ 1.30 $ 0.43 $ 0.52 $ (1.06) $ (0.91)
Net Income ..................... $ 1.82 $ 0.98 $ 0.83 $ (3.46) $ (0.91)
Dividends declared per share
of Common Stock(1) ............. $ 1.34 $ 1.18 $ 0.27 $ 0.24 $ 0.00
Weighted average number of
shares of Common Stock
outstanding (in thousands) ..... 18,000 18,000 18,105 21,500 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 and 1997.
</TABLE>
17
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ---------- ---------- ---------
BALANCE SHEET DATA (AT END OF PERIOD)):
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 7,348 $ 1,347 $ 46,091 $ 18,614 $ 19,447
Short Term Investment............................... 0 0 0 12,904 0
Accounts receivable, net............................ 13,871 11,881 16,427 14,562 16,897
Notes receivable.................................... 473 -- -- -- --
Accounts receivable from affiliates and
intercompany advances............................ 9,366 3,729 2,913 -- --
Inventories......................................... 3,994 5,452 4,542 4,495 3,635
Deferred Income Taxes............................... -- -- -- 187 97
Other current assets................................ 2,275 1,216 2,516 1,857 1,414
---------- ---------- ---------- ---------- ---------
Total current assets...................... 37,327 23,625 72,489 52,619 41,490
Investment in BAESA................................. 39,892 69,870 74,128 -- --
Deferred income tax long-term....................... -- -- 2,076 1,619
Long-lived assets for sale; principally land
and building..................................... -- -- -- 3,805 3,805
Property, plant and equipment, net.................. 33,355 32,397 36,445 49,936 47,294
Notes receivable.................................... -- -- -- -- --
Intangible assets, net.............................. 3,509 2,293 2,163 1,459 1,644
Other assets........................................ 1,067 693 441 86 58
---------- ---------- ---------- ---------- ---------
Total assets.............................. $ 115,150 $ 128,878 $ 185,666 $ 109,981 $ 95,910
========== ========== ========== ========== =========
Liabilities:
Current installments of long-term debt.............. $ 933 $ 1,549 $ 1,550 $ 1,550 $ 1,007
Current installments of capital
lease obligations................................ 2,409 2,537 1,204 341 908
Notes payable to bank............................... -- 4,250 4,600 25,000 5,430
Accounts payable -- trade........................... 8,472 7,469 12,536 16,619 13,750
Notes and accounts payable
-- affiliates..................................... 5,000 2,078 1,181 50 32
Income taxes payable................................ 1,455 229 123 115 199
Other accrued taxes and expenses.................... 12,071 3,678 7,007 8,672 4,830
---------- ---------- ---------- ---------- ---------
Total current liabilities................. 30,340 21,790 28,201 52,347 26,156
Long-term debt, excluding current installments...... 9,595 7,915 6,365 4,813 23,636
Capital lease obligations, excluding
current installments............................. 4,999 2,070 848 871 513
Deferred income taxes, net.......................... 7,661 18,273 18,732 0 0
Other liabilities................................... 2,610 2,899 2,871 2,593 2,213
---------- ---------- ---------- ---------- ---------
Total liabilities......................... 55,205 52,947 57,017 60,624 52,518
---------- ---------- ---------- ---------- ---------
Shareholders' equity:
Class A Shares....................................... 50 50 50 50 50
Class B Shares....................................... 130 130 165 165 165
Additional paid in capital........................... 28,033 47,967 90,738 90,738 103,910
Retained earnings.................................... 32,931 29,307 39,472 (40,232) (59,735)
Cumulative translation adjustment.................... -- -- (232) 0 0
Pension liability adjustment......................... (1,199) (1,523) (1,544) (1,364) (998)
---------- ---------- ---------- ---------- ---------
Total shareholders' equity................. 59,945 75,931 128,649 49,357 43,392
---------- ---------- ---------- ---------- ---------
Total liabilities and shareholders' equity. $ 115,150 $ 128,878 $ 185,666 $ 109,981 $ 95,910
========== ========== ========== ========== =========
OTHER DATA:
Depreciation and amortization........................ 4,954 4,917 4,781 5,589 5,971
Capital expenditures(1).............................. 2,075 3,961 10,418 24,237 4,777
Case sales volume(2)................................. 27,937 28,781 30,684 32,073 33,363
</TABLE>
- ----------
(1) Capital expenditures represent purchases of property, plant and equipment.
(2) Case sales volume information is unaudited.
18
<PAGE>
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, as
of fiscal year ended September 30, 1997 ("fiscal year 1997"), the fiscal year
ended September 30, 1996 ("fiscal year 1996") and the fiscal year ended
September 30, 1995 ("fiscal year 1995").
PRESENTATION OF FINANCIAL INFORMATION
In addition to conducting its own bottling operations, the Company owns
12,345,348 shares, or approximately 17% of the outstanding capital stock of
BAESA as of September 30, 1997, 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 and the Company does
not control, or have significant influence over, the management or operations of
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. On May 9, 1997, the Buenos Aires Stock Exchange suspended
trading of BAESA's Class B Shares after its fiscal second quarter results for
the period ended March 31, 1997 showed a negative net worth under Argentine
accounting principles of $18.7 million. The New York Stock Exchange also halted
trading in BAESA's American Depository Shares. On December 5, 1997, BAESA
announced a financial restructuring which would result in the issuance of
additional equity by BAESA in exchange for a portion of its outstanding debt,
and would (if the Company does not elect to exercise its preemptive rights to
purchase its PRO RATA share of the additional equity) result in the Company's
17% interest in the outstanding capital stock of BAESA being diluted to a .34%
interest. The Company withdrew its interest in BAESA Shareholder Associates, and
liquidated Argentine Bottling Associates, two partnerships, which previously
held the Company's interest in BAESA, during fiscal year 1997. These actions
have resulted in the Company holding its BAESA shares directly, and eliminates
for future periods, the accounting requirement that the Company report on an
equity basis the results of operations of BAESA.
ACCOUNTING IRREGULARITIES
During 1996, the Company 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 made its report to the Company's Board
of Directors.
The decision to retain Rogers & Wells (working with Price Waterhouse) was
made by the Company's full Board of Directors, and not a special committee
composed entirely of disinterested directors, because at the time of that
decision the Company had only one disinterested director and because the Board
felt that it was appropriate, under these circumstances, for that decision to be
made by the full Board of Directors. Prior to the investigation, Rogers & Wells
had acted as special securities counsel for the Company, including acting as
counsel in connection with the Company's initial public offering in September
1995. The results of the investigation were communicated orally to the Company's
Board of Directors and no written report was issued by Rogers & Wells. The
decision not to request a written report from Rogers & Wells, was based on the
advice of the Company's counsel, including Rogers & Wells handling shareholder
litigation which arose out of the accounting irregularities (which now has been
settled) that there was a substantial risk that any such written report would
not qualify for the protection of the attorney/client privilege and thus that an
oral rather than a written report to the Board of Directors was advisable. In
connection with the investigation, Rogers & Wells was given complete access to
all employees, officers and directors of the Company and all of its books and
records. The core investigation took place over a period of approximately two
months and included in excess of 30 interviews of the Company employees,
officers and directors and review of numerous documents.
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 were 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. 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 partly
attributable to existing capacity constraints while operating out of the old
plant which might have prevented the Company from meeting increased demand
during peak periods. However, the Company anticipates that its results of
operations in the future may be somewhat seasonal in the summer and holiday
seasons.
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.
19
<PAGE>
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 $6.0 million in the fiscal year 1994, $2.3 million in the
fiscal year 1995, $2.5 million in the fiscal year 1996, and $2.4 million in the
fiscal year 1997 corresponding to approximately 4%, 2%, 2.4%, and 2.5% 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 under the Internal Revenue Code. 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. Federal 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 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, 1997, the Company and its subsidiaries had
approximately $68.9 million in net operating losses available to offset against
future earnings for purposes of Puerto Rican taxation and $37.7 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.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales............................................................... 100.0% 100.0% 100.0%
Cost of Sales........................................................... 68.8 72.8 59.4
Gross Profit............................................................ 31.2 27.2 40.6
Selling and Marketing Expenses.......................................... 30.5 41.3 26.6
Administrative Expenses................................................. 8.5 9.3 5.5
Intangibles and Fixed Asset Write-offs and Restructuring Charges........ .5 2.6 --
Settlement expenses..................................................... 13.3 -- --
Income (Loss) from Operations........................................... (21.6) (26.1) 8.5
</TABLE>
20
<PAGE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NET SALES. Net sales for the Company decreased $3.7 million, or 3.6%, for
fiscal year 1997 from fiscal year 1996, to $99.2 million. This decrease was
primarily the result of the significant increase in discounts provided to
customers, partially offset by a 4.0% increase in sales volume in fiscal year
1997 as compared to fiscal year 1996. The increase in discounts resulted from
intense competitive activity. The average net sales price on an eight ounce
serving equivalent basis decreased during fiscal year 1997 by approximately 7.3%
as compared to fiscal year 1996.
COST OF SALES. Cost of sales for the Company decreased by $6.7 million, or
8.9%, to $68.3 million for fiscal year 1997 from fiscal year 1996. This decrease
was primarily the result of lower raw material costs and lower labor costs,
partially offset by a 4.0% increase in sales volume and by higher depreciation
costs for the new manufacturing facility in fiscal year 1997 as compared to
fiscal year 1996.
GROSS PROFIT. Gross profit for the Company increased by $3.0 million to
$30.9 million for fiscal year 1997 from $27.9 million in fiscal year 1996. As a
percentage of net sales, gross profit increased to 31.2% in fiscal year 1997
from 27.2% in fiscal year 1996. The increase was primarily due to the increased
sales volume of 4.0%, offset in part by lower average net sales price, and the
lower cost of sales which was due to lower raw material costs and labor costs,
partially offset by the increased depreciation costs of the Toa Baja Plant.
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 to offset traditional
marketing expenses or to acquire fixed assets. The Company's selling and
marketing expenses are shown net of all such reimbursements from PepsiCo.
Selling and marketing expenses for the Company decreased by $12.2 million,
or 28.8%, to $30.2 million for fiscal year 1997 from fiscal year 1996. This
decrease was primarily due to reductions in marketing spending of $8.2 million,
reductions in labor costs of $1.5 million, reductions in fleet and other
maintenance costs of $1.8 million, a reduction in insurance expense of $.5
million and net reductions in security and other expenses of $.2 million in
fiscal year 1997 as compared to fiscal year 1996. As a percentage of net sales,
selling and marketing expenses decreased to 30.5% during 1997 fiscal year as
compared to 41.3% for fiscal year 1996.
ADMINSITRATIVE EXPENSES. Administrative expenses for the Company decreased
by $1.2 million, or 12.3%, to $8.4 million, for 1997 fiscal year as compared to
fiscal year 1996. This decrease was primarily the result of lower professional
fees incurred in fiscal year 1997, due in part to the recovery of $1.5 million
from the Company's officers and directors liability insurance carrier, as
compared to fiscal year 1996. As a percentage of net sales, administrative
expenses decreased to 8.5% during fiscal year 1997 from 9.3% in fiscal year
1996.
SETTLEMENT OF LITIGATION. The Company's results of operations for fiscal
year 1997 were affected by the incurrence of a non-cash expense of $13.2 million
in connection with the Company's settlement of certain civil litigation,
representing the estimated value of 2.5 million Class B Shares which were
transferred as part of the settlement. Because these shares were contributed to
the Company by the Company's founding shareholders, and because the Company
received a $4.0 million recovery from its liability insurance carrier, the net
effect on the Company's equity of the settlement transaction was a $1.5 million
gain, which can be viewed as a recovery of previously expensed legal cost. There
was no similar non-cash expense incurred during fiscal year 1996. For further
information regarding the effect on the Company's results of operations of
certain transactions relating to the settlement, see note 12B to Notes to
Consolidated Financial Statements.
RESTRUCTURING CHARGES. The Company's results of operations for fiscal year
ended 1997 were affected by the incurrence of a non-recurring restructuring
charge of $.5 million. This charge was for the costs associated with employee
terminations which resulted in a reduction of the Company's work force by
approximately 5%. During fiscal year 1996, a charge of $2.9 million was
recorded. The 1996 charge was recorded in connection with the fixed asset
write-down of $1.4 million related to the closing of all bottling operations in
the Company's old bottling plant, which is now for sale, and $1.5 million in
pension asset write-offs and costs associated with employee terminations.
21
<PAGE>
INCOME (LOSS)) FROM OPERATIONS. Income (loss) from operations for the
Company increased to ($21.4) million during fiscal year 1997, from ($26.8)
million for fiscal year 1996. The increase is the result of (i) a $3 million
improvement in gross profit resulting from higher unit sales volume of 4%, and
lower raw material and labor costs, partially offset by lower net selling prices
due to increased discounts offered to customers and higher depreciation expense,
(ii) lower selling and marketing costs of $12.2 million, (iii) lower
administrative expenses of $1.2 million, (iv) the incurrence of non-cash
settlement of litigation costs of $13.2 million, and (v) a decrease in
restructuring charges of $2.2 million.
EQUITY IN NET EARNINGS(LOSS) OF BAESA. Based on information made public by
BAESA, equity in net loss of BAESA, net of income tax, amounted to ($51.5)
million for fiscal year 1996. The Company's equity in the loss reported by BAESA
for fiscal year 1996 was such that it reduced the Company's investment to zero,
meaning that no further equity in losses of BAESA would be reported by the
Company until BAESA reported profits sufficient to produce a positive investment
in BAESA on the Company's balance sheet. No such profits were realized during
fiscal year 1997. As a result of withdrawal of partnership interest in BAESA
Shareholder Associates and the liquidation of Argentine Bottling Associates, an
affiliated partnership through which the Company held its investment in BAESA,
the Company will no longer be subject to the accounting requirement that
requires the Company to report the results of operations of BAESA on an equity
basis.
INCOME TAX BENEFIT. Income tax benefit was $3.3 million for fiscal year
1997 as compared to $1.2 million for fiscal year 1996. The increase was
primarily due to income tax benefit arising from the carry back of current year
losses to fiscal year 1994.
NET INCOME (LOSS). Net loss for fiscal year 1997 was ($19.5) million,
compared to ($74.3) million for fiscal year 1996. Net loss during fiscal year
1997 primarily reflects loss before equity in net loss of BAESA of ($19.5)
million, as compared to ($22.9) million of loss before equity in net loss of
BAESA and equity in net loss of BAESA of ($51.5) million for fiscal year 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
NET SALES. Net sales for the Company decreased by $11.4 million, or 10.0%,
for fiscal year 1996 from 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 year
1996 as compared to fiscal year 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 year 1996 by approximately
14.5% as compared to fiscal year 1995.
COST OF SALES. Cost of sales for the Company increased by $7.1 million, or
10.5%, for fiscal year 1996 from 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 fiscal year 1996 from $46.5 million in fiscal year 1995. As a
percentage of net sales, gross profit decreased to 27.2% in fiscal year 1996
from 40.6% in 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.
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 to offset traditional
marketing expenses or to acquire fixed assets. The Company's selling and
marketing expenses are shown net of all such reimbursements from PepsiCo.
22
<PAGE>
Selling and marketing expenses for the Company increased $12.0 million, or
39.4%, to $42.5 million for fiscal year 1996 from fiscal year 1995. This
increase was primarily the result of increased marketing activities during
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
recognizing in fiscal year 1996 certain prepaid marketing and expense items
carried over from prior periods.
ADMINISTRATIVE EXPENSES. Administrative expenses for the Company increased
by $3.3 million, or 53.4%, for fiscal year 1996 from fiscal year 1995, to $9.6
million. This increase was primarily a result of $1.4 million of cost of
increased professional services associated with the Company being a public
company and the transition to the new management, $0.9 million of legal and
accounting costs associated with the restatement of first and second quarter
results and professional fees associated with certain civil litigation, 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 fiscal year
1996 have been affected by the incurrence of several non-recurring restructuring
charges of $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 fiscal year 1996, from $9.7 million
for fiscal year 1995. The decrease was 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 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 (when the Company no longer controlled, or had
significant influence over, the management or operations of BAESA), equity in
net loss of BAESA, net of income tax, amounted to ($51.5) million during fiscal
year 1996, compared to $5.6 million in fiscal year 1995. The decrease is
attributable to the losses incurred by BAESA for fiscal year 1996 as reported in
BAESA's public announcement. The Company's equity in the loss reported by BAESA
reduced the Company's investment in BAESA to zero, meaning that no further
equity in losses of BAESA would be reported by the Company until BAESA reported
profits sufficient to produce a positive investment in BAESA on the Company's
balance sheet. As a result of withdrawal of partnership interest in BAESA
Shareholder Associates and the liquidation of Argentine Bottling Associates, an
affiliated partnership through which the Company held its investment in BAESA,
the Company will no longer be subject to the accounting requirement that
requires the Company to report the results of operations of BAESA on an equity
basis.
NET INCOME (LOSS). Net loss during fiscal year 1996 was ($74.3) million,
compared to income of $15.1 million during fiscal year 1995. Net loss during
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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $19.4 million of cash and cash
equivalents and indebtedness for borrowed money, including short-term and
long-term borrowings and capital lease obligations of $31.5 million, which in
turn included $7.3 million of current and short-term obligations.
The Company has announced that its current priority is to restore
profitability with respect to its Puerto Rican operations. In that connection,
the Company previously made a decision to set aside its expansion plans. As of
September 30, 1997, the Company has used approximately $23.5 million, net of
interest earnings, of the cash set aside from its September 1995 initial public
offering to support these efforts for the repayment of indebtedness and by
additions to the Company's working capital which has been and continues to be
affected as a result of the Company's net operating losses, and to cover a
portion of the cost of the offering. In addition, on April 8, 1997, the Company
completed the refinancing of its remaining debt to include a payment schedule
which more closely matches the life of its production assets.
Net cash provided by (used in) operating activities for the Company was
($7.5) million for fiscal year 1997 as compared with ($6.8) million for fiscal
year 1996 and $16.5 million for fiscal year 1995. The net cash provided by (used
in) operating activities excluding the portion due to changes in assets and
liabilities was $.4 million during fiscal year 1997, ($19.8) million during
fiscal year 1996, and $13.8 million during fiscal year 1995. The net cash
provided by (used in) operating activities that was due to changes in assets and
liabilities was ($7.9) million during fiscal year 1997, $13.0 million during
fiscal year 1996, and $2.7 million during fiscal year 1995. As of September 30,
1997, the Company had $68.9 million in net operating loss carry forwards
available to offset future Puerto Rican income taxes and $37.7 million in net
operating loss carryforwards available to offset future U.S. taxable income.
Net cash provided by (used in) investing activities for the Company was
$8.5 million for fiscal year 1997, as compared with ($33.0) million for fiscal
year 1996 and ($5.9) million for fiscal year 1995. Purchases of property, plant
and equipment, net of disposals, amounted to ($4.4) million during fiscal year
1997 as compared with ($22.9) million during fiscal year 1996 and ($8.8) million
during fiscal year 1995. Purchases of short term investments were zero during
fiscal year 1997 as compared to ($12.9) for fiscal year 1996 and zero for fiscal
year 1995. The short term investments in 1996 consisted of short term discount
notes which the Company held until maturity in 1997. No such purchases were made
during fiscal year 1997 or 1995. Dividends received from BAESA amounted to zero
in fiscal year 1997 as compared with $2.8 million in fiscal year 1996 and $2.8
million in fiscal year 1995. In view of the current financial difficulties being
experienced by BAESA as reported in its recent public announcements, the Company
does not believe that BAESA will be in a position to pay dividends on its shares
in the foreseeable future. In addition, because the Company exerts no influence
over BAESA, even if BAESA does return to profitability, the Company would not be
able to affect decisions made by BAESA with respect to the payment of dividends.
As a result, the Company is unable to predict whether or when BAESA will pay any
future dividends. Also, if BAESA proceeds with its previously announced
financial restructuring, and the Company does not elect to exercise its
preemptive rights to purchase additional equity in BAESA, the Company's current
17% equity interest in BAESA will be diluted to a .34% equity interest.
Cash flows provided by (used in) financing activities for the Company were
($.2) million for fiscal year 1997 as compared with $12.3 million for fiscal
year 1996 and $34.2 million for fiscal year 1995. The significant financing
activity for the Company in fiscal year 1997 was the net repayment of
indebtedness of ($.2) million. 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 $30.2
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. In the future, the payment of dividends
will be 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.
In November 1994, the Company and its subsidiaries entered into a Credit
Agreement (the "Credit Agreement") with Banco Popular. The Credit Agreement
provided 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
24
<PAGE>
1995, Banco Popular increased the amount the Company could borrow under
revolving loans. As of March 31, 1996, the Company had outstanding under the
Credit Agreement revolving loans in an aggregate principal amount of $10.0
million, term loans in an aggregate principal amount of $5.3 million and
non-revolving loans in an aggregate principal amount of $15.0 million. On April
8, 1997, the Company entered into a Second Restated Credit Agreement (the
"Second Restated Credit Agreement") with Banco Popular. The effect of this new
agreement was to restructure the existing debt into two portions, a long term
loan of $25.0 million and a short term revolving credit facility of $5.0
million. Both portions bear interest at 2.5% over LIBOR. The Second Restated
Credit Agreement was entered into to refinance the debt outstanding under the
Credit Agreement which had become due.
The weighted average interest rate on such borrowings was 8.2% for the
fiscal year 1997. Beginning on May 1, 1997, the Company became required to make
monthly payments of principal in the amount of $.83 million with respect to the
new term loan for the first two years of the loan with annual escalating monthly
payments thereafter until the end of the tenth year of the loan (April 1, 2007)
when a $11.8 million balloon payment is due. The Company may prepay certain of
the loans subject to the terms and conditions of the Second Restated Credit
Agreement.
Under the terms of the Second Restated Credit Agreement, the Company is
subject to the following financial restrictions: (i) the Company must maintain a
minimum ratio of Total Liabilities to Tangible Net Worth (as defined in the
Second Restated Credit Agreement) of not more than 1.50 to 1 for fiscal year
1998 and for each fiscal year thereafter during the term of the Second Restated
Credit Agreement; (ii) a ratio of Operating Cash Flow to Total Debt Service (as
defined in the Second Restated Credit Agreement) of 1.00 to 1 through June 30,
1998, 1.30 to 1 from September 30, 1998 through June 30, 1999, and 1.5 to 1
thereafter; (iii) a minimum Tangible Net Worth of (as defined in the Second
Restated Credit Agreement) $39.5 million on September 30, 1998 and of $42
million, $44.5 million and $47 million, respectively, by September 30, 1999,
2000, 2001, and thereafter. The Company is also required to maintain with Banco
Popular a minimum cash balance of $10 million less certain prepayments of
indebtedness under the term loan, and under certain conditions this amount may
be reduced to zero. In addition, under certain circumstances, the Company may be
required to prepay a portion of the debt. Specifically, net proceeds of capital
asset dispositions over $.25 million per year, insurance recoveries other than
for business interruption not promptly applied toward repair or replacement, a
portion of excess cash flow (as defined in the Second Restated Credit
Agreement), and a portion of net proceeds associated with any sale of Class A
Shares, require early repayment of the amounts outstanding under this agreement.
Certain of the repayment amounts offset the minimum cash balance requirement.
The entire principal amount of loans outstanding under the Second Restated
Credit Agreement becomes immediately due and payable, 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 under the Second Restated Credit Agreement.
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 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 Second Restated Credit Agreement.
Pursuant to the Second Restated 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 the Company 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 $4.8 million in fiscal year
1997, $24.2 million in fiscal year 1996 and $10.4 million in fiscal year 1995.
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 fiscal years ending September 30,
1998 and 1999 will be approximately $4 million in each year.
25
<PAGE>
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 ................................. 27
Consolidated Balance Sheets at September 30, 1997
and 1996 ................................................... 28
Consolidated Statements of Income/(Loss) for the
Years Ended September 30, 1997, 1996 and 1995 .............. 30
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1997, 1996
and 1995 ................................................... 31
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1997, 1996 and 1995 .............. 32
Notes to Consolidated Financial Statements ................... 33
Schedule II -- Valuation and Qualifying Accounts ............. 52
26
<PAGE>
INDEPENDENT AUDITOR'S 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, 1997 and 1996,
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, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
December 5, 1997
Stamp No.1411348 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
27
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,447 $ 18,614
Short term investments -- 12,904
Accounts receivable:
Trade, less allowance for doubtful accounts of $1,389
and $1,158 in 1997 and 1996, respectively 11,681 11,262
Due from PepsiCo, Inc. and affiliated companies 943 877
Other 4,273 2,423
Inventories 3,635 4,495
Deferred income taxes 97 187
Prepaid expenses and other current assets 1,414 1,857
-------- --------
Total current assets 41,490 52,619
Investment in BAESA -- --
Deferred income tax, long-term 1,619 2,076
Long-lived assets for sale, principally land and building 3,752 3,805
Property, plant and equipment, net 47,347 49,936
Intangible assets, net of accumulated amortization 1,644 1,459
Other assets 58 86
-------- --------
Total assets $ 95,910 $109,981
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,007 $ 1,550
Current installments of capital lease obligations 908 341
Notes payable to bank 5,430 25,000
Accounts payable:
Trade 13,750 16,619
Affiliates 32 50
Income taxes payable 199 115
Accrued payroll 2,176 2,951
Accrued other taxes 374 701
Other accrued expenses 2,280 5,020
--------- ---------
Total current liabilities 26,156 52,347
Long-term debt, excluding current installments 23,636 4,813
Capital lease obligations, excluding current installments 513 871
Accrued pension cost, long-term 2,213 2,593
--------- ---------
Total liabilities 52,518 60,624
--------- ---------
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 103,910 90,738
Retained earnings/(deficit) (59,735) (40,232)
Pension liability adjustment (998) (1,364)
--------- ---------
Total shareholders' equity 43,392 49,357
--------- ---------
Total liabilities and shareholders' equity $ 95,910 $109,981
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 99,172 $ 102,891 $ 114,301
Cost of sales 68,237 74,956 67,846
--------- --------- ---------
Gross profit 30,935 27,935 46,455
Selling and marketing expenses 30,224 42,456 30,458
Administrative expenses 8,424 9,606 6,262
Restructuring charges 535 2,700 --
Litigation settlement expenses 13,172 -- --
--------- --------- ---------
Income/(loss) from operations (21,420) (26,827) 9,735
Other income (expenses):
Gain on early termination of supply agreement -- 2,111 --
Interest expense (2,644) (1,523) (1,215)
Interest income 1,218 2,418 207
Other, net 1 (256) 391
--------- --------- ---------
Total other income/(expense) (1,425) 2,750 (617)
Income/(loss) before income tax benefit and
equity in net earnings/(loss) of BAESA (22,845) (24,077) 9,118
Income tax benefit 3,342 1,205 297
--------- --------- ---------
Income/(loss) before equity in net earnings/(loss)
of BAESA (19,503) (22,872) 9,415
Equity in net earnings/(loss) of BAESA, net of
income tax benefit/(expense) of $20,062
and ($1,657), in 1996 and 1995, respectively -- (51,458) 5,638
--------- --------- ---------
Net income/(loss) $ (19,503) $ (74,330) $ 15,053
========= ========= =========
Earnings/(loss) per common share:
Income/(loss) before equity in net earnings/(loss)
of BAESA, net of income taxes $ (0.91) $ (1.06) $ 0.52
--------- --------- ---------
Net income/(loss) $ (0.91) $ (3.46) $ 0.83
--------- --------- ---------
Weighted average number of shares
outstanding (thousands) 21,500 21,500 18,105
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS)
FISCAL YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL RETAINED
COMMON COMMON PAID-IN EARNINGS
SHARES SHARES CAPITAL (DEFICIT)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCES AT SEPTEMBER 30, 1994 $ 50 $ 130 $ 47,967 $ 29,307
Cash dividends on common shares declared in
December 1994 (per share $0.25) -- -- -- (4,888)
Equity adjustment to recognize minimum
pension liability -- -- -- --
Class B common shares issuance, net -- 35 42,771 --
Translation adjustment -- -- -- --
Net Income -- -- -- 15,053
--------- --------- --------- ---------
BALANCES AT SEPTEMBER 30, 1995 $ 50 $ 165 $ 90,738 $ 39,472
Cash dividends on common shares declared in
December 1995 (per share $0.24) -- -- -- (5,374)
Equity adjustment to recognize minimum
pension liability -- -- -- --
Translation adjustment -- -- -- --
Net Loss -- -- -- (74,330)
--------- --------- --------- ---------
BALANCES AT SEPTEMBER 30, 1996 $ 50 $ 165 $ 90,738 $ (40,232)
Contribution of 2,500,000 Class B
common shares by founding Shareholders -- -- 13,172 --
Tendering of 2,500,000 Class B shares of
stock in partial settlement of litigation -- -- -- --
Equity adjustment to recognize minimum
pension liability -- -- -- --
Net Loss -- -- -- (19,503)
--------- --------- --------- ---------
BALANCES AT SEPTEMBER 30, 1997 $ 50 $ 165 $ 103,910 $ (59,735)
========= ========= ========= =========
<CAPTION>
CUMULATIVE PENSION TOTAL
TREASURY TRANSLATIION LIABILITY SHAREHOLDERS'
STOCK ADJUSTMENT ADJUSTMENT EQUITY
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCES AT SEPTEMBER 30, 1994 -- -- $ (1,523) $ 75,931
Cash dividends on common shares declared in
December 1994 (per share $0.25) -- -- -- (4,888)
Equity adjustment to recognize minimum
pension liability -- -- (21) (21)
Class B common shares issuance, net -- -- -- 42,806
Translation adjustment -- (232) -- (232)
Net Income -- -- -- 15,053
--------- --------- --------- ---------
BALANCES AT SEPTEMBER 30, 1995 -- $ (232) $ (1,544) $ 128,649
Cash dividends on common shares declared in
December 1995 (per share $0.24) -- -- -- (5,374)
Equity adjustment to recognize minimum
pension liability -- -- 180 180
Translation adjustment -- 232 -- 232
Net Loss -- -- -- (74,330)
--------- --------- --------- ---------
BALANCES AT SEPTEMBER 30, 1996 -- -- $ (1,364) $ 49,357
Contribution of 2,500,000 Class B
common shares by founding Shareholders $(13,172) -- -- --
Tendering of 2,500,000 Class B shares of 13,172
stock in partial settlement of litigation -- -- 13,172
Equity adjustment to recognize minimum
pension liability -- -- 366 366
Net Loss -- -- -- (19,503)
--------- --------- --------- ---------
BALANCES AT SEPTEMBER 30, 1997 -- -- $ (998) $ 43,392
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities: $(19,503) $(74,330) $ 15,053
Net income/(loss)
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Gain on early termination of supply agreement -- (2,111) --
Litigation settlement expenses 13,172 -- --
(Gain)/loss on sale of property, plant and equipment 238 (675) 17
Impairment on long-lived assets -- 1,134 --
Intangible asset write-off -- 624 --
Depreciation and amortization 5,971 5,589 4,781
Deferred income taxes 547 (1,462) (377)
Equity in net (earnings)/losses of BAESA -- 51,458 (5,638)
Changes in assets and liabilities:
Accounts receivable (2,335) 4,778 (3,730)
Inventories 860 47 910
Prepaid expenses and other current assets 443 659 (1,335)
Intangibles (272) -- --
Accounts payable (2,887) 5,063 4,170
Other liabilities and accrued expenses (3,832) 2,195 2,594
Income tax payable 84 (8) (106)
Other, net 16 247 158
-------- -------- --------
Net cash provided by (used in) operating activities (7,498) (6,792) 16,497
-------- -------- --------
Cash flows from investing activities:
Proceed from sale of property, plant and equipment 406 1,347 1,662
Proceeds from matured short term investment 12,904 -- --
Purchases of property, plant and equipment (4,777) (24,237) (10,418)
Short term investments -- (12,904) --
Dividends received from affiliate -- 2,839 2,839
-------- -------- --------
Net cash provided by (used in) investing activities 8,533 (32,955) (5,917)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Class B common stock, net -- -- 42,806
Proceeds from short-term borrowings 712 47,900 350
Repayment of short-term borrowings -- (27,500) --
Repayment of long-term debt (1,722) (1,552) (1,549)
Proceeds from capital lease 1,793 -- --
Repayment of capital lease obligations (985) (1,204) (2,555)
Dividends paid -- (5,374) (4,888)
-------- -------- --------
Net cash provided by (used in) financing activities (202) 12,270 34,164
-------- -------- --------
Net increase in cash and cash equivalents 833 (27,477) 44,744
Cash and cash equivalents at beginning of period 18,614 46,091 1,347
-------- -------- --------
Cash and cash equivalents at the end of period $ 19,447 $ 18,614 $ 46,091
======== ======== ========
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 2,560 $ 2,416 $ 1,550
Income taxes 258 186 175
Non-cash transactions:
Capital leases reclassified as operating leases 599 -- --
Proceeds from sale of asset net of underlying debt 287 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
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, 1997, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS
Pepsi Cola Puerto Rico Bottling Company ("PCPRB" 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
franchiser 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 in
1996 and 1995, 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. The Company's resulting investment in BAESA
of approximately 17%, as of September 30, 1997 and 1996, was accounted for
under the equity method of accounting until such investment was reduced to
zero. All balances and transactions have been eliminated in consolidation,
including significant intercompany profit on assets remaining within the
group. As of September 30, 1997, the Company has withdrawn its interest in
BSA, and ABA has been liquidated.
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 using the straight-line method of
depreciation over the shorter of the lease term or the estimated useful
life of the assets.
33
<PAGE>
The estimated useful lives (in years) of the Company's property, plant and
equipment are as follows:
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 and 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. Other intangibles
are also amortized on a straight-line method over their estimated useful
life. Intangible assets at September 30, 1997 and 1996 are summarized as
follows:
1997 1996
------- -------
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
Other .............................................. 478 184
------- -------
$ 2,220 $ 1,949
Less accumulated amortization ...................... (576) (490)
------- -------
$ 1,644 $ 1,459
======= =======
Amortization expense for the Company for the years ended September 30,
1997, 1996 and 1995 is summarized as follows:
1997............................................. $ 87
1996............................................. $ 90
1995............................................. $ 90
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
lives 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, 1997.
34
<PAGE>
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, available-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 shareholders' 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 accreted 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.
G. Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards 109 ("Statement 109"), "Accounting for
Income Taxes." Under the asset 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 in income in 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
35
<PAGE>
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 $3,242, $11,396 and $4,220 in 1997, 1996 and 1995, 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 than the Company's carrying value in the shares.
J. Cash Equivalents
Cash equivalents of $16,749 and $17,647 at September 30, 1997 and 1996
respectively 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.
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
shareholders.
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
Prior to October 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
opinion no. 25, "Accounting for Stock issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of the grant only if the current market price of the underlying stock
exceeded the exercise price. On October 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," which permits entities
to recognize as expense, over the vesting period, the fair value of all
stock-based awards on the date of the grant. Alternatively, the SFAS No.
123 also allows entities to continue to apply the provisions of APB No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair value based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
36
<PAGE>
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.
NOTE 3 - INVENTORIES
Inventories consists of the following:
1997 1996
------ ------
Raw Materials ................................ $1,070 $1,346
Finished Goods ............................... 1,428 1,684
Spare Parts and Supplies ..................... 780 1,072
Work-in Process .............................. 357 393
------ ------
$3,635 $4,495
====== ======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
1997 1996
-------- --------
Land and improvements ............................ $ 7,057 $ 7,057
Building and improvements ........................ 14,682 14,301
Machinery, equipment and vehicles ................ 48,081 45,931
Bottles, cases and shells ........................ 1,515 1,401
Furniture and fixtures ........................... 1,580 1,877
Construction in process .......................... 86 1,941
-------- --------
73,001 72,508
Less accumulated depreciation and amortization ... (25,654) (22,572)
-------- --------
Property, plant and equipment, net ............... $ 47,347 $ 49,936
======== ========
NOTE 5 - INVESTMENT IN BAESA
The Company owns 12,345,348 shares, or approximately 17% as of September 30,
1997 and 1996, respectively, of the outstanding capital stock of BAESA. Through
June 30, 1996, the Company exercised significant influence over the management
of BAESA, subject to the right of PepsiCo, Inc. ("PepsiCo") and certain of its
affiliates to approve certain management decisions. As of July 1, 1996, PepsiCo
assumed operating control of BAESA and the Company does not control, or have
significant influence over, the management or operations of BAESA. On May 9,
1997, The Buenos Aires Stock Exchange suspended trading of the BAESA's class B
shares after its fiscal second quarter results for the period ended March 31,
1997 showed a negative net worth under Argentine Accounting Principles. The New
York Stock Exchange also halted trading in BAESA's American Depository Shares.
On July 29, 1997, BAESA announced an agreement in principle to enter into a
long-term financial restructuring plan with its major debt holders in Argentina.
Under the terms of the restructuring BAESA's unsecured lenders in Argentina
would exchange debt for at least 98% of the equity in BAESA. BAESA's existing
shareholders would
37
<PAGE>
retain up to 2% of the equity and the right to purchase additional equity
pursuant to a rights offering, which would allow the stockholders to retain
their current proportionate ownership. The effect of this financial
restructuring will result in the reduction in ownership by the Company in BAESA
from 17% as of September 30, 1997 to approximately .34% assuming the rights
offering is not exercised by the Company. As of September 30, 1996, the
Company's investment in BAESA has been reduced to zero as a result of the share
of the losses of BAESA recorded by the Company under the equity method of
accounting. No additional investments in BAESA have been made by the Company
since September 30, 1996.
The following condensed audited financial information relating to BAESA as of
September 30, 1996, (in thousands of U.S. dollars) and for the two year period
ended September 30, 1996 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,
1996
---------
ASSETS
Cash and cash equivalents ...................................... $ 27,361
Accounts receivable, net ....................................... 64,069
Inventories .................................................... 31,077
Deferred income tax, net ....................................... 6,681
Other current assets ........................................... 8,469
---------
Total current assets ..................................... 137,657
Property, plant and equipment, net ............................. 586,908
Intangible assets, net ......................................... 79,092
Investment in joint venture .................................... 106,918
Other assets ................................................... 16,805
---------
Total assets ............................................. $ 927,380
=========
LIABILITIES
Current installments of long-term debt and capital lease
obligations .................................................. $ 290,299
Bank loans and overdrafts ...................................... 375,788
Accounts payable, income tax payable and accrued expenses ...... 190,981
---------
Total current liabilities ................................ $ 857,068
Long term debt ................................................. 87,461
Deferred income taxes .......................................... 7,740
Other long-term liabilities .................................... 8,385
---------
Total liabilities ........................................ 960,654
Total shareholders' equity/(deficit) ........................... (33,274)
---------
Total liabilities and shareholders' equity/(deficit) ..... $ 927,380
=========
38
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995
----------- -----------
<S> <C> <C>
Net Sales ........................................................ $ 680,236 $ 670,449
----------- -----------
Cost and Expenses:
Cost of sales .................................................... (472,692) (345,103)
Selling and marketing expenses ................................... (354,880) (160,644)
Administrative expenses .......................................... (192,210) (93,418)
Start-up costs in Brazil ......................................... -- (3,162)
Restructuring costs .............................................. (34,782) --
----------- -----------
(1,054,564) (602,327)
----------- -----------
Income (loss) from operations .................................... (374,328) 68,122
Other income (expenses), net .................................... (75,459) (30,785)
----------- -----------
Income/(loss) before income tax (expense) benefit and equity
in net earnings of affiliate ............................ (449,787) 37,337
Income/(loss) tax (expense) benefit .............................. (8,191) 3,079
----------- -----------
Income/(loss) before equity in net earnings of affiliate ... (457,978) 40,416
Equity in net earnings of affiliate .............................. 5,597 4,359
----------- -----------
Net income/(loss) .......................................... $ (452,381) $ 44,775
=========== ===========
</TABLE>
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 has been modified, first in
1995 and most recently on April 8, 1997. The Credit Agreement provides for a
term loan of $25 million over a ten year period, with a balloon payment at
maturity of $11.8 million. The term loan is collateralized with a priority lien
over all real estate, machinery and equipment, and any other assets or
properties of the Company, acceptable to the Bank. The Company has also been
granted a $5 million revolving credit facility (all of which is outstanding at
September 30, 1997), the principal amount of which may not exceed certain
stipulated percentages of eligible receivables and inventories, as defined.
Interest on these loans shall be at 2.5% over the LIBOR rate, if Eurodollar
funds are available, otherwise, at the highest of the rates of interest
announced publicly from time to time in the Wall Street Journal by the principal
commercial banks in New York, New York as their prime or base rate. 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.
Long-term debt consists of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Term Loan of $25,000 in 1997 and $6,000 in 1996 to Banco Popular,
payable, in 1997, in 120 monthly payments of $83 excluding interest... $ 24,583 $ 6,026
Others ................................................................ 60 337
-------- --------
Total long-term debt ............................................ 24,643 6,363
Less current installments ............................................. (1,007) (1,550)
-------- --------
Long-term debt, excluding current installments .................. $ 23,636 $ 4,813
======== ========
</TABLE>
The aggregate maturities of long-term debt at September 30, 1997 are as follows:
1998 ................................................... 1,007
1999 ................................................... 1,032
2000 ................................................... 1,108
2001 ................................................... 1,209
2002 ................................................... 1,259
Thereafter ............................................. 19,028
-------
Total ............................................ $24,643
=======
39
<PAGE>
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 of 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
calculated under the Economic Activity Limitation method. Such credit is
presently limited to 50% of taxable income (and lesser in subsequent years down
to 40% in 1998). The Small Business Job Protection Act of 1996 repealed Section
936 and provided for a 10-year phaseout period. 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
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, 1997 and 1996. However, PCPRB did not meet these gross income
requirements for the years ended September 30, 1997 and 1996 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 of 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, 1997, 1996 and 1995, the combined income tax
expense/(benefit) of PCPRB and its subsidiaries attributable to income from
continuing operations consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
U.S ......................................... $(4,231) $ (150) $ (477)
Puerto Rico ................................. 342 185 557
------- ------- -------
Total current income tax expense ............ (3,889) 35 80
------- ------- -------
Deferred:
U.S ......................................... -- (326) 893
Puerto Rico ................................. 547 (914) (1,270)
------- ------- -------
Total deferred income tax expense/(benefit).. 547 (1,240) (377)
------- ------- -------
Total income tax expense/(benefit) .......... $(3,342) $(1,205) $ (297)
======= ======= =======
</TABLE>
40
<PAGE>
Income tax expense/(benefit) attributable to income/(loss) from continuing
operations for the years ended September 30, 1997, 1996 and 1995 differed from
the amounts computed by applying the U.S. statutory tax rate of 35% as a result
of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense $ (7,984) $ (8,209) $ 3,191
Change in the beginning-of-the-year balance of the valuation
allowance for deferred tax assets 13,829 17,734 (2,742)
Calculated NOL value of aforementioned loss, as adjusted, for
Puerto Rico income taxes (6,437) -- --
Foreign tax credit, net of gross-up of foreign taxes -- -- (222)
Puerto Rico income taxes 342 (9,668) 2,029
Possessions tax credit (2,050) (1,484) (2,823)
Income tax credit related to prior year's losses (745) -- --
Other, net (297) 422 270
-------- -------- --------
Income tax expense/(benefit) $ (3,342) $ (1,205) $ (297)
======== ======== ========
</TABLE>
Current and deferred income tax expense/(benefit) of $20,062, and $1,657 for
1996 and 1995, 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, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax (benefit)/expense (exclusive of the effects of
other components listed below) ................................ $(13,282) $(18,974) $ 2,365
Increase/(decrease) in beginning of the year balance of the
valuation allowance for deferred tax assets ................... 13,829 17,734 (2,742)
-------- -------- --------
Total deferred income tax expense/(benefit) .................. $ 547 $ (1,240) $ (377)
======== ======== ========
</TABLE>
41
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1997
and 1996 are presented below:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred Taxes
Deferred tax assets:
Property, plant and equipment principally, due to differences
in depreciable lives $ 496 $ 334
Federal net operating loss carryforwards 13,200 8,633
Puerto Rico net operating loss carryforwards 26,986 18,703
Accrued expenses 387 763
Past service cost for pension plan 426 426
Inventories principally due to additional costs inventoried for
tax purposes 90 127
Accounts receivable, principally due to allowance for doubtful accounts 1,005 405
Other, net 149 66
-------- --------
Total gross deferred tax assets 42,739 29,457
Less: valuation allowance (41,023) (27,194)
-------- --------
Net deferred tax asset (liabilities) $ 1,716 $ 2,263
======== ========
</TABLE>
The subsequent recognition of tax benefits related to the valuation allowance
for deferred tax assets as of September 30, 1997 and 1996 will be allocated to
income from continuing operations.
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, 1997, Manufacturing
utilized $3,877 of the prior year Puerto Rican net operating loss carryforwards.
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, 1997, Distributing has
net operating loss carryforwards for federal tax purposes of $37,713, which
expire in 2004, and for Puerto Rican income tax purposes as follows:
Amount Year of Expiration
- ------ ------------------
$ 1,152 ................................................ 1998
4,286 ................................................ 1999
2,720 ................................................ 2000
10,917 ................................................ 2001
27,826 ................................................ 2003
22,004 ................................................ 2004
- --------
$ 68,905
========
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.
42
<PAGE>
NOTE 8 - RELATED PARTY TRANSACTIONS
The following are transactions between PCPRB and BAESA that took place during
the years ended September 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sale of preforms to BAESA, including guaranteed payments ................... $ -- $2,235 $4,419
Sale of machinery to unconsolidated affiliate of BAESA ..................... -- -- 208
Charges by BAESA to PCPRB for management fee ............................... -- 888 848
</TABLE>
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 hyper-inflationary conditions in Argentina at the time. This contract was
terminated during the year ended September 30, 1997. 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, in 1996, as a gain on the early termination of a
supply Agreement.
The following are transactions between PCPRB and subsidiaries, including ABA,
with other related parties for the years ended September 30, 1997, 1996 and
1995:
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. During 1996 $151 was paid under this agreement (no
additional payments are contemplated). No amounts were paid as of September 30,
1997 and 1995.
PCPRB paid approximately $3,671, $2,105, and $2,700 during 1997, 1996 and 1995,
respectively in advertising fees to a firm controlled by a shareholder of the
Company.
PCPRB paid approximately $232 during 1996, respectively for consulting fees to a
shareholder of BAESA and a former director of the Company.
The Company paid approximately $411 and $57 during 1997 and 1996, respectively
for legal fees to a firm, one of whose partners is a relative of the Company's
President.
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.
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 20%, 22% and
28% of the Company's sales during 1997, 1996 and 1995, respectively. Although
the
43
<PAGE>
Company's exposure to credit risk associated with nonpayments 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, 1997, 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 service 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 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. On April 16, 1997 the Company announced its decision to
suspend its pension plans for periods not yet determined. The Company has
obtained revised actuarial valuations under FASB 87 that reflect the full
benefits of the freeze of the pension plans. The accrued pension costs have been
adjusted accordingly.
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 at September 30, 1996, with a
related intangible asset (limited to the unrecognized prior service cost of the
related plans) of $23 at September 30, 1996, with the remainder being reflected
as an adjustment to shareholders' equity. At September 30, 1997, the additional
minimum liability was reduced to $998, and the adjustment to shareholders'
equity was similarly reduced.
The following table sets forth the funded status of the plans and amounts
recognized in the balance sheet at September 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of obligations:
Accumulated benefit obligation, including vested benefits of
$7,117 in 1997 and $7,290 in 1996 $ 7,195 $ 7,356
======= =======
Projected benefit obligations for services rendered to date 7,195 7,711
Plan assets at fair value, primarily consisting of common stocks and
time deposits 4,903 4,579
------- -------
Projected benefit obligation in excess of plan assets 2,292 3,132
Unrecognized net loss from past experience different from that assumed (998) (1,721)
Unrecognized prior service cost -- (23)
Adjustment to recognize minimum liability 998 1,388
------- -------
Accrued pension cost at September 30, 1997 and 1996 ($2,213 and
$2,593, respectively, long term) $ 2,292 $ 2,776
======= =======
Net pension expense for 1997 and 1996 included the following components:
Service cost for benefits earned during the period $ 108 $ 160
Interest cost on projected benefit obligation 557 518
Actual return on plan assets (724) (533)
Net amortization and deferral 475 442
------- -------
Net periodic pension cost $ 416 $ 587
======= =======
</TABLE>
44
<PAGE>
The actuarial present value of the projected benefit obligation was determined
using a weighted-average discount rate of 7% at September 30, 1997 and 1996 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 work life expectancy of the active participants.
NOTE 11 - STOCK OPTION PLANS
In 1997 the Company adopted two stock option plans (the "plans") pursuant to
which the Company's Board of Directors may grant stock options to certain
employees and directors of the Company and its affiliates who have served in
such capacities for at least one year prior to the date the options are granted.
The plans authorize grants of options to purchase up to one million shares of
authorized but unissued class B common stock. One of these stock option plans is
designed so as to be qualified for income tax purposes, whereas the other is not
a qualified plan. Stock options under the qualified plan are granted with an
exercise price equal to the stock's fair market value at the date of the grant.
All stock options have ten year terms and vest and become fully exercisable in
accordance with the terms of their grant.
Additionally, the Company entered into a stock option agreement with the
President of the Company to acquire 1,516,667 class B shares of the Company, at
an exercise price of $5.00 per share. This stock option will be exercisable in
whole or in part until exercised in full.
At September 30, 1997 there were 810,000 additional shares available for grant
under the plans. The per share weighted-average estimated fair value of stock
options granted during 1997 was $3.52 on the date of the grant using the Black
Scholes option-pricing model with the following weighted average assumptions:
expected dividend yield 0%, risk-free interest rate of 6.125%, and an expected
life of 10 years.
The Company applies APB opinion No. 25 in accounting for its Plan and,
accordingly no compensation cost has been recognized for its stock options in
the financial statements. Had the company determined compensation costs based on
the fair value of the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below.
1997
----
Net loss As Reported $19,503
-------
Pro Forma $25,510
-------
Net loss per share $ 1.19
-------
At September 30, 1997, the number of options exercisable was 1,706,667 and the
weighted average exercise price of those options was $5.00.
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, 1997, 1996 and 1995 is
summarized as follows:
1997.........................................................$1,661
1996......................................................... 1,387
1995......................................................... 1,287
45
<PAGE>
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, 1997.
Total Operating Leases
----------------------
1998 ............................................. $2,139
1999 ............................................. 2,026
2000 ............................................. 1,869
2001 ............................................. 1,800
2002 ............................................. 1,800
------
Total minimum lease payments ................. $9,634
======
Total Capital Leases
--------------------
1998 ............................................. $ 967
1999 ............................................. 547
2000 ............................................. 12
2001 ............................................. 3
------
Total minimum lease payments ................. 1,529
Less amount representing interest ............... 108
at 10.25% to 12% ------
Present value of lease payments .............. 1,421
Less current installments ........................ 908
------
Capital lease obligations,
excluding currentinstallments ................ $ 513
======
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 was a defendant in nine putative class actions alleging federal
securities violations by the Company and various officers and directors of the
Company. These claims were settled as of September 30, 1997. The Company has
recorded the cost of the settlement of the aforementioned nine putative actions
as follows:
Cost of 2,500,000 class B shares of stock effectively contributed by the
founding shareholders valued using the average trading price of the stock for a
period of trade dates prior to the date of the settlement ($5.269)
$13,172
Cash Payment of $2,500,000 less recovery from insurers --
-------
$13,172
=======
As part of the settlement of these claims, the Company was reimbursed $4,000,000
by its directors liability insurers, $2,500,000 of which were deemed by the
Company as a reimbursement of the amounts paid to the claimants and the
remaining balance of the recovery were recorded as a reduction of legal fees
incurred in connection with this matter.
The contribution of the 2,500,000 class B shares by the founding shareholders
was recorded as an additional contribution to the Company's capital using as its
basis the average trading price of the stock referred to above.
46
<PAGE>
The effect in the results of operations (pre-tax) of the Company for the year
ended September 30, 1997, of the above mentioned transaction is as follows:
(In thousands)
o Reduction in administrative expenses $ 1,500
o Settlement of the litigation (13,172)
-------
Net effect on net income/(loss) (11,672)
o Contribution of Class B shares by founding shareholders 13,172
-------
Net effect on shareholders' equity $ 1,500
=======
In addition, the Securities and Exchange Commission (the "Commission") has
issued a formal order of investigation in connection with accounting
irregularities uncovered during 1996. The Staff of the Commission is currently
engaged in that investigation and the Company is cooperating fully.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short term investments,
accounts receivable, accounts payable, notes payable to bank, 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 floating borrowing rate for similar debt instruments of
comparable maturity. The carrying amounts approximate the estimated fair value
at September 30, 1997 and 1996.
The Company currently does not hold any derivatives.
Under the equity method, the Company's investment in BAESA has been reduced to
zero.
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.
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
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 1997 Proxy Statement (the "Proxy Statement"), which
is to be filed with the Securities and Exchange Commission in December 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.
49
<PAGE>
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).
3.3 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).
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).
50
<PAGE>
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).
10.13 Consent of PepsiCo., Inc. to the terms of the Voting Trust Agreement
referred to under Exhibit No. 10.12 above. (Incorporated by reference
to Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the
quarterly period ended December 31, 1996).
10.14 Stock Option Agreement dated as of October 15, 1996 between Rafael Nin
and Pepsi-Cola Puerto Rico Bottling Company (incorporated by reference
to Exhibit 1 to the Amendment No. 1 to the Schedule 13D of Rafael Nin
dated January 7, 1997).
10.15 Pepsi-Cola Puerto Rico Bottling Company Qualified Stock Option Plan
dated as of December 30, 1996 (incorporated by reference to Exhibit 2
to the Amendment No. 1 to the Schedule 13D of Rafael Nin dated January
7, 1997).
10.16 Pepsi-Cola Puerto Rico Bottling Company Non-Qualified Stock Option
Plan dated as of 10.16 December 30, 1996 (incorporated by reference to
the Company's Proxy Statement dated January 31, 1997).
10.17 Amendment No. 4 to the Shareholders Agreement (incorporated by
reference to the Exhibit 10.13 to the Company's Annual Report on Form
10K/A-1 for the fiscal year ended September 30, 1996).
10.18 Second Restated Credit Agreement dated April 8, 1997 among Pepsi-Cola
Puerto Rico Bottling Company, Pepsi-Cola Puerto Rico Manufacturing
Company, Pepsi-Cola Puerto Distributing Company, Beverage Plastics
Company and Banco Popular de Puerto Rico (incorporated by reference to
Exhibit 10.18 to the Company's quarterly report on Form 10-Q for the
quarterly period ended June 30, 1997).
10.19 Master Lease Agreement dated April 18, 1997 between General Electric
Capital Corporation of Puerto Rico and Pepsi-Cola Puerto Rico Bottling
Company (incorporated by reference to Exhibit 10.19 to the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30,
1997).
10.20 Amendment No. 5 to Class A Shareholders Agreement (incorporated by
reference to Exhibit 10.20 to the Company's quarterly report on Form
10-Q for the quarterly period ended June 30, 1997).
10.21 Trust Agreement dated as of May 14, 1997 among certain shareholders of
the Company and Rafael Nin, as Trustee (incorporated by reference to
Exhibit 1 to Amendment No. 3 to the Schedule 13D of Rafael Nin dated
August 13, 1997).
10.22 Stock Option Agreement dated as of May 14, 1997 among certain
grantors, a special committee of the Company's Board of Directors, the
Company and Rafael Nin (incorporated by reference to Exhibit No. 2 to
Amendment No. 3 to the Schedule 13D of Rafael Nin dated August 13,
1997).
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, 1997.
(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.
51
<PAGE>
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
------------------------------------------
Balance at Charged to
beginning of costs and Charged to Balance at end
Description period expenses other accounts Deductions(1) of period
----------- ------------ ---------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended September 30, 1997:
Allowance for doubtful accounts .............. 1,158 355 (124) $ 1,389
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
</TABLE>
- ----------
(1) Uncollectible receivables.
52
<PAGE>
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 Executive December 23, 1997
- ------------------------ Officer
Rafael Nin
/s/ John William Beck Director December 23, 1997
- ------------------------
John William Beck
/s/ Charles R. Krauser Director December 23, 1997
- ------------------------
Charles R. Krauser
/s/ Anton Schedlbauer Director December 23, 1997
- ------------------------
Anton Schedlbauer
/s/ C. Leon Timothy Director December 23, 1997
- ------------------------
C. Leon Timothy
/s/ Richard Reiss Huyke Director December 23, 1997
- ------------------------
Richard Reiss Huyke
/s/ Sutton Keany Director December 23, 1997
- ------------------------
Sutton Keany
/s/ David L. Virginia Vice President and December 23, 1997
- ------------------------ Chief Financial Officer
David L. Virginia
/s/ Wanda Rivera Ortiz Chief Accounting Officer December 23, 1997
- ------------------------
Wanda Rivera Ortiz
53
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 19,447
<SECURITIES> 0
<RECEIVABLES> 18,826
<ALLOWANCES> 1,389
<INVENTORY> 3,635
<CURRENT-ASSETS> 41,490
<PP&E> 73,001
<DEPRECIATION> (25,654)
<TOTAL-ASSETS> 95,910
<CURRENT-LIABILITIES> 26,156
<BONDS> 24,149
0
0
<COMMON> 215
<OTHER-SE> 44,175
<TOTAL-LIABILITY-AND-EQUITY> 95,910
<SALES> 99,172
<TOTAL-REVENUES> 99,172
<CGS> (68,237)
<TOTAL-COSTS> (120,237)
<OTHER-EXPENSES> 1,219
<LOSS-PROVISION> (355)
<INTEREST-EXPENSE> (2,644)
<INCOME-PRETAX> (22,845)
<INCOME-TAX> (3,342)
<INCOME-CONTINUING> (19,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,503)
<EPS-PRIMARY> (.91)
<EPS-DILUTED> (.91)
</TABLE>
