SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
(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 BOTTLING COMPANY
(Exact name of Registrant as specified in its Charter)
DELAWARE ###-##-####
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CARRETERA 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, New York Stock Exchange
Par Value $.01
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.
<PAGE>
At the request of the staff of the Securities and Exchange Commission,
pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended,
Pepsi-Cola Puerto Rico Bottling Company (the "Company") hereby amends the
Company's annual report on Form 10-K as filed with the Securities and Exchange
Commission on December 31, 1997 (the "Annual Report") to clarify certain
disclosures that were referred to by the staff in its comment letter dated
March 19, 1998. This Form 10-K/A-1 restates Item 1 of the Annual Report
to clarify certain information regarding the Company's Business Strategy and
correct certain typographical errors, and restates Item 7 of the Annual Report
to clarify certain information regarding the possible effects of BAESA's long
term restructuring plan on the Company's rights and obligations under the
credit facility with Banco Popular.
<PAGE>
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.
1
<PAGE>
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 BEVERAGE 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 plans to report data provided by
A.C. Nielsen because 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).
2
<PAGE>
SOFT DRINK PRODUCTS
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:
<TABLE>
<CAPTION>
COMPANY COLA
VOLUME
CALENDAR YEAR (IN MILLIONS OF CASES)(1)
- ------------- -------------------------
<S> <C>
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.
</TABLE>
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:
<TABLE>
<CAPTION>
COMPANY SHARE OF COMPANY SHARE OF
SOFT DRINK TAKE-HOME COLA TAKE-HOME
CALENDAR YEAR MARKET SEGMENT(1) MARKET SEGMENT(1)
- ------------- -------------------- -----------------
<S> <C> <C>
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.
</TABLE>
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.
3
<PAGE>
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. The
Company through the implementation of new pricing initiatives intends to
increase the average net price of its goods sold by (i) increasing the number
of full service vending machines in the market, and (ii) increasing the volume
sold by the Company to the "cold market", and smaller independent supermarket
account segments through improved service using the route presell or route sell
method. There can be no assurance, however, that the Company will be
successful in achieving its goal of restoring the profitability of its Puerto
Rican bottling operations.
The Company completed, during the fiscal year 1996, the construction of
the Toa Baja plant and the consolidation of its operations in 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
R<i'>o 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.
4
<PAGE>
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 market, 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 of 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.
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
5
<PAGE>
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.
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
6
<PAGE>
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 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.
7
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE OF
FISCAL YEAR
RAW MATERIAL 1997 Cost
- ------------ ----------------
<S> <C>
Packaging............................................... 41.5
Concentrate............................................. 36.8
Sugar/fructose.......................................... 15.2
Carbon dioxide gas...................................... 1.4
Other................................................... 5.1
-----
Total 100.0%
=====
</TABLE>
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 R<i'>o 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 R<i'>o
Piedras plant has been cleared of all producing equipment and is currently on
the market for sale.
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
8
<PAGE>
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.
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.
9
<PAGE>
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.
10
<PAGE>
Carbonated soft drink products compete with other major commercial
beverages, such as coffee, milk and beer, as well as non-carbonated soft
drinks, citrus and non-citrus fruit drinks and other beverages.
The principal methods of competition in the soft drink industry in Puerto
Rico are pricing, advertising and product image. In addition, the Company
provides discounts to certain of its large customers such as supermarket
chains, fast food chains and other retail outlets which carry PepsiCo soft
drink products. The following charts compare the market share of PepsiCo soft
drink products and Coca-Cola soft drink products in the Puerto Rican soft drink
take-home market at the end of the periods indicated.
<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
</TABLE>
- ------------------------
(1) SOURCE: Asesores
<TABLE>
<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
11
<PAGE>
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 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 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 Commonwealth of
Puerto Rico with 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.
12
<PAGE>
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 V<e'>lez.................... 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
Jos<e'> Gonz<a'>lez.................. 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.
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 V<e'>lez 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 R<i'>o 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 Specialty Frozen Products LP from January 1993 to August 1993.
Jos<e'> Gonz<a'>lez 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
13
<PAGE>
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.
14
<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
15
<PAGE>
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
16
<PAGE>
subject to an excise tax at an effective rate of 3.6% (or 72% of 5%) of
the sales price of its soft drink products which represents approximately 1.5
cents per liter.
The amount of excise taxes paid by the Company on its products is
deducted from the Company's gross sales; thus the Company's net sales reflect
this deduction. The Company's net sales decreased significantly during the
periods in which the Carbonated Beverage Tax was in effect. The amount of
excise tax paid by the Company was $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."
18
<PAGE>
THE COMPANY
GENERAL
The following table sets forth certain financial information as a
percentage of net sales for the Company for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
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 .5 2.6 -
Charges
Settlement expenses 13.3 - -
Income (Loss) from Operations (21.6) (26.1) 8.5
</TABLE>
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.
ADMINISTRATIVE 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
18
<PAGE>
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 of 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 nonrecurring 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.
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 noncash
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
19
<PAGE>
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.
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 nonrecurring
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.
20
<PAGE>
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.
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
21
<PAGE>
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 nonrevolving
loans. In December 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 nonrevolving 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
22
<PAGE>
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. In addition, 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. Furthermore,
depending upon the type of the restructuring plan that may be adopted by BAESA,
there may be certain indirect effects on the Company's rights and obligations
under the credit facility. For example, if BAESA makes a rights offering as
part of its long term restructuring plan, and if the Company chooses to
exercise its rights in such rights offering, then Company may need the written
consent of Banco Popular prior to the exercise of its rights. Similarly, the
Company's ability to use any proceeds that it may receive either from sale of
BAESA's stock or through any future distributions made by BAESA to its
shareholders, may be restricted by certain financial covenants contained in
the Second Restated Credit Agreement. However, the Company believes that
BAESA's long term restructuring plan will not have a direct and immediate
effect on the rights and obligations of the Company under the credit facility
with Banco Popular.
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 the Company for the fiscal years
ending September 30, 1998 and 1999 will be approximately $4 million in each
year.
23
<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 13th day of April, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/S/ RAFAEL NIN Director and Chief Executive
- ------------------------- Officer
Rafael Nin
/S/ JOHN WILLIAM BECK Director and Chairman
- ------------------------- of the Board of Directors
John William Beck
/S/ CHARLES R. KRAUSER Director
- -------------------------
Charles R. Krauser
/S/ BASIL K. VASILIOU Director
- -------------------------
Basil K. Vasiliou
/S/ C. LEON TIMOTHY Director
- -------------------------
C. Leon Timothy
/S/ RICHARD REISS Director
- -------------------------
Richard Reiss
/S/ SUTTON KEANY Director
- -------------------------
Sutton Keany
/S/ DAVID L. VIRGINIA Vice President and
- ------------------------- Chief Financial Officer
David L. Virginia
/S/ WANDA RIVERA ORTIZ Chief Accounting Officer
- -------------------------
Wanda Rivera Ortiz
</TABLE>