SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] 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 1-12290
PANAMERICAN BEVERAGES, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
C/O PANAMCO, L.L.C.
701 WATERFORD WAY, SUITE 800
MIAMI, FLORIDA 33126
(Address of principal executive offices) (Zip code)
(305) 929-0800
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
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Class A Common Stock, $0.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X 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 definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
The aggregate market value of the voting and non-voting stock common stock
held by non-affiliates of the registrant was $991,889,340 (computed by
reference to the closing price as of March 15, 2002).
The number of shares outstanding of each of the registrant's classes of common
and preferred stock, par value $0.01 per share, as of March 15, 2002 were:
Class A Common Stock: 112,901,012
Class B Common Stock: 8,672,863
Class C Preferred Stock: 2
TABLE OF CONTENTS
PART I
Item 1. Business
Overview.................................................. 1
Corporate Structure....................................... 1
Our Franchise Territories................................. 3
Beverages and Packaging................................... 4
Sales, Distribution and Marketing......................... 6
Raw Materials and Supplies................................ 7
Production................................................ 8
Competition............................................... 9
Employees................................................. 10
Franchise Arrangements.................................... 10
Government Regulation..................................... 10
Political, Economic and Social Conditions
in Latin America......................................... 11
Currency Devaluations and Fluctuations.................... 13
Item 2. Properties........................................................ 13
Item 3. Legal Proceedings................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................... 16
Item 6. Selected Financial Data........................................... 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 37
Item 8. Financial Statements and Supplementary Data....................... 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................ 39
PART III
Item 10. Directors and Executive Officers of the Registrant................ 39
Item 11. Executive Compensation............................................ 43
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 48
Item 13. Certain Relationships and Related Transactions.................... 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 52
SIGNATURES........................................................ 56
PART I
ITEM 1. BUSINESS
OVERVIEW
Panamerican Beverages, Inc. ("Panamco" or the "Company") is the largest
soft drink bottler in Latin America and the third largest bottler of the soft
drink products of The Coca-Cola Company ("The Coca-Cola Company" or
"Coca-Cola"). In 2001, our sales accounted for approximately 5% of the
worldwide unit case volume reported by Coca-Cola, or the equivalent of one
bottle in every case. Our 2001 sales represented approximately 21% of the
Latin American unit case volume reported by Coca-Cola. Sales of products of
Coca-Cola accounted for approximately 87% of our net sales in 2001.
We have a 60-year bottling relationship with Coca-Cola. In 1995,
Coca-Cola designated Panamco an "anchor bottler", making us one of their
strategic partners in Coca-Cola's worldwide bottling system. Coca-Cola has
been a stockholder of our Company since 1993 and today beneficially owns
approximately 25% of our common stock. Coca-Cola has two representatives on
our Board of Directors.
We operate in diverse markets in Latin America. We operate in Mexico (a
substantial part of central Mexico, excluding Mexico City), Brazil (greater
Sao Paulo, Campinas, Santos and part of Mato Grosso do Sul in Brazil),
Colombia (most of the country), Venezuela (all of the country), Costa Rica
(all of the country), Nicaragua (all of the country), and Guatemala (Guatemala
City and surrounding areas).
The territories in which the Company operates have an aggregate
population of approximately 124 million people, or about 24% of the total
population of Latin America. Within these territories, we have the exclusive
right to produce and distribute substantially all of Coca-Cola's soft drink
products. We also produce and distribute a variety of flavored soft drinks and
bottled water products under licensed and proprietary trademarks in certain of
our territories. We distribute Kaiser and Heineken beers in our franchise
territories in Brazil. We also distribute Regional beer in the northeast of
Venezuela.
Our business began in 1941, when Albert H. Staton, Sr. and a group of
investors acquired a core of the franchised bottling operations of Coca-Cola
in Mexico. We were incorporated in Panama in 1945 as successor to a Mexican
company through which the business was initially conducted. By expanding into
other Latin American markets, we have been able to diversify, in part, our
business risk. In 1944 and 1945, we expanded our operations to Colombia and
Brazil, respectively. In 1950, we acquired Coca-Cola's bottling franchise for
the Sao Paulo territory. Since then, our operating units have acquired
additional bottling franchises within their respective countries. We entered
the Costa Rican market in 1995, both the Venezuelan market and the Nicaraguan
market in 1997 and the Guatemalan market in 1998.
CORPORATE STRUCTURE
HOLDING COMPANY STRUCTURE
We are a holding company and conduct our operations through tiers of
subsidiaries. The following chart summarizes our corporate structure and
ownership interest in our country level holding companies and describes their
interests in their bottling subsidiaries as of December 31, 2001:
1
PANAMCO
|
-------------------------------------------------------|-------------------------------------------------------
| | | | | | |
| | | | | | |
98% 50.1%* 72.6%** 100% 98% 97% 100%
Panamco Panamco Panamco Panamco Panamco Panamco Panamco
Mexico Costa Rica Nicaragua Guatemala Brazil Colombia Venezuela
| | | | | | |
| | | | | | |
| | | | | Panamco |
Panamco Mexico Panamco Costa Panamco Panamco Panamco Colombia owns Panamco
owns between Rica owns Nicaragua Guatemala Brazil owns 65% of one and Venezuela
85% and 99% of 100% of its owns 100% of owns 100% of 100% of its 100% of four owns 100% of
its bottling bottling its bottling its bottling bottling of its bottling its bottling
subsidiaries. subsidiary subsidiary. subsidiary. subsidiary. subsidiaries subsidiary.
- -------------------
* Panamco Mexico owns 49.9% of Panamco Costa Rica.
** Panamco Costa Rica owns 27.4% of Panamco Nicaragua.
As a holding company, our ability to pay operating expenses, any debt
service obligations and dividends primarily depends upon receipt of sufficient
funds from our majority-owned subsidiaries, which are in turn dependent upon
receipt of funds from their majority-owned subsidiaries. See "Item 5. --
Market for Registrant's Common Equity and Related Stockholder Matters --
Exchange Controls and Other Limitations Affecting Security Holders" for a
discussion of limitations imposed by exchange control laws on the payment of
dividends. Dividends paid to us and other foreign shareholders by the
subsidiaries are subject to investment registration requirements and
withholding taxes. See "Item 7. -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The payment of dividends by our subsidiaries is also subject, in
certain instances, to statutory restrictions or restrictive covenants in debt
instruments and is contingent upon the earnings and cash flow of, and
permitted borrowings by, such subsidiaries. These minority shareholders in
less than wholly owned subsidiaries receive a pro-rata portion of all
dividends paid by those subsidiaries.
SUBSIDIARY OPERATIONS
NORTH LATIN AMERICAN DIVISION
Our North Latin American Division ("NOLAD") is comprised of our
operations in Mexico, Costa Rica, Nicaragua and Guatemala.
Mexico. We own approximately 98% of the capital stock of Panamco Mexico,
S.A. de C.V. ("Panamco Mexico"), a Mexican corporation that in turn owns
interests ranging from 86% to 99% in five bottling subsidiaries that own and
operate nine bottling plants (including three water bottling plants) in
Mexico. Panamco Mexico also owns majority and minority interests in companies
that produce materials and equipment used in the production and distribution
of soft drinks. Panamco Mexico and its consolidated subsidiaries are
collectively referred to herein as "Panamco Mexico."
Costa Rica. We own all the capital stock (50.1% directly and 49.9%
indirectly through Panamco Mexico) of Panamco Costa Rica. Panamco Costa Rica
produces, distributes and sells Coca-Cola's products and other soft drink
2
products throughout Costa Rica. Panamco Costa Rica owns and operates one
bottling plant. Panamco Costa Rica also owns a plastics business. We acquired
these operations in 1995 and 1996.
Nicaragua. We own all the capital stock (72.6% directly and 27.4%
indirectly through Panamco Costa Rica) of Panamco de Nicaragua, S.A. ("Panamco
Nicaragua"). Panamco Nicaragua produces, distributes and sells Coca-Cola's
products, and other soft drink products, throughout Nicaragua. We acquired
Panamco Nicaragua in 1997.
Guatemala. In March 1998, we acquired all the capital of Embotelladora
Central, S.A. ("Panamco Guatemala"). Panamco Guatemala produces, distributes
and sells Coca-Cola's products, and other soft drink products in Guatemala
City and surrounding areas.
Panamco Costa Rica, Panamco Nicaragua and Panamco Guatemala are
collectively referred to as "Panamco Central America."
BRAZIL
We indirectly own approximately 98% of the capital stock of Refrescos do
Brazil S.A. ("Panamco Brazil"), a Brazilian holding company that through
subsidiaries owns a bottling subsidiary that, in turn, owns and operates four
bottling plants (including one water bottling plant) in Brazil, including our
state-of-the-art facility in Jundiai. Prior to March 2002, Panamco Brazil held
a 12.1% interest in Cervejarias Kaiser S.A. In March 2002, this interest was
acquired by Molson, Inc. as part of its acquisition of Kaiser. See "Item 7. --
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Panamco Brazil also owns facilities that produce equipment used
in the distribution of soft drinks. In September 1998, we acquired all the
capital stock of the Brazilian bottler, Refrigerantes do Oeste S.A.
("R.O.S.A."). R.O.S.A. produces, distributes and sells Coca-Cola's products in
the western central part of Brazil in the state of Matto Grosso do Sul.
Panamco Brazil and its consolidated subsidiaries are collectively referred to
herein as "Panamco Brazil."
COLOMBIA
We own approximately 97% of the capital stock of Panamco Colombia, S.A.
("Panamco Colombia"), a Colombian corporation that owns interests ranging from
65% to 100% in subsidiaries that own and operate 18 bottling plants (including
one water bottling plant) and own majority and minority interests in
corporations that produce materials and equipment used in the production and
distribution of soft drinks such as Friomix del Cauca, a cold drink equipment
manufacturing company. Panamco Colombia and its consolidated subsidiaries are
collectively referred to herein as "Panamco Colombia."
VENEZUELA
In May 1997, we acquired all the capital stock of Embotelladora Coca-Cola
y Hit de Venezuela S.A. ("Panamco Venezuela") (the "Venezuela Acquisition").
Panamco Venezuela, through its subsidiaries, produces, distributes and sells
products of Coca-Cola and other soft drink products throughout Venezuela.
Panamco Venezuela owns and operates 13 bottling plants (including two water
bottling plants). We also acquired the licensing right to distribute Regional
beer throughout Venezuela, which we began distributing in the northeast of
Venezuela in 1999. Panamco Venezuela and its consolidated subsidiaries are
collectively referred to herein as "Panamco Venezuela."
OUR FRANCHISE TERRITORIES
We have exclusive rights under our bottling agreements with Coca-Cola to
bottle and distribute soft drinks and water in all of the territories in which
we operate. We market all our other soft drink, bottled water, beer products
and other beverages only within our franchise territories. The countries where
we operate and our franchise territories are shown below:
3
[MAP INDICATING FRANCHISE TERRITORIES:
VENEZUELA
-- Country Population: 24.2 million
-- Franchise Area Population: 24.2 million
MEXICO
- -- Country Population: 99.1 million BRAZIL
- -- Franchise Area Population: 19.0 million
-- Country Population: 169.8 million
GUATEMALA -- Franchise Area Population: 25.0 million
- -- Country Population: 12.4 million
- -- Franchise Area Population: 4.7 million
NICARAGUA
- -- Country Population: 5.2 million
- -- Franchise Area Population: 5.2 million
COSTA RICA
-- Country Population: 4.0 million
-- Franchise Area Population: 3.9 million
COLUMBIA
-- Country Population: 43.2 million
-- Franchise Area Population: 41.9 million]
BEVERAGES AND PACKAGING
OUR PRODUCTS
We produce or distribute colas, flavored soft drinks, non-carbonated
drinks, bottled drinking water and beer. We produce and distribute Coca-Cola
products and our own proprietary brands. In 2001, 74% of our unit case volume
were products we sold of Coca-Cola and 26% of our unit case volume were products
of Panamco or other companies. In terms of net sales, Coca-Cola products
accounted for approximately 87% of our 2001 net sales (62% black colas and 25%
other Coca-Cola products), with the remainder of net sales accounted for by
water (7%), beer (3%), other products (2%) and other soft drinks (1%).
During the year 2001, Panamco accelerated its efforts in the introduction
of new products, furthering its objective of becoming a total beverage
company. Our focus on new products has had the effect of broadening the
product portfolio to better meet the needs of more sophisticated consumers
with an increasing variety of tastes. Specifically, we launched twelve new
products during 2001, primarily in the non-carbonated drink segment. Most of
the products introduced are products of Coca-Cola although some are
proprietary Panamco products.
We distribute two types of bottled water products: purified water and
mineral water. Purified water is prepared in a similar manner to the water
utilized in the soft drink manufacturing process. Mineral water is obtained
from springs and wells. We distribute mineral water under our own proprietary
trademarks, which include Risco in Mexico, Manantial in Colombia, Crystal in
Brazil and Shangri-la in Guatemala, and we distribute purified water under the
trademarks Risco in Mexico, Club K, Santa Clara and Soda Clausen in Colombia,
Nevada in Venezuela, Alpina in Costa Rica and Milca Soda in Nicaragua.
In Brazil, we distribute both Kaiser and Heineken beers and in Venezuela
we distribute Regional beer.
4
We produce and distribute flavored soft drinks under our own proprietary
trademarks, including "Club K", "Club Soda" and "Premio" in Colombia and
"Super 12" in Costa Rica. We produce and distribute bottled waters under our
own proprietary trademarks including "Risco" in Mexico, "Crystal" in Brazil,
"Manantial", "Premio", "Soda Clausen" and "Santa Clara" in Colombia, "Alpina"
in Costa Rica and "Shangri-la" in Guatemala.
The beverage products we produce or distribute and that accounted for
nearly all of our sales in the period ending December 31, 2001 are listed
below:
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PANAMCO PANAMCO PANAMCO PANAMCO PANAMCO PANAMCO PANAMCO
MEXICO BRAZIL COLOMBIA VENEZUELA COSTA RICA NICARAGUA GUATEMALA
----------------------------------------------------------------------------------------------------------------------------------
COCA-COLA SOFT COCA-COLA SOFT COCA-COLA SOFT COCA-COLA SOFT COCA-COLA SOFT COCA-COLA SOFT COCA-COLA SOFT
DRINK PRODUCTS: DRINK PRODUCTS: DRINK PRODUCTS: DRINK PRODUCTS: DRINK PRODUCTS: DRINK PRODUCTS: DRINK PRODUCTS:
Coca-Cola Coca-Cola Coca-Cola Coca-Cola Coca-Cola Coca-Cola Coca-Cola
Coca-Cola Light Coca-Cola Light Coca-Cola Light Coca-Cola Light Coca-Cola Light Coca-Cola Light Coca-Cola Light
Sprite Sprite Sprite Hit Naranja Sprite Sprite Fanta
Sprite Light Diet Sprite Fanta Hit Pina Fanta Fanta Sprite
Fanta Orange Fanta Quatro Hit Uva Fresca Fresca Lift
Fanta Strawberry Diet Fanta Lift Hit Manzana Lift
Fresca Simba Hit Kola Canada Dry BOTTLED WATER: BOTTLED WATER:
Lift Tai OTHER SOFT Hit Parchita Ginger Ale Kinley Soda Shangri-la*
Delaware Punch Diet Tai DRINKS: Grapette Uva Canada Dry
Senzao Kuat Roman** Grapette Kola OTHER SOFT DRINKS: Club Soda OTHER PRODUCTS:
Schweppes Premio* Grapette Naranja Super 12* Alpina* Hi-C
BOTTLED WATER: Tonic Water Club Soda* Grapette Pina Milca Soda** Powerade
Risco* Kinley Club Quatro BOTTLED WATER: OTHER PRODUCTS:
Soda BOTTLED WATER: Frescolita Canada Dry Hi-C
OTHER PRODUCTS: Fanta Uva Manantial* Chinotto Club Soda Kapo
Keloco* Club K* Chinotto Light Canada Dry Powerade
Beat BOTTLED WATER: Soda Clausen* Soda Quinada
Quatro Crystal* Santa Clara* Schweppes Alpina*
Powerade Aguakina
BEER: OTHER PRODUCTS: Schweppes
Kaiser** Powerade OTHER PRODUCTS:
Kaiser Light** Sonfil BOTTLED WATER: Powerade
Kaiser Bock** Nevada Sonfil
Kaiser Gold** Nestea**
Kaiser Summer OTHER PRODUCTS:
Draft** Malta
Heineken** Regional**
Nestea**
OTHER PRODUCTS: Sonfil
Kapo
BEER:
Regional**
___________________
Unless otherwise indicated, products are proprietary to Coca-Cola.
* Proprietary to Panamco
** Products licensed from third parties
5
PACKAGING AND PRESENTATIONS
A majority of our sales are made in glass or plastic bottles. Our
beverages are available in returnable presentations in different package types
including returnable PET bottles and glass bottles. Our nonreturnable
presentations include cans, nonreturnable glass, plastic bottles and plastic
bags.
SALES, DISTRIBUTION AND MARKETING
SALES
By selling our beverage products directly to over one million points of
sale, we believe we have one of the largest operations for the distribution of
consumer goods in Latin America. By country, our points of sales are located
20% in Mexico, 11% in Brazil, 36% in Colombia, 21% in Venezuela, 3% in Costa
Rica, 4% in Nicaragua and 5% in Guatemala. This network serves traditional
small stores (including small grocery stores, "Mom and Pop" stores, kiosks and
roadside stands), supermarkets, restaurants, bars, schools, offices,
businesses and distributors. The mix of sales to these particular types of
outlets varies by country and is a function of the economics, demographics and
other characteristics of each franchise area.
Most of our sales are made to four types of outlets: (i) traditional
small stores, (ii) supermarkets, (iii) restaurants and bars, and (iv) schools,
offices, businesses and distributors. At such outlets, we generally sell our
beverage products for either on-premise or off-premise consumption. A majority
of the products we sell are sold for off-premise consumption. Products we sell
for on-premise consumption at traditional small stores, restaurants, bars,
fast food outlets and similar locations represent the balance of our sales
volume.
While consumers typically prefer soft drinks served cold for on-premise
consumption, in certain cases, particularly in Mexico, consumers also prefer
to purchase cold soft drinks for off-premise consumption. As described below,
in each of our franchise territories we have programs to place our beverage
coolers, post-mix dispensers and vending machines at points of sale for our
products to make chilled products available to the consumer. We loan or sell
and provide financing for such merchandising equipment. Loaned equipment is
intended to be used exclusively for Panamco products.
In addition to bottled presentations, we sell soft drinks in post-mix
form. Soft drinks sold in post-mix form consist of the final carbonated
product in stainless steel and other pressurized canisters for use in
dispensers at retail outlets.
DISTRIBUTION
We have developed extensive product delivery and container retrieval
systems to maintain sales levels at each of our points of sale. By actively
managing our distribution routes, we seek to ensure that deliveries are made
when our clients (retailers) have the space and funds available to purchase
our beverage products. Distribution is also critical in Latin America, because
a significant portion of soft drink products are sold in returnable bottles.
We must regularly collect empty bottles from retailers and return them to our
bottling plants. Distribution is primarily carried out by our employees and is
supplemented by a network of independent distributors.
We have located and designed our production and distribution facilities
based upon local factors including population concentration, topography,
quality of roads and availability and efficiency of communications. In
territories with large, industrial cities, such as greater Sao Paulo, we
operate a smaller number of large distribution centers and often integrate
distribution and bottling capabilities at the same facility. In rural areas,
such as most of Colombia and Venezuela and parts of Mexico, Costa Rica,
Nicaragua and Guatemala, we use a larger number of small bottling plants and
warehouses.
6
We use two principal delivery methods depending upon local conditions:
the traditional route truck system and the pre-sell method. In Mexico, most of
Colombia, Venezuela and Nicaragua, the route truck system is widely used, in
which salesmen drive delivery trucks on pre-established routes and make
immediate sales from inventory available on the route truck. For all sales in
Brazil, most of Costa Rica and in certain cities in Colombia, Mexico,
Guatemala and Venezuela, we utilize the pre-sell system, in which a separate
sales force obtains orders from customers prior to the time of delivery by
route trucks. Use of the pre-sell system enables us to utilize our route
trucks more efficiently, delivering all of their freight capacity and at the
same time providing us real time information about the product and
presentation needs of our clients. The traditional system maximizes sales to
customers with less sophisticated cash management systems. We also employ a
system of bicycles, carts and small trucks for smaller clients to provide
flexible and fast deliveries within urban areas.
In order to more effectively respond to the needs of our clients and to
help us better manage our inventories we have computer systems in place in
each of our franchise territories. We have also equipped most of our sales
force with handheld computers to provide us with real time information about
the product and presentation needs of our clients.
MARKETING
Market segmentation has given rise to preferences on the part of
consumers for a variety of presentations. Income level, substitutes, pricing
and other factors affect consumer preferences. During 2001, we introduced new
presentations at both ends of the size spectrum - 250 ml/8oz and 2.5L - to
better meet these consumer preferences. The smaller presentations have the
objective of capturing consumers for whom the product would otherwise not be
affordable while the larger presentations provide a more cost-effective
alternative for in-home consumption.
In all of our territories, we attempt to adapt our product presentations
and distribution to each market and to the individual clients and consumers
within our territories in terms of the space available for product display,
point-of-sale material, advertising and delivery methods. In order to maximize
sales and per capita consumption of our products, we continually examine sales
data in an effort to develop a mix of product presentations that will best
satisfy consumers and provide our clients with the most effective product mix.
To this effect, we have invested in a sophisticated information system that
allows us to collect detailed, daily data on approximately 70% of our points
of sale. While the investment was made prior to 2001, utilization of this
information system significantly improved throughout last year. We also employ
a variety of marketing techniques in each of our franchise territories to
increase our share of sales, penetration and per capita consumption.
RAW MATERIALS AND SUPPLIES
Soft drinks are produced by mixing water, concentrate and sweetener. We
process the water we use in our soft drinks to eliminate mineral salts and
disinfect it with chlorine. We then filter it to eliminate impurities,
chlorine taste, trace metals and odors. We combine the purified water with
processed sugar or high fructose (or artificial sweeteners in the case of diet
soft drinks) and concentrate. To produce carbonation, we inject carbon dioxide
gas into the mixture. Immediately following carbonation, we bottle the mixture
in pre-washed labeled bottles. We maintain a quality control laboratory at
each production facility where we test raw materials and analyze samples of
soft drink products. All of our sources of supply for raw materials are
subject to the approval of Coca-Cola.
None of the raw materials or supplies for our products are currently in
short supply, although the supply of specific raw materials or supplies could
be adversely affected by government controls, strikes, adverse weather
conditions or other factors beyond our control. Any increase in the price of our
raw materials or supplies will increase our cost of sales and adversely affect
our net earnings to the extent we are unable to pass along the full amount of
such increases to the consumer.
Concentrates. We purchase concentrates from Coca-Cola for all Coca-Cola
products, as well as from other sources for our other products.
7
Water and sugar. We obtain water from various sources, including springs,
wells, rivers and municipal water systems. Sugar is readily available in all
of our territories as each of Mexico, Brazil, Colombia, Costa Rica, Venezuela,
Nicaragua and Guatemala is a producer of sugar. In addition, we are able to
use high fructose sweetener as a sugar substitute for certain of our products.
In 2001, high fructose accounted for approximately 38% of our sweetener use in
Mexico. We purchase our requirements from multiple suppliers in each country.
Carbon dioxide. We purchase all of our supply of carbon dioxide in
Colombia, Costa Rica and Venezuela from Praxair. All of our supply for Brazil
is being produced at one of our bottling plants in Brazil. Panamco Mexico
purchases its supply of carbon dioxide gas from Cryoinfra. Panamco Nicaragua
and Panamco Guatemala purchase their supply of carbon dioxide from Carbox, a
supplier located in Guatemala. Alternate suppliers are available in all the
countries where we operate.
Bottles, caps and other packaging materials. We usually purchase glass
bottles, plastic soft drink containers, plastic bottle caps, cans and general
packaging materials locally in each country from multiple suppliers. Our
supplies of plastic bottles in all of our territories are generally sourced
from single suppliers of such bottles in each country, and there are
alternative suppliers. Panamco Colombia has facilities to produce a small
portion of its own disposable plastic bottles and owns 20% of Comptec, S.A., a
joint venture with a subsidiary of Coca-Cola and other Andean bottlers formed
to produce returnable and disposable plastic bottles. Panamco Costa Rica owns
a plastics business, which supplies plastic bottles for all of Panamco Costa
Rica's requirements and to other customers in Central America, including
Panamco Nicaragua and Panamco Guatemala.
We purchase metal bottle caps primarily from the Zapata group of
companies, which have manufacturing facilities in Mexico and Brazil. In
Colombia, one of the companies in the Zapata group owns 60%, and Panamco
Colombia owns 40%, of Tapon Corona, S.A., a Colombian company that
manufactures bottle caps for Panamco Colombia, Panamco Venezuela and other
customers. Panamco Costa Rica, Panamco Nicaragua and Panamco Guatemala
currently purchase their bottle caps from Alcoa CSI, a third-party supplier.
We have facilities in Mexico, Brazil, Colombia and Costa Rica, which
produce plastic cases for carrying bottles. The Costa Rican facility supplies
Panamco Nicaragua and Panamco Guatemala. Plastic is purchased locally or
imported when necessary. Plastic cases in Venezuela are purchased mainly from
Gaveras Plasticas Venezolanas, C.A., which are produced from 100% recycled
materials. Other local suppliers are also available.
In addition to its bottling operations, Panamco Brazil also has the
capacity to produce cans for canned soft drinks at its Jundiai plant and to
produce plastic bottles at its bottling facility in Matto Grosso do Sul.
Panamco Mexico owns approximately 14.9% of Industria Envasadora de Queretaro,
S.A. de C.V., a canning cooperative for products of Coca-Cola in Mexico.
Panamco Colombia has the capacity to produce cans for canned soft drinks at
one of its Bogota plants. Panamco Venezuela has the capacity to produce cans
for canned soft drinks at three of its plants. Panamco Central America imports
cans from a Coca-Cola bottler in El Salvador, EMBOSALVA S.A.
Panamco Colombia has its own facilities to manufacture post-mix and
pre-mix dispensers (for on-premises preparation of soft drinks). This
operation has expanded to manufacture its own beverage coolers, which it also
sells to our other operating Panamco subsidiaries. In 1999, Panamco Colombia
acquired a minority interest in Ingenio San Carlos, a Colombian sugar
producer. In connection with this acquisition, Panamco Colombia has entered
into a long-term supply agreement with Ingenio San Carlos for sugar.
Panamco Mexico and Panamco Costa Rica manufacture their own racking
systems for their route trucks and freight vehicles.
PRODUCTION
Our subsidiaries own and operate a total of 47 bottling plants, with 9 in
Mexico, 4 in Brazil, 18 in Colombia, 13 in Venezuela, 1 in Costa Rica, 1 in
Nicaragua and 1 in Guatemala. The totals include 3 plants in Mexico, 1 plant
in Brazil, 1 in Colombia and 2 in Venezuela, which we use exclusively to
bottle mineral water at the source. Our plants have over 190 bottling lines
with an installed capacity of over 2 billion unit cases a year (assuming 500
8
production hours per month for 12 months per year). In order to increase
production efficiency and reduce costs we have implemented cost reduction
plans at all of our subsidiaries. We continue to evaluate and monitor the
efficiency of our operations.
Panamco Brazil's Jundiai plant is the largest and one of the most
sophisticated manufacturing complexes in the Coca-Cola system. Our Jundiai
plant has an annual production capacity of 250 million unit cases and has
obtained ISO 9002 and 14001 certificates for quality, productivity and
environmental safety.
COMPETITION
The beverage business in our franchise territories is highly competitive.
Our principal competitors are bottlers of Pepsi products and bottlers and
distributors of nationally and regionally advertised and marketed soft drinks.
Our principal competitors in each of our franchise territories are set forth
below:
NOLAD
Our principal competitors in Mexico are bottlers of Pepsi products, whose
territories overlap, but do not precisely match ours. We compete with Geupec,
Group Regordosa and Pepsi-Gemex for share of sales in our territory. In Costa
Rica, Embotelladora Centroamericana S.A. (Pepsi bottler) is our principal
competitor. In Nicaragua and Guatemala, The Central American Bottling
Corporation (Pepsi bottler) is our principal competitor.
BRAZIL
In Brazil our main competitor is AmBev. We also compete with "B" brands
or "tubainas", which are small, local, lower cost producers of flavored soft
drinks. Tubainas are local shops that produce "no frills" flavored soft drinks
in 2-liter presentations for at home consumption. They market their products
primarily in supermarkets. Tubainas have lower overhead and we believe that
they often do not comply with local tax laws, which enables them to offer
lower cost products.
COLOMBIA
In Colombia our principal competitor is Postobon, a well-established
bottler of both nationally advertised flavored soft drink products and Pepsi.
The owners of Postobon hold other significant commercial interests in
Colombia.
VENEZUELA
A joint venture formed between Pepsi and Empresas Polar S.A., the leading
beer distributor in Venezuela named Pepsi-Cola Venezuela, S.A., is our
principal competitor in Venezuela. Since December 1999, we also compete with
the producers of Kola Real, a "B" brand, in the central part of the country.
In addition to competition from other soft drink producers, carbonated
soft drink products compete with other major commercial beverages, such as
coffee, tea, milk, beer and wine, as well as noncarbonated soft drinks, citrus
and noncitrus fruit juices and drinks and other beverages.
Soft drink bottlers also compete for share of sales through distribution
and availability of products, pricing, service provided to retail outlets
(including merchandising equipment, maintenance of bottle inventories at
appropriate levels and frequency of visits), product packaging presentations
and consumer promotions. In recent years, price discounting by our competitors
has been a means of obtaining sales share in Brazil, Colombia and, Venezuela.
Our consumer promotions are guided primarily by Coca-Cola and take the
form of contests, television, radio and billboard advertising, displays,
merchandising and sampling.
9
EMPLOYEES
At December 31, 2001, we employed approximately 26,000 people (including
temporary workers, but excluding independent distributors). Approximately 35%
of our employees are members of labor unions, most of whom are in Mexico. Most
of the employees in Colombia are covered by non-union collective bargaining
agreements. The collective bargaining agreements for both unionized and
non-unionized employees are negotiated separately for each bottling
subsidiary, or in some instances, for each plant. In Mexico, collective
bargaining agreements are renegotiated annually with respect to wages and
biannually with respect to benefits. In Colombia and Venezuela, all collective
bargaining agreements are negotiated biannually.
In accordance with local labor laws, Panamco Mexico pays employees
amounts usually equal to 10% of its taxable income. The Mexican government
also requires employers to set aside a percentage of employee wages in
retirement accounts. In addition, both employers and employees in Mexico must
contribute amounts to the national health care system and a workers' housing
fund. In Colombia, Brazil, Costa Rica and Nicaragua, employers and employees
contribute to employee retirement accounts and to their national health care
systems. A profit-sharing program has been implemented in Venezuela pursuant
to which employees are entitled to receive an additional payment equal to at
least 15 days' wages (but not more than four months' wages), and a
profit-sharing program was established in Brazil in 1997. In Mexico and
Nicaragua, employees are entitled to a mandatory Christmas bonus in an amount
equal to 15 days and one month's salary, respectively. If an employee has
worked for a company less than one year, that employee's bonus is reduced in
proportion to the amount of time such employee was not employed. In Guatemala,
employees receive a mandatory bonus in the form of a three-month payment based
upon the salary paid during the preceding six months. We have voluntarily
instituted and maintained popular benefits for our employees including housing
loans.
We believe that our relationship with our employees is good in general.
In 2001, five employees and a union representing approximately 400 of our
employees in Colombia instituted a legal action against us and others claiming
human rights violations. See "Item 3. -- Legal Proceedings."
The labor laws in each of the seven countries in which we operate require
certain severance payments upon involuntary termination of employment.
FRANCHISE ARRANGEMENTS
Coca-Cola. We have the right to sell Coca-Cola's products, certain other
soft drinks and certain bottled water products pursuant to bottling or other
similar agreements described in "Item 13. -- Certain Relationships and Related
Transactions" for a discussion of our bottling agreements with Coca-Cola.
Other Brands. Panamco Colombia has agreements with companies other
than Coca-Cola for the sale of locally recognized soft drink products and
mineral water. These agreements contain provisions governing the production,
marketing and sale of the beverages that are, in most instances, less
stringent than the requirements contained in our bottling agreements with
Coca-Cola. Panamco Venezuela has an agreement for the sale and distribution of
beer under the Regional trademark. Panamco Brazil has an agreement to
distribute both Kaiser and Heineken beers.
GOVERNMENT REGULATION
Controls on Pricing and Promotions. Although there are none currently in
effect, in the last ten years the governments of Mexico, Brazil and Colombia
have imposed formal price controls on soft drinks. Currently in Mexico and
Colombia, for soft drinks and for other goods, price increases proposed by
manufacturers are subject to the informal approval of the respective
governments. In the past, the Mexican government also limited the types of
presentations for soft drinks. In Brazil, the government is recommending that
manufacturers maintain price levels
10
in line with a trailing four-month average of their historic price increases.
Each of the governments of the countries in which we operate regulates some of
our promotional activities such as cash prize contests and certain other
promotions.
Taxation of Soft Drinks. All the countries in which we operate impose a
value-added tax ("VAT") on the sale of soft drinks, with a rate of 18% in
Brazil, 16% in Colombia, 13% in Costa Rica, 12% in Guatemala, 15% in Mexico,
15% in Nicaragua and 14.5% in Venezuela. In addition, several of the countries
in which we operate impose excise or other taxes on soft drinks. In Guatemala,
there is an excise tax of US $0.18 per liter. Costa Rica imposes specific
taxes on soft drinks that together with its VAT results in an average
effective tax rate of approximately 25%. Brazil imposes an excise tax of 12.5%
and a consumption tax of 6.7%. Nicaragua also imposes an 11.5% consumption tax
plus US $0.11 surcharge per unit case. In 2002, Mexico introduced an excise
tax of 20% on fructose-based soft drinks and on water. In March 2002, this
excise tax was suspended until September 30, 2002. The reinstatement of this
tax, or any increase in the excise or other taxes on the sale of our products,
will adversely affect our sales volumes and profitability to the extent that
we are unable to pass the full amount of any such increase to consumers.
Environmental Regulation. We spent $2.0 million and $12.0 million in 2001
and 2000, respectively, on plant upgrades designed to meet environmental
objectives. We must comply with local permit requirements for constructing and
expanding facilities, drilling wells, drawing water from rivers and
discharging effluent.
Intellectual Property. The intellectual property laws of the countries in
which we operate require a proprietary owner of trademarks used in the
operation of franchises in the countries to make certain filings with the
government to protect the trademark. We have made all necessary filings to
protect our proprietary trademarks. To the best of our knowledge, Coca-Cola
and the owners of the other trademarks we use have made the necessary filings
to protect their respective trademarks.
See also "Item 5. -- Market for Registrant's Common Equity and Related
Stockholder Matters -- Exchange Controls and Other Limitations Affecting
Security Holders."
POLITICAL, ECONOMIC AND SOCIAL CONDITIONS IN LATIN AMERICA
In addition to the governmental regulations that have been imposed on our
operations, the Latin American markets in which we operate are characterized
by volatile, and frequently unfavorable, political, economic and social
conditions. High inflation and, with it, high interest rates are common. In
2001, the annual inflation rates were approximately 4% in Mexico, 10% in
Brazil, 8% in Colombia, 12% in Venezuela, 11% in Costa Rica, 5% in Nicaragua
and 9% in Guatemala. The governments in these countries have often responded
to high inflation by imposing price and wage controls or similar measures,
although currently there are no formal soft drink price controls in any of the
countries. These countries have also experienced significant currency
fluctuations. See "Item 1. -- Currency Devaluations and Fluctuations."
We can be adversely impacted by inflation in many ways. In particular,
when wages rise more slowly than prices, inflation can erode consumer
purchasing power and thereby adversely affect sales. Margins are diminished if
product prices fail to keep pace with increases in supply and material costs.
While we have been able in most recent years to increase prices in local
currency terms overall at least as much as inflation, net sales in local
currency terms may nevertheless remain flat or decrease if, among other
things, inflation or high unemployment diminishes consumer purchasing power,
as has been the case recently in Brazil, Colombia and Venezuela. Although we
expect that prices will generally keep pace with inflation in the near term,
sales volume may decline and supply and material costs may rise more rapidly
than prices in the future. See "Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operations." See also the
discussion under "Item 1. -- Currency Devaluations and Fluctuations" regarding
the impact of devaluations on net sales in dollars.
The governments in the countries in which we operate have historically
exercised substantial influence over many aspects of their respective
economies. In recent years, these governments have implemented important
measures
11
to improve their economies. The current political climate in these countries
may create significant uncertainty as to future economic, fiscal and tax
policies.
MEXICO
In July 2000, the "Institutional Revolutionary Party", which has ruled
Mexico since 1929, lost the presidential election and transferred the
presidential powers to President Vicente Fox, the leader of the opposition
party "Partido de Accion Nacional." During 2001, the economy of Mexico was
impacted by the slowdown of the economy in the United States its principal
trade partner, and gross domestic product ("GDP") contracted 0.3%.
BRAZIL
Since January 1999, the Brazilian government decided to modify its
exchange policy, discontinuing its band system and allowing the real to trade
freely. As a result, the real has experienced extreme volatility. Although the
modification of the exchange policy did not significantly exacerbate inflation
during 1999, unemployment has increased and wages in real terms fell. Lower
wages in real terms reduced consumer purchasing power in Brazil, which is
reflected in our lower sales for 2001.
COLOMBIA
Violence resulting from guerilla movements and traffic in narcotics
continued to affect our operation during 2001. Many businesses, including
ours, have been the victims of such violence on occasion. During 2000, the
Colombian government received an assistance package from the United States of
America in order to fight illegal drug traffic under a plan referred to as "Plan
Colombia." This plan, among other things, included programs to assist farmers
and the population in rural areas.
VENEZUELA
The year 2001 was characterized by growing uncertainties in the economic
and political arenas mainly due to a significant decrease in oil export
revenues, especially in the second half of the year. During the second half of
2001, the Central Bank defended the currency using part of the country's
international reserves, due to an increase in capital flight. In February
2002, the Central Bank decided to modify its exchange policy, allowing the
bolivar to trade freely. Since then, the bolivar has experienced extreme
volatility and has depreciated approximately 22% since December 31, 2001. See
"Item 7. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COSTA RICA
Presidential elections were held in February 2002 and a second-round
runoff will be held in April between Mr. Abel Pacheco of the "Partido Unidad
Social Cristiano" and Mr. Rolando Araya of the "Partido de Liberacion
Nacional." The Costa Rican economy had a very limited growth during 2001. The
minimum wage increased in real terms, although unemployment rose. Export
revenues fell 14% during 2001 and the banana and coffee growers have asked the
government for support to restructure part of their debt obligations.
NICARAGUA
President Enrique Bolanos took office in January 2002, and has presented
a package of bills to the National Assembly aiming to improve transparency on
public administration and curb corruption. Since his inauguration, President
Bolanos has received pledges of economic support from the United States and
multilateral organizations including the International Monetary Fund and the
Interamerican Development Bank. During 2001, export revenues fell due to a
decrease in volumes and falling prices.
12
GUATEMALA
Confrontation between the government of President Alfonso Portillo and
the opposition and business groups has continued to offset political stability
and attempts by civic groups to set up a national dialogue have been
unsuccessful. The controversy has centered on the government's management of
the public finances and allegations of corruption in high office. This
situation has created certain divisions within the ruling party as they start
to prepare for the presidential elections in November of 2003. Pursuant to
figures from the Central Bank, the economy grew 2.3% in 2001. A rise in the
VAT rate in August 2001 pushed inflation up to 9% for the year, well above the
4% to 6% target range. Coffee volumes have fallen and the sector has been
adversely affected as international prices have fallen to 30-year lows. Gains
in sugar and banana output have only partly offset the shortfall.
CURRENCY DEVALUATIONS AND FLUCTUATIONS
As a general matter, because our consolidated cash flow from operations
is generated exclusively in the currencies of Mexico, Brazil, Colombia,
Venezuela, Costa Rica, Nicaragua and Guatemala, we are subject to the effects
of fluctuations in the value of these currencies. See "Item 7. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Each of these countries has historically experienced significant currency
devaluations relative to the U.S. dollar. Such devaluations alone have
generally not adversely affected the profitability of our subsidiaries,
measured in local currencies, as substantially all costs of sales and expenses
are incurred in local currencies. However, in general, such devaluations are
accompanied by high inflation and declining purchasing power, which can
adversely affect our sales as well as income. Because our financial statements
are prepared in U.S. dollars, net sales (and other financial statement
accounts, including net income) tend to increase when the rate of inflation in
each country exceeds the rate of devaluation of such country's currency
against the U.S. dollar. Alternatively, net sales (and other financial
statement accounts, including net income) generally are adversely affected if
and to the extent that the rate of devaluation of each country's currency
against the U.S. dollar exceeds the rate of inflation in such country in any
period. When dividends are distributed to us by our foreign subsidiaries, the
payments are converted from local currencies to U.S. dollars, and any future
devaluations of local currencies relative to the U.S. dollar could result in a
loss of dividend income. For a discussion of devaluation rates in Mexico,
Brazil, Colombia, Venezuela, Costa Rica, Nicaragua and Guatemala, see "Item
7.-- Management's Discussion and Analysis of Financial Condition and Results
of Operations--Inflation."
In periods of high inflation and high interest rates, borrowings
denominated in local currencies are more costly, while borrowings indexed to
the U.S. dollar or other foreign currencies place the risk of devaluation on
the borrower. We could be adversely affected by a devaluation of the countries
where we operate.
ITEM 2. PROPERTIES
PROPERTIES
Our properties consist primarily of bottling, distribution and office
facilities in Mexico, Brazil, Colombia, Venezuela, Costa Rica, Nicaragua and
Guatemala. Panamco Mexico, Panamco Brazil, Panamco Colombia, Panamco
Venezuela, Panamco Costa Rica, Panamco Nicaragua and Panamco Guatemala
currently own and operate 9, 4, 18, 13, 1, 1 and 1 bottling plants,
respectively. As of December 31, 2001, the Company owned or leased over 292
warehouse distribution centers in its territories. See "Item 1. -- Business --
Production" for additional information regarding our properties.
As of December 31, 2001, the consolidated net book value of all land,
buildings, machinery and equipment owned by the Company was approximately
$1,043.9 million. These assets were subject to liens and mortgages securing
lines of credit and other indebtedness. The aggregate amount of such
indebtedness outstanding was approximately $11.1 million as of December 31,
2001. The total annual rent paid by the Company in 2001 for its leased
distribution and office facilities was approximately $9.7 million.
13
ITEM 3. LEGAL PROCEEDINGS
NOLAD
Mexico - Antitrust Matters. During May 2000, the Comision Federal de
Competencia (the Mexican Antitrust Commission, the "Commission") pursuant to a
compliant filed by PepsiCo, Inc. and certain of its bottlers in Mexico,
initiated an investigation of the sales practices of Coca-Cola and its
bottlers. In November 2000, in a preliminary decision and in February 2002,
through a final resolution, the Mexican Antitrust Commission held that
Coca-Cola and its bottlers engaged in monopolistic practices with respect to
exclusivity arrangements with certain retailers. The Mexican Antitrust
Commission did not impose any fines, but ordered Coca-Cola and its bottlers,
including certain Mexican subsidiaries of Panamco, to abstain from entering
into any exclusivity arrangement with retailers. Panamco plans to appeal this
decision. Although no assurances can be given, we do not believe that the
outcome of this matter, even if determined against us, will have a material
adverse effect on our financial condition or results of operations. See "Item
7. -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Forward-Looking Statements."
Costa Rica - Antitrust Matters. During August 2001, the Comision para
Promover la Competencia (the "Costa Rican Antitrust Commission") pursuant to a
similar complaint filed by PepsiCo, Inc. and its bottler in Costa Rica
initiated an investigation on the sales practices of Coca-Cola and Panamco
Costa Rica for alleged monopolistic practices in the retail distribution
channel including the gain of share of sales through exclusivity arrangements.
The Costa Rican Antitrust Commission is currently investigating the matter. We
believe that the complaint is without merit and we intend to vigorously defend
ourselves in this matter. Although no assurances can be given, we do not
believe that the outcome of this matter, even if determined against us, will
have a material adverse effect on our financial condition or results of
operations. See "Item 7. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Forward-Looking Statements."
VENEZUELA
Tax. In connection with the Venezuela Acquisition, in 1999 we received
notice of certain tax claims asserted by the Venezuelan taxing authorities,
which mostly relate to fiscal periods prior to the Venezuela Acquisition. The
claims are in preliminary stages and currently total to approximately $48.2
million. We have certain rights to indemnification from Venbottling (a company
owned by the Cisneros family) and Coca-Cola for a substantial portion of such
claims. Based on the information currently available, we do not believe that
the ultimate disposition of these cases will have a material adverse affect on
us. See "Item 7. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Forward-Looking Statements."
Distribution. During 1999, a group of independent distributors of Panamco
Venezuela commenced a proceeding to incorporate a union of distributors. As a
result, these distributors may, among other things, individually demand
certain labor and severance rights against Panamco Venezuela.
Since the incorporation process began, Panamco Venezuela has vigorously
opposed its formation through all available legal channels. In February 2000,
Panamco Venezuela presented a nullity recourse against the union incorporation
solicitation, as well as an injunction request before the Venezuelan Supreme
Court. On September 20, 2001, the Venezuelan Supreme Court rendered its
opinion confirming the incorporation of the union, but withheld granting any
specific labor rights to the members of the union other than the right to be
unionized. In order to obtain specific labor rights, the union (or its
members) will have to request and obtain from a court of law a determination
that the members of such union are considered workers pursuant to Venezuelan
labor laws, and thereafter claim against Panamco Venezuela the payment of such
benefits and rights including retroactive payments. To our knowledge, neither
the union nor any of its individual members have initiated any process with
the objective of obtaining such a court decision, although certain members of
the union have threatened such action. We intend to vigorously
14
defend our rights should this action be filed.
In February 2002, the union filed a petition before the Venezuelan
administrative agency in charge of labor matters attempting to obligate
Panamco Venezuela to negotiate a collective bargaining agreement. In response,
Panamco Venezuela filed a nullity recourse before the competent tribunal (the
"Court") along with an injunction requesting the Court to suspend the
collective bargaining negotiations until the nullity recourse is resolved. The
Court granted the injunction in favor of Panamco Venezuela and admitted the
nullity recourse. This injunction and nullity recourse was extended to a
subsequent request by the union to have the Venezuelan administrative agency
mediate the matter.
In March 2002, a subcommittee of the Venezuelan congress conducted a
hearing with representatives of the union as well as representatives of
Panamco Venezuela. The subcommittee is currently reviewing the matter and a
final recommendation from this political body is pending. We strongly believe
that this matter should be resolved by the court system in Venezuela and
intend to vigorously defend any attempts to politicize the matter.
BRAZIL
Panamco Brazil is the subject of administrative proceedings in the
Federal Revenue Office brought by Brazilian tax authorities seeking income
taxes, interest with respect to credits taken in current periods and fines in
an amount equivalent to $3.7 million as of December 31, 2000. Issues raised by
the tax authorities include the deductibility of certain investment losses.
The Brazilian tax authorities prevailed at the initial administrative
proceeding in 1991 and at the appellate administrative level in June 1993.
Panamco Brazil has appealed the decision. In April 1998, the Brazilian
Taxpayers' Council ruled unanimously in favor of Panamco Brazil. The amount in
question represents approximately $1.8 million. This ruling is not subject to
appeal. The Brazilian Taxpayers' Council, however, issued a ruling against a
former subsidiary of Panamco Brazil. The amount in question represents
approximately $1.9 million. Panamco Brazil has appealed this ruling. See Note
15 of "Notes to Consolidated Financial Statements."
COLOMBIA
In July 2001, a labor union and several individuals from the Republic of
Colombia filed a lawsuit in the U.S. District Court for the Southern District
of Florida against us (and certain of our subsidiaries) and Coca-Cola (and
certain of its subsidiaries). In the complaint, the plaintiffs alleged that we
engaged in wrongful acts against the labor union and its members in Colombia,
including kidnapping, torture, death threats and intimidation. The complaint
alleges claims under the Alien Tort Claims Act, the Torture Victim Protection
Act, RICO and state tort law and seeks injunctive and declaratory relief and
damages of more than $500 million, including treble and punitive damages and
the cost of the suit, including attorney fees. We have filed a motion to
dismiss the complaint for lack of subject matter and personal jurisdiction. A
ruling on our motion to dismiss the lawsuit is expected in the second quarter
of 2002. We believe this lawsuit is without merit and intend to vigorously
defend ourselves in this matter.
Other legal proceedings are pending against or involve the Company and
its subsidiaries, which are incidental to the conduct of their businesses. We
believe that the ultimate disposition of such other proceedings will not have
a material adverse effect on our consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2001.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
NATURE OF TRADING MARKET
As of March 15, 2002, we had approximately 1,368 holders of record of an
aggregate 112,901,012 shares of Class A Common Stock outstanding. As of
March 15, 2002, there were an estimated 1,111 holders of record of the Class B
Common Stock. We estimate that there are more than 9,000 beneficial
shareholders (as opposed to holders of record) of the Company's stock. As of
March 15, 2002, to our knowledge approximately 91% of the total outstanding
Common Stock was held of record by persons in the United States.
The Class A Common Stock has been listed and traded on the NYSE under the
symbol "PB" since September 21, 1993. The following table sets forth the range
of high and low closing sale prices of the Class A Common Stock as reported on
the NYSE during the periods shown:
High Low
2002:
First Quarter (through March 15) $17.96 $14.60
2001:
First Quarter $18.95 $13.56
Second Quarter $21.17 $17.62
Third Quarter $20.67 $16.52
Fourth Quarter $16.50 $13.95
2000:
First Quarter $20.50 $16.06
Second Quarter $17.69 $14.94
Third Quarter $20.13 $15.06
Fourth Quarter $17.50 $13.14
On March 15, 2002, the closing sale price of the Class A Common Stock on
the NYSE was $17.45 per share.
We declared quarterly cash dividends of $0.06 per share of common stock
during each of the years ended December 31, 2001 and 2000.
16
Certain Restrictions on Transfer. Our Articles of Incorporation prohibit
the transfer of shares of Class A Common Stock if the proposed transferee would
become the beneficial owner of 10% or more of the Class A Common Stock, unless
such transfer is approved by the Board of Directors or the holders of at least
80% of the shares entitled to vote. Such restriction also applies to any
transfer of shares of Class B Common Stock, which are then converted into Class
A Common Stock.
Our Articles of Incorporation also provide that shares of Class B Common
Stock automatically convert into a like number of shares of Class A Common Stock
if transferred to any person who is not a Qualifying Transferee, or an
Additional Qualifying Transferee, as defined therein.
We are registered with the Panamanian National Securities Commission and
are subject to a Panamanian statute, which prohibits acquisitions of 5% or more
of the outstanding voting securities of a Panama corporation without Board of
Directors' review or shareholder approval.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
None of the countries in which we operate currently restricts the
remittance of dividends paid by subsidiaries to us, although Brazil has laws in
effect that impose limitations on the exchange of local currency for foreign
currency at official rates of exchange. Panama does not restrict the payment of
dividends by us to our shareholders. Mexico, Brazil, Colombia, Venezuela, Costa
Rica, Nicaragua and Guatemala have imposed more restrictive exchange controls in
the past, and no assurance can be given that more restrictive exchange control
policies, which could affect the ability of the subsidiaries to pay dividends to
Panamco, will not be imposed in the future. The payment of dividends by such
subsidiaries is also in certain instances subject to statutory restrictions and
is contingent upon the earnings and cash flow of and permitted borrowings by
such subsidiaries. Payment of dividends by majority-owned subsidiaries
necessitates pro rata dividends to minority shareholders.
The Mexican Government has not restricted the conversion of the peso into
other currencies to pay dividends except during brief periods. However, other
types of transactions have been subject to exchange controls and less favorable
official rates of exchange as recently as 1991.
Brazil currently restricts the ability of nationals and foreigners to
convert the local currency into dollars or other currencies other than in
connection with certain authorized transactions, which include, among others,
payment of dividends in compliance with foreign investment registration
regulations. In Brazil, all foreign investments must be registered with the
Central Bank, which issues a certificate of registration of the foreign currency
value of such investment. Without such registration, no remittances of dividends
or profits may be made abroad, nor may any part of the original investment be
repatriated in foreign currency. The Central Bank has issued certificates to the
Company and its subsidiaries with respect to its investment in Panamco Brazil.
We must obtain an amendment to our Certificate of Registration from the Central
Bank upon any change in our investment in Brazil.
In Colombia, there are no restrictions on the remittance of profits to
foreign investors as long as the investment is registered with the Colombian
Central Bank and the proper tax has been withheld. The Central Bank has
registered the Company as a foreign investor in each of the directly owned
Colombian subsidiaries, and these registrations allow Panamco to remit all
dividends received from its Colombian subsidiaries, subject to payment of
applicable taxes. However, under current Colombian law, whenever foreign reserve
levels fall below the equivalent of three months of imports, repatriation and
remittance rights may be temporarily modified.
In April 1994, the Venezuelan government imposed controls on foreign
exchange transactions. These controls were lifted in April 1996; however, there
can be no assurance that such controls or regulations will not be reimposed.
Since 1996, no substantial restrictions on the foreign exchange system
remain in force in Nicaragua. Although the 1991 Foreign Investment Law, which
was created to guarantee foreign investors the right to remit 100% of profits
through the official exchange market, is still formally in effect, it no longer
has any practical application. Since it is not mandatory, most foreign investors
do not seek registration under the 1991 Foreign Investment Law. Investors,
17
whether registered under the 1991 Foreign Investment Law or not, can freely
repatriate their profits through the banking system. Profit repatriation has not
been a problem in Nicaragua in recent years.
In Guatemala, there are no restrictions on the remittance of profits to
foreign investors. There is no obligation for foreign investors to register
their investments with any governmental office or to solicit any authorization
to participate in local businesses. In February 1998, the Guatemalan Congress
enacted the Foreign Investment Law, which amended or, in some cases, eliminated,
restrictions created in the past that affected foreign investment. Since that
date, the Guatemalan government treats national and foreign investment under the
same rules and conditions. There can be no assurance that prior restrictions
will not be reimposed in the future.
TAXATION
Introduction
The following discussion summarizes the principal U.S. Federal income tax
consequences of acquiring, holding and disposing of the Company's Class A Common
Stock. The following discussion is not intended to be exhaustive and does not
consider the specific circumstances of any owner of Class A Common Stock.
The discussion is based on currently existing provisions of the United
States Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury Regulations thereunder, and current administrative rulings and
court decisions, all of which are subject to change (which change could be
retroactive). The discussion is limited to United States Federal income tax
matters and does not address other U.S. Federal taxes (such as estate taxes) or
the state, local or foreign tax aspects of acquiring, holding and disposing of
Class A Common Stock.
The discussion is limited to holders of Class A Common Stock that do not
currently own and have not owned any stock in the Company (or any of its
subsidiaries) other than Class A Common Stock and that hold such shares as a
capital asset (within the meaning of Section 1221 of the Code).
There is no reciprocal tax treaty between Panama and the United States
regarding withholding taxes.
Certain U.S. Federal Income Tax Consequences to U.S. Holders
The following discussion applies to a holder of Class A Common Stock who is
an individual citizen or resident of the United States, a corporation created or
organized in the United States or any other person subject to U.S. Federal
income taxation on its worldwide income and gain ("U.S. Holders").
Distributions by the Company. Distributions by the Company with respect to
Class A Common Stock will be taxable to U.S. Holders as ordinary dividend income
to the extent of the Company's current and accumulated earnings and profits.
Distributions, if any, in excess of the Company's current and accumulated
earnings and profits will constitute a nontaxable return of capital to a U.S.
Holder to the extent of the U.S. Holder's adjusted tax basis in the Class A
Common Stock and will be applied against and reduce the U.S. Holder's tax basis
in such Class A Common Stock. To the extent that such distributions are in
excess of the U.S. Holder's tax basis in its Class A Common Stock, the
distributions will constitute capital gain. Distributions with respect to Class
A Common Stock generally will not be eligible for the dividends-received
deduction.
Foreign Personal Holding Company. The Company and several of its
subsidiaries may be "foreign personal holding companies" ("FPHC"). A foreign
corporation is classified as an FPHC for a taxable year during which at least
60% of its gross income for the taxable year is "FPHC income" and more than 50%
of the voting power or value of all stock in such corporation is owned, directly
or indirectly (including shares owned through attribution), by five or fewer
individuals who are United States persons. FPHC income generally includes
royalties, annuities, proceeds from the sale of stock or securities, gains from
futures transactions in any commodities, rents, income from personal services,
dividends and interest (other than certain dividends and interest paid by a
qualifying related company that is incorporated in the same country as the
recipient corporation). After its initial year as an FPHC, a corporation may
remain an FPHC even if only 50% of its gross income is FPHC income.
18
All United States Holders that are shareholders of an FPHC are required
to include in their taxable income a deemed dividend equal to their share of
the corporation's "undistributed FPHC income." In general, a corporation's
undistributed FPHC income is the corporation's total taxable income (which is
gross income minus allowable deductions such as ordinary and necessary
business expenses), with certain adjustments, less dividends paid by the
corporation. Such a deemed dividend is recognized by all U.S. Holders that are
shareholders of an FPHC with undistributed FPHC income, regardless of their
percentage ownership in the corporation, and regardless of whether they
actually receive a dividend from the FPHC.
Because the Company intends to distribute sufficient dividends and to
cause each of its FPHC subsidiaries to distribute sufficient dividends so that
no FPHC will have undistributed FPHC income, it is not expected that U.S.
Holders will receive deemed dividend income as a result of the FPHC rules.
Nevertheless, if the Company or certain of its FPHC subsidiaries have
undistributed FPHC income, U.S. Holders will recognize deemed dividend income
regardless of whether they receive cash distributions from the Company.
Controlled Foreign Corporation. Panamco and its subsidiaries may be
"controlled foreign corporations" ("CFC"). A corporation is a CFC if more than
50% of the shares of the corporation, by vote or value, are owned, directly or
indirectly (including shares owned through attribution, which requires
treating warrants and securities convertible into shares actually or
constructively owned by a U.S. Holder as exercised or converted), by "10% CFC
Shareholders." The term CFC Shareholder means a U.S. person (including
citizens and residents of the United States, corporations, partnerships,
associations, trusts, and estates created or organized in the United States)
who owns, or is considered as owning through attribution, 10% or more of the
total combined voting power of all classes of stock entitled to vote of such
foreign corporation. Each 10% CFC Shareholder in a CFC is required to include
in its gross income for a taxable year its pro rata share of the CFC's
earnings and profits for that year attributable to certain types of income or
investments. Income recognized by a 10% CFC Shareholder under the CFC rules
would not also be recognized as undistributed FPHC income.
A U.S. Holder will not be a "10% CFC Shareholder" and will not be subject
to the CFC rules unless in the case of the Company the U.S. Holder owns 10% of
the Class B Common Stock or in the case of any CFC Subsidiary of the Company,
at least 10% of the value of the Company's outstanding shares or at least 10%
of the voting stock in one or more of the Company's CFC subsidiaries), in each
case directly or indirectly (including shares owned through attribution).
Passive Foreign Investment Company. A "passive foreign investment
company" ("PFIC") is defined as any foreign corporation at least 75% of whose
consolidated gross income for the taxable year is passive income, or at least
50% of the value of whose consolidated assets is attributable to assets that
produce or are held for the production of passive income. For this purpose,
passive income generally includes dividends, interest, royalties, rents,
annuities and the excess of gains over losses from the disposition of assets
which produce passive income. However, a corporation that is a CFC will not
be treated as a PFIC with respect to a shareholder who is a 10% CFC
shareholder.
Neither Panamco nor any of its subsidiaries has been or is a PFIC,
and the Company intends to conduct its affairs so as to avoid the
classification of the Company and its subsidiaries as PFICs. However, if ever
applied to the Company, the PFIC rules could produce significant adverse tax
consequences for a U.S. Holder, including the imposition of the highest tax
rate on income or gains allocated to prior PFIC years and an interest charge
on U.S. Federal income taxes deemed to have been deferred.
Foreign Tax Credits. Dividends received from the Company generally will
be characterized as passive income, and any U.S. tax imposed on these
dividends cannot be offset by excess foreign tax credits that a U.S. Holder
may have from foreign-source income not qualifying as passive income.
Dispositions of Stock. In general, any gain or loss on the sale or
exchange of Class A Common Stock by a U.S. Holder will be capital gain or loss
and will be long-term capital gain or loss if the U.S. Holder has held the
Class A Common Stock for more than 12 months. For noncorporate U.S. Holders,
long-term capital gain generally will be subject to U.S. Federal income tax at
a maximum rate of 20% if the underlying Class A Common Stock has been held
19
for more than 12 months. There are limits on the deductibility of capital
losses.
Information Reporting and Backup Withholding Requirements with Respect to
U.S. Holders. United States information reporting requirements may apply with
respect to the payment of dividends on the Class A Common Stock. Under current
Regulations, effective as of January 1, 2001, noncorporate U.S. Holders may be
subject to backup withholding at the rate of 31% on dividend payments made
after December 31, 2000 and prior to July 1, 2001 and 30.5% on payments made
after June 30, 2001 when a U.S. Holder (i) fails to furnish or certify a
correct taxpayer identification number to the payor in the manner required,
(ii) is notified by the IRS that it has failed to report payments of interest
or dividends properly or (iii) fails, under certain circumstances, to certify
that it has not been notified by the Internal Revenue Service that it is
subject to backup withholding for failure to report interest and dividend
payments.
Form 5471 Reporting Requirements. U.S. Holders may be required to file
IRS Form 5471 under certain circumstances. A United States person required to
file a Form 5471 to report its ownership of Class A Common Stock may also be
required to file one or more Forms 5471 for various subsidiaries of the
Company. As long as the reporting requirements above have been met, no U.S.
Income Withholding Tax is required on dividends paid.
Failure to provide the information required by Form 5471 may result in
substantial civil and criminal penalties. Each prospective shareholder should
consult its own tax advisor with respect to the specific requirements for
filing Forms 5471.
Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders
The following discussion summarizes the U.S. Federal income tax
consequences of acquiring, holding and disposing of Class A Common Stock by a
holder of Class A Common Stock that is not a U.S. Holder (a "Foreign Holder"),
is not engaged in the conduct of a trade or business in the United States and
is not present in the United States for 183 days or more during the taxable
year.
Distributions. Distributions by the Company to a Foreign Holder would be
subject to withholding of U.S. Federal income tax only if 25% or more of the
gross income of the Company (from all sources for the three-year period ending
with the close of the taxable year preceding the declaration of the dividend)
was effectively connected with the conduct of a trade or business in the
United States by the Company. The Company anticipates that it will recognize
income that is effectively connected with the conduct of a trade or business
in the United States. However, if the Company is subject to a branch profits
tax on the income effectively connected with the conduct of a trade or
business in the United States, dividends paid by the Company would not be
subject to a second-level withholding of U.S. Federal income tax as mentioned
above. As a Panamanian corporation not entitled to treaty benefits, the
Company would be subject to the branch profits tax. Therefore, there should be
no withholding on distributions to foreign shareholders.
Dispositions of Shares. A Foreign Holder generally will not be subject to
United States Federal income or withholding tax with respect to a gain
recognized on the disposition of Class A Common Stock.
Information Reporting and Backup Withholding Requirements with Respect to
Foreign Holders. Foreign Holders may be required to comply with certification
and identification procedures to prove their exemption from information
reporting and backup withholding requirements. Any amounts withheld under the
backup withholding rules from a payment to a Foreign Holder will be allowed as
a refund or a credit against such Foreign Holder's United States Federal
income tax, provided that the required information is furnished to the IRS. As
long as the reporting requirements above have been met, no U.S. Income
Withholding Tax is required on dividends paid.
Certain Panamanian Taxation Matters
The principal Panamanian tax consequences of ownership of Shares are as
follows:
20
General. Panama's income tax is exclusively territorial. Only income
actually earned from sources within Panama is subject to taxation. Income earned
by Panamanian corporations from offshore operations is not taxable in Panama.
The territorial principle of taxation has been in force throughout the history
of the country and is supported by legislation, administrative regulations and
court decisions.
The Company is not subject to taxes in Panama because almost all of its
income arises from the activities of its subsidiaries, which are conducted
entirely offshore from Panama. This is the case even though the Company
maintains its registered office and permanently employs administrative personnel
in Panama.
Taxation of Capital Gains. There are no taxes on capital gains realized by
an individual or corporation regardless of its nationality or residency on the
sale or other disposition of Shares on the basis of the already mentioned
principles of territorial taxation, inasmuch as the value of such Shares is
ultimately determined upon assets and activities which are held or conducted
almost entirely outside of Panama.
Taxation of Distributions. Dividends and similar distributions paid by the
Company with respect to Shares are also exempted from dividend taxes, otherwise
payable by withholding at source on such income, under the aforementioned
territorial principles of taxation since Panamanian dividend taxes do not arise
on dividends and similar distributions of non-Panamanian source income or on
income which is exempt from Panama's income tax.
The preceding summary of certain Panamanian tax matters is based upon the
tax laws of Panama and regulations thereunder currently in effect and is subject
to any subsequent change in Panamanian laws and regulations which may come into
effect.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (1)
(Table stated in thousands, except per share amounts)
The following table sets forth selected consolidated financial and
operating data for the Company. The selected financial data have been derived
from the consolidated financial statements of the Company. The audited
consolidated financial statements of the Company for the three years ended
December 31, 2001, are included elsewhere herein and have been audited by Arthur
Andersen LLP, independent certified public accountants, whose audit report is
also included herein. All of the consolidated financial statements referred to
above have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") and are stated in U.S. dollars. The selected consolidated
financial and operating data should be read in conjunction with "Item 7. --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere herein.
Year Ended December 31, (1)
-------------------------------------------------------------------------------
2001 2000 1999 1998 (8) 1997 (7)
---- ---- ---- ------- -------
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 2,650,872 $ 2,599,411 $ 2,415,817 $ 2,773,276 $ 2,510,210
Cost of sales, excluding depreciation and
amortization............................. 1,296,307 1,243,485 1,191,883 1,425,246 1,327,443
----------- ----------- ----------- ----------- -----------
Gross profit.......................... 1,354,565 1,355,926 1,223,934 1,348,030 1,182,767
Operating expenses:
Selling and distribution................. 629,387 636,739 572,038 657,138 563,917
General and administrative............... 204,897 244,551 251,450 222,327 193,437
Depreciation and amortization (2)(4)..... 210,667 274,046 214,539 253,112 159,371
Amortization of goodwill................. 26,416 35,819 36,284 35,739 20,121
Facilities reorganization charges (9).... - 503,659 35,172 - -
----------- ----------- ----------- --------- ---------
Total operating expenses.............. 1,071,367 1,694,814 1,109,483 1,168,316 936,846
----------- ----------- ----------- --------- ---------
Operating income (loss).................... 283,198 (338,888) 114,451 179,714 245,921
21
YEAR ENDED DECEMBER 31, (1)
-----------------------------------------------------------------------------
2001 2000 1999 1998 (8) 1997 (7)
---- ---- ---- ------- -------
Interest income ........................... 21,341 31,933 28,962 12,817 22,006
Interest expense........................... (119,390) (142,299) (129,072) (98,152) (60,889)
Other income (expense), net (3)............ (10,891) (31,662) (39,296) 22,136 44,033
Nonrecurring income, net (4)............... - - - 60,486 -
---------- ----------- ----------- ---------- -------------
Income (loss) before income taxes.......... 174,258 (480,916) (24,955) 177,001 251,071
Provision for income taxes (4)............. 50,369 21,800 31,254 51,374 57,302
---------- ----------- ----------- ---------- -------------
Income (loss) before minority interest..... 123,889 (502,716) (56,209) 125,627 193,769
Minority interest in earnings of subsidiaries 5,865 1,944 3,695 5,305 19,934
---------- ----------- ----------- ---------- -------------
Net income (loss)..................... $ 118,024 $ (504,660) $ (59,905) $ 120,322 $ 173,835
========== =========== =========== ========== ===========
Basic earnings (loss) per share (5)........ $ 0.94 $ (3.92) $ (0.46) $ 0.93 $ 1.44
========== =========== =========== ========== ===========
Diluted earnings (loss) per share (5)...... $ 0.93 $ (3.92) $ (0.46) $ 0.92 $ 1.43
========== =========== =========== ========== ===========
OTHER DATA:
Total product unit case volume............. 1,242,200 1,222,500 1,163,117 1,174,035 1,010,960
Dividends per share (5).................... $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.21
Weighted average shares outstanding (basic) (5) 125,559 128,833 129,683 129,538 120,841
Weighted average shares outstanding (diluted)
(5)...................................... 126,655 128,833 129,683 130,792 121,969
Capital expenditures (6)................... $ 83,121 $ 123,897 $ 163,203 $ 302,215 $ 208,669
Cash operating profit (10)................. $ 518,266 $ 386,064 $ 385,544 $ 468,565 $ 425,413
AT DECEMBER 31, (1)
-----------------------------------------------------------------------------
2001 2000 1999 1998 (8) 1997 (7)
---- ---- ---- -------- --------
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents....................... $ 133,666 $ 191,773 $ 152,648 $ 131,152 $ 332,995
Property, plant and equipment, net ........ 1,043,870 1,125,719 1,218,383 1,307,590 1,119,515
Total assets .............................. 2,693,026 3,026,321 3,613,122 3,647,690 3,587,069
Total long-term liabilities................ 1,022,375 1,192,981 1,437,834 964,525 897,056
Minority interest.......................... 28,541 27,805 27,974 26,243 26,783
Shareholders' equity....................... 1,072,445 1,167,311 1,751,896 1,978,234 1,937,770
-------------------
(1) The results of the Colombian and Venezuelan subsidiaries for all periods, the Mexican subsidiaries for 1997 and 1998 and
the Brazilian subsidiaries for 1997, have been remeasured in U.S. dollars, the reporting and functional currency, in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," as it applies to highly
inflationary economies such as those in which the subsidiaries operate. See Note 1 of "Notes to Consolidated Financial
Statements."
(2) Includes breakage of bottles and cases and amortization expense related to new introductions. See Note 1 of "Notes to
Consolidated Financial Statements."
(3) See Note 20 of "Notes to Consolidated Financial Statements."
(4) During 1998, Panamco Brazil conducted a study to evaluate the expected future utilization of returnable product
presentations in the Brazilian market, having observed accelerated demand for, and utilization of, nonreturnable
presentations in the marketplace. The results of this study show that the use of nonreturnable presentations will continue
to increase in the Brazilian market. Therefore, the Company has adjusted the carrying value of bottles and cases to reflect
their estimated use in the marketplace by charging $36.5 million to the 1998 operating results, increasing total
depreciation and amortization expense, and reducing the 1998 tax provision by $12.1 million.
Panamco Brazil reversed a contingency allowance recorded in prior years for excise tax credits taken on purchases of
concentrate between February 1991 and February 1994. The Company had previously accrued this allowance in the full amount of
such credits. Panamco Brazil reversed this allowance in 1998 because during 1998 the Brazilian Supreme Court resolved similar
claims of other bottlers in favor of the bottlers.
The reversal of the excise tax allowance amounted to $60.5 million and was credited to nonrecurring income, in the
statement of operations. Income tax credits recorded in this allowance, amounting to $20.0 million, were also reversed and
charged directly to income in the provision for income taxes in 1998.
(5) Dividends per share reflect the amounts declared and paid during the applicable period. Earnings per share, dividends per
share and shares outstanding for all periods have been adjusted to give effect to the two-for-one stock split effected on
March 31, 1997.
(6) Does not include purchases of bottles and cases.
(7) Includes eight months of net sales and net income of $349.5 million and $49.5 million, respectively, from Panamco
Venezuela, and five months of net sales and net income of $18.6 million and $0.7 million, respectively, from Panamco
Nicaragua.
(8) Includes nine months of net sales and net income of $45.1 million and $2.1 million, respectively, from Panamco Guatemala,
and four months of net sales and net income of $4.2 million and $0.9 million, respectively, from R.O.S.A.
(9) Facilities reorganization charges in 2000 are related to goodwill impairment of $350.0 million in Venezuela, write-off of
obsolete property, plant, equipment, bottles and cases, charges related to plant closings and disposal of property, plant
and equipment, job terminations and severance payments, and nonrecurring charges related to legal contingencies. Facilities
reorganization charges in 1999 are related to job terminations and severance payments and write-off of obsolete property,
plant, and equipment. See Note 2 of "Notes to Consolidated Financial Statements."
(10) Cash operating profit ("COP") means operating income plus depreciation, amortization, including amortization of goodwill,
and noncash facilities reorganization charges.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion addresses the financial condition and results of
operations of Panamco and its consolidated subsidiaries. This discussion
should be read in conjunction with our audited consolidated financial
statements, including the notes to the consolidated financial statements (the
"Financial Statements"), as of December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001 and the notes thereto
included elsewhere herein.
In 1998, the "Panamco Central America" group was created, which consists
of Panamco Costa Rica, Panamco Nicaragua and Panamco Guatemala. Prior to the
second quarter of 2001, the financial condition and results of operations of
these three companies were previously reported together in the financial
statements entitled Panamco Central America. In February 1999, the North Latin
American Division ("NOLAD") was created, which consists of Panamco Mexico and
Panamco Central America. The results of operations of Panamco Mexico and
Panamco Central America are reported together as Panamco NOLAD.
Unit case means 192 ounces of finished beverage product (24 eight-ounce
servings). Average sales prices per unit case means net sales in U.S. dollars
for the period divided by the number of unit cases sold during the same
period. Cash operating profit means operating income plus depreciation,
amortization, including amortization of goodwill, and noncash facilities
reorganization charges.
CRITICAL ACCOUNTING POLICIES
We have identified the following critical accounting policies that
underlie the Financial Statements. These critical accounting policies and how
we have applied them in the preparation of the Financial Statements are
discussed in Note 1 of "Notes to Consolidated Financial Statements."
ACCOUNTING POLICY
-------------------------------------------------------------
Basis for Translation
Property, Plant and Equipment
Bottles and Cases
Impairment
Franchisor Incentives
Derivative Instruments
INFLATION
EFFECT OF INFLATION ON FINANCIAL INFORMATION
Our net sales, and almost all operating costs, in each of Mexico, Brazil,
Colombia, Venezuela, Costa Rica, Nicaragua and Guatemala, are denominated in
the currency of such country. In accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52"), the
financial statements of our subsidiaries are remeasured or translated into
U.S. dollars for purposes of the preparation of the consolidated financial
statements. See Note 1 of "Notes to Consolidated Financial Statements."
Borrowings and purchases of machinery and equipment are often made in U.S.
dollars. During any period when the rate of inflation in a particular country
exceeds the rate of devaluation of the local currency against the U.S. dollar,
all amounts recorded in the statement of operations tend to be higher when
translated into U.S. dollars than would be the case in the absence of such an
excess. Conversely, if devaluation exceeds inflation, amounts recorded in the
statement of operations tend to be lower when translated into U.S. dollars.
23
The following table compares the rate of inflation, as measured by
certain national consumer price indices in the seven countries, with the rate
of devaluation (revaluation) for the periods shown:
Year Ended December 31, (1)
-----------------------------
2001 2000 1999
-------- ------- --------
Mexico
Inflation..................................... 4% 9% 12%
Currency devaluation (revaluation) ........... (5%) 1% (4%)
Brazil
Inflation..................................... 10% 10% 8%
Currency devaluation.......................... 19% 9% 48%
Colombia
Inflation..................................... 8% 9% 10%
Currency devaluation.......................... 3% 19% 22%
Venezuela
Inflation..................................... 12% 12% 20%
Currency devaluation.......................... 8% 9% 15%
Costa Rica
Inflation..................................... 11% 10% 10%
Currency devaluation.......................... 7% 7% 10%
Nicaragua
Inflation..................................... 5% 10% 7%
Currency devaluation.......................... 6% 6% 10%
Guatemala
Inflation..................................... 9% 5% 5%
Currency devaluation.......................... 4% (1%) 15%
___________________
(1) Inflation figures are based on the applicable Consumer Price Index
obtained from official local sources from each respective country and
currency devaluation (revaluation) figures are based on official U.S.
dollar exchange rates at year-end.
The level of inflation has a direct impact on the method used to
translate the financial statements from the local currency to the reporting
currency. SFAS 52 provides that, in a highly inflationary economy (defined as
having cumulative inflation for the three-year period preceding the balance
sheet date of approximately 100% or more), the effect of exchange rate
fluctuations on the translation is included in the determination of net income
for the period and is reflected as gains or losses in the related statement of
operations accounts. Such gains and losses do not affect the statement of
operations of companies operating in economies, which are not considered highly
inflationary but are instead included as part of accumulated other
comprehensive income (loss), a component of shareholders' equity.
Mexico, Brazil, Costa Rica, Nicaragua and Guatemala are not classified as
highly inflationary economies and the functional currencies for financial
reporting purposes under accounting principles generally accepted in the
United States are the Mexican peso, Brazilian real, Costa Rican colon,
Nicaraguan cordoba and Guatemalan quetzal, respectively.
Colombia and Venezuela were classified as highly inflationary economies
and accordingly their financial statements have been remeasured into U.S.
dollars in accordance with SFAS 52.
Effective December 31, 2001, we discontinued classifying Colombia as a
highly inflationary economy, and, accordingly, the functional currency of our
Colombian operations was changed from the U.S. dollar to the Colombian peso.
The effect of the change represented a decrease in both the deferred income
tax balance and shareholders' equity of $30.1 million in 2001. As a result of
this change and going forward, the financial statements of our Colombian
subsidiary will be translated from the Colombian peso to the U.S. dollar,
whereby translation adjustments (gains or losses) will not be reported in the
statement of operations but will be reported separately and included in
24
accumulated other comprehensive income (loss), which is a component of
shareholders' equity.
EFFECT OF INFLATION AND CHANGING PRICES ON OPERATIONS
In addition to high inflation, our operations are carried out in
countries which in the past experienced, and may in the future experience,
government price controls. While price controls have been a limiting factor,
we have been generally effective in the recent past in increasing prices in
local currency terms at least at the rate of inflation. All of our costs are
affected by inflation rates in the countries in which we operate. In general,
transactions in these countries are effectively tied to inflation either
through pricing, contract indexing, statute or informal practice.
Although currently there are no formal price controls on soft drinks in
our franchise territories, price and wage controls remain in effect in Mexico
and Brazil for certain other products and services, and price increases for
soft drinks in Mexico and Colombia are subject to the informal approval of the
respective governments.
Our sales also have been, and may in the future be, adversely affected
when wages rise more slowly than the rate of inflation, resulting in a loss of
consumer purchasing power. This has been the case in Brazil, Venezuela and
Colombia recently.
In Mexico, Brazil, Colombia, Venezuela, Costa Rica and Nicaragua, income
taxes are indexed to reflect the effects of inflation; however, the effects of
inflation are calculated differently for purposes of local taxation and
financial reporting.
SEASONALITY
All product sales are generally higher during the December holidays and
during the hottest and driest periods (with rainfall varying from year to
year). For this reason, we typically experience our best results of operations
in the second and fourth quarters. However, the seasonality effect is tempered
in our case because of the difference in the timing of the summer months in
the countries in which we operate. In Brazil, summer occurs during November,
December and January, while summer occurs in Mexico, Colombia, Venezuela,
Costa Rica, Guatemala and Nicaragua during the months of June, July and
August.
FORWARD-LOOKING STATEMENTS
The nature of our operations and the environment in which we operate
subject us to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In connection with the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, we note
the following facts that, among others, could cause future results to differ
materially from the forward-looking statements, expectations and assumptions
expressed or implied in this document:
Forward-looking statements, contained in this document include the amount
of future capital expenditures and the possible uses of proceeds from any
future borrowings. The words believes, intends, expects, anticipates,
projects, estimates, predicts, and similar expressions are also intended to
identify forward-looking statements. Such statements, estimates, and
projections reflect various assumptions by our management, concerning
anticipated results and are subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond
25
our control. Factors that could cause results to differ include, but are not
limited to, changes in the soft drink business environment (including actions
of competitors and changes in consumer preference), changes in governmental
laws and regulations (including income and excise taxes), market demand for
new and existing products, raw material prices and devaluation of local
currencies against the U.S. dollar. A discussion of certain of the factors
that could cause actual results to differ is set forth in our Registration
Statement on Form S-8, dated July 23, 2001 (File no. 333-65652). These and
other factors are also discussed in this document, particularly in "Item 1. --
Business" and "Item 7. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations." We cannot assure you that such
statements, estimates and projections will be realized. The forecasts and
actual results will likely vary and those variations may be material. We make
no representation or warranty as to the accuracy or completeness of such
statements, estimates or projections contained in this document or that any
forecast contained herein will be achieved. We caution readers not to place
undue reliance on these forward-looking statements. These statements speak
only as of their dates, and we undertake no obligations to update or revise
any of them, whether as a result of new information, future events or
otherwise.
MINORITY INTERESTS IN RESULTS OF OPERATIONS
We conduct our operations through tiers of subsidiaries in which, in some
cases, minority shareholders hold interests. See "Item 1. -- Business --
Corporate Structure -- Holding Company Structure" for further discussion on
ownership interest in our subsidiaries.
Because we have varying percentage ownership interests in our
approximately 60 consolidated subsidiaries, the amount of the minority
interest in income or loss before minority interest during a period depends
upon the revenues and expenses of each of the consolidated subsidiaries and
the percentage of each of such subsidiary's capital stock owned by minority
shareholders during that period.
CERTAIN SUBSIDIARY FINANCIAL INFORMATION
Income statement and balance sheet data for Panamco NOLAD (Panamco Mexico
and Panamco Central America, which consists of Costa Rica, Nicaragua and
Guatemala), Panamco Brazil, Panamco Colombia, and Panamco Venezuela, are
presented on the following pages. The data presented as of and for each of the
three years in the period ended December 31, 2001 have been derived from the
audited combined financial statements of Panamco Mexico and Panamco Central
America (Costa Rica, Nicaragua and Guatemala), the audited consolidated
financial statements of Panamco Colombia and Panamco Venezuela and the audited
combined financial statements of Panamco Brazil, as the case may be, which
financial statements are not included herein. As set forth in such income
statement and balance sheet data, minority interest in the Panamco Mexico
(part of Panamco NOLAD), Panamco Brazil and Panamco Colombia subsidiaries and
net income attributable to the Panamco Mexico, Panamco Brazil and Panamco
Colombia holding companies give effect to minority shareholdings below the
country holding company level. Minority interest in the Panamco Mexico,
Panamco Brazil and Panamco Colombia holding companies refers to the aggregate
minority interest in the net income of the respective country level holding
company. Net income attributable to Panamco gives effect to the deduction from
net income of the minority interests at both the country level holding company
and the subsidiary levels.
26
PANAMCO NOLAD
(Stated in thousands of U.S. dollars)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
Net sales $1,289,004 $1,200,350 $1,006,886
Cost of sales, excluding depreciation and amortization 568,515 534,207 475,287
Operating expenses, including depreciation
and amortization of goodwill 493,517 486,403 371,379
Facilities reorganization charges 1,144 37,052 -
---------- ---------- ----------
Operating income 225,828 142,688 160,220
Interest expense, net (12,165) (13,090) (13,692)
Other income (expense), net (694) (1,628) 1,897
---------- ---------- ----------
Income before provision for income taxes 212,969 127,970 148,425
Provision for income taxes 66,310 45,148 47,317
---------- ---------- ----------
Income before minority interest 146,659 82,822 101,108
Minority interest in Panamco Mexico subsidiaries 4,605 2,528 3,288
---------- ---------- ----------
Net income attributable to Panamco NOLAD 142,054 80,294 97,820
Minority interest in Panamco Mexico
holding company 2,139 1,202 1,556
---------- ---------- ----------
Net income attributable to Panamco $ 139,915 $ 79,092 $ 96,264
========== ========== ==========
UNIT CASE SALES DATA (IN THOUSANDS):
Soft drinks 351,528 355,939 339,632
Water 170,994 166,897 140,069
Other products 5,046 3,277 2,842
OTHER DATA:
Depreciation and amortization $ 79,634 $ 88,988 $ 58,346
Capital expenditures $ 59,044 $ 74,659 $ 79,058
Cash operating profit $ 305,462 $ 244,453 $ 218,566
AT DECEMBER 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ----------
BALANCE SHEET DATA:
Cash and equivalents $ 60,305 $ 74,136 $ 47,433
Property, plant and equipment, net 439,119 425,421 404,334
Total assets 881,118 809,909 753,614
Total debt 249,577 134,220 123,717
Total liabilities 521,895 371,703 310,949
Minority interest in Panamco Mexico subsidiaries 11,519 6,682 5,217
Shareholders' equity 347,704 431,524 437,448