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, 2002
[ ] 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:
-------------------- --------------------
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 [ ].
Indicate by check mark whether the registrant is an accelerated filer.
Yes X No __
The aggregate market value of the voting and non-voting stock common stock
held by non-affiliates of the registrant was $1,152,366,781 (computed by
reference to the closing price as of June 30, 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 24, 2003 were:
Class A Common Stock: 112,793,056
Class B Common Stock: 8,659,802
Class C Preferred Stock: 2
The number of shares outstanding of Class A Stock includes 466,667 restricted
shares that are not vested and remain subject to forfeiture.
TABLE OF CONTENTS
PART I
Item 1. Business
Overview........................................................ 1
Proposed Merger Transaction..................................... 1
Corporate Structure............................................. 2
Financial Information on Industry Segments and Geographic Areas. 4
Our Franchise Territories....................................... 4
Beverages and Packaging......................................... 5
Sales, Distribution and Marketing............................... 7
Raw Materials and Supplies...................................... 8
Production...................................................... 10
Competition..................................................... 10
Employees....................................................... 11
Franchise Arrangements.......................................... 12
Government Regulation........................................... 12
Political, Economic and Social Conditions in Latin America...... 13
Currency Devaluations and Fluctuations.......................... 15
Seasonality..................................................... 15
Additional Information.......................................... 15
Item 2. Properties....................................................... 16
Item 3. Legal Proceedings................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 18
Item 6. Selected Financial Data.......................................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 40
Item 8. Financial Statements and Supplementary Data...................... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............... 42
Item 11. Executive Compensation........................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management... 54
Item 13. Certain Relationships and Related Transactions................... 58
Item 14. Controls and Procedures.......................................... 59
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 60
Signature Pages and Certificates of Chief Executive Officer and Chief
Financial Officer.......................................................... 67
PART I
ITEM 1. BUSINESS
OVERVIEW
Panamerican Beverages, Inc. ("Panamco" or the "Company" or "we") 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 2002, our sales accounted for approximately 5% of the
worldwide unit case volume reported by Coca-Cola. Our 2002 sales represented
approximately 20% of the Latin American unit case volume reported by
Coca-Cola. Sales of products of Coca-Cola accounted for approximately 89% of
our net sales in 2002.
We have a 62-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 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), Guatemala
(Guatemala City and surrounding areas), Nicaragua (all of the country), Costa
Rica (all of the country), recently acquired Panama1 (all of the country),
Colombia (most of the country), Venezuela (all of the country) and Brazil
(greater Sao Paulo, Campinas, Santos and part of Mato Grosso do Sul).
The territories in which the Company operates have an aggregate
population of approximately 128 million people, or about 25-26% 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 and certain non-carbonated beverages. We also produce and distribute
a variety of flavored soft drinks and bottled water products under licensed
and proprietary trademarks in certain parts of our territories. In our
Brazilian franchise we distribute Kaiser, Bavaria and Heineken beers. We also
distribute Regional malt in 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. 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, the Guatemalan
market in 1998, and the Panamanian market in 2002.
PROPOSED MERGER TRANSACTION
On December 22, 2002, we entered into a merger agreement with
Coca-Cola Femsa S.A. de C.V. ("Coca-Cola FEMSA"), pursuant to which Coca-Cola
FEMSA will acquire Panamco in a transaction valued at approximately $3.6
billion, including the assumption of $880 million in estimated net debt (used
in this report to mean long-term obligations, including current portion and
bank loans, minus cash and equivalents). Under the terms of the transaction,
holders of our Class A common stock, excluding The Coca-Cola Company, will
receive $22 per share in cash and holders of our Class B common stock,
excluding Coca-Cola, will receive $38 per share in cash. Panamco Class A
shares trade on the New York Stock Exchange and do not have any voting rights.
Panamco Class B shares have full voting rights but do not trade on any
exchange. The Coca-Cola Company will receive approximately 304 million
unlisted Coca-Cola FEMSA Series D shares.
There can be no assurance that the proposed merger transaction with Coca-Cola
FEMSA will be completed, and consummation of the merger is subject to several
significant conditions. Assuming satisfaction of such conditions, the merger
is expected to close during the second quarter of 2003. Upon completion of the
merger transaction, Panamco will become a wholly-owned subsidiary of Coca-Cola
FEMSA and our shares of Class A common stock will be delisted from trading on
the New York Stock Exchange. Additional information regarding the proposed
--------------------------
1 Except where indicated consolidated numbers exclude operating results from
Coca-Cola de Panama throughout this report.
1
transaction can be found in the preliminary proxy statement that we filed with
the Securities and Exchange Commission on January 30, 2003. See also "Item 7.
-- Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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, 2002:
-----------------
| PANAMCO |
-----------------
|
-------------------------------------------------------------------------------------------------------------
| | | | | | | |
------------- ------------ ------------ ------------ ---------- ------------ ----------- -----------
| 98.1% | | 100% | | 69.4%** | | 50.1%* | | 53.0% | | 97.6% | | 100% | | 98.8% |
| | | | | | | | | CA | | | | | | |
| Panamco | | Panamco | | Panamco | | Panamco | |Beverages,| | Panamco | | Panamco | | Panamco |
| Mexico | | Guatemala | | Nicaragua | | Costa Rica | | Inc. | | Colombia | | Venezuela | | Brazil |
------------- ------------ ------------ ------------ ---------- ------------- ----------- -----------
| | | | | | | |
------------- ------------ ------------ ------------ ---------- ------------- ----------- -----------
| Panamco | | Panamco | | Panamco | | Panamco | | CA | | Panamco | | Panamco | | Panamco |
| Mexico owns | | Guatemala | | Nicaragua | | Costa Rica | |Beverages,| | Colombia | | Venezuela | |Brazil owns|
| between 86% | |owns 100% of| |owns 100% of| |owns 100% of| |Inc. owns | | owns 65% of | | owns 100% | |100% of its|
| and 99% of | |its bottling| |its bottling| |its bottling| | 95.7% of | |one and 100% | | of its | | bottling |
| its bottling| | subsidiary.| | subsidiary.| | subsidiary.| |Coca-Cola | | of four of | | bottling | |Subsidiary.|
|subsidiaries.| | | | | | | |de Panama.| |its bottling | |subsidiary.| | |
| | | | | | | | | | |subsidiaries.| | | | |
------------- ------------ ------------ ------------ ---------- ------------ ----------- -----------
* Panamco Mexico owns 49.9% of Panamco Costa Rica.
** Panamco Costa Rica owns 30.6% of Panamco Nicaragua.
SUBSIDIARY OPERATIONS
NORTH LATIN AMERICAN DIVISION
Our North Latin American Division ("NOLAD") is comprised of our
operations in Mexico, Guatemala, Nicaragua, Costa Rica and recently acquired
Panama.
Mexico. We own approximately 98.1% 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 eight bottling plants (including two 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."
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
about half of the country, including Guatemala City. Nicaragua. We own all the
capital stock (69.4% directly and 30.6% indirectly through Panamco Costa Rica)
of Panamco de Nicaragua, S.A. ("Panamco Nicaragua"). Panamco Nicaragua
produces, distributes and sells Coca-
2
Cola's products, and to a lesser extent other non-carbonated beverages,
throughout Nicaragua. We acquired Panamco Nicaragua in 1997.
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
products throughout Costa Rica. Today Panamco Costa Rica owns and operates one
bottling plant and a plastics business. We acquired these operations in 1995
and achieved 100% of coverage of the country in 1996, when we acquired a
smaller bottler that operated in the east side of the country.
Panama. In October 2002, we acquired slightly more than 50.0% of
Coca-Cola de Panama through our 53% ownership in CA Beverages, Inc. (a
joint-venture formed by Panamco, Heineken and Florida Ice and Farm and Company
"FIFCO"). In late December, we successfully concluded the tender offer for
shares of Coca-Cola de Panama through our ownership in CA Beverages Inc., with
an acceptance rate of approximately 95%. It is expected that, during the first
quarter of 2003, CA Beverages, Inc. will sell its shares in Coca-Cola de
Panama to Panamco, allowing for consolidation of this entity into Panamco's
results. For more information on this transaction refer to "Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Operating Segments."
COLOMBIA
We own approximately 97.6% 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 16 bottling plants
(including one mineral 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 produces, distributes and sells products of
Coca-Cola throughout Venezuela. Panamco Venezuela owns and operates 9 bottling
plants (including one water bottling plant). Panamco Venezuela and its
consolidated subsidiaries are collectively referred to herein as "Panamco
Venezuela."
BRAZIL
We indirectly own approximately 98.8% 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 and our
state-of-the-art facility in Jundiai. We operate in Sao Paulo, Campinas and
Santos, as well as in the western central part of the country in the state of
Matto Grosso do Sul. 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." Prior to March 2002, Panamco Brazil held a 12.1% interest in
Cervejarias Kaiser, S.A. ("Kaiser"). In March 2002, we sold our interest in
Kaiser as part of a larger transaction in which Molson, Inc. acquired Kaiser,
and entered into a partnership with Heineken. See "Item 7. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As a holding company, our ability to pay operating expenses, 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
3
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. The minority
shareholders of our subsidiaries receive a pro-rata portion of all dividends
paid by those subsidiaries.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
As a soft drink bottler operating in diverse markets in Latin
America, our operations are organized based on geographic location. We report
segment information for five geographic areas: NOLAD, Colombia, Venezuela,
Brazil and the corporate operations in the United States. Financial
information by segment, including revenues and long-lived assets, is provided
in Note 22 of the "Notes to Consolidated Financial Statements" included
elsewhere in this report. No revenues have been derived from our country of
domicile, Panama, prior to 2002 and our acquisition of Coca-Cola de Panama.
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:
[MAP OMITTED]
4
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, a few products licensed from other third parties and our own
proprietary brands. In 2002, approximately 74% of our unit case volume came
from 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 89% of our 2002 net sales (64% black
colas and 25% other Coca-Cola products), with the remainder of our net sales
accounted for by water (8%), beer (2%), and other non Coca-Cola products (1%).
In 2002, Panamco complemented its portfolio with new non-carbonated
products. 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 several new
products during 2002. Panamco also introduced new presentations and innovative
multi-serve packaging, as described in "Packaging and Presentations."
We produce and distribute flavored soft drinks under our own
proprietary trademarks, including "Super 12" in Costa Rica, "Kist" in Panama
and "Club K", "Club Soda" and "Premio" in Colombia. We produce and distribute
bottled waters under our own proprietary trademarks including "Risco" in
Mexico, "Shangri-la" in Guatemala, "Alpina" in Costa Rica and Nicaragua,
"Manantial", "Premio", "Soda Clausen", Club K and "Santa Clara" in Colombia
and "Crystal" in Brazil. During 2002, Panamco reached an agreement with The
Coca-Cola Company to convert its proprietary water brand Risco in Mexico to
Coca-Cola's brand Ciel. Risco is currently being licensed to The Coca-Cola
Company. It is expected that the conversion to Ciel, which started the last
week of January 2003, will be gradual.
We distribute two types of bottled water products: purified water
and mineral water. Purified water is prepared in a similar manner to the water
used in the soft drink manufacturing process. Mineral water is obtained from
springs and wells.
In Brazil, we distribute five beer brands including Bavaria, Kaiser
and Heineken beers. In Venezuela we distribute Regional malt.
The beverage products we produce or distribute and that accounted
for nearly all of our sales in the period ending December 31, 2002 are listed
below:
5
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| PANAMCO | PANAMCO | PANAMCO | PANAMCO | COCA-COLA DE | PANAMCO | PANAMCO | PANAMCO |
| MEXICO | GUATEMALA | NICARAGUA | COSTA RICA | PANAMA | COLOMBIA | VENEZUELA | BRAZIL |
| ---------------|---------------|---------------|---------------|--------------|----------------|----------------|---------------|
| COCA-COLA SOFT |COCA-COLA SOFT |COCA-COLA SOFT |COCA-COLA SOFT |COCA-COLA |COCA-COLA SOFT |COCA-COLA SOFT |COCA-COLA SOFT |
| DRINK PRODUCTS:|DRINK PRODUCTS:|DRINK PRODUCTS:|DRINK PRODUCTS:|SOFT DRINK |DRINK PRODUCTS: |DRINK PRODUCTS: |DRINK PRODUCTS:|
| Coca-Cola |Coca-Cola |Coca-Cola |Coca-Cola |PRODUCTS: |Coca-Cola |Coca-Cola |Coca-Cola |
| Coca-Cola Light|Coca-Cola Light|Coca-Cola Light|Coca-Cola Light|Coca-Cola |Coca-Cola Light |Coca-Cola Light |Coca-Cola Light|
| Sprite |Fanta |Sprite |Sprite |Coca-Cola |Sprite |Hit Naranja |Sprite |
| Sprite Light |Sprite |Fanta |Fanta |Light |Fanta |Hit Pina |Diet Sprite |
| Fanta Orange |Lift |Fresca |Fresca |Sprite |Quatro |Hit Uva |Fanta |
| Fanta | | |Canada Dry |Fanta |Lift |Hit Manzana |Diet Fanta |
| Strawberry |BOTTLED WATER: |BOTTLED WATER: | Ginger Ale |Fresca | |Hit Kola |Simba |
| Fresca |Shangri-la* |Kinley Soda | | |OTHER SOFT |Hit Mandarina |Tai |
| Lift | |Canada Dry |OTHER SOFT |BOTTLED WATER:|DRINKS: |Hit Parchita |Diet Tai |
| Delaware Punch |OTHER PRODUCTS:| Club Soda |DRINKS: |Pure Mountain*|Roman** |Grapette Uva |Kuat |
| Senzao |Hi-C |Alpina* |Super 12* | |Premio* |Grapette Kola |Kuat Light |
| Beat |Powerade | | |OTHER |Club Soda* |Grapette |Schweppes |
| | |OTHER PRODUCTS:|BOTTLED WATER: |PRODUCTS: | |Naranja | Tonic Water |
| BOTTLED WATER: | |Hi-C |Canada Dry |Kist* |BOTTLED WATER: |Grapette Pina |Kinley Club |
| Risco-Ciel*** | |Kapo | Club Soda |Juizz* |Manantial* |Quatro | Soda |
| | |Powerade |Canada Dry |Polar * |Club K* |Frescolita |Fanta Uva |
| OTHER PRODUCTS:| |Sunfil | Quinada |Super Malta **|Soda Clausen* |Chinotto | |
| Keloco* | | |Alpina* | |Santa Clara* |Chinotto Light |BOTTLED WATER: |
| Quatro | | | | | |Aguakina |Crystal* |
| Powerade | | |OTHER PRODUCTS:| |OTHER PRODUCTS: | Schweppes | |
| Nestea** | | |Powerade | |Powerade |Senzao |BEER: |
| Disney | | |Sunfil | | |Soda |Kaiser** |
| Kin Light | | |Nestea** | | | Schweppes |Kaiser Light** |
| | | |Fruitopia | | | |Kaiser Bock** |
| | | | | | |BOTTLED WATER: |Kaiser Gold** |
| | | | | | |Nevada |Kaiser Summer |
| | | | | | | | Draft** |
| | | | | | |BEER: |Heineken** |
| | | | | | |Regional** |Bavaria** |
| | | | | | | |Xingu** |
| | | | | | |OTHER PRODUCTS: |Santa Cerva** |
| | | | | | |Malta | |
| | | | | | | Regional** |OTHER PRODUCTS:|
| | | | | | |Nestea** |Kapo |
| | | | | | |Sonfil |Nestea |
| | | | | | |Powerade |Flash Power |
| | | | | | | | |
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Unless otherwise indicated, products are proprietary to Coca-Cola. Products in
italics are new introductions.
* Proprietary to Panamco.
** Products licensed from third parties.
*** Panamco reached an agreement to convert its water brand Risco to The
Coca-Cola Company's brand Ciel.
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 non-returnable
presentations, which are sometimes referred to as "NR" or "one-way", include
cans, NR glass, plastic bottles and plastic bags. During 2002, new packages
were introduced as follows: 1.5 returnable PET in Guatemala, 1.5 NR PET in
Mexico and Colombia, 1.65 NR PET in Colombia and 600 ml NR in Venezuela.
Panamco also introduced innovative multi-packages such as six-pack of 20 oz
PET bottles and six/twelve/fifteen pack of cans.
6
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 consumer goods distribution
operations in Latin America. By country, our points of sales are located
approximately 20% in Mexico, 5% in Guatemala, 4% in Nicaragua, 3% in Costa
Rica, 2% in Panama, 36% in Colombia, 20% in Venezuela and 10% in Brazil. 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. The
large grocery format, which typically accounts for close to 1% of the outlets
serviced in each country, represents less than 8% of our volume in most of the
countries, except in Brazil where it represents approximately 45%. Although
this is the fastest growing channel, it still represents a low percentage of
our total consolidated volume.
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 are
generally consumed in traditional small stores, restaurants, bars, fast food
outlets, entertainment venues and other similar locations.
While consumers typically prefer soft drinks served cold for
on-premise consumption, in certain cases, particularly in Mexico, consumers
also purchase cold soft drinks for off-premise consumption. For years, in each
of our franchise territories we have had programs to place new beverage
coolers, post-mix dispensers and vending machines at points of sale for our
products to make chilled products available to the consumer. At the end of
2002, cold equipment penetration per 10,000 inhabitants was approximately 79
in Mexico, 54 in Guatemala, 32 in Nicaragua, 59 in Costa Rica, 25 in Panama,
43 in Colombia, 55 in Venezuela and 33 in Brazil.
In addition to bottled presentations, we sell soft drinks in
post-mix form. Post-mix dispensed product consists of manufactured finished
syrup, which we sell to the outlet, and then is mixed with filtered water,
typically from the city water source, immediately before the consumer orders a
beverage. Post-mix sales represent a small portion of Panamco's total sales.
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
of the need to reach a significant portion of small retailers. Additionally, a
significant portion of our soft drink products are sold in returnable bottles
and we must continually collect empty bottles from retailers and return them
to our bottling plants to be washed and refilled. Distribution is primarily
carried out by our employees and in some cases it 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 plants and large distribution
centers and often integrate distribution and bottling capabilities at the same
facility. In markets with large rural areas, such as Colombia, Venezuela and
parts of Mexico, Guatemala, Nicaragua, Costa Rica and Panama, we use a larger
number of warehouses. During 2002 we rationalized the number of warehouses in
an effort to improve costs. Including our operations in Panama, today we have
210 distribution centers and 35 plants that integrate production and delivery.
Out of the 210 distribution centers, Panamco owns 172. We also serve highly
concentrated urban markets with over 500 miniwarehouses, 65% of which are in
Colombia.
7
We use two main delivery methods depending upon local conditions:
the traditional or conventional route truck system (in which salesmen drive
delivery trucks on pre-established routes and make immediate sales from
inventory available on the route truck) and the pre-sell method (in which a
separate sales force takes orders from customers prior to the time of delivery
by route trucks, usually within the next 24 hours). With the exception of
Guatemala, where we still sell approximately 83% of our volume through the
traditional route truck system, sales in all other countries are generally
made through the pre-sell method as follows: 86% of our commercial volume in
Mexico, 50% in Nicaragua, 85% in Costa Rica, 60% in Colombia, 69% in
Venezuela, and 97% in Brazil.
The pre-sell method 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. We also employ a system of bicycles, carts and small trucks for
smaller customers to provide flexible and fast deliveries within restricted
and highly concentrated 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 customers.
MARKETING
During 2002, we focused on price/value management and channel and
mix management to drive growth. 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. As
part of this strategy, we introduced new presentations in 2002 at both ends of
the size spectrum (single-serve and multi-serve sizes) - 600 ml and 1.5L - to
better meet these consumer preferences. The smaller presentations have the
objective of capturing consumers who look for convenience or for whom the
product would otherwise not be affordable while the larger presentations
provide a more cost-effective alternative for in-home/multiple consumption. We
also introduced innovative multi-pack alternatives, including six 20 oz.
packages and six/twelve/fifteen pack cans.
In all of our territories, we adapt our product presentations and
distribution to each market and to the individual clients and consumers 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 end, we have
invested in a sophisticated information system that allows us to collect
detailed, daily data on over 80% of our points of sale. While the investment
was made a couple of years ago, utilization of this information system has
significantly improved over time. 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. Examples of these initiatives
include the growth of displays and points of connection, value added
promotions, etc.
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 the
appropriate sweetener 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 or cans. 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 The Coca-Cola Company.
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
8
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 The Coca-Cola Company
for all Coca-Cola trademark products and from other sources for our
proprietary or third party products. See "Item 7. - Management Discussion and
Analysis of Financial Condition and Results of Operations - Overview - Related
Party Transactions with The Coca-Cola Company."
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, Guatemala, Nicaragua, Costa Rica,
Panama, Colombia, Venezuela and Brazil is a producer of sugar. In addition, we
are authorized by Coca-Cola to use high fructose sweetener as a sugar
substitute for certain of our products. We purchase our requirements from
multiple suppliers in each country.
Carbon dioxide. We purchase all of our supply of carbon dioxide in
Costa Rica, Colombia and Venezuela from Praxair. All of our supply for Brazil
is being cogenerated at one of our bottling plants. 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. Our local supplier in Panama is Industrias Hielo.
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 The Coca-Cola Company 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
International 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 the other 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 plastic bottle caps from Alcoa CSI, a
third-party supplier.
We have facilities in Mexico, 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. and 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 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 canned soft drinks at its Bogota plant.
Panamco Venezuela has the capacity to produce canned soft drinks at three of
its plants. Panamco Central America imports canned soft drinks from a
Coca-Cola bottler in El Salvador, EMBOSALVA S.A, except in Panama, which
produces its own canned product.
Finally, Panamco Colombia has its own facilities to manufacture its
own beverage coolers, which it also sells to our other operating Panamco
subsidiaries. Panamco Costa Rica manufactures its own racking systems for
route trucks and freight vehicles.
9
PRODUCTION
During 2002, we proactively took actions that resulted in the
reduction of a portion of our assets to improve costs within the context of
deteriorating macroeconomic conditions that impacted our region. As a result,
our subsidiaries, including Panama, now own and operate a total of 43 bottling
plants, four less than a year ago. Per country we have 8 plants in Mexico, 1
in Guatemala, 1 in Nicaragua, 1 in Costa Rica, 2 in Panama, 17 in Colombia, 9
in Venezuela and 4 in Brazil. The totals include 2 plants in Mexico, 1 plant
in Brazil, 1 in Colombia and 1 in Venezuela, which we use exclusively to
bottle water at the source. Despite the decrease in the number of plants, we
now have over 213 bottling lines, 18 more versus a year ago. Installed
capacity totals over 2.3 billion unit cases a year (assuming 500 production
hours per month for 12 months per year), including total carbonated soft
drinks capacity which is approximately 1.7 billion unit cases a year.
Additionally, in order to increase production efficiency and reduce costs we
have continued implementing cost reduction plans at all of our subsidiaries.
Product quality indexes have increased versus prior years and we will 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 obtained
ISO 9002 certification in the prior year and 14001 certification for quality,
productivity and environmental safety, which is confirmed every six months.
COMPETITION
The beverage business in our franchise territories is highly
competitive. Our principal competitors are bottlers of PepsiCo, Inc. ("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, Grupo Regordosa and Pepsi Bottling Group, who recently acquired
Pepsi-Gemex, for share of sales in our territory. Additionally, a new entrant,
Big Cola (also known as Kola Real), a "B" brand or low cost producer of soft
drinks, has increased competition in some of our Mexican territories. In Costa
Rica, Embotelladora Centroamericana S.A. (Pepsi bottler) is our principal
competitor. In addition, Cerveceria Costa Rica, a subsidiary of FIFCO and the
country's only beer manufacturer, competes against us in the juice segment in
Costa Rica. In Nicaragua and Guatemala, The Central American Bottling
Corporation (Pepsi bottler) is our main competitor and in Panama we compete
against Refrescos Nacionales (Pepsi bottler), a business unit of Bavaria
brewery (Cerveceria Nacional) in that country.
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 the country named Pepsi-Cola Venezuela, S. A., is
our main competitor in Venezuela. Since December 1999, we also compete with
the producers of Kola Real in the central part of the country.
10
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 mainly in 2-liter presentations for at home consumption. They market
their products primarily in supermarkets. In Brazil, B brands represent an
important portion of the market.
In addition to competition from other soft drink producers, our
products compete with other major commercial beverages, such as coffee, tea,
milk, beer and wine, as well as non-carbonated soft drinks, citrus and
non-citrus 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 value added promotions. In recent years, price discounting
by our competitors has been a means of obtaining sales share in Mexico,
Colombia, Venezuela and Brazil.
Our consumer promotions are guided primarily by Coca-Cola and take
the form of contests, television, radio and billboard advertising, displays,
merchandising and sampling.
EMPLOYEES
At December 31, 2002, we employed over 42,000 people (including
outsourced labor, but excluding independent distributors). Approximately 35%
of our employees are members of labor unions, most of who 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. In Mexico, collective bargaining agreements are renegotiated
annually with respect to wages and biannually with respect to benefits. In
Colombia all collective bargaining agreements are negotiated biannually. In
Venezuela all collective bargaining agreements are negotiated every three
years but salaries are reviewed annually.
In accordance with profit sharing programs required by 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 Guatemala, Nicaragua, Costa
Rica, Colombia and Brazil, employers and employees contribute to employee
retirement accounts and to their national health care systems. In accordance
with labor laws in Venezuela, a profit-sharing program has been implemented
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). A
profit-sharing program was established in Brazil in 1997. In Mexico,
Guatemala, Nicaragua and Costa Rica, employees are entitled to a mandatory
Christmas bonus in an amount equal to 15 days in the case of Mexico, and one
month's salary for the rest of the countries. 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 twelve 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.
11
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. See "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 had an agreement for the sale and distribution of
beer under the Regional trademark in Venezuela until November 1, 2002. Panamco
Venezuela continues to distribute malt in Venezuela 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,
Colombia, Brazil and Venezuela have imposed formal price controls on soft
drinks. Currently in Colombia, for soft drinks and for other goods, price
increases proposed by manufacturers are subject to the informal approval of
the government. In the past, the Mexican government also limited the types of
presentations for soft drinks. 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
15% in Mexico, 12% in Guatemala, 15% in Nicaragua, 16% in Colombia, 16% in
Venezuela and 18% in Brazil. 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 Q$ 0.18 per liter of soft drink and lower amounts for other
beverages like juices and water. During 2002, Nicaragua imposed a 11.0%
consumption tax, which was reduced to 9% on October. There is an additional
U.S. $0.11 surcharge per physical case of returnable glass products. Costa
Rica imposes specific taxes on soft drinks that together with its VAT result
in an average effective tax rate of approximately 24.4%. Brazil imposes an
excise tax of 12.5% and a consumption tax of 6.7%. In 2002, Mexico introduced
an excise tax of 20% on fructose-based soft drinks. This excise tax was
suspended temporarily and re-enacted in the month of July 2002. The tax
temporarily affected our costs by $8.3 million and the Company implemented a
transition from fructose corn-syrup to sugar. As of January 2003, beverages
produced with sweeteners other than sugar are taxed. Diet drinks and mineral
water fall under this category.
Environmental Regulation. We spent $1.8 million and $2.0 million in
2002 and 2001, 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 believe that we have made all
necessary filings to protect our proprietary trademarks and 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."
12
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 2002, the annual inflation rates were approximately 5.7% in Mexico,
7.0% in Guatemala, 3.9% in Nicaragua, 9.7% in Costa Rica, 7.0% in Colombia,
31.2% in Venezuela and 12.2% in Brazil. 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, 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 most of our countries. 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 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 had
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 2002, 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") grew only 1.7%. Growth has
been predominantly export-led more than by the expansion of the internal
economy. In addition, the domestic economy growth has been constrained by
rising unemployment.
President's Fox's policy agenda has been comprised of several
measures: fiscal and labor-market reform, liberalization of the electricity
sector and privatization. Without a majority in the legislature, these
measures may be difficult to implement. The tax reform approved by the Mexican
congress and which became effective at the beginning of 2002 was different
from the original proposal presented by the Fox administration. Monetary
policy has focused on keeping annual inflation at single-digit levels and the
government has to date been successful in implementing this policy.
GUATEMALA
2003 is an election year for Guatemala, where the ruling Frente
Republicano Guatemalteco (FRG) may have to confront the supporters of the
president Alfonso Portillo and the supporters of the party's secretary and
president of Congress, the retired general Efrain Rios Montt. In April 2002
the government signed a one-year precautionary stand-by arrangement with the
International Monetary Fund ("IMF"), providing a credit facility for the
equivalent of U.S. $105 million. Under the program, the government committed
itself to consolidating its fiscal position, strengthening the financial
sector and improving governance and transparency. The government has expressed
its intentions to extend the agreement with the IMF until the end of 2003, but
this will depend on its commitment to fiscal discipline in 2003. Guatemala had
a 12-month inflation rate of 7.0%, in part due to the rise in VAT in August
13
2001. The government decreed rises in the minimum wage for the beginning of
2003 of 14% for nonagricultural workers and 16% for agricultural workers,
which may exert upward pressure on prices. The quetzal firmed from a low
Q8.15:U.S.$1 in November 2001 to its present rate Q7.65:U.S.$1. The trade
deficit widened in 2002 reflecting weak external demand. Reports estimate that
the current-account deficit widened by more than U.S.$200 million.
NICARAGUA
President Enrique Bolanos has focused most of his political agenda
during 2002 in fighting corruption and confronting ex-president Mr. Arnoldo
Aleman in different legal and political arenas. In July of 2002, the U.S.
Congress approved trade promotion authority for the U.S. president, George W.
Bush, and talks on free-trade agreement between the U.S. and five Central
American countries including Nicaragua started in December. Talks with the IMF
have proceeded and a formal agreement may be reached. The requirements of the
IMF include a three-year poverty reduction and growth facility (PRGF). After
slowing significantly in 2002, GDP growth is expected to improve moderately in
2003, as a gradual revival in domestic business confidence boosts investment
and output, and the external environment slowly brightens. The size of the
trade deficit is expected to remain substantial, signaling that the
current-account deficit may encompass a significant percentage of GDP, perhaps
at over 20%.
COSTA RICA
President Abel Pacheco continues to enjoy a high level of popular
support, which has provided the government with a degree of legitimacy that
has helped it implement its policy agenda. Costa Rica's foreign policy centers
on improving trade relations and seeking foreign direct investment from the
United States and the European Union. Mr. Pacheco's administration has tried
to boost regional economic integration through the U.S.-sponsored Free-Trade
Area of the Americas (FTAA) initiative. On a bilateral level, Costa Rica is
trying to sign a free-trade agreement (FTA) with the U.S., having signed one
with Canada in 2002. The Banco Central de Costa Rica (the "Central Bank")
experienced difficulty in 2002 in reducing inflation in the face of persistent
fiscal deficits, labor market rigidities and other structural problems. The
Central Bank manages the exchange rate through a system of daily crawling peg
adjustments in order to maintain a stable trade-weighted real exchange rate.
The rate of depreciation is designed to match the inflation differential
between Costa Rica and its developed-country trading partners in the preceding
12 months, although in practice, this aim is not always met.
COLOMBIA
The newly elected president, Alvaro Uribe, is moving swiftly to
enact an agenda intended to address Colombia's political and economic
challenges through a referendum expected to be held by mid-2003. The Uribe
administration is currently working with IMF officials on a new stand-by
facility with the IMF for 2003 through 2006 to secure financial support from
multilateral agencies, which is essential to finance the country's fiscal
deficit. Fiscal reforms were enacted by the Colombian congress at the end of
2002, placing the public finances on a healthier footing. Persistently high
unemployment, fiscal constraints and an adverse political environment have
been the main impediment to growth. Agriculture, telecom, manufacturing and
construction have been the leading sectors in the Colombian economy. A
widening trade deficit and rising debt payments has lifted the current-account
deficit to approximately 2-3% of GDP.
VENEZUELA
The currency suffered a devaluation of approximately 85% and GDP
contracted approximately 8.9% during the year. Polarization of the government
and its opposition drove the country to a short-lived coup d'etat in the month
of April, when President Hugo Chavez was taken out of power for 48 hours,
before being able to return to the presidential palace. After the events of
April, the opposition and the government have been discussing different
alternatives to a democratic solution to the country's political situation
with direct participation of Mr. Cesar Gaviria, President of the Organization
of American States ("OAS"). Notwithstanding Mr. Chavez continues in power, his
governability has been further impaired by opposition-organized civil
campaigns, which included the national strike that began on December 2002 and
concluded in February 2003, with most of the population going back to work.
The national strike included a significant sector of the workers from
Petroleos de Venezuela, S.A., hampering oil
14
production by more than 85% from its normal levels. The recession and the
devaluation of the Bolivar have kept import spending depressed and since the
beginning of the national strike, oil earnings have dropped to minimal levels.
Additionally, in February 2003, the government imposed controls on foreign
currencies exchanges.
BRAZIL
Having won the presidential election in October, Luiz Ignacio "Lula"
de Silva took office on January 1st 2003 for a four-year term. Lula has
committed himself to maintaining the macroeconomic policy of the outgoing
government of Fernando Henrique Cardoso, including broad fiscal discipline, a
floating exchange rate and inflation targeting. Specifically, he has endorsed
the terms of the IMF agreement signed by Mr. Cardoso in August, which makes
available a U.S.$30 billion loan facility to provide balance-of-payments
support to the end of 2003.
CURRENCY DEVALUATIONS AND FLUCTUATIONS
As a general matter, because our consolidated cash flow from
operations is generated exclusively in the currencies of Mexico, Guatemala,
Nicaragua, Costa Rica, Colombia, Venezuela and Brazil, 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. 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 cash flows to Panamco. For a discussion of
devaluation rates in Mexico, Guatemala, Nicaragua, Costa Rica, Colombia,
Venezuela and Brazil, 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.
SEASONALITY
Sales of our soft drink products are highest during the December
holidays and during the hottest times of the year. For this reason, we
typically experience our best results 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 the rest of our territories during the months of June, July
and August.
ADDITIONAL INFORMATION
Additional information about Panamco may be found at our corporate
website at WWW.PANAMCO.COM. Through our website you may access, free of
charge, the various reports that we file with the Securities and Exchange
Commission.
15
ITEM 2. PROPERTIES
PROPERTIES
Our properties consist primarily of bottling, distribution and
office facilities in Mexico, Guatemala, Nicaragua, Costa Rica, Panama,
Colombia, Venezuela and Brazil. Panamco Mexico, Panamco Guatemala, Panamco
Nicaragua, Panamco Costa Rica, Coca-Cola de Panama, Panamco Colombia, Panamco
Venezuela and Panamco Brazil, currently own and operate 8, 1, 1, 1, 2, 17, 9
and 4 bottling plants, respectively. As of December 31, 2002, the Company
owned or leased over 200 warehouse distribution centers and 518
mini-warehouses, in addition to these in the 35 plants that integrate
production and delivery. See "Item 1. -- Business -- Production" for
additional information regarding our properties.
As of December 31, 2002, the consolidated net book value of all
land, buildings, machinery and equipment owned by the Company was
approximately $843.9 million. The total annual rent paid by the Company in
2002 for its leased distribution and office facilities was approximately $7.2
million.
ITEM 3. LEGAL PROCEEDINGS
NOLAD
Mexico - Antitrust Matters. During May 2000, the Comision Federal de
Competencia in Mexico (the Mexican Antitrust Commission, the "Commission")
pursuant to a complaint 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 the Company, to abstain from
entering into any exclusivity arrangement with retailers. The Company, along
with other Coca-Cola bottlers, appealed the resolution rendered in February of
2002 by a Recurso de Revision ("Review Recourse"), which was presented before
the Mexican Antitrust Commission. The Mexican Antitrust Commission confirmed
its original resolution and issued a confirmatory resolution on July 11, 2002.
The Company appealed this resolution before the competent courts by initiating
a Juicio de Amparo (appeal based on the violation of constitutional rights).
The Company anticipates that a decision from the appeals court could be
rendered by the end of 2003. Although no assurances can be given, the Company
does not believe that the outcome of this matter, even if determined against
the Company, will have a material adverse effect on its 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 in Costa Rica (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. Although no assurances can be given, the Company
does not believe that the outcome of this matter, even if determined against
the Company, will have a material adverse effect on its financial condition or
results of operations. Panamco Costa Rica has vigorously defended itself
throughout the process and presented its final conclusions to the Costa Rican
Antitrust Commission in September 2002. The Company is anticipating a decision
from the Costa Rican Antitrust Commission during the second quarter of 2003.
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 the
Company received notice of certain tax claims asserted by the Venezuelan
taxing authorities, which mostly relate to fiscal periods prior to the
Venezuela Acquisition. The Company has presented the appropriate recourses
against these claims at the administrative level as
16
well as the court level, where required. These claims currently total
approximately $23.1 million. The Company has 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 analysis that the Company has
completed in relation to these claims, as well as the defense strategy that
the Company has developed, the Company does not believe that the ultimate
disposition of these cases will have a material adverse affect on its
financial condition or results of operations. See "Item 7. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Forward-Looking Statements."
Labor and 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 the Company's 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. The Company intends to vigorously defend its rights should this
action be filed. During 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 labor
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.
Since 2001 (and after two decisions rendered during 2000 and 2001 by
the Venezuelan Supreme Court against affiliates of Empresas Polar, S. A.
whereby the Supreme Court found in those individual cases that the
relationship between the affiliates of Empresas Polar, S. A. and those
specific distributors was a relationship of labor nature and not of commercial
nature) Panamco Venezuela has been the subject of numerous claims by former
distributors (including former members of the distributors union) claiming
alleged labor and severance rights owed to them at the time of the termination
of their relationship with Panamco Venezuela. As of December 31, 2002, Panamco
Venezuela was the subject of approximately 430 lawsuits filed by former
distributors for a total amount of approximately $31.2 million.
Notwithstanding the number of claims and the amounts involved most of these
claims have been filed by former distributors that either have entered into
release agreements with Panamco Venezuela at the time of their termination and
therefore the Company believes that they have no rights for additional claims,
or are claims that have been filed after the statute of limitations for the
presentment of such claims has expired. There are also lawsuits presented by
people that have never had a distributor's or employee relationship with
Panamco Venezuela, which the Company believe have no merit at all. Since the
decisions rendered by the Supreme Court during 2000 and 2001 against the
affiliates of Empresas Polar, S. A., the Supreme Court has during 2002
mitigated its criteria of what should be considered a labor relationship
vis-a-vis a commercial relationship. The Company believes based on the new
decisions rendered by the Supreme Court as well as based on the individual
analysis of each individual claim, that these claims are without merits and
intends to vigorously defend itself against them.
17
COLOMBIA
During 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 the Company (and certain of our
subsidiaries) and Coca-Cola (and certain of its subsidiaries). In the
complaint, the plaintiffs alleged that the Company 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. The Company has filed a motion to dismiss the
complaint for lack of subject matter and personal jurisdiction. The Company
expects a ruling on the motion to dismiss in 2003. The Company believes this
lawsuit is without merit and intends to vigorously defend itself 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.
The Company believes that the ultimate disposition of such other proceedings
will not have a material adverse effect on its consolidated financial
condition.
BRAZIL
Tax. The Brazilian subsidiaries are also being assessed by the
Brazilian tax authorities for tax credits taken during 1995 and 1996, relating
to overpayments of the value-added tax in previous years. Such overpayments
related to value-added tax applied to samples, free products given to
customers and to credit sales. These assessments amount to approximately $24.7
million and $37.2 million as of December 31, 2002 and 2001, respectively, and
the Company has appealed the assessments at the administrative level. The
Company and its outside legal advisors believe that in view of the legal basis
adopted for the use of such credits, no significant liability should result
from this issue and therefore no provision for this matter has been recorded
in the accompanying consolidated financial statements.
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
2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
NATURE OF TRADING MARKET
As of March 24, 2003, we had approximately 1,302 holders of record
of an aggregate 112,793,056 shares of Class A Common Stock outstanding, of
which 466,667 shares are subject to forfeiture under restricted stock
agreements. As of March 24, 2003, there were an estimated 1,058 holders of
record of the Class B Common Stock. We estimate that there are approximately
4,000 beneficial shareholders (as opposed to holders of record) of the
Company's stock. As of March 24, 2003, 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:
18
High Low
-------- --------
2002:
First Quarter $18.43 $14.60
Second Quarter $18.69 $14.04
Third Quarter $14.93 $9.13
Fourth Quarter $20.78 $7.67
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 24, 2003, the closing sale price of the Class A Common
Stock on the NYSE was $21.00 per share.
We declared and paid quarterly cash dividends of $0.06 per share of
common stock during each of the years ended December 31, 2002 and 2001.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information with respect to the
Company's equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
-------------------------------------------------------------------------
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED AVERAGE REMAINING AVAILABLE FOR
EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, EQUITY COMPENSATION
WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS
---------------------- ---------------------- -------------------------
Equity compensation plans approved by
security holders..................... 5,488,649 $ 15.95 6,760,870
Equity compensation plans not approved
by security holders(1)............... 600,000 $ 14.25 -
--------- ---------
Total................................... 6,088,649 $ 15.79 6,760,870
========= =========
-------------------------------------------------------------------------------------------------------------------
(1) Refer to Note 18, "Stock Option Plans" for a discussion of the November 10,
2000 grant to certain executive officers.
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.
19
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 Venezuela and
Brazil have 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, 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,
in prior years, other types of transactions have been subject to exchange
controls and less favorable official rates of exchange.
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 February 2003, the Venezuelan government imposed controls on
foreign exchange transactions. Pursuant to the new exchange regime, all
purchases of foreign currencies have to be approved by the government. The new
regime imposes several requisites that have to be completed before the
purchase of foreign currencies can be approved by the government, which in
principle, would be limited to purchases of raw materials, finished food
product and to a lesser extent payment of dividends or capital repatriation.
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, whether registered under the 1991 Foreign Investment Law or
not, can freely repatriatetheir 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
20
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.
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
21
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 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, noncorporate U.S. Holders may be subject to backup
withholding at the rate of
22
30% on dividend payments made during 2002 and 2003 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. As long as the reporting
requirements above have been met, no backup withholding is required on
dividends paid to noncorporate U.S. holders.
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.
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 with respect to
dividends paid and broker proceeds. 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:
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.
23
The Company is not subject to taxes in Panama to the extent that its
income arises from the business or activities of its subsidiaries conducted
outside of Panama. Furthermore, such income as is earned by the Company in the
form of dividends from the operations of a subsidiary or related person in
Panama is subject to dividends tax by withholding at its source only and is
not subject to further Panamanian taxes at the Company level. This is the case
even though the Company maintains its registered office and permanently
employs administrative personnel in Panama.
Taxation of Capital Gains. There would be 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, to the extent that the
value of such Shares is determined upon assets and activities which are held
or conducted outside of Panama.
In the last quarter of 2002, the Company acquired a significant
investment in Coca-Cola de Panama (the "Panama Acquisition"), which could
represent a future source of income and value for the Company by way of
profits and dividends sourced within Panama. The Panama Acquisition has not as
yet generated additional value to the Company nor has it constituted a source
of new profit, by way of dividends or otherwise, for the Company. Furthermore,
at present, the value to the Company of the Panama Acquisition is de minimis
in proportion to the Company's overall value. Additionally, Panama's tax laws
and regulations do not provide any guidelines for the allocation of Panamanian
source as opposed to non-Panamanian sourced capital gains arising from the
sale or disposition of Shares.
Taxation of Distributions. Dividends and similar distributions paid
by the Company with respect to Shares would be exempt from Panamanian dividend
taxes under the aforementioned territorial principles of taxation to the
extent that such income is generated from businesses and activities conducted
by the Company's subsidiaries outside of Panama. In addition, dividends and
similar distributions made by the Company to its shareholders derived from
sources within Panama would not be subject to Panamanian dividends tax at the
Company's level, since this dividends tax applies only once, by withholding at
source, upon the first distribution of such dividend income from the Company's
subsidiary or related person doing business in Panama to its immediate
shareholder or parent company.
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
(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, 2002 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.
24
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------- ------------
STATEMENT OF OPERATIONS DATA:
Net sales (1).............................. $ 2,357,913 $ 2,630,772 $ 2,590,305 $ 2,405,233 $ 2,761,793
Cost of sales, excluding depreciation and
amortization shown separately below...... 1,204,216 1,296,307 1,243,485 1,191,883 1,425,246
----------- ----------- ----------- ------------ -----------
Gross profit.......................... 1,153,697 1,334,465 1,346,820 1,213,350 1,336,547
Operating expenses:
Selling and distribution (1)............. 582,726 609,287 627,633 561,454 645,655
General and administrative............... 169,140 204,897 250,491 251,450 222,327
Depreciation and amortization (2)(3)..... 235,205 210,667 276,524 214,539 253,112
Amortization of goodwill................. - 26,416 35,819 36,284 35,739
Facilities reorganization and other
charges (7)............................ 35,421 - 503,659 35,172 -
----------- ----------- ----------- ------------ -----------
Total operating expenses.............. 1,022,492 1,051,267 1,694,126 1,098,899 1,156,833
----------- ----------- ----------- ------------ -----------
Operating income (loss).................... 131,205 283,198 (347,306) 114,451 179,714
Interest income ........................... 6,994 21,341 31,933 28,962 12,817
Interest expense........................... (85,312) (119,390) (142,299) (129,072) (98,152)
Other income (expense), net................ 36,352 (10,891) (23,244) (39,296) 22,136
Nonrecurring income, net (4)............... - - - - 60,486
----------- ----------- ----------- ------------ -----------
Income (loss) before income taxes.......... 89,239 174,258 (480,916) (24,955) 177,001
Provision for income taxes (3)(4).......... 51,126 50,369 21,800 31,254 51,374
----------- ----------- ----------- ------------ -----------
Income (loss) before minority interest..... 38,113 123,889 (502,716) (56,209) 125,627
Minority interest in earnings of subsidiaries 4,871 5,865 1,944 3,695 5,305
----------- ----------- ----------- ------------ -----------
Net income (loss)..................... $ 33,242 $ 118,024 $ (504,660) $ (59,904) $ 120,322
=========== =========== =========== ============ ===========
Basic earnings (loss) per share............ $ 0.28 $ 0.94 $ (3.92) $ (0.46) $ 0.93
=========== =========== =========== ============ ===========
Diluted earnings (loss) per share.......... $ 0.27 $ 0.93 $ (3.92) $ (0.46) $ 0.92
=========== =========== =========== ============ ===========
OTHER DATA:
Total product unit case volume............. 1,228,054 1,242,200 1,222,500 1,163,117 1,174,035
Dividends per share (5).................... $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24
Weighted average shares outstanding (basic) 120,602 125,559 128,833 129,683 129,538
Weighted average shares outstanding (diluted) 121,172 126,655 128,833 129,683 130,792
Capital expenditures (6)................... $ 112,531 $ 83,121 $ 123,897 $ 163,203 $ 302,215
AT DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------- ------------
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents....................... $ 69,024 $ 133,666 $ 191,773 $ 152,648 $ 131,152
Property, plant and equipment, net ........ 843,886 1,043,870 1,125,719 1,218,383 1,307,590
Total assets .............................. 2,327,605 2,693,026 3,026,321 3,613,122 3,647,690
Total long-term liabilities................ 646,763 1,022,375 1,192,981 1,437,834 964,525
Minority interest.......................... 25,121 28,541 27,805 27,974 26,243
Shareholders' equity....................... 904,286 1,072,445 1,167,311 1,751,896 1,978,234
----------------------------------------------------------------------------------------------------------------------------
(1) Although not considered significant to the consolidated financial
statements, these captions include a reclassification of sales
incentives totaling $20.1 million in 2001, $9.1 million in 2000,
$10.6 million in 1999 and $11.5 million in 1998 from selling and
distribution expense to a reduction of net sales in accordance with
Emerging Issues Task Force Issue No. 01-09 "Accounting for
Consideration Given by a Vendor to a Customer (including a Reseller
of the Vendor's Products)."
(2) Includes breakage of bottles and cases and amortization expense
related to new introductions. See Note 1 of "Notes to Consolidated
Financial Statements."
(3) 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, non returnable presentations in the marketplace. The
25
results of this study showed that the use of non returnable
presentations will continue to increase in the Brazilian market.
Therefore, during 1998, Panamco 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.
(4) 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. Panamco 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.
(6) Does not include purchases of bottles and cases.
(7) Facilities reorganization and other charges in 2002 are related to
job terminations and severance payments, charges related to plant
closings and disposal of property, plant and equipment, offset by
excise tax benefits and the reversal of previously accrued facilities
reorganization charges. Facilities reorganization and other 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 3 of "Notes to Consolidated
Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion addresses the financial condition and
results of operations of Panamco and its consolidated subsidiaries. The
discussion begins with an overview of our:
o Proposed Merger Transaction with Coca-Cola FEMSA;
o Beverage Volumes;
o Operating Segments;
o Critical Accounting Policies;
o Related Party Transactions with The Coca-Cola Company;
o Effect of Inflation on Financial Information and Costs;
o Minority Interests in Operations; and
o Forward-Looking Statements.
The overview is followed by a review of items that affect the
comparability of historic or future results. We then provide an analysis of
our results of operations and liquidity and financial condition. The last
section of the discussion provides information about our market risks. This
discussion should be read in conjunction with our audited consolidated
financial statements, including the notes to the consolidated financial
statements, as of December 31, 2002 and 2001 and for each of the three years
in the period ended December 31, 2002 and the notes thereto included elsewhere
herein.
PROPOSED MERGER TRANSACTION
On December 22, 2002, we entered into a merger agreement with
Coca-Cola FEMSA, pursuant to which Coca-Cola FEMSA will acquire Panamco in a
transaction valued at approximately $3.6 billion, including the assumption of
$880 million in estimated net debt (used in this report to mean long-term
obligations, including current portion and bank loans, minus cash and
equivalents). Under the terms of the transaction, holders of our Class A
common stock, excluding The Coca-Cola Company ("Coca-Cola"), will receive $22
per share in cash and holders of our Class B common stock, excluding
Coca-Cola, will receive $38 per share in cash. Panamco Class A shares trade on
the New York Stock Exchange and do not have any voting rights. Panamco Class B
shares have full voting rights but do not trade on any exchange. Coca-Cola
will receive approximately 304 million unlisted Coca-Cola FEMSA Series D
shares. Additional information regarding the proposed transaction can be found
in the preliminary proxy statement that we filed with the Securities and
Exchange Commission on January 30, 2003.
26
There can be no assurance that the proposed merger transaction with
Coca-Cola FEMSA will be completed, and consummation of the merger is subject
to several significant conditions, including the approval by the holders of a
majority of our shares of Class B common stock and the approval by the holders
of a majority of our shares of Class A common stock present or represented by
proxy at the special meeting to be held to consider and vote upon the proposed
merger transaction who, in accordance with the merger agreement, are not
disqualified holders (for this purpose, disqualified holders means Coca-Cola
and its subsidiaries, Venbottling Holdings, Inc. and its subsidiaries, the
officers and directors of Panamco and any other holder who beneficially owns
shares of our Class B common stock). Other than the shareholder approvals,
other important conditions to the proposed merger transaction include
antitrust regulatory approvals, the disbursement of funds to Coca-Cola FEMSA
by its lenders, the confirmation of investment grade rating of the combined
company and the absence of changes that lead to a material adverse effect on
Panamco.
The merger transaction is expected to be completed shortly after we
receive shareholder and regulatory approvals for the merger, which we expect
will be during the second quarter of 2003. Upon completion of the merger
transaction, Panamco will become a wholly-owned subsidiary of Coca-Cola FEMSA
and our shares of Class A common stock will be delisted from trading on the
New York Stock Exchange.
BEVERAGE VOLUMES
Like most companies in the beverage industry, we measure our volumes
in unit cases of finished products. As used in this report, "unit case" means
192 ounces of finished beverage product (24 eight-ounce servings) and "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.
OPERATING SEGMENTS
As a soft drink bottler operating in diverse markets in Latin
America, our operations are organized based on geographic location. We report
segment information (see Note 22 of the "Notes to Consolidated Financial
Statements") for five geographic areas: North Latin American Division (or
NOLAD), Colombia, Venezuela, Brazil and the corporate operations in the United
States. NOLAD consists of Panamco's operations in Mexico and in the Central
American countries of Guatemala, Nicaragua and Costa Rica.
In September 2002, we entered into a joint venture with Heineken and
Florida Ice and Farm Company, the leading brewer in the Costa Rican market
("FIFCO"), and in October 2002, the joint venture (through a company called CA
Beverages, Inc.) acquired direct control of Coca-Cola de Panama Compania
Embotelladora, S.A. ("Coca-Cola de Panama") and indirect control of
Cervecerias Baru - Panama, S.A. ("Baru"), the second largest brewer in Panama.
Following this acquisition, CA Beverages, Inc. caused Coca-Cola de Panama to
launch a self-tender offer in Panama for its shares and CA Beverages, Inc.
launched a public tender offer in Panama for the shares of Baru that it did
not already own. The tender offers were completed during December 2002. We
expect in the first quarter of 2003 that CA Beverages, Inc. will spin off its
ownership in Coca-Cola de Panama to Panamco and its ownership of Baru to
Heineken and FIFCO. Until that process is completed, Panamco will continue to
record its ownership in CA Beverages, Inc. as an investment under the equity
method. Once the spin-off process is completed, Panamco will begin
consolidating the results of Coca-Cola de Panama under its NOLAD division. The
acquisition value for Coca-Cola de Panama, on a standalone basis, is estimated
to be $73 million, including net debt of $11.7 million. Panamco financed this
acquisition from available cash resources and bank debt of $60 million.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts in our Consolidated Financial Statements and the related
accompanying notes. We use our best judgment based on our knowledge of
existing facts and circumstances and actions that we may undertake in the
future, as well as the advice of external experts, in determining the
estimates that affect our Consolidated Financial Statements. We have
identified the following five accounting policies that
27
require us to make accounting estimates based on assumptions about matters
that are highly uncertain at the time we make the estimate and that could
materially change our Consolidated Financial Statements if we had had used a
different estimate or if our estimate could reasonably change from period to
period. Panamco's management has discussed the development and selection of
these accounting estimates with Panamco's Audit Committee prior to the filing
of this Annual Report on Form 10-K for the year ended December 31, 2002.
Basis for translation: Panamco, as the reporting entity, maintains
its accounts in U.S. dollars. The accounts of our subsidiaries are maintained
in the currencies of the respective countries. In accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS
52"), the accounts of our subsidiaries are translated from local currency
amounts to U.S. dollars. The method of translation is determined by the
functional currency of our subsidiaries. A subsidiary's functional currency is
defined as the currency of the primary environment in which a subsidiary
operates and is determined based on management's judgment. When the local
currency of a subsidiary is determined to be the functional currency, the
statements are translated into the currency of the reporting entity using the
current rate method. The adjustments generated by translation using the
current rate method are accumulated in an equity account entitled "Accumulated
other comprehensive loss" within our consolidated balance sheets.
When a subsidiary's accounts are not maintained in the functional
currency, the financial statements must be re-measured into the functional
currency. Re-measurement obviates translation if the subsidiary's functional
currency is also the reporting currency. Re-measurement involves re-measuring
monetary assets and liabilities using current exchange rates and non-monetary
assets and liabilities using historical exchange rates. The adjustments
generated by re-measurement are included in our consolidated statement of
operations.
Property, plant and equipment: Panamco determines the estimated
useful lives of property, plant and equipment after consideration of
historical results and management's experience. The estimated useful life of
these assets represents the service period the asset is expected to provide
including normal maintenance. A portion of a soft drink bottler's assets are
coolers that are used to display the products at the various points of sale.
As part of our normal operations, we may enter into rent-free agreements with
customers to place such coolers at the customer's location. Management
estimates the potential loss related to coolers placed with customers and
records a provision, which is included within depreciation expense. Based on
prior history and management's judgment, we believe that the provision
represents management's best estimate of the potential loss related to coolers
placed with customers.
Depreciation expense for property, plant and equipment is calculated
using the straight- line method over the estimated remaining useful lives of
the assets. A change in the method of depreciation used or a revision in the
estimated useful lives of assets may result in materially different amounts
reported in our results of operations or could materially affect our financial
condition.
Bottles and cases: We utilize the first-in, first-out ("FIFO") cost
or market method for valuing bottles and cases on hand. In addition, we
amortize the cost of newly introduced bottles and cases over their estimated
useful lives. We determine the estimated useful lives for new introductions
after consideration of prior history and management's experience. Any
adjustment in the methodology used to value the bottles and cases or a
revision in the estimated useful lives of new introductions may result in
materially different amounts reported in our results of operations or could
affect our financial condition.
Deferred Tax Assets: The carrying value of our deferred tax assets
assumes that we will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions, including our
financial performance and general market conditions. Management evaluates the
realizability of the deferred tax assets and assesses the need for additional
valuation allowances. During 2002, we increased the valuation allowance
in our Brazilian and Venezuelan subsidiaries by $4.3 million and $21.1
million, respectively. If these estimates and related assumptions change in
the future, we may be required to record additional valuation allowances
against our deferred tax assets, resulting in additional income tax expense
recorded in our consolidated statement of operations. Conversely, if our
financial performance improves, primarily in our Venezuelan operations, we may
be able to reverse a portion of the current valuation allowance against
deferred tax assets related to our Venezuelan operations, which would result
in a decrease in the income tax expense of the Venezuelan subsidiary.
28
Recoverability of long-lived assets: We review all long-lived
assets, including cost in excess of net assets of acquired business
("goodwill"), when facts and circumstances indicate that the carrying value of
the asset may not be recoverable. When necessary, we write down an impaired
asset to its estimated fair value based on the best information available.
Estimated fair value is generally based on either appraised value or measured
by discounting estimated future cash flows. Considerable management judgment
is employed to estimate discounted future cash flows.
Goodwill represents the residual purchase price after allocation to
all identifiable net assets acquired. In assessing the recoverability of our
goodwill, we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of goodwill. This process is
subjective and requires judgment at many points throughout the analysis. With
the adoption of SFAS No. 142, Panamco is required to test goodwill for
impairment at least annually. We completed the transitional goodwill
impairment test during the second quarter of 2002. This analysis resulted in
no indications of impairment. Subsequently, during the fourth quarter of 2002,
we performed a second goodwill impairment test as a result of the recent
events occurring in Latin America. This second impairment test also resulted
in no indications of impairment and established the new annual impairment test
date for the Company. However, changes in the assumptions used in the analysis
could have changed the resulting outcome. For example, to estimate the fair
value of our reporting units, management made judgments and estimates about
future cash flows based on 2003 forecasts and current long-range plans used to
manage the business. These long-range estimates could change in the future
depending on internal changes in Panamco as well as external factors. Future
changes in estimates could possibly result in a non-cash goodwill impairment
charge.
RELATED PARTY TRANSACTIONS WITH COCA-COLA
Coca-Cola is our largest shareholder and owns approximately 25% of
our outstanding Class A shares, 25% of our outstanding Class B shares and all
of our outstanding Series C Preferred Stock. Two members of our board of
directors are designees of Coca-Cola. For information about Coca-Cola's rights
as the holder of our Series C Preferred Stock, see "Item 12. Security
Ownership of Certain Beneficial Owners and Management -- Series C Preferred
Stock."
In 2002 and 2001, 74% of our unit case volume was attributable to
products of Coca-Cola. We sell Coca-Cola's products pursuant to bottling
agreements, which may have a material effect on our financial statements in
the case of non-compliance by Panamco or non-performance by Coca-Cola. In the
event of a problem with the quality of a beverage, Coca-Cola may require us to
take all necessary measures to withdraw the beverage from the market.
Coca-Cola must also approve the types of containers used in bottling and
controls the design and decoration of the bottles, boxes, cartons, stamps and
other materials used in production. The bottling agreements grant Coca-Cola
the right to inspect the products. We may not assign, transfer or pledge our
bottling agreements, whether voluntarily, involuntarily or by operation of
law, without the prior written consent of Coca-Cola.
Coca-Cola charges us for concentrates, based upon a set percentage
of the weighted average wholesale price (net of taxes) of each case sold to
retailers within each of our franchise territories. Coca-Cola may change such
pricing at its discretion. Total payments to Coca-Cola for concentrates were
approximately $333.0 million and $361.1 million in 2002 and 2001,
respectively. We pay no additional compensation to Coca-Cola under the
licenses for the use of the associated trade names and trademarks. The
bottling agreements provide that, subject to local law, Coca-Cola has the
right to limit the wholesale prices of its products.
As it has in the past, Coca-Cola may, in its discretion, contribute
to our advertising and marketing expenditures (including pricing support) as
well as undertake independent advertising and marketing activities. Coca-Cola
has routinely established annual budgets with Panamco for cooperative
advertising and promotion programs. In 2002 and 2001, Coca-Cola provided us
with $33.5 million and $36.5 million in marketing support. Incentive payments
that are related to the increase in volume of Coca-Cola products that result
from such expenditures are treated as an offset against the costs of
concentrates paid by Panamco to Coca-Cola.
29
In 2002, we reached an agreement with Coca-Cola to convert our Risco
water volume in Mexico to Coca-Cola's brand Ciel beginning in the first
quarter of 2003. The conversion was done in exchange for a total consideration
of $65.0 million to be paid by Coca-Cola. Approximately $56.0 million of this
amount was paid in the first quarter of 2003, $3.6 million was already paid in
the fourth quarter of 2002 and the remaining amounts will be paid in equal
installments between 2003 and 2006. Income from the conversion will be
deferred and recognized over the life of the contract, which is ten years.
EFFECT OF INFLATION ON FINANCIAL INFORMATION AND COSTS
Our net sales and many of our operating costs are denominated in the
currency of the country in which the subsidiaries recording such sales and
costs are located. In accordance with SFAS 52, the financial statements of our
subsidiaries are re-measured or translated into U.S. dollars for purposes of
the preparation of the consolidated financial statements. See "-- Critical
Accounting Policies -- Basis for translation." 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 are 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.
The following table compares the rate of inflation, as measured by
certain national consumer price indices in our operating territories, with the
rate of devaluation (revaluation) for the periods shown:
YEAR ENDED DECEMBER 31, (1)
--------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Mexico
Inflation................................................ 6% 4% 9%
Currency devaluation (revaluation)....................... 13% (5%) 1%
Brazil
Inflation................................................ 12% 10% 10%
Currency devaluation..................................... 52% 19% 9%
Colombia
Inflation................................................ 7% 8% 9%
Currency devaluation..................................... 25% 3% 19%
Venezuela
Inflation................................................ 31% 12% 12%
Currency devaluation..................................... 85% 8% 9%
Costa Rica
Inflation................................................ 10% 11% 10%
Currency devaluation..................................... 11% 7% 7%
Nicaragua
Inflation................................................ 4% 5% 10%
Currency devaluation..................................... 6% 6% 6%
Guatemala
Inflation................................................ 7% 9% 5%
Currency devaluation (revaluation)....................... (3%) 4% (1%)
-------------------
(1) Inflation figures are based on the applicable Consumer Price Index
obtained from official local sources from each respective country.
Currency devaluation (revaluation) figures are based on official
U.S. dollar exchange rates at year-end.
On February 5, 2003, the Venezuelan government imposed exchange rate
controls, fixing the Bolivar's value to the U.S. dollar at 1,600 Bolivars to
the U.S. dollar. In addition, the countries in which we operate have in the
past and may in the future impose government-mandated price controls. Although
currently there are no formal price
30
controls on soft drinks in our franchise territories, price and wage controls
do exist on other types of products and services in certain of the countries
in which we operate.
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 recently in most
of our operating countries.
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.
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 subsidiary's capital
stock owned by minority shareholders during that period.
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 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 the
economic and political environment of Venezuela, changes in governmental laws
and regulations (including income and excise taxes), market demand for new and
existing products, raw material prices, devaluation of local currencies
against the U.S. dollar and the ability to consummate the proposed merger
transaction with Coca-Cola FEMSA. 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 this "Item
7. -- Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in "Item 1. Business." 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.
31
ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
CLASSIFICATION OF EXPENSES RELATED TO OUR DISTRIBUTION NETWORK
We incur various expenses related to the distribution of our product
in each of our operating areas. Some of these expenses include internal
transfer costs and purchasing costs. We include these types of costs in the
selling and distribution and general and administrative lines of our statement
of operations, rather than as cost of sales. As such, certain costs of our
distribution network are excluded from our computation of gross profit. The
exclusion of these charges from our cost of sales line may result in the
amounts reported as gross profit not being comparable to other companies, who
may include all expenses related to their distribution network in cost of
sales when computing gross profit (or an equivalent measure). Had we included
our internal transfer costs in cost of sales, our cost of sales and gross
profit for the years 2002, 2001 and 2000 would have been as follows:
DECEMBER 31,
-------------------------------------------------
2002 2001 2000
-------------------------------------------------
Gross profit, as reported $ 1,153,697 $ 1,334,465 $ 1,346,820
Less: Internal transfer costs (28,357) (36,380) (27,711)
----------- ------------ -----------
Gross profit, pro forma $ 1,125,340 $ 1,298,085 $ 1,319,109
=========== ============ ===========
Cost of sales, as reported $ 1,204,216 $ 1,296,307 $ 1,243,485
Plus: Internal transfer costs 28,357 36,380 27,711
----------- ------------ -----------
Cost of sales, pro forma $ 1,232,573 $ 1,332,687 $ 1,271,196
=========== ============ ===========
Panamco retains a general purchasing function in our operating subsidiaries.
The total cost related to purchasing are included in general and
administrative expenses. We cannot reasonably estimate the amounts related to
purchasing of raw materials, which would normally be included in cost of
sales. The total purchasing cost incurred during 2002, 2001 and 2000 were $2.3
million, $2.4 million and $4.2 million, respectively.
SALE OF OUR 12.1% EQUITY STAKE IN CERVEJARIAS KAISER, S.A. ("KAISER")
During 2002, we recorded a gain on the sale of our 12.1% equity
stake in Kaiser as part of a larger transaction in which Molson, Inc.
("Molson") acquired Kaiser, and entered into a partnership with Heineken. The
sale generated proceeds for Panamco of $55.1 million and an $18.9 million
interest in Molson stock ($12.1 million at December 31, 2002 as a result of
translation adjustments). The interest in the Molson stock is recorded as an
investment. The Molson stock is subject to a two-year contractual restriction
on sale that expires on March 19, 2004, pursuant to the agreement with Molson
entered into at the time of the acquisition of Kaiser by Molson. The two-year
restriction can only be shortened in the case of a change in control of
Molson, transfer of substantially all of the assets of Molson, or any material
inaccuracy in Molson's representations and warranties contained in the Kaiser
purchase agreement. As of December 31, 2002, no events have occurred which
have decreased the original restriction period. This transaction resulted in a
gain of $48.6 million in 2002, which is included as part of Other income
(expense), net in the consolidated statement of operations. Panamco will
continue to distribute Kaiser products in its franchise areas in Brazil and
the acquisition of Kaiser is not expected to impact this distribution
agreement. See Note 7 of "Notes to Consolidated Financial Statements."
FACILITIES REORGANIZATION AND OTHER CHARGES, NET OF BENEFITS
2002 FACILITIES REORGANIZATION AND OTHER CHARGES
During 2002, Panamco recorded $110.2 million of facilities
reorganization and other charges ($92.0 million, net of tax benefits),
primarily due to the deterioration of macroeconomic conditions in some of the
countries in which Panamco operates. These charges consist of severance
charges related to approximately 2,100 employees, asset write-offs, and
impairment charges and write-offs of obsolete machinery and discontinued
production components.
32
As of December 31, 2002, approximately 1,200 of the 2,100 employees have been
terminated by Panamco, resulting in severance payments totaling $17.3 million.
The following table shows a summary of the facilities reorganization
and other charges and benefits included in the consolidated statements of
operations captions presented below for the year ended December 31, 2002,
including reversals related to the reorganization programs announced in 2000:
Full year 2002
--------------
Cost of sales $ 11,483 (a)
Selling, general and administrative 3,401 (b)
Cash facilities reorganization and other charges 18,513 (c)
-----------
Total cash charges 33,397
-----------
Noncash facilities reorganization and other charges 16,908 (d)
Depreciation and amortization 51,097 (e)
-----------
Total noncash charges 68,005
-----------
Total operating charges 101,402
Included in Other income (expense), net:
Nonoperating charges 8,801 (f)
-----------
Gross charges 110,203
Tax benefit (18,250)
-----------
Net charges $ 91,953
===========
(a) Cost of sales charges relate to the write-off of raw materials
inventory totaling $0.6 million, obsolete spare parts for
production machinery totaling $2.6 million and the payment of
excise taxes totaling $8.3 million on soft drink inventories
containing high fructose corn syrup in Mexico. The payment of
the excise taxes resulted from a law that was suspended shortly
after it was initiated, but subsequently reinstated effective
July 15, 2002.
(b) Selling, general and administrative charges relate to the
write-off of obsolete promotional materials totaling $0.3
million, obsolete spare parts totaling $1.0 million, a
provision for labor contingencies totaling $0.9 million and
miscellaneous administrative expenses totaling $1.2 million.
(c) The cash facilities reorganization and other charges relate to
severance charges for the termination of approximately 2,100
employees in Mexico, Venezuela and Colombia totaling $26.4
million, offset by excise tax benefits obtained in Brazil
totaling $3.4 million, and the reversal into income of accrued
facilities reorganization costs related to severance payments
totaling $4.5 million ($2.5 million relates to the
reorganization programs announced in 2000).
(d) The noncash facilities reorganization and other charges relate
to plant closings and related disposal of property, plant and
equipment in Venezuela and Mexico totaling $7.9 million and
$4.1 million, respectively, the loss on sale of unproductive
assets in Venezuela totaling $8.0 million, offset by the
reversal into income of accrued facilities reorganization
charges related to the reorganization programs announced in
2000 totaling $3.1 million.
(e) Depreciation and amortization charges relate to the writedown
of obsolete property, plant and equipment in Mexico, Venezuela
and Colombia totaling $43.8 million, of which approximately 83%
occurred in Venezuela, 11% in Mexico and 6% in Colombia and the
write-off of bottles and cases in Mexico, Venezuela and
Colombia totaling $7.3 million, of which approximately 76%
occurred in Venezuela, 18% in Mexico and 6% in Colombia.
(f) The nonoperating charges relate to the loss on disposal of
nonoperating property, plant and equipment, mostly in
Venezuela, totaling $4.4 million, the sale, at a loss totaling
$3.0 million, of the corporate airplane to a related party and
the loss on disposal of investments, mostly in Colombia,
totaling $1.4 million.
33
As a result of the above, Panamco's income for the year ended December 31,
2002 was impacted by the facilities reorganization and other charges totaling
$92.0 million, net of the related tax benefit of $18.3 million.
2000 FACILITIES REORGANIZATION PROGRAMS
During the year ended December 31, 2000, Panamco recorded charges of
$540.7 million, which was comprised of $503.6 million of facilities
reorganization charges, $31.1 million of asset write-downs presented as part
of depreciation and amortization expenses, and $6.0 million of nonoperating
charges presented in Other income (expense).
The following table shows a summary of the facilities reorganization
charges recorded in the consolidated statements of operations for the year
ended December 31, 2000:
FULL YEAR 2000
--------------
Facilities reorganization charges:
Cash $ 88,571 (a)
Noncash 415,088 (b)
-----------
Total facilities reorganization charges 503,659
Depreciation and amortization, excluding goodwill 31,079 (c)
-----------
Total operating charges 534,738
Included in Other income (expense), net:
Nonoperating charges 5,977 (d)
-----------
Gross charges 540,715
Tax benefit (46,516)
-----------
Net charges $ 494,199
===========
(a) Cash facilities reorganization charges relate to job
terminations totaling $77.3 million, restructuring of the
distribution system in Brazil and Venezuela totaling $9.4
million, and cash charges related to the disposal of property,
plant and equipment totaling $1.9 million.
(b) Noncash facilities reorganization charges relate to the
write-down of goodwill reflecting the recognition of impairment
of the cost in excess of net assets acquired in the Venezuelan
operating unit totaling $350.0 million, plant closings and the
related disposal of property, plant and equipment totaling
$24.8 million, obsolete property, plant and equipment in all
operating units totaling $23.8 million, obsolete bottles and
cases, mainly in the Venezuelan unit's water jug business,
totaling $7.8 million, and other charges related to legal
contingencies, mostly pertaining to tax matters, totaling $8.6
million.
(c) Depreciation and amortization charges, excluding goodwill,
relate to asset write-downs and consist of an increase in
provision related to changing the useful lives of coolers
totaling $11.0 million and the write-down of bottles and cases
due to loss in market value totaling $20.1 million.
(d) Nonoperating charges, totaling $6.0 million, relate to the
disposal of nonoperating assets, including the sale of
affiliated companies and land in some of the operating units.
As a result of the above, Panamco's income for the year 2000 was
impacted by facilities reorganization charges, asset write-downs and
nonoperating charges totaling $494.2 million, net of the related tax benefit
of $46.5 million.
34
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
2002 results were adversely impacted by events that occurred in
Venezuela. In February 2002, the Venezuelan government abandoned the trading
band for its currency, the Venezuelan Bolivar, which had the effect of quickly
depreciating the currency. From January 1, 2002 to December 31, 2002, the
bolivar devalued 85% relative to the U.S. dollar and inflation increased to
31% in 2002 from 12% in 2001. The devaluation of the bolivar increased the
relative price of our dollar-denominated raw materials in Venezuela and
decreased our U.S. dollar-reported net sales (and other financial statement
accounts, including net income). Unit case volumes were also affected by the
slowdown in the Venezuelan economy which culminated in a country-wide general
strike that began on December 2, 2002 and that effectively halted production
and distribution activities for Panamco during the month of December 2002 and
the month of January 2003.
During that period Panamco worked closely with Coca-Cola to take all
appropriate actions to safeguard its employees and its assets. In early
February 2003, the general strike effectively came to an end and Panamco
re-started its production and distribution activities in that country. Results
during the fourth quarter of 2002 reflect the negative impact of the general
strike in our results, including the loss of the majority of its volumes and
revenues during the month of December. We expect results during the first
quarter to reflect the impact of lost volumes and revenues during the month of
January. While production and distribution have already begun, it is
impossible to predict how fast they will reach normal levels. In addition, the
Venezuelan government imposed foreign exchange controls in January 2003 and it
is difficult to forecast the impact that this will have on the cost of dollar
denominated raw materials or on Panamco's overall financial results.
Net sales for Panamco declined 10.4% to $2.36 billion in 2002 from
$2.63 billion in 2001. The decline in net sales was driven by a 1.1% decline
in consolidated unit case sales volume, to 1,228.1 million unit cases from
1,242.2 million unit cases in the year 2001, and a 9.3% decline in average
dollar prices, to $1.92 per unit case. Soft drink sales volume for the year
declined by 1.6%, reflecting declines of 14.3% in Venezuela, 2.7% in Colombia
and 0.9% in Brazil, that could not be offset by an increase of 4.1% in the
NOLAD region. Unit case sales volume of bottled water increased 1.2% to 250.8
million, and beer, sold in Brazil and Venezuela, declined by 11.3% to 67.5
million unit cases. Volume growth during the year was negatively impacted by
the deteriorating macroeconomic and political conditions in many of the
countries in which Panamco operates. Particularly in Venezuela, unit case
volumes declined 32.0% during the fourth quarter as a result of the
country-wide strike. Net sales were also impacted by lower average dollar
prices per unit case, which were hurt by weaker currencies across the region
as well as by a more competitive soft-drink environment in Mexico. Prices in
local currency increased in every region except NOLAD.
During 2002, Panamco recorded $110.2 million of facilities
reorganization and other charges, ($92.0 million, net of tax benefits)
resulting primarily from the deterioration of macroeconomic conditions in some
of the countries in which Panamco operates. Panamco also recorded other
benefits of $48.6 million, primarily related to the sale of a 12.1% equity
stake in the Brazilian brewer, Kaiser. The following comparison of Panamco's
2002 and 2001 consolidated results of operations includes the effect of such
charges and benefits. See "-Items That Affect Historical or Future
Comparability" for further discussion on Panamco's facilities reorganization
and other charges and benefits.
During 2002, the cost of sales as a percentage of net sales
increased to 51.1% for Panamco, from 49.3% in 2001. Cost of sales as a
percentage of net sales was impacted by increases in dollar denominated raw
materials and packaging, which were not fully offset by increases in product
prices as well as by a change in product mix towards non-returnable
presentations. Facilities reorganization and other charges included in cost of
sales amounted to $11.5 million.
35
Operating expenses as a percentage of net sales increased to 43.4%
in 2002 from 40.0% in 2001, due to a decline in operating expenses of 2.7%,
which was lower than the 10.4% contraction experienced in net sales. Selling,
general and administrative expenses declined 7.7% to $751.9 million, mainly
the result of continued benefits associated with our reorganization programs,
as well as by the impact that weaker currencies have on the translation of
local currency denominated operating expenses. Selling, general and
administrative expenses also included $3.4 million in facilities
reorganization and other charges. Depreciation and amortization declined 0.8%,
to $235.2 million, despite $51.1 million in facilities reorganization and
other charges. These charges are mainly related to asset write-offs in
Venezuela. Facilities reorganization and other charges not included in
selling, general and administrative expenses or in depreciation and
amortization amounted to $35.4 million.
During 2002, operating income declined 53.7% to $131.2 million, from
$283.2 million in 2001. The decline in operating income was the result of a
decline in net sales of 10.4%, a decline in cost of sales and operating
expenses that, at 6.7%, was lower than the decline in net sales and $35.4
million in facilities reorganization and other operating charges.
Net interest expense decreased to $78.3 million in 2002 from $98.0
million in 2001, due primarily to an 8.1% gross debt reduction to $891.9
million at the end of the year, from $970.2 million at the end of 2001. Total
net debt decreased 1.6% to $822.8 million at December 31, 2002, from $836.6
million at December 31, 2001.
Other income increased to $36.4 million in 2002 from other expense
of $10.9 million in 2001. The $47.2 million year over year difference is
primarily the result of a $48.6 million gain from the sale of the 12.1% equity
stake in Kaiser, the recording of a $2.8 million foreign exchange gain in
2002, in comparison to a $9.3 million foreign exchange loss in 2001, a $1.3
million decrease in the provision for contingencies, partially offset by a
$2.2 million decrease in gains on sale of property and equipment and
investments, a $0.8 million decrease in equity earnings of unconsolidated
companies, a $0.4 million decrease in capital expenditure incentives from
Coca-Cola, and a $12.7 million increase in non-recurring and other charges.
The consolidated effective income tax rate increased to 57.3% from
28.9% in 2001, primarily due to Venezuela's use of tax loss carry forwards in
2001, which affects the comparison, as well as because a majority of the
earnings in 2002 were derived by fully tax-paying countries such as Mexico and
Central America.
As a result of the foregoing, Panamco recorded net income in 2002 of
$33.2 million, or $0.28 per basic share ($0.27 per diluted share), compared to
net income of $118.0 million, or $0.94 per basic share ($0.93 per diluted
share), during 2001.
2001 COMPARED TO 2000
Net sales increased 1.6% to $2.63 billion in 2001 versus 2000. Net
sales growth was driven by an increase of 1.6% in consolidated unit case sales
volume, to 1,242.2 million unit cases from 1,222.5 million unit cases in the
year 2000. Soft drink sales volume for the year increased by 0.1%, reflecting
increases of 2.1% in Brazil and 0.3% in Colombia, offset by decreases of 1.2%
in the NOLAD region and 0.3% in Venezuela. Unit case sales volume of bottled
water increased 3.9% to 247.8 million, and beer, sold in Brazil and Venezuela,
increased 9.6% to 76.1 million unit cases. Volume and net sales growth during
the year were positively impacted by Panamco's continued effort in introducing
new products. New products have had the effect of broadening our portfolio to
better meet consumer needs. Panamco was also active in introducing new
presentations at both ends of the size spectrum. The smaller presentations are
designed to capture consumers for whom the product would otherwise not be
affordable while the larger presentations provide a more attractive
alternative for in-home consumption.
During the year 2000, Panamco had facilities reorganization and
other charges, net of benefits, totaling $494.2 million. The following
comparison of Panamco's 2001 and 2000 consolidated results of operations
includes the effect of such charges and benefits. See "-- Items That Affect
Historical or Future Comparability" for further discussion on Panamco's
facilities reorganization and other charges and benefits.
36
The cost of sales as a percentage of net sales increased to 49.3% in
2001, from 48.0% in 2000, mainly due to an increase in the cost of raw
materials and packaging throughout most operations as well as a change in
product mix towards non-returnables.
Operating expenses as a percentage of net sales decreased to 40.0%
in 2001 from 65.4% in 2000, mainly as a result of a 7.3% decrease in selling,
general and administrative expenses, the result of the benefits associated
with our reorganization programs, and a 24.1% decrease in depreciation and
amortization, mainly the result of lower property and equipment balances and a
lower goodwill cost basis. In addition, results for the year 2000 include
$503.7 million in facilities reorganization charges. See "-- Items That Affect
Historical or Future Comparability" for further discussion on Panamco's
facilities reorganization and other charges and benefits.
Operating income increased to $283.2 million in 2001 from a loss of
$347.3 million in 2000, primarily as a result of the benefits of the
reorganization programs initiated in 2000 and 1999.
Net interest expense decreased to $98.0 million in 2001 from $110.4
million in 2000, due primarily to a 22.6% gross debt reduction to $970.2
million at the end of the year, from $1,253.8 million at the end of 2000.
Total net debt decreased 21.2% to $836.6 million at December 31, 2001, from
$1,062.0 million at December 31, 2000.
Other expense, net decreased 53.1% to $10.9 million in 2001 from
$23.2 million in 2000, primarily caused by a $5.7 million increase in gains on
sale of property and equipment and investments, a $1.7 million increase in
equity earnings of unconsolidated companies, a $0.8 million increase in
capital expenditure incentives from Coca-Cola, and a $5.1 million decrease in
non-operating charges, offset by a $1.1 million increase in foreign exchange
losses primarily in Brazil due to a 18.7% devaluation of the Brazilian real
during 2001.
The consolidated effective income tax rate increased to 28.9% from
4.5% in 2000. The increase is mainly due to facilities reorganization charges
of $503.7 million in 2000, of which $350.0 million was nondeductible for
income tax purposes, which resulted in a loss before income taxes of $480.9
million.
As a result of the foregoing, Panamco recorded net income in 2001 of
$118.0 million, or $0.94 per basic share ($0.93 per diluted share), compared
to a net loss of $504.7 million, or $3.92 per basic and diluted share, during
2000.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We have financed our capital investments and acquisitions primarily
through cash flow from operations and debt. We believe our future cash flow
from operations and our borrowing capacity will be sufficient to fund our
capital expenditures, acquisitions, dividends and working capital
requirements.
As a holding company, our principal internal sources of cash are
dividends and inter-company loans from our subsidiaries. The amount of
dividends payable by the subsidiaries to us is subject to general limitations
imposed by the corporate laws of the respective jurisdictions of incorporation
of such subsidiaries. Dividends paid to us and other foreign shareholders by
certain of our subsidiaries are subject to investment registration
requirements and withholding taxes. For a list of the withholding tax rate on
dividends by country, see Note 20 to the "Notes to Consolidated Financial
Statements."
In February 2003, the Venezuela government imposed exchange rate
controls. We do not expect such controls to affect our liquidity position in
2003 since we are not expecting our Venezuela subsidiary as a source of funds
for the holding company this year. However, the continuation of such controls
coupled with a marked improvement in the operating results of our Venezuelan
subsidiary could in the future affect our ability to upstream dollars to the
holding company, either by means of a dividend or inter-company loan, from
such subsidiary.
37
OFF-BALANCE SHEET ARRANGEMENTS
We have not engaged in transactions with structured finance or
special purpose entities and do not use off-balance sheet arrangements as a
source of liquidity.
DEBT FINANCING
Total consolidated indebtedness decreased to $891.9 million at the
end of 2002, from $970.2 million at the end of 2001, consisting of $600.9
million at the holding company level and $291.0 million of subsidiary
indebtedness. Of the total debt, 61.4% is long-term. The lower percentage of
long-term debt relative to 2001 reflects the reclassification of the $150.0
million 8.125% Senior Notes maturing on April 1, 2003 (the "2003 Yankee
Bonds"). Panamco will repay the 2003 Yankee Bonds with the proceeds of a
$150.0 million bridge loan to be provided by ING Bank, which will be assumed
in the proposed merger transaction by Coca-Cola FEMSA at the closing of the
transaction. See "-- Overview -- Proposed Merger Transaction." If the merger
is not consummated as planned, Panamco would have to refinance the bridge
loan, which most likely would be through the issuance of a syndicated loan.
The 2003 Yankee Bonds and Panamco's other public debt (Senior Notes due 2009)
have been rated investment grade by Standard & Poor (BBB-) and Moody's (Baa3).
Our dollar-denominated debt increased to 78.3% of the total at the
end of 2002 from 67.5% at the end of 2001. The $78.4 million reduction in
gross debt is mainly the result of a combination of a $19.5 million pay down
of our syndicated loan and a reduction of debt held by our subsidiaries
(primarily NOLAD with $70.0 million), offset by issuance of $60.0 million of
debt ($50.0 million at December 31, 2002) at the holding company level to fund
the Coca Cola de Panama acquisition. Approximately $118.3 million of debt in
our Mexican operations carries a Standard & Poor's rating of MX-AA and
approximately $50.6 million of debt in our Colombian operations carry a Duff &
Phelps rating of AAA. Net debt decreased to $822.8 million at the end of 2002
from $836.6 million at the end of 2001.
During the fourth quarter 2002, Panamco amended some of its debt
covenants with its lenders. More specifically, Panamco amended its maximum
Debt to EBITDA coverage from 2.25 to 2.35. As of December 31, 2002, Panamco
had a Debt to EBITDA ratio of 2.33 and was in full compliance with its
covenants, as amended. Any future failure by Panamco to meet its debt
covenants or obtain a waiver from the lending banks could have a material and
adverse effect on our financial condition.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of December 31, 2002 are as follows:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
-----------------------------------------------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
-----------------------------------------------------------------------------
Bank loans and long-term obligations $ 888,618 $ 343,419 $ 108,379 $ 146,820 $ 290,000
Capital lease obligations 3,244 990 2,254 - -
Operating leases 15,410 4,639 6,512 4,259 -
Purchase obligations 54,290 20,961 33,329 - -
Other long-term liabilities reflected
on the Balance Sheet under GAAP - - - - -
-------- -------- -------- -------- --------
Total $ 961,562 $370,009 $150,474 $151,079 $290,000
========= ========= ======== ======== ========
38
CAPITAL EXPENDITURES
Total capital expenditures were $112.5 million, $83.1 million and
$123.9 million in 2002, 2001 and 2000, respectively. During 2002,
approximately 75%, 8%, 11% and 6% of such expenditures were made by Panamco
NOLAD, Panamco Colombia, Panamco Venezuela and Panamco Brazil, respectively.
Total purchases for bottles and cases were $38.4 million, $47.8 million and
$73.7 million in 2002, 2001 and 2000, respectively. During 2002, approximately
57%, 29%, 13% and 1% of such expenditures were made by Panamco NOLAD, Panamco
Colombia, Panamco Venezuela and Panamco Brazil, respectively.
Our Board of Directors has established various criteria for the
allocation of capital resources. The factors that management reviews in
proposing three-year capital budgets include anticipated internal rates of
return, pay-back periods, corresponding plans of Coca-Cola and anticipated
levels of earnings and debt in the country in which such expenditures are
proposed to be made. During 2003, we estimate that we will have aggregate
capital expenditures of approximately $138.6 million. In addition, we expect
to invest approximately $61.5 million in bottles and cases. Estimates of
capital expenditures and bottles and cases purchases are based on our current
expectations and are subject to change. Actual costs may exceed estimates or
we may reallocate or alter our capital budget. We intend to fund our capital
expenditure program with cash on hand, consolidated cash flow from operations
and borrowings at the holding and subsidiary level.
Coca-Cola, from time to time, provides incentives for its bottlers
to make particular types of capital expenditures. During 2002, 2001 and 2000,
such incentives consisted of grants, which are included as other income in
"Other income (expense)" in the consolidated financial statements, and loans
included in the indebtedness referred to above. See Note 21 of "Notes to
Consolidated Financial Statements." Coca-Cola also provides cooperative
advertising support to us.
SHARE REPURCHASES
At December 31, 2001, we completed our $100.0 million share
repurchase program adopted in 1999, increased to a total of $150.0 million by
two $25.0 million supplements in 2001. In 2002, we adopted a new program (the
"2002 Share Repurchase Program") to repurchase up to $40.0 million of our
Class A Common Stock. During 2002, the Company repurchased 2,466,532 shares
amounting to $36.8 million (including brokerage commissions). We are currently
not repurchasing shares under the 2002 Share Repurchase Program, which can be
expected to increase Panamco's liquidity.
CASH FLOWS
Cash flow provided by operations amounted to $186.0 million in 2002,
a $171.4 million decrease from 2001. The decrease was primarily the result of
lower net income, the negative impact of exchange rates on our working capital
balances and the gain on the sale of Kaiser.
Cash used for investing activities amounted to $139.9 million in
2002 and primarily related to capital expenditures and purchases of bottles
and cases. During 2001, cash provided from investing activities reached $26.5
million and included the release of investments in bank deposits for $125.0
million, which guaranteed bank loans obtained by subsidiaries and were
therefore previously classified as non-current investments as well as $34.5
million proceeds from the sale of property, plant and equipment.
Cash used for financing activities amounted to $90.9 million in 2002,
a $353.7 million decrease from 2001. This decrease primarily reflects a
reduction in the number of shares repurchased under our Share Repurchase
Program as well as a decrease in the amount of gross debt repaid during 2002,
as compared to 2001.
At December 31, 2002, Panamco had consolidated cash and cash
equivalents of $69.0 million, a decrease of 48.4% compared to $133.7 million
as of December 31, 2001. At December 31, 2002, we had negative working capital
of $432.1 million. This represents a decrease in working capital of $263.2
million from negative working
39
capital of $168.9 million as of December 31, 2001 and is primarily impacted by
the reclassification of the 2003 Yankee Bonds, from long-term obligations to
current portion of long-term obligations. As noted above, Panamco has made
arrangements to repay this instrument with the proceeds of a bridge loan to be
provided by ING Bank. Excluding this amount, Panamco's working capital deficit
at December 31, 2002 amounted to $282.1 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business exposes us to many different market risks, such as
fluctuations in interest rates, currency exchange rates and commodity prices.
Consequently, we consider risk management as an essential activity in the
course of our business. To address certain of these risks, we enter into
various hedging transactions as described below. We utilize hedging strategies
to mitigate those risks. Our hedging strategies may include the use of
derivative instruments, such as forwards, futures and options, generally with
terms not exceeding one year.
COMMODITY PRICE RISK
Our largest exposure to commodity price fluctuations is for sugar.
As a risk management practice, we may periodically utilize both futures and
options contracts to hedge against an increase in the price of sugar. As of
December 31, 2002, we did not hold any material positions for the purchase of
commodities.
INTEREST RATE AND FOREIGN CURRENCY RISKS
We hedge our exposure to changes in interest rates on certain of our
financial instruments. From time to time, we enter into interest rate swap
agreements to mitigate our exposure to changes in interest rates. Our currency
exchange risk is generally related to the potential devaluation of the U.S.
dollar against the Latin American currencies used in the countries in which we
have operations. In each country where we operate, our sales are in local
currencies, while our holding company debt is in U.S. dollars. Therefore,
foreign currency exchange exposure relates primarily to our debt obligations
in U.S. dollars. To mitigate the impact of currency exchange rate
fluctuations, we may enter into foreign exchange forward contracts with
financial institutions in order to lock in the exchange rates for anticipated
transactions. As of December 31, 2002, these contracts had notional amounts of
$7.5 million and an unrealized loss and fair value of approximately $22
thousand recorded in our statement of operations and balance sheet,
respectively. Foreign exchange forward contracts generally have maturities or
expirations not exceeding 12 months.
The following table provides information about our derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. The table presents our debt obligations, principal
cash flows and related weighted average interest rates by expected maturity
dates and fair values. For interest rate swaps, the tables present notional
amounts, outstanding at December 31, 2002, weighted average interest rates and
fair values. Notional amounts are used to calculate the contractual cash flows
to be exchanged under the contract.
EXPECTED MATURITY DATE 2002 2001
--------------------------------------------------- ----------------- ----------------
THERE-
2003 2004 2005 2006 2007 AFTER TOTAL F.V.(3) TOTAL F.V.(3)
---- ---- ---- ---- ---- ------ ----- ------ ------ ------
LONG-TERM OBLIGATIONS,
INCLUDING CURRENT PORTION
(Amounts in equivalent millions
of U.S. dollars)
Fixed Rate Debt (1)
- In U.S. dollars $ 13.3 - - - - $290.0 $303.3 $335.7 $457.1 $483.6
Weighted average interest rate 2.5% - - - - 7.3%
- In Brazilian reals $ 0.1 - - - - - $ 0.1 $ 0.1 $ 1.6 $ 1.5
Weighted average interest rate 10.0% - - - - -
- In Guatemalan quetzals $ 1.5 $ 0.5 $ 0.5 $ 0.5 $ 0.4 - $ 3.4 $ 3.1 $ 4.5 $ 4.4
Weighted average interest rate 12.5% 11.5% 11.5% 11.5% 11.5% -
- In Colombian pesos - - - - - - - - $ 17.1 $ 17.1
40
EXPECTED MATURITY DATE 2002 2001
--------------------------------------------------- ----------------- ----------------
THERE-
2003 2004 2005 2006 2007 AFTER TOTAL F.V.(3) TOTAL F.V.(3)
---- ---- ---- ---- ---- ------ ----- ------ ------ ------
Weighted average interest rate - - - - - -
- In Mexican UDIS - - - $118.3 - - $118.3 $ 117.3 $127.0 $ 136.3
Weighted average interest rate - - - 8.7% - -
Floating Rate Debt (2)
- In U.S. dollars (4) $308.4 $ 85.6 $ 1.1 - - - $395.1 $ 400.7 $193.5 $ 193.5
Weighted average interest rate 4.4% 2.4% 3.3% - - -
- In Colombian pesos (5) - - $ 22.9 $ 15.7 $ 12.0 - $ 50.6 $ 50.6 $ 63.2 $ 63.2
Weighted average interest rate - - 10.5% 10.6% 9.6% -
- In Mexican pesos (5) $ 21.2 - - - - - $ 21.2 $ 21.2 $102.0 $ 102.0
Weighted average interest rate 9.3% - - - - -
- In Brazilian reals (5) - - - - - - - - - -
Weighted average interest rate - - - - - - - - - -
- In Costa Rican colon (5) - - - - - - - - $ 4.2 $ 4.2
Weighted average interest rate - - - - - - - - - -
----------------------------------------------------------------------------------------
Total debt $344.5 $ 86.1 $ 24.5 $134.5 $ 12.4 $290.0 $892.0 $928.7 $970.2 $1,005.8
====== ====== ====== ========
Less bank loans $135.5
------
Total 2003 long-term debt $209.0
======
INTEREST RATE DERIVATIVE FINANCIAL
INSTRUMENTS RELATED TO DEBT
Interest Rate Swaps
Fixed to Variable (6) $150.0 - - - - - $150.0 $ 0.4 - -
Average Pay Rate 5.9% - - - - - 5.9% - - -
Average Receive Rate 8.1% - - - - - 8.1% - - -
Variable to Fixed (7) - - - - - - $250.0 - $250.0 $ 10.4
Average Pay Rate - - - - - - 6.4% - 6.4% -
Average Receive Rate - - - - - - 1.9% - 4.4% -
-------------------------
(1) Fixed interest rates are weighted averages as contracted by us.
(2) Floating interest rates are based on market rates as of December 31, 2002,
plus the weighted-average spread for us.
(3) F.V. = Fair Value
(4) Market interest rates are based on the U.S. dollar LIBOR curve.
(5) Market rates are based on the country benchmark or LIBOR and assume a
flat yield curve.
(6) The fixed to variable interest rate swap matures on April 1, 2003 and its
fair value is recorded as an asset of $0.4 million at December 31, 2002.
(7) The variable to fixed interest rate swap matured on November 22, 2002.
The fair value at December 31, 2001, for the variable to fixed interest
rate swap was a liability of $10.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto beginning at page F-1 and filed as a part of this
Form 10-K are the financial statements required by Regulation S-X and the
supplementary data required by Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 1, 2002, Panamco appointed Deloitte & Touche, LLP as its
independent public accountant to replace Arthur Andersen LLP. For additional
information, see Panamco's Current Report on Form 8-K, dated July 1, 2002, as
filed with the Securities and Exchange Commission.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our Board of Directors presently consists of 9 members, whose terms
are divided into three classes as set forth below. Coca-Cola currently has the
contractual right to designate three nominees for election to the Board and
currently designates Messrs. Fayard and Schimberg to the Board. Venbottling
Holdings, Inc. ("Venbottling") presently has contractual rights to designate
Gustavo A. Cisneros and Oswaldo J. Cisneros for election to the Board. All
directors are elected for three-year terms.
The following table sets forth the names and country of citizenship of
the members of our Board, their tenure as directors and the year in which their
next term will expire:
COUNTRY OF DIRECTOR TERM
NAME CITIZENSHIP SINCE EXPIRES
-------------------------------------------------------------- -------------- -------- -------
Gustavo A. Cisneros.......................................... Venezuela 1997 2003
Oswaldo J. Cisneros.......................................... Venezuela 1997 2003
Gary P. Fayard............................................... U.S.A. 2001 2005
Craig D. Jung................................................ U.S.A. 2002 2004
Wade T. Mitchell............................................. U.S.A. 1986 2004
James J. Postl............................................... U.S.A. 2000 2005
Henry A. Schimberg........................................... U.S.A. 2000 2005
Houston Staton............................................... Colombia 1997 2005
Woods W. Staton Welten....................................... Colombia 1982 2003
The following table sets forth the names, ages and tenures of our
executive officers:
TOTAL YEARS
WITH
NAME AGE POSITION SINCE PANAMCO
---------------------------------- ----- -------------------------------------------------- ------ -----------
Woods W. Staton Welten........... 52 Chairman of the Board 2002 20
Craig D. Jung.................... 49 President and Chief Executive Officer 2002 1
Henry A. Schimberg................ 70 Vice Chairman of the Board 2000 3
Annette Franqui................... 40 Vice President--Chief Financial Officer, Treasurer 2002 2
and Assistant Secretary
Carlos Hernandez-Artigas.......... 39 Vice President--General Counsel and Secretary 1994 9
Felipe Alvira..................... 40 Vice President--Colombian Operations (President of 2003 10
Panamco Colombia)
Jose Antonio de Echavarri......... 43 Vice President--Venezuelan Operations (President 2002 8
of Panamco Venezuela)
Paulo Sacchi...................... 55 Vice President--Brazilian Operations (President of 2002 12
Panamco Brazil)
Officers are elected by our Board of Directors annually, and,
subject to certain employment agreements, serve at the discretion of the Board
of Directors. The backgrounds of the directors and the executive officers of
the Company in alphabetical order are described below:
Felipe Alvira was elected Operations Vice President-Colombia and
President Panamco Colombia in January 2003. Mr. Alvira joined Panamco in 1993
as national product manager for Panamco Colombia, and became the regional
director of the central zone for Panamco Colombia. From 1998 to 2000, Mr.
Alvira served as the Vice President, Operations for Panamco Colombia and from
2000 to 2002 he served as the Executive Vice President of Panamco Colombia.
Mr. Alvira is a citizen of Colombia.
42
Gustavo A. Cisneros was elected a director of Panamco in June 1997.
Mr. Cisneros is Chairman and Chief Executive Officer of the Cisneros Group of
Companies, an organization that includes more than 50 companies in Latin
America, Europe and the United States. Mr. Cisneros is a founding member of
the International Advisory Board of the Council on Foreign Relations in New
York, a former director of the International Advisory Committee of The Chase
Manhattan Bank and a director of the Chairman's International Advisory Council
of The Americas Society as well as a member of the Board of Overseers of the
International Center for Economic Growth and the International Advisory Board
of Power Corporation of Canada. Mr. Cisneros sits on the Board of Overseers at
Babson College, the International Advisory Board of Columbia University, and
at Harvard University's Advisory Committee of the David Rockefeller Center for
Latin American Studies and the International Advisory Board of the Center for
International Development. Mr. Cisneros is a member of the Board of Directors
of America Online Latin America, Inc., and of the University Council at The
Rockefeller University in New York. Mr. Cisneros is the cousin of Oswaldo J.
Cisneros. Mr. Cisneros is a citizen of Venezuela.
Oswaldo J. Cisneros was elected a director of Panamco in June 1997.
Until late 2000, he was President of Telcel Cellular, C.A., the largest
private cellular communications company in Venezuela, a company that he
founded in partnership with Bellsouth International. He was the Chairman of
Panamco Venezuela until May 1997. Mr. Cisneros is President and owner of
Central Azucarero Portuguesa, a modern and productive sugar mill, President of
Puerto Viejo Marina & Yacht Club and Director of Produvisa (glass
manufacturing company). Mr. Cisneros is the cousin of Gustavo A. Cisneros. Mr.
Cisneros is a citizen of Venezuela.
Jose Antonio de Echavarri was elected President of Panamco Venezuela
in December 2002. From April 2002 to September 2002, Mr. de Echavarri was
Operations Vice President (General Director) of Panamco Bajio S.A. de C.V. Mr.
de Echavarri served as Operations Vice President of Panamco Golfo S.A. de C.V.
from January 1999 to March 2002 and Operations Vice President of Panamco
Mexico Administracion S.A. from May 1997 to December 1998. Mr. de Echavarri is
a citizen of Mexico.
Gary P. Fayard was elected a director of Panamco in February 2001.
Since December 1999, Mr. Fayard has been Senior Vice-President and Chief
Financial Officer of The Coca-Cola Company. Mr. Fayard joined The Coca-Cola
Company in April 1994. In July 1994, he was elected Vice-President and
Controller. Prior to joining The Coca-Cola Company, Mr. Fayard was a partner
with Ernst & Young LLP. Mr. Fayard has served as an alternate director of
Coca-Cola FEMSA since 2000 and was designated by The Coca-Cola Company. Mr.
Fayard is a citizen of the United States of America.
Annette Franqui was elected Chief Financial Officer of Panamco in
October 2002. Ms. Franqui joined Panamco as Vice President of Corporate
Finance in April 2001. Prior to joining Panamco, Ms. Franqui spent close to
ten years at JPMorgan Chase, where she was most recently the Managing Director
in charge of Latin America Research, Sales and Trading. Earlier in her career
at JPMorgan, Ms. Franqui was an Institutional Investor-ranked Latin American
research analyst, covering food and beverage stocks and part of JPMorgan
Chase's Latin American Mergers and Acquisitions team. Ms. Franqui also spent
five years at Goldman, Sachs & Company, primarily in their London Corporate
Finance Group. Ms. Franqui is a citizen of the United States of America.
Carlos Hernandez was elected Secretary of Panamco in November 1993
and Vice President, General Counsel of Panamco in January 1994. From 1992 to
October 1993, he was an associate at the law firm Fried, Frank, Harris,
Shriver & Jacobson in New York City. Mr. Hernandez is a citizen of Mexico.
Craig D. Jung was elected President and Chief Executive Officer of
Panamco in September 2002. Mr. Jung joined Panamco as President and Chief
Operating Officer in March 2002. From October 2000 to March 2002, Mr. Jung was
the Chief Executive Officer of eOriginal, Inc., an e-commerce company. From
July 1997 to October 1999, he served as the Chief Operating Officer of the
Pepsi Bottling Group. From October 1996 to June 1997, Mr. Jung was the General
Manager of South America and the Caribbean for the Pepsi-Cola Company. Mr.
Jung is a citizen of the United States of America.
43
Wade T. Mitchell was first elected a director of Panamco in June
1986. Mr. Mitchell is retired. Prior to January 1994, he was an Executive Vice
President of SunTrust Bank in Atlanta, Georgia, for more than five years. Mr.
Mitchell is a citizen of the United States of America.
James J. Postl was elected a director of Panamco in July 2000. Mr.
Postl served as President and Chief Executive Officer of Pennzoil-Quaker State
Company until October 1, 2002. Mr. Postl joined Pennzoil-Quaker State Company
in October 1998 as President and Chief Operating Officer. He was elected to
his current position in May 2000. Prior to joining Pennzoil-Quaker State
Company, Mr. Postl served as President of Nabisco Biscuit Company from 1996 to
1998. Prior to joining Nabisco, Mr. Postl held a variety management positions
with PepsiCo, Inc. over a 19-year period. Mr. Postl is a citizen of the United
States of America.
Paulo J. Sacchi has been with Panamco for over twelve years. He was
appointed Vice President-Brazilian Operations and President of Panamco Brazil
in March 2002. From 1998 to March 2002, he was Panamco's Chief Financial
Officer. He previously served as Vice-President-Operations of Panamco Brazil,
and prior to that as Vice President-Strategic Planning and Vice
President-Operations. Mr. Sacchi is a citizen of Brazil.
Henry A. Schimberg was elected a director of Panamco in May 2000 and
Vice Chairman of the Board in October 2000. Until the end of 1999, Mr.
Schimberg served as President and Chief Executive Officer of Coca-Cola
Enterprises Inc. Mr. Schimberg served as President and a director of Coca-Cola
Enterprises Inc. since December 1991. He served as Chief Operating Officer
from December 1991 until April 1998, when he became Chief Executive Officer.
Mr. Schimberg has served on the board of Coca-Cola Enterprises as well as the
boards of numerous state soft drink associations and the Canada-United States
Fulbright program. Mr. Schimberg serves on the boards of directors of
Coca-Cola Amatil Limited and Coca-Cola HBC S.A. Mr. Schimberg is a citizen of
the United States of America.
Houston Staton Welten was elected a director of Panamco in 1997. For
more than four years prior to April 1997, he served on the Advisory Board of
Panamco. He has been a director of 3 Points Technology, Inc. since May 1996.
From 1992 through September 1995, Mr. Staton was an owner-operator of
McDonald's in Caracas, Venezuela. He is the brother of Woods W. Staton Welten.
Mr. Staton is a citizen of Colombia.
Woods W. Staton Welten is Chairman of the Panamco board since 2002. He
was first elected a director of Panamco in 1982. Mr. Staton Welten was the Vice
President of Marketing for Panamco Colombia from 1980 to 1982 and has been the
President of Arcos Dorados S.A., the Argentinean joint venture of McDonald's
Corporation, since 1984. He is the brother of Houston Staton Welten. Mr.
Staton is a citizen of Colombia.
COMPLIANCE WITH SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
The Securities Exchange Act of 1934 requires the Company's
directors, executive officers and any person owning more than 10% of the
Company's Class A common stock to file reports with the Securities and
Exchange Commission regarding their ownership of the Company's stock and any
changes in such ownership. Based on our review of the copies of these reports
and certifications given to us, we believe that the Company's executive
officers, directors and 10% shareholders complied with their filing
requirements for 2001, with the exception that: (i) Mario Gonzalez Padilla and
Jose Antonio de Echavarri's initial report on Form 3 was not filed on a timely
basis; (ii) Mr. Woods Staton failed to file two Form 4 reports on a timely
basis with respect to two transactions; and (iii) Mr. Ruben Pietropaolo failed
to file seven Form 4 reports on a timely basis with respect to ten
transactions. Mr. Pietropaolo has subsequently filed a Form 5 to report these
transactions immediately following this determination. Certain of Mr.
Pietropaolo's transactions resulted in a "short-swing profit" in the amount of
$52,870 pursuant to Section 16 (b) of the Securities Exchange Act of 1934. Mr.
Pietropaolo has disgorged this short-swing profit to the Company.
44
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table summarizes for the fiscal years ended December
31, 2002, 2001 and 2000, all compensation awarded to, earned by, or paid to
(i) all persons who served in the position of Chief Executive Officer during
2002, (ii) the Vice-Chairman of the Board of Directors, and (iii) the four
most highly compensated executive officers other than the Chief Executive
Officer who were serving in executive officer capacities at the end of
December 2002.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- --------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/SAR COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) AWARDS ($) AWARDS SATION ($)
----------------------------------- ------ ------------ ------------ ------------ -------------- -------------- -------------
Craig Jung 2002 $487,500 417,500(1) $147,331(2) - 325,000 $22,303(3)
Chief Executive Officer and
President
Annette Franqui 2002 303,550 94,660 2,700 - 70,000 30,889(3)
Chief Financial Officer and 2001 208,095 199,500 - - 80,000 2,240
Treasurer
Carlos Hernandez-Artigas 2002 301,600 96,512 154,037(2) - 45,000 39,783(3)
Vice President - General 2001 256,800 139,200 202,298 - 35,000 9,280
Counsel and Secretary 2000 228,000 13,600 226,033 - 25,900 5,494
Ruben Pietropaolo 2002 500,000 138,000 248,550(2) - 135,000 30,386(3)
President - Panamco NOLAD(4)
Paulo J. Sacchi 2002 400,000 160,000 15,282 - 65,000 51,970(3)
President - Panamco Brazil 2001 343,957 208,800 229,135 - 65,000 64,303
2000 325,000 27,600 224,600 - 64,320 8,737
Henry A. Schimberg 2002 - - - - 4,372 -
Vice Chairman of the Board 2001 - - - - 3,619 -
2000 - - - 4,275,000(5) 251,910(6) -
William G. Cooling 2002 - - - - - 1,350,000(7)
Former Chairman of the 2001 - - - - 3,619 -
Board and Former Chief 2000 - - - 5,700,000(5) 351,910(6) -
Executive Officer
------------------
(1) Mr. Jung joined the Company in March 2002 and was appointed Chief
Executive Officer and President in August 2002. 2002 Bonus amount
includes a $125,000 sign-on bonus.
(2) Other Annual Compensation includes housing allowance of $52,748 for Mr.
Hernandez and $120,000 for Mr. Pietropaolo, and moving expenses of
$106,601 for Mr. Jung.
(3) Represents life insurance premiums and/or the Company's contribution to
defined contribution plans.
(4) On March 26, 2003, Mr. Pietropaolo resigned as President of Panamco NOLAD,
as President of Panamco Mexico and as the Company's Vice President for
NOLAD Operations and, on March 27, 2003, he assumed the position as Vice
President--Special Operations of the Company. See "--Employment Agreement--
Mr. Pietropaolo".
(5) On November 10, 2000, when the closing price of the Class A Common Stock
on the New York Stock Exchange was $14.25 per share, the Company granted
400,000 and 300,000 shares of restricted stock to the former Chairman and
CEO and the Vice Chairman, respectively. By the terms of the restricted
stock, one-third of the shares vested in July 2001 as a result of the
share price exceeding the grant date share price by $5.00 for the
required period of time. Pursuant to the restricted stock agreement, as
amended, an additional one-third of the shares will vest if the share
price exceeds the grant date share price by $10.00 or more on or before
the fifth anniversary of the grant date, and the remaining one-third will
vest in the event that the share price equals or exceeds the grant date
share price by $15.00 or more on or before the sixth anniversary of the
grant date. The holders are entitled to dividends on the entire amount of
the restricted stock. The value of Messrs. Cooling and Schimberg's
unvested restricted stock as of December 31, 2002 was $5,514,667 and
$4,136,000, respectively. Non-vested shares will be forfeited to the
extent that they do not vest by the applicable expiration date. In
connection with the July 2001 vesting of the restricted stock, the
Company loaned $1,193,555 and $801,335 to Mr. Cooling and Mr. Schimberg,
respectively, which is the amount of their tax withholding triggered by
the restricted stock vesting.
45
Such loans bear interest at five percent per year and mature on the
earlier of June 2006 or 30 days following termination of employment. Mr.
Cooling has repaid his loan.
(6) On November 10, 2000, when the closing price of the Class A Common Stock
on the New York Stock Exchange was $14.25 per share, the Company granted
350,000 and 250,000 options, respectively, to Mr. Cooling and Mr.
Schimberg at an exercise price of $14.25 per share. These options vest
50% upon issuance and 50% after one year. These options were in addition
to the options granted to these persons in their capacity as directors
for such year.
(7) Represents severance payment to Mr. Cooling. See "--Employment
Agreements-Mr. Cooling."
OPTION GRANTS
The table below sets forth information concerning stock options
granted to the executive officers named in the "Summary Compensation Table"
during the year ended December 31, 2002:
OPTION/SAR GRANTS IN 2002
% OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS/SARS GRANTED EMPLOYEES IN EXERCISE OR BASE PRESENT VALUE
NAME (#)(1) FISCAL YEAR PRICE ($/SHARE) EXPIRATION DATE ($)(2)
------------------------ -------------------- ------------- ---------------- --------------- --------------
Craig Jung 175,000 11.27% $ 17.85 03/20/12 $ 1,393,000
Craig Jung 150,000 9.66% 8.86 11/04/12 619,500
Annette Franqui 70,000 4.51% 8.86 11/04/12 289,100
Carlos Hernandez-Artigas 45,000 2.90% 8.86 11/04/12 185,850
Ruben Pietropaolo 70,000 4.51% 14.97 01/08/12 461,300
Ruben Pietropaolo 65,000 4.18% 8.86 11/04/12 268,450
Paulo J. Sacchi 65,000 4.18% 8.86 11/04/12 268.450
Henry A. Schimberg 4,372 0.28% 8.86 11/04/12 18,056
-------------------
(1) These options were granted under the "Equity Incentive Plan" under which
the options vest over a three-year period.
(2) The grant date present value of the options is based on the
Black-Scholes option valuation model, whereby the weighted-average fair
value at date of grant for options with an exercise price of $8.86 was
$4.13, the options with an exercise price of $14.97 was $6.59 and the
options with an exercise price of $17.85 was $7.96. The weighted-average
assumptions for stock options granted during 2002 using the
Black-Scholes option valuation model were: (i) risk-free interest rate
of 3.58%, (ii) dividend yield of 2.49%, (iii) expected volatility of
47.6%, and (iv) expected option term life of 6.4 years.
OPTION EXERCISES AND YEAR-END VALUES
The table below sets forth information concerning the exercise of
stock options by the executive officers named in the "Summary Compensation
Table" during the year ended December 31, 2002 and the value of unexercised
options as of December 31, 2002:
VALUE OF UNEXERCISED IN-THE
NUMBER OF SECURITIES -MONEY OPTIONS/SARS AT
SHARES UNDERLYING UNEXERCISED FY-END ($) (BASED ON $20.78
ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) PER SHARE) EXERCISABLE /
NAME EXERCISE (#) REALIZED ($) EXERCISABLE / UNEXERCISABLE UNEXERCISABLE
------------------------ ------------ ------------ --------------------------- ---------------------------
Craig Jung 0 $ 0 0 / 325,000 $ 0 / $ 2,300,750
Annette Franqui 0 0 26,665 / 123,335 101,726 / 1,037,874
Carlos Hernandez-Artigas 0 0 112,532 / 76,968 400,469 / 698,439
Ruben Pietropaolo 0 0 0 / 135,000 0 / 1,181,500
46
AGGREGATE OPTION/SAR EXERCISES IN 2002 AND FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED IN-THE
NUMBER OF SECURITIES -MONEY OPTIONS/SARS AT
SHARES UNDERLYING UNEXERCISED FY-END ($) (BASED ON $20.78
ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) PER SHARE) EXERCISABLE /
NAME EXERCISE (#) REALIZED ($) EXERCISABLE / UNEXERCISABLE UNEXERCISABLE
------------------------ ------------ ------------ --------------------------- ---------------------------
Paulo J. Sacchi 0 0 223,146 / 129,774 922,392 / 1,108,660
Henry A. Schimberg 0 0 252,479 / 7,422 1,645,912 / 67,312
William G. Cooling 0 0 357,392 / 3,050 2,305,494 / 15,198
PENSION PLANS
The following table sets forth the annual retirement benefits that
may be paid to a total of 23 executives of the Company (including Messrs.
Sacchi, Hernandez and Pietropaolo) that are participants in the Company's
International Pension Plan, a non-qualified plan. To vest, the executive must
have 10 years of service with the Company and retire after age 55. Benefits
are payable at age 65 based on an executive's average annual salary and bonus
for the 3 years preceding retirement. The Company, at its option, may make a
lump sum distribution to an employee at retirement in lieu of annual benefits
described in this table. Reduced benefits are applicable for early retirement
starting at age 55. The years of credited service for Mr. Sacchi are 17.5
years, for Mr. Hernandez are 9 years and for Mr. Pietropaolo is 1 year.
INTERNATIONAL PENSION PLAN TABLE
YEARS OF CREDITED SERVICE WITH THE COMPANY
----------------------------------------------------------
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
--------------- -------- -------- -------- -------- --------
$ 100,000 $ 12,000 $ 16,000 $ 20,000 $ 24,000 $ 28,000
200,000 24,000 32,000 40,000 48,000 56,000
300,000 36,000 48,000 60,000 72,000 84,000
400,000 48,000 64,000 80,000 96,000 112,000
500,000 60,000 80,000 100,000 120,000 140,000
600,000 72,000 96,000 120,000 144,000 168,000
700,000 84,000 12,000 140,000 168,000 196,000
800,000 96,000 28,000 160,000 192,000 224,000
Mr. Jung's employment agreement with the Company provides him with a
pension benefit that, commencing at age 62, will pay him annually an amount
equal to the product of: (i) his years of service with the Company; (ii) his
annual base salary and bonus payment (determined by averaging his final three
years of service or shorter period if applicable); and (iii) 1.75%. The amount
of this benefit is to be offset by the amount of any Company contributions on
Mr. Jung's behalf to defined contribution plans. This pension benefit includes
a 75% survivor benefit for Mr. Jung's spouse. The benefit vests after three
years of service and Mr. Jung currently has one year of credited service. If
Mr. Jung's employment with the Company is terminated without cause under his
employment agreement, he will be credited with additional years of service
equal to the lesser of two years or the remaining term of his employment
agreement.
SERP FOR CRAIG JUNG
YEARS OF CREDITED SERVICE WITH THE COMPANY
--------------------------------------------------------
REMUNERATION 3 YEARS 6 YEARS 9 YEARS 12 YEARS 15 YEARS
---------------- -------- -------- -------- -------- --------
$ 1,000,000 $ 52,500 $105,000 $157,500 $210,000 $262,500
1,100,000 57,750 115,000 173,250 231,000 288,750
1,200,000 63,000 126,000 189,000 252,000 315,000
47
CASH BONUS PLAN
We adopt each year a short-term incentive plan (the "Bonus Plan"),
pursuant to which key executives of the Company and subsidiaries may receive
bonus compensation based on Company performance and other factors, as
determined by the Compensation Committee of the Board of Directors (the
"Committee"). Under the Bonus Plan, each participant is assigned a target
award expressed as a percentage of base salary. The actual award is based on
the performance measures set forth in the Bonus Plan as determined by the
Committee. For the 2003 Bonus Plan, the performance objectives are 20 percent
based on individual objectives and 80 percent based on the following three
financial objectives: sales volumes by physical case, net revenues per
physical case and earnings before interest and taxes. Depending on the
participant, the financial objectives may be measured on either a country
basis, a regional basis (e.g, NOLAD) or on a Company-wide basis. The actual
award may vary from 0 to 300 percent of a participant's target award. The
Committee has the authority to select participants, to establish target awards
and performance measures, and to make adjustments to awards. The target award
percentages for the current executives included in the "Summary Compensation
Table" are: Craig Jung, 75%, Annette Franqui, 50%, Carlos Hernandez, 45%,
Paulo Sacchi, 50%, and Ruben Pietropaolo, 40%. Mr. Schimberg is not eligible
for a bonus under the Bonus Plan or otherwise. The Committee may amend,
suspend or terminate the Bonus Plan at any time.
EQUITY INCENTIVE PLAN
We have an Equity Incentive Plan (the "Equity Incentive Plan"), the
purpose of which is to further the growth, development and financial success
of the Company by providing incentives to selected employees. Pursuant to the
Equity Incentive Plan, options (including incentive stock options) to purchase
shares of Class A Common Stock and restricted stock awards with respect to
Class A Common Stock may be granted. A total of 14,200,000 shares of Class A
Common Stock (subject to adjustment upon certain events) is available for
grant. The Equity Incentive Plan is administered by the Committee. The
Committee determines the terms and conditions of all grants, subject to
certain limitations set forth in the plan. In 2002, we granted options to
purchase 1,553,348 shares of Class A Common Stock under the Equity Incentive
Plan.
STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
We have a Stock Option Plan for Nonemployee Directors (the "Stock
Option Plan for Nonemployee Directors"), the purpose of which is to attract
and retain the services of experienced and knowledgeable nonemployee directors
and nonemployee members of the advisory board of the Company. The Stock Option
Plan for Nonemployee Directors provides each nonemployee director with an
option to purchase a specified number of shares of Class A Common Stock. A
total of 190,000 shares of Class A Common Stock is available for grant. The
Stock Option Plan for Nonemployee Directors is administered by the Board of
Directors or a subcommittee thereof. The Board of Directors has the discretion
to amend, terminate or suspend the Stock Option Plan for Nonemployee Directors
at any time. All options granted under the Stock Option Plan for Nonemployee
Directors expire 10 years from the date of issuance. In 2002, we granted each
nonemployee director options to purchase 4,372 shares of Class A Common Stock
of an exercise price of $8.86.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of the executive
officers named in the "Summary Compensation Table".
MR. JUNG. Our employment agreement with Mr. Jung, as amended,
provides for an initial term ending March 19, 2005 (which is automatically
extended for additional one-year periods unless we or Mr. Jung provide six
months advance notice that the term will not be renewed), pursuant to which
Mr. Jung serves as our Chief Executive Officer and President, and as a member
of our board of directors, reporting solely and directly to the board of
directors. Mr. Jung's employment agreement currently provides for a minimum
annual salary of $716,625, a target annual bonus in an amount equal to 75% of
his annual base salary and an annual stock option grant having a Black-Scholes
value on the date of grant in an amount equal to 265% of his annual base
salary. Mr. Jung received a $125,000 sign-on bonus
48
in March 2002 when we originally entered into this agreement. We also
reimbursed Mr. Jung on a grossed-up basis for costs incurred in relocating him
and his family to his new principal place of employment in Miami, Florida. In
the event of a subsequent relocation of our principal offices to a new
location outside of the Miami, Florida area to which Mr. Jung consents, he
will be entitled to similar reimbursements of costs in connection with the
subsequent relocation of his residence.
The agreement provides that Mr. Jung is entitled to participate in
the Company's Equity Incentive Plan and any other equity or long-term
incentive plans on at least as favorable basis as other similarly-situated
executives, and is eligible to participate in all pension (including any
401(k) plan), savings, profit-sharing and deferred compensation plans offered
to our senior executives. In addition, Mr. Jung and his dependents are
eligible to participate in all employee benefit programs applicable to senior
executives generally, in each case at a level and on terms and conditions
consistent with his positions and no less favorable than those provided to
other senior executives and with certain minimum levels of disability, life
insurance and accidental death and dismemberment coverages. Mr. Jung is
entitled to perquisites on the same basis as made available to our other
non-expatriate senior executives, and an automobile allowance, reimbursement
of fees and dues for one country club membership, tax and financial planning
services and an annual executive physical. Mr. Jung is also entitled to
receive a supplemental pension benefit as described above under the caption
"--Pension Plans".
If Mr. Jung's employment is terminated by the Company (other than
due to death, disability or cause) or by Mr. Jung as a constructive
termination without cause (as defined in his employment agreement), then Mr.
Jung will be entitled to receive the following benefits: (1) base salary
through the termination date, (2) a pro-rata target bonus for the year of
termination, (3) an amount equal to two times his base salary, at the
annualized rate in effect on the termination date, payable in 24 monthly
installments, (4) an amount equal to two times target bonus for the year of
termination, at the annualized rate in effect on the termination date, payable
in 24 monthly installments, (5) accelerated vesting of any outstanding stock
options, each option to remain exercisable for 12 months following the
termination date, and any other equity awards (if any) not yet vested, (6)
continued participation in all welfare benefit plans until the earlier of the
end of the 18-month period following the date of termination, or the date he
receives like coverages and benefits from a subsequent employer (determined on
a benefit by benefit basis), provided that he will receive an economic
equivalent on an after-tax basis if the plans do not permit his continued
participation, (7) relocation benefits up to $50,000, (8) for purposes of
determining the amount of his supplemental pension benefit, additional service
credit equal to the lesser of two years or the number of years remaining in
the term of his employment agreement after his termination of employment, (9)
any amounts earned, accrued or owing, but not yet paid to him and (10) other
benefits, if any, in accordance with applicable plans, programs and
arrangements of the Company and its affiliates. Upon a change in control (as
defined in the Company's Equity Incentive Plan), any outstanding stock options
will vest and remain exercisable in accordance with such plan and any other
equity awards will fully vest. If the payments or benefits to Mr. Jung would
result in a payment of an "excess parachute payment" for purposes of Section
280G of the Internal Revenue Code (and an imposition of an excise tax on Mr.
Jung), then the Company will provide a gross-up payment so that Mr. Jung will
be placed in the same economic position on an after-tax basis as he would have
been in had no excise tax been imposed.
Mr. Jung is prohibited for a period of two years following the
termination of his employment from competing directly or indirectly with, or
soliciting employees from, the Company or disclosing proprietary or
confidential information. In the event of any inconsistency between any
provision of Mr. Jung's employment agreement and any other plan or arrangement
of the Company (including the Change in Control Plan), the provision most
favorable to Mr. Jung shall govern.
MS. FRANQUI. Our employment agreement with Ms. Franqui provides for
an initial term ending October 6, 2005 (which is automatically extended for
additional one-year periods unless we or Ms. Franqui provide six months
advance notice that the term will not be renewed), pursuant to which Ms.
Franqui serves as our Vice President and Chief Financial Officer, reporting
solely and directly to the Chief Executive Officer. Ms. Franqui's employment
agreement currently provides for a minimum annual salary of $325,000 and a
target annual bonus in an amount equal to no less than 50% of her annual base
salary. The agreement provides that Ms. Franqui is entitled to participate in
the Company's Equity Incentive Plan and any other equity or long-term
incentive plans on at least as favorable basis as other similarly-situated
executives, and is eligible to participate in all pension (including any
401(k) plan), savings,
49
profit-sharing and deferred compensation plans offered to our senior
executives. In addition, Ms. Franqui and her dependents are eligible to
participate in all executive benefit programs applicable to senior executives
generally, in each case at a level and on terms and conditions consistent with
her position. Ms. Franqui also receives an automobile allowance.
Pursuant to Ms. Franqui's employment agreement with the Company, in
the event that Ms. Franqui's employment is terminated by the Company (other
than due to death, disability, cause or nonrenewal) or by Ms. Franqui as a
constructive termination without cause (as defined in Ms. Franqui's employment
agreement), then Ms. Franqui will be entitled to receive the following
benefits: (1) base salary through the termination date, (2) a pro-rata target
bonus for the year of termination, (3) an amount equal to 1.5 times her base
salary, at the annualized rate in effect on the termination date, payable in
18 monthly installments, (4) an amount equal to 1.5 times target bonus for the
year of termination, at the annualized rate in effect on the termination date,
payable in 18 monthly installments, (5) accelerated vesting of any outstanding
stock options, each option to remain exercisable for 12 months following the
termination date, and any other equity awards (if any) not yet vested, (6)
continued participation in all welfare benefit plans until the earlier of the
end of the 18-month period following the date of termination, or the date she
receives like coverages and benefits from a subsequent employer (determined on
a benefit by benefit basis), provided that she will receive an economic
equivalent on an after-tax basis if the plans do not permit her continued
participation, (7) any amounts earned, accrued or owing, but not yet paid to
her and (8) other benefits, if any, in accordance with applicable plans,
programs and arrangements of the Company and its affiliates.
Upon a change in control (as defined in the Company's Equity
Incentive Plan), any outstanding stock options will vest and remain
exercisable in accordance with such plan and any other equity awards will
fully vest. If the payments or benefits to Ms. Franqui would result in a
payment of an "excess parachute payment" for purposes of Section 280G of the
Internal Revenue Code (and an imposition of an excise tax on Ms. Franqui),
then the Company will provide a gross-up payment so that Ms. Franqui will be
placed in the same economic position on an after-tax basis as she would have
been in had no excise tax been imposed.
Ms. Franqui is prohibited for a period of 18 months following the
termination of her employment from competing directly or indirectly with, or
soliciting employees from, the Company or disclosing proprietary or
confidential information. In the event of any inconsistency between any
provision of Ms. Franqui's employment agreement and the Change in Control
Plan, the provision most favorable to Ms. Franqui shall govern.
MR. HERNANDEZ ARTIGAS. Our employment agreement with Mr. Hernandez
Artigas provides for an initial term that ended on September 30, 2002 (which
is automatically extended for additional one-year periods unless we or Mr.
Hernandez Artigas provide six months advance notice that the term will not be
renewed), pursuant to which Mr. Hernandez Artigas serves as our Chief Legal
Officer. Mr. Hernandez Artigas's employment agreement currently provides for
him to receive a minimum annual salary of $301,600, plus additional
compensation equal to 50% of his daily base salary for each vacation day
accrued per year during the vacation period per year, and to be eligible to
receive annual bonuses under the Company's annual bonus plan and to
participate in the Company's Equity Incentive Plan. We also provided Mr.
Hernandez Artigas with relocation assistance for costs incurred in relocating
him and his family to his new principal place of employment in Miami, Florida,
including a one-time relocation allowance, a three-year home rental allowance
(payable at Mr. Hernandez Artigas's election in a discounted lump sum with a
25% premium) and a three-year cost-of-living transitional allowance (all such
allowances are grossed-up for taxes), a 90-day interest free loan and
reimbursements with respect to his former residence (either relating to
selling the property or covering one year of maintenance costs).
In addition, Mr. Hernandez Artigas is entitled to receive life
insurance coverage in an amount equal to at least three times his base salary
and target bonus, disability insurance coverages in an amount equal to 60% of
base salary, specified health, medical, dental and vision coverages, and is
eligible to participate in all other plans offered by the Company to is
executives, including savings, pension, profit-sharing and deferred
compensation plans. In addition, Mr. Hernandez Artigas is entitled to payment
of luncheon club fees and dues, and fees for tax return, financial planning
and/or estate planning advice. Prior to September 30, 2002, the Company also
provided Mr. Hernandez Artigas with one first class round trip airfare per
year for Mr. Hernandez Artigas, his spouse and his children to travel between
Miami, Florida and his former country of residency, and tax equalization (on a
grossed-up
50
basis) in the event that any tax is assessed upon him in respect of any and
all payments (other any taxes imposed in respect of grants of restricted stock
and stock options) that is in excess of the tax that would have been assessed
had he remained in his former employment location with the Company.
If his employment is terminated by the Company (other than due to
death, disability, or cause) or by Mr. Hernandez Artigas for good reason (as
defined in his employment agreement), Mr. Hernandez Artigas will be entitled
to receive the following benefits: (1) any unpaid base salary through the date
of termination, (2) accrued but unpaid incentive bonus compensation, if any,
(3) payment for accrued and unused vacation days, (4) an amount equal to the
greater of (a) two (2) times the base salary and target bonus for the year in
which the termination occurs, or (b) the severance benefit as set forth and
calculated under the employment laws of Mexico as in effect as of October 1,
1999, (5) a pro rata portion of the incentive bonus compensation, if any, for
the bonus period during which termination of employment occurs, (6)
continuation of employee benefits for a period of 1.5 years after the date of
termination, in the manner and at such times as the benefits otherwise would
have been payable or provided to him, or, if earlier, until similar benefits
are obtained through new employment, and (7) reimbursement for moving and
related expenses incurred as a result of his relocation back to his home
country (collectively, the "Severance Benefits"). In the event that Panamco
LLC is unable to provide any of the Severance Benefits, Mr. Hernandez Artigas
will be entitled to cash in an amount equal to the value of that benefit. In
addition, in the event of termination of employment under the circumstances
described above, Mr. Hernandez Artigas will become immediately vested in his
stock options and will have one year from the date of termination of
employment to exercise such stock options.
In the event Mr. Hernandez Artigas is offered to be relocated to any
of the Company's operations under customary conditions and he refuses to
accept such offer, Panamco LLC shall have the right to terminate his
employment agreement for cause; provided, however, that Panamco LLC shall (x)
pay him the greater of (A) an amount equal to one half (1/2) times his base
salary and target bonus for the year in which the termination of employment
occurs, or (B) the severance benefit as set forth and calculated under the
employment laws of Mexico as in effect as of October 1, 1999, and (y)
reimburse him for reasonable moving and related expenses incurred as a result
of his relocation back to his home country. In addition, in such event Mr.
Hernandez Artigas will have one year from the date of termination within which
to exercise the portion of his stock options that was vested as of the date of
termination.
If the payments or benefits to Mr. Hernandez Artigas would result in
a payment of an "excess parachute payment" for purposes of Section 280G of the
Internal Revenue Code (and an imposition of an excise tax on Mr. Hernandez
Artigas), then Panamco LLC will provide a gross-up payment so that he will be
placed in the same economic position on an after-tax basis as he would have
been in had no excise tax been imposed. Mr. Hernandez Artigas is prohibited
for a period of two years following the termination of his employment (for any
reason other than cause or good reason) from competing directly or indirectly
with the Company. In addition, Mr. Hernandez Artigas is prohibited for a
period of two years following the termination of his employment for any reason
from disclosing proprietary or confidential information or soliciting the
Company's employees or clients.
MR. SACCHI. In connection with Mr. Sacchi's appointment as the
President of Panamco Brazil and the Company's Vice President--Brazilian
operations in February 2002, we entered into a employment agreement with Mr.
Sacchi and terminated his previous employment agreement with the Company. The
current agreement, as amended, provides for an annual base salary of $428,000
and expires December 31, 2003. At December 31, 2003, Mr. Sacchi will receive
the following retirement benefits (the "Retirement Benefits"): (1) the
benefits determined in accordance with the applicable provisions of the
Company's International Pension Plan that governs the terms of his retirement;
and (2) continued participation (for no additional cost) in the Panamco
Brasil-sponsored health and life insurance plans until his 72nd birthday. In
addition, at December 31, 2003, Panamco or Panamco LLC shall have the option
(but not the obligation) to engage Mr. Sacchi as a consultant for a term of 18
months or more in exchange for the monthly payment of $31,111.11. If Mr.
Sacchi's employment is terminated without cause or for good reason (each as
defined in his employment agreement) prior to December 31, 2003, then he shall
be entitled to receive the Retirement Benefits, an amount equal to his base
salary and an amount equal to his target bonus. The same benefits shall also
be provided to Mr. Sacchi if a change in control (as defined in his employment
agreement) of Panamco-Brasil or Panamco shall occur on or before December 31,
2003, and on or before December 31, 2003, Mr. Sacchi's employment is
terminated by Panamco-Brasil without cause or his employment is terminated for
good reason.
51
MR. SCHIMBERG. Our employment agreement with Mr. Schimberg provides
for an initial term that ended on December 31, 2001 (which is automatically
extended for additional six-month periods unless we or Mr. Schimberg provide
three months advance notice that the term will not be renewed), pursuant to
which Mr. Schimberg currently serves as a member of the board of directors and
as Vice Chairman of the board of directors. Mr. Schimberg's employment
agreement does not provide Mr. Schimberg with any entitlement to base salary
or an annual bonus, except to the extent the board of directors otherwise
provides in its sole discretion. On November 10, 2000, Mr. Schimberg received
grants of stock options and restricted stock pursuant to the terms of his
employment agreement with the Company (as described in the footnotes to the
Summary Compensation Table). Mr. Schimberg's employment agreement also
provides that he is entitled to participate in all fringe benefits and
perquisites, including vacations, available to senior executives of the
Company at levels, and on terms and conditions, that are commensurate with his
positions and responsibilities.
Mr. Schimberg's employment agreement provides that if Mr.
Schimberg's employment is terminated by the Company other than due to
disability or cause, or by Mr. Schimberg as a constructive termination without
cause (as defined in Mr. Schimberg's employment agreement), then Mr. Schimberg
will be entitled to a cash payment of $950,000 and any amounts of earned but
unpaid compensation as a director, benefits and other additional benefits in
accordance with applicable plans, programs and arrangements with the Company
and its affiliates, provided that the lump sum payment is not payable in
connection with a constructive termination without cause the sole basis of
which is that a new full-time Chief Executive Officer of the Company has
commenced employment or in connection with a termination of employment upon
expiration of the then scheduled term of his employment agreement. If the
payments or benefits under Mr. Schimberg's employment agreement would result
in a payment of an "excess parachute payment" for purposes of Section 280G of
the Internal Revenue Code (and an imposition of an excise tax on Mr.
Schimberg), then the Company will provide a gross-up payment so that Mr.
Schimberg will be in the same economic position on an after-tax basis as he
would have been in had no excise tax been imposed.
MR. PIETROPAOLO. In connection with Mr. Pietropaolo's appointment as
the President of Panamco NOLAD and the Company's Vice President--NOLAD
operations in January 2002, we entered into an employment agreement with Mr.
Pietropaolo. The agreement provides for an annual base salary of $456,730.78,
plus $38,461.53 as Christmas bonus, plus $4,807.69 as vacation bonus. Mr.
Pietropaolo is entitled to participate in the Company Annual Incentive Plan
and is also entitled to participate in all pension, profit-sharing, vacation,
insurance, hospitalization, medical health, disability and other employee
benefit or welfare plan, program or policy that the Company may adopt, subject
to eligibility and participation provisions set forth in the plan or program.
Mr. Pietropaolo is entitled to a housing allowance of $120,000 per year for
the first three years of employment and to a company car with a driver. Mr.
Pietropaolo is entitled to a golf club membership and to one round trip plane
ticket to the City of Buenos Aires per year.
On March 26, 2003, Ruben Pietropaolo resigned as President of
Panamco NOLAD, President of Panamco Mexico and as the Company's Vice
President--NOLAD Operations and, effective March 27, 2003, he assumed the
position of Vice President--Special Projects of the Company. On an interim
basis, Juan Carlos Jaramillo, the Executive Vice President of Panamco Mexico,
will lead the Company's operations in Mexico, Jose Francisco Vazquez will
continue to lead the Company's operations in Central America, and Felipe
Alvira will continue to lead the Copany's operations in Colombia. All three
executives will report directly to the Company's Chief Executive Officer.
In connection with this charge: (i) Mr. Pietropaolo's January 2002
employment agreement was terminated as he was paid the severance benefits
required by Mexican law totaling approximately $35,000; (ii) the Company and
Mr. Pietropaolo entered into a new agreement for his services as the Company's
Vice President-- Special Projects that provides for the payment of $700,000 to
Mr. Pietropaolo payable over the term of the agreement, which expires upon the
earlier of September 30, 2003 or the closing of a change of control
transaction, including the proposed merger transaction with Coca-Cola FEMSA;
(iii) Mr. Pietropaolo's existing stock options continue to be governed by the
terms of the Company's Equity Incentive Plan; and (iv) Mr. Pietropaolo waived
all benefits under the Company's Key Executive Retention, Severance and
Non-Competition Plan.
52
MR. COOLING. Mr. Cooling's employment agreement with the Company was
terminated effective August 30, 2002, pursuant to a severance agreement
between the parties. Under this severance agreement, the Company made a lump
sum payment of $1,350,000, of which $950,000 was an obligation of the Company
under Mr. Cooling's employment agreement. Mr. Cooling received no bonus
payment for 2002 and has repaid all outstanding loans. See "--Summary
Compensation Table".
CHANGE OF CONTROL PLANS
In September 2002, Panamco adopted the Key Executive Retention,
Severance and Non-Competition Plan and the Key Employee Retention, Severance
and Non-Competition Plan (the "Change of Control Plans"), which provide
benefits to designated executive officers and other employees of the Company.
The Change in Control Plans provide that in the event a participant's
employment with the Company is terminated without cause or as a result of an
Involuntary Termination (which generally includes a termination of the
employee's employment with the Company without cause or by the participant as
a result of certain changes in the participant's duties, principal place of
employment or salary and bonus opportunity), within the period (which we refer
to as the window period) that commences 90 days prior to (a) the occurrence of
a change in control of the Company (as defined in the Change of Control Plans)
or (b) any public announcement of the intention to undertake a transaction
that if completed would result in a change of control, and terminates upon the
expiration of no more than three years following the date of such change in
control, the participant will be entitled to receive the following benefits:
o a cash severance payment in an amount which varies by participant
from one-half to three times the participant's annual base salary
plus target bonus;
o continued provision of Panamco's standard group employee insurance
coverages for a specified period, which varies by participant from
six months to three years;
o payment of all salary and accrued vacation pay earned through the
date of termination of employment; and
o if the participant is an expatriate (as defined in the Change in
Control Plans), an additional cash payment of $25,000.
The Change in Control Plans further provide that upon a change of
control, each participant who is then employed by Panamco or whose employment
terminated prior to the change of control as a result of an Involuntary
Termination during the window period, shall become entitled to receive, in
lieu of any payments that he or she may be entitled to receive under Panamco's
annual incentive plan for the year in which the change of control occurs, a
lump-sum payment equal to the product of (a) the participant's target bonus
for the year in which the change of control occurs and (b) the number of days
from January 1 to the date of the change of control divided by 365. If a
participant's Involuntary Termination occurs prior to the date of the change
of control, the participant's outstanding stock options and restricted shares
of Panamco's Class A Common Stock granted under Panamco's Equity Incentive
Plan will fully vest and, in the case of stock options, become exercisable as
of the date of such termination of employment.
If certain designated participants, including Messrs. Jung, Hernandez
and Ms. Franqui, become subject to the excise tax imposed under Section 4999 of
the Internal Revenue Code, then Panamco will provide such participants with a
gross-up payment to place the participants in the same economic position on an
after-tax basis that such participants would have been in had no excise tax been
imposed. If any other participant becomes subject to the excise tax imposed
under Section 4999 of the Internal Revenue Code, then the participant's benefits
shall be reduced to the maximum amount as will result in no portion of the
payments being subject to the excise tax (the "Safe Harbor Cap"), but only if
the net after-tax amount that would be received by the participant, taking into
account all applicable federal, state and local income taxes and the excise tax,
is greater than the net after-tax amount that would be received by the
participant if the payments are not reduced to the Safe Harbor Cap. To the
extent that an executive receives any severance benefits under any other plan or
arrangement, then the payments and benefits payable under the Change in Control
Plans shall be reduced by a like amount.
The proposed merger transaction with Coca-Cola FEMSA will result in
a change of control under the Change of Control Plans.
53
DIRECTORS FEES
Directors of the Company other than the Chief Executive Officer
receive annual directors' fees of $35,000 and $1,000 per diem (or $500 per
telephonic conference call) for attendance at Board of Directors and committee
meetings. Committee chairmen receive $3,000 per year. Commencing September
2002, the Chairman of the Board is paid an aggregate annual fee of $170,000
per year for his services to the Company, but does not receive the per diem or
per telephonic conference call amounts noted above. The Company provides
medical insurance to its directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 2002 were Mr. Wade
T. Mitchell, Mr. Woods W. Staton Welten, Mr. James Postl, and Mr. Oswaldo
Cisneros. In September 2002, Mr. Woods W. Staton Welten resigned from the
Compensation Committee upon being named Chairman of the Board of the Company,
an officer's position under Panamco's bylaws. There were no Compensation
Committee interlocks during 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
We are not directly or indirectly owned or controlled by another
corporation or by any foreign government.
We have two classes of Common Stock and one series of Preferred
Stock: the Class A Common Stock, which currently has no voting rights, the
Class B Common Stock, which is entitled to one vote per share and the Series C
Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock"),
which currently has certain rights as described in detail below. The holders
of Class B Common Stock have the exclusive power to elect the Board of
Directors and to determine the outcome of all matters to be decided by a vote
of the shareholders. Class A Common Stock will not have voting rights unless
certain events occur which will cause all outstanding shares of Class B Common
Stock to be converted into shares of Class A Common Stock, at which point each
share of Class A Common Stock will carry one vote. Such events, which may
never occur, are specified in our Articles of Incorporation. Coca-Cola is the
sole holder of the Series C Preferred Stock.
The following table sets forth information with respect to the
beneficial ownership of Panamco's Class B Common Stock as of March 24, 2003 by
(1) each stockholder known by Panamco to own beneficially five percent or more
of the outstanding shares of Panamco's Class B Common Stock, (2) each Panamco
(A) director, (B) executive officer and (C) "named executive officer" included
in the "Summary Compensation Table", in each case known by Panamco to own shares
of Panamco's Class B Common Stock and (3) all directors and executive officers
as of March 24, 2003 as a group. As of March 24, 2003, there were 8,659,802
shares of Panamco's Class B Common Stock outstanding. There are no options to
acquire shares of Panamco's Class B Common Stock. Unless otherwise indicated in
a footnote, the business address of each person listed below is Panamco's
corporate address.
Amount and Nature of
Name and Address of Beneficial Owner of Class B Common Stock Beneficial Ownership Percent of Class
------------------------------------------------------------------- -------------------- ----------------
Mr. James M. Gwynn and Mr. Woods W. Staton Welten in the capacities
as Voting Trustees under the Voting Trust Agreement (1), (2)......... 5,155,052 59.5%
The Coca-Cola Company (3)............................................... 2,167,064 25.0%
Venbottling Holdings, Inc (4)........................................... 778,844 9.0%
Gustavo A. Cisneros (5)................................................. 272,217 3.1%
Oswaldo J. Cisneros (6)................................................. 265,765 3.1%
Wade T. Mitchell........................................................ 59,525 *
Woods W. Staton Welten.................................................. 3,408,838 39.4%
54
Amount and Nature of
Name and Address of Beneficial Owner of Class B Common Stock Beneficial Ownership Percent of Class
------------------------------------------------------------------- -------------------- ----------------
Houston Staton Welten................................................... 466 *
All Directors and Executive Officers as a group......................... 4,006,811 46.3%
------------------
* Less than one percent.
(1) Except as otherwise indicated below, each of the persons named in the
table has sole voting and investment power with respect to the shares
beneficially owned as set forth opposite such person's name.
(2) The address of the Voting Trustees is c/o The Bank of Butterfield
Executor & Trustee Co. Ltd., P.O. Box HM 195, Hamilton HM GX, Bermuda.
Messrs. Gwynn and Woods Staton disclaim beneficial ownership of the
shares held by the Voting Trust that are held on behalf of Voting Trust
participants other than themselves.
(3) The address of The Coca-Cola Company is One Coca-Cola Plaza, Atlanta,
Georgia, 30313. (4) The business address of Venbottling Holdings, Inc. is
Calle 53 Este Marbella, Torre Swiss Bank, Segundo Piso, Panama, Republic
of Panama.
(5) The business address of Gustavo A. Cisneros is Final Avenida La Salle,
Edificio Venevision, Urb. Colina de los Caobos, Caracas, Venezuela. The
shares of Panamco's Class B Common Stock beneficially owned by Gustavo A.
Cisneros are held by Venbottling Holdings, Inc. Gustavo A. Cisneros is a
director and indirect shareholder of Venbottling Holdings, Inc. and
disclaims beneficial ownership of all shares held by Venbottling
Holdings, Inc. other than those listed above.
(6) The business address of Oswaldo J. Cisneros is Av. Francisco de Miranda,
Parque Cristal Piso #14, Torre Oeste, Caracas, Venezuela. All of the
shares of Panamco's Class B Common Stock beneficially owned by Oswaldo J.
Cisneros are held by Venbottling Holdings, Inc. Oswaldo J. Cisneros is a
director and indirect shareholder of Venbottling Holdings, Inc. and
disclaims beneficial ownership of all shares held by Venbottling
Holdings, Inc. other than those listed above.
The following table sets forth information with respect to the
beneficial ownership of Panamco's Class A Common Stock as of March 24, 2003 by
(1) each stockholder known by Panamco to own beneficially five percent or more
of the outstanding shares of Panamco's Class A Common Stock, (2) each Panamco
(A) director, (B) executive officer and (C) "named executive officer" included
in the "Summary Compensation Table", in each case known by Panamco to own shares
of Panamco's Class A Common Stock and (3) all directors and executive officers
of Panamco as of March 24, 2003, as a group. As of March 24, 2003, there were
112,793,056 shares of Panamco's Class A Common Stock outstanding, of which
466,667 shares are subject to forfeiture under restricted stock agreements.
Unless otherwise indicated in a footnote to the table set forth below or above,
the business address of each person listed below is Panamco's corporate address.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF CLASS A COMMON STOCK BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
------------------------------------------------------------ -------------------- --------------------
The Coca-Cola Company........................................ 28,458,626 25.2%
Venbottling Holdings, Inc.................................... 10,271,156 9.1%
Gustavo A. Cisneros (2), (4)................................. 3,594,659 3.2%
Oswaldo J. Cisneros (3)...................................... 3,509,563 3.1%
William G. Cooling (4)....................................... 594,154 *
Gary P. Fayard (4)........................................... 1,206 *
Wade T. Mitchell (4)......................................... 117,449 *
Paulo Sacchi (4)............................................. 233,156 *
Woods W. Staton Welten (4)................................... 910,701 *
Houston Staton Welten (4).................................... 3,576,788 3.2%
Craig D. Jung (4)............................................ 50,000 *
James J. Postl (4)........................................... 4,313 *
Henry A. Schimberg (4)....................................... 352,475 *
Annette Franqui (4).......................................... 26,665 *
Ruben Pietropaolo (4)........................................ 111,667 *
Carlos Herandez Artigas (4).................................. 112,832 *
55
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF CLASS A COMMON STOCK BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
------------------------------------------------------------ -------------------- --------------------
Felipe Alvira (4)............................................ 81,566 *
Jose Antonio de Echavarri (4)................................ 55,133 *
All Directors and Executive Officers as a group.............. 13,330,493 11.8%
------------------
* Less than one percent
(1) Shares subject to options are considered outstanding for the purpose of
determining the percent of the class held by the holder of such option,
but not for the purpose of computing the percentage held by others.
(2) Includes 3,589,923 shares of Panamco's Class A Common Stock held by
Venbottling. Mr. Gustavo Cisneros is a director and indirect shareholder
of Venbottling. Mr. Cisneros disclaims beneficial ownership of all shares
held by Venbottling other than those listed above.
(3) Includes 3,504,827 shares of Panamco's Class A Common Stock held by
Venbottling. Mr. Oswaldo Cisneros is a director and indirect shareholder
of Venbottling. Mr. Cisneros disclaims beneficial ownership of all shares
held by Venbottling other than those listed above.
(4) Such shares include the following shares the directors and named
executive officers have the right to acquire within 60 days through the
exercise of vested stock options: Gustavo Cisneros, 4,736; Oswaldo
Cisneros, 4,736; William G. Cooling, 357,392; Gary P. Fayard, 1,206; Wade
T. Mitchell, 7,392; Paulo Sacchi, 233,146; Woods. W. Staton Welten,
7,392; Houston Staton Welten, 7,302; Craig D. Jung, 50,000; James J.
Postl, 2,479; Henry A. Schimberg, 252,479; Annette Franqui, 26,665; Ruben
Pietropaolo, 111,667; Carlos Hernandez, 112,532; Felipe Alvira, 81,566;
Jose Antonio de Echavarri, 55,133; and for all Directors and Officers as
a group, 1,315,823.
SERIES C PREFERRED STOCK
The holder of the Series C Preferred Stock (the "Holder") is not
entitled to receive any dividends with respect to the Series C Preferred Stock
and is entitled to a preference on the liquidation, dissolution or winding-up
of the Company of $1.00. Pursuant to the Certificate of Designation for the
Series C Preferred Stock, we have agreed not to take certain actions without
the approval of the Holder, including, but not limited to: (i) certain
consolidations, mergers and sales of substantially all of our assets; (ii) any
acquisition or sale of a business (or an equity interest therein) if the
purchase price or sales price thereof, as the case may be, exceeds a material
amount (as defined therein); (iii) entry into any new significant line of
business or termination of any existing significant line of business; (iv)
certain capital expenditures and acquisitions and dispositions of property and
equipment; (v) certain transactions with affiliates (as defined); (vi) certain
changes in our policy with respect to dividends or distributions to
shareholders; and (vii) certain changes to our Articles of Incorporation or
By-laws. These rights are subject to certain exceptions and qualifications and
may be suspended or terminated in certain circumstances.
The Holder has no voting rights except as provided for above and
except for any voting rights provided by law. The Holder is entitled to
designate for election to the Board of Directors a certain number of designees
depending on the percentage of the outstanding capital stock beneficially
owned by it.
The Holder of the Series C Preferred Stock has certain rights to
purchase additional shares of common stock issued by the Company to maintain
its proportionate interest, subject to certain exceptions and limitations.
The Series C Preferred Stock may not be transferred to any person
other than Coca-Cola or a corporation 100% of the capital stock of which
(other than directors' qualifying shares or shares held by persons to comply
with local law) is owned, directly or indirectly, by Coca-Cola. Upon any
transfer in violation of such restrictions, the Series C Preferred Stock will
convert automatically to a share of Class A Common Stock.
Pursuant to the investment agreement (the "Investment Agreement")
dated November 1, 1995, between us and Coca-Cola Export Corporation
("Export"), a wholly owned subsidiary of Coca-Cola, for so long as Export is
entitled to delegate one or more individuals for election to our Board of
Directors, in the event of certain subsequent new issues of Common Stock,
Coca-Cola will have the right to purchase shares of Common Stock from us (on
the terms of such new issue) in order to maintain its economic and voting
interest in Panamco. Under certain circumstances (but not currently), Export
has the right to request that we file a registration statement so as to permit
or facilitate the sale or distribution of shares of Class A Common Stock
beneficially owned by Coca-Cola. In addition, in certain instances (but not
currently), when we propose to register under the Securities Act of 1933
shares of our Common Stock in connection with an underwritten offer for our
own account, we must offer Export the opportunity to include in such
registration statement shares of Common Stock beneficially owned by Coca-Cola.
56
SERIES D PREFERRED STOCK
Immediately prior to the effective time of the merger between the
Company and Coca-Cola FEMSA, all shares of Class A Common Stock and Class B
Common Stock beneficially owned by The Coca-Cola Company through its
subsidiaries will be exchanged for newly issued shares of Series D Preferred
Stock, par value $0.01 per share, of the Company at a one-to-one ratio.
The holder of the Series D Preferred Stock (the "Holder") is not
entitled to receive any dividends with respect to the Series D referred Stock
and is entitled to a preference on the liquidation, dissolution or winding-up
of the Company of $0.00001. Pursuant to the Certificate of Designation for the
Series D Preferred Stock, we have agreed not to take certain actions without
the approval of the Holder, including, but not limited to: (i) any alteration,
amendment or modification of the Certificate of Designations of the Series D
Preferred Stock and (ii) certain changes to our Articles of incorporation or
By-laws.
The Holder has no voting rights except as provided for above and
except for any voting rights provided by law. The Holder has no right to
purchase additional shares of unissued common stock of the Company in the
future.
The Series D Preferred Stock may not be transferred to any person
other that Coca-Cola or a corporation 100% of the capital stock of which
(other than directors' qualifying shares or shares held by persons to comply
with local law) is owned, directly or indirectly, by Coca-Cola. Upon transfer
in violation of such restrictions, the Series D Preferred Stock will convert
automatically to a share of Class A Common Stock. In addition, the transfer of
the Series D Preferred Stock is subject to certain restrictions contained in
the Investment Agreement.
VOTING TRUST
The beneficial owners of 5,155,052 shares of Class B Common Stock,
who are no longer the holders of record of such shares, representing
approximately 59.5% of the shares of such class, have entered into a Voting
Trust Agreement, amended and restated as of April 20, 1993, as amended (the
"Voting Trust"), for which Mr. James M. Gwynn and Mr. Woods W. Staton Welten
act as the voting trustees (the "Voting Trustees"). The Voting Trust will
expire on January 11, 2013. The Voting Trust may be amended at any time by the
holders of voting trust certificates representing 70% of the shares subject to
the Voting Trust. Under the terms of the Voting Trust, the Voting Trustees may
vote as they, in their sole discretion, deem to be in the best interests of
the holders of the voting trust certificates. However, the Voting Trustees are
not permitted to vote on any proposal for a merger, consolidation or certain
other significant transactions involving the Company, except as directed by
the individual holders of the voting trust certificates (or, if no such
direction is received, in accordance with the recommendation of our Board of
Directors). The Voting Trustees have also agreed with Coca-Cola and Export (i)
to vote for Coca-Cola's designees for election to our Board of Directors and
(ii) not to take any action or cause us to take any action the effect of which
would circumvent or adversely affect or be inconsistent with any of the terms
of the Series C Preferred Stock. The Voting Trustees have also agreed with
Venbottling to vote for Venbottling's designees for election to our Board of
Directors. Certain of the Voting Trustees are directors of the Company. See
"Item 10 -- Directors and Officers of the Registrant."
The Voting Trustees will serve for five-year terms, unless earlier
removed by the holders of voting trust certificates representing 70% of the
shares subject to the Voting Trust. The Voting Trustees are not permitted to
transfer the shares of Class B Common Stock or any other voting securities
which may be held in the Voting Trust. The Voting Trust is on file at our
registered office, Dresdner Bank, Seventh Floor, 50th Street, City of Panama,
Republic of Panama, and is available on request of the Secretary.
57
SHAREHOLDER AGREEMENT WITH VENBOTTLING HOLDINGS, INC.
Pursuant to a Shareholder Agreement dated May 9, 1997, entered into
by us and Venbottling, Gustavo A. Cisneros and Oswaldo J. Cisneros have the
right to be appointed to our board of directors. If Venbottling ownership of
the total outstanding Common Stock of the Company decreases below 7.5%,
Venbottling shall cause one of its representatives to resign from the board of
directors and if its ownership decreases below 5% of the total outstanding
Common Stock of the Company, Venbottling shall cause its representatives to
resign from the board of directors. Venbottling has the right to request that
we file a registration statement so as to permit or facilitate the sale or
distribution of shares beneficially owned by it. Also, in certain
circumstances when we propose to register under the Securities Act of 1933
shares of our Common Stock in connection with an underwritten offer for our
own account we must offer Venbottling the opportunity to include in such
registration statement shares of Common Stock beneficially owned by it.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CISNEROS FAMILY
Many of the raw materials and supplies used in Venezuela are
purchased from companies owned by, related to, or affiliated with certain
members of the Cisneros family, the former owners of Panamco Venezuela, as
follows:
ENTITY MATERIAL SUPPLIED AMOUNT PAID IN 2002*
----------------------------------- ----------------- --------------------
Productos de Vidrio, S.A. Bottles $ 12,418
Central Azucarero Portuguesa, C.A. Sugar 30,808
Proyectos PET C.A. PET 7,495
Gaveras Plasticas Venezolanas, C.A. Plastic cases 463
C.A. Cerverceria Regional Beer 3,448
* Stated in thousands of U.S. dollars
We believe the terms of such arrangements are no less favorable to us than
those that could be obtained from independent third parties.
FRANCHISE ARRANGEMENTS
Panamco has exclusive rights under its bottling agreements with The
Coca-Cola Company to bottle and distribute Coca-Cola trademark soft drinks and
water in all of the territories in which Panamco operates. Panamco also
produces and distributes its proprietary brands. In 2002 and 2001, 74% of
Panamco's unit case volume, respectively, was attributable to Coca-Cola
products.
These bottling agreements expire on various dates. In 1995, Panamco
and The Coca-Cola Company agreed that all bottling agreements of Panamco's
Mexican subsidiaries would have a uniform term ending in 2005, renewable for
one additional ten-year term. In general, the Brazilian, Venezuelan,
Nicaraguan, Costa Rican, Guatemalan and Colombian agreements are for five-year
terms, renewable for one additional five-year term.
The bottling agreements regulate the preparation, bottling and
distribution of beverages in the applicable franchise territory. The bottling
agreements authorize the bottlers to use the concentrates purchased from The
Coca-Cola Company to bottle, distribute and sell a variety of beverages under
certain brand names and in certain approved presentations and to utilize the
trademarks of The Coca-Cola Company to promote these products. The Coca-Cola
Company reserves the right to market independently or license post-mix
products.
The prices that The Coca-Cola Company may charge Panamco for
concentrates are determined by The Coca-Cola Company from time to time at its
discretion. The Coca-Cola Company currently charges Panamco a
58
percentage of the weighted average wholesale price (net of taxes) of each case
sold to retailers within each of Panamco's franchise territories. Panamco pays
no additional compensation to The Coca-Cola Company under the licenses for the
use of the associated trade names and trademarks. Where local law permits, The
Coca-Cola Company has the right to limit the wholesale prices of its products.
Total payments by Panamco to The Coca-Cola Company for concentrates were
approximately $333.0 million and $361.1 million in 2002 and 2001,
respectively.
Panamco may not assign, transfer or pledge its bottling agreements,
whether voluntarily, involuntarily or by operation of law, without the prior
consent of The Coca-Cola Company. Moreover, Panamco may not enter into any
contract or other arrangement to manage or participate in the management of
any other bottler without the prior consent of The Coca-Cola Company. Panamco
may not sell or otherwise transfer ownership of any bottling operation.
As it has in the past, Coca-Cola may, in its discretion, contribute
to our advertising and marketing expenditures (including pricing support) as
well as undertake independent advertising and marketing activities. Coca-Cola
has routinely established annual budgets with Panamco for cooperative
advertising and promotion programs. In 2002 and 2001, Coca-Cola provided us
with $33.5 million and $36.5 million in marketing support. Incentive payments
that are related to the increase in volume of Coca-Cola products that result
from such expenditures are treated as an offset against the costs of
concentrates paid by Panamco to Coca-Cola.
In 2002, we reached an agreement with Coca-Cola to convert our Risco
water volume in Mexico to Coca-Cola's brand Ciel beginning in the first
quarter of 2003. The conversion was done in exchange for a total consideration
of $65.0 million to be paid by Coca-Cola. Approximately $56.4 million of this
amount was paid in the first quarter of 2003, $3.6 million was already paid in
the fourth quarter of 2002 and the remaining amounts will be paid in equal
installments between 2003 and 2006. Income from the conversion will be
deferred and recognized over the life of the contract, which is ten years.
VOTING TRUST
Panamco has agreed to reimburse the fees and expenses incurred by
the Voting Trust in connection with the proposed merger with Coca-Cola FEMSA,
including with respect to the consideration, evaluation and negotiation of the
transaction, and the review and execution of related documents, not to exceed
$1.0 million, unless otherwise approved by Panamco. To date, Panamco has paid
a retainer fee to the Voting Trust's legal advisor of $100,000.
ITEM 14. CONTROLS AND PROCEDURES
Panamco's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for Panamco. Such officers have
concluded (based upon their evaluation of these controls and procedures as of
a date within 90 days of the filing of this report) that Panamco's disclosure
controls and procedures are effective to ensure that information required to
be disclosed about Panamco in this report is accumulated and communicated to
Panamco's management, including its principal executive officers as
appropriate, to allow timely decisions regarding required disclosure.
The Certifying Officers also have indicated that there were no
significant changes in Panamco's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies
and material weaknesses.
59
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1), (2) The Financial Statements and Schedule II--Valuation and Qualifying
Accounts listed on the index on Page F-1 following are included
herein by reference. All other schedules are omitted, either
because they are not applicable or because the required information
is shown in the financial statements or the notes thereto.
(a)(3) Exhibits:
Exhibit No. Description of Exhibit
3.1 Restatement of Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, File No. 1-12290).
3.2 Amended and Restated By-laws of the Company (incorporated
herein by reference to Exhibit 3.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, File
No. 1-12290).
3.3 Certificate of Designation of the Series C Preferred Stock
(incorporated herein by reference to Exhibit 10.8 of the
Company's Registration Statement on Form F-4, File No.
333-7918.)
3.4 Certificate of Designation of the Series D Preferred Stock.
4.1 Indenture, dated as of July 11, 1997, by and between the
Company and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 of the
Company's Registration Statement on Form F-4, File No.
333-7918).
4.2 Indenture, dated as of March 1, 1996, between the Company and
Chemical Bank, as Trustee, in respect of the Company's 8.125%
Senior Notes due 2003 (incorporated herein by reference to
Exhibit 10.17 of the Company's Registration Statement on Form
F-4, File No. 333-7918).
4.3 Supplemental Indenture, dated as of March 27, 1996, between
the Company and Chemical Bank, as Trustee, in respect of the
Company's 8.125% Senior Notes due 2003 (incorporated herein
by reference to Exhibit 10.18 of the Company's Registration
Statement on Form F-4, File No. 333-7918).
4.4 Registration Rights Agreement, dated as of July 11, 1997, by
and between the Company and Lazard Freres & Co. LLC
(incorporated herein by reference to Exhibit 4.2 of the
Company's Registration Statement on Form F-4, File No.
333-7918).
9.1 Voting Trust Agreement as amended and restated as of July 15,
1993 (incorporated herein by reference to Exhibit 9.1 of the
Company's Registration Statement on Form F-1, File No.
33-67978).
9.2 Voting Trust Amendment, dated as of December 22, 2002
(incorporated by reference to Exhibit A to Exhibit DB to the
Company's Rule 13e-3 Transaction Statement filed with the
Securities and Exchange Commission on January 30, 2003, File
No. 005-47468).
10.1 Purchase Agreement, dated July 8, 1997, between the Company
and Lazard Freres & Co. LLC (incorporated herein by reference
to Exhibit 10.1 of the Company's Registration Statement on
Form F-4, File No. 333-7918).
10.2 Exchange Agreement, dated as of May 9, 1997, by and among the
Company, Venbottling Holdings, Inc., Atlantic Industries and
Embotelladora Coca-Cola y Hit de Venezuela, S.A.
(incorporated herein by reference to Exhibit 10.2 of the
Company's Registration Statement on Form F-4, File No.
333-7918).
10.3 Shareholder Agreement, dated as of May 9, 1997, by and among
the Company and Venbottling Holdings, Inc. (incorporated
herein by reference to Exhibit 10.4 of the Company's
Registration Statement on Form F-4, File No. 333-7918).
60
10.4 Voting Agreement, dated as of May 9, 1997, by and among
Venbottling Holdings, Inc., Lt. Gen. Donald Colin Mackenzie,
James M. Gwynn and Woods W. Staton II, in their capacity as
voting trustees, and the Voting Trust created pursuant to the
Voting Trust Agreement (incorporated herein by reference to
Exhibit 10.5 of the Company's Registration Statement on Form
F-4, File No. 333-7918).
10.5 Voting Agreement, dated August 10, 1993, among The Coca-Cola
Company and Lt. Gen. Donald Colin Mackenzie, James M. Gwynn
and Woods W. Staton Welton, in their capacity as voting
trustees (incorporated herein by reference to the Company's
Registration Statement on Form F-1, File No. 33-67978).
10.6 Supplement No. 1, dated as of May 9, 1997, by and among the
Company, The Coca-Cola Company and The Coca-Cola Export
Corporation in respect of the Amended and Restated Investment
Agreement, dated as of November 1, 1995, by and among the
Company, The Coca-Cola Company and The Coca-Cola Export
Corporation (incorporated herein by reference to Exhibit 10.7
of the Company's Registration Statement on Form F-4, File No.
333-7918).
10.7 Amended and Restated Investment Agreement, dated as of
November 1, 1995, by and among the Company, The Coca-Cola
Company and The Coca-Cola Export Corporation (incorporated
herein by reference to Exhibit 10.8 of the Company's
Registration Statement on Form F-4, File No. 333-7918).
10.8 Investment Agreement, dated August 10, 1993, among the
Company, The Coca-Cola Company and The Coca-Cola Export
Corporation (incorporated herein by reference to Exhibit 10.7
to the Company's Registration Statement on Form F-1, File No.
33-67978).
10.9 Stock Subscription Agreement, dated August 10, 1993, between
the Company and The Coca-Cola Export Corporation
(incorporated herein by reference to Exhibit 10.6 of the
Company's Registration Statement on Form F-1, File No.
33-67978).
10.10 Letter Agreement, dated May 9, 1997, among Atlantic
Industries, Venbottling Holdings, Inc. and the Company
(incorporated herein by reference to Exhibit 10.12 of the
Company's Registration Statement on Form F-4, File No.
333-7918).
10.11 Letter Agreement, dated May 9, 1997, between The Coca-Cola
Company and the Company (incorporated herein by reference to
Exhibit 10.13 of the Company's Registration Statement on Form
F-4, File No. 333-7918).
10.12 Letter Agreement, dated May 9, 1997, among Oswaldo Cisneros
Fajardo, Gustavo Cisneros Rendiles, Ricardo Cisneros
Rendiles, the Company and The Coca-Cola Company (incorporated
herein by reference to Exhibit 10.14 of the Company's
Registration Statement on Form F-4, File No. 333-7918).
10.13 Letter Agreement, dated May 9, 1997, between The Coca-Cola
Company and Embotelladora Coca-Cola y Hit de Venezuela, S.A.
(incorporated herein by reference to Exhibit 10.15 of the
Company's Registration Statement on Form F-4, File No.
333-7918).
10.14 Letter Agreement, dated May 9, 1997, among Oswaldo Cisneros
Fajardo, Gustavo Cisneros Rendiles, Ricardo Cisneros Rendiles
and the Company (incorporated herein by reference to Exhibit
10.16 of the Company's Registration Statement on Form F-4,
File No. 333-7918).
10.15 Stock Purchase and Sale Agreement, dated August 14, 1997
among Maria Rosario Lacayo Gil de Graziano, Maria Gabriela
Cardenal Lacayo, Manuel Ignacio Lacayo Gil and the Company
(incorporated herein by reference to Exhibit 10.19 of the
Company's Registration Statement on Form F-4, File No.
333-7918).
10.16 Stock Purchase Agreement, dated March 25, 1998, among
Interamerican Financial Corporation, the Company, Charver
Incorporated and Carlos Humberto Gonzalez (incorporated
herein by reference to Exhibit 10.21 of the Company's
Registration Statement on Form F-4, File No. 333-7918).
10.17 Stock Purchase Agreement for Shares, dated as of September
15, 1998, among Diecity, S.A., Dixer Distribuidora de
Bebidas, S.A. and Refrigerantes Do Oeste, S.A. (incorporated
herein by reference to Exhibit 10.1 of the Company's Form
20-F, File No. 1-12290).
61
10.18 Escrow Agreement, dated as of September 30, 1998, by and
among Dixer Distribuidora de Bebidas, S.A., Yetready S.A. and
Discount Bank and Trust Company (incorporated herein by
reference to Exhibit 10.3 of the Company's Form 20-F, File
No. 1-12290).
10.19 Customer's Outsourcing Agreement, dated December 1, 2000,
between Administracion S.A. de C.V. and E.D.S. de Mexico S.A.
de C.V. (incorporated herein by reference to Exhibit 10.34 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, File No. 1-12290).
10.20 Customer's Outsourcing Agreement, dated December 1, 2000,
between Spal Industria Brasilera de Bebidas, S.A. and
Electronic Data Systems do Brazil Ltda. (incorporated herein
by reference to Exhibit 10.35 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, File No.
1-12290).
10.21 Customer's Outsourcing Agreement, dated December 1, 2000
between Panamco Colombia, S.A. and Electronic Data Systems
Colombia S.A. (incorporated herein by reference to Exhibit
10.36 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, File No. 1-12290).
10.22 Customer's Outsourcing Agreement, dated December 1, 2000,
between Panamco de Venezuela, S.A. and Electronic Data
Systems de Venezuela "EDS" C.A. (incorporated herein by
reference to Exhibit 10.37 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, File No.
1-12290).
10.23 Customer's Outsourcing Agreement, dated December 1, 2000,
between Embotelladora Panamco Tica, S.A. and Electronic Data
Systems (EDS) de Costa Rica S.A. (incorporated herein by
reference to Exhibit 10.38 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, File No.
1-12290).
10.24 Customer's Outsourcing Agreement, dated December 1, 2000,
between Panamco de Nicaragua, S.A. and Electronic Data
Systems (EDS) de Nicaragua y Cia. Ltda. (incorporated herein
by reference to Exhibit 10.39 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, File No.
1-12290).
10.25 Customer's Outsourcing Agreement, dated December 1, 2000,
between Embotelladora Central, S.A. and Electronic Data
Systems (EDS) de Guatemala S.A. (incorporated herein by
reference to Exhibit 10.40 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, File No.
1-12290).
10.26 Customer's Outsourcing Agreement, dated December 1, 2000,
between Panamco L.L.C. Electronic Data Systems Corporation.
(incorporated herein by reference to Exhibit 10.41 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, File No. 1-12290).
10.27 Employment Agreement between the Company and Carlos
Hernandez-Artigas. (incorporated herein by reference to
Exhibit 10.43 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, File No. 1-12290).*
10.28 Employment Agreement between the Company and Henry A.
Schimberg (incorporated herein by reference to Exhibit 10.4
of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 1-12290).*
10.29 Financial Lease Agreement, dated as of September 5, 2001, by
and among Panamco de Venezuela, S.A., as borrower, Citibank,
N.A., as lender, and the Company, as guarantor (incorporated
herein by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 2001, File No. 1-12290).
10.30 Promissory Note, dated as of September 14, 2001, by and among
Panamco de Nicaragua, S.A., as borrower, Citibank, N.A., as
lender, and the Company, as guarantor (incorporated herein by
reference to Exhibit 10.3 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001, File
No. 1-12290).
62
10.31 Credit Agreement by and among the Company as Borrower, ING
Bank (Mexico) Institucion de Banca Multiple, ING Baring Grupo
Financiero (Mexico) S.A. de C.V. as the Bank, and Panamco
Mexico, S.A. de C.V. and Panamco Golfo, S.A. de C.V. as the
Guarantors, dated as of December 18, 2001 (incorporated by
reference to Exhibit 39 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).
10.32 Debt Acknowledgement and Obligor Substitution Agreement by
the Company as Original Obligor, Panamco Mexico, S.A de C.V.
as Substitute Obligor, Panamco Golfo S.A. de C.V. as Joint
Obligor and Guarantor and ING Bank (Mexico) Institucion de
Banca Multiple, ING Baring Grupo Financiero (Mexico) S.A. de
C.V. as the Bank, dated as of December 18, 2001 (incorporated
by reference to Exhibit 40 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).
10.33 Debt Acknowledgement and Obligor Substitution Agreement by
Panamco Mexico, S.A de C.V. as Original Obligor, Panamco
Golfo S.A. de C.V. as Substitute Obligor and ING Bank
(Mexico) Institucion de Banca Multiple, ING Baring Grupo
Financiero (Mexico) S.A. de C.V. as the Bank, dated as of
December 18, 2001 (incorporated by reference to Exhibit 41 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, File No. 1-12290).
10.34 Credit Agreement by and among the Company as Borrower, BBVA
Bancomer S.A. Institucion de Banca Multiple, Grupo Financiero
BBVA Bancomer S.A. as the Bank, and Panamco Mexico, S.A. de
C.V. and Panamco Golfo, S.A. de C.V. as the Guarantors, dated
as of December 18, 2001 (incorporated by reference to Exhibit
42 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, File No. 1-12290).
10.35 Debt Acknowledgement and Obligor Substitution Agreement by
the Company as Original Obligor, Panamco Mexico, S.A de C.V.
as Substitute Obligor, Panamco Golfo S.A. de C.V. as Joint
Obligor and Guarantor and BBVA Bancomer S.A. Institucion de
Banca Multiple, Grupo Financiero BBVA Bancomer S.A. as the
Bank, dated as of December 18, 2001 (incorporated by
reference to Exhibit 43 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).
10.36 Debt Acknowledgement and Obligor Substitution Agreement by
Panamco Mexico, S.A de C.V. as Original Obligor, Panamco
Golfo S.A. de C.V. as Substitute Obligor and BBVA Bancomer
S.A. Institucion de Banca Multiple, Grupo Financiero BBVA
Bancomer S.A. as Bank, dated as of December 18, 2001
(incorporated by reference to Exhibit 44 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, File No. 1-12290).
10.37 US$ 130 Million Second Amended and Restated Credit Agreement
entered by and among the Company as Borrower, the financial
institutions listed therein as Lenders, ING (US) Capital
L.L.C. as Administrative Agent and The Chase Manhattan Bank,
as the Syndication Agent, dated as of October 29, 2001
(incorporated by reference to Exhibit 45 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, File No. 1-12290).
10.38 Restricted Stock Agreement, dated as of November 10, 2000,
between the Company and William Cooling (incorporated by
reference to Exhibit 54 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).*
10.39 Restricted Stock Agreement, dated as of November 10, 2000,
between the Company and Henry Schimberg (incorporated by
reference to Exhibit 55 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).*
10.40 Stock Option Agreement, dated as of November 10, 2000,
between the Company and William Cooling (incorporated by
reference to Exhibit 56 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).*
10.41 Stock Option Agreement, dated as of November 10, 2000,
between the Company and Henry Schimberg (incorporated by
reference to Exhibit 57 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, File No.
1-12290).*
63
10.42 Promissory Note, dated as of June 21, 2001, from Henry A.
Schimberg to the Company (incorporated by reference to
Exhibit 59 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, File No. 1-12290).*
10.43 Promissory Note, dated as of August 14, 2001, from Henry A.
Schimberg to the Company (incorporated by reference to
Exhibit 60 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, File No. 1-12290).*
10.44 Termination Agreement and General Release, dated as of
October 7, 2002, between the Company and Mario Gonzalez
Padilla.*
10.45 Employment Agreement, dated as of February 27, 2002, between
the Company and Craig Jung (incorporated by reference to
Exhibit 62 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, File No. 1-12290).*
10.46 First Amendment to Employment Agreement, dated as of April 8,
2002, between the Company and Craig Jung.*
10.47 Second Amendment to Employment Agreement, dated as of July 1,
2002, between the Company and Craig Jung.*
10.48 Third Amendment to Employment Agreement, dated as of
November 4, 2002, between the Company and Craig Jung.*
10.49 Share Subscription Agreement entered by and among Coca Cola
de Panama as Seller and CA Beverages, Inc. as Buyer, dated as
of October 2, 2002.
10.50 Coca Cola OPA Trust Agreement entered by and among Coca Cola
de Panama Compania Embotelladora, S.A. as the Settlor, Banco
General, S.A. as the Trustee, Fundacion Pro Accionistas
Minoritarios de Coca Cola de Panama y Cervecerias Baru-Panama
as the Representative and CA Beverages, Inc., dated as of
October 2, 2002
10.51 Coca Cola Holdback Agreement entered by and among Coca Cola
de Panama Compania Embotelladora, S.A. as the Settlor, Banco
General, S.A. as the Trustee, Fundacion Pro Accionistas
Minoritarios de Coca Cola de Panama y Cervecerias Baru-Panama
as the Representative and CA Beverages, Inc., dated as of
October 2, 2002.
10.52 CBP OPA Trust Agreement entered by and among CA Beverages,
Inc. as Settlor, Banco General, S.A. as Trustee, Fundacion
Pro Accionistas Minoritarios de Coca Cola de Panama y
Cervecerias Baru-Panama as the Representative, dated
October 2, 2002.
10.53 CBP Holdback Agreement entered by and among CA Beverages,
Inc. as Settlor, Banco General, S.A. as Trustee, Fundacion
Pro Accionistas Minoritarios de Coca Cola de Panama y
Cervecerias Baru-Panama as the Representative, dated
October 2, 2002.
10.54 Amended and restated US$ 60 Credit Agreement entered by the
Company as borrower and ING Bank, N.V. as lender, dated as of
October 15, 2002.
10.55 Amendment to the US$ 130 million Second Amended and Restated
Credit Agreement dated as of November 20, 2002, entered by
and among the Company as borrower and the financial
institutions listed in the signature pages thereto as the
consenting lenders.
10.56 US$ 33 million Credit Agreement entered by and among Inarco
International Bank, N.V. as lender, Panamco de Venezuela,
S.A. as borrower, dated as of December 16, 2002.
10.57 Memorandum of Understanding entered by and among Inter-
American Financial Corporation, Florida Ice and Farm Co. and
Heineken Finance, N.V., dated as of September 13, 2002.
10.58 Limited Non-Competition Agreement entered by and among the
Company, Embotelladora Panamco Tica, S.A., Florida Ice & Farm
Co., Florida Bebidas, S.A., Heineken International B.V. and
Heineken Finance, N.V., dated as of September 13, 2002.
10.59 Employment Agreement entered by and among Annette Franqui and
Panamco L.L.C., dated as of October 7, 2002.
10.60 Letter Agreement between the Company and Woods W. Staton as
Chairman of the Company, dated as of February 5, 2003.
64
10.61 Second Amendment to Revolving Credit Agreement entered by and
among Comerica Bank as the lender, Panamco de Venezuela, S.A.
as the borrower and the Company as the guarantor, dated as of
December 17, 2002.
10.62 Amendment No 1 dated as of December 19, 2002 to the US$ 10
million guaranty dated as of August 19, 2002 made by the
Company as the guarantor in favor of Banco Santander Central
Hispano, S.A. in consideration of a US$ 10 million loan made
by the lender to Panamco de Venezuela, S.A. on August 19,
2002.
10.63 Agreement of Merger, dated as of December 22, 2002, among
Coca-Cola FEMSA, S.A. de C.V., Midtown Sub, Inc. and
Panamerican Beverages, Inc. (incorporated by reference to
the Current Report on Form 8-K filed by Panamerican
Beverages, Inc. with the Securities and Exchange Commission
on December 24, 2002).
10.64 Stockholder Agreement, dated as of December 22, 2002, among
the persons set forth in Schedule A thereto, Woods W. Staton,
II and James M. Gwynn, solely in their capacities as voting
trustees and not individually of acting on behalf of the
voting rust established pursuant to the Voting Trust
Agreement, amended and restated as of July 15, 1993, the
voting trust, Coca-Cola FEMSA, S.A. de C.V., Midtown Sub,
Inc. and Panamerican Beverages, Inc. (incorporated by
reference to the Current Report on Form 8-K filed by
Panamerican Beverages, Inc. with the Securities and Exchange
Commission on December 24, 2002).
10.65 Consent and Agreement, dated as of November 14, 2002, among
Panamerican Beverages, Inc., The Coca-Cola Company and The
Coca-Cola Export Corporation (incorporated by reference to
Exhibit (d)(5) to the Company's Rule 13e-3 Transaction
Statement filed with the Securities and Exchange Commission
on January 30, 2003, File No. 005-47468).
10.66 Amendment, dated January 13, 2003, to Consent and Agreement,
dated as of November 14, 2002, among Panamerican Beverages,
Inc. to The Coca-Cola Company and The Coca-Cola Export
Corporation (incorporated by reference to Exhibit (d)(6) to
the Company's Rule 13e-3 Transaction Statement filed with the
Securities and Exchange Commission on January 30, 2003, File
No. 005-47468).
10.67 Confidentiality Agreement, dated as of November 14, 2002,
among Panamerican Beverages Inc., Fomento Economico Mexicano,
S.A. de C.V. and Coca-Cola FEMSA, S.A. de C.V. (incorporated
by reference to Exhibit (d)(7) to the Company's Rule 13e-3
Transaction Statement filed with the Securities and Exchange
Commission on January 30, 2003, File No. 005-47468).
10.68 Key Executive Retention, Severance and Non-Competition Plan,
dated September 18, 2002.*
10.69 Key Employee Retention, Severance and Non-Competition Plan,
dated September 18, 2002.*
10.70 Severance Agreement and Mutual Release between the Company
and William G. Cooling, dated as of August 30, 2002
(incorporated by reference to Exhibit 99.1 of the Company's
Current Report of Form 8-K, dated August 30, 2002, File No.
1-12290).*
10.71 Employment Agreement, dated December 5, 2001, by and among
the Company, SPAL, Industria Brasileira de Bebidas and Paulo
Sacchi.*
10.72 First Amendment to Employment Agreement, dated December 6,
2002, by and among the Company, SPAL, Industria Brasileira de
Bebidas and Paulo Sacchi.*
10.73 Executive Deferred Compensation Plan.
10.74 Employment Agreement entered by and among Ruben Pietropaolo
de Jong and Administracion SA de CV, dated as of January 8,
2002.*
10.75 Amendment to Promissory Note, dated December 13, 2002,
between the Company and ING Bank, N.V.
10.76 Guaranty, dated as of December 16, 2002, made by the Company
in favor of Citigroup, Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges.
65
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants.
23.2 Explanation Concerning Absence of Current Written Consent of
Arthur Andersen, LLP.
99.1 Certificate of the Chief Executive Officer and President of
the Company pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contracts and compensatory plans or arrangements
required to be filed as exhibits to this form pursuant to Item
15(a)(3).
(a) During the fourth quarter of 2002, the Company filed Current Reports on
Form 8-K dated November 4, 2002 with respect to "Item 9. Regulation FD
Disclosure;" dated November 11, 2002 with respect to "Item 9. Regulation
FD Disclosure;" and dated December 22, 2002 with respect to "Item 5.
Other Events."
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PANAMERICAN BEVERAGES, INC.
Dated: March 27, 2003 By: /s/ Annette Franqui
-----------------------------------
Annette Franqui, Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: March 27, 2003 By: /s/ Craig D. Jung
-----------------------------------
Craig D. Jung, Director, President
and Chief Executive Officer
Dated: March 27, 2003 By: /s/ Woods W. Staton Welten
-----------------------------------
Woods W. Staton Welten, Director
and Chairman of the Board
Dated: March 27, 2003 By: /s/ Henry A. Schimberg
-----------------------------------
Henry A. Schimberg, Director and
Vice Chairman of the Board
Dated: March 27, 2003 By: /s/ Gustavo A. Cisneros
-----------------------------------
Gustavo A. Cisneros, Director
Dated: March 27, 2003 By: /s/ Oswaldo J. Cisneros
-----------------------------------
Oswaldo J. Cisneros, Director
Dated: March 27, 2003 By: /s/ Gary P. Fayard
-----------------------------------
Gary P. Fayard, Director
Dated: March 27, 2003 By: /s/ Wade T. Mitchell
-----------------------------------
Wade T. Mitchell, Director
67
Dated: March 27, 2003 By: /s/ James J. Postl
-----------------------------------
James J. Postl, Director
Dated: March 27, 2003 By: /s/ Houston Staton
-----------------------------------
Houston Staton, Director
68
CERTIFICATIONS
I, Craig Jung, certify that:
1. I have reviewed this annual report on Form 10-K of Panamerican
Beverages, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Craig D. Jung
-------------------------------------------
Craig D. Jung
Chief Executive Officer and President
69
I, Annette Franqui, certify that:
1. I have reviewed this annual report on Form 10-K of Panamerican
Beverages, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Annette Franqui
-------------------------------------------
Annette Franqui
Vice President, Chief Financial
Officer and Treasurer
70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent Auditors' Report.......................................... F-2
Report of Independent Certified Public Accountants ................... F-3
Consolidated Balance Sheets at December 31, 2002 and 2001............. F-4
Consolidated Statements of Operations for each of the
three Years in the Period Ended December 31, 2002................. F-6
Consolidated Statements of Shareholders' Equity and Comprehensive
Income (Loss) for each of the three Years in the Period
Ended December 31, 2002........................................... F-7
Consolidated Statements of Cash Flows for each of the three Years
in the Period Ended December 31, 2002............................. F-9
Notes to Consolidated Financial Statements............................ F-11
Report of Independent Certified Public Accountants on Schedule........ F-52
Schedule II - Valuation and Qualifying Accounts....................... F-53
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Panamerican Beverages, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheet of Panamerican
Beverages, Inc. (a Panamanian corporation) and subsidiaries (the "Company") as
of December 31, 2002 and the related consolidated statements of operations, of
shareholders' equity and comprehensive income (loss) and of cash flows for the
year then ended. Our audit also included the 2002 financial statement schedule
listed in the index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. The financial statements and
financial statement schedule of the Company as of December 31, 2001 and for
each of the two years in the period ended December 31, 2001, before the
reclassification discussed in Note 21, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements and stated that such 2001 and 2000 financial statement
schedule, when considered in relation to the 2001 and 2000 basic financial
statements taken as a whole, presented fairly, in all material respects, the
information set forth therein, in their reports dated February 5, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2002,
and the results of its operations and its cash flows for the year ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such 2002 financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002, the
Company changed its method of accounting for goodwill to conform to Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets.
As discussed above, the consolidated financial statements of the Company as of
December 31, 2001, and for each of the two years in the period then ended were
audited by other auditors who have ceased operations. These consolidated
financial statements have been revised as follows: (a) as described in Note 1
under the heading "Cost in Excess of Net Assets of Acquired Businesses", these
consolidated financial statements have been revised to include the
transitional disclosures required by SFAS No. 142, which was adopted by the
Company as of January 1, 2002. Our audit procedures with respect to the
transitional disclosures in Note 1 with respect to 2001 and 2000 included (i)
agreeing the previously reported net income (loss) to the previously issued
consolidated financial statements and the adjustments to reported net income
(loss) representing amortization expense (including any related tax effects)
recognized in those periods related to goodwill as a result of initially
applying SFAS No. 142 (including any related tax effects), to the Company's
underlying records obtained from management, and (ii) testing the mathematical
accuracy of the reconciliation of adjusted net income (loss) to reported net
income (loss), and the related earnings(loss)-per-share amounts; (b) as
described in Note 21, the 2000 consolidated statement of operations and
related notes have been revised to reflect the reclassification of certain
contingency accruals. Our audit procedures with respect to this
reclassification described in Note 21 included (i) agreeing the reported
amount to the previously issued consolidated financial statement, and (ii)
testing the mathematical accuracy of the reclassification. In our opinion, the
disclosures and the reclassification are appropriate and have been properly
applied. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 consolidated financial statements of the
Company other than with respect to such disclosures and reclassification and,
accordingly, we do not express an opinion or any other form of assurance on
the 2001 and 2000 consolidated financial statements taken as a whole.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
February 14, 2003
F-2
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP WHICH CEASED OPERATIONS, AND HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP. NO CHANGES WERE MADE TO THE 2001 AND 2000 CONSOLIDATED FINANCIAL
STATEMENTS OTHER THAN THOSE REQUIRED BY THE ADOPTION IN 2002 OF EMERGING
ISSUES TASK FORCE ISSUE NO. 01-09, "ACCOUNTING FOR CONSIDERATION GIVEN BY A
VENDOR TO A CUSTOMER (INCLUDING A RESELLER OF THE VENDOR'S PRODUCTS)" AS
DISCLOSED IN NOTE 1 TO THE 2002 CONSOLIDATED FINANCIAL STATEMENTS AND THE
RECLASSIFICATION DISCLOSED IN NOTE 21 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Panamerican Beverages, Inc.:
We have audited the accompanying consolidated balance sheets of Panamerican
Beverages, Inc. (a Panamanian corporation) and subsidiaries as of December 31,
2001 and 2000 and the related consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Panamerican Beverages, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Miami, Florida,
February 5, 2002 (except with respect to
the matters discussed in Note 23, as
to which the date is March 18, 2002).
F-3
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS OF UNITED STATES OF AMERICA ("U.S.") DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------------
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 69,024 $ 133,666
Accounts receivable, net 128,169 136,614
Inventories, net 105,116 103,040
Other current assets 17,010 27,466
---------- ----------
Total current assets 319,319 400,786
Investments 82,375 28,522
Long-term receivables 2,908 5,521
Property, plant and equipment, net 843,886 1,043,870
Bottles and cases, net 162,806 213,908
Deferred income taxes, net of current portion 61,235 94,592
Cost in excess of net assets acquired, net 836,657 869,056
Other assets 18,419 36,771
---------- ----------
Total assets $ 2,327,605 $ 2,693,026
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 264,128 $ 274,164
Current portion of long-term obligations 208,914 75,439
Bank loans 135,495 35,184
Income taxes payable 20,685 28,973
Deferred income taxes 22,687 28,043
Sales and other taxes payable 39,740 45,881
Current portion of employee severance payments 3,451 3,081
Employee profit sharing 18,501 21,016
Accrued facility reorganization charges 3,693 6,575
Other accrued liabilities 34,141 51,309
---------- ----------
Total current liabilities 751,435 569,665
---------- ----------
Long-term liabilities:
Long-term obligations, net of current portion 547,453 859,619
Pensions and employee severance payments,
net of current portion 24,257 30,882
Deferred income taxes, net of current portion 49,622 87,291
Other liabilities 25,431 44,583
---------- ----------
Total long-term liabilities 646,763 1,022,375
---------- ----------
Total liabilities $ 1,398,198 $ 1,592,040
---------- ----------
(Continued)
F-4
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(Continued)
DECEMBER 31,
-----------------------------
2002 2001
------------- ------------
Commitments and contingencies
(Notes 16, 17 and 18)
Minority interest in consolidated
subsidiaries $ 25,121 $ 28,541
---------- ----------
SHAREHOLDERS' EQUITY
Class A common stock, $0.01
par value; 500,000,000
authorized; 136,974,151 and
136,952,780 shares issued and
112,169,150 and 113,237,031
shares outstanding at December
31, 2002 and 2001,
respectively 1,370 1,369
Class B common stock, $0.01
par value; 50,000,000
authorized; 11,037,711 and
11,059,082 shares issued and
8,659,802 and 8,681,245 shares
outstanding at December 31,
2002 and 2001, respectively 110 111
Series C preferred stock,
$0.01 par value; 50,000,000
shares authorized; 2 shares
issued and outstanding at
December 31, 2002 and 2001,
respectively - -
Capital in excess of par value 1,602,265 1,591,827
Retained earnings 142,813 138,433
Accumulated other comprehensive loss (616,068) (458,341)
---------- ----------
1,130,490 1,273,399
Less 27,182,910 and 26,093,586
treasury shares held at
December 31, 2002 and 2001,
respectively, at cost (226,204) (200,954)
Total shareholders' equity 904,286 1,072,445
---------- ----------
Total liabilities and shareholders' equity $ 2,327,605 $ 2,693,026
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
Net sales $ 2,357,913 $ 2,630,772 $ 2,590,305
Cost of sales, excluding deprecia-
tion and amortization shown
separately below 1,204,216 1,296,307 1,243,485
--------- --------- ---------
Gross profit 1,153,697 1,334,465 1,346,820
--------- --------- ---------
Operating expenses:
Selling and distribution 582,726 609,287 627,633
General and administrative 169,140 204,897 250,491
Depreciation and amortization 235,205 210,667 276,524
Amortization of goodwill - 26,416 35,819
Facilities reorganization and
other charges 35,421 - 503,659
--------- --------- ---------
1,022,492 1,051,267 1,694,126
--------- --------- ---------
Operating income (loss) 131,205 283,198 (347,306)
--------- --------- ---------
Other income (expense):
Interest income 6,994 21,341 31,933
Interest expense (85,312) (119,390) (142,299)
Other income (expense), net 36,352 (10,891) (23,244)
--------- --------- ---------
(41,966) (108,940) (133,610)
--------- --------- ---------
Income (loss) before provision
for income taxes 89,239 174,258 (480,916)
Provision for income taxes --------- --------- ---------
51,126 50,369 21,800
--------- --------- ---------
Income (loss) before minority
interest 38,113 123,889 (502,716)
Minority interest in earnings of
consolidated subsidiaries 4,871 5,865 1,944
--------- --------- ---------
Net income (loss) $ 33,242 $ 118,024 $ (504,660)
========= ========= ==========
Basic earnings (loss) per share $ 0.28 $ 0.94 $ (3.92)
========= ========= =========
Basic weighted average shares
outstanding 120,602 125,559 128,833
========= ========= =========
Diluted earnings (loss) per share $ 0.27 $ 0.93 $ (3.92)
========= ========= =========
Diluted weighted average shares
outstanding 121,172 126,655 128,833
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Shares Amounts
----------------------- -------------------------------------------------------------------
Accumu-
lated
Common Other Total
Stock Capital in Compre- Treasury Share-
Held in $0.01 Excess of Retained hensive Shares, holders'
Issued Treasury Par Value Par Value Earnings Loss At Cost Equity
------------------------ -------------------------------------------------------------------
Balance, December 31, 1999 148,011,864 18,658,707 $ 1,480 $1,584,788 $ 586,196 $(363,269) $ (57,299) $1,751,896
Comprehensive loss:
Net loss - - - - (504,660) - - (504,660)
Translation adjustments
(including $1,972 from taxes) - - - - - (35,895) - (35,895)
Pension plan - - - - - (377) - (377)
----------
Total comprehensive loss (540,932)
----------
Share repurchase - 785,295 - - - - (13,675) (13,675)
Stock options exercised - (25,000) - 326 - - 79 405
Directors' compensation - (38,159) - 384 - - 137 521
Dividends declared
($0.24 per share) - - - - (30,904) - - (30,904)
----------- ---------- --------- ---------- --------- --------- -------- ----------
Balance, December 31, 2000 148,011,864 19,380,843 1,480 1,585,498 50,632 (399,541) (70,758) 1,167,311
Comprehensive income:
Net income - - - - 118,024 - - 118,024
Initial effect on deferred
taxes
relating to the change in
functional currency in the
Colombian subsidiary - - - - - (30,057) - (30,057)
Translation adjustments
(including $(17,308)
from taxes) - - - - - (25,997) - (25,997)
Pension plan - - - - - (2,746) - (2,746)
----------
Total comprehensive income 59,224
----------
Share repurchase - 7,283,685 - - - - (133,198) (133,198)
Stock options exercised - (336,580) - 3,025 - - 1,764 4,789
Restricted stock issued - (234,362) - 3,304 - - 1,238 4,542
Dividends declared
($0.24 per share) - - - - (30,223) - - ( 30,223)
----------- ---------- --------- ---------- --------- --------- -------- ----------
Balance, December 31, 2001 148,011,864 26,093,586 $ 1,480 $1,591,827 $ 138,433 $(458,341) $(200,954) $1,072,445
=========== ========== ======== ========= ======== ======== ======== =========
(Continued)
F-7
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(Continued)
Shares Amounts
------------------------ --------------------------------------------------------------------
Accumu-
lated
Common Other Total
Stock Capital in Compre- Treasury Share-
Held in $0.01 Excess of Retained hensive Shares, holders'
Issued Treasury Par Value Par Value Earnings Loss At Cost Equity
------------------------ -------------------------------------------------------------------
Balance, December 31, 2001 148,011,864 26,093,586 $ 1,480 1,591,827 $ 138,433 $(458,341) $(200,954) 1,072,445
Comprehensive income:
Net income - - - - 33,242 - - 33,242
Translation adjustments
(including $(38,786)
from taxes) - - - - - (157,533) - (157,533)
Pension plan - - - - (194) - (194)
----------
Total comprehensive loss (124,485)
----------
Share repurchase - 2,466,532 - - - - (36,661) (36,661)
Stock options exercised - (1,361,199) - 10,324 - - 11,280 21,604
Treasury stock issued to acquire
minority interest in subsidiary - (16,009) - 114 - - 131 245
Dividends declared
($0.24 per share) - - - - (28,862) - - (28,862)
- - - - - - - -
----------- ---------- --------- ---------- ---------- ---------- ---------- -----------
Balance, December 31, 2002 148,011,864 27,182,910 $ 1,480 $1,602,265 $ 142,813 $(616,068) $(226,204) $ 904,286
=========== ========== ========= ========== ========= ======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 33,242 $ 118,024 $ (504,660)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 235,205 237,083 312,343
Gain on foreign currency remeasurement (12,011) (5,541) (11,664)
Minority interest in earnings of consolidated subsidiaries 4,871 5,865 1,944
Deferred income tax benefit and change in
valuation allowance (27,249) (40,145) (75,681)
Provision for legal contingencies 3,648 137 5,166
Pensions and other employee benefits 14,473 17,945 6,890
Loss (gain) on sales of property, plant and equipment
and investments 193 (2,047) 3,642
Equity in losses (gains) of unconsolidated companies,
net of cash dividends received 290 (516) 1,189
Noncash facilities reorganization charges (benefits) 16,908 (2,015) 415,088
Nonoperating (benefits) charges (39,822) 874 5,977
Other (9,146) 6,867 5,433
Changes in operating assets and liabilities:
Accounts receivable (26,404) (10,857) (14,393)
Inventories (8,045) 278 15,025
Other current assets (3,393) 999 6,506
Long-term receivables (3,116) 1,006 4,562
Accounts payable and accrued expenses 40,142 98,030 64,133
Employee severance payments (16,922) (13,103) (2,835)
Other liabilities (16,816) (55,489) 58,774
----------- ----------- -----------
Total adjustments 152,806 239,371 802,099
----------- ----------- -----------
Net cash provided by operating activities 186,048 357,395 297,439
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (112,531) (83,121) (123,897)
Purchases of bottles and cases (38,388) (47,826) (73,746)
Purchases of investments (83,351) (1,463) (4,982)
Proceeds from sales of investments 69,413 127,718 54,959
Proceeds from sales of property, plant and equipment 24,972 34,465 18,164
Acquisition of minority interest in consolidated subsidiaries - - (965)
Other - (3,306) -
----------- ----------- ----------
Net cash (used in) provided by investing activities (139,885) 26,467 (130,467)
----------- ----------- -----------
(Continued)
F-9
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN THOUSANDS OF U.S. DOLLARS)
(Continued)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash flows from financing activities:
Payment of bank loans and other long-term obligations $(143,485) $ (529,145) $ (302,596)
Proceeds from bank loans and other long-term obligations 98,768 241,807 223,109
Issuance of capital and treasury stock 21,849 9,331 926
Share repurchase (36,661) (133,198) (13,675)
Payment of dividends to minority interest shareholders (2,490) (3,201) (980)
Payment of dividends to shareholders (28,862) (30,223) (30,904)
----------- ----------- -----------
Net cash used in financing activities (90,881) (444,629) (124,120)
----------- ----------- -----------
Effect of exchange rate changes on cash and equivalents (19,924) 2,660 (3,727)
----------- ----------- -----------
Net (decrease) increase in cash and equivalents (64,642) (58,107) 39,125
Cash and equivalents at beginning of year 133,666 191,773 152,648
----------- ----------- ----------
Cash and equivalents at end of year $ 69,024 $ 133,666 $ 191,773
=========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest $ 78,330 $ 109,078 $ 126,566
=========== ========== ==========
Income taxes $ 71,602 $ 83,602 $ 69,200
=========== ========== ==========
NONCASH ACTIVITIES:
Write-off of property, plant and equipment against
accrued facilities reorganization charges $ 16,908 $ (2,015) $ 54,451
=========== ========== ==========
Write-off of costs in excess of net assets acquired against
accrued facilities reorganization charges $ - $ - $ 350,000
=========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-10
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
The primary activity of Panamerican Beverages, Inc., a Panamanian
corporation, and subsidiaries (collectively, the "Company"), is the
production and sale of The Coca-Cola Company ("Coca-Cola") products and
other beverages. The Company operates in Mexico, Central America
(Guatemala, Nicaragua and Costa Rica), Colombia, Venezuela, and Brazil.
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 as
Panamco Central America. In February 1999, 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 and referred to in these financial
statements as Panamco NOLAD. During 2002, the Company formed a joint
venture to acquire an interest in the local Coca-Cola bottler in Panama,
see Note 7.
Approximately 89% of the Company's 2002 net sales were derived from the
distribution of Coca-Cola products. Coca-Cola may be able to exercise
influence over the conduct of the Company's business through rights
maintained under bottler agreements with the Company and otherwise. The
bottler agreements with Coca-Cola are renewed regularly, reflecting a
long and ongoing relationship with Coca-Cola.
On November 1, 1995, Coca-Cola, the Coca-Cola Export Corporation
("Export"), a wholly owned subsidiary of Coca-Cola, and the Company
entered into an Amended and Restated Investment Agreement (the
"Agreement") pursuant to which Coca-Cola designated the Company as an
anchor bottler and agreed to increase its equity interest in the Company.
Coca-Cola also acquired the right to approve certain major corporate
actions taken by the Company. Subject to satisfaction of certain
conditions, the Agreement calls for Coca-Cola to purchase Company capital
stock in amounts equal to the purchase price of bottling acquisitions to
be made by the Company from time to time, up to a maximum voting interest
of 25%. The price per share in any such acquisition of additional capital
stock will be the average closing price on the New York Stock Exchange
during a period preceding the announcement of the related bottling
acquisition. The Agreement does not obligate the Company to finance an
acquisition by selling stock to Export.
The designation of the Company as an anchor bottler means that the
Company is one of Coca-Cola's strategic partners in the worldwide
Coca-Cola bottling system. Although the designation does not guarantee
that the Company will be able to acquire any particular franchise or
renew existing bottler agreements, the Company believes it is looked upon
favorably and that Coca-Cola will provide the Company with favorable
treatment relating to these opportunities.
As of December 31, 2002 and 2001, Coca-Cola was the Company's largest
shareholder and owns approximately 25% of the Company's outstanding Class
A shares, 25% of the Company's outstanding Class B shares and all of the
Company's outstanding Series C Preferred Stock.
The significant accounting policies of the Company and its subsidiaries
are as follows:
Basis of Consolidation
The consolidated financial statements include the accounts and operations
of Panamerican Beverages, Inc. and its controlled subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in consolidation. Minority interest in majority-owned subsidiaries has
been recorded in the Company's consolidated financial statements
representing the minority owners' share of subsidiary's net assets and
earnings.
F-11
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Basis for Translation
The accounts of the Company are maintained in United States of America
("U.S.") dollars. The accounts of the subsidiaries are maintained in the
currencies of the respective countries.
For the Company's subsidiaries that use their local currency as the
functional currency, the assets and liabilities of these subsidiaries are
translated at year-end exchange rates, and income statement items are
translated at average exchange rates prevailing during the year. The
resulting translation adjustments are included in accumulated other
comprehensive income (loss), which is a component of shareholders'
equity. Foreign currency gains and losses resulting from transactions
denominated in foreign currencies, including intercompany transactions,
except for intercompany loans of a long-term nature, are included in
results of operations. For periods that the local economy is considered
to be highly inflationary, the respective subsidiary's financial
statements are remeasured into U.S. dollars.
For the Company's subsidiaries that use the U.S. dollar as the functional
currency, monetary assets and liabilities are remeasured into U.S.
dollars at year-end exchange rates. All other assets and liabilities are
remeasured at the historical rates of exchange prevailing at the time the
items were originally recorded. Income and expense items are remeasured
at average rates of exchange prevailing during the year, except for
depreciation, amortization and materials consumed from inventories, which
are translated at the rates of exchange in effect when the respective
assets were acquired. Foreign currency remeasurement gains (losses) on
monetary assets and liabilities have been included in the statement of
operations accounts to which such items relate as shown below:
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
----------- ----------- ------------
Net sales $ (4,846) $ 403 $ (92)
Cost of sales and operating
expenses 17,107 2,517 7,959
Interest and other income
(expense) (572) 2,666 2,406
Provision (benefit) for income
taxes 322 (45) 1,391
--------- -------- --------
Net remeasurement gain $ 12,011 $ 5,541 $ 11,664
========= ======== ========
Latin America
The Latin American markets in which the Company operates are
characterized by volatile and frequently unfavorable economic, political
and social conditions. High inflation and high interest rates are common.
The governments in the countries where the Company operates have
responded in the past to high inflation by imposing price and wage
controls or similar measures, although formal soft drink price controls
in each country have been lifted or phased out. Certain countries in
Latin America have also experienced significant currency fluctuations.
Since the Company's cash flows from operations are generated primarily in
the currencies of the subsidiaries, the Company is subject to the effect
of fluctuations in the value of those currencies.
During 2002, the Venezuelan government removed controls over the trading
range of the country's currency, the Bolivar, allowing the exchange rate
to be determined by market conditions. During 2002, the local currency
decreased in value in relation to U.S. dollar by approximately 85%, which
contributed to the net remeasurement gain for 2002 totaling $12.0
million. Subsequently, on February 5, 2003, the Venezuelan government
imposed exchange rate controls, fixing the Bolivar's value to the U.S.
dollar at 1,600 Bolivars to the U.S. dollar.
F-12
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
During January 1999, the Brazilian Government changed its local currency
exchange policy in relation to the U.S. dollar, allowing the exchange
rate to be determined by market conditions without the establishment of a
trading band. During 2002 and 2001, the local currency decreased in value
in relation to the U.S. dollar by 52.3% and 18.7%, respectively, and the
related exchange loss amounted to $0.9 million and $8.6 million,
respectively, which was recorded in other income (expense). As of
December 31, 2002 and 2001, the Brazilian subsidiaries have liabilities
denominated in U.S. dollars subject to translation exchange gains or
losses in the amount of $8.1 million and $5.5 million, respectively, and
assets subject to translation effect in the amount of $17.4 million and
$1.3 million, respectively.
Reclassifications
Certain amounts in the 2001 and 2000 consolidated financial statements
have been reclassified to conform to the current year presentation.
Although not considered significant to the consolidated financial
statements, the Company has, in accordance with Emerging Issues Task
Force ("EITF") Issue No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (including a Reseller of the Vendor's Products)",
reclassified customer promotional payments that were previously
classified as selling and distribution expenses as a reduction of net
sales totaling $20.1 million and $9.1 million in 2001 and 2000,
respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results in subsequent periods could differ from those estimates.
The most significant estimates with regard to these consolidated
financial statements are related to the estimation of facilities
reorganization charges, estimation of future cash flow generation for
purposes of impairment testing of long-lived assets, including goodwill,
realization of accounts receivable and inventories, useful life of
bottles and cases and cold equipment, and the settlement of taxes and
pensions.
Revenue Recognition
Revenues from sales are recorded at the time products are delivered to
trade customers. Net sales reflect units delivered at selling list prices
reduced by promotion allowances. The Company's frequency of delivery to
its customers as well as the Company's prior experience indicates that
sales returns are not significant. Therefore, no allowance for sales
returns is recorded.
Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss), foreign
currency translation adjustments and pension liability adjustments, and
is presented in the accompanying Consolidated Statements of Shareholders'
Equity and Comprehensive Income (Loss).
Cash and Equivalents
Cash and equivalents include cash on hand and in banks and certificates
of deposit stated at cost plus income accrued up to the balance sheet
date. Cash and equivalents have an original maturity of three months or
less at the date of acquisition.
F-13
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Inventories
Inventories are stated at the lower of average cost, determined using the
first-in, first-out ("FIFO") method, or market. Components of inventory
cost include bottled beverages, raw materials, and spare parts and
supplies. Provisions, when necessary, has been made to reduce obsolete
and slow-moving inventories to net realizable value.
Investments
The Company uses the cost method to account for certain equity
investments in which it has a minority interest and does not exercise
significant influence.
As a general policy, investments in other companies in which the Company
holds at least 20% of the outstanding shares, but less than 50%, are
accounted for using the equity method, wherein the Company's
participation in the earnings (losses) of those subsidiaries are recorded
in income as earned, and dividends received in cash are applied to reduce
the related investment. However, the ultimate decision regarding the
application of the equity method of accounting is dependent upon the
specific facts and circumstances of each investment.
The Company's equity in earnings (losses) and the changes in the
Company's equity of subsidiaries that are acquired or sold during the
period are included in the consolidated financial statements from or
until the date of the transaction.
The Company holds an ownership interest in CA Beverages, Inc., a joint
venture formed for the purposes of acquiring the Coca-Cola bottler and a
beer company in the Republic of Panama (see Note 7).
In addition, the Company has classified certain other investments as
held-to-maturity investments under the scope of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," based on the
Company's intent to hold such investments to maturity and its ability to
do so. These held-to-maturity investments are carried at amortized cost.
Property, Plant and Equipment
Property, plant and equipment includes the cost of land, buildings,
equipment and significant improvements to existing property. Additions,
improvements and expenditures for repairs and maintenance that
significantly add to the productive capacity or extend the life of an
asset are capitalized; other expenditures for repairs and maintenance are
charged to operating results as incurred. Leasehold improvements are
amortized over the shorter of the asset's life or the remaining
contractual lease term.
Interest incurred with respect to long-term capital projects is
capitalized. No interest was capitalized during 2002, 2001 or 2000.
When an asset is sold or retired, the cost and related accumulated
depreciation are removed from the respective accounts and any gain or
loss is included in results of operations for that year. Depreciation
expense is calculated under the straight-line method for all subsidiaries
over the estimated remaining useful lives of the assets.
Included in depreciation expense is a provision to cover losses related
to coolers that are placed with customers under rent-free agreements.
This provision is adjusted, as necessary, to account for the loss of
coolers.
F-14
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Bottles and Cases
The Company utilizes the lower of the FIFO cost or market method for
valuing bottles and cases on hand. Breakage of bottles and cases on hand
is included in depreciation expense. For the years ended December 31,
2002, 2001 and 2000, breakage expense amounted to $33.1 million, $37.7
million, and $60.9 million, respectively.
Bottles and cases include the cost of bottles and cases on hand and the
unamortized portion of the capitalized cost of new introductions, net of
any amounts collected for bottles and cases. The cost of new
introductions is amortized over estimated useful lives ranging from three
to six years for bottles and six to ten years for cases. Amortization
expense of $39.9 million, $40.3 million, and $58.5 million was recorded
in 2002, 2001 and 2000, respectively, and is included within depreciation
and amortization expense in the consolidated statements of operations.
Accumulated amortization at December 31, 2002 and 2001 amounted to $214.6
million and $207.9 million, respectively.
A certain number of bottles and cases are permanently in circulation in
the marketplace. The Company's practice is to accept returnable bottles
and cases in lieu of deposits on new sales. In practice, the Company's
customers generally do not return bottles and cases for refunds.
Accordingly, funds received by the Company from customers for bottles and
cases are netted against the Company's cost of acquiring bottles and
cases.
Cost in Excess of Net Assets of Acquired Businesses
The cost in excess of net assets of acquired businesses ("goodwill")
represents the residual purchase price after the allocation to all
identifiable net assets acquired.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," which requires goodwill to be tested for
impairment and written down when impaired, rather than being amortized
over useful lives, as previous standards required. SFAS No. 142 became
effective for the Company beginning January 1, 2002. SFAS No. 142
requires that goodwill no longer be amortized to earnings but instead
must be reviewed for possible impairment at least annually. The Company
ceased the amortization of goodwill beginning January 1, 2002 and also
performed the transitional goodwill impairment test, which indicated no
impairment as of January 1, 2002. Subsequent to the completion of the
transitional goodwill impairment test and due to recent events occurring
in Latin America, the Company performed a second goodwill impairment test
in the fourth quarter of 2002. The second impairment test resulted in no
indications of impairment and established a new annual impairment test
date for the Company. Goodwill of a reporting unit is tested for
impairment on an annual basis or between annual tests if an event occurs
or circumstances change that would reduce the fair value of a reporting
unit below its carrying amount.
The following table provides pro forma results for the years ended
December 31, 2002, 2001 and 2000 as if the non-amortization provisions of
SFAS 142 have been applied:
F-15
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
2002 2001 2000
---------- ---------- ----------
Net income (loss):
Reported net income (loss) $ 33,242 $ 118,024 $ (504,660)
Add back: Goodwill amortization, net of taxes - 24,774 34,242
-------- --------- -----------
Pro forma net income (loss) $ 33,242 $ 142,798 $ (470,418)
======== ========= ========
Basic earnings (loss) per share:
Reported net income (loss) $ 0.28 $ 0.94 $ (3.92)
Add back: Goodwill amortization, net of taxes - 0.20 0.27
-------- --------- ---------
Pro forma basic earnings (loss) per share $ 0.28 $ 1.14 $ (3.65)
======== ========= =========
Diluted earnings (loss) per share:
Reported net income (loss) $ 0.27 $ 0.93 $ (3.92)
Add back: Goodwill amortization, net of taxes - 0.20 0.27
-------- --------- ---------
Pro forma diluted earnings (loss) per share $ 0.27 $ 1.13 $ (3.65)
======== ========= =========
Impairment
The Company accounts for possible impairments of long-lived assets in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires that long-lived assets to be
held and used by the Company be reviewed for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If changes in circumstances indicate
that the carrying amount of an asset that an entity expects to hold and
use may not be recoverable, future cash flows expected to result from the
use of the asset and its disposition must be estimated. If the
undiscounted value of the future cash flows is less than the carrying
amount of the asset, an impairment charge may result after reviewing
certain indicators of fair value. During 2002, the Company recognized an
impairment expense of approximately $8.9 million related to the machinery
and equipment used to produce the Company's malta product in the
Venezuelan subsidiary. During 2000, the Company recognized an impairment
expense of $350.0 million attributable to the goodwill of the Company's
Venezuelan subsidiary.
Accounting for Internal Use Software
The Company follows the guidance provided in Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which specifies software costs
that are required to be capitalized.
Cost of Sales
Cost of sales includes expenses related to raw materials used in the
production of the Company's products, including but not limited to the
following: concentrate, sugar, cans, packaging, pet resin, glass, crowns
and plastic. Cost of sales also includes labor (wages and other benefits)
and other overhead costs including fuel, electricity and equipment
maintenance, specifically incurred or attributable to bottling and/or
acquiring the Company's products.
F-16
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Selling and Distribution Expenses
Selling and distribution expenses include sales commissions, marketing
expenses including promotions and advertising as well as labor costs
(wages and other benefits) for employees directly involved in the selling
and distribution of the Company's products.
General and Administrative Expenses
General and administrative expenses include labor costs (wages and other
benefits) for employees not directly involved in the selling and
distribution of the Company's products, professional service fees, and
other overhead costs not directly associated with the production of the
Company's products.
Marketing and Advertising Expense
The Company expenses broadcast advertising costs when invoiced, which
generally coincides with the broadcast of the related advertisement.
Other marketing and advertising costs are expensed as incurred. Marketing
expense, net of Coca-Cola reimbursements in 2002, 2001 and 2000 was $62.3
million, $52.8 million, and $60.9 million, respectively, and is included
within selling and distribution expense in the consolidated statements of
operations. The Company reduces marketing expenses by the amount of
marketing reimbursements received from Coca-Cola that relate to marketing
support at the date such amounts are received in cash.
Franchisor Incentives
Coca-Cola, at its sole discretion, provides the Company with various
benefits and incentives, including capital expenditure incentives,
promotional programs and advertising support. In 1999, Coca-Cola modified
the terms and conditions of its franchisor incentive arrangements. As a
result, reimbursements are now based on meeting certain conditions as
stipulated in the Capabilities and Performance Program ("CAPRS")
agreement. Until 1998, there were no conditions required for franchisor
incentives.
Prior to 1999, capital expenditure incentives were recorded as other
income when Coca-Cola confirmed its commitment to the related incentive.
Beginning in 1999, capital expenditure incentives are deferred when
received and have been amortized to other income on a straight-line basis
over 60 months beginning the next month after Coca-Cola confirms its
commitment to the related incentive (see Note 21).
Incentive payments that are related to the increase in volume of
Coca-Cola products that result from such expenditures and are viewed by
the Company as an offset against the costs of concentrates paid by the
Company to Coca-Cola. As described above, advertising and promotional
incentives are treated as reductions of marketing expense.
Pensions and Other Employee Benefits
Pension plan assets, liabilities and provisions, and related disclosures
are presented in accordance with SFAS No. 87, "Employers' Accounting for
Pensions" determined under the projected unit credit method. All of the
Company's subsidiaries, including the Company's servicing company, namely
Panamco LLC, but excluding the Company's Venezuelan subsidiary, have
pension plans, which cover all their employees except for the Mexican
plan, which covers only nonunion employees.
F-17
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
The Mexican, Brazilian and Costa Rican pension plans are funded and the
contributions are based on actuarial valuations. The Colombian plan is
unfunded and shared with a government agency. The Nicaraguan, Guatemalan
and Panamco LLC plans are unfunded.
The labor laws in each of the countries in which the Company operates
require severance payments upon involuntary termination. The Company
accrues for such costs when the amounts can be estimated. The Company has
no material post-retirement or post-employment benefits, which would
require adjustment under SFAS No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pensions," or SFAS No. 112,
"Employers' Accounting for Post-employment Benefits - an Amendment of
FASB Statements No. 5 and 43."
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting carrying values and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to
reverse. Deferred income tax provisions and benefits are based on the
changes to the asset or liability from period to period. A valuation
allowance is recognized to reduce net deferred tax assets to amounts that
management believes are more likely than not to be realized.
Stock-based Compensation
At December 31, 2002, the Company has two stock-based employee
compensation plans, which are described more fully in Note 18. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income (loss), as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the dates of grant. The following table
illustrates the effect on net income (loss) and earnings (loss) per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
December 31,
-------------------------------------------
2002 2001 2000
--------- --------- -----------
Net income (loss), as reported $ 33,242 $ 118,024 $ (504,660)
Stock-based compensation expense, included in the determination
of net income (loss), as reported, net of related tax effects - - -
Less: Total stock-based employee compensation expense
determined under a fair value based method for all awards,
net of related tax effects 7,361 10,040 5,379
--------- --------- ----------
Pro forma net income (loss) $ 25,881 $ 107,984 $ (510,039)
========= ========= ==========
Earnings (loss) per share:
Basic, as reported $ 0.28 $ 0.94 $ (3.92)
========= ========= ==========
Basic, pro forma $ 0.22 $ 0.86 $ (3.96)
========= ========= ==========
Diluted, as reported $ 0.27 $ 0.93 $ (3.92)
========= ========= ==========
Diluted, pro forma $ 0.21 $ 0.85 $ (3.96)
========= ========= ==========
F-18
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Financial Instruments
The Company's financial instrument counterparties are high quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk
through specific credit standards and diversification of counterparties.
The Company has procedures to monitor the credit exposure amounts.
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. Fair value
estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. The
assumptions used have a significant effect on the estimated amounts
reported. Due to the short-term nature of these accounts (i.e. usually
less than 3 months), the carrying amount of cash and equivalents,
accounts receivable, accounts payable and bank loans approximate fair
value as of December 31, 2002, and 2001.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 2002 and 2001 are summarized as follows:
2002 2001
-------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ------------
Molson, Inc. $ 12,057 $ 18,490 $ - $ -
========== ========== ========== ============
Foreign bonds and other instruments $ 3,246 $ 3,246 $ 3,133 $ 3,058
========== ========== ========== ============
Bank loans and long-term obligations
(including current portion) $ 891,862 $ 928,648 $ 970,242 $ 1,005,878
========== ========== ========== ============
The fair values of foreign bonds and other instruments are estimated
based on quoted market prices. For investments for which there are no
quoted market prices, fair values are derived from estimated yields for
investments of similar characteristics. The fair values of bank loans and
long-term obligations are based on quoted market prices or, where quoted
market prices are not available, on the present value of future cash
flows discounted at estimated yields on instruments with similar
characteristics.
The Company's other investments include cost and equity investments,
which are not included in the fair value calculation.
Derivative Instruments
The Company enters into derivative transactions to mitigate the risk
associated with interest rates, foreign currency exchange rates, price
fluctuations of goods used in the normal course of business and other
similar hedging strategies. Derivative instruments are recorded on the
balance sheet at fair value. Depending on the accounting treatment for
which the Company qualifies, the changes in fair value are recorded in
the consolidated statement of operations or, if the derivative instrument
is designated as a cash flow hedge, the effective portion of the hedging
relationship is recorded in accumulated other comprehensive income (loss)
and the ineffective portion of the hedging relationship is recorded in
the consolidated statement of operations. The policy of the Company is to
classify any gains or losses, realized or unrealized, in the same account
caption in the consolidated statements of operations as the item being
hedged.
F-19
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Earnings per Share
In accordance with SFAS No. 128, "Earnings per Share," basic earnings
(loss) per common share calculations are determined by dividing earnings
attributable to common shareholders by the weighted average number of
shares of common stock. Diluted earnings per share are determined by
dividing earnings available to common shareholders by the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding, related to outstanding stock options.
The following table reconciles the weighted average number of shares
outstanding with the number of shares used in the computation of diluted
earnings (loss) per share:
December 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Numerator:
Net income (loss) $ 33,242 $ 118,024 $(504,660)
========== ========== ==========
Denominator (in thousands):
Denominator for basic earnings (loss) per share 120,602 125,559 128,833
Effect of dilutive securities:
Options to purchase common stock 570 1,096 -
---------- ---------- ----------
Denominator for diluted earnings (loss) per share 121,172 126,655 128,833
========== ========== ==========
Earnings (loss) per share:
Basic $ 0.28 $ 0.94 $ (3.92)
========== ========== ==========
Diluted $ 0.27 $ 0.93 $ (3.92)
========== ========== ==========
Anti-dilutive securities not included in the diluted
earnings (loss) per share calculation:
Options to purchase common stock (in thousands) 4,850 2,115 7,003
Nonvested stock (in thousands) - - 700
Exercise prices: $ 13.75 $ 17.84 $ 13.75
to to to
$ 29.94 $ 29.94 $ 29.94
New Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities- an Interpretation of ARB
No. 51." FIN No. 46 addresses consolidation by business enterprises of
variable interest entities, which include entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support
from other parties. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. FIN
46 also applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial condition.
F-20
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation- Transition and Disclosure- an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The Company
will continue to account for stock-based compensation according to APB
No. 25, while its adoption of SFAS No. 148 requires the Company to
provide prominent disclosures about the effect of SFAS No. 123 on
reported income and will require the Company to disclose these effects in
the interim financial statements as well.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others- an interpretation of FASB Statements No. 5, 57,
and 107 and rescission of FASB Interpretation No. 34." FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of the guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December
31, 2002, regardless of the guarantor's fiscal year-end. The disclosure
requirements of FIN 45 are effective for financial statements of interim
or annual periods ending after December 15, 2002. The Company does not
expect the adoption of FIN 45 to have a significant impact on its
consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of costs covered by this standard include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operations, plant closing,
or other exit or disposal activities. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 eliminates the requirement to
classify gains and losses from the extinguishment of indebtedness as
extraordinary, requires certain lease modifications to be treated the
same as a sale-leaseback transaction, and makes other non-substantive
technical corrections to existing pronouncements. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with earlier
adoption encouraged. The Company does not expect the adoption of SFAS No.
145 will have a significant impact on its consolidated financial position
or results of operations.
F-21
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
(2) MERGER TRANSACTION
On December 22, 2002, Coca-Cola FEMSA, S.A. de C.V. ("Coca-Cola FEMSA"),
Midtown Sub, Inc. and the Company signed a merger agreement, pursuant to
which Coca-Cola FEMSA will acquire the Company in a transaction valued at
approximately $3.6 billion, including the assumption of approximately
$880 million in net debt (total long-term obligations, including current
portion and bank loans less cash and equivalents). In the proposed merger
transaction, the Company would be merged with Midtown Sub, Inc., a
wholly-owned subsidiary of Coca-Cola FEMSA. The Company will survive the
merger and continue to exist as a wholly-owned subsidiary of Coca-Cola
FEMSA, but the directors of the Company after the merger will be the
directors designated by Midtown Sub, Inc.
In the proposed merger transaction, each outstanding share of the
Company's Class A shares will be converted into the right to receive
$22.00 in cash and each outstanding share of the Company's Class B shares
will be converted into the right to receive $38.00 in cash. In exchange
for all the shares of the Company that it beneficially owns, The
Coca-Cola Company will receive, instead of cash, 304,045,678 Series D
shares of Coca-Cola FEMSA. Each outstanding option to purchase shares of
Class A shares will be cancelled, with the holder becoming entitled to
receive the excess, if any, of $22.00 over the exercise price, per share,
or such option.
There can be no assurance that the proposed merger transaction with
Coca-Cola FEMSA will be completed and consummation of the merger is
subject to several significant conditions, including the approval by the
holders of a majority of the Company's Class B shares and the approval by
the holders of a majority of the Company's Class A shares present or
represented by proxy at a special meeting to be held to consider and vote
upon the proposed merger transaction (the "Special Meeting"), excluding
the vote of specified holders of Class A shares that also hold Class B
shares. On January 30, 2003, the Company filed a preliminary proxy
statement with the Securities and Exchange Commission with respect to the
Special Meeting and the proposed merger transaction.
Other than the shareholder approvals, other important conditions to the
proposed merger transaction include antitrust regulatory approvals, the
disbursement of funds to Coca-Cola FEMSA by its lenders, the confirmation
of investment grade rating of the combined company and the absence of
changes that lead to a material adverse effect on the Company. The merger
transaction is expected to be completed shortly after the Company
receives shareholder and regulatory approvals for the merger, which the
Company expects will be during the second quarter of 2003.
(3) FACILITIES REORGANIZATION AND OTHER CHARGES
Current Year Charges
At the conclusion of the reorganization programs announced in 2000,
approximately 7,700 employees had been terminated by the Company. As of
June 30, 2002, the 2000 reorganization programs have been completed and
all remaining balances related to accrued facilities reorganization costs
totaling $4.2 million, which includes an estimated $1.1 million in cash
charges and $3.1 million in noncash charges, were reversed into operating
income by reducing facilities reorganization and other charges in the
Company's consolidated statements of operations.
During 2002, the Company recorded $110.2 million of facilities
reorganization and other charges ($92.0 million, net of tax benefits)
resulting primarily from the deterioration of macroeconomic conditions in
some of the countries, primarily in Venezuela, in which the Company
operates. These charges consist of $26.4 million of severance charges
throughout the Company's operations related to approximately 2,100
employees, $68.0 million of asset write-offs, impairment charges and
plant closings primarily in the Company's Venezuelan
F-22
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
operations and $23.7 million related to obsolete machinery and
discontinued product components, offset by excise tax benefits obtained
in Brazil totaling $3.4 million and the reversal into income of accrued
facilities reorganization costs related to severance payments totaling
$4.5 million. As of December 31, 2002, approximately 1,200 of the 2,100
employees have been terminated by the Company resulting in severance
payments totaling $17.3 million.
The following table shows a summary of the facilities reorganization and
other charges and benefits included in the consolidated statements of
operations captions presented below for the year ended December 31, 2002,
including reversals related to the 2000 reorganization programs, which
were concluded during 2002:
Cost of sales $ 11,483 (a)
Selling, general and administrative 3,401 (b)
Cash facilities reorganization and other charges 18,513 (c)
----------
Total cash charges 33,397
----------
Noncash facilities reorganization and other charges 16,908 (d)
Depreciation and amortization 51,097 (e)
----------
Total noncash charges 68,005
----------
Total operating charges 101,402
Included in Other income (expense), net:
Nonoperating charges 8,801 (f)
----------
Gross charges 110,203
Tax benefit (18,250)
----------
Net charges $ 91,953
==========
a) Cost of sales charges relate to the write-off of raw materials
inventory totaling $0.6 million, obsolete spare parts for production
machinery totaling $2.6 million and the payment of excise taxes
totaling $8.3 million on soft drink inventories containing high
fructose corn syrup in Mexico. The payment of the excise taxes
resulted from a law that was suspended shortly after it was
initiated, but subsequently reinstated effective July 15, 2002.
b) Selling, general and administrative charges relate to the write-off
of obsolete promotional materials totaling $0.3 million, obsolete
spare parts totaling $1.0 million, a provision for labor
contingencies totaling $0.9 million and miscellaneous administrative
expenses totaling $1.2 million.
c) The cash facilities reorganization and other charges relate to
severance charges for the termination of approximately 2,100
employees in Mexico, Venezuela and Colombia totaling $26.4 million,
offset by excise tax benefits obtained in Brazil totaling $3.4
million, and the reversal into income of accrued facilities
reorganization costs related to severance payments totaling $4.5
million ($2.5 million relates to the 2000 reorganization programs).
d) The noncash facilities reorganization and other charges relate to
plant closings and related disposal of property, plant and equipment
in Venezuela and Mexico totaling $7.9 million and $4.1 million,
respectively, the loss on sale of unproductive assets in Venezuela
totaling $8.0 million, offset by the reversal into income of accrued
facilities reorganization charges related to the 2000 reorganization
programs totaling $3.1 million.
e) Depreciation and amortization charges relate to the write-off of
obsolete property, plant and equipment in Mexico, Venezuela and
Colombia totaling $43.8 million, of which approximately 83% occurred
in Venezuela, 11% in Mexico and 6% in Colombia and the write-off of
bottles and cases in Mexico, Venezuela and Colombia totaling $7.3
million, of which approximately 76% occurred in Venezuela, 18% in
Mexico and 6% in Colombia.
F-23
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
f) The nonoperating charges relate to the loss on disposal of
nonoperating property, plant and equipment, mostly in Venezuela,
totaling $4.4 million, the sale, at a loss totaling $3.0 million, of
the corporate airplane to a related party and the loss on disposal
of investments, mostly in Colombia, totaling $1.4 million.
As a result of the above, net income for the year ended December 31, 2002
was impacted by the facilities reorganization and other charges totaling
$92.0 million, net of the related tax benefit of $18.3 million.
The following tables show the status of the balance of the reorganization
accrual related to the facilities reorganization and other charges
recorded in 2002 at December 31, 2002:
===== CHARGES ===== =========== APPLICATIONS ===========
BALANCE AT SEVERANCE ASSET BALANCE AT
DECEMBER 31, AND OTHER CASH WRITE-OFFS/ DECEMBER 31,
2001 CASH NONCASH PAYMENTS LOSS ON SALE REVERSALS 2002
-------------------------------------------------------------------------------------------
$ - $ - $ 20,054 $ - $ 20,054 $ - $ -
- 23,042 - 17,300 - 2,049 3,693
-------- -------- -------- ------------ -------- -------- --------
$ - $ 23,042 $ 20,054 $ 17,300 $ 20,054 $ 2,049 $ 3,693
======== ======== ======== ============ ======== ======== ========
Summary of Previously Announced Reorganization Programs
Facilities Reorganization Charges - During the year ended December 31,
2000, the Company recorded $503.7 million of facilities reorganization
charges. These charges are primarily the result of the $350.0 million
write-down of goodwill, attributable to Panamco Venezuela; the write-off
of noncash items of property, plant and equipment, obsolete bottles and
cases and charges related to legal contingencies amounting to $65.1
million; and cash items relating primarily to severance payments, job
terminations and reorganization of the distribution system of the
Venezuelan and Brazilian subsidiaries amounting to $88.6 million.
Severance payments recorded during 2000 relate to the termination of
approximately 10,000 employees across all levels and operating units of
the Company. Approximately 7,700 employees had been terminated by the
Company as of December 31, 2001 relating to the restructuring effected
during 2000. During the fourth quarter of 2001, the Company reevaluated
its original estimated headcount reduction of approximately 10,000
employees and revised the headcount reduction to approximately 8,200
employees throughout the Company.
Nonoperating Charges - During the year ended December 31, 2000, the
Company recorded $6.0 million of charges, of which $5.4 million was
recorded in the first quarter and $0.6 million were recorded in the fourth
quarter, related to the disposal of nonoperating assets, including land
from some of the operating plants, which are included in other expense,
net.
As a result of the facilities reorganization charges and nonoperating
charges, the Company recorded a tax benefit of $46.5 million, of which
$23.4 million was recorded in the first quarter of 2000 and $23.1 million
was recorded in the fourth quarter of fiscal 2000.
The following table summarizes the net charges and benefits recorded in
the consolidated statements of operations for the year ended December 31,
2000:
F-24
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
Cash Noncash Total
--------- ---------- ----------
Restructuring charges $ 86,677 $ 24,814 $111,491
Asset write-offs 1,894 381,637 383,531
Nonrecurring charges - 8,637 8,637
-------- -------- ---------
Facilities reorganization charges 88,571 415,088 503,659
Nonoperating charges - 5,977 5,977
-------- -------- ---------
Gross charges $ 88,571 $421,065 509,636
======== ========
Tax benefit (46,516)
--------
Net charges $463,120
=========
The following tables show the status of the balance of the reorganization
accrual and asset write-down allowance related to the facilities
reorganization charges recorded in 2000 at December 31, 2002, 2001 and
2000:
BALANCE AT SEVERANCE PROPERTY/ ASSET BALANCE AT
DECEMBER 31, AND OTHER EQUIPMENT WRITE-OFFS/ DECEMBER 31,
2001 CASH PAYMENTS SOLD WRITE-DOWN REVERSALS (ADDITIONS) 2002
------------- ------------- --------- ----------- --------- ----------- -------------
Write-off of property
and equipment $ - $ - $ - $ - $ - $ - $ -
Job termination and
severance payments 4,221 1,741 - - 2,480 - -
Other 8,305 5,159 - - 3,146 - -
---------- -------- -------- -------- ------- ------ ------
Facilities reorganization
charges $12,526 $ 6,900 $ - $ - $ 5,626 $ - $ -
========== ======== ======== ======== ======== ====== ======
The following table shows the status of the balance of the reorganization
accrual and asset write-down allowance at December 31, 2001 and 2000.
Balances of $6.0 million and $7.8 million are reflected in other
long-term liabilities in the consolidated balance sheets at December 31,
2001 and 2000:
BALANCE AT SEVERANCE PROPERTY/ ASSET BALANCE AT
DECEMBER 31, AND OTHER EQUIPMENT WRITE-OFFS/ DECEMBER 31,
2000 CASH PAYMENTS SOLD WRITE-DOWN REVERSALS (ADDITIONS) 2001
------------- ------------- --------- ----------- --------- ----------- -------------
Write-off of property
and equipment $ - $ - $ - $ (2,015) $ 2,015 $ - $ -
Job termination and
severance payments 44,899 42,693 - - 3,500 (5,515) 4,221
Other 10,732 2,427 - - - - 8,305
---------- ---------- --------- ----------- --------- -------- ---------
Facilities reorganization
charges $55,631 $45,120 $ - $ (2,015) $ 5,515 $(5,515) $ 12,526
========== ========== ========= ========= ========= ======== ========
F-25
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
==== CHARGES ==== ========= APPLICATIONS =========
BALANCE AT SEVERANCE PROPERTY/ ASSET BALANCE AT
DECEMBER 31, AND OTHER CASH EQUIPMENT WRITE-OFFS/ DECEMBER 31,
1999 CASH NONCASH PAYMENTS SOLD WRITE-DOWN 2000
------------- ---------- --------- ------------- ----------- ----------- -------------
Write-off of property
and equipment $ - $ 2,770 $ 54,451 $ - $ 6,112 $ 51,109 $ -
Job termination and
severance payments - 78,769 - 33,870 - - 44,899
Venezuela goodwill
impairment - - 350,000 - - 350,000 -
Other - 7,032 10,637 6,937 - - 10,732
----------- -------- --------- -------- -------- -------- --------
Facilities reorganization
charges $ - $88,571 $415,088 $ 40,807 $ 6,112 $401,109 $55,631
=========== ======== ========= ========= ======== ======== ========
(4) ACCOUNTS RECEIVABLE
December 31,
---------------------------
2002 2001
----------- ------------
Current accounts receivable consist of:
Customers and distributors $ 66,897 $ 87,183
Employees 5,193 5,929
Subsidiaries of Coca-Cola and related companies (Note 9) 19,484 16,510
Sales and income taxes receivable 14,237 8,942
Other 29,639 26,487
--------- ----------
135,450 145,051
Less - Allowance for doubtful accounts 7,281 8,437
--------- ----------
$ 128,169 $ 136,614
========= ==========
Long-term receivables consist of:
Notes from distributors $ 648 $ 1,158
Employee housing loan fund - 592
Other 2,260 3,771
--------- ---------
$ 2,908 $ 5,521
========= =========
Notes from distributors relate to financing provided by the Company to
distributors to acquire vehicles. Notes have maturities ranging from
three to five years and all bear interest at 15% as of December 31, 2002.
F-26
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(BALANCES IN THE TABLES ARE STATED IN THOUSANDS OF U.S. DOLLARS)
(5) INVENTORIES
DECEMBER 31,
---------------------------
2002 2001
----------- -----------
Inventories consist of:
Bottled beverages $ 25,629 $ 28,335
Raw materials 57,364 51,837
Spare parts and supplies 28,072 29,637
------ ------
111,065 109,809
Less - Allowance for obsolete and slow moving items 5,949 6,769
----- -----
$ 105,116 $ 103,040
========= =========
(6) OTHER CURRENT ASSETS
DECEMBER 31,
-------------------------
2002 2001
-------- ---------
Other current assets consist of:
Prepaid expenses $ 7,592 $ 7,466
Deferred income taxes 3,644 13,059
Other 5,774 6,941
-------- ---------
$ 17,010 $ 27,466
========= =========
(7) INVESTMENTS
The principal components of investments as of December 31, 2002 and 2001,
and the method of accounting applied and respective ownership percentages
for cost and equity method investments at December 31, 2002 are as
follows:
DECEMBER 31,
ACCOUNTING ------------------------
DESCRIPTION METHOD USED OWNERSHIP 2002 2001
------------------------------------------------- ----------- --------- --------- ---------
CA Beverages, Inc. Equity 53% $ 61,277 $ -
Tapon Corona de Colombia, S.A. Equity 40% 2,703 2,794
Molson, Inc. - 12,057 -
Industria Envasadora de Queretaro, S.A. de C.V. Cost 15% 1,075 1,132
Beta San Miguel Cost 3% 978 1,030
Cervejarias Kaiser, S.A. ("Kaiser") - - 13,276
Ingenio San Carlos - - 3,556
Comptec, S.A. - - 1,633
Foreign bonds - 1,946 3,133
Other 2,339 1,968
---------- ---------
$ 82,375 $ 28,522
========== =========
F-27
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
In September 2002, the Company formed a joint venture with Heineken, N.V. and
Florida Ice and Farm Company S.A. ("FIFCO") to acquire the Coca-Cola bottler
and a beer company in the Republic of Panama. On October 2, 2002, the joint
venture entity, CA Beverages, Inc. ("CA Beverages") acquired control of
Coca-Cola de Panama Compania Embotelladora, S.A. ("Coca-Cola Panama") and
indirect control of Cervecerias Baru-Panama, S.A. ("Baru"). In December 2002,
Coca-Cola Panama completed a self tender offer for its shares, as a result of
which CA Beverages became a 95.6% holder of stock of Coca-Cola de Panama. Also
in December 2002, CA Beverages completed a tender offer for shares of Baru, as
a result of which CA Beverages became a 99% holder of the stock of Baru.
All acts of CA Beverages must be unanimously approved by its board of
directors, which, by contract, is comprised of three directors with each
shareholder appointing one director. The Company accordingly lacks the ability
to elect a majority of CA Beverages directors or to cause CA Beverages to take
any action without first obtaining the approval of Heineken, N.V. and FIFCO.
As a result of the substantive participating rights of the minority
shareholders of CA Beverages and in accordance with EITF Issue No. 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights," the Company has not consolidated the results of CA
Beverages in 2002. The Company recorded an equity loss, included in other
income (expense), totaling $0.4 million related to its ownership interest in
CA Beverages, which includes the results of Coca-Cola Panama and Baru.
The Company held an investment interest of 12.1% in Cervejarias Kaiser, S.A.
("Kaiser"), a Brazilian brewery, which amounted to $13.3 million as of
December 31, 2001. During 2002, the Company recorded a gain on the sale of its
12.1% equity stake in Kaiser. The sale of the 12.1% equity stake was part of a
larger transaction in which Molson, Inc. ("Molson") acquired Kaiser and
entered into a partnership with Heineken. The sale generated proceeds for the
Company of $55.1 million, which includes an equity interest in Molson stock of
$12.1 million as of December 31, 2002. The interest in the Molson stock is
recorded as an investment. The Molson stock is subject to a two-year
contractual restriction on sale that expires on March 19, 2004, pursuant to
the agreement with Molson entered into at the time of the acquisition of
Kaiser by Molson. The two-year restriction can only be shortened in the case
of a change in control of Molson, transfer of substantially all of the assets
of Molson, or any material inaccuracy in Molson's representations and
warranties contained in the Kaiser purchase agreement. As of December 31,
2002, no events have occurred which have decreased the original restriction
period. This transaction resulted in a gain of $48.6 million, which is
included as part of Other income (expense), net in the Company's consolidated
statements of operations. The Company will continue to distribute Kaiser
products in its franchise areas in Brazil and the acquisition of Kaiser will
not impact this distribution agreement.
The Company does not hold any investments in general or limited partnerships.
F-28
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
(8) PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------------------------------------------
ESTIMATED
2002 2001 USEFUL LIVES
-------------- ------------ ---------------
Property, plant and equipment consist of:
Land $ 71,369 $ 86,040 -
Buildings 273,165 309,355 17 to 40 years
Leasehold improvements 4,103 7,563 5 to 8 years
Machinery, equipment, furniture and fixtures 1,103,274 1,162,129 2 to 20 years
Vehicles 396,630 357,178 3 to 10 years
Construction in progress 31,322 51,829 -
------------- --------------
1,879,863 1,974,094
Less - Accumulated depreciation and amortization 1,035,977 930,224
------------- --------------
$ 843,886 $ 1,043,870
============= ===============
During the years ended December 31, 2002, 2001 and 2000, the Company recorded
depreciation expense, including approximately $51.1 million of write-offs of
property, plant and equipment discussed in Note 3 above, of approximately
$162.3 million, $132.7 million, and $157.1 million, respectively.
(9) RELATED PARTY TRANSACTIONS
The Company purchases raw materials from various suppliers, including related
parties, subject to approval of Coca-Cola. Such transactions are in the
ordinary course of business at negotiated prices comparable to those
transactions with other customers and suppliers. The principal components of
related party transactions were purchases of concentrates, syrups, sugars,
returnable and non-returnable bottles, cans, and caps.
On April 22, 2002, the Company sold its corporate airplane for $10.5 million
to a trust affiliated with a director of the Company. In connection with this
transaction, the Company terminated the operating lease for the airplane by
payment to the lending bank of $14.9 million representing the amount
outstanding under the lease. The Company believes the terms of this
transaction were no less favorable to the Company than could have been
obtained from an unaffiliated third party.
On October 7, 2002, the Company announced that it had reached various
agreements with Coca-Cola to convert its Risco water volume in Mexico to
Coca-Cola's brand Ciel beginning in the first quarter of 2003. The conversion
is done in exchange for total cash consideration of $65.0 million to be paid
by Coca-Cola. The Company received $3.6 million during the fourth quarter and
will receive $56.0 million of the remaining consideration in the first quarter
of 2003 with the remaining amount to be paid in the following four years.
Income from the conversion will be deferred and recognized into income over
the life of the contract, which is ten years.
Amounts due from or due to related parties as of December 31, 2002 and 2001,
respectively, are as follows:
F-29
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
DECEMBER 31,
---------------------------
2002 2001
---------- ----------
Accounts receivable:
Subsidiaries of Coca-Cola $ 17,502 $ 14,025
Subsidiaries of Kaiser 1,982 2,485
--------- ---------
$ 19,484 $ 16,510
========= =========
Accounts payable:
Subsidiaries of Coca-Cola $ 29,407 $ 21,842
Productos de Vidrio, S.A. 2,469 2,912
Central Azucarero Portuguesa, C.A. 2,602 1,950
Tapon Corona de Colombia, S.A. 1,920 1,564
Comptec, S.A. 546 767
Other 1,673 -
--------- ---------
$ 38,617 $ 29,035
========= =========
The Company had the following significant transactions with related parties:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
-------- -------- --------
Income:
Marketing expense support from Coca-Cola
(recorded net against marketing expenses) $ 33,483 $ 36,503 $ 18,017
Kaiser beer distribution fees 3,762 3,650 4,840
Other 378 2,453 -
--------- --------- ---------
$ 37,623 $ 42,606 $ 22,857
========= ========= =========
Expenses:
Purchases of concentrate from Coca-Cola $ 333,019 $ 361,052 $ 343,075
Purchases of beer 37,649 52,295 59,372
Purchases of other inventories 95,645 179,133 79,011
--------- --------- ---------
$ 466,313 $ 592,480 $ 481,458
========= ========= =========
Capital expenditure incentives received in cash $ - $ 303 $ 408
========= ========= =========
(10) INCOME TAXES
As a Panamanian corporation, the Company does not pay income taxes on
income derived from foreign sources, but the operations of the
subsidiaries are subject to income taxes at the applicable local rates in
the countries where the subsidiaries operate. Income taxes are computed
taking into consideration the taxable and deductible effects of inflation
in each of the countries in which the Company operates. The provisions
for income taxes have been determined on the basis of the taxable income
of each individual company and not on a consolidated basis.
As of December 31, 2002, the Company had $80.7 million (tax effected) of
net operating loss carryforwards available from its subsidiaries to
offset future taxable income. The Company has recorded a total valuation
allowance of approximately $45.3 million of which $33.1 million applies
against net operating loss carryforwards from its subsidiaries. The
Company's net operating loss carryforwards, totaling $80.7 million,
expire as follows:
F-30
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
2003 2004 TO 2010 THEREAFTER NO EXPIRATION TOTAL
---------- ------------ ---------- ------------- ---------
NOLAD $ - $ 2,813 $ 4,495 $ - $ 7,308
Venezuela 10,628 17,460 - - 28,088
Brazil - - - 45,321 45,321
--------- ----------- -------- --------- ----------
Total $ 10,628 $ 20,273 $ 4,495 $ 45,321 $ 80,717
======== ======== ======= ======== ==========
The Mexican and Venezuelan subsidiaries are subject to an asset tax, to the
extent that such asset tax exceeds the income tax of the period, at an annual
rate of 1.8% and 1.0%, respectively. Any required payment of asset taxes is
refundable against the excess of income taxes over asset taxes for the
following ten and three years in the case of Mexico and Venezuela,
respectively.
Income tax expense for the years ended December 31, 2002, 2001 and 2000
consists of the following:
CURRENT DEFERRED VALUATION ALLOWANCE TOTAL
EXPENSE EXPENSE (BENEFIT) INCREASE (DECREASE) EXPENSE (BENEFIT)
2002:
NOLAD $ 65,381 $ (2,196) $ - $ 63,185
Colombia 10,043 (12,242) - (2,199)
Venezuela 2,133 (36,563) 21,131 (13,299)
Brazil 535 (1,506) 4,330 3,359
Corporate 283 (203) - 80
--------- ----------- ----------- ----------
Total $ 78,375 $ (52,710) $ 25,461 $ 51,126
========= =========== =========== ==========
2001:
NOLAD $ 79,258 $ (12,948) $ - $ 66,310
Colombia 4,900 (124) - 4,776
Venezuela 2,453 4,836 (28,673) (21,384)
Brazil 1,058 (3,236) - (2,178)
Corporate 2,845 - - 2,845
--------- ----------- ------------ -----------
Total $ 90,514 $ (11,472) $ (28,673) $ 50,369
========= =========== ============ ===========
2000:
NOLAD $ 78,609 $ (26,695) $ - $ 51,914
Colombia 11,612 (19,212) - (7,600)
Venezuela 5,366 (2,288) (11,037) (7,959)
Brazil 1,429 (16,449) - (15,020)
Corporate 465 - - 465
--------- ----------- ------------ -----------
Total $ 97,481 $ (64,644) $ (11,037) $ 21,800
========= ========== ============ ===========
The provisions for (benefits from) income taxes computed by applying the
local statutory rates to income before taxes, as reconciled to the actual
provisions (benefits), are as follows for the years ended December 31,
2002, 2001 and 2000:
F-31
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
2002 2001 2000
---- ---- ----
Consolidated statutory tax rate 50% 52% (2%)
Add (deduct)--
Tax inflation adjustments, net (17%) (11%) (1%)
Indexed tax depreciation (1%) 1% 1%
Employee profit sharing 4% 4% 1%
Asset tax 4% - 1%
Change in statutory rate 1% - -
Tax credits relating to the deduction of interest
on shareholders' equity and other - (2%) -
Increase (decrease) in valuation allowance 28% (11%) (2%)
Other (12%) (4%) 7%
----- ---- ----
Consolidated effective tax rate 57% 29% 5%
===== ==== ====
The local country statutory rates are approximately 34% in the NOLAD segment,
33% in Brazil, 35% in Colombia and 34% in Venezuela. The consolidated
statutory tax rate presented above has been determined on the basis of each
individual subsidiary. In addition, the Company's Corporate entity incurs
various expenses, for which no tax benefit is generated and therefore, results
in a higher statutory rate on a consolidated basis.
The components of the net deferred income tax liability (asset) as of December
31, 2002 and 2001 are as follows:
DECEMBER 31,
----------------------------
2002 2001
---------- ---------
Current:
Inventories $ 14,329 $ 18,404
Nondeductible provisions (3,783) (1,995)
Tax loss carryforwards (10,628) (28,865)
Valuation allowance 12,961 19,800
Other 6,164 7,640
--------- ----------
Total current liability, net 19,043 14,984
--------- ----------
Long-term:
Bottles and cases 9,171 24,619
Property, plant and equipment 44,346 68,344
Nondeductible provisions (20,318) (31,120)
Tax loss carryforwards (70,089) (66,012)
Valuation allowance 32,300 -
Other (7,023) (3,132)
---------- ---------
Total long-term asset, net (11,613) (7,301)
---------- ---------
Total $ 7,430 $ 7,683
========== =========
As of December 31, 2002, the net deferred income tax liability of $7.4 million
was presented in the balance sheet, based on tax jurisdiction, as current
deferred income tax assets of $3.7 million (included in other current assets,
see Note 6), non-current deferred income tax assets of $61.2 million, current
deferred income tax liabilities of $22.7 million and non-current deferred
income tax liabilities of $49.6 million. Similarly, at December 31, 2001, the
net deferred income tax liability of $7.7 million was presented in the balance
sheet,
F-32
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
based on tax jurisdiction, as current deferred income tax assets of $13.0
million (included in other current assets, see Note 6), non-current
deferred income tax assets of $94.6 million, current deferred income tax
liabilities of $28.0 million and non-current deferred income tax
liabilities of $87.3 million.
(11) BANK LOANS AND LONG-TERM OBLIGATIONS
At December 31, 2002, the Company and its subsidiaries had $135.5 million
in direct unsecured bank loans denominated in U.S. dollars and other
currencies, with maturities between one and twelve months. The weighted
average annual fixed interest rate for $14.5 million of the loans as of
December 31, 2002 was 3.5%. The remaining $121.0 million in bank loans,
as of December 31, 2002, had a weighted average annual interest rate of
2.4%.
Current and long-term obligations at December 31, 2002 and 2001 consisted
of the following:
DECEMBER 31,
---------------------------
2002 2001
--------- ----------
Current obligations:
Notes payable to banks, in various currencies, weighted average
interest rates of 2.5% and 9.2%, respectively $ 135,495 $ 35,184
Current maturities of long-term obligations 208,914 75,439
--------- ---------
Total current obligations 344,409 $ 110,623
========= =========
Long-term obligations:
Senior notes, in U.S. dollars, weighted average interest rates of 7.0%
and 7.5%, respectively, maturing from April 2003 to July 2009 $ 440,371 $ 450,000
Notes payable to banks, in U.S. dollars, weighted average interest rates of
2.4% and 3.6%, respectively, maturing from June 2003 to November 2004 120,770 179,975
Notes payable to banks, in Mexican pesos, weighted average interest rates
of 9.3% and 8.0%, respectively, maturing in December 2003 21,233 101,960
Notes payable to banks, in Brazilian reales, weighted average interest rates
of 10.1% and 9.2%, respectively, maturing from January 2003 to March 2003 50 1,558
Notes payable to banks, in Guatemalan quetzales, weighted average interest
rates of 11.5% and 15.0%, respectively, maturing from June 2003 to July
2007 1,779 2,908
Notes payable to banks, in Costa Rican colones, weighted average interest
rates of 17.5% in 2001, outstanding amount was repaid during 2002 - 4,224
Unsecured promissory notes, in Mexican pesos, weighted average interest
rates of 8.7% and 8.7%, respectively, maturing in November 2006 118,305 126,993
Marketable bonds, in Colombian pesos, weighted average
interest rates of 10.3% and 11.3%, respectively 50,615 63,287
Capital lease, in U.S. dollars, interest rates of
3.3% and 5.4%, respectively 3,244 4,153
--------- ----------
756,367 935,058
Less -current maturities 208,914 75,439
---------- ----------
Total long-term obligations, net of current maturities $ 547,453 $ 859,619
========== ==========
F-33
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
On November 12, 1999, the Mexican subsidiaries issued unsecured promissory
notes for 1.0 billion Mexican pesos equivalent to 380.0 million UDI's (unit of
real constant value, in Mexican pesos, whose value is calculated by Bank of
Mexico), payable semiannually with a seven-year maturity and bearing an annual
interest rate of 8.65% (including withholding). As of December 31, 2002 and
2001, the amount of this debt is $118.3 million and $127.0 million,
respectively.
Some of the Company's debt agreements establish, among other restrictions, an
interest coverage ratio not less than 4.0 to 1 and a debt-to earnings before
interest, taxes, depreciation and amortization ("EBITDA") ratio not more than
2.35 to 1. During the fourth quarter of 2002, the Company amended the terms of
its $130.0 million syndicated loan maturing in November 2004, as well as the
other agreements that included similar covenants, by modifying the
consolidated debt to consolidated debt-to-EBITDA ratio so that it may not
exceed 2.35 to 1.
During October 2002, the Company entered into a bridge loan agreement, related
to the acquisition of Coca-Cola Panama, of $60.0 million maturing on April
1, 2003 with monthly interest payments. Interest payments bear an annual
interest rate at LIBOR plus 0.60% from October 1, 2002 to January 1, 2003,
with incremental increases in the interest rate during 2003 and concluding
with an interest rate of LIBOR plus 1.10% from March 1, 2003 to maturity on
April 1, 2003. As of December 31, 2002, $50.0 million of the bridge loan
remained outstanding and is reflected as part of notes payable to banks in the
table above.
In the normal course of business, the Company provides guarantees to lenders
and financial institutions regarding debt obligations incurred by the
Company's operating subsidiaries. In general, the guarantees provide assurance
that the Company will repay debt obligations incurred by the Company's
operating subsidiaries if the operating subsidiaries are unable to repay the
obligations. As of December 31, 2002, the Company has provided guarantees
relating to approximately $76.0 million of the long-term obligations of the
Company's operating subsidiaries.
Maturities of current and long-term obligations, including bank loans, at
December 31, 2002 are as follows:
2003 $ 344,409
2004 86,043
2005 24,590
2006 134,477
2007 12,343
Thereafter 290,000
----------
$ 891,862
==========
As of December 31, 2002, the Company and its subsidiaries have complied with
all the terms and conditions established in the loan agreements.
F-34
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
(12) DERIVATIVE INSTRUMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," became effective for the Company on January 1, 2001.
The Company had a floating-to-fixed interest rate swap (the "Swap"),
which expired in November 2002, with a total notional amount of $250.0
million, which exchanged LIBOR for a fixed interest rate of 6.437%. Upon
adoption of SFAS No. 133, the Company designated the Swap as a cash flow
hedge. During 2001, the Company determined that it was probable that the
original forecasted transaction would not continue through the expiration
of the Swap. Therefore, during 2001, the Company reclassified $12.2
million of unrealized losses related to the Swap from accumulated other
comprehensive income (loss) to other expense, net in the Company's
consolidated statement of operations. The Company realized a loss of $1.0
million, included in other income (expense) net, for the year ended
December 31, 2002 in the Company's consolidated statement of operations.
The Company has a fixed-to-floating interest rate swap, expiring in April
2003, with a total notional amount of $150.0 million, which exchanges a
fixed interest rate of 8.125% for a LIBOR-based rate. As of December 31,
2002, the fair value of the interest rate swap was an asset of $0.4
million and is recorded within other current assets. The Company recorded
approximately $0.8 million, included as a reduction of interest expense,
for the year ended December 31, 2002 in the Company's consolidated
statement of operations.
During 2002, the Company entered into a foreign currency forward purchase
contract in its Mexican operations, expiring during the first quarter of
2003, with a notional amount of approximately $14.0 million. The Company
cancelled this contract during the fourth quarter of 2002. The Company
realized a loss of $0.4 million, included in other income (expense) net,
for the year ended December 31, 2002 in the Company's consolidated
statements of operations.
During 2002, the Company entered into foreign currency forward purchase
contracts to purchase the Brazilian real forward, expiring during the
first quarter of 2004, with total notional amounts of approximately $21.0
million. During the third and fourth quarters of 2002, the Company
cancelled the foreign currency forward purchase contracts. The Company
realized a loss of approximately $5.7 million, included in other income
(expense) net, for the year ended December 31, 2002 in the Company's
consolidated statement of operations.
During 2002, the Company entered into an equity forward purchase
contract, expiring in March 2004, on Molson shares to be received from
the sale of Kaiser, with a notional amount of approximately $18.1
million. The Company recognized an unrealized holding loss of
approximately $0.7 million, included in other income (expense) net, for
the year ended December 31, 2002 in the Company's consolidated statement
of operations. As of December 31, 2002, the fair value of the equity
forward purchase contract was a liability of $0.7 million and is recorded
within other current liabilities.
During 2002, the Company entered into a foreign currency forward contract
in Venezuela, expiring during the fourth quarter of 2002 for a notional
amount of approximately $5.0 million. The Company realized a gain of
approximately $0.3 million, included in other income (expense) net, for
the year ended December 31, 2002 in the Company's consolidated statement
of operations.
F-35
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
During 2002, the Company entered into a foreign currency forward purchase
contract to purchase the Colombian peso forward, expiring during the
first quarter of 2003 for a notional amount of approximately $7.5
million. As of December 31, 2002, the Company recognized an unrealized
loss of approximately $22 thousand recorded in Other income (expense)
net, in the Company's consolidated statements of operations. As of
December 31, 2002, the fair value of the foreign currency forward
purchase contract was a liability of $22 thousand and is recorded within
Other current liabilities.
(13) ACCOUNTS PAYABLE
December 31,
----------------------------
Accounts payable consists of: 2002 2001
---------- ---------
Trade and other payables $ 225,511 $ 245,129
Related party payables 38,617 29,035
---------- ---------
Total $ 264,128 $ 274,164
=========== =========
(14) OTHER ACCRUED LIABILITIES
December 31,
----------------------------
Other accrued liabilities consist of: 2002 2001
--------- ---------
Accrued salaries and benefits $ 10,848 $ 17,365
Fair value of derivative instruments 716 10,433
Interest payable 79 4,472
Other accrued expenses 22,498 19,039
--------- --------
Total $ 34,141 $ 51,309
========= ========
(15) PENSIONS
The status of the pension plans are presented in accordance with SFAS No.
132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits":
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------- -------------------------
UNFUNDED FUNDED UNFUNDED FUNDED
-------- ------ -------- ------
Change in benefit obligation:
Benefit obligation at beginning of year $ 18,983 $ 24,581 $ 14,556 $ 29,049
Service cost 644 1,655 610 2,410
Interest cost, net 2,021 2,142 1,886 2,508
Effect of curtailment and settlements - (3,226) 3,733 (8,601)
Actuarial (gain) loss (280) 398 252 (704)
Benefit payments (1,274) (1,970) (78) (2,304)
Translation (gain) loss (5,566) (2,574) (1,976) 2,223
---------- --------- ---------- ----------
Benefit obligation at end of year $ 14,528 $ 21,006 $ 18,983 $ 24,581
---------- --------- ---------- ----------
F-36
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------- --------------------------
UNFUNDED FUNDED UNFUNDED FUNDED
---------- --------- ------------ ------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ - $ 11,538 $ - $ 12,964
Actual return on plan assets - 1,396 - 769
Employer contributions - 1,790 - 3,263
Benefit payments - (1,577) - (3,543)
Translation gain - (1,625) - (1,915)
--------- --------- ---------- ------------
Fair value of plan assets at end of year $ - $ 11,522 $ - $ 11,538
--------- --------- ---------- ------------
FUNDED STATUS:
Benefit obligation in excess of fair value of
plan assets $ 14,528 $ 9,484 $ 18,983 $ 13,043
Unrecognized net actuarial (gain) loss 1,347 1,153 1,721 (2,584)
Unrecognized prior service cost (benefit) (69) (5,719) (102) (6,747)
Effect of curtailment and settlements - - (3,733) 797
Unrecognized net transition obligation (asset) 283 (307) 69 (700)
--------- --------- ---------- -----------
Net obligation recognized $ 16,089 $ 4,611 $ 16,938 $ 3,809
========= ========= ========== ===========
The net periodic pension cost consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2002
--------- -------- ---------
Service cost $ 2,299 $ 3,020 $ 3,294
Interest cost, net 4,163 4,394 5,870
Expected return on plan assets (1,314) (817) (1,518)
Amortization of prior service cost 335 601 540
Recognized net actuarial loss (gain) 143 (14) 121
Transition obligation (117) (80) (32)
--------- --------- ---------
Net periodic pension costs $ 5,509 $ 7,104 $ 8,275
========= ========= =========
The actuarial assumptions in 2002, 2001 and 2000, net of inflation, which
reflect the local economic conditions and particular circumstances of
each of the subsidiaries, are as follows:
2002
--------------------------------------------------------------------------------
EXPECTED RETURN RATE OF COMPENSATION
DISCOUNT RATE ON PLAN ASSETS INCREASE
------------------ ------------------ -----------------------
Mexico 11.0% 12.0% 8.0%
Guatemala 15.0% * 10.0%
Nicaragua 14.0% * 10.0%
Costa Rica 18.0% 20.0% 13.0%
Colombia 12.5% * 8.0%
Brazil 11.3% 11.3% 7.1%
Corporate 6.8% * 4.5%
F-37
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
2001
-------------------------------------------------------------------------------
EXPECTED RETURN RATE OF COMPENSATION
DISCOUNT RATE ON PLAN ASSETS INCREASE
---------------- -------------------- -------------------------
Mexico 12.0% 13.0% 9.0%
Guatemala 15.0% * 10.0%
Nicaragua 14.0% * 10.0%
Costa Rica 18.0% 20.0% 13.0%
Colombia 19.0% * 13.0%
Brazil 11.3% 11.3% 7.1%
Corporate 7.5% 8.0% 7.5%
2000
------------------------------------------------------------------------------
EXPECTED RETURN RATE OF COMPENSATION
DISCOUNT RATE ON PLAN ASSETS INCREASE
--------------- -------------------- ------------------------
Mexico 7.3% 9.0% 3.3%
Guatemala 15.0% * 10.0%
Colombia 19.0% * 13.0%
Brazil 6.0% 6.0% 2.0%
*Not applicable, as the benefits are not funded.
(16) COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to credit
risk, consist primarily of trade accounts receivable. The Company extends
credit on an unsecured basis to some of its distributors and customers.
Diversification of credit risk is difficult since the Company sells
primarily in the beverage industry. The Company's management recognizes
that extending credit and setting appropriate allowances for
uncollectible accounts receivable is largely a subjective decision based
on knowledge of the customer. The Company's management and their staff
meet regularly to evaluate credit exposure in the aggregate, and by
individual credit and maintains allowances for potential losses or
adjustments. Management sets and maintains credit standards and ensures
the overall quality of the credit portfolio.
Litigation, Claims and Assessments
From time to time, the Company and its subsidiaries are involved in
litigation, claims and assessments incidental to the operation of the
Company's business. As a general policy, the Company defends matters in
which the Company or its subsidiaries are named defendants and, for
insurable losses, maintains insurance to protect against adverse
judgments, claims or assessments that may affect the Company. In the
opinion of the Company, although the adequacy of existing insurance
coverage or the outcome of any legal proceedings cannot be predicted with
certainty, the ultimate liability associated with any claims or
litigation in which the Company or its subsidiaries are currently
involved will not materially affect the Company's financial condition but
could be material to the results of operations or cash flows in any one
accounting period.
F-38
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
Self-insurance
As of December 31, 2002, the Company's subsidiaries in Mexico, Colombia,
and Venezuela are partly self-insured through a wholly-owned subsidiary,
Panamco Insurance Company Limited ("Panamco Insurance"), for various
property risks. These risks, relating to property, plant and equipment,
include but are not limited to natural disasters, theft, machinery
malfunction, and other illegal acts by third parties. The Company is
responsible for the first $0.25 million for each and every loss incurred
and for a total of $1.0 million annually in excess of policy deductibles.
Expense related to claims covered by Panamco Insurance was approximately
$0.6 million, $0.5 million and $0.6 million in 2002, 2001 and 2000,
respectively. While the ultimate amount of claims incurred is dependent
on future developments, in management's opinion, the recorded allowance
of $0.4 million as of December 31, 2002 and 2001, respectively, is
adequate to cover the future payment of claims. As such, no activity has
been recorded for the self-insurance reserve during each of the three
years in the period ended December 31, 2002. However, it is reasonably
possible that recorded allowances may not be adequate to cover future
payment of claims. Adjustments, if any, to estimates recorded resulting
from ultimate claim payments will be reflected in operations in the
periods in which such adjustments are known.
Construction Commitments
In the normal course of business, the Company occasionally enters into
commitments for the construction of new production facilities. At
December 31, 2002, the amounts outstanding under these construction
commitments totalled approximately $4.5 million.
EDS Contract
On December 1, 2000, the Company entered into a five-year outsourcing
contract with EDS to manage its information technology infrastructure
throughout Latin America for approximately $97.6 million, which will end
on November 30, 2005. During 2002, the Company incurred $21.9 million in
expense related to this contract. The future minimum obligations under
this contract are $21.0 million in 2003, $18.4 million in 2004, and $14.9
million in 2005.
Vulnerability due to Concentration and Franchise Arrangements
The Company's primary raw material supplier is Coca-Cola. Transactions
with Coca-Cola are subject to maintenance provisions under existing
bottler agreements. The Company's other raw materials are sourced from
multiple vendors and the Company believes additional supply sources exist
for all these raw materials.
The Company has the right to sell Coca-Cola's products pursuant to
bottling or other similar agreements described below, which may have a
material effect on the Company's financial statements in the case of
non-compliance by the Company or non-performance by Coca-Cola.
In the event of a problem with the quality of a beverage, Coca-Cola may
require the Company to take all necessary measures to withdraw the
beverage from the market. Coca-Cola must also approve the types of
container used in bottling and controls the design and decoration of the
bottles, boxes, cartons, stamps and other materials used in production.
The agreements grant Coca-Cola the right to inspect the products.
Coca-Cola charges the Company a fixed price for concentrates, which may
change from time to time at the discretion of Coca-Cola. Coca-Cola
currently charges the Company a percentage of the weighted average
wholesale price (net of taxes) of each case sold to retailers within each
of the Company's franchise territories. The Company pays no additional
compensation to Coca-Cola under the licenses for the use of the
associated
F-39
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
trade names and trademarks. Subject to local law, Coca-Cola has the right
to limit the wholesale prices of its products.
As it has in the past, Coca-Cola may, in its discretion, contribute to
the Company's advertising and marketing expenditures as well as undertake
independent advertising and marketing activities. Coca-Cola has routinely
established annual budgets with the Company for cooperative advertising
and promotion programs.
Tax Credits
The Brazilian subsidiaries are being assessed by the Brazilian tax
authorities for tax credits taken during 1995 and 1996, relating to
overpayments of the value-added tax in previous years. Such overpayments
related to value-added tax applied to samples, free products given to
customers and to credit sales. These assessments amount to approximately
$24.7 million and $37.2 million as of December 31, 2002 and 2001,
respectively, and the Company has appealed the assessments at the
administrative level. The Company and its outside legal advisors believe
that in view of the legal basis adopted for the use of such credits, no
significant liability should result from this issue and therefore no
provision for this matter has been recorded in the accompanying
consolidated financial statements.
Other Contingencies
During May 2000, the Comision Federal de Competencia in Mexico (the
Mexican Antitrust Commission, the "Commission") pursuant to a complaint
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 the Company, to
abstain from entering into any exclusivity arrangement with retailers.
The Company, along with other Coca-Cola bottlers, appealed the resolution
rendered in February of 2002 by a Recurso de Revision ("Review
Recourse"), which was presented before the Mexican Antitrust Commission.
The Mexican Antitrust Commission confirmed its original resolution and
issued a confirmatory resolution on July 11, 2002. The Company appealed
this resolution before the competent courts by initiating a Juicio de
Amparo (appeal based on the violation of constitutional rights). The
Company anticipates that a decision from the appeals court could be
rendered by the end of 2003. Although no assurances can be given, the
Company does not believe that the outcome of this matter, even if
determined against the Company, will have a material adverse effect on
its financial condition or results of operations.
During August 2001, the Comision para Promover la Competencia in Costa
Rica (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. Although no assurances can be given, the Company does not
believe that the outcome of this matter, even if determined against the
Company, will have a material adverse effect on its financial condition
or results of operations. Panamco Costa Rica has vigorously defended
itself throughout the process and presented its final conclusions to the
Costa Rican Antitrust Commission in September 2002. The Company is
anticipating a decision from the Costa Rican Antitrust Commission during
the second quarter of 2003.
In connection with the Venezuela Acquisition, in 1999 the Company
received notice of certain tax claims asserted by the Venezuelan taxing
authorities, which mostly relate to fiscal periods prior to the Venezuela
Acquisition. The Company has presented the appropriate recourses against
these claims at the administrative level as well as the court level,
where required. These claims currently total approximately $23.1 million.
The
F-40
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
Company has 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 analysis that the Company has
completed in relation to these claims, as well as the defense strategy
that the Company has developed, the Company does not believe that the
ultimate disposition of these cases will have a material adverse affect
on its financial condition or results of operations.
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 the Company's 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. The Company intends to vigorously defend its rights should
this action be filed. During 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 labor
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.
Since 2001 (and after two decisions rendered during 2000 and 2001 by the
Venezuelan Supreme Court against affiliates of Empresas Polar S.A.,
whereby the Supreme Court found in those individual cases that the
relationship between the affiliates of Empresas Polar S.A. and those
specific distributors was a relationship of labor nature and not of
commercial nature), Panamco Venezuela has been the subject of numerous
claims by former distributors (including former members of the
distributors union) claiming alleged labor and severance rights owed to
them at the time of the termination of their relationship with Panamco
Venezuela. As of December 31, 2002, Panamco Venezuela was the subject of
approximately 430 lawsuits filed by former distributors for a total
amount of approximately $31.2 million. Notwithstanding the number of
claims and the amounts involved most of these claims have been filed by
former distributors that either have entered into release agreements with
Panamco Venezuela at the time of their termination and therefore the
Company believes that they have no rights for additional claims, or are
claims that have been filed after the statute of limitations for the
presentment of such claims has expired. There are also lawsuits presented
by people that have never had a distributor's or employee relationship
with Panamco Venezuela, which the Company believe have no merit at all.
Since the decisions rendered by the Supreme Court during 2000 and 2001
against the affiliates of Empresas Polar S.A., the Supreme Court has
during 2002 mitigated its criteria of what should be considered a labor
relationship vis-a-vis a commercial relationship. The Company believes
based on the new decisions rendered by the Supreme Court as well as based
on the individual analysis of each individual claim, that these claims
are without merits and intends to vigorously defend itself against them.
F-41
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
During 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 the Company (and certain of our subsidiaries)
and Coca-Cola (and certain of its subsidiaries). In the complaint, the
plaintiffs alleged that the Company 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. The Company has filed a motion to
dismiss the complaint for lack of subject matter and personal
jurisdiction. The Company expects a ruling on the motion to dismiss in
2003. The Company believes this lawsuit is without merit and intends to
vigorously defend itself 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. The Company believes that the ultimate disposition of such
other proceedings will not have a material adverse effect on its
consolidated financial condition.
(17) LEASES
The Company leases buildings, machinery and equipment, vehicles, and
office equipment throughout its operations under both operating and
capital leases that expire between 2003 and 2007.
The following are the minimum lease payments for each of the years
indicated applicable to capital and noncancellable operating leases as of
December 31, 2002:
CAPITAL OPERATING
------------- -----------
Fiscal year:
2003 $ 990 $ 4,639
2004 1,079 3,390
2005 1,175 3,122
2006 - 2,380
2007 - 1,879
---------- --------
Total minimum lease payments 3,244 $ 15,410
========
Amount representing interest 108
----------
Present value of minimum lease payments $ 3,136
==========
Rental expense for all operating leases charged against earnings amounted
approximately to $7.2 million, $9.7 million, and $13.5 million in 2002,
2001, and 2000, respectively, and is included within the general and
administrative expense in the consolidated statements of operations.
During 2002, the Company terminated operating leases, primarily related
to equipment used by the Company's NOLAD subsidiaries. The Company paid
approximately $23.0 million related to the termination of the lease
agreements.
F-42
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
(18) COMPENSATION PLANS
Cash Bonus Plan
The Company has adopted a short-term incentive plan (the "Annual
Incentive Plan"), pursuant to which key executives of the Company and
subsidiaries may receive bonus compensation based on Company performance,
as determined by the Compensation Committee of the Board of Directors
(the "Committee"). Under the 2002 Annual Incentive Plan, each participant
is assigned a target award expressed as a percentage of base salary in
varying amounts (which do not exceed 60% of base salary). The actual
award is based on Company performance, and may vary from 0% to 300% of
the target award, on the basis of the relationship between actual
performance of the participant's "Economic Unit" (that is, the Company,
Panamco Mexico, Panamco Colombia, Panamco Brazil, Panamco Venezuela,
Panamco Costa Rica, Panamco Nicaragua and Panamco Guatemala) and
projected performance. For purposes of evaluating Economic Unit
performance, the Committee compares actual revenues, cash operating
profit, net income, and free cash flow to projected amounts, subject to
adjustments made by the Committee as permitted by the Annual Incentive
Plan.
Change in Control Plans
The Company has adopted a Key Executive and a Key Employee Retention,
Severance and Non-Competition Plan (the "Change in Control Plans"), which
provide benefits to designated employees of the Company. The Change in
Control Plans provide that in the event a participating employee's
employment with the Company is terminated without cause or as a result of
an Involuntary Termination (which generally includes a termination of the
employee's employment with the Company without cause or by the executive
as a result of certain changes in the executive's duties, principal place
of employment or salary and bonus opportunity), within the period that
commences 90 days prior to (a) the occurrence of a change in control of
the Company or (b) any public announcement of the intention to undertake
a transaction that if completed would result in a change of control, and
terminates upon the expiration of no more than three years following the
date of such change in control, the participating executive officer or
employee will be entitled to receive certain benefits including a cash
severance payment, continued insurance coverage and payment of accrued
salary and vacation pay earned through the date of termination of
employment, and relocation expenses of $25,000 for expatriate executives.
In addition, participants in the Change of Control Plans will receive a
pro rated bonus at the time of the change of control. The proposed merger
transaction with Coca-Cola FEMSA (see Note 2) will result in a change of
control under the Change of Control Plans.
Employee Profit Sharing
Mexican, Brazilian and Venezuelan laws require that the Company make
payments to employees relating to profit sharing. Profit sharing payments
are treated as compensation expense and are reflected in the appropriate
captions in the accompanying consolidated statements of operations. The
employee profit sharing expense was $15.1 million, $36.5 million and
$33.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
F-43
Stock Option Plans
At December 31, 2002, the Company had two stock option plans. The Annual
Incentive Plan (the "Employee Plan") has a maximum of 14,200,000 shares
of Class A Common Stock available for stock option and restricted stock
grants. Under this plan, the options vest over a five-year period for the
options granted through 1996 and over a three-year period for options
granted beginning in 1997.
The Company also has a Stock Option Plan for Nonemployee Directors (the
"Directors Plan"), which was implemented to attract and retain the
services of experienced and knowledgeable nonemployee directors and
nonemployee members of the advisory board of the Company. The Directors
Plan provides each nonemployee director and each nonemployee advisory
board member with an option to purchase a specified number of shares of
Class A Common Stock. A total of 190,000 shares of Class A Common Stock
is available for grants under the Directors Plan, which is administered
by the Board of Directors or a subcommittee thereof. The Board of
Directors has the discretion to amend, terminate or suspend the Directors
Plan at any time. Under the Directors Plan, the options vest over a
four-year period for the options granted until 1996 and over a three-year
period for the options granted beginning in 1997. As of December 31,
2002, no options have been exercised or cancelled under the Directors
Plan and 162,369 remain outstanding.
There were 6,760,870 shares of common stock reserved for future grants as
of December 31, 2002 under all stock option plans.
On November 10, 2000, when the closing price of the Class A Common Stock
on the New York Stock Exchange was $14.25 per share, the Company granted
600,000 options to certain executive officers, outside the Employee Plan,
at an exercise price of $14.25 per share. These options vested 50% upon
issuance and 50% after one year. Since the grant of the stock options was
at an exercise price equal to that of the quoted market price on the date
of the grant, no compensation expense was recorded by the Company related
to these options.
Restricted Stock Grant
On November 10, 2000, when the closing price of the Class A Common Stock
on the New York Stock Exchange was $14.25 per share, the Company granted
700,000 shares of restricted stock to certain executive officers. The
terms of the restricted stock, as amended, are as follows: one-third of
the shares shall vest in the event that the share price equals or exceeds
the grant date share price by $5.00 or more on or before the second
anniversary of the grant date; two-thirds of the shares (reduced by
one-third if shares already vested) shall vest if the share price exceeds
the grant date share price by $10.00 or more on or before the fifth
anniversary of the grant date; and all the unvested shares shall vest in
the event that the share price equals or exceeds the grant date share
price by $15.00 or more on or before the sixth anniversary of the grant
date. The holders are entitled to dividends on the entire amount of the
restricted stock.
During the second quarter of 2001, the Company issued 700,000 shares and
retained possession of the shares subject to meeting the vesting
requirements. During July 2001, one-third of the shares became vested and
the Company delivered the vested shares to the executive officers and
recognized compensation expense of $4.5 million associated with the vesting
of one-third of the shares. Due to the uncertainty of the future market
price of the stock, management cannot make a reasonable estimate as to
what the compensation expense, associated with the vesting of two-thirds
of the shares, may be or if the remaining restricted stock will vest.
F-44
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
Stock Option Activity
A summary of option transactions is presented below:
2002 2001 2000
------------------------------- -------------------------------- --------------------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED OPTIONS WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
------------------------------- -------------------------------- --------------------------------
Outstanding on
January 1, 7,354,002 $ 17.70 7,003,224 $ 17.82 5,463,414 $ 19.00
Granted 1,553,348 10.45 1,039,295 16.31 1,750,110 14.54
Exercised (1,361,199) 15.87 (336,580) 14.23 (25,000) 16.20
Forfeited (1,457,502) 19.94 (351,937) 19.26 (185,300) 21.89
----------- ---------- ----------
Outstanding on
December 31, 6,088,649 $ 15.79 7,354,002 $ 17.70 7,003,224 $ 17.82
========= ========== ==========
Options exercisable
at end of year 3,766,525 $ 17.95 5,139,626 $ 18.59 4,041,840 $ 19.06
========= ========== ==========
Nonvested stock
at end of year 466,667 $ 14.25 466,667 $ 14.25 700,000 $ 14.25
========= ========== ==========
The following table sets forth certain information relating to
outstanding and exercisable stock options at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- ----------------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING AT WEIGHTED REMAINING NUMBER WEIGHTED
DECEMBER 31, AVERAGE CONTRACTUAL LIFE OUTSTANDING AT AVERAGE
2002 EXERCISE PRICE (IN YEARS) DECEMBER 31, 2002 EXERCISE PRICE
---------------------------------------------------------------- ----------------------------------------
$8.86 to $11.85 1,238,348 $ 8.91 10.0 - $ -
$11.86 to $15.00 1,614,444 14.46 7.3 1,307,763 14.39
$15.01 to $20.00 2,007,703 16.29 7.8 1,236,608 16.08
$20.01 to $25.00 917,210 21.51 5.7 911,210 21.52
$25.01 to $29.94 310,944 29.94 5.0 310,944 29.94
---------- ---------
6,088,649 $ 15.79 5.6 3,766,525 $ 17.95
========== =========
F-45
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
The weighted-average fair value at date of grant for stock options
granted during 2002, 2001 and 2000 was $4.13, $6.57, and $6.69,
respectively, and was estimated using the Black-Scholes option valuation
model with the following weighted-average assumptions:
DECEMBER 31,
--------------------------------------------
2002 2001 2000
--------- --------- ------------
Risk-free interest rate 3.58% 3.90% 5.78%
Dividend yield 2.49% 1.40% 1.30%
Expected volatility 47.6% 40.5% 42.0%
Expected option term lives 6.1 years 6.4 years 6.7 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. Option valuation models require
the input of highly subjective assumptions, including expected stock
price volatility. The Company's stock-based compensation arrangements
have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions used in
valuation models can materially affect the fair value estimate. As a
result, the existing models may not necessarily provide a reliable
measure of the fair value of its stock-based compensation.
(19) CAPITAL AND OTHER TRANSACTIONS
At the time of the signing of the Agreement (mentioned in Note 1), and in
connection with the acquisition of the Costa Rican franchise in 1995,
Export acquired additional shares of Class A and B Common Stock and 2
shares of a new Series C Preferred Stock ("Series C Shares") of the
Company. The holder of the Series C Shares (the "Holder") is not entitled
to receive any dividends with respect to the Series C Shares and is only
entitled to a preference on the liquidation, dissolution or winding up of
the Company of $1.00 in total. Pursuant to the Certificate of Designation
for the Series C Shares, the Company has agreed with the Holder not to
take certain actions without the approval of the Holder, including, but
not limited to: (i) certain consolidations, mergers and sales of
substantially all of the Company's assets; (ii) any acquisition or sale
of a business (or an equity interest therein) if the purchase price or
sales price thereof, as the case may be, exceeds a material amount (as
defined therein); (iii) entry into any new significant line of business
or termination of any existing significant line of business; (iv) certain
capital expenditures and acquisitions and dispositions of property and
equipment; (v) certain transactions with affiliates (as defined); (vi)
certain changes in the Company's policy with respect to dividends or
distributions to shareholders and (vii) certain changes to the Company's
Articles or By-laws. These rights are subject to certain exceptions and
qualifications and may be suspended or terminated in certain
circumstances.
At December 31, 2001, the Company had completed the $100.0 million share
repurchase program adopted in 1999, increased to a total of $150.0
million by two $25.0 million supplements in 2001 (the "1999 Share
Repurchase Program"). In 2002, the Company adopted a new program (the
"2002 Share Repurchase Program") to repurchase up to $40.0 million of the
Company Class A Common Stock. During 2002, the Company repurchased
2,466,532 shares amounting to $36.8 million (including brokerage
commissions). The Company applies the cost method to account for the
repurchase of its shares. Under this method, the Company repurchases its
shares and records them as treasury stock at the cost of the acquired
shares. If reissuance of the repurchased shares occurs for other than
stock option exercises, the reissuance is accounted for at the fair value
of the shares, with a corresponding decrease to the treasury stock
account based on the weighted average cost. The difference between the
fair value of the shares and its weighted average cost is recorded as an
adjustment to capital in
F-46
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
excess of par value. For stock option exercises, the difference between
the exercise price and the weighted average cost is recorded as an
adjustment to capital in excess of par value.
In general, with the exception of voting rights and certain conversion
rights, the Class A Common Stock and the Class B Common Stock have the
same rights and privileges. Each share of Class B Common Stock entitles
the holder to one vote on all matters as to which the shareholders are
entitled to vote. The Class A Common Stock is non-voting and does not
entitle the holder thereof to vote on any matter.
The Company declared cash dividends of $0.24 per share of common stock
for each of the years ended December 31, 2002, 2001, and 2000.
(20) RETAINED EARNINGS
Certain of the Company's subsidiaries are required by law to appropriate
a portion of their annual net income to legal provisions until such
allowances equal prescribed percentages of outstanding capital stock.
These legal allowances, which aggregated $31.6 million and $39.2 million
at December 31, 2002 and 2001, respectively, are generally not available
for distributions to shareholders until the liquidation of the individual
companies, except in the form of stock dividends in the Mexican
subsidiaries.
The Brazilian companies' statutes require minimum dividend distributions
representing 25% of net income (after deducting reserves provided by law
or by the shareholders) for the year. This dividend requirement may be
waived by the unanimous vote of shareholders at a meeting where a quorum
(consisting of the holders of a majority of the shares) is present.
Brazil imposes a withholding tax of 15% on dividends paid by domestic
subsidiaries to the Company that are derived from earnings generated
prior to January 1, 1996.
At December 31, 2002, accumulated undistributed retained earnings subject
to withholding taxes of foreign subsidiaries in Colombia and Costa Rica,
amounted to approximately $67.9 million and $76.2 million, respectively.
No provision for withholding tax is made on foreign earnings because they
are considered by management to be permanently invested in those
subsidiaries and, under current tax laws, are not subject to such taxes
until distributed as dividends. If the earnings were not considered
permanently invested, approximately $4.8 million and $11.4 million of
deferred taxes would have been provided for subsidiaries in Colombia and
Costa Rica, respectively, at December 31, 2002. The tax amounts were
calculated using the current withholding tax rate of 7% for Colombia and
15% for Costa Rica. Effective January 1, 2002, dividends corresponding to
untaxed profits became subject to withholding taxes in Venezuela;
however, during 2002, the Company did not declare any dividends in
Venezuela. As of December 31, 2002, no withholding taxes are generally
paid for distribution of earnings in Nicaragua or Guatemala.
Dividends from earnings generated until 1998 are not subject to income
taxes in Mexico, as long as they are paid from "net taxed income" (UFIN).
Dividends not paid from UFIN are subject to a 35% income tax. During 2000
and 2001, dividends paid to individuals or foreign residents were subject
to income tax withholding at an effective tax rate of approximately 7.7%.
As of December 31, 2001, the income tax withholding rate of approximately
7.7% in Mexico was eliminated.
F-47
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
(21) OTHER INCOME (EXPENSE), NET
Other income (expense), net for the three years ended December 31, 2002,
2001 and 2000 is as follows:
DECEMBER 31,
----------------------------------------------------
2002 2001 2000
--------- ---------- -----------
Reduction of (provision for) contingency accrual $ 817 $ (522) $ -
Exchange gain (loss), net 2,750 (9,272) (8,217)
Gain (loss) on sale of property and
equipment and investments (193) 2,047 (3,642)
Equity in earnings (losses) of
unconsolidated companies, net (290) 516 (1,189)
Capital expenditure incentives 2,207 2,637 1,886
Operating loss from non-bottling subsidiaries (870) (2,333) (741)
Gain on sale of Kaiser (see Note 7) 48,623 - -
Nonoperating charges (see Note 3) (8,801) (874) (5,977)
Other income 2,583 9,898 -
Other charges (10,474) (12,988) (5,364)
---------- ----------- --------------
Other income (expense), net $ 36,352 $ (10,891) $ (23,244)
========== =========== ==============
The Company maintains an interest in certain subsidiaries, which assist in the
production of materials and assets used in the Company's operations. These
subsidiaries have minimal operations related to third parties. The operating
results of these subsidiaries are included in "operating loss from
non-bottling subsidiaries" within other income (expense) in the Company's
consolidated statement of operations.
The detail of Nonoperating charges for the three years ended December 31,
2002, 2001 and 2000, respectively, consist of the following:
DECEMBER 31,
----------------------------------------------
2002 2001 2000
----------- ---------- -----------
Loss on sale of corporate airplane $ (3,000) $ - $ -
Loss on disposal of investments (1,378) - -
Loss on disposal of nonoperating assets (4,423) - (5,977)
Other nonoperating charges - (874) -
---------- ---------- ----------
Total nonoperating charges $ (8,801) $ (874) $ (5,977)
========== ========== ==========
During 2002, the Company reclassified $8.4 million recorded in 2000
related to certain contingency accruals from other income (expense) to
operating expenses. This reclassification in 2000 consists of $5.9
million to general and administrative expenses and $2.5 million to
depreciation and amortization expenses.
F-48
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
(22) SEGMENTS AND RELATED INFORMATION
The Company operates in the bottling and distribution industries and in
markets throughout Latin America. The basis for determining the Company's
operating segments is the manner in which financial information is used
by the Company in its operations. Management operates and organizes
itself according to business units, which comprise the Company's products
across geographic locations. The Company's Corporate entity engages in
various transactions, including but not limited to debt agreements and,
at times, derivative transactions, which may generate gains or losses.
These amounts are included as a separate reportable segment entitled
"Corporate" and are not allocated to the Company's other reportable
segments as the Company evaluates the performance of its Corporate entity
on a stand-alone basis and the Company believes the allocation of these
expenses to the remaining operating segments would result in a misleading
presentation of the Company's segment performance. The accounting
policies of the reportable segments are the same as those described in
the summary of significant accounting policies. Long-lived assets
constitute total assets less current assets less long-term deferred
income taxes less long-term receivables from affiliated companies.
Relevant information concerning the geographic areas in which the Company
operates in accordance with SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," is as follows:
2002
ELIMINA-
NOLAD COLOMBIA VENEZUELA BRAZIL CORPORATE TIONS TOTAL
Net sales $ 1,298,856 $ 367,098 $ 324,948 $ 367,011 $ - $ - $ 2,357,913
=========== ========== ======== ========== ============= ============== ===========
Operating income (loss) 205,245 19,814 (113,140) 14,097 96,137 (90,948) 131,205
=========== ========== ======== ========== ============= ============== ===========
Interest income 3,682 619 1,383 2,545 473 (1,708) 6,994
=========== ========== ======== ========== ============= ============== ===========
Interest expense (26,833) (8,699) (8,058) (3,430) (40,000) 1,708 (85,312)
=========== ========== ======== ========== ============= ============== ===========
Other income
(expense), net 4,809 (3,011) (2,914) 47,633 (10,165) - 36,352
=========== ========== ======== ========== ============= ============== ===========
Depreciation and
amortization 80,297 49,696 93,098 13,559 486 (1,931) 235,205
=========== ========== ======== ========== ============= ============== ===========
Capital expenditures 84,196 8,708 13,150 6.477 - - 112,531
=========== ========== ======== ========== ============= ============== ===========
Long-lived assets 656,412 226,137 248,917 111,896 1,713,752 (1,010,063) 1,947,051
=========== ========== ======== ========== ============= ============== ===========
Total assets 861,777 386,883 296,635 249,898 1,865,031 (1,332,619) 2,327,605
=========== ========== ======== ========== ============= ============== ===========
GOODWILL
-------------------------------------------------------------------------------------------------------
Balance as of
January 1, 2002 $ 72,249 $ 827 $ - $ 57,579 $ 738,401 $ - $ 869,056
Goodwill acquired
during the year - - - - - - -
Impairment losses - - - - - - -
Goodwill amortized
during the year - - - - - - -
Goodwill written off
related to sale of
business unit - - - - - - -
Translation adjustments (8,421) (166) - (23,812) - - (32,399)
----------- ---------- -------- ---------- ------------ ------------ -----------
Balance as of
December 31, 2002 $ 63,828 $ 661 $ - $ 33,767 $ 738,401 $ - $ 836,657
=========== ========== ======== ========== ============= ============== ===========
F-49
2001
---------------------------------------------------------------------------------------------------
ELIMINA-
NOLAD COLOMBIA VENEZUELA BRAZIL CORPORATE TIONS TOTAL
Net sales $ 1,283,824 $ 381,468 $ 554,679 $ 410,801 $ - $ - $ 2,630,772
=========== ========== ======== ========== ============= ============== ===========
Operating income (loss) 225,828 24,838 37,271 11,950 217,636 (234,325) 283,198
=========== ========== ======== ========== ============= ============== ===========
Interest income 8,367 2,287 160 4,115 8,181 (1,769) 21,341
=========== ========== ======== ========== ============= ============== ===========
Interest expense (20,532) (13,084) (17,586) (11,794) (58,163) 1,769 (119,390)
=========== ========== ======== ========== ============= ============== ===========
Other income
(expense), net (694) 1,410 6,317 (3,282) (14,642) - (10,891)
=========== ========== ======== ========== ============= ============== ===========
Depreciation and
amortization 79,634 56,404 61,184 19,913 21,898 (1,950) 237,083
=========== ========== ======== ========== ============= ============== ===========
Capital expenditures 59,044 8,274 9,808 5,965 30 - 83,121
=========== ========== ======== ========== ============= ============== ===========
Long-lived assets 690,519 325,040 348,294 188,932 1,650,240 (1,005,377) 2,197,648
=========== ========== ======== ========== ============= ============== ===========
Total assets 881,118 484,326 428,717 352,598 1,759,217 (1,212,950) 2,693,026
=========== ========== ======== ========== ============= ============== ===========
GOODWILL
---------------------------------------------------------------------------------------------------
Balance as of
January 1, 2001 $ 71,632 $ 1,102 $ - $ 70,988 $ 759,961 $ - $ 903,683
Goodwill acquired
during the year - - - - - - -
Impairment losses - - - - - - -
Goodwill amortized
during the year (2,394) (275) - (2,187) (21,560) - (26,416)
Goodwill written off
related to sale of
business unit - - - - - - -
Translation adjustments 3,011 - - (11,222) - - (8,211)
----------- ---------- -------- ---------- ------------ ------------ -----------
Balance as of
December 31, 2001 $ 72,249 $ 827 $ - $ 57,579 $ 738,401 $ - $ 869,056
=========== ========== ======== ========== ============= ============== ===========
F-50
PANAMERICAN BEVERAGES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Balances in the tables are stated in thousands of U.S. dollars)
2000
----------------------------------------------------------------------------------------------------
ELIMINA-
NOLAD COLOMBIA VENEZUELA BRAZIL CORPORATE TIONS TOTAL
Net sales $ 1,195,822 $ 383,768 $ 514,227 $ 496,488 $ - $ - $ 2,590,305
=========== ========== ========== ========== ============== ============== =============
Operating income (loss) 142,688 (23,022) (67,911) (6,943) (289,478) (102,640) (347,306)
=========== ========== ========== ========== ============== ============== =============
Interest income 11,394 3,135 3 1,572 18,971 (3,142) 31,933
=========== ========== ========== ========== ============== ============== =============
Interest expense (24,484) (7,621) (24,819) (13,810) (74,707) 3,142 (142,299)
=========== ========== ========== ========== ============== ============== =============
Other income (expense),
net (1,628) (8,374) 2,840 (12,463) (3,619) - (23,244)
=========== ========== ========== ========== ============== ============== =============
Depreciation and
amortization 88,988 67,075 96,804 30,246 31,517 (2,287) 312,343
=========== ========== ========== ========== ============== ============== =============
Capital expenditures 74,659 9,104 30,408 7,596 2,130 - 123,897
=========== ========== ========== ========== ============== ============== =============
Long-lived assets 621,338 360,676 393,012 245,802 1,782,534 (942,159) 2,461,203
=========== ========== ========== ========== ============== ============== =============
Total assets 809,909 459,409 469,278 424,806 1,870,162 (1,007,243) 3,026,321
=========== ========== ========== ========== ============== ============== =============
As of December 31, 2002 and 2001, the Company does not hold any
identifiable intangible assets as all previously acquired intangible
assets were classified as goodwill.
(23) QUARTERLY INFORMATION (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, 2002 JUNE 30, 2002 SEPTEMBER 30, 2002 DECEMBER 31, 2002
----------------- --------------- -------------------- ---------------------
Net sales $ 624,349 $ 623,434 $ 563,665 $ 546,465
========= ========= =========== =========
Gross profit $ 314,961 $ 314,980 $ 268,465 $ 255,291
========= ========= =========== =========
Net income (loss) $ 68,182 $ 32,205 $ (84,697) $ 17,552
========= ========= =========== =========
Basic earnings (loss) per share $ 0.56 $ 0.27 $ (0.71) $ 0.15
========= ========= ========== =========
Diluted earnings (loss) per share $ 0.56 $ 0.26 $ (0.71) $ 0.15
========= ========= ========== =========
FOR THE THREE MONTHS ENDED
MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 30, 2001 DECEMBER 31, 2001
----------------- --------------- -------------------- ---------------------
Net sales $ 644,845 $ 666,163 $ 633,271 $ 686,493
========= ========= =========== =========
Gross profit $ 328,582 $ 347,963 $ 323,611 $ 334,309
========= ========= =========== =========
Net income (loss) $ 21,321 $ 40,242 $ 30,110 $ 26,351
========= ========= =========== =========
Basic earnings (loss) per share $ 0.17 $ 0.32 $ 0.24 $ 0.22
========= ========= =========== =========
Diluted earnings (loss) per share $ 0.16 $ 0.31 $ 0.24 $ 0.21
========= ========= =========== =========
During 2002, the Company recorded certain facilities reorganization and
other charges, (See Note 3), of which the majority were recorded during
the three months ended September 30, 2002.
F-51
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP WHICH CEASED OPERATIONS, AND HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP. NO CHANGES WERE MADE TO THE 2001 AND 2000 FINANCIAL STATEMENT
SCHEDULE EXCEPT FOR THE DISCLOSURE OF THE "ALLOWANCE FOR LOSSES RELATED TO
COOLERS PLACED IN MARKET" AND THE EXCLUSION OF THE "ALLOWANCE FOR OBSOLETE AND
SLOW-MOVING INVENTORY".
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To Panamerican Beverages, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States of America, the consolidated financial statements included
in the Panamerican Beverages, Inc. (the "Company") annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 5, 2002 (except with respect to the matters
discussed in Note 23, as to which the date is March 18, 2002). Our audit was
made for the purpose of forming an opinion on those statements taken as a
whole. The Financial Statement Schedule II listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This financial statement
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein
in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Miami, Florida,
February 5, 2002.
F-52
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The following is an analysis of the valuation and qualifying accounts for
the three years ended December 31, 2002, 2001 and 2000:
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER DEDUCTIONS- BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS APPLICATIONS END OF YEAR
----------- ------------ ------------ ------------ ---------------- ---------------
2002:
Allowance for doubtful accounts $ 8,437 (719) 522 959 $ 7,281
Allowance for restructuring $ 12,526 35,421 - 44,254 $ 3,693
Allowance for losses related to
coolers placed in market $ 16,833 6,489 (2,200) 3,435 $ 17,687
2001:
Allowance for doubtful accounts $ 9,874 718 (499) 1,656 $ 8,437
Allowance for restructuring $ 55,631 - - 43,105 $ 12,526
Allowance for losses related to
coolers placed in market $ 13,855 6,569 (532) 3,059 $ 16,833
2000:
Allowance for doubtful accounts $ 11,534 585 861 3,106 $ 9,874
Allowance for restructuring $ - 503,659 - 448,028 $ 55,631
Allowance for losses related to
coolers placed in market $ 2,700 14,983 3,379 7,207 $ 13,855
F-53