-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RZxopRd+xHGll4MXaqmUva1rrzs2OiZ2wU67PWh/i1erdsH/dKaV7n3gAGmPqWp2 spRV1Gh6OMACDKkHdxJ60Q== 0000950144-98-003790.txt : 19980401 0000950144-98-003790.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003790 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUERTO RICAN CEMENT CO INC CENTRAL INDEX KEY: 0000081076 STANDARD INDUSTRIAL CLASSIFICATION: CEMENT, HYDRAULIC [3241] IRS NUMBER: 516601895 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04753 FILM NUMBER: 98580676 BUSINESS ADDRESS: STREET 1: P.O.BOX 364487 CITY: SAN JUAN STATE: PR ZIP: 00936-4487 BUSINESS PHONE: 8097833000 MAIL ADDRESS: STREET 2: POST OFFICE BOX 364487 CITY: SAN JUAN STATE: PR ZIP: 09336-4487 10-K 1 PUERTO RICAN CEMENT COMPANY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] 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 L-4753 PUERTO RICAN CEMENT COMPANY, INC. (Exact Name of Registrant as Specified in Its Charter) COMMONWEALTH OF PUERTO RICO 51-A-66-0189525 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) PO BOX 364487 - SAN JUAN, PUERTO RICO 00936-4487 (Address of Principal Executive Offices) (Zip Code) (Registrant's Telephone Number, Including Area Code): (787) 783-3000 Securities registered pursuant to Section l2 (b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ----------------------------- ----------------------- COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section l2 (g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 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 ----- ----- [Cover page 1 of 2 pages] 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant is $$273,285,209. This market value was computed by reference to the closing price of the stock on The New York Stock Exchange on March 19, l998. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the close of the period covered by this report: COMMON STOCK, $1.00 PAR VALUE 5,452,074 SHARES DOCUMENTS INCORPORATED BY REFERENCE l. Portions of the Company's Annual Report to Security Holders for the fiscal year ended December 3l, 1997, are incorporated by reference into Parts I and II. 2. Portions of the Company's definitive proxy statement for the 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference into Part III. [Cover page 2 of 2 pages] 3 CROSS REFERENCE SHEET AND TABLE OF CONTENTS
Page ITEM Number Reference ---- ------ --------- PART I 1. Business.................................................................. 6 (1) General Development of Business....................................... 6 Financial Information About Industry Segments......................... 6 (2) Narrative Description of Business..................................... 7 Financial Information about Foreign and Domestic Operations and Export Sales......................................... 13 Executive Officers of the Company .................................... 13 2. Properties................................................................ 14 (3) 3. Legal Proceedings......................................................... 15 (4) 4. Submission of Matters to a Vote of Security Holders....................... 15 PART II 5. Market for the Company's Common Equity and Related Stockholder Matters......................................... 16 (5) 6. Selected Financial Data................................................... 16 (6) 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 16 (7) 8. Financial Statements and Supplementary Data............................... 16 (8) 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................... 16
4
PART III l0. Directors of the Company and Executive Officers........................... 16 (9) 11. Executive Compensation.................................................... 16 (10) l2. Security Ownership of Certain Beneficial Owners and Management.......................................................... 16 (11) 13. Certain Relationships and Related Transactions............................ 17 (12) PART IV l4. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................................. 17
- ---------- (l) Information incorporated by reference to the Company's Annual Report to Stockholders for the year ended December 3l, l997 ("Annual Report") and the Board of Directors' Proxy Statement for use in connection with the Company's Annual Meeting of Stockholders to be held on May 6, l998 ("Proxy Statement"). (2) Annual Report, page 27, section entitled "Notes to Consolidated Financial Statements, Note 13 / Financial Data by Industries." (3) Annual Report, page 22, section entitled "Notes to Consolidated Financial Statements, Note 5 / Property, Plant and Equipment" and page 27, section entitled "Notes to Consolidated Financial Statements, Note 14 / Lease Commitments." (4) Annual Report, pages 28 to 29, section entitled "Notes to Consolidated Financial Statements, Note 16 / Contingent Liabilities and Other Commitments." (5) Annual Report, page 33, section entitled "Common Share Prices and Dividends Per Share," page 31, section entitled "Five-Year Statistical Comparison" and pages 23 to 24, section entitled "Notes to Consolidated Financial Statements, Note 10 / Long-term Debt." 5 (6) Annual Report, page 15, section entitled "Selected Financial Data." (7) Annual Report, pages 13 to 15, section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." (8) Annual Report, pages 16 to 31, sections entitled "Report of Independent Accountants," "Consolidated Statement of Income and Retained Earnings," "Consolidated Balance Sheet," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements," "Consolidated Fourth Quarter Results," "Financial Results by Quarter," and "Five-Year Statistical Comparison." (9) Proxy Statement, pages 2 to 8, section entitled "Information about Nominees, Directors and Principal Stockholders." (l0) Proxy Statement, pages 11 to 19, sections entitled "Executive Compensation" through and including section entitled "Certain Transactions with Management and Others. (11) Proxy Statement, pages 2 to 10, sections entitled "Information about Nominees, Directors and Principal Stockholders" and "Security Ownership of Certain Beneficial Owners." (12) Proxy Statement, page 19, sections entitled "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions with Management and Others." 6 PART I Item l. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Organization Puerto Rican Cement Company, Inc. ("PRC" or the "Company") was organized under the laws of the Commonwealth of Puerto Rico in l938. The Company is engaged in the production and sale of cement, ready-mixed concrete and lime; PRC is also engaged in the paper and packaging business and realty operations. Merger of Subsidiaries Effective January 1, 1997, PRC merged its two ready-mixed concrete subsidiaries, Concreto Mixto, Inc. ("CMI") and Ready Mix Concrete, Inc. ("RMC"), with RMC resulting as the surviving corporation. The merger allowed the Company to achieve economic efficiencies through the elimination of duplicate administrative functions, the consolidation of management functions and the reduction of related costs. The Company's manufacturing and operating facilities were not materially affected by this merger. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates within three industry segments: (i) cement and related products; (ii) paper and packaging; and (iii) realty operations. The cement and related products segment includes the manufacture and sale of cement, ready-mixed concrete and lime. The paper and packaging segment includes the manufacture and sale of multi-wall paper and polypropylene bags. The realty operations include the development, sale and rental of real property owned by the Company. Information on the industry segments in which the Company has been engaged for the last three fiscal years, including the amounts of revenue, operating profit and identifiable assets attributable to each of the Company's industry segments, is included as part of PRC's Annual Report, page 27, section entitled "Notes to Consolidated Financial Statements, Note 13 / Financial Data by Industries," which includes the financial statements and schedules furnished pursuant to Item 14 and is incorporated herein by reference. 6 7 (c) NARRATIVE DESCRIPTION OF BUSINESS CEMENT AND RELATED PRODUCTS SEGMENT CEMENT OPERATIONS Principal product. PRC produces Portland grey cement, Type I, manufactured under specifications of the American Society for Testing Materials. Portland grey cement is used primarily in the construction of residential, commercial and public buildings, and highways. PRC's cement plant is located in Ponce, on the southern coast of Puerto Rico. The cement manufacturing process generally involves the extracting, crushing, grinding and blending of limestone, clay and other raw materials. These raw materials are proportioned automatically according to chemical analysis and blended to obtain a stable quality. The Company manufactures cement using the dry process technology, which is more fuel efficient than other technologies. Raw materials, pursuant to the dry-process technology, are first processed through a preheating tower, where heat is supplied from hot gases originated in a rotary kiln, to effect partial calcination of the materials before they enter into the rotary kiln. Once in the rotary kiln, the material is exposed to extremely high temperatures which create a chemical reaction that converts it into clinker. The clinker drops from the kiln and is cooled with air. At the same time, this air serves to recapture the kiln's heat for use in the preheating process. Finally, gypsum is added to the clinker and both materials are ground to form finished cement. The Company sells and distributes cement (both in bulk and bagged) and related products in Puerto Rico. Sales are made on a direct basis to customers which consist of independent local distributors, including ready-mixed concrete producers, building material dealers, concrete products manufacturers, government agencies, and general and highway contractors. During the fiscal year ended December 3l, l997, the Company sold 1,097,453 tons of Portland grey cement to customers in Puerto Rico. Approximately 27.2% of the cement sold by PRC in 1997 was sold to its ready-mixed concrete subsidiary, RMC. Raw Materials. PRC owns, in fee, properties containing limestone and sand deposits which directly adjoin or are close to its cement plant site. The Company also owns properties near such plants that contain clay deposits. The Company has not conducted a systematic exploratory drilling program ordinarily considered necessary for the establishment of limestone and other raw materials reserve and, accordingly, makes no tonnage estimate of the availability of such raw materials. However, based on the results of scattered drilling on deposits of substantial depths, and past and present production from PRC's properties, the Company believes that the availability of limestone and other raw materials presents no foreseeable problem. There have been no recent material changes in the exploitation of the principal raw material deposits, and no material changes are expected. 7 8 PRC purchases raw gypsum in the open market from sources outside Puerto Rico. Coal for firing the kilns is purchased from Carbones de Colombia, S.A., a Colombian supplier, under a long-term supply contract. Electricity is purchased from the Puerto Rico Electric Power Authority, and water is obtained from wells located on the Company's properties. Competition. PRC is the principal producer of cement in Puerto Rico. During l997, the other cement manufacturing company in Puerto Rico, San Juan Cement Company, Inc., accounted for approximately 40% of the total bags of cement sold in Puerto Rico. The amount of cement imported to the Puerto Rico market during 1997 was not significant. Competition for the market is based on the price and quality of the products. Seasonal Effect on Sales. Demand for cement and related products is largely dependent on the requirements of the construction industry, which in Puerto Rico and the Caribbean are not necessarily seasonal because of year-round favorable climatic conditions. However, the requirements of the construction industry depend to some extent on Puerto Rico's general economic conditions. READY-MIXED CONCRETE OPERATIONS Principal product. Ready-mixed concrete is produced in batching plants by mixing controlled portions of cement, aggregates, water and chemical additives. The product is delivered to construction sites by concrete-mixer trucks owned by RMC, the Company's ready-mixed concrete subsidiary. The Company sells this product primarily to contractors on public construction projects as well as to residential and industrial builders. Net sales totaled $81,500,000 in 1997. The Company's annual ready-mixed concrete production capacity is over 1.5 million cubic yards, which is distributed in 18 batching plants, with delivery accomplished by a fleet of 224 concrete-mixer trucks. Only three batching plants are located on land owned by the Company while the remaining plants are located on parcels of land leased to the Company pursuant to operating leases with terms ranging from one to ten years. Raw materials. RMC purchases most of its cement from PRC. Aggregates, mainly sand and gravel, and chemical additives used to produce concrete are purchased from various suppliers. Competition. The Company believes that it is the largest producer of ready-mixed concrete in Puerto Rico. The Company competes with various large ready-mixed companies and several small ready-mixed operators. Competition is considered to be strong and is based primarily on price, although product quality, consistency and customer service are also taken into consideration. 8 9 Seasonal Effect on Sales. Demand for cement products, including ready-mixed concrete, is largely dependent on the requirements of the construction industry, which in Puerto Rico and the Caribbean are not necessarily seasonal because of year-round favorable climatic conditions. However, the requirements of the construction industry depend to some extent on Puerto Rico's general economic conditions. LIME OPERATIONS Principal product. The Company manufactures and sells hydrated lime, types Q and S (both in bulk and bagged), and pebble lime (bulk only). During the fiscal year ended December 3l, l997, approximately 24% of the lime produced by the Company was sold to the local construction and agricultural industries. The remaining 76% was sold to other industries for chemical use, both locally and in export markets. Approximately 21% (15% in 1996) of total sales of lime were made to the local Government or its agencies, mainly for use in connection with chemical water purification. Export sales for the year ended December 31, 1997 represented 50% of total lime sales. A significant portion of the exported lime is used in the alumina refining industry, and thus the demand may vary depending upon the market conditions of that industry. Raw Materials. Limestone with a high level of calcium carbonate is the only raw material used in the production of lime. The Company currently purchases limestone from various sources close to the plant. Competition. The Company is the only producer of lime in Puerto Rico. No material amount of lime was imported to the Puerto Rico market during 1997. Seasonal Effect on Sales. Due to the year-round favorable weather conditions of Puerto Rico and the Caribbean area, sales of limestone are not necessarily seasonal. AGGREGATES OPERATIONS Principal product. The Company expects to commence an operation to extract limestone from the earth's crust in the municipality of Guanica, Puerto Rico assuming that the legal proceedings with respect to permits for this project are concluded favorably (refer to Part I, Item 3, "Legal Proceedings"). This operation is located on property leased from the Government of Puerto Rico. The limestone material extracted from this property will be sold principally to the Company's lime subsidiary, Florida Lime Corporation. The Company also expects to begin the development of a 300-unit, low-cost housing project on its Vega Alta property assuming that the legal proceedings with respect to permits for this site are concluded favorably (refer to Part I, Item 3, "Legal Proceedings"). As part of this project, the portion of the land to be developed has to be leveled and prepared resulting in the production of aggregates (principally sand and crushed limestone). These aggregates will be used principally to supply the Company's ready-mixed concrete operations. 9 10 Raw materials. Guanica - The Company signed a 5-year lease contract, renewable for two additional 5-year periods. The lease provides for a maximum extraction of 500,000 cubic meters of raw material per year. The fees for extraction are $1.00 per cubic meter for the first two years, $1.05 for the next three years and $1.10 for the second 5-year period. The contract also provides for an annual fee of $15,000 for the first 5-year period and $20,000 for the second 5-year period. The annual fees as well as the extraction fees for the third 5-year period will be negotiated in the future. The Guanica facility will provide the Company with high-quality limestone material needed in the production of lime. Vega Alta - PRC owns, in fee, a property located in Vega Alta. Competition. The Guanica site is expected to be the principal supplier of limestone to the Company's lime subsidiary. The housing project at Vega Alta will compete with other real estate projects on the island. Due to a vast need for low-cost housing in the area of Vega Alta, the Company has received numerous requests from potential buyers and has created a waiting list for this purpose. Seasonal Effect on Sales. Due to the year-round favorable weather conditions of Puerto Rico and the Caribbean area, housing development and aggregate production are not necessarily seasonal. PAPER AND PACKAGING SEGMENT Principal Product. Multi-wall paper bags are produced by the Company's St. Regis Paper and Bag Division. Polypropylene bags are produced by the Company's wholly-owned subsidiary, Poly Bags and Packaging, Inc., which commenced production during 1997. Both types of bags are marketed almost exclusively in Puerto Rico. During 1997, paper bag sales were made to the following customers: 41% to PRC and its subsidiaries; 32% to the grain and animal feed industry; 16% to sugar producers; and 11% for other miscellaneous uses. Polypropylene bag sales during the year were made to the following customers: 73% to Florida Lime Corporation; 24% to the grain and animal feed industry; and 3% for other miscellaneous uses. Raw Materials. The Company purchases the paper, polypropylene and other related raw materials from various sources outside of Puerto Rico. Competition. The Company is the principal producer of multi-wall paper bags and the only producer of polypropylene bags in Puerto Rico. The Company competes based on the price and quality of its products principally against imported products. 10 11 REALTY OPERATIONS SEGMENT The Company, through one of its wholly-owned subsidiaries, owns and holds for future development and sale approximately 532 acres of land throughout Puerto Rico. The Company expects to develop a 300-unit housing project on 80 of these acres located in Vega Alta. Total Revenue Set forth below are (i) the total revenue (in thousands of dollars), net of intercompany sales, for each of the last three fiscal years contributed by any class of similar products that accounted for l0% or more of the Company's consolidated net sales in such fiscal years and (ii) the Company's consolidated net sales (in thousands of dollars) for each of the last three fiscal years:
Ready-mixed Portland Consolidated concrete grey cement net sales ----------- ----------- ------------ 1997 $81,501 $64,790 $156,675 1996 $75,606 $62,409 $149,277 1995 5,317 84,969 100,232
New Products PRC has not made any public announcements regarding, nor has it otherwise made public information about, any product or industry segment that is material to the Company's business. Patents and Trademarks St. Regis Paper and Bag Division had the right to use, until December 3l, l997, certain trademarks, trade names and patents owned by Stone Container Corporation (which trademarks, trade names and patents were once owned by St. Regis Paper Company of New York, then acquired by Champion International during l985, and after that sold to Stone Container Corporation). The Company annually negotiates the renewal of this agreement for the continuing use of such trademarks, trade names and patents. PRC believes that failure to renew such agreement would have no material impact on this business segment. Credit and Working Capital Practices As of December 31, 1997, the Company had invested approximately 11% of its total assets in inventory, which consists mainly of operating supplies and repair parts for its equipment. Taking into account the geographical locations of the Company's manufacturing facilities as compared to the geographical locations of its major suppliers, such investment in inventory is considered normal by industry standards. No significant amounts of finished goods are required to be maintained in inventory to meet rapid delivery requirements of customers. PRC sells its products to customers under normal commercial open account payment terms. 11 12 Customers During fiscal year l997, 14% of the Company's total dollar sales in the cement and related products segment were made to five (5) unrelated customers. None of these customers accounted for 10% or more of the Company's consolidated sales. Backlog In the opinion of the Company, backlog is not a relevant consideration in the types of business in which it is engaged. Government Contracts No material portion of the business of PRC is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. Research and Development During the last three fiscal years, other than for the conversion of two slurry mills to cement grinding mills completed in the third quarter of 1995, PRC has not spent any material amount of money on research and development activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques for itself or for any of its customers. Environmental Compliance During l978, PRC completed the installation of air pollution control equipment in its cement and lime plants located in Ponce at an aggregate approximate cost of $l7,000,000. Such equipment was installed in order to comply with regulations established by the Puerto Rico Environmental Quality Board ("EQB") and the terms of a consent order signed in August l974 (as amended in July l976 and February l978) with the United States Environmental Protection Agency ("EPA"). The Company financed the cost of the pollution abatement program through a loan obtained in l975 from the Government Development Bank for Puerto Rico. This loan was defeased in l985 as fully described in a Current Report on Form 8-K dated September l985. PRC's plants are in compliance with existing environmental regulations. No significant expenditures for pollution control equipment are expected in the near future. 12 13 Regulations issued by the EPA limit PRC's annual clinker production capacity. In 1997, such regulations limited the Company's capacity to 971,000 tons. The Company complied with these limitations and such limitations did not have a material effect on the capital expenditures, earnings or competitive position of PRC. During 1997, the EPA authorized an increase in the Company's annual clinker production capacity limit to 1,238,100 tons. The Company has solicited approval from the local EQB and expects to receive a final approval for the raise in the clinker production capacity during 1998. Employees As of December 3l, l997, the Company and its subsidiaries had 1,015 employees. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES During 1997, none of PRC's industry segments depended to any material extent on foreign operations. A significant portion of Florida Lime Corporation's sales volume depended on export sales. (e) EXECUTIVE OFFICERS OF THE COMPANY 1. Miguel Nazario, age 50, President and Chief Executive Officer of the Company since January 1, 1995; Vice President from August 8, l994 to December 31, 1994; prior to joining PRC, Mr. Nazario held various administrative positions over a ten-year period, most recently as a member of the Corporate Manufacturing Staff of Digital Equipment Corporation. 2. Jose O. Torres, age 52, Assistant Secretary, Treasurer and Vice President of Finance since January 1, 1988; Acting Vice President of Sales from August 1996 to August 1997; Vice President and Treasurer from October l983 to December 31, 1987; Vice President of Sales from l982 to October l983; Treasurer from l976 to l982. 3. Angel M. Amaral, age 64, Vice President and Controller since June l982; Controller from l976 to June l982. 4. Rene Di Cristina, age 47, President of RMC since September 1997; Vice President of RMC from January to September 1997; General Manager of CMI from August 1996 to December 1996; Vice President of Sales of PRC from October 1983 to August 1996. 5. Benito del Cueto, age 63, Vice President of Realty Operations of the Company since January 1996; Vice President of Desarrollos Multiples Insulares, Inc., a wholly-owned subsidiary of PRC from 1973 to December 1995. 13 14 6. Antonio L. Ferre Rangel, age 31, Executive Vice President since February 1998; Vice President of Operations and Strategic Planning since January 1996 to February 1998; Vice President of Strategic Planning from January 1995 to December 1996. Mr. Ferre joined the Company in 1992. 7. Eufemio Toucet, age 55, Vice President and General Manager of St. Regis Paper and Bag Division since January 1996; Consultant to the Company from May 1995 to December 1995; prior to joining the Company, Mr. Toucet was President and owner of Reliable Packaging, Inc. and prior to that worked with Digital Equipment Corporation as Business Operations Manager. 8. Juan R. Taraza, age 59, Vice President of Sales and Marketing since August 1997. Mr. Taraza joined the Company in June 1961. All officers are elected to serve for a term of one year and until the election and qualification of their respective successors. Item 2. PROPERTIES Used in cement and related products segments Cement. PRC owns, in fee, a cement plant located in Ponce, Puerto Rico on a 25 acre site. The Ponce cement plant operates under the dry process technology and during the last fiscal year, 1,094,000 tons of cement were produced. During that same period, 917,000 tons of clinker were produced for an approximate 79.4% (78.1% in 1996) of its effective kiln's clinker production capacity. The Company owns, in fee, properties containing adequate deposits of limestone and other raw materials, used in the production of Portland grey cement, which directly adjoin or are near the plant sites. PRC leases, under a long-term lease expiring in year 2004, with the municipality of Ponce, a parcel of land on which it installed certain facilities for receiving and handling coal. The coal received through said facility is used as fuel in the Company's cement and hydrated lime manufacturing operations. Lime. PRC owns, in fee, a lime manufacturing plant that is located within the Ponce cement plant premises. During 1997, the lime plant produced 33,277 tons of lime and was operated at approximately 76% of its capacity. The Company believes the plant to be in good condition and properly maintained. 14 15 Ready-mixed concrete. PRC owns, in fee, eighteen batching plants used in the production of ready-mixed concrete. Three of these batching plants are located on sites owned, in fee, by the Company. The remaining plants are located on leased properties with terms ranging from one to ten years. The Company does not expect any problem in the renewal of these contracts. The Company also owns a fleet of 224 concrete-mixer trucks. During l997, PRC continued the repairs and maintenance program on its plants. The Company believes that its plants are currently in good condition and properly maintained. Used in paper and packaging segment The manufacturing plant of the St. Regis Paper and Bag Division is located on a site owned, in fee, by the Company in Ponce, Puerto Rico. The Company believes the plant to be in good condition and properly maintained. Used in realty operations PRC and one of its subsidiaries own, in fee, and hold for future development and sale, approximately 532 acres of land throughout Puerto Rico. Used for office facilities The Company and its subsidiaries own a one story building which houses its executive offices located at the Amelia Industrial Park, in Guaynabo, Puerto Rico. RMC's administrative offices are located on leased property in Carolina, Puerto Rico. Information about leased properties is incorporated by reference from the Annual Report, page 27, section entitled "Notes to Consolidated Financial Statements, Note 14 / Lease Commitments." Item 3. LEGAL PROCEEDINGS There are presently pending against the Company the legal proceedings described in the Annual Report, pages 28 to 29, section entitled "Notes to Consolidated Financial Statements, Note 16 / Contingent Liabilities and Other Commitments," furnished pursuant to Item 14, to which reference is hereby made and which is incorporated by reference herein. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. 15 16 PART II Items 5 through 8 of Part II of this report are omitted as permitted by General Instruction G (2) since the information required by such items is contained in the Company's Annual Report which is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item l0. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (a) Identification of Directors Information required herein is contained in a definitive Proxy Statement for use in connection with the Company's Annual Meeting of Stockholders to be held on May 6, l998 filed with the Commission pursuant to Regulation l4A pages 2 to 8, section entitled "Information about Nominees, Directors and Principal Stockholders" and is incorporated herein by reference. (b) Identification of Executive Officers. (See Item 1. Business Section. Sub-section (e)) Item 11. EXECUTIVE COMPENSATION Information required by Item 11 is contained in the Proxy Statement, pages 11 to 19, section entitled "Executive Compensation" through and including the section entitled "Certain Transactions with Management and Others," and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by Item l2 is contained in the Proxy Statement, pages 2 to 10, sections entitled "Information about Nominees, Directors and Principal Stockholders" and "Security Ownership of Certain Beneficial Owners," and is incorporated herein by reference. 16 17 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 is contained in the Proxy Statement, page 19, sections entitled "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions with Management and Others" and is incorporated herein by reference. Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report on Form 10-K: 1. Financial Statements incorporated by reference to the Annual Report, pages 16 to 29; and 2. Financial statement schedules and supplementary data required by Item 8 of Form 10-K filed herewith. The financial statement schedules required by Item 14(d) of Form 10-K are excluded since the Company is primarily an operating company. All subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have any minority equity interest and/or indebtedness to any person other than the Company or the consolidated subsidiaries in amounts which together exceed l0% of PRC's total consolidated assets at December 3l, l997. (b) Reports on Form 8-K: None. (c) Exhibits required by Section 601 Regulation S-K: 3. Certificate of Incorporation and By-laws i. Certificate of Incorporation and amendment thereto filed as an exhibit to Form S-l on March 25, 1963, with (i) composite copy of the Certificate of Incorporation dated May l6, l983 filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1983, (ii) amendment dated May 6, 1987 filed as an exhibit to Form 10-Q for the fiscal quarter ended June 30, 1987 and (iii) amendment dated May 5, 1993 (increasing the number of authorized shares of common stock from 10 million to 20 million) filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1993.* 17 18 ii. By-Laws of the Company, as amended, filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1987, with (i) amendment dated January 1993 filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1993,* and (ii) amendment dated December 22, 1994, filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1994.* l0. Material contracts 10.1 Coal Purchase/Sale Agreement between PRC and Carbones de Colombia, S.A. dated as of December 14, 1982 filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1982.* Copy of addendum No. 5 which changed the quantity of coal purchases to 100,000 tons per year through the year 2000, was filed as an exhibit to Form 10-Q for the fiscal quarter ended March 31, 1992.* 10.2 (a) Consolidated and restated loan agreement dated as of September 27, 1985 among PRC, PRC's Guarantors and the Government Development Bank for Puerto Rico for approximately $18.3 million encompassing all outstanding debt of the Company to the bank as of that date.* (a) Indenture trust agreement dated September 27, l985 between PRC as grantor and Banco de Ponce as trustee for the benefit of the Government Development Bank for Puerto Rico.* (Both documents listed above in this paragraph l0.2 were filed as exhibits to a Current Report on Form 8-K dated September l985 and are related to the early extinguishment of the debt transaction described therein.) 10.3 Form of Severance Compensation Agreement executed by PRC during the third quarter of 1989 with a consultant and 18 of the PRC's key officers, filed as an exhibit to Form 10-Q for the fiscal quarter ended September 30, 1989.** 10.4 Amendment to the Consulting Agreement between PRC and Antonio Luis Ferre dated January 1, 1995 filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1994.** 10.5 Note Purchase Agreement dated January 27, 1997, with respect to $50,000,000 of Series A and $20,000,000 of Series B Senior Secured Notes due January 27, 2017 (used to refinance the outstanding principal balances of various long-term debt) filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1996.* 18 19 13. Annual Report to security holders for the year ended December 3l, l997. 21. Subsidiaries of the Company are included as part of the Annual Report to security holders, page 33, section entitled "Subsidiaries." All of the Company's subsidiaries are incorporated under the laws of the Commonwealth of Puerto Rico, except for Caribbean Cement Carriers Corporation, which is incorporated under the laws of the Republic of Panama, and Ferre Export Corporation, which is incorporated under the laws of the state of New York. 23. Consent of Price Waterhouse, independent public accountants. 27. Financial Data Schedule. ---------------------------------- * Incorporated herein by reference. ** Exhibit constitutes a management contract or compensatory plan or arrangement required to be filed pursuant to Item 601 (b) (10) (iii). 19 20 S I G N A T U R E S Pursuant to the requirements of Section l3 or 15(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUERTO RICAN CEMENT COMPANY, INC. (REGISTRANT) Date: March 25, 1998 By: /s/ Miguel Nazario -------------------------------- Miguel Nazario President and Chief Executive Officer and Director 20 21 Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: March 25, 1998 By: /s/ Miguel Nazario ------------------------------------------ Miguel Nazario President, Chief Executive Officer and Director Date: March 25, 1998 By: /s/ Antonio Luis Ferre ------------------------------------------ Antonio Luis Ferre Director and Chairman of the Board Date: March 25, 1998 By: /s/ Alberto M. Paracchini ------------------------------------------ Alberto M. Paracchini Director and Vice Chairman of the Board Date: March 25, 1998 By: /s/ Hector del Valle ------------------------------------------ Hector del Valle Director and Vice Chairman of the Board Date: March 25, 1998 By: /s/ Antonio L. Ferre Rangel ------------------------------------------ Antonio L. Ferre Rangel Director and Executive Vice President Date: March 25, 1998 By: /s/ Jose O. Torres ------------------------------------------ Jose O. Torres Vice President of Finance, Assistant Secretary and Treasurer
21 22 Date: March 25, 1998 By: /s/ Angel M. Amaral ------------------------------------------ Angel M. Amaral Vice President and Controller Date: March 25, 1998 By: /s/ Jose J. Suarez ------------------------------------------ Jose J. Suarez Director Date: March 25, 1998 By: /s/ Carlos del Rio ------------------------------------------ Carlos del Rio Director Date: March 25, 1998 By: /s/ Esteban D. Bird ------------------------------------------ Esteban D. Bird Director Date: March 25, 1998 By: /s/ Emilio J. Venegas ------------------------------------------ Emilio J. Venegas Director Date: March 25, 1998 By: /s/ Oscar A. Blasini ------------------------------------------ Oscar A. Blasini Director Date: March 25, 1998 By: /s/ Rosario J. Ferre ------------------------------------------ Rosario J. Ferre Director Date: March 25, 1998 By: /s/ Federico F. Sanchez ------------------------------------------ Federico F. Sanchez Director
22 23 Date: March 25, 1998 By: /s/ Jorge L. Fuentes ------------------------------------------ Jorge L. Fuentes Director Date: March 25, 1998 By: /s/ Luis A. Ferre Rangel ------------------------------------------ Luis A. Ferre Rangel Director Date: March 25, 1998 By: /s/ Juan A. Albors ------------------------------------------ Juan A. Albors Director Date: March 25, 1998 By: /s/ Waldemar Del Valle Armstrong ------------------------------------------ Waldemar Del Valle Armstrong Director
23 24 PUERTO RICAN CEMENT COMPANY, INC. AND SUBSIDIARY COMPANIES INDEX
Page ---- Report of independant accountants ......................................................... 25 Schedule VIII - Valuation and Qualifying accounts for the years ended December 31, 1995, 1996 and 1997 ....................................................... 26 Financial Data Schedule ................................................................... 27
24 25 The Chase Manhattan Bank Building PO Box 363566 San Juan PR 00936-3566 Telephone 787 754 9090 [PRICE WATERHOUSE LOGO] REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Puerto Rican Cement Company, Inc. Our audits of the consolidated financial statements referred to in our report dated February 20, 1998 appearing on page 16 of the 1997 Annual Report to Shareholders of Puerto Rican Cement Company, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse PRICE WATERHOUSE San Juan, Puerto Rico February 20, 1998 CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO) License No. 10 Expires Dec. 1, 1998 Stamp 1457942 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report 25 26 SCHEDULE VIII PUERTO RICAN CEMENT COMPANY, INC. AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------------------------------------------------------------------------------------------- Additions Deductions from Balance at Charged to Additions Reserves Balance at Write-off Beginning Cost and Charged to of Uncollectible End of DESCRIPTION of Year Expenses Other (1) Accounts Year - --------------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts 1995 $1,094,003 $505,013 $59,228 $1,539,788 1996 $1,539,788 $ 0 $ 1,203 $1,538,585 1997 $1,538,585 $ 0 $86,616 $1,451,969
(1) Additions include allowance for doubtful accounts of $505,013 of the ready-mixed concrete subsidiaries acquired in November 21, 1995. 26 EX-13 2 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 Puerto Rican Cement Company, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section represents Management's discussion and analysis of the Company's consolidated financial condition and results of operations. It should be read in conjunction with the accompanying financial statements. RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 During 1997, consolidated sales increased by $7.5 million, or 5%, to $156.8 million from $149.3 million during 1996. This increase was principally a result of increases of 5.4% in cement sales, 7.8% in ready-mixed concrete sales, and 3.6% in paper bag sales, offset by a decrease of 14% in lime sales due to a reduction in exports. Consolidated gross margins reported at 29.8% for 1997 compared favorably with gross margins of 28.1% for 1996. The principal reasons for this increase were improvements in inventory management and production schedules in both the cement and bag divisions which yielded lower costs of sale. This reduction in costs resulted in spite of brief interruptions in the clinker production related to the plant upgrade project currently underway. Consolidated selling, general and administrative expenses increased by $2.7 million, or 14.1%, to $21.9 million in 1997 from $19.2 million in 1996. This increase was principally attributable to the additional selling costs resulting from higher sales, normal inflationary growth, and higher expenses related to professional fees for legal, advertising and security services associated mainly with the development of the Company's new real estate projects and related legal proceedings for permits. These expenses will continue to impact general and administrative expenses during 1998. The Company's new projects will not be contributing to consolidated operations pending the granting of these permits. Interest and financial charges increased $1.3 million, or 28.9%, to $5.8 million in 1997 compared with $4.5 million for 1996. This increase reflects the effect of slightly higher interest rates on the $50 million, Series A Notes issued in January 1997 as compared to the shorter term indebtedness refinanced with the proceeds from the issuance of these Notes, and the interest on the additional $20 million in Series B Notes issued in July 1997. Interest income also increased during 1997 by $900,000, or 33.3%, to $3.6 million compared with $2.7 million in 1996. This increase resulted from additional investments in the Company's portfolio, specifically the $70 million, zero-coupon investment acquired for $17.6 million in December 1996. CEMENT AND RELATED PRODUCTS SEGMENT Cement operations. During 1997, cement dollar sales increased by 5.4 percent. This was principally due to an increase in sales volume of 59,000 tons, or 5.7%, to 1,097,000 tons in 1997 from 1,039,000 tons in 1996. Improved efficiencies in inventory management and the manufacturing processes, which resulted in lower costs, favorably impacted the cement operation's gross margins. Ready-mixed concrete operations. Sales in RMC represented the most significant change in consolidated net sales. Ready-mixed concrete dollar sales increased by $5.9 million, or 7.8%, to $81.5 million in 1997 from $75.6 million in 1996. This was mainly a result of an increase in sales volume of 3.6 percent. Also, RMC passed through to its clients increases in the cost and transportation of aggregates used as raw material. The gross margins of the ready-mixed concrete operations were favorably impacted by the increase in sales volume, coupled with economies achieved by the merger of the Company's two ready-mix concrete subsidiaries which took effect on January 1, 1997. Lime operations. Total lime sales decreased in 1997 by 7,000 tons, or 16.7%, as a result of the net effect of an increase in local sales of 2,000 tons, or 12%, offset by a decrease in export sales of 9,000 tons, or 34%. PAPER AND PACKAGING SEGMENT Multi-wall paper bags operations. During 1997, there was an increase in dollar sales of multi-wall paper bags of 3.6 percent. The increase resulted mainly from a 9.4% hike in the pasted bag division sales, offset by a slight decline in the pocket bags division sales. Efficiencies achieved through improvements in the inventory management and manufacturing process resulted in lower costs, which yielded improved gross margins for the year. 1996 COMPARED WITH 1995 Fiscal year 1996, represented the first full year of operation as subsidiaries of PRC of the two ready-mixed concrete companies acquired by the Company in November 1995. Accordingly, most of the significant changes in the comparative amount figures resulted from the inclusion of a full year of operation of the ready-mixed subsidiaries during 1996 compared with less than two months of operation in 1995. During 1996, consolidated net sales increased 49% to $149.3 million from $100.2 million in 1995. This increase was principally due to $48.1 million (net of intercompany sales) of additional sales contributed by the ready-mixed operations. Net sales also increased by 6% and 40% on the cement and lime operations, respectively. Export sales accounted for the lime sales increase. Consolidated gross margin decreased to 28% in 1996 compared with 36% in 1995. The inclusion of lower gross margins from the ready-mixed concrete operations was the 13 2 Puerto Rican Cement Company, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) principal reason for this decline. Cost of sales was also affected in 1996 by the additional purchases of higher cost clinker which in turn, increased the cost of producing cement. Consolidated selling, general and administrative expenses increased by $5.5 million compared with 1995, due to related expenses contributed by the ready-mixed operations. During 1995, only the last two months of operations were impacted by selling, general and administrative expenses from the ready-mixed operations. Consolidated interest and financial charges increased to $4.5 million in 1996 from $2.4 million in 1995 due to interest expense related to financial agreements entered in November 1995. Also, interest related to loans used in the mills conversion project was charged to expense during 1996. During the first three quarters of 1995, these expenses were capitalized as part of the cost of this project. CEMENT AND RELATED PRODUCTS SEGMENT Cement operations. Cement sales increased by 6% during 1996. The increase was principally due to a higher volume of cement sales. Cement sold in 1996 totaled 1,039,000 tons, an increase of 7% from sales of 968,000 tons in the prior year. Sales of cement to the ready-mixed subsidiaries were 31% higher than the prior year. Average selling price per bag of cement decreased less than 1%, principally as a result of higher bulk sales during 1996. Gross margin decreased from 40% in 1995 to 37% in 1996. During 1996, the Company more than doubled its purchases of clinker when compared with 1995, in order to meet the greater demand for cement during this year. This higher cost clinker directly impacted cost of sales, resulting in the decrease in gross margins. Clinker production was 2% lower in 1996 compared with 1995. Ready-mixed concrete operations. Results for 1996, included for the first time a full year of operations of the Company's ready-mixed concrete subsidiaries. Results for 1995, included only two months of the operations of the ready-mixed subsidiaries. Gross margin for the ready-mixed operation in 1996 increased from 5% for the two-month period of operations of 1995, to 8% for the 12-months of 1996. Income from operations was $0.5 million in 1996 compared with a loss of $0.3 million during the shorter 1995 period. Comparisons between a complete year to a segment of less than two months are not realistic for this particular period. Hydrated lime operations. Hydrated lime sales increased 40% from $3.6 million in 1995 to $5.1 million in 1996. This increase resulted from a higher volume of export sales which increased from 10,600 tons in 1995 to 26,300 tons in 1996. Gross margin increased from 7% in 1995 to 21% in 1996. This significant improvement resulted from the high level of export sales which contributed to better capacity utilization of the hydrated lime plant, thereby resulting in a lower cost per unit produced. PAPER AND PACKAGING SEGMENT Paper and packaging sales (net of intercompany sales) in 1996 were $6.0 million compared with $6.2 million in 1995, a decrease of 2%. Income from operations for this segment increased 46% to $0.8 million due to decreases in paper cost, improvements in inventory management and production schedules, and adjustments in sale prices to customers. SIGNIFICANT EVENTS Merger Effective January 1, 1997, the Company merged its two ready-mixed concrete subsidiaries, Concreto Mixto, Inc. and Ready Mix Concrete, Inc. ("RMC"), being RMC the surviving entity. This strategic step resulted in economic efficiencies for the Company through the elimination of duplicate administrative functions and their related costs. Plant Upgrade Project The Company's plant upgrade project, which core is to increase the clinker production capacity by 30% has advanced up to the point allowed by the permits secured. During 1997 and the first quarter of 1998 the Company performed all the modifications allowed and is awaiting the final local agency permits to proceed. San Juan Cement legal case As further discussed in Note 16 to the financial statements, the Company is the defendant in an antitrust case brought by SJC, the other cement manufacturer in Puerto Rico. The case is currently in a stay of the proceedings, requested jointly by PRC and SJC, and granted by the Courts in April 1997. Other Legal Proceedings The Company is involved in other legal proceedings related to its subsidiary RMC which are fully discussed in Note 16 to the financial statements. Realty / Limestone Extraction The Company has temporarily suspended its operations at Vega Alta and Guanica pending the conclusion of legal proceedings surrounding the permits for these projects (please refer to Note 16 to the financial statements for more details). The Vega Alta project consists of the development of a 300-unit, low-cost housing project on 80 acres of real estate owned by the Company, and the Guanica project consists of the extraction of limestone from a leased facility. 14 3 Puerto Rican Cement Company, Inc. SELECTED FINANCIAL DATA
Year Ended December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Operating revenues(1) $156,774,092 $149,276,622 $100,231,963 $ 92,829,872 $ 84,027,588 Income before income tax 22,805,472 21,568,030 23,049,750 21,342,365 19,145,787 Tax provision 6,802,261 6,879,639 7,257,317 5,579,153 6,710,065 Effect of change in accounting for postretirement benefits other than pensions, net (1,409,400) Cumulative effect of change in accounting for income tax 853,410 Net income 16,003,211 14,688,391 15,792,433 15,763,212 11,879,732 Net income per share(2) 2.91 2.66 2.90 2.76 2.14 Current assets 81,725,557 86,800,526 78,548,232 47,298,323 51,207,564 Current liabilities 18,924,124 30,481,303 27,977,386 16,872,039 17,273,306 Working capital 62,801,433 56,319,223 50,570,846 30,426,284 33,934,258 Current ratio 4.32 2.85 2.81 2.80 2.96 Property, plant and equipment, net 158,610,632 143,088,242 142,567,213 112,299,027 107,968,603 Long-term investments 46,367,581 46,980,338 31,228,541 42,030,507 32,512,367 Total assets 291,051,116 281,203,510 255,014,868 201,869,754 193,283,596 Long-term debt (exclusive of current portion) 76,179,792 67,023,200 57,549,475 31,696,403 26,633,080 Deferred income taxes 35,859,657 33,323,351 30,808,654 27,722,814 26,028,233 Stockholders' equity, net 157,064,315 147,421,046 135,805,923 122,971,336 120,675,030 Dividends per share 0.76 0.70 0.68 0.62 0.53 Cement sales in tons 1,097,453 1,038,798 968,188 959,561 855,540 - -------------------------------------------------------------------------------------------------------------------------------
(1) Including revenue from realty operations of:1997-$99,012; 1996-$103,794; 1995-$101,997; 1994-$97,095; 1993-$653,721. (2) Excluding, in 1993, the cumulative effects of changes in accounting for postretirement benefits and income taxes of ($0.24) and $0.15, respectively. As part of an initiative to develop the Company's real estate for various uses, such as low-cost housing, the Company has plans to start the preparation and leveling of land at its Vega Alta site. As a by-product, this process will result in the incidental extraction of aggregates. The Company expects to use these aggregates in its ready-mixed concrete subsidiary. Once the initial site of extraction is leveled, the Company will proceed with the development of the low-income housing project called Las Orquideas. The Company also leases a site in the southern town of Guanica which the Company expects will become an important source of limestone material for the Company's lime subsidiary, Florida Lime Corporation. Issuance of Notes During 1997, the Company completed the private issuance of $50 million in Series A and $20 million in Series B Senior Secured Notes. As further discussed in Note 10 to the financial statements, proceeds from these issuances were used to repay short- and medium-term debt, and to finance projects now under development. As a result of this refinancing transaction, the Company's current ratio improved to 4.32 to 1 as of December 31, 1997 from 2.85 to 1 as of December 31, 1996. Stock Repurchase The Company repurchased 68,000 shares of its common stock for $3.3 million on March 19, 1998 in a privately negotiated transaction approved by the Company's Board of Directors at its January 1998 meeting. At its February 1998 meeting, the Company's Board of Directors approved a program to repurchase up to 300,000, or 5.5%, of the Company's outstanding common stock. 15 4 Puerto Rican Cement Company, Inc. REPORT OF INDEPENDENT ACCOUNTANTS PRICE WATERHOUSE February 20, 1998 To the Board of Directors and Stockholders of Puerto Rican Cement Company, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of Puerto Rican Cement Company, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse Certified Public Accountants (OF PUERTO RICO) License No. 10 Expires Dec. 1, 1998 Stamp 1457844 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. 16 5 Puerto Rican Cement Company, Inc. CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Net sales $156,675,080 $149,172,828 $100,129,966 Revenue from realty operations, net 99,012 103,794 101,997 - ------------------------------------------------------------------------------------------------------------ 156,774,092 149,276,622 100,231,963 - ------------------------------------------------------------------------------------------------------------ Cost and expenses, including depreciation, depletion and amortization of $12,383,769 (1996 - $11,111,840; 1995 - $7,320,130) Cost of sales 110,010,997 107,291,187 64,232,980 Selling, general and administrative expenses 21,879,599 19,168,663 13,690,290 - ------------------------------------------------------------------------------------------------------------ 131,890,596 126,459,850 77,923,270 - ------------------------------------------------------------------------------------------------------------ Income from operations 24,883,496 22,816,772 22,308,693 - ------------------------------------------------------------------------------------------------------------ Other charges (credits): Interest and financial charges, net of interest charged to construction 5,765,894 4,464,152 2,423,200 Interest income (3,601,063) (2,660,077) (2,528,677) Other income (86,807) (555,333) (635,580) - ------------------------------------------------------------------------------------------------------------ Total other charges (credits) 2,078,024 1,248,742 (741,057) - ------------------------------------------------------------------------------------------------------------ Income before taxes 22,805,472 21,568,030 23,049,750 - ------------------------------------------------------------------------------------------------------------ Provision for income taxes: Current income taxes 4,265,955 4,402,169 4,199,686 Deferred income taxes 2,536,306 2,477,470 3,057,631 - ------------------------------------------------------------------------------------------------------------ 6,802,261 6,879,639 7,257,317 - ------------------------------------------------------------------------------------------------------------ Net income 16,003,211 14,688,391 15,792,433 Retained earnings at beginning of year 137,047,068 126,216,785 114,140,497 Cash dividends declared, $0.76, $0.70 and $0.68 per share in 1997, 1996 and 1995, respectively (4,172,076) (3,858,108) (3,716,145) - ------------------------------------------------------------------------------------------------------------ Retained earnings at end of year $148,878,203 $137,047,068 $126,216,785 ============================================================================================================ Earnings per share: Net income per share $ 2.91 $ 2.66 $ 2.90 ============================================================================================================
The accompanying notes are an integral part of these financial statements. 17 6 Puerto Rican Cement Company, Inc. CONSOLIDATED BALANCE SHEET
December 31, 1997 1996 - ---------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 2,995,634 $ 14,808,709 Investments available-for-sale 5,580,202 4,595,908 Short-term investments 6,967,225 1,917,616 Notes and accounts receivable, net 28,763,683 27,410,312 Inventories 32,885,743 33,443,290 Prepaid expenses 4,533,070 4,624,691 - ---------------------------------------------------------------------------------------------- Total current assets 81,725,557 86,800,526 Property, plant and equipment, net 158,610,632 143,088,242 Long-term investments 46,367,581 46,980,338 Other assets 4,347,346 4,334,404 - ---------------------------------------------------------------------------------------------- $291,051,116 $281,203,510 ============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 668,724 $ -- Current portion of long-term debt 1,109,781 15,401,050 Accounts payable 6,843,256 7,798,595 Accrued liabilities 7,075,160 5,300,186 Dividends payable 1,035,894 1,050,144 Income taxes payable 2,191,309 931,328 - ---------------------------------------------------------------------------------------------- Total current liabilities 18,924,124 30,481,303 - ---------------------------------------------------------------------------------------------- Long-term liabilities: Long-term debt, less current portion 76,179,792 67,023,200 Deferred income taxes 35,859,657 33,323,351 Other long-term liabilities 3,023,228 2,954,610 - ---------------------------------------------------------------------------------------------- Total long-term liabilities 115,062,677 103,301,161 - ---------------------------------------------------------------------------------------------- Total liabilities 133,986,801 133,782,464 - ---------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, authorized 2,000,000 shares of $5.00 par value each; none issued Common stock, authorized 20,000,000 shares of $1.00 par value each; 6,000,000 shares issued 6,000,000 6,000,000 Additional paid-in capital 14,702,914 14,702,914 Unrealized gain on investments available-for-sale, net 567,745 110,361 Retained earnings 148,878,203 137,047,068 - ---------------------------------------------------------------------------------------------- 170,148,862 157,860,343 Less - 547,926 (1996-472,926) shares of common stock in treasury, at cost 13,084,547 10,439,297 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 157,064,315 147,421,046 - ---------------------------------------------------------------------------------------------- Commitments and contingent liabilities - ---------------------------------------------------------------------------------------------- $291,051,116 $281,203,510 ==============================================================================================
The accompanying notes are an integral part of these financial statements. 18 7 Puerto Rican Cement Company, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 16,003,211 $ 14,688,391 $ 15,792,433 - --------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided (used) by operating activities (net of effect of acquisitions): Depreciation, depletion and amortization 12,383,769 11,111,840 7,320,130 Accretion of discounts on investments (2,859,626) (1,485,257) (2,202,236) Provision for deferred income taxes 2,536,306 2,477,470 3,057,631 Provision for postretirement benefits 246,832 244,215 404,804 Postretirement benefits paid (174,899) (153,364) (151,522) Gain on sale of land and equipment (30,976) (121,800) (420,635) Gain on sale of investments available-for-sale (50,451) (26,630) (22,092) Changes in assets and liabilities: (Increase) decrease in notes and accounts receivable (1,353,371) (2,883,927) 3,781,010 Decrease (increase) in inventories 557,547 (1,220,875) (1,793,997) Decrease in prepaid expenses 91,621 127,496 450,554 (Increase) in other assets (68,154) (1,720,590) (188,512) (Decrease) in accounts payable (955,339) (649,259) (4,353,055) Increase (decrease) in accrued liabilities 1,774,976 (464,033) (964,873) Increase (decrease) in income taxes payable 1,259,981 596,664 (329,845) (Decrease) in long-term liabilities (3,315) (9,671) -- - --------------------------------------------------------------------------------------------------------------------------- Total adjustments 13,354,901 5,822,279 4,587,362 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 29,358,112 20,510,670 20,379,795 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of ready-mixed concrete operations, net of cash acquired -- -- (5,793,226) Capital expenditures (28,028,571) (11,662,959) (10,249,840) Proceeds from sale of land and equipment 208,600 208,958 436,545 Proceeds from sale of investments available-for-sale 1,102,609 550,290 12,974,530 Purchases of investments available-for-sale (1,130,294) (550,290) -- Redemption of investments held-to-maturity 1,974,000 2,390,650 -- Purchases of investments held-to-maturity (4,000,000) (17,623,200) (3,708,372) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (29,873,656) (26,686,551) (6,340,363) - --------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Purchase of treasury stock (2,645,250) -- (2,181,000) (Decrease) in short-term borrowing -- -- (2,420,000) Increase in notes payable 668,724 -- -- Proceeds from loans 70,800,000 36,168,271 38,370,962 Payment of principal on long-term debt (75,934,679) (18,943,349) (32,323,466) Payment of notes payable -- (4,100,000) (300,000) Dividends paid (4,186,326) (3,739,968) (3,700,994) - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (11,297,531) 9,384,954 (2,554,498) - --------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (11,813,075) 3,209,073 11,484,934 Cash and cash equivalents at beginning of year 14,808,709 11,599,636 114,702 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2,995,634 $ 14,808,709 $ 11,599,636 ===========================================================================================================================
The accompanying notes are an integral part of these financial statements. 19 8 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997 and 1996 NOTE 1. REPORTING ENTITY AND SUMMARY OF ACCOUNTING POLICIES The Company was organized in 1938 under the laws of the Commonwealth of Puerto Rico. It is engaged primarily in the production and sale of cement and related products principally within the island of Puerto Rico. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SUMMARY OF ACCOUNTING POLICIES The following summarizes the most significant accounting policies judged by management to be the most appropriate in the circumstances to present the Company's consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiaries: Florida Lime Corporation ("FLC"), Ready Mix Concrete, Inc. ("RMC"), Desarrollos Multiples Insulares, Inc. ("DMI") and Poly Bags and Packaging, Inc. ("PBPI"). All material intercompany accounts and transactions have been eliminated in consolidation. STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, interest-bearing deposits and other investments with maturities of less than three months at the time of acquisition are considered cash equivalents. REVENUE RECOGNITION Revenue is recognized when the product is shipped in accordance with billing terms which are generally FOB shipping point. INVESTMENTS Investments in equity securities that have readily determinable fair values and all investments in debt securities are accounted for as follows: - - Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as investments held-to-maturity and reported at cost, adjusted for amortization of premiums or accretion of discounts. Such debt securities are reported as short-term or long-term investments, depending on whether the remaining term to maturity is shorter or longer than one year. - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - - Debt and equity securities not classified as either held-to-maturity or trading securities are classified as investments available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, in a separate component of shareholders' equity. INVENTORIES Inventories are stated at the lower of average cost or market. Inventory cost includes the related material, labor and overhead cost. Land for sale includes the original cost of land and all development costs incurred to bring land to a salable condition. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and depletion. Depreciation is provided on the straight-line basis over the estimated useful life of each type of asset. Depletion of quarries is calculated on the units-of-production method. Maintenance and repair costs which do not extend the life or improve productive capacity of the respective assets are expensed as incurred. Cost of renewals and betterments is capitalized. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income. INTEREST CHARGED TO CONSTRUCTION The Company capitalizes interest as a component of the cost of construction. Capitalized interest totaled $812,000 in 1995. No interest was capitalized in 1997 and 1996. GOODWILL Goodwill, included in other assets, is amortized on a straight-line basis over the estimated period of benefit not to exceed 30 years. INCOME TAXES Income taxes are accounted for following an asset and liability approach. Under this approach, deferred taxes are recognized for temporary differences between the tax basis and financial reporting basis of assets and liabilities, using enacted tax laws and rates. EMPLOYEE BENEFIT PLANS The Company has a non-contributory retirement plan. Pension costs are computed on the basis of accepted actuarial methods. The Projected Unit Credit method is used to determine pension expense. Pension expense includes service cost for benefits earned during the period, interest cost and amortization of unrecognized prior service cost, of gains and losses on plan assets and of the transition amount over a 15-year period. The Company's funding policy is to contribute annually the maximum amount deductible for income tax. 20 9 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company also offers postretirement medical and life insurance benefits to certain retired employees under an unfunded plan. The expected cost of providing postretirement health care and other benefits to an employee or its beneficiaries is recognized over their service period, is computed based on accepted actuarial methods, and includes service costs for benefits earned during the period, interest costs and amortization of actuarial gains and losses. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of shares of common stock outstanding during the year. The weighted average number of shares outstanding for the last three fiscal years was 5,502,074 in 1997, 5,521,486 in 1996 and 5,452,204 in 1995. During 1997, SFAS 128, "Earnings per Share," went into effect. This statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. It simplifies the standards for computing EPS previously found in APB Opinion 15, "Earnings per Share," and makes them comparable to international EPS standards. SFAS 128 replaces the presentation of primary EPS with a presentation of basic and diluted EPS on the face of the Income Statement for all entities with complex capital structures. The Company has a simple capital structure, therefore, this Statement has no effect on its EPS computation. PROFIT RECOGNITION ON SALES OF REAL ESTATE Land and development costs are allocated proportionately to lots sold based on area and total project cost. Income on sale of land is recognized at the time of sale except where the collection of such income is not reasonably assured and revenue therefore is not measurable. RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Comprehensive income has been defined as the change in equity of a business enterprise during a period from transactions and other events or circumstances, except those resulting from investments by owners and distributions to owners. This pronouncement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The pronouncement does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement supersedes SFAS 14, "Financial Reporting of Segments of a Business Enterprises," but retains the requirements to report information about major customers. This statement is effective for financial statement for periods beginning after December 15, 1997, and requires comparative information for earlier years. NOTE 2. MERGERS AND ACQUISITIONS On November 20, 1995, the Company purchased 100% of the outstanding shares of RMC and Concreto Mixto, Inc. ("CMI"). These acquisitions, which were accounted under the purchase method, were financed with the issuance of notes payable, the reissuance of 107,874 shares of the Company's common stock held in treasury (22,352 were issued in 1996), and cash. The principal business of RMC and CMI is to produce, sell and distribute ready-mixed concrete throughout the island of Puerto Rico. The following is a summary of the assets acquired and liabilities assumed from RMC and CMI at the date of their acquisition (in thousands): Current assets $19,869 Property, plant and equipment 27,242 Goodwill 1,657 Other assets 782 --------------------------------------------------------- 49,550 --------------------------------------------------------- Current liabilities 13,186 Long-term debt 12,788 --------------------------------------------------------- 25,974 --------------------------------------------------------- Net assets $23,576 =========================================================
Unaudited, proforma consolidated results of operations assuming that the acquisition of RMC and CMI had occurred as of January 1, follow (in thousands, except per share figures):
1995 - -------------------------------------------------------------- Net sales $144,385 Net income 14,789 Per share 2.71
The above proforma information includes amortization of goodwill, depreciation and other adjustments related to the acquisition. 21 10 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The accompanying statement of income and retained earnings includes the results of operations of RMC and CMI since November 20, 1995, the date of the acquisitions. Effective January 1, 1997, the Company merged its two ready-mixed concrete subsidiaries, RMC and CMI, in a tax-free reorganization with RMC resulting as the surviving company. The subsidiary's manufacturing and operating facilities were not materially affected by the merger. NOTE 3. NOTES AND ACCOUNTS RECEIVABLE Notes and accounts receivable at December 31, consist of:
1997 1996 - ----------------------------------------------------------------------- Notes receivable: Trade $ 452,043 $ 480,124 Other 1,184,949 1,168,069 - ----------------------------------------------------------------------- 1,636,992 1,648,193 ======================================================================= Accounts receivable: Trade 27,737,244 26,713,689 Employees and affiliated companies 77,820 49,057 Other 763,596 537,958 28,578,660 27,300,704 - ----------------------------------------------------------------------- LESS - Allowance for doubtful accounts 1,451,969 1,538,585 - ----------------------------------------------------------------------- 27,126,691 25,762,119 - ----------------------------------------------------------------------- $28,763,683 $27,410,312 =======================================================================
NOTE 4. INVENTORIES Inventories at December 31, consist of:
1997 1996 - ------------------------------------------------------- Finished products $ 1,891,283 $ 2,219,159 Work-in-process 2,973,083 4,510,088 Raw materials 3,939,004 3,544,512 Coal and fuel oil 4,015,335 2,928,482 Maintenance and operating supplies 19,564,436 19,738,447 Land held for sale 502,602 502,602 - ------------------------------------------------------- $32,885,743 $33,443,290 =======================================================
NOTE 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, consist of:
Useful life in years 1997 1996 - ---------------------------------------------------------------------------------- Land and quarries $ 12,576,694 $ 9,912,326 Buildings and structures 50 41,244,348 39,233,787 Machinery and equipment 5-20 120,279,062 105,382,873 Pollution control equipment 25 31,001,463 30,963,507 Automobiles and trucks 3-10 20,610,177 19,301,363 Rental property 10 653,524 653,524 Construction in progress 6,244,405 1,803,570 - ---------------------------------------------------------------------------------- 232,609,673 207,250,950 LESS - Accumulated depreciation and depletion 73,999,041 64,162,708 - ---------------------------------------------------------------------------------- $158,610,632 $143,088,242 ==================================================================================
NOTE 6. INVESTMENTS The carrying and market values, and scheduled maturities of investments at December 31, are as follows:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------------------- Investments available-for-sale, at market value: U.S. Treasury securities Due within 1 year $ 748,064 $ 749,063 Due from 1 to 5 years 1,172,204 1,169,847 $ 1,838,196 $ 1,846,290 - ------------------------------------------------------------------------------------------------------------------------------- 1,920,268 1,918,910 1,838,196 1,846,290 Municipal and other U.S. government agency securities Due from 1 to 5 years 1,153,996 1,165,056 1,179,127 1,169,718 Marketable equity securities 1,752,177 2,496,236 1,430,997 1,579,900 - ------------------------------------------------------------------------------------------------------------------------------- $ 4,826,441 $ 5,580,202 $ 4,448,320 $ 4,595,908 =============================================================================================================================== Short-term investments held-to-maturity, at amortized cost: Municipal and other U.S. government agency securities $ 1,050,069 $ 1,047,612 $ 1,917,616 $ 1,904,982 U.S. Treasury securities 5,917,156 5,885,551 -- -- - ------------------------------------------------------------------------------------------------------------------------------- $ 6,967,225 $ 6,933,163 $ 1,917,616 $ 1,904,982 =============================================================================================================================== Long-term investments held-to-maturity, at amortized cost: U.S. Treasury securities Due from 1 to 5 years $19,122,433 $18,700,964 $24,101,670 $23,253,296 Due from 5 to 20 years 18,916,213 22,181,600 17,715,663 17,114,370 - ------------------------------------------------------------------------------------------------------------------------------- 38,038,646 40,882,564 41,817,333 40,367,666 Municipal and other U.S. government agency securities Due from 1 to 5 years 8,328,935 8,488,696 5,163,005 4,986,817 - ------------------------------------------------------------------------------------------------------------------------------- $46,367,581 $49,371,260 $46,980,338 $45,354,483 ===============================================================================================================================
22 11 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The scheduled maturities of investments, based on their carrying book values, at December 31, 1997, are summarized below: Marketable equity securities, with no maturity $ 2,496,236 Due within one year 7,716,288 Due within 1 to 5 years 29,786,271 Due within 5 to 20 years 18,916,213 - --------------------------------------------------------------- $58,915,008 ===============================================================
Gross and net unrealized gains and (losses) at December 31, amounted to approximately:
1997 1996 - ------------------------------------------------------------------------------------------- Available- Held-to- Available- Held-to- for-sale maturity for-sale maturity - ------------------------------------------------------------------------------------------- Gross unrealized gains $ 756,117 $3,515,767 $156,997 $ 6,631 Gross unrealized losses (2,357) (545,560) (9,409) (1,645,119) -------------------------------------------------------------- Net unrealized gain (loss) 753,760 $2,970,207 147,588 $(1,638,488) ========== =========== Deferred income taxes (186,015) (37,227) --------- -------- Net unrealized gain reported in stockholders' equity $ 567,745 $110,361 ========= ========
Gross proceeds from the sale of available-for-sale investments amounted to $1,103,000 and $550,000 in 1997 and 1996, respectively. Gross realized gains on the sale of these investments totaled $50,000 in 1997 and $27,000 in 1996. NOTE 7. OTHER ASSETS Other assets at December 31, consist of:
1997 1996 - ------------------------------------------------------------ Investment in real estate $ 94,533 $ 94,533 Goodwill, net of accumulated amortization of $112,212 (1996 - $57,000) 1,541,321 1,596,533 Other long-term assets 2,711,492 2,643,338 - ------------------------------------------------------------ $4,347,346 $4,334,404 ============================================================
NOTE 8. ACCRUED LIABILITIES Accrued liabilities at December 31, consist of:
1997 1996 - ------------------------------------------------------------------ Accrued taxes other than on income $ 988,190 $ 924,643 Accrued payroll expenses 3,000,618 2,889,914 Accrued interest expense 2,226,969 293,796 Other accrued liabilities 859,383 1,191,833 - ------------------------------------------------------------------ $7,075,160 $5,300,186 ==================================================================
NOTE 9. SHORT-TERM BORROWING The Company has lines of credit available for short-term borrowing and discount of trade notes receivable in the aggregate amount of $20,600,000. However, under other loan agreements with financial institutions, the Company may incur additional unsecured short-term borrowing up to $10,000,000 and may discount trade notes receivable up to $5,000,000 through 1999. No commitment fees are paid on these credit facilities. Short-term borrowing amounting to $7,145,000 outstanding at December 1996 were refinanced with proceeds from the issuance of $70,000,000 long-term notes, as further described in Note 10. As the result of this refinancing, they were classified as long-term debt at December 31, 1996. The maximum aggregate short-term borrowing outstanding at any month-end was $3,940,000 in 1997 and $7,145,000 in 1996. The approximate average aggregate short-term borrowing outstanding during the year was $980,160 in 1997 and $1,249,000 in 1996. The weighted average interest rate of such borrowing computed annually was 6.27% during 1997 and 6.12% during 1996. NOTE 10. LONG-TERM DEBT Long-term debt at December 31, consists of:
1997 1996 - ---------------------------------------------------------------------------- 7.29% Series A Senior Secured Notes, payable in full on January 27, 2017, interest payable semiannually $50,000,000 7.34% Series B Senior Secured Notes, payable in full on January 27, 2017, interest payable semiannually 20,000,000 Revolving credit facility, paid off during 1997 -- $17,623,200 Term loans and other borrowing, with fixed interest rates ranging from 6.15% to 6.56%, refinanced in January 1997 -- 50,000,000 6.32% note, payable in twenty equal quarterly installments of $200,000 commencing February 1996, followed by eight equal quarterly installments of $500,000 in 2001 and 2002; interest payable monthly 6,400,000 7,200,000 Notes, with fixed interest rates ranging from 5% to 6%, paid-off in November 1997 -- 7,448,893 Notes payable - one non-interest bearing for $150,000 due on July 30, 1998, three for $150,000 each at 7% due in 1999 to 2001, and one for $200,000 at 7% due in quarterly installments commencing on October 1, 1997 784,792 -- Borrowing against cash surrender value of life insurance policies, bearing interest at 5%, and other 104,781 152,157 - ---------------------------------------------------------------------------- Total 77,289,573 82,424,250 Less - Current portion 1,109,781 15,401,050 - ---------------------------------------------------------------------------- Total long-term debt $76,179,792 $67,023,200 ============================================================================
23 12 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During 1997, the Company repaid the $17.6 million revolving credit facility with funds generated from the operations. On January 27, 1997, the Company announced the private placement of $70 million in Series A & B Senior Secured Notes (the "Notes") due in 2017. Series A Notes in the amount of $50 million were issued on that date, at an interest of 7.29% payable semiannually. Proceeds from this issuance were used to refinance short- and medium-term debt, including certain principal payments due in 1996 which were refinanced on a short-term basis in anticipation of the issuance of the Notes. On July 10, 1997, the Company issued the $20 million in Series B Notes, at an interest of 7.34% payable semiannually. Proceeds from this issuance were used mostly to finance the acquisition of new equipment and for the improvement and modernization of the cement plant. The Notes are secured by a zero-coupon bond from the U.S. Treasury placed as collateral. The bond was purchased in December 1996 for $17.6 million and will accrue to $70 million shortly after the maturity of the Notes. The balance sheet classification of the Company's long-term debt at December 31, 1996 is presented reflecting the effect of the issuance of the $50 million Notes. Aggregate maturities of long-term debt at December 31, 1997, are as follows:
Years Amount -------------------------------------------------- 1998 $ 1,109,781 1999 1,005,000 2000 1,005,000 2001 2,169,792 2002 and thereafter 72,000,000 -------------------------------------------------- $77,289,573 ==================================================
In September 1985, the Company restructured the terms of all of its outstanding debt with the Government Development Bank for Puerto Rico ("GDB"). The maturity date on the loans from GDB was extended to September 2002, and the annual interest rate was fixed. No interest or principal payments are required before maturity. Simultaneously, the Company placed U.S. government securities, with a cost of $8 million and a maturity value of $49.8 million, in an irrevocable trust. The principal and interest of these securities will be sufficient to fund the scheduled principal and interest payments on the Company's debt with the GDB. Accordingly, such debt was considered extinguished in 1985 and is not included as a liability in the consolidated balance sheet. The total balance of debt with GDB, not included in the consolidated balance sheet, consisting of principal plus accumulated interest, amounted to $40.2 million at December 31, 1997 (1996 - $38.4 million). The loan agreements with banks and other financial institutions impose certain restrictions on the Company. The most important restrictions are limitations on unsecured short-term borrowing and on discounting with recourse of trade paper from customers (See Note 9), maintaining working capital in excess of certain defined minimums and limitations on funded debt and other indebtedness. Other restrictions under such loan agreements relate to investments in and advances to subsidiaries and other persons, disposition of fixed assets, and payment of dividends. At December 31, 1997, the Company was in compliance with the provisions of the loan agreements. Restrictions imposed by the Notes issued in January and July 1997 are similar, yet more flexible, to the restrictions contained in the loan agreements existing at December 31, 1996. NOTE 11. INCOME TAXES Consolidated tax returns are not permitted under the Puerto Rico Income Tax Law; therefore, losses, if any, of subsidiaries cannot be used to offset taxable income of other members of the consolidated group. The Puerto Rico Income Tax Law allows an accelerated flexible depreciation method for certain property purchased prior to 1996, by which a taxpayer may claim depreciation at any rate without reference to useful lives. The depreciation claimed was limited to an amount not greater than income before taxes (determined without taking into consideration the depreciation deduction). Deferred income taxes of $35,860,000 (1996 - $33,323,000) have been accumulated primarily from using the flexible depreciation method for tax purposes only. The benefit available under the accelerated depreciation methods are limited by the alternative minimum tax ("AMT") provisions of the income tax law. The AMT is based on 22% of regular taxable income with certain adjustments for preference items, one of which relates to the accelerated depreciation methods. Any AMT paid may be used to reduce the regular tax liability of future years, to the extent that the regular tax exceeds the AMT. A new Puerto Rico Internal Revenue Code (the "Code") was enacted in 1994. The Code reduced the maximum corporate income tax rate from 42% to 39% for calendar year 1996 and thereafter. Also, the Code generally provides a 100% deduction for dividends from controlled Puerto Rico corporations. Other provisions of the Code include the replacement of the flexible depreciation method for property acquired after December 31, 1995, with a new accelerated depreciation method and the repeal of the reserve method for bad debts with recapture of the existing reserve over a four-year period. These provisions, effective for calendar year 1996, reduced the alternatives for deferral of income taxes. 24 13 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provision for deferred income taxes for the years ended December 31, consists of the following:
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Income tax applicable to: Flexible depreciation taken during the year $ 1,919,921 $ 9,565,906 Reversal of flexible depreciation taken in prior years $(2,483,526) (2,643,825) (2,342,018) AMT credit used (generated) 4,875,563 3,423,687 (4,246,939) Postretirement benefit obligation (28,054) (35,432) (98,780) Difference between pension credits and amounts deductible for tax purposes 14,955 49,467 (98,305) Other temporary differences 157,368 (236,348) 277,767 - -------------------------------------------------------------------------------------------------------------------------------- $ 2,536,306 $ 2,477,470 $ 3,057,631 ================================================================================================================================
The reconciliation of the difference between the Puerto Rico statutory tax rate on income before taxes and the consolidated effective tax rate follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ % of % of % of pre-tax pre-tax pre-tax Amount income Amount income Amount income - ------------------------------------------------------------------------------------------------------------------------------------ Computed tax provision $ 8,894,134 39.0 $ 8,411,532 39.0 $ 9,680,895 42.0 Increase (decrease) in taxes resulting from: Tax exempt income (57,644) (0.2) (143,540) (0.7) -- -- Interest earned on exempt securities (1,317,225) (5.8) (941,102) (4.4) (1,017,843) (4.4) Interest deducted for tax but not for financial statements (698,223) (3.1) (698,223) (3.2) (1,089,746) (4.7) Enacted future rate changes -- -- -- -- (755,000) (3.3) Other items (18,781) (0.1) 250,972 1.2 439,011 1.9 - ------------------------------------------------------------------------------------------------------------------------------------ $ 6,802,261 29.8 $ 6,879,639 31.9 $ 7,257,317 31.5 ====================================================================================================================================
The deferred tax assets and liabilities at December 31, are as follows:
1997 1996 - -------------------------------------------------------------------------------------------------------- Deferred Deferred Deferred Deferred Tax Assets Tax Liabilities Tax Assets Tax Liabilities - -------------------------------------------------------------------------------------------------------- Current: Prepaid pension cost $ 1,094,727 $ 1,079,772 Non-current: AMT credit $4,995,088 -- Postretirement benefit liability $ 1,179,059 1,151,005 -- Property, plant and equipment -- 35,777,522 -- 38,292,875 Other 180,201 346,668 115,766 212,563 - -------------------------------------------------------------------------------------------------------- Total deferred tax asset/liability $ 1,359,260 $37,218,917 $6,261,859 $39,585,210 ======================================================================================================== Net deferred tax liability $35,859,657 $33,323,351 ========================================================================================================
One of the consolidated subsidiaries enjoys a tax exemption grant under the provisions of the Puerto Rico Tax Incentives Act of 1987. Under this grant, the exemption rates applicable to income, property and municipal taxes range from 50% to 90% through year 2008. The subsidiaries' aggregate retained earnings amounted to $23,440,000 at December 31, 1997, (1996 - $21,443,000) and arose substantially from partially tax exempt operations. The subsidiaries' retained earnings are substantially exempt upon distribution to the Company; therefore, no income taxes have been provided for such earnings. NOTE 12. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan covering substantially all non-union employees of the Parent Company and all of its wholly-owned subsidiaries, excluding RMC which employees are covered by a separate plan described subsequently in this Note. The benefits are based on years of service and the employees' average compensation during the last five years of employment. 25 14 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net pension cost included the following components:
1997 1996 1995 - ------------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 543,821 $ 482,883 $ 474,075 Interest cost on projected benefit obligation 1,564,011 1,437,542 1,314,808 Actual return on plan assets (6,693,175) (1,880,634) (1,589,649) Deferral and amortization - net 4,546,996 52,829 52,829 - ------------------------------------------------------------------------------------ Net periodic pension expense $ (38,347) $ 92,620 $ 252,063 ====================================================================================
The following table sets forth the plan's obligations and amounts recognized in the Company's consolidated balance sheet at December 31:
1997 1996 - ----------------------------------------------------------------------- Actuarial present value of benefit obligations - Accumulated benefit obligation, including vested benefits of $18,265,535 (1996 - $18,140,655) $20,395,714 $18,391,695 ======================================================================= Projected benefit obligation for service rendered to date $23,856,631 $21,380,815 Plan assets at fair value 30,683,621 25,105,539 - ----------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 6,826,990 3,724,724 Unrecognized prior service cost 1,498,447 1,710,584 Unrecognized net gain (4,874,154) (1,863,064) Unrecognized portion of transition cost at January 1, 1987, being recognized over 15 years (637,228) (796,536) - ----------------------------------------------------------------------- Prepaid pension cost included in prepaid expenses $ 2,814,055 $ 2,775,708 =======================================================================
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of benefit obligation and the projected benefit obligation were 7.0% and 7.25% in 1997 and 1996, respectively. The expected long-term rate of return on assets was 9% and 8% in 1997 and 1996, respectively. Investments held by the Plan include high-grade corporate bonds, U.S. Treasury securities, and common stock, including 160,245 shares of the Company. The plan is administered by a Board of Trustees composed of five Directors of the Company. The Board uses two independent money managers which, within certain established guidelines, make investment decisions regarding the assets of the plan. RMC has a noncontributory defined benefit pension plan. This plan provides coverage to substantially all the subsidiary's non-union employees. Benefits under the plan are based on years of service and the employees' highest consecutive five-year average compensation within the last ten completed years of service. The plan's funded status includes an accumulated benefit obligation of $4,035,000, including $4,008,000 of vested benefits, a projected benefit obligation of $4,107,000 and plan assets at fair value of $4,491,000. The Company also provides health care and life insurance benefits to participants of the plan after retirement. The employees, upon retirement, have the option of continuing their participation in the Company's medical group insurance coverage under the same terms and conditions as prescribed for active employees. The life insurance plan coverage decreases, for a period of ten years after age 65, at an annual rate of 7-1/2%. The Company also provides severance benefits under the terms of collective bargaining agreements. The costs of these benefits are not significant. The postretirement benefit expense included the following components:
1997 1996 1995 - -------------------------------------------------------------------------------- Service cost of benefits earned $ 57,237 $ 57,784 $ 52,791 Interest cost 190,010 190,830 189,058 Amortization and deferral - net (415) (4,397) (4,926) - -------------------------------------------------------------------------------- Postretirement benefit expense $ 246,832 $ 244,217 $ 236,923 ================================================================================
The postretirement benefit liability includes the following components:
1997 1996 - ----------------------------------------------------------------------------- Actuarial present value of postretirement benefit obligations: Retirees $1,190,992 $ 1,213,562 Fully eligible active plan participants 618,534 609,852 Other active plan participants 957,904 957,899 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation 2,767,430 2,781,313 Unrecognized actuarial loss (gain) 7,076 (52,356) - ----------------------------------------------------------------------------- Postretirement benefit liability included in other long-term liabilities $2,774,506 $ 2,728,957 =============================================================================
The discount rate used to determine the accumulated postretirement benefit obligation was 7.25%. The assumed health care cost trend rate used to measure the accumulated postretirement benefit obligation was 10.5% initially, declining gradually to 5.25% in year 2018 and thereafter. A one-percentage-point increase in the assumed health care cost trend rate would have increased the 1997 postretirement benefit expense by $15,781 and would have increased the 1997 accumulated postretirement benefit obligation by $133,010. 26 15 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. FINANCIAL DATA BY INDUSTRIES The Company operates in the cement and related products, and paper and packaging industries, and in realty operations mainly within the island of Puerto Rico. Operations in the cement and related products industry involves production and sale of cement, lime and ready-mixed concrete. Operations in the paper and packaging industry involve production and sale of paper and polypropylene bags. Realty operations involve the development, sale and lease of real property. The Company's financial data by industries for the years ended December 31, is as follows (in thousands):
1997 1996 1995 - --------------------------------------------------------------------------- Sales to unaffiliated customers: Cement and related products $150,638 $143,083 $ 93,922 Paper and packaging 6,036 6,090 6,208 Realty operations 99 104 102 - --------------------------------------------------------------------------- $156,773 $149,277 $100,232 =========================================================================== Inter-segment sales: Cement and related products $ 30,003 $ 27,505 $ 1,926 Paper and packaging 4,267 3,667 3,428 - --------------------------------------------------------------------------- $ 34,270 $ 31,172 $ 5,354 =========================================================================== Operating profit: Cement and related products $ 23,521 $ 21,866 $ 21,625 Paper and packaging 1,263 847 582 Realty operations 99 104 102 - --------------------------------------------------------------------------- $ 24,883 $ 22,817 $ 22,309 =========================================================================== Identifiable assets: Cement and related products $222,695 $219,502 $204,196 Paper and packaging 6,353 5,152 3,978 Realty operations 882 879 1,226 Corporate 61,121 55,671 45,615 - --------------------------------------------------------------------------- $291,051 $281,204 $255,015 =========================================================================== Depreciation, depletion and amortization: Cement and related products $ 12,261 $ 11,032 $ 7,243 Paper and packaging 123 80 77 - --------------------------------------------------------------------------- $ 12,384 $ 11,112 $ 7,320 =========================================================================== Capital expenditures: Cement and related products $ 27,421 $ 11,613 $ 10,207 Paper and packaging 608 50 43 - --------------------------------------------------------------------------- $ 28,029 $ 11,663 $ 10,250 ===========================================================================
Operating profit is total revenue less operating expenses. Interest expense and income taxes have not been deducted in computing operating profit. Identifiable assets are those that are used in the Company's operations in each segment. Corporate assets are principally investments and other assets not used by any industry segment. None of the Company's largest customers accounted for 10% or more of total consolidated sales in 1997. Export sales were not significant. As discussed in Note 1, SFAS 131, "Disclosure About Segments of an Enterprise and Related Information," will require certain changes to the above disclosure in the 1998 financial statements and comparative information for earlier years must be restated. To reconcile industry information with consolidated amounts, the following eliminations have been made: $34,270,000 in 1997, $31,172,000 in 1996 and $5,354,000 in 1995 of inter-segment sales; $22,300 in 1997, $72,600 in 1996 and $52,800 in 1995 relating to the net change in inter-segment operating profit in beginning and ending inventories; and $15,948,000 in 1997, $15,666,000 in 1996 and $6,217,000 in 1995 of receivables arising from inter-segment sales. NOTE 14. LEASE COMMITMENTS The Company and its subsidiaries lease certain facilities and equipment under operating lease agreements. Rental expense under such agreements aggregated to $898,000 in 1997, $781,000 in 1996 and $296,000 in 1995. At December 31, 1997, the approximate future minimum lease payments under noncancellable operating leases were as follows:
Year -------------------------------------------------- 1998 $ 497,319 1999 468,587 2000 446,831 2001 385,661 2002 and thereafter 1,120,129 -------------------------------------------------- $2,918,527 ==================================================
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS The carrying amount of these assets approximates fair value because of the short period of time to maturity of those instruments. INVESTMENTS The fair values of investments are estimated based on their quoted market prices or those of similar investments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated using discounted cash flows based on the current rates offered to the Company for debt of the same remaining maturities. 27 16 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The carrying amount and estimated fair values of these financial instruments at December 31, are as follows (in thousands):
1997 1996 - ---------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------------------------------- Cash and cash equivalents $ 2,996 $ 2,996 $14,809 $14,809 Investments available-for-sale 5,580 5,580 4,596 4,596 Short-term investments 6,967 6,933 1,918 1,905 Long-term investments 46,368 49,371 46,980 45,354 Long-term debt 77,290 78,059 82,424 81,999
NOTE 16. CONTINGENT LIABILITIES AND OTHER COMMITMENTS The Company is obligated to purchase, under a long-term supply contract, a minimum of 100,000 metric tons of coal annually through the year 2000. The purchase price is negotiated annually. Coal purchases have exceeded the minimum amount required by the contract. Purchases under the contract amounted to $6,729,000 in 1997, $6,337,000 in 1996 and $6,543,000 in 1995. In November 1995, San Juan Cement Company, Inc. ("SJC") filed a claim against the Company and its two ready-mixed concrete subsidiaries, RMC and CMI, in the United States District Court of Puerto Rico. SJC claimed that the acquisition of these two ready-mixed companies by the Company, in November 1995, violated the federal antitrust laws, specifically the Clayton Act, claiming that it tends to substantially lessen competition. After the acquisition, the complaint was amended to include the rescission of the agreement, the divestiture of such companies and, the naming of a trustee to manage the assets of the acquired companies. On April 15, 1997, the Court granted a joint motion requesting a temporary stay of the proceedings in an attempt to reach a mutual understanding that may lead to a voluntary dismissal of this litigation; the case has remained under this stay since then. While there can be no certainty, the Company believes, based on the advice of its legal counsel, that an adverse final ruling in the lawsuit brought by SJC is not reasonably likely to have a material adverse effect on the Company's financial condition or results of operations. In addition, the Company believes that the cost of the defense of such litigation will not have a material adverse effect on the Company's financial condition or results of operations. RMC is also the defendant in a complaint filed before the Puerto Rico's Public Service Commission (the "Commission") by an independent truckers' association (the "Association"). The Association initially requested the prospective payment of freight tariff for the handling of aggregates approved by the Commission in 1988. The subsidiary was paying the tariff based on individually negotiated contracts at rates different from those approved by the Commission. In August 1996, the Association amended their complaint to include back-charges for the difference between the 1988 tariff and the amount actually paid by RMC. In September 1996, the San Juan Superior Court entered a partial decision upholding the validity of the 1988 tariff. The Company immediately filed an appeal as to the validity of this tariff, with a motion for reconsideration pending before the Court at the date of these statements. Pending the final decision of the Court, the Company is currently paying the 1988 tariff. The Association's complaint before the Commission with respect to the retroactive payment of the amount not paid is still pending a resolution of the Commission. While there can be no certainty, the Company believes based on the advice of its legal counsel, that it is likely to prevail on this matter. In any event, the Company believes that an adverse outcome of such proceedings should not have a material adverse effect on the Company's financial position or results of operations. Because of disputes with the Government of Puerto Rico, as more fully described below, the Company has suspended the development of a 300-unit housing project at Vega Alta and the work at its limestone extraction operation at Guanica. On July 8, 1997, the Puerto Rico Planning Board (the "Planning Board") issued a temporary cease and desist order against the housing project, asserting that the Company does not have the permits needed to extract and process sand and gravel from the site. The Company had previously received permits to build a housing project there, including a "temporary aggregate permit" which the Company believes 28 17 Puerto Rican Cement Company, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) was properly obtained and is sufficient to conduct the planned operations. The Planning Board held public hearings on the dispute on August 25, and September 23 and 24, 1997. The hearings have concluded and the Planning Board upheld their position. The Company is in the process of filing an appeal to the decision before the Puerto Rico Appellate Circuit Court. On July 11, 1997, the Puerto Rico Permits and Regulations Administration (the "Administration"), revoked a permit granted to the Company to operate a limestone extraction operation at its Guanica site. A permit had been granted by the Administration's Ponce office. The Company has appealed this decision before the Puerto Rico Circuit Court of Appeals and is awaiting a decision. Management believes, based on the advice of its legal counsel, that the outcome of these matters will not have a material adverse effect on the Company's financial position or results of operations. On June 27, 1997, the Company filed a lawsuit against the Puerto Rico Department of Consumer Affairs (the "Department") in response to a Department's investigation of the Company's labeling of bags of cement during 1995 and 1996. The Department has asserted that the bags should have disclosed that the cement was manufactured utilizing some imported clinker. The lawsuit was based on the Company's belief that the Department did not have the legal authority with respect to this matter. However, it was determined that the Department had the authority to investigate disclosure of clinker content and Company's labels. Administrative hearings were held on January 8, 14 and 29, and March 13, 1998 by an independent judge named by the Department. On March 16, 1998, the independent judge issued a favorable decision on the case which held that the Company did not violate any Department rule. This decision could be appealed by the Department within a 30-day period. Management believes, based on the advice of its legal counsel, that the outcome of these matters will not have a material adverse effect on the Company's financial position or results of operations. The Company is a defendant in a number of other legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final outcome of these matters will not significantly affect the Company's financial position or results of operations. NOTE 17. STOCKHOLDERS' EQUITY During 1997, the Company purchased 75,000 shares of its outstanding stock for $2,645,250. The Company purchased these shares for future corporate purposes and does not intend to retire or cancel them. In April 1996, the Company reissued 22,352 shares of its common stock held in treasury to complete the acquisition of RMC. The changes in the treasury stock and additional paid-in-capital components of shareholders' equity are detailed below:
Treasury Additional Number stock at paid-in of shares cost capital - -------------------------------------------------------------------------------- Balance at December 31, 1995 495,278 $10,967,229 $14,482,054 Treasury stock reissued (22,352) (527,932) 220,860 - -------------------------------------------------------------------------------- Balance at December 31, 1996 472,926 10,439,297 14,702,914 Treasury stock purchased 75,000 2,645,250 -- - -------------------------------------------------------------------------------- Balance at December 31, 1997 547,926 $13,084,547 $14,702,914 ================================================================================
NOTE 18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash was paid during the year for:
1997 1996 1995 - ------------------------------------------------------------------------ Interest (net of amount capitalized) $3,833,000 $4,377,000 $2,603,000 ======================================================================== Income taxes $3,535,000 $3,805,000 $4,501,000 ========================================================================
29 18 Puerto Rican Cement Company, Inc. CONSOLIDATED FOURTH QUARTER RESULTS (000's Omitted, Except Per Share Amounts)
- ----------------------------------------------------------------------------------------------------- Three months ended Twelve months ended December 31, December 31, --------------------------------------------------- 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------- Operating revenues $36,977 $37,193 $156,774 $149,277 Cost of sales 26,569 26,538 110,011 107,291 - ----------------------------------------------------------------------------------------------------- Gross margin 10,408 10,655 46,763 41,986 Selling, general and administrative expenses 6,390 5,264 21,880 19,169 - ----------------------------------------------------------------------------------------------------- Income from operations 4,018 5,391 24,883 22,817 - ----------------------------------------------------------------------------------------------------- Other charges (credits): Interest and financial charges 1,524 1,105 5,766 4,464 Interest income (973) (760) (3,601) (2,660) Other income (159) (85) (87) (555) - ----------------------------------------------------------------------------------------------------- 392 260 2,078 1,249 - ----------------------------------------------------------------------------------------------------- Income before income taxes 3,626 5,131 22,805 21,568 Tax provision 884 1,536 6,802 6,880 - ----------------------------------------------------------------------------------------------------- Net income $ 2,742 $ 3,595 $ 16,003 $ 14,688 ===================================================================================================== Earnings per share of common stock* $ 0.51 $ 0.65 $ 2.91 $ 2.66 =====================================================================================================
FINANCIAL RESULTS BY QUARTERS
(000's Omitted, Except Per Share Amounts) - ---------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Mar. 31 June 30 Sept. 30 Dec. 31 1997 Mar. 31 June 30 Sept. 30 Dec. 31 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Operating revenues $37,212 $43,429 $39,156 $36,977 $156,774 $37,403 $41,010 $33,671 $37,193 $149,277 ================================================================================================================================== Gross profit 10,649 13,775 11,931 10,408 46,763 10,363 11,914 9,054 10,655 41,986 ================================================================================================================================== Income before income tax 5,289 7,947 5,943 3,626 22,805 5,305 6,867 4,265 5,131 21,568 Tax provision 1,346 2,801 1,771 884 6,802 1,612 2,362 1,370 1,536 6,880 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,943 $ 5,146 $ 4,172 $ 2,742 $ 16,003 $ 3,693 $ 4,505 $ 2,895 $ 3,595 $ 14,688 ================================================================================================================================== Per share* $ 0.71 $ 0.93 $ 0.76 $ 0.51 $ 2.91 $ 0.67 $ 0.82 $ 0.52 $ 0.65 $ 2.66 ==================================================================================================================================
* Based on weighted average number of outstanding shares of 5,502,074 in 1997 and 5,521,486 in 1996. 30 19 Puerto Rican Cement Company, Inc. FIVE-YEAR STATISTICAL COMPARISON
December 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET SUMMARY Cash and equivalents $ 2,995,634 $ 14,808,709 $ 11,599,636 $ 114,702 $ 431,293 Investments available-for-sale 5,580,202 4,595,908 4,473,536 Short-term investments 6,967,225 1,917,616 974,073 520,000 Accounts receivable-net 28,763,683 27,410,312 24,526,385 14,358,827 13,626,159 Inventories 32,885,743 33,443,290 32,222,415 28,916,950 33,141,836 Prepaid expenses 4,533,070 4,624,691 4,752,187 3,907,844 3,488,276 - --------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS -- TOTAL 81,725,557 86,800,526 78,548,232 47,298,323 51,207,564 Property, plant and equipment-net 158,610,632 143,088,242 142,567,213 112,299,027 107,968,603 Other assets 4,347,346 4,334,404 2,670,882 241,897 1,595,062 Long-term investments 46,367,581 46,980,338 31,228,541 42,030,507 32,512,367 - --------------------------------------------------------------------------------------------------------------------------- $291,051,116 $281,203,510 $255,014,868 $201,869,754 $193,283,596 =========================================================================================================================== Notes payable (includes current portion of long-term debt and short-term borrowing) $ 1,778,505 $ 15,401,050 $ 11,749,853 $ 8,598,571 $ 7,491,735 Accounts payable and accrued liabilities 17,145,619 15,080,253 16,227,533 8,273,468 9,781,571 - --------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES -- TOTAL 18,924,124 30,481,303 27,977,386 16,872,039 17,273,306 Long-term debt (exclusive of current portion) 76,179,792 67,023,200 57,549,475 31,696,403 26,633,080 Deferred income taxes 35,859,657 33,323,351 30,808,654 27,722,814 26,028,233 Postretirement benefit liability 3,023,228 2,954,610 2,873,430 2,607,162 2,673,947 Capital stock (1)(2) 7,618,367 10,263,617 9,514,825 8,830,839 18,783,431 Unrealized gain on investments available-for-sale 567,745 110,361 74,313 Retained earnings 148,878,203 137,047,068 126,216,785 114,140,497 101,891,599 - --------------------------------------------------------------------------------------------------------------------------- $291,051,116 $281,203,510 $255,014,868 $201,869,754 $193,283,596 =========================================================================================================================== STATISTICAL DATA Book value per share $ 28.81 $ 26.67 $ 24.67 $ 22.38 $ 20.78 Shares outstanding at year-end 5,452,074 5,527,074 5,504,722 5,494,200 5,807,700 Number of stockholders 597 622 655 684 705 Average number of employees 1,015 969 939 552 533 Capital expenditures(3) $ 28,028,571 $ 11,662,959 $ 10,249,840 $ 11,256,763 $ 9,136,968 ===========================================================================================================================
(1) Includes the purchase of 75,000 in 1997, 75,000 shares in 1995, and 313,500 shares in 1994 of the Company's outstanding stocks for $2,645,250, $2,181,000, and $9,953,000, respectively. (2) Also includes the issuance of 107,874 shares of the Company's common stock held in treasury for the acquisition of RMC. (3) Includes expenditures in kiln capacity increase project in 1997, and mill conversion in 1995, 1994, and 1993. 31 20 Puerto Rican Cement Company, Inc. DIRECTORS AND OFFICERS DIRECTORS ANTONIO LUIS FERRE Chairman of the Board of the Company and President of El Dia, Inc. (Newspaper Publishing Group) ALBERTO M. PARACCHINI Vice Chairman of the Board of the Company and Director of Banco Popular de Puerto Rico (Commercial Bank) HECTOR DEL VALLE Vice Chairman of the Board of the Company MIGUEL A. NAZARIO President and Chief Executive Officer of the Company ANTONIO LUIS FERRE RANGEL Executive Vice President WALDEMAR DEL VALLE ARMSTRONG Attorney-at Law, Partner of Parra, Del Valle, Frau & Limeres JOSE J. SUAREZ Consultant to the Company ESTEBAN D. BIRD President of Bird Construction Company (General Contractors) OSCAR A. BLASINI President of G.B. Investments, Inc. (Real Estate Development and Investments) ROSARIO J. FERRE Second Vice President of Luis A. Ferre Foundation, Inc. EMILIO J. VENEGAS President of Sanson Corporation (Rock and Concrete Products) and Secretary of Venegas Construction Corporation (General Contractors) FEDERICO F. SANCHEZ President of Federico F. Sanchez and Company, Inc. and Interlink Group, Inc. (Real Estate Consultants, Brokers and Developers) JORGE L. FUENTES Chairman of the Board and Chief Executive Officer of Gabriel Fuentes, Jr. Construction Company, Inc. and Chairman of the Board and Chief Executive Officer of Fuentes Concrete Pile, Inc. (Concrete Pile Foundations) JUAN A. ALBORS President and General Partner of Albors Development Corp. (Real Estate Developers and Investors) LUIS ALBERTO FERRE RANGEL Co Director, El Dia, Inc. (Newspaper Publishing Group) CARLOS DEL RIO Senior Vice President and Chief Operating Officer - MOVA Pharmaceutical Corporation (Pharmaceutical Products Manufacturer) OFFICERS MIGUEL A. NAZARIO President and Chief Executive Officer ANTONIO LUIS FERRE RANGEL Executive Vice President JOSE O. TORRES Assistant Secretary, Vice President of Finance and Treasurer JUAN R. TARAZA Vice President - Sales and Marketing ANGEL M. AMARAL Vice President and Controller BENITO DEL CUETO Vice President - Real Estate EUFEMIO TOUCET Vice President and General Manager St. Regis Paper and Bag Division RENE DI CRISTINA President Ready Mix Concrete, Inc. ETIENNE TOTTI DEL VALLE Secretary 32 21 Puerto Rican Cement Company, Inc. STOCKHOLDER INFORMATION STATUTORY OFFICES Ponce, Puerto Rico EXECUTIVE OFFICES Guaynabo, Puerto Rico SUBSIDIARIES* Florida Lime Corporation Ready Mix Concrete, Inc. Poly Bags & Packaging, Inc. Desarrollos Multiples Insulares, Inc. Limestone Materials, Inc. *All Subsidiaries are 100% owned REGISTRAR AND TRANSFER AGENT ChaseMellon Shareholder Services New York, New York INDEPENDENT ACCOUNTANTS Price Waterhouse San Juan, Puerto Rico PUBLIC RELATIONS Gavin Anderson & Company New York, New York LEGAL COUNSEL Totti & Rodriguez Diaz San Juan, Puerto Rico FORM 10-K A copy of the Annual Report as filed with the Securities and Exchange Commission on Form 10-K will be mailed upon request made to Mr. Jose O. Torres, Vice President of Finance and Treasurer, Puerto Rican Cement Company, Inc., PO Box 364487, San Juan, Puerto Rico 00936-4487. PUERTO RICAN CEMENT COMPANY, INC. ANNUAL MEETING The Annual Meeting of Stockholders of Puerto Rican Cement Company, Inc. will be held at the office of the Company, Amelia Industrial Park, Guaynabo, Puerto Rico, Wednesday, May 6, 1998 at 10:00 a.m. COMMON SHARE PRICES AND DIVIDEND PER SHARE The Company's common stock is listed on the New York Stock Exchange (trading symbol:PRN). The following table sets forth the high and low sales price per share of the common stock.
Price per share ($) 1997 1996 - ------------------------------------------------------------------------- High Low High Low - ------------------------------------------------------------------------- First Quarter 28 3/4 28 5/8 34 32 1/8 Second Quarter 32 11/16 32 1/4 33 3/4 31 1/8 Third Quarter 40 1/8 39 7/8 31 7/8 28 5/8 Fourth Quarter 50 9/16 50 3/16 31 3/8 28 1/8 Full Year 50 9/16 28 5/8 34 28 1/8 Dividends per share $0.76 $0.70
INTERNET ADDRESS http//www.prcement.com PRN LISTED NYSE 33 EX-27 3 FINANCIAL DATA SCHEDULE
5 1 US DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 2,995,634 12,547,427 28,189,287 1,451,969 32,885,743 81,725,557 232,609,673 73,999,041 291,051,116 18,924,124 76,179,792 0 0 6,000,000 151,064,315 291,051,116 156,675,080 156,774,092 110,010,997 131,890,596 2,078,024 0 0 22,805,472 6,802,261 16,003,261 0 0 0 16,003,211 2.91 2.91
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