<PAGE>
 
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                       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 SEPTEMBER 30, 1998

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER 1-13914

                     PEPSI-COLA PUERTO RICO BOTTLING COMPANY
             (Exact Name of Registrant as Specified in Its Charter)


            DELAWARE                                  ###-##-####
(State or other Jurisdiction of         (I.R.S. Employer Identification Number)
 Incorporation or Organization)


                             CARRETERA 865, KM. 0.4
                            BARRIO. CANDELARIA ARENAS
                           TOA BAJA, PUERTO RICO 00949
          (Address of Principal Executive Offices, including Zip Code)

                                 (787) 251-2000
              (Registrant's Telephone Number, including Area Code)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: .

         TITLE OF EACH CLASS               NAME OF EXCHANGE ON WHICH REGISTERED

Class B Common Stock, Par Value $.01              New York Stock Exchange

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.

         Check whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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 common equity held by
non-affiliates of the registrant as of December 21, 1998, was approximately
$47,628,261.

         As of December 21, 1998, there were 21,690,000 shares of Common Stock
issued and outstanding. This amount includes 5,000,000 shares of Class A Common
Stock and 16,690,000 shares of Class B Common Stock.


                       DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the 1999 Proxy Statement of Pepsi-Cola Puerto Rico Bottling
Company are incorporated by reference into Part III of this Form 10-K to the
extent provided herein.

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                     PEPSI-COLA PUERTO RICO BOTTLING COMPANY
                     ---------------------------------------
                       Index to Annual Report on Form 10-K
                          Year Ended September 30, 1998


ITEM NO.                                                                PAGE NO.
--------                                                                --------

PART I

         Item 1.  BUSINESS.....................................................3
         Item 2.  PROPERTIES..................................................13
         Item 3.  LEGAL PROCEEDINGS...........................................13
         Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........13

PART II  

         Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS.........................................13
         Item 6.  SELECTED FINANCIAL DATA.....................................14
         Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS.........................17
         Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................25
         Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.........................51

PART III

         Item 10. DIRECTORS AND EXECUTIVE OFFICERS............................51
         Item 11. EXECUTIVE COMPENSATION......................................51
         Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT..............................................51
         Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............52

PART IV
         Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
                  FORM 8-K....................................................52
                  SIGNATURES..................................................57

                                       2
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                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Pepsi-Cola Puerto Rico Bottling Company (the "Company") is a holding
company which, through its manufacturing and distribution subsidiaries,
produces, sells and distributes a variety of soft drink and fruit juice products
and bottled water in the Commonwealth of Puerto Rico ("Puerto Rico"), pursuant
to exclusive franchise arrangements with PepsiCo, Inc. ("PepsiCo") and other
franchise arrangements. The Company also has rights to sell PepsiCo Products to
distributors in the U.S. Virgin Islands. The Company produces, sells and
distributes soft drink products primarily under the Pepsi-Cola, Slice, Wonder
Kola, Teem and Mountain Dew trademarks pursuant to exclusive franchise
arrangements with PepsiCo. In addition, the Company produces, sells and
distributes tonic water, club soda and ginger ale under the Seagram trademark
through an exclusive arrangement with Joseph E. Seagram & Sons, Inc. ("Seagram")
and sells and distributes fruit juice products under the Welch's trademark.

         The Company was incorporated and acquired the franchise rights to
produce, sell and distribute PepsiCo soft drink products in Puerto Rico in 1987.
A subsidiary of the Company manufactures plastic bottles and "preforms" (small
molded plastic units which are expanded with air to produce plastic bottles).

         For its fiscal year ended September 30, 1998, the Company had a net
loss of $9.6 million (including $3.3 million pre-tax of expenses related to
unusual items), compared to a net loss of $21.4 million during fiscal 1997
(including $13.2 million pre-tax of expenses related to settlement of civil
litigation). This loss from the Company's operations resulted primarily from
intense competitive pressures in Puerto Rico, which produced lower net sales
prices.

         This annual report on Form l0-K contains forward looking statements of
expected future developments. The Company wishes to insure that such statements
are accompanied by meaningful cautionary statements pursuant to the safe harbor
established in the Private Securities Litigation Reform Act of 1995. The forward
looking statements in this report refer to the ability of the Company to
implement pricing initiatives in a manner that improves the pricing environment
in the marketplace, its ability to generate cost savings through the
consolidation of existing operations, its ability to pay dividends, its expected
future capital expenditures and its ability to restore profitability through
these pricing initiatives and cost savings. These forward looking statements
reflect management's expectations and are based upon currently available data;
however, actual results are subject to future events and uncertainties which
could materially affect actual performance. The Company's future performance
also involves a number of risks and uncertainties. Among the factors that could
cause actual performance to differ materially are: continued competitive
pressures with respect to pricing in the Puerto Rican market; the inability to
achieve cost savings due to unexpected developments; changed plans regarding
capital expenditures; adverse developments with respect to economic, climatic
and political conditions in Puerto Rico; and the impact of such conditions on
consumer spending.

PRINCIPAL MARKET

         The principal market for the Company's products is Puerto Rico, a
Commonwealth of the United States with a population of approximately 3.7 million
inhabitants. Currently, approximately 35% of the population of Puerto Rico is
under the age of l8 and 45% of the population is under the age of 25 which the
Company believes is significant because young people are major consumers of soft
drinks.

         Although the Company has rights to sell PepsiCo products to
distributors in the U.S. Virgin Islands, it is not required to do so under its
franchise agreements with PepsiCo. During the fiscal year ended September 30,
1998, less than 1% of the Company's sales by volume were to distributors in the
U.S. Virgin Islands.

         The Company has received certain rights and preferences for expansion
of its exclusive business with PepsiCo throughout the Caribbean.

                                       3
<PAGE>
 
THE BEVERAGE INDUSTRY IN PUERTO RICO


         The Puerto Rican soft drink market is characterized by relatively low
per capita consumption as compared to the United States due primarily to modest
per capita income and the stage of industry evolution in Puerto Rico. In
addition, the imposition of the Carbonated Beverage Tax (in effect from 1991 to
1993) had a material adverse effect on per capita consumption of soft drinks in
the years in which it was in effect. The Carbonated Beverage Tax was repealed in
January 1994 but consumption remains low compared to consumption levels in the
United States. In 1995, the annual per capita consumption of soft drink products
in Puerto Rico was approximately 410 eight-ounce servings, as compared with
approximately 816 eight-ounce servings in the United States.

         The Company is one of the two largest soft-drink suppliers in Puerto
Rico. From inception it was the market share leader but, since 1996 lost market
share leadership to its principal competitor. In 1996, new ownership at the
competitor instituted unusually aggressive selling tactics including securing
exclusive marketing opportunities at leading supermarkets. The Company belives
that the erosion of market share has been stemmed but the principal competitor
still possesses a share advantage.

BUSINESS STRATEGY

         The most important element of the Company's current business strategy
is to restore the profitability of its Puerto Rican bottling operations. The
Company intends to pursue this strategy through the implementation of new
marketing initiatives designed to address the current intense price competition
in the soft drink market in Puerto Rico, and the implementation of cost cutting
measures. In addition, the Company is evaluating the profitability of its
various product lines and methods of distribution. There can be no assurance,
however, that the Company will be successful in achieving its goal of restoring
the profitability of its Puerto Rican bottling operations.

         The Company completed, during fiscal year 1996, the construction of the
Toa Baja plant and the consolidation of its operations into this facility during
1997. The Toa Baja plant has three bottling lines and increased the Company's
annual production capacity by 60%. The Company commenced operations at the Toa
Baja plant in the third fiscal quarter of 1996, closed its former plant and
currently holds it for sale. During fiscal 1999 it expects to sell the unused
facility and conclude the sale of its water division as announced in December
1998.

FRANCHISE ARRANGEMENTS

         PEPSICO PRODUCTS

         The Company has entered into a master franchise commitment letter (the
"Franchise Commitment Letter") with PepsiCo with respect to the sale of PepsiCo
soft drink products in Puerto Rico. The Company has also entered into exclusive
bottling appointment agreements (each an "Exclusive Bottling Appointment" and
collectively, with the Franchise Commitment Letter, the "Franchise
Arrangements") for the relevant trademarks of Pepsi-Cola, Diet Pepsi-Cola, 
Pepsi-Cola Free, Diet Pepsi-Cola Free, Lemon-Lime Slice, Diet Lemon-Lime Slice,
Mandarin Orange Slice, Diet Mandarin Orange Slice, Grape Slice, Teem, Diet Teem,
Wonder Kola and Mountain Dew. The Franchise Commitment Letter runs concurrently
with the Exclusive Bottling Appointments and will terminate in the event of the
termination or expiration of the Exclusive Bottling

                                       4
<PAGE>
 
Appointments. All of the Franchise Arrangements have the provisions described
below and were renegotiated with the change in ownership control effective July
17, 1998.

         The Franchise Arrangements require the Company to purchase its entire
requirements of concentrates and syrups for all of the PepsiCo soft drink
products from certain affiliates of PepsiCo. Pursuant to the Franchise
Commitment Agreement between the company and PepsiCo, PepsiCo charges the
Company the actual price of a unit of concentrate that is paid by bottlers for
the same or similar concentrate in the continental United States on an
equivalent yield basis based upon the then current domestic list price for each
of the respective PepsiCo products.

         The Company is obligated under the Franchise Arrangements to use,
handle and process the concentrates purchased from PepsiCo and to bottle, label,
package and distribute the PepsiCo soft drink products, in accordance with
PepsiCo's instructions. The Company must maintain and operate its plants and all
sales and distribution equipment in clean and sanitary conditions in accordance
with PepsiCo's standards and specifications, and otherwise must satisfy
PepsiCo's quality control standards. The Company must comply with all standards
and specifications with respect to the treatment and purification of water used
in manufacturing PepsiCo soft drink products and the maintenance and operation
of water treatment and purifying equipment. The Company must also conduct tests
of the PepsiCo soft drink products and the water used in their manufacture,
maintain records of such testing and permit PepsiCo access to its facilities for
inspection purposes.

         The Company is required to test market and introduce new packages,
sizes and products as PepsiCo may direct and promote and advertise the PepsiCo
soft drink products. The Company is also required to make capital expenditures
to maintain a sufficient inventory of bottles, cartons, containers and cases.

         The Franchise Arrangements also require the Company to display all
advertising and promotional materials furnished by PepsiCo or its affiliates and
to incur mutually agreed upon marketing, advertising and sales promotion
expenditures. See "- Marketing."

         The Exclusive Bottling Appointments have ten-year terms expiring on
July 17, 2008. Thereafter, each agreement is automatically renewed for
additional five-year terms unless either party gives written notice of its
intention not to renew the agreement at least 12 months prior to the date of
expiration of the term. PepsiCo may terminate the Franchise Arrangements if the
Company fails to comply in any material respect with the terms and conditions of
the Franchise Arrangements, subject to a right to cure in certain instances. In
addition, PepsiCo may terminate the Franchise Arrangements if there is a change
of effective control of the Company without PepsiCo's prior written consent

         OTHER PRODUCTS

         The Company has reached agreement on the terms of a soft drink
trademark license and bottling agreement with Seagram for the exclusive rights
to produce, sell and distribute tonic water, club soda and ginger ale under the
Seagram trademark in Puerto Rico. The Company must purchase concentrate from
Seagram at a price per unit mutually agreed upon by Seagram and the Company. The
Company is obligated to meet specified production levels. The Company may not
produce, sell or distribute any other tonic water, club soda or ginger ale other
than the Seagram trademark. The Company has further agreed to maintain certain
production and quality control standards and to use its best efforts to
advertise and promote the sale, distribution and consumption of the Seagram
products in the franchise territory. The license and bottling agreement with
Seagram is effective through January 31, 2000 and is renewable for successive
ten-year terms thereafter at the option of Seagram. The agreement with Seagram
may be terminated in the event that the Company does not comply with its terms
and, in the case of the Company's bankruptcy, appointment of a receiver or
assignment for the benefit of creditors.

         The Company has a sales and distribution agreement with Welch Foods
Inc. ("Welch's") for the rights to sell and distribute non-carbonated fruit
juice beverages under the Welch's trademark in Puerto Rico. The Company must
purchase the product from certain authorized sellers and may not manufacture,
sell or distribute certain

                                       5
<PAGE>
 
specified brand names which compete with Welch's products. The Company is
actively negotiating the renewal of this distribution agreement.

         FRANCHISE PROTECTION

         The Company's Franchise Arrangements with PepsiCo are subject to Act
No. 75 of June 24, 1964 of Puerto Rico, as amended ("Act 75"), which provides
that a company that grants distribution rights to a distributor in Puerto Rico
may not unilaterally terminate, perform any act detrimental to or refuse to
renew its agreement with distributor without just cause, and would be required
to pay damages to the distributor as specified in Act 75 in the event of a
termination, impairment or non-renewal without just cause, which are specific
acts set forth in Act 75 which are attributable to the distribution. Act 75 does
not protect a distributor in the event of a breach by such distributor.

PRODUCTION

         Soft drinks are produced by mixing water, concentrate and sweetener and
injecting carbon dioxide gas into the mixture to produce carbonation immediately
prior to bottling. Prior to mixing, the water is processed to eliminate mineral
salts, chlorinated and then passed through purification tanks containing sand
filters, to eliminate remaining impurities, and carbon filters, to eliminate
chlorine taste, copper and odors. The purified water is then combined with
processed sugar and concentrate. Following carbonation the mixture is bottled in
prewashed bottles or aluminum cans. The Company maintains a laboratory area at
its production facility, where raw materials are tested and samples of soft
drink products are analyzed to ensure quality control

         The raw materials used by the Company in the production of soft drinks
include concentrate, syrup, water, sugar or high factor corn syrup, carbon
dioxide gas, glass and plastic bottles, aluminum cans and other packaging
material. The Company is obligated under the terms of the Franchise Arrangements
to obtain concentrate for the production of soft drink products from PepsiCo or
its affiliates. The Company obtains water from publicly available supplies (such
as municipal water systems) and from its own drilled wells. The Company obtains
all of its sweetener requirements from a number of independent suppliers and
distributors located in the United States and Puerto Rico. The Company does not
directly purchase low calorie sweetener for use in diet soft drinks because
these sweeteners are already contained in the diet soft drink concentrates
purchased by the Company. The Company purchases its supplies of carbon dioxide
gas from a number of independent suppliers in Puerto Rico and elsewhere. The
Company purchases plastic bottles used in the bottling process principally from
its plastics operation and from other independent suppliers as needed. The
Company also manufactures preforms which are utilized in the bottle
manufacturing process. All bottles used in the bottling process of Cristalia
products are purchased by the Company from a number of independent suppliers.
The Company purchases its aluminum can requirements from Crown Cork & Seal.

         None of the raw materials or supplies used by the Company is currently
in short supply, although the available supply of certain materials could be
adversely affected in the future due to reasons outside the Company's control.

         The following table sets forth the principal raw materials utilized in
the soft drink production process and the approximate percentage of the
Company's total cost in fiscal year 1998 represented by each of them.

                                       6
<PAGE>
 
                                                           Percentage of
                                                            Fiscal Year
Raw Material                                                 1998 Cost
------------                                                 ---------
Packaging.................................................      41%
Concentrate...............................................      38%
Sugar/fructose............................................      15%
Carbon dioxide gas........................................      1%
Other.....................................................      5%
                                                               ----
     Total................................................     100%
                                                               ====

         The following chart shows the approximate effective production
capacity, number of shifts and bottling lines, and average fiscal year 1998
capacity utilization for the Toa Baja plant:


                Approximate Effective      Number of          Average 1998
Plant          Production Capacity (1)  Bottling Lines  Capacity Utilization (2)
-----          -----------------------  --------------  ------------------------
Toa Baja......   44,350 (2 shifts)            3                   68%

--------------------
(1) Approximate effective production capacity is expressed in thousands of cases
per year, assuming the number of shifts indicated. Effective production capacity
is a plant's theoretical installed capacity, adjusted for seasonal variations in
demand as well as regular maintenance and repair.
(2) Actual production in fiscal year 1998 expressed as a percentage of
approximate effective production capacity.

DISTRIBUTION

         Once the bottling process is complete, the Company packages its soft
drink products in cases, tanks and boxes for distribution throughout its
franchise territory. The Company uses three primary methods of distribution for
its soft drink products: conventional routes, bulk presell and route presell
delivery. In the conventional route form of distribution, a truck owned or
leased by the Company is loaded with the Company's beverage products and visits
each of the Company's customers along an assigned distribution route. The
customer places orders and accepts delivery of the amount of the Company's
products needed at that time. The drivers and sales persons which deliver the
Company's products along the conventional route system are employees of the
Company in Puerto Rico. The conventional route form of distribution is the main
form of distribution currently used by the Company in Puerto Rico.

         Under the bulk presell method of distribution, the Company's account
representatives and key account salespersons visit customers assigned to their
route and fill out order forms for the Company's products. These orders are
processed at the Company's plant and the products are delivered the next day in
trailer loads by independent truck drivers or in bulk (less than trailer loads)
by the Company's employees in Company-owned or leased trucks. The bulk presell
method is mostly used for wholesalers and large retailers.

         The Company intends to emphasize the "route presell" method of
distribution for its conventional routes where feasible to capitalize on its
planned introduction of new products and packaging formats. Under the route
presell method, employees of the Company visit customers assigned to their route
and take orders which are processed at the end of the day. The ordered products
are then delivered the next day by the Company's employees in Company-owned or
leased trucks. The Company believes this method provides better route coverage
in densely populated areas and facilitates the distribution of the Company's
existing products as well as the introduction of new products.

         As of September 30, 1998, the Company had approximately 135
distribution routes (conventional, bulk, and presell) and its transportation
fleet consisted of approximately 113 trucks. The Company's products are also
distributed to restaurants and soda fountains in post-mix form.

                                       7
<PAGE>
 
         In addition, the Company has approximately 1,300 "single service" and
1,800 "full service" vending machines throughout Puerto Rico. In the "single
service" format, the proprietor of the location of the machine purchases a
minimum amount of the Company's products while in the "full service" format, the
Company pays a commission to the proprietor and supplies and retains the profit
from sales from the machines. The Company is responsible for refurbishing and
maintaining the vending machines and there is no charge for installation and
maintenance or rental fees for the vending machines. The Company's bottled water
is distributed to customers in private homes, businesses and government
agencies, some of which have coolers installed by the Company. The Company
receives a rental payment for each cooler installed by the Company.

         In the fiscal year 1998, approximately 46% of the Company's volume was
to supermarkets, grocery and convenience stores, 35% was to "cash and carry's"
(small, high-volume wholesalers) and similar businesses, 14% was to restaurants
and soda fountains and 5% was through other distribution channels. The Company
also distributes its products through vending machines and is in the process of
expanding its placement of vending machines throughout Puerto Rico. The
Company's Cristalia brand bottled water is distributed to private homeowners,
businesses and government agencies. Most sales to the Company's customers are on
a credit basis, with payment due approximately 30 days after delivery. Credit
sales and cash sales accounted for approximately 93% and 7% respectively, of the
Company's total net sales in the fiscal year 1998.

MARKETING

         The Company has entered into a cooperative advertising and marketing
agreement with affiliates of PepsiCo in Puerto Rico. This arrangement provides
for advertising of Pepsi-Cola and other PepsiCo soft drink products on
television and radio stations, billboards, newspapers and other media. The total
amount spent by the Company on advertising pursuant to this cooperative
arrangement in any year is determined by the Franchise Arrangements.


         A primary basis of competition among soft drink bottling companies is
sales promotion activities, including television, radio and billboard
advertising and point of purchase promotional devices, such as display racks and
cases, clocks, neon signs and other merchandise and equipment bearing the Pepsi
logo and placed in retail outlets where the Company's products are sold.

         The Company also uses point-of-purchase promotional devices approved by
PepsiCo in marketing its products. These promotional devices consist primarily
of prominent in-store displays such as racks and cases that are delivered to the
Company's customers by distribution trucks along with soft drink deliveries. The
Company shares the cost of these point-of-purchase promotional devices,
excluding design costs, with PepsiCo. PepsiCo reimburses the Company for
PepsiCo's share of its marketing expenditures. PepsiCo may from time to time
during the year pay for marketing expenditures directly, subject to agreement
with the Company, and will be credited for such payments toward PepsiCo's share
of marketing expenditures.

         The Company has entered into long-term arrangements to offer discounts
to selected customers, such as the major supermarket chains in Puerto Rico. The
Company has also entered into cooperative marketing agreements with its
customers relating to special displays and promotional campaigns for the
Company's products. The competition with other soft drink companies for these
type of arrangements is intense. There is no certainty that any specific
relationship can be maintained longer than the period of agreement.

         The Company frequently uses promotional campaigns such as concerts and
sports events, merchandise giveaways, contests and similar programs to increase
sales of its products. These programs are typically heavily advertised and
frequently result in increased sales and higher per capita consumption of the
Company's products during the time the program is being conducted.

         The Company sells its soft drink and water products in a variety of 
non-returnable and returnable bottles, both glass and plastic, and in cans, in a
variety of sizes. In order to increase sales and per capita consumption of the
Company's products, the Company

                                       8
<PAGE>
 
continually examines sales data and customer preferences in order to develop a
mix of packaging formats which consumers will consider most desirable. All the
packaging formats utilized by the Company for PepsiCo soft drink products are
subject to the approval of PepsiCo.
         
         The Company uses its management information systems in order to
evaluate sales data for purposes of forecasting future sales and establishing
sales quotas and forecasts. Based on the information compiled in the Company's
historical sales records, the Company may initiate one or more of the marketing
programs described above in order to increase sales volume or per capita
consumption of its soft drink products.

COMPETITION

         The soft drink industry in Puerto Rico is highly competitive. In
addition, during fiscal years 1998 and 1997, the Company faced intense price
competition resulting in substantially lower net sale prices. The Company's
principal competitors in Puerto Rico are the local bottlers and distributors of
Coca-Cola in the cola market and Seven-Up in the flavored soft drink market. The
Company's other competitors include bottlers and distributors of nationally and
regionally advertised and marketed products, as well as bottlers of smaller
private label soft drinks, which private label soft drinks the Company believes
have historically represented approximately 5% of total soft drink sales in
Puerto Rico. Carbonated soft drink products compete with other major commercial
beverages, such as coffee, milk and beer, as well as non-carbonated soft drinks,
citrus and non-citrus fruit drinks and other beverages.

         The principal methods of competition in the soft drink industry in
Puerto Rico are pricing, advertising and product image. In addition, the Company
provides discounts to certain of its large customers such as supermarket chains,
fast food chains and other retail outlets which carry PepsiCo soft drink
products.

GOVERNMENT REGULATION

         The Company's operations are subject to the regulatory oversight of the
U.S. Department of Agriculture and Department of Labor, the Food and Drug
Administration, the Occupational Safety and Health Administration, the
Environmental Protection Agency and the Puerto Rico Environmental Quality Board.

         The Company is required to obtain municipal licenses for its bottling
plants. The Company is currently in compliance with such requirements.
Additionally, the Company routinely obtains the necessary approvals to operate
certain machinery and equipment, such as boilers, steamers, compressors and
precision instruments, from municipal authorities.

         The wastewater from the Tao Baja bottling plant is discharged to a 
collection and treatment system owned by the Puerto Rico Aqueduct and Sewer 
Authority ("PRASA"). The Company previously entered into a stipulation with 
PRASA with respect to the discharge of wastewater in excess of pretreatment 
standards and the Company paid a surcharge to cover the excess wastewater 
discharges. In 1998, the Company applied to have the permit reissued. On October
29, 1998, PRASA reissued the permit but without the surcharge provision included
in the old permit. The Company intends to negotiate with PRASA regarding the new
permit and required effluent standards. If the new permit cannot be negotiated,
the Company will be required to construct an on-site wastewater treatment
system. The cost of new treatment system may have a material affect on the
Company's future financial performance.
          
                                       9
<PAGE>
 

TAXATION

         The Puerto Rican government currently imposes an excise tax on
carbonated beverages of 5% of the "taxable price in Puerto Rico." The "taxable
price in Puerto Rico" for a product manufactured in Puerto Rico is effectively
defined under the Puerto Rico Excise Act as 72% of the manufacturer's sales
price. The Company is thus subject to an excise tax at an effective rate of 3.6%
(or 5% of 72%) of the price at which it sells its soft drink products.

EMPLOYEES

         At September 30, 1998, the Company had approximately 550 full-time
employees, approximately 65% of which were represented by a labor union. The
Company believes that its relationship with its employees and their unions is
excellent. The Company has not experienced any strike or work stoppage since the
Company was acquired in 1987. Labor relations are generally governed by labor
agreements entered into from time to time between the Company and its employees.
The Company has entered into three such agreements, with its union employees in
its manufacturing and distributing subsidiaries, its plastics subsidiary and its
bottled water division, respectively. A new agreement relating to the Company's
manufacturing and distributing subsidiaries was signed on November 25, 1997 and
expires on December 31, 2001. This new agreement provides the Company with a
reduction in operating costs as part of its strategy to increase and maintain
operating efficiencies. The agreement relating to its plastics subsidiary
expired on October 1, 1996. The Company currently is in the process of
renegotiating this agreement. 

                                       10
<PAGE>
 
EXECUTIVE OFFICERS OF THE COMPANY

         The executive officers of the Company are elected by the Board of
Directors and serve at its discretion. There is no family relationship among any
of the officers or directors. The following table sets forth certain information
regarding the executive officers of the Company.

Name                    Age      Position
----                    ---      --------

Robert C. Pohlad        44       Chief Executive Officer and Director
John F. Bierbaum        54       Chief Financial Officer, Vice President
Kenneth E. Keiser       47       President and Chief Operating Officer
Bradley J. Braun        44       Vice President, Finance and Assistant Secretary
Jay S. Hulbert          45       Vice President, Operations
Raymond R. Stitle       44       Vice President, Human Resources
A. David Velez          44       Vice President and President Pepsi-Cola Puerto
                                 Rico Distribution Company

         The following is a brief description of the business background of each
of the executive officers of the Company.

         ROBERT C. POHLAD. Mr. Pohlad has served as director and Chief Executive
Officer of the Company since July 1998. Mr. Pohlad has been and continues as a
director and Chief Executive Officer of Delta Beverage Group, Inc. since 1988.
Since 1987, Mr. Pohlad has also served as President of the Pohlad Companies, a
holding and management services company, which has an ownership interest in and
provides management services to the Company. Prior to 1987, Mr. Pohlad was
Northwest Area Vice President of the Pepsi-Cola Bottling Group. Mr. Pohlad also
currently serves as a director for Mesaba Holdings, Inc. and Grow Biz
International, Inc.

         JOHN F. BIERBAUM. Mr. Bierbaum has served as Chief Financial Officer of
the Company since July 1998. Mr. Bierbaum has been and continues as a director
(since 1993) and Chief Financial Officer of Delta Beverage Group, Inc. (since
1988). Mr. Bierbaum is also Chief Financial Officer of the Pohlad Companies, a
holding and management services company, which has an ownership interest in and
provides management services to the Company. Mr. Bierbaum has been associated
with the Pohlad Companies from 1975 to the present in a variety of capacities,
including his current position. From 1986 to 1988, Mr. Bierbaum served as Vice
President of the Pepsi-Cola Bottling Company of Tampa.

         KENNETH E. KEISER. Mr. Keiser has served as President and Chief
Operating Officer of the Company since July 1998. Mr. Keiser has been and
continues as President and Chief Operating Officer of Delta Beverage Group, Inc.
since 1990. From 1976 to 1990, he was employed by the Pepsi-Cola Bottling Group
in various capacities, including Division Vice President of the Central Division
from 1989 to 1990, Vice President of the Minneapolis Area from 1986 to 1989,
Director of Corporate Trade Development from 1985 to 1986, Area Vice President
of Philadelphia from 1982 to 1985, and various other capacities from 1976 to
1985.

         BRADLEY J. BRAUN. Mr. Braun became Vice President of Finance and
Assistant Secretary for the Company in July 1998. Mr. Braun has been and
continues as Vice President of Finance of Delta Beverage Group, Inc. since 1991.
Prior to joining Delta, Mr. Braun served as Controller of the Dakota Beverage
Company, Inc., a PepsiCo franchise bottler which is a wholly owned subsidiary of
the Pohlad Companies.

                                       11
<PAGE>
 
         JAY S. HULBERT. Mr. Hulbert joined the Company in July 1998 as Vice
President, Operations. Mr. Hulbert has been and continues as Vice President -
Operations for Delta Beverage Group, Inc. since 1988. Prior to joining 
Delta, Mr. Hulbert spent seven years working for the Pepsi-Cola Bottling Group
in a variety of capacities.

         RAYMOND R. STITLE. Mr. Stitle joined the Company in July 1998 as Vice
President, Human Resources. Mr. Stitle has been and continues as Vice President
of Delta Beverage Group, Inc. since 1988. Prior to joining Delta, Mr. Stitle was
employed by Pepsi-Cola USA.

         A. DAVID VELEZ. A. David Velez has been President of Pepsi Cola Puerto
Rico Distribution Co. since July 1998 and has been a Vice President of the
Company since March 1997. He was the General Manager for BAESA's operations in
Rio de Janeiro from October 1995 to February 1997. Prior to that he was the
General Manager for PepsiCo's Miami bottling operations.

                                       12
<PAGE>
 
ITEM 2.  PROPERTIES

PROPERTIES

         The properties of the Company primarily consist of bottling, warehouse,
distribution, plastic production and office facilities located in Puerto Rico.
The Company owns the property previously used as a bottling plant in Rio Piedras
and one bottling plant in Toa Baja. Substantially all of the company's real
property, machinery and equipment are pledged pursuant to the terms of a Credit
Agreement among the Company and its subsidiaries and Banco Popular de Puerto
Rico. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - The Company - Liquidity and Capital Resources." The
principal offices of the Company are located in Toa Baja. The Company leases two
warehouse and distribution facilities in Ponce, Sebana Grande and the production
facilities for Cristalia bottled water in Ponce. The remainder of the Company's
properties is held in fee.

         At September 30, 1998, the net book value of all land, buildings,
machinery, and equipment owned by the Company in Puerto Rico was approximately
$43.7 million. The total annual rent paid by the Company for the year ended
September 30, 1998 for its leased production, distribution and office facilities
and equipment in Puerto Rico was approximately $0.4 million.

         The Company intends to sell its unused Rio Piedras plant and equipment
during fical year 1999.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended September 30, 1998.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

         As of December 21, 1998, there were (i) 5,000,000 shares of Class A
Common Stock, par value $.01 per share (the "Class A Shares"), issued and
outstanding and held by two shareholders of record, and (ii) 16,690,000 shares
of Class B Common Stock, par value $.01 per share (the "Class B Shares"), issued
and outstanding and held by 686 registered shareholders of record. The principal
market for the Company's Class B Shares is the New York Stock Exchange, Inc.
(the "NYSE"). The Class A Shares are not listed for trading on any securities
exchange. The Class A Shares and Class B Shares are collectively referred to
herein as the "Common Stock."

         The company's Class B Shares have been listed for trading on the NYSE
since September 20, 1995 under the symbol PPO. The following table sets forth,
for the periods indicated, the high and low sales prices of the Company's Class
B Shares on the NYSE as reported in the consolidated transaction reporting
system. The closing

                                       13
<PAGE>
 
sale price of the Company's Class B Shares on the NYSE on December 21, 1998, as
reported in the consolidated transaction reporting system, was $4.5625


                                                      High            Low
                                                      ---------------------
1997
----
First Quarter                                         $5.50          $3.875
Second Quarter                                        $5.00          $4.125
Third Quarter                                         $6.50          $4.250
Fourth Quarter                                        $8.0625        $5.875

1998
----
First Quarter                                         $7.6875        $6.3125
Second Quarter                                        $8.00          $6.0625
Third Quarter                                         $7.75          $6.625
Fourth Quarter                                        $9.063         $6.00

         The Company's Board of Directors from time to time may declare, and the
Company may pay, dividends on its outstanding shares of Common Stock in the
manner and upon the terms and conditions provided by law. Pursuant to the terms
of the Credit Agreement (as defined below), the Company may not pay dividends
without the consent of Banco Popular if an event of default under the Credit
Agreement (including a violation of the financial restrictions) has occurred or
would occur because of the payment of dividends.

         The Company does not expect to pay any dividends for the foreseeable
future.

ITEM 6.  SELECTED FINANCIAL DATA

PRESENTATION OF FINANCIAL INFORMATION

         The following tables present summary consolidated financial information
of the Company and reflect the results of operations of the Company and its
previous equity interest in the net earnings of Buenos Aries Embotelladora S.A.
("BAESA") prior to June 17, 1998. This data has been derived from the
consolidated financial statements of the Company and its subsidiaries and from
information provided to the Company by BAESA. The inclusion in this report of
such information provided by BAESA is for information purposes only and the
Company makes no representation as to the accuracy or completeness of such
information. On June 17, 1998 the Company distributed all shares of BAESA held
by it pro-rata to the Company's Class B shareholders by way of a special
dividend. The consolidated financial statements of the Company for each of the
four years ended September 30, 1997 have been audited by KPMG Peat Marwick LLP,
independent public accountants. The consolidated financial statements of the
Company as of September 30, 1998 and for the year then ended have been audited
by Arthur Andersen LLP, independent public accountants.

                                       14
<PAGE>
 
<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED SEPTEMBER 30,
                                                       -------------------------------------------------------------
                                                          1994         1995         1996         1997         1998
                                                       ---------    ---------    ---------    ---------    ---------
                                                                (Dollars in Thousands, except per share data)
<S>                                                    <C>          <C>          <C>          <C>          <C>      
INCOME STATEMENT DATA (FOR YEAR ENDED):........
Net sales ..........................................   $ 104,048    $ 114,301    $ 102,891    $  99,172    $  99,405
Cost of sales ......................................      60,574       67,846       74,956       68,237       70,503
                                                       ---------    ---------    ---------    ---------    ---------
    Gross profit ...................................      43,474       46,455       27,935       30,935       28,902
Selling and marketing expenses .....................      30,497       30,458       42,456       30,224       30,072
Administrative expenses ............................      10,528        6,262        9,606        8,424        6,047
Restructuring charges ..............................        --           --          2,700          535        1,728
Litigation settlement expenses .....................        --           --           --         13,172         --
Provision for legal and environmental reserves .....        --           --           --           --            760
Loss on asset impairments ..........................        --           --           --           --            800
Insurance proceeds from business interruption losses        --           --           --           --         (1,309)
Intangibles and fixed asset write-offs .............       2,886         --           --           --           --
                                                       ---------    ---------    ---------    ---------    ---------
    Income (loss) from operations ..................        (437)       9,735      (26,827)     (21,420)      (9,196)
Gain on sale by PCPRB of
    Class B BAESA shares, net ......................      15,924         --           --           --           --
Gain on early termination of supply agreement ......        --           --          2,111         --           --
Interest expense ...................................      (1,237)      (1,215)      (1,523)      (2,644)      (2,437)
Interest income ....................................         147          207        2,418        1,218          839
Other income, net ..................................        (332)         391         (256)           1          206
                                                       ---------    ---------    ---------    ---------    ---------
    Total other income (expenses) ..................      14,502         (617)       2,750       (1,425)      (1,392)
                                                       ---------    ---------    ---------    ---------    ---------
    Income (loss) before income tax benefit
      (expense) and equity in net earnings
      (loss) of BAESA ..............................      14,065        9,118      (24,077)     (22,845)     (10,588)
    Income tax expense/(benefit) ...................       6,243         (297)      (1,205)      (3,342)        (978)
                                                       ---------    ---------    ---------    ---------    ---------
Income (loss) before equity in net earnings
      (loss) of BAESA ..............................       7,822        9,415      (22,872)     (19,503)      (9,610)
Equity in net earnings (loss) of BAESA, net of
      income taxes .................................       9,753        5,638      (51,458)        --           --
                                                       ---------    ---------    ---------    ---------    ---------
Net income/ (loss) .................................   $  17,575    $  15,053    $ (74,330)   $ (19,503)   $  (9,610)
                                                       =========    =========    =========    =========    =========
Earnings Per Share (1)
    Income (loss) before equity
       in net earnings (loss) of BAESA, net
       of income taxes .............................   $    0.43    $    0.52    $   (1.06)   $   (0.91)   $   (0.45)
    Net income/(loss) ..............................   $    0.98    $    0.83    $   (3.46)   $   (0.91)   $   (0.45)
Dividends declared per share  
    of Common Stock (1) ............................   $    1.18    $    0.27    $    0.24    $    0.00    $    0.00
Weighted average number of
    shares of Common Stock
    outstanding (in thousands) .....................      18,000       18,105       21,500       21,500       21,516
</TABLE>

                                       15
<PAGE>
 
<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30,
                                                    -------------------------------------------------------------
                                                       1994        1995         1996          1997         1998
                                                    ---------    ---------    ---------    ---------    ---------
<S>                                                 <C>          <C>          <C>          <C>          <C>      
BALANCE SHEET DATA (AT END OF PERIOD):.........                          (Dollars in Thousands)
Assets:
    Cash and cash equivalents ...................   $   1,347    $  46,091    $    --      $  19,621    $  24,720
    Short term investment .......................           0            0       12,904         --           --
    Accounts receivable, net ....................      11,881       16,427       14,562       16,897       15,753
    Accounts receivable from affiliates and
       intercompany advances ....................       3,729        2,913         --           --           --
    Inventories .................................       5,452        4,542         --          2,802        2,480
    Deferred income tax asset ...................        --           --            187           97          224
    Other current assets ........................       1,216        2,516        1,857        2,073        4,743
                                                    ---------    ---------    ---------    ---------    ---------
       Total current assets .....................      23,625       72,489       52,619       41,490       47,920
    Investment in BAESA .........................      69,870       74,128         --           --           --
    Deferred income tax asset, long-term .........       --           --          2,076        1,619        1,607
    Long-lived assets for sale; principally land
       and building .............................        --           --          3,805        3,752        2,615
    Property, plant and equipment, net ..........      32,397       36,445       49,936       47,347       43,731
    Intangible assets, net ......................       2,293        2,163        1,459        1,644        1,544
    Other assets ................................         693          441           86           58           15
                                                    ---------    ---------    ---------    ---------    ---------
       Total assets .............................   $ 128,878    $ 185,666    $ 109,981    $  95,910    $  97,432
                                                    =========    =========    =========    =========    =========

Liabilities:
    Current installments of long-term debt ......   $   1,549    $   1,550    $   1,550    $   1,007    $   1,007
    Current installments of capital
       lease obligations ........................       2,537        1,204          341          908          176
    Notes payable to bank .......................       4,250        4,600       25,000        5,430         --
    Accounts payable - trade ....................       7,469       12,536       16,619       13,750       10,212
    Notes and accounts payable - affiliates .....       2,078        1,181           50           32         --
    Income taxes payable ........................         229          123          115          199          150
    Accrued expenses ............................       3,678        7,007        8,672        4,830        5,958
                                                    ---------    ---------    ---------    ---------    ---------
       Total current liabilities ................      21,790       28,201       52,347       26,156       17,503
    Long-term debt, excluding current
       installments .............................       7,915        6,365        4,813       23,636       22,355
    Capital lease obligations, excluding
       current installments .....................       2,070          848          871          513            8
    Deferred income taxes, net ..................      18,273       18,732         --           --           --
    Other liabilities ...........................       2,899        2,871        2,593        2,213        3,110
                                                    ---------    ---------    ---------    ---------    ---------
       Total liabilities ........................      52,947       57,017       60,624       52,518       42,976
                                                    ---------    ---------    ---------    ---------    ---------
Shareholders' equity:
    Class A shares ..............................          50           50           50           50           50
    Class B shares ..............................         130          165          165          165          167
    Additional paid in capital ..................      47,967       90,738       90,738      103,910      127,009
    Retained earnings (accumulated deficit) .....      29,307       39,472      (40,232)     (59,735)     (69,345)
    Accumulated other comprehensive income ......      (1,523)      (1,776)      (1,364)        (998)      (3,425)
                                                    ---------    ---------    ---------    ---------    ---------
       Total shareholders' equity ...............      75,931      128,649       49,357       43,392       54,456
                                                    ---------    ---------    ---------    ---------    ---------
       Total liabilities and shareholders' equity   $ 128,878    $ 185,666    $ 109,981    $  95,910    $  97,432
                                                    =========    =========    =========    =========    =========
OTHER DATA:
    Depreciation and amortization ...............       4,917        4,781        5,589        5,971        5,103
    Capital expenditures (2) ....................       3,961       10,418       24,237        4,777        2,795
</TABLE>

(1)  Earnings per share of Common Stock and dividends declared per share of
     Common Stock are determined by dividing net income by the weighted average
     number of common shares outstanding during each period and dividends
     declared by the number of shares of Common Stock outstanding at the time of
     dividend declaration, respectively. Earnings per share information for
     fiscal years 1994 and 1995 has been adjusted to give effect to a stock
     split that occurred in fiscal year 1995.

(2)  Capital expenditures represent purchases of property, plant and equipment.

                                       16
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL OVERVIEW

         CHANGE IN CONTROL

         On July 17, 1998, P-PR Transfer, LLP, a Delaware registered limited
liability partnership (the "Partnership") and V. Suarez & Co., Inc., a Puerto
Rico corporation ("Suarez"), purchased an aggregate of 5,000,000 shares of the
Class A common stock, par value $.01 per share (the "Class A Shares"), and
6,210,429 shares of the Class B common stock, par value $.01 per share (the
"Class B Shares"), of the Company. The Partnership is a joint venture between
Pohlad Companies, a holding company including independent Pepsi-Cola bottlers,
and PepsiCo, Inc. The transactions were previously disclosed by the Company in a
current report on Form 8-K filed with the Securities and Exchange Commission on
July 31, 1998.

         In connection with the change in control, the Company issued warrants
to the Partnership and Suarez dated July 17, 1998 for the purchase of 1,360,000
Class B Shares and 340,000 Class B Shares, respectively, exercisable at $6.875
per share at any time during a period of seven years and six months after the
date of the warrants. The warrants may be transferred and give the holders one
demand and unlimited piggyback registration rights.

         Also in connection with the change in control, six of the Company's
seven directors resigned on July 17, 1998. Effective July 18, 1998, the size of
the Board of Directors was increased to eight members and seven new directors
were appointed, each of whom were designated by the Partnership. Also effective
July 18, 1998, certain of the Company's officers resigned. The Company's current
officers are described in Item 1 of this Form 10-K.

         RESTRUCTURING CHARGE

         In the fourth quarter fiscal year 1998, a restructuring charge of
$1.7 million was established under a plan to improve the Company's performance.
The charge includes approximately $0.7 million of severance and related charges
for the elimination of 17 administrative personnel and $1.0 million, including
$0.2 million of cash charges, for costs to exit activities, including the
elimination of certain product lines, canceling lease agreements and exiting
certain other business strategies. Management anticipates the restructuring plan
will provide annual savings of approximately $1.3 million to $1.4 million
beginning in 1999. Severance payments in fiscal year 1998 totaled approximately
$47 thousand, while charges relating to exit activities approximated $0.1
million.

         BAESA STOCK DIVIDEND

         In addition to conducting its own bottling operations, the Company
previously owned 12,345,347 shares, or approximately 17% of the outstanding
capital stock of BASEA, and, through June 30, 1996, exercised significant
influence over the management of BAESA, subject to the right of PepsiCo, Inc.
and certain of its affiliates to approve certain management decisions. As of
July 1, 1996, PepsiCo assumed operating control of BAESA and the Company no
longer controlled or had significant influence over, the management or
operations of BAESA.

                                       17
<PAGE>
 

         The Company's Board of Directors declared a dividend consisting of the 
12,345,347 shares of capital stock of BAESA owned by the Company. The dividend
was distributed on June 17, 1998 to the Company's shareholders of record as of
May 28, 1998. The distribution was made in the form of 6,172,674 BAESA American
Depository Shares (each representing two underlying BAESA shares) on a pro rata
basis to the holders of the Company's 21,500,000 outstanding Class A shares and
Class B shares. The carrying value of the capital stock of BAESA had been
written down to zero at September 30, 1997. The Company's financial information 
for fiscal year 1996 and earlier reflects the Company's equity interest in BAESA
during those periods.

         SEASONALITY

         The historical results of operations of the Company have not been
significantly seasonal. 

         INCOME TAXES

          The Company and its subsidiaries are Delaware corporations subject to
U.S. federal income taxes; however, each has elected the benefit of Section 936
of the U.S. Internal Revenue Code. Section 936 presently allows the Company a
tax credit equal to a portion of the amount of U.S. income taxes attributable to
earnings derived from operations within Puerto Rico and to certain qualified
investments maintained in Puerto Rico, subject to certain limitations. PCPRB and
its subsidiaries have elected to claim the credit under the Economic Activity
Limitation method. The 1996 Small Business Act (the "Act") repealed the Section
936 credit prospectively. However, the Act grandfathered in "existing credit
claimants" during a ten-year transition period. The credit under the Economic
Activity Limitation for Puerto Rico will be calculated under the rules existing
prior to the adoption of the Act for taxable years beginning after 1995 and
before 2002. For taxable years beginning after December 31, 2001, a cap is
placed upon the Puerto Rican source business income eligible for the credit. For
tax years beginning after January 1, 2006, the economic activity credit is
repealed in its entirety.

          In order to utilize income tax credits available under Section 936,
each company is required to derive at least 80% of its gross income from sources
within Puerto Rico, and at least 75% of gross income must be from an active
trade or business in Puerto Rico. PCPRB and its subsidaries, were in compliance
with these gross income requirements for the fiscal year ended September 30,
1998. PCPRB's subsidiaries were in compliance with these gross income
requirements for the fiscal years ended September 30, 1997 and 1996; however,
PCPRB did not meet these gross income requirements for the fiscal years ended
September 30, 1997 and 1996.

          Effective October 1998, the Company was granted an additional ten-year
Puerto Rican tax incentives exemption for its plastic preforms manufacturing and
sales operation. Under the terms of the grant, BEV received a 90% exemption from
Puerto Rico income tax, a 60% exemption from municipal tax and a 90% exemption
from property tax. In exchange for these tax exemptions, the Company agreed to
manufacture plastic preforms and plastic bottles, employ a minimum number of
persons and maintain equipment and facilities in Puerto Rico.

         As of September 30, 1998, the Company and its subsidiaries had
approximately $80.9 million in net operating losses available to offset against
future earnings for purposes of Puerto Rican taxation and $50.2 million in U.S.
net operating losses. The Puerto Rico net operating losses expire through 2005 
and the U.S. net operating losses expire through 2018. The net operating losses
belong to the Company and its manufacturing and distributing subsidiaries. For
Puerto Rican and U.S. tax purposes, related entities such as the Company and its
wholly owned subsidiaries may not join in the filing of a consolidated income
tax return. As a result, the net operating losses of one entity may not be
absorbed or utilized to offset the taxable income of any other related

                                       18
<PAGE>
 
entity. Only the entity that generated losses may use such losses to offset its
own future taxable income. As a result of the change in control transaction in
fiscal year 1998, the Company's utilization of its U.S. federal net operating 
loss carryforwards is limited annually. Realization of all these future income 
tax benefits is dependent on the existence of future taxable income. Valuation 
allowances covering substantially all of the Company's net operating loss
carryforwards have been provided as the Company does not believe that it is
"more likely than not" that the future income tax benefits will be realized. See
Note 13 to the Consolidated Financial Statements of the Company.

THE COMPANY

         GENERAL

         The following table sets forth certain financial information as a
percentage of net sales for the Company for the periods indicated.

                                                           FISCAL YEAR

                                                        1997         1998
                                                       -------     -------
Net Sales..........................................     100.0%      100.0%
Cost of Sales......................................      68.8        70.9  
Gross Profit.......................................      31.2        29.1  
Selling and Marketing Expenses.....................      30.5        30.2  
Administrative Expenses............................       8.5         6.1  
Restructuring and Other Charges, net...............       0.5         3.3  
Insurance Recoveries...............................         -         1.3
Litigation Settlement Expenses.....................      13.3           -  
Income (Loss) from Operations......................     (21.6)       (9.2) 
                                                       ======        ==== 

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

         NET SALES. Net Sales for the Company increased $0.2 million, or 0.2%,
in fiscal year 1998 from fiscal year 1997 to $99.4 million. This increase was
primarily the result of an increase in sales volume of approximately 3.0% offset
partially by increased discounts provided to customers in 1998 as compared to
1997. The average net sales price decreased during fiscal year 1998 by
approximately 1.8% as compared to fiscal year 1997.

         COST OF SALES. Cost of sales for the Company increased $2.3 million, or
3.3% for fiscal year 1998 as compared to fiscal year 1997 to $70.5 million. This
increase was primarily the result of the increase in sales volume.

         GROSS PROFIT. Gross profit for the Company decreased by $2.0 million
to $28.9 million in fiscal year 1998 from $30.9 million in 1997. As a percentage
of net sales, gross profit decreased to 29.1% in 1998 from 31.2% in 1997. The
decrease was primarily due to the higher discounts provided to customers (which
resulted in a lower average net sales price).

         SELLING AND MARKETING EXPENSES. The Company has a number of marketing
arrangements with PepsiCo pursuant to which the Company is required to make
certain investments in marketing, new products, packaging introductions and
certain capital goods. The Company receives reimbursements from PepsiCo for a
portion of such expenditures, which it is able to use to offset traditional
marketing expenses or to acquire fixed assets. The Company's selling and
marketing expenses are shown net of all such reimbursements from PepsiCo.

         Selling and marketing expenses for the Company decreased $0.1 million,
or 0.5%, to $30.1 million for the fiscal year 1998 as compared to the 1997
fiscal year. As a percentage of net sales, selling and marketing expenses
decreased to 30.2% during the fiscal year 1998 from 30.5% in the 1997 fiscal
year.

         ADMINISTRATIVE EXPENSES. Administrative expenses for the Company
decreased $2.4 million or 28.2% for fiscal year 1998 from fiscal year 1997 to
$6.0 million. This decrease was primarily the result of reductions of $0.9
million in the cost of legal services, reductions of $1.0 million in salaries
and wages, and $0.5 million in other

                                       19
<PAGE>
 
administrative expenses. As a percentage of net sales, administrative expenses
decreased to 6.1% during fiscal year 1998 from 8.5% in fiscal year 1997.

         SETTLEMENT OF LITIGATION. The Company's results of operations for
fiscal year 1997 were affected by the incurrence of a non-cash expense of $13.2
million in connection with the Company's settlement of certain civil litigation,
representing the estimated value of 2.5 million Class B shares transferred as
part of the settlement. There was no similar non cash expense that was incurred
during fiscal year 1998.

         UNUSUAL ITEMS. The Company's results of operations for fiscal year 1998
were affected by the incurrence of charges for unusual items totaling $3.3
million. The unusual items include costs related to the restructuring plan
initiated by the new management of the Company ($1.7 million), provision for
certain legal and environmental issues ($0.8 million) and provision for
reduction in the estimated market value of the former production facility now
held for resale ($0.8 million). The impact of these unusual items was offset by
the benefit of insurance proceeds of $1.3 million for loss of business from
September 22, 1998 to October 21, 1998 due to Hurricane Georges. Additional
insurance proceeds will be received for damage related to the hurricane.

         INCOME (LOSS) FROM OPERATIONS. Loss from operations for the Company
decreased to ($9.2) million in fiscal year 1998 from a loss of ($21.4) million
in fiscal year 1997. This increase is the net result of the decrease in gross
profit of $2.0 million, decreased selling and marketing costs of $0.1 million,
decreased administrative costs of $2.4 million, the absence of the settlement of
litigation charge of $13.2 million, and unusual items of $3.3 million in fiscal
year 1998 versus a restructuring charge of $0.5 million in fiscal year 1997.

         INTEREST AND OTHER INCOME/(EXPENSES). Other income/(expenses) in total
remained consistent between fiscal years 1998 and 1997.

         INCOME TAX BENEFIT (EXPENSE). Income tax benefit was $1.0 million for
fiscal year 1998 as compared to $3.3 million for fiscal year 1997. The Company's
effective tax rate differs from the statutory rate primarily due to the Puerto 
Rico economic activity credit and valuation reserves provided for the Company's
net operating losses.

         NET INCOME/(LOSS). Net loss during fiscal year 1998 was $(9.6) million,
compared to $(19.5) million during fiscal year 1997.

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

         NET SALES. Net sales for the Company decreased $3.7 million, or 3.6%,
for fiscal year 1997 from fiscal year 1996 to $99.2 million. This decrease was
primarily the result of the significant increase in discounts provided to
customers, partially offset by a 4.0% increase in sales volume in fiscal year
1997 as compared to fiscal year 1996. The increase in discounts resulted from
intense competitive activity. The average net sales price on an eight ounce
serving equivalent basis decreased during fiscal year 1997 by approximately 7.3%
as compared to fiscal year 1996.

         COST OF SALES. Cost of sales for the Company decreased by $6.7 million,
or 9.0%, to $68.2 million for fiscal year 1997 from fiscal year 1996. This
decrease was primarily the result of lower raw material costs and lower labor
costs, partially offset by a 4.0% increase in sales volume and by higher
depreciation costs for the new manufacturing facility in fiscal year 1997 as
compared to fiscal year 1996.

         GROSS PROFIT. Gross profit for the Company increased by $3.0 million to
$30.9 million for fiscal year 1997 from $27.9 million in fiscal year 1996. As a
percentage of net sales, gross profit increased to 3l.2% in fiscal year 1997
from 27.2% in fiscal year 1996. The increase was primarily due to the increased
sales volume of 4.0%, offset in part by lower average net sales price, and the
lower cost of sales which was due to lower raw material costs and labor costs,
partially offset by the increased depreciation costs of the Toa Baja plant.

         SELLING AND MARKETING EXPENSES. The Company has a number of marketing
arrangements with PepsiCo pursuant to which the Company is required to make
certain investments in marketing, new products, packaging

                                       20
<PAGE>
 
introductions and certain capital goods. The Company receives reimbursements
from PepsiCo for a portion of such expenditures, which it is able to use to
offset traditional marketing expenses or to acquire fixed assets. The Company's
selling and marketing expenses are shown net of all such reimbursements from
PepsiCo.

         Selling and marketing expenses for the Company decreased by $12.2
million, or 28.8%, to $30.2 million for fiscal year 1997 from fiscal year 1996.
This decrease was primarily due to reductions in marketing spending of $8.2
million, reductions in labor costs of $1.5 million, reductions in fleet and
other maintenance costs of $1.8 million, a reduction in insurance expense of
$0.5 million and net reductions in security and other expenses of $0.2 million
in fiscal year 1997 as compared to fiscal year 1996. As a percentage of net
sales, selling and marketing expenses decreased to 30.5% during 1997 fiscal year
as compared to 41.3% for fiscal year 1996.

         ADMINISTRATIVE EXPENSES. Administrative expenses for the Company
decreased by $1.2 million, or 12.3%, to $8.4 million, for 1997 fiscal year as
compared to fiscal year 1996. This decrease was primarily the result of lower
professional fees incurred in fiscal year 1997, due in part to the recovery of
$1.5 million from the Company's officers and directors liability insurance
carrier, as compared to fiscal year 1996. As a percentage of net sales,
administrative expenses decreased to 8.5% during fiscal year 1997 from 9.3% in
fiscal year 1996.

         SETTLEMENT OF LITIGATION. The Company's results of operations for
fiscal year 1997 were affected by the incurrence of a non-cash expense of $13.2
million in connection with the Company's settlement of certain civil litigation,
representing the estimated value of 2.5 million Class B Shares which were
transferred as part of the settlement. Because these shares were contributed to
the Company by the Company's founding shareholders, and because the Company
received a $4.0 million recovery from its liability insurance carrier, the net
effect on the Company's equity of the settlement transaction was a $1.5 million
gain, which can be viewed as a recovery of previously expensed legal cost. There
was no similar non-cash expense incurred during fiscal year 1996. For further
information regarding the effect on the Company's results of operations of
certain transactions relating to the settlement, see Note 18 to Notes to
Consolidated Financial Statements.

         RESTRUCTURING CHARGES. The Company's results of operations for fiscal
year 1997 were affected by the incurrence of a non-recurring restructuring
charge of $0.5 million. This charge was for the costs associated with employee
terminations which resulted in a reduction of the Company's work force by
approximately 5%. During fiscal year 1996, a charge of $2.7 million was
recorded. The 1996 charge was recorded in connection with the fixed asset
write-down of $1.4 million related to the closing of all bottling operations in
the Company's old bottling plant, which is now for sale, and $1.3 million in
pension asset write-offs and costs associated with employee terminations.

         INCOME (LOSS) FROM OPERATIONS. Loss from operations for the Company
increased to ($21.4) million during fiscal year 1997, from ($26.8) million for
fiscal year 1996. The increase is the result of (i) a $3 million improvement in
gross profit resulting from higher unit sales volume of 4%, and lower raw
material and labor costs, partially offset by lower net selling prices due to
increased discounts offered to customers and higher depreciation expense, (ii)
lower selling and marketing costs of $12.2 million, (iii) lower administrative
expenses of $1.2 million, (iv) the incidence of non-cash settlement of
litigation costs of $13.2 million, and (v) a decrease in restructuring charges
of $2.2 million.

         EQUITY IN NET EARNINGS (LOSS) OF BAESA. Based on information made
public by BAESA, equity in net loss of BAESA, net of income tax, amounted to
($51.5) million for fiscal year 1996. The Company's equity in the loss reported
by BAESA for fiscal year 1996 was such that it reduced the Company's investment
to zero, meaning that no further equity in losses of BAESA would be reported by
the Company and BAESA reported profits sufficient to produce a positive
investment in BAESA on the Company's balance sheet. No such profits were
realized during fiscal year 1997. As a result of withdrawal of partnership
interest in BAESA Shareholder Associates and the liquidation of Argentine
Bottling Associates, an affiliated partnership through which the Company held
its investment in BAESA, the Company will no longer be subject to the accounting
requirements that requires the Company to report the results of operations of
BAESA on an equity basis.

                                       21
<PAGE>
 
         INCOME TAX BENEFIT. Income tax benefit was $3.3 million for fiscal year
1997 as compared to $1.2 million for fiscal year 1996. The increase was
primarily due to income tax benefit arising from the carry back of current year
losses to fiscal year 1994.

         NET INCOME (LOSS). Net loss for fiscal year 1997 was ($19.5) million,
compared to ($74.3) million for fiscal year 1996. Net loss during fiscal year
1997 primarily reflects loss before equity in net loss of BAESA of ($19.5)
million, as compared to ($22.9) million for fiscal year 1996.

LIQUIDITY AND CAPITAL RESOURCES 
At September 30, 1998, the Company had $24.7 million of cash and cash
equivalents. Indebtedness for borrowed money, including short-term and long-term
borrowings and capital lease obligations at September 30, 1998 totaled $23.5
million, which included $1.2 million of current and short-term obligations.

         Net cash provided by (used in) operating activities for the Company was
($7.7) million for fiscal year 1998 as compared with ($7.4) million for fiscal
year 1997 and ($6.7) million for fiscal year 1996. The net cash provided by
(used in) operating activities excluding the portion due to changes in assets
and liabilities was $(2.2) million during fiscal year 1998, $0.4 million during
fiscal year 1997, and ($19.8) million during fiscal year 1996. The net cash
provided by (used in) operating activities that was due to changes in assets and
liabilities was ($5.5) million during fiscal year 1998, ($7.8) million during
fiscal year 1997, and $13.1 million during fiscal year 1996. 

         Net cash provided by (used in) investing activities for the Company was
$(2.3) million for fiscal year 1998, as compared with $8.5 million for fiscal
year 1997 and ($33.0) million for fiscal year 1996. Purchases of property, plant
and equipment, net of disposals, amounted to ($2.3) million during fiscal year
1998 as compared with ($4.4) million during fiscal year 1997 and ($22.9)
million during fiscal year 1996. Purchases of short terms investments were
$12.9 during fiscal year 1996 as compared to zero for fiscal year 1997 and
1998. The short term investments in 1996 consisted of short term discount notes
which the Company held until maturity in 1997. Dividends received from BAESA
amounted to zero in fiscal year 1998 as compared with zero in fiscal year 1997
and $2.8 million in fiscal year 1996.

         Cash flows provided by (used in) financing activities for the Company
were $15.2 million for fiscal year 1998 as compared with ($0.2) million for
fiscal year 1997 and $12.3 million for fiscal year 1996. The significant
financing activities for the Company in fiscal 1998 was the infusion of equity
related to the common stock sale attendant to the change of control of $23.1
million, net of issuance costs, and repayment of ($7.9) million of short and
long term debt. The significant financing activity for the Company in fiscal
year 1997 was the net repayment of indebtedness of ($0.2) million. The
significant financing activities for the Company in fiscal year 1996 were the
payment of dividends of ($5.4) million and the issuance of notes payable of
$47.9 million, and the repayment of debt of ($30.2) million. In the future, the
payment of dividends will be dependent on the achievement of adequate levels of
profitability in the Company's Puerto Rican operations, and, under certain
conditions, the consent by Banco Popular. The Company does not expect to pay any
dividends for the foreseeable future.

         On April 8, 1997, the Company entered into a Second Restated Credit
Agreement (the "Second Restated Credit Agreement") with Banco Popular. The
effect of this new agreement was to restructure existing debt into two
portions, a long term loan of $25.0 million and short term revolving credit
facility of $5.0 million. Both portions bear interest at 2.5% over LIBOR. 

                                       22
<PAGE>
 
Beginning on May 1, 1997, the Company became required to make monthly payments
of principal in the amount of $83 thousand with respect to the new term loan for
the first two years of the loan with annual escalating monthly payments
thereafter until the end of the tenth year of the loan (March 1, 2007) when a
$11.8 million balloon payment is due. The Company may prepay certain of the
loans subject to the terms and conditions of the Second Restated Credit
Agreement.

         Under the terms of the Second Restated Credit Agreement, the Company
is subject to the following financial restrictions: (i) the Company must
maintain a minimum ratio of total liabilities to tangible net worth (as defined
in the Second Restated Credit Agreement) of not more than 1.50 to 1 for fiscal
year 1998 and for each fiscal year thereafter during the term of the Second
Restated Credit Agreement and (ii) a ratio of operating cash flow to total debt
service (as defined in the Second restated Credit Agreement) of 1.00 to 1
through June 30, 1998, 1.30 to 1 from September 30, 1998 through June 30, 1999,
and 1.5 to 1 thereafter; a minimum tangible net worth of (as defined in
the Second Restated Credit Agreement) of $39.5 million on September 30, 1998 and
of $42 million, $44.5 million and $47.0 million respectively, by September 30,
1999, 2000, 2001, and thereafter. The Company is also required to maintain with
Banco Popular a minimum cash balance of $10 million less certain prepayments of
indebtedness under the term loan, and under certain conditions this amount may
be reduced to zero. In addition, under certain circumstances, the Company may be
required to prepay a portion of the debt. Specifically, net proceeds of capital
asset dispositions over $.25 million per year, insurance recoveries other than
for business interruption not promptly applied toward repair or replacement, a
portion of excess cash flow (as defined in the Second Restated Credit
Agreement), require early repayment of the amounts outstanding under this
agreement. Certain of the repayment amounts offset the minimum cash balance
requirement. The entire principal amount of loans outstanding under the Second
Restated Credit Agreement becomes immediately due and payable if the Company
violates any of these financial restrictions. Furthermore, the Company may not
pay dividends without the consent of Banco Popular under the Second Restated
Credit Agreement.

         The Company believes that as of September 30, 1998 it is in full
compliance with the terms of the Second Restated Credit Agreement.

         Pursuant to the Second Restated Credit Agreement, the Company has
granted Banco Popular a security interest in all its machinery and equipment,
receivables, inventory and the real property on which the Toa Baja Plant and the
Rio Piedras Plant are located.

         Capital expenditures, before the effect of dispositions, for the
Company totaled $2.8 million in fiscal year 1998, $4.8 million in fiscal year
1997 and $24.2 million in fiscal year 1996. The Company's capital expenditures
have been financed by a combination of borrowings from third parties and
internally generated funds. The Company estimates that its capital expenditures
for the fiscal years ending September 30, 1999 and 2000 will be approximately
$10 million and $5 million respectively.

Disclosures About Market Risk
-----------------------------

The Company uses financial instruments, primarily variable rate debt, to finance
operations, for capital expenditures and for general corporate purposes. The
Company's exposure to market risk for changes in interest rates relates
primarily to investments, and short- and long-term debt obligations. The Company
places its investments in high-quality securities with major financial
institutions while limiting exposure to any one issuer. The Company does not use
derivative financial instruments or engage in trading activities.

The table below summarizes the principal cash flows of the Company's financial 
instruments outstanding at September 30, 1998, categorized by type of instrument
and by year of maturity.

<TABLE> 
<CAPTION> 
(U.S. Dollars in thousands)             1999      2000      2001      2002      2003      Thereafter    Fair Value    
                                      --------  --------  --------  --------  --------   ------------  ------------   
<S>                                   <C>       <C>       <C>       <C>       <C>        <C>           <C>            
Cash and cash equivalents-                                                                                            
   Deposit and money market                                                                                           
    accounts                          $11,120   $     -   $     -   $     -   $     -      $     -        $11,120     
   Short-term investment (5% at                                                                                       
    September 30, 1998)                13,600         -         -         -         -            -         13,600     
                                      --------  --------  --------  --------  --------   ----------    -----------    
                                      $24,720   $     -   $     -   $     -   $     -      $     -        $24,720     
                                      ========  ========  ========  ========  ========   ==========    ===========     

Long-term debt-
   Term loan, interest at 2.5% over
    LIBOR or at prime (8.219% at
    September 30, 1998)               $ 1,007   $ 1,092   $ 1,192   $ 1,250   $ 1,354      $17,435          $23,330
                                      ========  ========  ========  ========  ========   ==========      ===========
</TABLE> 

YEAR 2000 COMPLIANCE

         The Year 2000 problem concerns the ability of information systems and
equipment controlled by computer chips and systems to properly recognize and
process date-sensitive information on and beyond January 1, 2000. The risks from
this date change are both internal and external and can potentially affect the
Company's production, distribution and administrative systems and the Company's
customers, suppliers of raw materials, utilities and distribution services. Year
2000 related problems could prevent customers from accepting deliveries from the
Company or processing payments for amounts due to the Company. Suppliers may be
prevented from producing and supplying goods or services essential to the
Company's business.

         Delta Beverage Group, Inc. ("DBG"), a company affiliated with P-PR
Transfer, LLP, provides information services to the Company, including the use
of information systems and technology, under an accounting services agreement
executed in fiscal year 1998. The Company expects to complete its transition to
DBG's systems, hardware and software during the first quarter of 1999. Below is
a discussion of the Company's Year 2000 readiness and planning status, which now
includes DBG's Year 2000 planning.

         The Company's production facility uses equipment that operates using
computer control systems based upon programmed logic controllers. The Company
plans to complete a Year 2000 compliance evaluation of these systems by March
31, 1999. The Company also uses computer systems to forecast demand, order raw
materials, monitor inventory levels, ship product and record shipments. The
software that runs these processes is a combination of commercially available
software and internally developed applications. The Company's initial assessment
indicates that these applications are Year 2000 compliant, and the Company,
through DBG, plans to complete the testing of these applications by June 30,
1999. The Company relies on a supply chain to produce and distribute its
products from manufacturing facilities to distribution warehouses and finally to
customers. The Company's two distribution centers use a common supply chain
management application that is Year 2000 compliant.

         In order to assess the external risks to the Company, DBG plans to
survey the Year 2000 readiness of the Company's suppliers and key customers by
June 30, 1999.

         The Company has not incurred material incremental costs associated with
its Year 2000 plan. This is due in part to the recent conversion to systems
provided by DBG. Within the last 18 months, DBG has replaced most software
applications in use before 1993 with systems that are Year 2000 compliant. The
Company believes that the remaining costs associated with addressing Year 2000
compliance issues will not be material.

         Certain of the Company's automated processes can be performed manually
and the Company intends to develop additional contingency plans to deal with
possible computer systems failures. The Company can also build inventories of
raw materials and finished goods in advance of the year 2000 to protect against
supply and production disruptions. The Company intends to fully assess its Year
2000 compliance and risks in time to implement any necessary contingency plans.

                                      23
<PAGE>
 
INFLATION

         There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended September 30, 1998, or during the
fiscal years ended September 30, 1997 or 1996.

IMPACT OF CHANGES IN ACCOUNTING STANDARDS

         The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," in fiscal year 1998 which
requires the presentation of a basic and diluted earnings per share for all
periods presented. Accordingly, the Company's net loss per common share was
computed by dividing the net loss by the weighted average number of common
shares outstanding. Net loss per common share - assuming dilution did not
include the Company's potentially dilutive securities because to do so would
have been antidilutive. The Company also adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," in fiscal year 1998. This statement
established standards for the reporting and display of comprehensive income and
its components.

         In 1997, the Company implemented the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This statement addresses the timing of recognition and the
measurement of (i) long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and (ii) long-lived assets
and certain identifiable intangibles to be disposed of. This statement requires
that such assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable, and
that such assets be reported at the lower of carrying amount or fair value. The
adoption of this statement did not have a material impact on the Company's
consolidated financial position or results of operations.

                                       24
<PAGE>
 
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following information is submitted pursuant to the requirements of Item 8.

                                                                            Page
                                                                            ----

Pepsi-Cola Puerto Rico Bottling Company and Subsidiaries

     Report of Independent Public Accountants, dated December 10, 1998....  26
     Independent Auditors' Report, dated December 5, 1997.................  27
     Consolidated Balance Sheets as of September 30, 1998 and 1997........  28
     Consolidated Statements of Income/(Loss) for the Years Ended
         September 30, 1998, 1997 and 1996................................  29
     Consolidated Statements of Shareholders' Equity for the Years Ended
         September 30, 1998, 1997 and 1996................................  31
     Consolidated Statements of Cash Flows for the Years Ended
         September 30, 1998, 1997 and 1996................................  32
     Notes to Consolidated Financial Statements...........................  33
     Schedule II - Valuation and Qualifying Accounts......................  56

                                       25
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
    Pepsi-Cola Puerto Rico Bottling
    Company and Subsidiaries:

We have audited the accompanying consolidated balance sheet of Pepsi-Cola Puerto
Rico Bottling Company and Subsidiaries as of September 30, 1998, and the related
consolidated statements of income/(loss), changes in shareholders' equity and
cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pepsi-Cola Puerto Rico Bottling
Company and Subsidiaries as of September 30, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                                   /s/ ARTHUR ANDERSEN LLP


Memphis, Tennessee,
   December 10, 1998.

                                       26
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
     Pepsi-Cola Puerto Rico Bottling
     Company and Subsidiaries:


We have audited the accompanying consolidated balance sheet of Pepsi-Cola
Puerto Rico Bottling Company and Subsidiaries as of September 30, 1997, and the
related consolidated statements of income/(loss), shareholders' equity and cash
flows for each of the years in the two-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pepsi-Cola Puerto
Rico Bottling Company and Subsidiaries as of September 30, 1997, and the results
of their operations and their cash flows for each of the years in the two-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.


                                                    /s/ KPMG Peat Marwick LLP


San Juan, Puerto Rico,
December 5, 1997.

Stamp No. 1527391 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.

                                       27
<PAGE>
 
            PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                          (U. S. DOLLARS IN THOUSANDS)



                       ASSETS

<TABLE>
<CAPTION>
                                                                      September 30
                                                                   -----------------
                                                                     1998      1997
                                                                   -------   -------
<S>                                                                <C>       <C>    
CURRENT ASSETS:
    Cash and cash equivalents                                      $24,720   $19,621
    Accounts receivable:
       Trade, less allowance for doubtful accounts of $1,265 and
          $1,389 in 1998 and 1997, respectively                     11,722    11,681
       Due from PepsiCo, Inc. and affiliated companies               1,408       943
       Other                                                         2,623     4,273
    Inventories                                                      2,480     2,802
    Deferred income taxes                                              224        97
    Prepaid expenses and other current assets                        4,743     2,073
                                                                   -------   -------

                  Total current assets                              47,920    41,490

DEFERRED INCOME TAXES                                                1,607     1,619

LONG-LIVED ASSETS FOR SALE, principally land and building            2,615     3,752

PROPERTY, PLANT AND EQUIPMENT, net                                  43,731    47,347

INTANGIBLE ASSETS, net of accumulated amortization                   1,544     1,644

OTHER ASSETS                                                            15        58
                                                                   -------   -------

                                                                   $97,432   $95,910
                                                                   =======   =======
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       28
<PAGE>
 
            PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

              (U. S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



           LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                  September 30
                                                                             ----------------------
                                                                               1998          1997
                                                                             ---------    ---------
<S>                                                                          <C>          <C>      
CURRENT LIABILITIES:
    Current installments of long-term debt                                   $   1,007    $   1,007
    Current installments of capital lease obligations                              176          908
    Notes payable to bank                                                         --          5,430
    Accounts payable:
       Trade                                                                     9,623       13,750
       Affiliates                                                                 --             32
    Income taxes payable                                                           150          199
    Accrued expenses                                                             5,958        4,830
                                                                             ---------    ---------

                  Total current liabilities                                     16,914       26,156
                                                                             ---------    ---------

LONG-TERM DEBT, excluding current installments                                  22,355       23,636

CAPITAL LEASE OBLIGATIONS, excluding current installments                            8          513

ACCRUED PENSION COST                                                             3,110        2,213
                                                                             ---------    ---------

                  Total liabilities                                             42,387       52,518
                                                                             ---------    ---------

SHAREHOLDERS' EQUITY:
    Class A common shares, $0.01 par value; authorized, issued and
       outstanding 5,000,000 shares                                                 50           50
    Class B common shares, $0.01 par value; authorized 35,000,000 shares;
       issued and outstanding 16,690,000 and 16,500,000 shares in 1998 and
       1997, respectively                                                          167          165
    Additional paid-in capital                                                 127,009      103,910
    Accumulated deficit                                                        (69,345)     (59,735)
    Accumulated other comprehensive income (loss)                               (2,836)        (998)
                                                                             ---------    ---------

                  Total shareholders' equity                                    55,045       43,392
                                                                             ---------    ---------

                  Total liabilities and shareholders' equity                 $  97,432    $  95,910
                                                                             =========    =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       29
<PAGE>
 
            PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF INCOME/(LOSS)

               (U.S. Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended September 30
                                                    -----------------------------------
                                                      1998         1997         1996   
                                                    ---------    ---------    ---------
<S>                                                 <C>          <C>          <C>      
Net sales                                           $  99,405    $  99,172    $ 102,891

Cost of sales                                          70,503       68,237       74,956
                                                    ---------    ---------    ---------

    Gross profit                                       28,902       30,935       27,935
                                                    ---------    ---------    ---------

Selling and marketing expenses                         30,072       30,224       42,456
Administrative expenses                                 6,047        8,424        9,606
Restructuring charges                                   1,728          535        2,700
Provision for legal and environmental
    reserves                                              760         --           --
Losses on asset impairments                               800         --           --
Insurance proceeds from business
    interruption losses                                (1,309)        --           --
Litigation settlement expenses                           --         13,172         --   
                                                    ---------    ---------    ---------

    Loss from operations                               (9,196)     (21,420)     (26,827)
                                                    ---------    ---------    ---------

Other income (expense):
    Gain on early termination of supply agreement        --           --          2,111
    Interest expense                                   (2,437)      (2,644)      (1,523)
    Interest income                                       839        1,218        2,418
    Other, net                                            206            1         (256)
                                                    ---------    ---------    ---------
       Total other income/(expense)                    (1,392)      (1,425)       2,750
                                                    ---------    ---------    ---------

       Loss before income tax benefit and
           equity in net loss of BAESA                (10,588)     (22,845)     (24,077)

Income tax benefit                                        978        3,342        1,205
                                                    ---------    ---------    ---------

       Loss before equity in net loss of BAESA         (9,610)     (19,503)     (22,872)

Equity in net loss of BAESA, net of income tax
    benefit of $20,062 in 1996                           --           --        (51,458)
                                                    ---------    ---------    ---------

       Net loss                                     $  (9,610)   $ (19,503)   $ (74,330)
                                                    =========    =========    =========


Net loss per common share                           $   (0.45)   $   (0.91)   $   (3.46)
                                                    =========    =========    =========

Net loss per common share - assuming dilution       $   (0.45)   $   (0.91)   $   (3.46)
                                                    =========    =========    =========

Weighted average number of common shares
    outstanding (in thousands)                         21,516       21,500       21,500
                                                    =========    =========    =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       30
<PAGE>
 
            PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

              FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

                          (U.S. Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             Retained
                                              Class A  Class B  Additional   Earnings             
                                               Common   Common   Paid-in   (Accumulated  Treasury 
                                               Shares   Shares   Capital     Deficit)      Stock  
                                              -------  -------  ----------  -----------  -------- 
<S>                                             <C>    <C>       <C>         <C>         <C>      
BALANCE, September 30, 1995                     $ 50   $   165   $  90,738   $  39,472   $     -- 
                                                                                                  
Cash dividends on common shares                                                                   
   declared in December 1995 (per share $0.24)    --        --          --      (5,374)        -- 
Minimum pension liability adjustment              --        --          --          --         -- 
Foreign currency translation adjustment           --        --          --          --         -- 
Net loss                                          --        --          --     (74,330)        -- 
                                                ----   -------   ---------   ---------   --------
                                                                                                  
BALANCE, September 30, 1996                       50       165      90,738     (40,232)        -- 
                                                                                                  
                                                                                                  
Contribution of 2,500,000 Class B                                                                 
   common shares by founding shareholders         --        --      13,172          --    (13,172)
Tendering of 2,500,000 Class B common shares                                                      
   in partial settlement of litigation            --        --          --          --     13,172 
Minimum pension liability adjustment              --        --          --          --         -- 
Net loss                                          --        --          --     (19,503)        -- 
                                                ----   -------   ---------   ---------   --------
                                                                                                  
BALANCE, September 30, 1997                       50       165     103,910     (59,735)        -- 
                                                                                                  
                                                                                                  
Sale of 190,000 Class B common shares             --         2         948          --         -- 
Sale of 5,000,000 Class A common shares, net of
    equity issuance costs of $1,599               --        --      22,151          --         -- 
Minimum pension liability adjustment              --        --          --          --         -- 
Net loss                                          --        --                  (9,610)        --
                                                ----   -------   ---------   ---------   --------
BALANCE, September 30, 1998                     $ 50   $   167   $ 127,009   $ (69,345)  $     -- 
                                                ====   =======   =========   =========   ======== 
</TABLE>

<TABLE>
<CAPTION>
                                                Accumulated Other    Total                    
                                                  Comprehensive   Shareholders'  Comprehensive
                                                  Income (Loss)      Equity       Income(Loss)
                                                 ---------------  -------------  -------------
                                                                                              
<S>                                                  <C>            <C>           <C>
BALANCE, September 30, 1995                          $  (1,776)     $ 128,649                 
                                                                                              
Cash dividends on common shares                                                               
   declared in December 1995 (per share $0.24)              --         (5,374)                
Minimum pension liability adjustment                       180            180    $     180    
Foreign currency translation adjustment                    232            232          232    
Net loss                                                    --        (74,330)     (74,330)   
                                                     ---------      ---------      -------    
                                                                                              
BALANCE, September 30, 1996                             (1,364)        49,357    $ (73,918)   
                                                                                   =======    
Contribution of 2,500,000 Class B                                                             
   common shares by founding shareholders                   --             --                 
Tendering of 2,500,000 Class B common shares                                                  
   in partial settlement of litigation                      --         13,172                 
Minimum pension liability adjustment                       366            366          366    
Net loss                                                    --        (19,503)   $ (19,503)   
                                                     ---------      ---------      -------    
                                                                                              
BALANCE, September 30, 1997                               (998)        43,392    $ (19,137)   
                                                                                    =======    

Sale of 190,000 Class B common shares                       --            950
Sale of 5,000,000 Class A common shares, net of                                               
    equity issuance costs of $1,599 (Note 15)               --         22,151                 
Minimum pension liability adjustment                    (1,838)        (1,838)   $  (1,838)   
Net loss                                                               (9,610)      (9,610)                  
                                                     ---------      ---------    ---------    
BALANCE, September 30, 1998                          $  (2,836)     $  55,045    $ (11,448)   
                                                     =========      =========    =========    
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       31
<PAGE>
 
           PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                          (U.S. Dollars in thousands)

<TABLE>
<CAPTION>
                                                                         Fiscal Years Ended September 30
                                                                        --------------------------------
                                                                          1998        1997        1996
                                                                        --------    --------    --------
<S>                                                                     <C>         <C>         <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                            $ (9,610)   $(19,503)   $(74,330)

    Adjustments to reconcile net loss to net cash
       used in operating activities-
          Gain on early termination of supply agreement                     --          --        (2,111)
          Litigation settlement expenses                                    --        13,172        --
          (Gain)/loss on disposition of property, plant and equipment         80         238        (675)
          Losses on asset impairments                                        800        --         1,134
          Restructuring charges, net of cash payments                      1,573        --          --
          Provision for legal and environmental reserves                     760        --          --
          Insurance proceeds from business interruption losses            (1,309)       --          --
          Intangible asset write-off                                        --          --           624
          Depreciation and amortization                                    5,312       5,971       5,589
          Deferred income taxes                                              190         547      (1,462)
          Equity in net loss of BAESA                                       --          --        51,458
          Changes in assets and liabilities -
             Accounts receivable                                           2,453      (2,335)      4,778
             Inventories                                                     322       1,627         113
             Prepaid expenses and other current assets                    (2,670)       (216)        659
             Intangible assets                                              (109)       (272)       --
             Accounts payable                                             (5,562)     (2,887)      5,063
             Other liabilities and accrued expenses                          234      (3,832)      2,195
             Income taxes payable                                            (49)         84          (8)
             Other, net                                                     (154)         16         247
                                                                        --------    --------    --------
                  Net cash used in operating activities                   (7,739)     (7,390)     (6,726)
                                                                        --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sale of property, plant and equipment                      480         406       1,347
    Redemption of (investment in) short-term investments                    --        12,904     (12,904)
    Capital expenditures                                                  (2,795)     (4,777)    (24,237)
    Dividends received from affiliate                                       --          --         2,839
                                                                        --------    --------    --------
                  Net cash provided by (used in) investing activities     (2,315)      8,533     (32,955)
                                                                        --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Sales of common stock, net of equity issuance costs                   23,101        --          --
    Proceeds from short-term borrowings                                   72,784         712      47,900
    Repayment of short-term borrowings                                   (78,214)       --       (27,500)
    Principal payments on long-term debt                                  (1,281)     (1,722)     (1,552)
    Proceeds from capital leases                                            --         1,793        --
    Repayment of capital lease obligations                                (1,237)       (985)     (1,204)
    Dividends paid                                                          --          --        (5,374)
                                                                        --------    --------    --------
                  Net cash provided by (used in) financing activities     15,153        (202)     12,270
                                                                        --------    --------    --------

CHANGE IN CASH AND CASH EQUIVALENTS                                        5,099         941     (27,411)

CASH AND CASH EQUIVALENTS, beginning of period                            19,621      18,680      46,091
                                                                        --------    --------    --------

CASH AND CASH EQUIVALENTS, end of period                                $ 24,720    $ 19,621    $ 18,680
                                                                        ========    ========    ========

SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid for-
       Interest                                                         $  2,437    $  2,560    $  2,416
       Income taxes                                                          321         258         186
       Noncash transactions -
          Capital leases reclassified as operating leases                   --           599        --
          Proceeds from sale of asset, net of underlying debt               --           287        --   
</TABLE>

The accompanying notes are an integral part of these statements.

                                       32
<PAGE>
 
            PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        SEPTEMBER 30, 1998, 1997 AND 1996

              (U.S. Dollars in thousands, except per share data)


1.      ORGANIZATION AND NATURE OF OPERATIONS:

Pepsi-Cola Puerto Rico Bottling Company ("PCPRB") and its manufacturing and
distribution subsidiaries bottle, sell and distribute beverages sold primarily
under the Pepsi-Cola trademark in the Commonwealth of Puerto Rico. The Company's
division of Cristalia Premium Water ("Cristalia") is engaged in extracting,
processing, bottling and distributing bottled water in Puerto Rico. Beverage
Plastics Company ("BEV"), a wholly owned subsidiary, manufactures plastic
preforms and plastic bottles in Puerto Rico, primarily for use by the Company.
All of the companies operate under exclusive bottling appointments and franchise
agreements with the franchiser, which include operating and marketing
commitments, term limitations and extensions, and conditions for termination.
The Pepsi-Cola exclusive bottling appointments have ten-year terms expiring on
July 17, 2008. Each of the exclusive bottling appointments will automatically be
extended for additional five-year terms, unless either party gives one year's
witten notice.

The consolidated financial statements include the accounts of PCPRB and its
wholly owned subsidiaries (the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. As of September 30, 1997
and 1996, the Company maintained an effective equity interest in Buenos Aires
Embotelladora S. A. ("BAESA") of approximately 17%, which was accounted for
using the equity method until such investment was reduced to zero in fiscal year
1996. Effective June 17, 1998, the Company's remaining ownership in BAESA
was transferred to the Company's existing shareholders (refer to Note 11).

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates
----------------

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 disclosures 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.

Cash and Cash Equivalents
-------------------------

Cash and cash equivalents include temporary investments in short-term
securities, primarily discount notes, with original maturities of three months
or less.

                                       33
<PAGE>
 
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Income Taxes
------------

The Company uses the liability method of accounting for deferred income taxes.
Deferred income taxes reflect the estimated future tax consequences attributable
to operating loss and tax credit carryforwards, and temporary differences
between the Company's assets and liabilities for financial reporting and income
tax purposes, using income tax rates currently in effect. Deferred tax assets
are recognized if management believes, based on available evidence, that it is
"more likely than not" that the future income tax benefits will be realized.
Deferred tax assets or liabilities are classified based upon the current or
long-term classification of the asset or liability giving rise to the temporary
difference or the expected future use of the loss or credit carryforward.

Stock-Based Compensation 
------------------------ 

Stock options and other stock-based compensation awards are accounted for using
the intrinsic value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.

Environmental Remediation Costs
-------------------------------

Costs associated with environmental remediation obligations are accrued when
such costs are probable and reasonably estimable. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value.

Concentration of Credit Risk
----------------------------

Trade receivables subject the Company to concentrations of credit risk as
substantially all of the Company's customers are located in Puerto Rico and two
customers accounted for approximately 16%, 20% and 22% of the Company's net
sales during fiscal years 1998, 1997 and 1996, respectively. However, the
Company's customer base is comprised of a large number of entities and the
Company performs background checks and other reviews before extending credit to
potential customers. In addition, the Company establishes allowances for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. Management believes there
are no significant concentrations of credit risk with any individual party or
groups of parties.

Fair Values of Financial Instruments
------------------------------------

The estimated fair values of the Company's financial instruments approximate
their carrying values.

Reclassifications
-----------------

Certain 1997 and 1996 balances have been reclassified to conform to the current
year presentation.

                                       34
<PAGE>
 
3.       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," in fiscal year 1998 which
requires the presentation of a basic and diluted earnings per share for all
periods presented. Accordingly, the Company's net loss per common share was
computed by dividing the net loss by the weighted average number of common
shares outstanding. Net loss per common share - assuming dilution did not
include the Company's potentially dilutive securities (refer to Note 17) because
to do so would have been antidilutive.

The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income," in fiscal year 1998. This statement established standards for the
reporting and display of comprehensive income and its components.

In June 1997, the Financial Accounting Standards Board (the "Board") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires the presentation of segment information on a basis consistent
with that used by management for operating decisions. In February 1998, the
Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" which requires, among other items, additional
disclosures on changes in the Company's benefit obligations and fair values of
plan assets.
The provisions of these statements will be adopted effective October 1, 1998.

                                       35
<PAGE>
 

4.      RESTRUCTURING CHARGE:

In the fourth quarter fiscal year 1998, a restructuring charge of $1,728 was
established under a plan to improve the Company's performance. The charge
includes approximately $679 of severance and related charges for the elimination
of 17 administrative personnel and $1,049, including $224 of accruals for
future payments, for costs to exit activities, including the elimination of
certain product lines, canceling lease agreements and exiting certain other
business strategies. Management anticipates the restructuring plan will provide
annual savings of approximately $1,300 to $1,400 beginning in 1999. Severance
payments in fiscal year 1998 totaled approximately $47, while charges relating
to exit activities approximated $108.

5.      IMPAIRMENT OF LONG-LIVED ASSETS:

In fiscal year 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement addresses the timing of recognition and the
measurement of impairment of (a) long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, and (b)
long-lived assets and certain identifiable intangibles to be disposed of. This
statement requires that such assets be reviewed for impairment whenever events
or changes in circumstances indicate that their carrying amount may not be
recoverable, and that such assets be reported at the lower of carrying amount or
fair value.

During fiscal year 1996, the Company consolidated its manufacturing activities
in its new manufacturing facility. Based upon a 1996 appraisal of the former
facility, the Company recorded a non-cash charge of $1,400; $800 for the
impairment of the manufacturing plant no longer in operation and being held for
sale, and $600 for certain manufacturing equipment and furniture no longer in
use. During fiscal year 1998, the Company recorded a non-cash charge of $800 for
the additional impairment of the idle manufacturing plant held for sale. This
charge represents management's best estimate of an anticipated loss from the
disposition of the plant in a current transaction between willing parties.

6.       INSURANCE PROCEEDS FROM BUSINESS INTERRUPTION LOSSES:

For the period from September 22, 1998 through October 21, 1998, the Company
incurred business interruption losses resulting from Hurricane Georges. In the
opinion of management and pursuant to a preliminary review by the insurer,
collection of a claim filed under the Company's business interruption insurance
policy is probable. As a result, included in the accompanying fiscal year 1998
consolidated statement of income/(loss) are anticipated recoveries of $1,309
attributable to business interruption losses which occurred during fiscal year
1998.



                                       36
<PAGE>
 
7.      INVENTORIES:

Inventories are stated at the lower of cost (first-in first-out method) or
market and included the following at September 30:

                                           1998               1997
                                          ------             ------

     Raw materials                        $1,438             $1,070
     Finished goods                          877              1,254
     Spare parts and supplies                117                121
     Work-in process                          48                357
                                          ------             ------
                                          $2,480             $2,802
                                          ======             ======

8.      PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are stated at cost. Property and equipment
renewals and betterments are capitalized, while maintenance and repair
expenditures are charged to operations currently. Property and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation and amortization is calculated using the straight-line method over
the estimated useful lives of purchased assets, or the shorter of the lease
terms or the estimated useful lives of assets acquired under capital lease
arrangements. Those lives are as follows:

                                                        Years
                                                        -----

             Building and improvements                    40
             Machinery, equipment and vehicles          10 - 15
             Bottles, cases and shells                  4 - 10
             Furniture and fixtures                     5 - 10

Property, plant and equipment included the following at September 30:

                                                          1998       1997
                                                        --------   --------

   Land and improvements                                $  6,893   $  7,057
   Building and improvements                              14,790     14,682
   Machinery, equipment and vehicles                      49,399     48,081
   Bottles, cases and shells                               3,327      3,422
   Furniture and fixtures                                  1,809      1,580
   Construction in process                                   134         86
                                                        --------   --------
                                                          76,352     74,908
   Less -  Accumulated depreciation and amortization     (32,621)   (27,561)
                                                        --------   --------
                                                        $ 43,731   $ 47,347
                                                        ========   ========

                                       37
<PAGE>
 
9.      INTANGIBLE ASSETS:

Goodwill, the cost in excess of the assigned value of businesses acquired, is
being amortized using the straight-line method over its economic life not to
exceed 40 years. Other intangibles are amortized using the straight-line method
over their estimated useful lives. Intangible assets consisted of the following
at September 30:

                                                1998         1997
                                               ------       ------

     Goodwill                                  $1,277       $1,277
     Trademark (14 years)                         300          300
     Water distribution rights (20 years)         165          165
     Deferred costs and other                     587          478
                                               ------       ------
                                                2,329        2,220
     Less -  Accumulated amortization            (785)        (576)
                                               ------       ------
                                               $1,544       $1,644
                                               ======       ======

The Company periodically evaluates the recoverability of its intangible assets
as well as their amortization periods to determine whether an adjustment to the
carrying value or a revision to the estimated useful lives is appropriate. In
fiscal year 1996, the Company recorded a noncash charge of approximately $600 in
order to write off an intangible asset.


10.      ACCRUED EXPENSES:

Accrued expenses consisted of the following at September 30:

                                                     1998         1997  
                                                    ------       ------
         Accrued payroll and related benefits       $1,854       $2,176
         Accrued taxes other than income               364          374
         Marketing and advertising accruals          1,313          825
         Customer deposits                             484          436
         Accrued trade payables                      1,884          891
         Other accrued expenses                         59          128
                                                    ------       ------

                                                    $5,958       $4,830
                                                    ======       ======

11.     INVESTMENT IN BAESA:

As of September 30, 1997, the Company owned 12,345,348 shares, or approximately
17%, of the outstanding capital stock of BAESA. In May 1997, the Buenos Aires
Stock Exchange suspended trading of BAESA's class B shares after its fiscal
second quarter results for the period ended March 31, 1997 showed a negative net
worth under Argentine Accounting Principles. The New York Stock Exchange also
halted trading in BAESA's American Depository Shares.

During fiscal year 1998, BAESA entered into a long-term financial restructuring
plan with its major debt holders in Argentina whereby BAESA's unsecured lenders
exchanged debt for substantially all of the equity in BAESA. The Company did not
exercise its right under a related rights offering to retain its current
proportionate ownership in BAESA, resulting in a dilution of the Company's
equity interest from approximately 17% to approximately 0.34%. Effective
June 17, 1998, the Company's remaining ownership in BAESA was transferred to the
Company's existing shareholders. The Company's recorded investment in BAESA had
already been reduced to zero in fiscal year 1996.

                                       38
<PAGE>
 
12.     NOTES PAYABLE TO BANK AND LONG TERM DEBT:

The Company maintains a credit agreement with Banco Popular which provides for a
term loan of $25,000, payable with 120 principal payments and a balloon
payment at maturity on April 1, 2007 of $11,800. The term loan is
collateralized with a priority lien on substantially all of the Company's real
estate, machinery and equipment. The Company is also required to maintain a
specified cash balance with the bank ($5,000 and $2,500 at September 30, 1998
and 1997, respectively) which is restricted from use by the Company.

The credit agreement also includes a $5,000 revolving credit facility, with
borrowings limited to the sum of stipulated percentages of the Company's
eligible receivables and inventory. There were no borrowings outstanding under
the revolving credit facility as of September 30, 1998, while it was fully drawn
at September 30, 1997.

The term loan and revolving credit facility bear interest at 2.5% over the LIBOR
rate, if Eurodollar funds are available, otherwise at the highest prime rate or
base rate of interest published from time to time in the Wall Street Journal by
principal commercial banks headquartered in New York, NY. The credit agreement
contains various covenants and events of default, including the maintenance of
certain minimum financial ratios and financial requirements and additional debt
restrictions.

Long-term debt consisted of the following as of September 30:

                                             1998            1997
                                            -------        -------

     Term loan                              $23,330        $24,583
     Other                                       32             60
                                            -------        -------
        Total long-term debt                 23,362         24,643
     Less -  current installments            (1,007)        (1,007)
                                            -------        -------
                                            $22,355        $23,636
                                            =======        =======

Scheduled maturities of long-term debt for the four years subsequent to fiscal
year 1999 are as follows:

       Fiscal
        Year                                            Amount
        ----                                            ------

        2000                                            $1,092
        2001                                             1,192
        2002                                             1,250
        2003                                             1,354
     Thereafter                                         17,467
                                                       -------
                                                       $22,355
                                                       =======

                                       39
<PAGE>
 

PCPRB and its subsidiaries are Delaware corporations subject to U.S. federal
income taxes; however, each has elected the benefit of Section 936 of the U.S.
Internal Revenue Code. Section 936 presently allows the Company a tax credit
equal to a portion of the amount of U.S. income taxes attributable to earnings
derived from operations within Puerto Rico and to certain qualified investments
maintained in Puerto Rico, subject to certain limitations. PCPRB and its
subsidiaries have elected to claim the credit under the Economic Activity
Limitation method. The 1996 Small Business Act (the "Act") repealed the Section
936 credit prospectively. However, the Act grandfathered in "existing credit
claimants" during a ten-year transition period. The credit under the Economic
Activity Limitation for Puerto Rico will be calculated under the rules existing
prior to the adoption of the Act for taxable years beginning after 1995 and
before 2002. For taxable years beginning after December 31, 2001, a cap is
placed upon the Puerto Rican source business income eligible for the credit. For
tax years beginning after January 1, 2006, the economic activity credit is
repealed in its entirety.

In order to utilize income tax credits available under Section 936, each company
is required to derive at least 80% of its gross income from sources within
Puerto Rico, and at least 75% of gross income must be from an active trade or
business in Puerto Rico. PCPRB and its subsidiaries were in compliance with
these gross income requirements for the fiscal year ended September 30, 1998.
PCPRB's subsidiaries were in compliance with these gross income requirements for
the fiscal years ended September 30, 1997 and 1996; however, PCPRB did not meet
these gross income requirements for the fiscal years ended September 30, 1997
and 1996.

Effective October 1998, the Company was granted an additional ten-year Puerto
Rican tax incentives exemption for its plastic preforms manufacturing and sales
operation. Under the terms of the grant, BEV received a 90% exemption from
Puerto Rico income tax, a 60% exemption from municipal tax and a 90% exemption
from property tax. In exchange for these tax exemptions, the Company agreed to
manufacture plastic preforms and plastic bottles, employ a minimum number of
persons and maintain equipment and facilities in Puerto Rico.

                                       40
<PAGE>
 
13.     INCOME TAXES (Continued):

For the fiscal years ended September 30, 1998, 1997, and 1996, the combined
income tax expense/(benefit) of PCPRB and its subsidiaries attributable to
income from continuing operations consisted of the following:

<TABLE>
<CAPTION>
                                                    Fiscal Years Ended September 30
                                                    -------------------------------
                                                      1998       1997       1996
                                                    -------    -------    --------
<S>                                                     <C>        <C>        <C>     
Current:
   U.S                                              $(1,251)   $(4,231)   $  (150)
   Puerto Rico                                           83       342        185
                                                    -------    -------    -------

      Total current income tax expense/(benefit)     (1,168)    (3,889)        35
                                                    -------    -------    -------
Deferred:
   U.S                                                  223       --         (326)
   Puerto Rico                                          (33)       547       (914)
                                                    -------    -------    -------

      Total deferred income tax expense/(benefit)       190        547     (1,240)
                                                    -------    -------    -------

      Total income tax expense/(benefit)            $  (978)   $(3,342)   $(1,205)
                                                    =======    =======    =======
</TABLE>

Income tax expense/(benefit) attributable to income/(loss) from continuing
operations for the years ended September 30, 1998, 1997 and 1996 differed from
the amounts computed by applying the U.S. statutory federal tax rate of 35% as a
result of the following:

<TABLE>
<CAPTION>
                                                                 Fiscal Years Ended September 30   
                                                                 -------------------------------
                                                              1998           1997           1996
                                                          -------------  -------------  -------------
<S>                                                       <C>            <C>            <C>      
    Computed statutory federal tax expense                   $ (3,706)     $ (7,984)     $ (8,209)
    Change in the beginning-of-the-year balance of the
       valuation allowance for deferred tax assets              9,799        13,829        17,734
    Calculated NOL value of aforementioned loss, as
       adjusted, for Puerto Rico income taxes                    --          (6,437)         --
    Puerto Rico income taxes                                   (4,959)          342        (9,668)
    Puerto Rico economic activity credit                       (1,304)       (2,050)       (1,484)
    Income tax credit related to prior year's losses             --            (745)         --
    Carryback of U.S. federal net operating losses, 
       previously reserved                                     (1,251)         --            --
    Meals and entertainment disallowance                          227          --            --
    Other, net                                                    216          (297)          422
                                                             --------      --------      --------

        Total income tax expense/(benefit)                   $   (978)     $ (3,342)     $ (1,205)
                                                             ========      ========      ========
</TABLE>

Income tax benefit of $20,062, in fiscal year 1996 was also provided in 
connection with the equity in net loss of BAESA.

                                       41
<PAGE>
 
13.     INCOME TAXES (Continued):

The significant components of deferred income tax expense/(benefit) attributable
to income from continuing operations for the years ended September 30, 1998,
1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                  Fiscal Years Ended September 30
                                                      ------------        ------------        ------------
                                                          1998                1997                1996          
                                                      -------------       -------------       -------------     
<S>                                                   <C>                 <C>                 <C>                 
Deferred income tax benefit                             $ (9,609)           $(13,282)            $(18,974)         
Increase in beginning of the year                                                                      
    balance of the valuation allowance for deferred                                                               
    tax assets                                             9,799              13,829               17,734         
                                                        --------            --------             --------         
    Total deferred income tax expense/(benefit)         $    190            $    547             $ (1,240)        
                                                        ========            ========             ========          
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1998
and 1997 are presented below:

                                                           1998         1997
                                                         -------     --------
   Property, plant and equipment, principally due to
       differences in depreciable lives                 $  1,204     $    496
   U.S. federal net operating loss carryforwards          17,567       13,200
   Puerto Rico net operating loss carryforwards           31,264       26,986
   Accrued expenses                                        2,415          387
   Past service cost for pension plan                       (114)         426
   Inventories principally due to additional costs
     inventoried for tax purposes                             79           90
   Accounts receivable                                       210        1,005
   Other, net                                                 28          149
                                                        --------     --------

   Total gross deferred tax assets                        52,653       42,739

   Less - Valuation allowance                            (50,822)     (41,023)
                                                        --------     --------

   Net deferred tax asset                               $  1,831     $  1,716
                                                        ========     ========

The subsequent recognition of tax benefits related to the valuation allowance
for deferred tax assets as of September 30, 1998 and 1997 will be allocated to
income from continuing operations.

                                       42
<PAGE>
 
13.     INCOME TAXES (Continued):

At September 30, 1998, the Company had U.S. federal net operating loss 
carryforwards approximating $50,200 which expire through 2018 and Puerto Rico 
tax net operating loss carryforwards approximating $80,900 which expire through 
2005. As a result of the change in control transaction in fiscal year 1998 
(refer to Note 15), the Company's utilization of its U.S. federal net operating 
loss carryforwards is limited annually. Realization of all of these future 
income tax benefits is dependent on the existence of future taxable income. 
Valuation allowances covering substantially all of the Company's net operating
loss carryforwards have been provided as the Company does not believe that it is
"more likely than not" that the future income tax benefits will be realized.

14.     RELATED PARTY TRANSACTIONS:

In fiscal year 1998, the Company entered into a management agreement with the
controlling partner in P-PR Transfer, LLP (refer to Note 15). For services
performed pursuant to the management agreement, the Company pays that company a
management fee. Management fees of approximately $50 were incurred in fiscal
year 1998. In addition, the Company has entered into an accounting services
agreement with a separate entity in which the same controlling partner in P-PR
Transfer, LLP maintains a controlling interest. For services performed pursuant
to the accounting services agreement, the Company pays this affiliate an
accounting services fee. Accounting services fees of approximately $76 were
incurred with this affiliate in fiscal year 1998.

Certain former members of the Company's Board of Directors and certain of its
former executive officers were also directors and/or officers of BAESA until
approximately mid-1996. During fiscal year 1996, BAESA charged PCPRB management
fees totaling approximately $888. In addition, PCPRB sold $2,235 in preforms to
BAESA pursuant to a long-term supply contract. In management's opinion, the
terms of this contract were reasonable, and at the time of the contract no other
comparable contract from an outside party was available to BAESA. The above
described contract was terminated during the year ended September 30, 1997.
Pursuant to the termination agreement, Company obligations to BAESA of
approximately $2,065 were settled for a cash payment of $50. In addition, the
Company was relieved of obligations relating to certain operating leases. The
resulting gain on early termination of the supply agreement was recorded in
fiscal year 1996.

During fiscal year 1996, the Company paid approximately $151 in construction
management fees to a former shareholder and director of the Company.

                                       43
<PAGE>
 
14.     RELATED PARTY TRANSACTIONS (Continued):

The Company paid approximately $744, $3,671 and $2,105 in fiscal years 1998,
1997 and 1996, respectively, in advertising fees to a firm controlled by a
former shareholder of the Company.

During fiscal year 1996, the Company paid approximately $232 in consulting fees
to a former shareholder of BAESA and a former director of the Company.

The Company paid approximately $241, $411 and $57 in fiscal years 1998, 1997 and
1996, respectively, in legal fees to a firm with a partner who is a relative of
the Company's former president.

15. SHAREHOLDERS' EQUITY:

Pursuant to the terms of ten-year voting trust agreement and related stock
option agreement executed on September 28, 1996, the 5,000,000 authorized and
outstanding Class A shares were placed into a voting trust. The then trustee of
the trust was the president of the Company, who held an unrestricted right to
vote such shares and had the right to purchase such shares, for the benefit of
the Company, through September 28, 1998 at $1 per share. In a transfer agreement
(the "Agreement") effective July 17, 1998, the president assigned to P-PR
Transfer, LLP (the "Partnership") the stock option agreement for the purchase of
the Class A shares. The Partnership paid the Company $23,750 under the Agreement
and simultaneously purchased the 5,000,000 Class A shares for $1 per share.
Payments by the Partnership to the Company pursuant to the Agreement are
recorded as additional shareholders' equity, net of approximately $1,599 in
equity issuance costs.

Also effective July 17, 1998, the Partnership purchased a total of 6,210,429
Class B shares under stock option agreements between the Partnership and the
Class B shareholders. V. Suarez & Co., Inc. ("Suarez") then purchased 1,000,000
Class A shares and 1,242,085 Class B shares from the Partnership. The
combination of these transactions resulted in a change in control of the
Company.

On July 17, 1998, the Company issued a warrant to the Partnership and Suarez for
the purchase of an additional 1,360,000 and 340,000 Class B shares,
respectively, for $6.875 per share, exercisable at any time during the 90 month
period from the date of the warrant.

The Class A shares have a voting preference over the Class B shares.

16.     PENSION PLANS:

The Company maintains separate non-contributory salaried and hourly defined
benefit pension plans covering eligible salaried and hourly employees of the
Company. Benefits under the salaried plan are based upon years of service and
average earnings during the last five years of employment, while benefits under
the hourly plan represent a fixed amount times years of credited service. The
Company makes annual contributions to the plans as required by applicable
regulations. Contributions provide benefits for service rendered to date and for
services expected to be performed in the future. The plans are insured by the
Pension Benefit Guaranty Corporation. On April 16, 1997, the Company suspended
future participation in the plans for an indeterminable period. However, at
present management does not intend to terminate the plans.

In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," the Company recognized a minimum pension liability, computed as the
excess of the accumulated benefit obligation over the fair value of plan assets,
with an adjustment to shareholders' equity.

                                       44
<PAGE>
 
16.     PENSION PLANS (Continued):

The following table sets forth the funded status of the plans and amounts
recognized in the consolidated balance sheet at September 30, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                         1998       1997
                                                                       -------    -------
<S>                                                                    <C>        <C>    
    Actuarial present value of benefit obligations:
      Accumulated benefit obligation, including vested benefits
        of $7,570 in 1998 and $7,117 in 1997                           $ 7,650    $ 7,195
                                                                       =======    =======

    Projected benefit obligation                                         7,650      7,195
    Plan assets at fair value, primarily consisting of common
      stocks and time deposits                                           4,498      4,903
                                                                       -------    -------
    Projected benefit obligation in excess of plan assets                3,152      2,292
    Unrecognized net loss from past experience different
      from that assumed                                                 (2,836)      (998)
    Adjustment to recognize minimum liability                            2,836        998
                                                                       -------    -------

    Accrued pension cost ($3,110 and $2,213 noncurrent, respectively)  $ 3,152    $ 2,292
                                                                       =======    =======

    Net periodic pension expense for fiscal years 1998 and 1997
      included the following components:
        Service cost for benefits earned during the period             $  --      $   108
        Interest cost on projected benefit obligation                      491        557
        Actual return on plan assets                                       599       (724)
        Net amortization and deferral                                   (1,053)       475
                                                                       -------    -------

        Net periodic pension cost                                      $    37    $   416
                                                                       =======    =======
</TABLE>

In fiscal years 1998 and 1997, the actuarial present value of the projected
benefit obligation was determined using a weighted-average discount rate of 7%
and an expected long-term rate of return on plan assets of 9%. The cost of
retroactive benefits resulting from plan amendments is amortized over the future
work life expectancy of the active participants.

17.     STOCK OPTION PLANS:

In fiscal year 1997, the Company adopted two stock option plans (the "plans")
pursuant to which the Company's Board of Directors may grant stock options to
certain employees and directors of the Company and its affiliates who have
served in such capacities for at least one year prior to the date the options
are granted. The plans authorize grants of options to purchase up to 1,000,000
shares of authorized but unissued Class B common stock. At September 30, 1998,
there were 700,000 shares available for grant under these plans. One of these
stock option plans is designed to be qualified for income tax purposes, whereas
the other is not a qualified plan. 

                                       45
<PAGE>
 
17.     STOCK OPTION PLANS (Continued):

Stock options under the qualified plan are granted with an exercise price equal
to the stock's fair market value at the date of the grant. All stock options
have ten-year terms and vest and become fully exercisable in accordance with the
terms of their grant.

Also in fiscal year 1997, the Company entered into a stock option agreement with
its former president to acquire 1,516,667 Class B common shares of the Company
at an exercise price of $5.00 per share. These stock options will be exercisable
in whole or in part until exercised in full.

The Company accounts for these plans using the intrinsic value method, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per common share would have
been reduced to the following pro forma amounts:

                                          Fiscal Years Ended September 30,
                                          --------------------------------
                                             1998                1997   
                                          ----------          ---------   

          Net loss:
              As reported                 $  (9,610)          $(19,503)
              Pro forma                     (10,262)           (25,510)

          Net loss per common share:
              As reported                    $(0.45)            $(0.91)
              Pro forma                       (0.44)             (1.19)

The effect on fiscal years 1998 and 1997 pro forma net loss and net loss per
common share of expensing the estimated fair value of stock options is not
necessarily representative of the effect on reported earnings in future years
due to the vesting period of stock options and the potential for issuance of
additional stock options in future years.

The weighted average fair value of options granted in fiscal years 1998 and 1997
were $5.92 and $3.52, respectively. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:


                                          Fiscal Years Ended September 30,
                                          --------------------------------
                                           1998                    1997   
                                          ------                  ------   

          Risk-free interest rate           6.0%                    6.1%
          Price volatility                 66.7%                   51.5%
          Expected dividend yield           0.0%                    0.0%
          Expected term (in years)            10                      10

                                       46
<PAGE>
 
17.     STOCK OPTION PLANS (Continued):

A summary of the Company's stock option plans at September 30, 1998 and 1997,
and changes during the years then ended, is as follows:

                                           No. of Shares        Price Range
                                           -------------        -----------

    Outstanding at September 30, 1996                --                   --
    Granted                                   1,706,667                $5.00
    Exercised                                        --                   --
    Lapsed or cancelled                              --                   --
                                              ---------        -------------
    Outstanding at September 30, 1997         1,706,667                $5.00
    Granted                                     110,000        $6.25 - $8.75
    Exercised                                  (190,000)               $5.00
    Lapsed or cancelled                              --                   --
                                              ---------        -------------
    Outstanding at September 30, 1998         1,626,667        $5.00 - $8.75
                                              =========        =============

At September 30, 1998, the number of options exercisable was 1,626,667. The
weighted average exercise price of those options was $5.17 and the weighted
average remaining contractual life was 8.28 years.

18.      COMMITMENTS AND CONTINGENCIES:

Lease Commitments
-----------------

The Company leases certain office space and other facilities under agreements
expiring through 2006. Total rent expense during fiscal years 1998, 1997 and
1996 was approximately $1,657, $1,661 and $1,387, respectively.

                                       47
<PAGE>
 
18.      COMMITMENTS AND CONTINGENCIES (Continued):

Future minimum rental payments under all noncancellable operating leases with
initial or remaining lease terms of one year or more were as follows at
September 30, 1998:

                                                     Total Operating
        Year                                              Leases       
        ----                                         ---------------

        1999                                              $ 2,026
        2000                                                1,869
        2001                                                1,800
        2002                                                1,800 
        2003                                                1,800

Future minimum lease payments under capital leases were as follows at September
30, 1998:

                                                                Total Operating
        Year                                                        Leases
        ----                                                    ---------------

        1999                                                         $ 187
        2000                                                            10
        2001A                                                            7
        2002                                                             7
                                                                     -----
        Total minimum lease payments                                   211
        Less -  amount representing interest at 10.25% to 12%          (27)
                                                                     -----
        Present value of minimum lease payments                        184
        Less -  Current installments                                  (176)
                                                                     -----

        Capital lease obligations, excluding current installments    $   8
                                                                     =====

                                       48
<PAGE>
 
18.     COMMITMENTS AND CONTINGENCIES (Continued):

Legal and Environmental Reserve
-------------------------------

In the fourth quarter of fiscal year 1998, the Company recorded a provision of
$760 to increase its legal and environmental reserves, principally to remove
four underground storage tanks and remediate soil contamination at the former
manufacturing facility, to settle two outstanding supplier claims and to
establish legal reserves for various litigation, claims and assessments. The
legal and environmental reserve has been classified as a current liability in
the accompanying consolidated balance sheet as all payments are expected to be
made within one year.

Settlement of Litigation
------------------------

The Company was formerly a defendant in nine class actions alleging federal
securities violations by the Company and various former officers and directors
of the Company. These claims were settled as of September 30, 1997. The Company
has recorded the cost of the settlement in fiscal year 1997 as follows:

   Cost of 2,500,000 Class B shares effectively contributed
     by the founding shareholders, valued using the average
     trading price of the stock for a period of trade dates prior
     to the date of the settlement                                   $13,172

   Cash payments of $2,500, less recovery from insurers                  -
                                                                    --------
                                                                     $13,172
                                                                    ========

As a part of the settlement, the Company was reimbursed $4,000 from its
directors liability insurers, $2,500 of which were deemed a reimbursement of
amounts paid to claimants, with the remainder offset against legal expenses
incurred in connection with the settlement. The contribution of the 2,500,000
Class B shares by the founding shareholders was reflected as a contribution of
capital using the average trading price of the stock referred to above.

The effect of the settlement on the pre-tax results of the Company for the year
ended September 30, 1997, was as follows:


     Reduction in administrative expenses                          $  1,500
     Settlement of the litigation                                   (13,172)
                                                                   --------
         Net effect on net income/(loss)                            (11,672)
     Contribution of Class B shares by founding shareholders         13,172
                                                                   --------

       Net effect on shareholders' equity                          $  1,500
                                                                   ========

In addition, the Securities and Exchange Commission (the "Commission") was
pursuing a formal order of investigation in connection with accounting
irregularities discovered in fiscal year 1996. In fiscal year 1998, the Company
settled the Commission's charges with an agreement to cease and desist from
committing any violation or future violation of specified securities laws. The
Company was not required to pay any fines or penalties associated with this
settlement.

General Litigation
------------------

The Company is subject to various litigation, claims and assessments arising in
the normal course of business. Management believes that the ultimate resolution
of these matters, either individually or in the

                                       49
<PAGE>
 
18.     COMMITMENTS AND CONTINGENCIES (Continued):

aggregate, will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.

19.     SUBSEQUENT EVENTS:

The Company has signed a letter of intent dated November 20, 1998 to sell
substantially all assets relating to the bottling, sale and distribution of
potable water under the "Cristalia" tradename to Cristalia Acquisition Corp., a
corporation whose president is a former executive of the Company. Terms of the
agreement provide for a purchase price equal to the net book value of the assets
of the business, as defined, as of December 31, 1998.

The Company has signed a letter of intent dated October 8, 1998 to acquire a
controlling interest in Pepsi-Cola (Bahamas) Bottling Company, Ltd. Terms of the
agreement are not final. Management anticipates finalizing the acquisition by
December 31, 1998 or in the first quarter of 1999.

Effective January 1, 1999, the Company will change its fiscal year-end from
September 30 to December 31. As a result, the Company will report results for
the three months ended December 31, 1998 and thereafter on a calendar year
basis.

                                       50
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         The Company previously reported a change in independent accountants for
the fiscal year ending September 30, 1998. See the Company's Current Report on
Form 8-K dated September 1, 1998.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

         Information regarding the Company's Directors is incorporated by
reference to the information contained under the caption "Proposal No. l -
Election of Directors" in the Company's 1999 Proxy Statement (the "Proxy
Statement"), which is to be filed with the Securities and Exchange Commission in
January 1999. Information regarding the Company's Executive Officers is set
forth in Part I of this Form 10-K.


ITEM 11. EXECUTIVE COMPENSATION

         Information regarding executive compensation is incorporated by
reference to the information contained under the caption "Executive
Compensation" in the Company's 1999 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding stock ownership of each person known to the
Company to be the beneficial owner of more than 5% of its outstanding Common
Stock is incorporated by reference to the information contained under the
caption "Security Ownership" in the Company's 1999 Proxy Statement.

                                       51
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTION

          Information regarding certain relationships and related transactions 
is incorporated by reference to the information contained under the caption 
"Certain Relationships and Related Transactions" in the Company's 1999 Proxy 
Statement.

          With the exception of the information specifically incorporated by 
reference, the Company's 1999 Proxy Statement is not to be deemed filed as part 
of this report for purposes of this Part III.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

          (a)       Documents filed as part of this report:

                    (1)       A list of the financial statements filed as part 
                              of this report appears on page 25.

                    (2)       The financial statement schedule required
                              to be filed as part of this report consists of
                              Schedule II Valuation and Qualifying Accounts
                              appearing at the end of this Item.
                             
                    (3)       The following exhibits are filed as part of this
                              report:

 
EXHIBIT
NUMBER   DESCRIPTION OF EXHIBIT
------   ----------------------

3.1      Amended and Restated Certificate of Incorporation of the Company
         (incorporated by reference to Exhibit 3.1 to the Company's Annual
         Report on Form 10-K for the fiscal year ended September 30, 1995).

3.2      Amended and Restated By-Laws of the Company (incorporated by reference
         to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1995),

3.3      Amended and Restated By-Laws of the Company (incorporated by reference
         to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1995).

4.1      Form of Specimen Stock Certificate representing Class B Shares
         (incorporated by reference to Amendment No.3 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-94620) (the
         "S-l Registration Statement")).

10.1     Franchise Commitment Letter between PepsiCo, Inc. and the Company dated
         July 17, 1998 (filed herewith).

10.2     Exclusive Bottling Appointment between PepsiCo, Inc. and the Company
         dated July 17, 1998 (filed herewith).

10.3     Transfer Agreement among Rafael Nin, P-PR Transfer, LLP and the Company
         dated June 15, 1998 (incorporated by reference to Exhibit 2.1 to
         Amendment No. 3 to the Company's Registration Statement on Form S-3
         (Reg. No. 333-40093).

                                      52 
<PAGE>

10.4     Warrant dated as of July 17, 1998, to purchase 1,360,000 shares of
         Class B common stock issued to P-PR Transfer, LLP (incorporated by
         reference to Exhibit 10.2 to the Company's Form 8-K dated July 31,
         1998).

10.5     Warrant dated as of July 17, 1998, to purchase 340,000 shares of Class
         B Common stock issued to V. Suarez & Co., Inc. (incorporated by
         reference to Exhibit 10.3 to the Company's Form 8-K dated July 31,
         1998)

10.6     Accounting Services Agreement between Delta Beverage Group, Inc. and
         the Company dated October 16, 1998 (filed herewith).

10.7     Management Agreement between Pohlad Companies and the Company dated
         July 20, 1998 (filed herewith).

10.8     Stock Option Agreement dated as of October 15, 1996 between Rafael Nin
         and Pepsi-Cola Puerto Rico Bottling Company (incorporated by reference
         to exhibit 1 to the Amendment No. 1 to the Schedule 13D of Rafael Nin
         dated January 7, 1997).

10.9     Pepsi-Cola to Puerto Rico Bottling Company Qualified Stock Option Plan
         dated as of December 30, 1996 (incorporated by reference to exhibit 2
         to the Amendment No.1 to the Scheduled 13D of Rafael Nin dated January
         7, 1997).

10.10    Pepsi-Cola Puerto Rico Bottling Company Non-Qualified Stock Option Plan
         dated as of December 30, 1996 (incorporated by reference to the
         Company's Proxy Statement dated January 31, 1997).

10.11    Amendment to October 15, 1996 Stock Option Agreement dated as of June
         15, 1998 between Rafael Nin and the Company (filed herewith).

10.12    Second Restated Credit Agreement dated April 8, 1997 among Pepsi-Cola
         Puerto Rico Bottling Company, Pepsi-Cola Puerto Rico Manufacturing
         Company, Pepsi-Cola Puerto Rico Distributing Company, and Beverage
         Plastics Company (incorporated by reference to Exhibit 10.18 to the
         Company's quarterly report on Form 10-Q for the quarterly period ended
         June 30, 1997).

10.13    Master Lease Agreement dated April 18, 1997 between General Electric
         Capital Corporation of Puerto Rico and Pepsi-Cola Puerto Rico Bottling
         Company (incorporated by reference to Exhibit 10.19 to the Company's
         quarterly report on Form 10-Q for the quarterly period ended June 30,
         1997).

10.14    First Amendment to Second Restated Credit Agreement dated December 21,
         1998 among Pepsi-Cola Puerto Rico Bottling Company, Pepsi-Cola Puerto
         Rico Manufacturing Company, Pepsi-Cola Puerto Rico Distributing
         Company, and Beverage Plastics Company (filed herewith).

10.15    First Amendment to Second Restated Credit Agreement and Loan Documents
         (filed herewith).

11.1     Computation of Per Share Earnings (filed herewith).

21.1     List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the
         S-l Registration Statement).

23.1     Consent of Independent Public Accountants, dated December 28, 1998 
         (filed herewith).

23.2     Independent Auditors' Consent, dated December 28, 1998 (filed 
         herewith).

27.1     Financial Data Schedule (filed herewith).

     (b) Reports on Form 8-K.
         
         (i)   On July 31, 1998, the registrant filed a Current Report on Form
               8-K relating to the change of control of the Company.

         (ii)  On August 20, 1998, the registrant filed a Current Report on Form
               8-K relating to the change in the Company's fiscal year.

         (iii) On August 31, 1998, the registrant filed a Current Report on Form
               8-K relating to a change in the Company's certifying accountant.

         (iv)  On September 28, 1998, the registrant filed a Current Report on
               Form 8-K relating to a temporary disruption of the Company's
               soft drink production as a result of Hurricane Georges.

         (v)   On October 7, 1998, the registrant filed a Current Report on Form
               8-K relating to the resumption of the Company's soft drink
               production following a shut down resulting from Hurricane
               Georges.

     (c) The exhibits listed under Item 14(a)(3) are filed herewith or
         incorporated herein by reference
     (d) The financial statement schedule listed under Item 14(a)(2) is filed
         herewith.
 
                                      53
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE


                                        
To the Board of Directors of
   Pepsi-Cola Puerto Rico Bottling
   Company and Subsidiaries:


We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Pepsi-Cola Puerto Rico Bottling Company and
Subsidiaries as of and for the year ended September 30, 1998, and have issued
our report thereon dated December 10, 1998.  Our audit was made for the purpose
of forming an opinion on those statements taken as a whole.  The schedule listed
in Item 14(a)2 is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements.  This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the 1998 financial data required to be set forth in relation
to the basic financial statements taken as a whole.



                                         /s/ ARTHUR ANDERSEN LLP



Memphis, Tennessee,
 December 10, 1998.

                                      54
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
                         ON FINANCIAL STATEMENT SCHEDULE

                                        
The Board of Directors
  Pepsi-Cola Puerto Rico Bottling
  Company and Subsidiaries:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Pepsi-Cola Puerto Rico Bottling Company and
Subsidiaries as of September 30, 1997, and for each of the years in the two-year
period ended September 30, 1997, and have issued our report thereon dated
December 5, 1997.  Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in Item 14(a)2 is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the 1997 and 1996
financial data required to be set forth in relation to the basic financial
statements taken as a whole.

                                    /s/ KPMG Peat Marwick LLP



San Juan, Puerto Rico,
December 5, 1997.

Stamp No. 1527397 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.

                                      55
<PAGE>
 
            PEPSI-COLA PUERTO RICO BOTTLING COMPANY AND SUBSIDIARIES
                 Schedule II Valuation and Qualifying Accounts
                          (U.S Dollars in thousands)

<TABLE>
<CAPTION>
                                                                              Additions
                                         Balance at      ---------------------------------------------
                                         Beginning       Charged to Costs      Charged to                  Balance at
                                         of Period        and Expenses      Other Accounts  Deductions   End of Period
                                         ---------       ----------------   --------------  ----------   -------------
<S>                                      <C>             <C>                <C>             <C>          <C>
Fiscal Year Ended September 30, 1998:
 Allowance for Doubtful Accounts            $1,389            $  498            $  -          $(622)(1)     $1,265
 Restructuring Charges                         163             1,728               -         (1,143)(2)        748
 
Fiscal Year Ended September 30, 1997:
 Allowance for Doubtful Accounts             1,158               355               -           (124)(1)      1,389
 Restructuring Charges                           -               535               -           (372)           163  
 
Fiscal Year Ended September 30, 1996:
 Allowance for Doubtful Accounts             1,458               511               -           (811)(1)      1,158
 Restructuring Charges                           -             2,700               -         (2,700)             -
 
</TABLE>
(1) Write off of uncollectible receivables.
(2) Comprised of $215 of severance payments and other exit costs, $825 of asset
writedowns and $103 reversed into income.


                                      56
<PAGE>
 
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 25(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                 PEPSI-COLA PUERTO RICO BOTTLING COMPANY

                                 By:  /s/ Robert C. Pohlad
                                    --------------------------------------------
                                 Name:  Robert C. Pohlad
                                 Title:  Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

           SIGNATURES           TITLE                          DATE
           ----------           -----                          ----

/s/ Robert C. Pohlad            Chief Executive Officer and    December 29, 1998
----------------------------    Director (Principal Executive
Robert C. Pohlad                Officer)

/s/ John F. Bierbaum            Chief Financial Officer       December 29, 1998
----------------------------
John F. Bierbaum                and Vice President 
                                (Principal Accounting
                                Officer) 

/s/ Christopher C. Clouser      Director                       December 29, 1998
----------------------------
Christopher C. Clouser

/s/ Philip N. Hughes            Director                       December 29, 1998
----------------------------
Philip N. Hughes

/s/ Diego Suarez, Jr.           Director                       December 29, 1998
----------------------------
Diego Suarez, Jr.

/s/ Basil K. Vasiliou           Director                       December 29, 1998
----------------------------
Basil K. Vasilou

/s/ John F. Woodhead            Director                       December 29, 1998
----------------------------
John F. Woodhead

/s/ Raymond W. Zehr, Jr.        Director                       December 29, 1998
----------------------------
Raymond W. Zehr, Jr.

                                       57
<PAGE>

                                 EXHIBIT INDEX
 
EXHIBIT
NUMBER   DESCRIPTION OF EXHIBIT
------   ----------------------

3.1      Amended and Restated Certificate of Incorporation of the Company
         (incorporated by reference to Exhibit 3.1 to the Company's Annual
         Report on Form 10-K for the fiscal year ended September 30, 1995).

3.2      Amended and Restated By-Laws of the Company (incorporated by reference
         to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1995),

3.3      Amended and Restated By-Laws of the Company (incorporated by reference
         to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1995).

4.1      Form of Specimen Stock Certificate representing Class B Shares
         (incorporated by reference to Amendment No.3 to the Company's
         Registration Statement on Form S-1 (Registration No. 33-94620) (the
         "S-l Registration Statement")).

10.1     Franchise Commitment Letter between PepsiCo, Inc. and the Company dated
         July 17, 1998 (filed herewith).

10.2     Exclusive Bottling Appointment between PepsiCo, Inc. and the Company
         dated July 17, 1998 (filed herewith).

10.3     Transfer Agreement among Rafael Nin, P-PR Transfer, LLP and the Company
         dated June 15, 1998 (incorporated by reference to Exhibit 2.1 to
         Amendment No. 3 to the Company's Registration Statement on Form S-3
         (Reg. No. 333-40093).

10.4     Warrant dated as of July 17, 1998, to purchase 1,360,000 shares of
         Class B common stock issued to P-PR Transfer, LLP (incorporated by
         reference to Exhibit 10.2 to the Company's Form 8-K dated July 31,
         1998).

10.5     Warrant dated as of July 17, 1998, to purchase 340,000 shares of Class
         B Common stock issued to V. Suarez & Co., Inc. (incorporated by
         reference to Exhibit 10.3 to the Company's Form 8-K dated July 31,
         1998)

10.6     Accounting Services Agreement between Delta Beverage Group, Inc. and
         the Company dated October 16, 1998 (filed herewith).

10.7     Management Agreement between Pohlad Companies and the Company dated
         July 20, 1998 (filed herewith).

10.8     Stock Option Agreement dated as of October 15, 1996 between Rafael Nin
         and Pepsi-Cola Puerto Rico Bottling Company (incorporated by reference
         to exhibit 1 to the Amendment No. 1 to the Schedule 13D of Rafael Nin
         dated January 7, 1997).

<PAGE>
 
10.9     Pepsi-Cola to Puerto Rico Bottling Company Qualified Stock Option Plan
         dated as of December 30, 1996 (incorporated by reference to exhibit 2
         to the Amendment No.1 to the Scheduled 13D of Rafael Nin dated January
         7, 1997).

10.10    Pepsi-Cola Puerto Rico Bottling Company Non-Qualified Stock Option Plan
         dated as of December 30, 1996 (incorporated by reference to the
         Company's Proxy Statement dated January 31, 1997).

10.11    Amendment to October 15, 1996 Stock Option Agreement dated as of June
         15, 1998 between Rafael Nin and the Company (filed herewith).

10.12    Second Restated Credit Agreement dated April 8, 1997 among Pepsi-Cola
         Puerto Rico Bottling Company, Pepsi-Cola Puerto Rico Manufacturing
         Company, Pepsi-Cola Puerto Rico Distributing Company, and Beverage
         Plastics Company (incorporated by reference to Exhibit 10.18 to the
         Company's quarterly report on Form 10-Q for the quarterly period ended
         June 30, 1997).

10.13    Master Lease Agreement dated April 18, 1997 between General Electric
         Capital Corporation of Puerto Rico and Pepsi-Cola Puerto Rico Bottling
         Company (incorporated by reference to Exhibit 10.19 to the Company's
         quarterly report on Form 10-Q for the quarterly period ended June 30,
         1997).

10.14    First Amendment to Second Restated Credit Agreement dated December 21,
         1998 among Pepsi-Cola Puerto Rico Bottling Company, Pepsi-Cola Puerto
         Rico Manufacturing Company, Pepsi-Cola Puerto Rico Distributing
         Company, and Beverage Plastics Company (filed herewith).

10.15    First Amendment to Second Restated Credit Agreement and Loan Documents
         (filed herewith).

11.1     Computation of Per Share Earnings (filed herewith).

21.1     List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the
         S-l Registration Statement).

23.1     Consent of Independent Public Accountants, dated December 28, 1998 
         (filed herewith).

23.2     Independent Auditors' Consent, dated December 28, 1998 (filed 
         herewith).

27.1     Financial Data Schedule (filed herewith).