-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsJrnGjjNWyYS7CZy3hspwIGX8y6CtZAO6OyhSoD2mbG2Rct9WuwiKgNQi4hxmXc 5sWXqCeaox1aXTPRJBQ3lw== 0000950123-02-003091.txt : 20020415 0000950123-02-003091.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003091 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011229 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEPSI BOTTLING GROUP INC CENTRAL INDEX KEY: 0001076405 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 134038356 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14893 FILM NUMBER: 02590528 BUSINESS ADDRESS: STREET 1: ONE PEPSI WAY CITY: SOMERS STATE: NY ZIP: 10589-2201 BUSINESS PHONE: 9147676000 MAIL ADDRESS: STREET 1: ONE PEPSI WAY CITY: SOMERS STATE: NY ZIP: 10589-2201 10-K 1 y58773e10-k.txt THE PEPSI BOTTLING GROUP, INC. NO. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K ANNUAL REPORT Pursuant to Section 13 of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 29, 2001 ------------------------- THE PEPSI BOTTLING GROUP, INC. ONE PEPSI WAY SOMERS, NEW YORK 10589 (914) 767-6000 INCORPORATED IN DELAWARE 13-4038356 (JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) ------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, par value $.01 per share New York Stock Exchange 7% Series B Senior Notes due 2029 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO___ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE 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 NUMBER OF SHARES OF CAPITAL STOCK OF THE PEPSI BOTTLING GROUP, INC. OUTSTANDING AS OF MARCH 11, 2002 WAS 279,881,744. THE AGGREGATE MARKET VALUE OF THE PEPSI BOTTLING GROUP, INC. CAPITAL STOCK HELD BY NON-AFFILIATES OF THE PEPSI BOTTLING GROUP, INC. AS OF MARCH 11, 2002 WAS $4,155,502,225.
DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTION ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED - ----------------------------- ----------------------------- ANNUAL REPORT TO SHAREHOLDERS I, II PROXY STATEMENT FOR THE PEPSI BOTTLING GROUP, INC. MAY 22, 2002 ANNUAL MEETING OF SHAREHOLDERS III
PART I ITEM 1. BUSINESS INTRODUCTION The Pepsi Bottling Group, Inc. ("PBG") was incorporated in Delaware in January, 1999, as a wholly-owned subsidiary of PepsiCo, Inc. ("PepsiCo") to effect the separation of most of PepsiCo's company-owned bottling businesses. PBG became a publicly traded company on March 31, 1999. As of February 21, 2002, PepsiCo's ownership represented 37.9% of the outstanding common stock and 100% of the outstanding Class B common stock, together representing 42.9% of the voting power of all classes of PBG's voting stock. PepsiCo also owns 7.0% of the equity interest of Bottling Group, LLC, PBG's principal operating subsidiary. We refer to our publicly traded common stock as "Common Stock" and, together with our Class B common stock, as our "Capital Stock." When used in this Report, "PBG," "we," "us" and "our" each refers to The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC, which we also refer to as "Bottling LLC." RECENT ACQUISITION On March 13, 2002, we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola's international beverages in Turkey for a purchase price of approximately $100 million in cash and assumed debt. PRINCIPAL PRODUCTS PBG is the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages. Pepsi-Cola beverages sold by us include PEPSI-COLA, DIET PEPSI, PEPSI ONE, PEPSI TWIST, MOUNTAIN DEW, MOUNTAIN DEW CODE RED, AMP, LIPTON BRISK, LIPTON'S ICED TEA, SLICE, MUG, AQUAFINA, STARBUCKS FRAPPUCCINO, FRUITWORKS, SIERRA MIST, DOLE and SOBE and, outside the U.S., 7UP, PEPSI MAX, MIRINDA and KAS. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of 41 states, the District of Columbia, eight Canadian provinces, Spain, Greece and Russia. In some of our territories, we also have the right to manufacture, sell and distribute soft drink products of other companies, including DR PEPPER, 7UP and ALL SPORT in the U.S. Approximately 79% of our volume is sold in the United States, and the remaining 21% is sold in Canada, Spain, Greece and Russia. We have an extensive distribution system in the United States and Canada. In Russia, Spain and Greece, we use a combination of direct store distribution and distribution through wholesalers, depending on local marketplace considerations. RAW MATERIALS AND OTHER SUPPLIES PBG purchases the concentrates to manufacture Pepsi-Cola beverages and other soft drink products from PepsiCo and other soft-drink companies. In addition to concentrates, we purchase sweeteners, glass and plastic bottles, cans, closures, syrup containers, other packaging materials and carbon dioxide. We generally purchase our raw materials, other than concentrates, from multiple suppliers. PepsiCo acts as our agent for the purchase of such raw materials. The Pepsi beverage agreements provide that, with respect to the soft drink products of PepsiCo, all authorized containers, closures, cases, cartons and other packages and labels may be purchased only from manufacturers approved by PepsiCo. There are no materials or supplies used by PBG that are currently in short supply. The supply or cost of specific materials could be adversely affected by price changes, strikes, weather conditions, governmental controls or other factors. 2 PATENTS, TRADEMARKS, LICENSES AND FRANCHISES Our portfolio of beverage products includes some of the best recognized trademarks in the world and includes PEPSI-COLA, DIET PEPSI, PEPSI ONE, PEPSI TWIST, MOUNTAIN DEW, MOUNTAIN DEW CODE RED, AMP, LIPTON BRISK, LIPTON'S ICED TEA, SLICE, MUG, AQUAFINA, STARBUCKS FRAPPUCCINO, FRUITWORKS, SIERRA MIST, DOLE, SOBE and outside the U.S., 7UP, PEPSI MAX, MIRINDA and KAS. The majority of our volume is derived from brands licensed from PepsiCo or PepsiCo joint ventures. In some of our territories, we also have the right to manufacture, sell and distribute soft drink products of other companies, including DR PEPPER, 7UP and ALL SPORT in the U.S. PBG conducts its business primarily under agreements with PepsiCo. These agreements give us the exclusive right to market, distribute, and produce beverage products of PepsiCo in authorized containers in specified territories. Set forth below is a description of the Pepsi beverage agreements and other bottling agreements to which we are a party. Terms of the Master Bottling Agreement. The Master Bottling Agreement under which we manufacture, package, sell and distribute the cola beverages bearing the PEPSI-COLA and PEPSI trademarks was entered into in March of 1999. The Master Bottling Agreement gives us the exclusive and perpetual right to distribute cola beverages for sale in specified territories in authorized containers of the nature currently used by us. The Master Bottling Agreement provides that we will purchase our entire requirements of concentrates for the cola beverages from PepsiCo at prices, and on terms and conditions, determined from time to time by PepsiCo. PepsiCo may determine from time to time what types of containers to authorize for use by us. PepsiCo has no rights under the Master Bottling Agreement with respect to the prices at which we sell our products. Under the Master Bottling Agreement we are obligated to: (1) maintain such plant and equipment, staff, and distribution and vending facilities that are capable of manufacturing, packaging and distributing the cola beverages in sufficient quantities to fully meet the demand for these beverages in our territories; (2) undertake adequate quality control measures prescribed by PepsiCo; (3) push vigorously the sale of the cola beverages in our territories; (4) increase and fully meet the demand for the cola beverages in our territories; (5) use all approved means and spend such funds on advertising and other forms of marketing beverages as may be reasonably required to meet the objective; and (6) maintain such financial capacity as may be reasonably necessary to assure performance under the Master Bottling Agreement by us. The Master Bottling Agreement requires us to meet annually with PepsiCo to discuss plans for the ensuing year and the following two years. At such meetings, we are obligated to present plans that set out in reasonable detail our marketing plan, our management plan and advertising plan with respect to the cola beverages for the year. We must also present a financial plan showing that we have the financial capacity to perform our duties and obligations under the Master Bottling Agreement for that year, as well as sales, marketing, advertising and capital expenditure plans for the two years following such year. PepsiCo has the right to approve such plans, which approval shall not be unreasonably withheld. In 2001, PepsiCo approved our annual plan. 3 If we carry out our annual plan in all material respects, we will be deemed to have satisfied our obligations to push vigorously the sale of the cola beverages, increase and fully meet the demand for the cola beverages in our territories and maintain the financial capacity required under the Master Bottling Agreement. Failure to present a plan or carry out approved plans in all material respects would constitute an event of default that, if not cured within 120 days of notice of the failure, would give PepsiCo the right to terminate the Master Bottling Agreement. If we present a plan that PepsiCo does not approve, such failure shall constitute a primary consideration for determining whether we have satisfied our obligations to maintain our financial capacity, push vigorously the sale of the cola beverages and increase and fully meet the demand for the cola beverages in our territories. If we fail to carry out our annual plan in all material respects in any segment of our territory, whether defined geographically or by type of market or outlet, and if such failure is not cured within six months of notice of the failure, PepsiCo may reduce the territory covered by the Master Bottling Agreement by eliminating the territory, market or outlet with respect to which such failure has occurred. PepsiCo has no obligation to participate with us in advertising and marketing spending, but it may contribute to such expenditures and undertake independent advertising and marketing activities, as well as cooperative advertising and sales promotion programs that would require our cooperation and support. Although PepsiCo has advised us that it intends to continue to provide cooperative advertising funds, it is not obligated to do so under the Master Bottling Agreement. The Master Bottling Agreement provides that PepsiCo may in its sole discretion reformulate any of the cola beverages or discontinue them, with some limitations, so long as all cola beverages are not discontinued. PepsiCo may also introduce new beverages under the PEPSI-COLA trademarks or any modification thereof. If that occurs, we will be obligated to manufacture, package, distribute and sell such new beverages with the same obligations as then exist with respect to other cola beverages. We are prohibited from producing or handling cola products, other than those of PepsiCo, or products or packages that imitate, infringe or cause confusion with the products, containers or trademarks of PepsiCo. The Master Bottling Agreement also imposes requirements with respect to the use of PepsiCo's trademarks, authorized containers, packaging and labeling. If we acquire control, directly or indirectly, of any bottler of cola beverages, we must cause the acquired bottler to amend its bottling appointments for the cola beverages to conform to the terms of the Master Bottling Agreement. Under the Master Bottling Agreement, PepsiCo has agreed not to withhold approval for any acquisition of rights to manufacture and sell PEPSI trademarked cola beverages within a specific area -- currently representing approximately 13.2% of PepsiCo's U.S. bottling system in terms of volume -- if we have successfully negotiated the acquisition and, in PepsiCo's reasonable judgment, satisfactorily performed our obligations under the Master Bottling Agreement. We have agreed not to acquire or attempt to acquire any rights to manufacture and sell PEPSI trademarked cola beverages outside of that specific area without PepsiCo's prior written approval. The Master Bottling Agreement is perpetual, but may be terminated by PepsiCo in the event of our default. Events of default include: (1) our insolvency, bankruptcy, dissolution, receivership or the like; (2) any disposition of any voting securities of one of our bottling subsidiaries or substantially all of our bottling assets without the consent of PepsiCo; 4 (3) our entry into any business other than the business of manufacturing, selling or distributing non-alcoholic beverages or any business which is directly related and incidental to such beverage business; and (4) any material breach under the contract that remains uncured for 120 days after notice by PepsiCo. An event of default will also occur if any person or affiliated group acquires any contract, option, conversion privilege, or other right to acquire, directly or indirectly, beneficial ownership of more than 15% of any class or series of our voting securities without the consent of PepsiCo. As of February 21, 2002, no shareholder of PBG, other than PepsiCo, holds more than 7.0% of our Common Stock. We are prohibited from assigning, transferring or pledging the Master Bottling Agreement, or any interest therein, whether voluntarily, or by operation of law, including by merger or liquidation, without the prior consent of PepsiCo. The Master Bottling Agreement was entered into by us in the context of our separation from PepsiCo and, therefore, its provisions were not the result of arm's-length negotiations. Consequently, the agreement contains provisions that are less favorable to us than the exclusive bottling appointments for cola beverages currently in effect for independent bottlers in the United States. Terms of the Non-Cola Bottling Agreements. The beverage products covered by the non-cola bottling agreements are beverages licensed to us by PepsiCo, consisting of MOUNTAIN DEW, DIET MOUNTAIN DEW, MOUNTAIN DEW CODE RED, SLICE, SIERRA MIST, AQUAFINA, FRUITWORKS, MUG root beer and cream soda. The non-cola bottling agreements contain provisions that are similar to those contained in the Master Bottling Agreement with respect to pricing, territorial restrictions, authorized containers, planning, quality control, transfer restrictions, term, and related matters. Our non-cola bottling agreements will terminate if PepsiCo terminates our Master Bottling Agreement. The exclusivity provisions contained in the non-cola bottling agreements would prevent us from manufacturing, selling or distributing beverage products which imitate, infringe upon, or cause confusion with, the beverage products covered by the non-cola bottling agreements. PepsiCo may also elect to discontinue the manufacture, sale or distribution of a non-cola beverage and terminate the applicable non-cola bottling agreement upon six months notice to us. We also have agreements with PepsiCo granting us exclusive rights to distribute AMP and DOLE in all of our territories and SOBE in certain specified territories. The distribution agreements contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels and causes for termination. Some of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in similar beverage products. Terms of the Master Syrup Agreement. The Master Syrup Agreement grants us the exclusive right to manufacture, sell and distribute fountain syrup to local customers in our territories. The Master Syrup Agreement also grants us the right to act as a manufacturing and delivery agent for national accounts within our territories that specifically request direct delivery without using a middleman. In addition, PepsiCo may appoint us to manufacture and deliver fountain syrup to national accounts that elect delivery through independent distributors. Under the Master Syrup Agreement, we will have the exclusive right to service fountain equipment for all of the national account customers within our territories. The Master Syrup Agreement provides that the determination of whether an account is local or national is at the sole discretion of PepsiCo. The Master Syrup Agreement contains provisions that are similar to those contained in the Master Bottling Agreement with respect to pricing, territorial restrictions with respect to local customers and national customers electing direct-to-store delivery only, planning, quality control, 5 transfer restrictions and related matters. The Master Syrup Agreement has an initial term of five years and is automatically renewable for additional five-year periods unless PepsiCo terminates it for cause. PepsiCo has the right to terminate the Master Syrup Agreement without cause at the conclusion of the initial five-year period or at any time during a renewal term upon twenty-four months notice. In the event PepsiCo terminates the Master Syrup Agreement without cause, PepsiCo is required to pay us the fair market value of our rights thereunder. Our Master Syrup Agreement will terminate if PepsiCo terminates our Master Bottling Agreement. Terms of Other U.S. Bottling Agreements. The bottling agreements between us and other licensors of beverage products, including Cadbury Schweppes plc -- for DR PEPPER, 7UP, SCHWEPPES and CANADA DRY, the Pepsi/Lipton Tea Partnership -- for LIPTON BRISK and LIPTON'S ICED TEA, the North American Coffee Partnership -- for STARBUCKS FRAPPUCCINO, and Monarch Company -- for ALL SPORT, contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels, sales of imitations, and causes for termination. Some of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in similar beverage products. Terms of the Country Specific Bottling Agreements. The country specific bottling agreements contain provisions similar to those contained in the Master Bottling Agreement and the non-cola bottling agreements and, in Canada, the Master Syrup Agreement with respect to authorized containers, planning, quality control, transfer restrictions, causes for termination and related matters. These bottling agreements differ from the Master Bottling Agreement because, except for Canada, they include both fountain syrup and non-fountain beverages. These bottling agreements also differ from the Master Bottling Agreement with respect to term and contain certain provisions that have been modified to reflect the laws and regulations of the applicable country. For example, the bottling agreements in Spain do not contain a restriction on the sale and shipment of Pepsi-Cola beverages into our territory by others in response to unsolicited orders. 6 SEASONALITY Our peak season is the warm summer months beginning with Memorial Day and ending with Labor Day. Approximately 75% of our operating income is typically earned during the second and third quarters. Over 80% of cash flow from operations is typically generated in the third and fourth quarters. COMPETITION The carbonated soft drink market and the non-carbonated beverage market are highly competitive. Our competitors in these markets include bottlers and distributors of nationally advertised and marketed products, bottlers and distributors of regionally advertised and marketed products, as well as bottlers of private label soft drinks sold in chain stores. We compete primarily on the basis of advertising and marketing programs to create brand awareness, price and promotions, retail space management, customer service, consumer points of access, new products, packaging innovations and distribution methods. We believe that brand recognition, availability and consumer and customer goodwill are primary factors affecting our competitive position. GOVERNMENTAL REGULATION APPLICABLE TO PBG Our operations and properties are subject to regulation by various federal, state and local governmental entities and agencies as well as foreign government entities. As a producer of food products, we are subject to production, packaging, quality, labeling and distribution standards in each of the countries where we have operations, including, in the United States, those of the federal Food, Drug and Cosmetic Act. The operations of our production and distribution facilities are subject to the laws and regulations of, among other agencies, the Department of Transportation, and various federal, state and local occupational and environmental laws. These laws and regulations include, in the United States, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act and laws relating to the operation, maintenance of and financial responsibility for, fuel storage tanks. We believe that our current legal, operational and environmental compliance programs adequately address such concerns and that we are in substantial compliance with applicable laws and regulations. We do not anticipate making any material expenditures in connection with environmental remediation and compliance. However, compliance with, or any violation of, future laws or regulations could require material expenditures by us or otherwise have a material adverse effect on our business, financial condition and results of operations. Bottle and Can Legislation In all but a few of our United States and Canadian markets, we offer our bottle and can beverage products in non-refillable containers. Legislation has been enacted in certain states and Canadian provinces where we operate that generally prohibits the sale of certain beverages unless a deposit or levy is charged for the container. These include Connecticut, Delaware, Maine, Massachusetts, Michigan, New York, Oregon, California, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Quebec. Maine, Massachusetts and Michigan have statutes that require us to pay all or a portion of unclaimed container deposits to the state and California imposes a levy on beverage containers to fund a waste recovery system. In addition to the Canadian deposit legislation described above, Ontario, Canada, currently has a regulation requiring that 30% of all soft drinks sold in Ontario be bottled in refillable containers. This regulation is currently being reviewed by the Canadian Ministry of the Environment. The European Commission issued a packaging and packing waste directive that was incorporated into the national legislation of most member states. This has resulted in targets being set for the 7 recovery and recycling of household, commercial and industrial packaging waste and imposes substantial responsibilities upon bottlers and retailers for implementation. We are not aware of similar material legislation being proposed or enacted in any other areas served by us. We are unable to predict, however, whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations. Soft Drink Excise Tax Legislation Specific soft drink excise taxes have been in place in certain states for several years. The states in which we operate that currently impose such a tax are West Virginia, Arkansas and Tennessee and, with respect to fountain syrup only, Washington. Value-added taxes on soft drinks vary in our territories located in Canada, Spain, Greece and Russia, but are consistent with the value-added tax rate for other consumer products. We are not aware of any material soft drink taxes that have been enacted in any other market served by us. We are unable to predict, however, whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations. Trade Regulation As a manufacturer, seller and distributor of bottled and canned soft drink products of PepsiCo and other soft drink manufacturers in exclusive territories in the United States and internationally, we are subject to antitrust laws. Under the Soft Drink Interbrand Competition Act, soft drink bottlers operating in the United States, such as us, may have an exclusive right to manufacture, distribute and sell a soft drink product in a geographic territory if the soft drink product is in substantial and effective competition with other products of the same class in the same market or markets. We believe that there is such substantial and effective competition in each of the exclusive geographic territories in which we operate. California Carcinogen and Reproductive Toxin Legislation A California law requires that any person who exposes another to a carcinogen or a reproductive toxin must provide a warning to that effect. Because the law does not define quantitative thresholds below which a warning is not required, virtually all manufacturers of food products are confronted with the possibility of having to provide warnings due to the presence of trace amounts of defined substances. Regulations implementing the law exempt manufacturers from providing the required warning if it can be demonstrated that the defined substances occur naturally in the product or are present in municipal water used to manufacture the product. We have assessed the impact of the law and its implementing regulations on our beverage products and have concluded that none of our products currently require a warning under the law. We cannot predict whether or to what extent food industry efforts to minimize the law's impact on food products will succeed. We also cannot predict what impact, either in terms of direct costs or diminished sales, imposition of the law may have. EMPLOYEES As of December 29, 2001, we employed approximately 37,000 full-time workers, of whom approximately 30,000 were employed in the United States. Approximately 8,800 of our full-time workers in the United States are union members. We consider relations with our employees to be good and have not experienced significant interruptions of operations due to labor disagreements with the exception of a labor dispute at certain of our New Jersey facilities, which was successfully resolved on July 22, 2001. FINANCIAL INFORMATION ON INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS 8 For financial information on industry segments and operations in geographic areas, see Note 15 to PBG's Consolidated Financial Statements, found on page 52 of our Annual Report to Shareholders for the year ended December 29, 2001, which is incorporated herein by reference and is included as Exhibit 13 hereto. ITEM 2. PROPERTIES We operate 70 soft drink production facilities worldwide, of which 62 are owned and 8 are leased. Of PBG's 328 distribution facilities, 264 are owned and 64 are leased. We believe that our bottling, canning and syrup filling lines and our distribution facilities are sufficient to meet present needs. We also lease headquarters office space in Somers, New York. We also own or lease and operate approximately 28,000 vehicles, including delivery trucks, delivery and transport tractors and trailers and other trucks and vans used in the sale and distribution of our soft drink products. We also own more than 1.2 million soft drink dispensing and vending machines. With a few exceptions, leases of plants in the United States and Canada are on a long-term basis, expiring at various times, with options to renew for additional periods. Most international plants are leased for varying and usually shorter periods, with or without renewal options. We believe that our properties are in good operating condition and are adequate to serve our current operational needs. ITEM 3. LEGAL PROCEEDINGS From time to time we are a party to various litigation matters incidental to the conduct of our business. There is no pending or, to PBG's best knowledge, threatened legal proceeding to which we are a party that, in the opinion of management, is likely to have a material adverse effect on our future financial results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS (a) Special Meeting of Shareholders of PBG was held on November 27, 2001. (b) The only matter voted on was: Approval of an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock of the Company from 300,000,000 to 900,000,000. The number of votes cast in connection with said approval was as follows: Number of Votes Cast: For Against Abstain Broker Non-Votes --- -------- ------- ---------------- 105,980,118 23,457,374 398,670 N/A 9 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information pertaining to the executive officers of PBG as of February 21, 2002: CRAIG E. WEATHERUP, 56, is currently the Chairman of our Board. Mr. Weatherup was also the Chief Executive Officer of PBG from March 1999 to September 2001. Mr. Weatherup served on the Board of Directors of PepsiCo from 1996 until March 1999. Prior to becoming our Chairman and Chief Executive Officer, he served as Chairman and Chief Executive Officer of the Pepsi-Cola Company since July 1996. He was appointed President of the Pepsi-Cola Company in 1988, President and Chief Executive Officer of Pepsi-Cola North America in 1991, and served as PepsiCo's President in 1996. Mr. Weatherup is also a director of Federated Department Stores, Inc. and Starbucks Corporation. JOHN T. CAHILL, 44, is currently our Chief Executive Officer. Previously, Mr. Cahill served as our President and Chief Operating Officer from August 2000 to September 2001. Mr. Cahill has been a member of our Board of Directors since January 1999 and served as our Executive Vice President and Chief Financial Officer prior to becoming President and Chief Operating Officer in August 2000. He was Executive Vice President and Chief Financial Officer of the Pepsi-Cola Company from April 1998 until November 1998. Prior to that, Mr. Cahill was Senior Vice President and Treasurer of PepsiCo, having been appointed to that position in April 1997. In 1996, he became Senior Vice President and Chief Financial Officer of Pepsi-Cola North America. Mr. Cahill joined PepsiCo in 1989 where he held several other senior financial positions through 1996. ERIC J. FOSS, 43, is currently our President, PBG North America. Previously, Mr. Foss was our Executive Vice President and General Manager, PBG North America from August 2000 to September 2001. From October 1999 until August 2000, he served as our Senior Vice President, U.S. Sales and Field Operations, and prior to that, he was our Senior Vice President, Sales and Field Marketing, since March 1999. Mr. Foss joined Pepsi-Cola Company in 1982 and has held a variety of other field and headquarters-based sales, marketing and general management positions. From 1994 to 1996, Mr. Foss was General Manager of Pepsi-Cola North America's Great West Business Unit. In 1996, Mr. Foss was named General Manager for the Central Europe Region for Pepsi-Cola International, a position he held until joining PBG in March 1999. YIANNIS PETRIDES, 44, has been our President, PBG Europe, since June 2000, with responsibilities for PBG's operations in Spain, Greece and Russia. Most recently, he served as Business Unit General Manager for PBG in Spain and Greece. Mr. Petrides joined PepsiCo in 1987 in the international beverage division. In 1993, he was named General Manager of Frito Lay's Greek operation with additional responsibility for the Balkan countries. Two years later, he was appointed Business Unit General Manager for Pepsi Beverages International's bottling operation in Spain. ALFRED H. DREWES, 46, is our Senior Vice President and Chief Financial Officer. Appointed to this position in June 2001, Mr. Drewes previously served as Senior Vice President and Chief Financial Officer of Pepsi Beverages International ("PBI"). Mr. Drewes joined PepsiCo in 1982 as a financial analyst in New Jersey. During the next nine years, he rose through increasingly responsible finance positions within Pepsi-Cola North America in field operations and headquarters. In 1991, Mr. Drewes joined PBI as Vice President of Manufacturing Operations, with responsibility for the global concentrate supply organization. PAMELA C. MCGUIRE, 54, has been our Senior Vice President, General Counsel and Secretary since November 1998. Ms. McGuire joined PepsiCo in 1977 and served as Vice President and Division Counsel of Pepsi-Cola Company from 1989 to March 1998, when she was named Vice President and Associate General Counsel of the Pepsi-Cola Company. 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Stock Trading Symbol - PBG. Stock Exchange Listings - PBG's Common Stock is listed on the New York Stock Exchange. Our Class B common stock is not publicly traded. Shareholders - As of March 11, 2002, there were approximately 44,033 registered and beneficial shareholders of Common Stock. PepsiCo is the holder of all of the outstanding shares of Class B common stock. Dividend Policy - Quarterly cash dividends are usually declared in January, March, July and November and paid at the end of March, June, September and at the beginning of January. The dividend record dates for 2002 are expected to be March 8, June 7, September 6 and December 6. Cash Dividends Declared Per Share on Capital Stock: Quarter 2001 2000 ------- ---- ---- 1 $.02 $.02 2 $.02 $.02 3 $.02 $.02 4 $.01(1) $.02 ----- ---- Total $.07 $.08
Stock Prices - The high, low and closing prices for a share of PBG Common Stock on the New York Stock Exchange, as reported by Bloomberg Service, for each fiscal quarter of 2001 and 2000 were as follows (in dollars): (2) 2001 High Low Close ---- ---- --- ----- First Quarter 21 1/4 16 25/32 19 5/91 Second Quarter 22 23/43 17 19/20 20 29/40 Third Quarter 22 43/50 19 17/25 22 3/10 Fourth Quarter 24 29/40 21 5/8 23 4/5 2000 High Low Close ---- ---- --- ----- First Quarter 11 15/32 8 1/8 10 1/8 Second Quarter 13 5/8 9 1/32 13 17/32 Third Quarter 16 19/32 13 1/4 15 23/32 Fourth Quarter 21 1/8 14 5/32 19 29/32
- ------------------ (1) As a result of a 2-for-1 split of PBG Common Stock effective November 27, 2001, PBG's previous quarterly dividend of $.02 per share was halved. (2) For purposes of comparability share prices for the quarters prior to November 27, 2001 have been adjusted to reflect the 2-for-1 split of PBG Common Stock which was effective November 27, 2001. 11 ITEM 6. SELECTED FINANCIAL DATA "Selected Financial and Operating Data" for the years 1995 through 2001, on page 56 of our Annual Report to Shareholders for the year ended December 29, 2001 is incorporated into this report by reference and is included as Exhibit 13 hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Financial Review" on pages 26 through 56 of PBG's Annual Report to Shareholders for the year ended December 29, 2001 is incorporated into this report by reference and is included as Exhibit 13 hereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. "Management's Financial Review -- Market Risks and Cautionary Statements" on pages 26 and 39 of our Annual Report to Shareholders for the year ended December 29, 2001 is incorporated herein by reference and is included as Exhibit 13 hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of PBG and its subsidiaries are incorporated herein by reference to our Annual Report to Shareholders for the year ended December 29, 2001, included as Exhibit 13 hereto, at the pages indicated: Consolidated Statements of Operations - Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 (page 31). Consolidated Statements of Cash Flows - Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 (page 35). Consolidated Balance Sheets - December 29, 2001 and December 30, 2000 (page 36). Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 (page 40). Notes to Consolidated Financial Statements (pages 41-54). Report of Independent Auditors (page 55). 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PBG The name, age and background of each of the PBG's directors nominated for election are contained under the caption "Election of Directors" in PBG's Proxy Statement for its 2002 Annual Meeting of Shareholders and are incorporated herein by reference. Pursuant to Item 401(b) of Regulation S-K, the requisite information pertaining to the executive officers of PBG is reported in Part I of this Report. Executive officers are elected by PBG's Board of Directors, and their terms of office continue until the next annual meeting of the Board or until their successors are elected and have been qualified. There are no family relationships among our executive officers. Information on Compliance with Section 16(a) of the Exchange Act is contained in PBG's Proxy Statement for its 2002 Annual Meeting of Shareholders under the caption "Section 16 Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information on compensation of PBG's directors and certain named executive officers is contained in PBG's Proxy Statement for its 2002 Annual Meeting of Shareholders under the captions "Directors' Compensation" and "Executive Compensation," respectively, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on the number of shares of PBG Common Stock beneficially owned by each director, each named executive officer and by all directors and named executive officers as a group is contained under the captions "Ownership of Common Stock by Directors and Executive Officers" and "Stock Ownership of Certain Beneficial Owners" in PBG's Proxy Statement for its 2002 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain transactions between PBG, PepsiCo and their affiliates and certain other persons is set forth under the caption "Certain Relationships and Related Transactions" in PBG's 2002 Proxy Statement and is incorporated herein by reference. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The following consolidated financial statements of PBG and its subsidiaries, included in our Annual Report to Shareholders for the year ended December 29, 2001, are incorporated by reference into Part II, Item 8 of this report: Consolidated Statements of Operations - Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999. Consolidated Statements of Cash Flows - Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999. Consolidated Balance Sheets - December 29, 2001 and December 30, 2000. Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999. Notes to Consolidated Financial Statements. Report of Independent Auditors. 2. Financial Statement Schedule. The following financial statement schedule of PBG and its subsidiaries is included in this report on the page indicated: Page Independent Auditors' Report on Schedule and Consent .......................F-2 Schedule II - Valuation and Qualifying Accounts for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 . F-3 3. Exhibits See Index to Exhibits on pages E-1 - E-3. (b) Reports on Form 8-K None. 14 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, The Pepsi Bottling Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 28, 2002 The Pepsi Bottling Group, Inc. By: /s/ John T. Cahill ------------------------- John T. Cahill 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 Pepsi Bottling Group, Inc. and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Craig E. Weatherup Chairman of the Board March 28, 2002 - ---------------------- Craig E. Weatherup /s/ John T. Cahill Chief Executive Officer and March 28, 2002 - ------------------ Director John T. Cahill /s/Alfred H. Drewes Senior Vice President and Chief March 28, 2002 - ------------------- Financial Officer (Principal Alfred H. Drewes Financial Officer) /s/ Andrea L. Forster Vice President and Controller March 28, 2002 - --------------------- (Principal Accounting Officer) Andrea L. Forster /s/ Linda G. Alvarado Director March 28, 2002 - --------------------- Linda G. Alvarado /s/ Barry H. Beracha Director March 28, 2002 - -------------------- Barry H. Beracha /s/ Thomas W. Jones Director March 28, 2002 - -------------------- Thomas W. Jones /s/ Thomas H. Kean Director March 28, 2002 - ------------------ Thomas H. Kean /s/ Susan D. Kronick Director March 28, 2002 - -------------------- Susan D. Kronick /s/ Margaret D. Moore Director March 28, 2002 - --------------------- Margaret D. Moore
S-1 INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE Independent Auditors' Report on Schedule and Consent........................ F-2 Schedule II - Valuation and Qualifying Accounts for the fiscal years ended December 29, 2001 December 30, 2000 and December 25, 1999........... F-3 F-1 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors and Shareholders The Pepsi Bottling Group, Inc.: Under date of January 24, 2002 we reported on the Consolidated Balance Sheets of The Pepsi Bottling Group, Inc. (the "Company") as of December 29, 2001 and December 30, 2000 and the related Consolidated Statements of Operations, Cash Flows and Changes in Shareholders' Equity for each of the fiscal years in the three-year period ended December 29, 2001, which are incorporated by reference in this Form 10-K. In connection with our audits of the aforementioned Consolidated Financial Statements, we also audited the related consolidated financial statement schedule included in this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic Consolidated Financial Statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to the use of reports included herein or incorporated herein by reference in the registration statements (Nos. 333-79357, 333-79369, 333-79375, 333-79365, 333-80647, 333-60428, 333-69622, 333-73302) on Form S-8 of The Pepsi Bottling Group, Inc. /s/ KPMG LLP New York, New York March 28, 2002 F-2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THE PEPSI BOTTLING GROUP, INC. IN MILLIONS
ADDITIONS --------------------------- Balance At Charged To Charged To Beginning Cost And Other Balance At End DESCRIPTION Of Period Expenses Accounts(a) Deductions(b) Of Period ----------- --------- -------- ----------- ------------- --------- FISCAL YEAR ENDED DECEMBER 29, 2001 Allowance for losses on trade accounts receivable $42 $ 9 $-- $ 9 $42 DECEMBER 30, 2000 Allowance for losses on trade accounts receivable $48 $ 2 $-- $ 8 $42 DECEMBER 25, 1999 Allowance for losses on trade accounts receivable $46 $ 6 $ 3 $ 7 $48
- ------------------------ (a) Represents recoveries of amounts previously written off. (b) Charge off of uncollectable accounts. F-3 INDEX TO EXHIBITS ITEM 14(a)(3) EXHIBIT 3.1 Articles of Incorporation of The Pepsi Bottling Group, Inc. ("PBG"), which are incorporated herein by reference to Exhibit 3.1 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 3.2 By-Laws of PBG, which are incorporated herein by reference to Exhibit 3.2 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 3.3 Amendment to Articles of Incorporation of PBG, which is incorporated herein by reference to Exhibit 3.3 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 3.4 Amendment to Articles of Incorporation of PBG dated as of November 27, 2001. 4.1 Form of common stock certificate, which is incorporated herein by reference to Exhibit 4 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.2 Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc., PepsiCo, Inc. and The Chase Manhattan Bank, as trustee, relating to $1,000,000,000 5 3/8% Senior Notes due 2004 and $1,300,000,000 5 5/8% Senior Notes due 2009, which is incorporated herein by reference to Exhibit 10.9 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.3 First Supplemental Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc., Bottling Group, LLC, PepsiCo, Inc. and The Chase Manhattan Bank, as trustee, supplementing the Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc., PepsiCo, Inc. and The Chase Manhattan Bank, as trustee, which is incorporated herein by reference to Exhibit 10.10 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.4 Indenture, dated as of March 8, 1999, by and among PBG, as obligor, Bottling Group, LLC, as guarantor, and The Chase Manhattan Bank, as trustee, relating to $1,000,000,000 7% Series B Senior Notes due 2029, which is incorporated herein by reference to Exhibit 10.14 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 4.5 U.S. $250,000,000 364 Day Credit Agreement, dated as of April 22, 1999 among PBG, Bottling Group, LLC, The Chase Manhattan Bank, Bank of America National Trust and Savings Association, Citibank, N.A., Credit Suisse First Boston, UBS AG, Lehman Commercial Paper Inc., Royal Bank of Canada, Banco Bilbao Vizcaya, Deutsche Bank AG New York Branch and/or Cayman Islands Branch, Fleet National Bank, Hong Kong & Shanghai Banking Corp., The Bank of New York, The Northern Trust Company, The Chase Manhattan Bank, as Agent, Chase Securities Inc. as Arranger and Nationsbanc Montgomery Securities LLC and Solomon Smith Barney Inc. as Co-Syndication Agents, which is incorporated herein by reference to Exhibit 4.5 to PBG's Annual Report on Form 10-K for the year ended December 25, 1999. E-1 4.6 U.S. $250,000,000 5 Year Credit Agreement, dated as of April 22, 1999 among PBG, Bottling Group, LLC, The Chase Manhattan Bank, Bank of America National Trust and Savings Association, Citibank, N.A., Credit Suisse First Boston, UBS AG, Lehman Commercial Paper Inc., Royal Bank of Canada, Banco Bilbao Vizcaya, Deutsche Bank AG New York Branch and/or Cayman Islands Branch, Fleet National Bank, Hong Kong & Shanghai Banking Corp., The Bank of New York, The Northern Trust Company, The Chase Manhattan Bank, as Agent, Chase Securities Inc. as Arranger and Nationsbanc Montgomery Securities LLC and Solomon Smith Barney Inc. as Co-Syndication Agents, which is incorporated herein by reference to Exhibit 4.6 to PBG's Annual Report on Form 10-K for the year ended December 25, 1999. 4.7 U.S. $250,000,000 364 Day Credit Agreement, dated as of May 3, 2000 among PBG, Bottling Group, LLC, The Chase Manhattan Bank, Bank of America, N. A., Citibank, N.A., Credit Suisse First Boston, UBS AG, Lehman Commercial Paper Inc., The Northern Trust Company, Deutsche Bank AG New York Branch and/or Cayman Islands Branch, Royal Bank of Canada, Banco Bilbao Vizcaya, Fleet National Bank, The Bank of New York, The Chase Manhattan Bank, as Agent, Salomon Smith Barney Inc and Banc of America Securities LLC as Co-Lead Arrangers and Book Managers and Citibank, N.A. and Bank of America, N.A., as Co-Syndication Agents, which is incorporated herein by reference to Exhibit 4.7 to PBG's Annual Report on Form 10-K for the year ended December 30, 2000. 4.8 U.S. $250,000,000 Amended and Restated 364 Day Credit Agreement, dated as of May 2, 2001 among PBG, Bottling Group, LLC, The Chase Manhattan Bank, Bank of America, N. A., Citibank, N.A., Credit Suisse First Boston, Lehman Commercial Paper Inc., The Northern Trust Company, Deutsche Bank AG New York Branch and/or Cayman Islands Branch, Royal Bank of Canada, Banco Bilbao Vizcaya, Fleet National Bank, The Bank of New York, State Street Bank and Trust Company, The Chase Manhattan Bank, as Agent, Salomon Smith Barney Inc and JP Morgan as Co-Lead Arrangers and Book Managers and Citibank, N.A. and Bank of America, N.A., as Co-Syndication Agents. 10.1 Form of Master Bottling Agreement, which is incorporated herein by reference to Exhibit 10.1 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 10.2 Form of Master Syrup Agreement, which is incorporated herein by reference to Exhibit 10.2 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 10.3 Form of Non-Cola Bottling Agreement, which is incorporated herein by reference to Exhibit 10.3 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 10.4 Form of Separation Agreement, which is incorporated herein by reference to Exhibit 10.4 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 10.5 Form of Shared Services Agreement, which is incorporated herein by reference to Exhibit 10.5 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 10.6 Form of Tax Separation Agreement, which is incorporated herein by reference to Exhibit 10.6 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). 10.7 Form of Employee Programs Agreement, which is incorporated herein by reference to Exhibit 10.7 to PBG's Registration Statement on Form S-1 (Registration No. 333-70291). E-2 10.8 PBG Executive Income Deferral Plan, which is incorporated herein by reference to Exhibit 10.8 to PBG's Annual Report on Form 10-K for the year ended December 25, 1999. 10.9 PBG 1999 Long-Term Incentive Plan, which is incorporated herein by reference to Exhibit 10.9 to PBG's Annual Report on Form 10-K for the year ended December 25, 1999. 10.10 PBG Directors' Stock Plan, which is incorporated herein by reference to Exhibit 10.10 to PBG's Annual Report on Form 10-K for the year ended December 25, 1999. 10.11 PBG Stock Incentive Plan, which is incorporated herein by reference to Exhibit 10.11 to PBG's Annual Report on Form 10-K for the year ended December 25, 1999. 10.12 Amended PBG Executive Income Deferral Program, which is incorporated herein by reference to Exhibit 10.12 to PBG's Annual Report on Form 10-K for the year ended December 30, 2000. 10.13 PBG Long Term Incentive Plan, which is incorporated herein by reference to Exhibit 10.13 to PBG's Annual Report on Form 10-K for the year ended December 30, 2000. 10.14 PBG Directors' Stock Plan. 12 Statement re Computation of Ratios. 13 PBG 2001 Annual Report to Shareholders. (Pages 26 through 56) 21 Subsidiaries of PBG. 23 Report and Consent of KPMG LLP 24 Copy of Power of Attorney. E-3 EX-3.4 3 y58773ex3-4.txt AMENDMENT TO ARTICLES OF INCORPORATION EXHIBIT 3.4 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF THE PEPSI BOTTLING GROUP, INC. ------------------------------------------------------------------ The Pepsi Bottling Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: The name of the Corporation is The Pepsi Bottling Group, Inc. SECOND: The Certificate of Incorporation is hereby amended by striking out Subparagraph (a) of Article SECOND thereof and substituting in lieu of said Subparagraph (a) of Article SECOND the following: "(a) The Corporation shall have the authority to issue 920,100,000 shares, with a par value of $0.01 per share, of which (i) 900,000,000 shares shall be Common Stock, and 100,000 shares shall be Class B Common Stock (the Common Stock and the Class B Common Stock being collectively referred to herein as the "Capital Stock"), and (ii) 20,000,000 shares shall be shares of Preferred Stock (the "Preferred Stock")." THIRD: That the amendment of the Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Executed on this 27th Day of November, 2001. /s/ Pamela C. McGuire ----------------------------------- Pamela C. McGuire Senior Vice President and Secretary EX-4.8 4 y58773ex4-8.txt AMENDED AND RESTATED 364 DAY CREDIT AGREEMENT Exhibit 4.8 EXECUTION COUNTERPART ------------------- U.S. $250,000,000 364-DAY AMENDED AND RESTATED CREDIT AGREEMENT Dated as of May 2, 2001 among THE PEPSI BOTTLING GROUP, INC. BOTTLING GROUP, LLC THE LENDERS NAMED HEREIN THE CHASE MANHATTAN BANK, as Agent, JPMORGAN and SALOMON SMITH BARNEY INC., as Co-Lead Arrangers and Joint Book Managers and CITIBANK, N.A. and BANK OF AMERICA, N.A., as Co-Syndication Agents ------------------- AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 2, 2001 among THE PEPSI BOTTLING GROUP, INC., a Delaware corporation (the "Company"), BOTTLING GROUP, LLC, a Delaware limited liability company (the "Guarantor"), the banks, financial institutions and other institutional lenders (the "Initial Lenders") listed on the signature pages hereof, and THE CHASE MANHATTAN BANK ("Chase"), as Agent (in such capacity, the "Agent") for the Lenders. The Company, the Initial Lenders and the Agent are parties to a Credit Agreement dated as of May 3, 2000 (as heretofore amended, modified and in effect on the date hereof, the "Existing Credit Agreement") providing for the making of loans by the Lenders to the Company in an aggregate principal amount at any one time outstanding not exceeding $250,000,000. The parties hereto wish to amend the Existing Credit Agreement to, among other things, extend the Termination Date by 364 days and add State Street Bank and Trust Company (the "New Lender") as an "Initial Lender" thereunder, and to restate the Existing Credit Agreement to read in its entirety as set forth in the Existing Credit Agreement (which Existing Credit Agreement is incorporated herein by this reference) as so amended (as so amended and restated, the "Credit Agreement"). The parties hereto agree as follows: Section 1. Definitions. Capitalized terms used but not otherwise defined herein have the meanings given them in the Existing Credit Agreement. Section 2. Amendments. The Existing Credit Agreement is hereby amended, effective as of the Restatement Date (as defined in Section 4 hereof), as follows, and as so amended is restated in its entirety effective on the Restatement Date: (a) General. Each reference to this "Agreement" and words of similar import in the Existing Credit Agreement, as amended and restated hereby shall be deemed to be a reference to the Existing Credit Agreement as amended and restated hereby and as the same may be further amended, supplemented and otherwise modified and in effect from time to time. (b) Termination Date. The definition of "Termination Date" set forth in Section 1.01 of the Existing Credit Agreement is amended in its entirety to read as follows: "Termination Date" means May 1, 2002 or, if earlier, the date of termination in whole of the Commitments pursuant to Section 2.05(a) or 6.01 or, in the case of any Lender whose Commitment is extended pursuant to Section 2.06(c), the date to which such Commitment is extended; provided in each case Amended and Restated Credit Agreement -2- that if any such date is not a Business Day, the relevant Termination Date of such Lender shall be the immediately preceding Business Day." (c) New Lender. The New Lender shall be deemed to be an "Initial Lender" under and for all purposes of the Credit Agreement and each reference in the Credit Agreement to "Initial Lender" shall be deemed to include the New Lender. Section 3. Representations and Warranties. Each of the Company and the Guarantor (each, a "Loan Party") represents and warrants that (i) each of the representations and warranties of such Loan Party contained in Section 4.01 of the Existing Credit Agreement, after giving effect to the amendment and restatement contemplated hereby, is true and correct on and as of the Restatement Date with the same force and effect as if made on and as of the Restatement Date, and as if each reference in Section 4.01(e) to "December 25, 1999" referred to "December 30, 2000", and (ii) no Default or Event of Default has occurred and is continuing on and as of the Restatement Date. The Company agrees that if any representation and warranty contained in this Section 3 shall prove to have been incorrect in any material respect when made, it shall be deemed to be an Event of Default under Section 6.01(b) of the Existing Credit Agreement as amended and restated hereby. Section 4. Conditions to Effectiveness. This Agreement shall become effective on the date (the "Restatement Date") on which the Agent notifies the Company that the following conditions have been satisfied; (i) Execution by All Parties. This Agreement shall have been executed and delivered by each of the Company, the Guarantor, the Agent and the Initial Lenders. (ii) Documents. On the Restatement Date, the Agent shall have received the following documents, each of which shall be dated the Restatement Date and shall otherwise be satisfactory to the Agent in form and substance; (a) Certified copies of the resolutions of the Board of Directors of the Company and of the Guarantor approving this Agreement, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement. (b) A certificate of the Secretary or an Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the other documents to be delivered hereunder. (c) A certificate of the Secretary or an Assistant Secretary of the Guarantor certifying the names and true signatures of the officers of the Guarantor authorized to sign this Agreement and the other documents to be delivered hereunder. Amended and Restated Credit Agreement -3- (d) An opinion of Pamela McGuire, General Counsel of each of the Company and the Guarantor, substantially in the form of Exhibit C to the Existing Credit Agreement (with such necessary changes to reflect the amendment and restatement contemplated hereby) and as to such other matters as any Initial Lender through the Agent may reasonably request. (e) A favorable opinion of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel for the Agent. (f) The Agent shall have received such other approvals, opinions or documents as any Initial Lender through the Agent may reasonably request. Section 5. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 6. EXPENSES. Without limiting its obligations under Section 8.04 of the Existing Credit Agreement, the Company agrees to pay all reasonable out-of-pocket expenses incurred by the Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Agent, in connection with the preparation, execution and delivery of this Agreement. Section 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Section 8. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. Amended and Restated Credit Agreement ------------------------------------- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. THE PEPSI BOTTLING GROUP, INC., as Borrower By: ----------------------- Name: Title: BOTTLING GROUP, LLC, as Guarantor By: ----------------------- Name: Title: THE CHASE MANHATTAN BANK, as Agent By: ----------------------- Name: Title: Amended and Restated Credit Agreement ------------------------------------- COMMITMENT INITIAL LENDERS - ---------- --------------- $30,000,000 THE CHASE MANHATTAN BANK By: ----------------------- Name: Title: $30,000,000 CITIBANK, N.A. By: ----------------------- Name: Title: $30,000,000 BANK OF AMERICA, N.A. By: ----------------------- Name: Title: $30,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By: ----------------------- Name: Title: Amended and Restated Credit Agreement ------------------------------------- $25,000,000 CREDIT SUISSE FIRST BOSTON By: ----------------------- Name: Title: By: ----------------------- Name: Title: $20,000,000 THE NORTHERN TRUST COMPANY By: ----------------------- Name: Title: $20,000,000 LEHMAN COMMERCIAL PAPER INC. By: ----------------------- Name: Title: $15,000,000 ROYAL BANK OF CANADA By: ----------------------- Name: Title: Amended and Restated Credit Agreement ------------------------------------- $12,500,000 BANCO BILBAO VIZCAYA By: ----------------------- Name: Title: $12,500,000 THE BANK OF NEW YORK By: ----------------------- Name: Title: $12,500,000 FLEET NATIONAL BANK By: ----------------------- Name: Title: $12,500,000 STATE STREET BANK AND TRUST COMPANY By: ----------------------- Name: Title: - --------------------------------------- $250,000,000 - Total of the Commitments Amended and Restated Credit Agreement ------------------------------------- EX-10.14 5 y58773ex10-14.txt PBG DIRECTORS' STOCK PLAN EXHIBIT 10.14 PBG DIRECTORS' STOCK PLAN (Effective as of May 23, 2001) 1. PURPOSES The principal purposes of the PBG Directors' Stock Plan (the "Plan") are to provide compensation to those members of the Board of Directors of The Pepsi Bottling Group, Inc. ("PBG") who are not also employees of PBG, assist PBG in attracting and retaining outside directors with experience and ability on a basis competitive with industry practices, and associate more fully the interests of such directors with those of PBG's shareholders. 2. EFFECTIVE DATE The Plan was unanimously approved by the Board of Directors of PBG, conditional on shareholder approval, and will become effective on May 23, 2001. 3. ADMINISTRATION The Plan shall be administered and interpreted by the Board of Directors of PBG ("Board"). The Board shall have full power and authority to administer and interpret the Plan and to adopt such rules, regulations, guidelines and instruments for the administration of the Plan and for the conduct of its business as the Board deems necessary or advisable. The Board's interpretations of the Plan, and all actions taken and determinations made by the Board pursuant to the powers vested in its members hereunder, shall be conclusive and binding on all parties concerned, including PBG, its directors and shareholders and any employee of PBG. The costs and expenses of administering the Plan shall be borne by PBG and not charged against any award or to any award recipient. 4. ELIGIBILITY Directors of PBG who are not employees of PBG ("Non-Employee Directors") are eligible to receive awards under the Plan. Directors of PBG who are employees of PBG are not eligible to participate in the Plan, but shall be eligible to participate in other PBG benefit and compensation plans. 5. INITIAL AWARD Under the Plan, each Non-Employee Director shall, on the first day of the month after commencing service as a director of PBG, receive a formula grant of restricted stock ("Restricted Stock"). The number of shares of Restricted Stock to be included in each such award shall be determined by dividing $25,000 by the Fair Market Value (as defined below) of a share of PBG Common Stock on the date of grant (the "Stock Grant Date"), or if such day is not a trading day on the New York Stock Exchange ("NYSE"), on the immediately preceding trading day. The number of shares so determined shall be rounded to the nearest number of whole shares. If the recipient of the Restricted Stock continuously remains a director of PBG, the Restricted Stock granted hereunder shall vest and any restrictions thereon shall lapse on the first anniversary of the Stock Grant Date; provided, however, that, in the event of a Non-Employee Director's death or Disability (as defined in Section 6(c) hereof), the Restricted Stock granted to such Non-Employee Director shall vest and any restrictions thereon shall lapse immediately. Notwithstanding the foregoing, a Non-Employee Director may not sell or otherwise transfer any Restricted Stock granted to him or her prior to the date such Non-Employee Director ceases to serve as a director of PBG for any reason. The Non-Employee Director shall have all of the B-1 rights of a stockholder with respect to such Restricted Stock, including the right to receive all dividends or other distributions paid or made with respect to the stock. Any dividends or distributions that are paid or made in PBG Common Stock shall be subject to the same restrictions as the Restricted Stock in respect of which such dividends or distributions were paid or made. However, any dividends or distributions paid or made in cash shall not be subject to such restrictions. Each Restricted Stock award shall be evidenced by an agreement setting forth the terms and conditions thereof, which terms and conditions shall not be inconsistent with those set forth in this Plan. 6. ANNUAL AWARD (a) Under the Plan, each Non-Employee Director shall receive an annual formula grant of options to purchase shares of PBG Common Stock ("Options") at a fixed price (the "Exercise Price"). Such grant shall be made annually on April 1 (the "Option Grant Date"); provided, however, that each individual who becomes a Non-Employee Director after April 1, and in a month other than January, February or March, shall receive a pro-rated annual formula grant of options (a "Pro-Rated Grant") on the first day of the month following the date he or she commences service as a director of PBG (the "Pro-Rated Option Grant Date"). To receive a grant of Options, a Non-Employee Director must be actively serving as a director of PBG on the Option Grant Date or the Pro-Rated Option Grant Date, as applicable. (b) The number of Options to be included in each option award shall be determined by dividing the Grant Amount (as defined below) by the Fair Market Value (as defined below) of a share of PBG Common Stock on the Option Grant Date or Pro-Rated Option Grant Date, as applicable, or if such day is not a trading day on the NYSE, on the immediately preceding trading day. Grant Amount shall mean $275,000, except that, in the case of a Pro-Rated Grant, Grant Amount shall mean the following: (i) $206,250 in the case of an individual who commences service as a director of PBG on or after April 2 and on or before June 30; (ii) $137,500 in the case of an individual who commences service as a director of PBG on or after July 1 and on or before September 30; (iii) $68,750 in the case of an individual who commences service as a director of PBG on or after October 1 and on or before December 31. No Pro-Rated Grant shall be made in the case of an individual who commences service as a director of PBG on or after January 1 and on or before March 31. The number of Options so determined shall be rounded to the nearest number of whole Options. "Fair Market Value" shall mean the average of the high and low per share sale prices for PBG Common Stock on the composite tape for securities listed on the NYSE for the day in question, except that such average price shall be rounded up to the nearest one-fourth. (c) Options shall vest and become immediately exercisable on the Option Grant Date or Pro-Rated Option Grant Date, as applicable. Each Option shall have an Exercise Price equal to the Fair Market Value of PBG Common Stock on the Option Grant Date or Pro-Rated Option Grant Date, as applicable, or if such day is not a trading day on the NYSE, on the immediately preceding trading day. Each Option shall have a term of ten years; provided, however, in the event the holder thereof shall cease to be a director of PBG, or its successor, for a reason other than death or Disability (as defined below), such Options shall thereupon immediately terminate and expire. A Non-Employee Director has a "Disability" if he or she is totally and permanently disabled as determined using the standards PBG applies under its long-term disability program. (d) Non-Employee Directors may exercise their Options by giving an exercise notice to PBG in the manner specified from time to time by the Board. Options may be exercised by using either a standard cash exercise procedure or a cashless exercise procedure. From time to time, the Board may change or adopt procedures relating to Option exercises. If, at any time, a Non-Employee Director suffers a Disability or is otherwise incapable of exercising his or her Options before the expiration thereof, the Board may take any steps it deems appropriate to prevent such Options from lapsing prior to being exercised. (e) Each Option award shall be evidenced by a written agreement setting forth the terms and conditions thereof, which terms and conditions shall not be inconsistent with those set forth in this Plan. B-2 (f) With respect to each Option award, by an election made before the Option Grant Date or Pro-Rated Option Grant Date, as applicable, Non-Employee Directors may elect to convert up to one hundred percent (100%) of their Options into shares of PBG Common Stock at the ratio of three Options for one share. The number of shares so determined shall be rounded to the nearest number of whole shares. If less than one hundred percent (100%) of the Options are converted, Options shall be converted in increments of thirty (30) Options. 7. SHARES OF STOCK SUBJECT TO THE PLAN The shares that may be delivered under this Plan shall not exceed an aggregate of 300,000 shares of PBG Common Stock, adjusted, if appropriate, in accordance with Section 9 below; provided that any shares authorized but not delivered under the Prior Plan (as hereinafter defined) shall be available for delivery under this Plan in addition to the above mentioned 300,000 shares. The shares granted or delivered under the Plan may be newly issued shares of Common Stock or treasury shares. 8. DEFERRAL Non-Employee Directors may make an advance election to defer into PBG phantom stock units (i) all of the shares of Restricted Stock granted under Section 5 and/or (ii) all of the shares resulting from an election made under Section 6(f). Non-Employee Directors who elect to defer receipt of such shares shall be credited with a number of phantom stock units equal to that number of shares of Restricted Stock or PBG Common Stock that they would have received had they not elected to defer. During the deferral period, the value of the phantom stock units will fluctuate based on the market value of PBG Common Stock. Non-Employee Directors will be credited with dividends on phantom stock units at the same rate and time as dividends are declared on PBG Common Stock. Any such dividends shall be credited as additional phantom stock units. At the end of the deferral period, Non-Employee Directors will receive the aggregate value of the PBG phantom stock units credited to them. The value of PBG phantom stock units will be determined by multiplying the number of PBG phantom stock units by the Fair Market Value of PBG Common Stock on the last trading day of the deferral period. All payments of deferred awards shall be made in cash, unless the Board in its discretion decides to make the distribution in shares of PBG Common Stock or in a combination of cash and shares of PBG Common Stock. Unless otherwise determined by the Board, (i) the deferral period with respect to shares of Restricted Stock granted under Section 5 shall equal the Non-Employee Director's period of service as a director of PBG (i.e., such deferral period shall end on the date the Non-Employee Director ceases to be a director of PBG, including by reason of death or disability), and (ii) the deferral period with respect to shares resulting from an election made under Section 6(f) shall be such as elected by the director of PBG and shall not be less than two (2) years. 9. DILUTION AND OTHER ADJUSTMENTS The number and kind of shares of PBG Common Stock issuable under the Plan, or which may or have been awarded to any Non-Employee Director, may be adjusted proportionately by the Board to reflect stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of shares, any spin off or other distribution of assets of the Company to its shareholders, any partial or complete liquidation, or other similar corporate changes. Such adjustment shall be conclusive and binding for all purposes of the Plan. 10. EFFECT OF MISCONDUCT Notwithstanding anything to the contrary herein, if a Non-Employee Director commits Misconduct (as defined below), he or she shall forfeit all rights to any unexercised Options, Restricted Stock and PBG phantom stock units credited to him or her under Section 8. For purposes of this Plan, Misconduct occurs if a majority of the Board determines that a Non-Employee Director has: (a) engaged in any act which is considered to be contrary to the PBG's best interests; (b) violated the PBG's Code of Conduct or engaged in B-3 any other activity which constitutes gross misconduct; (c) engaged in unlawful trading in the securities of PBG or of any other company based on information gained as a result of his or her service as a director of PBG; or (d) disclosed to an unauthorized person or misused confidential information or trade secrets of PBG. 11. WITHHOLDING TAXES PBG shall have the right to require the payment (through withholding from any amount payable from PBG to the Non-Employee Director or otherwise) of any withholding taxes required by federal, state, local or foreign law in respect of any award. 12. RESALE RESTRICTIONS, ASSIGNMENT AND TRANSFER Options (unless the Board of Directors specifically determines otherwise), Restricted Stock and PBG phantom stock units may not be sold, transferred or assigned, except in the event of the Non-Employee Director's death, in which case his or her Options, Restricted Stock or PBG phantom stock units may be transferred by will or by the laws of descent and distribution. All restrictions on Restricted Stock granted to a Non-Employee Director shall lapse upon his or her death. Options may be exercised by the decedent's personal representative, or by whomever inherits the Options, at any time, through and including their original expiration date. Once awarded, the shares of PBG Common Stock received by Non-Employee Directors may be freely transferred, assigned, pledged or otherwise subjected to lien, subject to restrictions imposed by the Securities Act of 1933, as amended, and subject to the trading restrictions imposed by Section 16 of the Securities Exchange Act of 1934, as amended. PBG phantom stock units may not be transferred or assigned except by will or the laws of descent and distribution. 13. FUNDING The Plan shall be unfunded. PBG shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any award under the Plan. 14. PRIOR DIRECTORS' STOCK PLAN SUPERSEDED Upon this Plan's approval by the shareholders of PBG, this Plan shall supersede The PBG Directors' Stock Plan of 1999 (the "Prior Plan"). Thereafter, all shares authorized but not delivered under the Prior Plan shall be available for delivery under this Plan, no more awards shall be made under the Prior Plan, and all awards granted under the Prior Plan shall be governed by and administered in accordance with the terms of this Plan. 15. DURATION, AMENDMENTS AND TERMINATIONS The Board of Directors may terminate or amend the Plan in whole or in part; provided, however, that the Plan may not be amended more than once every six (6) months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations thereunder; provided further, however, that no such action shall adversely affect any rights or obligations with respect to any awards theretofore granted under the Plan, unless consented to by the recipients of such awards. The Plan shall continue until terminated. B-4 EX-12 6 y58773ex12.txt STATEMENT RE COMPUTATION OF RATIOS Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES We have calculated PBG's ratio of earnings to fixed charges in the following table by dividing earnings by fixed charges. For this purpose, earnings include pre-tax income plus fixed charges and losses recognized from equity investments reduced by undistributed income from equity investments. Fixed charges include interest expense, capitalized interest and one-third of net rent expense, which is the portion of rent deemed representative of the interest factor. FISCAL YEAR 2001 2000 1999 (B) 1998 (B) 1997 1996 1995 1994 ------- ------ ---------- ---------- ------ ------ ------ ------ Net income (loss) before taxes and minority interest $ 482 $ 397 $ 209 $(192) $ 115 $ 138 $ 110 $ 63 Undistributed (income) loss from equity investments - - - 5 12 1 (3) (1) Fixed charges excluding capitalize interest 217 222 227 245 238 238 256 247 ------- ------- ------- ------- ------- ------- ------- ------- Earnings as adjusted $ 699 $ 619 $ 436 $ 58 $ 365 $ 377 $ 363 $ 309 ======= ======= ======= ======= ======= ======= ======= ======= Fixed charges: Interest expense $ 204 $ 208 $ 209 $ 230 $ 226 $ 224 $ 243 $ 234 Capital interest 1 1 1 1 1 1 1 1 Interest portion of rental expense 13 14 18 15 12 14 13 13 ------- ------- ------- ------ ------- ------- ------ ------- Total fixed charges $ 218 $ 223 $ 228 $ 246 $ 239 $ 239 $ 257 $ 248 ======= ======= ======= ====== ======= ======= ====== ======= Ratio of earnings to fixed charges 3.20 2.78 1.91 (A) 1.53 1.58 1.41 1.25
(A) As a result of the losses incurred in the fiscal year ended December 26, 1998 PBG was unable to fully cover the indicated fixed charges. Earnings did not cover fixed charges by $188 million in 1998. (B) Excluding the impact of unusual impairment and other charges and credits of $16 million of income in 1999 and $222 million of expense in 1998, the ratio of earnings of fixed charges would have been 1.85 and 1.14 in 1999 and 1998, respectively. EX-13 7 y58773ex13.txt MANAGEMENT'S FINANCIAL REVIEW The Pepsi Bottling Group, Inc. - -------------------------------------------------------------------------------- EXHIBIT 13 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- OVERVIEW - -------- Fiscal year 2001 marked the third year for The Pepsi Bottling Group, Inc. (collectively referred to as "PBG," "we," "our" and "us") as an independent public company and the third consecutive year of generating outstanding operating results. Highlights of these results are as follows: - - We delivered 13% constant territory EBITDA growth in 2001. - - Our worldwide constant territory physical case volume grew by 3% in 2001. - - We increased our 2001 worldwide constant territory net revenue per case by 3% as compared to the same period in 2000. - - We increased our return on invested capital to 8.4% in 2001, an increase of 0.8 percentage points. - - We delivered 2001 diluted earnings per share of $1.03, an increase of $0.26, or 35%, over 2000. Diluted earnings per share in 2001 include tax benefits of $0.08, resulting from reductions in Canadian income tax rates. Diluted earnings per share in 2000 reflect a $0.02 favorable impact from the inclusion of an additional week in our 2000 fiscal year. The following discussion and analysis covers the key drivers behind our success in 2001 and is broken down into six major sections. The first three sections provide an overview, discuss related party transactions, and focus on items that affect the comparability of historical or future results. The next two sections provide an analysis of our results of operations and liquidity and financial condition. The last section contains a discussion of our market risks and cautionary statements. The discussion and analysis throughout Management's Financial Review should be read in conjunction with the Consolidated Financial Statements and the related accompanying notes. Constant Territory We believe that constant territory performance results are the most appropriate indicators of operating trends and performance, particularly in light of our stated intention of acquiring additional bottling territories, and are consistent with industry practice. Constant territory operating results are derived by adjusting current year results to exclude significant current year acquisitions and adjusting prior year results to include the results of significant prior year acquisitions as if they had occurred on the first day of the prior fiscal year. In addition, 2000 constant territory results exclude the impact from an additional week in our fiscal year ("53rd week"), which occurs every five or six years, as our fiscal year ends on the last Saturday in December. Constant territory results also exclude any unusual impairment and other charges and credits discussed on page 29 and in Note 4 to the Consolidated Financial Statements. Use of EBITDA EBITDA, which is computed as operating income plus the sum of depreciation and amortization, is a key indicator management and the industry use to evaluate operating performance. It is not, however, required under accounting principles generally accepted in the United States of America ("GAAP"), and should not be considered an alternative to measurements required by GAAP such as net income or cash flows. In addition, EBITDA excludes the impact of the non-cash portion of the unusual impairment and other charges and credits discussed on page 29 and in Note 4 to the Consolidated Financial Statements. Critical Accounting Policies The preparation of our Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our Consolidated Financial Statements and the related accompanying notes. We use our best judgement based on our knowledge of existing facts and circumstances and actions that we may undertake in the future, as well as advice of external experts, in determining the estimates that affect our Consolidated Financial Statements. We have policies and procedures in place to ensure conformity with GAAP and we focus your attention on the following: REVENUE RECOGNITION We recognize revenue when our products are delivered to customers. Sales terms do not allow a right of return unless product freshness dating has expired. ALLOWANCE FOR DOUBTFUL ACCOUNTS We determine our allowance for doubtful accounts based on an evaluation of the aging of our receivable portfolio. Our reserve contemplates our historical loss rate on receivables and the economic environment in which we operate. RECOVERABILITY OF LONG-LIVED ASSETS We review all long-lived assets, including intangible assets, when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, we write down an impaired asset to its estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows, which are discounted based on our weighted-average cost of capital. 26 INCOME TAXES Our effective tax rate and the tax bases of our assets and liabilities reflect our best estimate of the ultimate outcome of our tax audits. Valuation allowances are established where expected future taxable income does not support the recognition of the related deferred tax asset. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT We use derivative instruments to hedge against the risk of adverse movements in the price of certain commodities and fuel used in our operations. Our use of derivative instruments is limited to interest rate swaps, forward contracts, futures and options on futures contracts. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use. All derivative instruments are recorded at fair value as either assets or liabilities in our Consolidated Balance Sheets. The fair value of our derivatives is generally based on quoted market prices. The evaluation of hedge effectiveness is subject to assumptions based on terms and timing of underlying exposures. COMMITMENTS AND CONTINGENCIES We are subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. Liabilities related to commitments and contingencies are recognized when a loss is probable and reasonably estimable. For a more detailed discussion of our significant accounting policies, refer to Note 2 of our Consolidated Financial Statements. RELATED PARTY TRANSACTIONS - ------- ----- ------------ Relationship with PepsiCo, Inc. PepsiCo, Inc. ("PepsiCo") owns 37.7% of our outstanding common stock and 100% of our outstanding Class B common stock, together representing 42.8% of the voting power of all classes of our voting stock at December 29, 2001. In addition, PepsiCo owns 7% of the equity of Bottling Group, LLC, our principal operating subsidiary. We fully consolidate the results of Bottling Group, LLC and present PepsiCo's share as minority interest in our Consolidated Financial Statements. We have a number of agreements with PepsiCo. The most significant agreements that govern our relationship with PepsiCo consist of: (1) the master bottling agreement for cola beverages bearing the "Pepsi-Cola" and "Pepsi" trademark in the United States; bottling and distribution agreements for non-cola products in the United States, including Mountain Dew; and a master fountain syrup agreement in the United States; (2) agreements similar to the master bottling agreement and the non-cola agreements for each specific country, including Canada, Spain, Greece and Russia, as well as a fountain syrup agreement similar to the master syrup agreement for Canada; (3) a shared services agreement whereby PepsiCo provides us or we provide PepsiCo with certain administrative support, including procurement of raw materials, transaction processing, such as accounts payable and credit and collection, certain tax and treasury services, and information technology maintenance and systems development. The amounts paid or received under this contract are equal to the actual costs incurred by the company providing the service. From 1998 through 2001, a PepsiCo affiliate provided casualty insurance to us; and (4) transition agreements that provide certain indemnities to the parties, and provide for the allocation of tax and other assets, liabilities, and obligations arising from periods prior to the initial public offering. Under our tax separation agreement, PepsiCo maintains full control and absolute discretion for any combined or consolidated tax filings for tax periods ending on or before the initial public offering. PepsiCo has contractually agreed to act in good faith with respect to all tax audit matters affecting us. In addition, PepsiCo has agreed to use their best efforts to settle all joint interests in any common audit issue on a basis consistent with prior practice. We purchase concentrate from PepsiCo that is used in the production of carbonated soft drinks and other ready-to-drink beverages. The price of concentrate is determined annually by PepsiCo at its sole discretion. We also produce or distribute other products and purchase finished goods and concentrate through various arrangements with PepsiCo or PepsiCo joint ventures. We reflect such purchases in cost of sales. We share a business objective with PepsiCo of increasing the availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at its sole discretion, provides us with various forms of marketing support to promote its beverages. This support covers a variety of initiatives, including marketplace support, marketing programs, capital equipment investment, and shared media expense. Based on the objective of the programs and initiatives, we record marketing support as an adjustment to net revenues or as a reduction of selling, delivery and administrative expense. There are no conditions or other requirements that could result in a repayment of marketing support received. We manufacture and distribute fountain products and provide fountain equipment service to PepsiCo customers in some territories in accordance with the Pepsi beverage agreements. 27 Amounts received from PepsiCo for these transactions are offset by the cost to provide these services and are reflected in selling, delivery and administrative expenses. We pay a royalty fee to PepsiCo for the Aquafina trademark. Refer to the Items That Affect Historical or Future Comparability section of Management's Financial Review for further discussions of concentrate supply and bottler incentives. In addition, refer to Note 2 of our Consolidated Financial Statements for further discussions on accounting for bottler incentives and Note 16 for further discussions on our relationship with PepsiCo. Board of Directors Two of our board members are also employees of PepsiCo. In addition in 2001, certain members of our Board of Directors also served on the boards of other companies affiliated with PepsiCo. ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY - ----- ---- ------ ---------- -- ------ ------------- Stock Split On November 27, 2001, our shareholders approved an amendment to our Certificate of Incorporation increasing the authorized shares of PBG common stock from 300 million to 900 million facilitating a two-for-one stock split of issued common stock. The stock split was effected in the form of a 100% stock dividend paid to our shareholders of record on November 27, 2001. As a result of the stock split, the accompanying Consolidated Financial Statements and Management's Financial Review reflect an increase in the number of outstanding shares of common stock and shares of treasury stock and the transfer of the par value of these incremental shares from additional paid-in capital. All PBG share and per share data have been restated to reflect the split, except for discussions of our capitalization. New Accounting Standards During 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 141, "Business Combinations," which requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001, and SFAS 142, "Goodwill and Other Intangible Assets," which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment. Effective the first day of fiscal year 2002 we will no longer amortize goodwill and certain franchise rights, but will evaluate them for impairment annually. We have completed the initial impairment review required by SFAS 142 and have determined that our intangible assets are not impaired. The adoption of SFAS 142 will reduce our fiscal year 2002 amortization expense by approximately $128 million, or $0.31 per diluted share, based on the weighted-average number of diluted shares outstanding as of December 29, 2001. In addition, during 2001 the FASB also issued SFAS 143, "Accounting for Asset Retirement Obligations" and SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that we recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS 144 superseded SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for the impairment of long-lived assets and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 143 is effective for fiscal year 2003 and SFAS 144 is effective for fiscal year 2002 and we do not anticipate that the adoption of these statements will have a material impact on our Consolidated Financial Statements. During 2000 and 2001, the Emerging Issues Task Force ("EITF") addressed various issues related to the income statement classification of certain promotional payments. In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for Certain Sales Incentives," addressing the recognition and income statement classification of various sales incentives. Among its requirements, the consensus will require the costs related to consumer coupons currently classified as marketing costs to be classified as a reduction of revenue. In January 2001, the EITF reached a consensus on Issue 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future." EITF 00-22 requires that certain volume-based cash rebates to customers currently recognized as marketing costs be classified as a reduction of revenue. In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF 00-25 addresses the income statement classification of consideration, other than that directly addressed in EITF 00-14, from a vendor to a reseller or another party that purchases the vendor's products. In November 2001, the EITF codified Issues 00-14, 00-22 and 00-25 as Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." EITF 00-22 was effective for the first quarter of 28 2001 and was not material to our Consolidated Financial Statements. The remainder of EITF 01-9 is effective for 2002 and we do not anticipate that the adoption will have a material impact on our Consolidated Financial Statements. Our Consolidated Financial Statements reflect the implementation of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, on the first day of fiscal year 2001. SFAS 133, which was issued in 1998, establishes accounting and reporting standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts, which are collectively referred to as derivatives. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. Asset Lives At the beginning of fiscal year 2000, we changed the estimated useful lives of certain categories of assets primarily to reflect the success of our preventive maintenance programs in extending the useful lives of these assets. The changes, which are detailed in Note 3 to the Consolidated Financial Statements, lowered total depreciation cost by approximately $69 million, or $0.13 per diluted share in 2000 as compared to 1999. The estimated useful lives of our assets were the same in 2001 and 2000. Fiscal Year Our fiscal year ends on the last Saturday in December and, as a result, a 53rd week is added every five or six years. Fiscal years 2001 and 1999 consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. The following table illustrates the approximate dollar and percentage point impacts that the extra week had on our operating results:
dollars in millions, except per share amounts PERCENTAGE POINTS ----------------- DOLLARS 2001 VS. 2000 2000 VS. 1999 ------- ------------- ------------- Volume..................................................... N/A (2) 2 Net Revenues............................................... $ 113 (1) 2 EBITDA..................................................... $ 14 (2) 2 Diluted Earnings per Share................................. $0.02 (4) 5
Initial Public Offering PBG was incorporated in Delaware in January 1999 and, prior to our formation, we were an operating unit of PepsiCo. We became a public company through an initial public offering on March 31, 1999. Our initial public offering consisted of 100 million shares of common stock sold to the public, equivalent to 65% of our outstanding common stock, leaving PepsiCo the owner of the remaining 35% of outstanding common stock. For the period prior to our initial public offering, we prepared our Consolidated Financial Statements as a "carve-out" from the financial statements of PepsiCo using the historical results of operations and assets and liabilities of our business. Certain costs reflected in the Consolidated Financial Statements may not necessarily be indicative of the costs that we would have incurred had we operated as an independent, stand-alone entity from the first day of fiscal year 1999. These costs include an allocation of PepsiCo's corporate overhead and interest expense, and income taxes: - We included overhead related to PepsiCo's corporate administrative functions based on a specific identification of PepsiCo's administrative costs relating to the bottling operations and, to the extent that such identification was not practicable, based upon the percentage of our revenues to PepsiCo's consolidated net revenues. These costs are included in selling, delivery and administrative expenses in our Consolidated Statements of Operations. - We allocated $3.3 billion of PepsiCo's debt to our business and charged interest expense on this debt using PepsiCo's weighted-average interest rate. Once we issued $3.3 billion of third-party debt in the first quarter of 1999, our actual interest rates were used to determine interest expense for the remainder of the year. - We reflected income tax expense in the Consolidated Financial Statements as if we had actually filed a separate income tax return. The amounts of the historical allocations described above are as follows:
dollars in millions 1999 ---- Corporate overhead expense................................................. $ 3 Interest expense........................................................... $ 28 PepsiCo's weighted-average interest rate................................... 5.8%
Unusual Impairment and Other Charges and Credits Our operating results were affected by the following unusual charges and credits:
dollars in millions 1999 ---- Non-cash compensation charge............................................... $ 45 Vacation policy change..................................................... (53) Asset impairment and restructuring charges................................. (8) ---- $(16) ==== After minority interest and income taxes................................... $ (9) ====
29 - - Non-cash Compensation Charge In connection with the completion of our initial public offering, PepsiCo vested substantially all non-vested PepsiCo stock options held by our employees. As a result, we incurred a $45 million non-cash compensation charge in the second quarter of 1999, equal to the difference between the market price of the PepsiCo capital stock and the exercise price of these options at the vesting date. - - Vacation Policy Change As a result of changes to our employee benefit and compensation plans in 1999, employees now earn vacation time evenly throughout the year based upon service rendered. Previously, employees were fully vested at the beginning of each year. As a result of this change, we reversed an accrual of $53 million into income in 1999. - - Asset Impairment and Restructuring Charge In the fourth quarter of 1999, $8 million of the remaining restructuring reserve recorded in 1998 relating to an asset impairment and restructuring in our Russian operations, was reversed into income. The reversal was necessitated as actual costs incurred to renegotiate manufacturing and leasing contracts in Russia and to reduce the number of employees were less than the amounts originally estimated. Comparability of our operating results may also be affected by the following: Concentrate Supply We buy concentrate, the critical flavor ingredient for our products, from PepsiCo, its affiliates and other brand owners who are the sole authorized suppliers. Concentrate prices are typically determined annually. In February 2001, PepsiCo announced an increase of approximately 3% in the price of U.S. concentrate. PepsiCo has recently announced a further increase of approximately 3%, effective February 2002. Amounts paid or payable to PepsiCo and its affiliates for concentrate were $1,584 million, $1,507 million and $1,418 million in 2001, 2000 and 1999, respectively. Bottler Incentives PepsiCo and other brand owners provide us with various forms of marketing support. The level of this support is negotiated annually and can be increased or decreased at the discretion of the brand owners. This marketing support is intended to cover a variety of programs and initiatives, including direct marketplace support, capital equipment funding and shared media, and advertising support. Direct marketplace support is primarily funding by PepsiCo and other brand owners of sales discounts and similar programs, and is recorded as an adjustment to net revenues. Capital equipment funding is designed to support the purchase and placement of marketing equipment and is recorded as a reduction to selling, delivery and administrative expenses. Shared media and advertising support is recorded as a reduction to advertising and marketing expense within selling, delivery and administrative expenses. There are no conditions or other requirements that could result in a repayment of marketing support received. The total bottler incentives we received from PepsiCo and other brand owners were $598 million, $566 million and $563 million for 2001, 2000 and 1999, respectively. Of these amounts, we recorded $293 million, $277 million and $263 million for 2001, 2000 and 1999, respectively, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. The amount of our bottler incentives received from PepsiCo was more than 90% of our total bottler incentives in each of the three years, with the balance received from the other brand owners. Employee Benefit Plan Changes We made several changes to our employee benefit plans that took effect in fiscal year 2000. The changes were made to our vacation policy, pension and retiree medical plans and included some benefit enhancements as well as cost containment provisions. These changes did not have a significant impact on our financial results in 2001 or 2000. In 1999, our Board of Directors approved a matching company contribution to our 401(k) plan that began in 2000. The match is dependent upon the employee's contribution and years of service. The matching company contribution was approximately $17 million and $15 million in 2001 and 2000, respectively. In the fourth quarter of 1999 we recognized a $16 million compensation charge related to full-year 1999 performance. This expense was one-time in nature and was for the benefit of our management employees, reflecting our successful operating results as well as providing certain incentive-related features. 30 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS in millions, except per share data FISCAL YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999 - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- NET REVENUES............................................................. $8,443 $7,982 $7,505 Cost of sales............................................................ 4,580 4,405 4,296 ----- ----- ----- GROSS PROFIT............................................................. 3,863 3,577 3,209 Selling, delivery and administrative expenses............................ 3,187 2,987 2,813 Unusual impairment and other charges and credits......................... -- -- (16) ----- ----- ----- OPERATING INCOME......................................................... 676 590 412 Interest expense, net.................................................... 194 192 202 Foreign currency loss.................................................... -- 1 1 Minority interest........................................................ 41 33 21 ----- ----- ----- INCOME BEFORE INCOME TAXES............................................... 441 364 188 Income tax expense before rate change.................................... 161 135 70 Income tax rate change benefit........................................... (25) -- -- ----- ----- ----- NET INCOME............................................................... $ 305 $ 229 $ 118 ====== ====== ====== BASIC EARNINGS PER SHARE................................................. $ 1.07 $ 0.78 $ 0.46 Weighted-Average Shares Outstanding...................................... 286 294 257 DILUTED EARNINGS PER SHARE............................................... $ 1.03 $ 0.77 $ 0.46 Weighted-Average Shares Outstanding...................................... 296 299 257
See accompanying notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 31 MANAGEMENT'S FINANCIAL REVIEW RESULTS OF OPERATIONS - ------- -- ----------
FISCAL 2001 VS. 2000* FISCAL 2000 VS. 1999* ------------------------ --------------------- CONSTANT CONSTANT REPORTED TERRITORY REPORTED TERRITORY CHANGE CHANGE CHANGE CHANGE EBITDA 12% 13% 18% 16% Volume 2% 3% 3% 1% Net Revenue per Case 3% 3% 3% 3%
* Fiscal years 2001 and 1999 consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. EBITDA On a reported basis, EBITDA was $1,190 million in 2001, representing a 12% increase over 2000, including an approximate 2 percentage point negative impact from the 53rd week in 2000. Constant territory growth of 13% for 2001 was a reflection of higher pricing, an increased mix of higher margin cold drink volume, and solid volume growth in the U.S., as well as continued growth in our operations outside the U.S., particularly in Russia. These increases were partially offset by investments in our cold drink infrastructure. In 2000, reported EBITDA was $1,061 million, representing an 18% increase over 1999, with the 53rd week contributing approximately 2 percentage points of the growth. Constant territory EBITDA was 16% higher than 1999, driven by continued pricing improvements in our take-home segment, mix shifts to higher-margin cold drink volume, favorable cost of sales trends, and improved results outside the United States. VOLUME Our worldwide physical case volume grew 2% in 2001, including an approximate 2 percentage point negative impact from the 53rd week in 2000. Constant territory volume growth was 3% in 2001, reflecting U.S. growth of more than 1% and 10% growth outside the United States. U.S. growth was led by the introductions of Mountain Dew Code Red and Pepsi Twist, expanded distribution of Sierra Mist, strong growth in Aquafina, as well as the integration of SoBe in the majority of our markets. This growth was partially offset by declines in brand Pepsi. New product innovation and consistent in-store execution resulted in positive cold drink and take-home volume growth in the United States. In addition, take-home volume growth in the U.S. benefited from significant growth in mass merchandiser volume. Outside the U.S., all countries delivered solid volume growth in 2001, led by our operations in Russia. Volume growth in Russia was driven by the introduction of Mountain Dew and continued growth of Aqua Minerale, our water product, and Fiesta, our value-brand beverage. Our reported worldwide physical case volume grew 3% in 2000, with the 53rd week contributing approximately 2 percentage points of the growth. Worldwide constant territory volume grew 1% in 2000 with flat volume growth from our U.S. operations and 7% growth from our operations outside the United States. In the U.S., volume results reflected growth in our cold drink segment and the favorable impact of the launch of Sierra Mist in the fourth quarter of 2000, offset by declines in our take-home business. Our cold drink trends reflected our successful placement of additional cold drink equipment in the United States. Take-home volume remained lower for the year reflecting the effect of our price increases in that segment. Our volume growth outside the U.S. was led by Russia where we have reestablished brand Pepsi, introduced Fiesta, and continued to increase distribution of Aqua Minerale. Partially offsetting the growth in Russia were volume declines in Canada resulting from significant take-home price increases in that country. NET REVENUES Reported net revenues were $8,443 million in 2001, representing a 6% increase over the prior year, including an approximate 1 percentage point negative impact from the 53rd week in 2000. On a constant territory basis, net revenues increased by 6%, reflecting 3% volume growth and 3% growth in net revenue per case. Constant territory U.S. net revenues grew 6% consisting of 5% growth in net revenue per case and volume growth of more than 1%. U.S. net revenue per case results reflect higher pricing, primarily in foodstores, and an increased mix of higher-revenue cold drink volume from new product innovation and double-digit Aquafina growth. Constant territory net revenues outside the U.S. grew 7%, reflecting volume growth of 10%, offset by declines in net revenue per case of 3%. Excluding the negative impact from currency translations, net revenue per case growth was flat outside the U.S. and increased 4% worldwide. Reported net revenues were $7,982 million in 2000, a 6% increase over the prior year, with the 53rd week contributing approximately 2 percentage points of the growth. On a constant territory basis, worldwide net revenues grew more than 4%, driven by a 1% volume increase and a 3% increase in net revenue per case. Constant territory net revenue per case growth was driven by the U.S., which grew 6%, reflecting higher pricing, particularly in our take-home segment, and an increased mix of higher-revenue cold drink volume. These results were partially offset by account level investment spending aimed at sustainable Aquafina and cold drink inventory gains in the marketplace. 32 Outside the U.S., constant territory net revenues were down 1%, reflecting a 7% increase in volume offset by an 8% decrease in net revenue per case. Excluding the negative impact from currency translations, net revenue per case decreased 1% outside the U.S. and increased 4% worldwide. COST OF SALES Cost of sales increased $175 million, or 4% in 2001, including an approximate 2 percentage point favorable impact from the 53rd week in 2000. On a constant territory basis, cost of sales increased 5% driven by a 3% increase in volume and a more than 1% increase in cost of sales per case. The increase in cost of sales per case reflects higher U.S. concentrate costs and mix shifts into higher cost packages and products, offset by country mix and favorable currency translations. Cost of sales increased $109 million, or 3% in 2000, with the 53rd week contributing approximately 2 percentage points of the growth. On a per case basis, cost of sales was essentially flat in 2000. Included in cost of sales in 2000 were the favorable impacts from the change in our estimated useful lives of manufacturing assets, which totaled $34 million in 2000 and an approximate 1 percentage point favorable impact from currency translations. Excluding the effects of the change in asset lives and currency translations, cost of sales on a per case basis was more than 1% higher, as higher U.S. concentrate costs were partially offset by favorable packaging and sweetener costs, favorable country mix, and efficiencies in production. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES Selling, delivery and administrative expenses grew $200 million, or 7%, over the comparable period in 2000, including an approximate 1 percentage point favorable impact from the 53rd week in 2000. Approximately half of the increase came from higher selling and delivery costs, specifically our continued investments in our U.S. and Canadian cold drink strategy including people, routes and equipment. Also contributing to the growth in selling, delivery and administrative expenses are higher advertising and marketing costs and higher costs associated with investments in our information technology systems. Selling, delivery and administrative expenses increased $174 million, or 6% in 2000, with the 53rd week contributing approximately 1 percentage point of the growth. Included in selling, delivery and administrative expenses are the favorable impacts from the change in estimated useful lives of certain selling and delivery assets, which lowered depreciation expense by $35 million, and currency translations, which lowered selling, delivery and administrative expense growth by approximately 1 percentage point in 2000. Excluding the effects of the change in asset lives, currency translations and the inclusion of the 53rd week, selling, delivery and administrative expenses were approximately 7% higher in 2000. Driving this increase were higher selling and delivery costs primarily reflecting our significant investment in our U.S. cold drink infrastructure that began in 1999 and continued through 2000. In addition, higher performance-related compensation costs contributed to the cost growth. Growth in administrative costs associated with the company matching contribution for our new 401(k) plan in 2000 was offset by a one-time, $16 million compensation charge in 1999. INTEREST EXPENSE, NET Net interest expense increased by $2 million, or 1%, in 2001 primarily reflecting lower interest income in 2001. The reduction in interest income was due to lower average cash balances in 2001, consistent with increases in acquisition spending and share repurchases, which were primarily funded through cash generated from operations. Net interest expense decreased by $10 million, or 5%, in 2000, primarily driven by increases in interest income consistent with our increase in cash and cash equivalents in 2000 and reduced levels of debt outside the United States. MINORITY INTEREST Minority interest represents PepsiCo's 7% ownership in our principal operating subsidiary, Bottling Group, LLC. The growth in minority interest expense over the last three years is due to higher Bottling Group, LLC earnings over the same periods. INCOME TAX EXPENSE BEFORE RATE CHANGE Our full-year effective tax rate for 2001 was 36.5% before our income tax rate change benefit. This rate corresponds to an effective tax rate of 37.0% in 2000. The one-half point decrease is primarily due to the reduced impact of fixed non-deductible expenses on higher anticipated pre-tax income in 2001, partially offset by the decreased favorable impact of our foreign results. Our full-year effective tax rate for 2000 was 37.0%, compared to 37.4% in 1999. Our effective tax rate, excluding unusual impairment and other charges and credits, would have been 37.0% and 33 38.0% in 2000 and 1999, respectively. The one point decrease is primarily due to the reduced impact of fixed non-deductible expenses on higher pre-tax income in 2000. This impact was partially offset by the decreased favorable impact of our foreign results. INCOME TAX RATE CHANGE BENEFIT During 2001, the Canadian Government enacted legislation reducing federal and certain provincial corporate income tax rates. These rate changes reduced deferred tax liabilities associated with our operations in Canada, and resulted in one-time gains totaling $0.08 per diluted share in 2001. EARNINGS PER SHARE
shares in millions 2001 2000 1999 ---- ---- ---- Basic earnings per share on reported net income ......................... $1.07 $0.78 $0.46 Weighted-average shares outstanding...................................... 286 294 257 Diluted earnings per share on reported net income........................ $1.03 $0.77 $0.46 Weighted-average shares outstanding...................................... 296 299 257
Dilution Diluted earnings per share reflect the potential dilution that could occur if stock options from our stock compensation plan were exercised and converted into common stock that would then participate in net income. Our stock price improvement during the last two years has resulted in $0.04 and $0.01 per share of dilution in 2001 and 2000, respectively. Weighted-Average Shares Outstanding In 1999, immediately preceding our initial public offering, we had 55 million shares of common stock outstanding. In connection with the offering, we sold 100 million shares of common stock to the public. Since our initial public offering, shares outstanding reflect the effect of our share repurchase program, which began in October 1999. In addition, in November 2001 we executed a two-for-one stock split in the form of a 100% stock dividend, which doubled our weighted-average shares outstanding. As a result of the stock split in 2001, the amount of shares authorized by the Board of Directors to be repurchased totals 50 million shares, of which we have repurchased approximately 31 million shares since the inception of our share repurchase program. Pro Forma Earnings per Share The table below sets forth earnings per share adjusted for the initial public offering, the impact of our unusual impairment and other charges and credits and the impact of our income tax rate change benefit as previously discussed. In 1999, we assumed 310 million shares were outstanding from the beginning of the year and further adjusted shares outstanding for our share repurchase program.
shares in millions 2001 2000* 1999 ---- ----- ---- Diluted earnings per share on reported net income......................... $1.03 $0.77 $ 0.38 Unusual impairment and other charges and credits.......................... -- -- (0.03) Income tax rate change benefit............................................ (0.08) -- -- ----- ----- ------ Adjusted diluted earnings per share....................................... $0.95 $0.77 $ 0.35 ===== ===== ====== Assumed diluted shares outstanding........................................ 296 299 309
* Includes a favorable impact from the inclusion of the 53rd week in 2000 of $0.02. 34 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS dollars in millions FISCAL YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999 - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- CASH FLOWS--OPERATIONS Net income...................................................................... $305 $229 $ 118 Adjustments to reconcile net income to net cash provided by operations: Depreciation................................................................. 379 340 374 Amortization................................................................. 135 131 131 Non-cash unusual impairment and other charges and credits.................... -- -- (32) Deferred income taxes........................................................ 23 -- (27) Other non-cash charges and credits, net...................................... 182 176 141 Changes in operating working capital, excluding effects of acquisitions: Accounts receivable....................................................... (28) 13 (42) Inventories............................................................... (50) 11 3 Prepaid expenses and other current assets................................. 2 (97) 4 Accounts payable and other current liabilities............................ 57 28 48 ----- ---- ------ Net change in operating working capital................................. (19) (45) 13 ----- ---- ------ NET CASH PROVIDED BY OPERATIONS................................................. 1,005 831 718 ----- ---- ------ CASH FLOWS--INVESTMENTS Capital expenditures............................................................ (593) (515) (560) Acquisitions of bottlers........................................................ (120) (26) (176) Sales of property, plant and equipment.......................................... 6 9 22 Other, net...................................................................... (123) (52) (19) ----- ---- ------ NET CASH USED FOR INVESTMENTS................................................... (830) (584) (733) ----- ---- ------ CASH FLOWS--FINANCING Short-term borrowings--three months or less...................................... 50 12 (58) Proceeds from long-term debt.................................................... -- -- 3,260 Replacement of PepsiCo allocated debt........................................... -- -- (3,300) Net proceeds from initial public offering....................................... -- -- 2,208 Payments of long-term debt...................................................... -- (9) (90) Minority interest distribution.................................................. (16) (3) -- Dividends paid.................................................................. (12) (12) (6) Proceeds from exercise of stock options......................................... 18 -- -- Purchase of treasury stock...................................................... (249) (103) (90) Decrease in advances from PepsiCo............................................... -- -- (1,750) ----- ---- ------ NET CASH (USED FOR) PROVIDED BY FINANCING....................................... (209) (115) 174 ----- ---- ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.................... (7) (4) (5) ----- ---- ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (41) 128 154 CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR..................................... 318 190 36 ----- ---- ------ CASH AND CASH EQUIVALENTS--END OF YEAR........................................... $ 277 $318 $ 190 ===== ==== ====== SUPPLEMENTAL CASH FLOW INFORMATION NON-CASH INVESTING AND FINANCING ACTIVITIES: Liabilities incurred and/or assumed in conjunction with acquisitions of bottlers................................................................ $ 25 $ 9 $ 65
See accompanying notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 35 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED BALANCE SHEETS in millions, except per share data DECEMBER 29, 2001 AND DECEMBER 30, 2000 - --------------------------------------------------------------------------------
2001 2000 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents.................................................. $ 277 $ 318 Accounts receivable, less allowance of $42 in 2001 and 2000............... 823 796 Inventories................................................................ 331 281 Prepaid expenses and other current assets.................................. 117 189 ------ ------ TOTAL CURRENT ASSETS.................................................... 1,548 1,584 Property, plant and equipment, net......................................... 2,543 2,358 Intangible assets, net..................................................... 3,684 3,694 Other assets............................................................... 82 100 ------ ------ TOTAL ASSETS............................................................ $7,857 $7,736 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities............................. $1,004 $ 941 Short-term borrowings...................................................... 77 26 ------ ------ TOTAL CURRENT LIABILITIES............................................... 1,081 967 Long-term debt............................................................. 3,285 3,271 Other liabilities.......................................................... 550 474 Deferred income taxes...................................................... 1,021 1,072 Minority interest.......................................................... 319 306 ------ ------ TOTAL LIABILITIES....................................................... 6,256 6,090 SHAREHOLDERS' EQUITY Common stock, par value $0.01 per share: authorized 900 shares, issued 310 shares................................. 3 2 Additional paid-in capital................................................. 1,739 1,736 Retained earnings.......................................................... 649 355 Accumulated other comprehensive loss....................................... (370) (254) Treasury stock: 29 shares and 20 shares in 2001 and 2000, respectively..... (420) (193) ------ ------ TOTAL SHAREHOLDERS' EQUITY.............................................. 1,601 1,646 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $7,857 $7,736 ====== ======
See accompanying notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 36 LIQUIDITY AND FINANCIAL CONDITION - --------- --- --------- --------- LIQUIDITY AND CAPITAL RESOURCES Liquidity Prior to our Separation from PepsiCo and our Initial Public Offering We financed our capital investments and acquisitions through cash flow from operations and advances from PepsiCo prior to our separation from PepsiCo and our initial public offering. Under PepsiCo's centralized cash management system, PepsiCo deposited sufficient cash in our bank accounts to meet our daily obligations, and withdrew excess funds from those accounts. These transactions are included in decrease in advances from PepsiCo in our Consolidated Statements of Cash Flows. Liquidity After our Initial Public Offering Subsequent to our initial public offering, we have financed our capital investments and acquisitions primarily through cash flow from operations. We believe that our future cash flow from operations and borrowing capacity will be sufficient to fund capital expenditures, acquisitions, dividends and working capital requirements. Financing Transactions On February 9, 1999, $1.3 billion of 5 5/8% senior notes and $1.0 billion of 5 3/8% senior notes were issued by Bottling Group, LLC and are guaranteed by PepsiCo. On March 8, 1999, we issued $1 billion of 7% senior notes, which are guaranteed by Bottling Group, LLC. During the second quarter of 1999, we executed an interest rate swap converting 3% of our fixed-rate debt to floating-rate debt. On March 31, 1999, we offered 100 million shares of PBG common stock for sale to the public in an underwritten initial public offering generating $2.2 billion of net proceeds. The proceeds from the above financing transactions were used to repay obligations to PepsiCo and fund acquisitions. We also have a $500 million commercial paper program that is supported by a credit facility. The credit facility consists of two $250 million components, one of which expires in May 2002 and the other of which expires in April 2004. There were no borrowings outstanding under this program at December 29, 2001 or December 30, 2000. Capital Expenditures We have incurred and will continue to incur capital costs to maintain and grow our infrastructure, including acquisitions and investments in developing market opportunities. - Our business requires substantial infrastructure investments to maintain our existing level of operations and to fund investments targeted at growing our business. Capital infrastructure expenditures totaled $593 million, $515 million and $560 million during 2001, 2000 and 1999, respectively. We believe that capital infrastructure spending will continue to be significant, driven by our investments in the cold drink segment and capacity needs. - We intend to continue to pursue acquisitions of independent PepsiCo bottlers in the U.S. and Canada, particularly in territories contiguous to our own, where they create shareholder value. These acquisitions will enable us to provide better service to our large retail customers, as well as to reduce costs through economies of scale. We also plan to evaluate international acquisition opportunities as they become available. Cash spending on acquisitions was $120 million, $26 million and $176 million in 2001, 2000 and 1999, respectively. CASH FLOWS Fiscal 2001 Compared to Fiscal 2000 Operating free cash flow grew $22 million from $273 million in 2000 to $295 million in 2001. Operating free cash flow is defined as net cash provided by operations less net cash used for investments, excluding cash used for the acquisitions of bottlers. Net cash provided by operating activities increased $174 million to $1,005 million in 2001, driven by strong EBITDA growth and the timing of casualty insurance payments, partially offset by higher net working capital due to growth in our business. Net cash used for investments increased by $246 million from $584 million in 2000 to $830 million in 2001, primarily due to acquisition spending and increased capital expenditures, which were driven by increases in the U.S. associated with our cold drink strategy. Also contributing to the increase were significantly higher pension contribution payments in 2001. Net cash used for financing increased by $94 million to $209 million in 2001. This increase primarily reflects our share repur- 37 chase program offset by higher short-term borrowings outside the U.S. and proceeds from stock option exercises. Fiscal 2000 Compared to Fiscal 1999 Operating free cash flow grew $112 million, or 70%, to $273 million in 2000. Net cash provided by operating activities increased $113 million to $831 million in 2000, driven by strong EBITDA growth partially offset by the timing of casualty insurance payments in 2000, which significantly contributed to our unfavorable change in operating working capital. Net cash used for investments decreased by $149 million from $733 million in 1999 to $584 million in 2000, primarily due to acquisition spending, which was $150 million lower in 2000. Capital expenditures decreased by $45 million, or 8%, as increases in the U.S. associated with our cold drink strategy were offset by decreases outside the United States. Net cash (used for) provided by financing decreased from a source of cash of $174 million in 1999 to a use of cash of $115 million in 2000. This decrease resulted from net cash received from initial public offering activities in 1999 coupled with an increase of $13 million of share repurchases in 2000. MARKET RISKS AND CAUTIONARY STATEMENTS - -------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the financial position of the company routinely is subject to a variety of risks. These risks include the risk associated with the price of commodities purchased and used in our business, interest rate on outstanding debt and currency movements of non-U.S. dollar denominated assets and liabilities. We are also subject to the risks associated with the business environment in which we operate, including the collectibility of accounts receivable. We regularly assess all of these risks and have policies and procedures in place to protect against the adverse effects of these exposures. Our objective in managing our exposure to fluctuations in commodity prices, interest rates, and foreign currency exchange rates is to minimize the volatility of earnings and cash flows associated with changes in the applicable rates and prices. To achieve this objective, we primarily enter into commodity forward contracts, commodity futures and options on futures contracts and interest rate swaps. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use. A sensitivity analysis has been prepared to determine the effects that market risk exposures may have on the fair values of our debt and other financial instruments. To perform the sensitivity analysis, we assessed the risk of loss in fair values from the hypothetical changes in commodity prices, interest rates, and foreign currency exchange rates on market-sensitive instruments. Information provided by this sensitivity analysis does not necessarily represent the actual changes in fair value that we would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor were held constant. In addition, the results of the analysis are constrained by the fact that certain items are specifically excluded from the analysis, while the financial instruments that relate to the financing or hedging of those items are included. As a result, the reported changes in the values of some financial instruments that affect the results of the sensitivity analysis are not matched with the offsetting changes in the values of the items that those instruments are designed to finance or hedge. The results of the sensitivity analysis at December 29, 2001 are as follows: Commodity Price Risk We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. We use futures contracts and options on futures in the normal course of business to hedge anticipated purchases of aluminum and fuel used in our operations. With respect to commodity price risk, we currently have various contracts outstanding for aluminum and fuel oil purchases in 2002, which establish our purchase price within defined ranges. These contracts have notional amounts of $573 million and $557 million at December 29, 2001 and December 30, 2000, respectively. These notional amounts do not represent amounts exchanged by 38 the parties and thus are not a measure of our exposure; rather, they are used as a basis to calculate the amounts due under the agreements. We estimate that a 10% decrease in commodity prices with all other variables held constant would have resulted in a decrease in the fair value of our financial instruments of $15 million and $18 million at December 29, 2001 and December 30, 2000, respectively. Interest Rate Risk The fair value of our fixed-rate long-term debt is sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the fair market value of our debt representing differences between market interest rates and the fixed rate on the debt. With respect to this market risk, we currently have an interest rate swap converting 3% of our fixed-rate debt to floating-rate debt. This interest rate swap has a notional value of $100 million at December 29, 2001 and December 30, 2000. We estimate that a 10% decrease in interest rates with all other variables held constant would have resulted in a net increase in the fair value of our financial instruments, both our fixed rate debt and our interest rate swap, of $144 million and $158 million at December 29, 2001 and December 30, 2000, respectively. Foreign Currency Exchange Rate Risk In 2001, approximately 15% of our net revenues came from Canada, Spain, Greece and Russia. Social, economic, and political conditions in these international markets may adversely affect our results of operations, cash flows, and financial condition. The overall risks to our international businesses include changes in foreign governmental policies, and other political or economic developments. These developments may lead to new product pricing, tax or other policies, and monetary fluctuations which may adversely impact our business. In addition, our results of operations and the value of the foreign assets are affected by fluctuations in foreign currency exchange rates. As currency exchange rates change, translation of the statements of operations of our businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We have not hedged currency risks because cash flows from international operations have generally been reinvested locally, nor historically have we entered into hedges to minimize the volatility of reported earnings. We estimate that a 10% change in foreign exchange rates with all other variables held constant would have affected reported income before income taxes by less than $30 million in 2001 and 2000. Foreign currency gains and losses reflect translation gains and losses arising from the re-measurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries and transaction gains and losses. Russia is considered a highly inflationary economy for accounting purposes. EURO We have successfully executed our plans to address the issues raised by the Euro currency conversion. These issues include, among others, the need to adapt computer and financial systems, business processes and equipment, such as vending machines, to accommodate Euro-denominated transactions and the impact of one common currency on cross-border pricing. We have experienced no business interruption as a result of the issuance and circulation of Euro-denominated bills and coins beginning January 1, 2002. Our financial systems and processes have been successfully converted to accommodate the Euro. Due to numerous uncertainties, we cannot reasonably estimate the long-term effects one common currency may have on pricing, costs and the resulting impact, if any, on the financial condition or results of operations. CAUTIONARY STATEMENTS Except for the historical information and discussions contained herein, statements contained in this annual report on Form 10-K may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available competitive, financial and economic data and PBG's operating plans. These statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different. Among the events and uncertainties that could adversely affect future periods are lower-than-expected net pricing resulting from marketplace competition, material changes from expectations in the cost of raw materials and ingredients, an inability to achieve the expected timing for returns on cold drink equipment and related infrastructure expenditures, material changes in expected levels of marketing support payments from PepsiCo, an inability to meet projections for performance in newly acquired territories, and unfavorable interest rate and currency fluctuations. 39 THE PEPSI BOTTLING GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY in millions FISCAL YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999 - --------------------------------------------------------------------------------
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE STOCK CAPITAL EARNINGS LOSS STOCK TOTAL INCOME/(LOSS) ----- ------- -------- ---- ----- ----- ------------- BALANCE AT DECEMBER 26, 1998.................... $-- $ -- $ -- $(238) $ -- $(238) Comprehensive income: Net loss before IPO....................... -- -- -- -- -- -- $(29) Net income after IPO...................... -- -- 147 -- -- 147 147 Currency translation adjustment........... -- -- -- (4) -- (4) (4) Minimum pension liability adjustment...... -- -- -- 19 -- 19 19 ---- Total comprehensive income................... $133 ==== Initial public offering: 100 shares net of settlement of advances from PepsiCo....... 2 1,736 -- -- -- 1,738 Treasury stock transactions, net: 5 shares... -- -- -- -- (90) (90) Cash dividends declared on common stock...... -- -- (9) -- -- (9) ---- ------ ---- ----- ------- ------ BALANCE AT DECEMBER 25, 1999.................... 2 1,736 138 (223) (90) 1,563 Comprehensive income: Net income................................ -- -- 229 -- -- 229 $229 Currency translation adjustment........... -- -- -- (31) -- (31) (31) ---- Total comprehensive income................... $198 ==== Treasury stock transactions, net: 5 shares... -- -- -- -- (103) (103) Cash dividends declared on common stock...... -- -- (12) -- -- (12) ---- ------ ---- ----- ------- ------ BALANCE AT DECEMBER 30, 2000.................... 2 1,736 355 (254) (193) 1,646 Comprehensive income: Net income................................ -- -- 305 -- -- 305 $305 Currency translation adjustment........... -- -- -- (49) -- (49) (49) FAS 133 adjustment...................... -- -- -- (12) -- (12) (12) Minimum pension liability adjustment.... -- -- -- (55) -- (55) (55) ---- Total comprehensive income................... $189 ==== Stock split: (shares: 145 outstanding - 9 treasury)................................. 1 (1) -- -- -- -- Stock option exercises: 2 shares............. -- (4) -- -- 22 18 Tax benefit - stock option exercises......... -- 8 -- -- -- 8 Purchase of treasury stock: 12 shares........ -- -- -- -- (249) (249) Cash dividends declared on common stock...... -- -- (11) -- -- (11) ---- ------ ---- ----- ------- ------ BALANCE AT DECEMBER 29, 2001.................... $ 3 $1,739 $649 $(370) $ (420) $1,601 === ====== ==== ===== ======= ======
See accompanying notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Tabular dollars in millions, except per share data - -------------------------------------------------------------------------------- NOTE 1--BASIS OF PRESENTATION The Pepsi Bottling Group, Inc. ("PBG") consists of bottling operations located in the United States, Canada, Spain, Greece and Russia. These bottling operations manufacture, sell and distribute Pepsi-Cola beverages including Pepsi-Cola, Diet Pepsi, Mountain Dew and other brands of carbonated soft drinks and ready-to-drink beverages. Approximately 90% of PBG's 2001 net revenues were derived from the sale of Pepsi-Cola beverages. References to PBG throughout these Consolidated Financial Statements are made using the first-person notations of "we," "our" and "us." Prior to our formation, we were an operating unit of PepsiCo, Inc. ("PepsiCo"). On March 31, 1999, we offered 100 million shares of PBG common stock for sale at $23 per share in an initial public offering generating $2.2 billion in net proceeds. These proceeds were used to fund acquisitions and repay obligations to PepsiCo. On November 27, 2001, our shareholders approved an amendment to our Certificate of Incorporation increasing the authorized shares of PBG common stock from 300 million to 900 million facilitating a two-for-one stock split of issued common stock. The stock split was effected in the form of a 100% stock dividend paid to our shareholders of record on November 27, 2001. As a result of the stock split, the accompanying Consolidated Financial Statements reflect an increase in the number of outstanding shares of common stock and shares of treasury stock and the transfer of the par value of these incremental shares from additional paid-in capital. All PBG share and per share data have been restated to reflect the split except for discussions of our capitalization. Subsequent to the offering and the stock split, PepsiCo owned and continues to own 106,011,358 shares of common stock, consisting of 105,911,358 shares of common stock and 100,000 shares of Class B common stock. PepsiCo's ownership at December 29, 2001, represents 37.7% of the outstanding common stock and 100% of the outstanding Class B common stock, together representing 42.8% of the voting power of all classes of our voting stock. PepsiCo also owns 7% of the equity of Bottling Group, LLC, our principal operating subsidiary, as of December 29, 2001. The common shares and Class B common shares are substantially identical, except for voting rights. Holders of our common stock are entitled to one vote per share and holders of our Class B common stock are entitled to 250 votes per share. Each share of Class B common stock held by PepsiCo is, at PepsiCo's option, convertible into one share of common stock. Holders of our common stock and holders of our Class B common stock share equally on a per share basis in any dividend distributions. The accompanying Consolidated Financial Statements include information that has been presented on a "carve-out" basis for the period prior to our initial public offering. This information includes the historical results of operations and assets and liabilities directly related to PBG, and has been prepared from PepsiCo's historical accounting records. Certain estimates, assumptions and allocations were made in determining such financial statement information. Therefore, these Consolidated Financial Statements may not necessarily be indicative of the results of operations, financial position or cash flows that would have existed had we been a separate, independent company from the first day of fiscal year 1999. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. NEW ACCOUNTING STANDARDS During 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 141, "Business Combinations," which requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001, and SFAS 142, "Goodwill and Other Intangible Assets," which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment. Effective the first day of fiscal year 2002, we will no longer amortize goodwill and certain franchise rights, but will evaluate them for impairment annually. We have completed the initial impairment review required by SFAS 142 and have determined that our intangible assets are not impaired. The adoption of SFAS 142 will reduce our fiscal year 2002 amortization expense by approximately $128 million, or $0.31 per diluted share, based on the weighted-average number of diluted shares outstanding as of December 29, 2001. In addition, during 2001 the FASB also issued SFAS 143, "Accounting for Asset Retirement Obligations" and SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that we recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS 144 superseded SFAS 121, "Accounting for the Impairment of Long-Lived Assets 41 and for Long-Lived Assets to Be Disposed Of," and Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for the impairment of long-lived assets and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 143 is effective for fiscal year 2003 and SFAS 144 is effective for fiscal year 2002 and we do not anticipate that the adoption of these statements will have a material impact on our Consolidated Financial Statements. During 2000 and 2001, the Emerging Issues Task Force ("EITF") addressed various issues related to the income statement classification of certain promotional payments. In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for Certain Sales Incentives," addressing the recognition and income statement classification of various sales incentives. Among its requirements, the consensus will require the costs related to consumer coupons currently classified as marketing costs to be classified as a reduction of revenue. In January 2001, the EITF reached a consensus on Issue 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future." EITF 00-22 requires that certain volume-based cash rebates to customers currently recognized as marketing costs be classified as a reduction of revenue. In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF 00-25 addresses the income statement classification of consideration, other than that directly addressed in EITF 00-14, from a vendor to a reseller or another party that purchases the vendor's products. In November 2001, the EITF codified Issues 00-14, 00-22 and 00-25 as Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." EITF 00-22 was effective for the first quarter of 2001 and was not material to our Consolidated Financial Statements. The remainder of EITF 01-9 is effective for 2002 and we do not anticipate that the adoption will have a material impact on our Consolidated Financial Statements. Our Consolidated Financial Statements reflect the implementation of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, on the first day of fiscal year 2001. SFAS 133, which was issued in 1998, establishes accounting and reporting standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts, which are collectively referred to as derivatives. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. BASIS OF CONSOLIDATION The accounts of all of our wholly and majority-owned subsidiaries are included in the accompanying Consolidated Financial Statements. We have eliminated intercompany accounts and transactions in consolidation. FISCAL YEAR Our fiscal year ends on the last Saturday in December and, as a result, a 53rd week is added every five or six years. Fiscal years 2001 and 1999 consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. REVENUE RECOGNITION We recognize revenue when our products are delivered to customers. Sales terms do not allow a right of return unless product freshness dating has expired. Reserves for returned product were $4 million, $3 million and $2 million at fiscal years ended 2001, 2000 and 1999, respectively. ADVERTISING AND MARKETING COSTS We are involved in a variety of programs to promote our products. We include advertising and marketing costs in selling, delivery and administrative expenses and expense such costs in the year incurred. Advertising and marketing costs were $389 million, $350 million and $342 million in 2001, 2000 and 1999, respectively. BOTTLER INCENTIVES PepsiCo and other brand owners, at their sole discretion, provide us with various forms of marketing support. This marketing support is intended to cover a variety of programs and initiatives, including direct marketplace support, capital equipment funding and shared media, and advertising support. Based on the objective of the programs and initiatives, we record marketing support as an adjustment to net revenues or as a reduction of selling, delivery and administrative expenses. Direct marketplace support is primarily funding by PepsiCo and other brand owners of sales discounts and similar programs and is recorded as an adjustment to net revenues. Capital equipment funding is designed to support the purchase and placement of marketing equipment and is recorded as a reduction of selling, delivery and administrative expenses. Shared media and advertising support is recorded as a reduction to advertising and marketing expense within selling, delivery and administrative expenses. There are no conditions or other requirements that could result in a repayment of marketing support received. The total bottler incentives we received from PepsiCo and other brand owners were $598 million, $566 million and $563 million for 2001, 2000 and 1999, respectively. Of these amounts, we recorded $293 million, $277 million and $263 million for 2001, 2000 and 1999, respectively, in net revenues, and the remainder as a reduction of selling, delivery and administrative expenses. The amount of our bottler incentives received from PepsiCo was 42 more than 90% of our bottler incentives in each of the three years, with the balance received from the other brand owners. SHIPPING AND HANDLING COSTS We record shipping and handling costs within selling, delivery and administrative expenses. Such costs totaled $947 million, $925 million and $915 million in 2001, 2000 and 1999, respectively. FOREIGN CURRENCY GAINS AND LOSSES We translate the balance sheets of our foreign subsidiaries that do not operate in highly inflationary economies at the exchange rates in effect at the balance sheet date, while we translate the statements of operations at the average rates of exchange during the year. The resulting translation adjustments of our foreign subsidiaries are recorded directly to accumulated other comprehensive loss. Foreign currency gains and losses reflect translation gains and losses arising from the re-measurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries and transaction gains and losses. Russia is considered a highly inflationary economy for accounting purposes. INCOME TAXES Our effective tax rate and the tax bases of our assets and liabilities reflect our best estimate of the ultimate outcome of our tax audits. Valuation allowances are established where expected future taxable income does not support the recognition of the related deferred tax asset. EARNINGS PER SHARE We compute basic earnings per share by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock that would then participate in net income. CASH EQUIVALENTS Cash equivalents represent funds we have temporarily invested with original maturities not exceeding three months. ALLOWANCE FOR DOUBTFUL ACCOUNTS We determine our allowance for doubtful accounts based on an evaluation of the aging of our receivable portfolio. Our reserve contemplates our historical loss rate on receivables and the economic environment in which we operate. INVENTORIES We value our inventories at the lower of cost computed on the first-in, first-out method or net realizable value. PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment ("PP&E") at cost, except for PP&E that has been impaired, for which we write down the carrying amount to estimated fair-market value, which then becomes the new cost basis. INTANGIBLE ASSETS Identifiable intangible assets arise principally from the allocation of the purchase price of businesses acquired, and consist primarily of territorial franchise rights. Our franchise rights are typically perpetual in duration, subject to compliance with the underlying franchise agreement. We assign amounts to such identifiable intangibles based on their estimated fair value at the date of acquisition. Goodwill represents the residual purchase price after allocation to all identifiable net assets. Identifiable intangible assets are evaluated at the date of acquisition and amortized on a straight-line basis over their estimated useful lives, which in most cases is from 20-40 years the maximum period permitted by GAAP. RECOVERABILITY OF LONG-LIVED ASSETS We review all long-lived assets, including intangible assets, when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, we write down an impaired asset to its estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows, which are discounted based on our weighted-average cost of capital. Accordingly, actual results could vary significantly from such estimates. MINORITY INTEREST PBG and PepsiCo contributed bottling businesses and assets used in the bottling businesses to Bottling Group, LLC, our principal operating subsidiary, in connection with the formation of Bottling Group, LLC. As a result of the contribution of these assets, PBG owns 93% of Bottling Group, LLC and PepsiCo owns the remaining 7%. Accordingly, the Consolidated Financial Statements reflect PepsiCo's share of consolidated net income of Bottling Group, LLC as minority interest in our Consolidated Statements of Operations, and PepsiCo's share of consolidated net assets of Bottling Group, LLC as minority interest in our Consolidated Balance Sheets. TREASURY STOCK We record the repurchase of shares of our common stock at cost and classify these shares as treasury stock within shareholders' equity. Repurchased shares are included in our authorized and issued shares but not included in our shares outstanding. We record shares reissued using an average cost. Since our initial public offering, shares issued and outstanding reflect the effect of our share repurchase program, which began in October 1999. In the second quarter of 2001, the Board of Directors authorized the repurchase of 10 million shares of common stock, increasing the cumulative amount of shares that can be repurchased to 25 million shares. As a result of our stock split in November of 2001, the amount of shares authorized by the 43 Board of Directors to be repurchased now totals 50 million shares. Share repurchases were approximately 12 million in 2001 for $249 million and approximately 9 million in 2000 for $103 million. We have repurchased approximately 31 million shares since the inception of our program and have reissued approximately 2 million for stock option exercises. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT We use derivative instruments to hedge against the risk of adverse movements in the price of certain commodities and fuel used in our operations. Our use of derivative instruments is limited to interest rate swaps, forward contracts, futures and options on futures contracts. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use. All derivative instruments are recorded at fair value as either assets or liabilities in our Consolidated Balance Sheets. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability ("fair value hedge") or a hedge of a forecasted transaction ("cash flow hedge"). For a fair value hedge, both the effective and ineffective portions of the change in fair value of the derivative instrument, along with an adjustment to the carrying amount of the hedged item for fair value changes attributable to the hedged risk, are recognized in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument that are highly effective are deferred in accumulated other comprehensive loss until the underlying hedged item is recognized in earnings. The ineffective portion of fair value changes on qualifying hedges is recognized in earnings immediately and is recorded consistent with the expense classification of the underlying hedged item. If a fair value or cash flow hedge were to cease to qualify for hedge accounting or be terminated, it would continue to be carried on the balance sheet at fair value until settled but hedge accounting would be discontinued prospectively. If a forecasted transaction were no longer probable of occurring, amounts previously deferred in accumulated other comprehensive loss would be recognized immediately in earnings. On occasion, we may enter into a derivative instrument for which hedge accounting is not required because it is entered into to offset changes in the fair value of an underlying transaction recognized in earnings ("natural hedge"). These instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings. STOCK-BASED EMPLOYEE COMPENSATION We measure stock-based compensation expense in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, compensation expense for stock option grants to PBG employees is measured as the excess of the quoted market price of common stock at the grant date over the amount the employee must pay for the stock. Our policy is to grant stock options at fair value on the date of grant. COMMITMENTS AND CONTINGENCIES We are subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. Liabilities related to commitments and contingencies are recognized when a loss is probable and reasonably estimable. RECLASSIFICATIONS Certain reclassifications were made in our Consolidated Financial Statements to 2000 and 1999 amounts to conform with the 2001 presentation. NOTE 3--COMPARABILITY OF RESULTS Stock Split On November 27, 2001, our shareholders approved an amendment to our Certificate of Incorporation increasing the authorized shares of PBG common stock from 300 million to 900 million facilitating a two-for-one stock split of issued common stock. The stock split was effected in the form of a 100% stock dividend paid to our shareholders of record on November 27, 2001. As a result of the stock split, the accompanying Consolidated Financial Statements reflect an increase in the number of outstanding shares of common stock and shares of treasury stock and the transfer of the par value of these incremental shares from additional paid-in capital. All PBG share and per share data have been restated to reflect the split except for discussions of our capitalization. Asset Lives At the beginning of fiscal year 2000, we changed the estimated useful lives of certain categories of assets primarily to reflect the success of our preventive maintenance programs in extending the useful lives of these assets. The changes, which are detailed in the table below, lowered total depreciation cost by approximately $69 million, or $0.13 per diluted share in 2000. In 2001, we are utilizing the same asset lives as in 2000.
Estimated Useful Lives ---------------------- (in years) ---------- 2000 1999 ---- ---- Manufacturing equipment......................................... 15 10 Heavy fleet..................................................... 10 8 Fountain dispensing equipment................................... 7 5 Small specialty coolers and specialty marketing equipment....... 3 5 to 7
44 Fiscal Year Our fiscal year ends on the last Saturday in December and, as a result, a 53rd week is added every five or six years. Fiscal years 2001 and 1999 consisted of 52 weeks while fiscal year 2000 consisted of 53 weeks. The extra week in 2000 contributed approximately $0.02 of additional diluted earnings per share to our 2000 operating results. Initial Public Offering For the period prior to our initial public offering, we prepared our Consolidated Financial Statements as a "carve-out" from the financial statements of PepsiCo using the historical results of operations and assets and liabilities of our business. Certain costs reflected in the Consolidated Financial Statements may not necessarily be indicative of the costs that we would have incurred had we operated as an independent, stand-alone entity from the first day of fiscal year 1999. These costs include an allocation of PepsiCo's corporate overhead and interest expense, and income taxes: - We included overhead related to PepsiCo's corporate administrative functions based on a specific identification of PepsiCo's administrative costs relating to the bottling operations and, to the extent that such identification was not practicable, based upon the percentage of our revenues to PepsiCo's consolidated net revenues. These costs are included in selling, delivery and administrative expenses in our Consolidated Statements of Operations. - We allocated $3.3 billion of PepsiCo's debt to our business and charged interest expense on this debt using PepsiCo's weighted-average interest rate. Once we issued $3.3 billion of third-party debt in the first quarter of 1999, our actual interest rates were used to determine interest expense for the remainder of the year. - We reflected income tax expense in the Consolidated Financial Statements as if we had actually filed a separate income tax return. The amounts of the historical allocations described above are as follows:
1999 ----- Corporate overhead expense................................................. $ 3 Interest expense........................................................... $ 28 PepsiCo's weighted-average interest rate................................... 5.8%
In addition, our historical capital structure is not representative of our current structure due to our initial public offering. In 1999, immediately preceding the offering, we had 55 million shares of common stock outstanding. In connection with the offering, we sold 100 million shares to the public. NOTE 4--UNUSUAL IMPAIRMENT AND OTHER CHARGES AND CREDITS Our operating results were affected by the following unusual charges and credits:
1999 ----- Non-cash compensation charge............................................... $ 45 Vacation policy change..................................................... (53) Asset impairment and restructuring charges................................. (8) ---- $(16) ==== After minority interest and income taxes................................... $ (9) ====
- - Non-cash Compensation Charge In connection with the completion of our initial public offering, PepsiCo vested substantially all non-vested PepsiCo stock options held by our employees. As a result, we incurred a $45 million non-cash compensation charge in the second quarter of 1999, equal to the difference between the market price of the PepsiCo capital stock and the exercise price of these options at the vesting date. - - Vacation Policy Change As a result of changes to our employee benefit and compensation plans in 1999, employees now earn vacation time evenly throughout the year based upon service rendered. Previously, employees were fully vested at the beginning of each year. As a result of this change, we reversed an accrual of $53 million into income in 1999. - - Asset Impairment and Restructuring Charges In the fourth quarter of 1999, $8 million of the remaining restructuring reserve recorded in 1998, relating to an asset impairment and restructuring in our Russian operations, was reversed into income. The reversal was necessitated as actual costs incurred to renegotiate manufacturing and leasing contracts in Russia and to reduce the number of employees were less than the amounts originally estimated. 45 NOTE 5--INVENTORIES
2001 2000 ----- ----- Raw materials and supplies................................................................. $ 117 $ 107 Finished goods............................................................................. 214 174 ----- ----- $ 331 $ 281 ===== =====
NOTE 6--PROPERTY, PLANT AND EQUIPMENT, NET
2001 2000 ------- ------- Land....................................................................................... $ 145 $ 145 Buildings and improvements................................................................. 925 903 Manufacturing and distribution equipment................................................... 2,308 2,169 Marketing equipment........................................................................ 1,846 1,745 Other...................................................................................... 121 106 ------- ------- 5,345 5,068 Accumulated depreciation................................................................... (2,802) (2,710) ------- ------- $ 2,543 $ 2,358 ======= =======
We calculate depreciation on a straight-line basis over the estimated lives of the assets as follows: Buildings and improvements................................ 20-33 years Manufacturing equipment................................... 15 years Distribution equipment.................................... 5-10 years Marketing equipment....................................... 3-7 years
NOTE 7--INTANGIBLE ASSETS, NET
2001 2000 ------- ------- Franchise rights and other identifiable intangibles........................................ $ 3,636 $ 3,557 Goodwill................................................................................... 1,574 1,591 ------- ------- 5,210 5,148 Accumulated amortization................................................................... (1,526) (1,454) ------- ------- $ 3,684 $ 3,694 ======= =======
NOTE 8--ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
2001 2000 ------ ---- Accounts payable.................................................................................... $ 362 $344 Trade incentives........................................................................... 205 206 Accrued compensation and benefits.......................................................... 141 147 Accrued interest........................................................................... 71 71 Accounts payable to PepsiCo................................................................ 17 -- Other current liabilities.................................................................. 208 173 ------ ---- $1,004 $941 ====== ====
NOTE 9--SHORT-TERM BORROWINGS AND LONG-TERM DEBT
2001 2000 ---- ---- Short-term borrowings Current maturities of long-term debt.................................................... $ 3 $ 1 Other short-term borrowings............................................................. 74 25 ---- ---- $ 77 $ 26 ==== ====
Long-term debt 5 5/8% senior notes due 2009............................................................ $1,300 $1,300 5 3/8% senior notes due 2004............................................................ 1,000 1,000 7% senior notes due 2029................................................................ 1,000 1,000
Other................................................................................... 18 6 ------ ------ 3,318 3,306 Less: Unamortized discount.............................................................. 30 34 Current maturities of long-term debt.............................................. 3 1 ------ ------ $3,285 $3,271 ====== ======
Maturities of long-term debt as of December 29, 2001 are 2002: $3 million, 2003: $3 million, 2004: $1,008 million, 2005: $0, 2006: $0 and thereafter, $2,304 million. The $1.3 billion of 5 5/8% senior notes and the $1.0 billion of 5 3/8% senior notes were issued on February 9, 1999, by our subsidiary Bottling Group, LLC and are guaranteed by PepsiCo. We issued the $1.0 billion of 7% senior notes, which are guaranteed by Bottling Group, LLC, on March 8, 1999. During the second quarter of 1999 we executed an interest rate swap converting 3% of our fixed-rate debt to floating-rate debt. We allocated $3.3 billion of PepsiCo's long-term debt in our financial statements prior to issuing the senior notes referred to above. Our interest expense includes the related allocated interest expense of $28 million in 1999, and is based on PepsiCo's weighted-average interest rate of 5.8% in 1999. We also have a $500 million commercial paper program that is supported by a credit facility. The credit facility consists of two $250 million components, one of which expires in May 2002 and the other of which expires in April 2004. There were no borrowings outstanding under this program at December 29, 2001 or December 30, 2000. We have available short-term bank credit lines of approximately $177 million and $135 million at December 29, 2001 and December 30, 2000, respectively. These lines are used to support the general operating needs of our businesses outside the United States. The weighted-average interest rate for these lines of credit outstanding at December 29, 2001 and December 30, 2000 was 4.3% and 8.9%, respectively. 46 Amounts paid to third parties for interest were $191 million, $202 million and $108 million in 2001, 2000 and 1999, respectively. In 1999, allocated interest expense was deemed to have been paid to PepsiCo, in cash, in the period in which the cost was incurred. NOTE 10--LEASES We have noncancellable commitments under both capital and long-term operating leases. Capital and operating lease commitments expire at various dates through 2021. Most leases require payment of related executory costs, which include property taxes, maintenance and insurance. Our future minimum commitments under noncancellable leases are set forth below:
COMMITMENTS --------------------- CAPITAL OPERATING ------- --------- 2002........................................................................ $-- $ 22 2003........................................................................ -- 20 2004........................................................................ -- 17 2005........................................................................ -- 16 2006........................................................................ -- 14 Later years................................................................. 3 82 --- ---- $ 3 $171 === ====
At December 29, 2001, the present value of minimum payments under capital leases was $1 million, after deducting $2 million for imputed interest. Our rental expense was $40 million, $42 million and $55 million for 2001, 2000 and 1999, respectively. NOTE 11--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT These Consolidated Financial Statements reflect the implementation of SFAS 133, as amended by SFAS 138, on the first day of fiscal year 2001. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts, which are collectively referred to as derivatives. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. In June 2000, the FASB issued SFAS 138, amending the accounting and reporting standards of SFAS 133. Prior to the adoption of SFAS 133, there were no deferred gains or losses from our hedging activities recorded in our Consolidated Financial Statements. The adoption of these statements resulted in the recording of a deferred gain in our Consolidated Balance Sheets, which was recorded as an increase to current assets of $4 million and a reduction of other comprehensive loss of $4 million. Furthermore, the adoption had no impact on our Consolidated Statement of Operations. As of December 29, 2001, our use of derivative instruments is limited to an interest rate swap, forward contracts, futures and options on futures contracts. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use. CASH FLOW HEDGE We are subject to market risk with respect to the cost of commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. We use futures contracts and options on futures in the normal course of business to hedge the risk of adverse movements in commodity prices related to anticipated purchases of aluminum and fuel used in our operations. These contracts, which generally range from 1 to 12 months in duration, establish our commodity purchase prices within defined ranges in an attempt to limit our purchase price risk resulting from adverse commodity price movements and are designated as and qualify for cash flow hedge accounting treatment. In 2001, the amount of deferred losses from our commodity hedging that we recognized into income was $4 million. At December 29, 2001 a $19 million deferred loss remained in accumulated other comprehensive loss in our Consolidated Balance Sheets resulting from our commodity hedges. We anticipate that this loss, which is $12 million on an after-tax basis, will be recognized in cost of sales in our Consolidated Statements of Operations over the next 12 months. The ineffective portion of the change in fair value of these contracts was not material to our results of operations in 2001. FAIR VALUE HEDGES We finance a portion of our operations through fixed-rate debt instruments. At December 29, 2001 our debt instruments primarily consisted of $3.3 billion of fixed-rate long-term senior notes, 3% of which we converted to floating rate debt through the use of an interest rate swap with the objective of reducing our overall borrowing costs. This interest rate swap, which expires in 2004, is designated as and qualifies for fair value hedge accounting and is 100% effective in eliminating the interest rate risk inherent in our long-term debt as the notional amount, interest payment, and maturity date of the swap matches the notional amount, interest payment and matu- 47 rity date of the related debt. Accordingly, any market risk or opportunity associated with this swap is fully offset by the opposite market impact on the related debt. The change in fair value of the interest rate swap was a gain of $7 million in 2001. The fair value change was recorded in interest expense, net in our Consolidated Statements of Operations and in prepaid expenses and other current assets in our Consolidated Balance Sheets. An offsetting adjustment was recorded in interest expense, net in our Consolidated Statements of Operations and in long-term debt in our Consolidated Balance Sheets representing the change in fair value in long-term debt. EQUITY DERIVATIVES We use equity derivative contracts with financial institutions to hedge a portion of our deferred compensation liability, which is based on our stock price. These prepaid forward contracts for the purchase of PBG common stock are accounted for as natural hedges. The earnings impact from these hedges is classified as selling, delivery and administrative expenses consistent with the expense classification of the underlying hedged item. FAIR VALUE Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The carrying value of these financial assets and liabilities approximates fair value due to the short maturity of our financial assets and liabilities, and since interest rates approximate fair value for short-term debt. Long-term debt at December 29, 2001 had a carrying value and fair value of $3.3 billion and $3.4 billion, respectively, and at December 30, 2000 had a carrying value and fair value of $3.3 billion and $3.2 billion, respectively. NOTE 12--PENSION AND POSTRETIREMENT BENEFIT PLANS PENSION BENEFITS Our U.S. employees participate in noncontributory defined benefit pension plans, which cover substantially all full-time salaried employees, as well as most hourly employees. Benefits generally are based on years of service and compensation, or stated amounts for each year of service. All of our qualified plans are funded and contributions are made in amounts not less than minimum statutory funding requirements and not more than the maximum amount that can be deducted for U.S. income tax purposes. Our net pension expense for the defined benefit pension plans for our operations outside the U.S. was not significant. POSTRETIREMENT BENEFITS Our postretirement plans provide medical and life insurance benefits principally to U.S. retirees and their dependents. Employees are eligible for benefits if they meet age and service requirements and qualify for retirement benefits. The plans are not funded and since 1993 have included retiree cost sharing.
PENSION ---------------------------- Components of net periodic benefit costs: 2001 2000 1999 - ----------------------------------------- ---- ---- ---- Service cost.................................................... $ 28 $ 27 $ 30 Interest cost................................................... 50 49 42 Expected return on plan assets.................................. (60) (56) (49) Amortization of net loss........................................ -- -- 4 Amortization of prior service amendments........................ 4 5 5 ---- ---- ---- Net periodic benefit costs...................................... $ 22 $ 25 $ 32 ==== ==== ====
POSTRETIREMENT ---------------------------- Components of net periodic benefit costs: 2001 2000 1999 - ----------------------------------------- ---- ---- ---- Service cost.................................................... $ 3 $ 3 $ 4 Interest cost................................................... 16 14 12 Amortization of net loss........................................ 1 1 -- Amortization of prior service amendments........................ (6) (6) (5) ----- ----- ---- Net periodic benefit costs...................................... $ 14 $ 12 $ 11 ===== ===== ====
We amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits.
PENSION POSTRETIREMENT ----------------- ----------------- Changes in the benefit obligation: 2001 2000 2001 2000 - ---------------------------------- ---- ---- ----- ---- Obligation at beginning of year.................................. $ 664 $ 647 $ 212 $ 206 Service cost..................................................... 28 27 3 3 Interest cost.................................................... 50 49 16 14 Plan amendments.................................................. 10 4 -- (10) Actuarial loss/(gain)............................................ 48 (19) 14 11 Benefit payments................................................. (40) (40) (17) (12) Acquisitions and other........................................... -- (4) -- -- ----- ----- ----- ----- Obligation at end of year........................................ $ 760 $ 664 $ 228 $ 212 ===== ===== ===== =====
48
PENSION POSTRETIREMENT ----------------- ----------------- Changes in the fair value of assets: 2001 2000 2001 2000 - ------------------------------------ ---- ---- ----- ---- Fair value at beginning of year.................................. $ 665 $ 597 $ -- $ -- Actual (loss)/gain on plan assets................................ (117) 96 -- -- Employer contributions........................................... 70 16 17 12 Benefit payments................................................. (40) (40) (17) (12) Acquisitions and other........................................... -- (4) -- -- ----- ----- ----- ---- Fair value at end of year........................................ $ 578 $ 665 $ -- $ -- ===== ===== ===== ====
Selected information for the plans with accumulated benefit obligations in excess of plan assets:
PENSION POSTRETIREMENT ----------------- ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- Projected benefit obligation........................................ $ 760 $ 31 $228 $212 Accumulated benefit obligation...................................... 690 14 228 212 Fair value of plan assets........................................... 604 -- -- --
Funded status recognized on the Consolidated Balance Sheets:
PENSION POSTRETIREMENT ----------------- ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- Funded status at end of year........................................ $(182) $ 1 $(228) $(212) Unrecognized prior service cost..................................... 36 31 (16) (21) Unrecognized loss/(gain)............................................ 153 (73) 57 45 Unrecognized transition asset....................................... (1) (1) -- -- Fourth quarter employer contributions............................... 26 10 5 7 ----- ----- ----- ----- Net amounts recognized.............................................. $ 32 $(32) $(182) $(181) ===== ==== ===== =====
Net amounts recognized in the Consolidated Balance Sheets:
PENSION POSTRETIREMENT ----------------- ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- Prepaid expenses.................................................... $ -- $ 31 $ -- $ -- Other liabilities................................................... (101) (63) (182) (181) Intangible assets, net.............................................. 37 -- -- -- Accumulated other comprehensive loss................................ 96 -- -- -- ----- ---- ----- ----- Net amounts recognized.............................................. $ 32 $(32) $(182) $(181) ===== ==== ===== =====
At December 29, 2001, the accumulated benefit obligation of certain PBG pension plans exceeded the fair market value of the plan assets resulting in the recognition of an additional unfunded liability as a minimum balance sheet liability. As a result of this additional liability, an intangible asset of $37 million and an increase to accumulated other comprehensive loss of $96 million was recognized. The adjustment to accumulated other comprehensive loss is reflected after minority interest and taxes in our Consolidated Statements of Changes in Shareholders' Equity. The weighted-average assumptions used to compute the above information are set forth below:
PENSION --------------------------- 2001 2000 1999 ---- ---- ---- Discount rate for benefit obligation........................................... 7.5% 7.8% 7.8% Expected return on plan assets................................................. 10.0% 10.0% 10.0% Rate of compensation increase.................................................. 4.3% 4.6% 4.3%
POSTRETIREMENT --------------------------- 2001 2000 1999 ---- ---- ----
Discount rate for benefit obligation........................................... 7.5% 7.8% 7.8%
COMPONENTS OF PENSION ASSETS The pension plan assets are principally invested in stocks and bonds. None of the assets are invested directly into PBG stock. HEALTH CARE COST TREND RATES We have assumed an average increase of 8.0% in 2002 in the cost of postretirement medical benefits for employees who retired before cost sharing was introduced. This average increase is then projected to decline gradually to 4.5% in 2009 and thereafter. Assumed health care cost trend rates have an impact on the amounts reported for postretirement medical plans. A one-percentage point change in assumed health care costs would have the following effects:
1% 1% INCREASE DECREASE Effect on total fiscal year 2001 service and interest cost components...................... $- $- Effect on the fiscal year 2001 accumulated postretirement benefit obligation............... 7 (6)
OTHER EMPLOYEE BENEFIT PLANS We made several changes to our employee benefit plans that took effect in fiscal year 2000. The changes were made to our vacation policy, pension and retiree medical plans and included some benefit enhancements as well as cost containment provisions. These changes did not have a significant impact on our financial results in 2001 or 2000. 49 In 1999, our Board of Directors approved a matching company contribution to our 401(k) plan that began in 2000. The match is dependent upon the employee's contribution and years of service. The matching company contribution was approximately $17 million and $15 million in 2001 and 2000, respectively. In the fourth quarter of 1999 we recognized a $16 million compensation charge related to full-year 1999 performance. This expense was one-time in nature and was for the benefit of our management employees, reflecting our successful operating results as well as providing certain incentive-related features. NOTE 13--EMPLOYEE STOCK OPTION PLANS Under our long-term incentive plan, stock options are issued to middle and senior management employees and vary according to salary and level within PBG. Except as noted below, options granted in 2001 and 2000 had exercise prices ranging from $18.88 per share to $22.50 per share, and $9.38 per share to $15.88 per share, respectively, expire in 10 years and become exercisable 25% after the first year, 25% after the second year and the remainder after the third year. Options granted in 1999 had exercise prices ranging from $9.63 per share to $11.50 per share and, with the exception of our chairman's options, are exercisable after three years and expire in 10 years. Our chairman's 1999 options are exercisable ratably over the three years following our initial public offering date. In 2001, two additional option grants were made to certain senior management employees. One grant had an exercise price of $19.50 per share, expires in 10 years and became exercisable on the grant date. The other grant had an exercise price of $22.50 per share, expires in 10 years and becomes exercisable in 5 years. In conjunction with our initial public offering, we issued a one-time founders' grant of options to all full-time non-management employees in 1999 to purchase 200 shares of PBG stock. These options have an exercise price equal to the initial public offering price of $11.50 per share, are exercisable after three years and expire in 10 years. In connection with the completion of our initial public offering, PepsiCo vested substantially all non-vested PepsiCo stock options held by PBG employees. As a result, we incurred a $45 million non-cash compensation charge in the second quarter of 1999, equal to the difference between the market price of the PepsiCo capital stock and the exercise price of these options at the vesting date. The following table summarizes option activity during 2001:
WEIGHTED- AVERAGE EXERCISE Options in millions OPTIONS PRICE ------- -------- Outstanding at beginning of year...................................... 33.2 $ 10.75 Granted............................................................ 10.2 20.47 Exercised.......................................................... (1.8) 10.84 Forfeited.......................................................... (1.9) 12.01 ----- -------- Outstanding at end of year............................................ 39.7 $ 13.20 ===== ======== Exercisable at end of year............................................ 6.6 $ 13.38 ===== ======== Weighted-average fair value of options granted during the year........ $ 8.55 ========
The following table summarizes option activity during 2000:
WEIGHTED- AVERAGE EXERCISE Options in millions OPTIONS PRICE ------- ----- Outstanding at beginning of year...................................... 22.4 $11.49 Granted............................................................ 13.2 9.57 Exercised.......................................................... (0.2) 10.53 Forfeited.......................................................... (2.2) 11.20 ------ ------ Outstanding at end of year............................................ 33.2 $10.75 ====== ====== Exercisable at end of year............................................ 1.8 $11.11 ====== ====== Weighted-average fair value of options granted during the year........ $ 4.68 ======
The following table summarizes option activity during 1999:
WEIGHTED -AVERAGE EXERCISE Options in millions OPTIONS PRICE ------- ----- Outstanding at beginning of year...................................... -- $ -- Granted............................................................ 24.2 11.49 Exercised.......................................................... -- -- Forfeited.......................................................... (1.8) 11.50 ------ ------ Outstanding at end of year............................................ 22.4 $11.49 ====== ====== Exercisable at end of year............................................ -- $ -- ====== ====== Weighted-average fair value of options granted during the year........ $ 5.15 ======
50 Stock options outstanding and exercisable at December 29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED-AVERAGE WEIGHTED- REMAINING AVERAGE Options in millions CONTRACTUAL WEIGHTED-AVERAG EXERCISE RANGE OF EXERCISE PRICE OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS PRICE - ----------------------- ------- ------------- -------------- -------- ------- $9.38-$11.49............. 10.4 7.99 $ 9.38 2.2 $ 9.40 $11.50-$15.88............ 19.5 7.02 $11.55 2.3 $11.57 $15.89-$22.50............ 9.8 9.00 $20.47 2.1 $19.59 ---- ---- ------ --- ------ 39.7 7.77 $13.20 6.6 $13.38 ==== ==== ====== === ======
We adopted the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation," but continue to measure stock-based compensation cost in accordance with the Accounting Principles Board Opinion 25 and its related interpretations. If we had measured compensation cost for the stock options granted to our employees under the fair value based method prescribed by SFAS 123, net income would have been changed to the pro forma amounts set forth below:
2001 2000 1999 ---- ---- ---- Net Income Reported................................................................. $ 305 $ 229 $ 118 Pro forma................................................................ 269 204 102 Diluted Earnings per Share Reported................................................................. $1.03 $0.77 $0.46 Pro forma................................................................ 0.91 0.69 0.39
The fair value of PBG stock options used to compute pro forma net income disclosures was estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:
2001 2000 1999 ---- ---- ---- Risk-free interest rate......................................................... 4.6% 6.7% 5.8% Expected life................................................................... 6 years 7 years 7 years Expected volatility............................................................. 35% 35% 30% Expected dividend yield......................................................... 0.20% 0.43% 0.35%
NOTE 14--INCOME TAXES The details of our income tax provision are set forth below:
2001 2000 1999 ---- ----- ---- Current: Federal............................................................ $ 93 $107 $ 79 Foreign.............................................................. 5 1 (1) State................................................................ 15 27 19 ---- ----- ---- 113 135 97 ---- ----- ---- Deferred: Federal............................................................. 43 7 (17) Foreign.............................................................. (1) -- -- State................................................................ 6 (7) (10) ---- ----- ---- 48 -- (27) ---- ----- ---- 161 135 70 Rate change benefit.................................................. (25) -- -- ---- ----- ---- $136 $135 $ 70 ==== ===== ====
Our 2001 income tax provision includes a nonrecurring reduction in income tax expense of $25 million due to enacted tax rate changes in Canada during the year. Our U.S. and foreign income before income taxes is set forth below:
2001 2000 1999 ---- ---- ---- U.S.......................................................................... $375 $318 $188 Foreign...................................................................... 66 46 -- ---- ---- ---- $441 $364 $188 ==== ==== ====
Our reconciliation of income taxes calculated at the U.S. federal statutory rate to our provision for income taxes is set forth below:
2001 2000 1999 ---- ---- ---- Income taxes computed at the U.S. federal statutory rate..................... 35.0% 35.0% 35.0% State income tax, net of federal tax benefit................................. 3.1 3.2 3.2 Impact of foreign results.................................................... (9.0) (7.5) (9.1) Goodwill and other nondeductible expenses.................................... 3.9 5.1 7.8 Unusual impairment and other charges and credits............................. -- -- (0.6) Other, net................................................................... 3.5 1.2 1.1 ---- ---- ---- 36.5 37.0 37.4 Rate change benefit.......................................................... (5.7) -- -- ---- ---- ---- Total effective income tax rate.............................................. 30.8% 37.0% 37.4% ==== ==== ====
51 The details of our 2001 and 2000 deferred tax liabilities (assets) are set forth below:
2001 2000 ------- ------- Intangible assets and property, plant and equipment........................................ $ 1,094 $ 1,098 Other...................................................................................... 109 96 ------- ------- Gross deferred tax liabilities............................................................. 1,203 1,194 ------- ------- Net operating loss carryforwards........................................................... (121) (139) Employee benefit obligations............................................................... (141) (112) Bad debts.................................................................................. (13) (15) Various liabilities and other.............................................................. (72) (70) ------- ------- Gross deferred tax assets.................................................................. (347) (336) Deferred tax asset valuation allowance..................................................... 122 148 ------- ------- Net deferred tax assets.................................................................... (225) (188) ------- ------- Net deferred tax liability................................................................. $ 978 $ 1,006 ======= ======= Included in: Prepaid expenses and other current assets.................................................. $ (43) $ (66) Deferred income taxes...................................................................... 1,021 1,072 ------- ------- $ 978 $ 1,006 ======= =======
We have net operating loss carryforwards totaling $370 million at December 29, 2001, which are available to reduce future taxes in the U.S., Spain, Greece and Russia. Of these carryforwards, $2 million expire in 2002 and $368 million expire at various times between 2003 and 2021. We have established a full valuation allowance for the net operating loss carryforwards attributable to Spain, Greece and Russia based upon our projection that it is more likely than not that these losses will not be realized. In addition, at December 29, 2001 we have a tax credit carryforward in the U.S. of $7 million with an indefinite carryforward period. Our valuation allowances, which reduce deferred tax assets to an amount that will more likely than not be realized, have decreased by $26 million, in 2001 and increased $1 million in 2000. Deferred taxes are not recognized for temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration. Determination of the amount of unrecognized deferred taxes related to these investments is not practicable. Income taxes receivable were $15 million and $12 million at December 29, 2001 and December 30, 2000, respectively. Such amounts are recorded within prepaid expenses and other current assets in our Consolidated Balance Sheets. Amounts paid to taxing authorities for income taxes were $101 million, $147 million and $111 million in 2001, 2000 and 1999, respectively. NOTE 15--GEOGRAPHIC DATA We operate in one industry, carbonated soft drinks and other ready-to-drink beverages. We conduct business in 41 states and the District of Columbia in the United States. Outside the U.S., we conduct business in eight Canadian provinces, Spain, Greece and Russia.
NET REVENUES ---------------------------------- 2001 2000 1999 ---- ---- ---- U.S........................................................... $7,197 $6,830 $6,352 Other countries............................................... 1,246 1,152 1,153 ------ ------ ------ $8,443 $7,982 $7,505 ====== ====== ====== LONG-LIVED ASSETS --------------------------------- 2001 2000 1999 ---- ---- ---- U.S........................................................... $5,395 $5,192 $5,139
Other countries............................................... 914 960 987 ------ ------ ------ $6,309 $6,152 $6,126 ====== ====== ======
NOTE 16--RELATIONSHIP WITH PEPSICO At the time of the initial public offering we entered into a number of agreements with PepsiCo. The most significant agreements that govern our relationship with PepsiCo consist of: (1) the master bottling agreement for cola beverages bearing the "Pepsi-Cola" and "Pepsi" trademark in the United States; bottling and distribution agreements for non-cola products in the United States, including Mountain Dew; and a master fountain syrup agreement in the United States; (2) agreements similar to the master bottling agreement and the non-cola agreements for each specific country, including Canada, Spain, Greece and Russia, as well as a fountain syrup agreement similar to the master syrup agreement for Canada; (3) a shared services agreement whereby PepsiCo provides us or we provide PepsiCo with certain administrative support, including procurement of raw materials, transaction processing, such as accounts payable and credit and collection, certain tax and treasury services, and information technology maintenance and systems development. The amounts paid or received under this contract are equal to the actual costs incurred by the company providing the service. From 1998 through 2001, a PepsiCo affiliate provided casualty insurance to us; and (4) transition agreements that provide certain indemnities to the parties, and provide for the allocation of tax and other assets, liabilities, and obligations arising from periods prior to the 52 initial public offering. Under our tax separation agreement, PepsiCo maintains full control and absolute discretion for any combined or consolidated tax filings for tax periods ending on or before the initial public offering. PepsiCo has contractually agreed to act in good faith with respect to all tax audit matters affecting us. In addition, PepsiCo has agreed to use their best efforts to settle all joint interests in any common audit issue on a basis consistent with prior practice. We purchase concentrate from PepsiCo that is used in the production of carbonated soft drinks and other ready-to-drink beverages. The price of concentrate is determined annually by PepsiCo at its sole discretion. We also produce or distribute other products and purchase finished goods and concentrate through various arrangements with PepsiCo or PepsiCo joint ventures. We reflect such purchases in cost of sales. We share a business objective with PepsiCo of increasing the availability and consumption of Pepsi-Cola beverages. Accordingly, PepsiCo, at its sole discretion, provides us with various forms of marketing support to promote its beverages. This support covers a variety of initiatives, including marketplace support, marketing programs, capital equipment investment, and shared media expense. Based on the objective of the programs and initiatives, we record marketing support as an adjustment to net revenues or as a reduction of selling, delivery and administrative expense. We manufacture and distribute fountain products and provide fountain equipment service to PepsiCo customers in some territories in accordance with the Pepsi beverage agreements. Amounts received from PepsiCo for these transactions are offset by the cost to provide these services and are reflected in selling, delivery and administrative expenses. We pay a royalty fee to PepsiCo for the Aquafina trademark. The Consolidated Statements of Operations include the following income (expense) amounts as a result of transactions with PepsiCo and its affiliates:
2001 2000 1999 ---- ---- ---- Net revenues................................................ $ 262 $ 244 $ 236 Cost of sales............................................... (1,927) (1,626) (1,488) Selling, delivery and administrative expenses............... 259 266 285
We are not required to pay any minimum fees to PepsiCo, nor are we obligated to PepsiCo under any minimum purchase requirements. There are no conditions or requirements that could result in the repayment of any marketing support payments received by us from PepsiCo. With respect to PepsiCo's 7% ownership of Bottling Group, LLC, Bottling Group, LLC guarantees that to the extent there is available cash, it will distribute pro rata to PepsiCo and PBG sufficient cash such that aggregate cash distributed to PBG will enable us to pay income taxes and interest on our $1 billion 7% senior notes due 2029. Net amounts payable to PepsiCo and its affiliates were $17 million at December 29, 2001 and net amounts receivable from PepsiCo and its affiliates were $8 million and at December 30, 2000. Such amounts are recorded within accounts payable and other current liabilities and accounts receivable in our Consolidated Balance Sheets, respectively. NOTE 17--CONTINGENCIES We are involved in a lawsuit with current and former employees concerning wage and hour issues in New Jersey . We are unable to predict the amount of any costs or implications of this case at this time as legal proceedings are ongoing. We are subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. We believe that the ultimate liability arising from such claims or contingencies, if any, in excess of amounts already recognized is not likely to have a material adverse effect on our results of operations, financial condition or liquidity. NOTE 18--ACQUISITIONS During 2001, PBG acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola beverages from two PepsiCo franchise bottlers. In May and August of 2001, we acquired Pepsi-Cola Bottling of Northern California, and Pepsi-Cola Elmira Bottling Co. Inc., respectively, for an aggregate purchase price of $125 million of cash and assumed debt. In December 2001, we signed a letter of intent to purchase the Pepsi-Cola Bottling Company of Macon, Inc. The transaction is expected to close in the first quarter of 2002. During 2000, we acquired two territories in Canada for an aggregate purchase price of $26 million in cash. These acquisitions were accounted for by the purchase method, and were made to enable us to provide better service to our large retail customers, as well as reduce costs through economies of scale. The aggregate purchase price exceeded the fair value of net tangible assets acquired, including the resulting tax effect, by approximately $108 million and $14 million in 2001 and 2000, respectively. The excess was recorded in intangible assets. 53 NOTE 19--COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
shares in thousands 2001 2000 1999 ---- ---- ---- Number of shares on which basic earnings per share is based: Weighted-average outstanding during period....... 286,024 294,294 256,852 Add - Incremental shares under stock compensation plans............................. 9,655 4,376 -- ------- ------- ------- Number of shares on which diluted earnings per share is based...................... 295,679 298,670 256,852 Basic and diluted net income applicable to common shareholders............................. $ 305 $ 229 $ 118 Basic earnings per share........................... $ 1.07 $ 0.78 $ 0.46 Diluted earnings per share......................... $ 1.03 $ 0.77 $ 0.46
Diluted earnings per share reflect the potential dilution that could occur if the stock options from our stock compensation plan were exercised and converted into common stock that would then participate in net income. The calculation of earnings per share above reflects the two-for-one stock split as discussed in Note 3. Our stock price improvement has resulted in $0.04 and $0.01 per share of dilution in 2001 and 2000, respectively. In 1999, immediately preceding our initial public offering, we had 55 million shares of common stock outstanding. In connection with the offering, we sold 100 million shares of common stock to the public. Since our initial public offering, shares outstanding reflect the effect of our share repurchase program, which began in October 1999. In addition, in November 2001 we executed a two-for-one stock split in the form of a 100% stock dividend, doubling our weighted-average shares outstanding. As a result of the stock split in 2001, the amount of shares authorized by the Board of Directors to be repurchased totals 50 million shares, of which we have repurchased approximately 31 million shares since the inception of our share repurchase program. NOTE 20--SUBSEQUENT EVENTS (UNAUDITED) During the first quarter of 2002, we acquired the operations and exclusive right to manufacture, sell and distribute Pepsi-Cola's international beverages in Turkey for a purchase price of approximately $100 million in cash and assumed debt. NOTE 21--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH 2001 QUARTER QUARTER QUARTER QUARTER FULL YEAR ------- ------- ------- ------- --------- Net revenues.................. $1,647 $2,060 $2,274 $2,462 $8,443 Gross profit.................. 765 952 1,052 1,094 3,863 Operating income.............. 90 217 285 84 676 Net income (1)................ 26 116 150 13 305
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER FULL YEAR ------- ------- ------- ------- --------- Net revenues.................. $1,545 $1,913 $2,125 $2,399 $7,982 Gross profit.................. 700 880 962 1,035 3,577 Operating income.............. 75 191 256 68 590 Net income.................... 17 85 123 4 229
(1) During 2001, the Canadian Government passed laws reducing federal and certain provincial corporate income tax rates. These rate changes resulted in one-time gains of $16 million and $9 million in the second and third quarters of 2001, respectively. The first, second and third quarters of each year consisted of 12 weeks, while the fourth quarter consisted of 16 weeks in 2001 and 17 weeks in 2000. The extra week in fiscal year 2000 contributed $7 million of additional net income to our fourth quarter and fiscal year 2000 results. 54 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS To Our Shareholders: We are responsible for the preparation, integrity and fair presentation of the Consolidated Financial Statements, related notes and other information included in this annual report. The Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts based upon our estimates and assumptions, as required. Other financial information presented in the annual report is derived from the Consolidated Financial Statements. We maintain a system of internal control over financial reporting, designed to provide reasonable assurance as to the reliability of the Consolidated Financial Statements, as well as to safeguard assets from unauthorized use or disposition. The system is supported by formal policies and procedures, including an active Code of Conduct program intended to ensure employees adhere to the highest standards of personal and professional integrity. Our internal audit function monitors and reports on the adequacy of and compliance with the internal control system, and appropriate actions are taken to address significant control deficiencies and other opportunities for improving the system as they are identified. The Consolidated Financial Statements have been audited and reported on by our independent auditors, KPMG LLP, who were given free access to all financial records and related data, including minutes of the meetings of the Board of Directors and Committees of the Board. We believe that management representations made to the independent auditors were valid and appropriate. The Audit Committee of the Board of Directors, which is composed solely of outside directors, provides oversight to our financial reporting process and our controls to safeguard assets through periodic meetings with our independent auditors, internal auditors and management. Both our independent auditors and internal auditors have free access to the Audit Committee. Although no cost-effective internal control system will preclude all errors and irregularities, we believe our controls as of December 29, 2001 provide reasonable assurance that our assets are safeguarded. Alfred H. Drewes Andrea L. Forster Senior Vice President Vice President and Chief Financial Officer and Controller REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders The Pepsi Bottling Group, Inc.: We have audited the accompanying Consolidated Balance Sheets of The Pepsi Bottling Group, Inc. as of December 29, 2001 and December 30, 2000, and the related Consolidated Statements of Operations, Cash Flows and Changes in Shareholders' Equity for each of the fiscal years in the three-year period ended December 29, 2001. These Consolidated Financial Statements are the responsibility of management of The Pepsi Bottling Group, Inc. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 The Pepsi Bottling Group, Inc. as of December 29, 2001 and December 30, 2000, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP - ------------------ New York, New York January 24, 2002 55 SELECTED FINANCIAL AND OPERATING DATA in millions, except per share data
2001 2000(1) 1999 1998 1997 1996 FISCAL YEARS ENDED ---- ------- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net revenues....................................... $8,443 $ 7,982 $7,505 $7,041 $ 6,592 $6,603 Cost of sales...................................... 4,580 4,405 4,296 4,181 3,832 3,844 ------ ------- ------ ------ ------- ------ Gross profit....................................... 3,863 3,577 3,209 2,860 2,760 2,759 Selling, delivery and administrative expenses...... 3,187 2,987 2,813 2,583 2,425 2,392 Unusual impairment and other charges and credits (2) -- -- (16) 222 -- -- ------ ------- ------ ------ ------- ------ Operating income................................... 676 590 412 55 335 367 Interest expense, net.............................. 194 192 202 221 222 225 Foreign currency loss (gain)....................... -- 1 1 26 (2) 4 Minority interest.................................. 41 33 21 -- -- -- ------ ------- ------ ------ ------ ----- Income (loss) before income taxes.................. 441 364 188 (192) 115 138 Income tax expense (benefit) (3)(6)................ 136 135 70 (46) 56 89 ------ ------- ------ ------ ------ ----- Net income (loss).................................. $ 305 $ 229 $ 118 $ (146) $ 59 $ 49 ====== ======= ====== ====== ====== ===== PER SHARE DATA: (5) Basic earnings (loss) per share.................... $ 1.07 $ 0.78 $ 0.46 $ (1.33)$ 0.54 $ 0.45 Diluted earnings (loss) per share.................. $ 1.03 $ 0.77 $ 0.46 $ (1.33)$ 0.54 $ 0.45 Cash dividend per share............................ $ 0.04 $ 0.04 $ 0.03 -- -- -- Weighted-average basic shares outstanding.......... 286 294 257 110 110 110 Weighted-average diluted shares outstanding........ 296 299 257 110 110 110 OTHER FINANCIAL DATA: EBITDA (4)......................................... $1,190 $1,061 $ 901 $ 721 $ 774 $ 792 Cash provided by operations........................ 1,005 831 718 625 548 451 Capital expenditures............................... (593) (515) (560) (507) (472) (418) BALANCE SHEET DATA (AT PERIOD END): Total assets....................................... $7,857 $7,736 $7,624 $7,322 $ 7,188 $7,052 Long-term debt: Allocation of PepsiCo long-term debt............ -- -- -- 3,300 3,300 3,300 Due to third parties............................ 3,285 3,271 3,268 61 96 127 ------ ------- ------ ------ ------ ----- Total long-term debt 3,285 3,271 3,268 3,361 3,396 3,427 Minority interest.................................. 319 306 278 -- -- -- Advances from PepsiCo.............................. -- -- -- 1,605 1,403 1,162 Accumulated other comprehensive loss............... (370) (254) (223) (238) (184) (102) Shareholders' equity (deficit)..................... 1,601 1,646 1,563 (238) (184) (102)
(1) Our fiscal year 2000 results were impacted by the inclusion of an extra week in our fiscal year. The extra week increased net income by $7 million, or $0.02 per share. (2) Unusual impairment and other charges and credits comprises of the following: - - $45 million non-cash compensation charge in the second quarter of 1999. - - $53 million vacation accrual reversal in the fourth quarter of 1999. - - $8 million restructuring reserve reversal in the fourth quarter of 1999. - - $222 million charge related to the restructuring of our Russian bottling operations and the separation of Pepsi-Cola North America's concentrate and bottling organizations in the fourth quarter of 1998. (3) 1998 includes a $46 million income tax benefit in the fourth quarter for the settlement of a disputed claim with the Internal Revenue Service relating to the deductibility of the amortization of acquired franchise rights. (4) Excludes the non-cash component of unusual impairment and other charges and credits. (5) Reflects the 2001 two-for-one stock split. (6) Fiscal year 2001 includes Canada tax law change benefits of $25 million. 56 EX-21 8 y58773ex21.txt SUBSIDIARIES Exhibit 21 Subsidiaries of The Pepsi Bottling Group, Inc. As of December 29, 2001
Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- AJN Holdings, Inc. Delaware Alistar Beverages Corporation Washington Allied Acquisition Company of Delaware, Inc. Delaware Apodaka Inversiones, S.L. Spain Atlantic Holding Company California Atlantic Soft Drink Company, Inc. South Carolina Beverage Products Corporation Oklahoma Bottling Group Holdings, Inc. Delaware Bottling Group, LLC Delaware C & I Leasing, Inc. Maryland Catalana de Bebidas Carbonicas, S.A. Spain Centran, Inc. Pennsylvania Centro-Mediterranea de Bebidas Carbonicas PepsiCo S.C. m.p.a. Spain Centro-Levantina de Bebidas Carbonicas PepsiCo S.L. Spain Compania de Bebidas PepsiCo, S.A. Spain CSD Sawgrass, Inc. Florida D.C. Beverages, Inc. Delaware Desormeau Vending Corporation New York Dornfell Ireland General Cinema Beverages of North Florida, Inc. Delaware General Cinema Beverages of Virginia, Inc. Delaware
General Cinema Beverages of Washington, D.C., Inc. Delaware Gray Bern Holdings, Inc. Delaware Grayhawk Leasing, LLC Delaware Hillwood Bottling, LLC Delaware International Bottlers Management Co. LLC Delaware KAS, S.L. Spain Neva Holdings, LLC Delaware New Bern Transport Corporation Delaware Pepsi Bottling Group GmbH Germany Pepsi Bottling Group Global Finance Sarl Luxembourg GB Russia LLC (Pepsi Bottling Group (St. Petersburg) LLC) Delaware PBG Bottling Group Spanish Investments, S.A. Spain PBG Canada Finance, LLC Delaware PBG Canada Finance II, LLC Delaware PBG Canada Global Holdings ULC Nova Scotia PBG Canada Holdings, Inc. Delaware PBG Commerce, Inc. Delaware PBG Comercial SECOR, S.L. Spain PBG Holding de Espana ETVE, S.L. Spain PBG Michigan, LLC Delaware PBG Northern Atlantic Limited Ireland PBG Spirituosen Holdings, LLC Delaware PBG Texas L.P. Delaware PepsiCo IVI S.A. Greece PepsiCo Holdings 000 Russia
2 PepsiCo Ventas Andalucia, S.A. Spain Pepsi-Cola Allied Bottlers, Inc. Delaware Pepsi-Cola Bottling Beteiligungsges GmbH Germany Pepsi-Cola Bottling Finance B.V. Netherlands Pepsi-Cola Bottling Global B.V. Netherlands Pepsi-Cola Commodities, Inc. Delaware Pepsi-Cola de Espana, S.L. Spain Pepsi-Cola General Bottlers of Princeton, Inc. West Virginia Pepsi-Cola General Bottlers of Virginia, Inc. Virginia Pepsi-Cola Laurel Bottling Company Pennsylvania Pepsi-Cola Soft Drink Factory of Sochi Russia Pepsi International Bottlers (Ekaterinburg) LLC Russia Pepsi International Bottlers (Samara) LLC Russia Pet-Iberia, S.L. Spain Primrose, LLC Delaware Rice Bottling Enterprises, Inc. Tennessee Rockledge Holdings, LLC Delaware Seven-Up Espana S.A. Spain Spirituosen e Compania Comercio E Distribucas de Bebidas Portugal Spirituosen, S.A. Spain TGCC, Inc. Delaware The Pepsi Bottling Group (Canada), Co. Canada The Pepsi Bottling Group NRO Ltd. Canada White Co., Inc. Delaware Woodlands Insurance Company, Inc. Vermont
3 EX-23 9 y58773ex23.txt REPORT AND CONSENT OF KPMG LLP EXHIBIT 23 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors and Shareholders The Pepsi Bottling Group, Inc.: Under date of January 24, 2002 we reported on the Consolidated Balance Sheets of The Pepsi Bottling Group, Inc. (the "Company") as of December 29, 2001 and December 30, 2000 and the related Consolidated Statements of Operations, Cash Flows and Changes in Shareholders' Equity for each of the fiscal years in the three-year period ended December 29, 2001, which are incorporated by reference in this Form 10-K. In connection with our audits of the aforementioned Consolidated Financial Statements, we also audited the related consolidated financial statement schedule included in this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic Consolidated Financial Statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to the use of reports included herein or incorporated herein by reference in the registration statements (Nos. 333-79357, 333-79369, 333-79375, 333-79365, 333-80647, 333-60428, 333-69622, 333-73302) on Form S-8 of The Pepsi Bottling Group, Inc. /s/ KPMG LLP New York, New York March 28, 2002 EX-24 10 y58773ex24.txt COPY OF POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Pamela C. McGuire and Steven M. Rapp, signing singly, the undersigned's true and lawful attorney-in-fact to execute and file on behalf of the undersigned in the undersigned's capacity as a Director and /or Executive Officer of The Pepsi Bottling Group, Inc. ("PBG") all necessary and/or required applications, reports, registrations, information, documents and instruments filed or required to be filed by PBG with the Securities and Exchange Commission ("SEC"), any stock exchanges or any governmental official or agency, including without limitation: 1) execute and file any amendment or supplement to PBG's Annual Report on Form 10-K for the year ended December 29, 2001, with all exhibits thereto and other documents in connection therewith (the "Form 10-K"); 2) do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute the Form 10-K and timely file the Form 10-K; 3) execute and file Forms 3, 4 and 5 in accordance with Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder; 4) do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 3, 4 or 5 and timely file such form; 5) execute and file Form 144 in accordance with Rule 144 of the Securities Act of 1933 and the rules thereunder; 6) do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 144 and timely file such form; 7) execute and file Registration Statements on Form S-8 under the Securities Act of 1933; 8) do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Registration Statements on Form S-8 and timely file such form; and 9) take any other action of any type whatsoever in connection with the foregoing, which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. The undersigned hereby grants to each such attorney-in-fact full power and authority to do and perform any and every act and thing whatsoever requisite, necessary, or proper to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, with full power of substitution or revocation, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. Each of attorneys-in-fact named herein shall have the power to act hereunder with or without the other. The undersigned acknowledges that the foregoing attorney-in-fact, in serving in such capacity at the request of the undersigned, are not assuming, nor is PBG assuming, any of the undersigned's responsibilities to comply with Section 16 of the Securities Exchange Act of 1934. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as this 4th day of February, 2002. THE PEPSI BOTTLING GROUP, INC. By: /s/ Pamela C. McGuire ------------------------ Pamela C. McGuire Senior Vice President, General Counsel and Secretary
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Craig E. Weatherup Chairman of the Board February 7, 2002 - ---------------------- Craig E. Weatherup /s/ John T. Cahill Chief Executive Officer and February 7, 2002 - ------------------ Director John T. Cahill /s/Alfred H. Drewes Senior Vice President and Chief February 7, 2002 - ------------------- Financial Officer (Principal Alfred H. Drewes Financial Officer) /s/ Andrea L. Forster Vice President and Controller February 6, 2002 - --------------------- (Principal Accounting Officer) Andrea L. Forster /s/ Linda G. Alvarado Director February 7, 2002 - --------------------- Linda G. Alvarado /s/ Barry H. Beracha Director February 7, 2002 - -------------------- Barry H. Beracha /s/ Thomas W. Jones Director February 7, 2002 - ------------------- Thomas W. Jones /s/ Thomas H. Kean Director February 1, 2002 - ------------------ Thomas H. Kean
/s/ Susan D. Kronick Director February 1, 2002 - -------------------- Susan D. Kronick /s/ Margaret D. Moore Director February 4, 2002 - --------------------- Margaret D. Moore
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